HC Deb 15 July 1958 vol 591 cc1030-9

4.15 p.m.

Mr. Simon

I beg to move, in page 13, line 26, at the end to insert: (2) Where—

  1. (a) a company carries on a trade other than such a trade as is mentioned in subsection (1) of section four of the Finance (No. 2) Act, 1955; or
  2. (b) the business of a company consists mainly in the making of investments;
and the company's income for any year of assessment includes a dividend the net amount of which would, if the company carried on such a trade as is mentioned in the said subsection (1), be required to any extent to be brought into account as a trading receipt which has not borne tax,—
  1. (i) the gross amount corresponding to so much of the said net amount as would have been required to be brought into account as aforesaid shall be left out of account in determining for the purposes of section twenty of the Finance Act, 1953 (which relates to payments between associated companies in respect of losses), whether the company has any surplus for tax purposes during any period of what is the amount of that surplus; and
  2. (ii) if any annual payment payable by the company is to any extent payable out of the said dividend, that annual payment shall be deemed to that extent not to be payable out of profits or gains brought into charge to tax, and section one hundred and seventy of the Income Tax Act, 1952, shall apply accordingly.
Clause 19, formerly Clause 17, deals with the alternative form of dividend stripping which has arisen since the 1955 legislation, namely, dividend stripping carried out for the benefit of an ordinary trading concern which is in a position to claim repayment of Income Tax by reference to trading losses suffered by it. The Clause, as drawn, disqualifies for use in support of a loss claim, not only a dividend which the loss-making concern draws direct after buying up the company being stripped, the victim with the accumulative reserves, but also a dividend received by an intermediary; in other words, dividend stripping by proxy. That is hit at, not only in relation to dealing companies, as in the previous Clause that we have discussed, but also in relation to a company sustaining trading losses and being in a position, therefore, to claim the benefits of the provision of the tax code, which grosses up any dividend paid.

There are, however, certain devices that might be resorted to to get the fruits of stripping by proxy into the hands of the principal, in this case, the loss-making company, which do not involve the payment of a dividend by an intermediary. In effect, two are struck at by this Clause—the only two that have come to mind. The first is where the intermediary, having stripped the company that is being acquired—the company with the accumulated reserves—instead of paying a dividend to the principal company could, by Section 20 of the 1953 Finance Act, make a subvention payment to the loss-making principal. The Committee will remember that that Section accords certain facilities for marrying the losses and profits of different members of a group of companies.

The second way in which the intermediary can get the fruits of the stripped dividend into the hands of the principal other than by paying a dividend, which is already covered by Clause 19, as I think it is now, is by entering into a deed of covenant providing for the appropriate annual payment to the principal. Again, I think that I should make it plain to the Committee that no case where such a device has been adopted has come to the notice of the Inland Revenue, but with the thought that has been brought to bear on this problem, as the Committee can well envisage, it has been imagined that those two devices could be resorted to, and that that being the case the gap should obviously be closed.

The new subsection (2) therefore provides, first, that in the case of a stripped dividend received by the intermediary it must be left out of account in considering whether it has sufficient income available to make a subvention payment to any associated company. To cover the second case—the payment under a deed of covenant—there is a similar provision that the intermediary must account to the Revenue, as a separate transaction, for the Income Tax deductible from any annual payment which it makes out of the stripped dividend which it has received, and it cannot consider that its obligation is discharged by the Income Tax which is deemed to have been deducted by payment of the stripped dividend.

The hon. Gentleman the Member for Sowerby (Mr. Houghton) asked me, on the last Amendment, whether I could assure him that every conceivable gap had been closed. I think that the terms on which I give an assurance really depend on the meaning of the word "conceivable". I obviously cannot give an assurance that every gap has objectively been closed. I can assure him that this matter has been very closely investigated, as I am sure the Committee will appreciate from the very recondite devices which are now closed by this Amendment and by the one which the Committee has just approved. Very great scrutiny has been brought to bear on this problem and we can now conceive of no gaps which we have not closed; but, of course, human nature is fallible and human reason is fallible, and the Committee will not expect me to go beyond that point.

