HC Deb 17 June 1953 vol 516 cc1075-98
Mr. Boyd-Carpenter

I beg to move, in page 28, line 19. to leave out from "means," to the first "and," in line 23, and to insert: the Iron and Steel Holding and Realisation Agency set up by the Iron and Steel Act, 1953. This Amendment, like the next one, is, in substance, of a drafting character. When the Bill was drafted, the Iron and Steel Bill was a Bill; it is now an Act.

Amendment agreed to.

Further Amendment made: In page 28, line 25, leave out "as aforesaid," and add "under that Act."—[Mr. Boyd-Carpenter.]

Motion made, and Question proposed, "That the Clause, as amended, stand part of the Bill."

Mr. Albu

This is a most important Clause and I hope that we shall have a full explanation of its purposes. As I understand it, the object of the three main parts of the provision is to enable the Iron and Steel Holding and Realisation Agency to do certain things which would otherwise be illegal, so that they may be able to alter the capital structure of the companies and thus dispose of the companies better than they would otherwise be able to do.

It is extremely difficult for those who are not accountants, or even lawyers, to follow the exact details of what is proposed. However, I have endeavoured to do so. I have consulted friends and, as far as I can see, subsection (1, a) enables a company still within the ownership of the Agency to make a distribution in the form of dividends either to the Agency or to another company within the Agency without becoming subject to the normal Profits Tax at the distributed Profits Tax rate.

Before we discuss the merits of that, I should like to know whether that was really necessary. Is not it a fact that the companies are in fact subsidiaries of the Agency as long as the whole of the shares are owned by the Agency? Therefore, under Section 38 of the 1947 Act, it is possible for them to do this already or at least to elect to do it. If that is not so, I take it that this has been introduced for the purpose of making an exception here.

Subsection (1, b) gives the companies a concession on the late lamented E.P.L. provisions of last year's Act so that a dividend can be treated as a capital payment or a capital receipt, according to who receives it, so increasing or decreasing the standard rate of profits by 12 per cent. And it seems that Clause 26 (2) deals with the Clause introduced into the Bill of 1951 to prevent the evasion of Profits Tax by the issue of redeemable preference shares instead of the distribution of profits and permits this to be done without payment of tax if certified by the Treasury as necessary for the purposes of the Agency.

8.30 p.m.

The "Economist" of 16th May fortifies my belief that I was right, for, speaking of the Clause, it points out that it would be a very important advantage to the Agency in disposing of the shares. Before we can possibly agree to the passing of this Clause, we want to know what the effect will be. It looks to me, at any rate, as if the total effect must be a loss of revenue in the first stage to the Treasury. It is perfectly true that, as a result of immediate loss of tax revenue, it may be possible to pay higher dividends, or to make an alteration in the capital structure of the companies, by the issue of redeemable preference shares in such a way that a higher price will be obtained for the companies as a whole.

Certainly, we on this side of the Committee are most insistent that the price obtained for the companies shall be the highest possible, if they are to be sold at all, and certainly not less than that at which they were originally taken over. But in the interim, of course, certain things have happened which have been no doubt the reason why the Chancellor is introducing this Clause. One of the things that has happened is that the yield on ordinary shares has gone up as a result of the Government's financial and credit policy and therefore, presumably in order to obtain the price which the Government want for the shares, the Government must be able to show that the companies have been in the habit of paying a higher rate of dividend.

It may be argued, and no doubt will be argued by some hon. Members opposite, that if the companies ever are sold, or an attempt is made to sell them, the people who will buy them, whoever they may be, will not so much look at the rate of dividend paid in the last year as at the value of the assets of the company which are disclosed in their accounts, and that therefore the price is much more dependent upon the value of the assets and the profits made on those assets, which are also published, than it is on the rate of dividend which had been paid.

This argument overlooks the fact that the larger companies, the ones which rumour has it will be first sold off, are likely to pass into the hands mainly of large, institutional investors, and nobody quite knows what those people will do. After all, the value of the company to the ordinary shareholder is purely the value of the dividend which he receives, because if a quantity of shares is issued publicly to a very large number of people that large number of people will have no influence whatsoever on the rate of dividend paid, and the value of the assets is of no concern to them whatever. The question of the dividend to be paid will be one for the people who happened to put in the greatest amount of money and were originally the board of directors.

Therefore, there is an attempt here to establish in the minds of the investing public a tradition of a higher rate of yield on these shares than the rate of interest which has been paid so far on the Iron and Steel Corporation stock. I imagine that that is the reason for Clause 26 (1, b). On the whole, I think that we shall have to have a very full explanation of what looks to us like financial wangling to try to overcome the difficulties into which the Government have got themselves by de-nationalising the iron and steel industry and attempting to sell the companies back to private hands.

