Orders of the Day — Clause 42 – in the House of Commons at 9:45 pm on 15 July 1981.
I beg to move amendment No. 71, in page 31, line 9, leave out from beginning to 'corporate' in line 10 and insert
'that body corporate has control of, or is controlled by, another body corporate or both are under the control of the same per son or persons within the meaning of section 534 below'.
Mr. Deputy Speaker:
With this we may take the following amendments: No. 72, in page 31, line 30, leave out 'five years' and insert 'two years'.
No. 73, in page 31, line 37, at end add—
'(8) subsection (1) above does not apply to any sum paid the settor by way of loan or repayment of a loan if it appears that the loan and the repayment were effected for bona fide commercial reasons and did not form part of a scheme or arrangements of which the main purpose, or one of the main purposes was the avoidance of liability to income tax;'.
Amendment No. 71 is an amendment to clause 43, which makes an addition to section 451 to the Taxes Act, which will be known as section 451A. The effect of subsection (1) of the new section is that if the trustees of a settlement make a payment to a company connected with the settlement, and that company then pays the settlor, that payment is treated as a payment by the trustees direct to the settlor. If it is a capital payment, it can become income and subject to assessment for income tax. Under clause 42, if the trustees pay to an unconnected company, but that company is associated with a connected company, it pays to the connected company which pays to the settlor. I am sorry if I am using many technical phrases about a complicated process of payment. When it goes through the two processes from unconnected company to connected company and then to the settlor, it can still be treated as a payment direct to the settlor.
It is reasonable to treat that apparently indirect payment as a direct payment if the two intermediate companies are controlled by the same person. However, that is not quite what the clause says. It refers to associated companies. An associated company, as defined by section 302 of the Taxes Act—which is referred to in the clause—is a company that has at one time, in the past 12 months, been a controlled company. An associated company is not necessarily under the control of the same person at the time when the payment process takes place.
The mischief against which the clause is aimed is when the two companies are controlled by the same person. The amendment proposes that only when the companies are controlled by the same person, not if they have been controlled in the past by the same person, should the clause apply.
11.30 pm
Amendment No. 72 deals with the repayment of a loan by the process that I have described in dealing with amendment No. 71. It makes it a capital payment which is to be taxable as income. By the new subsection (6)(a) there is recognition that payment by way of loan, or repayment of a loan, shall not be affected by the provision if it is only a temporary loan, that is, if
the whole of the loan is repaid within twelve months".
There is the proviso of similar loans made to or by the settlor that are outstanding for over 12 months at any time in five years. I am not sure what the reference to five years means. Does it mean before, after or both when applied to the loan in question? It seems that it is five years before or five years after. I submit that five years is far too long. These are anti-tax avoidance provisions. However, it is necessary only to go so far as is reasonable in finding instances in which there could be tax avoidance. In amendment No. 72 I propose that the five years in the clause be reduced to two years.
I shall deal briefly with amendment No. 73. The new section 451A of the Taxes Act, which is introduced by the clause, is in common with all its subsections an anti-tax avoidance section. As such it assumes too readily that every transaction that involves the sort of payment that is described in subsection (1) is made for the purpose of avoiding tax. That is not a fact. There may be loans to trading companies that are bona fide commercial transactions. Even if those involved in such transactions can prove that they are genuine transactions, they will have no relief under the section. I suggest in amendment No. 73 a defence for those who are carrying on genuine commercial transactions to enable them to prove that they are genuine and thereby get out of the difficulty of having the repayment of a loan taxed as an income payment to the lender.
Section 451 of the Taxes Act, to which the amendments of my right hon. Friend the Member for Crosby (Sir G. Page) are directed, has a long and inglorious history and has been much criticised by the courts in not only the past decade but, I should think, over the past three decades. This Government, for the first time for many years, have bent their mind to trying to rationalise the provision. My right hon. Friend, will, I am sure, be the first to recognise and appreciate what has been done in the Bill to make the section a rather more human provision. However, I think that the House will recognise that there is a problem to be countered by section 451. A balance must be struck.
Amendment 71 suggests that my right hon. Friend would prefer that the test of association between the company and the settlor should be applied at the moment that the transaction of the capital sum by loan or repayment of loan is made. I understand the argument. However, I am sure that my right hon. Friend will recognise on reflection that if it were to be applied only at that moment it would be possible to circumvent the section almost in its entirety by ensuring that the financial movements took place earlier or later.
It is for that reason that the Government prefer that the test should be applied not only when the financial movements take place, but during the preceding year. I recognise my right hon. Friend's point, but it would make it a little too easy—as I am sure he will agree on reflection—if the test had to be applied only at one single instant of time.
On amendment No. 72, again we wish to ensure that the settlor does not make any permanent loans or receive any repayment of permanent loans from a body corporate connected with himself. I lapse into technical jargon only because my right hon. Friend, with his commendable lucidity, has explained the loans procedure so clearly to the House. Therefore, I do not believe that I need explain it myself.
The reason we have made a two-year test is to ensure that a senior does not make a series of loans over a period which are, in effect, a continuous method of funding a company. Therefore, we say that the loans should be repaid within 12 months and that that should not be repeated during a period of five years. It is a matter for legitimate debate as to whether five years is too long. I would say with all respect to my right hon. Friend's powerful argument that two years is too short. I hope, however, that because the Government have taken some fairly considerable steps to liberalise section 451, my right hon. Friend will allow us to judge a little by experience. If it should be found that this provision has been too tightly drawn, I hope that there will be opportunities in subsequent Finance Bills to deal with it. I would be the last to pretend that section 451, even after the amendments which commended themselves in Committee, will remain the most perfect example of the legislator's art—if it is an art rather than a science, or something of a rather lower order altogether.
I see entirely the force of my right hon. Friend's arguments on amendment No. 73. We hoped that it would be for the convenience of taxpayers and their advisers as well as for the convenience of the Revenue to lay down some fairly precise tests which have to be satisfied. If they are satisfied, a payment to a settlor will escape tax. If I understood the drift of my right hon. Friend's remarks, I think that he would prefer the section to be more imprecisely drawn, but that there should be a motive test so that the taxpayer may escape the charge if he can demonstrate that his motives were of the purest.
With his considerable experience, my right hon. Friend will know that, although motive tests serve a purpose, they serve also to complicate legislation for the taxpayer, the Revenue and the taxpayer's advisers. Often it must be a matter of fine debate as to precisely what the taxpayer's motives were in any given situation. Although I may be searching for the Holy Grail, I hope that in this instance we can define the tests with sufficent precision that the taxpayer will know whether he is within or without the section and we shall not have to have recourse to the sort of tests which my right hon. Friend proposes in amendment No. 73.
Therefore, I hope that my right hon. Friend will feel that he has initiated a useful debate and that, with the assurance that, of course, we shall be happy to look at the further developments in this area in the light of the amendments which have been approved by the Committee, he will feel able to withdraw the amendment.
I am grateful to my hon. and learned Friend for going into these matters so carefully. I should like to leave these amendments as markers in looking at the developments of the amendments to section 451 which the Bill contains. I beg to ask leave to withdraw the amendment.