§ 340A.—(1) Subject to subsection (2) below, in computing for the purposes of corporation tax the income of a credit union for any accounting period—
- (a) neither the acivity of the credit union in making loans to its members nor in placing on deposit or otherwise investing from time time its surplus funds shall be regarded as the carrying on of a trade or part of a trade; and
- (b) interest received by the credit union on loans made by it to its members shall not be chargeable to tax under Case III of Schedule D or otherwise.
§ (2) Paragraph (b) of subsection (1) above shall not apply to an accounting period of a credit union for which the credit union is obliged to make a return under section 340(5) of this Act and has not done so within three months after the end of that accounting period or such longer period as the inspector shall allow.
§ (3) No share interest, loan interest or annuity or other annual payment paid or payable by a credit union in any accounting period shall be deductible in computing for the purposes of corporation tax the income of the credit union for that period from any trade carried on by it or be treated for those purposes as a charge on income.
§ (4) A credit union shall not be regarded as an investment company for the purposes of sec tion 304 or section 306 of this Act (management expenses and capital allowances).
§ (5) In the case of a credit union registered under the Industrial and Provident Societies Act (Northern Ireland) 1969 before the passing 860 of the Credit Unions Act 1979, the preceding provisions of this section shall apply to the accounting period beginning on or after 1 October 1979.
§ (6) For the year 1978–79 and the next six following years of assessment there shall be disregarded for all purposes of the Income Tax Acts any share interest paid to a member by a credit union and a credit union shall not be obliged under section 340(5) of this Act to make a return in respect of any such payment.
(7) In this section—
credit union" means a society registered as a credit union under the Industrial and Provident Societies Act 1965 or the Industrial and Provident Societies Act (Northern Ireland) 1969;
share interest" and "loan interest" have the same meaning as in section 340 of this Act;
surplus funds", in relation to a credit union, means funds not immediately required for its purposes;
§ and references to the payment of share interest or loan interest include references to the crediting of such interest.
- (a) in subsection (1) (share and loan interest to be deductible or constitute a charge on income) after the words"subject to subsection (6) below" there shall be inserted the words "and to section 340A(3) of this Act"; and
- (b) at the beginning of subsection (3) (share and loan interest to be chargeable under Case III of Schedule D) and at the beginning of subsection (5) (duty to make return of payments made without deduction of tax) there shall be inserted the words "Subject to section 340A(6) of this Act.".—[Mr. Denzil Davies.]
§ Brought up, and read the First time.
§ 2.52 p.m.
§ The Minister of State, Treasury (Mr. Denzil Davies)
I beg to move, That the clause be read a Second time.
§ Mr. Deputy Speaker (Mr. Oscar Murton)
It will be convenient to discuss at the same time Government amendment No. 41.
§ Mr. Davies
Amendment No. 41 is a drafting amendment consequential on the new clause. New clause 1 deals with the taxation position of credit unions. As hon. Members will know, especially those who were on the Committee and also my hon. Friend the Member for Belfast, West (Mr. Fitt), who has made representations on this matter, there have been some difficulties relating to the taxation of credit unions. I believe that this new clause meets almost entirely the representations that we have received. I hope 861 that it will put to rest the fears that have been expressed about the trading position. If the House accepts the new clause, as far as the tax on the trading surpluses of credit unions is concerned and any surplus made by them in relation to their activities with their members, there would be complete exemption from corporation tax for ever. That could, of course, be changed in future, but this new clause would give a complete exemption for ever for all credit unions in relation to their surpluses from corporation tax throughout the United Kingdom.
The other contention raised in Committee was the question of taxation on their dividends. The new clause provides that until 1984–85, and including the year 1984–85, no tax will be charged on the dividends paid to their members by credit unions. That income will be completely free, as a matter of law, not as a matter of administrative convenience, in the hands of the members of credit unions. I believe that this proposal goes a long way to meeting the concern expressed by many hon. Members on both sides of the House about the original provisions in the Bill. What happens after the 1984–85 year of assessment will have to be decided when the times comes. But we have been able to secure this complete exemption for six years. This goes a long way to meet the fears that were raised.
