§ Mr. H. Brooke
I beg to move, in page 19, line 12, after "year" to insert "(i)."
This Amendment paves the way for a subsequent Amendment, in page 19, line 14, in the name of my right hon. Friend. Perhaps it would be more convenient if I spoke about this Amendment and that one when we reach it.
Amendment agreed to.
§ The Deputy-Chairman
I think that with this Amendment, that in the name of the hon. Member for Stechford (Mr. Roy Jenkins), in page 19, line 14; to leave out "three" and to insert "five," and his similar Amendment in page 19. line 19, can be considered.
I shall not detain the Committee for more than a few minutes on this question, because this Amendment, like the one I moved an hour or so ago on the question of the definition of the Commissioners' jurisdiction, is to obtain from the Government some clari- 2262 fication, in this case clarification of the meaning in their mind of the word "substantially." It will be clear from the Schedule that if in the opinion of the Commissioners having jurisdiction in the matter—and the Solicitor-General gave us a statement on who those Commissioners, in different circumstances, were—… the annual rate of dividend on the shares in question in the said year is not substantially greater than the annual rate of dividend on those shares in the period of three years ending on the relevant date.certain things follow.
The phrase "annual rate of dividend" is a little obscure. We are not clear whether it means the average rate of dividend or whether it means the rate of dividend in one of the three years, perhaps the peak rate. I think that almost certainly it means the average. There is a reference elsewhere in the Schedule to make it possible for us to understand it does mean average, but it is not clear.
Quite apart from that, this word "substantially" seems to be a rather dangerous word to use. What does the Chancellor mean by "substantially"? Time and time again in debates on Finance Bills through the years, the Opposition of the time—of whatever party—have complained of the use of vague words or the vague use of words of this kind. It has been argued that such vagueness may give rise to very difficult legal actions. I hope that I carry with me the right hon. and learned Gentleman the Member for Kensington, South (Sir P. Spens) on this question.
I should be out of order if I were to dilate upon some of the cases in which there have been lengthy debates in Committee on the use of the word "substantially" or the word "mainly," cases in which different legal authorities might interpret the words in different ways. I recall, without going into the matter in detail, a long debate in connection with the uplift of Purchase Tax a year or two back, when the word "mainly" was used and there was a long debate about whether it meant 51 per cent., as some of us thought, or some higher figure. We were told, I think, by the Chancellor that he thought that it meant about 80 per cent.
The same difficulty arises about the word "substantially." Suppose that the annual rate of dividend in the three years 2263 in question is x. Is the rate of dividend on the shares in question in the said year substantially greater if it is x plus 2, or x plus 3, or x 4? I think it is really a rather important point. I shall not press it at any length, but I hope that the Chancellor will reconsider it.
The Committee has always been against leaving these matters to the discretion of officials. When I say that, it is not a reflection on the officials themselves. We all know that officials of both the Customs and Excise and the Board of Inland Revenue have an extremely difficult task in interpreting the complicated legislation which we thrust at them. They may have had few more complicated pieces of legislation to deal with than this for dealing with dividend stripping. I think it is unfair to them and equally unfair to the taxpayer if this word "substantially" is thrown either on them or, indeed, on the Commissioners having jurisdiction in the matter, and I suggest that the right hon. Gentleman looks at this point again and, if possible, on Report, makes it a little clearer than it is at present.
The Committee does not like these forms of definition which are usually called "Chancellor's foot definitions"—definitions which vary according to the length of the Chancellor's foot or in accordance with the opinions of the Commissioners or officials. I ask the right hon. Gentleman to tell us what the Government mean by "substantially" in this context, and if he cannot tell us exactly what is meant by it, whether he would agree, if we asked leave to withdraw this Amendment, to look at it again and perhaps make a statement about it on Report.
§ Mr. H. Brooke
I will very willingly respond to the right hon. Gentleman the Member for Huyton (Mr. H. Wilson) by saying that if we can see any better way of doing this between now and the Report stage we will gladly do it; but I must not hold out any hope to him that there is within view, at any rate at present, a better way of doing it. I am glad he said that he would be disposed to ask leave to withdraw his Amendment, because it would be impossible, as the Committee, I am sure, will realise, to remove the word "substantially" from here.
