§ '(1) The payments of interest by a company in respect of an issue of loan stock offered in accordance with the provisions of this section and the premiums paid on the redemption of that stock shall be deemed to be charges on the company which are allowable for the calculation of the corporation tax due to be paid by the company and shall not be taken to constitute a distribution as defined by section 233 of the Taxes Act 1970.
§ (2) For the purpose of this section "value added loan stock" means a loan stock with a stated repayment date in respect of which the amounts of the distributions to be paid from time to time shall be fixed at the time of issue in accordance with a published formula by reference to the amount of the value added by the company in the accounting reference period in respect of which each distribution is made, and the terms of the repayment shall be fixed in accordance with a published formula by reference to the amount of the value added by the company in the five last accounting reference periods before the repayment falls due.'.—[Sir Brandon Rhys Williams.]
§ Brought up, and read the First time.760
§ New Clause 36—Index-linked Preference Shares:
- `(1) References in the Corporation Tax Acts to distributions of a company shall not include references to a payment made by a company on the redemption of its own shares if—
- (a) the company is an unquoted company and either a trading company or the holding company of a trading group; and
- (b) the shares are index-linked preference shares.
- (2) "Index-linked preference shares" are shares which—
- (a) are issued for consideration which is new consideration; and
- (b) do not carry right either to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities; and
- (c) do not carry any right to dividends other than dividends which—
- (i) are of a fixed amount or at a fixed rate per cent. of the nominal value of the shares; and
- (ii) represent no more than a reasonable commercial return on the new consideration received by the company in respect of the issue of the shares; and
- (d) on repayment do not carry any rights except a right to an amount equal to that new consideration multiplied by a figure expressed as a decimal and determined by the formular RD ÷ RI where—
- RD is the retail prices index for the month in which the purchase occurs; and
- RI is the retail prices index for the month in which that new consideration was given;
- Provided that—
- if RD is less than RI, RD shall be taken as equal to RI; and
- if the figure determined above would, apart from this limitation, be a figure having more than three decimal places, it shall be limited to three decimal places rounded to the nearest third decimal place.
§ New Clause 141—Deep discounted and indexed securities:
- `(1) References in the Corporation Tax Acts to distributions of a company shall not include references to a payment made by a company on the redemption repayment or purchase of its own securities (and notwithstanding that such payment exceeds the aggregate consideration received by the company for such securities) if such securities have been issued upon terms approved by the Board.
- (2) Any excess of any such payment as is referred to in the immediately preceding subsection over the aggregate consideration received by the company concerned for the related securities shall be included:—
- (a) in the sums to be deducted in computing for the purposes of Schedule D the profits or gains of a trade carried on by that company; or
- (b) if that company is an investment company within the meaning of section 304 of the Taxes Act or a company in the case of which that section applies by virtue of section 305 of that Act, in the sums to be deducted as expenses of management in computing the profits of the company for the purposes of corporation tax;
- (3) The board may make such regulations as it considers expedient for any purpose connnected with or incidental to this section; and any such regulations shall be made by statutory instrument subject to annulment in pursuance of a resolution of the Commons House of Parliament.'.
§ Sir Brandon Rhys Williams
The object of the new clause is to enable firms to issue long-term bonds, without undue risk to themselves, which will also give a fair return to the investor, whatever happens about the rate of inflation.
The dilemma at the moment is that companies which are in debt to the bank, want to expand and need to borrow money on a long-term basis, cannot shrewdly increase their bank debt and, being unable to predict their rate of profit in the long run because of circumstances which are very difficult to foresee, they cannot go out to the market for an equity issue either. The outcome of that dilemma in all too many cases is that companies which ought to be investing, which have good projects which should be receiving support, are postponing their decisions from one year to the next, and the general level of investment in the corporate sector is far too low.
We see from the Corporation Tax Green Paper, which was published earlier this year, that the average net rate of return on capital outside the oil and gas sector, which was 11 per cent. in 1965, had fallen to only 3 per cent. in 1980. That is a measure of the difficulty for firms which want to raise money in the conventional way by the issue of equity shares. Their profits are simply not large enough to justify their doing so. In current cost terms, the return of many companies is probably less even than 3 per cent. now. Yet, if those businesses are to survive, they have to invest in modern equipment. The problem must be solved.
Looking at the way in which the Government finance their own projects, we see that they currently raise capital with yields of 12, 13 or 14 per cent. on conventional dividend and repayment terms, but, with the innovation of Government-indexed stock, we see that they are able to raise money without undue difficulty with a return to the investor of only 3 per cent. It is obvious from that evidence that the market requires a real interest rate of only about 3 per cent., even in present circumstances, but insists on a further 10 per cent. or more, which constitutes a repayment of capital or some kind of inflation insurance on top of the real rate of interest.
