HC Deb 12 June 1956 vol 554 cc463-71
Mr. Stevens

I beg to move, in page 35, line 24, to leave out "is" and insert "was."

I understand that it is your direction, Sir Charles, that we might at the same

direction. It is all very well for him to say that he does not want the tax to be a dividend tax, but that is what it is for all practical purposes. In those circumstances, I shall certainly divide the Committee upon the Clause. The Chancellor will then be able to see what is the position of his own supporters as their heads are counted at this hour of the night.

Question put:—

The Committee divided: Ayes 125, Noes 0.

Division No. 213.] AYES [2.29 a.m.
Agnew, Cmdr. P. G. Hill, Mrs. E. (Wythenshawe) Heave, Airey
Aitken, W. T. Hinchingbrooke, Viscount Nicolson, N. (B'n'm'th, E. & Chr'oh)
Allan, R. A. (Paddington, S.) Hirst, Geoffrey Oakshott, H. D.
Arbuthnot, John Hornby, R. P. O'Neill, Hn. Phelim (Co. Antrim, N.)
Ashton, H. Hornsby-Smith, Miss M. P. Ormsby-Gore, Hon. W. D.
Balniel, Lord Howard, John (Test) Page, R. C.
Barber, Anthony Hughes Hallett, Vice-Admiral J. Pannell, N. A. (Kirkdale)
Barter, John Hughes-Young, M. H. C. Peyton, J. W. W.
Baxter, Sir Beverley Hylton-Foster, Sir H. B. H. Pitman, I. J.
Bell, Philip (Bolton, E.) Iremonger, T. L. Pott, H. P.
Bennett, F. M. (Torquay) Irvine, Bryant Godman (Rye) Powell, J. Enoch
Biggs-Davison, J. A. Jenkins, Robert (Dulwich) Rippon, A. G. F.
Body, R. F. Jennings, J. C. (Burton) Robinson, Sir Roland (Blackpool, S.)
Boothby, Sir Robert Johnson, Eric (Blackley) Schofield, Lt.-Col. W.
Boyle, Sir Edward Joseph, Sir Keith Sharpies, R. C.
Brooke, Rt. Hon. Henry Keegan, D. Shepherd, William
Brooman-White, R. C. Kerby, Capt. H. B. Simon, J. E. S. (Middlesbrough, W.)
Butler, Rt. Hn. R.A.(Saffron Walden) Kerr, H. W. Smithers, Peter (Winchester)
Channon, H. Kershaw, J. A. Spens, Rt. Hn. Sir P. (Kens'gt'n, S.)
Chichester-Clark, R. Kimball, M. Stevens, Geoffrey
Conant, Maj. Sir Roger Kirk, P. M. Steward, Sir William (Woolwich, W.)
Cordeaux, Lt.-Col. J. K. Lagden, G. W. Stoddart-Scott, Col. M.
Corfield, Capt. F. V. Leburn, W. G. Studholme, Sir Henry
Crouch, R. F. Legge-Bourke, Maj. E. A. H. Summers, Sir Spencer
Currie, G. B. H. Legh, Hon. Peter (Petersfield) Thompson, Lt.-Cdr. R. (Croydon, S.)
Dance, J. C. G. Lindsay, Hon. James (Devon, N.) Thornton-Kemsley, C. N.
D'Avigdor-Goldsmid, Sir Henry Lindsay, Martin (Solihull) Tiley, A. (Bradford, W.)
Donaldson, Cmdr. C. E. McA. Linstead, Sir H. N. Tilney, John (Wavertree)
du Cann, E. D. L. Longden, Gilbert Vickers, Miss J. H.
Elliot, Rt. Hon. W. E. Lucas-Tooth, Sir Hugh Vosper, D. F.
Emmet, Hon. Mrs. Evelyn Mackie, J. H. (Galloway) Wakefield, Edward (Derbyshire, W.)
Errington, Sir Eric McLean, Neil (Inverness) Wakefield, Sir Wavell (St. M'lebone)
Fell, A. Macmillan, Rt.Hn.Harold(Bromley) Wall, Major Patrick
Freeth, D. K. Maddan, Martin Ward, Dame Irene (Tynemouth)
Galbraith, Hon. T. G. D. Marquand, Rt. Hon. H. A. Waterhouse, Capt. Rt. Hon. C.
George, J. C. (Pollok) Mathew, R. Williams, Paul (Sunderland, S.)
Glover, D. Maude, Angus Williams, R. Dudley (Exeter)
Godber, J. B. Mawby, R. L. Wills, G. (Bridgwater)
Green, A. Maydon, Lt.-Comdr. S. L. C. Yates, William (The Wrekin)
Grosvenor, Lt.-Col. R. G. Medlicott, Sir Frank
Harrison, A. B. C. (Maldon) Morrison, John (Salisbury) TELLERS FOR THE AYES:
Harrison, Col. J. H. (Eye) Nabarro, C. D. N. Mr. Redmayne and Bryan.
Heath, Rt. Hon. E. R. G. Nairn, D. L. S.
NOES
Nil
TELLERS FOR THE NOES: Mr. Grimond and Harold Lever.

