Clause 44.—(TAX ON DISTRIBUTIONS ETC. RECEIVED BY U.K. COMPANY.) (Hansard, 12 July 1965)

§ Mr. John Peyton (Yeovil)
I beg to move Amendment No. 104, Clause 44, in page 103, line 32, to leave out from beginning to "three-quarters" in line 34.

§ Mr. Deputy-Speaker
With this Amendment we are taking the two following Amendments, both in the name of the hon. Member for Belfast, North (Mr. Stratton Mills) and the names of some of his hon. Friends, Amendment No. 105, Clause 44, in line 34, after "trades", insert or the ownership of premises occupied for the purpose of trade by the company receiving the dividend". and Amendment No. 106, Clause 44, in line 35, leave out "that company" and insert the company paying the dividend".

§ Mr. Peyton
I always move Amendments on a Finance Bill with a good deal of trepidation and with more than my normal modesty. When, in addition, I do so from this Box, I feel even greater need of protection. But when the Amendments are concerned with this particular Finance Bill, my sense of horror increases even more. That is not entirely my fault. The Government must accept responsibility for some fault.
I always wish that I knew beforehand what was to be the fate of my Amendments because the argument I would then use would be considerably coloured by foreknowledge.

§ Mr. Peyton
The gesture I have just had from the Chief Secretary makes it clear that his reply will be negative.

§ Mr. Diamond
I wanted to indicate to the hon. Gentleman that I would listen very carefully to everything that he has to say.

§ Mr. Peyton
I am obliged to the right hon. Gentleman. It was a very strange way of indicating close attention. It is not a method that I would have selected myself, but I am grateful to the right hon. Gentleman for his interpretation which, under the circumstances, I think 70 was badly needed even by those of greater perspicacity than I. However, Mr. Deputy Speaker, I shall not trespass upon your good will any further.
I understand that it is the intention of this provision of Clause 44 that Income Tax shall be levied only on dividends which go outside a group of companies resident in the United Kingdom. I can understand that purpose and I hope that the right hon. Gentleman will accept from me that it is no part of our purpose to challenge it. All I am saying is that the relief which the Government propose to give is unnecessarily restrictive. Clause 44(3,b) deals with the case of a company jointly owned by five or fewer other companies, all of whom own at least 10 per cent. but none of whom qualify for the position of parent-subsidiary relationship.
That being the case, why insist on confining the relief to a company which is … carrying on … a trade or trades …"? It is those words which I find offensive. If a company, or a series of companies, in their wisdom, find it convenient to set up a holding company with the purpose that it should co-ordinate the activities of a number of other trading companies, why should not they do so without incurring a tax penalty or tax inconvenience of quite a major order? It is wholly unnecessary.
No one is suggesting that the purpose of this provision should be defeated by allowing dividends to go outside the group without tax being paid on them. That is quite clear. I am only on the somewhat narrow point on which the Government seem to be unreasonable in insisting that relief should not be given in the case of a holding company which is jointly owned but that before relief can be given the company must be one … carrying on … a trade or trades …". For the life of me, I cannot see the sense in this.
I am emboldened by the right hon. Gentleman's past treatment of Amendments moved in Committee to hope that sense will prevail. Unfortunately, his gloomy gesture has not inspired great confidence. However, hope springs eternal that he will not entirely turn his back on common sense.