One thing that seems to be quite clear is that even if the price finally obtained for companies is as high as it was previously, the result will be that in the end a very much higher yield or return will be given to people who own those shares than would have been necessary to pay the people who own iron and steel stock, and the burden on the industry is going to be higher. If that is not the effect of this Clause, I do not know what is.

Subsection (2) may not have quite the same effect, but it will mean a loss of revenue to the Treasury and will certainly render companies more easy to sell. That is not an object of which hon. Members on this side are particularly in favour. The most dangerous and possibly dishonest part of this Clause, however, is subsection (1)—particularly subsection (1. a).

Mr. Mitchison

If I repeat a little of what has been said by my hon. Friend the Member for Edmonton (Mr. Albu) I hope that the Financial Secretary will excuse me. It is rather difficult not to do so. When I first saw this Clause I read it very carefully, and then I re-read it, and I am bound to tell the Financial Secretary that I have become increasingly suspicious of it. In the last Clause we finished what the soldiers, in their witty way, would call "Operation Infanticide," but we are still having to deal with the ghost of the infant Excess Profits Levy and also with Profits Tax.

Here—and I am picking my words carefully—we are dealing with iron and steel shares, which are at present public property and which, by and large, have made exceedingly good profits during the last year under public ownership. They are now going to be sold back to private enterprise in pursuance of an Act of this Parliament. The companies concerned are apparently rather short of liquid capital.

That is the general effect of the Iron and Steel Corporation report and accounts, which have just been published. The profits have been doubled and liquid reserves are obviously small in comparison with the assets of the companies. They appear in the balance sheet as a considerably smaller item than the nominal capital or the book value— whichever one likes to take—of the companies concerned. It is not at all surprising, as the Corporation themselves indicate that more liquid capital will be required, and it is in the light of that consideration that we must look at this Clause.

I start with one principle, and I hope I shall get the Financial Secretary, with all his rectitude and judgment, to agree with me about it. We should not use taxation—particularly special taxation— in order to facilitate the public duty of the Realisation Agency if by so doing we sacrifice revenue. That is the first proposition, and I hope that it will be accepted, because I should have thought it grossly improper to levy taxes and then apply the proceeds of those taxes to effect what is, after all, a political party purpose approved by Parliament—the de-nationalisation of the iron and steel industry. I should regard that as an entirely wrong use of the power of taxation.

Looking at the Clause from that angle, the first thing I discover is that if an iron and steel company entirely owned by the Realisation Agency—I shall not go into the case of further subsidiary companies because for the principle of the matter that is not necessary—make a distribution which, in this case, would go to the Realisation Agency itself, then, if I read the Clause correctly, in respect of that distribution there shall be no Profits Tax. That amounts to 20 per cent. These are really obscure matters which are difficult to follow, and I hope the Financial Secretary will not take some of my comments, if they are at all sharp, as an excuse for not answering the case. Paragraph (b) seems to me to make a counter concession but the counter concession applies only, as regards this distribution—I hope I am right—to 30 per cent. of 12 per cent. of the distribution; and I make that 3 or 4 per cent.

It seems to me, therefore, that the effect of the subsection and the whole tenor of the Clause is to give a special benefit as regards this distribution when made by a wholly owned subsidiary to the Agency itself. It is a special benefit because in fact it exempts from Profits Tax to a greater degree than any benefit which could be drawn from the dying child, Excess Profits Levy. If that is true I shall have some comments to make. If not, why are these arrangements made? We were told in the earlier debate that it was to facilitate the task of the Realisation Agency, but I fail to see what purpose they serve in that connection.

I come to another point. If they are encouraging distribution, do we want that at the moment? The agency has to sell these iron and steel shares, whatever we think of the rights or wrongs of the obligation, in the terms of the Iron and Steel Act, and for that purpose certain things have to be considered under Section 19 (6) of the Iron and Steel Act.

All "material factors" have to be taken into account including the physical assets, capital structure, reserves and trading aspects of the company in question, and the monetary and market conditions prevailing at the time of sale. That is from the seller's point of view, but the next question is, what effect will it have on the buyer if peculiar fiscal arrangements are used as a means of facilitating the Agency's task?

Whether or not my interpretation is right—and I may be wrong—it seems to agree with what was said by my hon. Friend the Member for Edmonton. It is obvious that the effect will be to mislead the buyer to some extent—and when I say mislead the buyer I mean that unless he goes into detail about these exceedingly complicated and difficult financial matters, he will not realise that from the very time when the goods are, as it were, in the shop window, in order to facilitate their sale and to market the contents of the shop window more readily, some peculiar financial and fiscal provisions have been inserted. I may be wrong. I may be deemed too suspicious. I should be only too glad to know I am. But why any special fiscal provision at all?

