Clause 19. — (Interest Payable Abroad to Be Deductible in Computing Profits in Certain Cases.)

Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 23 June 1949.

Alert me about debates like this

Photo of Mr Osbert Peake Mr Osbert Peake , Leeds North 12:00, 23 June 1949

I beg to move, in page 12, line 32, after "secured," to insert "mainly."

Clause 19 is inserted, I believe, in order to correct a decision of the courts to the effect that interest payable overseas by a person carrying on a trade in the United Kingdom is not liable as a deduction for assessment of Income Tax in the United Kingdom. The Clause provides that, subject to five very stringent conditions, interest of that character shall be liable against assessment for Income Tax here. The second of the conditions is that the payment of the interest is secured upon assets outside the United Kingdom which are employed in the trade. It has been represented to us that there may be cases where the payment of the interest is primarily secured upon assets situated overseas but where also there is a floating charge upon assets situated in this country. For that reason we propose to insert the word "mainly."

Photo of Sir Frank Soskice Sir Frank Soskice , Birkenhead East

I am happy to say, on behalf of the Government, that we can accept this Amendment.

Amendment agreed to.

Photo of Mr Osbert Peake Mr Osbert Peake , Leeds North

I beg to move, in page 12, line 41, to leave out from the beginning, to "without," in line 42.

Encouraged by the success we have just had, I move this Amendment. I need not repeat what I have said about the Clause, but the fifth condition of being allowed to charge interest incurred overseas against assessment of Income Tax here is that the interest is paid to a person not resident in the United Kingdom. There are cases where persons have two residences, one in the United Kingdom and one elsewhere, and we wish to provide for the case where the payment of interest overseas is made to a person who is not only resident overseas, but also resident in the United Kingdom.

Photo of Sir Frank Soskice Sir Frank Soskice , Birkenhead East

I am very sorry to disappoint the right hon. Gentleman on this occasion. The position with regard to a person who is resident in the United Kingdom would be that he would be taxable upon the interest, the debenture charge, or whatever it may be, which is paid to him. That being so, the English company paying the debenture charge, in the ordinary way, would be entitled, if it were paid out of taxed income, to deduct the tax in paying the resident and retain that tax. If it was not paid out of taxed income, the ordinary Rule 21 would apply and the tax would have to be paid out of tax to the Revenue. My reason for saying we cannot accept this Amendment is that the position is already dealt with under existing legislation.

Amendment negatived.

11.0 p.m.

Photo of Mr Selwyn Lloyd Mr Selwyn Lloyd , Wirral

I beg to move, in page 13, line 6, to leave out subsection (3), and to insert: (3) Where the trade is carried on by a partnership or by a company in which the director in question has a controlling interest, sums allowed in respect of interest payable to any partner or the director in question shall not exceed an amount which the Commissioners having jurisdiction in the matter may consider a reasonable rate of interest in all the circumstances. Subsection (3), as it stands, represents an exclusion from the concession which the Clause represents. The subsection deals with two separate matters. It says: Where the trade is carried on by a partnership, this section shall not apply to any interest which is payable to any of the partners or is payable in respect of the share of any partner in the partnership capital. On the question of interest which is payable in respect of the share of a partner in partnership capital, I am advised that it is already well-established that such interest is not deductible under any circumstances at the present time. Therefore, it would not appear to be necessary to exclude such interest from this concession.

But the main point of my Amendment is to deal with the other type of interest referred to in the subsection; that is, interest payable in respect of any loan by a partner. It seems to me quite unreasonable that such interest should be excluded from the benefit of the section. I am told that if there is a question of a loan payable to one of the partners, that is an expense which can be deducted and held against the partnership profits.

Photo of Mr Terence Donovan Mr Terence Donovan , Leicester East

That is because the property for which the rent is paid is outside the partnership capital.

Photo of Mr Selwyn Lloyd Mr Selwyn Lloyd , Wirral

Supposing capital which forms a loan in respect of which interest is paid is brought into a business, not as part of the partnership capital, but as a temporary loan from a bank or other person to tide over a temporary difficulty, that is precisely analogous with the rent on the business. I agree that if it is part of the partnership capital, it should not be entitled to exemption, but if the partner has to act as a banker to tide over a temporary difficulty, it seems quite unreasonable that interest on such a loan should not be regarded as an expense of the partnership. I am told that this is a point of some substance and I ask that it be given sympathetic consideration.