§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)
The Chief Secretary said that he wanted to listen to my hon. Friend the Member for Yeovil (Mr. Peyton) before making up his mind about his reply. Now that my hon. Friend has moved the Amendment with such eloquence and force, perhaps the right hon. Gentleman will nod or shake his head in order to give me some guidance on the second stage of the argument against this small but highly important inequality which has crept into the Bill.
I feel that a group of five or less companies which owns a subsidiary jointly, and sets up a consortium is becoming more and more a common feature of our industrial life. It is an essential feature which we do not want to disturb, and it seems to me the logical thing for the companies to do, especially if they do not all own equal shares in the subsidiary.
In view of the progress being made in the new technologies of oil and nuclear power, and in complete plant installations and other matters, it is more and more essential that we should not put a tax inconvenience upon these companies. Subsection 3 of the Clause restricts the benefit to a trading company, ruling out a holding company and the benefit in the Clause is that a subsidiary can pay its dividends to its parent without deducting and accounting for Income Tax.
Presumably, if there is a holding company in this position the reverse applies and it has to pay Income Tax before it can pass on its dividend to its parents. The Chief Secretary may well say that that is no great disadvantage because it will all come out in the wash, but it is his principle, with regard to Corporation Tax, that dividends shall only pay Income Tax when they leave the group as a whole. Here is a clear instance of the principle being breached.
Secondly, if one of the parent company's were to reduce its dividend, or miss a dividend one year, it would be in no position to claim back the tax which its subsidiary had pain on its behalf. Supposing the subsidiary had paid a considerable amount of tax on the distribution which it had paid to its parent, and at a later stage the parent lost a lot of money, it would not be in a position, as it had paid no Income Tax, or less Income Tax, to claim back that tax 72 which had been paid on its behalf. This would be a very serious and unfair penalty to put upon it.
Thirdly, I think it partly true that I do not entirely understand the full effects of Clause 79, which we reach later, but this will affect the liability of an overseas trading company to get overspill relief, because it will affect the basis on which the figures are computed for overspill relief, and might well have a very unfortunate effect on the shareholders during the transitional period, if the subsidiary is an overseas trading company.
There are some very strong reasons why this apparent anomaly should be put right. I know that the Chancellor has put down Amendment No. 169, which enables a parent to pay its dividends without tax from the dividends it receives from its subsidiaries, which have already paid tax. This, as I understand it, does not affect the Amendment which my hon. Friend the Member for Yeovil (Mr. Peyton) has moved. It may affect some companies in some ways but it may not have a uniform effect across the whole board. I submit that this Amendment should be accepted. The Government seem to take such a narrow attitude to this. It is not in any way a question of altering the yield of the tax, it is simply a question of making arrangement which could possibly cut out some hardships, and will certainly cut out a lot of inconvenience.
It is not for the Government to lay down the sort of subsidiaries which consortia should set up, whether trading or holding subsidiaries. It would be much better for them to leave this decision to the parent, and for these reasons I strongly urge the Financial Secretary to accept the Amendment which my hon. Friend the Member for Yeovil has moved so persuasively.

§ Mr. John Harvey (Walthamstow, East)
Since we last discussed these difficulties in Committee, the Chancellor has put down Amendment No. 169, which goes some way to meet a number of cases which we had in mind. The point that still worries a number of us, and certainly worries a number of companies outside the House, is that Amendment No. 169 does not meet the case of a company which has received the dividend 73 after deduction of tax, and does not itself pay a dividend. Nor does it deal with a case where a company has already paid all its dividends without deducting tax.
These are two circumstances which we feel should have been provided for, and which we asked, in Committee, should he provided for. They are not provided for by Amendment No. 169 and would be covered by this Amendment. I hope that on this occasion the Chief Secretary will feel able to accept the slight widening of the scope of Amendment No. 169.

§ Mr. Patrick Jenkin
I can anticipate the Chief Secretary's reply to this, assuming that the arguments which have been made by my hon. Friends do not carry weight. It will be, "The reason we do not feel able to accept the Amendment is that we have to draw the line somewhere." I am willing to bet that those words are in his brief.

§ Mr. Diamond
How much?

§ Mr. Jenkin
The point of this Amendment, and some of those to which we shall come later, is that, however desirable it may be when one is introducing a tax of this sort to introduce it on a basis which appears to give, theoretically the fairest or most convenient answer, the Treasury has to remember that it is applying it to an existing state of affairs and it has to take as much notice as it possibly can, within the limits of reasonable administrative practicality, of the circumstances affecting the tax as they are now. This is necessary to minimise the number of changes that the company, or consortia of companies, will have to make in its arrangements when adapting itself to the new tax.
Any limitation on the right of a consortium to elect for the payment of dividends gross is, to that extent, an encouragement and an inducement to change their mode of operation in order to put themselves in a position where they can take advantage of it. The Amendment which my hon. Friend the Member for Yeovil (Mr. Peyton) has moved would make a change to the Clause, to prevent the sort of alterations in a company's structure which might, therefore, be necessary. The arguments that he adduced for saying that there was no intention to limit the deduction of tax from dividends paid outside the company, 74 but that there seemed to be no reason why there should be any restriction on the deduction of payment of dividend increases to dividends, within a group, appeared to me to be very strong ones.
I hope that the Treasury will look at this with sympathy, because this is a matter which has considerable merit.

