HC Deb 18 June 1958 vol 589 cc1230-58
Mr. Stevens

I beg to move, in page 12, line 24, after "aforesaid", to insert: if for the period of six years in the said subsection (1) of section four there were substituted a reference to a period of two years". I venture to move from a controversial subject to one which is not so controversial but which is technical. The words on the Notice Paper refer to Section 4 of the Finance (No. 2) Act, 1955, to which reference has been made earlier today. In this special context, however, I think it would be for the benefit of the Committee if I pointed out that Section 4 of that Act refers to persons carrying on a particular trade. That trade is specified in Section (4) as a trade which consists of or comprises dealings in shares or other investments"—

Hon. Members


Mr. Stevens

If I am out of order, Mr. Hynd, I am sure that you will help me.

The Temporary Chairman

The word "Order" is, I think, being applied to a certain amount of noise that is going on in the Committee.

Mr. Stevens

I am grateful to you. Mr. Hynd.

I was saying—I repeat it for the benefit of those who did not hear me—that Section 4 of the Finance (No. 2) Act, 1955, refers to persons who are concerned in a particular trade, namely, a trade which consists of or comprises dealings in shares or other investments". It goes on to deal with the dividend stripping, about which we have heard a good deal today.

I remind the Committee that the type of company which one has in mind is the investment or finance company and, in particular, that kind of company which buys shares of a subsidiary company and subsequently sells those shares at a loss and, because it is a finance company, is able to charge the loss on the sale of those shares against its profits for Income Tax and other taxation purposes.

Clause 17, however, goes much wider than that. It begins with the words: Where a person carries on a trade other than such a trade as is mentioned in…section four of the Finance (No. 2) Act, 1955 In other words, the Clause throws the issue wide open, not merely to finance companies and investment companies, but to ordinary trading companies.

In the course of the ordinary commercial and industrial development of the country it may very well happen that a trading company buys as a subsidiary company another company which has an accumulated balance of profit. Until Clause 17 becomes law, if in the course of the next year or two that purchasing company makes a loss, the loss is available for set-off against the profit of the subsidiary company which has these accumulated profits.

Under Clause 17, however, that will become impossible. We find that the dividend-stripping exercise is widened from the investment company or the finance company, which, as I have said, is in a very special category in these respects, right out to the trading company. I suggest to my hon. and learned Friend the Financial Secretary that it is quite beyond the wit of a managing director or chairman of an ordinary trading company to look into the crystal when he buys a subsidiary company and to say, "Is this not magnificent? In three years' or four years' time I am going to make a trading loss, not a loss on the sale of shares or something of that kind, but an ordinary common or garden trading loss; but at the moment I am buying this other company which has a profit, and when I make a loss in three or four years' time, because of Clause 17, I shall not be able to set off this loss occurring in the future against the profits of the subsidiary which I am acquiring."

9.15 p.m.

It is quite beyond the perspicacity of any board of directors to look into the future in that way. As my hon. Friend the Member for Kidderminster (Mr. Nabarro) said on Clause 16, this Clause and Clause 16 are very closely associated. I suggest to my hon. and learned Friend that this Clause 17 has gone too far, that in trying to catch the tax dodgers, the dividend strippers, the Government are bringing into the net the perfectly ordinary trading concern, even perhaps, the Daily Herald. I do not know whether I am in order in mentioning the Daily Herald on this Clause. However, it does seem to me that the Clause goes much too far.

Section 4 of the Finance (No. 2) Act, 1955, puts up a barrier respecting these new concerns, these companies acquired for spurious purposes, of six years. It seems to me entirely unreasonable that a normal trading company should have to wait six years before it can do what any other normal businessman can do, and that is set off the loss on one concern against the profit on another concern.

What the Amendment seeks to do for the trading company, not for the investment or financial companies, the companies we are considering in connection with dividend stripping, is to reduce the time factor, the barrier of six years, to two years. I think that anyone who has knowledge of these matters knows perfectly well that in dividend stripping operations, to which hon. Members on both sides of the Committee are opposed, the transaction takes place in a very short time. It seems wholly unreasonable that a trading company should have to wait six years before any set off can take place. The Amendment seeks, therefore, in the case of the trading company only, to reduce that barrier of six years to two years, and I hope that my hon. and learned Friend will be able to say that he accepts the force of the arguments which I have advanced and that the Government will accept the Amendment.

Mr. Page

I support my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens), who moved this Amendment, in saying that this Clause seems to go too far. I should like to add a few words about the way in which it seems to me it will work. The Clause refers specifically to the process of reclaiming tax under Section 341 of the 1952 Act. Under Section 341, a company which makes losses and also happens to have an investment income is entitled to ask that its losses be set off against its investment income for tax purposes; that is to say, the dividend which it will have received from its investments will have suffered tax and the company, having made a trading loss, can ask for its trading loss to be taken into account against that dividend from its investments, and, therefore, for a return of tax. It can do that not only in the year in which the loss occurs, but in the immediately following year. It has two years in which to make that choice.

