Clause 21.—(AMENDMENTS AS TO SPECIAL CLASSES OF BUSINESS.) (Hansard, 1 July 1958)

§ Mr. Wade
As this Clause deals with special classes of business, I think it is appropriate to refer to some classes which have not been covered by the Clause, but which. I think, might have been. The main purpose of the flat rate of Profits Tax, as we have heard, is to remove the distinction between distributed and undistributed profits. As a consequence of introducing the new flat rate, the Chancellor has brought to light a number of anomalies, and certain new hardships have been created which might have not been foreseen, some of which are difficult to justify.
We have heard the Paymaster-General point out more than once in these debates that where a surplus is liable to 1230 Income Tax it ought to be liable also to Profits Tax. I will not reopen the debate on that subject, but it is possible to have a case of an incorporated body which distributes part of its surplus in such a way that part of the surplus is not liable to Income Tax, but is liable to Profits Tax. I do not think that the logic of the Paymaster-General would apply to such a case.
I should like to refer, by way of illustration, to the problem I had intended to raise in an Amendment which has not been selected. There is a small group of insurance companies with a very limited field of activity. They were established to carry out insurance on such properties as churches, chapels and manses, and the profits from this insurance business is used to make grants to various denominational charities. The object of my Amendment was to allow the sums devoted to charity—

§ The Chairman
Order. That Amendment is not selected, and to try to use it as an illustration is not fair.

§ Mr. Wade
I will, if I may, limit my remarks to Clause 21, which deals with special classes of business, and elaborate the point that where the surplus of an incorporated body is devoted to charity, and, in consequence, there is no liability to Income Tax, there should not either be a liability to Profits Tax.
As I understand, there are these cases where a company has been formed for the purpose of devoting the profits, if that be the right word, to charity, and the major part of the surplus is used in that way. It seems reasonable that in such a case there should not be a liability to Profits Tax.
To quote the case of the Methodist Insurance Office, I understand that only an insignificant sum is paid by way of dividend. Last year, £94 was paid by way of dividend, while £22,850 was paid in grants to charities. I am informed that the surplus out of which these grants were paid is liable to Profits Tax. It seems that this is an anomaly which might well be remedied. I could give a number of examples showing that the increase in the rate will affect charities very seriously.
Rightly or wrongly, in the past the surpluses which have been distributed to charities have been treated as undistributed profits. The very small amount paid to shareholders has been treated as distributed profits. The remainder which has been distributed to charities has been treated as undistributed profits.
If it continues, the rate will increase from 3 per cent. to 10 per cent. and that will seriously affect charities which benefit from these companies. As it is late, I do not propose to give the figures which I could quote on this subject, but I hope that the Chancellor will look into this matter and, if necessary, introduce, on Report, legislation to remedy what I feel sure is an anomaly which cannot have occurred to him in introducing the Clause.

§ Mr. Maudling
I do not know that I entirely follow the hon. Member's argument, but as far as I do the answer is that the rule about charitable contributions is exactly the same for Income Tax and Profits Tax. These contributions 1232 are allowable only if they are wholly and exclusively expended in the course of the business of the persons concerned, that is, if they are charities for the employees of the business, for example. Where the hon. Member is confused is on the point that if a covenant is made by a company it can pay to someone after deduction of Income Tax and the recipient of the charity can claim the Income Tax because he is liable to Income Tax, but he cannot claim the Profits Tax because in any event he would not have been liable to Profits Tax.
The rule, as I have said, is the same and although I know the case which the hon. Member has in mind I cannot hold out any hope that at any stage my right hon. Friend would amend the basic rules about what are and what are not expenses for the computation of profits for Income Tax and Profits Tax purposes.