CLAUSE 30.—(Meaning of "distribution" and provision with respect to repaid loans.) (Hansard, 11 June 1947)

§ The Solicitor-General
I beg to move, in page 27, line 1, at the beginning, to insert: Subject to the provisions of the next succeeding Subsection. This Amendment is designed to pave the way for an Amendment which appears later on the Order Paper—page 27, line 15, at the end, to insert: (2) Where a distribution is one in respect of which the person making it is authorised or required to deduct income tax, the amount of the distribution shall be taken for the purposes of the last preceding Section to be the amount which represents or would be deemed to represent income for the purposes of the Income Tax Acts"— in which the object of the Amendment is, I think, made much more clear. It is in the nature of a drafting Amendment to clear up an obscurity which may appear in the Bill as worded. Therefore, I propose to move the Amendment formally and explain the reason when we come to the further Amendment.

§ Mr. Stanley
I think that the other way round is more usual. If this particular Amendment is passed, it may commit us when we come to a decision on the other Amendment.

§ The Solicitor-General
The object of the two Amendments is to make certain that where distributions are subject to a reduction in Income Tax and are declared free of tax, they will be taken for the purpose of charging Profits Tax at the I2½ per cent, rate on distributed profits when the amount distributed is income for the purposes of Income Tax. For example, if a company declares profits before making provision for Income Tax of, say, £200,000 and distributes £100,000 in dividends, less Income Tax at 9s. in the pound, and distributes £55,000 free of 1171 tax, the charge of Profits Tax at the higher rate ought to be on the full amount of £100,000. As the Clause is worded it could be construed that the actual distribution to members which the Clause was aimed at was not the full amount—that is to say, £100,000—but £100,000 less the 9s. tax, namely, £55,000. We want to make it clear by this Amendment that what we are talking about is not £55,000, which is the net sum after deduction of tax, but the distribution, in the case which I have instanced, of £100,000.

Mr. Eeeles
I beg to move, in page 27, line 1, at the end, to insert: "out of the chargeable profits."
This is really quite a small point, We think the distinction between capital and income is becoming more and more blurred all the time, and that it is a good thing that we should try to make it as definite as possible. By "chargeable profits" we do not mean chargeable profits for one year, but any such chargeable profits as the company may have accumulated in the past as well as during that year. I think the Amendment would improve the Bill.

§ The Solicitor-General
We feel that the object of the Amendment is already covered. If one looks at the Bill one finds that the distribution charge is limited by the amount of the non-distribution relief which has been mentioned before and is provided for by Clause 24 (3). That means that it is limited to the net relevant distribution of profits. If one adds the words proposed, one introduces a certain amount of obscurity, because if one works out the machinery of the tax, what is sought to be introduced by the Amendment is already provided for. In other words, under Clause 28, in the net relevant distribution, account has to be taken of the franked investment income and the abatement, and in so doing what the Amendment seeks to achieve is being brought about. As in all cases, if we are asked why we do not accept the words if they do not do anything, the answer is that if we accept words which have no apparent and obvious purpose we are introducing a certain amount of doubt in the minds of those who have to construe the Clause, 1172 because they always seek to attribute some meaning to whatever words are found in the Clause. Therefore, I ask the Committee not to accept the Amendment, because the point is already covered and it will introduce a certain amount of obscurity.

§ Mr. Eccles
I beg to ask leave to withdraw the Amendment.

§ Mr. Eccles
I beg to move, in page 27, line 4, after "person," to insert: (otherwise than in a liquidation for the purpose of an amalgamation or reconstruction). This Clause sets out to define exactly what a distribution is—when is a distribution not a distribution? We think it is important that the tax should not be charged when no real distribution in the ordinary sense of the word has taken place, but merely an exchange of one piece of paper for another. That is to say, if a company reconstructs and its capital is exchanged for shares in a new company, there has not really been any distribution in the sense of a trading profit at all. It would make the reconstruction of, for instance, the cotton industry very much more expensive if, every time two cotton mills amalgamated, this tax had to fall upon the proportion of the assets distributed over and above the original nominal capital. I admit that the proviso to Clause 24 (3) is of some help, but we think it should be made quite clear, in the interests of rationalising business and making easier reconstructions, on which the Government are as keen as anybody, that when there is no money passing but it is simply a case of exchanging the share capital of the company for shares in another company, that is not a distribution within the meaning of this Bill.

