NEW CLAUSE.—(Amendment of Rule 13, Schedule D, Cases I. and II., 8 and 9 Geo. V., c. 40.) (Hansard, 15 July 1924)

§ Mr. HANNON

I beg to move, "That the Clause be read a Second time."

This Clause has been put on the Paper as the result of a unanimous Resolution arrived at at one of the quarterly meetings of the Associated British Chambers of Commerce last year. The Resolution war moved at the instance of the representative of Birmingham on the Central Council of the Associated Chambers, and is in these terms: That the Executive Council be requested to impress upon the Government the importance of amending Rule 13 of Cases I and [I of the Rules applicable to Schedule D of the Income Tax Act, 1918, so that its provisions will apply to limited companies as well as to persons either solely or in partnership carrying on two or more distinct trades, that is to say, that where one limited company holds the maximum number of shares allowed by law in one or more subsidiary companies, the privilege of setting off or grouping the results for the purposes of Income Tax should be allowable as is already the case with regard to persons or partnerships. I would now like to read from the Income Tax Act, 1915, the actual rule relating to Cases I and II referred to in my new Clause. It runs as follows: A person who carries on, either solely or in partnership, two of more distinct trades the profits of which are chargeable under the rules of this Schedule, may deduct from or set off against the profits as computed under this Act in respect of one or more such trades, the loss so computed sustained in any other such trade and mar make separate statements as to each such trade. My new Clause would ask that the same concession be made to limited companies the majority of whose shares is held by a parent company, as now applies in the 326 case of individuals and firms. As I under stand it, the Inland Revenue authorities at present regard the expression "persons" as including a limited company, but it has been held for the purposes of Income Tax that a limited company is a separate legal entity and, therefore, a separate person. Now it would appear, on comparing the cases of limited companies with those of individuals and firms, that on the ground of convenience it would be desirable to treat limited companies just as individual firms are treated under Rule 13. I submit to the House that where the shares of various limited companies, so far as they are allowed by law to be held by one company, those companies should be grouped in the sense of the proposed new Clause, and ought to stand together for Income Tax purposes. I think the Chancellor of the Exchequer will admit that this principle was constituted in relation to limited liability companies in respect to Corporation Profits Tax, and Excess Profits Duty. These are now, of course, things of the past so far as the collection of revenue is concerned; but I am sure the Chancellor—at least I hope so—will consider whether the principle obtained in relation to the first does not equally apply to the second case. I do not understand how any injury could be inflicted on the Inland Revenue by the adoption of the suggestion in the new Clause now submitted to the House. Individual cases may vary. Nevertheless, I think on the whole the convenience to the Inland Revenue authorities would more than repay any possible loss which might supervene from the adoption of this new Clause.

My proposal is that the assessment should be upon the whole group of companies. That would obviate claims being made for a refund of taxation under Section 34 of the Income Tax Act, 1918, except, of course, in the case of a total loss which, however, must be very exceptional. I think the. Inland Revenue authorities will be saved a great deal of time, worry and inconvenience if they act on my suggestion in the circumstances I am endeavouring to describe, rather than to have separate assessments of the companies, and having to settle each trouble as it arises. My suggestion would be an advantage to the revenue authorities and to the taxpayers of the country. I would also bring 327 to the notice of the Chancellor of the Exchequer that where you have various companies occupying a relationship to the parent company in which it is very difficult to deal with the individual trading profits, returns, very often, without any intention of wishing to be so, are necessarily erroneous. It is very difficult to make an accurate estimate in respect of every one of the items involved in the actual working. The price paid for goods and the sale of goods from one of these companies to the other may very often give rise to considerable differences in an aggregate statement of profit and loss. It may also be said in support of my new Clause that a taxpayer in a position of having to furnish returns for the separate companies have to carry on very often complex dealings amongst themselves, and may be tempted to adjust a relationship which will be in his own favour, and at the expense of the Revenue; whereas if the Inland Revenue Authorities are dealing with the entire group it will be a much simpler process, and will indeed obviate the possibility of what, indeed, might be fraud upon the Exchequer.

I hope the Chancellor of the Exchequer will consider this from a common-sense point of view as well as from that of the Revenue. Where there is an associated group of companies it is just that there should be a balancing of profit and loss; that they should be dealt with in the aggregate, and not as individual concerns; that the Revenue Authorities instead of treating each company as a legal entity for Income Tax purposes should deal with the group as a whole. I know how anxious the Chancellor of the Exchequer is to secure the largest possible body of revenue, naturally, from Income Tax, and people on this side of the House may occasionally say irritating things, but we have helped the right hon. Gentleman to get the full measure of revenue and further in securing that very large surplus which he expects—and I think very rightly expects—to secure from the current year. Therefore in submitting to him as I do now, with great respect, a proposal of this kind I am sure he will give to it a generous consideration which he has withheld from some other proposals.

Mr. GRAHAM

The subject which the hon. Gentleman has introduced is a technical one, and his speech was technical, but I think the matter is quite capable of simple explanation. My hon. Friend comes along to-night with a proposal which, he says, would extend the arrangement at present existing, and as suggested by his proposed new Clause. The condition is that the one company shall hold a maximum number of shares in another company. I think I can summarise the reply which almost any Government would give to this part under two or three very simple heads. In the first place, it is perfectly clear that the proposal of my hon. Friend would run counter to the whole of company law in this country. I imagine that the Committee know that before a Clause of this kind could be operative for revenue purposes, there would have to be substantial changes in the company law of this country. Moreover, if the Clause were adopted, it is clear that we should have companies for the purposes of Income Tax substantially in the position of partnerships or in the position of a single individual. I hardly think that the companies themselves would be in favour of this if they had fully kept I hat possibility in view. I mention these difficulties to show that of themselves they would make it impossible for the Government to accept this Clause. During the War it is true that an arrangement of this kind was imported into the Excess Profits Duty, but that was a temporary duty for war purposes. These conditions do not obtain now. For those reasons my right hen. Friend is obliged to resist this Clause. But there is one comfort which it is as well to offer the House, and that is, I think that where a company holds, all the shares in other companies, there is the possibility of making an arrangement at the present time which would enable this result substantially to be achieved and it seems to be a matter for their ingenuity rather than for an alteration in company law.