It has an alternative in the following Section in the 1952 Act, Section 342. Assume that a company makes a trading loss. Perhaps it has no investment income, or perhaps it does not wish to take that loss into account against its investment income at once. It continues to hold that loss or carry it forward for tax purposes over the next six years.

The advantage of Section 341 over Section 342 is that if the company takes advantage of Section 341 it gets immediate tax relief. In some cases that may save the company from serious financial difficulties, but Clause 17 now prevents the company with ordinary trading losses from taking advantage of that immediate relief from tax. I appreciate that before 1955, finance companies and investment companies took advantage of Section 341 of the 1952 Act in such a way as my hon. Friend the Member for Langstone describes.

One had a company dealing with investments which brought up another company with cash reserves of, say, £100,000. Paying £100,000 for that company was a trading expense for a company dealing in securities. Having got those cash reserves, that company would pay itself as shareholder a dividend of £90,000, thereby reducing the shares to a value of £10,000. It would then sell those shares for £10,000, thereby making a loss on paper of £90,000, although it had received that £90,000 in dividends. That loss, so Section 4 of the 1955 Act has said, shall not be taken into account against the investment income, the dividend of £90,000.

That is the peculiar case of the investment company, because in that case the company is paying tax on capital gains. It is able to deduct capital losses because the goods in which it is dealing are securities. Now Clause 17 endeavours to apply that same rule not only to investment companies but to ordinary trading companies, and the trading company which has made a pure trading loss will not be entitled to ask for that loss to be taken into account against its investment income if that investment income comes from the profits which have accumulated before the company acquired that investment, that is to say if it happens to have bought its shares in some other company after that company has made some profit and accumulated it to set off future profit from that company against its losses.

Surely the dividend stripping transactions which we want to check are those which are done deliberately to buy up undistributed cash reserves and set them off against losses. If we set a time limit such as my hon. Friend the Member for Langstone has put in the Amendment, we shall preserve the right of the genuine trading loss company to set off that loss for tax purposes and tax relief against genuine profits. Those were the words which my hon. Friend used on Second Reading, and he said that we did not want to damage the right to set off genuine loss against genuine profit for the purpose of tax relief. I think we can preserve that, despite Clause 17, by some such Amendment as my hon. Friend has moved.

The Financial Secretary to the Treasury (Mr. J. E. S. Simon)

This Amendment seeks to confine the operation of Clause 17 to cases where the acquisition by the loss-making trading concern of shares in the company which is to be stripped of its accumulated reserves took place more than two years before the date when the dividend is taken out. As the Clause stands, it applies where the shares were acquired not more than six years before the dividend becomes payable.

Perhaps I may remind the Committee of the type of transaction with which we are concerned in Clause 17. My hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) and my hon. Friend the Member for Crosby (Mr. Page) are right when they say that in this Clause we have passed from either the investment company in Clause 16 or the exempt taxpayer, such as the charity, which was also dealt with in the 1955 legislation and in Clause 16, to the ordinary trading companies. So the case is, I admit, a different one; but, nevertheless, it is just as surely a case of dividend stripping, and just as surely is the income against which the losses are set a purely artificial one.

May I give an example of the type of transaction with which this Clause is concerned? I will quote the example I gave during the Second Reading debate. It is where company B, with trading losses, acquires say the whole of the ordinary shares of company A, which has approximately £60,000 of liquid tax reserves. Company A then pays up the reserves to company B by way of dividend and the tax law treats that as a gross dividend of about £100,000, from which £40,000 tax has been deducted. Company B, having made a loss of over £100,000, can claim repayment of tax amounting to the £40,000 which is deemed to have been deducted. The Committee will see that the profit against which the loss is suffered is a purely fictitious one. It is the creation of a fiction of the law which grosses up a net dividend to a gross figure.

It is against that background that we must view this Amendment. I do not deny for a moment that the losses in this type of case are genuine, but the complaint of the taxpayer, the complaint of the Revenue and the complaint of the Committee, in discussing these devices of dividend stripping, is that the income brought into existence to support the loss claim is artificial in the way I have demonstrated. Therefore, it seems appropriate to use the existing test of artificiality, namely, the test of six years which is in the main Act, the 1955 Act.

Mr. Stevens

The kind of trading loss to which I was referring was not a loss in the case of the acquired subsidiary, but a future, perfectly genuine trading loss in the case of the acquiring company, namely, the purchasing company. How could that be an artificial loss in the sense in which my hon. and learned Friend has been using the word?

Mr. Simon

What we are concerned with is the loss in the acquired company, against which the profits of the acquiring company are set. That is the example I gave. It operates equally where the loss-making company buys up a profitable company. That is the other example which would be caught by Clause 17.