§ Mr. Diamond
I accept that this is an Amendment which is of considerable merit. It has, therefore, been considered with the greatest possible sympathy. The hon. Gentleman the Member for Yeovil (Mr. Peyton), in moving the Amendment with clarity and helpfulness, asked me for an indication of which way my mind was going. I did my best to indicate to him that I would listen to him with care, but that, if his arguments were of the kind which, having given the matter careful thought, I anticipated they would be, I might not be in a position to recommend to the House that the Amendment should be accepted. I know I used a rather shorthanded indication for all this, but I feel sure that he got my meaning.
We cannot accept this Amendment for reasons which have not wholly been touched on. Let me say, first, to the hon. Gentleman the Member for Cirencester and Tewkesbury (Mr. Ridley), that he used the words "holding company" on one or two occasions, and talked about a "parent". We are not considering the parent-subsidiary relationship, which is not subject to the trade limitation. We are talking about what is normally known as a consortium, which is subject to the trade limitation.
To do justice to the arguments, I have to go back a little and explain that the essential structure of Corporation Tax is that when a company pays a dividend it accounts for the tax then and there. But, obviously, it is too narrow to look at just one company by itself; we should have regard not only to the "father" but to the "family". Therefore, we have regard to the parent company and its subsidiaries and treat them as one company, the family company. We have made this exception to that limited extent, because this is one company for all commonsense purposes.
We have gone further, however—one should always hesitate to go further—and made a concession. This has been built up into a principle, and hon. Members 75 opposite are trying to draw further concessions from the principle—and it is not a principle at all; it is purely a concession. Notwithstanding the essential structure of the tax and the fact that, therefore, we cannot possibly depart from it except from the commonsense point of view that a parent-subsidiary is virtually the same as one company, we have taken the view that it is common practice for joint trading ventures to be run by a consortium, that we want to encourage this kind of organisation, that it would be outmoded to have regard only to parent-subsidiary relationships when trading is carried on frequently in the form of a consortium and therefore that we should make an exception to the rule exclusively in favour of joint ventures in trade carried on by a consortium. That is what we have done.
The hon. Gentleman asks me whether we are prepared to go much further and why an investment company should not have the same advantages, for what they are worth. The answer must be that I see no reason for extending this unusual exception which we have granted to trading consortia.

§ Mr. F. A. Burden (Gillingham)
Is there any merit in this argument from the point of view of a consortium of companies which enters into big export contracts? How would it affect them in the recovery of the export rebate?

§ Mr. Diamond
We are not discussing export rebate, which does not affect this situation at all. But in terms of paying dividends, gross or net, it might be convenient and might suit the overall finances of the consortium that the privileges accorded in the Bill should be available to it. That is what this discussion is about.
I repeat that we cannot go beyond the limited exception. I am, therefore, afraid that I am not able to afford the immediate welcome to the Amendment which I afforded on a previous occasion, from which the hon. Member for Yeovil will immediately recognise that this is due to the merits of the matter and not to what his right hon. Friend the Member for Altrincham and Sale (Mr. Barber) called obduracy.

§ Mr. Eric Lubbock (Orpington)
Could the right hon. Gentleman say what hap- 76 pens when the top company does not pay dividends at all?

§ Mr. Diamond
What happens then happens in the case of any company of any kind other than in the case of the particular company which we are considering. In short, that does not affect this Amendment, which seeks to give the advantages which apply to a trading consortium to a non-trading consortium—for example, an investment consortium. We cannot go as far as to recommend that.