8.45 p.m.

Let me follow this chase a little bit further. The next point is the question of the issue of redeemable preference shares. This really puzzles me. If I have got it right, here again a special fiscal benefit is to be conferred, because in certain circumstances an issue of redeemable preference shares which otherwise would attract tax as a distribution is not to be treated as a distribution, and the question is, why? It is perfectly obvious that the Agency—and it seems hardly necessary for the statute itself to say so—has the power, as set out quite clearly in Section 19 (2): While any securities of a company are held by the Agency, they shall have all such rights and may exercise all such powers in relation to the company as are by law vested in or exercisable by the holders of such securities, and in particular, without prejudice to the generality of this provision, the Agency may exercise their powers as a holding company for the purpose of procuring— (a) any reorganisation or alteration of the share or loan capital of any subsidiary of the Agency, including the cancellation of securities and the issue of new securities … I should have thought that was enough for all practical and reasonable purposes, and I really do not see why what appears to be this special encouragement should be given in this special case. I have looked through the list, and it is not because there are not already redeemable preference shares in some of these companies. They already exist, and quite a lot of other preference shares. I can quite understand the Agency having to exercise that sort of power, but why, unless I have misunderstood the purpose of the Clause, is there to be a special fiscal concession when they form an issue? I absolutely fail to understand the reason.

It is perfectly true that the whole of this is to be conditional. Conditional on what? It is conditional upon the Treasury certifying that the issue of redeemable shares is made for the purpose of facilitating the performance by the Realisation Agency of its function in returning any undertaking or property to private ownership. That is the safeguard in subsection (4), for what appears to be an advantage at any rate in most cases. I have not overlooked the fact that the following subsection obviously contemplates cases in which it may not be an advantage, but it clearly in most cases tends to be an advantage, and so far as that is concerned the only thing the Treasury has got to see is not that this is right, not that this means sacrificing revenue. Where has the watch dog of our finances got to now? All the Treasury has got to certify is that it is for the purpose of this particular political duty conferred by an Act of Parliament.

Really, we have been hearing something today about the constitutional position. I should have thought that in cases of this sort the duty of the Treasury, the primary and obvious duty of the Treasury, was to see that tax revenue was not sacrificed in order to effect a purpose which savours strongly of the political. It ought not to be put in the position merely to say, "You can certify any of these things if they facilitate the passing of the Agency," or to be put in a position where it could not possibly carry on what may be its conflicting function of being the watch-dog of the revenue and to that extent the watch-dog of the taxpayer.

I hope I am not being too suspicious. I can only assure the Financial Secretary it is a complicated Clause that has already aroused the suspicions of many other people in and out of this Committee, and I hope he is going to say this involves no sacrifice of revenue at all; that these financial arrangements are something which have no connection whatever with the rather peculiar position of this body. I fail to see how we can say that, since it appears to be the thing the Treasury have decided. I hope he will at least say that, whatever they have attempted to do in this Clause, they did not really contemplate sacrificing revenue for a political purpose, and that on reconsideration they do not ask the country to do a thing like that.

Mr. Jack Jones (Rotherham)

I rise to make a few inquiries about what this Clause sets out to do. I have read it and re-read it with interest, but I am still a little puzzled. As the Committee know, I am not a lawyer, an economist or, indeed, a financier, and when lawyers, economists and financiers say they are puzzled by this Clause, nobody will expect the ordinary back-bench steel-worker to say other than that he, too, is puzzled.

As I see it, this Clause is designed to do one thing, namely, to help the political party opposite to get the country to believe their policy is the correct one, so that they can reasonably easily do what they set out to do in returning to private enterprise the great steel industry, of which we have yet another report showing real progress, and property accruing to the country at large.

If this Clause set out to give benefits to those companies remaining with the Agency, I could understand it, because logically the companies which it will be less easy to sell will be those which are less efficient. That is not political nous; it is just ordinary, commonsense logic. But what do we find? We find the exact opposite. We find that those companies can receive financial benefit on condition that they satisfy the Treasury that they are being returned to private enterprise. In other words, it is a financial inducement, at the expense of the country at large, to persuade people to put into operation the Tory policy of denationalisation.

I think I can fairly claim to have listened to or read everything said in the House on nationalisation and denationalisation, and I have attempted, very humbly, to take part in those proceedings. I was always led to believe by the party opposite when they were in opposition that the industry was to be returned to private ownership because under nationalisation it had lost its incentive and morale, that production had suffered, that the quality of its products had deteriorated, that the workpeople were dissatisfied and there was general chaos; and that immediately the industry was denationalised there would be financiers waiting to take it over.

