§ 8.0 p.m.
§ Mr. Gaitskell
I beg to move, in page 4, line 34, after "entitled" to insert:after the twenty-sixth day of October, nineteen hundred and fifty-five.
§ The Temporary Chairman (Mr. James H. Hoy)
Perhaps the Committee might consider, with this Amendment, the Amendments in line 38, and the first Amendment in line 45; in page 5, lines 7, 26 and 33.
§ Mr. Gaitskell
I quite agree, Mr. Hoy, that all those Amendments hang together. 2215 The operative Amendment is not the first Amendment, which I have moved, but the very simple Amendment which occurs in a number of places on the Order Paper, in the first instance in page 4, line 38, to leave out "and" and to insert "or."
This is an even more complicated Clause than the previous Clause, and it will be necessary for me to make a brief explanation, even at this stage, of what is involved. There are a number of Amendments down of a technical character, but even before we reach them I think I must give an explanation of what is involved.
The Clause deals with what is called dividend stripping, which, as I understand it, arises under two conditions: first, when a company has substantial undistributed profits which can be paid out in dividends and presumably are therefore available in liquid form; and, secondly, as a bargain, a transaction, between a person or a company whom I might describe as a "normal" taxpayer and an "abnormal" taxpayer. By "normal," I mean an individual who is paying Income Tax and Surtax, if it is an individual, in the ordinary way, and by "abnormal" I mean either a finance company the business of which is to buy and sell shares, and which is therefore liable to taxation on what would be capital profits in the case of other persons, or an institution such as a charity, which is exempt from taxation.
Those two conditions produce the following types of bargain. A finance company, for example, buys up a controlling interest in another company of the kind which I have described—that is to say, a company with large undistributed profits. Let us say these amount to £150,000. The finance company then proceeds to distribute to itself £50,000 of accumulated dividends, net of tax, the tax having previously been paid by the company which it has bought. It then proceeds to resell the company for £100,000. It has taken £50,000 out of the company, it paid £150,000 for it originally, and it sells the company for £100,000. It can thus show a loss of £50,000 on the capital transaction and for that reason is able to claim a tax rebate, at 8s. 6d. in the £, of £21,000, in round figures. It has therefore spent £150,000 2216 and received back £171,000, so that the final outcome is a gain of £21,000.
Another case is where a charity, rather than a finance company, is involved and where the charity does exactly the same thing—for example, buys the other company for £150,000, draws out £50,000 in dividends, resells the company for £100,000 and then does not claim the capital loss in this case, because that would not be involved, but claims the return of tax on the £50,000 dividends which it has received, and thus gets a net gain of £21,000 or thereabouts.
I do not doubt that in order to achieve these bargains there is a certain sharing in the advantages to be gained from the tax authorities, so that I suppose in the instance which I have given the price to be paid for the company would be rather higher than I have suggested. It may be any figure, according to how the bargaining goes.
I want to make it quite plain from the start that we entirely support the Government's action in proposing to stop this very serious piece of tax-avoidance. Indeed, it is our view, from what we have heard about these matters, that it might well have been stopped earlier. I think that the Government are to be severely criticised for not having done this at least in their April Budget. They would certainly have received strong support from this side of the Committee and not much time would have been wasted. From what the Financial Secretary has said in answers to Questions, it is evident that the losses from this type of transaction have been growing very greatly in recent years and months.
Our second point of criticism is that in our opinion the Clause does not go far enough. I apologise for having to explain the background to the Amendment, but it would have been quite unintelligible without such an explanation. The Amendment is intended to strengthen the operation of the Clause because, as we understand the Clause, it catches only a finance company, or a charity for that matter, which acquires the controlling interest in another company after 26th October last and then proceeds to distribute the dividend within six years. A company which has already acquired the controlling shares in another company, has in fact already engaged upon this business but has not so far 2217 drawn off the cream and taken advantage of the tax situation, is still able to do so, according to our reading of the Clause.
The reason is that the conditions laid down in the Bill are that the only companies which are caught by the Clause are those which actually buy the shares after the date of the Budget and proceed to distribute the dividends within six years. It seems to us quite wrong that those already engaged on this—I will not say nefarious type of transaction as that would be an unfair word, perhaps—extremely doubtful type of transaction, who have been benefiting at the expense of the Revenue and the country over a considerable time, should be allowed to do so.
Our Amendment does at least go some way to prevent that, because by substituting the word "or" for "and" it would catch the company which has bought the shares, provided it distributed them within six years. It is not necessary, as a result of the Amendment, for the shares to be bought after the Budget date. By our Amendment the company which has bought shares even before the Budget but not distributed them would be caught. We believe that to be a very reasonable and sensible Amendment, and we very much hope that the Government will be able to accept it.
We have proposed that the same change should be made in the case of a charity. There may be a difference between the two cases and for my part I should say the strongest argument arises in the case of a company. I think we would all feel a little more sympathetic towards a charity than towards a finance company, but if the Government take the view that there is a strong case against one type of tax avoider and not such a strong case against the other type, I think that my hon. Friends, after listening to the arguments, would not adhere literally to the terms of every one of these Amendments, but would be prepared to see some of them accepted on the lines I have just indicated and others rejected.
So far as I see, the only argument which can be adduced against what we are putting forward is that to do so would be in some way retrospective. I do not see that that applies in this instance. After all, we are not saying that we should make people pay tax which they 2218 did not pay previously on a transaction which has been completed, but we say that if they now proceed to draw out a dividend on which they expect to make a profit in one way or another they should not get away with it. I do not regard that as in any way retroactive legislation.
I do not enter the general argument which has occurred so often as to the virtues and vices of such legislation. I do not think it arises in this case. The plain fact is that this practice has been going on far too long. The cost involved is remarkably heavy. In reply to Questions by my right hon. Friend the Member for Huyton (Mr. H. Wilson), the Financial Secretary admitted that it was more than £4 million a year and that, I think, is not the full story. I know that my right hon. Friend has further comments to make on this matter if later he catches your eye, Mr. Hoy. In these circumstances, we feel it our duty to strengthen the Clause, and I very much hope that the Government will accept the Amendment.
§ 8.15 p.m.
§ Mr. Houghton
I hope that the Government will give serious consideration to these Amendments. In an earlier debate we heard an explanation of why this, and perhaps other things, were not included in the Finance Bill following the April Budget, but I am quite sure that the need for doing something arose long before last April.
A few moments ago, when dealing with representations by Lloyd's underwriters, the Financial Secretary to the Treasury said that although the Chancellor had heard those representations during last winter, unfortunately he could not do anything in the last Finance Bill because he had to keep it short owing to the Parliamentary timetable and the impending General Election. Just as perhaps Lloyd's underwriters had their concession deferred, so dividend strippers have had a check on their nefarious activities deferred, and a lot of money has gone into a few pockets because the Chancellor was unable to deal with the matter properly immediately before the General Election.
The General Election accordingly had a beneficial effect on the fortunes of the Government, accompanied quite accidentally and unintentionally by a benefit 2219 to the fortunes of the dividend strippers. Whilst nothing can be done at the moment to put the clock back over the benefit conferred on the Government, there is no reason at all why the clock should not be put a little way back to deal with the activities of dividend strippers which have gone unchecked in the meantime.
The Committee knows my views on this kind of racket. I realise that there are strong differences of opinion about the morality of these tax avoidance devices. Some say, supported by learned judges and others who are supposed to know, that every citizen can so arrange his affairs as to attract the smallest amount of tax and no one shall say him nay. So long as he can do it legally he is perfectly entitled to do so. If the Legislature does not like it, it can stop it. It is just as simple as that, with the result that our tax legislation becomes more complicated as years go by, littered up and cluttered up with all sorts of complex provisions designed to stop these ingenious devices for avoiding payment of tax In connection with the Excess Profits Levy and similar special imposts we have written into the legislation on the subject an overall provision against activities deliberately designed to evade the payment of tax which otherwise would be due, but in regard to the main code of Income Tax there is no such overriding provision. We deal with each loophole as we find it and close it completely, or not at all, according to how legislation can be drafted to deal with it. This Committee becomes a stopper-up of loopholes. Really it is a most demoralising occupation. It is like constantly reviewing and amending law with a gang of thieves and vagabonds crowded in Parliament Square going about their wicked intentions whilst waiting for the Legislature to put them out of business.
These tax avoiders go about their work so quietly and secretly that it is only when the evidence which the Board of Inland Revenue can get from various officers throughout the country is brought to the Board that it can say, "There is a new racket—a new loophole—let us watch it." The Board watches it and asks all the local officers who encounter that sort of attempt to evade tax to report it centrally so that it can be watched as the practice grows and, when the time comes, 2220 it acquaints the Chancellor of these activities in the hope that he can do something about them.
Here we are dealing with such a case. Partly because of the time which must have elapsed in seeing whether it was serious enough for legislation to be undertaken and partly because of the difficulty of introducing legislation after the practice was shown to require legislation in the circumstances which I have mentioned, we now find that the amount of revenue which is being stripped off in this instance reaches a sum running into six figures. I do not know why we should be so coy about these figures. If it is a matter of six figures, let us say what the figures are. We got this information only by asking a question. It is quite serious, because the number of people indulging in this kind of tax avoidance is probably not very large, and therefore, there is some big money being made somewhere.
I hope the Government will deal with this device strongly and firmly when it arises. We have said many times before that those who find the tax system under P.A.Y.E. extracting every penny of tax from their earnings, who have no investments to manipulate, no capital gains to make and no activities which can draw off some relief from the burden of taxation, resent this sort of thing, and quite rightly resent it. It is our job here to give a reassurance to the great mass of taxpayers, who have no escape from the clutches of the tax gatherer, but who suffer the deduction of every penny of the tax which the law demands, that when we see these rackets, we will stop them firmly, and if necessary reach back to recover some of the money lost.
I do not think any Member of this Committee will dispute the general rightness of that approach. I have no objection in principle to restrospective legislation. Certainly I do not see why people who have been purposely defeating the tax gatherer by using this device to lessen the burden on themselves should hide behind any general principle that we do not deal with them retrospectively. If they could gain retrospectivly they would do so, and quite a number of them do. We know that some people have discovered a means of tax avoidance and have claimed repayment for past years, if the law permits them to do so; and I think that we should have no scruples about 2221 applying such reasonable retrospective measures as are required in particular circumstances.
These Amendments are not, in the strict sense of the terms, retrospective legislation, and so that objection is really removed. They are an attempt at least at stopping the dividend strippers, and I therefore hope that we shall have a satisfactory reply from the Government.
I say, in conclusion, that there have been few Finance Bills in my short experience in this House which have gone through the whole of the Committee stage with so few concessions having been made by the Chancellor of the Exchequer. We have had only rabbit skins, boottees and baskets, as far as I can recall, made the subject of Purchase Tax concessions. Now, we are not asking for a concession for the taxpayer, but asking for stronger measures to deal with an admitted evil. We are asking that something shall be done which the Government can in no way describe as stimulating inflationary tendencies, putting more impetus behind consumer demand or aggravating the present economic situation. This is a matter of justice, in which the State, the Legislature and the taxpaying public expect the Committee to deal adequately with a device which is a patent avoidance of tax and should be dealt with quite firmly.