This applies throughout the United Kingdom. It is only right that the tax regime of credit unions should be the same throughout the United Kingdom. The new clause meets that point. I hope that it meets the points that were raised and allays the genuine fears that were expressed.
§ Mr. Peter Rees (Dover and Deal)
When we came to consider the taxation treatment of credit unions upstairs in Standing Committee, the Committee was almost unanimous in welcoming the exemption of surpluses from transactions between credit unions and their members. Some hon. Members on the Standing Committee thought that was probably true as a general principle, without any need for statutory provision. Whether that is a true view or not, we obviously welcomed a specific exemption making the position clear beyond doubt. Consistent with that, we, on this side, thought it 862 wrong that they should be able to claim investment company status for management expenses.
I think I am right in recalling that when the Committee turned to consider the tax treatment of the so-called dividends by credit unions to their members we found that the solution proposed by the Government was indefensible. I do not make that point in any criticism of the Minister. We recognise the difficulties with which he was faced, which were perhaps not of his own making. The Committee obviously groped around for some satisfactory solution that would be fair to the interests of members of credit unions and fair to the interests of members of comparable savings organisations.
I ventured to put forward in Committee the proposition that either the surpluses, when distributed, should be entirely free of tax or should be subject to tax. That was perhaps a rather stark position, but the Minister eventually recognised that the solution he propounded, which depended upon a distinction between credit unions set up before and after a certain date, was difficult to commend to the public. I am sure that the whole House is grateful to the Minister of State for having reconsidered the problem with an open mind and come up with his present compromise suggestion, which involves all credit unions being subject to tax or, to be more exact, the members of credit unions being subject to tax on the distribution of surpluses distributed to them, but after a period of six years.
There will be a period of six years, as it were, when the present arrangements, such as they are—the Minister may wish to touch on that—will be perpetuated. Or are we to understand that total exemption will be conceded for credit unions this side of St. George's Channel and the other side?
§ Mr. Derail Davies indicated assent."
§ Mr. Rees
I am grateful for that intimation. After six years, the members of all credit unions will be on the same basis.
863 That is the proper way in which the problem should be approached. It is not essentially a credit union matter. It is a taxation matter. One has to consider the treatment of credit unions by comparison and in relation to the treatment of comparable bodies. It means that the House at some future period could reconsider and come back to this question when it returns to the whole treatment of interest for tax purposes, particularly taxation for small amounts of interest. As emerged in Committee, this is possibly a subject that another Parliament in another context will want to consider. It is what I would call a general taxation problem and not one specific to credit unions.
On this basis, we are certainly prepared to accept the new clause, recognising that it now fits, in a more orderly and consistent way, into the general framework of taxation comprised in the Income and Corporation Taxes Acts.
§ Mr. J. Enoch Powell (Down, South)
When the House, and subsequently the Committee, considered the original proposals in the Bill for tax treatment of credit unions and their distributions to their members, there was an almost universal feeling that the proposal was inherently unsatisfactory, in that, among other things, it created permanently two classes of unions whose members would be, in perpetuity, differently treated.
This all arose from the fact that, in Northern Ireland, where most of the credit unions still are within the United Kingdom, a special extra-statutory concession had been made which had been in existence for now virtually 10 years and raised the question how they were to be brought into tax.
On Second Reading, I said on behalf of my hon. Friends:those who my hon. Friends and I represent have no desire to be differentiated, for good or ill. in matters of taxation, from their fellow citizens in the rest of the United Kingdom." —[Official Report, 12 February 1979; Vol. 962, c. 827.]I suggested that any solution which was to be acceptable should conform to three requirements: first, there should be a uniform United Kingdom tax system; secondly, there should not be two classes of taxpayer; thirdly, the Northern Ireland credit unions should be shielded from the wind of a new tax liability.
864 3 p.m.
An act of surgery was performed in Committee, and the Minister of State, like the good surgeon, has followed that up now with an act of prosthesis in the shape of the new clause. I think that he has now hit upon as satisfactory an arrangement as could have been devised.
