§ Mr. E. Fletcher
I beg to move, in page 12, line 40, to leave out "1954–55," and to insert "1953–54."
The effect of this Amendment is to make this Clause operative as of the year 1953–54 instead of as of the year 1954–55. As we were saying just now, this is the Clause which is designed to stop a particularly obnoxious kind of racket, which was the subject of a new Clause, which the hon. Member for Ashton-under-Lyne (Mr. Rhodes) explained during the Budget debate last year, when we pointed out to the Government how a number of companies, particularly textile companies in Lancashire, had taken advantage of the section of the Income Tax code which enabled certain companies to obtain a cessation when they closed down their operations.
It was explained that a number of very well-known companies who had had a particularly good year in 1951, and then had a bad year in 1952, resorted to this device. They liquidated the company which had been operating for a number of years, and immediately formed a new company with substantially the same name, but technically a new company. By resorting to this device several millions of revenue was denied to the Exchequer.
We urged the Government in last year's Finance Bill to take immediate and urgent steps to stop that drain of revenue. This year the Government have acceded to our request, but they have done so belatedly. They ought to have done it last year, and it would still be perfectly competent for them to make the opera- 2232 tion of Clause 16 retrospective as of last year. In view of the warnings that were given by the Treasury in the debates last year it would, we submit, be proper and reasonable for the Government to do so, and would not carry with it any of the normal objections which there are on both sides of the Committee to retrospective legislation.
I would remind the Committee of what the Economic Secretary to the Treasury said on this subject during our debates last year. Having expressed his sympathy with the views put forward from these benches, he said—speaking of the Chancellor of the Exchequer:In view of his responsibilities and the interest in this matter, my right hon. Friend is keeping a careful eye on the position and will not hesitate to take action—if necessary, drastic action—if he considers that the state of the public revenue call for it."—[OFFICIAL REPORT, 8th July, 1953; Vol. 517, c. 1306.]I think that every hon. Member of the Committee who heard those words last year, and everyone who read them subsequently in financial and industrial circles, understood them to mean that the Government had it in mind to stop this device, to put an end to this racket, and, if necessary, to do it retrospectively to the years as of which the warning was given.
After our debates last year the matter assumed particularly unpleasant proportions, because we found that not only was this going on with the knowledge of the Treasury but other Government Departments were conniving in it, scandalous though it may seem. Other Government Departments were in collusion with some of these infamous companies which were resorting to this device to save themselves revenue.
2233 May I give one example to show how serious the matter became? The well-known firm of John Brown and Company, the famous shipbuilders, who had a great number of Admiralty contracts, resorted to this device. But they could only do so with Admiralty consent, because that company was under contract to fulfil Admiralty engagements. For some reason or other, the company went into liquidation and the same day John Brown & Co., formed another company with the same name, but, before doing so, went to the Admiralty and said, "Will the Admiralty please transfer our existing contracts to the company we are forming in the same name?" There we had a scandalous example of a Government Department assisting a company to take advantage of this device in order to—[An HON. MEMBER: "Defraud."]—at any rate, to deny revenues to the Treasury. In the debates last year my hon. Friends drew the attention of the Treasury to this practice and we feel fully justified, in view of the serious warning that was given last year, to urge that the operation of the Clause should be made retroactive.
§ Mr. Rhodes
Up to the time when we first drew this matter to the notice of the Chancellor, which was 12 months ago last February, 56 companies availed themselves of this cessation rule. We estimated at that time that the amount of money lost to the Treasury was about £10 million. I am informed that since February, 1953, as many again, probably more, companies have done the same thing.
Until a week or two ago it was quite common to see, in the commercial papers, especially in the North, an entry showing that money which had been allocated in the previous balance sheet for the payment of Income Tax was now free to be put into the general reserve. More often than not an increased dividend was paid as a result. The last one I saw ran to the figure of £867,000 which had been transferred from the Income Tax reserve to the general reserve.