§ The Solicitor-General
On considering this Amendment, which has not been on the Order Paper for very long, we feel that there are certain cases which require to be dealt with. As it is drafted, however, the Amendment goes a good deal too far. It includes any form of amalgamation or reconstruction which, we feel, would be opening the door rather too wide. Accordingly, we would ask the hon. Gentleman to withdraw his Amendment on our undertaking to look care- 1173 fully into the point he has made with a view to providing if we can for some sort of exception in the case of an amalgamation which would not offend against the principle of the tax.

§ Mr. Eccles
I am willing to withdraw, but I hope in this connection that the Government have noted the large number of assurances that have been given and that they will require a great deal of time on the Report stage.

§ Mr. Assheton
I beg to move in page 27, line 9, after "person," to insert: excluding loans made in the ordinary course of business and the remuneration paid to employees. This Clause as at present worded seems to mean that if the director of any company were deemed to have a controlling interest in the company the remuneration which was paid to employees or, even in the case of banking companies, the loans made in the ordinary course of business would be subject to Profits Tax at the full rate. I do not think that that is intended, or it would be a serious matter where there is a large staff. Perhaps the Solicitor-General will be able to help us in this matter.

§ The Solicitor-General
I am sorry, but I cannot follow the path I have hitherto been following and accept almost every argument advanced by the hon. Gentlemen opposite. We feel that this Amendment is dangerous and is going too far. After all, remuneration is already liable as a deduction from tax. That would be allowable against trading profits, so that it would be excluded. It would not come as a distribution because it was deduction from the profits of the company With regard to loans, we feel that if we accepted that part of the Amendment it would make a great deal of abuse possible. Clause 30 (2) provides for a case where loan is re-paid, and there there is a corresponding reduction. We feel that to exclude loans altogether and say that they are to be regarded as distributions would make it possible for unscrupulous people to embark upon a course which would lead to a considerable amount of tax evasion. Therefore, we say that this Amendment is rather dangerous and ought not to be accepted because it would open the door to a great deal of tax evasion.

§ Sir. Assheton
I am not quite happy about this. I wonder whether the Solicitor-General would consider the insertion of the word "proprietor" instead of "any person." That might get over the difficulty.

§ The Solicitor-General
Without any commitment, may we be given the opportunity to ponder the matter? We do not want to give any undertaking at all.

§ Mr. Assheton
I beg to ask leave to withdraw the Amendment on that condition.

§ Mr. Assheton
I beg to move, in page 27, line 13, after "reducing," to insert: "or in redeeming."
This is a matter of clarification. We want to make it quite possible for the Solicitor-General to give us an assurance that the redemption of preference shares is not the distribution of dividends and, therefore, subject to tax.

§ The Solicitor-General
We feel that the question of redeeming capital is already sufficiently covered by the word "reducing," except in the case where there is a premium. In the case where it is redeemed by premium we feel the premium shoud be regarded as distribution. Ordinary redemption, therefore, is already covered by the wording of the Clause as it stands, and, therefore, we cannot accept the Amendment.

§ The Solicitor-General
I beg to move, in page 27, line 15, at the end, to insert: (2) Where a distribution is one in respect of which the person making it is authorised or required to deduct income tax, the amount of the distribution shall be taken for the purposes of the last preceding Section to be the amount which represents or would be deemed to represent income for the purposes of the Income Tax Acts. This is the Amendment which I endeavoured to explain on a previous occasion, and it relates to the meaning of gross distribution.

§ Mr. Eccles
It seems to me that there will be a lot of trouble under this Clause about the valuation of distributions other than those in cash. Subsection (1, b): assets are distributed in kind to any person. In line 10 it says: There shall be deemed for the purposes of the last preceding section to be a distribution to that person of that amount or, as the case may be, of an amount equal to the value of those assets. That is a very loose sort of phrase. How are companies to know what is the value of some of these assets which may be classed as distribution? There ought to be some way in which we can tell by what principles these assets are going to be followed. Suppose a man gets the tenancy of a house for five years, what then? There are many kinds of non-cash distributions which I should say would be covered by the Bill, and we ought to have some idea of how they are to be made. Perhaps the Solicitor-General would tell us something on that score.

