HC Deb 27 June 1957 vol 572 cc433-67

4.17 p.m.

The Financial Secretary to the Treasury (Mr. J. Enoch Powell)

I beg to move, in page 17, line 10, to leave out "received" and to insert "receivable."

This Amendment corrects a minor error. The payments in question will be allowed for the tax purposes of the company which makes them in the year in which they become due and not necessarily in the year in which they are made. Consequently, they should be charged to tax to the company which receives them in the year in which they are receivable, not necessarily that in which they are received.

Amendment agreed to.

Mr. Douglas Jay (Battersea, North)

I beg to move, in page 17, line 20, to leave out from "Kingdom" to the end of line 28.

The purpose of this Amendment is to ensure that an overseas trade corporation shall not be exempt from tax, unless it at least pays some tax in the country in which it is carrying on its trading operations. We understand that it is the Chancellor's purpose in the whole of this O.T.C. device to avoid discrimination as he calls, it, between a British company trading overseas and its foreign competitors.

Although we do not accept in full the whole of this plan, taking it for granted for the moment, I can see that there may be some case for arguing that if a United Kingdom firm trading overseas pays some Income Tax or Profits Tax, or whatever the tax arrangements may be in the country where it carries on trade, then it should be relieved of United Kingdom taxation in this specially far-reaching fashion.

But supposing there is no local tax levied, as, I believe, is the case in certain countries, then to exempt the overseas trade corporation from. British taxation altogether is to put it in a fantastically favourable position vis-à-vis other British companies which may be exporting and carrying on overseas trade in various ways. It seems to me an extraordinary conclusion, if one sets out to try to put United Kingdom companies on a fair level with their competitors and, indeed, with other trading companies generally, to reach a point at which a certain minority of companies may be absolutely exempt from all tax, either in the country concerned or in the United Kingdom—unless, presumably, they remit dividends to shareholders here, in which case to that extent they would still pay United Kingdom tax.

I am informed that no tax is chargeable in, for instance, Kuwait and Bermuda, of a kind which would preclude this concession applying to a company which was an O.T.C. Therefore, it appears to be true that if there were a British O.T.C. operating in those two countries, it would pay virtually no tax. Perhaps the Financial Secretary will explain how this will work. I suppose that it will mean that if there were an oil company, or a branch of one of the great oil companies which had created an O.T.C. for the purpose and which had its management in the United Kingdom and which carried on trade in Kuwait—where, presumably, it would carry on some of its trading operations—that company would be almost completely exempt from taxation.

In the case of Bermuda, would it be possible for Mr. Noel Coward, for instance—and I use his name not to advertise, but just to take a realistic example—or for some other playwright to form a private company—and, unless the Financial Secretary contradicts me, I assume that there is nothing to prevent a private company as well as a public company becoming an overseas trade corporation—and forming an O.T.C. which would have its management and control in the United Kingdom and which would carry on the trade of selling plays or books or other literary products, perhaps the copyrights, whatever may be the most appropriate legal method, in Bermuda.

Supposing the whole of the shares of that company were held by a British playwright or an actor or somebody of that kind, who for the purpose of the law was resident not in the United Kingdom but in Bermuda, would we not then reach the conclusion that on the profits of those operations, if there were profits, no tax would be paid, either Profits Tax or Income Tax, either by the company or by the shareholder, in either that country or the United Kingdom? I agree that that may be a rather extreme case.

This concession has the double and rather extraordinary effect that at one and the same time it gives a bonus to British investors to invest abroad and to foreign investors to invest in this country. There may be an argument for that, but it is a rather strange thing that this tax concession, at much expense to the Revenue, should produce those two mutually contradictory effects. This provision also leaves the Chancellor in the position of having to assume that a tax described as of a character and scope corresponding in all respects to Income Tax, that is to say, to our Income Tax, is charged in another country where in fact it is not charged. We are reaching a remarkable Alice-in-Wonderland position in tax law if we base the liability of a United Kingdom taxpayer on assuming that some tax exists in some other country where, in fact, we explicity recognise that it does not exist.

I am sure that the Financial Secretary is aware that Australia, when introducing a similar concession, specifically enjoined that it should not apply in a country where there is no tax similar to the British Income Tax or Profits Tax. That is our intention. My authority for saying that is the memorandum from the Board of Inland Revenue, which we have all read. Of course, we have now learned that the Chancellor has not as high an opinion of the Board of Inland Revenue as have some of us and that he is disposed to disregard its advice. Indeed, he seems to think that he is acting correctly as Chancellor when he says that he knows that the Board of Inland Revenue thought of it, but that he has decided to neglect what it said.

I do not know whether the Chancellor will go very far on those principles. Even if he does not pay attention to the advice of the Board of Inland Revenue about what he should do in matters of policy, I hope that he will at least be prepared to accept it as an authority on the actual legal practice in other countries, and I hope that the Financial Secretary will agree that a limitation on the concession is enforced in Australia.

If the Australians are able to effect a limitation of that kind, it must be practical and possible to administer it in our country. This seems to us another case where, as it stands, the Bill has been carried to extreme lengths to permit this class of company to pay virtually no tax and I hope that the Committee will feel that this is a case where we can reasonably and legitimately lay down some limitation.

Mr. Powell

The general object of this part of the Bill is to place companies resident in the United Kingdom in the same position as non-resident companies trading abroad in the same country. Of course, that includes companies resident in that foreign country where the trade in question is being carried on. That being the purpose of this part of the Bill, it would be quite impossible to pick and choose between one territory and another and to say that here is a territory which has an income tax—admittedly low, but an income tax—and, therefore, the provisions of Part IV should apply—

Mr. Jay

May I ask a question about the purpose? Is it really the Government's purpose—because we have had it stated both ways—to put a British company in, say, Kuwait on a level with a non-resident company, presumably a British company operating and registered there, or, as we originally thought, with some other foreign company, perhaps an Australian company, operating in the same business in Kuwait? If it is the latter, it will not be achieved by this concession.

Mr. Powell

The object is as I originally stated, and it is not consistent with that object that one should select one set of territories where one tax system exists and allow Part IV to operate there while refusing to allow it to operate in another kind of territory with a different tax system.

The right hon. Gentleman imagined a case of a private company whose business it is to sell or otherwise to exploit the works of a playwright. He will find that that possibility is excluded by subparagraph (ii) of subsection (3, b). The subsection to which the Amendment relates has the purpose of ensuring that all companies whose trading profits are exempt by this part of the Bill have a permanent establishment somewhere so as to be a legitimate object of local taxation in the country concerned. It is not the object of this part of the Bill to create a situation in which a company escapes taxation anywhere, whatever the taxation may be in the various countries or places in which it operates. That is not the object for which the O.T.C. provisions were designed.

Paragraph (b), which the Amendment proposes to leave out, is, therefore, essential. It assumes that throughout the world there is a tax system identical with that in this country and it is a requirement that all the profits of a company obtaining exemption under Part IV should, on this hypothesis, be caught by tax. That is to say, they will, somewhere or other, have a permanent establishment which will render them liable to whatever local taxation there is.

4.30 p.m.

Paragraph (b) is, in fact, sufficient to achieve that purpose without paragraph (a). Paragraph (a) applies the actual test of whether a tax similar in character to Income Tax or Profits Tax is being paid. As the Committee will observe, that case is covered by the universal and theoretical test of paragraph (b), but paragraph (a) is a convenient way of finding out whether Income Tax or Profits Tax was, in fact, being paid in some overseas country. That simple and actual test will often suffice, and it is helpful to have it side by side in the Bill with the universal and theoretical test in paragraph (b).

To omit paragraph (a) would, therefore, be quite possible, although inconvenient; to omit paragraph (b) would be disastrous. If we omitted paragraph (b), it would mean, for example, that the pioneer relief given in some overseas countries would he frustrated, because it would mean that a company which, under the local law and for deliberate local purposes, was exempted from tax, would not benefit by Part IV of the Bill. It would be back again in the original position of bearing full United Kingdom taxation, because it would not be able to qualify as an overseas trading corporation.

