Clause 17.—(CHANGES IN OWNERSHIP OF TRADE, ETC., OR TERMS OF PARTNERSHIP.) (Hansard, 17 June 1953)

§ The Chairman
Mr. Stevens.

§ The Chairman
Did the hon. Member for Islington, East (Mr. E. Fletcher) stand up just now when I called him?

Hon. Members
No.

§ Mr. Fletcher
It was difficult to hear what was happening, Sir Charles.

§ The Chairman
I called the hon. Gentleman, whose name appears on the first Amendment on the Paper to this Clause. I called the names of the two other hon. Members whose names appear on the Amendment. Then I called "Mr. Stevens," to move his Amendment.

§ Mr. Fletcher
I could not hear, Sir Charles, because there was so much noise. I apologise, of course.

§ The Chairman
I have now called the next Amendment. The hon. Gentleman the Member for Islington, East, is not sitting in his usual place, but, still, I did not see him stand up when I called his name.

Hon. Members
He did not.

§ Mr. Hugh Gaitskell (Leeds, South)
With very great respect, Sir Charles, we have had a very reasonable discussion on this Bill so far. It was the case that a great deal of noise was going on. I am sure the Government will raise no difficulty about this, and I would respectfully suggest to you that it is not unreasonable to allow my hon. Friend to move his Amendment.

§ The Chairman
I am bound by the rules of order. I, personally, should be perfectly happy to allow the hon. Member to move his Amendment, but I 977 am bound by the rules. I had already called the hon. Member for Islington, East. I called, "Mr. Fletcher, Mr. Douglas Houghton, Mr. Albu." I looked around. No one stood up. Then I called the next Amendment.

§ Mr. Fletcher
It was very difficult to hear you, Sir Charles. I apologise for sitting here rather than my usual place.

§ The Chairman
Order. I have called the next Amendment. The hon. Gentleman did not stand up and attract my attention when I called him. I looked round, and I called three names in connection with this Amendment. No one stood up. Therefore, I went on to the next Amendment.

§ Mr. Fletcher
With great respect, Sir Charles, there was so much noise in the Chamber that it was very difficult to hear what names you were calling. We were dealing with Clauses 15 and 16. Will you allow me to move my Amendment?

§ The Chairman
If the Committee will allow me to do so, I propose this course. If the hon. Gentleman assures me that he was in the Committee when his name was called, I will allow him to move his Amendment.

