HC Deb 18 June 1951 vol 489 cc179-82

(1) Where a company in a group of companies makes a payment out of but not exceeding its profits after deducting capital allowances to another company in the group the payment shall be treated for income tax purposes as a business expense incurred by the paying company and as a business receipt by the receiving company provided that both companies are controlled in the United Kingdom for purposes of assessment to income tax.

(2) A group of companies for the purposes of this section shall be a group of companies within the meaning of the Companies Act, 1948.—[Sir P. Bennett.]

Brought up, and read the First time.

Sir Peter Bennett (Birmingham, Edgbaston)

I beg to move, "That the Clause be read a Second time."

This Clause is not of wide scope but it deals with a matter of great concern to a number of companies that have separate legal entities but operate in groups. It is well-known to the Revenue authorities, because many discussions have taken place on it. Under the existing law, losses incurred by one member of a group of companies cannot be set off against the profits of another. There is a large degree of common interests between the companies in a group and the rigidity of the legal conception makes matters unequal and unfair when it comes to levying taxes on profits. Those connected with groups of companies have expressed the view that the proposal contained in the Clause is practicable, and have pointed out that in the past there have been similar provisions for setting off E.P.T.

The proposed Clause would remove the present difficulties in regard to Income Tax. It is often difficult to see whether a transaction between two of these linked companies is really an independent transaction or a payment out of profits, but if both companies are registered and controlled in this country and operate within the scope of United Kingdom taxation, the Clause would have no undesirable effect whatever. What comes out of the taxable profits in one case would go into tax computations in another. To that extent it relieves the loss made in the other companies and that seems to us to be wholly proper. This is not a case of tax avoidance, but simply a rectification, and it reduces inequality in our tax practices.

The Attorney-General

We would not be opposed to the principle of this new Clause, though with a very slight qualification. The definition of grouping which the Clause embodies is taken from the Companies Act, 1948, and to that extent the Clause on the Order Paper departs to some extent from the Millard Tucker recommendation. It recommends that the group relationship should be determined according to whether there was a 90 per cent. community of interest. Subject to that one qualification, however, the Clause does carry out the purport of one of the recommendations of the Millard Tucker Committee and, as I have said, we do not oppose the principle at all.

For this Clause I again pray in aid what my right hon. Friend said earlier about considering some of the Clauses which carry into effect recommendations of that Committee. We would not wish at this stage to accept the new Clause, but we hope that the hon. Gentleman will agree to it being treated as the other Clauses dealing with the Millard Tucker recommendations have been treated, namely, in the terms of the announcement which my right hon. Friend made earlier when we began to consider these Clauses. Upon that understanding, I would ask the hon. Gentleman to consider asking the leave of the Committee to withdraw his Clause.

Colonel J. R. H. Hutchison

The right hon. and learned Gentleman talked about the definition of a group of companies. I should like to be clear about what he says. He says he prefers the definition used by the Millard Tucker Committee of 90 per cent. holding. For E.P.T. the definition of a group of companies is 90 per cent. holding irrespective of the residence of the companies concerned in the group. On the other hand, the Profits Tax definition is a 75 per cent. holding of a company, which must be resident in the United Kingdom. Is it the E.P.T. definition of a group of companies that the right hon. and learned Gentleman is seeking to use in connection with this Clause?

The Attorney-General

The definition which we suggest—and I say this subject to further consideration of the Clause and its actual working out—is the definition which would require a 90 per cent. community of interest. As the Clause at present provides, both companies are to be controlled in the United Kingdom for the purposes of assessment of Income Tax. In other words, the only difference between the Millard Tucker recommendation and the Clause relates to the quantum of community interest. That is to say, the Committee was taking 90 per cent. and the Clause assumes a majority as is provided by the Companies Act.

Colonel Hutchison

Yes, but E.P.T. with the 90 per cent. interest does not demand that all the companies shall be resident and controlled in the United Kingdom.

The Attorney-General

I am simply following the Clause, and the Clause says that both companies are controlled in the United Kingdom for Income Tax purposes.

Sir Ian Fraser (Morecambe and Lonsdale)

Can the learned Attorney tell us if it is an omission on his part, or whether he deliberately said "controlled" and omitted any reference to "resident"?

The Attorney General

I used the word "controlled" for purposes of Income Tax.

Sir I. Fraser

I am sorry, but perhaps I did not make myself quite clear. The learned Attorney states that he is now going to take what we might term the "90 per cent. company" controlled in this country. Does that mean that the subsidiary must also be resident here in the United Kingdom?

The Attorney-General

Resident in the sense that it is liable to British Income Tax; but we accept the principle of this Clause, and I think that what the hon. Gentleman is referring to is a matter which may require further consideration. It is a matter which may reasonably require that; but as I envisage it, two companies are both liable to United Kingdom taxation, with a 90 per cent. community of interest.

Colonel Hutchison

Yes, but now we have three different definitions; one for E.P.T., one for profits, and one for Income Tax.

Captain Crookshank

The right hon. and learned Gentleman says that the Government have agreed in principle with what is in the Clause as it stands. But according to the words put down, in comparison with his remarks, there is not yet complete agreement about the word "controlled" in this context. That, we assume, will be subject to further consideration by him, but also, that it will be subject to further consideration by the House.

The Attorney-General

So that there is no misunderstanding about this, let me make it perfectly clear that I am not promising anything for the Report stage. This is something for next year.

Captain Crookshank

I can understand that, but if we do not find agreement before then, it is for the House to decide. But we understand that the principle is accepted.

The Attorney-General


Sir P. Bennett

I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.