The effect of leaving out paragraph (b) would be that it would frustrate the deliberate tax relief given in overseas countries; in other words, it would defeat the one purpose which right hon. and hon. Gentlemen opposite have recognised as valid in this part of the Bill.

Mr. Jay

Might it not be possible, as the Australians appear to do, to give the pioneer relief, but so to frame the concession as to limit the relief in the way we propose?

Mr. Powell

We are not debating whether Part IV of the Bill ought to be restricted to giving pioneer relief, but whether this paragraph should stand. I am pointing out to the Committee that if this test is omitted, pioneer relief, amongst other things, will automatically be frustrated.

By the omission of this paragraph, we would bring in companies which I am sure nobody in the Committee would want to be exempt from tax. It is possible for a company to be carrying on trade in no country at all. It might, for example, be drilling for oil under the sea beyond the territorial limit. It may be carrying on whaling operations, whilst resident in this country and therefore taxable in this country, apart from Part IV of the Bill. It is precisely to ensure that companies are not in the position of carrying on all their operations in no country, while resident in the United Kingdom, and thus, by virtue of this part of the Bill, escape all taxation, that we must have the universal test in paragraph (b).

Therefore, because its omission would leave out companies which everybody wants to bring in and would bring in companies which everyone would like to be left out, I suggest that we must retain paragraph (b).

Mr. G. R. Mitchison (Kettering)

May I ask the hon. Gentleman one or two questions? I am intrigued by this possibility of a company having operations in the middle of the ocean. I suppose that the example of whaling would do, but even then one would have to bring in the products of whaling to land ultimately. I see that the Financial Secretary to the Treasury is shaking his head, and I understand from him that he knows of a company which carries on whaling and never brings any products to the land.

Mr. Powell

The company might be organised so that the bringing of the products to land was the business of another company.

Mr. Mitchison

These fascinating possibilities have not been as fully developed in my mind as in the remarkably ingenious mind of the Parliamentary Secretary. I would ask him how does the Clause operate there, because there is no assumption that, in a place which is not a country outside the United Kingdom, there is any tax at all. Apparently, there appears to be an unfair discrimination between those who carry on their whaling operations or whatever they may be inside territorial waters and those who do it outside territorial waters. That is the first question which I should like to put to him, and I feel certain that the hon. Gentleman's ingenuity will provide an immediate answer.

The second question is a little different. A company is not to qualify as an overseas trading corporation unless, to put it shortly, all of its trading profits are chargeable to something similar to Income Tax or Profits Tax. Let us assume that the whole of the profits are chargeable to Profits Tax. I do not think—and here I stand to be corrected, if need be—that the standards for the assessment of Profits Tax and Income Tax are the same, and, therefore, the profits so chargeable might be different. What happens in that case? If the profits are, in fact, chargeable to anything like Profits Tax, then I suppose there is no assumption to be made about Income Tax at all. Perhaps the hon. Gentleman could elucidate that.

Mr. Eric Fletcher (Islington, East)

Speaking for myself, I am more confused about this than I was before I heard the Financial Secretary's attempted explanation of it. While I do not want to delay the Committee, I think that in the interests of clarity we ought to know what this means before we pass from it.

I wish to refer to subsection (5), paragraphs (a) and (b), but before I do so, I should like to refer to what I thought were the very significant observations of my right hon. Friend the Member for Battersea, North (Mr. Jay), which I thought the Financial Secretary seemed to brush aside as if they did not matter. My right hon. Friend referred to the example of a company carrying on trade largely outside the United Kingdom, and he inquired what would be the position of a private company which acquired the rights of Mr. Noel Coward's talent and so forth. I think that my right hon. Friend asked a very sensible and intelligent question, but what was the answer?

The Financial Secretary referred us to a paragraph which has no relation to the matter at all. It has to deal with ships and aircraft, and I am not sure that Mr. Noel Coward has any connection with ships and aircraft, though I quite understand that he may be thought to have some connection with copyright in literary, dramatic, musical or artistic works. How does that subsection affect the matter? Paragraph (b, ii) of subsection (5) merely deals with payments in respect of copyright in literary, dramatic, musical or artistic works, the author of which is ordinarily resident in the United Kingdom. That has nothing to do with the point which my right hon. Friend was raising. My right hon. Friend was saying suppose we had a gentleman—or a company enjoying the benefits of his talent and works—operating very largely outside the United Kingdom.

Mr. Powell


Mr. Fletcher

Yes, non-resident.

Mr. Powell

They would not pay tax.

Mr. Fletcher

The Financial Secretary says they would not pay tax. I am not sure whether my right hon. Friend will think that a very satisfactory answer, but if so, I do not think it is the end of the matter. It certainly makes the position a little clearer. The Minister is now saying to my right hon. Friend that such a gentleman pays no tax.

Mr. Powell

At the moment.

Mr. Fletcher

May we take it that that is the intention of this part of the Bill, and that he should pay no tax?

Mr. Powell

That is the present position.

Mr. Fletcher

Is it intended that it should continue and that other people should be able, if they so desire, to take advantage of this part of the Bill, put themselves in a similar position and, therefore, pay no tax? I take it that it will make it easier for them to do so than is the case at present.

There is quite a serious problem here. The Minister is now saying that certain people can take advantage of the law as it stands to avoid paying tax. We want to know whether it is the effect or the intention of Part IV that artistes and others carrying on a similar kind of profession should be able to obtain greater benefits from the Income Tax laws than they enjoy at present. I think that that was the purport of my right hon. Friend's question.

I now revert to the principal object of the Amendment, namely, the elimination of paragraph (b). The Minister said that it would not matter if paragraph (a) were in the Bill or not, but that paragraph (b) was essential. If it does not matter about paragraph (a) I am at a loss to understand why it should be included. If the Minister is content to rely upon paragraph (b) why not rely upon it, and not have paragraph (a)? Either paragraph (a) is necessary or it is not.

Contrary to the Minister, I should have thought that paragraph (a) was essential, and that it would have been much better to rely upon it and to eliminate paragraph (b). One of the reasons why I think that is that paragraph (b) seems to be quite unintelligible. It says: A company shall not qualify as an Overseas Trade Corporation unless"— then come certain assumptions— the profits arising from the whole of the trade carried on by the company would he chargeable in one or more such countries to tax of that character. This is a very novel form of Parliamentary draftsmanship, as I am sure the Minister, who has made some study of phraseology, will admit. How, in an Act of Parliament, can one define an obligation or qualification which is based upon an assumption? I know of no precedent for it whatever.

Let us analyse the situation. First, what is the assumption? It is that in every country outside the United Kingdom there is a tax of a character and scope corresponding in all respects to Income Tax. Who will decide that? Other countries have different kinds of fiscal laws. It is not every country which thinks that the most sensible way of raising revenue is by way of Income Tax. Other countries have withholding tax and sales tax—all kinds of comic taxes not known to this country. Some may well be of a scope not identical with our Income Tax, but in some respects similar. Who is to say whether the tax laws of a country such as Kuwait or Bahrein correspond to our Income Tax laws? There may be considerable argument about that.

Let us suppose that there is a doubt about it, and that it is arguable whether a given country, such as Kuwait, has a tax, corresponding to our Income Tax. The assumption made in paragraph (b) would not then hold good, and I take it that the Minister would then agree that the rest of the operative words of the paragraph would not apply. What would be the position then? In other words, what would be the effect upon whaling companies and similar organisations? Can the Minister tell us whether or not it is intended to disqualify companies from having the benefit of the overseas trade corporation provisions on such ambiguous grounds as these? If the Minister is right, and paragraph (b) is the one upon which he relies, would it not be more sensible to withdraw paragraph (a) and rewrite paragraph (b) in a form which is quite definite and intelligible? I believe that my right hon. Friend has raised a very sensible point, which I hope the Committee will press before we part with this part of the Clause.

Amendment negatived.

4.45 p.m.

