§ (1) The following provisions of this section shall have effect, where, during the whole of any chargeable accounting period of a body corporate ordinarily resident in the United Kingdom—
- (a) that body corporate, or, if it is a member of a group within the meaning of the Eleventh Schedule to this Act, the members of the group together, own at least one quarter of the ordinary share capital of another body corporate ordinarily resident in the United Kingdom; and
- (b) the first-mentioned body corporate and the said other body corporate are not members of one group within the meaning of the said Eleventh Schedule.
§ (2) If the standard profits for a full year of the first-mentioned body corporate fall to be computed by reference to its profits for the standard years—
- (a) sub-paragraphs (1) and (2) of paragraph 10 and sub-paragraph (a) of paragraph 11 of the said Eleventh Schedule shall, for the purposes of computing its profits for the said chargeable accounting period, and its standard profits for a full year in relation to that period, apply as if it and the said other body corporate were members of a group; and
- (b) where it makes an election under paragraph (a) of subsection (4) of section thirty-three of this Act, the said subsection (4) shall have effect, for the purpose of computing the said standard profits, as if the average amount of its paid-up share capital in the year specified in the election were reduced by an amount bearing to the amount paid by it in cash for any share capital of the said other body corporate owned by it during the year specified in the election the same proportion as the average amount of that share capital so owned by it bears to the full amount thereof.
§ (3) If the standard profits for a full year of the first-mentioned body corporate fall to be calculated by reference to the percentage of an amount (other than the amount referred to in paragraph (a) of subsection (4) of the said section thirty-three)—
- (a) its standard profits for a full year in relation to the said chargeable accounting period shall he reduced by an amount equal to the like percentage of the amount paid by it in cash for any share capital of the said other body corporate owned by it during the whole of the chargeable accounting period; and
- (b) in computing its profits or losses (otherwise than for the purposes of ascertaining its undistributed profits or over-distribution of profits for any period) for the said chargeable accounting period any dividends received from that share capital shall be left out of account.
§ (4) The preceding provisions of this section shall not apply in any case where the provisions of section forty-four of this Act have effect as respects the liability to the excess profits levy of the first-mentioned body corporate by reason of its acquisition of the ordinary share capital of the said other body corporate.
§ (5) For the purposes of this section a body corporate shall be taken to own ordinary share capital of another body corporate if it owns it directly or through another body corporate or other bodies corporate or partly directly and partly through another body corporate or other bodies corporate, and the provisions of subsections (2) and (3) of section forty-two of, and Part I of the Fourth Schedule to, the Finance Act, 1938 (which defines certain expressions used in this section and in the said section forty-two), shall have effect for the purposes of this section as they have effect for the purposes of the said section forty-two.—[The Solicitor-General.]
§ Brought up, and read the First time.
§ The Solicitor-General
I beg to move, "That the Clause be read a Second time."
It seems to be my fate to move the Second Reading of Clauses of extreme complication, but I hope that this one will be equally acceptable to the Committee. It is the Clause which endeavours to make provision for the position where one body corporate ordinarily resident in the United Kingdom has at least a 25 per cent. shareholding in another body corporate. The Clause meets Amendments which were tabled in the names of my hon. Friend the Member for Altrincham and Sale (Mr. Erroll) and others. Its purpose is to exclude from the company's profits dividends received from any trade investment amounting to at least one-quarter of the issued share capital of another company.
If we exclude from the company's profits those dividends from such an 1259 investment, it is also right that in computing the owner-company's capital or undistributed profits, we should deduct the investment itself. The two things go together. Where the capital is on a profits standard, that capital adjustment is only necessary in so far as the investment was acquired after the beginning of the company's standard years. Investments acquired before the standard period do not affect the comparison between the standard period capital and the present capital.
In such a case, what happens is that it is the dividend which is taken out both from the standard profits and the chargeable profits and, in effect, a 25 per cent. shareholding is being treated for the two purposes of excluding the dividends and excluding the cost of the shares, in exactly the same way as the holding of 75 per cent. or more by a member of a group of companies in another member of the same group under the provisions of the Eleventh Schedule.
