§ The Solicitor-General (Major Sir David Maxwell Fyfe)I beg to move, in page 741 21, line 41, after "transactions," to insert:
being a transaction which involves, or transactions one or more of which involve—The object of this Amendment to what is now Clause 33 is to carry out the suggestion that I made at the conclusion of the Debate on the Committee stage, when I said that my right hon. Friends and I were quite prepared to consider any Amendment which would clearly delimit the target at which we were aiming, but would not in any way lessen the powers which we thought were necessary. We suggest this Amendment as carrying out that purpose. The House will see that it limits our attack on this tax avoidance to the two cases which I stressed and which were generally admitted:
- (a) the transfer or acquisition of shares in a company; or
- (b) a change or changes in the person or persons carrying on a trade or business or part of a trade or business."
My hon. Friend the Member for North Tottenham (Mr. R. C. Morrison) will see that in (b) we have clearly aimed at, and clearly attacked, the abuse of the working proprietor position. Paragraph (a) deals with what we call familiarly the "birth, marriage and divorce" of companies for purposes of improving their excess profits standard. These were the two evils at which our anti-tax avoidance provisions were aimed. The other matters which were mentioned and especially stressed by my hon. Friend the Member for Edgbaston (Sir P. Bennett), such as expenses of advertising and research, and certain matters of prices, will no longer be struck at. These were the innocent transactions, which my hon. Friend and other hon. Members were afraid might, unwittingly, be struck at by this Act. I hope the House will feel that by this Amendment we have maintained exactly the spirit and letter of the suggestion that I made to the House, that is, to make quite clear that the target at which we are aiming is not in any way lessened, nor is the strength of the missile which we aim at it.
- "(a) The transfer or acquisition of shares in a company; or
- (b) a change or changes in the person or persons carrying on a trade or business or part of a trade or business."
§ Mr. Benson (Chesterfield)Once again the Government have given way to the pressure from hon. Members behind them. 742 [An HON. MEMBER: "Why should they not?"] Because it is the duty of this House to safeguard the fisc and not to facilitate the activities of people who wish to evade taxation. When this provision was introduced in 1940, tremendous pressure was put upon the Government to weaken it by introducing the words "main purpose." After two or three years' experience, it was found that that modification allowed a large number of people to indulge in transactions which did avoid tax, and now, once again, the Clause is weakened by the Government introducing a strictly limiting Amendment. It is true that the Solicitor-General, when he was defending the Clause on the Committee stage, pointed out that the vast majority of the cases of tax avoidance, with which the Inland Revenue had had to deal, had been cases where companies had bought up other companies, for the purpose of manipulating their standards, or where limited companies and private companies had introduced additional working partners or directors, obviously with the purpose of improving the standard. Admittedly these two types of avoidance are still brought under the Clause as amended, but is there any reason why a Clause like this, which, I suggest, contains adequate safeguards for the taxpaper, should limit the target to such a small area?
We have had a long experience now of legislation against tax avoidance and history has repeated itself time and time again. A Clause has been drafted, and it may or may not have been improved in its passage through the House, but in a few years it has been found that the Clause was drafted too narrowly. If we draft a narrow Clause, to say exactly what is illegal, by doing so we also say what is legal, and the ingenuity of the tax avoider enables him to look around and find some loophole. Every hon. Member knows that that has been the history of tax avoidance legislation in the past 20 years, and here again we are commiting the same blunder. We are limiting the Clause and narrowing the target to such an extent that any other form of tax avoidance will be legal—if it has not previously been stopped. I suggest that there is adequate protection for the taxpayer in this Clause, Sub-section (3) of which says that a transaction shall be regarded as having for its main object the avoidance of tax if the main benefit to be derived from that action is the 743 avoidance of tax. If the main benefit to be derived from any particular transaction is the avoidance of tax, is there any reason why that transaction should not be voided? Here, again, we have a safeguard in that the ultimate decision upon whether the main benefit is, or is not, the avoidance of tax, rests with the Special Commissioners. It does not rest with the Commissioners of Inland Revenue.