Mr. Roy Jenkins (Birmingham, Stechford)

I beg to move, in page 17, line 31, at the end to add: or in any European country which the Board of Trade, with the consent of the Treasury, may declare to be part of a European free trade area including the United Kingdom: Provided that any such declaration shall be made in the form of a statutory instrument and shall be laid before Parliament. This is a comparatively simple, but important, Amendment. It deals with subsection (6), which says: A company shall not qualify as an Overseas Trade Corporation if it is carrying on a trade in the Republic of Ireland. The Amendment seeks to extend the provisions of this subsection so that it will also apply to any European country which came to form part of the European Free Trade Area, if and when such a trade area is set up—although the declaration from the Board of Trade to specify which countries should be included would be required, and it would have to be laid before Parliament in the form of a Statutory Instrument.

It seems clear that if and when a European Free Trade Area comes about it will be undesirable in many respects—and I should have thought that this would certainly be recognised by the Government and hon. Members opposite—for it to be possible for overseas trade corporations to operate within the Free Trade Area and to gain the benefits of Part IV of the Bill.

For instance, we are all aware that it is quite possible for a United Kingdom manufacturing company to hive off an export company which will enjoy the benefits of being an overseas trade corporation. If the European Free Trade Area were to come into being, without some such provisions as the Amendment provides it would seem possible for United Kingdom capital to be used—and perhaps United Kingdom manufacturing expertise or "know-how"—to set up a manufacturing company in Germany or Belgium, let us say, which would manufacture goods largely for export into the British market but which would have a separate, importing company to take over and do the actual importing and selling of goods in this country, so that the manufacturing company, set up with British capital and "know-how", operating under British auspices in Europe and able to enjoy a much more favourable tax position than if it were set up and manufacturing in this country, would not disqualify itself from the provisions of Part IV by trading in this country. This would be a most undesirable situation.

There are many powerful arguments in favour of our participating in a European Free Trade Area, but there are no arguments in favour of such participation providing incentives, by way of favourable tax concessions, for British capital to be used not in this country but in Europe for the manufacture of goods which may ultimately be exported into this country. There is a point of real danger here.

The whole of Part IV deals with extremely complicated matters, which lead us inevitably to put our remarks in the form of questions rather than assertions. I therefore do that in regard to the example which I have just quoted.

I should like the Economic Secretary, who, I trust, will apply himself extremely closely to this matter, to give a detailed explanation of the dangers which do, or do not, exist here, and to tell us whether this is a real danger. If he takes the view that a danger does not exist, that it is not necessary to make safeguards such as we propose, I hope that, alternatively, he will explain why it is necessary to make this special provision concerning the Republic of Ireland with which we are already, as it were, within a free trade area; and why it is not so necessary to make it with other countries which would be in a wider free trade area when this came to be set up. Therefore, believing this to be the real danger with which we have to deal, I should like the Economic Secretary to tell us what is the position.

I hope that he will not sweep this matter aside. In our debates yesterday we found a slightly alarming dichotomy in the attitude of the Government to some of the anti-avoidance provisions in this part of the Bill. I believe it was the Financial Secretary—he is not present at the moment—who was most eloquent on this point. Sometimes the Government say that this part of the Bill is hedged round with the most meticulous provisions to make sure that there is no abuse, and that they want to give this concession in such a way that there will be no avoidance and no evasion. At other times the Chancellor of the Exchequer—who is rapidly qualifying as one of the most reckless Chancellors we have ever had in this country—says, "This is a concession which I want to give as widely as possible. I want to benefit all shareholders of companies. I want to see British trade encouraged, and if it leads to dangers, that must be put up with. I am taking a clear view. I am a 'one hundred per center' on this and other issues."

This is rather an alarming difference. I hope that the Economic Secretary, speaking in the absence of both his right hon. Friend the Chancellor and his hon. Friend the Financial Secretary, will, in dealing with this Amendment, lean a little more towards the technique practised by the Financial Secretary and give a close and detailed explanation of the position regarding the real danger in this part of the Bill. I hope that he will tell us whether, when a European Free Trade Area is set up, there will be a tax incentive to manufacturers, employing British capital and "know-how", to carry on, not here at home employing British labour, but elsewhere on the Continent of Europe employing non-British labour.

The Economic Secretary to the Treasury (Mr. Nigel Birch)

The reason for the omission of the Republic of Ireland is that there is a special double taxation agreement with Southern Ireland in which companies trading there are not subject to Irish Income Tax. They are subject to a small corporation Profits Tax of 10 per cent. if they make more than £2,500. In view of this special agreement, which does not exist elsewhere, it was thought right to omit Ireland. We have been in consultation with the Government of Ireland who agree that this is the correct way to deal with the matter.

Mr. Roy Jenkins

Why is Ireland different, because Ireland excludes the United Kingdom resident companies operating in Ireland from the operation of Irish Income Tax? Why is there a difference of principle between Ireland and, shall we say, some other overseas territory which gives pioneer relief exempting a company entirely from local taxation, and the position of a United Kingdom resident company, say, in Bermuda, where, as we heard during the debate on a previous Amendment, Income Tax does not exist?

Mr. Birch

The main reason Ireland is different is because of this exclusive agreement. There may be certain places where no taxation is charged and where a special case may apply, but that is the general principle.

The main object of the Amendment is to exclude countries in the Free Trade Area from the benefit of Part IV of the Bill. Having listened to the hon. Member for Stechford (Mr. Roy Jenkins) I am still not altogether clear why the party opposite wish to make the Amendment. This provision is based on the idea of jurisdiction—that the taxation of a company should in the first instance be in the country where it operates and that the taxation in the country of residence or origin, as it were, comes in only when the profits are distributed. I do not understand what would be the object of cutting out the Free Trade Area from that general principle. Risks mentioned by the hon. Gentleman would exist just as much anywhere else as in the Free Trade Area.

Mr. Jenkins

I think not. It would not be possible to manufacture goods in most parts of the world and import them duty free into this country, as would be possible from the Free Trade Area.

Mr. Birch

It would certainly be easier to import them from the Commonwealth at easier rates of duty.

Mr. Jenkins

But not duty-free.

Mr. Birch

That is certainly a point. But I think the real reason, the main reason, against accepting the Amendment is that it seems to me to be a highly hostile act, when we are trying to negotiate a Free Trade Area, to say that we will make other countries in the area pariahs, as it were, and not allow trading on the same terms in that area as in the rest of the world.

So far as the migration of companies is concerned, and the dangers which ma), ensue from that, we should be in a far worse position if the Free Trade Area did not come about because the inducement to companies to set up abroad in order to avoid United Kingdom tax would be far greater if the common market comes about with no Free Trade Area than if we had a free trade union with other countries.

I am glad that the hon. Gentleman is in favour of a Free Trade Area. It seems to me wrong to make a special distinction here. Of course companies manufacturing overseas in the Free Trade Area could not export directly to this country while trading as O.T.Cs. There would have to be elaborate arrangements with a third party which would be subject to taxation. I do not think there is any real danger here, and I think that it would be a retrograde step to take action such as this which could be considered only as something hostile to the whole conception.

Mr. Roy Jenkins

After listening to the Economic Secretary I am by no means entirely convinced. The right hon. Gentleman said that after listening to my speech he was not clear why we put down the Amendment. My trouble is that after listening to his speech I am not clear why the Government introduced Part IV of the Bill. The right hon. Gentleman failed to explain most of the points. He told us the reason for the specific exclusion of Ireland was this special form of double taxation agreement. I do not know exactly the details of the double taxation agreement and perhaps the right hon. Gentleman does not either, but I do not think he made absolutely clear what was the difference in principle in the treatment of companies operating in Ireland under this double taxation agreement and companies operating in overseas countries where there are special concessions such as pioneer relief.

As to the position in Europe, I agree that if we had a common market without a Free Trade Area there would be a danger that we would have to set up companies within the wall of the Common Market if we were to compete within the Common Market. But what we all believe—and the Government do not seem to have done much about it in recent months—is that we should guard against the danger of extending the narrow Common Market into a wider Free Trade Area. The danger I was concerned with was a more extreme danger than that which the right hon. Gentleman talked about. I was not concerned with the position in which we would have to set up companies within the fence of the Common Market, in order to sell within the six countries on reasonably favourable terms.

I was concerned about the position in which, the Free Trade Area having come about, it might be advantageous for British manufacturers to set up special companies operating within Europe under

more favourable tax conditions in order to sell, not in Europe, but to a hived-off importing or exporting company—according to which way one looks at it—into the British home market.