9.30 p.m.

The reasons why the six-year period seemed to us to be an appropriate one and not too long are three. First, the ostensible tax income created by stripping retains to the full the artificial character which I have tried to indicate, even if its receipt is deferred for more than two years. Secondly, the absence of any demonstrable motive of avoidance at the date of acquisition does not in any way affect the artificiality of that income and it remains artificial throughout. My hon. Friend the Member for Crosby said that the provision should be used only in a case where the transaction is deliberately done to buy up a company with tax-paid reserves. But the motive at the time that the purchase takes place is irrelevant here. The artificiality of a "stripped" dividend taken out as soon as an opportunity to use it presents itself remains the same.

Thirdly—this seems to me to be the most important point in considering time limits—it is an unsafe assumption that the likelihood of a loss for two years ahead cannot be foreseen. Take, for example, the case of company B buying up company A and its strippable reserves in early March, 1959. At that time that company might well have laid plans for the scrapping and replacement of a considerable quantity of machinery and plant so as to give rise to large initial allowances for the year 1960–61, and the expected amount of those reliefs might well be sufficient to swamp company B's profits for that year. In that way those concerned would be able at the time of acquisition to foresee the loss in the taxable year two years ahead in order to permit a loss claim against the dividend paid, say, at the end of March, 1961.

There is, finally, the case put to me by my hon. Friend the Member for Langstone, where company B buys up company A in order to take over the productive assets and good will of a real business. There are many cases of that sort. In other words, it is not merely a device for obtaining control of liquid funds which are to be stripped. In that case the full amount of the post-acquisition profits of company A which are available for the payments of dividend can be used to cover the dividend which the stripping company B draws from its new subsidiary.

Therefore, in the genuine case Clause 17 should produce no hardship even at the end of the six-year period, because the dividend paid would, first, have to exhaust the true trading profits in the whole of the post-acquisition period before it becomes caught by Clause 17. For those reasons, and principally because a period of two years is altogether too short, in that losses at the end of that period could be forseen, I cannot advise the Committee to accept the Amendment.

The Deputy-Chairman

The Question is—

Mr. Stevens

I am rather disappointed by the answer—

The Deputy-Chairman

I started to put the Question.

Mr. Stevens

I was about to suggest, Sir Gordon, that in due course I had a decision to make whether to suggest that the Committee should divide upon the Amendment or whether I should ask leave to withdraw it. Am I not permitted

to say a word or two as to the decision I should make?

The Deputy-Chairman

The hon. Member did not rise and so I began to put the Question.

Mr. Stevens

If I am in order in doing so, I wish to say that I am disappointed by the reply given by my hon. and learned Friend. To a very large extent it seems that my hon. and learned Friend has got the position upside down. He was talking of dividend stripping, whereas in the case of a trading company no such position arises. I was thinking of a perfectly normal Section 341 claim by the parent company for two or three years after the acquisition of the subsidiary.

Because it seems that owing to the stress and difficulty of dealing with other matters my hon. and learned Friend and his right hon. Friend have not had time to give sufficient attention to the Amendment, I ask the leave of the Committee to withdraw it for the time being, in the expectation, which I am sure will be realised, that between now and Report my right hon. Friend will give further consideration to it. Accordingly, I beg to ask leave to withdraw the Amendment.

Hon. Members


Amendment negatived.

Amendment proposed: In page 12, line 28, leave out from second "the" to "subsection" in line 29 and insert: thirteenth day of December, nineteen hundred and fifty-five".—[Mr. Fletcher.]

Question put, That the words proposed to be left out stand part of the Clause:—

The Committee divided: Ayes 230, Noes 191.