§ Mr. Pitman
I am very happy to join with the right hon. Member for Leeds South (Mr. Gaitskell) and the hon. Member for Sowerby (Mr. Houghton) in supporting my right hon. Friend the Chancellor in stopping this dividend stripping. I am sure that the hon. Member for Sowerby is right in saying that the whole opinion of the Committee is behind that general principle. In other words, we join him in his stopping-up of loopholes. I do not know whether Jack Warner was a constituent of Sowerby, but I hope that the hon. Member for Sowerby, the next time he uses the phrase "a stopper-up of loopholes," will make an effort at simulating his local dialect.
The two points which I should like to make refer to the distinction which has to be drawn. I follow the argument of the right hon. Member for Leeds, South in his £150,000 case, but I would point out that the figures happened to disguise—though the right hon. Gentleman was not intending to disguise it—a fundamental 2222 dissimilarity between the two cases, because in the case of the finance company they have recovered tax on £50,000 by reason of a capital loss, whereas the £50,000 dividend to a charity led to a tax recovery by reclaim of tax, a different method which happened to be the same amount.
§ Mr. Pitman
When that is made clear, it makes it very much easier for us to discuss this very difficult point, because I wish to emphasise the distinction that, as far as the charity is concerned, if it is paying no capital to the vendor by reason of its ability to gain a tax reclaim, then there is nothing wrong with what is happening at all.
What this Committee is really objecting to is the case in which some of the tax benefits which this Committee, in its wisdom, intended for charity go to the vendor and not to the charity. In the case of the finance company, the issue is directed solely to the fact that a finance company, since it deals with stocks and shares where we might deal with cakes and buns, treats these as revenue items of expenditure and of income, and receives the tax benefit for any losses in that respect. It is such a fundamental difference that it is important to make the distinction.
Secondly, this leads right on to one point on which I want to put a question to the Financial Secretary. If we were to make this provision retrospective in this way, would it not be extraordinarily hard on a charity, particularly one which had not passed on any such benefit to the vendor but which was doing a perfectly legitimate thing, which any of us can do in any company or in any other way, by taking that taxation benefit to which as citizens we are entitled?
§ Mr. E. Fletcher
I am glad that the hon. Member for Bath (Mr. Pitman) has pointed out the distinction between, on the one hand, an operation conducted between a private individual and a finance company and, on the other hand, an operation between a private individual and a charity. I think it will be necessary, if not on this Amendment, at any rate on the Question, "That the Clause stand part of the Bill," to see where this argument leads us. If an operation of 2223 the first kind is racketeering, as I think it is, I would be loath to think that it ceases to be racketeering because one of the parties to the transaction is what is sometimes called a charity.
Charities are of different kinds and it is notorious that the whole law of charitable trusts has become immersed in considerable confusion. There are some valid charities, the purposes and objects of which we all appreciate and subscribe to it we can, but there are a great many other so-called charities whose objects are much more dubious and whose practices raise at any rate a doubt as to whether they are entitled to the full exemption from any taxation which the existing law allows them.
I should not have thought that it was true of any charity—certainly, it cannot be true of all charities—that it is permissible for them to make use of the existing law of the land which enables them to enter into a transaction with an individual whereby he avoids a great deal of tax liability and the charity gets considerable unconvenanted benefit which no other company or concern would get. If we are to examine that, we should consider what the Royal Commission said about the privileged position of charities in our tax law, and we shall have to think something about the case for reform, which is so well argued in paragraph 168 and other paragraphs.
The size of the problem is very large. As the Royal Commission pointed out, the present position is that about 110 trusts ranking as charities are known to the Charity Commissioners, and the present annual cost of the exemption is estimated at about £35 million of tax. I do not want to elaborate the ethics, or lack of ethics, of dividend stripping so far as charities are concerned beyond having entered that caveat that it does not follow as a matter of course that one is more sympathetic to tax evasion if one of the perpetrators happens to be entitled to tax exemption by reason of being a charity.
I want to confine myself to the quite narrow point that is raised by this series of Amendments. It seems to me that the arguments are even stronger in the case of the charity than in the case of the financial house. The two Amendments which I have in mind which deal with 2224 charities are those in page 5, lines 26 and 33.
We have not heard any Government spokesman on the merits of this series of Amendments, which seem to me to have overwhelming arguments to support them. If one could anticipate the only possible objection that has occurred to anybody—that there might be some retrospective effect and that the proposal is obnoxious on that ground—I should like to deal with that.
On Second Reading, the Financial Secretary took credit for saying that his object was to kill dividend stripping. If these Amendments are accepted, dividend stripping will become impossible as from 26th October, when the Bill was introduced but unless these Amendments are accepted, dividend stripping will still be legal, at any rate in the case of finance companies and charities which acquired shares of a particular type before 26th October, 1955. Therefore, if these Amendments are accepted they will not prevent anything being done that should not be done today. The only effect of these Amendments will be to prevent dividend stripping in the future both in respect of people who subsequently acquire shares and in respect of people who acquired them in the past.
Let us consider whether there is any objection to that. It seems to me we can test it best in the case of a charity. It does not make much difference whether one takes the example the Financial Secretary gave us or the one that my right hon. Friend the Member for Leeds, South (Mr. Gaitskell) took, but let us take my right hon. Friend's. The argument as I understand—the Economic Secretary will correct me if I am wrong—is that the charity derives much greater advantage from dividend stripping than finance companies. In the example which my right hon. Friend gave of the purchase for £150,000 and the dividend stripping of £50,000, the finance company gets back at 8s. 6d. in the pound £23,000, or whatever it was, representing the loss incurred, but, in the case of a charity, the charity gets back the whole of the tax that was suffered by the company which paid the dividend of £50,000.
That results from the method of tax collection in respect of companies, because companies have to pay their dividend gross—declare it gross—have to pay tax on their profits regardless of 2225 whether their shareholders are normal shareholders, as my right hon. Friend said, or are, perhaps, abnormal shareholders either because they may be liable to Surtax or because they may be charities and, therefore, not liable to tax at all. I think the Economic Secretary will agree that in the case posed the charity would be able to get back the whole of the tax that had been suffered by the company before it paid the dividend of £50,000, which, at 10s. in the £, to take a convenient arithmetical figure, would be another £50,000.
We must assume that charities as well as finance companies have been indulging in this kind of racketeering either because they thought it of some genuine advantage to the charitable object which they promote or else because that was the only way in which they could derive funds. They may or may not have made a bargain with the original vendor whereby they paid him more than they otherwise would have paid in the belief that they could benefit from this dividend stripping. If that is the case, it does not seem to me that they are deserving of sympathy any more than a finance company is deserving of any sympathy. It does not seem to me that if anybody prior to 26th October has, so to speak, perpetrated the first half of this device, but has not yet consummated the crime by actually having conducted the operation of stripping the dividend, that concern is entitled to any sympathy or consideration, or can object to this Amendment on the ground that it is retrospective. It seems to me that such a company should suffer the normal consequences that arise on any change in the law, as, for example, when Income Tax or Purchase Tax or Profits Tax, or any other tax is increased. There is no element of retrospection about this proposal. I hope, therefore, that for the reasons which have been urged, the Government will accept the Amendment.
§ Mr. Pitman
Has the hon. Gentleman any information that charities have been doing this? I know that we have been talking on principle, but I did not know that there were actual cases.
§ Mr. Fletcher
Oh, yes. My information is, and I think that it is clear from the way in which the Clause is drawn, that dividend stripping has been taking place 2226 both by finance companies and by charities. I think that this Clause is designed to stop it in both cases. Without betraying any information, I think that the Economic Secretary, to whom no doubt the facts which led the Chancellor to introduce this Clause are available, will know the extent to which charities are involved, as well as finance companies.
§ The Economic Secretary to the Treasury (Sir Edward Boyle)
I think it would be for the convenience of the Committee if I rose now and took up straight away the point which the hon. Member for Islington, East (Mr. Fletcher) has made. To the very best of our knowledge, charities are not known to have exploited this device on any considerable scale. I can assure the hon. Gentleman of that. So far as charities are concerned, this Clause, if I may use the eloquent language of the Inland Revenue, is preventive rather than remedial. It is to prevent abuse, but we have no reason to think that there has been any great abuse by charities in the past.
On one point made by the right hon. Member for Leeds, South (Mr. Gaitskell) I entirely agree that this Clause is extremely complicated, and I am sure the Committee is deeply obliged to him for the extremely lucid exposition which he gave at the start of our discussion. I think that, whatever our differences of opinion may be, in lucidity of exposition of a complicated matter the right hon. Gentleman must take a very high place among Parliamentarians of this era.
As I see it, the set of Amendments with which we are dealing concerns two matters. In the first place—and this was the point on which the right hon. Gentleman laid most stress—the Clause does not apply where the dealing concern acquired the shares before Budget day. That is to say, it does not deal with post-Budget dividends on pre-Budget shares. Where the dealing concern acquired the shares after Budget day, the Clause applies only to dividends paid out of reserve within six years of the acquisition of the shares. I will deal with that point at the same time.
The position was that dividends received up to Budget day on pre-Budget acquisitions ought to be caught if paid within six years of acquisition, and, 2227 furthermore, the dividends on post-Budget acquisitions should be caught without any time limit. On the first point, it is the Government's view that a Clause dealing with pre-Budget acquisitions—that is to say, in the case of post-Budget dividends on pre-Budget shares—would have involved a certain measure, a certain flavour of retrospective legislation which we wanted to avoid.
I can assure the right hon. Gentleman that a great deal of thought has been given to the drafting of this Clause, and if the final version is not satisfactory to hon. Members opposite it is not due to any lack of considering the possibilities. We thought, on the one hand, that it would be contrary to normal precedent to make this Clause retrospective without as it were, giving warning that we intended t deal with this whole abuse of dividend stripping, and, secondly, I thought that the right hon. Gentleman a little understated the extent to which his proposals would be retrospective. This is a very complicated matter and if I do not make myself clear, I am sorry, but I will put it as clearly as I can.
We know that the dividend stripper buys shares and takes a dividend and then sells the shares. We all know that we ought not to allow the dividend stripper, as a trading expense, so much of the purchase price as is equal to the dividend. If the Clause had been drafted that way, I think the Committee will agree that it would have clearly been retrospective to disallow part of the purchase price of shares bought before Budget day; but, as the Committee will realise, for reasons of administrative convenience—and I could explain those but I ask the Committee to believe that they are real ones—we are in the Clause charging the dividend instead of disallowing the relevant part of the purchase price.
It really comes to very much the same thing, because we could not justify taxing the dividend which comes out of a fund of profits which have already paid tax, except on the ground that the dividend represents the disallowance of the relevant part of the purchase price. I put it to the Committee that although in form the Amendment might not seem retrospective, it would, in fact, prove retrospective in substance.