5.0 p.m.

This seems to me a very undesirable situation. The Government believe in the Free Trade Area and we on this side of the Committee believe in the Free Trade Area, though recognising some of its dangers, but we want to minimise those dangers and certainly while the negotiations are being conducted, however dilatorily by the Government. We do not want to see developing the situation in which we actually carry through a tax provision which would give a direct incentive for British capital and "know-how" to be exported to Europe and used there to manufacture goods for the home market. Because I feel that this is a real danger and because I am unconvinced by the Economic Secretary's arguments I hope that my hon. Friends will carry the matter into the Division Lobby.

Mr. H. Wilson

Are we not to have a reply to my hon. Friend from the Economic Secretary?

Mr. Birch

I have already replied to that point. If, of course, a country in Europe has a more easy tax system than ours that of itself gives advantage to the manufacturers of that country whether British, French or whatever their nationality. However, I do not think that that of itself is a reason for taking away the O.T.C. concessions from the Free Trade Area. I think that that would be a most retrograde step.

Question put, That those words be there added:—

The Committee divided: Ayes 206, Noes 250.

Division No. 147.] AYES [5.2 p.m.
Ainsley, J. W. Bottomley, Rt. Hon. A. G. Coldrick, W.
Allaun, Frank (Salford, E.) Bowden, H. W. (Leicester, S.W.) Collick, P. H. (Birkenhead)
Allen, Arthur (Bosworth) Bowen, E. R. (Cardigan) Collins, V. J.(Shoreditch & Finsbury)
Allen, Scholefield (Crewe) Bowles, F. G. Corbet, Mrs. Freda
Awbery, S. S. Boyd, T. C. Cove, W. G.
Bacon, Miss Alice Brookway, A. F. Craddock, George (Bradford, S.)
Balfour, A. Brown, Rt. Hon. George (Belper) Cronin, J. D.
Bellenger, Rt. Hon. F. J. Brown, Thomas (Ince) Grossman, R. H. S.
Bence, C. R. (Dunbartonshire, E.) Burton, Miss F. E. Cullen, Mrs. A.
Benn, Hn. Wedgwood (Bristol, S.E.) Butler, Mrs. Joyce (Wood Green) Darling, George (Hillsborough)
Benton, G. Callaghan, L. J. Davies, Rt. Hn. Clement(Montgomery)
Beswick, Frank Carmichael, J. Davies, Ernest (Enfield, E.)
Blackburn, F. Champion, A. J. Davies, Harold (Leek)
Blenkinsop, A. Chapman, W. D. Deer, G.
Blyton, W. R. Chetwynd, G. R. de Freitas, Geoffrey
Boardman, H. Clunie, J. Dodds, N. N.
Dugdale, Rt. Hn. John(W. Brmwch) Lee, Miss Jennie (Cannock) Shinwell, Rt. Hon. E.
Dye, S. Lewis, Arthur Short, E. W.
Edelman, M. Lindgren, G. S. Silverman, Julius (Aston)
Edwards, Rt. Hon. John (Brighouse) Lipton, Marcus Simmons, C. J. (Brierley Hill)
Edwards, Rt. Hon. Ness (Caerphilly) Logan, D. G. Skeffington, A. M.
Edwards, W.J. (Stepney) MacColl, J. E. Slater, Mrs. H. (Stoke, N.)
Evans, Albert (Islington, S.W.) McInnes, J. Slater, J. (Sedgefield)
Fernyhough, E. McKay, John (Wallsend) Snow, J. W.
Fienburgh, W. MacMillan, M. K. (Western Isles) Sorensen, R. W.
Forman, J. C. MacPherson, Malcolm (Stirling) Sparks, J, A.
Fraser, Thomas (Hamilton) Mahon, Simon Steele, T.
Gaitskell, Rt. Hon. H. T. N. Mallalieu, E. L. (Brigg) Stewart, Michael (Fulham)
Gibson, C. W. Mann, Mrs. Jean Stonehouse, John
Gordon Walker, Rt. Hon. P. C. Marquand, Rt. Hon. H. A. Stones, W. (Consett)
Greenwood, Anthony Mellish, R. J. Strachey, Rt. Hon. J.
Grey, C. F. Messer, Sir F. Strauss, Rt. Hon. George (Vauxhall)
Griffiths, David (Rother Valley) Mlkardo, Ian Summerskill, Rt. Hon. E.
Griffiths, Rt. Hon. James (Llanelly) Mitchison, G. R. Swingler, S. T.
Grimond, J. Moody, A. S. Sylvester, G. O.
Hale, Leslie Moss, R. Taylor, Bernard (Mansfield)
Hall, Rt. Hn. Glenvil (Colne Valley) Moyle, A. Thomas, Iorwerth (Rhondda, W.)
Hamilton, W. W. Mulley, F. W. Thomson, George (Dundee, E.)
Hannan, W. Noel-Baker, Rt. Hon. P. (Derby, S.) Thornton, E.
Harrison, J. (Nottingham, N.) Oliver, G. H. Tomney, F.
Hastings, S. Oram, A. E. Ungoed-Thomas, Sir Lynn
Hayman, F. H. Orbach, M. Usborne, H. C.
Healey, Denis Oswald, T. Viant, S. P.
Henderson, Rt. Hn. A. (Rwly Regis) Owen, W. J. Wade, D. W.
Hobson, C. R. (Keighley) Padley, W. E. Warbey, W. N.
Holmes, Horace Palmer, A. M. F. Watkins, T. E.
Holt, A. F. Panned, Charles (Leeds, W.) Wells, Percy (Faversham)
Houghton, Douglas Pargiter, G. A. West, D. G.
Howell, Charles (Perry Barr) Parker, J, Wheeldon, W. E.
Hoy, J. H. Parkin, B. T. White, Mrs. Eirene (E. Flint)
Hughes, Cledwyn (Anglesey) Paton, John White, Henry (Derbyshire, N.E.)
Hughes, Emrys (S. Ayrshire) Pearson, A, Wigg, George
Hughes, Hector (Aberdeen, N.) Peart, T. F. Wilkins, W. A.
Hunter, A. E. Pentland, N. Willey, Frederick
Hynd, H. (Accrington) Popplewell, E. Williams, Rev. Llywelyn (Ab'tillery)
Hynd, J. B. (Attercliffe) Prentice, R. E. Williams, Ronald (Wigan)
Irving, Sydney (Dart ford) Price, J. T. (Westhoughton) Williams, Rt. Hon. T. (Don Valley)
Isaacs, Rt. Hon. G. A. Probert, A. R. Williams, W. R. (Openshaw)
Janner, B. Proctor, W. T. Willis, Eustace (Edinburgh, E.)
Jay, Rt. Hon. D. P. T. Pryde, D. J. Wilson, Rt. Hon. Harold (Huyton)
Jeger, George (Goole) Randall, H. E. Winterbottom, Richard
Jenkins, Roy (Stechford) Rankin, John Woodburn, Rt. Hon. A.
Johnson, James (Rugby) Redhead, E. C. Woof, R. E.
Jones, Rt. Hon. A. Creech (Wakefield) Reid, William Yates, V. (Ladywood)
Jones, David (The Hartlepools) Rhodes, H. Younger, Rt. Hon. K.
Jones, Jack (Rotherham) Robens, Rt. Hon. A. Zilliacus, K.
Kenyon, C. Roberts, Goronwy (Caernarvon)
Key, Rt. Hon. C. W. Robinson, Kenneth (St. Pancras, N.) TELLERS FOR THE AYES:
Ledger, R. J. Ross, William Mr. J. Taylor and Mr. G. H. R. Rogers.
Lee, Frederick (Newton) Royle, C.
