HC Deb 15 June 1936 vol 313 cc729-37

8.35 p.m.

Mr. W. S. MORRISON

I beg to move, in page 17, line 6, at the end, to insert: (2) For the purpose of Sub-section (1) of the said Section twenty-one the sums which are to be regarded as income available for distribution among the members of an investment company, and not as having been applied or been applicable to the current requirements of the company's business or to such other requirements as may be necessary or advisable for the maintenance and development of that business, shall include any sum expended or applied, or available to be expended or applied, out of the income of the company in or towards the redemption, repayment, or discharge of any loan capital or debt (including any premium thereon) in respect of which any person is a loan creditor of the company. In order to explain this Amendment, I ought to say that Clause 18—

Mr. LEES-SMITH

I would point out to the Financial Secretary that this Clause was not explained on the Second Reading, but it was stated at that time that there would be an explanation on this occasion of the whole Clause as distinct from any Amendment to it. Therefore, I hope the hon. and learned Gentleman will begin by telling the Committee the intention of the Clause.

Mr. MORRISON

When I replied to the Debate on the Budget Resolutions, I told the Committee that Clauses 17 and 18 go together. Both of them are designed to counteract evasion of taxation by means of one-man companies, but whereas Clause 17 deals with one-man companies in their ordinary form, Clause 18 applies the same principles somewhat more stringently to a particular form of one-man company, that which is called an investment company and the holdings of which consist entirely of securities. It will be obvious to the Committee that in dealing with the question of evasion by one-man companies as a whole, one has to be careful to avoid injuring proper industrial companies by provisions intended to catch evaders. There may be a commercial business running as a one-man company which, although it may have been put in that form for the purpose of avoiding taxation, also has an operative industrial side, so that the provisions have to be drawn with some care in order to check that form of evasion as completely as may be, but at the same time to leave unimpaired the industrial function. When one comes to investment companies the sole purpose of which is to hold a block of securities and which, in fact, have no operative or industrial function to perform except the collection of dividends from securities and their distribution, it is clear that one can, without risk of hampering the activities of the company, go a good deal further in the provisions to stop evasion.

When I was speaking on this matter during the discussion of the Budget Resolutions, I described briefly the purpose of Clause 17, and I said that Clause 18 was of such a highly technical character that, unless the Committee desired it, I did not propose at that stage to enter into the question. The hon. Member for East Edinburgh (Mr. Pethick-Lawrence) was good enough to agree with that, and thus we are, as the right hon. Gentleman the Member for Keighley (Mr. Lees-Smith) said, confronted with this Clause without having had any detailed exposi- tion of its provisions. I hope I have made that clear.

The Clause is an attempt to counter certain forms of tax evasion which have grown up with these investment companies. I will refer to one large group of these schemes as being typical of the whole. A man transfers his securities to a company and gets in return non-interest-bearing redeemable debentures which yield no income that can be assessed for Income Tax purposes, but he cashes these debentures as he wants the money, and it goes back to him in the form of capital. Of course, in order to ensure that he can do that with impunity, he has to have actual control of the company. Other people are in the habit of forming these companies and keeping them in an almost perpetual state of liquidation, so that payments of assets to the shareholders, who consist of the individual evading Income Tax and his associates, go on merrily the whole time. What is disbursed as a result of the liquidation is held to be capital paid and not dividend. Roughly, that is the sort of thing which happens. I cannot profess at this stage to go into all the myriad shapes taken by these companies for the purpose of evading taxation.

The object of the Amendment I have moved is to ensure that an investment company which has made no distribution or only a small distribution of income in surtaxable form cannot escape from the special provisions as to taxation which we have been considering in the last Clause; that is to say, if a one-man company does not distribute its profits in a surtaxable form, those profits can be considered as the income of the shareholders and thus be subject to taxation in the proper form. If an investment company does not make any distribution or makes only a very small distribution of income in surtaxable form, we are making sure by this provision that in future it will not succeed in evading taxation by this means.

The object of Clause 18 is to deal with schemes in which the tax evasion is done by an arrangement to draw the income of the company in capital form as by the redemption of debentures or some other form of debt. Clearly it must not be left open to the company to argue that because of this very redemption it is not in a position to distribute income in a surtaxable form. What has happened in the past has been that, in determining what is a reasonable distribution of profits, the company has been able to say, "We owe Mr. A. £1,000 and therefore it is reasonable and proper for us to withhold from distribution £1,000 against the day when we have to pay that money to Mr. A," who is the tax evader. This provision is to prevent that happening. If the money is owed to the taxpayer, the company cannot make the withholding of that amount of money a criterion of the reasonable distribution of its profits. This is a difficult matter to explain, but I hope the Committee has followed me in my explanation.