2228 As for the second point of post-Budget acquisitions, I think that I shall be able to satisfy the right hon. Gentleman a great deal more. On this point, I want frankly to give a warning not only to the Committee but to those outside as well. Generally speaking, with regard to post-Budget acquisitions the payment of the dividend follows fairly quickly on the purchase of the shares. The Clause as it stands already catches any dividend paid within six years of the purchase and since, as the Committee is aware, for the purposes of the Clause, dividends are treated as primarily arising out of profits earned by the company after the date of acquisition, it is not very likely that a dividend paid, say, 20 or 30 years after acquisition would come, to any extent, out of pre-acquisition profits.
In any case, to go beyond the conventional six-year period would present a very difficult administrative task, because it would involve getting detailed records of dividends, and of profits available to meet them, for what would really be an almost indefinite future period. Even so, we must keep a very careful watch for any attempts to get round the legislation.
Here, I should like to give a very definite warning. Dividend stripping has proved a profitable game to those who play it, and although we have tried to draw the present legislation tightly, all experience in dealing with tax avoidance experts warns us that clever people may find devious and complicated ways around the legislation. Therefore, I should like to make it absolutely clear, and my right hon. Friend specifically asked me if I would say this tonight, that the position will be watched. If, later, abuses are found to develop outside the six years, the question of tightening up the law may then have to be considered, notwithstanding any administrative problem that would result.
I mean that as a definite warning. We intend to end this device of dividend stripping, and if we find that ways and means are found of getting round the present legislation, my right hon. Friend will not hesitate to reconsider this question again. I hope that, on the second point raised by the Amendment, I have satisfied hon. Members opposite. The first point about retrospection is a complicated one. We 2229 thought that it would be contrary to precedent to make this legislation retrospective without giving warning of our intention. We think that the Amendment moved so lucidly by the right hon. Gentleman the Member for Leeds, South did have a retrospective flavour about it. That is why, although I listened most carefully to the arguments advanced—and I am sure we are all grateful that the issue should have been aired in so clear a form—I ask the Committee to reject the Amendment.
§ Mr. Gaitskell
I was glad to hear what the Economic Secretary had to say about what he called the second point in the Amendment, that is, the point about the time limit. In particular, I welcome his warning to anybody who intends to defeat the object of the Clause. I can only hope that should the object be defeated in any way, and at some future Committee stage of a Finance Bill it is discussed, we shall not then have the argument put forward that an Amendment from the Opposition is retrospective.
§ Mr. Gaitskell
I can only hope that the hon. Gentleman will for this purpose, at any rate, be there to substantiate it.
The hon. Gentleman will not be surprised to hear that we were disappointed at what he said about our main point. I cannot see that his argument is a strong one and I want to put an example to him. It is the simple case of a finance company which has purchased a controlling interest in another company before the Budget. No doubt it has done so with the intention of dividend stripping, but no dividend stripping has actually taken place. It would have proceeded in the ordinary way to draw out the dividends and, having done so, it would then have sold its existing interest. As the hon. Members for Bath
§ (Mr. Pitman) and Islington, East (Mr. E. Fletcher) so rightly stressed, it then gets its gain, odd as it may sound, from the capital loss it has sustained.
§ All that is taking place after the Budget. The only thing that has taken place before the Budget is the purchase of the company, and it is absurd to say that we are asking for retrospective legislation because we desire to penalise those who carry out this operation of dividend stripping and the sale of the company in order to make the capital loss in order to make the claim after the Budget. I cannot see that there is any justification for the squeamishness of the Economic Secretary in this matter. After all, these people have been getting away with it for a considerable time.
§ I would not deny that in some cases they may have paid high prices for the companies in question. I have no doubt that that is in the mind of the hon. Gentleman. Neither would I deny that they will now make something of a loss. But when all is said and done, it is not a bad thing that there should be a loss in a few instances of this kind to offset the profits which they have made at the expense of the revenue and of the taxpayers in these last months, indeed, years.
§ Would the hon. Gentleman be prepared to think again about this matter? I have the feeling that there is a rather more fundamental difference between the two sides of the Committee on this point, and that he is being much too tender to these people. If we can have no offer from the Government benches to think again about this question, there is nothing left for us to do but to divide the Committee and so to press our Amendment as far as we can.
§ Question put, That those words be there inserted:—
§ The Committee divided: Ayes 185, Noes 238.2233
|Division No. 67.]||AYES||[8.54 p.m|
|Ainsley, J. W.||Blenkinsop, A.||Burke, W. A.|
|Albu, A. H.||Blyton, W. R.||Burton, Miss F. E.|
|Allen, Arthur (Bosworth)||Boardman, H.||Butler, Herbert (Hackney, C.)|
|Allen, Scholefield (Crewe)||Bottomley, Rt. Hon. A. G.||Butler, Mrs. Joyce (Wood Green)|
|Attlee, Rt. Hon. C. R.||Bowden, H. w. (Leicester, S.W.)||Carmichael, J.|
|Awbery, S. S.||Boyd, T. C.||Castle, Mrs. B. A.|
|Bacon, Miss Alice||Braddock, Mrs. Elizabeth||Champion, A. J.|
|Balfour, A.||Brockway, A. F.||Chapman, w. D.|
|Benson, G.||Broughton, Dr. A. D. D.||Clunie, J.|
|Bevan, Rt. Hon. A. (Ebbw Vale)||Brown, Rt. Hon. George (Belper)||Coldrick, w.|
|Blackburn, F.||Brown, Thomas (Ince)||Collick, P. H. (Birkenhead)|
|Collins, V. J. (Shoreditch & Finsbury)||Jones, Jack (Rotherham)||Pursey, Cmdr. H.|
|Corbet, Mrs. Freda||Jones, J. Idwal (Wrexham)||Reid, William|
|Craddook, George (Bradford, S.)||Jones, T. W. (Merioneth)||Rhodes, H.|
|Cronin, J, D.||Kenyon, G.||Roberts, Albert (Normanton)|
|Crossman, R. H, 8.||Key, Rt. Hon. C. W.||Roberts, Goronwy (Caernarvon)|
|Cullen, Mrs. A.||King, Dr. H. M.||Robinson, Kenneth (St. Pancras, N.)|
|Dalton, Rt. Hon. H.||Lawson, G. M.||Rogers, George (Kensington, N.)|
|Davies, Stephen (Merthyr)||Ledger, R. J.||Ross, William|
|Deer, G.||Lee, Frederick (Newton)||Short, E. W.|
|Delargy, H. J,||Lee, Miss Jennie (Cannock)||Silverman, Julius (Aston)|
|Dodds, N. N.||Lever, Leslie (Ardwick)||Simmons, C. J. (Brierley Hill)|
|Dugdale, Rt. Hon. John (W. Brmwch)||Lipton, Lt.-Col. M.||Skeffington, A. M.|
|Dye, S.||Logan, D. G.||Slater, Mrs. H. (Stoke, N.)|
|Edelman, M.||MacColl, J. E.||Slater, J. (Sedgefield)|
|Edwards Rt. Hon. John (Brighouse)||McGovern, J.||Smith, Ellis (Stoke, S.)|
|Edwards, Rt. Hon. Ness (Caerphilly)||McInnes, J.||Sorensen, R. W.|
|Edwards, Robert (Bilston)||McKay, John (Wallsend)||Sparks, J. A.|
|Edwards, W. J. (Stepney)||McLeavy, Frank||Steele, T.|
|Fletcher, Eric||MacMillan, M. K. (Western Isles)||Stones, W. (Consett)|
|Forman, J. C.||MacPherson, Malcolm (Stirling)||Stross, Dr. Barnett(Stoke-on-Trent, C.)|
|Fraser, Thomas (Hamilton)||Mahon, S.||Summerskill, Rt. Hon. E.|
|Gaitskell, Rt. Hon. H. T. N.||Mallalieu, E. L. (Brigg)||Swingler, S. T.|
|Gooch, E, G.||Mann, Mrs. Jean||Sylvester, G, O.|
|Gordon Walker, Rt. Hon. P. C.||Marquand, Rt. Hon. H. A.||Taylor, Bernard (Mansfield)|
|Greenwood, Anthony||Mason, Roy||Taylor, John (West Lothian)|
|Grenfell, Rt. Hon. D. R.||Mayhew, C. P.||Thomas, Iorwerth (Rhondda, W.)|
|Griffiths, David (Rother Valley)||Messer, Sir F.||Thomson, George (Dundee, E.)|
|Griffiths, Rt. Hon. James (Llanelly)||Mitchison, G. R.||Thornton, E.|
|Hamilton, W. W.||Monslow, W.||Timmons, J.|
|Hannan, W.||Moody, A. S.||Tomney, F.|
|Hastings, S.||Morris, Percy (Swansea, W.)||Turner-Samuels, M.|
|Hayman, F. H.||Mort, D. L.||Viant, S. P.|
|Herbison, Miss M.||Moss, R.||Warbey, W. N.|
|Hobson, C. R.||Moyle, A.||Weitzman, D.|
|Holman, P.||Mulley, F. W.||Wells, Percy (Faversham)|
|Holmes, Horace||Neal, Harold (Bolsover)||Wells, William (Walsall, N.)|
|Houghton, Douglas||Oram, A. E.||West, D. G.|
|Howell, Charles (Perry Barr)||Owen, w. J.||Wheeldon, W. E.|
|Howell, Denis (All Saints)||Padley, W. E.||White, Henry (Derbyshire, N.E.)|
|Hughes, Cledwyn (Anglesey)||Paling, Will T. (Dewtbury)||Wilkins, W. A.|
|Hughes, Emrys (S. Ayrshire)||Pannell, Charles (Leeds, W.)||Willey, Frederick|
|Hughes, Hector (Aberdeen, N.)||Pargiter, G. A.||Williams, David (Neath)|
|Hunter, A. E.||Parker, J.||Williams, Ronald (Wigan)|
|Hynd, J. B. (Attercliffe)||Parkin, B. T.||Williams, Rt. Hon. T. (Don Valley)|
|Irving, S. (Dartford)||Peart, T. F.||Willis, Eustace (Edinburgh, E.)|