Agnew, Sir Peter Bossom, Sir Alfred Cunningham, Knox
Aitken, W. T. Boyd-Carpenter, Rt. Hon. J. A. Currie, G. B. H.
Allan, R. A. (Paddington, S.) Braine, B. R. Dance, J. C. G.
Amery, Julian (Preston, N.) Bromley-Davenport, Lt.-Col. W. H. Davidson, Viscountess
Amory, Rt. Hn. Heathcoat (Tiverton) Brooman-White, R. C. D'Avigdor-Goldsmid, Sir Henry
Arbuthnot, John Browne, J. Nixon (Craigton) Deedes, W. F.
Armstrong, C. W. Bryan, P. Digby, Simon Wingfield
Ashton, H. Bullus, Wing Commander E. E. Dodds-Parker, A. D.
Astor, Hon. J. J. Burden, F. F. A. Donaldson, Cmdr. C. E. McA.
Atkins, H. E. Butler, Rt. Hn. R. A. (Saffron Walden) Doughty, C. J. A.
Baldock, Lt.-Cmdr. J. M. Campbell, Sir David Drayson, G. B.
Baldwin, A. E. Carr, Robert du Cann, E. D. L.
Balniel, Lord Cary, Sir Robert Dugdale, Rt. Hn. Sir T. (Richmond)
Barber, Anthony Channon, Sir Henry Eden, J. B. (Bournemouth, West)
Barlow, Sir John Chichester-Clark, R. Elliott, W.W.(N'castle upon Tyne, N.)
Barter, John Clarke, Brig. Terence (Portsmth, W.) Emmet, Hon. Mrs. Evelyn
Baxter, Sir Beverley Cole, Norman Erroll, F. J.
Beamish, Maj Tufton Conant, Maj. Sir Roger Farey-Jones, F. W.
Bell, Philip (Bolton, E.) Cooke, Robert Fell, A.
Bell, Ronald (Bucks, S.) Cooper, A. E. Finlay, Graeme
Bennett, F. M. (Torquay) Cooper-Key, E. M. Fisher, Nigel
Bevins, J. R. (Toxteth) Cordeaux, Lt.-Col. J. K. Fletcher-Cooke, C.
Bidgood, J. C. Corfield, Capt. F. V. Foster, John
Birch, Rt. Hon. Nigel Craddock, Beresford (Spelthorne) Fraser, Sir Ian (M'cmbe & Lonsdale)
Bishop, F. P. Crowder, Sir John (Finchley) Freeth, Denzil
Body, R. F. Crowder, Petre (Ruislip—Northwood) Galbraith, Hon. T. G. D.
Gammans, Lady Kimball, M. Raikes, Sir Victor
Garner-Evans, E. H. Lagden, G. W. Ramsden, J. E.
George, J. C. (Pollok) Lambton, Viscount Rawlinson, Peter
Gibson-Watt, D. Lancaster, Col. C. G. Redmayne, M.
Glover, D. Langford-Holt, J. A. Rees-Davies, W. R.
Godber, J. B. Leavey, J. A. Remnant, Hon. P.
Gomme-Duncan, Col. Sir Alan Leburn, W. G. Renton, D. L. M.
Goodhart, Philip Legge-Bourke, Maj. E. A. H. Ridsdale, J. E.
Cower, H. R. Lindsay, Hon. James (Devon, N.) Rippon, A. G. F.
Graham, Sir Fergus Lindsay, Martin (Solihull) Robinson, Sir Roland (Blackpool, S.)
Gram, W. (Woodside) Lloyd, Maj. Sir Guy (Renfrew, E.) Rodgers, John (Sevenoaks)
Green, A. Low, Rt. Hon. A. R. W. Roper, Sir Harold
Grosvenor, Lt.-Col. R. G. Lucas, P. B. (Brentford & Chiswick) Ropner, Col. Sir Leonard
Gurden, Harold Lucas-Tooth, Sir Hugh Russell, R. S.
Hall, John (Wycombe) McAdden, S. J. Schofield, Lt.-Col. W.
Harris, Frederic (Croydon, N.W.) Macdonald, Sir Peter Scott-Miller, Cmdr. R.
Harris, Reader (Heston) Mackeson, Brig. Sir Harry Sharples, R. C.
Harrison, A. B. C. (Maldon) Mackie, J. H. (Galloway) Shepherd, William
Harrison, Col. J. H. (Eye) McLaughlin, Mrs. P. Simon, J. E. S. (Middlesbrough, W.)
Harvey, Sir Arthur Vere (Macclesfd) Maclean, Fitzroy (Lancaster) Smithers, Peter (Winchester)
Harvey, John (Walthamstow, E.) McLean, Neil (Inverness) Spearman, Sir Alexander
Hay, John Macmillan, Maurice (Halifax) Spens, Rt. Hn. Sir P. (Kens'gt'n, S.)
Heald, Rt. Hon. Sir Lionel Macpherson, Niall (Dumfries) Stanley, Capt. Hon. Richard
Heath, Rt. Hon. E. R. G. Maddan, Martin Stevens, Geoffrey
Henderson, John (Cathcart) Maitland, Cdr. J. F. W. (Horncastle) Steward, Harold (Stockport, S.)
Hesketh, R. F. Maitland, Hon. Patrick (Lanark) Steward, Sir William (Woolwich, W.)
Hicks-Beach, Maj. W. W. Manningham-Buller, Rt. Hn. Sir R. Storey, S.
Kill, Rt. Hon. Charles (Luton) Markham, Major Sir Frank Studholme, Sir Henry
Hill, Mrs. E. (Wythenshawe) Marlowe, A. A. H. Summers, Sir Spencer
Hill, John (S. Norfolk) Marshall, Douglas Sumner, W. D. M. (Orpington)
Hinchinbrooke, Viscount Mathew, R. Taylor, Sir Charles (Eastbourne)
Hirst, Geoffrey Mawby, R. L. Teeling, W.
Holland-Martin, C. J. Maydon, Lt.-Comdr. S. L. C- Temple, John M.
Hope, Lord John Milligan, Rt. Hon. W. R. Thomas, Leslie (Canterbury)
Hornby, R. P. Molson, Rt. Hon. Hugh Thompson, Kenneth (Walton)
Hornsby-Smith, Miss M. P. Morrison, John (Salisbury) Thompson, Lt.-Cdr. R. (Croydon, S.)
Horobin, Sir Ian Mott-Radclyffe, Sir Charles Thorneycroft, Rt. Hon. P.
Howard, Hon. Greville (St. Ives) Nabarro, G. D. N. Thornton-Kemsley, C. N.
Howard, John (Test) Neave, Airey Tilney, John (Wavertree)
Hudson, W. R. A. (Hull, N.) Nicholls, Harmar Turton, Rt. Hon. R. H.
Hughes Hallett, Vice-Admiral J. Nicolson, N. (B'n'm'th, E. & Chr'ch) Tweedsmuir, Lady
Hughes-Young, M. H. C. Oakshott, H. D. Vane, W. M. F.
Hutchison, Sir Ian Clark(E'b'gh, W.) Ormsby-Gore, Rt. Hon. W. D. Vickers, Miss Joan
Hutchison, Sir James (Scotstoun) Orr-Ewing, Charles Ian (Hendon, N.) Wakefield, Edward (Derbyshire, W.)
Hutchison, Michael Clark (E'b'gh, S.) Orr-Ewing, Sir Ian (Weston-S-Mare) Wall, Major Patrick
Hylton-Foster, Rt. Hon. Sir Harry Osborne, C. Ward, Rt. Hon. G. R. (Worcester)
Iremonger, T. L. Page, R. G. Ward, Dame Irene (Tynemouth)
Irvine, Bryant Godman (Rye) Panned, N. A. (Kirkdale) Watkinson, Rt. Hon. Harold
Jenkins, Robert (Dulwich) Partridge, E. Webbe, Sir H.
Jennings, J. C. (Burton) Peyton, J. W. W. Whitelaw, W. S. I.
Johnson, Dr. Donald (Carlisle) Pickthorn, K. W. M. Williams, Paul (Sunderland, S.)
Johnson, Eric (Blackley) pike, Miss Mervyn Williams, R. Dudley (Exeter)
Johnson, Howard (Kemptown) Pilkington, Capt. R. A. Wood, Hon. R.
Joynson-Hicks, Hon. Sir Lancelot Pitman, I. J. Woollam, John Victor
Keegan, D. Pitt, Miss E. M. Yates, William (The Wrekin)
Pott, H. P.
Kerby, Capt. H. B. Powell, J. Enoch TELLERS FOR THE NOES:
Kerr, Sir Hamilton Price, Henry (Lewisham, W.) Mr. Wills and Legh.
Kershaw, J. A. Profumo, J. D.

