HC Deb 08 July 1953 vol 517 cc1293-313

If a body corporate (herein called "the first body corporate") shall go into voluntary liquidation and the property and undertaking of the first body corporate or any substantial portion thereof is acquired by way of sale by another body corporate (herein called "the second body corporate") the membership of which is the same or substantially the same as the membership of the first body corporate, and it shall appear to the Commissioners of Inland Revenue that the main or one of the main purposes of the liquidation of the first body corporate and the acquisition of its property and undertaking or a substantial portion thereof as the case may be by the second body corporate (herein called "the transaction") was to avoid or reduce liability to income tax or that the effect of the transaction reasonably to be anticipated was the avoidance or reduction of liability to income tax, they may at any time before the first body corporate is dissolved apply to a judge of the High Court, and on such an application being made no further step shall be taken to bring about the dissolution of the first body corporate until the judge to whom the application is made shall give leave in that behalf, and if it shall be proved, on an issue being directed, that the main or one of the main purposes or the effect of the transaction reasonably to be anticipated were the purposes or effect aforesaid, the judge may declare that the acquisition shall be void and of no effect and that the second body corporate shall be incapable of acquiring directly or indirectly any portion of the property or undertaking of the first body corporate, and upon the making of such a declaration the said acquisition shall be void and of no effect for any purpose, and the property and undertaking so acquired of the first body corporate shall so far as it has not been disposed of by the second body corporate to a person acquiring it without notice of the transaction remain vested in the first body corporate, and any consideration moving from the second body corporate shall so far as may be practically possible remain vested in the second body corporate.—[Mr. E. Fletcher.]

Brought up, and read the First time.

Mr. Eric Fletcher (Islington, East)

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

This new Clause aims at stopping up a loophole in the law which has attracted a good deal of attention recently, not only in the financial Press but also in the daily Press. Therefore, I hope that the Government will not think, as was suggested about the new Clause which we have just been discussing, that this one is merely the outcome of excessive zeal on the part of members of the Labour Party to close up defects in the existing code of the Income Tax Acts. It is perfectly true that we on these benches are most anxious to stop all tax evasion and to do all that we can to ensure that the Government of the day closes up every loophole which makes it possible for a firm to escape taxation by a technical, artificial device.

This new Clause deals with a very clear device which, accordingly to the information in my possession, has been extensively used during recent months, and is one which, if allowed to continue, must inevitably continue to cost the Exchequer a great deal of money. Before I seek to explain to the House exactly how our proposed new Clause would work, may I explain the particular evil at which it is directed?

As the House will be aware, there are provisions in the Income Tax code which enable a company, when it ceases to trade, to have its taxes adjusted on a different basis. For example, a company whose trading accounts end on 30th September in any given year pay Income Tax for the year ended, say, on 5th April, 1953, not on the profit which they made in the year ended 30th September, 1952, but on the profit for the year ended 30th September, 1951. It so happens that a certain number of companies had an exceptionally good year in 1951 and for various reasons a bad year in 1952.

That was particularly the case in one or two specific industries, notably the textile industry of Lancashire, where a slump occurred rather more than 12 months ago, with the result that the very high level of profits that had arisen in 1951 was succeeded by a very bad year. If any of those companies had decided to close down their business it would have been quite normal and proper that they should not have been taxed in their final year's trading on the exceptionally high profit of 1951 but should have been allowed to bring into account the actual very low profits made during the last year of their trading. I think that everybody in the House will agree that the ordinary Income Tax provisions with regard to cessation are designed to meet the cases of companies which genuinely cease trading operations.

5.45 p.m.

But it has been found recently—I think probably to the surprise of a number of people interested in textile and other companies—that during the last few months there has been a spate of companies, many of them well-known companies, some of them almost household names in Lancashire and, indeed, elsewhere, which have suddenly changed their name by the introduction of the word "Holdings" after their name and before the word "Limited." What has happened is that the old company has closed down and has transferred the whole of its assets and business to a technically new company, but a company which adopts the name of the old company with the introduction of some such distinctive words as "(Holdings)" or "(1953)."

The result of that is that these companies have been able, to continue to carry on their business; the shareholders of the new company have been identical with the shareholders of the old company, and in everything except in name it has been the same body of people who have been carrying on the business, which in many cases has been in operation for a great many years. These companies have resorted to the device of winding up the old company and transferring their assets to a new company with an almost identical name for this reason—that by so doing they have found that they have been able to get the benefit of the cessation provisions of the Finance Acts.

These provisions were only designed to meet the position where there was a genuine cessation. They were never intended to operate when in fact there was no genuine cessation but merely an entirely artificial cessation, while, in fact, the old business continued with the same body of shareholders benefiting, and the same directors carrying on the business with the benefit of the goodwill and everything associated with the capital.

Mr. Jack Jones (Rotherham)

That is a racket.

Mr. Fletcher

As my hon. Friend says, that is a racket. All I want to do at the moment is to explain the facts. If it is a racket, it is one which I must admit has been openly conducted in a great many cases, because to enable this device to be carried out the shareholders have to be circulated and reasons have to be given by the board to the shareholders as to the purpose of dissolving one company and transferring the assets to a similar company and so forth.

In many cases the directors have stated, quite candidly, as the reason for the reorganisation, that it will save the shareholders a large amount of tax. In some cases it may be £25,000, in others £100,000, and I am told that in one case the amount of tax saved by this ruse, or device or wangle is as much as three-quarters of a million pounds. That is the evil which this new Clause is directed towards stopping.