2264 Let us examine the kind of case that might arise. A company might have declared in the past three years dividends of 4 per cent., 5 per cent. and 5 per cent., and if, in the fourth year, it repeated its dividend of 5 per cent. it would fall foul of the Bill because it would have increased its dividend above the average of the previous three years. I assure the right hon. Gentleman that there is no need to insert the word "average," because under paragraph (2) the Commissioners have to have regard to various matters—to all the dividends paid on the shares in the various periods, and they have totake such averages and make such adjustments as may appear to them to be required for a fair comparison.I think that more effectively achieves the result the right hon. Gentleman was seeking.
The fact is, one must have some word which indicates that reasonable and small dividend increases are permissible, but that large ones are not. I do not see at the moment, and nor does my right hon. Friend, any better way than to include the word "substantially," which we have already agreed to include in Clause 4 in a not wholly dissimilar context. With that explanation, I hope the right hon. Gentleman will not press the matter further, at the moment at any rate.
Mr. H. Wilson
I am not so worried about the word "average." I did indicate that I thought that was covered in the other part of the Schedule, to which the right hon. Gentleman has just drawn attention; but I am bound to say that even there the way the Schedule as drafted leaves it to the Special Commissioners to decide what averages are fair, not taking a flat average, as the Committee might have felt reasonable.
On the question of "substantially," the right hon. Gentleman has given a brief assurance that the matter will be looked at between now and the Report stage. He pointed out what I think the whole Committee realised, that if I were to press this Amendment successfully to a Division it might have quite a serious effect on the operation of the Bill, and he gave the illustration of the company that has paid dividends of 4 per cent., 5 per cent. and 5 per cent. Of course, it was not our intention to say that a very small increase 2265 of that kind should be ruled out by the Bill. I made clear when I moved the Amendment that we certainly had no intention of pressing it to a Division, or asking the Government to accept it. It was put down for the purpose of elucidation.
Having taken as an example dividends of 4, 5 and 5 per cent., the Financial Secretary went on to say that a little increase in dividends would be all right, but a large one would not. Of course, he still has not told us what he means by "little," and what he means by "large." That attempt at elucidation did not carry us any further than his explanation concerning the word "substantially." We recognise the difficulties of the Chancellor, but I would ask him to reconsider this question between now and the Report stage. In the case mentioned, if a dividend of 50 per cent. were paid, that would be regarded as a substantial increase, and, if a dividend of 5½ per cent. were paid, it clearly would not. Somewhere between 5½ per cent. and 50 per cent. the increase would be regarded as substantial. We shall be letting this Clause pass in rather a sloppy manner if we do not attempt to define it more closely, and we shall be placing a very difficult task upon the Commissioners, who, somewhere or other, will have to draw a line between 5½ per cent. and 50 per cent.
I do not need to tell the Chancellor that there is a body of opinion which is beginning to say that we would do better in our tax legislation if we tore up the Income Tax Act, 1952, and many later amending provisions, and simply stated that the law in relation to taxation shall be whatever the Special Commissioners, or other Commissioners having jurisdiction in the matter, may decide at any time on the kind of question before them.
I am quite sure that the Chancellor would not accept the view held by that school of opinion, and hon. Members on this side of the Committee certainly would not do so, but every time a Bill goes out from this or any succeeding Committee with sloppy words like "substantially," where nobody says clearly what is meant, more and more power is put into the hands of the Commissioners; more and more responsibility is placed upon their shoulders. The argument of those who say that the law really means nothing, and that the 2266 responsibility for tax matters has now passed into the hands of the Special Commissioners, is strengthened. I ask the right hon. Gentleman to have another look at the matter, and I hope that he will be successful in finding a better form of words than these, which I am sure both sides of the Committee agree to be unsatisfactory. I beg to ask leave to withdraw the Amendment.
Amendment, by leave, withdrawn.
