§ (1) As from the data of any change in the persons carrying on a business, the business shall, for the purposes of armament profits duty, be deemed to have been discontinued and a new business shall be deemed to have commenced:
§ Provided that a business which at the date of any such change is an armament business shall not be deemed to be discontinued by reason of the change, and the standard profits of the business for any chargeable accounting period shall be computed accordingly, and, in particular, in computing the capital employed in the business after the change, no regard shall be had to any consideration given in respect of the transfer of the business or any of the assets thereof on the occasion of the change.
§ (2) Where two or more businesses are amalgamated and immediately before the amalgamation any of those businesses were armament businesses, the resulting business shall be treated for the purposes of the provisions of this Act relating to the computation of standard profits as if—748
§ (a) it had been in existence throughout the period during which there were in existence any of the former businesses which were armament businesses immediately before the amalgamation;
§ (b) any profits made or losses incurred or capital employed in any of those former businesses had been made, incurred or employed in the resulting business; and
§ (c) any assets of any of those former businesses had become assets of the resulting business when they became assets of the former business
§ and, in particular, in computing the capital employed in the resulting business, no regard shall be had to any consideration given in respect of the transfer of any of those former businesses or any of the assets thereof, on the occasion of the amalgamation:
§ Provided that nothing in this Section shall affect any liability to armament profits duty in respect of any period before the amalgamation.
§ (3) Where part of an armament business is transferred (as a going concern) by the person theretofore carrying it on to another person, the part transferred and the part not transferred shall each be deemed for the purposes of the provisions of this Act relating to the computation of standard profits to be a continuation of the original business, and the said provisions, including the provisions of this Section relating to amalgamations, shall apply accordingly, subject to any necessary modifications:
§ Provided that, for the purpose aforesaid, such apportionments shall be made of the profits made, and losses incurred, and the capital employed, in the original business, and of any assets of the original business, as may appear to the Commissioners, or, on appeal to the Board of Referees, to that Board, to be just.—[Mr. Burgin.]
§ Brought up, and read the First time.
§ 8.59 p.m.
§ Mr. Burgin
I beg to move, "That the Clause be read a Second time."
I hope that what looks to be a formidable Clause can be reduced to very simple proportions by a little explanation. Hon. Members in all parts of the Committee will be with me on this occasion, because it is quite clear that what I am endeavouring to do is to prevent the possibility of evasion. I am endeavouring here to foresee that there might be certain possible methods of endeavouring to escape from this tax. As the Committee know, in general Income Tax practice, if a business changes hands, as a broad general rule the old business ceases on that day and the new business commences. It is the recognised rule that where company A sells its business to company B, the businesses cease and begin respectively. The 749 first part of this Clause says that where you are dealing with an armament business that general Income Tax rule on the stoppage of a business and the commencement of a new one shall not apply. In other words, if there is a continuity of armament business for profit purposes you cannot get out of the fact that you are on a higher profit-earning year by the simple expedient of dissolving your company or selling your business to an other. That is the out-and-out transfer of the whole of the business from an old owner to a new owner.
The second part of the new Clause deals with a more complicated business. It deals with two businesses amalgamating. The Clause says that if either of them is an armament business, the combined business shall be considered as continuing the armament business. You would not alter the profits standard of the armament business by marrying the two businesses. If one was an armament business it would carry to the amalgamated business its standard as an armament business.
The third part of the Clause deals with the man not selling the whole of his business or amalgamating with another, but selling part of his business. It says that if that part of his business is armament business, then after splitting up, both the old business and the new business will be treated as continuing the original armament business. That is using rather a sort of boxing language in an endeavour to explain the Clause, but I assure Members of the Committee that it is a very sensible hand-made Clause to deal with the possibility of evasion. Where you have a business which could change its owner ship with normal Income Tax consequences you provide, by the first proviso to Sub-section (1), that that should not apply to armament businesses, and if you think that by amalgamation you are going to alter the character of the business, you are defeated by paragraph (2), and if you think you can alter the character of the business by sub-dividing and setting it apart, you are again unable to do that by the express wording of the third part of the new Clause.
§ 9.3 p.m.
