§ Sir D. HERBERT
I beg to move, in page 7, line 29, to leave out Sub-section (1).
I put this Amendment down rather in a hurry, and, to some extent, under a misapprehension, and I therefore shall not trouble the Committee so long in regard to it as I might otherwise have had to do. The Committee ought to realise exactly the effect of this Sub-section, and we ought to have some justification for it from the Government. It deals with the deduction of Income Tax from dividends when they are paid. That deduction now has to be made on the Income Tax at the standard rate current at the time that the dividend is paid, and is not dependent on the period in which it is earned, or anything of that kind. The result is that just about the time when the Chancellor of the Exchequer opens his Budget, there may be a number of dividends just about to be paid, from which there might have been deducted what will turn out ultimately to be either an over-deduction or an under-deduction as the result of a change in the standard rate of Income Tax.
This Sub-section provides for the case where there has been in these circumstances an over-deduction. As the law would stand without this Sub-section, that over-deduction would have to be made good ultimately by the company to the shareholder. This Sub-section proposes that the company shall not be under any liability to make good an over-deduction to the shareholder who receives the dividend. It says that the matter shall be disposed of by making a less deduction from the following dividend, and it expressly says that there shall be no liability to the actual recipient 2448 of the dividend from which the over-deduction was made. Take the case of stocks or shares which are being constantly dealt with and in which there is a free and big market. Very often the holder of the stocks or shares, at the time when the over-deduction is made good, will be a different person from the holder of the stocks or shares against whom the over-deduction was made. It is all very well from the point of the Revenue to say that if too much is deducted at one time, the company will take so much less the next time when they come to deduct tax; but it is not by any means the same thing for the taxpayer who finds himself faced with a proposal that, when too much has been taken away from him, the restoration may have to be made good to some totally different person.
That is the effect of this proposal, and the Financial Secretary will agree that I have stated it quite clearly. If the stocks or shares were always held by the same person, there would be no harm. If, for instance, the Financial Secretary has a respectable little holding of 10,000 shares in the Shell Transport Company, on which he gets a dividend about the middle of April, and has a deduction at the rate of 4s. 6d. made against that dividend; and he subsequently sells the shares, and it turns out that the tax deducted should have been only 4s., because, owing to the advent of a Conservative Government, the tax has been reduced by 6d., then the Financial Secretary would lose that 6d. Perhaps it would be poetic justice that he, as a Member of the present Government, should have to suffer and pay the extra 6d. which he helped to put on, but I have no doubt that he would feel reason to complain, because it would be rather hard that the 6d. too much which had been taken from his dividend should, instead of being restored to him, be restored to the right hon. Gentleman the Member for Epping (Mr. Churchill), shall we say, who had bought the shares in the meantime. Unless there is some strong reason for this Sub-section, or some different explanation to be given for it, I urge that it should be left out, and that, if a company make an over-deduction, it should be the duty of the company to repay it to the particular shareholder from whose dividend it was taken. It would not cause a vast amount 2449 of trouble, and a little trouble is worth undertaking for the sake of justice and fairness.
§ Mr. A. M. SAMUEL
I am induced to offer a few observations on this Clause because, when it was introduced on the Budget Resolutions, I dealt with it, and certain explanations were given to me by the Financial Secretary. I put down at the time certain things that he said. He may have made a mistake, but evidently what he told us was so confused, that I must join with my hon. Friend and ask him to explain at considerable length how this Clause will work. I am quite clear about the Clause so far as it deals with ordinary shares. What it means is this: If a man has had declared to him a dividend of £100 gross, and he has received £80 net with a deduction of 4s. in the £ Income Tax—owing to the fact that the company could not deduct at the rate of 4s. 6d. because it was a physical impossibility, the Budget Resolution not having been passed—when he returns his income for the purposes of Surtax, he must not return his income gross as £100, but at something like £103 4s. 6d. That is to say, he must calculate every pound as £1 0s. 7¾d., 3¼ per cent. more. I am clear about that. I know that for the purposes of Surtax that is the case. That deals with Sub-section (3) of the Clause which relates to ordinary shares. I am not going to ask any questions about that on this Amendment. I wish to deal with the first part, and I take it, Mr. Young, that you would like us to deal with the general question somewhat on the lines of the last Clause, in which case I do not think I shall need to move my own Amendments.
§ Mr. CHARLES WILLIAMS
On a point of Order. Shall we be able to discuss the proviso to paragraph (b) on which I have an Amendment? I take it the present discussion will not prevent us from bringing forward the points we wish to make on further Amendments, providing those Amendments are called.
§ The CHAIRMAN
The Amendment before the Committee is to leave out Sub-section (1). I have not selected any of the other Amendments.
§ Mr. SAMUEL
The reason I am not dealing with ordinary shares in this particular discussion is because I understand the points I am now raising have nothing to do with ordinary shares. Therefore, I wish to save the Financial Secretary the trouble of explaining the differences in detail in regard to the two classes of shares. It is in regard to the preference shares that I am in doubt. If a deduction at 4s. 6d., which is the ruling rate, is made three weeks or so prior to a Budget Resolution bringing about a reduction of the Income Tax to, say, 3s. 6d., the deduction must be made from the tax charged to the preference shareholder on the occasion of the next payment of preference dividend within one year. What happens if no preference dividend is ever again declared? Suppose the company goes into liquidation? A certain overcharge has been made. Who will get the refund? Or who would get the refund five years hence if they were cumulative preference shares? I have written out these points, and I will hand them to the Financial Secretary, so that he may see exactly what they are. The point is that at present there is a limit of one year from the passing of the Act. On the Report stage of the Budget Resolutions the Financial Secretary told us:The rule under paragraph (a) is that when it comes to the autumn dividend"—He made use of the word "autumn"—the taxpayer will receive less than £5 with 4s. 6d. subtracted.What did he mean by that? The taxpayer does not receive £5 with 4s. 6d. subtracted. He misled me. For his autumn dividend the taxpayer will not receive "less than £5." What he will receive will be something less than £2 10s. He was dealing with a case of a person who holds £100 worth of preference shares and is entitled to £5 annual dividend, and he said that when the tax was 4s. in the £ one-fifth of that was deducted and he would actually receive £4. Then he went on to say that when it comes to the autumn dividend, the taxpayer would receive less than £5 with 4s. 6d. subtracted—in order to make up for the fact that he has received too much in the Spring."—[OFFICIAL REPORT, 6th May, 1930; col. 834, Vol. 238.]2451 The whole thing is in a muddle, and I hope the Financial Secretary will say what he means.
There is one other poinnt on which we require information. If nothing by way of interest is paid for more than 12 months after the passing of the Act, at what rate of tax is an adjustment under this Clause to be made if the Income Tax rate has fallen? It is said that on any sale of the stock in the meantime the buyer will take into consideration the benefit or discount inherent in the value owing to some reduction of or addition to the Income Tax. I would ask the attention of the Attorney-General to this point. If Preference shares have been sold after one-half year's incorrect deduction has been made, may we take it for certain that any adjustment of the Income Tax will affect the owner of the shares at the time the adjustment is made? If so, is it to be assumed that the new owner has taken that into account when he was calculating the price at which he should buy the shares from the late owner? In that case I would ask how the new buyer can foresee what the tax will be at the time when he buys from the late owner? These are points which will have to be cleared up. They have not been foreseen by the Treasury or by the hon. and learned Attorney-General. We do not wish to be obstructive on this Clause, but this is a matter which ought to be explained to us, and we will, so far as we can, give any assistance in the adjustment of what is, I am certain, a hiatus in the provisions for the administration of the law.
