Clause 152 - Meaning of ''loan''

Finance Bill – in a Public Bill Committee at 2:45 pm on 8th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 2:45 pm, 8th June 2004

I beg to move amendment No. 292, in

clause 152, page 138, line 16, at end insert 'except in prescribed circumstances'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss amendment No. 270, in

clause 160, page 142, line 29, at end add 'except in prescribed circumstances'.

Photo of George Osborne George Osborne Conservative, Tatton

The amendments deal with the clause that sets out the definition of a loan and the circumstances under which an unauthorised payment is made. They seek to avoid something that we think may occur. Under subsection (4), if a member or employer of a scheme is liable to make payments to the scheme but does not, the debt is considered as a loan. Subsections (4) and (5) raise the possibility that a payment due from either a sponsoring employer or a member to a registered pension scheme that simply is not paid by the time that it falls due will be treated as a loan. Clause 168 would then kick in, making it an unauthorised loan with all the consequences that would follow from that. When we discussed clause 150, the Financial Secretary spelled out some of the various sanctions and surcharges that could be applied.

Obviously, such powers should be in place, but it does not make sense for them to be applied if the sponsoring employer simply fails by accident to pay amounts due—even though a person at arm's length would expect them to be paid promptly—and the pension scheme cannot recover the funds by the due date. We need some device, some carve-out, to avoid the unnecessary consequences of what is basically a failure by the sponsoring employer, not by the registered pension scheme. Similar comments apply to amendment No. 270 to clause 160, which deals with scheme administration payments.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Under the new regime, registered pension schemes will be allowed to make certain loans, but other loans will be regarded as unauthorised payments and therefore subject to tax charges. For example, we recognise that pension schemes can provide a valuable source of business finance to sponsoring employers, so registered pension schemes will continue to be allowed to make such loans, but loans to scheme members do not have the same business purpose and so will not be allowed. Clause 152 sets out the rules for determining what is and what is not to be regarded as a loan for the purposes of applying the rules on loans.

First, the clause establishes that the transactions whereby schemes purchase certain financial instruments that are publicly available or that are listed on the stock exchange will be allowed and will not come within the rules on loans. Secondly, the clause brings certain other transactions within the rules on loans. Those are guarantees provided by the pension scheme over loans made by third parties to the member or sponsoring employer and debts owed to the schemes by a member or sponsoring employer where the debt is not paid on the normal date for payment. The clause provides clarity for schemes on the treatment of certain payment and other transactions that they may wish to make.

Subsection (4) prevents members or sponsoring employers deferring the payment of debt to pension schemes on non-commercial terms. It does that by treating debts that are outstanding for long periods as loans that are subject to the restrictions on loans set out in the Bill. The subsection will treat such debt as a loan only if it is not repaid on normal commercial terms and will take into account the circumstances of the debtor. The subsection ensures that the schemes collect debts on normal commercial terms from members and sponsoring employers. It ensures that the funds in those schemes, which have been built up with generous tax reliefs, are protected from non-commercial transactions.

Amendment No. 292 seeks to include a regulation-making power, which would mean that, in certain circumstances, the provisions of subsection (4) would not apply. That might mean that certain debts would be left outstanding for unspecified periods, providing what is, in effect, an interest-free loan for the employer or member concerned. Having that rule in place is an important protection for members. I do not believe

that a regulation-making power to amend the commercial nature of the subsection would be appropriate. I urge the hon. Gentleman to withdraw the amendment.

Amendment No. 270 proposes a similar change to clause 160. It seeks to provide a power to prescribe circumstances whereby a registered pension scheme may make a loan to a member. Unlike loans to sponsoring employers, there are no commercial reasons why loans should be made to members. Sponsoring employers are closely linked to their pension schemes and there has for many years been provision for commercial loans to be made by pension schemes. We have had no representations from industry to extend the provisions to loans to members, as there is not, generally, the same business relationship. Loans to members involve an unnecessary financial risk for pension schemes. Many schemes are controlled or influenced by members and may make loans that will not be prudent investments.

Together, clauses 152 and 160 provide clarity for schemes on the type of loans that they can make and the treatment of them. I therefore urge the hon. Gentleman to withdraw his amendment and, if he does not do so, I urge the Committee to reject it.

Photo of George Osborne George Osborne Conservative, Tatton

The important point there was that the Financial Secretary said that the circumstances would be taken into account. Opposition spokesmen frequently complain about the Government taking on regulatory powers—I have just done so on the Floor of the House— but here was an Opposition amendment that would have given the Government regulatory powers.

The reason is that we wanted to avoid a situation where unnecessary consequences flow from what is, fundamentally, a failure by a sponsoring employer, and not a registered pension scheme. We did not think that the clause was sufficiently flexible to allow that. The Financial Secretary said that all sorts of horrible things might happen. One assumes that the regulations drafted by the Inland Revenue will be sensible enough to ensure that it is rarely restricted. Nevertheless, if the hon. Lady is satisfied, and has not had strong representations from the industry, I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 152 ordered to stand part of the Bill.

Clause 153 ordered to stand part of the Bill.