Again, I suggest, we know from long experience that, as an appellate body, the Special Commissioners have always been extremely careful to protect the rights of the taxpayer. This is not the first occasion upon which an Attorney-General, a Solicitor-General or a Chancellor of the Exchequer has come to this House and explained that what he is proposing to do is to strengthen a Clause, because the decisions of the Special Commissioners have allowed so many fish to escape his net. I suggest that Sub-section (3) is adequate protection, and if we delimit the object of the Clause, it will only be a year or two before the Chancellor comes again and attempts to strengthen the Clause. I hope the Chancellor of the Exchequer will consider this matter very seriously.
§ Sir Peter Bennett (Birmingham, Edgbaston)I am rather surprised at the attitude taken up by my hon. Friend, because he will remember that when we discussed this in Committee, the Chancellor of the Exchequer and the Solicitor-General made it quite clear that they must have sufficient powers to deal with the tax-dodging which had been brought to light by the experience of the last three years. The officials of the Inland Revenue have got the cases, and they know exactly what they are aiming at. We said that we were in sympathy with that and wished to help them, but that we did not want to have the wording so wide that it would hurt people who were not engaged in tax-dodging, but were carrying out normal business activities. I submit that if the officials are satisfied that the words are sufficient for their purpose, that is exactly what we are aiming at. If they say that they have sufficient weapons to deal with the cases made out, I think that the Solicitor-General is doing the right thing in carrying out the promise he made, that he was shooting at a certain target, and that that 744 was the target he wanted to hit—or, to put it another way, that he had decided to shoot a solid shot at the target and was not using a high explosive, so that the rest of us would not be hurt by the blast. I hope the Amendment will be accepted by the House.
§ Mr. HammersleyIf the sentiments expressed by my hon. Friend the Member for Chesterfield (Mr. Benson) were agreed to, it seems to me that one essential tenet of taxation, namely, that the taxpayer should know as near as he can where he stands, would be lost.
§ Mr. BensonSurely, under Sub-section (3), the taxpayer is the best person to know what is the major benefit arising from taxation, and, if it is avoidance of tax, he will know it before the Inland Revenue know it.
§ Mr. HammersleyIt may be that a transaction which is perfectly innocent, and absolutely desirable, might have a benefit in this direction, and then, under the Clause as it is now drawn, it would be the duty of the taxpayer to show that it was not the main benefit. There was a great deal of apprehension that this Clause was too widely drawn, and we received the information that the cases that the Chancellor had in mind were, in fact, cases of this kind. They were share transactions, and transactions in respect of working proprietors. We asked that the cases of abuse should be definitely decided and delineated in the Clause, and the Chancellor of the Exchequer has done that. We are very grateful to him for so doing. Although it is wise that he has done this, I do not think it is right that the taxpayer who is innocent should be in jeopardy, and should have to prove that he is innocent. That is the point. The taxpayer would not finally escape taxation, but he would be put in the position of a tax inspector making directions, and he would then have to go to the Special Commissioners. Of course, if he were innocent, nothing would happen, but, in the meantime, he would be in an uncomfortable and invidious position, and, it may be, he would refrain from doing something which he ought to do in the interests of the community. For these reasons, I wholeheartedly welcome the Amendment.
§ Mr. Pethick-Lawrence (Edinburgh, East)I do not think there is any real 745 difference of opinion in any part of the House, on this matter. We are all agreed that tax avoidance with the object of evading a burden which is falling upon others shall be stopped, and I think we are all agreed that if there are perfectly innocent people, engaged in a transaction for ordinary purposes, they shall not be penalised by the decisions in this Bill.