§ Mr. C. S. Taylor
The point that I have in mind is a very simple one and I do not think that my right hon. Friend will have any qualms about making this 750 concession to me. Under the first half of this Clause there may be a private company, say, for example, Smith & Company, that had been formed 10, 15 or 20 years ago. That company after 1936 might have decided to change from a private company into a public company, and under the terms of law that public company, having the same name as the private company whose business it had taken over, is a new company, although the directors and the management are the same and the business precisely the same, except that it has changed from a private company into a public company. I ask my right hon. Friend to give me an assurance that where a business remains the same except in that one small particular the company in question would be permitted to come under the provisions of Clause 4 of the White Paper instead of Clause 6, and would be considered an old company having commenced before and not after 1936.
§ 9.5 p.m.
§ Mr. Pethick-Lawrence
There are two points on this new Clause which I want to raise. Let me say at once that I appreciate the intention of the Clause, and so far as it goes it will achieve something to prevent an evasion of the tax. The first point is the apportionment. This is dealt with in the proviso. But for the proviso the position would be as follows: Suppose there is one company which has never done anything but armament work. It makes a certain profit in the standard year and a considerably increased profit in the year under charge. The whole of that increase would be subject to assessment. Another company who are not doing armament work are making a constant profit. If these two companies are brought together it will be of no advantage to the second company because the profits of the second company are constant, its excess profits will remain precisely as if the armament company had existed alone. But according to the provisions in the first Clause of those which relate to A.P.D. the importation of this non-armament company under normal circumstances would have reduced the charge by quite a considerable amount by the apportionment arrangement under the proviso. It is clear that the framers of the Armaments Profit Duty realise that position and it is provided in the proviso that a Board of Referees shall adjudicate 751 on the matter. I want to be clear that they will adjudicate on a common-sense view of this particular case, and that the whole of that excess profit shall be allocated to armaments and pay the whole 60 per cent. If that is so, then precisely similar arrangements should prevail in the case of a company which from the beginning has been in precisely the position of this amalgamated company. Therefore, I say that almost every individual case will have to come before the Board of Referees for a proper apportionment. If that is not the case a most unfair position will arise.
The other point is in connection with a matter which I had hoped to put forward in an Amendment. I am told, however, that it is out of order and therefore I will put the point now. There is a danger which I foresee exists in a real form if the proposals of the right hon. Gentleman come into law in their present form. Let me explain the position. Suppose an entirely new firm comes into the world in order to make armaments for the Government. The promoters having started business consider that they will be called upon before long to pay excess profits if they take anything like £ 200,000 worth. They consider what they should do, and they form themselves into a company with two or three subsidiary companies. The parent company will take contracts from the Government and then let out subcontracts to these subsidiaries, and will so arrange the amount and prices as to avoid the duty under both heads. The subsidiary company will not come into the picture, because it will be so arranged that it will never get sub-contracts to an amount of £ 200,000. Only the parent company comes into the picture, and so arranges the price between itself and its subsidiaries that they never make a profit which the Chancellor of the Exchequer can get at at all. That is the case put in its simplest form.
I am aware that if a company subdivides itself for the purpose of doing this the Clause contains a provision against it, but I think that a clever lawyer could devise a scheme of the kind I have envisaged which would cut through the mesh of this Clause. Let me put a possible case which occurs to me. The provision in the Clause is against a company sub-dividing itself. Suppose there is 752 company A, which has been in the habit of putting out its contracts to company B, a perfectly bona fide contract and a perfectly bona fide price between the two. Company A might create a subsidiary company of its own, and that subsidiary company might purchase company B. There is no proceeding there which would justify the provision of the Clause against sub-division coming into play, but subsidiary company A now being in possession of company B through its sub-contracting company, would be able to manipulate prices between itself and company B and so evade the duty. That is an illustration which has occurred to me while I have been standing on my feet, and I am sure that a clever lawyer who is in the habit of dealing with Surtax and Death Duties could think of a far better expedient and device for evading this tax. Since my Amendment will not be called I should be glad if the right hon. Gentle man can really assure the Committee that with all these devices he will be able to prevent any evasion of this duty.
§ 9.15 p.m.