The Government, having entered the market for inflation-protected investment, ought to allow private businesses to enter the same sector as well.
762 It is difficult for firms to rely on long-term fixed interest stocks in the way that the Government do by issuing debentures or preference shares and paying the very high rate of interest that the market would demand. It would, in effect, constitute a large repayment of the loan in the early years. If companies had to repay at 14, 15, 18 or perhaps even 20 per cent., they would be burdening themselves in the early years of repayment with more than they could hope to produce from their new investment, unless they had some exceptional and highly sparkling project for which they needed the money. That type of speculative and adventurous investment is not what I am concerned with here.
In any event, if a company raises money on fixed interest terms with such a high yield, it is bound to be gambling to some extent on the rate of depreciation of the currency before the final repayment falls due, and that is not a healthy form of finance.
In the past month there has been an interesting new departure in this area. We know that the Government are aware of the problem and are seeking to do something about it. The Government have declared themselves willing to help companies which want to issue what are called deep discount or zero coupon bonds—that is, companies which are willing to pay back capital to their investors rather than dividends. They give their investors a capital gain at the end of a fixed period rather than a regular dividend or return on their bonds from year to year. Some companies in special positions might find that concession attractive. We know of funds that are looking for suitable investments under Islamic rules, and which are queasy about accepting a return from the borrower that has the character of interest. However, they do not feel the same compunction about taking capital gains when the loan is finally repaid. I am glad that in the London market it will be possible, when the Government have fulfilled their promises, for borrowers and lenders to come together in that type of arrangement under new and favourable tax provisions.
The Government's assumption is that management, in raising long-term money, is willing to take a view on the rate of inflation during the life of the loan and is willing to risk the company's future if the estimate proves to be too high. When the issue is made, the company is already committed to a sum that must be repaid in due course. That sum may be easy to pay if inflation rises again and the currency depreciates, but, if the Government are more successful in reducing inflation than the company has reckoned, the burden of debt through issuing such a bond will also be higher than the company has reckoned and that will make this type of borrowing a speculative and dangerous method of obtaining long-term finance.
The majority of British companies that wish to raise long-term finance have managements that are looking for funds because they are confident of their company's ability to hold its own in the long run, but they do not know for certain how to anticipate the depreciation of the currency and they are not confident that they can make a useful profit for distribution every year. They wish to find a way of raising money that is fair to borrowers and attractive to lenders, whatever happens to the rate of depreciation of the currency.
We must make it possible for such companies to issue what one may call "dynamised" debentures, which will be a genuine prior charge on the company's performance but 763 will be expressed in terms that adapt automatically year by year to the changes in the value of money. That is the gap in the structure of corporate finance that must be restored.
Before the Second World War, the great majority of publicly quoted companies had debentures or preference shares as part of their capital structure. If they were faced with the dilemma that companies now face, the natural thing was to raise money through the issue of debentures, especially if they could secure that issue on a project with an intrinsic value, such as an extension to a factory. That is not possible now because the market does not readily entrust itself in the long term to debentures that return only a fixed dividend regardless of inflation.
If we allow companies to issue a dynamised debenture, there will be a regular rise in the price of the share in the investor's portfolio. When I moved a similar new clause on Report of the Finance Bill last year, that was an additional obstacle to the Government making way for such a proposal, because the investor was liable to a capital gain on the paper profits that he would make through the automatic increase in the dividend with the passage of time. The Government have had the foresight this year to recognise that capital gains tax is a levy on capital that should be ended. That obstacle has accordingly been removed. The difficulty still remains that debenture interest was, and still is, recognised as a charge before the calculation of corporation tax. If, however, it were to be dynamised, it would be held by the Revenue not to constitute debenture interest any more but to be a distribution of profit. This is the obstacle that the Government should remove.
Bank debt—both the real interest and the inflation protection elements—is recognised as a prior charge on a company and is accepted as an element that has to be deducted before the calculation of the company's liability to corporation tax. A payment of dynamised debenture interest, provided that it was dynamised by a recognisable and acceptable formula, should also be recognised as interest and a genuine prior charge. It should not be regarded as a distribution of profits for the calculation of the company's tax liability.
I should like to mention the position of equity holders if a company decided to issue this type of stock. It might be held that the equity owners would be pushed into a lower status because a new class of investor would appear above them in the company's priorities. That would be a complete misreading of the situation. If a company needs to invest and has to get the funds from somewhere, it is desirable that it should be able to do so on favourable interest rate terms. If its judgment is right and the project in which it seeks to invest is going to be profitable in the long run, the equity holders will have the whole of the benefit beyond the prior charge element that goes to the service of the capital by the arrangement that the company makes when it issues the original loan.