If I am asked what is the scale on which this abuse is being worked, all I can say from the information I have been able to gather is that there must have been in the last year or 18 months at least 100 or 200 companies which have resorted to this device and, as far as I can calculate, the amount lost to the Treasury must be at least £10 million. That is the magnitude of the problem.

I hope that this new Clause, in its present or in some other form, will commend itself to the Government. I hope that the Government will be as anxious as we are to stop this scandal for, unless it is stopped, let us consider what the position will be. The noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) was saying a few minutes ago, with a certain amount of justification, that a taxpayer is entitled, within the law, to arrange his tax affairs to his own advantage. Yet the corollary of that is that when a glaring loophole in the law presents itself, it is the duty of the Government of the day to see that the loophole is stopped up, because unless it is stopped, and stopped immediately, the mere acquiescence by the Government in the continuation of the state of affairs which permits it is an open invitation and encouragement to others to resort to the loophole that exists, and avoid tax.

I have in my hand a list which was printed in the "Manchester Guardian" of 4th May this year of 50 or 60 Lancashire textile companies which have—I was about to say been through this bogus reconstruction, but I do not want to use too opprobrious an epithet—recently changed their name in the way I have described although they are still continuing business.

Knowing that this racket exists, let us consider the position of all the other companies similarly placed. If 60 companies can do it and get away with it, ought other companies, particularly their competitors, to do it or ought they not? As the law stands it is perfectly legal for them to do it, and in a sense, I suppose, the directors of the other companies might almost be criticised by their shareholders if they do not resort to this device. Therefore, if the law is allowed to stand as it is, particularly after being ventilated in the House today, I should doubt if it would be right in future to call any company which carries out this operation a racketeer. It is for the Government to stop it.

The Government are in this position. They have either to acquiesce in this state of affairs or they have to change the law. If they leave the position as it is I should have thought that other companies in the next 12 months which try to save for their shareholders another £10 million, or perhaps more, which ought to go to the Revenue, will be able to say, "This was well known on 8th July, 1953, and nothing was done about it." I hope, therefore, that the Government are fully alive to the seriousness of the matter. It is a state of affairs which was never intended, and it is a device of a highly technical and artificial kind which gives one body of taxpayers an unfair and unjust advantage over all others and produces a substantial loss of revenue to the Exchequer.

The House will have observed that the new Clause is in a form which, owing to the rules of Order imposing limitations upon us, may not be the most ideal form. We owe it to the skill and ingenuity of my right hon. and learned Friend the Member for Neepsend (Sir F. Soskice) for having designed a form of words within the rules of order. Our suggestion is the modest one that, where a bogus reconstruction scheme of this kind, accompanied by a transfer of assets from an old company about to be wound up to a new company formed with an identical name, comes to the notice of the Inland Revenue, they should be able to go to a judge of the High Court and ask for an order that no further steps be taken to carry out the transaction until the matter has been investigated. If, on investigation, the court comes to the conclusion that the only object, or the main object of the reorganisation scheme, is the avoidance of tax then the whole transaction can be declared null and void. It may well be the new Clause in this form does not go far enough.

I should have thought that no honest trading company could have objected to a provision of that kind. It leaves untouched any legitimate or reasonable scheme of reconstruction carried out for ordinary business reasons and having no relation to an attempt to avoid tax. The new Clause is designed merely to catch and to stop those who resort to this ruse for the single purpose, as admittedly on their own showing a great many have done, of saving their shareholders large sums of taxation.

If the Economic Secretary is prepared to concede the principle of the new Clause, I think I am speaking for my other hon. Friends in saying that I should welcome any improvements in drafting that the Government, with their resources, can introduce. If, therefore, an undertaking could be given to put a Clause which they might think would be not less effective but probably more effective, into the Income Tax Act for the purpose of securing the same object, I should be satisfied.

I should not, however, be satisfied with a mere warning to traders that, if they continue to do this, it will be stopped next year. That is not the way for the Government to legislate. It is not sufficient for the Government to make pronouncements about what they think is ethical and to say that, if it goes on, there may be legisation, even retrospective legislation, next year. That is not the way we want the matter dealt with. We want it dealt with now. For those reasons I hope that the Government will accept the new Clause.

6.0 p.m.

Mr. H. Rhodes (Ashton-under-Lyme)

I beg to second the Motion.

In a few weeks before 5th April this year, I believe that about 56 companies in Lancashire changed their names. It might have appeared from this that an important financial reconstruction was being undertaken to improve the efficiency of the industry. Let me quote what the "Manchester Guardian" commented on it: The impression may have been given that a movement for reorganising the financial structure and direction of cotton trade firms had suddenly begun but, during the last three or four weeks, the movement seems just as suddenly to have stopped. The cessation of the changes, at or about the end of the income tax year, suggests the reason why most of them were made. That is a quotation taken from the "Manchester Guardian" of 4th May.

What are the advantages that accrue to firms who do this? Normally, a company is assessed for taxation in any one year on the profit made in that one of its own financial years which ended during the previous tax year. It sounds complicated but is, in fact, very simple. A company whose accounts cover a period of 12 months—say, to 30th June—will be assessed for taxation in the year ended 5th April, 1953, on profits earned in the 12 months up to the end of June, 1951. That means that a firm which had done very well and had made large profits in 1950 and 1951, would have to pay taxation on those profits before the end of the financial year 1952–53.

