Clause 29.—(TRANSACTIONS DESIGNED TO AVOID LIABILITY TO THE PROFITS TAX.) (Hansard, 2 July 1951)

§ The Attorney-General
I beg to move, in page 22, line 22, at the end, to insert: (4) Any direction of the Commissioners under this section shall specify the transaction or transactions giving rise to the direction and the adjustments as respects liability to the profits tax which the Commissioners consider appropriate. (5) No direction shall be given by the Commissioners under this section by reason only—

(a) that, in the case of any body corporate, unincorporated society or other body, no distribution to proprietors has been 2041 made or only a smaller distribution than might have been made; or

(b) that debentures of a company (not being a company the directors whereof have a controlling interest therein) have been issued for full consideration paid in cash to the company,

or by reason of any transaction which, or of any transactions all of which, required and received the consent of the Treasury under section thirty-three of this Act, if the consent was specially given to the transaction or transactions in question, was given before the carrying out thereof, and was given after full and accurate disclosure by the applicants for the consent of all facts and considerations material to be known to the Treasury. (6) If—

(a) a body corporate, unincorporated society or other body furnishes to the Commissioners particulars of a transaction or transactions effected or to be effected by them; and

(b) the Commissioners are satisfied that the transaction or transactions as described in the particulars have been, or, as the case may be, will be entered into for bona fide commercial reasons and are such that no direction ought to be given under this section in respect of it or them,

they may, if they think fit, notify the body corporate, unincorporated society or other body accordingly, and thereupon their power to give a direction under this section with respect to the transaction or transactions in question shall cease: Provided that—

(i) the particulars given under this subsection with respect to any transaction or transactions shall be such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the Commissioners and, where the requirements of this paragraph of this proviso are not complied with, any notification given by the Commissioners under this subsection shall be void; and

(ii) in no event shall the giving of a notification under this subsection with respect to any transaction or transactions prevent the giving by the Commissioners of a direction under this section with respect to transactions which include that transaction or all or some of those transactions and also include another transaction or other transactions.

The Amendment is designed to give effect to a number of undertakings which I and my right hon. Friend gave during the Committee stage in reply to various arguments adduced by hon. Gentlemen opposite. I think I can summarise as follows the various points with which the long Amendment deals.
In the first place, it was urged that the Commissioners should be under an obligation to give reasonable information with regard to the matter covered by any particular direction that they might make, 2042 and that is effected by subsection (4) of the Amendment. The House may remember that I called attention, when answering the arguments advanced, to the difficulty about the Commissioners being required to give an elaborate statement of their reasons, but I said that we would try to go as far as we could to meet the request made by hon. Gentlemen opposite, and in subsection (4) we have tried to do that.
Subsection (5) deals with various points which were made. It was argued that the fact that a company distributed a lesser amount than it might otherwise have done should not give rise to the liability of having a direction—that is dealt with in subsection (5, a)—and that the mere fact that debentures were issued should not give rise to the risk of a direction being made. We have acceded to that request except in the case of companies which are director-controlled. In the case of such companies the House will agree that there would be very considerable scope for evasion if they were within the exception which subsection (5, b) introduces.
Subsection (6) is also designed to meet a request, namely, that it should be possible to get an indication in advance from the Commissioners as to whether they would make a direction in relation to any transaction. The subsection goes further than that and also covers the case where a transaction has actually taken place. I believe that the Amendment fully meets the arguments adduced on Committee stage and I hope the House will think that it improves the Bill.

§ Mr. Manningham-Buller (Northants, South)
I beg to move, as an Amendment to the proposed Amendment, to leave out "(not being a company the directors whereof have a controlling interest therein)."
The Amendment relates to subsection (5) of the proposed Amendment and the Attorney-General has made a passing reference to this point. Subsection (5) provides that: No direction shall be given by the Commissioners … by reason only … that debentures of a company … have been issued for full consideration paid in cash to the company…. Exceptions from the general rule created by the subsection are companies of which the directors have a controlling 2043 interest. In moving the Government Amendment to this Clause the right hon. and learned Gentleman said that exception had to be made in the case of director-controlled companies to prevent tax evasion. I should be grateful if he could explain more fully why he regards it as being necessary to draw this distinction between ordinary companies on the one hand, and companies which are director-controlled on the other, in relation to debentures which have been issued for full consideration paid in cash.
I can see that he could advance powerful arguments in the case of debentures for which the full consideration had not been paid in cash, but I am not sure that I correctly understand the logic of his argument that there should be this differentiation.

§ Viscount Hinchingbrooke
I beg to second the Amendment to the proposed Amendment.