My hon. Friends and I have put this Amendment forward not so much to get a reply from the Financial Secretary as to get a serious reply from the Chancellor of the Exchequer. There are comparisons going about which are not exactly complimentary. When Sir Stafford Cripps 2234 was Chancellor he tried desperately to do what was needed to maintain the country's morale. He appealed to his own people, he appealed to hon. Members behind him, who had influence with the unions, for wage restraint. It worked. He appealed to the employers also, and he saw to it, by legislation if necessary, that they, too, exercised restraint.
Restraint is a very important factor and is one of the two that can keep democracy, as we know it, ticking over. The one is restraint on the part of those who can do it voluntarily, and the other is a very mild inflation. If working folk see an action of this kind going unchecked and no pronouncement or warning is given on it so that they can feel that someone is looking after their interests, there will be a build-up far more than we have had up to now in the shape of wage claims, and unrest and dissatisfaction.
ask the Chancellor of the Exchequer, who is a good-minded man, to say something this morning, although the hour may seem ridiculous, that can go out through the Press to the elements who, by their own restrained example, should be showing the way—that is, those folks who have money to dispose of in dividends—so that they will not look for new loopholes for evasion.
If the Treasury officials refer to the files of the "Manchester Guardian" they will see in the trade notes that a new method is being evolved. I leave it to them to pursue this, but it is there to be seen. I ask the Chancellor to tell us what he really thinks on this, so that it can go out to the country as his views on restraint, not only in relation to dividends but to this kind of practice.
§ Mr. Boyd-Carpenter
As the hon. Member knows, this abuse is not going unchecked. This Clause is in the Bill to check it, and although it would be premature to discuss it, I would say that it is designed to check it and, in my belief, will check it.
What we are concerned with on the Amendment is the perfectly straightforward but much narrower issue as to whether the Clause should operate with respect to company reconstructions made in the present financial year—that is, the Clause as it stands—or whether there 2235 should be put into it the provision proposed in the Amendment, which would make it operate in respect of company reconstructions during the financial year 1953–54. That, and that alone, is the issue which arises in the Amendment.
No one, of course, defends, and, indeed, my hon. Friend the Economic Secretary, in words which have already been quoted, in last year's debate condemned in no uncertain terms, this practice, which, I think, he said was a practice which no reputable company would use. But we face a rather different and, frankly, much more difficult issue when we propose to translate that condemnation into, not merely taking steps to stop the process, which I believe we are doing, but to take the further step of using retrospective legislation to do it.
One hon. Member was good enough to refer, during the discussion on the Motion to report Progress, to the fact that I have spoken more than once in Committee and in the House on the general principles affecting the desirability of retrospective legislation. In principle, probably most, if not all hon. Members, regard it at least as very serious to alter the law not for the future, but to alter the law which operated when people based arrangements upon it in the past. It is not impossible to do it, and there are many precedents; but it is not justifiable unless there is a substantial public purpose for it, such as a large loss of revenue which can only be stopped by making legislation retrospective or retroactive.
That is how the Committee and the House has from time to time approached the problem whether to make some practice retrospectively different in its legal effect from what it was thought to be at the time of the transaction. The Committee, and the House, ought to be sparing in the use of this power. It is easy and human to say that because one dislikes a practice one must not only stop it, but must stop it in a way which has retrospective effect. That is not a wise frame of mind, and one ought to feel compelled to use retrospective effect only when a substantial public purpose is served, and can only be served, in that way.
Let me apply these principles to the facts of this case as I see them. Is it 2236 essential to do it, and would it be right? One consideration is that the Clause is general in its effect and is not confined, nor can it be confined, to cases of deliberate tax evasion. It operates on all company reconstructions which come within its general terms; that is to say, where a company had to the extent of 75 per cent. the same ownership before and after reconstruction. It will operate not only upon companies which have used the existing law on company reconstruction to evade tax, but upon those which had genuine, honest reasons for reconstruction.
That fact is rather material to the question whether we ought to make this provision retroactive, because if we decide to do so we shall upset arrangements made in good faith as part of genuine reconstructions in addition to the transactions made to avoid tax in this not very reputable way. Of course, if one makes the provision retroactive one will catch the guilty with the innocent. It would involve reopening tax settlements which were made on the basis of the then existing law and in many cases where no suspicion of tax evasion arises.