§ Mr. OLIVER STANLEY
I am afraid it will be impossible for me to follow the argument of the hon. Member for Farnham (Mr. A. M. Samuel), which I confess I fail to understand, but I wish to deal briefly with a point which I think raises a real question of principle in connection with this Sub-section, and that is that a repayment in respect of over-deduction of tax is made without any references at all to the equity of the situation. It is definitely laid down that the benefit of this Clause shall never inure to the person who was the subject of the original hardship, though presumably this Clause is intended to help him. If I have suffered an over-deduction of tax from the dividend on some shares, 2452 and if in the ensuing 12 months I am forced to sell those shares, the benefit which inures under paragraph (b) comes not to me, who suffered the over-deduction, but to the person who bought from me, the man who happens to hold the shares at the particular time when the money is repaid. The Clause does not even say that the benefit shall come to the man who holds the shares at the next dividend payment, if the dividend is passed in that year; nothing is laid down as to how the amount is to be made up beyond the limit of one year. It seems to me that the principle, if we can call it a principle, underlying this arrangement, is the same vicious principle which underlay the Clause which we have just finished discussing, and that is that we are doing these things to fit the machine and without regard to the equity of the proceedings.
The only possible reason that can be put forward for not giving this benefit to the original holder is that the procedure prescribed is easier from the point of view of the Exchequer, and of the company as the agent of the Exchequer. But it is quite wrong that we should allow the interests of the machinery to stand in the way of doing justice to the taxpayer. The Exchequer, which is the machinery, exists for the benefit of the taxpayer and not the taxpayer for the benefit of the machinery. Whatever the difficulties may have been in the last Clause, in this particular case I cannot see what obstacles there can be in the way of doing justice to the taxpayer. The period for the repayment is limited to one year. Surely every company must know the state of its register at the last dividend payment, and it would not be putting any intolerable hardship on the company, and would only be doing justice to the taxpayer, if this provision were so altered that the benefit of this repayment were made to inure to the benefit of the person who originally suffered from the over-deduction, that is, the person who was the holder of the shares when the dividend was paid. Owing to the way in which the question has been put it is impossible for me to hand in any manuscript Amendment to secure the carrying out of this intention, but I hope to be able to put forward an Amendment on Report stage and I trust that the hon. Gentleman wilt try to meet us.
§ The FINANCIAL SECRETARY to the TREASURY (Mr. Pethick-Lawrence)
There has been considerable misconception, particularly in the mind of the hon. Member for Westmorland (Mr. Stanley) as to the object of this Clause. It is not the object of the Clause to secure any gain to the Exchequer. The company pays the tax to the Exchequer, and therefore this is not a matter between the taxpayer and the Exchequer, but it defines the relationship between the taxpayer and the company, and it has been drawn up for the convenience of the company.
§ Mr. PETHICK-LAWRENCE
The hon. Member seemed to suggest that in order to oblige the Exchequer we were doing something which would create a great deal of difficulty. That is not the case at all. The Exchequer is perfectly satisfied with the arrangement by which it receives the money from the company, but difficulties have arisen in regard to cases where the dividend warrants are made out subsequent to the end of the financial year but before the Budget statement has been made, and it is with a view to meeting that point, and after full consultation with the companies, that this particular scheme has been brought forward. What is the scheme? The hon. Member for Farnham (Mr. A. M. Samuel) did not seem to me quite to understand what the scheme was. [Interruption.] I said the right hon. Gentleman did not seem to understand it. If he did, I fail to understand what his point is. He took me to task for some words I had used on a previous occasion when this subject was under discussion. What are the facts? There is a spring dividend and an autumn dividend. I spoke about a £5 autumn dividend on 5 per cent. preference shares and I was speaking about £200 preference shares. I was thinking of 5 per cent. and a half-year's dividend on £200. Putting the Income Tax aside on a £200 preference share at 5 per cent., a man will receive £5 in the spring dividend and £5 in the autumn dividend. Where the Income Tax remains standing at 4s. 6d. that man will receive a spring dividend of £5 less 4s. 6d. in the £ and in the 2454 autumn he will receive £5 less 4s. 6d. in the £. Supposing the tax were reduced from 4s. 6d. to 4s., then it is the reverse of the case I was stating When the Financial Resolutions were under discussion. In the case of payment in the spring the warrant was made out before the change was announced and the owners of preference shares receive in the spring £5 less tax at 4s. 6d. in the £. The tax has been reduced and they ought to have only 4s. in the £ deducted from that particular dividend.
Somehow that has got to be made good. The simplest method was to make it good on the next occasion when the tax became due and that is done by deducting not 4s. 6d. in the autumn, and not even 4s., because that is what he ought to have deducted on both dividends. As a matter of fact, this man had too much deducted on the first occasion in the spring, and therefore he will have less than the normal amount of tax of 4s. deducted in the autumn, and it will be somewhere in the neighbourhood of 3s. 6d. and the following year he will go back to the 4s., which is the normal amount. Those are the facts, and as long as the same holder is in possession of the shares all the time, I think it will be generally agreed that that is the simplest way to deal with the matter, and that is the view of the company.
The hon. Member for Watford (Sir D. Herbert) asked about the case where a man disposes of his shares during the course of the half-year. The proposal is that, in spite of that, the benefit of the additional reductions shall go to the holder of the preference shares in the autumn. It may be said that this is very unfair. It may be said that you have taken away more than you ought to have done, and that you are giving something extra to the autumn holder. The answer to that is that at the time when the March holder sells his shares to the autumn holder, the change in the rate of interest has been known, and the fact that an additional payment will be made will be taken into account in the price of the shares. We are all accustomed to the shares being sold cum dividend or ex-dividend where the dividend is due to be paid or to the buyer or the seller. In this case there will be a very small additional effect produced in addition to the effect of the dividend having to be 2455 paid at a certain time, and there will be a small additional effect by this excess of tax having to be refunded, and that will be taken into account in the price of the shares. It was the opinion of those who were anxious that this change should be made that it should be made in that way, and it is believed that by an alteration in the price no injustice will be done between the two different shareholders. Another point raised was that if there was no autumn dividend the matter would be held up. If hon. Members will refer to Clause 11, Sub-section (1, b), they will find the following words:Provided that the foregoing provision shall not authorise the retention of any part of the amount over-deducted for more than one year from the passing of the Act so imposing the tax.So that where the autumn interest is not paid and a full year elapses, then the direct method of paying back to the individual shareholder will be effected instead of the method proposed in this Clause.
§ Mr. PETHICK-LAWRENCE
I am not quite clear what the hon. Gentleman means. Our proposal is perfectly straightforward. The tax is paid direct by the company, and the company retains a larger amount of money than it otherwise should do. The proposal of this Sub-section is that it should refund that money to the preference shareholders in the autumn, but if there be no autumn dividend, in this particular part of Subsection 1 (b) it is provided that the company shall not hold the money indefinitely, but shall refund it to the preference shareholders direct.
§ Mr. PETHICK-LAWRENCE
I think it is perfectly clear that we are dealing only with preference shareholders who have received the wrong dividend in the spring of the year.
Sir NAIRNE STEWART SANDEMAN
Does the Financial Secretary mean that the Government are getting the use of this extra 6d. for six months?
§ Mr. PETHICK-LAWRENCE
The Government are entirely unaffected by that change, and if anybody gets the benefit it is the company. The amount is comparatively small, and therefore I think it is not unreasonable that the method we are suggesting should be adopted. I think I have now explained this matter to the satisfaction of the great bulk of hon. Members, and I hope that this proposal which has been put forward by the companies will be allowed to pass.
§ Mr. MARJORIBANKS
I think the remarks of the Financial Secretary will have struck many Members of the Committee as a sort of elaborate joke on the public and the Committee, because it appears to contemplate a reduction of taxation. I should have thought that the time to introduce elaborate proposals of this kind would be when there was some prospect of lower taxation, and at present there is no such prospects whatever. It seems to be that it is quite unnecessary to encumber the Statute Book with provisions to cover such a very unlikely eventuality, and one wonders why such a provision should have been brought forward, who proposed it, and what is the use of it.