Amendment agreed to.

8.45 p.m.

The ATTORNEY-GENERAL

I beg to move, in page 17, line 12, to leave out paragraph (a).

It may be convenient to consider this Amendment along with three other Amendments which appear later on the Paper—in line 16, to leave out "(including creditors)"; in line 18, after "entitled," to insert as members or loan creditors of the company, and in line 19, at the end, to insert which would be available for distribution to members and loan creditors. These Amendments all deal with the same point. Sub-section (2) as originally drafted proposed two tests as to whether an investment company should be deemed, for the purposes of Section 21 of the Finance Act, 1922, to be under the control of not more than five persons. For reasons which have already been referred to, when one in dealing with an investment company it is important to consider not only those who are, in the ordinary sense, members of the company, but also those who may appear as loan creditors of the company. I do not want to place these Amendments before the Committee as purely drafting Amendments, but they are in fact very little more. Their effect is to substitute a single test for the two tests which at present appear in paragraphs (a) and (b) of Sub-section (2). I may best explain the matter to the Committee if I read the Sub-section as it will appear when amended, if these Amendments are accepted: Without prejudice to the provisions of the last foregoing section, an investment company shall be deemed for the purposes of sub-section (6) of the said section twenty-one to be under the control of not more than five persons if any five or fewer persons would, if the company were wound up, be entitled, as members or loan creditors of the company, to receive more than half the assets of the company which would be available for distribution to members and loan creditors. In the Sub-section as originally drafted, creditors generally were included. We have thought it better to substitute this new and simpler test which, in practice, should not be difficult of application. Suppose that a company were wound up and the assets distributed among the members and loan creditors, would more than five people appear as interested in one or other capacity? If five or fewer than five appear as interested, in one or other of these capacities, then the Section applies.

8.49 p.m.

Mr. SPENS

I had put down an Amendment to paragraph (a) which it is now proposed to delete, but I think the same point arises in relation to the words which the Attorney-General proposes to insert in the later Amendments. Ought there not to be some method of measuring the amount to which the five or fewer persons would be entitled on the winding up of the company? I suggest that unless there is some method such as a reference to the last audited balance sheet of the company, as I had intended to propose in my Amendment, there will be any amount of dispute as to whether or not the value of the share capital and the loan debt of the five or fewer persons is equivalent to more than one-half of the assets. The Sub-section ought to include a yard-stick for the purpose of making this measurement.

Sir A. M. SAMUEL

If there is not to be a reference to the last audited balance sheet, what is to be the standard of measurement in this matter?

8.51 p.m.

The ATTORNEY-GENERAL

The difficulty of tying oneself down to the last audited balance sheet is that it might not contain the true value of the assets. Those familiar with balance sheets know that it is not unusual for a balance sheet to value assets at their original cost, although in some cases that figure has little relation to their value at the time when the company goes into liquidation. Admittedly the proposed words, to some extent, leave the matter at large. As with so many other subjects, arguments can be advanced on both sides. If you tie yourself to the balance sheet, you get the advantage of certainty hut, on the other hand, you may depart from the realities of the position. If you leave at large the question of ascertaining the true value of the assets, no doubt you open to debate and discussion matters which would not be so open in the other case, but, in our opinion, there is unlikely to be any great difficulty in practice. These things will be determined in relation to the available evidence which probably, in 999 cases out of a thousand, will enable a decision to be made without great difficulty. We think that, on the whole, the objections which can be raised to leaving the matter at large are less than the objections which can be raised to tying oneself down to the values as shown in the last audited balance sheet.

Mr. PETHICK-LAWRENCE

I suppose we may take it that the moment this Measure is passed, people will cease to make use of this form of avoidance and therefore the only cases that will be left will be those which obviously fall outside this provision.

The ATTORNEY - GENERAL

We hope so.

Amendment agreed to.

Further Amendments made: In page 17, line 16, leave out "(including creditors)."

In line 18, after "entitled," insert: as members or loan creditors of the company.

In line 19, at the end, insert: which would be available for distribution to members and loan creditors."—[The Attorney-General.]