That is not true. We know that it will be possible to sell certain parts of the industry reasonably soon; it will probably be reasonably easy to float on the market one or two of the larger corporations for return to private ownership. What I want to know is, assuming there is to be a financial benefit accruing to those companies which for some time remain in the ownership of the Agency, at what date the benefit begins to accrue? When does this Clause operate from?

Apparently there is to be a financial benefit, about which we shall probably know more when the Government reply. If there is to be that financial benefit, in my opinion there will be less incentive to buy companies; in other words, potential buyers will hold off, waiting for this Clause to come into operation, at which date they will get this financial benefit. This financial benefit can be obtained only at the expense of the Revenue, and therefore there will be no benefit to the country at large. In other words, they will hold off to get a valuable industry sold to them at less price than ought to be the case. It will be interesting to learn from the Financial Secretary, who, I assume, is to reply, when this particular date operates.

As I have said, if this had been a Clause to help those companies remaining with the Agency to put themselves into a state of efficiency so as to make them a good potential buying proposition, I could have understood it, because they are the people who will need benefit first and most. On this side of the Committee we have argued that the industry in its entirety will not be sold. There are certain parts of the industry which some of us know better than the Members on the Government Front Bench, and we know that they will not be sold at all. They will probably be declared redundant as the months and years roll by.

I want the Government to come clean on this matter, and to let the country know exactly what is the intention of this Clause, because we are reasonably suspicious about its intention, as we have every right to be. We would like the Government to tell us exactly when this Clause is to become operative and what will be the extent, if it can be computed, of the revenue loss which the country will suffer because of the introduction and working out of this Clause.

There are other Amendments which, I understand, will be called and about which we shall have certain questions to ask. The primary question which I seek to ask is whether this Clause will delay the selling of the industry to private enterprise, and if so, to what extent will the Revenue and the country suffer?

Mr. Mulley

I do not propose to debate again the issue of whether it is a good or a bad thing that the steel industry is to be denationalised. That is a matter of difference between us, but I think that what Members on both sides of the Committee should have in mind, as custodians of the taxpayer, is whether the issue which is proposed in this Clause is fair to them and is fair to other industries in comparison with the Realisation Agency and the denationalised section of the steel industry. Although we have the advice of learned counsel, we are still in some difficulty to know what is the actual purport and intention of the Clause. I hope that the Financial Secretary will make that quite clear, in his usual cogent way, when he comes to reply, as I hope he soon will.

It appears from what one can gather, in a very amateur way, from the Clause and from the enlightenment which we have already received from my hon. Friends on this side of the Committee, that there are some very grave doubts about the rightness or fairness of this Clause. I would have been much more sympathetic to the Clause if we had not already had a number of days' debate on the Finance Bill already, because we have had the principle of non-discrimination thrust down our throats from the Treasury Bench on the issues of initial allowances and Purchase Tax. We have been told that even in the national interest the Government cannot make any form of discrimination, and yet, although the national interest, apparently, will not prevail, the interest of the Tory Party can prevail, and we have a special Clause in the Bill to facilitate, in the words of the Clause, the performance by the Realisation Agency of its functions in returning any undertaking or property to private ownership. 9.0 p.m.

The economic strength of the country, ably described in the concluding sentences of the Chancellor's last speech to the Committee, is ignored, but private interests involved in returning industry to private ownership are not only given a place in the Bill but are also written into the terms of the Bill. That is very unreasonable discrimination. Other excellent cases of discrimination in the interest of the country's economy have been turned down. It may well be that that was the reason why we were not even allowed to write "in the national interest" as one of the functions of the Iron and Steel Board. It may be that I have misinterpreted the Clause, and I hope the Financial Secretary will direct his remarks to this matter. I hope, Mr. Hopkin Morris, that you know what the Clause is about because I do not know how far I am in order owing to my doubts as to the actual contents of the Clause.

This seems to me to be an instance of giving a taxation advantage to a denationalised industry. We created an economic advantage for the nationalised industries that we set up, but we never attempted to twist the law of the land or taxation in their favour. I was surprised to learn that the Overseas Section of the British Broadcasting Corporation has to pay Income Tax——

The Deputy-Chairman

Reference to the British Broadcasting Corporation cannot be in order in this debate.

Mr. Mulley

If we cannot refer to something which is not in the Clause in order to provide an analogy, we are in a difficult position through our inability to compare one taxpayer with another.

The Deputy-Chairman

The Clause does not discuss what the British Broadcasting Corporation does.

Mr. Mulley

I was only referring to the British Broadcasting Corporation as a taxpayer, and a taxpayer who obviously has an interest in the Clause.

The Deputy-Chairman

There are varieties of taxpayers, but they do not come within the Clause.