|Isaacs, Rt. Hon. G. A.||Popplewell, E.||Wilson, Rt. Hon. Harold (Huyton)|
|Jay, Rt. Hon. D. P. T.||Price, J. T. (Westhoughton)||Winterbottom, Richard|
|Jeger, George (Goole)||Price, Philips (Gloucestershire, W.)||Woodburn, Rt. Hon. A.|
|Jeger, Mrs. Lena (Holbn & St. Pncs, S.)||Probert, A. R.||Yates, V. (Ladywood)|
|Jenkins, Roy (Stechford)||Proctor, W. T.|
|Jones, David (The Hartlepools)||Pryde, D. J.||TELLERS FOR THE AYES:|
|Mr. Pearson and Mr. J. Johnson.|
|Agnew, Cmdr. P. G.||Burden, F. F. A.||Emmet, Hon. Mrs. Evelyn|
|Aitken, W. T.||Butcher, Sir Herbert||Farey-Jones, F. W.|
|Allan, R. A. (Paddington, S.)||Butler, Rt. Hn. R. A. (Saffron Walden)||Fell, A.|
|Alport, C. J. M.||Campbell, Sir David||Finlay, Graeme|
|Amory, Rt. Hn. Heatheoat (Tiverton)||Carr, Robert||Fisher, Nigel|
|Arbuthnot, John||Cary, Sir Robert||Fleetwood-Hesketh, R. F.|
|Armstrong, C. W.||Chichester-Clark, R.||Fletcher-Cooke, C.|
|Ashton, H.||Clarke, Brig. Terence (Portsmth, W.)||Fraser, Hon. Hugh (Stone)|
|Atkins, H. E.||Cole, Norman||Freeth, D. K.|
|Baldock, Lt.-Cmdr. J. M.||Conant, Maj. Sir Roger||Garner-Evans, E. H.|
|Baldwin, A. E.||Cordeaux, Lt.-Col. J. K.||George, J. C. (Polick)|
|Balniel, Lord||Corfield, Capt. F. V.||Glover, D.|
|Barlow, Sir John||Craddock, Beresford (Spelthorne)||Gomme-Duncan, Col. A.|
|Barter, John||Crookshank, Capt. Rt. Hn. H. F. C.||Gower, H. R.|
|Baxter, Sir Beverley||Crosthwaite-Eyre, Col. O. E.||Graham, Sir Fergus|
|Bell, Ronald (Bucks, 8.)||Crouch, R. F.||Grant, W. (Woodside)|
|Bevins, J. R. (Toxteth)||Crowder, Sir John (Finchley)||Grant-Ferris, Wg Cdr. R. (Nantwich)|
|Bidgood, J. C.||Crowder, Petre (Ruislip—Northwood)||Green, A.|
|Biggs-Davison, J. A.||Cunningham, Knox||Gresham Cooke, R.|
|Birch, Rt. Hon. Nigel||Dance, J. C. G.||Grimond, J.|
|Bishop, F. P.||Davidson, Viscountess||Grimston, Hon. John (St. Albans)|
|Body, R. F.||Deedes, W. F.||Grimston, Sir Robert (Westbury)|
|Boyle, Sir Edward||Dodds-Parker, A. D.||Grosvenor, Lt.-Col. R. G.|
|Braine, B. R.||Donaldson, Cmdr. C. E. McA.||Gurden, Harold|
|Bromley-Davenport, Lt.-Col. W. H.||Doughty, C. J. A.||Hall, John (Wycombe)|
|Brooke, Rt. Hon. Henry||Duncan, Capt. J. A. L.||Hare, Hon. J. H.|
|Brooman-White, R. C.||Duthie, W. S.||Harris, Frederic (Croydon, N.W.)|
|Buohan-Hepburn, Rt. Hon. P, G. T.||Eden, Rt. Hn. Sir A. (Warwik & L'm'tn)||Harrison, A. B. C. (Maldon)|
|Harrison, Col. J. H. (Eye)||McKibbin, A. J.||Remnant, Hon. P.|
|Harvey, Air Cdre. A. V. (Macclesfd)||Mackie, J. H. (Galloway)||Renton, D. L. M.|
|Harvey, Ian (Harrow, E.)||McLaughlin, Mrs. P.||Ridsdale, J. E.|
|Heald, Rt. Hon. Sir Lionel||Maclay, Rt. Hon. John||Rippon, A. G. F.|
|Heath, Edward||Maclean, Fitzroy (Lancaster)||Roberts, Peter (Heeley)|
|Henderson, John (Cathoart)||McLean, Neil (Inverness)||Robertson, Sir David|
|Hicks-Beach, Maj. W. W.||Macleod, Rt. Hn. Iain (Enfield, W.)||Robson-Brown, W.|
|Hill, Rt. Hon. Charles (Luton)||MacLeod, John (Ross & Cromarty)||Rodgers, John (Sevenoaks)|
|Hill, Mrs. E. (Wythenshawe)||Macmillan, Rt. Hn. Harold (Bromley)||Roper, Sir Harold|
|Hill, John S. Norfolk)||Ropner, Col. Sir Leonard|
|Hinchingbrooke, Viscount||Macmillan, Maurice (Halifax)||Ropner, Col. Sir Leonard|
|Hirst, Geoffrey||Macpherson, Niall (Dumfries)||Russell, R. S.|
|Holland-Martin, C. J.||Maddan, Martin||Schofield, Lt.-Col. W.|
|Holt, A. F.||Maitland, Cdr. J. F. W. (Horncastle)||Scott-Miller, Cmdr. R.|
|Horobin, Sir Ian||Maltland, Hon. Patrick (Lanark)||Sharples, Maj. R. S.|
|Horsbrugh, Rt. Hon. Dame Florence||Manningham-Buller, Rt. Hn. Sir R.||Shepherd, William|
|Howard, John (Test)||Marples, A. E.||Smithers, Peter (Winchester)|
|Hudson, Sir Austin (Lewisham, N.)||Mathew, R.||Smyth, Brig. J. G. (Norwood)|
|Hudson, W. R. A. (Hull, N.)||Maude, Angus||Spearman, A. C. M.|
|Hughes Hallett, Vice-Admiral J.||Maydon, Lt,-Comdr. S. L. C.||Speir, R. M.|
|Hughes-Young, M. H. C.||Milligan, Rt. Hon. W. R.||Spens, Rt. Hn. Sir P. (Kens'gt'n, S.)|
|Hulbert, Sir Norman||Moore, Sir Thomas||Stanley, Capt. Hon. Richard|
|Hutchison, Sir Ian Clark (E'b'gh, W.)||Morrison, John (Salisbury)||Stevens, Geoffrey|
|Hutchison, James (Scotstoun)||Nabarro, G. D. N.||Stewart, Henderson (Fife, E.)|
|Hyde, Montgomery||Nairn, D. L. S.||Storey, S.|
|Hylton-Foster, Sir H. B. H,||Neave, Airey||Studholme, H. G.|
|Irvine, Bryant Godman (Rye)||Nicholls, Harmar||Summers, G. S. (Aylesbury)|
|Jenkins, Robert (Dulwich)||Nicholson, Godfrey (Farnham)||Sumner, W. D. M. (Orpington)|
|Jennings, J. C. (Burton)||Nicolson, N. (B'n'm'th, E. & Chr'ch)||Taylor, William (Bradford, N.)|
|Johnson, Eric (Blackley)||Nugent, G. R. H.||Thomas, Rt. Hn. J. P. L. (Hereford)|
|Jones, A. (Hall Green)||Oakshott, H. D.||Thomas, Leslie (Canterbury)|
|Kaberry, D.||O'Neill, Hn. Phelim (Co. Antrim, N.)||Thompson, Kenneth (Walton)|
|Keegan, D.||Orr, Capt. L. P. S.||Tiley, A. (Bradford, W.)|
|Kerby, Capt. H. B.||Orr-Ewing, Charles Ian (Hendon, N.)||Touche, Sir Gordon|
|Kerr, H, W.||Page, R. G.||Tweedsmuir, Lady|
|Kirk, P. M.||Panned, N. A. (Kirkdale)||Vaughan-Morgan, P. K.|
|Lagden, G. w.||Partridge, E.||Vickers, Miss J. H.|
|Lambton, Viscount||Peake, Rt. Hon. C.||Vosper, D. F.|
|Lancaster, Col. C. G.||Peyton, J. W. W.||Wade, D. W.|
|Langford-Holt, J. A.||Pickthorn, K. W. M.||Wakefield, Edward (Derbyshire, W.)|
|Leather, E. H. C.||Pilkington, Capt. R. A.||Wall, Major Patrick|
|Leavey, J. A.||Pitman, I. J.||Ward, Dame Irene (Tynemouth)|
|Leburn, W. G.||Pitt, Miss E. M.||Waterhouse, Capt. Rt. Hon. C.|
|Legh, Hon. Peter (Petersfield)||Pott, H. P.||Watkinson, H. A.|
|Lennox-Boyd, Rt. Hon. A. T.||Powell, J. Enoch||Whitelaw, W.S.I. (Penrith & Border)|
|Lindsay, Hon. James (Devon, N.)||Price, Henry (Lewisham, W.)||Williams, Paul (Sunderland, S.)|
|Lindsay, Martin (Solihull)||Prior-Palmer, Brig. O. L.||Williams, R. Dudley (Exeter)|
|Linstead, Sir H. N.||Profumo, J. D.||Wills, G. (Bridgwater)|
|Lloyd, Rt. Hon. Selwyn (Wirral)||Raikes, Sir Victor||Wilson, Geoffrey (Truro)|
|Low, Rt. Hon. A. R. W.||Ramsden, J. E.||Wood, Hon. R.|
|Luoas, Sir Jooelyn (Portsmouth, S.)||Rawlinson, P. A. G.||Woollam, John Victor|
|Lucas-Tooth, Sir Hugh||Redmayne, M.|
|Macdonald, Sir Peter||Rees-Davies, W. R.||TELLERS FOR THE NOES:|
|Mr. Godber and Mr. Barber.|
Question put and agreed to.
§ Amendments made: In page 4, line 34, leave out "ordinary."
In line 35, leave out from "class" to end of line and insert:
to which this section applies.
§ In line 41, after second "shares" insert "or those shares."
§ In page 5, line 12, leave out "together."
§ In line 23, leave out "ordinary."
In line 23, leave out from "class" to "being" in line 24 and insert:
to which this section applies.
§ In line 29, after "shares" insert "or those shares."
§ In line 37, leave out "together."
In page 7, line 8, leave out from beginning to "fully-paid" and insert:
'shares of a class to which this section applies ' means shares of any class forming
part of a company's share capital other than a class of.
§ In line 9, leave out "share" and insert "shares."
§ In line 11, leave out "share" and insert "shares."—[Mr. H. Brooke.]
§ Mr. Harold Wilson (Huyton)
I beg to move, in page 7, line 11, to leave out from "which" to "does" in line 12.
§ The Deputy-Chairman
It may be for the convenience of the Committee if we take, with this Amendment, that in page 19, line 10, the two in line 16, those in lines 22 and 30, and those in page 20, lines 11 and 14.
§ Mr. H. Wilson
I am sure that it is for the convenience of the Committee, at any rate that of my hon. Friends, and I take it that of the Treasury Bench also, 2235 that all these Amendments should be considered together. I do not intend to detain the Committee for more than a moment or two, because our real purpose is to get some explanation from the Government, as we think that there is here a rather unusual form of phrase.
The words which we propose to leave out refer to theCommissioners having jurisdiction in the matter.From the drafting it is not clear who those Commissioners are. A number of people who have studied the Bill have thought that it meant Special Commissioners while others have told me that they thought that it meant the Commissioners of Inland Revenue, which I gather is one of the fancy titles for the Board of Inland Revenue. Because of those doubts we have put down the Amendment so that the Government spokesman can tell the Committee exactly which Commissioners are intended, and can tell us also why it would not be better to withdraw this form of words and to make specific reference to the Commissioners intended.
§ The Solicitor-General (Sir Harry Hylton-Foster)
Perhaps it would be convenient were I to explain at once how this matter strikes us. In their legal effect, the words are very nearly surplusage. The Commissioners are not the Commissioners of Inland Revenue—and I do not fancy giving the Committee a lecture on commissioners in general, who are odd creatures with dual functions at times. These are Commissioners of Taxes, and where they would have jurisdiction they would be acting as the ordinary appellant tribunal—the independent statutory tribunal. They might be either General Commissioners or Special Commissioners. The easiest way to illustrate the point is by considering how the problem would arise under subsection (8, c). It would arise, of course, when the computation of the profits, or the gains or losses, of the trade in question was going on.