§ Mr. Benson
In Sub-section (1) of this. Clause, it is stated that if there is any change in the persons carrying on a business the business shall be deemed to be a new business. It would appear that if an ordinary private business which had been in existence for a number of years took on an armament contract after July, 1936, and after that date there had been some change in the directorship, although there was a complete continuity in the business and no serious change in the interests represented in it, under this Sub-section the firm could claim, if it so suited it, that a new business had arisen. In a previous Clause, it was laid down that where there had been low profits in previous years, the referees are entitled to substitute for a standard year in the case of a public company 6 per cent., and in the case of a private company, I assume they would be more or less guided by the 6 per cent. that is laid down. But if there was a minor change in the partnership and the firm desired to establish itself as a new firm, it would immediately come under Sub-section 9 (b) of a previous Clause at a basic percentage of 10 per cent. Is it the intention that merely by some minor change in the partnership, a firm, if it wishes, can establish a basic rate of 10 per cent?
§ 9.18 p.m.
§ Mr. Gallacher
I was more than pleased to see the volatile Minister get up at that Box as Jack the Giant-Killer, but I warn him that the bunch of robbers he is after will be very difficult to catch, and that once they are caught, they will be very difficult to hold. I want to ask the right hon. Gentleman a question. If he will turn his attention to the Official Report of Monday, 26th June, he will find that in the middle of a speech that was being made by the Chancellor of the Exchequer, I made an interjection, as follows:In the event of a contractor letting out a series of sub-contracts, each of them of £200,000, are all those sub-contracts excluded from the scheme, although it may be that these sub-contracts are let out merely to subsidiary companies?The Chancellor replied:Oh, no, the scheme covers the cases which the hon. Member has in mind."— [Official Report, 26th June, 1939; col. 59, Vol. 349.]Will the Minister be good enough to tell me where the scheme covers these cases?
§ 9.19 p.m.
§ Mr. Burgin
In reply to the question put by the hon. Member for West Fife (Mr. Gallacher), the main contractor is, of course, caught by the tax, because he has got the contract for the whole. Each subsidiary company which does £ 200,000 is caught under the definition.
§ Mr. Burgin
If less than £ 200,000, only the main contractor is caught. My hon. Friend the Member for Eastbourne (Mr. C. S. Taylor) asked a question about a private company turning itself into a public company. In order to answer his question, I must know whether he means at a date subsequent to 1st April, 1939, or at a date prior to 1st April, 1939.
§ Mr. C. S. Taylor
This is an actual case of a company that was a private company and has now been changed into a public company. Certainly, the change took place between 1936 and 1939.
§ Mr. Burgin
The Committee will understand my purpose in asking that question. It is only to 1st April, 1939, that this tax can date back. We are dealing with the financial year 1939. Any change of ownership that occurred prior to 1st April, 1939, will have the ordinary consequences 754 of the ordinary law, and will in that case have started a new business. There is nothing in this proposal that acts retrospectively to alter the law as from a date prior to the time to which the tax could date back. No such idea is contemplated. Therefore, it must be clear that changes in ownership, even of armament businesses, prior to 1st April, 1939, will operate under the old law of altering and changing ownership.
§ Mr. Burgin
No, I think not. I may have misunderstood my hon. Friend. I am not dealing with the question whether it is an old company or a new company for the purpose of the standard year. That is a matter of interpretation. I am answering the question whether there is a change in ownership. Where in the case of an armament business there is a change from a private company to a public company at a date subsequent to 1st April, 1939, it will be treated as if there had not been a change of ownership, but if the change took place before 1stApril, 1939, the old law prevails. My hon. Friend's anxiety is to know which standard year that company would have. That is something that was dealt with in another Clause.
§ Mr. Taylor
Surely it comes under this Clause which deals with succession, and could not have come under any other Clause that has been dealt with? May I refer to the original National Defence Contribution? In that case, such a company as I have in mind would have been regarded as an old company and not a new company. It makes a very vital difference. There is no idea of evasion in the case of the company I have in mind. It makes a vital difference to the company whether it is considered a company that has continued with its unbroken record or whether it is to be considered a new company. Just because it changes from a private company into a public company and does not change its business in any way and has the same directors and is the same in every other respect except that there are different shareholders, which may be the case in regard to any company— I cannot see why such a company should be penalised in this manner.
