§ Mr. Roderick
asked the Chancellor of the Exchequer whether he will take action to prevent tax avoidance by means of artificial payments of interest.
§ Mr. Denzil Davies
The Inland Revenue is aware of recent attempts at tax avoidance by what purport to be payments of interest in advance on large artificial borrowings. Tax relief is claimed on this interest.665W
The Inland Revenue is challenging these schemes under the existing law. But assuming that the matter goes to appeal, it could be some years before a final ruling is obtained. It appears that there are a considerable number of these schemes, and in view of their wholly artificial nature, it is unacceptable that substantial amounts of tax should remain at risk. To put the matter beyond doubt, therefore, legislation will be introduced at the Report stage of the Finance Bill to counter artificial devices for exploiting the provisions which allow tax relief for interest paid.
The new rule will apply generally to all payments made after today. Payments up to and including today will not be allowed either by deduction, set off or carry forward, against corporation tax profits arising after 8th June 1976, or against income tax assessments for years after that date (including a proportion, on a time basis, of income assessed for 1976–77. If any taxpayer is in doubt whether an arrangement he has entered into is within the scope of this statement he is advised to send a full account of the facts and the relevant documents to the
Amount of borrowing: (a) total outstanding US $ (b) of which, amount carrying exchange cover guarantee US $ All Nationalised Industries … … … … … 7,297.9 million 6,599.2 million Of which, Post Office … … … … … 1,288.4 million 1,193.0 million Local Authorities … … … … … 1,347.5 million 1,248.7 million
The sterling costs and benefits to the exchange equalisation account of the exchange cover scheme depend upon the exchange late relationships between sterling and the various currencies borrowed at the beginning and at repayment of individual loans and the movement in United Kingdom and overseas interest rates throughout the period of the loans. During the life of the loans the EEA benefits as the result of higher interest rates paid by the public sector borrowers. The cost to the EEA of the scheme consists of the increased sterling liability of the foreign currency borrowing when the loans are repaid. If all the loans in the second column were repaid now, i.e. prematurely, the borrowers could be expected to have to make some kind of compensation payments to the lenders. The calculation of the net cost to the 666W Board of Inland Revenue. Somerset House, London, W.C.2.