CLOSE COMPANIES: LOANS TO PARTIC- IPATORS (Hansard, 14 July 1976)

§ Mr. Peter Rees
I beg to move Amendment No. 40, in page 24, line 20, after 'makes', insert 'within two years of the making of the loan'. Even at this hour of night, the House will recall that Section 286 of the Income and Corporation Taxes Act 1970 provides that, where a close company makes a loan to one of its shareholders, that loan shall be treated as though it were a dividend and so attract advance corporation tax. Therefore, it is a provision of a semi-penal nature. Presumably, some ingenious person in the Inland Revenue has thought of all kinds of ways in which that provision may be circumvented by loans being made by open public companies which are in some measure controlled by close companies or by public companies which subsequently pass under the control of close companies. As a result, we are saddled with Section 287.
As often happens in these situations, Section 287 goes for an overkill and a whole range of innocent transactions may be caught by section 286. Realising this, the Minister of State, with his usual generous nature, has caused to be inserted subsection (4), which is what I call a let-out provision. But it is rather tightly, not to say circumspectly, drawn. A person will not be able of take advantage of that let-out provision and so escape the provisions of Section 286 if he is unable to show that there is no connection

"(a) between the making of the loan and the acquisition of control; or

(b) between the making of the loan and the provision by the close company of funds for the company making the loan".
The draftsman has then gone on, determined to stop every possible loophole, by providing the close company shall be regarded as providing funds as aforesaid if it directly or indirectly makes any payment or transfers any property to, or releases or satisfies (in whole or in part) a liability of, the company making the loan. It seems to me, as I hope it will seem to the House, that that goes too far. It will he difficult for anyone to pass through the eye of that needle.
835 This modest amendment, which is not technical in character, is designed to limit those words to the provision of funds by a close company to an open company within two years of the making of the loan. Otherwise there might be some tenuous connection between the making of the original loan and the provision of funds by the close company for the open company.
This is a modest and reasonable amendment. I hope that the Minister of State, having briefed himself thoroughly on what underlies it, will feel disposed to accept it.

§ Mr. Denzil Davies
We discussed this matter in Committee. I said then that I certainly could not accept a two-year period. I thought that it was too short. One can envisage tax avoidance transactions where the making of the loan and the provision of the funds would be within two years and one day, thus making it easy to avoid the provision.
I said that I was prepared to consider inserting a time limit. I thought that at least six years on each side would be the best time limit from the point of view of ensuring that there was not tax avoidance.
Having considered the matter again, I think that on balance it is better not to have a time limit in the provision, but to leave the matter to be decided by the events of the particular case. The longer the time between the making of the loan and the provision of the funds, the easier it will be to show that it was not a tax avoidance but a commercial arrangement. In that respect the taxpayer is protected.
I think that to lay down an arbitrary time limit, even of six years, would not be helpful, but would make the operation of the clause more inflexible. It is far better to leave it as it is.
Obviously, if the transactions are very close together, it is often more likely that they will be tax avoidance transactions. If they are wider apart, it will be more difficult to show that they are tax avoidance transactions. The time limit would inhibit genuine commercial transactions rather than allow them not to be caught.

§ Mr. Graham Page
That is a very disappointing reply. Usually the Minister of State is so helpful. My hon. and learned Friend the Member for Dover and Deal (Mr. Rees) has put forward a helpful amendment to a clause which is fairly reasonable up to this point. Then in these lines it becomes very restrictive.
At this stage it is hopeless to try to make any amendments which are not approved by Treasury Ministers but I forecast that we shall come back to this point next year with another amendment to put it right. It cannot work satisfactorily as it stands.

§ Mr. Peter Rees
With leave of the House, I, too, am very disappointed with the Minister's reply. He seems to shy away from precision in these matters. When quasi-penal provisions of this nature exist, the taxpayer is entitled to know exactly what he faces. The Minister of State is too prone to say that this is a matter for the courts. One appreciates that, but the taxpayer is entitled to know, without the trouble and cost of going to the courts, what he faces.
The Minister has signally failed to meet the challenge thrown to him. As my right hon. Friend said, if we cannot extract anything from him this time, we shall have to return to the subject on other and perhaps more fortunate occasions.