As it happens, trade in Lancashire and in many industries elsewhere reached a peak in 1951 and record profits were made. Some companies, perhaps more wide awake than others, saw in the future a lessening of activity and, perhaps, a slump round the corner. In the cotton industry, which I am using as an example, that is what in fact happened. The result was that quite a lot of firms, if they did not actually make losses, had considerably reduced profits. I suppose that some smart lawyer or accountant hit on the idea of bringing into being the cessation rules in the present taxation laws. Under the cessation rules, if a new company is started its taxation liability for the first tax year cannot be assessed on the profits of previous years, and so the assessment is based on an apportionment of the profits made in the first year of its operation. That, I believe, is an accurate description of the cessation rules.

Take the case of a firm which made up its accounts, and made a large profit, to the end of June, 1951. I am not mentioning its name, but this is one that I have taken from the records. In the year ended 30th June, 1951. this firm's consolidated net profit was in the region of £2 million. Its consolidated net profit in June, 1952, was below £500,000. That is a difference of £1,500,000 taxed at 9s. in the £. Can we allow this device to continue, or what attitude are we to adopt? Are the Government going to stop this practice or will they give the advantage to people who did not do this, whether because they simply did not know about it or because it was below their dignity or was unethical? We must face up to this question today.

I have another example of a firm whose accounts are made up to 31st August. In 1951, their profit was nearly £1 million. In 1952, it was £262. As far as I understand, they have not paid any of their assessment. They were assessed on their profits for 1951 and should have paid before the end of the 1952–53 financial year, but they have not done so.

The reasons for all this can be seen in the "Financial Times" almost any day. My examples have been taken during the past week. Companies describe the bringing back of the tax reserves for which they have made provision. One company says "Added investment income" and gives a certain figure, and it refers to it as "tax over-provision." It then proceeds to pay a dividend of 15 per cent. Without exaggeration, in my opinion that is paying away my money or the money of anybody else who is a taxpayer. Surely, we are assessed on the basis of how much we receive, and each individual is assessed according to his income. To that extent, every taxpayer supports the economy of the country.

Let me give another example, taken during the past week. Anybody who cares to watch the "Financial Times" can see the picture: From provisions in the previous years the sum of £110,000 no longer required is brought back. … The facts are established. There is no doubt that this situation must be changed. We haul up before our magistrates poor parsons who have not disclosed their Easter offerings, and yet we have, as I have shown, a case in which nearly £750,000 will be excused, unless something is done about it today.

The noble Lord the Member for Dorset, South (Viscount Hinchingbrooke), when speaking about the Income Tax law, said that a person was entitled to dodge it if he could. Every right thinking person hopes that we will make a real recovery in our economic position, both internally and overseas. Tremendous importance is attached to productivity and production. I have always felt that the basis of productivity is good relations between management and workers, but we cannot have good relations if the workers in a factory know that by altering its name their firm can save itself a tremendous amount of tax and thereby impose extra taxation on other people.

There is another point about the matter. It has not finished here. This year and last year have been good years for those engaged in munitions manufacture. We shall have a crop of firms engaged in munitions doing exactly the same thing. The practice may have finished in the textile industry and many consumer goods industries because their slump is over but not so munitions firms.

As the Economic Secretary to the Treasury knows, I have been hammering at this question now for some months. During my inquiries I rang up a responsible firm of solicitors who have been doing this kind of work. I asked, "Could you give me some information on how to form a holding company?" The reply was." We have done 20 and we are going to do a lot more." That was last week, so they must be expecting quite a considerable clientele coming along, and it may be coming from the munitions industry.

We need a clear answer from the Government today; what are they going to do about it? Such an answer would set at rest the minds of solicitors and accountants who will not touch this kind of thing with a barge pole. It would make them feel that the Government have their interests at heart. There are many hard cases of solicitors and accountants who refuse to have anything to do with this kind of thing. Despite what the noble Lord the Member for Dorset, South said about ethics, there are a lot of such people in business now. I consider that those accountants and solicitors who have been harmed by this wangle are entitled to a statement about what the Government intend to do.

I believe that much damage has been done. It is very difficult to find out all the particulars and I do not know the amount involved, but the more I delve into the question the bigger the problem becomes and the larger the amount of money involved. I ask the Government to give a clear indication of what they intend to do.

The Economic Secretary to the Treasury (Mr. R. Maudling)

I am obliged to the hon. Members who have moved and seconded the Motion for raising this important matter, airing it and for the way in which they have put their arguments. I shall endeavour to follow in the same tone in which they started the discussion.

The device in question has been described by the two hon. Members and it is probably not desirable to go into too much detail in explaining how this can be done. It arises from the cessation provisions in regard to Income Tax, which are very complicated, as the Millard Tucker Committee pointed out. Broadly, the effect of having a cessation and a company reconstruction of this kind in a period when switching from high profits to low profits will mean that the company is taxed twice on the low profits period and not on the high profits period. In cases where the device is adopted it means that the company concerned saves a large amount of taxation.

I want to be clear on one point which, I think, was raised by the hon. Member for Islington, East (Mr. E. Fletcher)—that this is not a question of fraudulent evasion. The hon. Member who seconded the Motion impugned that by saying that people are brought before the courts and prosecuted because prosecutions had occurred in cases of fraudulent—

Mr. Jack Jones

Would the Minister call it a legal twist?

Mr. Maudling

There is no legal twist.

6.15 p.m.

Mr. E. Fletcher

I was careful to say that this was not a fraud. My complaint is that it is legitimate as the law stands at present.

Mr. Maudling

There is a slightly different twist, possibly, in the remarks of the seconder. This is a perfectly legal thing to do.