Would it serve the public purpose to make this retroactive to 1953–54? My information is that, broadly, the main body of these transactions took place earlier. It will be appreciated that precise details are impossible to obtain, but the general tenor of the information which I have is that probably the largest number of the transactions with which we are concerned took place in 1952–53. Consequently, if we adopted the proposal in the Amendment and made it retrospective to 1953–54, we should not catch the main body of these transactions. That being so we must face the problem of whether it does not follow that it would be right to go further than is suggested here and make the provisions retrospective to 1952–53. That would be an even more serious thing to do than that which is here proposed. All the objections to interfering with perfectly honest and normal tax settlements, all the disturbance caused by the reopening of transactions of some years back, would become even more important when the retrospection was two years rather than one. 2237 On the other hand, in the light of the facts which I have placed before it, the Committee, if it is concerned to go back and to pursue these cases into the period in which the bulk of them took place, must recognise that the proposal to make the provision retroactive to 1953–54 will not achieve that object. It would be necessary to take the even more drastic and obviously much more difficult step of making the proposal retroactive for a further year.
That bears a good deal on whether we should be wise, in these circumstances, to make the provision retroactive at all. I have suggested a test to the Committee—whether major public purposes would be served by making the provisions retroactive. It seems to me that we shall not achieve very much clawing back of revenue. What is probably even more important in the minds of hon. Members, we shall not operate on the main body of these transactions at all by this proposal. We should, therefore, be faced with the great embarrassment and the difficulty of principle of indulging in retroactive legislation without biting on the main body of the transactions.
There is another point perhaps worth considering. Reference has very properly been made to the remarks made on this subject last year from these benches. Those statements were serious and seriously considered. They did not, of course, contain any express indication or warning of retroactive action. That, again, is a factor which we should weigh heavily before deciding upon retroactive action, for it undoubtedly makes such action the more difficult to justify in accordance with the principles on which the Committee has proceeded for some time. I wonder whether the Committee cannot come sensibly to the conclusion that what we want to do is to make this practice, if not impossible, at any rate un-remunerative for the future. That is what the Clause does; but I must not anticipate any discussion on it.
On the issue as to whether we should seek to hit at transactions in the past year. it really does seem that the whole weight of consideration is against it. This is not a case in which we can say to ourselves conscientiously that the principles, which I suggested to the Committee a few moments ago could alone justify using the retroactive 2238 weapon, are really satisfied here. We are not going to serve any substantial purpose, we are not going to touch the main body of transactions.
I do not underestimate the very important psychological considerations to which the hon. Member for Ashton-under-Lyne (Mr. Rhodes) referred. It is extremely important for the moral wellbeing of our society to take effective action to check it. I agree entirely with the hon. Member, but I would suggest that by putting the Clause in the Bill, a Clause which is welcomed by all quarters, we are making it clear that this loophole in the existing tax law is being stopped. By it I believe that we really meet the very important psychological considerations which he had in mind.
I would, therefore, suggest to the Committee that the case for retroactive action is not made out and that we ought not to allow ourselves to be driven by our natural dislike, which no one shares more strongly than my right hon. Friend the Chancellor of the Exchequer, of the nature of these transactions to take the retroactive step.
§ Mr. Gaitskell
I have listened carefully to the Financial Secretary's statement, but I do not find it convincing. The fact is that this practice was universally condemned last year, and in very outspoken terms by the Economic Secretary, speaking for the Government. It was made quite clear, by implication, that if it went on, the Government would act. I would suggest that is a very relevant consideration when we come to the question of retroactive legislation.
Everybody agrees that one has to be very careful about that. The first question was: was any warning given? The answer in this case is, plainly, yes, it was given. The second question is: does it really matter very much as regards the future? I say it does matter because if practices of this kind continue, and the Government's bluff can be called in this way, it will be a thoroughly bad thing for the administration and enforcement of income tax legislation.
As for the argument that it does not really catch everybody out because there were certain cases before 1953–54, that, I think, we must let go, on the grounds that before February of last year this question was not raised. We must be 2239 honest about that and face the fact that no warning was given earlier; so earlier cases would have to be left out.