If the Chancellor of the Exchequer contemplates lowering taxation, now is the time to come forward and say so. I am sure that a proposal of that kind would be received with acclamations by my hon. Friends on this side of the Committee. In the meantime, we have to consider this complicated Section with no possible hope of it ever coming into effect. It is on the face of it a boon to the company and a boon to the taxpayer. I think we may regard it in an attitude of timeo Danaos et dona ferentes. When one sees a concession to the taxpayer, one frequently looks for the injustice which will inevitably follow. With the first part of the Sub-section I have comparatively little quarrel, because I see very little new law in it. If the Attorney-General can see any new law in sub-paragraph (i), I should be glad to hear his explanation. The only thing that I can see is that this Sub-section has not been very carefully drafted. I notice that Rule 20 of the General Rules of Income Tax are mentioned in Sub-section (2) of this Clause. Rule 20 is as follows: 2457The profits or gains to be charged on any body of persons shall be computed in accordance with the provisions of this Act on the full amount of the same before any dividend thereof is made in respect of any share right or title thereto, and the body of persons paying such dividend shall be entitled to deduct the tax appropriate thereto.I have read that rule and there is nothing there with regard to preference dividends, and I would like the Financial Secretary to explain why he has selected preference dividends only. Has the Stock Exchange been consulted on this matter? This may be a minor point, but I think it is one which has so far escaped the investigation of hon. Members opposite. There is no inherent justice up to now, and the position is similar to that which the late Mr. Thomas Gibson Bowles illustrated by bringing a test case and causing an Act of Parliament to be passed to put it right. I cannot see any new law until we get to Sub-section (1, d) and then we get the first injustice.
I would like the Members of the Committee to understand clearly that by Statute merely for the convenience of the registrars of companies an injustice is being perpetrated by withholding money from the shareholders for a whole year. That cannot be right in equity or in justice. It can only be right as a matter of convenience, and it is for the Financial Secretary to satisfy the Committee that such a Clause was necessary. We must never lose sight of the fact that this Clause will never come into operation as long as we have a Socialist administration and it clearly contemplates a Conservative administration. But, nevertheless, we in this Committee must consider this Clause as if the Government really meant business.
Is the Financial Secretary satisfied that the convenience of the matter justifies this change which is an undoubted injustice to every single holder of stock in this country. It is, of course, a comparatively minor injustice, because the money will eventually go to the person who held the shares, but in Sub-section (1, c) there is the real injustice which was disclosed by my hon. Friend the Member for Westmorland (Mr. O. Stanley). It provides that the money shall go to a person who has really no right to it whatever. That cannot be right, although it may be justified on the score of convenience. I know that companies have 2458 been bombarded with disputes and re quests on this matter, and no doubt it will be very convenient to company registrars in future not to be bothered with disputes of this kind, but it is their business to look after these disputes, and it is within the competence of the ordinary common law of England to right these disputes. There is no reason why the House of Commons should make statutory an injustice of this kind, and then leave it to the unfortunate seller to put the matter right. The hon. Gentleman says that those who are familiar with the usual procedure of buying and selling "ex dividend" and "cum dividend" will readily understand this matter, but in this case the sum will be far less, and it may easily escape notice. It will be so small that the ordinary arrangements of the Stock Exchange will not pay any attention to it. De minimis non curat Stock Exchange. The hon. Gentleman's answer may have been logical, but it was specious, and, of course, entirely divorced from the realities and probabilities of the case; and the fact remains that this injustice, this departure from equitable principles, is to be put upon the Statute Book.
There are two other matters which it is essential to discuss if it is desired to make this Clause a reasonable one. Subsection (1, c, i) says that the amount made good shallin the case of an over-deduction which is made good under paragraph (b) of this Sub-section ensure to the benefit of the person entitled to the payment on the occasion on which the over-deduction is made good.That seems to me to apply to every deduction that could take place, and I shall be very pleased if the hon. Gentleman can show me how paragraph (ii) comes in, which says that the amount shallin any other case enure to the benefit of the person entitled to the security or share in question at the date when the amount is made good.That seems to me to be mere surplusage; I do not see what case it covers. It seems to me that paragraph (i) covers every situation that could arise, and I do not see what persons the umbrella of paragraph (ii) covers at all. Finally, after paragraphs (i) and (ii), we have the words:and not in either case.In connection with these words, the words 2459in any other casein paragraph (ii) do not make sense. It is not a question of two alternatives, but of many alternatives. This, however, is perhaps a drafting point.
To recapitulate my grievances against Sub-section (1), I do not know whether paragraph (a) is confined to preference dividends—certainly Rule 20 is not; I think that a minor injustice occurs under paragraph (b), and a great injustice under paragraph (c), merely, in both cases, for the convenience of registrars of companies; while the last eight lines of the Sub-section are extremely obscure and unintelligible. In view of this, I think that the hon. Gentleman ought to explain to the Committee in what secret chamber these paragraphs were devised. I think it is clear that they were devised not by any Government Department, but by some private interest, and I think the Committee is entitled to know what private interest has devised this obscure and unintelligible wording, and what principle it attempts to express.
§ Major NATHAN
I cannot quite share the apprehensions of the hon. Member for Eastbourne (Mr. Marjoribanks). He suggests that the right to repayment of the over-deduction will not be reflected in the price, but I am sure it will be generally agreed that the public is not so gullible as that, and that even the smallest differences in value are reflected in market prices. Let it be remembered that market prices, in reality, are not made by the public, who may be uninstructed in these matters, but by jobbers and brokers who have a very keen eye to the most minute differences in value between one security and another. On the score of injustice in connection with this over-deduction, I find myself in agreement with the Financial Secretary. My object in rising is not to criticise the provisions of this Subsection, beyond expressing my apprehension at the complex terms in which the law is being expressed, but rather to address myself to a point some part of which was made by the hon. Member for Eastbourne. I am not criticising, but am asking for information.
Sub-section (1, a) makes legal any deduction under Section 2 of the Statute in question. Sub-section (1, b) states that 2460 any over-deduction to be made good under that Section shall be made good in a certain manner. Sub-section (1, c) deals with an entirely different subject-matter, being directed, as I understand it, to indicating to whom the over-deduction is to be made good, and here I find myself for the moment in agreement with the hon. Member for Eastbourne. I am quite unable to understand what the words of paragraphs (i) and (ii) mean, while the wordsand not in either caseseem to me to carry the matter no further, but to only confuse the situation. The matter, however, does not end there, and I think that the hon. Member for Eastbourne might have pursued his interesting argument rather further. The repayment under paragraph (i) is to enure to the benefit of the person entitled to the payment on the occasion on which the over-deduction is made good, but I would ask, what is the definition of the person entitled to the payment on the occasion on which the over-deduction is made good? As to the statement in paragraph (ii), thatin any other case"—if there be any other case—the payment is toenure to the benefit of the person entitled to the security or share in question at the date when the amount is made good,I do not understand whetherthe person entitled to the security or share in question at the date when the amount is made goodis the same person as the person referred to in paragraph (i), thought I suspect that he is. Would the Financial Secretary say who is the person referred to in paragraph (i), and how he differs from the person referred to in paragraph (ii)? The hon. Gentleman, in his reply to the hon. Member for Farnham (Mr. A. M. Samuel), said that over-deductions would be made good to the holder who had suffered over-deduction if he still retained the shares when the next dividend fell due, but I take it that the words:not in either casemean, not in the case of any over-deduction, because paragraph (c) refers to any over-deduction which relates back to paragraph (b), which covers the whole subject-matter of the Clause. If I understand the matter correctly, the 2461 original holder of the shares, whether he still retains them or whether he has parted with them, is not to be entitled to the benefit of the deduction. That is what the Sub-section says in plain terms. The Financial Secretary said that, if the original holder has not parted with the shares, he will receive the money back when it is made good on his next dividend payment, but the original holder is excluded from the benefit of any repayment by the words to which I have just referred. Paragraph (b) refers to the manner in which any over-deduction is to be made good, and paragraph (c) refers to the person to whom it is to be made good; and in paragraph (c) it is specifically stated that, to whomsoever it may be made good, the one person to whom it is never to be made good is the original holder. Where, under Sub-section (1), in view of this phraseology, does he obtain the right to repayment?