Mr. Eric Fletcher (Islington, East)

Obviously, on this side of the Committee, we support the Amendment proposed by the hon. and learned Gentleman, but his speech, coupled with his earlier speech, shows the complete inadequacy of this method of trying to deal with this most complicated subject.

I have no doubt that the matter has received the closest scrutiny and that the Treasury has tried to conjure up every possible device which it can think of which would enable taxpayers in the future to circumvent their present position. I am quite convinced, as the hon. and learned Gentleman himself is, that it cannot be beyond the ingenuity of people who wish to resort to dividend stripping in the future to concoct a device which will evade the net now drawn for about the sixth time, in the efforts which the Treasury has made to produce a completely watertight system which will prevent every kind of dividend stripping.

I have no doubt that the Treasury has closed a great many gaps, but it is quite obvious that others will make themselves apparent to those whose business it is to seek ways of avoiding the strict letter of the law. I think that the lesson that emerges from our discussions in Committee, and from these two Amendments, is that the Treasury must in future look for a quite different method of protecting the Revenue. It is not good enough to proceed in this piecemeal fashion by very elaborate complicated Clauses, difficult enough for the experts to understand and almost incomprehensible to the layman, which, as history shows, fail in their objective.

We support the Amendment, but we should draw from it and from the previous Amendment the lesson that in future there will be some quite different approach. I should have thought that we would want in future to have a system whereby the Finance Act lays down a general principle stating the kind of tax avoidance which Parliament wishes to stop, and then leaves it to the discretion of Special Commissioners or, as I would prefer, to a special Taxation Tribunal to find the facts and decide whether a particular transaction is, or is not, legitimate. If it comes within the mischief that Parliament has decided to stop and it fails to satisfy the requirements of Parliament that there is some legitimate basis for it, then any claim that might be made to call back from the Exchequer tax which has already been paid should fail. I hope that in future we shall think on these lines.

Mr. Diamond

This Amendment deals with a slightly varied form of tax stripping—indeed, it has become more apparent that new methods of tax stripping are almost limitless—but it rests on an incompletely considered alternative.

The obvious way of passing profits from a company which has made them to a company which needs them is to declare a dividend. The Revenue having been told to do some more thinking and having put their thinking cap on for a further two weeks, have thought out two further methods of transferring profits from a company which has made them. In this case, however, companies transfer the profits before they are made. That is to say, they make an annual payment under a deed of covenant or alternatively they make a subvention payment.

These are two methods, but only two of several methods, whereby companies associated with one another and having the same desire pass the profits from the profitable ones for the unprofitable ones to receive them. These are only two methods whereby companies engaged in that operation find success. Two further methods come to mind immediately.

It is well known that the problem of transferring profits and income from a rich company to a poor company for obvious Income Tax advantages is frequently considered, has been considered for years, and is being continually carried out. It depends on the circumstances of the two companies.

We are in the situation that we part with the Finance Bill, except for Third Reading, some time or other tonight, and the hon. and learned Gentleman is, therefore, not in a position to introduce any further Amendments and you, Sir Charles, are presumably not in a position to accept any manuscript Amendments. Suppose the Committee came to the conclusion that the usual expedient of selling by one company to another company at inflated or deflated prices was a method of avoiding this anti-dividend stripping legislation. It is frequently a method adopted between two companies where by the richer one gets rid of some of its riches in favour of the poorer one.

4.30 p.m.

Supposing, alternatively, these two companies were sharing office accommodation, same sort of premises and services and, as is very usual, because it suited it to do so, one company took responsibility for the whole of the office accommodation, services, staff and so on, and charged the other company an inclusive fee, which frequently happens. Supposing that that inclusive fee were substantially inflated or deflated, as the case may be, as would be within the competence and the propriety of the two companies to do. The result would be that the income would be passed from a rich to a poor company in substantial quantity and would achieve exactly the same result as the deed of covenant for a modest annuity.

In those circumstances, they would achieve what it was desired to achieve, namely, to pass income or profits from the rich company to the poor company. If that were felt to be a matter which wanted looking at, we would not be able to look at it. We are too late. We have decided that there are other matters to be done. Those are but two which occur to me "off the cuff", having looked at the Amendment and seen what the hon. and learned Gentleman is suggesting.