time discuss my consequential Amendment to line 25, after "business", to insert: in the relevant chargeable accounting period.

The Clause contains a departure from established practice. It concerns the method by which, where there are a parent company and one or more subsidiaries, they can elect for group assessment of Profits Tax instead of each company being separately assessed. The original provision for grouping was in Section 22 of the Finance Act, 1937, which provided that the notice for group assessment could be given at any time within six months of the end of the chargeable accounting period. The Clause, as drafted, with "is" means that should the parent or a subsidiary cease to trade within six months after the chargeable accounting period, the grouping notice could not be given. That kind of thing can happen often, not least in reorganisation and reconstruction.

I ask my hon. and learned Friend the Solicitor-General, by accepting the Amendments, to maintain the tradition of the 1937 Act and to let the period be six months from the end of the chargeable accounting period whether trading has ceased or not.

The Solicitor-General (Sir Harry Hylton-Foster)

My hon. Friend the Member for Langstone (Mr. Stevens) has so rapidly and lucidly explained the reason for his Amendments that there is no need for me to detain the Committee about them. Obviously a grouping notice ought not to be given in respect of a chargeable accounting period of a subsidiary during which one of the companies was not carrying on a trade or business chargeable to Profits Tax.

It is clear that the Amendments are right in principle. I cannot, on behalf of the Government, accept my hon. Friend's words in his Amendments because they are not quite right, but, if my hon. Friend will withdraw his present Amendment, my right hon. Friend will arrange to table a suitable Amendment on Report which will effect the purpose which my hon. Friend has in mind.

Mr. Stevens

I am glad to have that assurance from my hon. and learned Friend. On that understanding, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Motion made, and Question proposed. That the Clause stand part of the Bill.

Mr. H. Wilson

I do not intend to detain the Committee for more than a minuteߞ[An HON. MEMBER: "We have heard that before."] I do not—and if I am not interrupted for too long I shall do it in half a minute. I merely want to ask the learned Solicitor-General briefly to explain the purpose of the Clause. I am sure that nine-tenths of hon. Members below the Gangway do not know what it is about.

The Solicitor-General

I shall do my best. We all have our wild moments of optimism—even Law Officers—but not even in my wildest moments of optimism could I do anything but think that an explanation of this Clause could be anything but dreary in the extreme. The difficulty is that some hon. and right hon. Members know all about it already and others do not—and most of them certainly do not want to.

The truth is that Profits Tax falls with equal venom upon all companies—unless their profits are so small as to be exempted—whether they are in a group or not. If a group of companies is suitable for group treatment it can give notice, which has the effect of causing the profits and losses of the group of companies to be treated as profits and losses of the principal company, and the frank investment income of the subsidiaries is treated as that of the principal. Dividends and other distributions within the group do not carry the higher rate of tax.