Mr. Rhodes

I did not suggest it was a fraudulent thing—I think it is. What I was suggesting was that if it is possible to bring before the court a poor parson for evading taxation on his Easter offerings, how serious should this House regard this matter and act upon it?

Mr. Maudling

I am obliged to the hon. Member and I am sure we agree on this. I was concerned to make it clear that companies were doing what it is perfectly legal for them to do, and doing it openly. We have heard quoted today several times that the taxpayer is entitled to arrange his affairs so as to attract the minimum of tax and, legally speaking, that is entirely true.

To take a trivial example, we all know that near the end of the Income Tax year there is a boom in marriages. That is a quite legitimate practice to avoid paying the tax. But there is a different sort of degree between that sort of arrangement of one's affairs and the deliberate adoption of an artificial and fictional device designed to contravert the whole purpose of the Income Tax.

There is a difference in kind there and a difference in kind which the Government and the House would wish to recognise. I am sure that everyone in the House will thoroughly deprecate the use of a dissolution of a company and a reforming of a company by a change that is purely nominal for the sole and only purpose of avoiding taxation. I am sure we all agree that that is thoroughly to be deprecated.

It is difficult to know the extent of this problem, naturally, because it is not always until delayed proceedings that one knows what has been happening. I think it is true to say that the device can only be employed in fairly unusual circumstances where there has been a period of high profits followed by a period of low profits, such as happened in the textile industry, to which the hon. Member for Ashton - under - Lyne (Mr. Rhodes) referred. There has been a bunch of those examples, but that period has passed—

Mr. Rhodes

Not in munitions.

Mr. Maudling

I should have thought that at present those particular circumstances had passed. The difficulty of dealing with the problem is the difficulty of prohibiting reconstructions which are designed to avoid taxation without, at the same time, prohibiting reconstructions which are perfectly legitimate and which may, incidentally, save tax as well. There is the difficulty, which always obtains in these cases, of distinguishing between the genuine case and the case which is not genuine. That is one of the reasons which makes it all the more important that artificial devices of this kind should not be employed by companies, because they are bound in the long run to prejudice genuine companies.

We have been studying this problem with very considerable care. We are obliged to the hon. Members for the proposed new Clause they have put forward and we have studied that with care. I notice that the thought put into it is exemplified by the changes they have made between the Committee stage proposal and the proposal on Report stage about, for example, not prejudicing the innocent party. We have studied the Clause, but we find that, in practice, it seems unlikely that it would really work satisfactorily.

It introduces certain innovations in Income Tax practice. I do not think that anyone would regard that as an objection if the Clause were otherwise satisfactory, but we fear that, in practice, the sort of declaration from the court, which is the basis of the proposal, could not be made until a very considerable period had elapsed for investigation, discussion, argument and counter-argument and possibly appeal.

In the intervening period the new company would have carried on the undertaking, would have entered into business contracts and incurred liabilities, including the liability to tax upon profits. On a declaration being made under the Clause that the act was void the new company would lose the property. But the Clause makes no provision for the contracts and the liabilities of the new company to be transferred back to the old company. There is the more important point that in the intervening period, which would be rather extensive, the new company might have developed and changed quite substantially in its character from the character of the old company.

Those are practical objections. There is also the perhaps even more practical objection of the very great difficulty of deciding what was the main purpose of the company reconstruction. My impression is that this phraseology was taken from some of the Profits Tax legislation which I am told is not very easy to administer. The problem is to find an effective test to decide between the genuine case and what one would call the artificial or fictitious case.

We have studied the Clause very carefully and we are obliged for the suggestion it contains, but we do not feel that this method would be satisfactory. We are studying, deliberately and carefully, methods of dealing with the problem. I hope that what I have to say will be noted. I hope that no reputable firm or responsible professional adviser will regard this type of device as the sort of thing they should adopt. I say that quite clearly. I would also say that it is undoubtedly to the general disadvantage that this type of practice should develop. It should not be assumed by companies that it is necessarily in their own advantage that they should do this.

We are studying carefully what should be done. I do not want to say too much about what we are likely to do because, in trying to tackle questions of tax avoidance, it is not always wise to give too much notice in advance of what we intend to do. I would leave it that we accept much of what hon. Gentlemen opposite say about this problem, and that we do not think the use of this device to avoid taxation is the sort of thing in which a reputable firm or a reputable company should engage.

In view of his responsibilities and his interest in the matter, my right hon. Friend is keeping a careful eye on the position and he will not hesitate to take action—if necessary, drastic action—if he considers that the state of the public revenue call for it. I cannot go beyond that. We cannot accept this new Clause as it stands. We do not believe that it is the right way to deal with the problem, but I assure hon. Gentlemen opposite that what I have said I have most carefully considered and it is most sincerely meant.

Mr. William Ross (Kilmarnock)

The hon. Gentleman made it plain at the start of his speech that what these companies were doing was legal. How, then, can he ask -us to accept this suggestion that the Chancellor will take action? Cannot he tell us what kind of action will be taken? If it is legal what kind of action can be taken?

Mr. Frederic Harris (Croydon, North)

I have listened to every word of this discussion and I am rather confused. I should like to ask one or two questions. Am I not right in saying that the tax to which reference is made is the future assessment of tax based on the profits the companies have made in the past year or so? If so, this is not a question of avoidance of tax on profits that the companies themselves have made: this is a question of stopping the immediate payment of tax on high profits which would have followed if the assessment had gone on and the companies had traded as they were. If that is so—

Mr. Ross

That is not so.