Even if those two were decided to be caught in some subtle way which I have not yet observed—I am not a lawyer—by some of the provisions of the Amendment in conjunction with the rest of the Clause, does not the very fact of the Amendment show what nonsense it is to try to make provisions of this kind in these bits and steps for people to try to think of possible developments against which to provide in this way? All that we are attempting to do is to protect the Revenue. The public policy is clearly established. Both sides of the Committee are after the same thing. The only curious thing is that, somehow, the Chancellor seems to have dug his toes in against accepting the advice of the Inland Revenue.

My hon. Friend the Member for Islington, East (Mr. E. Fletcher) said that the Treasury would have to think again, but it is not fair to blame this on to the Treasury. The Treasury, knowing the facts and how impossible it is for civil servants to think out all the possible and complex economic transactions which can take place over a community of 50 million people over the course of twelve months, obviously has come to its conclusion and said, as was in the Money Resolution which we passed on Budget day, that the proper way to deal with this matter is to have a full and precise warning and, if necessary, to act on that warning and to bring in retrospective legislation.

The Amendment, in the first place, does not deal with the matter fully as the Committee is attempting to deal with it, and, secondly, shows once more how impossible it is to stop the gaps when the Committee is at one in wishing to stop them in any method other than those which have been suggested on this side of the Committee. I have an obvious preference for the method which I am suggesting, because any other method must be so wide as to catch bona fide transactions as well as those done in bad faith; but, certainly, something would have to be done rather than the present method. Although, therefore, one accepts the Amendment as far as it goes, it only is accepted in the sense that it shows how unsatisfactory is this method of stopping stripping of dividends.

Mr. Houghton

It will not help to delay the Committee longer on this Amendment. I repeat the feelings of uneasiness which I expressed when I spoke a few moments ago. We are not dealing here with ingenuity so much as rascality. Let us not mince our words, especially since they are privileged. We are dealing with people who are indulging in such artificial devices that they cannot be regarded as in the normal course of trying to arrange one's affairs so as to attract the smallest amount of tax.

I was glad to hear the Financial Secretary give the assurance that as far as he and the Administration can see, the Clause, after it is amended, will be effective in dealing with further possible attempts at avoidance. The Committee will, however, recall that on 8th November, 1955, the then Financial Secretary to the Treasury, now Minister of Housing and Local Government and Minister for Welsh Affairs, said: The Bill will catch and defeat every dividend-stripping operation where the shares are acquired after 26th October, 1955—Budget Day. From that day dividend stripping will become unprofitable, and the dividend stripper will be out of business—will be out of that business, anyway."—[OFFICIAL REPORT, 8th November, 1955; Vol. 545, c. 1666.] Notwithstanding that emphatic statement, the then Chancellor of the Exchequer fortified the legislation of 1955 by making a statement about his readiness to introduce retrospective legislation if other forms of dividend stripping came to light which should be checked, and which not only should be checked but checked retrospectively, if it was thought that they were devices clearly at variance with the attempt of the Chancellor to stop this form of tax avoidance. Yet a whole new Clause in the present Bill—Clause 19—deals with a form of dividend stripping which was not dealt within the 1955 Act and which, apparently, has come to light on a somewhat extensive scale since. Notwithstanding that, the present Chancellor felt unable to fulfil the expectations of the Committee that retrospective legislation would recover the tax lost by devices which he hoped to check in 1955 but which he failed to do.

As my hon. Friend the Member for Islington, East (Mr. E. Fletcher) has just said, the Committee is virtually helpless in the face of this elaborate network of ingenious activities which has nothing to do with the ordinary business of the community but which is solely directed at milking the revenue. I find little difficulty in distinguishing between all this and the person having his hand in the till. It is as bad as that. We shall simply have to see how it goes.

The time is, however, rapidly approaching when, on an extremely complicated form of tax avoidance such as this, the Chancellor should be bold enough to ask the House of Commons to give him powers to deal with new forms of tax avoidance of this kind as they arise and not wait for this most complicated and cumbersome method of dealing with ingenious tax avoidance arrangements in the annual Finance Bill.

Amendment agreed to.

Mr. Simon

I beg to move, in page 13, line 28, after "person", to insert "or company".

