Clause 18.—(PAYMENTS BETWEEN ASSOCIATED COMPANIES IN RESPECT OF LOSSES.) (Hansard, 17 June 1953)

§ Mr. Stevens
I beg to move, in page 15, line 14, to leave out "for tax purposes."
I hope it will be convenient to the Committee if, with this Amendment, we discuss the next four Amendments in lines 17, 40, 43 and in page 16, line 20, to leave out the same words, and also the Amendment in page 16, line 22, to leave out from "by," to end of subsection, and insert: recognised accounting principles and after capital allowances. Clause 18 is one which I welcome very much, because it gives Income Tax relief to associated companies where the loss of one of those associated companies in a given year is made up by payments, under an agreement between the two companies, by one of the other associated companies in the group which has made a profit. I should be grateful if my hon. and learned Friend, when he replies, would indicate what kind of agreement is specified—whether it is an agreement under seal, an exchange of letters, or whether even a verbal agreement would be sufficient.
986 By this Clause the relief is limited to the lesser amount of the Income Tax surplus of the payer or the Income Tax deficit of the receiver, and these words "surplus" and "deficit" are defined under subsection (5) of the Clause. I know how difficult it is accurately to define these words, but I am not happy myself about the definitions which are given here, because these words are defined in such a manner that they are neither fish nor fowl nor good red herring.
The fact is that surpluses or deficits are not profits or losses which might be shown in the accounts of either of the companies concerned, nor are they even the Income Tax assessments of the companies concerned, save possibly in the case of a new business, for the simple reason that Income Tax assessments are normally based upon the preceding year's profits or losses, as the case may be, and not upon those made in the year of assessment.
As it stands, this Clause is unwieldy, and I think it would be difficult to interpret it in practice. I therefore suggest the omission of these words "for tax purposes," and instead the insertion of the words proposed in the last Amendment, which I believe are practical and have the merit of simplicity.

§ The Solicitor-General
I am sorry once more to have to disappoint my hon. Friend the Member for Langstone (Mr. Stevens), but I really cannot meet him on this series of Amendments. There is more in this than a mere matter of drafting, as I shall seek to indicate.
What my hon. Friend wants to do, by the deletion of the words "for tax purposes," would mean the adoption of a standard which might be easy to recognise but which could vary a great deal indeed. When one talks about recognised accountancy principles, recognition may vary from day to day and the principles may not always be agreed upon. It is extremely desirable that there should be some element of precision in these calculations so as to narrow, as far as possible, the area of dispute between the taxpayer and the Inland Revenue.
I am told that this is not just a matter of drafting in that, if we accept this proposed standard of recognised accountancy principles, it would, in fact, give 987 rather more latitude to companies than does the Clause as at present drafted. It might bring out larger figures of deficits which could be the subject of payments by the associated companies, and in principle there does not seem to us to be any reason for allowing this. In our view, it is right that, for Income Tax purposes, surpluses and deficits should be calculated according to Income Tax principles.
I must say that I do not think that my hon. Friend's fears about the difficulty of calculating according to Income Tax principles will be realised in practice. Those of us who have to look at these matters from time to time may take the view that it would be much more easy to arrive at the right result by calculating according to Income Tax principles than by adopting recognised accountancy principles, which may vary between industries, and, indeed, not only between industries but between different parts of the country.
If I may give an example, for the computation of a surplus or deficit, one could take, on recognised accountancy principles, the replacement cost basis, which is certainly not recognised for Income Tax purposes. When we are dealing with Income Tax here, it does seem to be right to take the standard which is laid down in the Bill.

§ Mr. Stevens
My hon. and learned Friend has said that it was better that this business of surplus and deficit should be calculated in accordance with Income Tax principles, but surely that is just what this subsection does not do. The subvention payments are made in respect of the current year—the year of assessment, as it were—but the adjustments provided by the Clause are based, in accordance with normal Income Tax principles, upon the preceding year and can have no relation at all to the current year.

§ The Solicitor-General
If my hon. Friend will look at subsection (5), he will see the matter defined in a certain way which, I think I am right in saying, accords with Income Tax principles.

§ Sir Frank Soskice (Sheffield, Neepsend)
May I also hope that the Solicitor-General will, as I think he hinted just now, reject this Amendment? Am I not 988 right in saying also that a good part of the objective which the hon. Gentleman has in mind is to some extent achieved, because profits are computed on accountancy principles, subject to any correction which the Income Tax Acts make in those accountancy principles? Broadly speaking, is not the object which he has in mind already met in the context of the Bill now before the Committee?
I would venture to hope that the Solicitor-General will resist the Amendment. As matters stand, one knows at least that there is precision, and if one leaves out the reference to the Income Tax Acts, one will substitute for that precision a great deal of uncertainty, and I am sure that the hon. Gentleman would not want to introduce a measure of uncertainty here.