§ 7.0 p.m.
§ The ATTORNEY-GENERAL (Sir William Jowitt)
I quite agree that this Clause is complicated and that the drafting needs to be looked into very carefully. I think, if I might say so, that the hon. Member for Eastbourne (Mr. Marjoribanks) did not state the matter accurately when he said that it did not involve a change in the existing law.
§ Mr. MARJORIBANKS
I did not say so. I asked the hon. and learned Gentleman what the meaning of the changes was.
§ The ATTORNEY-GENERAL
It was quite unnecessary for the hon. Member to rise to a point of Order. I would have given way. I understood him to say that there was no change in the existing law. If he did not say so but asked for information, I will tell him that I think I am right in saying that each of these Sub-sections does effect a change. In (1, a) the change is in that it gives you a fixed period of one month which is not liable to be cut down as under the Act of 1913. The alteration in (1, b) is much more important because under (1, b) the company are entitled to retain the excess deduction for a period of time therein specified. But for the alteration of the law made in (1, b), they would have no power to do that and no defence to an action for retaining it. Again, in (1, c), you have a complete 2462 change in the law, because what is contemplated is that you shall pay the excess deduction you have taken from A and, instead of paying it to A, you shall pay it to B.
§ Mr. MARJORIBANKS
As far as I am concerned, I made it clear in regard to (b) and (c) that there were, in fact, drastic changes in the law containing great injustices.
§ The ATTORNEY-GENERAL
I am sorry I misunderstood the hon. Member. I cannot say I appreciate what the injustices are, because it seems to me, having only the qualification of a lawyer—business men may correct me—that this matter must be reflected in the price of the share and that an injustice that might appear at first blush would be put right, because the purchase price of the share, if there had been an over-deduction, would be higher because the purchaser would know that, when the next dividend came, not only would he get such dividend as there might be but, as an added bonne bouche, such deductions as were over-deducted before. I aim asked about the distinction between (i) and (ii) of paragraph (c). When we learned logic, we used to learn that everything in the world is either a grid iron or not a gridiron. Everything in the world is either an over-deduction which is made good under paragraph (b) or which is not made good under paragraph (b). Consequently, you get your two categories. The first category of those made good under paragraph (b) refers to the method by which you do it. If you make it good under paragraph (b), you have got the method of taking less on the second occasion to make good what you over-deducted on the first occasion. Now (ii) refers to "any other case," which includes the case where you simply pay without waiting for a further dividend and simply send round to your various shareholders the excess deductions you have made. The company may elect to pay them over promptly to shareholders. If it does that, it comes under (ii) and the words "in any other case."
The hon. Member who spoke last raised one point which led me to say that the drafting needs to be carefully considered. I am not myself certain that the Courts would have adopted that construction of those words: 2463To the benefit of the person entitled to the payment on the occasion on which the over-deduction is made good.The whole framework of the Clause draws a distinction between two people, the person entitled to the benefit at the time the deduction was made as opposed to the person entitled to the share at the time of the putting right of the excess deduction. Those are the two people you are contrasting and you are saying in paragraph (c) that in any other case the amount made good shall inure to the benefit of the person entitled to the security or share at the date when the amount is made good and not to the person entitled to the share when the original deduction was made. I should suggest, as a matter of construction to the hon. Member, that it is a matter of differentiating, and, when you say no to the second man you are emphasising that you must take the first. If there has been no change in the ownership of the share, it is obvious that the Court will say that the man who all along has been owner will not be disqualified from receiving that which is obviously his as shown by the words of the original Section. I will tell the hon. Member that I will take an opportunity of seeing the Parliamentary draftsman about it and pointing out the difficulties he has pointed out to me and, if the draftsman thinks better words can be found, I shall ask him to put it right on Report stage.
§ Mr. ALBERY
I would like to put one further question to the hon. and learned Gentleman. In further explanation of what he said, will he tell us how the difficulties which this very complicated Clause seeks to overcome were met in the past? If they were not met, how did this arise?
§ The ATTORNEY-GENERAL
I understand that the companies had to pay it back and that it was by reason of the difficulties the companies experienced on these occasions that they made representations that some such arrangement as this should be made. It is not a matter for the revenue; it is simply a matter for the companies to enable them to make a business adjustment.
§ Sir L. WORTHINGTON-EVANS
There is one point I would like the hon. and learned Member to elucidate a little 2464 further. Dealing with (c, ii), he said that the company was not bound to keep the tax for a year, but they might at any moment repay if they chose. But when he was dealing with (c, i), he said that the value of the tax which would ultimately come to the shareholder would be reflected in the price of the share, that the share might be cum-dividend and it might also be cum-tax. That is the argument. How can that be if the company may at any time repay the tax to the previous holder? That is our point. The share is cum-dividend because the date of the dividend is known. Within a few days or even as much as a month before in respect of Government stocks, it is quoted ex-dividend, but up to that point it is cum-dividend. There is a fixed time in which you can make a stock cum-dividend or ex-dividend because you know when the dividend is going to be paid. How can these shares have a regular price cum-tax when you do not know whether the company is going to repay the tax or not? I do not see how the hon. and learned Member can get out of it. It is really important. If you do not reflect the value of the tax in the price, you are taking it from one man whose property it is and transferring it to someone else whose property it is not. That is what you are doing unless it is reflected in the price which the seller gets. Your answer is that it is reflected in the price which the seller gets. If it is, then of course there is no injustice to either of them, but I undertake to say that it never will be reflected in the price. Odds and ends of tax, a relatively small percentage of the dividend, cannot be reflected in the price. How can it be when you have not a fixed date for the repayment of the tax, and when at any moment the tax may be repaid?
§ Mr. PETHICK-LAWRENCE
The case of (c, i) provides for making good an over-deduction by a company in the dividend. Where in the subsequent dividend the over-deduction is made good, then under (c, i) any return of over-deducted tax is paid to the man who is entitled to the dividend. Therefore, the amount is made good to the man who is entitled to the second dividend.
§ Mr. PETHICK-LAWRENCE
That is the case I have already answered—the man who has overpaid a tax sells his share to another man. That man when he gets his next dividend is entitled to have that amount made good. That being so, the first man selling to the second is entitled to charge some more for the shares in consequence of that tax. I see no difficulty in that.
§ Sir L. WORTHINGTON-EVANS
That is all right up to that point, but the learned Attorney-General pointed out, dealing with (c, ii), that the company was not bound to wait and repay the tax to the original owner or to the holder with the next dividend. They can repay it at any time. I ask the hon. Gentleman how it can possibly be reflected in the price when the seller at the time he sells and the buyer at the time he buys do not know whether it is cum-tax or not cum-tax.
§ Mr. PETHICK-LAWRENCE
Whether the company chooses to pay it or otherwise, the benefit enures to the holder after the sale to which the hon. Member has referred. It is reflected in the price, because the buyer gets the benefit of this reduction. Whatever method is adopted, the buyer gets the benefit of this repayment, and the object of paragraph (c) is to ensure that the buyer in all cases gets the benefit of the repayment. The difference between (i) and (ii) is that in the case of (i) it can be paid at the time the second dividend is paid and in the case of (ii) it can be paid at any other time. In every case, the benefit accrues to the holder who is entitled to hold the shares or to get the dividend on the shares.
§ Major GEORGE DAVIES
By this Clause we are deliberately making an injustice by Statute, and we satisfy ourselves by saying business procedure is going to put it right. A great many of us have grave doubts, in the first place, whether you can always rely on business procedure to put right what we may do wrong and, in the second place, whether the explanations which have been given are going to cover the situation. My right hon. Friend has pointed out the difficulties of quoting ex and cum if you do not know the exact date. There may be an explanation, but in a large number of cases I think the injustice will not 2466 be reflected in the price, as in many cases small holders of shares who are not liable to Income Tax at the top rate get it deducted at the source, and it is not worth their while to collect it, and the Treasury wins. That is a case which it is in the hands of the individual to adjust, but here we are putting on the Statute Book a piece of injustice. We are taking money away from someone who may have to pay it and giving it to someone who is not entitled to it, and we say, "Between you, you will straighten it out." Another question will arise when trustees have to pay interest or dividends to beneficiaries. If shares are sold ex-tax, or cum-tax, the price received is less than would otherwise be the case, because there has been this illegal deduction, and the trustees find that the capital of the estate is reduced by that amount, and it is not repaid to the beneficiaries but to some other purchaser, who gets it in the price.