My hon. Friend the Member for Chesterfield (Mr. Benson) says that in the past this particular method of tax avoidance has consisted of certain actions, but if this House, at the instigation of the Chancellor of the Exchequer, confines the penalties in this Clause to an action of a precise and specific nature, is it not possible that those who want to practise tax avoidance will go a little out of their way and adopt a new method which, in view of this Amendment, will not be specifically prohibited by the law of the land? That is not a question of sentiment, but one of practical effect and I want to ask the Government and the Chancellor two questions. First, is the Chancellor reasonably sure that the fear which my hon. Friend the Member for Chesterfield has raised is not substantial? Is it possible, or likely, that those who have used methods of tax avoidance which were open to them in the past, would be stopped from doing so in the future if the Clause were carried out in its entirety, or, is it possible that they may find a loophole in consequence of the Amendment which he is moving to-day? That is the first question.
The second question is: Will the Chancellor give us the assurance that if—in spite, it may be, of any statement which he makes in answer to the first question—there is, again, definite proof that tax avoidance has arisen out of this Amendment, he will come to us again? Will he hold himself perfectly free in, say, two years' time, or at the first available opportunity—it cannot be next year because time must elapse—not only to strengthen the law, but to make it retrospective so that those who are taking improper advantage of the Amendment which has been moved to-day will not gain any advantage by such improper action?
§ Sir A. GridleyIf the hon. Member for Chesterfield (Mr. Benson) will forgive me, I would like to say that I thought it a little unworthy of him to suggest that the Chancellor of the Exchequer, of all 746 people, is more likely to yield to persuasions from this side of the House, than from any other quarter.
§ Mr. Pethick-Lawrenee indicated dissent.
§ Sir A. GridleyWe all know how difficult it is to get concessions from the Chancellor, no matter to what party we may belong, and, therefore, I think that the hon. Member's remark, if I may respectfully say so, was a little unjust and uncalled for. I took part in the Debate on this Bill in the Committee stage, and pressed strongly for some limiting of Clause 32, as it then was and as then drawn, and the Solicitor-General, in endeavouring to meet the arguments, divulged to us that the great majority of cases were of the type which the Chancellor is still seeking to catch by the provisions of this Amendment. I would point out to the hon. Member for Chesterfield that paragraph (a) of this Amendment, which deals with the transfer or acquisition of shares of a company, is still extremely wide. Therefore, I think that his fears that improper share transactions may still be sought have very little foundation. Since the Committee stage, there is one paint which I did venture to suggest to the Chancellor of the Exchequer. We heard of cases in which juniors had been brought into partnership. Such cases had been taken to the Commissioners, who, although they felt that the arguments for bringing in a junior were ridiculous, could not prove that the motive was not a bona fide one. Therefore, I would like to see brought within the ambit of this Clause, something to the following effect:
No person under 21 years of age at the passing of this Act, or who was under that age before the appropriate date in 1941, may be deemed to be a partner or working proprietor under the provisions of Clause 32 of this Act and of this Clause.The wording of that may not be altogether appropriate, but I see no reason for not ante-dating an age limit, because anyone round about that age during the last two or three years ought to be either in military service, or directed to work of greater national importance. I do not know whether the Chancellor has considered whether or not it would be appropriate to get this further power, and make it impossible for anyone under the age of 21 to be made, or to be deemed, a work- 747 ing partner. Perhaps, when he replies, he will be good enough to deal with the point. May I thank him once more for the way in which he has met the criticisms brought out in the Committee stage?
§ Sir Waldron Smithers (Chislehurst)May I ask one question on what the hon. Member for Stockport (Sir A. Gridley) has said about the part of the Clause which deals with the sale of shares? Some share companies, on being offered a price far shares, may try to avoid E.P.T., but others may sell their shares perfectly innocently. I would like to know if something can be done for those people who sell their shares innocently, and have no idea whatever of tax avoidance.