Clause 19, which has already been considered today by the Committee, provides for the dividend stripping where there is a trading loss. As it stands, it prevents a loss-making concern from using, in respect of a repayment claim, a dividend obtained by milking off the accumulated reserves of a company in which it has acquired a shareholding. By the Amendments which have just been passed, in addition to the dividend, we have provided for the subvention payment and payment under a deed of covenant.

With a group of companies the acquisition in question might be no more than a technical change of ownership arising out of a rearrangement of the internal structure of the group. I think it was my hon. Friends the Members for Portsmouth, Langstone (Mr. Stevens) and Crosby (Mr. Page) who in Committee drew attention to the fact that the Clause as drawn would prevent or penalise perfectly legitimate operations, and my right hon. Friend the Paymaster-General promised that that matter would be considered and an official Amendment tabled on Report. The Amendment which I am now moving carries out that under taking. It inserts a new subsection which would enable such a dividend to be recognised for the purpose of the recipient's last claim provided that it represents profits earned during the period when the paying company was already a member of the group.

The procedure starts by indicating the situation in which the let-out is to operate—shares in the company which eventually pays a dividend out of its accumulated reserve (which so far in these discussions I have called company A) and acquired by the company which receives that dividend, company B, from a third company, company C. Under the normal application of Clause 19, the dividend received by company B would be treated as a stripped divided, at any rate to the extent that it must be assumed to be paid out of profits accumulated by company A before the date when its shares are acquired by company B—in other words, treated as though they were preacquisition profits.

If, however, the companies are associated and are members of a three-company group, the examination of the source of the dividend is to be carried out as if the acquisition of company A shares, the company to be stripped, by company B had taken place on the date when they were originally acquired by company C under sub-paragraph (a), or if company C, the third company, did not become a member of the group until a later date under sub-paragraph (b). In other words, the profits earned by company A during the period of group membership before its shares were taken over by company B will be treated as though they were "post-acquisition" profits and, therefore, available as cover for the dividend that it pays to company B. I think that the Amendment carries out my right hon. Friend's undertaking.

The remaining part of the Clause covers instances in which there is more than one intra-group transfer, but the way that that operates is plain once the three-company group system is comprehended.

Mr. Graham Page (Crosby)

I should like to express my gratitude to my hon. and learned Friend for including this Amendment in pursuance of the undertaking given in Committee. It is certainly a complicated subject, but the group transactions are not really dividend stripping in the sense that we have discussed dividend stripping in other Clauses. They do not cause any damage to the taxpayer. It is a matter between the companies within the group.

Amendment agreed to.

Further Amendments made: In page 13, line 29, leave out "subsection (1)" and insert "the foregoing provisions".

In line 31, leave out from first "trade" to end of line, and insert: or business were such a trade as is mentioned in subsection (1) of section four of the said Act of 1955.

In line 36, at end insert: (3) Where shares in a company were acquired by another company from a third company at a time when the three companies were associated, any question whether or to what extent a dividend on those shares was paid out of profits accumulated before the acquisition, shall, for the purposes of this section (but for no other purposes), be determined as if the acquisition had taken place at whichever of the following times is the later, that is to say—

  1. (a) the time when the shares were acquired by the said third company;
  2. (b) the time when the said other company and the said third company became associated;
except that if the said third company had acquired the shares from a fourth company at a time when the four companies were associated, the foregoing provisions of this subsection shall have effect as if for the references in paragraphs (a) and (b) to the third company there were substituted references to the fourth company and for the reference in paragraph (b) to the said other company a reference to the third company; and so on for any greater number of associated companies. In this subsection "associated" means, as regards two companies, that one is a subsidiary of the other or both are subsidiaries of a third company, and, as regards three or more companies, that one is associated with each of the others; and "subsidiary" has the meaning assigned to it for certain purposes of the profits tax by section forty-two of the Finance Act, 1938.

In line 37, leave out from beginning to "which" and insert "() Subsections (5) and (6) of section four of the said Act of 1955".

In line 39, leave out "definition of" and insert "definitions of 'company' and".

In line 41, leave out "subsection" and insert "section".—[Mr. Simon.]

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