As for the final argument that a number of innocent cases would be caught, I fail to follow that. I do not see that any very great harm is done if certain so-called innocent reconstructions took place, if they were completely innocent,
§ I cannot see that they would lose under this Amendment. In all these circumstances, therefore, I would suggest to my hon. Friends that we divide on this Amendment.
§ Question put, "That 1954–55' stand part of the Clause."
§ The Committee divided: Ayes, 122; Noes, 87.2241
|Division No. 150.]||AYES||16.18 a.m|
|Aitken, W. T.||Harris, Frederic (Croydon, N.)||Oakshott, H. D.|
|Allan, R. A. (Paddington, S.)||Harrison, Col. J. H. (Eye)||O'Neill, Hon. Phelim (Co. Antrim, N.)|
|Alport, C. J. M.||Harvey, Ian (Harrow, E.)||Ormsby-Gore, Hon. W. D.|
|Arbuthnot, John||Heath, Edward||Page, R. G.|
|Baldock, Lt.-Cmdr. J. M.||Henderson, John (Cathcart)||Pitman, I. J.|
|Baxter, Sir Beverley||Hinchingbrooke, Viscount||Powell, J. Enoch|
|Birch, Nigel||Hirst, Geoffrey||Price, Henry (Lewisham, W.)|
|Bishop, F. P.||Holland-Martin, C. J.||Prior-Palmer, Brig. O. L.|
|Black, C. W.||Hollis, M. C.||Raikes, Sir Victor|
|Bossom, Sir A. C.||Hope, Lord John||Rayner, Brig. R.|
|Boyd-Carpenter, Rt. Hon. J. A.||Hornsby-Smith, Miss M. P.||Redmayne, M.|
|Boyle, Sir Edward||Hudson, Sir Austin (Lewisham, N.)||Remnant, Hon. P.|
|Brains, B. R.||Hylton-Foster, H. B. H.||Ridsdale, J. E.|
|Bromley-Davenport, Lt.-Col. W. H.||Iremonger, T. L.||Rodgers, John (Sevenoaks)|
|Brooman-White, R. C.||Jenkins, Robert (Dulwich)||Russell, R. S.|
|Buchan-Hepburn, Rt. Hon. P. G. T.||Johnson, Eric (Blackley)||Schofield, Lt.-Col. W.|
|Butler, Rt. Hon. R. A. (Saffron Walden)||Kaberry, D.||Scott-Miller, Cmdr. R.|
|Campbell, Sir David||Kerby, Capt. H. B.||Shepherd, William|
|Channon, H.||Leather, E. H. C.||Simon, J. E. S. (Middlesbrough, W.)|
|Clarke, Col. Ralph (East Grinstead)||Legge-Bourke, Maj. E. A. H.||Smithers, Peter (Winchester)|
|Colegate, W. A.||Legh, Hon. Peter (Petersfield)||Stevens, Geoffrey|
|Conant, Maj. Sir Roger||Lindsay, Martin||Steward, W. A. (Woolwich, W.)|
|Cooper-Key, E. M.||Linstead, Sir H. N.||Summers, G. S.|
|Craddock, Beresford (Spelthorne)||Lucas, Sir Jocelyn (Portsmouth, S.)||Thomas, P. J. M. (Conway)|
|Crookshank, Capt. Rt Hen. H. F. C.||Macdonald, Sir Peter||Thompson, Lt.-Cdr. R. (Croydon, W.)|
|Crosthwaite-Eyre, Col. O. E.||McKibbin, A. J.||Thornton-Kemsley, Col. C. N.|
|Crouch, R. F.||Mackie, J. H. (Galloway)||Turner, H. F. L.|
|Darling, Sir William (Edinburgh, S.)||Maclean, Fitzroy||Turton, R. H.|
|Digby, S. Wingfield||Maitland, Patrick (Lanark)||Vane, W. M. F|
|Donner, Sir P. W.||Manningham-Buller, Rt. Hn. Sir Reginald||Wakefield, Edward (Derbyshire, W.)|