§ Mr. Stevens
I have paid the greatest attention to such very learned opinions, and, although very disappointed, I beg to ask leave to withdraw the Amendment.

§ The Solicitor-General
I beg to move, in page 16, line 46, to leave out from "payments," to "are," in line 2, on page 17, and to insert: to which the said section one hundred and seventy applies by virtue of section three hundred and eighteen of the said Act or which. This Amendment is designed to correct a somewhat technical and minor flaw in the provisions of the Clause as it now stands. The flaw is contained in subsection (5, b (iii)). It is more or less of a drafting character, and I do not think that our Amendment makes any practical alteration. I will explain it in detail if the Committee would like me to do so, but its effect will be to remove unnecessary words that are already covered by other parts of the Bill. If I may give an example, some of the matters mentioned in Section 345 (2) of the Income Tax Act, 1952, would already be covered, and there is no need to mention them in this subsection.

§ Mr. F. J. Erroll (Altrincham and Sale)
I beg to move, in page 18, line 3, to leave out from "company," to the end of line 4. and to insert: assessable in the United Kingdom for tax purposes. 989 When the Finance Bill was published and when the companies saw this Clause, they were naturally delighted at the arrangements proposed except in one respect, and that was in regard to the companies' subsidiaries operating overseas, because the general wording of the Clause as it now stands is that such arrangements can operate only between companies registered and controlled and operating within the United Kingdom. In many cases there are companies which, although registered and controlled in the United Kingdom, are operating overseas, and it is felt that, as the Clause now stands, these companies will not be included in the benefits of the Clause as a whole.
There is a further type of case where there are United Kingdom registered and controlled companies owning subsidiaries operating overseas, and in those cases it is particularly valuable to have the benefits of this Clause. The Amendment which I am proposing would, of course. make the subvention payments possible for such companies and organisations at a time when we are anxious to see as large overseas development as possible. It would be particularly valuable if the losses in the first few years of an overseas subsidiary could be offset against the profits of the United Kingdom parent company, as will, of course, be possible if this Amendment is accepted, which I hope it will be.

§ Mr. E. Fletcher
This Amendment is followed by one in page 18, line 3, to leave out from "Kingdom," to the end of line 4, which stands in my name and the names of some of my hon. Friends. It covers the same point, and I gather it is the intention of the Chair that they should be taken together.
The purpose of my Amendment would be to secure precisely the same effect as the Amendment which has been moved by the hon. Member for Altrincham and Sale (Mr. Erroll), and I entirely agree with what he said.
It seems to me that this Clause as it stands discriminates unfairly against companies trading overseas, whether trading overseas through a subsidiary company or whether themselves trading overseas. I could have understood it if there had been a limitation of this Clause designed 990 to exclude from its benefits English subsidiaries of foreign companies, but I gather that that would be too difficult and probably would not be desirable.
I fail to understand, however, why the benefit of this Clause should be denied to a company which is resident in the United Kingdom but which carries on trading operations elsewhere. I fail to understand why a group of companies, one of which is a subsidiary trading overseas— whether in the Commonwealth or outside it is hardly material—should be denied the benefits of the Clause. I hope the Solicitor-General will be able to accept this Amendment, for the reasons which the hon. Member has given, and which I cordially support.

§ The Solicitor-General
I am sorry to disappoint to some extent but not entirely my hon. Friend the Member for Altrincham and Sale (Mr. Erroll) and the hon. Member for Islington, East (Mr. E. Fletcher). The fear was expressed by my hon. Friend whether the Clause in its present form covered the case of a company resident and registered here and which has branches operating outside the United Kingdom but where the control rests in the United Kingdom. I think I can assure my hon. Friend that that class of company will certainly be covered by the Clause as it stands.
If I might, I should like to refer him to the First Report of the Royal Commission on the Taxation of Profits and Income, paragraph 12, where he will see stated: The legal view seems to be well established that the activity of management and control is an integral part of the trade. From this it follows that the trade of a resident corporation cannot be regarded as carried on wholly outside the United Kingdom. Where we get a resident corporation it will be covered by this Clause in its present form.
The first reason I must oppose the Amendment is that it is unnecessary to make any alteration, and secondly, we could not accept the words proposed in either of these Amendments because there are companies which are not resident here but are assessable for tax in relation to income brought over here and provided by Schedule D, and under the formula proposed by this Amendment they would come within the Clause. The Millard Tucker Committee recommended 991 that the operation of this Clause should be limited to companies resident in this country, and it is for this reason that I regret that I cannot accept the Amendment.

