Clause 4.—(PURCHASES OF SHARES BY FINANCIAL CONCERNS AND PERSONS EXEMPTED FROM TAX.) (Hansard, 8 December 1955)

§ Mr. E. Fletcher
I beg to move, in page 5, line 19, to leave out from "enactment" to the first "to" in line 21.
This is one of the most important Amendments which fall to be considered during our discussions today. As the Chancellor will appreciate, we are attempting to leave out the following words from Clause 4 (2)— … (including, save as otherwise expressly provided, an enactment in any future Act) … This part of the Clause deals with dividend stripping in so far as charities are affected. We had a considerable debate in Committee on dividend stripping generally and I do not propose, nor will it be necessary, in moving the Amendment, to deal with the general case. It will be sufficient to deal with dividend stripping by charities.
The Economic Secretary will remember that in Committee I suggested that dividend stripping has been practised in the last few months not only by finance companies, financial trusts and companies 622 engaged in pure finance transactions, but also by charities. The Economic Secretary said that in his experience there had not been very much dividend stripping by charities. I said with great respect that the hon. Gentleman was quite wrong. Since then, I have made further inquiries.
I am not animadverting on whether they are entitled to do so or not, but I have found that a number of charitable organisations have practised dividend stripping. I am not moralising about dividend stripping. The House has decided that the practice is reprehensible and should be stopped but, on the other hand, as the law stands, certain privileged exemption from taxation is given to charities.
The whole object of this Amendment is to inquire what are the Government's future intentions towards charities, because it is most significant that this part of the Bill not merely deals with charities as such under present enactments but also includes charities which will fall under any future enactments. That is a most serious thing, and I hope that we shall not find that, by some kind of side-wind in inserting into a Bill words dealing with some future enactments, we shall involve, under our dividend-stripping regulations, some bodies which, though not charities today, may fall within this definition of charities at a later date.
As the Economic Secretary will be aware, the whole subject of charities and the way in which they should be regarded by the tax law is the subject of a very considerable analysis in the recent report of the Royal Commission of the Taxation of Profits and Income. We have also had a separate Commission dealing with the whole law of charities. A great many people tend to think that a charity in the popular sense is some organisation that is necessarily worth while supporting, but that is not the precise truth, because a charity in the legal sense has come to mean something quite different.
Charities, which originally derived from the Poor Law of Elizabeth, were introduced at a time when it was not merely desirable but necessary that private bodies should engage in all kinds of philanthropic and benevolent works. The necessity for charities of that kind is obviously very much less in these days of the Welfare State, and the result today is that we have all kinds of charities which. 623 because they qualified under the technical legal definition of a charity, are subject to no Income Tax at all. The Royal Commission said that the result is that about £25 million a year or more is free of taxation. The Royal Commission also suggested that the subject should be very thoroughly overhauled, and that in future the legal definition of a charity should be modified and brought into line with modern requirements.
I do not criticise any body which is technically a charity for taking advantage of the law as it stands today. For example, a great many charities deliberately invite persons to subscribe, by way of a covenant, for seven years or more in order that the subscribers may save Income Tax or Surtax. I have not yet heard anybody on either side of the House suggest that that is a wrong, improper or immoral thing to do.
By analogy, the same kind of thing has been happening with regard to dividend stripping by charities. An Oxford college is a charity, for example, and has the benefit of the law relating to charities. So have a great many similar institutions. I would not like to say that any particular Oxford college, or any other college or comparable institution, has engaged in dividend stripping operations, but I think we are entitled to consider whether, if they had so engaged, they would have been doing anything reprehensible or not.
I can quite well imagine that any charitable organisations are entitled to take the view that, so long as they are regarded by the law as being charitable, they are entitled to encourage people to subscribe to its funds in such a way that enables taxpayers to avoid or evade taxation. I can imagine a plausible argument being put to the effect that if a charity saw an opportunity by some financial transaction of earning for itself twice as much as would have been made by some other kind of transaction, it would be morally justified in doing so, but I do not want to enter into the rights and wrongs of that matter.
6.45 p.m.
The effect of this Clause, as I understand, will be very considerably to limit the possibilities of dividend stripping that are available to charities. I do not, 624 however, take the view that it will necessarily exclude their attractiveness altogether, because, as the Financial Secretary will know, as the Bill stands, it is still only necessary for a charity to enter into one of these transactions and then retain the unstripped company which it has acquired for a period of six years or more, and then, at the end of the six years, to strip it, for the charity to obtain precisely the same advantage as it would get today.
There cannot be many investments, as the Chancellor will know, that double themselves in value in six years, and, therefore, there still is—and it is well-known in the City of London—a considerable temptation, not only on the part of charities but of all financial organisations, to buy up a company which is swollen with undistributed dividends and retain it for the period of six years and then distribute. That is why we put down our Amendment to extend the period to ten years. I do not want to pursue that, but merely to obtain from the Economic Secretary an explanation of the very mysterious words— (including, save as otherwise expressly provided, an enactment in any future Act). It seems to me that that might mean anything. It might mean an Act relating to Income Tax, or one relating to charities. It might mean anything. It seems to us so novel, so unprecedented, that the House certainly ought not to pass it without a great deal of further examination.