Mr. Mulley

I shall not pursue that point, Mr. Hopkin Morris. I wish to make the general point that the iron and steel industry, another nationalised industry of the same category as that to which I have been referring, has been subject to the Profits Tax, Income Tax and all the other taxes in the same way as any private industry, and in that respect it has been completely competitive. Reading the Clause, it seems that the purpose of having the Clause in the Bill is to put the Realisation Agency in some special preferential position for a political purpose, in the words of the Clause, …of facilitating … its functions in returning any undertaking or property to private ownership. An Act has been passed to return the industry to private ownership, and while we disagree with the decision, we should expect the Government to implement it, but we should not expect them to implement it by giving that body any preferential treatment in terms of tax as against other bodies who would have equal claim in the national interest for preferential provisions so that they could more easily achieve their objectives. What is the reason for this discrimination, this introduction of a new principle in taxation, contained in the Finance Bill? I hope the Financial Secretary will be able to satisfy us on the point.

Mr. Boyd-Carpenter

I agree with the hon. Member for Sheffield, Park (Mr. Mulley) that on this Amendment we should not—you would not permit us to do so, Mr. Hopkin Morris—discuss high or low whether it is a good thing to denationalise steel. What we have to do is, taking that accomplished fact as an accomplished fact, to decide whether in those circumstances the taxation provisions of the Clause are fair and sensible. That is the issue posed by the Clause.

I sympathise a good deal with the hon. Member for Edmonton (Mr. Albu) and the hon. and learned Member for Kettering (Mr. Mitchison) in the difficulties which they encountered when they first saw the Clause. It is a complex one, but I am bound to add also in fairness that I know of no two Members of this Committee whom I should least expect to find in difficulty in construing any Clause in any Bill, however complex. I am glad to see that on that proposition, at any rate, I carry the hon. and learned Gentleman the Member for Kettering with me.

In order to understand the purpose of this Clause, I should say broadly at this stage how it is intended to operate. First of all, I should like to make clear that it only relates, as the express terms of the Clause make clear, to companies wholly owned by the Agency, that is to say, in the ultimate resort by the State. I do not think, therefore, that we need share the distress of the hon. Member for Rotherham (Mr. Jack Jones) that the Treasury watchdog is, as he described it, off form in this respect. We are dealing with assets, money and property which are already completely in the ownership of the State, and I can assure the hon. Member that though the Treasury watchdog, like other watchdogs, may occasionally fall into a doze, this is not one of those occasions.

Secondly—and perhaps this is most important from the point of view of the issues raised in this debate—hon. Members will see from the terms of subsections (2) and (3) that the tax adjustments under this Clause are intended to apply only in the case of distributions which are made for the purpose of the disposal of the companies. In other words, they would not apply to ordinary dividend distributions. But hon. Members who, as I did, sat through the financial Clauses of the Iron and Steel Bill, will recall that there was great emphasis, perhaps even more from the other side of the Committee than from this side, on the need for the regrouping and rearrangement of the structures, financial and otherwise, of the companies before sale.

Mr. Mulley

I, too, sat through the whole of the debates, but I do not remember anyone on this side of the Committee suggesting that. What we suggested was that it would be done as a financial trick to sell the companies, and this is bearing out what we then said.

Mr. Boyd-Carpenter

I cannot vouch for the hon. Member, but I know that some of those with greater experience of that industry, such as the hon. Member for Rotherham, were much concerned with the structure and the reorganisation of the industry, as is anyone who knows anything about this industry.

Part of the way in which the finances of that reorganisation and reconstruction may have to be effected will be the making of distributions in one form or another, such as in the form, as I think the hon. Member for Edmonton (Mr. Albu) mentioned, of redeemable preference shares or possibly in the form of bonus shares in order to get the financial structure of the companies in preparation for sale into an appropriate form.

Under the ordinary tax law as it now stands, if the distributions are made in any of those ways they would attract the distributed rate of Profits Tax at 22½ per cent. or the undistributed rate of 2½ per cent. It seems to us wrong that in a reorganisation, which is in the interests of the sale and efficiency of the industry and, of course, in the interest of the taxpayer, we should not get a good price. There I agree with the hon. Member for Edmonton that we have every intention and desire to get as good a price as possible— with due regard to the interests of the industry, I hasten to add for the benefit of the hon. Member for Rotherham.

It seems to us quite wrong that these distributions, which are not distributions in the ordinary sense of company profits but are distributions for the purposes of selling the firms at a reasonable price, should attract a high rate of Profits Tax at the point of distribution. One of two things would happen——

Mr. Mitchison

I am sure it was a slip of the tongue, but the hon. Gentleman said that they might be made for the purpose of facilitating the sale. That is the very matter that the Treasury has to certify. He then slipped in a reference to the efficiency of the industry, which does not arise on this. The Treasury has to certify that they are for the purpose of sale, but there is not a word about the efficiency of the industry.