Mr. Harris

I am not trying to cover up any point. I enter into the argument on a serious basis.

If the profits have gone on a very high level and then, suddenly, there has been a stump and if the companies had to continue paying the tax in the subsequent year on the same basis, they would, presumably, be up against it financially. They just could not meet their obligations and the tax demands. As the tax people would not wait for the payment of such tax, presumably these companies might go broke.

On the other hand, if they are able to go into voluntary liquidation and then start again, then, as long as they are not avoiding the payment of tax—

Mr. Mitchison

Does not it occur to the hon. Gentleman that the simplest way of avoiding that difficulty is to provide for the tax when one makes the profit?

Mr. Harris

I do not disagree with the hon. and learned Member about that, but where companies have been trading on a very high basis and, possibly, using resources which they should not have used—over-trading, in fact—it may be that they are in difficulty if they meet the additional tax demands very quickly. The point I want to make is that by this device the companies would avoid paying tax on profits actually made. I understand that the answer is, "Yes" and that satisfies me.

Mr. Jack Jones

I have sat in the House for many years and listened to many discussions. I pay tribute to the Economic Secretary. Usually he comes to the Dispatch Box and sweeps away his notes and seems very composed in his answers. I have never seen him more perplexed and uncertain of his case than he was today. The hon. Gentleman nods. I think he agrees.

Mr. Maudling

indicated dissent.

Mr. Jones

I am not a lawyer, an economist, or a textile manufacturer, but the facts of this case are simple. It seems that if the law is to remain as it is now the textile industry, in particular, will, in the boom years, profit accordingly and will also profit in the lean years. Those in the industry will form a new company. The same faces, the same personnel, the same shareholders will continue to wax fat, however the cat jumps. In ordinary workmen's English it is nothing but a racket—a legal twist.

The textile industry is the one industry which cannot afford to have this sort of thing. Hon. Gentlemen opposite may ask what I know about this industry when I am supposed to be a steel expert. I did not represent Bolton for five years without knowing something about what was going on in the textile industry. This is the one industry where people are being told to pull up their socks, to accept redeployment, new forms and conditions and face intensive competition. The Japanese are literally working on roller skates and Germany is coming into the picture.

The workers in Lancashire who fear slumps and all that goes with them are now being told by the public Press and HANSARD, and in other ways, that this sort of thing is to be allowed. The psychological effect on them will be disastrous when they are told that people remote from industry, with no other connection except that of money, can, by the exploitation of this loophole, keep on taking money out of the industry which the industry cannot afford.

The industry wants new machinery and new ideas, and here we have illustrations, in 56 cases given in the public Press, in which, by the simple addition of the one word "holding," companies are allowed to do this sort of thing. The Economic Secretary suggests that it was done for purposes of reconstruction; it was done for nothing else but to give to those who already have a little extra, and to make it more awkward for those who work in the industry successfully to compete with their competitors.

I suggest that the Government should find a better answer than the one they have given us; otherwise, we should register our protest against what I consider to be a racket and a legal twist by going into the Division Lobbies and showing that we will have nothing to do with this business.

6.30 p.m.

Sir F. Soskice

I am quite sure that everybody will agree that we have had a very useful debate, because it has uncovered a very serious state of affairs. It has uncovered a situation in which companies, acting within the law, may, nevertheless, impose on the shoulders of their fellow taxpayers liability for tax which they themselves escape running into a figure of £10 million for this year.

What can be done this year can probably also be done next year, although the Economic Secretary has said that it applied only to the preceding year. My hon. Friend the Member for Ashton-under-Lyne (Mr. Rhodes) instanced the manufacturers of munitions and armaments, and we on this side of the House take a very serious view of this particular matter. If, as I hope, the House feels that it is ready to come to a decision, the question is: what is the decision to which we should come? The Economic Secretary I must say, has not gone anything like far enough. It is not as if this matter has just been brought to his notice.

It is difficult for the Government, on Report, to rectify a matter of this sort, but my hon. Friend the Member for Ashton-under-Lyne in most specific terms on Second Reading, drew attention to this particular situation. When the Committee stage came round, we put down a Clause which was not selected, and that is not a matter on which I could possibly have any complaint, but its very presence on the Order Paper should have brought clearly to the notice of the Government the existence of the problem and the urgency of the need to deal with it.

The Economic Secretary when considering the matter, must have been informed of the dimensions of the problem; he must have been made aware of its seriousness. The question is whether he has gone far enough in simply indicating that

we are on the Report stage and that he and those associated with him disapprove of this kind of procedure. I hope that my hon. Friends will agree that he has not gone far enough, because he has had plenty of warning and we have done everything we could to bring the matter to his notice.

The Economic Secretary has also raised criticism of the new Clause. We on this side of the House are limited by certain rules of order, and we must not, in our drafting, impose charges on the subject without the covering of a Financial Resolution. Accordingly, when we wish to initiate a debate of this sort, we could only put down a Clause that did not offend against the rules of order. You, Mr. Speaker, by calling the new clause, endorsed the view which we ourselves had formed, that the Clause was in order, and it certainly gratified us to see that it was.

I should have thought that, if not inhibited by the rules of order, it would have been quite possible to provide that, in regard to transactions of this sort, if the court declared that they were entered into with the object of avoiding tax, the company doing so should in the ordinary way be taxed on the preceding year's profits. That would be a way round it.