Division No. 161.] AYES [9.37 p.m.
Aitken, W. T. Birch, Rt. Hon. Nigel Cooper, A. E.
Amery, Julian (Preston, N.) Bishop, F. P. Cooper-Key, E. M.
Amory, Rt. Hn. Heathcoat (Tiverton) Body, R. F. Cordeaux, Lt.-Col. J. K.
Anstruther-Gray, Major Sir William Bossom, Sir Alfred Craddock, Beresford (Spelthorne)
Arbuthnot, John Bowen, E. R. (Cardigan) Crosthwaite-Eyre, Col. O. E.
Armstrong, C. W. Boyd-Carpenter, Rt. Hon. J. A. Crowder, Sir John (Finchley)
Ashton, H. Braine, B. R. Cunningham, Knox
Atkins, H. E. Brooman-White, R. C. Davidson, Viscountess
Baldwin, Sir Archer Browne, J. Nixon (Craigton) D'Avigdor-Goldsmid, Sir Henry
Balniel, Lord Bryan, P. Deedes, W. F.
Barlow, Sir John Bullus, Wing Commander E. E. Digby, Simon Wingfield
Barter, John Burden, F. F. A. Dodds-Parker, A. D.
Batsford, B. C. C. Butcher, Sir Herbert Donaldson, Cmdr. C. E. McA
Beamish, Col. Tufton Campbell, Sir David Doughty, C. J. A.
Bell, Philip (Bolton, E.) Carr, Robert du Cann, E. D. L.
Bell, Ronald (Bucks, S.) Cary, Sir Robert Dugdale, Rt. Hn. Sir T. (Richmond)
Bennett, F. M. (Torquay) Chichester-Clark, R. Duncan, Sir James
Bevins, J. R. (Toxteth) Cole, Norman Duthie, W. S.
Bidgood, J. C. Conant, Maj. Sir Roger Elliott, R. W. (Ne'castle upon Tyne, N.)
Bingham, R. M. Cooke, Robert Errington, Sir Eric
Finlay, Graeme Kaberry, D. Pitman, I. J.
Fisher, Nigel Keegan, D. Pitt, Miss E. M.
Fletcher-Cooke, C. Kerr, Sir Hamilton Powell, J. Enoch
Fraser, Sir Ian (M'cmbe & Lonsdale) Kimball, M. Price, David (Eastleigh)
Freeth, Denzil Kirk, P. M. Price, Henry (Lewisham, W.)
Gammans, Lady Lagden, G. W. Prior-Palmer, Brig, O. L.
Garner-Evans, E. H. Lambton, Viscount Profumo, J. D.
George, J. C. (Pollok) Langford-Holt, J. A. Ramsden, J. E.
Gibson-Watt, D. Leavey, J. A. Rawlinson, Peter
Glover, D. Leburn, W. G. Redmayne, M.
Glyn, Col. Richard H. Legge-Bourke, Maj. E. A. H. Renton, D. L. M.
Godber, J. B. Legh, Hon. Peter (Petersfield) Ridsdale, J. E.
Goodhart, Philip Lindsay, Hon. James (Devon, N.) Robinson, Sir Roland (Blackpool, S.)
Gough, C. F. H. Lindsay, Martin (Solihull) Rodgers, John (Sevenoaks)
Gower, H. R. Lloyd, Maj. Sir Guy (Renfrew, E.) Roper, Sir Harold
Graham, Sir Fergus Lloyd, Rt. Hon. Selwyn (Wirral) Ropner, Col. Sir Leonard
Grant-Ferris, Wg Cdr. R. (Nantwich) Longden, Gilbert Russell, R. S.
Green, A. Low, Rt. Hon. Sir Toby Sharples, R. C.
Gresham Cooke, R. Lucas, Sir Jocelyn (Portsmouth, S.) Shepherd, William
Grimond, J. Lucas-Tooth, Sir Hugh Simon, J. E. S. (Middlesbrough, W.)
Grimston, Hon. John (St. Albans) Macdonald, Sir Peter Smithers, Peter (Winchester)
Grimston, Sir Robert (Westbury) Mackeson, Brig. Sir Harry Spearman, Sir Alexander
Grosvenor, Lt.-Col. R. G. McKibbin, Alan Speir, R. M.
Gurden, Harold Mackie, J. H. (Galloway) Stevens, Geoffrey
Harris, Frederic (Croydon, N.W.) McLaughlin, Mrs. P. Steward, Sir William (Woolwich, W.)
Harris, Reader (Heston) Maclean, Sir Fitzroy (Lancaster) Stuart, Rt. Hon. James (Moray)
Harrison, A. B. C. (Maldon) McLean, Neil (Inverness) Studholme, Sir Henry
Harvey, John (Walthamstow, E.) MacLeod, John (Ross & Cromarty) Summers, Sir Spencer
Heald, Rt. Hon. Sir Lionel Maddan, Martin Sumner, W. D. M. (Orpington)
Heath, Rt. Hon. E. R. G. Maitland, Cdr. J. F. W. (Horncastle) Taylor, Sir Charles (Eastbourne)
Henderson-Stewart, Sir James Maitland, Hon. Patrick (Lanark) Taylor, William (Bradford, N.)
Hesketh, R. F. Markham, Major Sir Frank Teeling, W.
Hill, Rt. Hon. Charles (Luton) Marlowe, A. A. H. Temple, John M.
Hill, Mrs. E. (Wythenshawe) Marples, Rt. Hon. A. E. Thompson, Kenneth (Walton)
Hinchingbrooke, Viscount Marshall, Douglas Thompson, R. (Croydon, S.)
Hirst, Geoffrey Maudling, Rt. Hon. R. Thornton-Kemsley, Sir Colin
Hobson, John (Warwick & Leam'gt'n) Maydon, Lt.-Comdr, S. L. C. Tiley, A. (Bradford, W.)
Holland-Martin, C. J. Medlicott, Sir Frank Turton, Rt. Hon. R. H.
Holt, A. F. Molson, Rt. Hon. Hugh Tweedsmuir, Lady
Hornby, R. P. Mott-Radclyffe, Sir Charles Vane, W. M. F.
Howard, Gerald (Cambridgeshire) Nabarro, G. D. N. Vickers, Miss Joan
Howard, Hon. Greville (St. Ives) Nairn, D. L. S. Vosper, Rt. Hon. D. F.
Wade, D. W.
Howard, John (Test) Nicholson, Sir Godfrey (Farnham) Wakefield, Sir Wavell (St. M'lebone)
Hudson, W. R. A. (Hull, N.) Nicolson, N. (B'n'm'th, E. & Chr'ch) Wall, Patrick
Hughes-Young, M. H. C. Noble, M. A. C. (Argyll) Ward, Rt. Hon. G. R. (Worcester)
Hurd, A. R. Nugent, G. R. H. Ward, Dame Irene (Tynemouth)
Hutchison, Michael Clark (E'b'gh, S.) Oakshott, H. D. Webster, David
Hyde, Montgomery O'Neill, Hn. Phelim (Co. Antrim, N.) Williams, Paul (Sutherland, S.)