Mr. Boyd-Carpenter

But the hon. and learned Gentleman appreciates that the sale of a company in an efficient form is obviously in the interest of getting a good price, and it is a proper reference. The consideration, of course, is for the purpose of sale, and the sale of a good going concern is surely the best form of sale, both from the point of view of the industry and of the taxpayer who will receive the sale price. I do not think there is any real difference between us about that.

The issue with which we were faced was that such distributions for the purpose of reorganisation on sale would, under the ordinary law, in many cases attract the distributed rate of Profits Tax. Either one of two things would happen. In some cases that fact would perhaps make it seem undesirable to effect the reorganisation and therefore the taxpayer, as the ultimate recipient of the proceeds of sale, would be the loser. Alternatively, the tax would be paid, which would be an additional burden that would not normally have been imposed. Therefore the taxpayer again would undoubtedly be the loser, because a company from which the assets had been drained to pay this extraordinary rate of tax would normally command a lower price. The conclusion to which we came under both those heads was that in the interest of obtaining a reasonable sale price it was better to secure that extraordinary distributions made in the process of reorganisation should not be made to attract the distributed rate of Profits Tax.

That is the simple explanation, which I agree is perhaps not so easy as it might be to read into the necessarily complex language in which the Clause is clothed. There is certainly no question here, as one or two hon. Members seemed to suggest, of some peculiar and special advantage being given to private individuals or organisations. The question is the purely practical one, in the interest of the national Exchequer, as to whether we are the more likely to get a proper price on the sale of the companies if the reorganisation is hindered by the liability to tax being attracted in the course of that reorganisation or not. Having given considerable thought to this matter, we came to the conclusion that the wisest thing to do was to come to this Committee and ask hon. Members by this Clause to exempt from the distributed rate of tax the distributions made in this way and in this way only.

The hon. Member for Sheffield, Park seemed to think that legislation of this kind was unprecedented, and he indicated that when the party opposite were nationalising industries, they made no alterations in the ordinary operation of the tax law. That is not the case. The Finance Act of 1947 provided that in the case of all the nationalised industries the undistributed rate, the lowest rate, should apply to what would otherwise be deemed to be distributions. We are not going so far. They, in respect of industries wholly in public ownership, applied the undistributed rate to all distributions. We are seeking to apply it by this Clause not to the normal distributions, which will continue to attract the distributed rate, but only to the special distributions made for the purpose of securing the reorganisation for disposal.

Mr. Albu

Surely it is a different situation. The only distributions made by a nationalised industry are those of fixed-interest stock, Government stocks, which in the case of a private industry would not class as distribution since they are not even preference shares.

9.15 p.m.

Mr. Boyd-Carpenter

The hon. Member is, of course, quite wrong. He has completely forgotten Cable and Wireless, Ltd., which was included. If he studies the position he will find that the analogy is perfectly correct.

Mr. Mulley

Will the hon. Gentleman give way?

Mr. Boyd-Carpenter

I am sorry; I have just given way, and I am coming to a conclusion.

Therefore, I suggest that in this process we are being more moderate than were our predecessors. I will not seek to reecho the Indian pro-consul who was astonished at his own moderation, because I think this is a reasonable proposal. It is a reasonable one because we accept the view, expressed during this debate as well as previously from the benches opposite, that in conducting this operation, on which Parliament has, after all, now decided, it is our duty to try to secure for this valuable piece of the taxpayers' property a proper price on disposal. In our operation we shall be assisted in obtaining that proper price by the proposals embodied in the Clause.

Mr. G. R. Strauss (Vauxhall)

The Financial Secretary has given certain explanations about the Clause. He will appreciate that this is the first time since the Budget was introduced that we have had any explanation whatsoever justifying its provisions. As they stand, they cause us considerable alarm and suspicion. That alarm and suspicion have been expressed by my hon. Friends who have spoken before me. Although the Financial Secretary has helped to some extent in making us understand the purpose of the Clause, we are not at the moment fully satisfied that it is justified.

As I understand it, the purpose of the Clause is to exempt from taxation distributions of capital deemed necessary by the Holding and Realisation Agency in carrying out their duty of reorganising the companies which they hold for the purposes of public sale. We all want to ensure that there shall be the minimum loss, or, if possible, no loss, on the revenue when these companies are sold. What we want to be quite sure about is that nothing improper is done for the purpose of misleading potential investors, or that nothing at all unfair is done, in the process of reorganisation by tax exemption to which this Committee should take exception.

The first question I should like to ask the Financial Secretary is this. Where the Clause talks about distribution, is that distribution completely confined to distribution of capital for the sale of these companies, such as distribution of bonus shares, redeemable preference shares, or something of that sort? Is the sole purpose of the Clause to ensure that if a reorganisation in the structure takes place and different types of shares—bonus shares or redeemable preference shares-are issued from those which now exist, which to a large extent are only ordinary shares, that distribution, or their receipt by some other company, will not be subject to the taxation which is provided by existing legislation?