It all works merrily enough if all the companies concerned are subject to Profits Tax, but they might not be; they may be exempt from Profits Tax under the provisions appropriate to very tightly held companies who have their income apportioned among their proprietors for the purpose of Surtax, in which case they are exempt from Profits Tax. All would work well if group treatment and the effect of a grouping notice came to an end if one of the companies concerned became exempt from Profits Tax. It was thought that that was the position, but the courts last year said that it was not so. The result is a gaping hole in the Profits Tax provisions, because one could, by setting up a one-man holding company to hold the dividends of a trading company avoid the taxation of the profits of the trading company at the price of a modest payment of Surtax in respect of the dividends distributed by the principal.

The Clause sets that right in substance. The main provision is to be found in subsection (3) which provides that when one of the companies becomes exempt from Profits Tax the operation of the grouping notice is to be suspended. That is the principle upon which the Clause marches. Everything which follows subsection (3) is really a consequential adjustment of the law, resulting from that provision, subject to the fact that subsection (6) provides for an election which now exists by concession. It may suit a group of companies to keep group treatment at the price of waiving their exemption from Profits Tax, and the power of election to do that is provided by subsection (6).

The first two subsections do nothing but validate the existing practice of the Revenue with regard to group treatment and grouping notices, in so far as doubt has been cast upon it by the decision of the courts. I am at the disposal of the Committee, but I am loth to detain them with further detail. I shall be glad to answer any questions which hon. Members may wish to ask me.

2.45 a.m.

Mr. H. Wilson

I am sure that the whole Committee owes a deep debt of gratitude to the Solicitor-General. [HON. MEMBERS: "Oh."] Yes, really, not only for the very agreeable way in which he explained this Clause, but also for the great clarity which he lent to its explanation. I see from the faces of some of the hon. Gentlemen below the Gangway opposite that they are wiser now about this Clause than I suspected that they were when I put the question to the Solicitor-General, and therefore I feel that the question was not put in vain. I am sure that the Solicitor-General's explanation was followed by hon. Members on both sides of the Committee.

I wish to put one point to the hon. and learned Gentleman. This Clause was the subject of considerable reference by the Chancellor and by the Financial Secretary in the Budget debate and also on the Second Reading of the Finance Bill. When on those occasions we pressed for more information, it was suggested that we wait till the Committee stage. Well, here we are at the Committee stage, and I am sure that it would be wrong to pass too quickly from this, because it is clear from what the Solicitor-General said that it is an important new departure and one on which I suspect the Treasury did not enter too happily.

This case, if I remember rightly—and the Solicitor-General will correct me if I am wrong—derives from a decision in the courts known as the Heelex case. As the hon. and learned Gentleman has explained, it is simply a case of subsidiaries claiming a concession already claimed by the parent company. I think the Solicitor-General will agree that when this case went before the courts no one—certainly not the Inland Revenue—thought that subsidiaries could make such a claim, and that the concession applied only to the parent company. The decision, which was fully recorded in the taxation journals at the time—about March of last year—went against the Board of Inland Revenue, and here we have a case which is not found every year in the Finance Bill, but occurs now and again, where the Board of Inland Revenue has found its prey has escaped it because of a defect or minor loophole in the law, and the Board is trying to make certain that its prey will not escape again.

It is clear from the drafting of this Clause that it is not retrospective. The Board is not trying to catch what it failed to get in the courts last year. But many companies, I know, are a little worried about the practice of the Inland Revenue of altering the law when it fails to get its prey because of the state of the law. We regard this Clause as a minor piece of anti-tax avoidance. This case and the other, the Clause which relates to the Universal Grinding Wheel Company decision, were held out during the Budget debate by the Chancellor, the Financial Secretary, and, I think, the Economic Secretary, as proof that the Government were ever vigilant in dealing with tax avoidance, a subject on which I spent a little time during that debate. These are minor cases, and we do not oppose them. No Government of any party—even if the hon. Member for Orkney and Zetland (Mr. Grimond) by any mischance ever became the Patronage Secretary—

Dame Irene Ward (Tynemouth)

"Shetland".