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

Mr. Mitchison

This is the Clause which is going to save everything. It provides those stringent conditions which are to make impossible the tax avoidance which has been so freely prophesied by I think everyone who has studied this part of the Bill. Let us have a look at it. The importance of it, it seems to me, is that it is intended to do that which the Board of Inland Revenue thought impracticable and unworkable. While I agree that on questions of policy its opinion is not infallible, nor indeed always relevant, on questions of administration we are bound to pay attention to its knowledge and experience of the practical side.

It is quite a long Clause. It starts by making a general exclusion of companies that carry on a trade in this country. That in itself, though by now the words are pretty definite in their meaning, has certainly led to a great deal of trouble in the past, and even now is not as clear as all that. We could have had no better instance than the little dispute which arose, I think it was yesterday, about whether a company buying and selling land is or is not carrying on a trade. That dispute reflected quite a deal of legal controversy on exactly that point.

Then we come to an exception which will depend on the meaning, among other things, of "a recognised market," and the Government are so confident that everyone attaches the same meaning to those words that they have not thought fit to include a definition. So far as I know, the words have never before occurred in any Statute, fiscal or otherwise. The nearest we ever got to them was a recognised Stock Exchange, and that is a bit different.

We come after that to the question of exporting companies. This was a matter that was again considered very carefully by the Board when it was putting in its observations to the Royal Commission. I think that the conditions laid down here reflect some of the comments which were made in those memoranda. But I remember, and the Committee will remember, that yesterday vigorous protests were made from the Government benches about not tying up businesses, not compelling people to carry on their trade in one way or another and not, in fact, interfering with the ordinary run of free business.

Look at subsection (2). Look at the conditions which are here imposed and which have the effect that if, in fact they are not strictly complied with, a company ceases to be an overseas trade corporation. I agree with the Government that if we are to have an overseas trade corporation at all we have to try to draw a line; but the Government go on to say, "We have drawn a line." They may have done, but my conclusion is a little different. If this is a line we are trying to draw, then a concession of this sort depends on such narrow distinctions that it is really indefensible in principle.

We shall not carry out the object we have in mind if this is the sort of distinction we have to draw. I would say that it is possible for a company so minded to comply with these conditions. It is, of course, a considerable interference with business in one form or another. I agree that it is possible to do it, but the distinction, fiscal, moral or any other between a company which does comply and a company which does not comply seems to me to be completely bogus.

I think that it is perfectly possible for a company to arrange to comply with many of these conditions and in fact to do things which, I am sure, are not within the general intentions of this part of the Bill, at any rate as it has been explained to us. We could not have had a more remarkable instance of a completely inconsistent addition to this Clause as a whole than the one that we had yesterday when the Government accepted an Amendment which would allow a company trading abroad to sell in this country not merely the produce that it made or produced abroad but any commodity of the same kind. Any distinction that there may previously have been between a producing company and a merchant company disappeared the moment that that quite illogical concession was made.

5.15 p.m.

The fact that the concession was argued, let alone conceded, shows the extraordinary artificiality of the lines that are drawn in this Clause. Naturally a good many hon. Members opposite say, "Oh, well; we and our friends would like the concessions to be as large as possible; let us make a sieve so full of holes that anybody can get through them. Let us extend to every conceivable purpose the special concession that is to be given only in special circumstances to special companies." We have had a good deal of that.

Is not there another deduction to he drawn from all this? Is not the other deduction simply that this is the wrong way in which to try to give a special concession to companies trading overseas when we do it purely on the fiscal basis of it being what is here called an overseas trade corporation and refrain from doing it with regard to the purposes that that company is serving.

I had a good deal of sympathy with an Amendment moved yesterday from the benches opposite about the special case of some chartered companies. I am not sure, when we look at it, that it did not really boil down to a single company. It is no doubt true that there are companies registered and resident in this country which are carrying out projects of special value to parts of the Commonwealth in particular. We argued last year, and we shall argue again today, that a concession, having regard to that sort of purpose and that sort of project and that sort of enterprise, is thoroughly justified.

This proposal goes wildly beyond that. The line that is attempted to be drawn here does not depend in any way on the character of the trade that is served, on its use to the Commonwealth or its use for any other special purpose that might commend itself to the Committee, but purely on the character of the business. How extraordinarily narrow it is. Look, for instance, at the subsection to which I was referring, about exporting. The first part says that the goods have to be sold on what are commonly called "free-on-board" terms, or perhaps others indicating delivery at a rather later stage.

Nothing whatever is to be done about insurance, commission and other charges by anyone but the seller. That is the ordinary procedure with a delivery of that kind; the purchasing company is not to provide service. That does restrict it to f.o.b. deliveries or to cost, insurance and freight deliveries at some later stage. In practice, the type of delivery that is carried out in many of these cases is a strange mixture that does not fall into the somewhat rigid categories here laid down.

I would not draw the conclusion that we ought to make no provision at all but would simply point out that it is not a good way of drawing the line if we have to depend on a dictation so rigid and so abstract. I find a great deal of support for that point of view in the Bill.

When I turn to the miscellaneous Clauses—to which I refer for purposes of illustration—I find in the special subsection the very remarkable provision that if the company has done anything by mistake or has been obliged to do it, and has not had any material advantage out of it, the Commissioners may disregard it. We may have to consider that provision when we come to it.

The need to insert a provision of that sort illustrates better than any words I can use the artificialities that are introduced into the Clause. My conclusion is not that the distinctions are not necessary or are too wide or too narrow. That is not what I am considering. It is that the lines on which those distinctions are drawn must be wrong, and they throw a light on the artificial character of the proposals in Part IV. If, instead of drawing the line in this way, it had been drawn in relation to the special relief provided for Dominion countries, or in relation to the particular purpose of the company, or something of that sort, it would have been far easier to work. Here I rely on the Board of Inland Revenue's opinion. It would have been far easier for those concerned to understand and conform to than are these elaborate provisions.

We shall not oppose the Clause. It is obvious that if we are to have some provision of the wide kind indicated by the preceding Clause, we must have qualifications and disqualifications, and we must try to draw our line somewhere. The Clause illustrates that the purpose of Part IV is misconceived because we have to draw such a wholly artificial line if we are to make any sense out of it.

Before I sit down I cannot forbear teasing the Financial Secretary on his complete failure to answer the extremely difficult question that his own almost excessive ingenuity raised in connection with subsection (5). He devised out of the recesses of his mind the conception—it may be perfectly real—of a company which did not carry on a trade in any country because it carried it on in the middle of the sea. When I asked what we did about that the hon. Gentleman did not explain what the company was.

Mr. Powell

The hon. and learned Member for Kettering (Mr. Mitchison) will observe in paragraph (b) that the profits arising from the whole of the trade carried on by such a company would not be chargeable in any country and therefore the company would not qualify as an overseas trade corporation.

Mr. Mitchison

I am very glad we have an answer at last. We might perhaps have had it when the point was raised, but there it is. Does not it illustrate the fantastic character of this part of the Bill? Suppose a company which does a little bit of whaling, sometimes inside and sometimes outside territorial waters, or two companies, one of which fishes inside territorial waters and the other outside—[Interruption.] One of my hon. Friends points out that they might catch something even better and fruitier than fish. They might find oil. We all know what that means. It will depend upon territorial waters whether the company becomes an overseas trade corporation.

Curiously enough, the middle of the ocean is not overseas, but the territorial waters on the other side are. That is as it may be. I take it only as an instance of the extreme artificiality of the line we have to draw. I suggest that a line so drawn is unworkable and opens the door to evasion, and consequently to the administrative difficulties that the Board foresaw. The need to draw it shows that there is something wrong in the character of the concession that is offered by the Bill. What is fundamentally wrong is that the concession has no regard to the purpose for which the company is operating. I include in that Commonwealth purposes.

