§ Mr. RidleyI beg to move amendment No. 83, in page 45, line 3, leave out from beginning to 'shares' and insert
'but subject to subsection (4) below.(4) Subsection (1) above shall not apply in relation to—if (in either case) the shares were issued to and continuously held by the person from whom they are redeemed.
- (a) the redemption of fixed-rate preference shares, or
- (b) the redemption, on terms settled or substantially settled before 6th April 1982, of other preference shares issued before that date,
(5) In this section—fixed-rate preference shares" means shares which—This also is an amendment to the purchase of own shares provisions. When a company buys back or redeems its own shares, the normal position is that any payment over and above the return in the original subscription price is a distribution of profits. Clause 49 ensures that when a shareholder is a dealer in shares he is not to be treated as receiving a distribution. Instead, the transaction is treated in his hands just like any other disposal of shares that he makes—as a sale. The purchase or redemption price is accordngly taken into account in arriving at his dealing profits.
- (a) were issued wholly for new consideration, and
- (b) do not carry any 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—
"new consideration" has the same meaning as in Part X of the Taxes Act; and'.
- (i) are of a fixed amount or at a fixed rate per cent. of the nominal value of the shares, and
- (ii) together with any sum paid on redemption, represent no more than a reasonable commercial return on the consideration for which the shares were issued;
There is a special case which needs further consideration. It is that of institutions or others who do not buy and sell shares but provide finance by subscribing for shares and are treated as carrying on a trade or providing finance. They also are covered by the clause. The price that they receive on the sale of the shares by them, otherwise than to the company, would be taken into account in computing their profits chargeable to tax under case 1 or case 2 of schedule D. That gives rise to two problems that it is right to resolve.
First, some institutions have in the past subscribed for preference shares of various types. There is usually little premium due on their redemption and the change of treatment will have little effect. It has been suggested, however, that in some cases the finance package has been negotiated on the basis of a considerable part of the consideration of the shares and was to be paid not in the form of dividends, which were accordingly lower than usual, but in the premium on redemption. When that financing was negotiated, it was expected that the premium would be treated as a distribution which in the hands of a corporate institution is franked investment income and therefore not subject to further tax. The change introduced by clause 49 will increase the tax 935 consequence. They could thus obtain a significantly smaller return than expected from the investment. That matter should be put right.
The provision of finance on that basis should be encouraged to continue. It is advantageous to the company that is raising finance to be relieved of some of the burden of paying for finance in the early years when it needs to retain as much of its profit as possible. It is helpful to be able to issue shares on terms under which the company must pay a lower than usual rate of dividend and makes it up only when the shares are redeemed. Clause 49 will discourage that. Those who provide that type of finance must take more of a return in the form of dividend if they are to continue to be able to offer finance and receive the same tax reward as before doing so.
In providing for the future, however, we must be careful. Clause 49 is partly an anti-avoidance provision in so far as we make a breach in it for shares that are already issued. There is no scope to take advantage of that breach. That is not so for shares that will be issued in future.
In future, therefore, I propose to restrict the change in the rules for fixed-rate preference shares as defined in the clause. That is based on an existing tax definition which broadly excludes shares which, though called preference shares, are nearer to ordinary shares. That will go a long way towards meeting the points that have been put to us.
§ Mr. Robert SheldonI understand the way in which the clause affects the return on investment when one is concerned about the redemption of fixed-rate preference shares, but does the hon. Gentleman believe that that is a problem for the future? I should have thought that there were few, if any, cases when that applied to transactions that have taken place before the conception of the present legislation. Perhaps the hon. Gentleman could enlighten me. I know that he has great hopes for the extension of this form of lending instrument for the future. If that is so, this type of legislation is desirable and necessary. Without his expectation for the future, however, would it have been necessary?
§ Mr. RidleyI must agree with the right hon. Gentleman that when the legislation was designed we did not expect there to be any cases of this kind. Only when it was published did the possibility come to light that some loans of this kind existed. It is a reasonable and respectable form of finance. First, therefore, we did not wish to prejudice loans that existed. Secondly, we wanted to facilitate the continuance of this form of financing.
We are verging on the subject of yesterday's debate on different forms of lending instruments. The vast variety of these and the differing tax treatments mean that one must pick one's way through this field carefully. Our guiding principle has been to give people the maximum freedom to do that which suits them most. The amendments were drafted with that in mind.
§ Amendment agreed to.