HC Deb 02 July 1958 vol 590 cc1536-42
Mr. Stevens

I beg to move, in page 48, line 37, leave out from "dividend" to second "at" in line 38.

As I understand, the Amendment in page 49, line 8, to leave out "three-fifths" and to insert "two-fifths", is entirely consequential on the other one, and I suggest that it would be convenient to discuss them together.

The Deputy-Chairman (Sir Gordon Touche)

Yes, and I think it would be for the convenience of the Committee also to discuss with them the two Amendments to line 15, and the Amendments to lines 20, 22, 27, 29, 31 and 46.

Mr. Stevens

The other Amendments could well be taken together, but touch on a rather different point from the two to which I have just referred. I will try to work my way through this jungle of Amendments, however, as best I can.

Coming back now to Profits Tax at a fairly late hour, I am wondering whether it would not have been for the convenience of the Committee if the Seventh Schedule, which deals with the transitional provisions concerning the change from the two rates to the one rate of tax, could have been considered shortly after Clause 20. We have got a little rusty on Profits Tax.

The main object of the transitional provisions of the Seventh Schedule is to prevent a company from escaping a certain liability to Profits Tax in cases where the dividend decision is taken after 15th April, 1958, when this change was known, where a company might consider artificially reducing the rate of dividend in respect of profits made before the Budget date and then, in the subsequent year, stepping up the dividend rate again so that the average would come out very nicely, and it would in that way escape a certain amount of Profits Tax.

I think that hon. Members on both sides of the Committee would agree that those transitional provisions are necessary, but I suggest that they go rather too far. Here again, I would be inclined to confine myself to the Amendments in page 48, line 37 and page 49, line 8, because the Amendments beginning at page 49, line 15 and ending at line 46 touch on another point.

The Deputy-Chairman

The Consequential Amendments to page 48, line 37, can be discussed, but they have not been selected to be called.

Mr. Stevens

Paragraph 3 of the Schedule gives a certain emergency exit—a way out—provided that not less than three-fifths of the profits of the company are distributed. Having regard to the incidence of Income Tax, and the 10 per cent. Profits Tax rate, three-fifths is a wholly unrealistic rate; it is very nearly the maximum amount of available profits which any company can distribute by way of dividend. For that reason my right hon. Friend, my hon. Friend and myself have tabled the Amendments. The Seventh Schedule as at present drawn applies the test of whether or not a reasonable dividend has been declared—a dividend in the next period after 15th April, 1958, compared with the standard period before 15th April, 1958—by relating the dividend to the capital of the company.

All sorts of things may have happened in the interim period to the capital of the company—bonus shares may have been issued—and so the percentage dividend declared in relation to the capital——

Notice taken that 40 Members were not present;

House counted, and, 40 Members being present—

Mr. Stevens

I was trying to deal with a rather complicated series of Amendments when that rather unfriendly intervention was made. It seems to my hon. Friends and myself that the much fairer basis would be to take the relationship of the dividend to the profits which have been earned than the relationship of the dividend to the capital, whatever the capital of the company might be.

Mr. Maudling

As my hon. Friend the Member for Langstone (Mr. Stevens) pointed out, it is important in these transitional provisions to ensure that dividends are not attributed to a year otherwise than that to which they would otherwise be attributed for the purposes of taking improper benefit from the reduction of the distributive profits tax. It is accepted that transitional requirements of this kind are required. I must admit that they are not perfectly tailored to every particular case. In making transitional provisions of this kind it is probably impossible to do more than what is generally right. I do not think that the proposals put forward in the Amendments are an improvement.

The general principle of the Schedule is to adjust the actual dividend paid by reference to a standard dividend in a standard period. There are two precautions against hardship arising. The first is that the deemed dividend will not be more than 60 per cent. of the profits. That is a high figure, but it is deliberately high because there is beyond that the second provision whereby if the fall in the company's profits continue they can, at a period of two years, claim an adjustment. I think that the main point is that the comparison shall not be with the standard dividend but based upon the percentage of profits distributed.

The form in which the Amendment has been put down would lead to a substantial increase in the total amount of Profits Tax payable. This, no doubt, was not the intention and hon. Gentlemen were doubtless thinking of cases in which company profits have been declining. I am advised that in these cases, if this were accepted, it could lead to a serious loss to the Revenue which, I am told, might be in the neighbourhood of £20 million.

To adopt the Amendment as it stands would not, I think, carry out the intentions of its supporters, and if the intention was to concentrate on cases where profits have fallen, would run the risk of a loss of revenue which is too great for the Chancellor to accept. While recognising that the transitional provisions are not perfect in every particular, the Chancellor does not feel this Amendment would improve them.