Mr. Geoffrey Stevens (Portsmouth, Langstone)

As I listened to the hon. and learned Member for Kettering (Mr. Mitchison), it seemed that he overlooked the undoubted fact that the overseas trade corporation is an entirely new conception in our taxation law and practice. In the circumstances, it must be somewhat complicated. I am less pessimistic than he. I prefer that the conditions of disqualification be reasonably fully set out. In any case, our taxation practice is based not only upon statute law but upon case law, which is derived from it.

Before very long, we shall be able to solve such problems as what is and what is not a recognised market to the satisfaction of the hon. and learned Member for Kettering and the learned profession which he represents, of which he is so distinguished an ornament, and which may benefit very greatly from the complexities of Clause 21, if, indeed, the Clause is as complex as the hon. and learned Gentleman suggests.

I have only one point to raise. I would say how much we welcome Part IV and, in broad terms, accept the disqualifications of Clause 21. As the hon. and learned Gentleman has said, the line has to be drawn somewhere, but I am puzzled about one particular bit of the line, indicated by subsection (3, a (i)). Banking is excluded from overseas trade corporation status. On the Second Reading of the Bill the Financial Secretary to the Treasury gave the Government's reasons. He said: The activities of banking, finance and insurance are also excluded, because it would be difficult to say of any concern of that kind that its day-to-day operations can be separated from the activities of central control and management."—[OFFICIAL REPORT, 7th May, 1957; Vol. 569, c. 819.] That may be true, but I see absolutely no reason why that should disqualify a bank from overseas trade corporation status.

5.30 p.m.

A great part of the problem of the balance of payments position of this country is eased by the overseas banking services provided by our banking institutions. To a large extent, they carry them out in overseas territories, not by subsidiary companies only, but by branches. It might well be advantageous to put them on the same basis as the financial institutions of the countries with whom they will be in competition. There is a little difficulty here. I agree that it is not so easy to think of suitable conditions in which all banking organisations could be brought in. I am not at all certain that the banks themselves in this country having overseas activities are entirely happy about the precise lines upon which they might be allowed to qualify. Therefore, I have no practical proposal to make at present for bringing banks within the framework of this Bill.

None the less, I think it important that the position of the banks should be considered. I should like the Financial Secretary to give a little further explanation on the Motion, That the Clause stand part of the Bill, of the consideration which the Government have given to the position of banks and indicate that they would be willing in the months ahead to consider the position again, so that if a good case could be made—as may well prove to be so—perhaps in a subsequent Finance Bill the banks could be brought within the ambit of Part IV.

Mr, Edward du Cann (Taunton)

While welcoming, like my hon. Friend the Member for Langstone (Mr. Stevens), the provisions of Part IV and accepting the disqualifications and the way in which they are drafted, none the less I wish to ask the Financial Secretary for some further clarification of subsection (3, a (11)) in relation to the ordinary commercial operations of pastoral and stock and station agencies in Australasia, as they are called.

This Clause deals with lending money. The point I wish to make is a relatively narrow one as to what "wholly or mainly" means. I had an Amendment on the Order Paper which, if it had been called, might have clarified the matter, but I can explain the point quite shortly. These businesses consist largely of the following categories of work: firstly, the sale of wool, of land and of stock for auction and by private treaty on a commercial basis; secondly, the sale of agricultural merchandise of various kinds to their clients, machinery and other agricultural necessities—in particular to farmers in Australasia; and, thirdly, the operation of grazing properties.

Of those categories, by far the most important is the sale of livestock and the sale of wool and the sale of land. As the Committee will be aware, that is vital to Australasian economy and it is of vital importance to the British Commonwealth in the export trade. The Committee will be familiar with the amount of wool sold, in particular to the United States of America. The United Kingdom companies—there are five or six of them—behave with very great responsibility and have a high reputation in Australasia for the manner in which they carry out their operations.

One of the matters which is particularly highly regarded is the way in which they arrange orderly marketing of agricultural products and in that connection, as a customary part of their operations, they provide their clients with finance pending the sales of commodities in which they are interested. For instance, they might lend money to a farmer while the wool is growing on the back of his sheep. That is an example, but there are many other such activities. This is an ordinary matter of quite natural commercial practice.

I have looked at the accounts of a number of these companies and I have the accounts of one such company in front of me. When we look at the total income derived from these different activities and compare the activities of buying and selling on commission in the way I have described with the activities of lending to clients and the gross income derived from those two things, it is clear that the lending of money constitutes a very small part of the business, but when we look at the net figure when a large sum of money is involved, a rather different picture is shown.

It is not clear at the moment how the Inland Revenue will judge this matter, whether it will judge it on the basis of the gross figure, which I should have thought the logical basis, or judge it on the basis of the net figure. Should it judge it on the basis of the net figure, it would seem quite unreasonable because that would mean that these companies would be disqualified from being considered overseas trade corporations, although in fact on the face of it, in logic and from the point of view of the layman, they would seem abundantly qualified.

That is the point I ask the Financial Secretary to give an answer to or to resolve in some way, but two other points arise out of this subsection. Firstly, in regard to the wording of the Clause it may be that I have slightly misunderstood it, but it seems that the long sentence comprises two different things, lending money on the one hand and providing capital for hire purchase operations on the other. I take it that those are two separate things and that one should not read the subsection as meaning lending money for the purpose of its provision for hire purchase purposes. I take it that entirely separate operations are concerned in that subsection.

The second additional point is this. I do not wish to enter upon a discussion of Clause 32 at the moment because I realise that would be out of order, but we find that subsection (2, b) of that Clause comprises the lending of money without security. In this case the question of whether or not the clients of the companies concerned give security for the loans they receive is not mentioned. I am told that in Australia in particular, and especially in the State of Victoria, if one asks for security one is thought to be quite mad. To ask for security is not done.

I wonder why there should be this distinction in the Clause. It might be that hon. Members may think Victoria is a very desirable place in which to live, but this is a matter of some importance to the companies concerned. In dealing with these matters this is a large part of their important business, which is vital to this country. I should be grateful if the Financial Secretary could say why the difference is made in the wording later and not here. I am quite satisfied with the way in which the Clause is drafted.

Mr. Donald Chapman (Birmingham, Northfield)

I wish to ask the Financial Secretary a question about the interpretation of subsection (5). He will be aware that we put down some Amendments to this Clause which, in effect, would have stipulated that the companies must have a permanent establishment in the area in which they are trading in order to qualify as O.T.C.s.

Those Amendments have not been called, so we have to look at the interpretation of the subsection as it remains unamended. The question I want to ask is this. Subsection (5) says: A company shall not qualify as an Overseas Trade Corporation unless— (a) the profits arising from the whole of the trade carried on by the company are chargeable in a country or countries…to income tax… That means, in other words, unless Income Tax would have been paid on its trade in the foreign country.

Suppose that a company in this country sells not by means of a permanent establishment in a foreign country but merely by means of an agent who is more or less a general broker and does not confine himself to selling the firm's goods, but the goods are nevertheless sold in such a way that Income Tax in that country will fall on the proceeds, is not the exporting company in some way brought within the terms of the Clause? It would be selling merely through an agent and undertaking little or no risk. However, because the profits on its wares would be subject to Income Tax in the foreign country as they passed through the hands of an agent, that company would be able to qualify as an O.T.C. and accumulate untaxed reserves in that foreign country which might presumably be used for starting up a business there or establishing its own sales outlet there.

The puzzle is what will happen where exporting companies are merely acting through agents. Will they have the benefit of the Clause? Will they be able to accumulate funds in the countries where they are merely selling? Where companies are undertaking no risks of any magnitude in the foreign market and meeting no real competition but are merely leaving it all to an agent, is it right that the Bill should be extended to cover them? These are problems which one foresees if the Clause is unamended.

Mr. Powell

My hon. Friend the Member for Langstone (Mr. Stevens) reminded the Committee that we are taking the first, and necessarily experimental, step in a new departure in our tax law. Therefore, he will realise that such questions as he raised about the possibility of bringing banking in any form within the ambit of Part IV must be given further consideration. The main problem, as he recognised, is that it is extremely difficult to separate that part of the profits of a banking business which are made in this country by the central operations from those made overseas. That is at the heart of the difficulty about placing banking business in the same position as other businesses which qualify under Part IV. As I have said, this is the first stage, and we shall have to see what experience teaches us as we go on in its application.