Hylton-Foster, Rt. Hon. Sir Harry Orr, Capt. L. P. S. Williams, R. Dudley (Exeter)
Iremonger, T. L. Orr-Ewing, Charles Ian (Hendon, N.) Wills, Sir Gerald (Bridgwater)
Irvine, Bryant Godman (Rye) Osborne, C. Wilson, Geoffrey (Truro)
Jenkins, Robert (Dulwich) Page, R. G. Wood, Hon. R.
Jennings, Sir Roland (Hallam) Pannell, N. A. (Kirkdale) Woollam, John Victor
Johnson, Dr. Donald (Carlisle) Partridge, E.
Johnson, Eric (Blackley) Peel, W. J. TELLERS FOR THE AYES:
Jones, Rt. Hon. Aubrey (Hall Green) Peyton, J. W. W. Mr. Edward Wakefield and
Joseph, Sir Keith Pickthorn, K. W. M. Colonel J. H. Harrison.
Joynson-Hicks, Hon. Sir Lancelot Pilkington, Capt. R. A.
Ainsley, J. W. Callaghan, L. J. Edwards, W. J. (Stepney)
Allen, Scholefield (Crewe) Carmichael, J. Evans, Albert (Islington, S. W.)
Bacon, Miss Alice Castle, Mrs. B. A. Evans, Edward (Lowestoft)
Baird, J. Champion. A. J. Fernyhough, E.
Balfour, A. Chapman, W. D. Finch, H. J.
Bence, C. R. (Dunbartonshire, E.) Clunie, J. Fitch, E. A.
Benn, Hn. Wedgwood (Bristol, S. E.) Coldrick, W. Fletcher, Eric
Benson, Sir George Collins, V. J. (Shoreditch & Finsbury) Fraser, Thomas (Hamilton)
Beswick, Frank Craddock, George (Bradford, S.) George, Lady Megan Lloyd (Car'then)
Bevan, Rt. Hon. A. (Ebbw Vale) Cronin, J. D. Gibson, C. W.
Blackburn, F. Crossman, R. H. S. Gordon Walker, Rt. Hon. P. C.
Blenkinsop, A. Dalton, Rt. Hon. H. Grenfell, Rt. Hon. D. R.
Blyton, W. R. Darling, George (Hillsborough) Grey, C. F.
Boardman, H. Davies, Stephen (Merthyr) Griffiths, David (Rother Valley)
Bowles, F. G. Deer, G. Griffiths, Rt. Hon. James (Llanelly)
Boyd, T. C. Diamond, John Griffiths, William (Exchange)
Braddock, Mrs. Elizabeth Dodds, N. N. Hale, Leslie
Brockway, A. F. Donnelly, D. L. Hall, Rt. Hn. Glenvil (Colne Valley)
Broughton, Dr. A. D. D. Ede, Rt. Hon. J. C. Hamilton, W. W.
Brown, Thomas (Ince) Edelman, M. Harrison, J. (Nottingham, N.)
Burke, W. A. Edwards, Rt. Hon. John (Brighouse) Hastings, S.
Burton, Miss F. E. Edwards, Rt. Hon. Ness (Caerphilly) Hayman, F. H.
Butler, Herbert (Hackney, C.) Edwards, Robert (Bilston) Herbison, Miss M.
Hobson, C. R. (Keighley) Mahon, Simon Rogers, George (Kensington, N.)
Holman, P. Mainwaring, W. H. Ross, William
Houghton, Douglas Mallalieu, E. L. (Brigg) Royle, C.
Howell, Charles (Perry Barr) Mallalieu, J. P. W. (Huddersfd, E.) Short, E. W.
Howell, Denis (All Saints) Mann, Mrs. Jean Skeffington, A. M.
Hoy, J. H. Mason, Roy Slater, Mrs. H. (Stoke, N.)
Hubbard, T. F. Mayhew, C. P. Slater, J. (Sedgefield)
Hughes, Emrys (S. Ayrshire) Mitchison, G. R. Smith, Ellis (Stoke, S.)
Hughes, Hector (Aberdeen, N.) Monslow, W. Sorensen, R. W.
Hunter, A. E. Moody, A. S. Soskice, Rt. Hon. Sir Frank
Hynd, J. B. (Attercliffe) Morris, Percy (Swansea, W.) Sparks, J. A.
Isaacs, Rt. Hon. G. A. Morrison, Rt. Hn. Herbert (Lewis'm, S.) Spriggs, L.
Janner, B. Moss, R. Stewart, Michael (Fulham)
Jay, Rt. Hon. D. P. T. Moyle, A. Stonehouse, John
Jeger, George (Goole) Mulley, F. W. Stones, W. (Consett)
Jenkins, Roy (Stechford) Noel-Baker, Francis (Swindon) Sylvester, G. O.
Johnson, James (Rugby) Noel-Baker, Rt. Hon. P. (Derby, S.) Taylor, Bernard (Mansfield)
Jones, Rt. Hon. A. Creech (Wakefield) Oram, A. E. Taylor, John (West Lothian)
Jones, David (The Hartlepools) Oswald, T. Thomson, George (Dundee, E.)
Jones, Elwyn (W. Ham, S.) Padley, W. E. Thornton, E.
Jones, Jack (Rotherham) Paget, R. T. Ungoed-Thomas, Sir Lynn
Jones, J. Idwal (Wrexham) Paling, Rt. Hon. W. (Dearne Valley) Usborne, H. C.
Kenyon, C. Pannell, Charles (Leeds, W.) Warbey, W. N.
Key, Rt. Hon. C. W. Pargiter, G. A. Watkins, T. E.
Parker, J. Weitzman, D.
King, Dr. H. M. Paton, John West, D. G.
Lawson, G. M. Pentland, N. Wheeldon, W. E.
Ledger, R. J. Plummer, Sir Leslie White, Mrs. Eirene (E. Flint)
Lee, Frederick (Newton) Popplewell, E. Wilcock, Group Capt. C. A. B.
Lee, Miss Jennie (Cannock) Price, J. T. (Westhoughton) Wilkins, W. A.
Lever, Leslie (Ardwick) Price, Philips (Gloucestershire, W.) Willey, Frederick
Lewis, Arthur Probert, A. R. Williams, David (Neath)
Logan, D. G. Proctor, W. T. Williams, Rev. Llywelyn (Ab'tillery)
Mabon, Dr. J. Dickson Pursey, Cmdr. H. Williams, Rt. Hon. T. (Don Valley)
McCann, J. Randall, H. E. Willis, Eustace (Edinburgh, E.)
MacColl, J. E. Rankin, John Wilson, Rt. Hon. Harold (Huyton)
MacDermot, Niall Redhead, E. C. Woodburn, Rt. Hon. A.
McGhee, H. G. Reid, William Woof, R. E.
McGovern, J. Reynolds, G. W. Yates, V. (Ladywood)
McInnes, J. Robens, Rt. Hon. A.
McLeavy, Frank Roberts, Goronwy (Caernarvon) TELLERS FOR THE NOES:
MacMillan, M. K. (Western Isles) Robinson, Kenneth (St. Pancras, N.) Mr. Pearson and Mr. Simmons.
Mr. Stevens