§ Mr. Albu
I beg to second the Amendment.
The only additional comment I should like to make on what my hon. Friend the Member for Islington, East (Mr. E. Fletcher) has said is that I cannot see why these words in brackets are needed at all. I know that no Parliament can bind any other, and, presumably, if in future enactments there were changes in the present arrangements, this situation can be safeguarded in the appropriate Bill. Why it is necessary, therefore, to include in a Bill in this Parliament phrases which are intended to safeguard what may be done in a Bill of the future, I cannot understand, unless it is considered that the Parliamentary draftsmen of the future may be so forgetful as to forget what this Bill has done, though I 625 do not think that that will be the case. I cannot see why the Treasury cannot accept this Amendment.

§ Sir E. Boyle
I am very glad to answer the point which has just been raised by the hon. Member for Edmonton (Mr. Albu). This is a technical matter, and this is really an Amendment which I know my hon. and learned Friend the Solicitor-General would have dealt with could he have been here. It was not convenient for him to come, and he has asked me to apologise to the House for his absence.
This is really a drafting point. It is simpler to include these words now rather than have to make special exceptions for cases coming within the scope of the present Clause in the event of any future legislation being enacted that confers exemption from Income Tax extending to dividends, and that is why I say that it is really a purely drafting point. If hon. Gentlemen opposite feel uneasy about it I certainly would not waste the time of the House in resisting this Amendment at any length, because it is not a matter of importance one way or the other. It is simply a matter of the convenience of drafting in the future.
The hon. Gentleman the Member for Islington, East (Mr. E. Fletcher) seemed to be suggesting that the Amendment was related to the question of what happens to charities that indulge in certain activities in the future. I can assure him that they are caught by the Clause as drafted. I took his point, but it has not much to do with this Amendment.

§ Sir Patrick Spens (Kensington, South)
I hope the House will prefer that this Amendment shall be accepted. I do not like this form of legislation, because in future enactments the authors might forget that this Clause exists and then find that they have done something which they never intended to do by virtue of a Clause of this nature in this Bill, which everybody will have forgotten about. So, technically, it is better that these words should be left out.

§ Mr. E. Fletcher
I am obliged to the Economic Secretary and I entirely agree with the right hon. and learned Gentleman. The words cause us all some concern and we are glad to know that the Amendment will be accepted.

§ Sir E. Boyle
I beg to move, in page 7, line 6, to leave out "any fund or trust and."
It would be for the convenience of the House if we could take this Amendment with the Amendment immediately following, to line 7.
This Amendment meets a point raised by my right hon. and learned Friend the Member for Kensington, South (Sir P. Spens) during the Committee stage. The words proposed modify subsection (8, b) by providing that in the definition of "person" in that paragraph the words, "any fund or trust" should be omitted and that instead there shall be added at the end of the paragraph words ensuring that any reference in the Clause to a person entitled to an exemption from Income Tax will, in relation to the trust or fund, include a reference to persons entitled to make claims for the granting of that exemption. We are grateful to my right hon. and learned Friend for drawing attention to this point and I am glad we have been able to meet it.

§ Sir P. Spens
I am much obliged to my hon. Friend for what he has done. It is essential that where a tax is imposed the persons accountable and made liable should be included in the Bill, and it was to make this clear that I suggested this drafting Amendment.

§ Sir E. Boyle
I beg to move, in page 7, line 11, to leave out "fixed gross."
This time it would be for the convenience of the House if we could discuss this Amendment with the next two Amendments to lines 12 and 13, and also the Amendment to line 17.

§ Mr. E. Fletcher
On a point of order, Mr. Speaker. It seems to me that the Amendment to line 13 raises a rather special point and I hope that the House will have an opportunity of dealing specially with that Amendment. I hope that we shall not deal with these important matters too quickly.

§ Sir E. Boyle
I think I shall be able to satisfy the hon. Gentleman about that Amendment. Paragraph (c) of subsection (8) defines the shares of a class to which this Clause applies as meaning any class of shares— … other than a class of fully-paid preference shares carrying only a right to dividends at a fixed gross rate … which … does not substantially exceed the yield generally obtainable on preference shares the prices of which are quoted on stock exchanges in the United Kingdom.… The effect of paragraph (c) as drafted is that the only type of shares excluded is a fully-paid, non-participating preference share carrying a fixed gross rate of dividend that is not abnormally high.
Now, if I can have his attention, I come to the point in which the hon. Gentleman the Member for Islington, East (Mr. E. Fletcher) is interested. It has been represented that preference shares carrying a rate fluctuating only with the rate of Income Tax—that is to say, preference shares carrying a fixed net rate or a rate free of Income Tax up to a specified amount in the £—should not be treated less favourably under the Clause than preference dividends at a fixed gross rate. This is a minor and reasonable point and the Amendment seeks to meet it.