Most people, when they think of indexation, fly to the retail price index as the natural index to use. That has been the course followed by the Government in respect of the indexed loans issued in recent months. My view is that the retail price index is the most dangerous index to use. It can have a most malignant effect, as we have seen in Italy, Belgium and other countries recently where the RPI has been used excessively. An undertaking that links its liabilities to the retail price index, which it cannot control, may well find itself in due course with a commitment that it cannot meet. It is like borrowing short and lending long; 764 it is inherently unsound. Therefore, I am not recommending that companies should be encouraged to use the retail price index as the method of dynamising their debentures. We need to find a benign index which means that, whatever happens about inflation, it will always be within the capacity of the borrower to meet his obligations.
The value added by the company seems the natural measure of its capacity to pay its debts year in year out; or accountants may prefer to use the turnover. That is a matter for experts. I recognise that it would be difficult to prevent abuse, but it is for investors to examine closely the terms of the issue before they entrust their money to the company.
I wish now to deal with the tax avoidance minefield. I understand that section 233 of the Income and Corporation Taxes Act 1970 was introduced to prevent companies from declaring a dividend and calling it a prior change for the calculation of corporation tax. That was an understandable provision. What has now become clause 55 on emergence from Standing Committee is a provision to catch firms which, in collusion with their banks, are borrowing on terms that make interest look like a distribution. That enables the bank to take advantage of its own tax position and share the benefit with the borrower. I understand that was also an abuse that my right hon. and hon. Friends felt needed to be tackled.
I cannot discern that the Government have made a concession in clause 55 that enables firms to do precisely what I am seeking to make it possible for them to do in new clause 10. If my hon. Friend is able to convince me of that, I shall, of course, be delighted, but it does riot seem to me, however I read it, that they can put that meaning on it. In any event, I am concerned not with special circumstances, but with an extremely common problem that is threatening our economy. I am asking not for a tax concession but for justice for borrowers and lenders alike in the face of the deterioration of the paper currency, which is not any fault of theirs.
New clause 10 would open the way for the revival of long-term corporate bonds which were an essential source of funds for public companies before successive Governments allowed inflation to undermine the capital market. I hope that my right hon. and hon. Friends will recognise that the problem exists and will say that it must be solved, at the latest, in next year's Budget.
§ 12 midnight
§ Mr. Horam
New clause 36, in my name and that of my hon. Friends, seeks to tackle the same problem as that outlined by the hon. Member for Kensington (Sir B. Rhys Williams) but front a slightly different angle. Its purpose is to ensure that if index-linked preference shares were issued by a company the money that the holders of those shares received when they cashed them in at the end of their lives would not be treated as income for income tax purposes. It would be subject to capital gains tax, but as this is to be indexed after a fashion as a result of the Finance Bill they would not have to pay much there. Some shares would therefore become an attractive place for people to put their money and industry could be helped.
We have limited the new clause to unquoted companies because they often need this help most as their capacity to borrow is most restrained, and one has to start somewhere with what is a fairly radical innovation.
Another advantage of this approach would be that it would enable a company to extend its equity without 765 changing control, which would mean that it could borrow more from banks without affecting the equity ratio too much. Therefore, an extra instrument would be available to the small company to borrow in certain circumstances, which is comparable to the type of instrument that the Government have steadily been making more and more available to themselves, particularly the instrument of indexation.
It is important to bring back the individual lender, as Graham Searjeant said the other day in The Observer:But as everyone from the Wilson Committee to the Grylls study group has pointed out, if we really want to channel more of our savings to industry and investment, then we must open up a direct line between individuals and companies to counter the dominance of banks, building societies, national savings and the institutions.This is the sort of instrument that would enable granny to lend without too much risk; and industry would gain from that source of individual borrowing.
The Government have, perhaps rather shamefacedly, recognised their obligation in this respect—they could hardly do otherwise, when they are extending index linking to so much of their stock. They have to do something to help industry, and recently we have seen announcements from the Government of some changes in the treatment of deep discount bonds, zero coupon bonds and other instruments of this kind.
The Guardian said the other day:The Inland Revenue said that the discount would be treated as interest when the bond is redeemed. Analysts said, however, that the precise definitions the revenue had chosen made such bonds attractive to issue—but not to buy, undermining the objective of encouraging a new market in them. Mr. Peter Turner of James Capel called it a 'marginal improvement'".The Government appear to be doing something. If we are to make an impact on small company financing, we shall need to take radical measures such as those that I have advocated in my new clause.
I hope that the Minister will respond by making plain to the House and to the financial markets what the Government have in mind—whether they intend merely to limit the improvements to the marginal considerations which have had no impact on small company financing, or whether they intend to make important changes whereby companies would have the same facilities as the Government have made available to themselves for borrowing.