Mr. Enroll
Could the Solicitor-General make it plain that when he refers to a United Kingdom company with branches overseas he includes subsidiaries overseas which are now controlled by the United Kingdom company? Some branches are not the same as subsidiaries, and that is the important point.

§ The Solicitor-General
I thought I said that where control lay in a resident company, then it is impossible to say that the trading is carried on wholly outside the United Kingdom.

§ Mr. E. Fletcher
May I put one other case to the Solicitor-General? I can appreciate that where there is control here such a company would come within the Clause as it now stands, because such a company would be deemed to be carrying on trade partly in the United Kingdom; but I have in mind the case of the subsidiary company trading overseas in mining operations or some such activity, where the control is abroad in the sense that there is a local board. It could not be said for the purposes of Income Tax administration that the control was exercised here.
May I put this further point to the Solicitor-General? The Millard Tucker Committee recognised that some condition must be satisfied to enable companies to obtain the benefit of this provision. They said that both companies entering into an agreement to make a subvention payment as contemplated by this Clause, must be companies which are treated as resident in the United Kingdom for Income Tax purposes. But would not the Solicitor-General agree that the full effect is given to that recommendation by the first condition in subsection (9), which says that the Clause will apply only to a company resident in the United Kingdom? Why is it necessary to go on and add the further limitation that the company shall be carrying on trade wholly or partly in the United Kingdom?
992 I gathered from what the Solicitor-General said that it was not intended to exclude from the benefits of this Clause subsidiary companies which had, in fact, carried on their operations overseas. All I am asking is that he should make sure that the Clause is wide enough to extend its benefits to subsidiaries whose operations are overseas, whether or not the control is technically exercised by the parent board in this country or by a local board overseas.

§ The Solicitor-General
This Clause is limited in its operation to companies which are resident in the United Kingdom and carrying on trade wholly or partly in this country. Therefore, a subsidiary company, to qualify under this Clause as part of the group, would have to be one resident here and carrying on trade wholly or partly in the United Kingdom. With regard to those last few words, may I repeat that there is no doubt that if the company is resident here, managing activities outside this country but exercising control here, whether it be a principal or a subsidiary company, it is engaging in trade within the United Kingdom. Therefore, the cases which have aroused the anxiety of my hon. Friend are fully covered by the Clause as it stands.

§ Mr. Erroll
I want to look carefully at the reply of the Solicitor-General and, if necessary, to raise the matter again on Report. In the meantime, I beg to ask leave to withdraw the Amendment.

§ The Solicitor-General
I beg to move, in page 18, line 21, at the end, to insert: (11) Sub-paragraph (ii) of paragraph (b) of subsection (5) of this section shall not be taken to apply to any part of the allowances for a year of assessment earlier than the year referred to in the sub-paragraph, notwithstanding that it is carried forward to the year so referred to under subsection (2) of section three hundred and twenty-three or subsection one of section three hundred and tweny-four of the Income Tax Act, 1952. This Amendment has been tabled by my right hon. Friend to make clear a point about which some doubt was felt and to which attention was called by my hon. Friend the Member for Langstone (Mr. Stevens). There is some doubt as to the extent to which unexhausted allowances can be carried forward. But for this Amendment it might be argued 993 that, in the calculation contemplated by this Clause, there could be carried forward and brought into account allowances from a previous year which had not been exhausted. We have considered that, and we have come to the conclusion that all doubts should be removed and that it should be made absolutely clear, as this Amendment does, that for the purpose of calculating losses under this Clause one is not entitled to bring into account unexhausted capital allowances from the previous year.

§ Mr. Stevens
I am glad that the Solicitor-General has taken note of something which I put down, although I am not entirely certain that he has taken the right kind of note. There must be many cases where even an associated company may be involved in material capital expenditure, in respect of which substantial initial allowances are given; for instance, where the reorganisation of a factory is concerned initial allowances may not be absorbed by the profits of the year because, if substantial reorganisation is going on, the factory would not be in a position to turn out large quantities of goods which would give rise to those profits. Therefore, it seems inequitable that there is no provision in respect of such subvention payments for a carry-forward of those initial allowances. Is this the last word of the Government on this matter or will they look at my words yet again? I hope so.

§ The Solicitor-General
My hon. Friend's words were, as usual, absolutely clear. I do not think I can hold out any hope to him that this matter will be changed on any further consideration. What we are proposing is fully in line with the Profits Tax provisions relating to groups of companies and, having considered the matter, we have come to the conclusion that the doubt should be resolved in the way proposed by this Amendment.