§ Mr. H. Brooke
I beg to move, in page 19, line 14, at the end, to insert:or(ii) in a case where the shares in question were acquired in the ordinary course of a business of arranging public issues and placings of shares, represents a yield on the cost to the person receiving the dividend which is not substantially greater than the yield obtainable by investing in comparable shares the prices of which are quoted on stock exchanges in the United Kingdom.This Amendment and the Amendment in page 19, line 18, are designed to make sure that the Bill does not interfere with perfectly legitimate transactions. It is the wish of us all that the effect should be to stop those who are trying to cheat, while not interfering with perfectly legitimate and normal business. The main purpose of paragraph 2 of the Schedule is to allow normal business to continue. However, it has come to my right hon. Friend's notice that unless we amend it in the way he suggests a certain type of transaction might be unfairly caught by the Schedule.
If an issuing house acquires, in the normal course of its business, a block of shares in a private company with a view to a public issue of the shares, or to placing them among, perhaps, institutional investors, the rate of dividend which that private company was paying as a private company might be quite different from that which would be paid it the shares were sold to the public. There are various reasons which might cause a dividend on the shares of a private company to be kept low, as distinct from the shares in a public company.
For example, a high proportion of the private company's profits might go out in the form of directors' remuneration to the owners of the shares, and the dividend, in the strict sense, would be relatively small. When the issuing house has acquired the shares of this private company, clearly, on proceeding to sell them to the public or to place them, it 2267 will know that it will have to indicate a prospective dividend yield that will be sufficiently attractive to persuade people to buy the shares. It will calculate that dividend in relation to the price that it has paid for the shares and the future dividend thus calculated may be perfectly appropriate to a company of that kind when a public company, though it is, in fact, substantially higher than the dividend that was being paid so long as it was a private company.
This will cause no difficulty at all provided that the first dividend paid by the company after its acquisition by the issuing house is paid not to the issuing house, but to the investors who have bought the shares. That will be the normal event. But, of course, it may not always happen so. It may be that the issuing house will have to nurse the company for a time before it is in a position to offer or to place the shares.
If it had to nurse the company for a year or more and a dividend was declared in that time, a dividend appropriate to the company as a public company, that dividend might, by being substantially higher than the previous dividend paid by it as a private company, be caught by the Bill. The purpose of this Amendment is to seek to overcome that difficulty and to preserve the possibility of these perfectly legitimate and normal transactions with no thought or idea of dividend stripping in them from being stopped by the Bill.
The effect of the Amendment would be that where shares are acquired in the ordinary course of business of arranging public issues and placings of shares, a dividend which is received within one year of the date of acquisition of the shares will not be caught by this Bill if the annual rate of dividend paid in that year is not substantially greater than the yield obtainable by investing in comparable shares, the prices of which are quoted on Stock Exchanges in the United Kingdom.
In other words, if the dividend that is paid bears to the price which the issuing house has paid the same general relation 2268 that the dividend paid by an ordinary public company of that type bears to the market price of that company's shares on the Stock Exchange, then it will be accepted by this Bill as a genuine transaction, and will not be liable to dividend stripping penalties. That is all that this Amendment seeks to do. I have explained it as briefly as possible and, I trust, as lucidly as possible, and I hope that it may be acceptable to the Committee.
§ Mr. Pitman
One very short question. Does the word "public" apply to both issues and placings of shares? I want to thank the Chancellor very much for this concession to genuine business. There was a point of doubt, and I did not know whether this was the time for clearing it up.
§ Mr. Houghton
I presume that this is the price of virtue. I hope that the hon. Member for Bath (Mr. Pitman) has taken note of what happens when one tries to discriminate in favour of the genuine transaction in legislating against tax avoidance. It might be a discouragement to the hon. Gentleman who raised it earlier.
§ 10.45 p.m.
§ Mr. H. Brooke
If I may reply to my hon. Friend the Member for Bath (Mr. Pitman), the word "public" is related only to the noun "issues."
§ Amendment agreed to.
Further Amendment made: In page 19, line 18, after "case" insert:
under sub-paragraph (i) of the said paragraph (b)."—[Mr. H. Brooke.]
§ Schedule, as amended, agreed to.