|Drayson, G. B.||Marples, A. E.||Wall, Major Patrick|
|Drewe, Sir C.||Marshall, Douglas (Bodmin)||Ward, Hon. George (Worcester)|
|Fleetwood-Hesketh, R. F.||Maude, Angus||Ward, Miss I. (Tynemouth)|
|Fletcher-Cooke, C.||Maudling, R.||Waterhouse, Capt. Rt. Hon. C.|
|Fort, R.||Maydon, Lt.-Comdr. S. L. C.||Wellwood, W.|
|Galbraith, T. G. D. (Hillhead)||Mellor, Sir John||Williams, Gerald (Tonbridge)|
|Garner-Evans, E. H.||Molson, A. H. E.||Wills, G.|
|Godber, J. B.||Nabarro, G. D. N.||Wilson, Geoffrey (Truro)|
|Gomme-Duncan, Col. A.||Neave, Airey|
|Graham, Sir Fergus||Nicholson, Godfrey (Farnham)||TELLERS FOR THE AYES:|
|Grimston, Sir Robert (Westbury)||Nicolson, Nigel (Bournemouth, E.)||Mr. Studholme and Mr. Vesper.|
|Hall, John (Wycombe)||Noble, Comdr. A. H. P.|
|Acland, Sir Richard||Delargy, H. J.||Janner, B.|
|Adams, Richard||Dodds, N. N.||Jay, Rt. Hon. D. P. T.|
|Albu, A. H.||Evans, Albert (Islington, S.W.)||Jeger, George (Goole)|
|Benn, Hon. Wedgwood||Evans, Stanley (Wednesbury)||Jenkins, R. H. (Stechford)|
|Blackburn, F.||Fienburgh, W.||Johnson, James (Rugby)|
|Blenkinsop, A.||Finch, H. J.||Jones, Frederick Elwyn (West Ham, S.)|
|Bowden, H. W.||Fletcher, Eric (Islington, E.)||Jones, Jack (Rotherham)|
|Braddock, Mrs. Elizabeth||Foot, M. M.||Keenan, W.|
|Broughton, Dr. A. D. D.||Gaitskell, Rt. Hon. H. T. N.||King, Dr. H. M.|
|Brown, Rt. Hon. George (Belper)||Gibson, C. W.||Lawson, G. M.|
|Burton, Miss F. E.||Gordon Walker, Rt. Hon. P G||Marquand, Rt. Hon. H. A|
|Butler, Herbert (Hackney, S.)||Grey, C. F.||Mellish, R. J.|
|Callaghan, L. J.||Griffiths, William (Exchange)||Mikardo, Ian|
|Champion, A. J.||Hannan, W.||Mitchison, G. R.|
|Chetwynd, G. R.||Hargreaves, A.||Morgan, Dr. H. B. W.|
|Collick, P. H.||Hayman, F. H.||Morris, Percy (Swansea, W.)|
|Craddock, George (Bradford, S.)||Herbison, Miss M.||Moyle, A.|
|Crosland, C. A. R.||Hobson, C. R.||Oswald, T.|
|Dalton, Rt. Hon. H.||Holmes, Horace||Parker, J.|
|Davies, Ernest (Enfield, E.)||Hughes, Hector (Aberdeen, N.)||Peart, T. F.|
|Davies, Harold (Leek)||Hynd, H. (Accrington)||Popplewell, E|
|Price, J. T. (Westhoughton)||Slater, Mrs. H. (Stoke-on-Trent)||Whiteley, Rt. Hon. W.|
|Proctor, W. T.||Slater, J. (Durham, Sedgefield)||Willey, F. T.|
|Rhodes, H.||Taylor, John (West Lothian)||Williams, Rev. Llywelyn (Abertillery)|
|Roberts, Rt. Hon. A||Thomas, Ivor Owen (Wrekin)||Williams, Ronald (Wigan)|
|Ross, William||Thomson, George (Dundee, E.)||Williams, W. R. (Droylsden)|
|Shackleton, E. A. A.||Thornton, E.||Wyatt, W. L.|
|Short, E. W.||Wallace, H. W.|
|Shurmer, P. L. E.||West, D. G.||TELLERS FOR THE NOES:|
|Simmons, C. J. (Brierley Hill)||Wheeldon, W. E.||Mr. Wilkins and Mr. Rogers.|
Question put, and agreed to.