The original assessment might be made nominally by the Additional Commissioners or by the Special Commissioners. If the computation were not called in question, the whole matter would drop and we should not have to worry further. If it were challenged, then the appeal body would be either the General Commissioners or the Special Commissioners, as the case might be, and that 2236 body of Commissioners would be the Commissioners having jurisdiction in the matter.
It was thought that when we were dealing with a matter clearly of degree or opinion it was best to put into the Statute, for purposes of clarity, whose opinion it is which would absolutely govern the matter—as indeed it would. It in no way affects the rights of appeal, as I understand the enactment.
I ought also to tell the Committee that there is a very respectable precedent, which has now become Section 299 of the Act of 1952, where exactly the same phrase is used twice in the Section. That Section relates to capital allowances to lessees of plant and material. So far as I know, it has never given any trouble and it has proved a satisfactory form of enactment. I hope that, with that explanation, the Committee will think it right to leave this form of words in the Bill.
§ Mr. E. Fletcher
I am sorry to say that I am not wholly satisfied with that explanation, and I was particularly alarmed by what the Solicitor-General said about the right of appeal. If I understand him, he said that the Commissioners who would have jurisdiction in the matter might in certain circumstances be one set of Commissioners and in other circumstances might be a different set of Commissioners. He said that if there were an appeal the Commissioners would be the Special or General Commissioners.
He is well aware that in the ordinary law of the land, if a Statute lays down that such and such shall be the case, in the opinion of a particular court, it makes a great deal of difference when one appeals; because in the ordinary way, if there is an appeal, then in the absence of some statutory provision giving a discretion to the court of first instance, the appellate tribunal can look at the position and formulate its own opinion on the law or on the facts. That is not the case where a Statute places a discretion on the court of first instance, because in that case the appellate tribunal may well say, and often has said, "If we had been free we should have come to a different opinion but this is a case where the learned judge has a discretion which he has exercised."
It seems to me that before we part from these words we must be clear about where we are. Are the appellate Commissioners, 2237 in the event of an appeal, to be bound by the opinion of the Commissioners who first had jurisdiction in the matter or are they free to look at the matter afresh and come to their own decision? I notice that in that part of his speech the Solicitor-General slurred over this problem, which worries me a great deal.
He also said that he thought the words were very nearly surplusage. I do not know what that means. Either they are surplusage or they are necessary. It seems to me quite inexplicable that they can be "nearly surplusage." Either these words mean something and are intended to have some effect, in which case we should like to know what it is, or they are unnecessary and have no effect. We cannot be fobbed off by a statement by the Law Officer that such and such words "are nearly surplusage."
I am sorry to detain the Committee on what appeared to be a relatively small point which I had hoped that the Law Officer would deal with to our satisfaction, but I am bound to say that his observations have left me more perplexed than I was originally. It is necessary that the matter should be cleared up before we proceed further.
§ 9.15 p.m.
§ The Solicitor-General
This is entirely my fault. I tried to go too quickly so as not to detain the Committee. I hope I can satisfy the hon. Member that his doubts are not well-founded, although, of course, if they were well-founded, I should agree with him in regarding it as a matter of importance.
The Commissioners, when assessing, do not exercise jurisdiction. The Commissioners who exercise jurisdiction for this purpose are appeal Commissioners either in the form of General Commissioners or Special Commissioners, as the case may be. They are the independent appellate tribunal in the sense of the Acts—that kind of appeal tribunal. Of course, it is true that if a Statute in general confers a discretion on the lower tribunal it thereby narrows the right of appeal from that tribunal to the superior tribunal because the superior tribunal will say, "Here is a discretion conferred and we will not interfere with the exercise of it unless it has been unreasonably exercised."
That does not arise here because under the relevant tax statutes no right of appeal exists from the appeal Commissioners save on a point of law. It is very difficult 2238 to see how under this Bill any point of law could arise within the context of those words because all the matters governed by the opinion of the Commissioners having jurisdiction here are questions of fact. But, suppose there were a point of law on which an appeal could arise, then, of course, the discretion point would not occur in that appeal because no one is given discretion as to what the law is. That is why I hope I am quite right in advising the Committee that the right of appeal is, by these words in this Bill, wholly unaffected—that is, the right of appeal from the appeal Commissioners to the court on a point of law.
As to describing the words as nearly surplusage, I am sorry if that offends the accurate and graceful mind of the hon. Member for Islington, East (Mr. E. Fletcher), but it happens to be a convenient form of words. They are very nearly surplusage—things very nearly without legal effect—but they help a person reading the Bill who is not a lawyer with the wisdom of the hon. Member to understand on whose judgment the matter will be determined.
§ Amendment negatived.
§ Motion made, and Question proposed, That the Clause, as amended, stand part of the Bill.
§ Mr. H. Wilson
The Amendments we have been debating for the last few minutes were designed, in the first case, to strengthen and, in the second case, to elucidate the provisions of the extremely tortuous measure that the Government have decided upon as a means of countering dividend stripping and on this Question it is appropriate to consider dividend stripping, or "the Indian rope trick," against a rather broader setting.
The first thing one has to ask—we must press the Government on this—is how expensive is this practice of dividend stripping and what is the cost? The Financial Secretary to the Treasury misled the House—no doubt accidentally—in our debate on Second Reading when he said that there was a loss to the Revenue of slightly more than six figures.
§ Mr. Wilson
At any rate, the Economic Secretary to the Treasury said "approaching six figures," which makes it even smaller, If the Financial Secretary says he did not use the word 2239 "slightly" we accept that. Nevertheless, when he said "more than six figures" most hon. Members thought that it was in excess of £100,000, but less than seven figures. Now it becomes clear that he meant seven figures and possibly eight; we are not sure which. I am sure the Committee would acquit the right hon. Gentleman of any intention to mislead, but it turns out that he meant a seven-figure amount.
At Question Time a week last Thursday I put some Questions to the Chancellor of the Exchequer and we had some further estimates from the Financial Secretary. Admittedly, that afternoon was not an afternoon on which some hon. and right hon. Gentlemen were at their clearest, because we had been debating the Finance Bill until eight o'clock in the morning, and, as hon. Gentlemen will recall, the position of the Finance Bill at 2.30 that afternoon was in a state of some considerable doubt. Therefore, it would be quite understandable if the Financial Secretary was not at his clearest and most lucid when he gave those answers.
However, the right hon. Gentleman did say quite clearly that he estimated a loss of £4 million as the loss in the financial year 1954–55, and, in reply to the second part of the same question, he said that he had no information for the current financial year. But we must set against that the fact that the Chancellor, during the Budget debate—I think on the Friday, speaking from memory—confirmed that the loss to the Revenue from dividend stripping was increasing and was causing him concern.
I am not suggesting that it is possible to measure how rapidly it is increasing, but it is known that at this stage in the current year we are running a loss to the Revenue, on the basis calculated by the Financial Secretary, of some £4 million per annum. How much more it is perhaps not yet possible to measure, but as we have pointed out to the right hon. Gentleman from this side of the Committee, these figures seriously understate the total loss.
On the same Thursday afternoon, in reply to another Question which I put to him, the Financial Secretary said:The estimates in question relate only to tax on the technical losses sustained by the dealing concerns that bought the shares for 2240 dividend stripping."—[OFFICIAL REPORT, 17th November, 1955; Vol. 546, c. 763.]Nothing could be clearer than that, but is is quite clear that that Answer means that the figures included in his estimate are only a part—and I suggest only the smaller part—of the total loss to the Revenue from this particular racket.
The right hon. Gentleman, on that occasion, would not venture a complete estimate, though I suggested in a supplementary question that the loss to the Revenue was possibly £10 million, £12 million or even £15 million in a full year. I think that to justify that very rough estimate which I gave in the form of a Question, we might take the case given by the right hon. Gentleman in his speech on Second Reading.
The Committee will recall that on Second Reading the right hon. Gentleman very clearly explained the whole practice of dividend stripping by taking a simple example, and I think that most hon. Members will probably agree that the theory and practice of dividend stripping has never been more clearly and lucidly explained to the House than it was on that afternoon. Let us have a look at the case he took. The right hon. Gentleman gave us the case of a company which buys up for £100,000 the shares of another company with large undistributed cash reserves. Then, he said, we assume that the company pays out £92,000 in dividends and sells the remaining shares for £8,000. This company, then being a company which deals in securities, treats as a trading loss the £92,000 lost through buying the shares for £100,000 and selling them for £8,000, and proceeds to claim Income Tax relief.
As the right hon. Gentleman quite fairly said, it does not need to bring into account the dividends received in this computation, and it claims 8s. 6d. in the £ on £92,000. On the Financial Secretary's calculations, which my own rough check confirms, that means that they got back £39,100 at the expense of the Revenue. On the right hon. Gentleman's calculations, that is the whole story, but, of course, I think it will be quite obvious to all hon. Members that it is not the whole story. I am not sure how many hon. Gentlemen opposite I am carrying with me at this particular stage of the calculations, but I should have thought that most of them would agree that it is not the whole story.
2241 Let us look at the motive, because the Financial Secretary's approach to the whole problem was weakened by his failure to look at the motive. In many cases, indeed, I should say the majority of cases, the initiative is taken by the vendor company—a company which has accumulated liquid cash reserves and has not distributed those cash reserves, perhaps because it was responsive to the appeals of successive Chancellors of the Exchequer not to distribute profits, or, more likely, because it was afraid of being caught for Surtax. In the case taken by the right hon. Gentleman, the vendor has succeeded in distributing his profits without paying Surtax and he has done this by selling the shares, which, since they convey to him a capital gain, are not subject in that way to Surtax.
Let us suppose that the vendor had done the other thing and had declared a dividend for the purpose of clearing the decks. Such a dividend would, I think it will be agreed, have been a gross dividend of £160,000, giving a net dividend of £92,000. That is to say, £160,000 gross less tax at 8s. 6d. in the £ on £160,000 gives him a net dividend of £92,000. This would, of course, have borne Surtax. I quite agree with the right hon. Gentleman in his answer at Question Time that one cannot say how much Surtax would have been borne because one does not know at which rate of Surtax the individual profiting from the transaction would have been caught.
But let us consider a case in which there are three shareholders. In most cases where this practice is followed, it is usually a small number of shareholders and not a large company. Let us say that the income and tax position of these three gentlemen would make them liable for Surtax at the rate of 9s. 6d. in the £, which is a perfectly reasonable estimate in this case. At a rate of 9s. 6d. in the £ on the distribution of the net dividend of £92,000, the Revenue would then have got £79,000 in Surtax.
Looking at the operation from the vendor's end, therefore, the Revenue has lost £79,000. In other words, the whole operation has enabled the shareholders to get their hands on £92,000 without paying the £79,000 in Surtax which they would otherwise probably have paid. At the same time, as the right hon. Gentleman said, it has enabled the purchasers to claim £39,100 in repayment of tax. So that the real loss to the Revenue against 2242 the Surtax that would have been payable had there been distribution in the ordinary way is the £79,000 plus £39,100, which is £118,100, or three times as much as the right hon. Gentleman said.