I beg to move, in page 12, line 41, at the end to add: (3) For the purposes of this section no regard shall be paid to the acquisition of shares on which a dividend is paid to which subsection (1) applies to the extent to which they are acquired by one member of a group of companies from another member of the same group. For the purposes of this section a group of companies shall consist of a holding company and its subsidiary companies as defined in section one hundred and fifty-four of the Companies Act, 1948. We have just been discussing the question of trading companies. Now we come to something rather wider and that is the question of this kind of operation, but in a family of companies, a group, which consists of a parent company and one or more subsidiaries. Once more, as I said on the earlier Amendment which I moved, we are all in opposition to the business of dividend stripping; indeed, it benefits no one in the long run.

But, obviously, where there is a family of companies, a parent company and subsidiaries, the question of tax advantage cannot arise in a general sense, or even in a particular sense because the shareholders are one family. They are shareholders in the parent company and, ipso facto, shareholders in the subsidiaries as well. Therefore, operations of this kind designed for better and simpler administration cannot be said to offend in any sense the feeling of this Committee on these operations.

We have suggested that to tie the matter down one could not do better than go to a Section of the law which has stood the test of time for ten years, Section 154 of the Companies Act, 1948, which sets out clearly and concisely those considerations which must be satisfied in order that a group of companies may, in law, be deemed to have been constituted. Therefore, I move this Amendment to exclude from the provisions of Clause 17 those which are concerned solely with one or more of a family of companies in the same group.