§ Mr. Peyton
With the leave of the House, may I make a few comments on what the Chief Secretary has said, and particularly on what he has not said. I am obliged to him for his courtesy. He at least said what he had to say in a courteous manner. However, he has done nothing to explain the difference between a holding company and a trading company, or the distinction in the treatment of the two, which I cannot understand.
Then there are these most objectionable references to concessions and privileges. Cannot the Government look at this matter from a different point of view? They are imposing on companies, which, by their profits, finance this country, vast changes in the tax structure. We on this side of the House think that many of these changes have not been properly considered and this is an example. Yet we hear talk about concessions and privileges.
I have long suspected—and what the Chief Secretary said only confirmed the suspicion—that there is a deep belief in the Treasury and in the Inland Revenue that their convenience is synonymous with the national interest. I do not believe that to be true for a moment. I wish that we could have some concrete evidence that from time to time the Treasury and the Inland Revenue consult the convenience of other people and of the companies from whose earnings they extract considerable sums of money. I hope that the right hon. Gentleman will not go on talking in these terms about concessions and privileges. I find objectionable this bureaucratic belief that the convenience of the Treasury and the Inland Revenue is identical with the national interest.
77 I now return to the gloom and despondency into which the Chief Secretary's answer has thrust me. I do not believe that this is a point of sufficient stature to warrant advising my hon. Friends to divide. [HON. MEMBERS: "Why not?"] However, I believe that this is a wretched example of the pedestrian meanness which has characterised the Government and their advisers in their approach to these immense problems. I wish that we could have some evidence from time to time that the Government, the Treasury and the Inland Revenue were concerned to consult the convenience of people other than themselves.

§ Mr. Lubbock
I am a little surprised to hear the hon. Member for Yeovil (Mr. Peyton) say that he does not propose to advise his hon. Friends to divide the House on this Amendment, because the Government have refused concessions on a number of other cases which I think were much less serious and on which a Division has been forced.
I should like to rub in what the Chief Secretary said in answer to my intervention. He merely repeated that he could not extend the concession to companies which were not trading, irrespective of the effect that this would have on the total liability to tax of the two companies—that is, the one paying the dividend and the one receiving it. If these companies are not trading companies and they pay a dividend to the shareholder company, and if then it does not pay a dividend, it will have no means of recovering the Income Tax.
Yet, in the whole group, no money has gone outside to the shareholders; it has remained in the group. This is the main purpose of the Chancellor of the Exchequer and the Government in introducing Corporation Tax. They want to persuade companies to plough more money back. The companies are doing as they ask, and yet Income Tax will be levied on the underlying companies. That is the effect of refusing to accept the Amendment.
The Amendment would delete the business of the company paying the dividend consists wholly or mainly of the carrying On of a trade or trades". As the right hon. Gentleman has explained, that means that if the underlying company paying the dividend is not 78 a trading company, it will be subject to Income Tax and it will not have the benefit of the option provided in the Clause, and yet the parent company will not be able to recover this Income Tax even if it does not pay a dividend. In those circumstances, this is an important enough matter to press to a Division.

§ Mr. Henry Brooke (Hampstead)
I beg to move Amendment No. 296, Clause 44, in page 103, line 38, to leave out "one tenth", and to insert "one-twentieth".

§ Mr. Deputy-Speaker
With this Amendment, we can take also Amendment No. 235, Clause 44, page, 103, line 36, leave out from "resident" to end of line 38, and Amendment No. 236., Clause 44, line 37, leave out from "one" to end of line 38.

§ Mr. Brooke
My Amendment is brief. My speech will be almost equally brief and I am sure no less compelling. I think that I can see why the Government have introduced line 38 into the Bill, but none of the reasons for it which I can imagine would justify setting the limitation in that line as high as one-tenth. It would be more fair and just to substitute a figure of one-twentieth, which would be quite sufficient to enable the Government to accomplish their purpose, if I understand that purpose aright.
Perhaps the right hon. Gentleman the Chief Secretary would consider a company in which all the shares are owned by a consortium of five companies. In the exceptional case they might all hold the same number of shares, 20 per cent. each. But some members of the consortium might well be larger shareholders than others. Four of the companies in the consortium might together hold 91 or 92 or 93 per cent. of the shares, and the fifth company might hold 9 or 8 or 7 per cent. Yet they are all in the consortium. Why should the Bill provide that one of those companies should be treated differently from the others?
We have just heard the Chief Secretary speaking about the desirability of treating all members of a family alike. Why should he seek to break up the family and to treat one of the brothers—the youngest brother, perhaps, but a sturdy one all the same—the one holding between 5 and 10 per cent. of the shares, differently from all the other members of the family?
79 I know that the right hon. Gentleman is a compassionate man and does not wish to break up families. I have been Home Secretary and I know the importance of keeping a family together. If the right hon. Gentleman accepted my Amendment, he would accomplish a desirable object and he would do no harm whatever to the structure of the Bill or to the purpose of paragraph (b).