I hope that that explanation, although brief, is clear, and if there is any other point on which hon. Members think that I can assist them, I shall be very glad to do so.
§ Sir F. Soskice
The Solicitor-General has explained very clearly how the Clause is to work. He has explained that where there is an investment consisting of a 25 per cent. holding in another company, the income from that investment is to be excluded for the purpose of computing the standard and the chargeable profit. There is a corresponding provision, as the hon. and learned Gentleman has said, for excluding, in respect of the acquisition of such a holding before the relevant period, the cost of acquiring that holding.
I can quite see how it works. What I rather hoped that the Solicitor-General might say was what precisely is the purpose of excluding a holding of that sort and the income from it. In what way does the change, now being made by the Clause proposed by the Solicitor-General, fit in with the general structure of this Excess Profits Levy?
I think the Committee might have had some explanation of the reason for this change, in addition to the explanation as to the exact machinery of the change proposed. I would ask the Solicitor-General to explain why it is that at this stage in 1260 our deliberations this proposal is being made, and in what sense it is thought that the original scheme of taxation was defective and requires now to be remedied by this proposed alteration?
§ Sir P. Spens
I apprehend—I may be wrong—that the object of this Clause, in part, is to meet the argument against double taxation, and that this applies to all companies, that is to say trading companies, or insurance companies, or any other company which has to carry investments as part of its business; while in fact if it holds 25 per cent. or upwards of the original share capital of a company, to that extent it is not included in its accounts, because already that company will have paid the Excess Profits Levy, if it ought to have been paid.
I hope that this is not to be all which is to be done for investment trust companies. I raised the question of those companies at a very much earlier stage in the discussions on this Bill. I was promised that it would be reconsidered before Report stage. When that promise was given this new Clause was already on the Order Paper. I merely wish to repeat what I said then, that investment trust companies, which are nothing but conduit pipes for using the savings of the public and putting them into safe investments, are something quite different from any form of commercial or other company which has to have certain investments in the course of its trade.
It seems to those of us who are interested in investment trust companies that it ought not to be necessary that an investment trust company should hold as much as 25 per cent. of the ordinary share capital of a company to be entitled to this relief; but that whatever the amount of the holding in the ordinary share capital trading company, which has already been subjected to the Excess Profits Levy, that income should not again be brought into account for Excess Profits Levy when it has been received by an investment trust company. I hope the Solicitor-General will be able to say that that matter is still open for reconsideration between now and Report stage.
§ Mr. G. R. Mitchison (Kettering)
There is one question which I should like to ask the Solicitor-General. I am rather puzzled at the way in which the Chancellor has approached the question of 1261 subsidiary companies, both in this new Clause and in the Schedule relating to connected companies.
He has taken a particular line, 25 per cent. I do not know why. The interconnected companies were originally taken on the basis of a holding of 75 per cent. Now we have a Clause dealing with companies holding from 25 per cent. up to 75 per cent. The one thing which seems to have been entirely rejected appears to me to be the most essential thing; that is some distinction between companies which really are subsidiaries, because half or more of the capital is held by another company, and the kind of case, put by the hon. and learned Member for Kensington, South (Sir P. Spens), of investments and the precautions or methods for not taxing the same income twice.
It seems to me that the two types of holding are rather different problems, and that, in a way, to treat companies with a holding of between 51 and 75 per cent. under these provisions, instead of treating them under the Schedule, is rather illogical, because the same question of control arises. While, generally, no one wants to have double taxation in this kind of case, it does leave the companies between 51 and 75 per cent. much freer in one sense than those in which there is a rather larger holding.