8.55 p.m.

Mr. W. S. MORRISON

I beg to move, in page 17, line 21, to leave out "paragraph (a) of."

This is consequential on Amendments previously made.

Amendment agreed to.

Further Amendment made: In page 17, line 22, after "persons," insert: by reason that any five or fewer persons would, if the company were wound up, be entitled as loan creditors to receive more than one-half of the assets therein referred to."—[Mr. W. S. Morrison.]

Mr. W. S. MORRISON

I beg to move, in page 17, line 38, after "repayment," to insert "or discharge."

I move this in order that a certain type of evasion may be brought within the scope of the Clause. I need not say more than that there is a case in mind which this alteration will meet.

Amendment agreed to.

8.57 p.m.

The ATTORNEY-GENERAL

I beg to move, in page 17, line 40, at the end, to insert: Provided that—

  1. (i) where by virtue or in consequence of any settlement within the meaning of the next following section of this Act a loan creditor has been or could be required by some other person (hereafter referred to as a 'beneficiary') to pay to the beneficiary the whole of any sums which have been or might be paid to that loan creditor by the company in redemption, repayment or discharge of the loan capital or debt (including any premium thereon) in respect of which he is a loan creditor, or to pay or transfer to the beneficiary the whole of any sums or assets representing directly or indirectly any such sums as aforesaid, the beneficiary and not the loan creditor shall be deemed, for the purposes of the said Section twenty-one and any provisions of this or any other Act relating thereto, to be a member of the company and, for the purposes of the said paragraph 8, to have the interest in the income of the company which the loan creditor would, but for this provision, he deemed to have by virtue of the foregoing provisions of this section; and
  2. (ii) where a loan creditor has been or could be required as aforesaid to pay or transfer to the beneficiary a part only of any such sums or assets as aforesaid, the beneficiary, as well as the loan creditor, shall be deemed to be a member of the company for the purposes of the said Section twenty-one and any provisions of this or any other Act relating thereto, and for the purpose of the said paragraph 8 the interest which the loan creditor is deemed to have in the income of the company by virtue of the foregoing provisions of this section shall be apportioned by the Special Commissioners between the beneficiary and the loan creditor.
(4) In relation to an investment company paragraph 11 of the First Schedule to the Finance Act, 1922, shall have effect as if references to shares included references to loan capital. This is a somewhat long proviso designed to effect a comparatively simple purpose, which I hope will commend itself to the Committee. It is intended to meet the case in which debentures or other loan capital are held in the name of nominees or trustees, and the proviso provides that in that case they shall be dealt with for the purposes of the original paragraph (b) on the same footing as if they were held in the name of the real owner. It is the general intention of all this part of the Bill that people shall not be able to alter their position by putting a screen of nominees between them and their taxable capacity. Paragraph (i) of the proviso enacts that provision in general terms, and paragraph (ii) deals with the question where only part of the assets or the loan is held by nominees. The new Sub-section (4) deals with a Schedule in the Act of 1922 which gives the commissioners power to require a man who is the registered holder of shares to say whether he holds them in his own beneficial interest or as a nominee for somebody else. It is clearly right that a corresponding provision should apply to loan capital.

Amendment agreed to.

9.0 p.m.

Mr. W. S. MORRISON

I beg to move, in page 18, line 24, to leave out from "any," to the end of the Clause, and to insert: debt incurred by the company—

  1. (a) for ally money borrowed or capital assets acquired by the company; or
  2. (b) for any right to receive income created in favour of the company; or
  3. (c) for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium thereon)
or in respect of any redeemable loan capital issued by the company: Provided that a person carrying on the business of banking shall not be deemed to be a loan creditor in respect of any loan capital or debt issued or incurred by the company for money lent by him to the company in the ordinary course of that business. This is a second thought in the effort to overcome that very difficult dilemma of finding a satisfactory definition of what is called in the Clause a loan creditor. We think this definition is a better one, because it is comprehensive enough to include all cases where a person assumes the status of loan creditor to evade taxation, and at the same time it is more strictly drawn so as to make certain that ordinary trade debts are not effected. There is a proviso to exclude from the term "loan creditor" an ordinary banker who has made an advance in the ordinary way of business. It is clear that such a person is by no means one of those collusive loan creditors against whom we are seeking to safeguard the revenue.

Amendment agreed to.