Photo of Sir Frank Soskice Sir Frank Soskice , Birkenhead East

This is, I feel, rather an unreasonable Amendment. It is one thing to say that capital which is raised by borrowing abroad should have the relief which is provided for in this Clause. It seems to me, at any rate, that it is very far from that to say that when there are two or three partners, one of whom is a foreign resident and is paid interest by the partners here, they should be entitled to be placed in the same position as a company which for various reasons has to raise part of its money in the foreign money market. The two situations are entirely dissimilar. After all, the partner is a co-owner of the firm's business.

I ask the Committee to reject this Amendment, not from the narrow legalistive view, but from the general view that it is not the sort of thing contemplated at all. Where a number of persons really own the same business and some of them are paying interest to one resident abroad—never mind what it is for—that is a situation which is utterly different from the sort of situation we are contemplating here. One can well understand that in some cases it might create a real temptation to try and evade the law and create an excessive payment by manipulation of the partnership business. I am quite conscious of the fact that the Amendment concludes with the words: … shall not exceed an amount which the Commissioners having jurisdiction in the matter may consider a reasonable rate. … At the same time I think it is placing an almost impossible burden on the Commissioners to expect them to investigate the affairs of a partnership business in every case with a view to determining in every case what is a reasonable rate of interest. There might be cases where it was somewhat over the reasonable rate, although it could not be said to be out-and-out excessive. One would get all sorts of gradations, and to put upon the Commissioners, in the case of a claim for interest, the burden of nicely discriminating where the exact reasonable line arose would put a too excessive burden upon them.

I ask the Committee to say that this relief is granted for a very particular case, that is, where a company has to raise money on a foreign money market, and in which it should have the same measure of relief as if it raised it here. This ought not to be extended to an area which is different and in which, if it did so extend, there might be some temptation on the part of dishonest partners—or partners at any rate open to be influenced by facts of that kind—to charge rather too high a rate of interest, when it would not be possible in all circumstances for the Commissioners to go into the whole matter and say exactly what is a reasonable interest to be charged. For those general reasons, and because this is not the kind of thing which the Clause is intended to cover, I hope that the Committee will agree that the Amendment ought not to be accepted.

Photo of Mr Nigel Birch Mr Nigel Birch , Flintshire

I think it is an established principle that a partnership is entitled to charge rent payable to one of the partners.

Photo of Mr John Thomas Mr John Thomas , Dover

He pays rates and taxes, so what is the difference?

Photo of Mr Nigel Birch Mr Nigel Birch , Flintshire

The point made by the Solicitor-General was that this proposed Amendment could not work, because it would be impossible for the Income Tax Commissioners to decide what was reasonable interest. The effect, therefore, of refusing this Amendment is that such partnerships will be penalised. Might not that be avoided, and substantial justice done if the Government accepted a suggestion under which the maximum interest was 5 per cent., or something like that? Could the Solicitor-General give an assurance that he would accept an Amendment which did not put the onus upon the Commissioners of deciding what was a reasonable rate of interest?

Photo of Mr David Eccles Mr David Eccles , Chippenham

If I understand this aright, I am inclined to agree with what the Solicitor-General says about the difficulty of the Commissioners investigating the rate of interest, but surely all the person has to do is simply to find a third party—a bank, or his wife, or somebody else—and say, "Here is £5,000 which I am going to lend to the partnership. I am not allowed to lend it direct and get the allowance, so you take it and lend it for me." It seems too easy. Would it not be better to put the matter in the law?

Photo of Mr Selwyn Lloyd Mr Selwyn Lloyd , Wirral

I do not propose to develop the argument further tonight, or to ask my hon. and right hon. Friends to divide on this matter, but I hope it will be given some reconsideration. It is a small point, but one on which we are clearly quite right.

Amendment negatived.

Clause, as amended, ordered to stand part of the Bill.