PRESCRIBED RATE OF INTEREST (Hansard, 16 July 1987)

§ Mr. Blair
Clause 89 enables the Treasury to fix the rate of interest from time to time as it wishes. I should be grateful if the Economic Secretary would tell me what practice the Treasury intends to pursue. Will it be the same as it is at present?

§ Mr. Lilley
The hon. Gentleman has raised an important point. We intend to consult widely on the appropriate structure of interest rates within pay and file, and that consultation will begin shortly. The Government have no fixed view. It will, of course, be important to ensure that the system is both workable and fair, and is as widely agreed within the industry as possible, while at the same time meeting the needs of the Revenue, but we do not approach it with a fixed idea in our mind.

§ Sir William Clark
After consultation, let us suppose that it is agreed that the interest chargeable is one, two or three points above base rate, or whatever is thought reasonable. If we hypothesise a charge of two points above base rate, which today would give a rate of 11 per cent, would it. not be unfair to keep the rate at the previous level—particularly if the base rate came down'? I think that a month or two after the base rate comes down the interest charge should come down by the same amount.

§ Mr. Lilley
I shall certainly bear that in mind. If there were too great a difference between the rate applied and that prevailing in the market, problems would indeed arise. We should have to take such considerations into account when reaching a decision.

§ Mr. Blair
I should like to pursue the point a little further. Presumably at present interest is simply loaded on to whatever corporation tax is unpaid, and that is fixed by the commissioners in some way. How is it done? I am a little concerned about the Treasury fixing the interest rate. We are told that there will be consultation on the proper basis on which that is to be done. However, the whole structure of the provisions in the Bill is to put considerable power into the hands of the Inland Revenue or the Treasury, which will be making the assessments. There will be automatic penalties, and the prescribed rate of interest will be fixed by the Treasury from time to time.
1334 What concerns me is that there will probably be very little opportunity for us to debate the outcome of the change in structure. When the Treasury decides the prescribed rate of interest, will we have an opportunity to decide whether it is correct? The hon. Member for Croydon, South (Sir W. Clark) has raised a fair point. Will the rate be one, two or three points above the base rate? The difference between those figures could he millions or even hundreds of millions of pounds. It is important that we obtain clarification and are given some assurance that any Treasury decision on the prescribed rate of interest will be made only after the widest possible consultation, and that we shall have an opportunity to comment after that decision.

§ Mr. Lilley
At present the interest rate is determined by statutory instrument placed by the Treasury. In theory, the House could object every time that the interest rate is changed. I understand—although I will correct this if I am wrong—that we will be able to establish a system that must be agreed by the House rather than the present pattern in which rates are altered by statutory instrurnent. However, that point may have to be clarified.

§ Mr. Blair
It would be helpful and worthwhile if we were given some opportunity to assess the mechanism that the Treasury intends to use. The Economic Secretary has put his finger on a significant change. At present, through statutory instrument, we can vote against the Treasury's decisions. Presumably that will change when we have agreed to the new method of assessment. The Treasury will then be able simply to change the rate of interest, and there will be no opportunity to dispute it after we have agreed that method.

§ Mr. Lilley
One option that will have to be considered is a differential between interest rates. At present the differential relates to the time when interest becomes payable. It is payable after six months if the company underpays, and after 12 months if it overpays. Although there is currently the same rate of interest, there is no symmetry between the two. If there were symmetry, there might be a possibility of round tripping, and so forth. I do not wish to mislead the Committee by suggesting that just one rate of interest will necessarily result.