§ Sir William ClarkI beg to move amendment No. 163, in page 17, line 27, at end insert—
'(1A) In paragraph 12 of Schedule 1 to the Finance Act 1974 (conditions for interest relief; interest in partnership)—This should not be a long debate, but a question of principle is involved. Clause 28 relaxes the requirements necessary to obtain tax relief on bank interest on money borrowed for lending to a close company. That is welcome. But what is the difference between investing in a close company and investing in a partnership or an unincorporated company?
- (a) paragraph (a) (which requires the borrower to have acted personally in the conduct of the trade, profession or vocation) shall be omitted;
- (b) in paragraph (b) for the words "that period" there shall be substituted "the period from the application of the proceeds of the loan to the payment of the interest".'.
The 5 per cent.-plus holding that is obligatory in relation to the interest relief does not give any proprietorial rights to an investor in a close company. Anyone with a 6 per cent. holding in a close company has little control over it. The holder of the other 94 per cent. can do a lot without recourse to the 6 per cent. investor. The position is the same if one invests in a partnership.
I cannot understand why the Treasury will not accept the logic that if it is right to give a tax relief—and I agree as regards close companies—similar relief should apply to an investment in a partnership.
I think that the Treasury has a fixation on proprietorial rights of the 5 per cent. plus holding. With the little experience that I have of the City, of companies and of partnerships, I should not have thought that anybody investing in a close company and having 6 per cent. of the share capital was in any different position from somebody investing in a partnership where he had 6 per cent. of the equity. The answer in Committee was not entirely satisfactory. The Treasury has not yet satisfactorily explained the difference between an investor in a close company and an investor in a partnership.
§ Mr. Peter ReesThere is undoubtedly an analogy to be drawn between an investment in a close company and an investment in a partnership. My hon. Friend certainly has a point there. However, I do not think that the problem has quite the dimensions that he originally ascribed to it, because it is possible for partners to borrow and to obtain relief on the interest, as it will be a normal trading expense. That does not entirely meet the problem, because my hon. Friend presumably has in mind the case of someone who borrows to buy, for instance, a share of goodwill or assets of the partnership. But there are many ways in which these transactions can be undertaken. In many cases there will be a measure of relief.
However, I recognise that there will not be relief, on the present form, for an outright borrowing to acquire an interest, which is clearly the primary situation that my hon. Friend has in mind. It is a complex area. We may have to consider whether there will be a difference between an active partner, a sleeping partner and a partner with limited liability.
There are various dimensions to the problem. It must probably also be looked at against the background of the changes in the structure of companies that my right hon. Friend the Secretary of State for Trade is considering.
§ Sir William ClarkI take the point about a person's being a non-active partner, but what is the difference between somebody who is investing in a partnership and does not take an active role in it and a man who invests in a close company and does not take an active part in it? He still gets the relief, and the investor who puts his money into the partnership does not. I do not think that my hon. and learned Friend is right in saying that one can have a sleeping partner. One could have a sleeping investor in a close company.
§ Mr. ReesI hope that I was not over-brief, but at this hour of the night I did not want to labour the point. I said that my hon. Friend had drawn a very fair analogy. But I said that there were other dimensions to the problem, and I instanced the fact that it might be necessary to consider whether a distinction 1673 should be drawn between an active partner, a sleeping partner and a partner with limited liability.
The problem is not quite as simple as perhaps my hon. Friend was disposed to suggest. At this hour I do not want to go again into a problem that we touched on in Standing Committee.
I hope that my hon. Friend will allow us to look—at more leisure than has been possible since the end of the Committee stage—at the structure of companies, the question whether a company may purchase its own shares, and similar problems, which are germane to the kind of problem that my hon. Friend raised. I can give no undertaking, but I hope that we shall return to the matter in another year.
§ Sir William ClarkI appreciate my hon. Friend and learned Friend's saying that he will look at the matter again, though he can give no assurance. I do not think that he could give an assurance that the matter will come up in the next Budget, but there is an anomaly, and it should be eradicated from our tax laws. In view of the fact that my hon. Friend says that he will look at it again, I give him a categoric assurance that I will raise the same point on the next Finance Bill. I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.