§ Any profits arising from an allocation of stock or other securities in substitution for stocks or shares held in any undertaking which is the subject of nationalisation, shall not be deemed to be profits arising on a sale of such stocks or shares for purposes of taxation. — [Lieut.-Colonel Birch.]
§ Brought up, and read the First time.
§ 4.45 p.m.
§ Lieut.-Colonel Nigel Birch (Flint)
I beg to move, "That the Clause be read a Second time."
The Clause as it stands would, I have no doubt, require or at any rate receive considerable further elaboration if its principles were accepted by the right hon. Gentleman the Chancellor of the Exchequer, and there has in fact been considerable technical difficulty in drafting this Clause, to which I will refer in a moment. There is no electoral interest in this at all. I do not think it will catch anybody any votes, but it does involve a question of principle, and as nationalisation proceeds it will make a very great deal of practical difference to a number of institutions. The first point is that this Clause really only affects certain institutions, such as banks and insurance companies, whose taxation is affected by realised capital profits or losses. My hon. and gallant Friend the Member for North Blackpool (Brigadier Low) will speak on the legal aspect of this matter, and as I do not want to weary the House by going into the technical side of the matter, I will give an over-simplified mathematical illustration of the point I have in mind. I will take the case of two insurance companies. Insurance companies are great people for making plans, and what they make plans about, of course, is their income for long periods ahead. Let us take the case of two insurance companies, one of which buys £100 of Bank of England stock, and the other of which buys £400 of Local Loans stock.
I take that illustration because it was used by the Government in the Select Committee on the Bank of England Bill. They took £400 of Local Loans stock as being almost exactly equivalent of £100 68 of Bank of England stock. Companies buying either £100 of Bank stock or £400 of Local Loans stock were, in fact, buying the right to an income of £12 gross per annum in what appeared to be perpetuity. In 1931, for reasons into which we need not go now, gilt-edged prices were very low indeed; I think I am correct in saying that Bank of England stock went as low at £230. It is now approximately £395. Therefore, someone who is liable to tax on capital profits is liable in respect of quite a considerable sum. Taking the profit made and capitalised at 3 per cent., it would boil down to this, that while the insurance company which acquired £400 of Local Loans stock would still be receiving a gross income of £12 per annum, the unfortunate insurance company which bought Bank stock on the assumption that it was equivalent to a Government security and was liable to 100 per cent. Excess Profits Tax would have its income reduced to just over £7 per annum. That would be entirely due to force majeure and not in any way through its own fault, because it was perfectly reasonable, as was admitted in the Bank of England Bill, to assume that this stock was as good as a gilt-edged stock paying the same rate of interest.
It is not only a case of capital profits. I have no doubt that some schemes of nationalisation will result in very substantial capital losses. This was the technical difficulty in drafting this new Clause. We could not draft a Clause in the very simple form of saying that a change of investments owing to nationalisation should not be equivalent to a sale, because a Private Member might be held in that case to be proposing an increase in taxation. The matter works both ways. I am not appealing that institutions should get off tax to which they are really liable. All I say is that they should retain, as they now have, the option as to when those profits or losses are taken. Under the present law it will be extremely difficult for an insurance company to plan ahead if there is the likelihood that, for some reason over which it has no control it is suddenly held to have made a sale 69 of some investment and is charged a very large sum in taxation on that sale.
§ Brigadier Low
I beg to second the Motion.
My hon. and gallant Friend the Member for Flint (Lieut.-Colonel Birch) has raised a nice point. I have been looking into the legal side of it. I am somewhat surprised to find that, although this case is a somewhat difficult one, the Chancellor has not at the moment got the Solicitor-General at his side. As my hon. and gallant Friend stated, the law at the moment is that persons who, while carrying on their business, may from time to time vary investments, any money made by them from the realisation of an investment is part of the profits of their trade for the purpose of Income Tax. One might well have thought that this principle would not be applied to variations of investments forced upon such persons either by statute, by order of the Treasury, or by what I might call a quasi-compulsory offer by the Treasury for a conversion. The two leading cases on this subject show that one would have been quite wrong in thinking that the principle did not apply to those cases. No doubt the Chancellor is well acquainted with those two cases. The first case, that of the Royal Insurance Company v. Stephen, which was reported in the 44th volume of the "Times Law Reports," was concerned with the railways amalgamation under the 1921 Act. In that case the insurance company, which held certain stocks in various railway companies affected by the provisions of the Railway Act, was forced under that Act to exchange the whole of its stocks for new stock in the amalgamated companies. It was held that the effect of what had happened was that the old investments had been realised, and therefore, in that case the insurance company was able to take advantage of its loss under that realisation and to claim deductions in respect of tax.