Unfortunately, the Government have left the matter in the situation in which we are to go for a whole year without anything being done, unless the position is dealt with by the introduction of a separate Measure. I do not know whether the Government propose to do that, but I gather from the Economic Secretary that they do not. The hon. Gentleman simply says that he does not like this type of transaction, and that is the very least which he could have said. I therefore hope that my hon. Friends will feel that they should take this matter to a Division, if for no other purpose than that of emphasising the seriousness with which they regard this particular type of transaction.

Question put, "That the Clause be read a Second time."

The House divided: Ayes, 220; Noes, 244.

Division No. 218.] AYES [6.37 p.m.
Acland, Sir Richard Anderson, Alexander (Motherwell) Bacon, Miss Alice
Albu, A. H. Anderson, Frank (Whitehaven) Barnes, Rt. Hon. A. J.
Allen, Arthur (Bosworth) Attlee, Rt. Hon. C. R. Bartley, P.
Allen, Scholefield (Crewe) Awbery, S. S Bellenger, Rt. Hon. F. J
Bence, C. R. Hannan, W. Plummer, Sir Leslie
Benn, Hon. Wedgwood Hargreaves, A. Popplewell, E.
Benson, G. Harrison, J. (Nottingham, E.) Price, Joseph T. (Westhoughton)
Beswick, F. Hastings, S. Proctor, W. T.
Bing, G. H. C. Hayman, F. H. Pryde, D. J.
Blackburn, F. Healey, Denis (Leeds, S. E.) Pursey, Cmdr. H.
Blenkinsop, A. Henderson, Rt. Hon. A. (Rowley Regis) Rankin, John
Blyton, W. R. Herbison, Miss M. Reid, Thomas (Swindon)
Boardman, H. Hobson, C. R. Reid, William (Camlachie)
Bottomley, Rt. Hon. A. G. Holman, P Rhodes, H.
Bowden, H. W. Holmes, Horace (Hemsworth) Richards, R.
Bowles, F. G. Houghton, Douglas Roberts, Rt. Hon. A.
Braddock, Mrs. Elizabeth Hoy, J. H. Ross, William
Brockway, A. F. Hubbard, T. F. Royle, C.
Brook, Dryden (Halifax) Hudson, James (Ealing, N.) Shackleton, E. A. A.
Broughton, Dr. A. D. D. Hughes, Hector (Aberdeen, N.) Shinwell, Rt. Hon. E.
Brown, Rt. Hon. George (Belper) Hynd, H. (Accrington) Short, E. W.
Brown, Thomas (Ince) Irvine, A. J. (Edge Hill) Silverman, Sydney (Nelson)
Burke, W A. Irving, W. J. (Wood Green) Simmons, C. J. (Brierley Hill)
Burton, Miss F. E. Isaacs, Rt. Hon. G. A. Skeffington, A. M.
Butler, Herbert (Hackney, S.) Janner, B. Slater, Mrs. H. (Stoke-on-Trent)
Carmichael, J. Jay, Rt. Hon. D. P. T. Slater, J. (Durham, Sedgefield)
Castle, Mrs. B. A. Jeger, George (Goole) Smith, Ellis (Stoke, S.)
Clunie, J. Jeger, Dr. Santo (St. Pancras, S.) Snow, J. W.
Coldrick, W. Jones, David (Hartlepool) Sorensen, R. W.
Collick, P. H. Jones, Frederick Elwyn (West Ham, S.) Soskice, Rt. Hon. Sir Frank
Corbet, Mrs. Freda Jones, Jack (Rotherham) Sparks, J. A.
Cove, W. G. Keenan, W. Steele, T.
Craddock, George (Bradford, S.) Key, Rt. Hon. C. W Stokes, Rt. Hon. R. R.
Crosland, C. A. R. King, Dr. H. M. Strauss, Rt. Hon. George (Vauxhall)
Crossman, R. H. S. Kinlay, J. Stross, Dr. Barnett
Cullen, Mrs. A. Lee, Miss Jennie (Cannock) Summerskill, Rt. Hon. E
Daines, P. Lever, Leslie (Ardwick) Swingler, S. T.
Dalton, Rt. Hon. H. Lewis, Arthur Sylvester, G. O.
Darling, George (Hillsborough) Lindgren, G. S. Taylor, Bernard (Mansfield)
Davies, Ernest (Enfield, E.) Lipton, Lt.-Col. M. Taylor, John (West Lothian)
Davies, Harold (Leek) Logan, D. G. Taylor, Rt. Hon. Robert (Morpeth)
Davies, Stephen (Merthyr) McGhee, H. G. Thomas, Ivor Owen (Wrekin)
de Freitas, Geoffrey McGovern, J. Thomson, George (Dundee, E.)
Deer, G. McInnes, J. Thornton, E.
Delargy, H. J. McKay, John (Wallsend) Timmons, J.
Dodds, N. N. McLeavy, F. Tomney, F.
Donnelly, D. L. MacPherson, Malcolm (Stirling) Turner-Samuels, M.
Driberg, T. E. N. Mallalieu, J. P. W. (Huddersfield, E.) Ungoed-Thomas, Sir Lynn