It is very important if we are told that the purpose of the Clause is to confine these special tax exemptions to distribution of capital, because, as the Clause reads, there is no such limitation. We had to assume that dividends were in the minds of the Government, because there is nothing to suggest otherwise, and when one talks about distribution by a company one naturally thinks of dividends.

We had in mind that the Government thought there should be some distribution of dividends by these companies—internal distribution in the hands of the Agency—and we could not understand what it was about. It may be to give a better impression to potential buyers of the value of the company. If that is so, it is wholly wrong and, we would have thought, unacceptable to hon. Members on all sides of the Committee. But if there is no reference meant at all to the distribution of profits in dividends, but solely distribution in respect of capital for the sake of reorganisation, that is an explanation which —if it does not satisfy us—relieves our minds in one respect.

Therefore, I ask the hon. Gentleman to give a categorical reply to the question of whether distribution is confined to distribution of capital and has no reference whatever to distribution of profit from one company to the other, those companies being, of course, in the hands of the Agency. If he is not referring to distribution of profit it seems to me, although I listened to his explanation as carefully as I could, that the provisions in subsection (1, a) are not relevant. But I think I will leave that until I get the answer from the Financial Secretary on the major point I have in mind.

I think it would help the general discussion if we could have an answer to the cardinal question of whether distribution does not concern profits and dividends but only concerns capital for the reorganisation of the capital structure of the company. If the hon. Gentleman can give a reply now that will facilitate the debate.

Mr. Boyd-Carpenter

If the right hon. Member wishes I am glad to oblige. I did deal with this aspect of the matter, which I think is important, at some length, and I will re-state what I said then. I distingushed between what one might call normal distributions—the ordinary distributions of profits earned, which to a greater or lesser degree the boards of companies decided upon in the light of their annual accounts—and abnormal distributions which are part of a system of financial reorganisation.

Because I do not want to mislead the Committee, I prefer not to use the word "capital" as opposed to its normal converse of revenue. I prefer to use the distinction, normal and abnormal for very obvious reasons that certain payments are sometimes thought by some people to be of a capital nature and some of a revenue nature. There are hon. Members who make a very good living arguing precisely those points in a different place from this. It is the intention, to use this provision where it is necessary to reconstruct the financial structure, where it is necessary to facilitate a new issue of shares, where it is necessary to secure the transfer of a block of shares from a subsidiary company or from the company to the market—the right hon. Member can envisage half a dozen cases in which the mechanics would require such a change. That is the answer to the question.

It is certainly not intended to use this provision in order to produce dividends paid by the companies in order to mislead potential purchasers. Neither this Government nor any British Government would descend to such a subterfuge which, if attempted by an individual, would lead to the Old Bailey. There would be nothing more foolish because the sale of these securities is to be undertaken publicly in the full light of public knowledge. It would be quite impossible to mislead the people concerned in these transactions by so manifestly foolish as well as dishonest a course.

As the point was raised, I thought it necessary to make it perfectly clear and to repeat that the whole purpose of this is to make possible, without attracting the distributed rate of tax—with all the consequences to which I have referred— a reconstruction which will facilitate sale.

Mr. John Freeman (Watford)

Like many hon. Members, I find it extraordinarily difficult to follow in detail the purpose of this Clause, even after the helpful explanation of the Financial Secretary. Most of my education, such as it was, was concerned with events prior to A.D. 100, which does not help in dealing with matters of this kind.

A few moments ago the Financial Secretary used arguments directed to the steel industry rather than to the contents of this Clause which left me with a serious doubt in my mind. He will allow me to say that, although he was a diligent attendant during the discussion on the financial Clauses of the Iron and Steel Act, he was not in his place quite so regularly during the discussions on the earlier Clauses.

The hon. Gentleman sought to justify some of the purposes of this Clause by reference to the opinion which he alleged was expressed by hon. Members on this side of the Committee about the desirability of regrouping companies. I believe, unless I misunderstood him—in which case I will withdraw—that he has attributed to hon. Members on this side of the Committee views which we never expressed and indeed which we strongly deprecate.

Surely he will accept that the whole tenor of the argument about that on the Iron and Steel Bill was that a rearrangement of these companies must take place for one of two reasons, either because it was held to be in the interest of the efficient management of the industry and therefore to the public interest that there should be a regrouping, or—and this is where we on this side of the Committee expressed strong suspicion—it might be desirable to the Government or to the Agency to regroup companies against the public interest and against the real welfare of the industry specifically for the purpose of making a sale, but which might none the less be damaging to the good management of the industry.