With regard to the point raised by my hon. Friend the Member for Taunton (Mr. du Cann), I understand that the companies which he has particularly in mind have been in touch with the Inland Revenue which is examining the facts of the undertakings and their business. Therefore, all that I ought to say at the moment is that "consisting wholly or mainly" is intended to convey the general emphasis of the undertakings of the firm concerned. My hon. Friend also referred to Clause 32, but that is concerned with a different matter, not with the disqualification of a company but with whether part of its receipts rank as trading or investment income. I can confirm, as he said, that the two matters which are dealt with in sub-paragraph (ii) are separate and not cumulative.

5.45 p.m.

The hon. Member for Northfield (Mr. Chapman) spoke about an overseas trade corporation carrying on a merchant business, but carrying it on, as it were, indirectly and not directly. It must, of course, be entirely an overseas merchant business, and it must be one in which no profits are earned in this country. The other provisions of the Clause and other Clauses in Part IV are designed to produce that effect. That being so, what the subsection in question is designed to achieve is that no part of those profits—they are profits of the company and not of the agent; we are dealing only with the profits of the company—are earned in such circumstances that no local tax system bites upon them. That is why the Bill does not in any way have the effect of absolving from both United Kingdom tax and local tax, whatever or wherever it is, any part of the profits of a company.

If there is a situation in which as a result of these provisions there would be no tax liability anywhere, here or in any other country, then the company would be disqualified by subsection (5). I think that the main problem which the hon. Member had in mind was concerned with-other parts of the Clause and other provisions of this Part of the Bill, those which ensure that no profits earned in this country shall rank for the exemption given by Part IV.

Mr. Gordon Walker (Smethwick)

I am grateful to the hon. Gentleman for the care with which he has replied to the points raised. I had intended to speak before he rose. First, can he tell us what a "recognised market" is? I should have thought that "recognised" demands "by" after it. It must be recognised by someone. I hope that he will be able to deal with this point.

Subsection (2) deals with the necessity to sell exports at f.o.b. prices to an overseas subsidiary if it is to be an O.T.C. I presume from my reading of the Bill that any O.T.C. which broke these provisions by not selling at genuine f.o.b. prices would be disqualified as an O.T.C. Who decides that it should be disqualified? How long would it be disqualified? Would it have an appeal against disqualification?

These are important points, because subsection (2) has been inserted specially to satisfy foreign criticism, particularly about the terms of G.A.T.T., and if it is not clear how the provision is to be enforced there will be very considerable doubts in the minds of other countries which are members of G.A.T.T. We are inclined to think that this part of the Clause will be unenforceable. It is extremely important that there should be a very clear penalty on anyone who is caught. However, I think it would be extremely difficult to enforce in the general run of things. Our view is that all these f.o.b. provisions are eyewash put in to satisfy foreign critics of the Government. We do not wish to divide against the Clause, because it contains disqualifications which must be provided. The f.o.b. part of it will arise again on Clause 28 where we can go into the matter at greater length.

One major point about the Clause to which I should like to draw the hon. Gentleman's attention is this. The Clause contains the disqualifications. I take it that any overseas trade corporation can disqualify itself deliberately by infringing any of these provisions. The disqualifications apply whether done deliberately or not. Therefore, any overseas trade corporation that found it convenient to stop being one just disqualifies itself, and then, presumably, requalifies itself later if it so wishes.

In other words, is it not true that by the provisions of Clause 21, which are designed to limit the concessions of this part, a company can, so to speak, pop in and out of the status of an overseas trade corporation as it wishes; that it can deliberately disqualify itself and then requalify itself? Say it does a little trading at home—it disqualifies itself by doing so, and it might be very convenient for it to do so. For some tax reason or other it then wants to requalify, so it stops that trading at home. Is not the effect of the Clause that companies can, if it is convenient for them for tax purposes, opt in and out?

How are we to guard against that? if that is the effect, does it not open up a rather wide door for people to dispose of their status as an overseas trade corporation, or disqualifying themselves as one? Does it not mean that they could really arrange their tax affairs more freely than could those companies in the United Kingdom that could not possibly qualify as overseas trade corporations? This would give special benefit to those who could qualify for that status, then disqualify themselves and later requalify. This seems to us to be a point of some importance, and I should like to hear the views of the Government on it.

Mr. Powell

Perhaps the Committee will excuse me if I do not at this stage deal with the question of a recognised market, since we shall in due course reach Amendments dealing with that.

The second point that the right hon. Member for Smethwick (Mr. Gordon Walker) put to me related to the matters set out in subsection (2)—if there is disqualification, how long does it last and what right of appeal is there? In the first instance, of course, it is the business of the Inland Revenue to apply the tax law. If it appears to the Inland Revenue that the trading income of a company is not exempt, that the company does not qualify as an overseas trade corporation by reason of the disqualifications here set out, the Department will assess it for tax in this country as not being an overseas trade corporation—

Mr. Mitchison

These are very detailed provisions about the terms of particular contracts. How does the hon. Gentleman anticipate that, in the ordinary course of taxation practice, the Inland Revenue is to find out whether such and such a sale, in the case of a company which may carry on many sales in the year, was strictly f.o.b., without any services being rendered or charges incurred?

Mr. Powell

Of course, the Inland Revenue will have to be satisfied about the business as a whole and that the conditions in this part of the Bill are fulfilled. It is proposed to give the Department extensive powers to obtain the necessary information. The price charged is a matter which arises under Clause 28, and the existing powers of the Income Tax Acts are there applied to transactions such as one might here be concerned with. But the general procedure is clearly—

Mr. Mitchison

I apologise for troubling the hon. Gentleman again, but I know of no provision at present under which the Inland Revenue would be able to get this detailed information. Perhaps even now, or on some future occasion, the Financial Secretary would tell me about it. It would seem to involve disclosure of the particular contracts. Moreover, I do not understand how the Inland Revenue is to begin. It is given the accounts of a company, or whatever it is—and these are the terms of every single contract. As I understand it, if a company enters into a single contract otherwise than on strict f.o.b. terms, it is thereby disqualified for a period.

Mr. Powell

As we shall see when we come to Clause 28, the Inland Revenue already inquires into the prices at which transactions take place between companies, and inquires into the details of those transactions for tax purposes. There is no essential difference between its satisfying itself on these matters and satisfying itself as to the starting point of the business which is carried on by a company claiming overseas trade corporation status.

As I have said, the procedure will be that if the Inland Revenue is not satisfied that the company has avoided these disqualifications its duty will be to assess the company to United Kingdom Income Tax. The normal appeal procedure will then follow—the appeal to the Commissioners, and, on points of law, appeal to the High Court. There is, therefore, the normal, impartial resort as between the taxpayer and the Inland Revenue in this case, as generally.

The disqualification, like the qualification, applies, in general—and detailed exceptions appear later in the part—for a year. Overseas trade corporation status, like the tax code on which it bites, is a matter of the tax year. It is a year to year matter, and it is therefore for the Inland Revenue to satisfy itself year by year that companies to which this status is accorded are not disqualified in any of the ways set out in the Bill.

The right hon. Gentleman raised the very important question of a company deliberately disqualifying itself, for tax avoidance purposes, in years when it was convenient for it not to be an overseas trade corporation. This is a matter which is germane to that discussed by the Committee yesterday, when my right hon. and learned Friend the Member for Kensington, South (Sir P. Spens) raised the question of an option—to be or not to be an overseas trade corporation.

It will quite clearly be necessary to take steps to prevent companies from being able to disqualify themselves for tax avoidance purposes, and to give a discretion to the Inland Revenue, such as it has in a good many circumstances already—as it already has, for example, under Clause 27—not to accord overseas trade corporation status to a company which is clearly hopping in and out of that status for tax avoidance purposes. It is my right hon. Friend's intention to take measures to that end in the Amendments which he will table on Report to meet, in part, the point raised yesterday by my right hon. and learned Friend.

Mr. Mitchison

Does that mean that what the Commissioners will have to consider is the question of the company's intentions in entering into contracts or making other arrangements which disqualify it for a period?

Mr. Powell


Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.