The moratorium, so to speak, for existing credit unions of six years will draw no distinction between those which have or might have enjoyed the concession hitherto and new unions. The six-year moratorium will apply to everyone on both sides of the Irish Sea.
Of course, there will be a jolt, or a step, when the six-year period ends. I hope that I am not out of order in referring to another amendment on the Paper and inquiring whether a provision in it was designed, or partly designed, to alleviate that gradient. I refer to subsection (6) of new clause 4, which enables credit unions to pay into a fund instead of direct to the shareholders sums which would otherwise have been distributed to the shareholders or members of the union. It may be that that provision could be used by credit unions whose members have hitherto been enjoying exemption in order to provide a smoother graduation of liability as between the first six years and the subsequent period than would otherwise occur.
At any rate, that is something which, either in connection with new clause 4, which will give him a slight moratorium, or now, the Minister of State will be able to clear up. I hope that the proposal in the Bill will be accepted as reasonable by hon. Members but also that it will be felt by members of the credit unions and the credit unions themselves in Northern Ireland to be a reasonable solution to a difficulty which could not be wholly satisfactorily dealt with but which arose out of an anomalous tax ruling in the Province. I hope therefore that it will command general agreement.
§ Mr. Gerard Fitt (Belfast, West)
I, too, welcome what the Minister has said. I know that, in the concluding days of this Parliament, it is useful that agreement can be found in the House on this matter. I was not present on Second Reading, but I have this afternoon been reading the Minister's speech on that 865 occasion. He showed himself very much aware how important credit unions have been in Northern Ireland, where about 85,000 people are members of them.
The credit union idea seems to have taken root more deeply in Northern Ireland than in any other part of the United Kingdom. From my earliest days, particularly in religious circles, the idea of credit unions among communities has always been put forward—the idea of self-help within a community, of people sustaining one another in times of need without resorting to moneylenders. I have had no affection, and at times open hostility, for moneylenders.
Not once, throughout all the years that credit unions have existed in Northern Ireland, has anyone defaulted as a result of money lost through membership of such a co-operative union. Therefore, one is inclined to ask why, credit unions having existed for so long to the mutual benefit of members, there not having been any cases of misappropriation, dishonesty or mismanagement, legislation is necessary. That seems to be the view of many people in control of credit unions in Northern Ireland.
The money in credit unions is used by members not for the flamboyant material things of life but for furniture, holidays or household essentials. The amounts involved are not phenomenal.
The credit union system is voluntary. There is no question of anyone making a profit. Those who give up their time and expertise to keep credit unions in business are the best type of people to be found in any part of the United Kingdom. Such people are motivated by concern for the community, not for financial or material gain.
Given their record—no one has run away with anyone else's money; they have a clean, honest record—the credit unions in Northern Ireland ask why there has to be legislation. There were no doubt other reasons which made it imperative for the Government to initiate the legislation. I believe that the new clause will go some way to allay any fears that the Government are in some way attacking credit unions. I am sure that is not the Government's intention. I shall distribute copies of the Second Reading of the Bill to as many credit unions as possible in my constituency to show that the Minister 866 is aware of the good objectives which motivate the credit unions.
Are the credit unions aware that the Government have had a second look at the proposed legislation and are, in effect, to exempt credit unions from tax liabilities for six years? That would seem a reasonable time to allow the credit unions to make whatever changes may be necessary. Who knows what the prevailing conditions may be in six years? In view of the Liverpool, Edge Hill by-election result, we could have a Liberal Government at Westminster and they may be inclined to be even more liberal than my right hon. Friend.
I am not quite certain how the Minister has publicised this proposal. Has he informed those who made representations to him that he has had a change of mind, or has he left it to hon. Members? If the credit unions are told that the Government have gone out of their way to introduce an exemption for six years, I am sure that they will receive that change in a spirit of good will.
I realise that the Government have gone as far as they can. There will be no question this afternoon of the House totally rejecting the Bill. If it were to be rejected and reintroduced in another Parliament, credit unions may not receive the sympathy which has been extended to them by this Government. I welcome the new clause.