Dugdale, Rt. Hon. John (W. Bromwich) Mann, Mrs. Jean Viant, S. P.
Ede, Rt. Hon. J. C. Manuel, A. C. Wade, D. W.
Edelman, M. Marquand, Rt. Hon. H. A. Wallace, H. W.
Edwards, Rt. Hon. John (Brighouse) Mason, Roy Wells, Percy (Faversham)
Edwards, W. J. (Stepney) Mayhew, C. P. Wells, William (Walsall)
Evans, Albert (Islington, S. W.) Messer, Sir F. Wheatley, Rt. Hon. John
Evans, Stanley (Wednesbury) Mikardo, Ian Wheeldon, W. E.
Fernyhough, E. Mitchison, G. R. White, Mrs. Eirene (E. Flint)
Flelcher, Eric (Islington, E.) Monslow, W. White, Henry (Derbyshire, N. E.)
Follick, M. Moody, A. S. Whiteley, Rt. Hon. W.
Foot, M. M. Morgan, Dr. H. B. W. Wigg, George
Forman, J. C. Morley, R. Wilcock, Group Capt. C. A. B.
Freeman, John (Watford) Morrison, Rt. Hon. H. (Lewisham, S.) Wilkins, W. A.
Gaitskell, Rt. Hon. H. T. N. Moyle, A. Willey, F. T.
Mulley, F. W. Williams, Rt. Hon. Thomas (Don V'll'y)
Gibson, C. W. Nally, W. Williams, W. R. (Droylsden)
Glanville, James Neal, Harold (Bolsover) Williams, W. T. (Hamersmith, S.)
Gordon-Walker, Rt. Hon. P. C. Noel-Baker, Rt. Hon. P. J Winterbottom, Ian (Nottingham, C.)
Greenwood, Anthony (Rossendale) Oliver, G. H. Winterbottom, Richard (Brightside)
Grey, C. F. Orbach, M. Woodburn, Rt. Hon A.
Griffiths, Rt. Hon. James (Llanelly) Oswald, T. Wyatt, W. L.
Griffiths, William (Exchange) Padley, W. E. Yates, V. F.
Grimond, J. Palmer, A. M. F. Younger, Rt. Hon. K.
Hale, Leslie Pannell, Charles
Hall, Rt. Hon. Glenvil (Colne Valley) Pargiter, G. A. TELLERS FOR THE AYES:
Hall, John T. (Gateshead, W.) Parker, J. Mr. Kenneth Robinson and
Hamilton, W W. Peart, T. F. Mr. James Johnson.
NOES
Aitken, W. T. Banks, Col. C. Boothby, Sir R. J. G.
Allan, R. A. (Paddington, S.) Barber, Anthony Boyd-Carpenter, J. A.
Alport, C. J. M. Baxter, A. B. Boyle, Sir Edward
Amery, Julian (Preston, N.) Beamish, Maj. Tufton Braithwaite, Sir Albert (Harrow, W.)
Amory, Heathcoat (Tiverton) Bell, Ronald (Bucks, S.) Braithwaite, Lt.-Cdr. G. (Bristol, N. W.)
Anstruther-Gray Major W. J. Bennett, F. M. (Reading, N.) Bromley-Davenport, Lt.-Col. W. H.
Ashton, H. (Chelmsford) Bennett, Dr. Reginald (Gosport) Brooke, Henry (Hampstead)
Assheton, Rt. Hon. R. (Blackburn, W.) Bennett, William (Woodside) Brooman-White, R. C.
Astor, Hon. J. J. Bevins, J. R. (Toxteth) Browne, Jack (Govan)
Baldock, Lt.-Cmdr. J. M. Birch, Nigel Buchan-Hepburn, Rt. Hon. P. G. T.
Baldwin, A. E Bishop, F. P. Bullus, Wing Commander E. E.
Burden, F. F. A. Hyde, Lt.-Col. H. M. Peyton, J. W. W
Butcher, Sir Herbert Hylton-Foster, H. B. H. Pitman, I. J.
Bulter, Rt. Hon. R. A. (Saffron Walden) Jenkins, Robert (Dulwich) Pill, Miss E. M.
Campbell, Sir David Johnson, Eric (Blackley) Powell, J. Enoch
Carr, Robert Johnson, Howard (Kemptown) Price, Henry (Lewisham, W.)
Cary, Sir Robert Jones, A. (Hall Green) Prior-Palmer, Brig. O. L.
Channon, H. Joynson-Hicks, Hon. L. W Profumo, J. D.
Clarke, Col. Ralph (East Grinstead) Kaberry, D. Raikes, Sir Victor
Clyde, Rt. Hon. J. L. Kerr, H. W. Rayner, Brig. R.
Colegate, W. A. Lambton, Viscount Rees-Davies, W. R.
Cooper, Sqn. Ldr. Albert Lancaster, Col. C. G. Remnant, Hon. P.
Cooper-Key, E. M. Langford-Holt, J. A. Renton, D. L. M.
Craddock, Beresford (Spelthorne) Law, Rt. Hon. R. K. Roberts, Peter (Heeley)
Crosthwaite-Eyre, Col. O. E Leather, E. H. C. Robinson, Roland (Blackpool, S.)
Crouch, R. F. Legge-Bourke, Maj. E. A. H. Rodgers, John (Sevenoaks)
Crowder, Sir John (Finchley) Legh, Hon. Peter (Petersfield) Ropner, Col. Sir Leonard
Cuthbert, W. N. Lennox-Boyd, Rt. Hon. A. T. Russell, R. S.
Darling, Sir William (Edinburgh, S.) Lindsay, Martin Ryder, Capt. R. E. D.
Deedes, W. F Linstead, Sir H. N. Salter, Rt. Hon. Sir Arthur