Mr. Stevens

I am not clear whether we have, in fact, discussed the Amendment to Schedule 7, page 49, line 10, at end to insert: (4) Where a body or society proves to the satisfaction of the Commissioners that the dividend for the standard period is abnormally high, for a specific cause other than fluctuation in profits, so as to make it inequitable as a standard for the chargeable accounting period, the Commissioners shall make such reduction of the additional distribution as is just.

The Deputy-Chairman

That, as I understand, is a separate Amendment.

Mr. Stevens

I did not realise that this proposal would involve such a very large figure. Because of that, and in view of what my right hon. Friend has said, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

2.0 a.m.

Mr. Stevens

I beg to move, in page 49, line 10, at the end to insert: (4) Where a body or society proves to the satisfaction of the Commissioners that the dividend for the standard period is abnormally high, for a specific cause other than fluctuation in profits, so as to make it inequitable as a standard for the chargeable accounting period, the Commissioners shall make such reduction of the additional distribution as is just. This Amendment attacks the same problem from a rather different angle. It envisages the case where, for an exceptional reason, there has been a sharp fall in profits so that the provisions of the Seventh Schedule would lead to an unrealistic state of affairs.

It provides that the taxpayer could appeal, in these circumstances, to the Commissioners, and that the Commissioners should have the power to make such reduction of the additional distribution as in their opinion should be deemed to be just and reasonable. If my right hon. Friend cannot accept the batch of Amendments which we have just discussed, then I suggest that he should make what I might term an emergency exit for those special cases. I hope that he will say that he will be able to accept it.

Mr. Maudling

My right hon. Friend the Chancellor considers that this proposal is eminently reasonable, and he will table an Amendment himself, covering this principle, on the Report stage.

Mr. Stevens

I am very grateful to my right hon. Friend. In view of his promise, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Arbuthnot

I beg to move, in page 49, line 49, after "dividend" to insert: or in consequence of the application by the body or society to that purpose of any sums, whether distributable or not". As my hon. Friend the Member for Langstone (Mr. Stevens) has pointed out, the Seventh Schedule contains transitional provisions designed to prevent companies avoiding the 30 per cent. rate of tax on distributions made out of the profits of periods up to 31st March, 1958, by artificially allocating to later periods dividends which, in fact, come out of those profits; or by unduly reducing the size of the dividends.

This is done in the Schedule by fixing a standard period and then providing, broadly speaking, that if the rate of dividend in the period between the end of the standard period and 1st April, 1958, is less than the rate for that standard period, the company shall be deemed to have paid an additional dividend; that is, a dividend to bring the rate up to that for the standard period, and to pay tax accordingly.

The Schedule provides for an adjustment if there is a change in the paid-up share capital of the company, but for this purpose bonus issues—and in my view, rightly—are disregarded since they do not involve the introduction of any new money. The purpose of this Amendment is to provide that increases in share capital due to the capitalisation of share premium accounts, or capital reserves, should also be ignored since they, too, do not involve the introduction of any new money.

Mr. Maudling

This Amendment, as I understand it, is designed to meet the point raised by the Institute of Chartered Accountants. My right hon. Friend the Chancellor is also prepared to accept the argument put forward and to agree to the Amendment.

Amendment agreed to.

Mr. Maudling

I beg to move, in page 50, line 20, to leave out, "before the passing of this Act".

There are three Government Amendments to the Seventh Schedule. They are designed to deal with the comparatively small point concerned with the revocation of grouping notices. They meet a point originally raised by the hon. Member for Southampton, Test (Mr. J. Howard). Under the Schedule, as drafted, the grouping notices can only be revoked if they were given before the passing of the Act. If, however, the principal company acquires a subsidiary shortly before 1st April it has until August or September to give a grouping notice and it may not be in a position to decide, before the end of July, whether or not it would be to its advantage to give a grouping notice in respect of the period up to 31st March, 1958.

There is no reason why the principal company should not be given the normal time within which to give a grouping notice for the period up to 31st March, still being able to revoke it for subsequent periods if it wishes to do so, but under the paragraph as drafted it would not be able to revoke the grouping notice for periods after 31st March unless it gives the notice before the passing of the Act.

This Amendment meets this point by deleting the words "before the passing of this Act", in paragraph 2 (1).

Amendment agreed to.

Further Amendments made: In page 50, line 33, leave out "before the passing of this Act".

In page 50, line 37, at the end add: (4) This paragraph shall not authorise the revocation of any notice given after the passing of this Act, unless the notice has effect for a period beginning before the end of March, nineteen hundred and fifty-eight.—[Mr. Maudling.]

Schedule, as amended, agreed to.