New Clause.—(AMENDMENT AS TO DOUBLE TAXATION RELIEF.) (Hansard, 6 July 1949)

§ Mr. Selwyn Lloyd
I beg to move, "That the Clause be read a Second time."
I cannot pretend that this subject will have the same popular interest as the new Clause which we have just finished discussing. Nevertheless, it concerns a hardship to a small number of people, and I hope that the Government will consider the matter very seriously. It relates to deductions of tax from the dividends upon preferred shares in companies which are subject to double taxation relief. Before the Act of 1945, the dividend on a preferred share would be paid less the net United Kingdom rate of tax, so that if the full standard rate was 9s. in the £ and the relief was 4s. 6d. in the £. the dividend would be paid less 4s. 6d. in the £. The 1945 Act made it obligatory upon companies to deduct the full standard rate in such cases, but it also contained a provision that in the case of persons entitled to claim repayment of tax, their claim would be limited to the net United Kingdom rate. Therefore, the tax would be deducted at the standard rate of 9s. in the £.
2281 9.45 p.m.
In my example, if relief were given at 4s. 6d. in the £, the person entitled to the repayment of tax would only be entitled to claim it at the rate of 4s. 6d. in the £. Suppose we had a person of very small means whose sole source of income might be the dividend of £100 on preference shares in some company which was subject to double taxation relief. That £100 would be paid less 9s. in the £—in other words, less £45—but when that person came to claim the repayment which he was entitled to claim, he would be able to claim only £22 10s. That appears to me to show a complete lack of justice, and it affects people entitled to a repayment of tax who are a very poor section of the community and who would suffer this substantial injustice. Those who apparently benefit from that state of affairs are not the Exchequer but the ordinary shareholders of the company, because they are the people into whose general funds goes the extra 4s. 6d. which the company has been able to deduct.
It seems to me that it should not be beyond the wit of the Government, the Treasury or the right hon. and learned Gentleman, to remedy what is a very small anomaly but one which causes a real injustice to people least able to bear it. The matter has been raised before, but has been usually met with a sterile answer. The Chancellor gave an indication, during the discussion on the last new Clause, that a way might be found round this problem, and, because it seems to me that these people will be subject to a great deal of hardship, just as was the case with the people whom we have just been discussing, I hope the Government will not defend themselves behind the legality of this position, but will either accept the new Clause or indicate that they will remedy what is a serious injustice to a small selected class.

§ Mr. Eccles
I beg to second the Motion.
My hon. and learned Friend who moved the new Clause with exemplary lucidity has put the point perfectly. It covers a small but none the less definite injustice.

§ The Solicitor-General
I have on at least one previous occasion heard the hon. and learned Member for Wirral (Mr. Selwyn Lloyd), who moved the new 2282 Clause, propound the argument which he thought right to put forward in support of it. I am afraid I can only give him in reply the answer which I have given him before. I hope I may vie with him in the brevity and lucidity with which he put forward his case. I will endeavour to do so.
It seems to me that the hon. and learned Gentleman is up against a clear dilemma from which there is no escape. If the Revenue pays to the preference shareholders relief at the full standard rate of tax, it means that the Revenue will be paying to the shareholders money which the Revenue has never received, and will be taking out of its pocket tax which it has never received. Therefore, 'that is an impossible way of dealing with the matter, and I am quite sure that the hon. and learned Gentleman would not expect that solution to be adopted.
The only alternative method is the method adopted for the purposes of Dominion Income Tax under Section 27 of the Finance Act, 1920. That method, which is the only alternative way so far as we view the matter, is also open to equally serious objection. The system that was embodied in that Section of the Act had the result that it was the ordinary shareholder who paid the preference shareholder the amount of the foreign tax, which is equally impossible. There is no reason why any preference shareholder should be repaid the amount of foreign tax on his dividends at the expense of the ordinary shareholder. That would simply mean that the preference shareholder is getting an uncovenanted benefit, because this is what happened when the Dominion Income Tax plan was in operation. Under that plan, the company simply deducted the net United Kingdom rate, Therefore, the difference between the net and the full standard rate had to come from somewhere. It had been paid; the company had paid it, and it did not get it back by deduction from its shareholders when it paid its dividend.
What was the result of that? It simply meant that the difference between the net United Kingdom rate and the standard rate came out of the general pool of profits available to pay the ordinary shareholders after the preference shareholders had received their fixed dividend. That is equally impossible. If the former plan is adopted, the Revenue is called 2283 upon to pay money it never received, and if the latter is adopted, the preference shareholder is getting an uncovenanted benefit at the expense of the ordinary shareholder, and that is grossly unfair to the ordinary shareholder.
The only practical way of dealing with the matter is for the preference shareholder to get his relief at the net United Kingdom rate, and that is the plan we have adopted. After all, if the preference shareholder wants to dispose of his shares—he being a person whose income is so low that he is liable to relief by repayment—he can dispose of his shares and invest the money in other securities which are not affected by the double taxation relief.

§ Mr. C. Williams
As the Solicitor-General indicated, he has made that speech once or twice before, and each time I hear it I am less and less convinced that there is any case whatever to be made out against my hon. and learned Friend's new Clause. When at the end of his speech the right hon. and learned Gentleman said that if the shareholder were dissatisfied he should sell his shares, it really seemed to me to be a remark which I had never heard before from the Treasury Bench. I have never heard it said before, in answer to a question about an unfair method of taxation, that if the shareholder is aggrieved, the best thing to do is for him to sell his shares. I think that is a thing which ought to be noted. If a shareholder did that, heaven only knows what he would do with the money he received. Never before from the Government Front Bench, from the Solicitor-General or from the Financial Secretary have I heard such an argument when a financial grievance was being discussed.
It is certainly a great pity that between the Committee stage of the Bill and this stage something was not thought out by the Treasury to alleviate a grievance which, though possibly not a very big one, is to my mind and to the minds of a considerable number of people who have listened to the arguments put forward tonight, one which is doing an injustice as between the preference and the ordinary shareholder.

§ Mr. Assheton
My hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) put the case for this Clause 2284 extremely well, and made it clear to the House that it could only affect people with very small incomes indeed; but it is a hardship, and nothing which the Solicitor-General said convinced me to the contrary. He played a very good game of skittles; he put up two alternative methods of dealing with this hardship, and said that it was quite impossible to adopt either of them. That is a very good trick of Debate, but it does not satisfy the House, and I suggest that this new Clause is very sound.