§ Sir John Hobson (Warwick and Leamington)
The object of Amendments Nos. 235 and 236 is to go a little further than my right hon. Friend the Member for Hampstead (Mr. Brooke) had intended, either by leaving out the two last qualifications or the second of them, because the qualifications that we now have after the words "so resident" are of which the company receiving the dividends is one"— that is one of those who holds part of the 75 per cent.— and of which none owns less than one-tenth of that capital". The Minister without Portfolio admitted in Committee that these questions of the qualifications as to who should have the advantages of the Clause had nothing whatever to do with tax avoidance, that no question of inadvertent loss of tax arose, that no question of any ultimate loss or gain arose to either the Inland Revenue or to the taxpayer and that all this is merely a question of timing as to when and at what stage the tax should be deducted and whether, in the case of a consortium owning a subsidiary, the owning company should receive dividends gross or only less tax; and which of those companies and in what circumstances some or any of them could have the benefit of having the dividend paid to them gross or whether the Inland Revenue should be able to have substantial sums of money paid to it initially although the dividend was going from the subsidiary to one of the major owning companies.
The last two lines of paragraph (b) produce some rather startling results. I heard the Chief Secretary say in the last debate that the Government wanted to encourage consortia and joint ventures in trade. We are here dealing only with such cases and only with cases where trade is concerned.
80 Let us consider the effect that the last two lines of paragraph (b) produces. If four companies each owned 17½ per cent. they would own 70 per cent. between them. Suppose that three other companies each own 10 per cent. The Bill does not make it clear which of those three other companies is the one company of the five which is entitled to enjoy the benefits of the Clause. I have never been able to understand how this concession would work where four companies hold just less than 75 per cent. of the shares and two or more companies own in equal proportions exactly the same numbers of the balance up to 100 per cent. Only one of those additional companies would come within the "five or fewer" which owned 75 per cent. or more of the shares. There is nothing in the Bill to indicate, therefore, how, under the provisions of the Bill, such a situation would be dealt with. One is left in the air as to whether the companies themselves could choose, whether the paying company could choose, the receiving company could choose or the Inland Revenue could choose. One does not know.
There could be another situation in which, for instance, two companies own 36 per cent. of the shares each, or 72 per cent. between them, and three companies own 9⅓ per cent. of the shares each, or 28 per cent. between them. They are all United Kingdom companies. I do not think that in those circumstances any of them would be entitled to the benefit of the Clause, because, although one of them owns almost 10 per cent., the 10 per cent. provision would exclude. So there would be five companies owning 100 per cent.; they all would have substantial holdings, but not one of them, not even the one owning 36 per cent. of the shares, would be entitled to the benefit of paragraph (b).
There is then the situation in which five companies own 15 per cent. each. They own 75 per cent. of the shares and they all get the benefit. Two other companies own only 12½ per cent. of the shares each; neither of them would be qualified. My right hon. Friend the Member for Hampstead wants to lower the 10 per cent. to 5 per cent., but it would not help those companies where there are five or fewer companies which 81 between them own 75 per cent. of the shares.
There might then be a situation in which three companies own 31 per cent. each and one owns 7 per cent. The last does not qualify, but the first three do. It seems to be an extraordinary provision that these specific percentages should be laid down as additions to the main qualification. The main qualifications is that both the receiving and the paying companies must be United Kingdom companies, and one has to have a situation in which three-quarters or more of the ordinary shares of the capital are owned between them by five or fewer companies.
6.0 p.m.
In that situation, why is it necessary to go any further? That exactly describes the situation which is meant to be covered—that a few United Kingdom companies own the vast majority of the shares of the company. Why should we put a limitation of 10 per cent. or even 5 per cent. on the number of five who have to take part? If we have a situation in which five or fewer companies own three-quarters or more of the total shares, why should we bother not to extend the privilege to any other United Kingdom company if it owns some part of the 25 per cent.? If there are two United Kingdom companies, and the vast majority of the shares—more than three-quarters—are owned by five or fewer companies, why should not every company which is part of the censortium, whatever proportion of the share it holds, whether it has more than 10 per cent. or not, have an equal advantage with the other companies which form part of that consortium? For this reason I have put down Amendments Nos. 235 and 236.