That is another dilemma which arises out of the excellent desire of the Chancellor of the Exchequer to facilitate what we admit is a difficulty in the conduct of business if and when that blessed state may arise when we have a reduction of the standard rate of Income Tax. This Committee, and the community at large who are concerned in these things, will realise first that, however much we think we can rely on the stock markets to readjust things, we are not entitled to put on the Statute Book a manifest injustice. In endeavouring to do so, the Chancellor is raising a number of dilemmas which in the aggregate are of considerable importance and, in any event, are an unbusinesslike and improper kind of procedure for the Committee to mix itself up with.
§ Captain CAZALET
I think I understood the perfectly clear statements of the Financial Secretary and the Attorney-General so far as they went, but I do not think they answered my right hon. Friend's point. I should like to ask who has been consulted on the point. Have the Stock Exchange Committee or any business firm been consulted, and have they agreed that this is the best way of dealing with this highly contentious problem? The point my right hon. Friend raised was this: Before the Clause was introduced, a company had the right 2467 to pay to the holders of shares, say in April, any reduction that there may have been in Income Tax. The case selected by my right hon. Friend was from 4s. 6d. to 4s. As I gather from the Attorney-General, a company under paragraph (b) of this Clause would have the right either to do the same as they have done up to now, that is, to send the warrant to the original holder in April, or to postpone payment and give it to the individual who happens to hold the shares in the autumn. If they have an alternative, how can the extra amount that is due in the autumn be reflected in the market price, because the company has the right at any time between the two dates to pay the individual shareholder?
They know who the holder is when the dividends are first sent out, but the shares may have changed hands five or six times in the meantime.
§ Sir D. HERBERT
On a point of Order. Did I understand you, Sir, to rule that one could not discuss on this Clause the question of deductions from ordinary dividends because the Resolution applied only to preference dividends?
§ Sir D. HERBERT
May I ask whether you have considered that there are apparently two Resolutions on which this Clause is based and, unless I have made some very grievous error in my understanding of the Clause, it is intended to deal with ordinary dividends as well as preference dividends. I may now confess that I put down my first Amendment because at first sight I did not think there was a financial Resolution to justify the subsequent ones.
§ Mr. PETHICK-LAWRENCE
The question of dividends on other than preference shares is dealt with in Sub-section (3) and, therefore, I would ask you, Sir, to uphold your ruling. I agree that the particular Amendment to which the hon. Gentleman is referring only deals with preference shares but, when we come to Section (3), the question of ordinary shares can be raised.
§ Sir D. HERBERT
I apologise. I was under the impression that by arrangement we were having a discussion on the Clause generally.
§ Mr. C. WILLIAMS
The Attorney-General said everything was either a grid-iron or it was not, and he went on to explain that apparently one part of paragraph (c) belonged to one side or the other. Where I am in trouble is that in paragraph (c) apparently there are three things, which are (1) grid-irons, (2) not grid-irons, and (3) this alternative. In the first place the paragraph refers to the people who are entitled to these dividends on the occasion of which the over-deduction is made good. That is one side of it. In paragraph (ii) you come to the date at which it is made good. Apparently those are the two different kinds which you expect. Then you come to what apparently is the gross unfairness. You are apparently not dealing either with the date when deduction is made—apparently that is ruled out, and also the date on which the amount is made good—but you go on and say:And not in either case to the benefit of the person entitled to the payment.It is absolutely clear that in no circumstances can this payment be made to the person who is entitled to it. The Financial Secretary said in his opening remarks that this was done in the interest and by the advice of certain companies. Because certain companies have made representations to the Exchequer that these dividends should be paid in a particular way, why should we lay it down that under no circumstances are the people entitled to payment to be allowed to have it? Anyone may have the dividend except those who are entitled to it. This is one of those curious things that emerge every now and then from the minds of the present occupants of the Treasury Bench. Whoever else may have a thing, the person who has a right to it certainly shall not have it. Give it to anyone else, but never to the person who is justifiably entitled to it.
Let me go a litle way back, to the proviso to paragraph (b). There again you come to a very interesting and curious technical position. It lays down 2469 clearly that the foregoing provision shall not authorise the retention of any part of the amount you have deducted for more than one year after the passing of the Act so imposing the tax. I should like to ask who does get it in that one year. If it means that this can only go on for a year and then there will be a change, as some of the earlier speakers assumed, I could understand it, but surely that is not the only meaning that can be read into these words. I should like to know why you have laid down a year and not any other period. It does not seem to cover the Finance Act or anything else. It seems just to have arrived there in a curious way. There is a further point that wants explanation. Paragraph (a) lays down a period of a month. On what principle is that done? Apparently this is new law. If it is old law, the period might have been less. We are entitled, when we are making new rules and regulations of this type, to know on what principle this is laid down. At the beginning of the Sub-section references are made to rule 19 of the General Rules for the payment of interest, and also to Rule 20. It is exceedingly difficult for some of us who are not lawyers to understand the various rules that come up.
On an occasion such as this it is not in the public interest that we should have these rules quoted unless we are given an explanation as to how they are to be used. There was an interesting
§ discussion between the Attorney-General and my hon. Friend the Member for Eastbourne (Mr. Marjoribanks), who between them knew a good deal about the rules, but they differed as to the rules in this particular Sub-section. Speaking as an ordinary Member of the Committee, I do not think that after the explanation which has been given, any of us could give advice to our constituents as to how much Income Tax any of them would have to pay under the particular Sub-section. The fact remains that, rein regard to the Sub-section as drafted it has been definitely stated that it is the intention to create an injustice. For that reason I hope that as far as my party are concerned we shall go into the Lobby against the proposal, unless the Chancellor of the Exchequer makes a very good and clear explanation. I do not wish to keep the Chancellor of the Exchequer from addressing the Committee, but I should like to state the grave difficulty many of us find in explaining his attitude in the country. I feel sure that he will give an explanation which is simple, clear, and efficient.
§ Question put, "That the Question be now put."
