§ Motion made, and Question proposed," That the Clause stand part of the Bill."
§ Mr. Houghton
Some of us on these benches have doubts about a proposal in Clause 23, which apparently deals with one—but only one—of the recommendations of the Millard Tucker Committee with regard to relief for business losses. There are three kinds of relief for business losses. One is in the case of business losses which may be set off against non-business income in the same year of assessment. An example is a landowner carrying on some farming operation who makes a loss on his farm and who can claim relief for those losses by setting them off against the Income Tax assessment on his rents for the same year of assessment.
Another kind of business loss is that incurred by a company which is entitled under the existing law to set off those losses against future profits within a limit of six years. Thirdly, there is the kind of business loss which a company may set off against profits made by another business owned by the same company.
Clause 23, so far as I understand it, relates only to the time limitation at present imposed on the setting off of losses against future profits. The Millard 185 Tucker Committee, in paragraph 79 of its report said:We have come to the conclusion that there is no sufficient reason for restricting the period within which business losses can be carried forward, and we accordingly recommend that the owner of a business should be allowed to carry forward business losses and set them against subsequent profits from the business without time limit.11.0 p.m.
I have not been able to trace the origin of the present six-year limitation upon the set-off of losses against future profits, but I do recall that there has been some magic about a six-year period in Income Tax law both as regards the setting off losses against future profits and also as regards the right of a taxpayer to claim repayment for some relief to which he may have been entitled in previous years.
But there is one doubt about this proposal, which is whether it may be used for a company manipulation in order to avoid taxation, not only Income Tax, but Profits Tax as well. For example, it is possible for a company making a profit to acquire another company which has an accumulation of losses. It can then deflect trade from the company making a profit to the one making a loss so that the profits are reduced in one company in order that profits may be set off against losses in the other company.
Similarly, it is possible for a company to acquire another company which is making a loss and manipulate the trade as between the concerns in order to get the best advantage from the set-off of losses against future profits. The question I am asking the Chancellor is whether he is satisfied that these abuses, which must be known to him, are either not sufficiently widespread or serious enough to merit the retention of the existing time limitation or whether he has other steps in mind to deal with them.
It is noticeable that the right hon. Gentleman has not heeded any of the other recommendations made by the Millard Tucker Committee in this group of paragraphs in the Report dealing with losses. The right hon. Gentleman has not, for instance, taken up the proposal of the Millard Tucker Committee to allow the owner of a business which has made a loss in the final year to set off that loss against previous profits for the three preceding years.
186 Nor has he adopted the recommendation of the Committee that a business loss might be set off against non-business income for the following year of assessment instead of as at present against the current year of assessment. The right hon. Gentleman must have had some reason for selecting from among the several recommendations made by the Millard Tucker Committee this one for incorporation in this year's Finance Bill.
I should like to have a few words of explanation as to why the Chancellor has selected this recommendation, to know what particular merit he feels it has to justify inclusion in a Bill already full of other important matters, and to ask whether he can give an assurance that abuses of the set-off of losses against future profits are being carefully watched in this connection.
§ Mr. Maudling
The hon. Member for Sowerby (Mr. Houghton) has correctly interpreted the purpose of this Clause, which is to carry out one of the recommendation of the Millard Tucker Committee. At present a trader who suffers a loss in any particular year can set that off against income from other sources. If he does not wish to do that he can carry it forward for set off against subsequent profits from the same business for a maximum period of six years.
It was represented by the Millard Tucker Committee that this was a quite arbitrary limit for which there was no justification. I rather gathered that the hon. Gentleman agreed that the six-year period had no real justification.
§ Mr. Maudling
I will come to that in a moment.
My right hon. Friend the Chancellor therefore considered that this was an important matter on which the Millard Tucker Committee had pronounced quite definitely, and which he thought was suitable for inclusion in this year's Finance Bill.
The point the hon. Gentleman mentioned about the possibility of abuse is a significant one. I can assure him it was in the mind of the Millard Tucker Committee, who took full account, when they made their recommendations, of the possibility of abuse arising in the way he 187 suggests. It is arguable to what extent, in certain circumstances, tax avoidance—not evasion—of this kind might give arise to abuse.
Even in cases where there are abuses, it is extremely difficult in practice to distinguish between cases where the acquisition of a company is based on sound business reasons and where it is not based, in the ultimate event, on sound business reasons. The fact is that it would only be in rare circumstances that any abuse could occur.
The successors to the previous company would have to carry on precisely the same business and there would have to be no period of cessation in between. But, in this, the Inland Revenue authorities, who keep an eagle eye on the matter, are satisfied that the possibility of tax avoidance in these directions are at present very small indeed. I can give the assurance, that should that problem arise in the future to a serious extent, the Chancellor will give it very close and necessary attention.