§ Sir H. Lucas-Tooth
There is one question arising out of the Clause which I should like to ask. It is whether cash distributions, which are made to some people other than members of a company would be caught by this Clause. If the cash distributions were made to employees of a company or possibly to workmen or directors, would they be caught by the terms of this Clause? It is not very clear. I think that an Amendment should have been put down to the phrase "any person."

§ Major Haughton (Antrim)
I notice that the Amendment put down in the names of my hon. and right hon. Friends and myself was not called, and I should like at this stage to raise a point which concerns director-controlled companies. A director-controlled company can be described as one in which the directors have a controlling interest, and as was said in the Debate last night, it is of very great importance at the present time that there should be closer links than ever before between directors and shareholders of companies. At this point, in accordance with Parliamentary practice, I should declare my personal interest in this matter. I happen to be a director of one or more companies of this kind. To get a fail picture of the matter which I want to raise, we have to go back ten years to 1176 the Finance Act, 1937. In the eleventh paragraph of the Fourth Schedule to that Act is defined the limitation on the remuneration to be paid to directors of companies in which they have a controlling interest. The last thing I want to do is to weary the Committee with a citation of long-past Finance Acts, but I am driven to quote in order to make this case clear. In that Act the limitation was described as follows: In the case of a trade or business carried on in any chargeable accounting period by a company the directors whereof have a controlling interest therein, the deduction to be allowed in respect of the remuneration of the directors other than whole-time service directors shall not exceed fifteen per cent, of the profits arising from the trade or business in that period (computed before making any deduction in respect of the remuneration of the directors other than whole-time service directors), or fifteen hundred pounds, whichever is the greater, so, however that the deduction shall in no case exceed fifteen hundred pounds. I am driven again to define what is meant by whole-time service directors because it must be made clear that the expression "whole-time service directors" means directors who are required to devote substantially the whole of their time to the service of the company in a managerial or technical capacity but who have not more than 5 per cent, of the shareholdings. Under that Schedule there is a limitation of the amount of remuneration which shall be paid to directors, and I do not think anybody in this Committee would find fault with a limitation of that kind provided it related to three factors: first, that it is fair; second, that it is adequate; and third, that it does not lead to double taxation.
I seek tonight to apply that first test of whether or not that limitation of 1937 is clear. I think we have to admit that it effects no provision at all for the size of the company because, whereas in one company of this type two or three directors may be quite adequate, in others possibly six or seven directors are needed to cope successfully with its affairs. I know in advance that the Chancellor may say, "I am taking good care"—or '' Good care has been taken in the past of these limitations," because one of them allows 15 per cent, on the total profits of a concern which is reasonable and adequate; but if we take as recent an example as the first three months of this year, when companies—whether privately-owned and whether they had directors 1177 with a controlling interest in them or not, or whether they were general companies —were faced with exceptional difficulties, the directors of those concerns, if they were any good at all, were on their toes trying to overcome difficulties and frustrations of different kinds, but because of climatic and other difficulties they probably had a bad showing for that year. It is quite wrong, I submit, on the first test of fairness, that the remuneration of directors should be in inverse proportion to the efforts that they make.
On the second test of double taxation, I know of cases—and I am thinking of exact figures—where, in certain companies, a large part of the directors' remuneration has been disallowed and added to the company's profit and assessed to Profits Tax while exactly the same remuneration was assessed to Income Tax and Surtax on the individuals. No one can deny—and I ask the Chancellor to consider this point—that this is an indisputable case of double taxation. It may be cited that in the case of sole traders and partnerships, which are exempted, the arguments which I am seeking to substantiate tonight are not right. I know that they are not subject to Surtax. I think I have said enough, however, to give a general background to this plea that I am putting forward on behalf of these types of companies which are to he found in Yorkshire and Lancashire and in different parts of the country, as they are in that part of the United Kingdom from which I come, and I hope that the Chancellor will consider these points, because I think they are quite fair.
In the first case, the point I want to make is that those limitations were made in 1937, which was ten years ago, when the value of money was different. Had my Amendment been called, it would have suggested that those allowances should be doubled. I would go still further and suggest, on the plea of fairness, on the plea of the avoidance of double taxation, that the Section of the 1937 Act should be amended to read "per director," because the amount to be paid to a small company per director would be smaller than the amount to a bigger company which requires more directors.
I apologise for the time I have taken in giving this background to a rather out-of-date Measure but, as the Chancellor said last night, to those of us who were 1178 listening to his remarks when we were dealing with that large section of the Finance Bill, Clauses 14 to 18 these Finance Bills came forward year by year, they try to translate into the practice of the day the things which will enable tax to be applied reasonably and in a simple way. Because he said that, I am the more encouraged to plead with him tonight to go back to that Finance Act of ten years ago and ask him whether the regulations laid down there, perfectly reasonable in their day, are applicable to the present time, and whether he can see his way to amend them.