Therefore, if I might summarise the question which I am putting to the hon. and learned Gentleman, it is this. Why was a subsidiary company restricted to this rather novel and high definition in the Eleventh Schedule, leaving it over to this Clause to deal with a group of cases, some of which will concern subsidiaries while others will not? Lastly, why, when we come to the bottom of the scale, was the figure of 25 per cent. taken? It seems to me that 25 per cent. does not have any particular reason for its existence one way or the other, and perhaps the hon. and learned Gentleman will tell us what mathematical or philosophical considerations influenced the Chancellor or the Treasury when they arrived at that percentage.
§ The Solicitor-General
If I may, I will deal first with the question raised by the hon. and learned Member for Kettering (Mr. Mitchison). He referred in particu- 1262 lar to the Eleventh Schedule and the conditions under which we can treat various companies as one entity for the purposes of E.P.L. We had a debate about that last night, and I doubt if I would be in order in going into it very far this evening. But I would say that the test there—and it may be right or wrong—is to see whether we can treat a number of companies as one for the purposes of E.P.L.
This new Clause really deals with a different problem, and it is aimed at dealing with the same income bearing E.P.L. twice. My hon. and learned Friend the Member for Kensington, South (Sir P. Spens) was right in stating the objective of this new Clause, and I say to him straight away that the submission of this new Clause does not in any way restrict the assurance which he received from my hon. Friend on an earlier occasion in regard to franked investment income.
Indeed, I think I am right in saying that Amendments in the names of my hon. Friends put forward proposals somewhat on these lines, in which these dividends of 25 per cent. or over were described as franked investment income, no matter by whom the income was received. The object of the Clause is to avoid, as far as it can be avoided, double taxation for purposes of E.P.L.
The hon. and learned Member for Kettering asked me about the 25 per cent. One must admit that it is an arbitrary figure, but I think the line is drawn in the right place. It would be very difficult administratively if we were to say that any investment income received from another company should receive the treatment proposed in this Clause, and we came to the conclusion that a holding of 25 per cent. at least was the right limit to draw on the lowest level.
§ Mr. Mitchison
If I may interrupt the hon. and learned Gentleman, surely, the same point arose over the Profits Tax and has been dealt with? If, as we are told, the object of this Clause is to deal with the question of double taxation, then why limit it at the comparatively high figure of 25 per cent.? If it is to deal with subsidiaries, then I could have understood it, although I should have thought that the 25 per cent. was too low. If it is a question of double taxation why 25 per cent.?
§ The Solicitor-General
I have done my best to indicate to the hon. and learned Gentleman why we arrived at that figure. As a matter of fact, it is a figure which was proposed by my hon. Friends in their Amendments. That is a pure matter of coincidence, but it shows that there is a number of people who think that is the right place at which to draw the line. One can always argue where the line should be drawn, either above or below, but one thing we must avoid is the tremendous administrative complications that would arise in relation to every case if we had no line at all, and which would add considerably to the work entailed. While we think there should be a line, we also believe that in this case we have drawn it at the right place.
§ Sir F. Soskice
I am sorry to prolong the debate on this point, and I can assure the Solicitor-General that I do so with no desire to harass him. He has been very courteous and has given us the information at his disposal, but I must confess that I do not think he has really answered the question put to him. I asked what the object of this particular provision was. He answered, in effect, that the object was to exclude franked investment income for the purpose of the computation of the Excess Profits Levy. That is perfectly intelligible.
Some hon. Members feel that the franked investment income provisions are appropriate to the levy, and some do not. Some think they are appropriate only in the case of investment companies, and that is how the matter stands. What we on this side of the Committee feel great difficulty about is that if it is desired that income which has already been taken into account for the purposes of the Excess Profits Levy shall not be taken into account again, then it seems, as my hon. and learned Friend the Member for Kettering (Mr. Mitchison) pointed out, very difficult to see why a minimum of 25 per cent. is imposed.
Surely, if the object is simply to secure that if one company has included in the computation of its profits, in order to see whether it is liable to the Excess Profits Levy, a certain stream of income, and that same stream of income should not again be taken into account in computing another company's profits for this Excess Profits liability, then all we need to provide is that the second company should 1264 have received income from the first company; that is to say, that the second company should have received some dividends from the first company.