The other case was that of the Westminster Bank v. Osner, in 1933, which was concerned with a quasi-compulsory offer by the Treasury. In that case the Bank exchanged its National War Bonds for War Loan and Conversion under terms that increased the value of its investment funds. This was held to be a realisation, and, therefore, the profit was chargeable to Income Tax. It was pointed 70 out in that case, in which the House of Lords upheld the decision, that arrangements had already been made under the Finance Act (No. 2), 1931, whereby persons affected by conversions were in certain cases, where they were so authorised by the Treasury, to be treated for Income Tax purposes as if the exchange of securities had not taken place, unless—and this is important—they gave notice that they desired not to be so treated. In other words, the persons who may, so to speak, make investments as part of their business, in cases where their investments had been exchanged as a result of conversion, were given an option as to whether or not they wished to regard themselves as having made the exchange or not having made the exchange. In the new Clause there is no such option, because we take it that in cases where a profit has been made the stockholder will obviously make the option to regard the exchange as not having taken place. We do not refer to cases where a loss has resulted for a technical reason to which my hon. and gallant Friend referred, and also for other reasons which no doubt the Chancellor can think of for himself. I crave the indulgence of the Chancellor and the House on behalf of my hon. and gallant Friend and myself in that we have had some difficulty in drafting the Clause, but I have no doubt my hon. and gallant Friend made the point clear, and I have tried to add something from the legal point of view.
§ Mr. Dalton
I am grateful to the hon. and gallant Member for Flint (Lieut.-Colonel Birch) and the hon. and gallant Member for North Blackpool (Brigadier Low), because I understand their concern has been to smooth the progress of nationalisation and to make the policy of the Government generally acceptable to all those affected, without any suggestion of unfair treatment arising, and I welcome very much their co-operation. I think— I emphasise "think," because I am not quite sure —that their case is a good one both in equity and in law. As they have said, it has been difficult for them to draft a Clause to carry out exactly what they have in mind. I am advised that this new Clause would not quite do, but I am prepared to go into the matter and to make some statement on it when I introduce the Finance Bill next April. It is a matter on which clarification is necessary. It will be quite lime enough then, because the first of many Measures of 71 nationalisation which will be passed in this Parliament—that relating to the Bank of England—will no doubt be law by April, but the exchange of securities to be effected will not affect current tax liabilities in this financial year. There will be time enough to deal with the matter on its merits in the next Finance Bill. I undertake to do that.
I think the hon. and gallant Member for Flint made a valid point about the interchange of Local Loans and Bank stock. I readily say that it would be quite wrong, in the case of two insurance companies one of which invested in Local Loans stock and the other in Bank of England stock, to penalise the latter as against the former when the change takes place into the new 3 per cent. Government Stock contemplated by the Bank of England Bill. Therefore, I accept provisionally—unless some further argument can be produced in my further consideration of the matter—the argument the hon. and gallant Gentlemen have made, and I will undertake to deal with the matter in the next Finance Bill. I shall not necessarily do so exactly on the lines of this new Clause, but I will look into it with a view to removing either doubt or unfairness in the treatment of persons who hold stocks due to be exchanged under nationalisation Measures.
§ 5.0 p.m.
§ Mr. Oliver Stanley (Bristol, West)
Hon. Members on this side are very grateful to the right hon. Gentleman the Chancellor for the reply he has given. My hon. and gallant Friends who have moved and seconded the new Clause have a good case which they have put with moderation. I can assure the right hon. Gentleman, on their behalf and on my own, that we shall always be only too anxious to help him to remove the grosser inequities which will arise from the programme of nationalisation, as indeed we always try to help him to avoid the greater inefficiency. It is a promising beginning, and if he goes on as he has started, we have every hope that, before the end, some of these Measures may go through, if not with any profit to the country, at least without any great loss. We shall look forward, when the Budget comes, to the sincere effort of the right hon. Gentleman in dealing with this difficult question, and that 72 being so, I hope that my hon. and gallant friend will be able to withdraw the Motion.
§ Motion, and Clause, by leave, with-drawn.