DEBTS OF OVERSEAS GOVERNMENTS ETC. (Hansard, 16 July 1990)

§ Mr. Peter Viggers (Gosport)
I beg to move amendment No. 42, in page 63, line 26, leave out 'subject to subsection (3) below' and insert 'in certain circumstances".

§ Madam Deputy Speaker
With this, it will he convenient to consider amendment No. 43, in page 63, line 40, at end insert— '(2A) Subject to subsection (3) below, the circumstances in which subsections (1) and (2) apply are where either—

(a) the loss results from a transaction with a connected party, or

(b) within a period of twelve months before and after the event giving rise to the loss the company enters into transactions in the same class of debt with the result that the total amount owed to the company by debtors of that class is no less at the end of that period than it was at the beginning;

and for the purpose of this subsection parties are connected and debts are of the same class if they meet the conditions laid down in regulations. (2B) Regulations under subsection (2A) above shall be made by the Treasury but shall be subject to annulment by a resolution of the House of Commons.'.

§ Mr. Viggers
There is an important point of principle at stake and the amounts involved are large.
Clause 74 and the amendments deal with the treatment of sovereign debt and the rights of banks to write off bad debts against profits. I have always understood that it is an essential point of principle that taxation should be levied on income or profits, which should be properly assessed. It is the duty of directors and auditors to provide a true and fair view of a company's accounts so that taxation can be levied according to that true and fair view. According to those principles, it is critical that bad or irrecoverable debts are written down or written off and proper deductions allowed. Clause 74 breaches that principle. Sovereign debt write-offs are allowed only on a formula basis of 5 per cent a year of the original debt. Prudence may require a higher level of write-off: the directors and auditors may well decide that it is appropriate for larger deductions to be made from the company's accounts. The Bill as currently drafted, however, prevents tax relief in that year.
12.30 am
I am grateful to my right hon. Friend the Secretary of State for writing to me and spelling out the Government's view. I also listened to the arguments that were advanced in Committee. The Government have presented three arguments in favour of clause 74 in its original form. First, they seek to show that it will benefit everyone to introduce certainty and clarity. Secondly, they argue that, according to the Red Book, they will gain some £200 million in the current year as a result of their proposed change. I think that the second argument contradicts the first; while certainty and clarity may indeed be introduced, the banks will lose out to the tune of £200 million this year.
809 The third argument—it is to the credit of my right hon. Friend and his colleagues that they have not tried to make a great point of this—is that banks could engage in tax avoidance. My amendments take account of that possibility and provide for anti-avoidance, but only in cases in which banks have been responsible for avoidance by way of swaps with other banks or deals with connected persons.
In my view, the arguments against the clause as drafted are strong. First, it sets a precedent. In many instances, directors and auditors will seek to put forward their own views on the valuation of assets: it is fundamental that they should be allowed to do so, and that tax should be levied according to their valuation. In the case of, for example, the valuation of properties, stock, goodwill—my right hon. Friend and I both know a good deal about that—and unexplored oil acreage, it is necessary for directors and auditors to form a true and fair view. If their commercial judgment is to be segregated from taxation, I believe that that is a point of principle that the Government will live to regret.
The clause provides for the Treasury to produce regulations. Let me say in advance that I shall not seek to divide the House, but I hope that, when drafting the regulations, my right hon. Friend will take account of what I have said, and also of the cogent points made in Committee.

§ Sir William Clark
I support my hon. Friend the Member for Gosport (Mr. Viggers). It is extraordinary that the Inland Revenue should take it on itself to decide whether a debt is good or bad: it has no experience whatever of the conditions of the person who owes the money, and no idea of the stability of the country involved —for most of the debts are overseas debts.
Surely, for the Revenue arbitrarily to limit bad-debt provision to 5 per cent.—or whatever formula it may come up with—is entirely contrary to all our tax experience. In the case of any company's accounts, the computation is put in by the accountants; the accounts have been audited, and the auditor's certificate has dealt with the bad-debt provision. If the directors and the company's financial section cannot satisfy the auditor that the bad-debt provision is too much or too little, it is a reflection on the certificate. Although the auditor has passed accounts saying that, say, 100 units is bad-debt provision, the Inland Revenue, with no experience of the local circumstances —mainly overseas—of the debt, may then arbitrarily decide that, in the computation of profits for that tax year, the only amount allowed is a percentage of the sovereign debt.
As my hon. Friend the Member for Gosport has pointed out, there can be argument about the value of oil rights or goodwill. In the case of sovereign debts the bank knows how much has been loaned. The assessment of the bad debt provision for that loan is determined not only by the bank's board of directors but by its representative, the bank manager abroad. Between them they have to satisfy the auditor, and if he is satisfied that the bad debt provision is valid and reasonable, I cannot see why the Inland Revenue, which has no experience of the circumstances of the loan, should take it upon itself arbitrarily to say that the provision shall be only a certain amount. That is a violation of what has happened in the past about bad debt provision.
810 We all congratulate my right hon. Friend on his promotion to Secretary of State for Trade and Industry. If he is convinced by the argument advanced by my hon. Friend the Member for Gosport, he should persuade his successor to take action to remove this anomaly.