§ The Committee divided: Ayes, 247; Noes, 120.2473
|Division No. 347.]||AYES.||[7.34 p.m.|
|Adamson, Rt. Hon. W. (Fife, West)||Carter, W. (St. Pancras, S. W.)||Gossling, A. G.|
|Adamson, W. M. (Staff., Cannock)||Charieton, H. C.||Gould, F.|
|Addison, Rt. Hon. Dr. Christopher||Chater, Daniel||Graham, Rt. Hon. Wm. (Edin., Cent.)|
|Aitchison, Rt. Hon. Craigie M.||Church, Major A. G.||Gray, Milner|
|Alexander, Rt. Hon. A. V. (Hillsbro')||Clarke, J. S.||Grenfell, D. R. (Glamorgan)|
|Ammon, Charles George||Cluse, W. S.||Griffith, F. Kingsley (Middlesbro' W.)|
|Arnott, John||Clynes, Rt. Hon. John R.||Griffiths, T. (Monmouth, Pontypool)|
|Aske, Sir Robert||Cocks, Frederick Seymour||Groves, Thomas E.|
|Attlee, Clement Richard||Cove, William G.||Grundy, Thomas W.|
|Ayles, Walter||Daggar, George||Hall, F. (York, W. R., Normanton)|
|Baker, John (Wolverhampton, Bilston)||Dallas, George||Hall, G. H. (Merthyr Tydvil)|
|Baldwin, Oliver (Dudley)||Dalton, Hugh||Hall, Capt. W. P. (Portsmouth, C.)|
|Barnes, Alfred John||Davies, Rhys John (Westhoughton)||Hamilton, Mary Agnes (Blackburn)|
|Batey, Joseph||Denman, Hon. R. D.||Hamilton, Sir R. (Orkney & Zetland)|
|Benn, Rt. Hon. Wedgwood||Dickson, T.||Harbord, A.|
|Bennett, Capt. Sir E. N. (Cardiff C.)||Dudgeon, Major C. R.||Hardie, George D.|
|Benson, G.||Duncan, Charles||Harris, Percy A.|
|Bentham, Dr. Ethel||Ede, James Chuter||Hartshorn, Rt. Hon. Vernon|
|Bevan, Aneurin (Ebbw Vale)||Edmunds, J. E.||Haycock, A. W.|
|Bondfield, Rt. Hon. Margaret||Edwards, C. (Monmouth, Bedwellty)||Hayday, Arthur|
|Bowen, J. W.||Edwards, E. (Morpeth)||Hayes, John Henry|
|Brockway, A. Fenner||Egan, W. H.||Henderson, Arthur, Junr, (Cardiff, S.)|
|Bromfield, William||Elmley, Viscount||Henderson, Thomas (Glasgow)|
|Brothers, M.||Forgan, Dr. Robert||Henderson, W. W. (Middx., Enfield)|
|Brown, Ernest (Leith)||Freeman, Peter||Herriotts, J.|
|Brown, Rt. Hon. J. (South Ayrshire)||Gardner, B. W. (West Ham, Upton)||Hirst, G. H. (York W. R. Wentworth)|
|Brown, W. J. (Wolverhampton, West)||Gardner, J. P. (Hammersmith, N.)||Hoffman, P. C.|
|Buchanan, G.||George, Megan Lloyd (Anglesea)||Hopkin, Daniel|
|Burgess, F. G.||Gibbins, Joseph||Horrabin, J. F.|
|Buxton, C. R. (Yorks. W. R. Elland)||Gibson, H. M. (Lancs, Mossley)||Hudson, James H. (Huddersfield)|
|Caine, Derwent Hall||Gill, T. H.||Hunter, Dr. Joseph|
|Cameron, A. G.||Gillett, George M.||Hutchison, Maj.-Gen. Sir R.|
|Isaacs, George||Morgan, Dr. H. B.||Smith, Ben (Bermondsey, Rotherhithe)|
|Jenkins, W. (Glamorgan, Neath)||Morley, Ralph||Smith, Frank (Nuneaton)|
|John, William (Rhondda, West)||Morrison, Herbert (Hackney, South)||Smith, H. B. Lees- (Keighley)|
|Johnston, Thomas||Morrison, Robert C. (Tottenham, N.)||Smith, Rennie (Penistone)|
|Jones, J. J. (West Ham, Silvertown)||Mort, D. L.||Smith, Tom (Pontefract)|
|Jones, Rt. Hon. Leif (Camborne)||Moses, J. J. H.||Smith, W. R. (Norwich)|
|Jones, Morgan (Caerphilly)||Mosley, Lady C. (Stoke-on-Trent)||Snell, Harry|
|Jones, T. I. Mardy (Pontypridd)||Mosley, Sir Oswald (Smethwick)||Snowden, Rt. Hon. Philip|
|Jowett, Rt. Hon. F. W.||Muggeridge, H. T.||Sorensen, R.|
|Jowitt, Rt. Hon. Sir W. A.||Nathan, Major H. L.||Stamford, Thomas W.|
|Kedward, R. M. (Kent, Ashford)||Naylor, T. E.||Strachey, E. J. St. Loe|
|Kennedy, Thomas||Noel Baker, P. J.||Strauss, G. R.|
|Kirkwood, D.||Oldfield, J. R.||Sullivan, J.|
|Knight, Holford||Oliver, George Harold (Ilkeston)||Sutton, J. E.|
|Lambert, Rt. Hon. George (S. Molton)||Oliver, P. M. (Man., Blackley)||Taylor, R. A. (Lincoln)|
|Lansbury, Rt. Hon. George||Owen, H. F. (Hereford)||Taylor, W. B. (Norfolk, S. W.)|
|Lathan, G.||Palin, John Henry||Thorne, W. (West Ham, Plaistow)|
|Law, Albert (Bolton)||Paling, Wilfrid||Thurtle, Ernest|
|Law, A. (Rossendale)||Perry, S. F.||Tinker, John Joseph|
|Lawrence, Susan||Pethick-Lawrence, F. W.||Toole, Joseph|
|Lawson, John James||Picton-Turbervill, Edith||Tout, W. J.|
|Lawther, W. (Barnard Castle)||Pole, Major D. G.||Townend, A. E.|
|Leach, W.||Potts, John S.||Trevelyan, Rt. Hon. Sir Charles|
|Lee, Frank (Derby, N. E.)||Price, M. P.||Vaughan, D. J.|
|Lee, Jennie (Lanark, Northern)||Ramsay, T. B. Wilson||Viant, S. P.|
|Lees, J.||Richards, R.||Walkden, A. G.|
|Lewis, T. (Southampton)||Richardson, R. (Houghton-le-Spring)||Walker, J.|
|Lindley, Fred W.||Riley, Ben (Dewsbury)||Wallace H. W.|
|Lloyd, C. Ellis||Riley, F. F. (Stockton-on-Tees)||Wallhead, Richard C.|
|Logan, David Gilbert||Ritson, J.||Watkins, F. C.|
|Longbottom, A. W.||Romeril, H. G.||Watson, W. M. (Dunfermline)|
|Longden, F.||Rosbotham, D. S. T.||Wellock, Wilfred|
|Lowth, Thomas||Rowson, Guy||Welsh, James (Paisley)|
|Macdonald, Gordon (Ince)||Russell, Richard John (Eddisbury)||West, F. R.|
|MacDonald, Rt. Hon. J. R. (Seaham)||Salter, Dr. Alfred||Westwood, Joseph|
|MacDonald, Malcolm (Bassetlaw)||Samuel, Rt. Hon. Sir H. (Darwen)||White, H. G.|
|McElwee, A.||Sanders, W. S.||Whiteley, Wilfrid (Birm., Ladywood)|
|McEntee, V. L.||Sandham, E.||Wilkinson, Ellen C.|
|McKinlay, A.||Sawyer, G. F.||Williams, David (Swansea, East)|
|Maclean, Sir Donald (Cornwall, N.)||Scrymgeour, E.||Williams, Dr. J. H. (Lianelly)|
|McShane, John James||Scurr, John||Williams, T. (York, Don Valley)|
|Malone, C. L'Estrange (N'thampton)||Sexton, James||Wilson, C. H. (Sheffield, Attercliffe)|
|Mansfield, W.||Shepherd, Arthur Lewis||Wilson, R. J. (Jarrow)|
|March, S.||Sherwood, G. H.||Winterton, G. E. (Leicester, Loughb'gh)|
|Marcus, M.||Shield, George William||Wise, E. F.|
|Marley, J.||Shillaker, J. F.||Wright, W. (Rutherglen)|
|Mathers, George||Shinwell, E.||Young, R. S. (Islington, North)|
|Matters, L. W.||Short, Alfred (Wednesbury)|
|Messer, Fred||Simmons, C. J.||TELLERS FOR THE AYES.—|
|Middleton, G.||Sinkinson, George||Mr. Allen Parkinson and Mr.|
|Milner, Major J.||Sitch, Charles H.||William Whiteley.|
|Montague, Frederick||Smith, Alfred (Sunderland)|
|Acland-Troyte, Lieut.-Colonel||Cranborne, Viscount||Henderson, Capt. R. R. (Oxf'd, Henley)|
|Ainsworth, Lieut.-Col. Charles||Croft, Brigadier-General Sir H.||Herbert, Sir Dennis (Hertford)|
|Albery, Irving James||Cunliffe-Lister, Rt. Hon. Sir Philip||Hills, Major Rt. Hon. John Waller|
|Allen, W. E. D. (Belfast, W.)||Dalkeith, Earl of||Hoare, Lt.-Col. Rt. Hon. Sir S. J. G.|
|Atkinson, C.||Dalrymple-White, Lt.-Col. Sir Godfrey||Hurd, Percy A.|
|Balfour, George (Hampstead)||Davidson, Rt. Hon. J. (Hertford)||King, Commodore Rt. Hon. Henry D.|
|Balfour, Captain H. H. (I. of Thanet)||Davidson, Major-General Sir J. H.||Knox, Sir Alfred|
|Balniel, Lord||Davies, Dr. Vernon||Lamb, Sir J. Q.|
|Beaumont, M. W.||Davies, Maj. Geo. F. (Somerset, Yeovil)||Lane Fox, Col. Rt. Hon. George R.|
|Betterton, Sir Henry B.||Davison, Sir W. H. (Kensington, S.)||Law, Sir Alfred (Derby, High Peak)|