Digby, S. Wingfield Lloyd, Maj. Sir Guy (Renfrew, E.) Scott, R. Donald
Dodds-Parker, A. D. Lloyd, Rt. Hon. Selwyn (Wirral) Scott-Miller, Cmdr. R.
Donaldson, Cmdr. C. E. McA Lockwood, Lt.-Col. J. C Simon, J. E. S. (Middlesbrough, W.)
Doughty, C. J. A. Longden, Gilbert Smithers, Peter (Winchester)
Douglas-Hamilton. Lord Malcolm Low, A. R. W. Smithers, Sir Waldron (Orpington)
Drayson, G. B. Lucas, Sir Jocelyn (Portsmouth, S.) Smyth, Brig. J. G. (Norwood)
Drewe, Sir C. Lucas, P. B. (Brentford) Snadden, W. McN.
Duncan, Capt. J. A. L Lucas-Tooth, Sir Hugh Spearman, A. C. M.
Eccles, Rt. Hon. Sir D. M McAdden, S. J. Speir, R. M.
Elliot, Rt. Hon. W. E. McCallum, Major D. Spens, Sir Patrick (Kensington. S.)
Fell, A. McCorquodale, Rt. Hon. M. S Stanley, Capt. Hon. Richard
Finlay, Graeme Mackeson, Brig. H. R. Steward, W. A. (Woolwich, W.)
Fisher, Nigel McKibbin, A. J. Stewart, Henderson (Fife, E.)
Fleetwood-Hesketh, R. F. Mackie, J. H. (Galloway) Stoddart-Scott, Col. M.
Fletcher-Cooke, C. Maclay, Rt. Hon. John Storey, S.
Ford, Mrs. Patricia Maclean, Fitzroy Strauss, Henry (Norwich, S.)
Fraser, Sir Ian (Morecambe & Lonsdale) Macleod, Rt. Hon. Iain (Enfield, W.) Studholme, H. G.
Galbraith, Rt. Hon. T. D. (Pollok) MacLeod, John (Ross and Cromarty) Summers, G. S.
Galbraith, T. G. D. (Hillhead) Macpherson, Niall (Dumfries) Sutcliffe, Sir Harold
George, Rt. Hon. Maj. G. Lloyd Maitland, Patrick (Lanark) Taylor, Charles (Eastbourne)
Godber, J. B. Manningham-Buller, Sir R. E. Taylor, William (Bradford, N.)
Gomme-Duncan, Col. A. Markham, Major Sir Frank Thomas, Rt. Hon. J. P. L. (Hereford)
Gough, C. F. H. Marlowe, A. A. H. Thomas, Leslie (Canterbury)
Gower, H. R. Marplot, A. E. Thomas, P. J. M. (Conway)
Graham, Sir Fergus Marshall, Sir Sidney (Sutton) Thompson, Kenneth (Walton)
Gridley, Sir Arnold Maude, Angus Thompson, Lt.-Cdr. R. (Croydon, W.)
Grimston, Hon. John (St. Albans) Maudling, R. Thorneycroft, Rt. Hn. Peter (Monmouth)
Grimston, Sir Robert (Westbury) Maydon, Lt.-Comdr. S. L. C. Thornton-Kemsley, Col. C. N.
Hall, John (Wycombe) Medlicott, Brig. F. Tilney, John
Harden, J. R. E. Mellor, Sir John Touche, Sir Gordon
Harris, Frederic (Croydon, N.) Molson, A. H. E. Turner, H. F. L
Harrison, Col. J. H. (Eye) Monckton, Rt. Hon. Sir Walter Turton, R. H.
Harvey, Air Cdre. A. V. (Macclesfield) Morrison, John (Salisbury) Vane, W. M. F.
Harvey, Ian (Harrow, E.) Mott-Radclyffe, C. E. Vaughan-Morgan, J. K
Harvie-Watt, Sir George Nabarro, G. D. N. Vosper, D. F.
Hay, John Neave, A. M. S Wakefield, Edward (Derbyshire, W.)
Heath, Edward Nicholls, Harmar Wakefield, Sir Wavell (St. Marylebone)
Henderson, John (Cathcart) Nicholson, Godfrey (Farnham) Walker-Smith, D. C.
Higgs, J. M. C. Nicolson, Nigel (Bournemouth, E.) Ward, Hon. George (Worcester)
Hill, Dr. Charles (Luton) Nield, Basil (Chester) Ward, Miss I. (Tynemouth)
Hill, Mrs. E. (Wythenshaw) Noble, Cmdr. A. H. P Waterhouse, Capt. Rt. Hon. C.
Hinchingbrooke, Viscount Nugent, G. R. H. Webbe, Sir H. (London & Westminster)
Hirst, Geoffrey Oakshott, H. D. Wellwood, W.
Holland-Martin, C. J Odey, G. W. Williams, Gerald (Tonbridge)
Hope, Lord John O'Neill, Phelim (Co. Antrim, N.) Williams, Sir Herbert (Croydon, E.)
Hornsby-Smith, Miss M. P. Orr, Capt. L. P. S. Williams, Paul (Sunderland, S.)
Horobin, I. M. Orr-Ewing, Charles Ian (Hendon, N.) Williams, R. Dudley (Exeter)
Howard, Hon. Greville (St. Ives) Orr-Ewing, Sir Ian (Weston-super-Mare) Wills, G.
Hudson, W. R. A. (Hull, N.) Osborne, C. Wilson, Geoffrey (Truro)
Hulbert, Wing Cdr. N. J. Partridge, E. Wood, Hon. R.
Hutchinson, Sir Geoffrey (Ilford, N.) Peake, Rt. Hon. O.
Hutchison, Lt.-Com. Clark (E'b'rgh, W.) Peto, Brig. C. H. M TELLERS FOR THE NOES:
Major Conant and Mr. Redmayne.