Mr. Page

As Clause 17 stands, it will undoubtedly penalise trading by companies in groups, in cases where there is no real loss to the Revenue at all. It seems to me that those companies should be excluded from the operation of the Clause.

Group operating is a very normal way of company operating. I am informed that the Clause will penalise the company rearrangements and reconstructions which have been advised by the Inland Revenue in connection with overseas trading corporations. Companies which have, since the overseas trading corporation provisions of the previous Finance Act, made their rearrangements and reconstructions, would be caught under the Clause unless group operating is excluded. I urge my right hon. Friend to give very serious consideration to the Amendment.

Mr. Maudling

My right hon. Friend the Chancellor of the Exchequer agrees that my hon. Friend the Member for Langstone (Mr. Stevens) has a good point here in that the provisions about dividend stripping should not apply to companies operating within the same group. Obviously, companies operating within a group are in a quite different position from separate companies, and dividend stripping, in the normal sense of the word, does not arise at all.

My right hon. Friend is not willing to accept the Amendment in its present form, because the definition of a group of companies, although within the Companies Act, 1948, is not that which is normally taken for Income Tax purposes, where the normal test of group membership is a 75 per cent. holding of ordinary shares. That is a technical point.

The main reason is that it would make a big loophole in the general provisions because it does not confine its operation to profits earned while the paying company was a member of the group. Clearly, the Clause could be used as it stands to get round the general provisions. The Amendment is not acceptable, but if my hon. Friend would be prepared to withdraw it I will undertake on behalf of my right hon. Friend to introduce on Report an Amendment designed to meet the point of companies operating within a group, which I think it would be generally agreed should be covered. This is a particular case.

Mr. Page

May I point out that an Amendment which has not been selected would have met the very point to which my right hon. Friend has just referred?

Mr. Maudling

I had that point in mind, but I am sure that I should have been out of order in saying anything about it.

Mr. Mitchison

We shall have to see what the Government propose on Report and consider the matter then. Meanwhile, may I ask the right hon. Gentleman a question on a matter which puzzles me a little?

The object of the Clause in general is to prevent the recovery of tax taken to have been deducted, in cases where it does not really represent anything, that is to say, to get back from the Revenue a sum of money which has no real existence. Is it impossible that the transaction between two companies within a group should not lead to that result?

Taking the group as a whole, could not the result of this exception be a benefit to the group of companies by reason of their being a group, which they would not have had if they had been a single company and which is given to them at the expense of the Revenue? I say quite frankly to the right hon. Gentleman that I always feel that when I ask questions about financial matters I am lucky if I understand a quarter of them.

Mr. Maudling

I would not enter into the question of how much any Member of the Committee understands of any particular aspect of any of these discussions. The answer which I hope the hon. and learned Member will find satisfactory is that what we will endeavour to do is to meet the point that the Bill has drafted would do a substantial injustice to groups of companies, but in meeting that injustice we shall not go so far as to enable those companies to indulge in dividend stripping. I hope that the Amendment we shall propose will allay the fears of my hon. Friend and of the hon. and learned Member.

Mr. Mitchison

I am most grateful for the last sentence of the right hon. Gentleman. Can we rely on this, that the Amendment will not put a group of companies in any better financial position than they would have been if, the ownership of the outfit being the same, it was a single company?

Mr. Maudling

I think I can say that that would be the object of the operation. I have tried to explain the object which would underlie the Amendment which we will put forward and I must ask hon. Members to await that Amendment.

Mr. Stevens

I have no hesitation in saying on this occasion that, in view of the assurance I have had, I beg to ask leave to withdraw the Amendment.

Amendment by leave withdrawn.

Mr. John Rodgers (Sevenoaks)

I beg to move, in page 12, line 41, at the end to add: (3) Neither subsection (1) nor subsection (2) of this section shall apply so as to restrict a claim to relief under section three hundred and forty-one of the Income Tax Act, 1952, subsection (3) of section fifteen of the Finance Act, 1953, or paragraph 3 of the Third Schedule to the Finance Act, 1954, where a person as mentioned in subsection (1) of this section shall prove to the satisfaction of the General Commissioners or the Special Commissioners that the transfer or acquisition of shares in a company or a change or changes in the person or persons carrying on a trade or business or a reconstruction of companies was not a transaction, either alone or in conjunction with other transactions and arrangements, the main purpose or one of the main purposes of which was the avoidance or reduction of liability to income tax. (4) Any person aggrieved by the decision of the said Commissioners not to give a certificate pursuant to subsection (2) of section three hundred and forty-one of the Income Tax Act, 1952, on the ground only that avoidance or reduction of liability to income tax was the main purpose or one of the main purposes of the transaction mentioned in subsection (3) of this section may by notice in writing given to the Commissioners of Inland Revenue within three months from the date on which notice of the said decision is given to him make an application to have his claim for relief heard and determined by the Special Commissioners, who shall hear and determine the claim in like manner as an appeal made to them against an assessment under Schedule D, and all the provisions of the Income Tax Act, 1952, relating to such an appeal shall apply accordingly with any necessary modifications. I am encouraged in commending this Amendment by the remarks of the Paymaster-General on the previous Amendment. My Amendment seeks to deal with companies which at the moment are being acquired and are not members of a group but later may become members of a trading group. The first part of my Amendment is an attempt to restrict the application of the present subsections (1) and (2) so that they would prevent bona fide company reconstruction and mergers coming within the operation of these subsections. In its present form, I believe Clause 17 goes beyond its proper function of stopping tax avoidance. I believe it will penalise and prevent transactions which are absolutely desirable in the commercial life of the country.