|Boothby, R. J. G.||Dixon, Captain Rt. Hon. Herbert||Leighton, Major B. E. P.|
|Bourne, Captain Robert Croft||Eden, Captain Anthony||Lewis, Oswald (Colchester)|
|Boyce, H. L.||Edmondson, Major A. J.||Long, Major Eric|
|Bracken, B.||Elliot, Major Walter E.||Maitland, A. (Kent, Faversham)|
|Briscoe, Richard George||Erskine, Lord (Somerset, Weston-s-M.)||Makins, Brigadier-General E.|
|Buckingham, Sir H.||Falle, Sir Bertram G.||Marjoribanks, E. C.|
|Bullock, Captain Malcolm||Ferguson, Sir John||Monsell, Eyres, Com. Rt. Hon. Sir B.|
|Burton, Colonel H. W.||Ford, Sir P. J.||Morrison, W. S. (Glos., Cirencester)|
|Butler, R. A.||Forestier-Walker, Sir L.||Nicholson, O. (Westminster)|
|Cadogan, Major Hon. Edward||Graham, Fergus (Cumberland, N.)||Nield, Rt. Hon. Sir Herbert|
|Carver, Major W. H.||Grattan-Doyle, Sir N.||O'Connor, T. J.|
|Cautley, Sir Henry S.||Greene, W. P. Crawford||Ormsby-Gore, Rt. Hon. William|
|Cayzer, Sir C. (Chester, City)||Grenfell, Edward C. (City of London)||Penny, Sir George|
|Cazalet, Captain Victor A.||Gretton, Colonel Rt. Hon. John||Percy, Lord Eustace (Hastings)|
|Chamberlain, Rt. Hn. Sir J. A. (Birm., W.)||Hacking, Rt. Hon. Douglas H.||Peto, Sir Basil E. (Devon, Barnstaple)|
|Chapman, Sir S.||Hall, Lieut.-Col. Sir F. (Dulwich)||Ramsbotham, H.|
|Churchill, Rt. Hon. Winston Spencer||Hannon, Patrick Joseph Henry||Remer, John R.|
|Cobb, Sir Cyril||Hartington, Marquess of||Roberts, Sir Samuel (Ecclesall)|
|Colville, Major D. J.||Harvey, Major S. E. (Devon, Totnes)||Salmon, Major I.|
|Courtauld, Major J. S.||Haslam, Henry C.||Samuel, A. M. (Surrey, Farnham)|
|Samuel, Samuel (W'dsworth, Putney)||Steel-Maitland, Rt. Hon. Sir Arthur||Waterhouse, Captain Charles|
|Sandeman, Sir N. Stewart||Stuart, Hon. J. (Moray and Nairn)||Wayland, Sir William A.|
|Shepperson, Sir Ernest Whittome||Sueter Rear-Admiral M. F.||Wells, Sydney R.|
|Sinclair, Col. T. (Queen's U., Belfst)||Thomas, Major L. B. (King's Norton)||Williams, Charles (Devon, Torquay)|
|Smith-Carington, Neville W.||Thomson, Sir F.||Windsor-Clive, Lieut.-Colonel George|
|Somerville, A. A. (Windsor)||Titchfield, Major the Marquess of||Wolmer, Rt. Hon. Viscount|
|Somerville, D. G. (Willesden, East)||Tryon, Rt. Hon. George Clement||Womersley, W. J.|
|Southby, Commander A. R. J.||Vaughan-Morgan, Sir Kenyon||Worthington-Evans, Rt. Hon. Sir L.|
|Spender-Clay, Colonel H.||Ward, Lieut.-Col. Sir A. Lambert|
|Stanley, Lard (Fylde)||Wardlaw-Milne, J. S.||TELLERS FOR THE NOES.—|
|Stanley, Maj. Hon. O. (W'morland)||Warrender, Sir Victor||Captain Margesson and Captain|
Question, "That the consideration of the Clause be postponed until after the consideration of the new Clauses," put, and agreed to.
§ Captain BOURNE
I beg to move, in page 8, line 31, to leave out Sub-section (2).
I move this Amendment with the object of getting an explanation from the Chancellor of the Exchequer as to what is intended in this Sub-section. As I understood the original Financial Resolution on which this Clause is founded, the object of the Sub-section is to deal with the assessment of Income Tax in the case of royalties and copyright, and also under paragraph (a) in the case of some rather mysterious preference dividends. This Sub-section is a bad example of legislation by reference. Section 211, Sub-section (2) of the Income Tax Act, 1918, lays down conditions under which a person who has to pay rent for a house may deduct the Income Tax if it is charged to him and charge that Income Tax to the landlord. I presume that the object of this Sub-section as far as paragraphs (b) and (c) are concerned is to provide that where in the case of the payments for royalties or copyright the person making that payment deducts the Income Tax prior to forwarding the cheque to the person entitled to the payment before the date on which this House has agreed to the Budget Resolution altering the Income Tax, he will be entitled to deduct the appropriate amount of the Income Tax in order to get an adjustment on the next cheque which he sends.
I am extremely puzzled as to what is meant by paragraph (a). It seems to me that we have dealt with deduction of Income Tax in the case of preference shares, and I am puzzled to know what preference dividend can be meant which will come under Sub-section (2, a) that is not already covered by Sub-section (1). If there are any, I should have thought that they would come under the terms 2474 of Sub-section (4). Sub-section (1) provides that the amount of Income Tax shall be adjusted on the next payment of the preference dividend, and, if that is not convenient to the company, shall at any convenient time make payment of the amount of the tax, if it is a case of over-deduction, which is due. I do not see what dividend can come under Rule 20, which says that the company may deduct the Income Tax before paying any dividend, or how it can relate to Clause 211 of the Income Tax Act, 1918, Sub-section (2), which deals solely with the payment of any rent, interest or annuity.
§ Captain BOURNE
The Financial Secretary says that this Sub-section deals with an increase in the Income Tax. What is the position of people who receive royalties or copyright where the Income Tax is reduced but it has been deducted at the source at a rather higher figure than that which is ultimately agreed upon by this House? I understood that this Sub-section was to deal with either case, with an increase or a reduction.
§ Mr. WARDLAW-MILNE
It is difficult to understand in reading this Subsection and comparing it with the previous Clause exactly where there can be a difference between the cases that are covered by Sub-section (1) and the cases that are covered under this Sub-section. I understand that this provision is to apply in a case in which there is an increase in the amount of tax, but if the Financial Secretary will refer to the previous Sub-section, he will see that the case is equally apparently covered by that Sub-section. It is difficult to understand what is the object of this Sub-section, if it is covered by the previous one and also whether Sub-section (2, b) relating to copyrights and royalties is 2475 only effective if there is a deduction and not an increase. It seems to me that paragraphs (b) and (c) require explanation if they are not covered by the previous Sub-section.
§ Mr. SNOWDEN
This Sub-section is required to supplement the existing provision of Section 211 of the Income Tax Act, 1918, and relates to the adjustment of insufficient deduction of tax in any year in which the standard rate is increased. The paragraphs relating to copyrights and patent royalties relate to matters which are not at present covered.