§ Mr. Fletcher
Yes, Sir Charles, I was here.
I beg to move, in page 12, line 27, to leave out subsection (2).
Clause 17 is a somewhat complicated Clause which is designed to give effect to some of the recommendations of the Mil-lard Tucker Committee dealing with the abstruse subject of the taxation of partnerships where there has been a change in the constitution of a partnership firm. It will be appreciated that the bulk of the Clause deals with what is to take place when there is a change in the constitution of a firm.
Broadly speaking, the Clause reverses the present option when a change takes place: In other words, whereas at present when a change takes place in the constitution of a firm there is an option on the partners to elect that the change will operate as a cessation or termination of the business for taxation purposes; in future, pursuant to the recommendations of the Tucker Committee, there will be an automatic cessation for taxation purposes, but the partners will have an 978 option to elect that for taxation purposes the partnership should be treated as if it were continuous.
In addition to that, subsection (2), which it is the object of this Amendment to delete, deals with a different but related subject. It deals with what is to happen when there is a change in the allocation of profits among the partners of a partnership firm. The object of this Amendment is to delete the subsection, for a variety of reasons.
In the first place, it does not carry out the recommendations of the Tucker Committee, not that that in itself would be an objection, because, after all, the recommendations of the Committee are not sacrosanct. But I think what has emerged from the drafting of this subsection is that the Government, in making an attempt to carry out and even extend the recommendations of the Tucker Committee, have exposed an underlying fallacy in the recommendations of that Committee.
If I may read exactly what the Tucker Committee say, it will, perhaps, make it easier to appreciate the significance of this Amendment. The Tucker Committee say, in paragraph 72 (d): Where there is a change in the basis of allocation of profits among the partners the cessation provisions should apply if, and only if, there is a formal dissolution in writing of the partnership followed by the creation of a new partnership, and notice in writing is given to the Inland Revenue within a specified period. This subsection, I think the Solicitor-General will agree, does not purport to adopt the ipsissima verba or indeed the object of the Tucker Committee with the limitations which it contains. It seeks to go very much further. It seeks to provide that in future, if there is any variation in the allocation of the profits of a partnership among the partners interested, then any one partner can have the right to say that these shall for taxation purposes be profits on cessation.
The fallacy underlying the Tucker Committee's recommendation is this. They appear to assume that all partner, ship agreements are recorded in writing, because they refer to the necessity for a document of dissolution. It is notoriously not the case that all partnership agreements are recorded in writing. They may well be among stockbrokers, solicitors, accountants, and other professional 979 people, but there are throughout the country a large number of small traders carrying on business in partnership who have never found it necessary to record the terms of their partnership in writing. There are something like 20,000 assessments of partnerships, of which only 4,850 are for amounts of over £5,000. The subject with which we are dealing is the liability to taxation of this manifold variety of traders, as well as professional people, who carry on business in partnership.
It has always been understood that people who carry on business in partnership should have the maximum amount of fluidity and flexibility for the kind of arrangements they wish to make among themselves, because they vary from one trade to another and from one business to another. There may be family businesses in which all the partners are members of one family, or partnerships in which there is no family relationship, or businesses in which new partners frequently come in and others go out. Very often there are salaried partners.
It is by no means always the case that partners decide at the beginning of the year that the profits shall be divided in such and such percentages among themselves at the end of the year. They may well decide, and frequently do, that each partner snail have a certain minimum salary, and that after the salaries have been paid the resultant net profits shall be divided. They may even not make their final arrangements at the beginning of the year.
One of the vital objections which I see to this subsection is that in future it will make it extremely difficult, if not impossible, for any firm carrying on business in partnership to make any change in its domestic arrangements as the year proceeds, because if it does it will come up against the difficulty that the change, however slight, may involve it in being subject to a totally different basis of taxation. Everybody knows that electing whether to be taxed as if there has been a cessation or as if the business is a continuing one involves an element of gamble, because more often than not the option has to be exercised at a time when the past profits are known, and when some reasonable guess may be made of the current profits, but when the future 980 profits cannot possibly be foretold. It is therefore very difficult to tell whether it will suit all or some of the partners to exercise the option. Parliament has always recognised that there should be that option in appropriate cases, that the taxpayers should have that choice where there has been a change in the constitution of the firm, which is reasonable when some partners go out and cease to trade and others come in.
The arguments which apply where there is a change in the constitution are quite sound, but those same arguments cannot possibly be held to justify giving an option to any one partner to elect for a change in the whole basis of taxation merely because there has been some variation in the way in which the partners divide the profits among themselves. Let me take a specimen case, with which the Solicitor-General will no doubt be familiar. Frequently when there are salaried partners it is desired to increase somebody's salary. It is no less desirable to increase the salary because the man happens to be a salaried partner, but such an increase in salary would amount to a change under subsection (2), because it would be a change in the manner in which the partners share the profits or gains of the trade "— or, at any rate, I think the Solicitor-General would agree it might well be so construed.
3.45 p.m.
If there were a change of that kind— and it need not be an increase in the basic salary; it may be an increase in somebody's commission—any change, however trivial, would mean that any of the partners could elect to exercise this option under subsection (2) perhaps to the detriment of the whole firm, or perhaps to the detriment of other partners. The mere fact that such a contingency could arise would make it much more difficult for firms trading in partnership to grant that kind of increase in salary or to make that kind of change which nowadays is a commonplace of trading relationships. Therefore, my first objection to this subsection is that it would operate to make it more difficult for firms to carry on their business.

§ The Solicitor-General (Sir Reginald Manningham-Buller)
Perhaps I might interrupt the hon. Gentleman. His first 981 objection appears to be a pretty weighty one, and perhaps I might indicate that, for reasons which I will give briefly, we propose to accept the Amendment. I therefore hope it will not be necessary for the hon. Gentleman to elaborate his second, third and fourth objections.

§ Mr. Fletcher
I am very pleased to hear that, because in fact I have six other arguments. However, in view of that very welcome intervention by the Solicitor-General, I obviously shall not find it necessary to weary the Committee with the full force of the further arguments I was proposing to adduce for this Amendment.

§ The Solicitor-General
I should like just to say this. We are glad to accept this Amendment. We have given careful consideration to this point again after the hon. Gentleman put down his Amendment. This Clause does seek to implement the principle that lies behind one part of the Millard Tucker Report. The really important provision with regard to partnerships is contained in subsection (1), but we feel that there is great force in the argument that the insertion of subsection (2) might act as a deterrent to variations of salaries which might be desirable in partnerships. We therefore propose to accept this Amendment, on the understanding that it may be necessary to make some consequential Amendments at a later stage, although it is unnecessary to deal with them at the present moment.

§ Mr. Fletcher
If I may say so, I am very grateful to the Solicitor-General and the Government for having accepted this Amendment.

§ Mr. G. P. Stevens (Portsmouth, Langstone)
I beg to move, in page 13, line 26, to leave out from "forty-two." to "there," in line 27.
Section 343 of the Income Tax Act deals with the transfer to companies of the business of firms and the carrying forward of losses of the firm to the company if the persons who own the shares in the company are the same, in broad terms, as the persons who were partners in the firm, or an individual in the case of a single-man company. Subsection (3) provides that if there is a change in the trade—and under the Clause the trade is treated as permanently discontinued— 982 but the same person continues to be engaged in it, the new firm will succeed to the available losses of the old. I am very glad to see that subsection (3, c) extends this right of succession to available capital allowances, but the words which I propose should be omitted exclude that concession of available capital allowances when the successor is a limited company.
It seems to me that what is being taxed in this case is not so much individuals or limited companies, but in fact the profits on a business, and for Income Tax purposes the capital allowances are deducted from profits or added to losses as the case may be. When there is a change from a firm to a limited company, it is true that the legal ownership becomes different, but it is the same business, they are the same profits and they are, I think, the same capital allowances.
I wonder, therefore, whether the Clause, as it stands at present, is not rather illogical. The capital allowances are available if it is a firm which is a successor to the business but are not available if it is a limited company which succeeds and has the same profits and the same business. I do not see the reason for differentiating, and I hope that, if my hon. and learned Friend agrees, he will accept the Amendment.

