Clause 22.—(CAPITAL ALLOWANCES ETC. (AMENDMENT AS TO CERTAIN SALES).) (Hansard, 24 June 1954)

§ The Solicitor-General
I beg to move, in page 25, line 10. after "sale," to insert: and the circumstances are not at that time such that an allowance or charge under Part X or XI of that Act falls or might fall to be made to or on that party in consequence of the sale. I should like to say a word about Clause 22 in order to make the object of the Amendment clear. The Clause is intended to remedy what now appear to be two defects in the Fourteenth Schedule of the Income Tax Act, 1952, relating to balancing charges and allowances where there is a sale between different concerns. The effect and object of this Amendment is to ensure that in remedying this defect there should be no retrospective effect.
The Clause applies only to assessments for 1954–55 and later years, so that it would not, at first sight, be possible for it to have any retrospective effect. But a balancing charge for 1954–55 or 1955–56 might arise from a sale which took place before 6th April, and it could be argued that the Clause is consequently open to objection as having a somewhat retrospective effect. It is to avoid any argument upon that score that I move this Amendment.

§ Mr. Stevens
I should like to express my thanks to my right hon. and learned Friend the Solicitor-General and. through him, to my right hon. Friend the Chancellor of the Exchequer for accepting, broadly speaking, the terms of the Amendment which I put down, and which was not selected.
The Clause as drafted undoubtedly can have, as my right hon. and learned Friend says. a retrospective effect, and 641 by the Amendment the Chancellor has demonstrated his horror of retrospective legislation. I only want to say, further, that I sincerely hope that the virus of anti-retroaction will remain with him and his right hon. Friends during the discussion of the remaining Clauses of the Bill.

§ Mr. Houghton
The Solicitor-General has not explained how these two defects in the Fourteenth Schedule of the 1952 Act came to light. The Committee is asked to overrule a decision of the Special Commissioners in the case of paragraph (a) and a decision of the House of Lords in the case of paragraph (b), and we ought to have a little more explanation how the trouble occurred. The Amendment moved by the Solicitor-General prevents retrospective effect being given to paragraph (a). As I understand, the Special Commissioners decided that an election could be made under the Fourteenth Schedule of the 1952 Act when a parent company in this country sold—

§ The Solicitor-General
In moving a limiting Amendment to what is already in the Clause I am confined to dealing with the effect of that Amendment I cannot go on to give reasons for the inclusion of the Clause in the Bill. I could indicate quite shortly why paragraphs (a) and (b) have been put in when we come to the Question, "That the Clause stand part of the Bill," but I do not think it right to take up the time of the Committee on a discussion of this limiting Amendment.

§ Mr. Houghton
In that case I shall defer my remarks until then.

§ The Solicitor-General
I beg to move, in page 25, line 22, at the end, to add: Provided that paragraph (a) of this section shall not apply in the case of a sale made before the sixth day of April, nineteen hundred and fifty-four, where the property was sold at a price other than that which it would have fetched if sold in the open market. I have to admit to the Committee that my last speech was made on the wrong Amendment. I am glad that no one noticed it. The speech which I made on the last Amendment was the one I ought to have made in moving this one. The 642 hon. Member for Sowerby (Mr. Houghton) has been extremely kind to me.

§ Mr. Mitchison
Is that what the right hon. and learned Gentleman would call "prospective oration" rather than retrospective legislation?

§ The Solicitor-General
I would rather not answer that question. It was a most unfortunate accident, for which I apologise.

§ Mr. Houghton
I was not being kind to the right hon. and learned Gentleman. I found his speech hard to follow, but I assumed that he made the speech which obviously had to be made.

§ The Solicitor-General
I am sorry. I was hoping that the hon. Member was being kind to me for once. Dealing with the previous Amendment, the point—

§ The Temporary Chairman (Mr. George Thomas)
Order. I do not want to be difficult, but I think it would be better if that discussion were left until we come to the Question. "That the Clause stand part of the Bill." The Amendment appears to be consequential upon the Secretary-General's last speech.

§ The Solicitor-General
I hope that I may now say properly what I ought to have said before as to the effect of the Amendment to paragraph (a), since it has been incorporated in the Clause, but before I do so I think it would be convenient to indicate what the Clause is intended to deal with. It seeks to remedy two defects in the Fourteenth Schedule of the 1952 Act. Paragraph 4 of that Schedule gives power to opt to treat. The effect of exercising the option on a sale is to pass on from the vendor to the purchaser the burden of allowances and the liability for balancing charges.
That works all right when the vendor and the purchaser are in the United Kingdom, and it was meant to be confined to transactions between persons who were subject to United Kingdom tax. There was no difficulty about it in that case, because it did not impose a tax or produce a relief. But where the sale takes 643 place to a company resident outside the United Kingdom the effect of exercising the option can be to relieve the vendor of the liability to a balancing charge, while making it impossible to recover that liability from the purchaser, as it would be recoverable if he were subject to the jurisdiction of this country.
The effect of the Amendment to paragraph (a) is to eliminate that defect and to prevent the option from being exercisable when the sale takes place to a person resident outside the United Kingdom. The Amendment goes one stage further. A company in this country can sell to another company overseas, which has a branch here, in which case the branch would be liable to tax. There can be no objection to the transfer to the branch in this country because there would be no avoidance of tax in consequence of the exercise of the option. The branch would be liable.
A second defect which the Clause is intended to remedy emerged as a result of a decision by the House of Lords—in the case of Commissioners of Inland Revenue v. Wilson's (Dunblane) Ltd.—which prevented the adjustment which the Schedule provides should take place in the event of certain sales operating. The House of Lords said that that provision would not operate if the sale had taken place at market price and not at some lower price. It had been thought that the provision to stop evasion would also apply if the sale were at market value, but it has been held to the contrary, and it is only right that an adjustment should be made to ensure that there is no evasion.

§ Mr. Stevens
Despite the Amendments which have now been incorporated in the Clause, I am still not quite happy about it. The position of a company incorporated in this country, and therefore normally liable to United Kingdom tax—

§ Mr. Stevens
There are many instances where companies incorporated in the United Kingdom and subject to United Kingdom Income Tax operate branches in territories overseas, including Empire 644 territories. I raised on Clause 16 the question about the extent of national feeling in a territory dictating a policy to the United Kingdom company of forming a company registered in the territory in which it is operating. A sale, taking place in circumstances of that sort, by the parent company here to the newly-formed company overseas, is legally a sale by the vendor to the purchaser, but it is really an internal transaction.
As the Clause is drafted at present, very possibly penal balancing charges may lie at the door of the vendor company. I see my right hon. and learned Friend shaking his head negatively, but it still seems to me that that is possible. The price for the transaction as a matter of expedience may not be the open market price but may well be a price substantially higher than the taxation written-down value in this country of the assets transferred.
I see the object of the Clause. The Chancellor does not want charges by reason of the fact that the purchaser is not subject to United Kingdom taxation. That is very obvious, but it seems to me that if in a transaction of the nature I have indicated, which is virtually a domestic transaction, though it is a sale in law, the plant and machinery and the industrial buildings sold to the new company formed overseas are used by that company for the purpose of the group for a reasonable period of, say, three years after the sale, no such balancing charges should arise, but the taxation written-down values may well be deemed for taxation purposes to be the selling price. I should be very glad if my right hon. and learned Friend would consider that point seriously.