§ Mr. Tim Renton (Mid-Sussex)
I am sure that the whole House is grateful to my hon. Friend the Member for Kensington (Sir B. Rhys Williams) for the ingenuity of the scheme which he has proposed. It was typical of him to bring a novel approach to the problems of corporate finance. His message, and that of the hon. Member for Gateshead, West (Mr. Horam), speaking for the Social Democrats, is a genuine one—that everyone should be worried about the inability of companies, both large and small, to raise money on long-term debt in this country in recent years. One sees from our financial press that in this country there have been no issues of long-term corporate debt in sterling for many years. In the Wall Street Journal, on the other hand, a whole page is devoted to new bond issues, new types of bonds, and so on. Clearly the ability of American companies to go on to the bond market and 766 raise money on a 20-year or 25-year term gives them a flexibility in financing which is non-existent in this country.
The alternatives contained in these new clauses highight the problem. However, I want to point out to my hon. Friend and to the hon. Member for Gateshead, West that, in my opinion, it is extremely important to keep the idea simple. If we had dynamised debentures—what a marvellous phrase that is, worthy of my hon. Friend—or if we had index-linked preference shares, I suspect that they would be far too complex and too novel for them to gain general acceptance. I hope therefore, that the Treasury and my hon. Friends on the Front Bench, in their important capacity as Treasury Ministers, will consider a basically more simple approach, such as the one outlined in the recommendations of the committee headed by my hon. Friend the Member for Surrey, North-West (Mr. Grylls), who has done so much work in recent months on the question of companies raising money on the long-term debt market.
I suggest that my hon. Friends on the Front Bench should look for a parallel in this country to what has been happening in the United States—the ability of companies here, both large and small, to raise money by issuing loan stock carrying no dividend whatsoever, at a deep discount, with redemption at a fixed price 20 or 25 years hence. The bond offered in the United States for this purpose would be a bond offered at a price of only 10, carrying no dividend, but redeemable at a price of 100 in 20 or 25 years' time.
The advantage to the investor is that he can work out the sums from his own point of view. He could do a discounted cash flow and work out for himself what the yield would be over the period of the stock. He would then be dependent on the tax treatment that he was afforded—whether it would be treated as a capital gain, or as income. The advantage to the issuer of the stock is that he has nothing to pay in the early years. As such loan stock is often required by the lender for substantial capital expenditure programmes, there is great advantage to the lender in not having to pay out a great deal in interest in the early years before the project comes to fruition. That means that he does not have to pay interest when he is spending on new capital assests and has not yet any income from the project. That is one of the great attractions to the lender of the deep discount bonds issued with no current dividend or yield.
I hope that such deep discount, no-yield bonds will be considered seriously by the Treasury. The key is the tax treatment. It is essential for the proper means to be found for at least a substantial part of the gain to be treated as capital gain in the hands of the individual recipient and as a taxable expense for corporation tax purposes in the hands of the lender. So far the Treasury has failed to build that bridge.
Dealing between intermediaries in how such deals should be treated is also a problem. The tax problems are not insuperable if the Treasury has a mind to conquer them. I am aware of the regular pessimism by the Treasury towards novel experimentation in fund raising. I remember the Treasury's deep concern about issuing Government index-linked gilts. The Government thought that every Arab in the world would pile into them because they would be the only index-linked, fully convertible currency stock in the world and would go to such a premium that they would be embarrassing. That did not happen. In the end 767 the Treasury accepted the arguments. After years of persuasion, index-links have come on to the market. If anything, they have been a damp squib.
I hope that my right hon. and hon. Friends on the Front Bench, who are imaginative and have good financial brains, will not allow the innate and native caution and pessimism of their civil servants to weigh too heavily against them. I hope that they will consider deep discount, nil-yield loan stocks by companies in a spirit of determination to make them work. In some such instrument lies another avenue for companies to raise money from the debt market. That avenue has been closed to them for too many years.
§ Mr. Richard Wainwright
New clause 41 is the third in a useful trinity of measures proposed by the hon. Member for Kensington (Sir B. Rhys Williams), my hon. Friend the Member for Gateshead, West (Mr. Horam) and myself. My new clause is intended to put it beyond doubt that capital repayments on money borrowed by a company shall not be regarded as distributions for corporation tax purposes. It is intended that companies will be able to issue deep discount bonds, or indexed bonds, sure in the knowledge that the cost will be allowable for corporation tax purposes.
One purpose of the trinity of measures is to give the private sector a fairer chance of borrowing necessary money against the extraordinary and growing privileges which the State takes to itself as borrower. Those privileges were increased this afternoon in the Government's new clause 2 which gives the Government the opportunity to be nationalised retail moneylenders to local government and other bodies.