§ The Attorney-General
The kind of evasion that might be possible supposing we did not exclude director-controlled companies would be that they might cause debentures to be issued to, for example, members of their families. It is true that it might be for full cash consideration, but as the debenture interest does not rank as a distribution for purposes of Profits Tax, a company controlled by a family or by one or two people could, by the issue of a number of debentures, so diminish the profits that very little would fall within the scope of Profits Tax.
The hon. and learned Gentleman asked why distinguish between director-controlled companies and companies not director-controlled? It may be that we are taking a risk in leaving out companies that are not director-controlled, but a business owned by two or three people would have it entirely in their hands and could do exactly as they liked. So there is much more risk in the case of such a company than there is in the case of a big public company which is unlikely to resort to the device of trying to reduce its profits by issuing a number of debentures.
That is why, in measuring up the risk involved, we felt we were justified in 2044 taking the risk in the case of large public companies not director-controlled, but that if we went further the risk would be too great. For those reasons, we think it is necessary to exclude from the scope of this exception director-controlled companies. It does not follow that a direction must be made if they issue debentures, but we want to take them out of the scope of this automatic exception.

§ Mr. Manningham-Buller
In view of that explanation, I beg to ask leave to withdraw the Amendment to the proposed Amendment.

§ Mr. Manningham-Buller
I beg to move, as an Amendment to the proposed Amendment, in subsection (6) to leave out "may, if they think fit," and to insert "shall."
This is a drafting Amendment and I hope it will be acceptable to the right hon. and learned Gentleman. The House will see that under subsection (6) of the proposed Government Amendment, before the Commissioners can issue a notification they have to be satisfied that a transaction has been entered into for bona fide commercial reasons. Over and above that, the Clause as it stands gives the Commissioners a discretion whether to give the notification even though that may be satisfied. If the Commissioners are satisfied, I think the obligation should be laid upon them to give the notification, since I can see no reason for their withholding it where they are satisfied that the transaction comes within subsection (6).

§ Mr. Selwyn Lloyd
I beg to second the Amendment to the proposed Amendment. This is an Amendment which should obviously be made to make the Government's Amendment more specific.

§ The Attorney-General
For the reasons advanced by the hon. and learned Member for Northants, South (Mr. Manningham-Buller), who moved the Amendment, I am quite ready to accept it.

§ Captain Crookshank
Before we part from this long Amendment, which has been moved by the right hon. and learned Gentleman, I wish to say that we are very pleased indeed to find that the Government have accepted five of the major points which were discussed at considerable length on Committee stage. If it is nothing else, it is a complete repudiation by the Government of the very unworthy message that the Prime Minister thought fit to send on 18th June to the electors at Westhoughton, when he spoke of this side of the House in these words: Although they have no policy, the Opposition do all they can to hamper the Government by means of sham fights and late Sittings, unable to win the debate … That just is not the fact, because the Government have on this very vital Clause accepted the contentions which were put forward from this side, which is the lie direct to the statement made by the Prime Minister.
Furthermore, this big concession—we recognise that it is a big concession by the Government—is proof to the whole world of the value of free debate in this House such as would not have obtained in, possibly, other places. We could have wished that the delay between the Committee and Report stages could have been longer, but the full debates which we have had have given time not only to the Government, but, what is equally important, to their advisers, to weigh up the arguments which have been put and which may not at first sight have leapt to their minds when the Clauses were drafted. It has given them time to reconsider these matters and to give fresh advice to the Government, which the Government can accept or refuse as the case may be. Whoever is responsible for accepting these Amendments, a large share of the credit must go to my right hon. and hon. Friends on this side of the House, who put them so cogently and lucidly at an earlier stage of our deliberations.

§ Mr. Lionel Heald (Chertsey)
I desire only to add one word to what my right hon. and gallant Friend has said, in view of the importance of the matter. It must be borne in mind that great prominence was given to the Prime Minister's message in the closing stages of the Westhoughton by-election—that is a fact. It was placarded and was sent out on loudspeakers. No one suggests that the Prime 2046 Minister would intentionally make a misleading statement, but it is right to say that widespread indignation has been caused throughout the country—[Interruption.]

§ Mr. Speaker
This is a bit hot. I allowed the right hon. and gallant Member for Gainsborough (Captain Crook-shank), to make a reference to the message that the Prime Minister sent, but we cannot debate the message on this Amendment.

§ Mr. Heald
I only wanted to say this: that I thought it would be a pity for us to dismiss this matter too summarily, because this was a case where on Committee stage we debated the Clause for 12 hours, and it was suggested that we had been wasting time and obstructing the course of business, but we are now all agreed—I hope, including the Prime Minister, although we could not gather so this afternoon—that that was a mistake and that we were not wasting time.

§ Viscount Hinchingbrooke
Ought not the Leader of the House, who is present, to make a formal withdrawal on behalf of the Prime Minister?

§ Mr. Selwyn Lloyd
Does not this emphasise the point that discussion on this case took place from 4.0 a.m. to 4.0 p.m. on 12th June?