§ Mr. Laurie Pavitt (Brent, South)
I commend the new clause and congratulate my right hon. Friend the Minister of State. I was not a member of the Standing Committee although I am a Cooperative-sponsored member in this House, but that particular group was well represented on the Committee. I followed these affairs upstairs with a good deal of interest.
This anomaly emerged from discussions in Committee. It would be disastrous if. because of the successes of an individual form of co-operation in one part of the United Kingdom, an extension of this excellent facility were penalised. I have a life-long interest in and concern with the ethics and principles of the cooperative movement.
This particular form of credit and thrift was pioneered in Northern Ireland. In the history of the co-operative movement there are the Raiffeisen movement 867 in Germany, the Rochdale movement in Great Britain and the excellent work of Horace Plunkett, first of all in Ireland as a whole and later in Ulster.
My right hon. Friend has come to a fair compromise solution in this matter. The whole of the credit union movement—and I have some participants in my constituency—will welcome the fact that we have reached a solution to what could have been a fairly intractable problem.
§ Mr. Tony Newton (Braintree)
I played my part in Committee in demolishing the arguments for the proposal, because there was no doubt that it was unacceptable. It could have led to one factory in my constituency having a credit union whose members paid no tax because it was already established, and a factory next door setting up a credit union and its members being taxed. That would have been manifestly unfair. Therefore, I am grateful for the Minister's reconsideration. I support this compromise.
It might be regarded as strange to have doubts, but I have some about the proposal that these payments should be free of tax. Once that concession has been made, it will be difficult to withdraw it. It could be seen as unfair competition, for the attraction of small savings, against other financial institutions. There could be a massive incentive for high-rate taxpayers to ensure that their money is in a credit union.
As I pointed out in an exaggerated way in Committee, the ultimate conclusion is that £180 of tax-free interest from a credit union, which would have been the maximum figure in the Bill at the time, is equivalent to a top-rate payer of the investment income surcharge of £9,000 of income from any other source. There is a major incentive to high-rate taxpayers to put their money into a credit union.
§ Mr. Powell
At least that would have constituted the necessary common bond between taxpayers at a high rate.
§ Mr. Newton
I take the right hon. Gentleman's point. I do not want to defend our existing rates of tax, because they are too high. The problem must be tackled by reducing tax rates rather than by increasing the scope for devices to 868 reduce tax burden in this way. The right answer is a de minimis exemption for small amounts of interest from whatever source—whether from banks, building societies, credit unions or any other form of saving.
§ 3.15 p.m.
§ Mr. Dezil Davies
The right hon. Member for Down, South (Mr. Powell) drew attention to new clause 4. It is not intended that it should have the type of effect that he thought that it might have. The amendment to that new clause to some extent meets the argument of the hon. Member for Braintree (Mr. Newton) in that it reduces the shareholding to £2,000, although it allows the dividend limit to be increased.
My hon. Friend the Member for Belfast, West (Mr. Fitt) raised several points. There is no intention of curtailing the activities of credit unions. The success of credit unions in Northern Ireland has led us to believe that we must ensure that in the rest of the United Kingdom they are given the right framework to develop, as they have developed in Northern Ireland. I hope that the Bill will put credit unions on a firm foundation. The experience in Northern Ireland shows that they are excellent institutions. They enable people to borrow money at reasonable rates of interest without having to go to moneylenders. That is important, especially because of the small sums of money which can be borrowed from credit unions.
I hope that all the interested parties are aware of the new clause and that they will regard it as a good compromise between the different interests. I hope that they will accept that it does not jeopardise the development of the credit union movement in Northern Ireland and in the rest of the United Kingdom.
The hon. Member for Braintree asked about high-rate taxpayers. There is not much in his argument. The limits are such that I cannot see that groups of stockbrokers will get together to form credit unions to avoid income tax. The limits in the legislation are fairly stringent.
The overriding purpose of the Bill is so good that we should not inhibit the growth of credit unions merely because it might lead to the avoidance, in some instances, of higher rates of taxation. I hope that the House will agree to accept 869 the new clause and amendment No. 41, which is consequential.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.