I am glad that the hon. Member for Mid-Sussex (Mr. Renton) made it clear that we are not just discussing the rights and wrongs of taxing or not taxing borrowings in a domestic sense. We were correctly reminded that this is a great handicap to British companies in their world competition with American, German and other companies which have the advantage of a corporate bond market that enables them to borrow capital at reasonable cost and to set it against their tax liabilities.
Furthermore, my clause borrows from the bookkeeping arrangements that the Government have rightly adopted in respect of their own indexed bonds. As the House will know, the Government put into the public expenditure figures year by year the appropriate instalment of the capital repayment on indexed bonds that they have to make at the redemption date of the bonds. The House may be comforted to know that to that extent there is sound accountancy in that that accruing liability is entered into public expenditure year by year.
§ Sir William Clark
I think that the hon. Gentleman has his facts slightly wrong. The Government put the index linking cost in a table in the Red Book, but if one looks lower down that table one will see that that same figure is deducted. Therefore, it is not charged against the national accounts.
§ Mr. Wainwright
I should like to dispute that out of school with the hon. Gentleman. He is usually right in such matters, but we did have this out in the Treasury and Civil Service Select Committee and, rightly or wrongly, I was satisfied that this matter was accounted for.
768 Whether or not the Government do it, it is reasonable accountancy practice that the ultimate cost of paying back on a deep discounted or indexed security should be accounted for year by year. My clause provides that the properly calculated annual instalment shall also be an expense for corporation tax purposes.
There can be no doubt about the State's privilege. It is definitely crowding out borrowers from the private sector. This is the real crowding cut—not the crowding out that the Government always allege flows from high public expenditure. It is crowding out because of the privileges which the State takes to itself and which up to now it has, in tax terms, virtually refused to private borrowers.
On 17 March the Treasury and Civil Service Select Committee examined Treasury Inland Revenue officials and inquired why the Government had borrowing privileges. An under-secretary at the Inland Revenue said:The Government has desired to sell gilts and has deliberately made them attractive at various times. I think the answer is probably as simple as that.An under-secretary from the home finance group of the Treasury added:And much of the cost you get back in lower yield".Whereupon, very appositely, the hon. Member for Enfield, North (Mr. Eggar) commented:There it has deliberately crowded out the private borrower.To that the under-secretary from the Treasury replied:It is certainly a privileged state.I believe, as I hope do other hon. Members, that the scales are unfairly weighted against the private borrower to the great detriment of our industry, especially in export markets.
The trouble in this area arises on the tax front. It is not an offence to issue deep discounted securities or indexed securities as a private borrower, but the tax terms are prohibitive. None of the Government statements that have been made in recent weeks to try to show that the gate has been opened for this type of borrowing by the private sector amounts to a row of beans so long as the tax treatment makes them so unattractive. That was clearly brought out at the same Select Committee sitting, when the same under-secretary said:We have always been—and I think would be—concerned about a situation in which the company could make a payment for the use of money which was deductible from its own corporation tax profits but was rot in any sense chargeable to lax in the hands of the recipient.That fear is unjustified. However, if the borrower can set off the expenses of borrowing against corporation tax, it is argued that the lender will have to pay tax on the capital sums that he receives for the loan. That is wholly unnecessary and unjustified and is supported only by mere superstition. It is sheer superstition to suppose that an expense against corporation tax in the hands of a borrower will, as a matter of principle, be taxable for income tax in the hands of the recipient. There is nothing to justify that. We are dealing with two different taxes and sets of citizens.
The cost of borrowing money to the borrowing company has nothing to do with whether the amount is taxable in the lender's hands. The idea that a particular sum must somehow, in someone's hands, give rise to a tax liability is nonsense. However, to cover up the whole thing and to make it seem respectable, it has been dignified by the word "symmetry". The superstition that there is a symmetry in tax to which we must all pay obeisance has crept into our tax language. That is a false god if ever there was one. No principle can justify the argument that, 769 because a sum is an expense in the hands of one group of people, it must be taxable when it is in another's hands. Those who deal with tax know that some sums are taxed four or five times over in different hands while other sums escape tax altogether.
I do not wish to detain the House with the innumerable examples that come to mind, but the obvious example is the golden handshake. A golden handshake is a proper expense to be set against corporation tax by the company that gives the handshake. As we all know, if the golden handshake is worked out properly, it is not taxable in the hands of the recipient. That is just one example of the way in which the same sum is allowed as an expense for corporation tax but is completely free of tax in the hands of the recipient.
I ask only that similar rules should apply. As has been said, if we are to be more competitive, it is vital that the private sector should be able to borrow in the sophisticated ways that the State is exploiting as much as possible. I shall be very disappointed if the Government continue to maintain that the State must have privileges that are to be wholly denied to the private entrepreneur.