§ Mr. Nicholas Brown
It will be no comfort to the hon. Member for Gosport (Mr. Viggers) and the right hon. Member for Croydon, South (Sir W. Clark) and the hon. Member for Berwick-upon-Tweed (Mr. Beith) to learn that the arguments advanced by them were vigorously advanced at length by their hon. Friends in Committee. They were not warmly received by the Opposition or by the Government. I am as certain as one can be in such matters that the Secretary of State will not accept the amendments. It would be peculiar if he did because they are wrecking amendments. They are designed to emasculate new section 88C of clause 74 which deals with actual losses on the sale or write off of debts rather than the claiming of deductions for the provision which new section 88B covers.
Currently, such losses may be claimed only at 5 per cent. per year where the debt confirmed is a less-developed country debt that has already been provided against unless the debt is sold to the debtor nation, in which case the whole loss may be claimed. Amendments Nos. 42 and 43 would mean that the 5 per cent. restriction applied only in two narrowly defined cases; otherwise the whole loss would be claimable. I am sure from what the hon. Member for Gosport and the right hon. Member for Croydon, South have said that their intention is to restrict clause 74 as narrowly as possible. That is not in the spirit of what Ministers said in support of the clause, and it is certainly not the view of the Opposition. I am sorry that I cannot offer the hon. Gentleman any greater comfort. The hon. Member for Gosport said he did not intend to push the amendment to a Division. However, if we are asked to vote on it, I shall request my hon. Friends to vote against the amendment.

§ Mr. Lilley
I am tempted to urge my hon. Friend the Member for Gosport (Mr. Viggers) to push his amendment to a Division so that I may have the pleasure of joining the hon. Member for Newcastle upon Tyne, East (Mr. Brown) in the Lobby. I enjoy debating such matters with him, but we rarely vote on the same side. My hon. Friend the Member for Gosport and my right hon. Friend the Member for Croydon, South (Sir W. Clark) advanced important issues which we considered at great length in Committee. I congratulate them on the pithiness of their contributions which were in contrast to those made in Committee. They made their case effectively.
My hon. Friend the Member for Gosport says that it is a matter of principle that tax should fall on profits properly assessed at the time that they are assessed. However, the tax system contains the well established precedent that tax may be phased differently from the way in which it appears in a company's accounts. Not least, capital allowances for tax purposes may differ from those taken in management and company accounts. I do not think that any great principle is involved on timing. We are altering only the time in which the banks pay their profits and not the measure of profits, except in the context of the point raised by my right hon. Friend the Member for Croydon, South (Sir W. Clark).
811 The essence of the matter is that sovereign debt is sui generis. It is different from the sort of debts that ordinary companies incur. A bad debt that is incurred by a company is normally fairly obvious because the debtor has ceased to exist, has disappeared, has been made bankrupt or has become insolvent. Countries rarely disappear and are rarely declared bankrupt.

§ Mr. Nicholas Brown
Sometimes.

§ Mr. Lilley
That may happen sometimes, but only rarely. I think that in one instance the debts were carried with it, but I must be careful about what I say.
It is a matter of assessing whether a loan is likely to be repaid at the end of its life. I am sure that my hon. Friend the Member for Gosport, who wants profits and debts to be related to timing, is not suggesting that we wait until the end of the loan before we assess whether it is a bad debt and should be written off and given tax relief. Sometimes it is necessary to make an estimate beforehand. It has long been accepted that the Bank of England's matrix is an authoritative guide to the necessary provisions that will be acceptable for tax purposes under tax law. Quite commonly, banks have made provisions in excess of the bank's matrix, and there has been no suggestion that they are automatically eligible for tax. It is only the bank's matrix, which suggests the prudential level that is required, which has been taken as the amount to be written off for tax purposes. In this underlying legislation we are enshrining the matrix in law and removing uncertain elements. A range of parameters has been defined and we are taking mid point. We are removing one or two subjective criteria and leaving objective criteria, and providing certainty and objectivity without changing the principle. I hope that my hon. Friends will understand that I cannot recommend acceptance of the amendments.
My hon. Friend the Member for Gosport said that an attempt has been made to cover tax avoidance. The attempt has not succeeded because debts sold out of the group by one company may well be replaced by debts bought from outside the group by another company in the same group, and that other company may be outside the United Kingdom. In practice, it will be impossible for us to police an international banking group to ensure that that does not happen. Consequently, the possibility of avoidance would be rife if the amendments were accepted. I urge the House to reject the amendments. I understand that it is unlikely that they will be divided upon.