§ (1) Where a company at the balance sheet date holds stock which it has purchased from another member of the same group the last named company shall be entitled to a deduction in computing its profits for income tax purposes amounting to the difference between the value of the stock as appearing in the balance sheet of the first named company and the cost thereof to the last named company.
§ Brought up, and read the First time.
§ Sir P. Bennett
I beg to move, "That the Clause be read a Second time."
I do not know if the learned Attorney will wish to deal with this Clause in the same way, because this also deals with group company accounts, and concerns the selling of goods sold or processed from one member of the group to another, and unless the transfer price is a cost price. there is a profit by the company on transferring them. The extent to which these goods have not passed outside the group represents an unreal profit. As the law is today, the selling company is chargeable for any profit made, irrespective of whether the group as a whole can be said to have made any profit.
Modern company law requires the elimination of this profit from the consolidated accounts of the group, for the Companies Act, 1948, requires that a company's accounts shall comply in that manner. The profit made from the sale of goods from one branch to another cannot be included. It is true that if a group does not like the legal entities it can rearrange these matters so that the separate companies are not, legally, entities, but branches, but there are very often weighty reasons, and I know a good many of them, which make this very undesirable, such as local status and the position of the local directors.
There are many advantages in keeping in being companies which are very often only branches. The Clause gives the allowance to the transferor company and it has been recommended that the allowance should always be made to the transferee company, that is the company to whom the stock has been sold. Either would be an acceptable measure of justice in the abstract, but we feel it is better that the allowance should be to the transferor; that is the original company because that company is less likely to be affected by trading abroad where the United Kingdom company when it trades abroad would be normally the basis of assessment for overseas tax.
184 We feel that it would be better for the assessment to be made on the transferor rather than on the transferee. There are a number of other points over this, but I shall not weary the Committee. I merely suggest that the Attorney-General might look at this in the same way he has promised with the previous proposed Clause I have put forward, with a view to obtaining a statement from him.
§ The Attorney-General
The hon. Member for Edgbaston (Sir P. Bennett) did not argue it in very great detail and I apprehend that he does not expect from me a detailed reply. May I perhaps content myself by saying this. We do not oppose the principle of the relative paragraph—paragraph 297—of the Millard Tucker Report which deals with this particular topic. The hon. Member pointed out that he had deviated in his Clause in various respects from that recommendation. The respects in which he has deviated from the recommendation seem to us to raise not inconsiderable difficulties.
I shall not go into the difficulties beyond saying that we feel that we certainly could not accept his Clause. We accept the principle of the Millard Tucker recommendation in that paragraph to which I have referred, but the hon. Gentleman's method of putting that recommendation into effect as disclosed in the Clause is one we cannot accept. Perhaps, however, he will be content with the assurance I have given him with regard to the actual recommendation itself.
§ Mr. Maudling
Can the right hon. and learned Gentleman give an assurance that in giving further consideration to this point he will bear in mind the importance of using the Companies Act definition of a group? Otherwise, the effect might be to exclude subsidiary companies operating overseas. It might occur that the transfer of stock between company and company in a group will embrace deliberately subsidiary companies overseas. I think he will find that the drafting of my hon. Friend's Clause referring to the transferor rather than the transferee was designed with this particular point in mind about the importance of overseas subsidiary companies. It must raise a large number of complicated difficulties, but I hope the 185 right hon. and learned Gentleman will keep an open mind on this matter.
§ The Attorney-General
I think we are discussing general principles rather than detailed application, but I must confess that when the hon. Member has in mind that overseas subsidiaries should be included he is leading us very much to the situation with which we have tried to deal in Clause 33 and one of the respects in which the Clause on the Order Paper departs from the Millard Tucker recommendations is that it includes overseas companies. That is one of the things which would raise great difficulties and I do not think we can see our way to accept that aspect of it.
§ Sir P. Bennett
In view of the statement of the right hon. and learned Gentleman in which he promised, as on the previous Clause, to study the matter—although I appreciate that we shall not get a result on the Report stage—I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.