§ Mr. Beaumont-Dark
I shall be brief because otherwise I should only repeat what has been said by other hon. Members. Deep discount bonds have a real part to play in industry's financing. When the Government gave themselves as borrowers the privilege of having indexed bonds it was only fair to give the industry the same chance.
As the hon. Member for Colne Valley (Mr. Wainwright) said, the word that sums up what is wrong with the Revenue's view is "symmetry". I hope that we can get away from that word. When the indexation of capital gains tax was mentioned in the Budget speech it was greeted with much applause by everybody, because it showed an imaginative way of doing things. Within 48 hours, when one saw the Bill, one realised that, although the Government were full of good and splendid intentions, the Revenue and the draftsmen had soon turned that good idea into an administrative mish-mash and almost a nightmare. There have been few changes to make it anything else.
When the next good idea arrived of deep discount bonds for industry, which many of us had been trying to achieve for years but which the Revenue said was quite impossible and would impoverish the State, the Minister made a statement that many of us welcomed with open arms. Within 24 hours the Revenue and its draftsmen had turned what looked like another good idea into a lead balloon.
I hope that it will be some months before tha legislation is drafted so that this good idea can be returned to the House, thoroughly discussed and turned into sensible legislation. When one read about paying tax on dividends before they were received, one knew that, although the political masters thought that it was a good idea, the Revenue and its draftsmen wanted no part of it.
I hope that we shall learn from the indexation of capital gains tax that good ideas should be allowed to flourish and succeed. Indexing, which was not supposed to be able to work, can work. Discount bonds do not mean that people are avoiding taxation. The idea that stalks the Revenue's corridors is that somebody may get away with something. We should be interested in making industry prosper and bringing forward ideas that will encourage industry to take 770 the enormous risks involved in borrowing money. The way to do that is to open up the long-term market to industry away from bank debt. We all know how painfully short-term bank debt can be with long-term ideas.
I hope that the Chancellor's excellent idea will be allowed to flourish, that symmetry will not be allowed to rule, and that a good idea will become a good Bill. If it becomes a good Bill, industry will borrow and prosper more rapidly.
§ Mr. Michael Grylls (Surrey, North-West)
I want to comment briefly on the proposal initiated by my hon. Friend the Member for Kensington (Sir B. Rhys Williams). We are all sometimes presumptuous and think that important debates should be held in prime viewing time and not in the middle of the night. It is ironic that when the House talks about long-term money for industry it is in the middle of the night. It is an important problem and it may not receive the attention that it should. I welcome the interest that the Government have taken. I hope that the tax treatment will be sorted out. As my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) said, it is crucial for industry.
It is odd that Japan is the only country that has an investment-led recovery. Yet it is also the one country that provides long-term credits on a low pay-back basis. As the Committee tried to show, there is a lesson to be learnt from that. If it has wider support, it will be very good for industry.
Measures of this kind are desperately needed because, as my hon. Friend the Member for Mid-Sussex (Mr. Renton) rightly said, projects tend to have a negative cash flow in the early stages so that it is difficult to pay high interest rates. That is why there is need for a deep discount or the American accrual system in which in the early period one is deemed to have paid the full interest when one has perhaps paid only half and one then catches up at the end of the load period.
It would be eminently sensible to meet the realities of industry in this way. Most projects will involve research and development and the difficulties of getting anything new going. Funding of this type is therefore needed and this may be one of the gaps that British industry has suffered. Certainly there is ample evidence to suggest that.
It has been valuable to draw attention to this matter, albeit at half-past midnight, and I hope that the Government will take this short but important debate as encouragement for the modest steps that they have taken and that they will take further steps in next year's Finance Bill. Indeed, they could do something before then if they were so minded and thus enable these markets to get going and the bond market to help industry once again. This has been one of our most important debates. I hope that the Government will be encouraged by the unanimity throughout the House and will move ahead a little further.
§ Mr. Ridley
I, too, welcome the three constructive suggestions that have been put forward for reviving the long-term capital market. It has been a concern of many, not least my hon. Friend the Member for Surrey, North-West (Mr. Grylls), who has consistently drawn attention to the need for this. He has put forward many constructive ideas and is still working on the problem. I pay tribute not just to what he will achieve but to what he has already achieved.
771 We have put forward some very attractive propositions on this subject in recent weeks, although, listening to the debate, one would have thought that the House had not realised this. When I deal with the new clauses in detail, I shall show the extent to which the points raised have already been met. Before doing that, however, I should say something about the wider context.
Earlier today we had a debate on monetary implications and whether there was a need for overfunding. One way in which the need for overfunding can be reduced must be to take long-term industrial borrowing away from the banks and to take it straight from the savers, that is, the investors. If there is a crowding-out phenomenon, as the hon. Member for Come Valley (Mr. Wainwright) constantly alleges, the way to deal with it is to get the long-term capital markets going—although it is scarcely fair to accuse the Government of crowding out when they have to provide the funds for the banks to supply industry. We simply seek to cut out the two intermediaries—the Government and the banks.