§ Mr. Mulley
The Parliamentary Secretary to the Ministry of Civil Aviation has given us another carefully considered reply, but I do not think it is good enough to explain why, in view of the point put by my hon. Friend, this method of closing the loophole of tax avoidance has been selected. It would be different if this proposal had been brought forward along with the other recommendations of the Millard Tucker Committee. Why is this particular one chosen this year?
I do not claim to have any special knowledge in this field but I was surprised to read in a financial paper a little while ago that one can get a substantial price for a company carrying substantial losses. Surprisingly, apparently, contrary to what one would have expected, the price is larger if the losses on the books are larger. It seems that the good will built up with the Inland Revenue authorities is a more valuable asset in some circumstances than good will of the normal commercial character.
Looking at the matter as a layman, without any special tax or business knowledge, it seems that, if one cannot make a profit in a firm over six years, we on this side of the Committee, when we take 188 over, will have a thin time because if the present Government run their full time, they will not be able to balance the books of the country. We have had no explanation why this change has been brought forward now. We should not let this Clause pass tonight unless we get a firm assurance that the other much more substantial recommendations of the Millard Tucker Committee are to be brought forward next year, if this Government are still in power.
§ Mr. Gerald Nabarro (Kidderminster)
I feel the use of the word "abuse" by the Parliamentary Secretary to the Ministry of Civil Aviation and reference to "tax avoidance" by the hon. Member for Sheffield, Park (Mr. Mulley) might give a somewhat misleading impression. Surely, it is true to say that the higher the average industrial rate of tax becomes—and now it is a three-tier system comprising Income Tax, Profits Tax, and Excess Profits Levy, which results, taking an average, in all the companies paying taxation, at about 70 per cent. of gross profits earned—a greater selling value is given to a company which shows on the balance sheet a substantial loss carried forward.
It is not at all difficult to envisage a situation in which a company that has been trading for a number of years finds itself in the position of having assets that might perhaps be worth only £10,000 but of having carried forward on its balance sheet a loss amounting to £100,000. The value of that company in the open market, to any other company buying it to make the first company a wholly-owned subsidiary—the value of the sale—is, of course, related to the value of the loss forward of the company that is being sold.
In view of the average rate of total taxation at 70 per cent. there is nothing at all immoral or indecent in buying a company with a substantial loss forward. In fact, in many circumstances. it is a sound business deal. Therefore. I deprecate the use of the expression "abuse" on this side of the Committee or "tax avoidance" on the other side, because bringing a loss forward is a perfectly legal contrivance of which I am sure the hon. Member for Sowerby (Mr. Houghton) would readily approve
§ Mr. McKay
I think it is a peculiar practice to allow these privileges to businesses which they have not had in the past. I understand that in the past losses were permitted to be carried forward for six years against profits. Now that time limit is to be removed. We should compare the position of companies with that of the individual. The individual is taxed at the point where, in the opinion of the Exchequer, he has reached a sufficiently high standard of income to enable him to live in reasonable circumstances. The same, presumably, applies to companies which are taxed upon profits they make over and above their needs. Those profits, in a sense, are their liabilities.
We are dealing here with firms which may get into a bad condition of health, as it were, losing money year after year. The individual may be relieved of tax if through sickness he cannot meet his liability in a particular year, but if he is ill for some years can he, when he regains his health, offset his past losses against his future income? Of course not. An individual who has been ill is not allowed to count any losses against future income. Yet an industrial firm has been allowed a period of six years, and it is now proposed to extend the period. I do not think that is fair.
§ Sir Arnold Gridley (Stockport, South
I only want to make one point which may appeal to all hon. Gentlemen. The Committee will appreciate that there are many companies today—perhaps more than is generally appreciated—who are incurring losses because of the continuance of high rates of Purchase Tax. As long as Purchase Tax continues at the present high rates such companies will continue to make losses and, therefore, the period of six years is not sufficient if Purchase Tax continues, and none of us can see the early abandonment of that tax. That is a perfectly good reason and justification of the extended period.
Mr. Glenvil Hall
I think my hon. Friends on this side of the Committee will not seek to take this matter to a Division, but that does not mean to say we are very happy about this proposal. We are rather suspicious to begin with that this proposal—if it can be called a proposal, because it was not in fact a recommendation of Millard Tucker 190 Committee—has been picked out for inclusion in the Finance Bill.
The only reason that the Parliamentary Secretary to the Ministry of Civil Aviation gave was that six years was an arbitrary period. Well, all dates are arbitrary. If I have a certain sum of money coming to me in March it falls into one year, and if it comes at the end of April it falls into another. It would make all the difference—and indeed often it does—to what Income Tax I pay. We do not think it a valid reason for putting this provision in the Finance Bill this year that the Millard Tucker Committee could find no real reason for the six years, the period embodied up to now in Finance Acts. Therefore, we shall watch this matter very closely during the coming year, and we rely on the undertaking by the Parliamentary Secretary that the Government will watch it, and that if there is tax evasion they will come again to the Committee and put this matter right.
§ Clause ordered to stand part of the Bill.