§ The Solicitor-General
With regard to the questions put by the hon. and gallant Member for Antrim (Major Haughton), I feel some hesitation in embarking upon a discussion of whether the amounts provided for as deductible directors' remuneration in the 1937 Act are appropriate or not. The question, as I see it, is rather remote from the subject with which the Clause deals. The hon. and gallant Gentleman was asking, in view of the difference in the value of money and the different circumstances which obtain today, whether the proportion which can be deducted by way of directors' remuneration still obtains. That is not a matter with which this Clause deals. The hon. Gentleman will see that there is a Clause which deals with directors' remuneration for the purpose both of Excess Profits Tax and of Profits Tax. I think it would be more germane on that discussion to look at this particular aspect of the 1937 Act. So far as I am concerned, I would not venture an opinion at the moment as to whether or not those figures should be altered, because I do not feel the matter comes within the purview of the present discussion.
The hon. Member for South Hendon (Sir H. Lucas-Tooth) asked whether the term "any person" was limited to a member of a company under Clause 30 (1, a) The word is "person." When one looks to see what the gross relevant distribution is for the purpose of tax, and when one looks back to see how that is defined, in Clause 29 one finds that one has to consider, for the purpose of the tax the gross relevant distributions to proprietors. Therefore, for practical purposes, when one talks about distributions to persons, one has to refer only to Clause 29—

§ Sir H. Lucas-Tooth
What is the purpose of the use of the word "person"?

§ The Solicitor-General
It is most convenient.

§ Sir H. Lucas-Tooth
Would not it be better to use the word "proprietor"?

§ The Solicitor-General
The Clause is drafted in this way for technical drafting reasons which it would take some time to explain.

§ Mr. Kirkwood (Dumbarton Burghs)
In view of the sad story we have heard about directors, I would like to suggest an easy way by which directors who are paying double taxation may relieve themselves of that burden. All they have to do is to stop being directors, and I will get them jobs in the shipyards, or they can get work in the mines.

§ Captain Crookshank
The Solicitor-General departed from what I regarded as the very good case presented by my hon. and gallant Friend the Member for Antrim (Major Haughton) by saying, in effect, that this was not the right place to discuss the matter. He did not assist by telling us what was the right place. He will appreciate that these Clauses are very complicated. Of course, the Opposition put down Amendments only in what they believe to be the right places, but, unfortunately, they sometimes choose the wrong place. Wherever the right place may be, obviously we will not want to discuss the matter again and, as it would appear to be in Order to discuss this matter on the Question, "That the Clause stand part of the Bill," I would like the Chancellor to do in this case what he has promised to do in the other cases which have arisen during the Debate, namely, to consider the point which my hon. and gallant Friend made. I have read the 1937 Act, and it is quite true that these restrictions were put in the Act for good and proper reasons, and in relation to the figures which were thought appropriate at that time. As far as I know, in the years which have elapsed, when the National Defence Contribution existed and before the introduction of the Excess Profits Tax, that policy was not questioned in any way and those figures were accepted.
This may not be the right place, but, for all that, the Solicitor-General absolved himself from answering the question on its 1180 merits. I reinforce what has been said by my hon. and gallant Friend and I request the Chancellor to be good enough to take this into consideration.

§ Mr. Dalton
I will. This is very technical. I am advised that it does not really fit here. None the less, the point is interesting. We will certainly look into it in the light of what has been said by the hon. and gallant Member for Antrim (Major Haughton).