We have considered zero coupon bonds, deep discount bonds, indexed bonds and any other type of instrument that the City or the borrowers care to think up, including suggestions such as value-added stocks which my hon. Friend the Member for Kensington (Sir B. Rhys Williams) especially recommends. Such stocks can take a whole variety of forms.
The first principle is that it should be left to the ingenuity and requirements of the borrowers and the lenders to design between them lending instruments that suit their purpose to the best. Of course the tax treatment is relevant, but for every different combination of borrower and lender, or different type of instrument and the relevant type of tax treatment, one will probably come to a different answer. Therefore, what we have done—I believe this is the right thing to do—is to provide for every possible route and to provide tax treatment in three main ways so that borrowers and lenders can choose that which suits them best.
First, the annual increase, whether it is indexed, deep discount or zero, can be treated as rolled-up interest and paid at maturity of the bond. That is the case at present and there is nothing to stop it happening. To those who throw symmetry at Treasury Ministers, I say that if an industrial borrower borrows from an exempt fund or an overseas lender he will obtain corporation tax relief on the repayment increment and the lender will be exempt from tax. In that way, there will be no tax payable anywhere. Indeed, the immoral principal of the Liberal Party of asymmetry has even been conceded in that case, although the hon. Member for Come Valley never realised it.
Secondly, as an additional, and in some cases a preferable, route to that, we were hoping to be able to legislate—we would need to legislate—for the accrual system which is practised in America. The system is that every year the interest is deemed to have been paid, although it has not been paid, and that is treated as a tax loss in the hands of the borrower and income in the hands of the lender. So, again with an exempt fund that does not pay tax, there is no tax to pay by the lender whereas the borrower can offset corporation tax on behalf of interest that he has not even paid. Where is the symmetry there? That is a real tax advantage, but, not content with that, we have suggested that there is a third possible route.
The gain on any of these bonds could be treated as a capital gain, in which case it would be a capital gain in the 772 hands of the lender, but after indexation probably very little tax would be payable In the hands of the borrower it would not be offsetable because a capital loss cannot be offset against profits for corporation tax.
Those are the routes that we set out, but I must put forward one or two caveats because legislation is not yet before the House. First, we hope to legislate the accruals route. It is complex and there will be difficulties. We cannot promise when or exactly what form the legislation will take, but we will report again to the House as soon as we are able to do so.
Secondly, there will be certain anti-avoidance provisions for early sale of rolled-up interest bonds by private individuals before maturity. Otherwise, a tax avoidance device would be opened that the House would not tolerate for one minute. I hope that the House will realise that these are golden opportunities.
I now wish to consider the three new clauses. The first, tabled by my hon. Friend the Member for Kensington, would treat both the interest and the capital uplift according to the value added by the company in the way that he described. Those bonds, which could be issued now, could either be treated by agreement between the lenders and the borrowers as rolled-up interest bonds or they could be treated as capital uplift.
Clause 55 deals with the point which my hon. Friend seemed to be very concerned with, that the interest could be treated as interest and could be offset against corporation tax. Dynamised though it may be, it is still offsettable against corporation tax under clause 55. That is because clause 55 provides that whether it is offsettable depends in whole or in part on the results of the company's performance. As my hon. Friend's suggestion is dependent at least in part on the results of the company's performance, it would be treated as interest and it could be rolled up and deducted for the future. If we legislated the accruals route, it could be deemed to be paid and charged annually in the way that I described. Although clause 55 was designed as an anti-avoidance provision—and it will not be too popular with some companies—it at least meets my hon. Friend's suggestion.
Equally, my hon. Friend could have those bonds treated as capital bonds, again by agreement of lenders and borrowers, and the capital route treatment would apply. To those who keep saying that we have favoured Government stock, surely that is the answer. Identical bonds to index-linked bonds can be issued by companies, and the only difference—I admit that this is a slight difference—is that for the first year the indexation uplift would not be allowed, whereas with indexed gilts it is. There is no other difference in treatment. My hon. Friend will find that there is nothing to stop the sort of stock he has in mind being issued straight away and that the parties can choose the tax treatment which they find most suitable.
§ Mr. Renton
may have misunderstood my hon. Friend, but surely there is a profound difference. In the case of index-linked Government gilts, after a year no capital gains tax is payable In the case of the type of index-linked corporation stock that we have been discussing, probably the minimal tax to be paid will be capital gains tax on the uplift. There is a profound difference.
§ Mr. Ridley
If the bond is index-linked, it will not rise by more than the index. Therefore, if it is treated as a 773 capital bond it is impossible for it to rise more than the index and there could not be a taxable gain. The only difference is that the first year of inflation is not allowable under the 12-month waiting rule.