§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
§ Mr. Stevens
I should like to make an inquiry of the Chancellor. I think that the debate on the last Amendment has made perfectly plain the object of the Clause, with particular reference to the type of transaction at which it is specifically aimed, but the Financial Secretary indicated that there would be caught by the Clause not only those erring companies but probably some perfectly innocent others as well.
I think my right hon. Friend was referring there only to complete companies being reconstructed, but what is the position under the Clause in regard to hiving off of part of a business of a company to another company within the same group? As I see it, at present there is a double taxation liability. The previous owner of the hived off part of the business will be assessed for taxation on the last year of ownership of that part of the business: the new owner of that part of the business which is transferred will be assessed in respect of the first year of its new source of income on the same quantum of profits, and so double assessment will arise.
The particular kind of case I have in mind, which is real and important, arises for example where an organisation in this country has branches overseas, perhaps in the Empire. I have had many examples of this in recent years where nationalist feeling dictates the policy of the company concerned, laying down that overseas it shall form a new company in that territory, perhaps giving a share to the indigenous natives. It seems to me that this Clause will penalise that kind of transaction. I am not clear on that, but if it is so, as I believe it to be, and if it is considered to be undesirable that that should be so, a very simple proviso would deal with that particular difficulty.
At the end of line 13, on page 13, there could be a proviso to the effect that if a transfer of a part of the trade is made 2242 to a company or partnership which is not resident in the United Kingdom, no charge of tax should be made in respect of the part of the assessment which is apportionable to it. I should like my right hon. Friend to tell me whether I am right, and if so, whether he considers that to be a very undesirable feature of the Clause as drawn, and, in those circumstances, whether he might contemplate an Amendment.
§ Mr. Gaitskell
I wish to raise a somewhat similar point to that raised by the hon. Member for Langstone (Mr. Stevens). What I should like to know is whether the Clause covers the case where it is not a matter of a company being changed, so to speak, into another company, but a case of a person or partnership becoming a company.
I understand that the abuses which gave rise to this Clause have, in fact, occurred in a number of cases where it has been a matter of a partnership or simply an individual becoming a company. If that is the case, it seems to me that there is a pretty strong argument for taking the same action to prevent the advantage accruing from the present provisions of the Income Tax Acts in such a case, as occurs in the case of a more straightforward company reconstruction.
§ Mr. Boyd-Carpenter
My hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) raised two points. His main point related to the case where companies, to use his phrase, hived off, and he feared that they might attract in that way what he described as double taxation. I think that what he had in mind was the possibility that the provisions of this Clause and of the ordinary law might simultaneously apply so as to attach two sets of liability to the same company. I can assure him that that will not happen.
What will happen will be this. If the hived-off company comes within the provisions of this Clause with respect to 75 per cent. common control, the Clause 2243 will apply and the other provisions of the law which normally apply will not, that is to say, it will be taxed on this basis. If the Clause does not apply, the ordinary law alone will apply. There will certainly be no double taxation. I note my hon. Friend's other point on the question of companies overseas.
The right hon. Member for Leeds, South (Mr. Gaitskell) raised the question whether this Clause operated where the operation was conducted in the first place by bodies other than a company—that is to say, I think, a case such as a partnership. The answer is that it will not. The subsection will not apply unless a company is the person or one of the persons engaged in carrying on the trade before the change, and it therefore does not cover changes in the proprietorships of businesses carried on by individuals or individuals in partnership.
We did consider that aspect of the matter before the Clause was inserted in the Bill, and it is theoretically possible that the same device which was used in a certain number of cases by companies could be used in changes in the 2244 proprietorship of partnerships and businesses of that sort, but there did not appear to be any serious evidence that there was abuse in this direction, and as changes in the proprietorship of partnerships, and so on, tend to take place quite normally and naturally for normal business reasons, we did not think that it was necessary to interfere with them. We shall watch the position and if in this sphere, contrary to our expectations, the use of this device is developed, we shall not hesitate to take the necessary action.
§ Clause ordered to stand part of the Bill.
§ To report Progress, and ask leave to sit again.—[Mr. Redmayne.]
§ Committee report Progress; to sit again this day.