There does not seem to be any object in computing a minimum shareholding of 25 per cent., or any other percentage. I am not sure whether I understood the Solicitor-General to imply this, but it may be that this is the answer he wishes to convey. It may be that what he wishes to say is that we do not want too elaborate a system to be introduced; we do not want to have to exclude all income which has previously drawn tax because it would impose on the taxing authorities an unduly heavy burden.
That is something I can perfectly understand, if that is the answer which was intended to be given. But it was not the answer given, although, if I understood the hon. and learned Gentleman correctly, he seemed to be implying that was the reason. Perhaps he will be good enough to say whether, in fact, that is the reason or not, and whether the object of the 25 per cent. limit is that a number of categories of income which would otherwise count as franked investment income are to be excluded because the shareholding of the second company is not sufficiently large to warrant their being included in the company's income. If that is the object, will the hon. and learned Gentleman say so? From what we can see from the Clause, it seems to be neither here nor there.
If the object is to exclude franked investment income, so far as we can see there is no point in having a shareholding limit. If it is not, then we should like to know what the object is. Accordingly, we would press the Solicitor-General to refresh himself from the usual sources of information, if he has not the information ready at his fingertips, and inform us what the object is and why that particular limit was settled upon as the right one.
§ The Solicitor-General
The additional reason for selecting the 25 per cent. limit is that, quite apart from the administrative difficulties, we want to secure that what one is dealing with here is a real investment which is something more than an attempt to invest surplus funds.
§ Mr. Roy Jenkins
Can the reason be the fact that the Solicitor-General takes the view that the companies most affected 1265 by the hardship of double taxation of what is normally called franked investment income are those with a 25 per cent. holding or above in another company? I should have thought that that was not so. The kind of company likely to own 25 per cent. or more of another company would probably be a company—
§ The Solicitor-General
I said earlier that this Clause does not seek to implement the assurance given to my hon. and learned Friend the Member for Kensington, South (Sir P. Spens) with regard to an investment company. This is a Clause of general application dealing with the investments of all kinds of companies.
§ Mr. Jenkins
The difficulty, I understand, is that an assurance was given by the Chancellor to the hon. and learned Member for Kensington, South (Sir P. Spens) about investment companies. Do we understand that that is intended to cover only investment companies and not, for instance, insurance companies? If we are left in the position that we have an assurance that may amount to something or may amount to very little so far as investment companies are concerned, and that we are passing a new Clause dealing with companies owning more than 25 per cent., we are bound to ask why these particular categories have been chosen—one to be dealt with specifically at this stage and the other possibly on the Report stage—and why companies left out altogether, such as insurance companies, are not within this Clause.
It seems to me that so far as hardship does arise from double taxation on investment income, those affected are not those companies owning 25 per cent. or more of another company but those companies with a very wide portfolio of investments, such as insurance companies which do not own as much as 25 per cent. of another company. We want to know whether anything is to be done for those companies. Are we to be left in the extraordinary anomalous position of having something done for companies owning 25 per cent. or more of another company, and possibly something to be done for investment companies and nothing to be done for a wide range of companies which come into neither category?
§ Sir John Mellor (Sutton Coldfield)
I find it difficult to understand what my 1266 hon. and learned Friend the Solicitor-General means by administrative difficulty. Surely it is only a question of the Revenue recognising that the income is, in fact, received from another company. Once that is recognised I see no difficulty whatsoever from the point of view of administration in regarding it as franked investment income. I should like to know what the Solicitor-General has in mind about the administrative reason, which was the first reason and therefore, presumably, the most important reason he gave for requiring this provision.
How can an administrative difficulty possibly arise in such a matter? I would press my hon. and learned Friend for an explanation. He has spoken freely of the administrative difficulty, but a vague reference to administrative difficulty is not very convincing if he is not prepared to tell us how that administrative difficulty can arise. Could I have an answer?
§ Clause read a Second time, and added to the Bill.