I come to the new clause tabled by the hon. Member for Gateshead, West (Mr. Horam). Unquoted companies can, under clause 48, buy back index-linked preference shares in exactly the way that he wants. They would be treated as a capital gain on redemption rather than at distribution under clause 48 and schedule 9. But there are two conditions in the main which he has left out of his clause but which we have included in clause 48. There would need to be a five-year holding period, to outwit blatant avoiders and evaders who used it simply to milk a company, which would be possible, and also we have to guard against the company paying a minimum dividend under clause 48(1) (b) (i). There are those two exceptions, but if the borrowers and the lenders choose the right investment the tax treatment that my hon. Friend seeks is available. There is thus no need for further legislation and there is no need for the clause to be pressed to a Division.
The preferred treatment of the hon. Member for Colne Valley for deep discount and indexed bonds is that the uplift in the capital value should be allowable against corporation tax but that the interest should be deductible even if no interest is paid. The hon. Gentleman, for example, can choose whether to treat the bond as a rolled-up interest bond or as a capital bond so long as both parties make clear what they intend it to be from the start. In that instance the interest would be deductible and that would be fine. There would be a need for an anti-avoidance provision to stop sales by private individuals before maturity.
On the annual deductibility of interest, the hon. Gentleman has borrowed half a leg of the American accrual system. If we were to legislate on that basis next year, we would be able to provide him with what he wants. The hon. Gentleman says that the interest which has not been paid should be deemed to have been paid in the hands of the borrower and that he should be able to deduct it from his corporation tax. However, the clause does not provide that the interest which has not been paid should be deemed to have been received by the lender and that he should have to pay tax on it. That is a serious omission. It does not destroy the purpose of it because, as I have said, exempt funds and overseas borrowers are not liable to tax in any event.
I do not think that it would be possible to work out a system of taxation on an accrual basis for indexed stock because it would not be possible to know how much should be deemed to be paid each year without looking into the crystal ball and fixing the RPI for 10 years hence, and that cannot be done. That route would be difficult to provide for in legislation.
§ Mr. Richard Wainwright
If the difficulties are as great as the hon. Gentleman claims, how can the Government manage to enter in the Red Book year by year a carefully computed sum by reference to inflation over the past year in respect of their obligation to repay indexed bonds? The Government do that satisfactorily in the Red Book. Why should a private company not be capable of doing the same thing and being allowed to do it?
§ Mr. Ridley
There would have to be a balancing charge on the redemption of the stock. It becomes too complicated, which is what the hon. Gentleman would discover if he studied the matter. If the annual deemed interest payments are found to be greater or smaller than they should have been when the index is finally known, there has to be a correction at the end of the period and the arithmetic involved in that, as well as the complication, means that the game is not worth the candle, especially as there are so many other ways in which the stocks can be marketed.
We have provided three routes and we have clarified tax treatment with the one exception. We hope that legislation for the third route will be available soon. It may be available next year subject to our studies and review. If hon. Members are to talk all this down and are not prepared to recognise the advantages of what the Government have done, they are putting off British companies from going to the market to borrow these stocks. It will be no surprise to the House to know that, since a fortnight ago, when we made the announcement, all those in the queue seeking to borrow these stocks have been foreign companies. Hon. Members and the press are determined to say that the Treasury is stingy, that Ministers do not understand and that the arrangements that have been made are awful—all the things that my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) has said—but all that they have done is to put off British companies. My hon. Friend has not put off the American companies as they are used to such stocks. I recommend to hon. Members that, although we have met the burden of most of the new clauses, they might try to sell what we have done rather than talking it down.
§ Sir Brandon Rhys Williams
I thank my hon. Friend the Minister for what he said, which will have to be studied extremely carefully and with the advice of experts. The House will agree that the meaning of the new provisions does not immediately leap to the mind like a childrens's rhyme. However, my hon. Friend is clearly bent on solving the problem and has gone a long way towards doing so. I do not want to ask the House to support the new clause because we have gained a great deal tonight. We must study carefully my hon. Friend's remarks.
I thank my hon. Friends who have supported me in the debate, particularly my hon. Friend the Member for Surrey, North-West (Mr. Grylls), because he has pioneered this subject and has helped to light up the scene by the activities of his Committee. It is helpful, and many people will rejoice, that we have said goodbye to symmetry. Much has been said on that subject which will be remembered and used again.
However, as my hon. Friend the Minister said in his closing remarks, the problem remains that British companies have not leapt to take up the opportunities that he believes have been opened up. Perhaps that is because this is indeed such a minefield, and the provisions that the Government have introduced are so complex. I hope that the debate has served a useful purpose. I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.