§ Mr. Burden
It seems that the Government are endeavouring to encourage the movement towards consortia in order to benefit our export trade. Those who are in the trade realise that considerable benefits can frequently accrue from this.
If this is the case, then I am convinced that the Chief Secretary will listen carefully to the proposals which have been put forward by my right hon. Friend the Member for Hampstead (Mr. Brooke) and my right hon. and learned Friend the Member for Warwick and Leamington (Sir J. Hobson). It is important to realise that a consortium may comprise several 82 firms which have an extremely large share of the business which is accruing to the consortium. But there may be one or two smaller firms whose part is equally important in the whole but which have not a very large share of the consortium. Their share might be related to the capital or the capital goods or the amount of know-how which they have invested in the consortium. But, small though it may be, it may be essential to the performance of the consortium.
I therefore suggest that the Chief Secretary should give very careful thought to the proposals which have been put forward by my right hon. Friends because of that fact and should not penalise any member of a consortium., no matter how small its total holding may be, in view of the fact that, small though it may he, its effect upon the earning capacity of the consortium may be vital

§ Mr. Diamond
I have listened carefully to the argument in favour of the Amendments. I draw a distinction between the Amendment moved by the right hon. Member for Hampstead (Mr. Brooke) and the other Amendments which we have discussed at the same time. I draw this distinction because our anxiety is to help consortia, which are engaged as a joint venture in trade, to the extent of departing from the principle of Corporation Tax that tax should be accounted for when a dividend is paid.
But one has in mind the founder-members of the consortium—people holding a substantial share in the consortium. The hon. Member for Gillingham (Mr. Burden) referred to one or two others holding a small proportion. If it were one or two others I should have no objection to what he proposes, but what is being proposed in Amendments Nos. 235 and 236 is to widen the scope very considerably indeed and to give shareholders of minimal shareholdings this same privilege—I am sorry to use the word "privilege"—or same advantage, or same arrangement, to use as neutral a term as possible. We could not go so far as to widen arrangements to that extent. It could mean a vast number of shareholders to whom a dividend could be paid gross.
The principle is, "You pay your tax when you pay your dividend", when "you" is the family and not necessarily just the one company. As an exception 83 to that principle, and purely in the interests of encouraging this form of joint trading, we have made the exception for the consortium. But consortium can mean only a small number of firms getting together because each cannot do the job by itself. They get together in a form of partnership or a trading venture for this limited purpose. I therefore cannot advise the House to accept the Amendments down in the name of the right hon. and learned Member for Warwick and Leamington (Sir J. Hobson) because these would extend the scope enormously.
The answer to the question which he asked me is that any one of the members that felt that it could claim, by adding other members of the consortia to the figure so that the necessary percentage was achieved, could claim this concession. His Amendments, therefore, would give every single member of the consortium, although each held only one share, the opportunity to make this claim. If two of them held 75 per cent. and a vast number held the other 25 per cent., each one of the vast number could make the claim. I therefore could not possibily recommend the House to accept either of those Amendments.

§ Sir J. Hobson
That may be an answer to Amendment No. 235, but it is not the answer to Amendment No. 236. That would confine it to five who held 75 per cent. or more of the shares without limitation about their requiring 1 per cent. or 5 per cent. It would be confined to five companies which were founder-members, but they would not be limited themselves to any particular proportion of holdings.

§ Mr. Diamond
I hope that I have not misunderstood the hon. and learned Gentleman. He is talking about Amendment No. 236, which has virtually the same effect as Amendment No. 235.

§ Sir J. Hobson
No.

§ Mr. Diamond
I am advised that that is so. I have to have regard to what is on the Order Paper and to the best advice on it which is available to me, even if that is not precisely the interpretation put on the Amendment by those who put it on the Order Paper. I am advised that that is exactly the effect of 84 it and that a large number of beneficiaries could come under the Amendment. That is why I cannot advise the House to accept it.
The right hon. Member for Hampstead is on an entirely different point. He recognises that one should have a substantial interest and that a number of substantial interests does not exclude one member of the consortium from having an interest of less than 10 per cent. No one could maintain that 10 per cent. was a figure which satisfied all cases and that 9 per cent. could never be a substantial or appropriate interest. One knows of consortia in which the main trading partners hold substantial amounts but one partner, who is a financier, does not necessarily hold such a substantial amount. He might hold less than 10 per cent. One is bound to recognise that 10 per cent. in what I might call a small consortium dealing with small figures might be less absolutely than 5 per cent. in a very large consortium. A smaller amount of capital might be involved. I accept that we cannot say that 10 per cent. is the right figure for all time. I think that 5 per cent. is going a bit low. But in view of the argument put forward by the right hon. Gentleman, and as I am the youngest brother of my family of three brothers, I think that it is an Amendment which I could recommend the House to accept.