§ Sir J. AndersonAs regards the point made by my hon. Friend the Member for Chislehurst (Sir W. Smithers), I think I know the case which could best be quoted to illustrate the point he makes. In that particular case, if my conjecture is correct, some innocent shareholders may have been concerned in the scandal which arose in connection with that transaction, and which was such that I am sure all hon. Members in this House, with very few exceptions, would agree that there was good ground for applying the law with retrospective effect. In regard to the point just made by the hon. Member far Stockport (Sir A. Gridley), I looked at his suggestion, but I would point out to him that, if it were to be adopted, it would involve an increased charge. Therefore, I suppose that that, without a Resolution, would be out of Order, and I felt that I could not consider it further nor, indeed, do I think that the addition he suggested would be necessary, because the Amendment we are considering seems to do all that is required.
Regarding what the hon. Member for Chesterfield (Mr. Benson) had to say, it seemed to me that he was basing his argument, and concentrating attention unduly, on Sub-section (3) of the Clause, and was leaving out of consideration altogether the fact that there is a provision in Subsection (2), which, taken by itself, would go a long way towards tightening up the provisions in the earlier Finance Act which have been found, in practice, to be defective. The Amendment which is proposed to Sub-section (3) has no effect 748 whatever in weakening Sub-section (2). Let us, therefore, look to see just what the effects of the proposed Amendment to Sub-section (3) will be, and what are the arguments on which the Amendment rests. As Sub-section (3) stands in the Bill, in regard to every transaction, the mere fact that it has the result of lightening the burden of tax is taken as conclusive proof that the main purpose, or one of the main purposes, of the management was to avoid tax liability. Experience has shown that, in regard to the types of transaction which were so fully discussed during Committee stage, it is extraordinarily difficult to produce evidence to rebut the suggestion that, though the main effect of a transaction was to relieve the taxpayer of part of his tax burdens, that was not his purpose, or one of his main purposes. Experience has shown that it is difficult to make the fact of tax avoidance conclusive proof as to purpose or intention, and what we have to ask ourselves is whether, in regard to other actions by taxpayers, which have the effect of reducing the burden of their tax obligations, it would be reasonable to apply the same principle. Quite frankly, I do not think it would. There is no experience which suggests that it would be necessary to apply the provision of Sub-section (3) to other classes of transactions, and there are very many transactions, of a perfectly legitimate character, in regard to which it would be unjust to claim that tax lightening was the intention of the taxpayer, and that there was proof of evasion.
Let me take a simple case of an enterprising firm, which believes in research and starts a new research establishment, in the course of the year, to do some long-term research. The immediate effect is to lighten the burden of tax, and it may be very difficult to show that, in the long run, that expenditure will be remunerative, and that there was no other real purpose than to lighten the burden of tax. It is of the essence of fruitful research, that it may be undertaken in many cases where the hope of direct reward is somewhat remote. Many other cases could be given where a perfectly legitimate action is taken by a taxpayer, which has the immediate effect of reducing the tax burden, but where a reasonable person would concede at once that the purpose of what had been done was not tax avoidance. To say, in such 749 cases, that the mere fact that the immediate effect was tax avoidance, must be taken as conclusive proof of a purpose, that no reasonable person would attribute to the taxpayer, would not be good sense. Therefore, I think the problem that confronted us in the Committee stage was really a practical one. Could we devise words which were widespread enough to cover the only serious abuses without such a sweeping rule? If we have succeeded, as I think we have, I think it is reasonable that the Clause should be amended in the manner we are now proposing.
In regard to the point put by the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence), I can certainly say, as I have already indicated to the House, that I feel reasonably assured that there is no substantial danger, on the experience that we have had, of the effectiveness of the Clause as we have sought to amend it being in any way impaired in practice by the Amendment that has been produced. I will also say that if, contrary to my fairly confident anticipation, experience should show that some other kind of expedient has been discovered by ingenious taxpayers—would-be tax avoiders—which requires correction and remedy, I will not hesitate to come to this House with an appropriate Amendment.
§ Mr. Pethick-LawrenceAnd make it retrospective?
§ Sir J. AndersonYes, Sir. It will be retrospective.
§ Amendment agreed to.