§ The Solicitor-General
I regret to have to disappoint my hon. Friend. The Government cannot accept this Amendment, and the short answer to the point which he has put forward so ably is that Section 343 of the Income Tax Act, 1952, has no application to capital allowance and consequently it is excluded from the scope of subsection (3, c) of this Clause, which merely ensures that the present position shall continue.
It is quite inappropriate to propose any amendment of the law in that respect which would affect transfers to a company by partnership but would not affect any change in relation to similar transfers by an individual. Indeed, I think the effect of the Amendment, if we accepted it, would be that it would apply to some partnerships in which, before the transfer to the company, there had been a change in partnership to which succession treatment had been applied. I hope that I have said enough to satisfy my hon Friend that we have considered this point 983 very carefully; but for the reasons which I have advanced we regret that we are unable to accept the Amendment.

§ Mr. Stevens
Although I am disappointed, I am satisfied with the hon. and learned Gentleman's reply, and therefore I beg to ask leave to withdraw the Amendment.

§ Mr. E. Fletcher
I beg to move, in page 14, line 5, at the end, to insert: Provided that where such a change arises by reason of the death of a partner it shall not be necessary for such notice to be signed by the personal representatives of the deceased partner. This Amendment is designed to give effect to a specific recommendation of the Tucker Committee. It does not deal with the subsequent part of the recommendation, namely, the situation in which, where there is a change in the constitution of a firm, any one partner can obtain the benefit of the option to elect that there shall not be succession by giving notice to all the other partners that he desires the partnership to be treated for taxation purposes on a continuing basis.
In order to exercise that option, notice has to be given to all the other partners. A change in the constitution of a firm very often occurs by reason of the death of a partner, and if a partner dies, and therefore there is a change, notice cannot be given to a partner who is dead, and notice has to be given to the personal representatives.
The Tucker Committee specifically deals with the situation in paragraph 72 (b) where they say: (Where the change arises by reason of the death of a partner, the surviving partners shall be entitled to exercise the option without being required to secure the agreement of the deceased's personal representatives.) I do not know whether the Government accept that recommendation or whether they do not, but, if the Government accept it, then it is clearly necessary to have some words in the Clause to give effect to it. I think that the appropriate words to insert at the end of subsection (4) would be: Provided that where such a change arises by reason of the death of a partner it shall not be necessary for such notice to be signed by the personal representatives of the deceased partner. 984 It will be observed that, in order effectively to exercise the option, all the partners have to concur in the exercise of the option. That involves, therefore, the representatives of the deceased partner. I do not know whether the Solicitor-General thinks that the matter is sufficiently dealt with in the words at the end of subsection (7) because, as I understand the Clause, the concluding words of subsection (7) deal with a totally different subject. They deal with a contingency which would have operated if subsection (2), which is now omitted, had remained in the Clause. I hope that, in order to make it clear that the consent of the deceased partner's representatives is to be dispensed with, these words may be added to the Clause.

§ The Solicitor-General
I am sorry to have to disappoint the hon. Gentleman, but I cannot accept the Amendment. He is quite right in saying that the Amendment which he proposes would bring this part of the Bill more into line with the recommendation of the Millard Tucker Committee, and it is a deliberate decision of the Government, for the reasons which I am going to explain very shortly, to depart from that provision.
The effect of subsection (1), as the hon. Gentleman will appreciate, is to reverse the present practice. Under the present practice, the partnership will continue unless all the partners elect that it should cease. Under the changes recommended by the Millard Tucker Report and given effect to by this Bill, we get the reverse, that there is a cessation unless all the partners agree that it should carry on. The reason for that change is that it has been found that automatic continuance of a partnership may result in great inequality and hardship on individual partners.
If we once accept that position, and stipulate that all the partners should have to agree that the partnership, although changed, continues, it seems quite illogical to say that we should not also require to have the assent of the representatives of the deceased partner, because if we omit the representatives of the deceased partner from the list of those who have to assent, it may well mean that the deceased partner's estate would be penalised by taxation in a way which might happen now and in a way which this Bill is seeking to cure. After all, if a partner 985 has retired but is surviving, he will have something to say on whether there should be cessation or not.
4.0 p.m.
It seems to us that here we have to depart from this recommendation of paragraph 72 (b) of the Millard Tucker Report in order, as far as we can, to ensure that there is equity and fairness, and that the estate of a deceased person may not, in particular cases, suffer inequalities regarding taxation by reason of the omission of the necessity to consent. I hope that that explanation will satisfy the hon. Gentleman that we are right in making this small variation from the recommendations of the Report.

§ Mr. E. Fletcher
I am very grateful to the Solicitor-General for having given that explanation, and, personally, I was very impressed with what he said. In the circumstances, I beg to ask leave to withdraw the Amendment.