If that is a representative case, and I see no reason to suppose that it is unrepresentative, the figure given by the right hon. Gentleman—deliberately, but quite honestly—understates the position. That is why I, for my part, put his figure of £4 million a year up to £12 or £15 million.
I know that there are all kinds of refinements that might be introduced into these figures. There is the special position of charities, to which my hon. Friend the Member for Islington, East (Mr. Fletcher) referred. There are also the complications of possibly catching even the trading company for certain Profits Tax. But when one has made all allowance for such possible refinements, it is fair to argue that an estimate which only bases itself on the tax reclaimed is a relatively small proportion of the total loss to the revenue. That is why I put the right hon. Gentleman's figure of £4 million a year up to £12 or even £15 million a year.
As my hon. Friend the Member for Sowerby (Mr. Houghton) pointed out, it is no secret that this business has been going on for a considerable time. As my hon. Friend the Member for Ashton-under-Lyne (Mr. Rhodes) interjected on Second Reading, very many people in the City expected that the April Finance Bill would have dealt with this problem. Most of the journals that deal with tax problems were certainly foreshadowing legislation at that time. Taxation was foreshadowing it and some of the accountancy journals were foreshadowing very confidently that measures to deal with this practice would be introduced in the April Budget, which was introduced at the usual time of the year.
I want to join with my hon. Friend the Member for Sowerby in asking why this provision was not introduced in the April Budget when, quite clearly, most people knew the practice was going on and most expected measures to be taken. In consequence of the failure of the Government to introduce it in April it is quite clear that many other people have intensified their activities since, to make sure of getting this advantage before the next Budget. Not everyone, of course, ex- 2243 pected an autumn Budget, but I am quite sure that some individuals with liquid cash reserves, finding that they had been spared last April, got to work as quickly as they could to make sure they would be able to strip their dividends before the Budget next April. That is why I suggest that this year, 1955 to 1956, the figure is considerably higher, on the right hon. Gentleman's method of calculation, than the estimate of £4 million.
This is what we must ask. Why was this not done in April? We all know the answer. My hon. Friend the Member for Sowerby has told us the answer. This measure was omitted to facilitate the speedy passage of the April Finance Bill so that the Government could get to the country for their quick General Election. We must ask whoever is to reply to the debate—is it to be the learned SolicitorGeneral?—quite clearly to tell the Committee tonight why this measure was not introduced in the April Finance Bill, when every one expected it. I hope he will tell us. If he cannot, I hope that one of his colleagues from the Treasury will tell us. If neither knows the answer I hope they will ask the Chancellor to come in, and that he will tell us, because this is a very serious matter.
If my estimate is right—and it may be an under-estimate—the Chancellor, who is supposed to be dedicated to the idea of economy, will have lost in the six months delay or more about £6 million or £7 million for the Revenue, and lost it for political reasons, lost it because it seemed to him more advantageous to the country to have a quick Budget and a quick Election than to take the measures necessary to protect Her Majesty's Revenue from these racketeers.
If it is true because of that that £7 million has been lost to the Revenue I am sure the Committee will wish in its own mind to set off that £7 million or more of loss, incurred for this very unworthy motive, against the Purchase Tax figures which we have been debating during the past two or three weeks. I see a small frown furrows the brow of the Economic Secretary, but if I put this point to him I am sure that he will take it as quickly as he usually takes these matters. Over these past few days we have been debating the great hardship and burdens placed on the housewives by the series of petty taxes on household necessities. Although it has been very 2244 difficult to get any information out of the Chancellor it would appear that these add up to about—did the hon. Gentleman the Member for Dover (Mr. Arbuthnot) wish to say what it was?
§ Mr. Wilson
I think the hon. Gentleman must have got it wrong. The Chancellor estimated that it would be about £7 million on household necessities. If one ignores the textiles, clothing, furniture and pottery the figure would be £7 million in total per annum. That means that the amount of money the Chancellor has allowed to escape because of his Election Budget he now has to take back from the housewives almost to the same extent. He need not have imposed this intolerable burden on the British housewives if he had taken this step sooner. If there is anything wrong with my calculation, I hope the hon. Gentleman will correct me.
§ Mr. Wilson
The hon. Gentleman, no doubt, has been doing some mental arithmetic. I took the Chancellor's own figures. If the Chancellor has been allowing these racketeers to fleece each average family in the country of 4d. a week ever since the General Election I can only hope the hon. Gentleman is proud of that. I hope I shall get an answer from the Solicitor-General about the timing of this measure, and why it was not taken in the April Budget. The figures I have given show how the Government have under-estimated the revenue they have lost.
They are looking at the transactions entirely on the side of the purchaser and have ignored the vendor. I suggested on Second Reading that this was a one-sided way of looking at it. It not only affects the Estimates, but is a case of the Government approaching the practical problem of stopping it from the wrong end. The Government intend to regard—I think that this stands out from the Financial Secretary's speech and, to some extent, from the Economic Secretary's speech on Second Reading—the purchaser of the shares, the investment dealing company, the charity, or whoever it may be, as the initiator of the transaction.
I would suggest to them that it is more appropriate to regard the vendor, the Surtax dodger, as the initiator in this case, although, in fact, there may be joint 2245 initiative. Wherever there are two prices for the same thing because of the way in which the tax system works it obviously pays both to enter into deals of this kind, just as it pays both parties in the parallel case of bond washing to enter into deals of this kind. It pays both the seller and the buyer.
I think that the Treasury Ministers will confirm that in some cases the vendors have set up a special company, a purely notional, nominal company, to act as the purchaser of these shares. Certainly in this case the initiative was taken by the vendor. I should have thought, as I have said, that the principal motive was the avoidance of Surtax, and that in most cases the initiator was the vendor rather than the purchaser.
§ Mr. Pitman indicated dissent.
§ Mr. Wilson
I see that the hon. Member for Bath (Mr. Pitman) shakes his head. I agree that in every case, the motive is not avoidance of Surtax. In some cases it is simply an attractive method of being able to get a tax rebate on the line suggested by the right hon. Gentleman, but in the majority of cases I suggest that the motive comes from Surtax dodging, namely, the desire to distribute liquid reserves without being caught for Surtax.
It is because the Government are looking at this from the wrong end that we have the extremely tortuous procedure embodied in the Bill. I think that, by and large, this tortuous procedure is likely to be effective. We have given our reasons tonight why we thought that there was one loophole which ought to be stopped. It is because we think that, on the whole, this tortuous and cumbersome procedure is likely to be effective that we do not propose to vote against the Clause, although I am very doubtful whether it was necessary to be so cumbersome in providing this method of stopping dividend stripping. Six whole pages have been devoted to this business, and I think that about three pages of the Schedule are in smaller type, which suggests that the total number of words used is very considerable.
I think that the reason why this had to be so complicated is that the Government have started from the end of the purchaser of the shares and not from the end of the vendor of the shares. One might take a parallel—I agree that it is not entirely perfect—of the burglar and the man who 2246 goes in for the receipt of stolen property. The latter, I gather, is usually known as a "fence." Supposing that the Government were to find that burglary was going on on a considerable scale, they would be likely, if they followed the same procedure as they have followed here, to try to stop burglary by making a provision that dealing in stolen property was a crime, or, at any rate, by making it unprofitable, with elaborate arrangements to protect the genuine antique dealer or the dealer in silverware or gold in order to enable his legitimate trade to continue. I think that that is a fair parallel of what the Government are doing. They are trying to make it difficult for the "fence." I suggest to the right hon. Gentleman that it would have been a great deal easier if he had tackled the problem from the other end and made burglary illegal. In this particular case he should have provided that the Surtax payable would have been payable on the transaction. I think that would have been just as effective and just as complete in its enforcement, and a great deal simpler.
I still cannot get over my suspicion that the Treasury rejected this proposition to deal with it simply from the end of the vendor, because any measures taken to achieve that end would smack of a tax upon capital gains. There is a desire on the part of the Treasury—I do not know whether it is Ministerial, or whether it comes from the officials who advise the Minister—to avoid doing anything which looks like the thin edge of the wedge of a tax on capital gains.
As I said on Second Reading, and as I am sure the whole Committee will agree. the measure proposed in the Clause, and in the Schedule that goes with it, will not deal with all the problems which arise from the fact that the tax system treats one class of company one way in relation to the achievement of capital gain and another class of company in a different way. That is why these measures are not successful in dealing with the manifold forms of bond washing that are still legal. I should be out of order if I went into detail about the various forms of bond washing that are still legal, but there is no doubt that bond washing is still going on to a very considerable extent.
If the Chancellor had sought to put an end to dividend stripping by the sort of approach which I have been suggesting for the past few months, it would, or 2247 could, have had the effect of making illegal at the same time a considerable proportion of the still legal bond washing that is going on. On Second Reading, I said:… this …meaning dividend stripping—and other forms of legal evasion, such as bond washing, are due to the fact that we have a dual system of taxation under which the individual pays Surtax on income, but capital gain remains tax free … while, to a finance dealing company, the same capital gain becomes an income loss and is entitled to tax rebate."—[OFFICIAL REPORT, 8th November, 1955; Vol. 545, c. 1789.]It would be out of order to go wider than dividend stripping in debating this Clause, and since the Financial Resolution has prevented hon. Members from putting down new Clauses it is impossible for us to suggest means by which other and parallel rackets could have been dealt with. I hope that the right hon. Gentleman the Financial Secretary will convey to the Chancellor my statement that I wish to press the Chancellor to apply his mind to this broader problem, to all the types of what for sake of a generic title I will call "scrip-teasing," which includes dividend stripping, bond washing, and all the rest. There are many more which have no name. Having given his mind to the problem, I ask the Chancellor to prepare really effective methods of dealing with these rackets in the next Finance Bill.
I hope that the Chancellor will realise the truth of the words in the minority Report of the Royal Commission, published a few months ago, which said that so long as capital gains remained exempt from taxation it was impossible to deal with the problem of the conversion of income into capital gains in all its possible forms by specific pieces of legislation. The majority Report did not deal with the problem of dividend stripping. The minority Report devoted a short section to the problem. As we are asked tonight to approve this Clause, it is interesting to note that the only members of the Royal Commission who gave their minds to the problem of dividend stripping said that they thought it would be impossible to deal with this problem by specific pieces of legislation. and that the only way of dealing with it was by an attack on the problem of capital gains.
2248 Therefore, while we will not oppose this Clause, it is a matter for consideration that it could have been done much more effectively and much more simply. I hope that the next time we debate a Finance Bill, one which, I hope, will leave room for new Clauses, we shall find that the Chancellor has listened to the advice given to him from this side of the Committee on this Bill, and that he will introduce more sweeping legislation to deal with all the parallel problems that present themselves to the Treasury.