§ Amendment negatived.
§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
§ Captain BOURNE
I should like to know exactly what is intended by Subsection (4, b). This is an exceedingly complicated Clause and it seems to me that it will make it extremely difficult in a case where an over-deduction of tax has taken place, and where in the case of a preference share part of the dividend is paid at a fixed rate and part at a variable rate. Take the case of a preference share which is fixed at 5 per cent. but where, if the ordinary dividend rises above 8 per cent. the remaining profit is either divided equally or in a certain proportion between the preference shareholders and the ordinary shareholders. In that case, it seems to me that the result of Sub-section (2, b) will mean that the Income Tax on the half-yearly dividend on the preference share, 2½ per cent. which would represent the half of the fixed dividend, will be deducted at the source and will be withheld by the company under the provisions of Sub-section (1, b) inasmuch as an additional 6d. in the £ will be required. If the company has made 10 per cent. and there is an extra 1 per cent. payable to the preference shareholders, in that case the amount of Income Tax on the additional 1 per cent. will be calculated according to Sub-section (3) and the taxpayer will be assumed to have received a somewhat larger income than he has actually received.
That is an extraordinarily clumsy way of doing business and is extremely unfair to the individual taxpayer, particularly if he wants to sell a share, while, as 2476 regards calculating the actual or gross income during any given financial year, the taxpayer will be in a position of enormous difficulty. He will have to look up every one of these preference shares and will have to find out how much of the dividend was due to a fixed dividend or how much has been due to an adventitious dividend, and he will then have to calculate how much dividend was due compared with that which he has actually received. That is putting an unnecessary burden upon the taxpayer. It would have been much simpler to have dealt with this question of preference shares by the provisions of Sub-section (1) irrespective of whether it was a fixed or a varying rate. In the case of a great number of preference shares they are cumulative. On certain occasions they miss a dividend, perhaps for six months or a year, and then the company has a good year and on the next payment the amount of the dividend is greater than, say, the 5 per cent. and may go up to a great deal more in order to make up for the arrears.
Will the Chancellor of the Exchequer inform us what happens under these conditions? So far as I can see, under this Clause the case of arrears comes neither under Sub-section (1), (3) or (4). In the case of such payment being made before the Budget Resolutions have gone through Committee of this House and the dividend warrant has been made out at the standard rate of Income Tax, in the event of there being an alteration in the rate of tax, what is to happen to that portion of dividend which is due on the accumulated arrears? It is a matter of some importance to many taxpayers, especially when we are passing through a rather bad period and when there are companies who have to pay less on their preference dividend, or to suspend the payment of the dividend, but who, when business revives, will almost certainly be in a position to pay the arrears on the cumulative preference shares. I should be glad if we could have an explanation before we finally pass from this Clause.
§ Mr. WARDLAW-MILNE
Sub-section (4) says:the expression 'preference dividend' means—(a) a dividend payable on a preferred share at a fixed gross rate per cent.2477 Does the Chancellor of the Exchequer regard that as the legal definition, because as he well knows in non-legal circles, a preferred share is not necessarily a preference share in the ordinary use of the term. I wonder whether the definition of preference dividend given in Sub-section (4) is that usually given in the Finance Acts, because if not there may be some slight confusion. I find it difficult to understand the necessity for Sub-section (1) and I make my protest against the Clause being passed in its present form.
§ Sir HENRY CAUTLEY
I should like to know what is the exact meaning of Sub-section (3). The wording is confusing.
§ 8.0 p.m.
§ Mr. PETHICK-LAWRENCE
The object of Sub-section (3) is this: Where a company pay a dividend on ordinary shares you treat the amount received in cash as though it was a tax-free dividend. Therefore, you calculate back the gross amount of dividend by adding tax. On the dividend warrant it will appear differently, but in view of the fact that the tax has been changed between the making out of the warrant and the time of its being received, we provide that the actual dividend received by the shareholder should be grossed up to the correct amount necessitated by the new Income Tax which the Budget of that year has imposed.
§ Sir H. CAUTLEY
I am obliged for that explanation, and that is what I thought the Clause was intended to mean, but the hon. Gentleman did not, I think, give due weight to the words having reference to where a dividend hasbeen deducted by reference to a standard rate of tax greater or less than the standard rate for the year in which the dividend became due.Does that mean when the dividend was earned or when it was paid? If it only means what the Financial Secretary has just said, my objection disappears.
§ Mr. PETHICK-LAWRENCE
The period in which the dividend was earned has nothing to do with the amount of tax to be paid.
§ Sir A. STEEL-MAITLAND
Take a dividend of £1,000, the tax on which 2478 would have been £200 at the old rate, leaving a net £800. I take it that you then gross that up to get at an income of which £800 was the net amount, you bring it up to something like £1,032, and you calculate 4s. 6d. on that and receive your dividend warrant in that form.
§ Mr. PETHICK-LAWRENCE
The trouble arises because the warrant has been made out before the Budget speech is made. Therefore, the dividend warrant will appear as the ordinary £1,000 gross, less £200 tax, but it is treated by the Revenue as if what is written on the dividend warrant was not correct, and the only thing that stands is the cash payment of £800, which is treated as being the correct cash payment on a gross dividend of something over £1,000.
In reply to the hon. and gallant Member for Oxford (Captain Bourne), I think he stated the case quite correctly. As he said, it is somewhat complicated, but looking at the various alternatives, it has been decided that this is the best method of doing it. He asked what would happen in the case of arrears of preference dividends. They are treated exactly as if they were current dividends. Suppose there is one that is six months in arrears on a 5 per cent. preference share, and it has been decided to pay them all in the spring payment, then, instead of paying on 5 per cent. in the spring, they pay on 10 per cent. in the spring, and the whole of the incorrect amount of the tax is passed on the next payment.
§ Captain BOURNE
Would that come under Sub-section (1) of this Clause? If so, it is obvious that if you suddenly pay 7½ per cent., with under-deduction of Income Tax, the amount due to come on the next payment, which would presumably be at the rate of 2½ per cent., would be very large indeed. Is it to be treated as a preference dividend under Sub-section (1)?
§ Mr. PETHICK-LAWRENCE
The difference between Sub-sections (1) and (2) is the difference between over- and under-payments, and in either case, whether over- or under-payments, in the case of a double dividend the double error would be passed on to the next payment.
§ Captain CAZALET
Can the hon. Gentleman assure us that this Clause has been drafted after the Attorney-General has considered certain points arising out of it, and is it drafted in accordance with the convenience of the majority of companies which have been consulted? Every explanation which the Financial Secretary has given has, I think, been perfectly fair, and if we could get that assurance, that it is for the convenience of the various companies, I think the Committee would be grateful.
§ Mr. P. SNOWDEN
The hon. and gallant Member raised that question a few moments ago, and I had intended to reply, but the eloquence of a subsequent speaker drove it out of my mind. Yes, that is so. These provisions have been discussed with the Federation of British Industries and the London Chamber of Commerce.
§ Sir D. HERBERT
The explanation which has been given has been quite satisfactory, and I did not wish to press my Amendment to a division, but a great deal of this debate might have been saved if this explanation had been given on the Report stage of the Budget Resolutions. We tried then to get further information, and we were told to wait for the Bill. I make that suggestion, that in future it would be a very great help if we could get the necessary information beforehand as to what the Government think about these different Clauses.
§ Sir H. CAUTLEY
In the interests of the Bill, may I suggest to the Chancellor of the Exchequer, at the end of Subsection (1), in order to make the legal phraseology right, that he should either leave out the words:and not in either case to the benefit of the person entitled to the payment., or to the security or share, at the date when the original deduction was made,or that he should add the words:except in cases where the owner, shareholder, or owner of the shares at the two dates is one and the same person.
§ Mr. PETHICK-LAWRENCE
The Attorney-General has already said that he will consider that question between now and the Report stage.