Whether or not the Financial Secretary agrees with that point, I think he will agree that there is a point of real distinction. When he was asked just now to justify the Clause, he based his argument on the desirability—with which he alleged we agreed—of the rearrangement of companies and the anxiety felt by the Government not to distract or hinder that in any way. But surely that argument depends entirely—at any rate for our support—on his not having confused the two types of rearrangement which may be possible.

I would direct his attention to subsection (3) of this Clause which states specifically and exactly in what circumstances the Treasury may issue a certificate under this Clause. They may certify under this section only when the distribution is being made for, the purpose of facilitating the performance by the Realisation Agency of its functions in returning any undertaking or property to private ownership. Unless I am mistaken, that is a very narrow definition. There may be cases in which it is not impossible for the Treasury to issue a certificate where the rearrangement is wholly in the interests of good management of the industry and not directly for the purpose of making a sale.

I hope the argument I am putting holds water and that, whatever may have been the general merit of his argument, the Financial Secretary will recognise that there is here a profound distinction. If my right hon. Friends on the Front Bench consider that his general explanation of this Clause has been reasonably satisfactory, I still hope he will explain to me where what I may call the industrial argument is at fault. If he cannot do that, I hope that he will seriously consider between now and a later stage adding to subsection (3) words which would make it possible for the Treasury to give its certificate where a regrouping or rearrangement was being made with the approval of the Iron and Steel Board for the sole purpose of the good management of the industry and public well-being, and not specifically for the purpose of making a sale or returning a company to private ownership.

9.30 p.m.

Mr. G. R. Strauss

If the Financial Secretary replies to the questions asked by my hon. Friend the Member for Watford (Mr. J. Freeman), I should like him to answer another question which still gives me some anxiety. It is one on which further clarity is necessary. He told us—this was important and new— that these distributions which he had in mind were for the purpose of the capital reorganisation of companies. I find it difficult to understand how any distribution of that sort could attract distributed Profits Tax unless it were some distribution of ordinary profits or dividends in the normal course of business. That is the sort of distribution which we think should not be exempt from Profits Tax.

Perhaps the hon. Gentleman will be able to give an illustration where a distribution for the purpose of capital reorganisation might attract distributed Profits Tax but for the special provision of this Clause. I should be most grateful if he could do that.

Mr. Boyd-Carpenter

I hesitated before rising to my feet in case any other hon. Member wished to take part in the debate. It is probably inconvenient and tedious for the Committee if I intervene too frequently. Naturally, I am only too anxious to deal with any point which any right hon. or hon. Member may wish to discuss. The hon. Member for Watford (Mr. J. Freeman) asked two questions. The hon. Gentleman is perfectly correct in his construction of subsection (3), but I think that he will recall that in arrangements made for the purposes of facilitating sale it is clear that the reorganisation, if attractiveness of sale is considered, may well in many cases involve changes which, looked at from the other point of view of efficiency, would also arise. If one is buying something one is more attracted to buying an efficient set-up than an inefficient one.

The hon. Gentleman asked me whether I would consider carrying further the provisions of this Clause by widening subsection (3). That is something of a reversal of the criticisms so far. It is the exact opposite of the argument directed from the benches opposite. I hesitate to give any such assurance. It is one thing to arrange for an alteration of what would be the normal tax law of the country when one is concerned with the direct interests of the Revenue in the sense that what we forgo in tax we believe we shall—at least and probably more—gain in sales. That is a pure matter of judgment as to how one effects the sales. If one goes further and suggests that, because one approves of a reorganisation, tax concession should be made, then one gets into very complicated issues indeed in which I think other industries which are not going through this process of denationalisation might have something to say.

The hon. Member for Watford was at the Ministry of Supply and, of course, I and my right hon. Friend would take note of anything he had to say on this subject; but I would not like to mislead him by suggesting that I feel that there is anything to be followed up in that direction. The right hon. Gentleman the Member for Vauxhall (Mr. G. R. Strauss) raised a further point which I am bound to say has for the moment escaped that fallible instrument, my memory.

Mr. G. R. Strauss

I asked the hon. Gentleman to be good enough to give an example where capital reorganisation——

Mr. Boyd-Carpenter

I am much obliged to the right hon. Gentleman. I recall it at once and he need not go any further. One of the perfectly simple things would be an issue of bonus shares in order that they should go to the Agency to be the basis of a new issue.

Mr. Strauss

I am not a taxation expert, but is the hon. Gentleman saying that the distribution of bonus shares is likely to attract a distributed profits tax in those circumstances?

Mr. Boyd-Carpenter

I am advised by the Solicitor-General that not only is that so, but that it is in Section 36 of the Finance Act. 1947.

Question put, and agreed to.

Clause, as amended, ordered to stand part of the Bill.