§ Mr. Pitman
I support the Chancellor on this Clause more enthusiastically than I gather the right hon. Gentleman the Member for Huyton (Mr. H. Wilson) has just done. In that connection I want to deal particularly with my Amendments which were not on the Order Paper in time to be called: In page 6, line 15, after "if," to insert:neither the person acquiring the shares nor any associated persons to whom the shares are subsequently sold makes any loss in respect of such shares which falls to be taken into account, or if every such person who makes such a loss elects not to take it into account, in computing the profits arising from, or loss sustained in, the trade, or if.In line 21, at the end to insert:For the purposes of this subsection, shares shall be deemed to be sold to an associated person where the buyer is a body of persons over whom the seller has control or the seller is a body of persons over whom the buyer has control or both the seller and the buyer are bodies of persons and some other person has control over them.I want to deal with these Amendments in terms of the finance company. The right hon. Gentleman mentioned a company which was bought up for £100,000 and resold, after the payment of £92,000 in dividends, for £8,000. He also used the term "scrip-teasing." In my estimate this might be called "strip-teasing" but with the important difference that the residue becomes less and not more interesting as the stripping takes place and as it approaches the less interesting £8,000 mark.
§ Mr. H. Wilson
I am not sure whether the hon. Gentleman said "strip-teasing" first and "scrip-teasing" second or "scrip-teasing" first and "strip-teasing" second. Perhaps I should make it clear that when I used that generic phrase—and I would be glad if hon. Gentlemen opposite could think of a better—I said "scrip."
§ Mr. Pitman
I am happy to clear up the doubt because, with my name, I have the greatest sympathy for the reporters over mis-hearings. I used the term "scrip-teasing" first and made the contrast with "strip-teasing."
In such a case it is in the capital loss being treated as a charge against income for the tax computation that the real vice of the stripping takes place. Therefore, it is only in the case of finance companies that this can possibly arise because it is only in finance companies that there can be any gain in taxation benefit from what would otherwise be a capital loss and, therefore, a non-tax recovery loss.
Finance companies may be divided into two classes: those which are genuine finance houses and those which are there for tax avoidance. I will call them ad hoc finance companies. The genuine finance house carries out some important functions. For instance, it buys the shares of a deceased holder of, say, 10 per cent. of a private company and helps the estate in finding the death duties. Again it can carry out the function performed by the Industrial and Commercial Finance Corporation, of helping to finance a young and hopeful company, the small private business. Usually the finance house, like the I.C.F.C., demands that it shall hold at least a 10 per cent. part of the equity. Other occasions are when it helps one or other of two large shareholders to buy out the other and so brings to an end what might be called internecine mismanagement. Fourthly, by obtaining a share in management, it may exert some influence towards greater efficiency in the conduct of an organisation. Finally, it generally produces a market for shares which are otherwise not marketable.
It is very important that in hitting at the ad hoc company we do not also cause fears, doubts and uncertainties about higher taxation on the part of the genuine finance house which is carrying out these beneficial functions. One of the difficulties about the autumn Budget was that it was necessarily introduced in a hurry. It was necessarily secret before its publication, and there has therefore been no opportunity for people interested in running genuine finance houses to collect their thoughts about it; to get a collective expression of opinion, and take action to try to ensure that their interests would be properly considered and that this Committee would take them into account.
2250 It was not until 17th November that they could get together and make any representations at all, and it was only last night that I received from them the Amendment which I put down upon the Order Paper, which was accordingly starred this morning and is unfortunately too late to be called. That Amendment goes to the root of the trouble, which lies in the sale for £8,000 of those shares which were bought for £100,000, after the stripping which had taken place. It is in the recovery of the tax upon the £92,000 that the vice is introduced.
If, as happens in so many of these finance house operations, there is no diminution in capital value, but the shares are sold—after the very minor dividend stripping that takes place—at a higher price than that for which they were bought, the Inland Revenue actually gains, because the capital profit attracts Income Tax. It is therefore quite clear that if the vice lies in the resale of shares at a lower price, the correct way of remedying the matter is to introduce some provision to cover those cases and, as the Amendment sought to do, to exempt from the mischief of the Bill any resale which was not made at such a loss.
I hope that the Chancellor will reconsider this question on Report, and that, in the meanwhile, he will meet representatives of finance houses and discuss with them the fundamental point whether, in giving certainty of relief to them, an opening might be caused of which the hon. Member for Sowerby (Mr. Houghton) would like to be a stopper-up, and which ought not to be opened up. The Chancellor and the finance house representatives should see whether there is such a risk. I have asked several people in the business if they could think of any way in which the Amendment would open up an undesirable practice and they have been unable to think up such a possible loophole.
This evening the Economic Secretary gave an unconditional guarantee that, having given warning of the Government's desire to stop all abuses, he will make any future legislation retrospective, in order to take care of any such abuses which may arise in the intervening period. Since he has said that, will he not apply that principle to the Amendment to which I have referred? If it is not capable of abuse—and I do not think it is—it will do what the Committee 2251 wishes, namely, give to elements of the community who are doing a very good job a feeling of certainty about their ability to continue their beneficial functions. If it is capable of abuse, his threat and subsequent legislation will be effective.
§ Mr. Houghton
The hon. Member for Bath (Mr. Pitman), in his usual fair-minded way, has been describing to the Committee the difficulty of legislating against these ingenious devices for tax avoidance without hitting the just as well as the wicked. That problem always concerns the Committee when asked to legislate on these complicated matters. It is one of the main reasons why the Chancellor is reluctant to come forward with legislative proposals to stop abuses unless they become so serious and widespread that he must attack them, even though it means another substantial addition to our already complicated legislation.
We are discussing the seamy side of the full-blooded capitalism which the hon. Member for Dorset, South (Viscount Hinchingbrooke) says is the only alternative to Communism. It reminds me of the stern old judge who once said to a prisoner, "If ever there was a case worse than this case that case is this case." There is no doubt that this is one of the most serious cases of tax avoidance that we have had for some time. I want to go back to what the Financial Secretary said in his Second Reading speech about it and to clear up some of the doubts about the six figures.
The right hon. Gentleman said:Clause 4 is designed to exterminate the small but ingenious tribe of dividend strippers.That was not a very friendly thing to say. It is obvious that the right hon. Gentleman felt it very keenly. He was emotionally roused about this ingenious tribe of dividend strippers. He went on to describe to the House how this ingenious thing was done. After giving the description he said:This trick"—the right hon. Gentleman's temper was still up—is at present perfectly lawful.He meant that the law does not stop it. It is not lawful. There is a difference between the two. He went on:It has just begun to be exploited on a really big scale. If we waited until the next 2252 Finance Bill the loss of revenue in the interval would exceed six figures.This is where the six figures come from. The right hon. Gentleman concluded with a gesture which impressed the whole House:I am not prepared to stand by and see the Revenue milked like that."—[OFFICIAL REPORT, 8th November, 1955; Vol. 545, c. 1668–1669.]But the Revenue had been milked like that in the previous financial year to the tune, not of six figures but of seven. Several millions has already been stripped through this trick, which has become known jocularly in the City as "the Indian rope trick".
I do not think that the right hon. Gentleman was being as fair as he usually is to the House when he said that if something was not done before the next Finance Bill the Revenue would lose more than six figures. He ought to have said, "We have already lost £4 million", when the urgency behind these proposals would have become much more apparent. My hon. Friend the Member for Ashton-under-Lyne (Mr. H. Rhodes) got up, somewhat impertinently and unkindly, and said:This brave talk is all very well, but the Comptroller and Auditor General pointed this out before the April Budget, and nothing was done."—[OFFICIAL REPORT, 8th November, 1955: Vol. 545. c. 1669.]
§ 10.0 p.m.
§ Mr. H. Wilson
I have discussed that with my hon. Friend the Member for Ashton-under-Lyne (Mr. Rhodes). He informs me that it was a mishearing and that he was referring not to the Comptroller and Auditor General, but to the magazine called The Accountant.
§ Mr. Houghton
I expect that the information given by The Accountant is very reliable, and I do not think that my hon. Friend's intervention lost anything by being misreported.
It is time that we discovered the truth about this and other forms of tax avoidance. I recently received a letter from a person whom I have never met, and whose name I shall not mention, which reads:So the Indian rope trick has not been made retrospective.There seems to be a note of depreciation in that: 2253Now let me tell you another little story. I sell a company for the value of cash reserves to a holding company. Then I leave the valuation of the assets as a director's loan, for which I take so much of the principal each year and allow the interest to accrue, and it becomes part of the debt. The rope this time ties your friends in the Inland Revenue".That is something else with which I do not think the Clause deals. It deals with dividend stripping, but not with asset stripping, which it presumably is. One case after another comes to notice and there is literally no end to it.
I know what is in the mind of the noble Lord the Member for Dorset, South, so I will say that even if taxation were lower this kind of thing would be almost as prevalent as it is now. Of that I am sure. Reports of commissions of inquiry and investigation over many years have drawn attention to tax evasion as a very serious matter.
I think what is really at stake, if I may say so, is a difference of approach to this kind of thing between my hon. and right hon. Friends and hon. and right hon. Gentlemen opposite. I do not like to strike moral attitudes, much less do I like to attribute to hon. Members opposite any unworthy motives. That would be quite wrong. My point is that I believe that they accept this as part of the activities of business and big finance rather more readily than we do. They become, so to speak, contaminated by the company they keep. I hope that is not an unworthy imputation. They regard the phrase "He is a good business man" as indicating a praiseworthy member of society, but we wonder whether such a phrase is not just a little slick, a glossing over of some of the things which we would not regard as fully acceptable in the field of public administration, for example.
However, I will leave that point, because I think it does represent a substantial difference of approach. To be fair, however, we must add this. On this side we are so far removed from these activities that we have not come to accept them. We do not practise them. We are not in this at all. It is something which is not only foreign to our nature, but we are quite removed from any temptation. [Laughter.] Hon. Gentlemen opposite laugh. It is an indication of the levity with which this social evil is treated by them, and there is no doubt that it is a social and a moral evil.
2254 I will moralise no more. [HON. MEMBERS: "Hear, hear."] It is quite evident that what I have been saying is not to the taste of hon. Members opposite. They feel a little uneasy about it. They are a little ashamed about it. If they are not, they jolly well ought to be.
I ask the Chancellor to tell us the whole story about the losses which are being incurred. Does he think that the proposal which gives all the dividend strippers a clean bill of health for the past, and deals only with the future, measures up to his brave talk on the Second Reading? Can he assure us that other devices of a similar kind are being carefully watched with a view to being brought within the comprehensive war against serious tax avoidance?
§ Sir Patrick Spens (Kensington, South)
I want to intervene for a very short time. There have been a number of challenges from the other side of the Committee and I would willingly take up a great deal of time in trying to answer them.
In reply to the hon. Member for Sowerby (Mr. Houghton), I still maintain, as many lawyers have maintained for generations, that there is no moral stigma in doing something which is permitted and not forbidden by the law. That has been handed down by the highest authority. It is well known that the law always lags behind the growth of moral feeling in the country, and it is when the moral feeling of the country requires that something shall be done that the law is changed. If right hon. and hon. Gentlemen will follow the history of company law in this country they will find that right from the moment it started that has been a true description of everything which has happened.