Hon. Members

"Zetland".

Mr. Wilson

I am not sure whether that is in order.

If the Liberal Party were to become the Government of this country, I think it very doubtful whether even a Liberal Chancellor would allow this particular state of affairs to continue, and we support the Government in what they are doing.

Obviously, the Government did not take this decision because of the Heelex case but because they were afraid a number of other companies would follow suit. As the Financial Secretary said at the time, it was opening a door—I do not think he talked about a "yawning gap" on that occasion. I wish to ask the Solicitor-General whether the Board of Inland Revenue knows of any other cases which followed the Heelex precedent. We have had to wait twelve months for this decision. There was an opportunity in the autumn Budget, and perhaps the hon. and learned Gentleman will tell us whether the Government acted with all promptitude on what, I agree, is rather a minor case but one which raises an interesting point of tax law.

Mr. H. Lever

As the only conceivable excuse for the hideous, prolix and unintelligible language in which these Clauses are framed is, as the Solicitor-General has told us, that an equally hideous, prolix and unintelligible Clause has been run through in the courts and replaced by this Clause, couched in the same language, will some effort now be made to have Clauses printed in English which can be readily understood, even at this hour of the night, by ordinary Members of the Committee who have got to vote?

The Solicitor-General

I am not quite sure whether I ought, at this hour, to discuss prolixity with the hon. Member, but I must say I share his distress that this revenue legislation is now invariably so complicated. I feel sure that he, with his wisdom, would know how extremely difficult it is to rectify complexity without making complexity worse confused. I quite understand that he did not have time to read this Clause before getting here in the small hours of this morning, but perhaps he will have time to read and consider it, and I hope he will then think its meaning, for a technical matter, is reasonably clear.

If I might answer the right hon. Member for Huyton (Mr. H. Wilson), the Revenue, I understand, do not know of the existence of any case which has, if one likes, "profited" by the position which this is launched to cure. He referred to the well-known practice of the Revenue where they have had an established practice running a long time and it turns out that it is not legally sound. It is rather well known that it is liable to be put right, and no doubt that helps to secure that people do not profit in the interim from what has happened as a result of the surprising decision of the court.

Mr. Houghton

I do not complain about the drafting of this Clause, but I think it is really worth while drawing the attention of the Committee to the fact that it has taken two and a half pages of this Finance Bill to close what my right hon. Friend described as a minor loophole in our taxation system. The next Clause in the Bill is another stopper-up of loopholes, so that makes a total of something like three and a half pages of the Finance Bill to deal with these two points alone. That is a standing warning against expecting too many loopholes to be closed in too few Bills.

I sometimes feel that my hon. Friends have exaggerated hopes of what they can do in Finance Bills to stop up loopholes and to prevent avoidance and evasion in one fell swoop. I think this is perhaps a sobering reflection on that hope. My own belief is that we shall never really clean up our taxation system until we have a kind of umbrella Clause—though I know how offensive that would be to many purists in legislation—but we had, in connection with the Excess Profits Levy, an umbrella Clause to provide against practices which were against the intentions of Parliament.

I do not pursue that, but I think it is worth while drawing attention to the difficulties of dealing with these matters—some of them comparatively small and some of them big, but all of them apparently taking a very large part of our Finance Bills to deal with. I hope that will be borne in mind, because this is a fairly complicated Finance Bill, and it hardly touches some seventeen recommendations of the Royal Commission on tax evasion and another dozen on tax avoidance. These two Clauses are dealing with unexpected difficulties which have arisen as a result of the Court of Appeal decision in the case of the Heelex Investments Company and the House of Lords decision in the case of the Universal Grinding Wheel Co. Ltd., which is dealt with in the next Clause of the Bill.

Question put and agreed to.

Clause ordered to stand part of the Bill.