§ Mr. Lubbock
I did not intend to speak on this series of Amendments but I must ask the Chief Secretary to think again about what he said about Amendments No. 235 and No. 236. He will correct me if I am wrong, but I understood him to say that the two were identical. The cursory study which I have made of the two proposals, even since coming into the Chamber this afternoon, shows me that they are entirely different in nature. If the right hon. Gentleman will lay his brief aside for a moment and consider the wording of those proposals as they would affect the Clause he will understand what I mean. The big difference between the two is that Amendment No. 235 is designed to delete, from the word "resident", the remainder of the words to the end of line 38. Amendment No. 236 is designed to leave in the phrase … of which the company receiving the dividends is one …". 85 That is the vital difference between the two. If we consider the example given by the right hon. Gentleman—of two companies owning 75 per cent. of the capital and a large number of other companies owning the remaining 25 per cent.—it would seem that if one does not have the words … of which the company receiving the dividends is one … remaining in the provision, all the little companies will obtain the benefit of the concession. However, if one starts from the word "one" and leaves out the remainder of the provision, only the first five companies will come into the matter.
We can also consider the right hon. Gentleman's example of the two companies which initially formed the consortium obtaining the benefit of the Clause. I hope that he will realise that there is an important difference that should be considered and that the less far-reaching Amendment should be accepted, particularly when it is remembered that we are considering the situation of five or fewer companies owning a large proportion of the capital or, as the provision puts it: … three-quarters or more of the ordinary share capital of that company is owned between them by five or fewer companies … While I am grateful for what the right hon. Gentleman said about the Amendment standing in the name of the right hon. Member for Hampstead (Mr. Brooke), I hope that he will give further consideration to this matter.

§ Mr. Harold Lever (Manchester, Cheetham)
I hesitate to intervene on this point because I confess that I have not given the matter close consideration. However, I must with respect tell my right hon. Friend it does not need close consideration to see what appears abundantly plain, for I find it difficult to imagine how he could conceivably have been advised that acceptance of Amendment No. 236 would result in innumerable companies benefiting thereby. After all, the provision would read: (b) the business of the company paying the dividend consists wholly or mainly of the carrying on of a trade or trades, and three-quarters or more of the ordinary share capital of that company is owned between them by five or fewer companies so resident, of which the company receiving the dividends is one …". 86 Unless I have lost all control of my understanding of English, surely only five companies at the most could benefit if that Amendment were accepted. I will willingly give my right hon. Friend sufficient time—

§ Mr. Diamond
My hon. Friend has given me enough time.

§ Mr. Lever
—to consider the matter further. I may be absolutely wrong—

§ Mr. Lever
—because I have not studied the matter closely. Nevertheless, the provision would say that … the company paying the dividend consists wholly or mainly of the carrying on of a trade or trades, and three-quarters or more of the ordinary share capital of that company is owned between them by five or fewer companies …". I do not see how innumerable companies could benefit from that.

§ Mr. Diamond
I do not set myself up as a lawyer against my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) or the great engineering knowledge of the hon. Member for Orpington (Mr. Lubbock). I rely on the advice I am given and I repeat—and I will come to the construction of the Clause in a moment—that if Amendment No. 236 were accepted there could be the situation in which two companies held 75 per cent. of the shares and a very large number of companies the other 25 per cent., but each one of the others could claim the right to receive its dividends gross.

§ Mr. Harold Lever
No

§ Mr. Diamond
That is what I am advised.

§ Mr. Lever
My right hon. Friend should consider the matter further.

§ Mr. Diamond
If I am asked to interpret it, then I would draw the attention of my hon. Friend to the fact that it would not say that a company must be owned by five or fewer companies but that … three-quarters or more of the ordinary share capital … must be owned by … five or fewer companies so resident … 87 I am advised that that is the relevant part of it.

