NEW CLAUSE.—(Definition of the expression "controlling interest.") (Hansard, 28 June 1938)

§ Sir Irving Albery
I beg to move, "That the Clause be read a Second time."
My reason for proposing this Clause is that my attention has been drawn to the fact that there is no definition in the National Defence Contribution provisions of the 1937 Finance Act of the expression "controlling interest." I am told that as a result there are very considerable differences in the treatment by different inspectors according to the interpretation which they put upon the term. If the ideal to be aimed at is uniformity of treatment in the incidence of taxation, it seems to be highly undesirable that different inspectors should be left to use their own judgment in this matter, as at present. The result is that in some cases there is a wide definition of controlling interest, relating to directors fees and other charges, while in others, inspectors apply a much narrower definition. It must be to the advantage of everybody that some precise definition should be framed. I know that it is always difficult for a Private Member to draft a new Clause, above all to a Bill which is so technical as this, but I am not tied to the words which I have put upon the Paper and if the Chancellor of the Exchequer agrees that it is desirable that there should be a. definition and decides to consider the matter, he may be able to suggest a more appropriate form of words.

§ Sir J. Simon
I am afraid that I cannot accept this proposal. My hon. Friend 1786 is quite right when he says that there is at present on the Statute Book no definition of the term "controlling interest," but I think I can satisfy the Committee in a very few words that this is one of the cases in which it is better not to attempt to lay down a long and elaborate definition. The very purpose of the test is that it should be applied in connection with the National Defence Contribution in cases in which the directors of the company have a controlling interest. In such a case the deduction allowed for the remuneration of those directors is limited, as regards whole-time directors, to 15 per cent. of the profits. Otherwise, if the directors had a controlling interest, they could vote the whole of the profits to themselves as directors' salaries. If my hon. Friend will consider this case, which is not the most complicated case that might arise, I think he will see at once that a definition would be inadvisable. Suppose that, in company A, the whole of the shares are owned by two persons, and that company A itself owns all the shares in another company, B. In these circumstances, the two persons who own all the shares in company A can manifestly secure that they are appointed directors of company B, but they will not hold any shares in company 18 at all. Being the only directors of company B, they will have control of it, and can vote the whole of the profits of company B as remuneration to themselves as directors. My hon. Friend suggests that we should say that no one should be regarded as a director having a controlling interest unless his own shareholding in the company is in a majority, but, in the case I have put, the directors would not hold any shares at all.
The truth is that there are a good many cases where it is much better to rely upon a fairly plain, intelligible phrase, and trust to its being applied to the particular circumstances of the case, than to go about the frightfully difficult business of attempting a complete, absolute and watertight definition. As a matter of 1787 fact, this phrase "controlling interest" has been used before in our tax law without any definition. A very well-known revenue judge, Mr. Justice Rowlatt., said it seemed to him that "controlling interest" was a phrase that had a certain well-known meaning. He went Ion to describe what it meant, and added that he found no difficulty in applying it. I think it would be better, in determining whether in any individual case directors have or have not a controlling interest, to leave it to the good sense of the Special Commissioners or the General Commissioners, as the case may be. My hon. Friend will remember that it is not determined merely by an inspector. If his decision is not thought to be right and reasonable, it can always be decided, in case of difficulty, by a very skilled and impartial authority. I think we must all have a pretty good idea of what is a controlling interest. One is reminded of the observation of the wise man who said that he was quite unable to define an elephant, but that, if he met one, he knew it when he saw it.

§ Sir P. Hannon
The Chancellor has spoken of an impartial authority. Might I ask what sort of impartial authority he has in mind?

§ Sir J. Simon
I was thinking of the Special Commissioners, who are a judicial tribunal spending their whole time in administering the Income Tax laws and similar laws as between taxpayers and the Revenue.

§ Mr. Maitland
This proposed new Clause, to which my name is attached, was put down, not so much in view of the type of case which the Chancellor had in mind in 1937, but rather to be quite certain that those people who have not a controlling interest are not unfairly treated. I should like to ask the Chancellor whether, after his experience, he is satisfied that there are substantially no grounds for thinking that anyone is being unfairly brought within the purview of the provision in question.

§ Sir J. Simon
I have not had my attention actually drawn to any such cases. If either of my hon. Friends knows of any, I shall be very glad to look into them, but I think that what has been said to-day will help to clear away any misunderstanding. I will have the work 1788 ing of the Section watched, but I am strongly of opinion that it would be advisable to make no change at present, and I hope very much that a practice will be established which will be found to be satisfactory.

§ Sir John Mellor
The Chancellor has given us by means of a particular instance a destructive criticism of the terms of the proposed new Clause, but I do not think he has made out quite so convincing a case for having no definition at all of what is a controlling interest. I do not think that this matter ought to be left as a question purely of fact for the decision of the court. I suggest that, unless the House of Commons knows its own mind, it is very difficult for the courts to make up their minds with any degree of confidence, accuracy and consistency as to what the term "controlling interest" should imply. The Chancellor has told us that a very learned judge, Mr. Justice Rowlatt, has succeeded in describing quite clearly what a controlling interest means. If that be so, I should not have thought it was beyond the power of the draftsmen to reduce that description to the form of a Clause. I suggest that, the more the legal implication of such expressions is left indecisive, the more litigation we are likely to have, and such litigation is apt to be highly expensive to the taxpayer.

§ Sir I. Albery
In view of the fact that we have had so far very little experience of the working of the National Defence Contribution, and in view of what the Chancellor has said, I beg to ask leave to withdraw the Clause.