Here we have another example. Since I first entered the House in 1933 there have been innumerable instances in which the House has had to pass legislation in keeping with the moral standards which have grown up during the time which has elapsed since previous legislation was introduced. Here is another case. There is not the slightest doubt that this is a method of avoiding taxation which, in the opinion of all decent, honourable men, ought to be ended.
Let hon. Members put themselves in the position of the Government. We know perfectly well that when the first instance arises of an attempt to avoid 2255 taxation the Financial Secretary and his advisers think, "What will this come to?" They have to consider the matter for quite a long time, and we all know that these abuses have to reach a certain stage before it is possible to introduce legislation. The older hon. Members will recall Sir John Simon's Finance Acts, and will remember the frightful difficulty at that time of dealing with quite a number of methods of tax avoidance. The right hon. Member for Huyton (Mr. H. Wilson) cannot complain because some time has been taken in devising the legislative changes which are necessary to deal with this case of tax avoidance, for there are four pages on the subject, almost unintelligible even to a lawyer. I believe they are capable of dealing with this abuse. These methods of tax avoidance are always extremely difficult matters to deal with and an immense amount of time is required in the Treasury, with its legal and other advisers, before some provision can be produced to be put before the House.
I want to draw attention to a point in the machinery of the Clause. I was astounded, when I looked at subsection (8, b), to read:'Person' includes any fund or trust …That is something I have never seen in legislation before. The whole of the operative subsections of the Clause and all the operative subsections of the Schedule refer to persons. I know of no fund which is not owned by someone or managed by someone. I know of no trust which has not got trustees. I have not the slightest idea what my right hon. Friends had in their minds by saying that funds or trusts shall be accountable and shall not do this or that. I have not the slightest idea how they are going to make the provision operative in that way.
Of course, I do not expect an answer at present. This is something quite new in our taxation legislation, so far as I know. Between now and the Report stage, I ask that my right hon. Friend should consider whether it really is not quite ridiculous to say that a fund or a trust is a person, and whether the Government ought not to try to define the individuals who are to be accountable and who are to be liable if they misbehave in the way the Clause indicates.
2256 On the much wider question, which I should like to debate, I would ask the right hon. Gentleman for Huyton (Mr. H. Wilson), who made a very interesting speech, whether it really matters what the motives are? Does it really matter what the losses are? Is not the real gain that Her Majesty's Government are active and are acting as promptly as is reasonably possible to expect?
§ Mr. John Howard (Southampton, Test)
I will not detain the Committee for more than a few moments, but I wish to support my hon. Friend the Member for Bath (Mr. Pitman) in his allusions to the genuine finance house as distinct from what he described as the ad hoc finance house. I think that is comparable to the nominal company to which the right hon. Member for Huyton (Mr. H. Wilson) referred, which is a mere tool in these transactions, as distinct from a finance house carrying on perfectly genuine and reputable business in facilitating the introduction of companies either to the Stock Exchange or to finance companies.
I should also like to refer to what was said by the hon. Member for Sowerby (Mr. Houghton), who spoke of a new form of the Indian rope trick which depended upon loans to directors. I think the hon. Member will agree when I point out that loans to directors are not only subject to distribution charge for Profits Tax purposes, but can also be regarded as a distribution for Surtax purposes and need not be the glowing prizes which his correspondent seemed to assume they would be.
I turn to the reasons why it has been necessary to introduce this legislation and how it is that the Inland Revenue has been milked for a number of years by this dividend stripping operation. Let us look at how this has occurred. It is obvious that in the type of company which the right hon. Member for Huyton instanced—the company with three shareholders—that it is already covered by tax legislation under Section 245 of the Income Tax Act, 1952. It can be subject to Surtax direction if the company is withdrawing funds under the guise of capital or not distributing a reasonable proportion of profits as dividends.
If it is able to resist a direction of the Commissioners, that means that it is relying on the declaration the late Sir Stafford Cripps made in 1948 when he stated that 2257 if private limited companies to which the Surtax Clause would apply continued to distribute a reasonable rate of dividend based on past history he would not take action under the provision which is now contained in Section 245 of the 1952 Act so as to ensure that the members of those companies bear Surtax.
Members of private companies which are amassing profits reach a point where with the machinations of the finance houses they have been able to withdraw those profits under the guise of capital and have been escaping Surtax. In the process they have slipped through Section 245 of the Act, and in all probability have already made representations to the Special Commissioners for Income Tax asking that they might receive a clearance so that there may be no question of any Surtax being levied upon them in respect of the past profits which they have retained.
If we look to the reasons, we must come to the conclusion that dividend restraint is the basic cause of enabling these companies to amass undistributed profits. Dividend restraint is all very well in the case of public companies where increased dividends might have repercussions on the trade union movement, on wage rates, and so forth, but, in the case of private limited companies, it simply means that members of these companies are able to avoid the Surtax due if they had distributed a reasonable percentage of the profits.
The legislation before us tonight seeks to stop this form of tax avoidance, and since, in many instances, the company which has been sold to a finance house has subsequently been resold, after the cash has been taken out, to the original owners of the private company, I should like to ask my right hon. Friend the Chancellor whether he will give us some indication of the attitude which the Special Commissioners are likely to take in future when any of these companies, or members of these companies, apply to them for Surtax clearance under the 1952 Act.
I hope I have said sufficient to make it clear that I consider that the whole problem has been created by a purely artificial restraint upon our economy which prevented the normal distribution of dividends, or of reasonable distributions, and by applying that sort of thing while 2258 ignoring the difference which exists between private and public companies, we have created a situation which has enabled finance companies and dividend strippers to co-operate to their profit.
§ Sir E. Boyle
We have, very properly, spent two hours or more on this Clause, and perhaps the Committee might well feel that the time is now approaching when we might come to a decision upon it. Perhaps I could first answer the point put by my right hon. and learned Friend the Member for Kensington, South (Sir P. Spens). I had hoped that I might achieve what for me would have been a very remarkable thing, and that is to give a completely satisfactory answer on a point of law to a former Lord Chief Justice of India. Although not so fortunate as that, I am able to say to my right hon. and learned Friend that subsection (8, b) of this Clause, to which he referred, is connected with the definition of a charity for Income Tax purposes. We will look into the precise wording, and I will write to my right hon. and learned Friend about it when we have had time to consider it further.
I should like to say how much I appreciated the opening remarks, even though I did not agree with all the later ones, of the hon. Member for Sowerby (Mr. Houghton). I will not take him up on the question of attitudes, as I know very well that attitudes are very often unprofitable things to argue about. I do very much agree with him that what we want to do is to make this Clause in such a form as will hit dividend stripping, while at the same time not hitting proper legal business purposes. I do not think that there is anything necessarily wrong in being a good business man, and I agree that we want to strike a happy medium here. We have tried to do our best, and I repeat that a great deal of time and thought has been given to the drafting of this Clause.
If, in practice, this Clause turns out not to be strong enough, as I have already said earlier this evening in the debate on an Amendment to the Clause, my right hon. Friend will not hesitate to consider whether further strengthening legislation may not be needed. I would say to the hon. Gentleman, who made a perfectly fair point when reading from a letter, that we shall consider other forms of stripping, and what one might call different species 2259 of the same genus, if that is the correct biological term.
The right hon. Member for Huyton (Mr. H. Wilson) opened this discussion with a speech in which it would not be unfair to say he repeated a number of the arguments which he deployed on Second Reading, and on that subject I cannot do any more than give him the same answer which gave him on that occasion so far as concerns the question why we did not follow the bond-washing method of hitting the vendor of the shares rather than the purchaser. It would be tedious to repeat what I said in the Second Reading debate. One thing that the right hon. Gentleman forgot in his otherwise completely fair exposition was that in the case of bond washing there is an agreement to buy back. In the case of dividend stripping there is no question that the purchaser is the initiator of the operation. Therefore, it seems to us that he is the man on whom it is fair to impose the liability.
§ Mr. H. Wilson
The hon. Gentleman is so concerned to repeat the argument he used on Second Reading that he is now using it in reply to a point which I did not make this evening. On Second Reading, I said that in dealing with bond washing the attack came on the vendor, and the hon. Gentleman gave that answer, which, as far as it goes, was perfectly fair. I did not make that same point tonight. When the hon. Gentleman spoke on Second Reading, however, his answer was limited to saying that this was considered by his advisers to be the most effective way of dealing with it. He did not give any further reasons than that. Can he elaborate a little further tonight?
§ Sir E. Boyle
I do not think I can add any more to that. I am sorry if I misrepresented the right hon. Gentleman in any way, but I cannot add further now to what I said on the earlier occasion.
The right hon. Gentleman asked why this had not been done in the April Budget and I should like to answer that perfectly fair question. The information which led my right hon. Friend to say, in answer to a Question, that the relevant figure of what this was costing was £4 million, became available only recently the figures which were the basis of his Answer on 17th November became available only quite a short time ago.
2260 The right hon. Gentleman will realise that information of this kind cannot be known with any precision until the end of the tax year, when repayment claims come to be made. Until those repayment claims came to be made, no information was available to the Inland Revenue that the loss for 1954–55 was anything like £4 million. There is nothing in the least sinister about this.
§ Mr. Wilson
This is an important point, for the reasons I gave in my speech. The hon. Gentleman tells us that it was not until getting on for 17th November that the Treasury could assess the size of the loss in statistical terms, yet even when the size cannot be measured in statistical terms one can still know that it is fairly serious. For instance, during the Budget debates the Chancellor agreed that the loss was getting worse. I do not ask him to say how much it is getting worse, but he said that it was getting worse without being able to measure the figures.
Is the hon. Gentleman seriously maintaining that his advisers were not aware before the April Budget that this was becoming a serious matter, even if they could not put any statistical estimate on it? If his advisers did not know that this was becoming a serious development, certainly, as my hon. Friend and I and others have mentioned, the trade Press knew that it was becoming serious. Surely the hon. Gentleman and the Chancellor read these papers from time to time.
§ Sir E. Boyle
I can only repeat—I say this with absolute sincerity to the right hon. Gentleman—that it was not until after the end of the tax year, when repayment claims come to be made, that we had any idea that the loss was anything like the figure of £4 million. I assure the right hon. Gentleman that that is so.
The only other point on which I should like to say a word is the point raised by my hon. Friend the Member for Bath (Mr. Pitman). All the Committee will be grateful for the advice and help that we have had in this discussion from my hon. Friend, who knows such a great deal about the subject. As I understand, my hon. Friend was suggesting that the Clause should not apply unless the shares which were bought by the dealing concern are actually sold at a loss.
2261 I can only say that we have considered this point very carefully and that it is the opinion of my right hon. Friend that any such provision would open the door to serious further avoidance. There are a number of reasons for that, with which I need not trouble the Committee now, but to my hon. Friend I should like to say that we would not have come to this decision without looking into the matter very carefully.
We have spent some time on the Clause. I do not think there is any dispute in the Committee as to its importance and as to the importance of doing something severe about the question of dividend stripping; and as I have said, my right hon. Friend will not hesitate to look at this subject again in the light of how the Clause works in practice.
§ Clause, as amended, ordered to stand part of the Bill.
§ Postponed Clause 5 ordered to stand part of the Bill.
§ Second Schedule agreed to.