§ Mr. Burgin
I am not arguing whether it is penalised or not. Something the hon. Gentleman has said makes me wonder whether there was any change at all. Do I understand there was a new company formed or was the private company sold to a new company?
§ Mr. Burgin
Then the matter is as I understood it from the start. There was an actual change of entity, the transfer from the old company to the new. The ordinary Income Tax law would render that an effective change of ownership, with all the consequences that would flow from that unless there is some Income Tax rule that the hon. Member can pray in aid. But it only becomes relevant to the point we are discussing if it was after the 1st April, 1939. If the transfer was before that date, the operation is outside the purview of the Clause, and the change of ownership carries the usual consequence.
The right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) raised a number of points of importance, most of which dealt with the subsidiary company. The main contractor is or is not within the tax according to whether or not the receipts amount to £200,000. But all the examples he was putting were cases where the main contractor did come within the limit. His anxiety was lest the main con tractor paid too much for services or articles necessary to complete his work. It is a question of price or cost in which the contract powers under the Ministry of Supply Bill must come into operation. The Minister has the same powers over sub-contracts as over the main contracts and a contract with a subsidiary is a sub contract. I should have thought that the ordinary rule of wisdom would be that if there was any identity of ownership between contractors and sub-contractors the scrutiny of price should be the closer, and I should have thought that was where the control would lie. The right hon. Gentle man asked whether the receipts of the subsidiary companies might not be so apportioned as never to amount to £200,000. I admit the possibility but I say that the method of controlling is by a rigorous costing system and examination under the powers of the Ministry of Supply Bill.
§ Mr. Pethick-Lawrence
Would the right hon. Gentleman give the matter further consideration in consultation with his expert advisers and if he finds that the Clause would not prevent evasion will he consider the steps necessary to make it adequate?
§ Mr. Burgin
Most certainly. I give that assurance at once. The Chancellor of the Exchequer has said that should it be found necessary to buttress the powers by further legislation the new legislation would be retrospective to the same extent as the new Clause. The right hon. Gentleman gave one final example in dealing with subsidiaries. He mentioned a company which had been in the habit of sub-contracting to Company B and the main contractor bought up the sub contractor. The sub-contractor was itself an armament firm and consequently in buying up the subsidiary would make the whole of that sub-contractor come within the category of an enlarged subsidiary. I can give a covering assurance that with my expert advisers I will look at the points which have been made because the desire of the framers of this Clause is to prevent evasion on all possible lines of transfer, amalgamation or sub-division. With regard to apportionment the proviso secures the apportionment of standard profits and capital between new entities so that each new entity will take over every portion of the standard which corresponds to its own business. Such an apportionment will be possible without undue difficulty, but there is provision for appeal to the Board of Referees. The right hon. Gentleman must decide, whether he treats that as a reinforcement of his earlier argument, but it is an academic matter.
§ Mr. Gallacher
Does the right hon. Gentleman admit that the Chancellor of the Exchequer had no right to say that the scheme covers the cases which the hon. Member had in mind— the cases to which the right hon. Gentleman has referred now in connection with the argument of the right hon. Member for East Edinburgh (Mr. Pethick-Lawrence).
§ Mr. Burgin
The hon. Member for West Fife (Mr. Gallacher) in his question expressly said that each of the sub-contracts was of £200,000. When he put the question to me just now he said that it was below £200,000. If we are not dealing with the question he put and which is in 757 the OFFICIAL REPORT, that is another matter. The Chancellor of the Exchequer's answer as appearing in the OFFICIAL REPORT is faultless.
§ Mr. Gallacher
The Chancellor of the Exchequer replied to the case that the hon. Member had in mind, and it was obvious that the case was that of a contractor letting out orders to subsidiary companies in order to get under the £200,000. When the Minister tells me that the main contractor will be responsible, of course he will have to pay on any profit he makes, but if £500,000 should be let out to three sub contractors is it the case that that £500,000 is not taxable as far as these three subsidiaries are concerned?
§ Mr. Burgin
No, it is not taxable with the three subsidiaries any more than it would be with three strangers. The tax applies if the receipts are £ 200,000. If the receipts are less, the tax will not apply whether the recipient is a complete stranger— a Chinaman— or a subsidiary company.
§ Clause read a Second time, and added to the Bill.