HC Deb 15 July 1958 vol 591 cc1026-30
The Financial Secretary to the Treasury (Mr. J. E. S. Simon)

I beg to move, in page 12, line 33, at the end to insert: (5) Where such a company as is mentioned in the new paragraph (d) set out in subsection (3) of this section has received such a dividend as is mentioned therein, any question whether any dividend on shares in that company is to be brought into account as mentioned in subsection (1) of the said section four or whether any exemption from income tax extending to any dividend on such shares is to be excluded to any extent by subsection (2) of that section shall be determined as if the words "being shares sold or issued to him or otherwise acquired by him after the twenty-sixth day of October, nineteen hundred and fifty-five, and not more than six years before the date on which the dividend becomes payable" in subsection (1) of the said section four, and all similar expressions in that section, were omitted. This Amendment relates to Clause 18, which was formerly Clause 16, and which brought under control a new form of dividend stripping which had come to notice after the 1955 legislation, namely, dividend stripping by proxy—the interposition of an intermediate company between the company to be stripped and the stripping company.

So far as I know, the gaps which this Amendment is designed to cure have not been exploited, but, at any rate, they have come to the imagination of the Inland Revenue since the earlier stages of the Bill, and certainly since the Bill was printed. They arise in this way, having regard to the terms of the original 1955 legislation which did not, of course, have regard to dividend stripping by proxy at all. That legislation would still permit stripping by proxy to take place if the intermediary or subsidiary had already been in the ownership of the principal company—that is, the stripping company—before 27th October, 1955, which was the initial date in the 1955 legislation. That is the first case.

The second case where stripping by proxy could still take place is if the intermediary or subsidiary, whenever set up, had been in the ownership of the stripping company for more than six years at the time when the stripping by proxy took place. I can, if the Committee wishes, spell that out at greater length, but I hope that I have said sufficient to indicate the two possible gaps in the Clause which was designed to strike at dividend stripping by proxy.

The remedy which is envisaged is that the limitations which, in a straightforward case, would restrict the operation of the Clause to dividends on shares acquired after 27th October, 1955, and not more than six years before the dividend became payable, should be left out of account in the case of dividend stripping by proxy, and subsection (5) introduced by the present Amendment so provides.

Mr. Douglas Houghton (Sowerby)

Obviously, we on this side of the Committee will support an Amendment which is designed to close a gap, even though no one yet has been noticed to go through it. But it is rather disturbing that the more we consider this form of tax avoidance, the more forms of ingenuity appear to come to light, or the possibility of them.

One might say that throughout the discussions on this Clause in the Finance Bill we have heard the echoes of the emphatic and bold declaration of the Financial Secretary of 1955 that Section 4 of the Finance Act, No. 2, of 1955, was putting an end to dividend strippers. This Amendment deals with that section of the dividend-stripping legislation which was so clear in 1955. I hope that the hon. and learned Gentleman will be able to assure the Committee that, before the Bill passes out of our hands, in the next few hours, every gap perceivable at the moment will have been closed by the legislation before us, because on a previous occasion the Committee will remember that a former Financial Secretary—now the Minister of Housing and Local Government—was so determined to stop this form of dividend stripping, and so emphatic that the 1955 legislation would do it, that we parted company with the Bill feeling that a widespread form of tax avoidance had been effectively dealt with.

Since then, we have discovered that it was not. The threat made by the right hon. Gentleman, then the Financial Secretary, and his colleagues, that, if necessary, retrospective legislation would cover new forms of dividend stripping which were discovered, showed how clearly the Government felt that they had effectively dealt with the situation. Apparently, no one thought of dividend stripping by proxy. Dividend strippers there were known to be, but dividend stripping by proxy was, apparently, not then thought of, but has since been regarded as a possible form of tax avoidance.

We shall come later, very briefly, no doubt, to other provisions which we think might strengthen the hand of the Administration in dealing with this form of tax avoidance. Clearly, we shall support this Amendment, and others that will have the same broad objective, but the Committee cannot help but be disturbed that there seems to be no end to these ingenious forms of tax avoidance. It rather confirms what my right hon. Friend the Member for Huyton (Mr. H. Wilson) suggested in an earlier debate, as, perhaps, becoming urgently necessary; that the right hon. Gentleman the Chancellor of the Exchequer should have additional powers to deal with gaps as they appear, and not have the kind of annual stopping of gaps that is scarcely on the Statute Book before fresh devices are discovered.

We have those misgivings. Nevertheless, we support the Amendment and hope that it, and the associated Amendments in the next Clause, will do what the hon. and learned Gentleman hopes they will do, and that there will not be any more gaps discovered in the dividend-stripping defences to give rise to serious misgivings about the effectiveness of our taxation legislation in this respect.

Mr. John Diamond (Gloucester)

I should, first, like to thank the Financial Secretary for moving the Amendment. It was considerate of him to rise in his place and say a few words because, of course, when we were last on the Committee stage of the Bill we reached a stage where Amendments were moved with such rapidity that it was impossible for anybody who had not spent many years looking at a gathering from the auctioneer's chair to see how the Chair was able to catch the eye of the mover of an Amendment, and see that it was, in fact, being moved by a nod of the head so slight as to escape the attention of other hon. Members. As we are all endeavouring to get this Bill through even more quickly than we were then, I had feared that the Financial Secretary's head would have been literally oscillating in an effort to get through the Amendments. I therefore think it right to thank the hon. and learned Gentleman, and to ask him to continue this precedent of actually moving the Amendments.

Having said that, perhaps I might put a slight gloss on some of the words used by my hon. Friend the Member for Sowerby (Mr. Houghton), when he said that hardly was the 1955 Bill a Statute than a new provision had to be thought of. Of course, here is an example of a Bill by no means being a Statute but a further provision having to be introduced to stop, at all events, an imagined possible gap in the defences.

As we know, this Clause deals with exactly the same difficulties with which the 1957 Finance Act dealt. The Clause is titled in the same way, and deals with precisely the same problem, and the very introduction of this Amendment shows that it is just impossible to foresee, at any given moment, all the possible loopholes there are in any particular piece of tax avoidance machinery. It is just impossible to foresee that. It is only a week or two ago that we were saying the same sort of thing in Committee, when it was then suggested that it was possible to foresee them. The fact that, before two weeks have gone by, the Government find it necessary to introduce another Amendment is of the greatest importance, not only in regard to the Amendment itself but as serving to indicate that this is not an adequate method of dealing with tax avoidance, and, in particular, with dividend stripping.

When this point was put to the Chancellor, he went so far as to say that the fact that this had been considered in Committee at one stage would have relevance in the decision he had to make later as to whether he would be prepared to make any new provision retrospective. As the Government have, within two weeks, realised that their previous provisions were inadequate, and as we have been pressing the Government to make these dividend-stripping proposals nugatory in regard to tax reclaims, is the hon. and learned Gentleman now able to say that, should this latest Amendment not stop up the latest gap in these anti-dividend-stripping provisions—as I believe it will not—the Government will be prepared, should they last out another year, to introduce in their next Finance Bill, if necessary, retrospective legislation to deal with any avoidance of this Amendment?

Amendment agreed to.

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