§ Mr. Harold Lever
It says "five or fewer companies".

§ Mr. Diamond
I am sorry to interrupt my hon. Friend—[Laughter.]—I am bound to be in that position from time to time. I can only repeat that this is the advice I am given on the construction of the Clause. I am bound to accept that advice on its construction, even if in doing so I am going against the views of my hon. Friend the Member for Cheetham. I cannot advise the House to accept that Amendment and I am pointing out that it means something different from what it has been said to mean. I am explaining what it means and what I have been advised it means. I must, therefore, advise the House not to accept it.

§ Mr. Lever
Assuming that, on reflection, my right hon. Friend is advised that it means the opposite of what he has been advised it means—and I have ventured an extemporary opinion on what it means—may we take it that the Government will then do something about the matter; if, on mature reflection, they come to the conclusion that the advice given to my right hon. Friend is not right?

§ Mr. Diamond
I do not know what we are discussing if it means something different from my interpretation of the Amendment.

§ Mr. Brooke
Without wishing to enter into this controversy between the right hon. Gentleman and his hon. friend, I express my thanks to the Chief Secretary for accepting both my argument and my Amendment.

§ Mr. Diamond
I beg to move, Amendment No. 169, Clause 44, in page 104, line 5, at the end to insert: Provided that an election under this subsection shall not prevent the payment of any amount of dividends under deduction of income tax, and where notwithstanding the election any amount is so paid, this Part of this Act shall have effect in relation to it as if there had been no such election.

§ Mr. Speaker
I suggest that the House should at the same time consider the 88 preceding two Amendments, Amendment No. 234, Clause 44, in page 103, line 41, after "received", insert: (or such proportion of them as they may for any accounting period jointly elect) Amendment No. 294, Clause 44, in line 42, after "former", insert: or such part of them as shall be specified in the notice of election".

§ Mr. Diamond
This Amendment results from consideration which was promised in Committee and I can best explain it by pointing out that sometimes a parent company will want to receive a dividend net and sometimes gross. There are cases, however, where a subsidiary company's income is mixed, when there should, therefore, be the right for the parent and the subsidiary to elect that part of a dividend should be paid gross and part of it under deduction of tax. This could be done without undue administrative difficulty and that is what the Amendment seeks to do. It was thought previously that it would be adequate if an election could be made for one year and a different election for the following year. However, the Amendment gives greater flexibility. I hope, therefore, that it will be acceptable to the House.

§ Mr. Diamond
I beg to move Amendment No. 170, Clause 44, in page 104, line 34, at the end to insert: (6A) Where in the year 1966–67 or any later year of assessment a company receives from another company (both being resident in the United Kingdom) any such payments as are referred to below in this subsection, and the conditions of subsection (3) (a) or (b) above would be satisfied in relation to the companies if the payments were dividends, then, subject to Schedule 11 to this Act, the company receiving the payments and the company paying them may jointly elect that this subsection shall apply to any such payments received from the latter by the former, and so long as the election is in force those payments may be made without deduction of income tax and section 170 of the Income Tax Act 1952 shall not apply thereto. The payments for which an election may be made under this subsection are any payments which are for corporation tax charges on income of the company making them. This Amendment results from an undertaking given in Committee to consider whether it would be possible to provide for the payment without deduction of tax of annual interest or annual payments by a subsidiary company, to its 89 parent. In the Bill as it now stands there is this facility but it is limited to dividends. We have carefully considered the suggestion made, and have decided that it would be appropriate to allow payment of interest without deduction of Income Tax in the same class of tax in which the payment of dividends without deduction of Income Tax is permitted in the Bill already.
I think that this is a useful Amendment. It will mean that subsidiary companies may pay interest to their parent companies without at that stage creating a liability within the group to account to the Inland Revenue for Income Tax in respect of that payment. The parent company will in due course have to pay Corporation Tax in respect of that payment in the ordinary way. The Amendment, therefore, may represent quite a useful alleviation to some companies in the matter of their timing of payment, although it will not affect the final result in any way.

§ Mr. Patrick Jenkin
I intervene only briefly to express my gratitude to the Treasury Bench for having tabled both this and the previous Amendment, both of which were, in substance, moved from this side in Committee, although the language of this Amendment is somewhat different. Both represent sensible provisions which will make for easier administration relating to interest of groups of companies.