I have in mind normal schemes of reconstruction and mergers of companies in which one of the companies has incurred a general trading loss but is still fully operative and carrying on a trading business. In particular, I am thinking of smaller firms, including many family businesses, which may have been hit by a temporary decline in business, or may have been adversely affected by the operation of the credit squeeze, whose only chance of survival may be a merger with a company which possesses accumulated reserves and which may be able to sustain the loss of the first company, buy it and keep it in being.

Clause 17 as it stands in its published form would prevent a great many reconstructions and mergers which are legitimate and helpful in the economic life of the country. Its provisions would cause companies to go out of existence and their goodwill, industrial and commercial know-how and integrated labour force would be lost. Unless an Amendment of this kind is approved, this House in the future will have to approve of measures which would allow larger and richer companies to take over genuine trading concerns which have made a loss in order to keep those companies in being and to keep their labour force integrated. Clause 17, as drafted, will prevent the economic and sound type of reconstruction, with little gain to the revenue, and it will operate to the detriment of industry and commerce generally.

Mr. Diamond

Will the hon. Member say why it will prevent it?

10.0 p.m.

Mr. Rodgers

I will come to that in a moment. I entirely agree with the Chancellor's desire to prevent a reconstruction aimed at taking over a company which has made a loss and the only asset of which is its loss—a company, in fact, which has gone out of business, which has a name and a loss and which is not paying a cash dividend. Such an operation should not be tolerated. It is quite different, however, from the company which is legitimately trading, which has incurred a loss and which cannot continue to trade unless somebody takes over the loss and refinances the company.

Providing the company which takes over the smaller company, which is making a loss, carries on the legitimate trading of that company, carries on with its normal vocation, I believe that it should be possible to offset the loss against the profits of the acquiring company. Without this there will be no take-over of that smaller company. To answer the hon. Member for Gloucester (Mr. Diamond), the merger will not take place except on these terms. It is only this type of legitimate trading and the continuation of a legitimate trading company which I wish to protect. The first subsection of the Amendment seeks to do that.

The second subsection is to safeguard the revenue and the application of subsections (1) and (2), where the merger is a bona fide commercial transaction. It is a distinct issue from the questions normally considered for the purposes of Section 341 of the Income Tax Act, 1952. It is obviously bound to be a difficult decision to make whether a take-over bid is a bona fide business transaction not aimed at tax avoidance but at keeping in trade a company which otherwise would go under. I believe that a body such as the Commissioners of Inland Revenue, who are very wise and very experienced in this matter, is the right body to interpret it. If relief is still refused under Section 341 on the ground that the main purpose of the merger is tax avoidance, there ought to be an appeal in the normal way, as is the case if a tax claim is disallowed, where there is a right of appeal. In this case, too, I think there ought to be provision for an appeal to the Commissioners.

I hope, therefore, that my right hon. Friend the Chancellor will consider the purpose of the Amendment, which is quite seriously to help and further those companies which are trading, which have a legitimate business, which have fallen on evil days but which can continue to make a profit if somebody will take them over and take over their losses, too. They should be exempted from the present strictures on tax avoidance, which would apply to them under the Clause as drafted.

Mr. Houghton

The Amendment was the one to which I referred in the course of my remarks earlier. It seems to introduce a feature into the administration of the Income Tax which the Chancellor suggested would be repugnant to him—that of giving the Commissioners of Inland Revenue the power to sit in judgment on the motives of the taxpayer in embarking on certain transactions.

I quoted the words put into the Excess Profits Duty and the Excess Profits Levy legislation which achieved this purpose the other way round and gave the Commissioners the power to say that in their view a transaction was an artificial device which had for its purpose wholly or mainly tax avoidance. This seeks to provide that where the taxpayer can prove that he was innocent of any such intention and that he was genuinely undertaking this transaction in pursuance of a perfectly legitimate purpose the Commissioners shall exempt him from any penal effects of the Clause as drafted.

We on this side would not feel that that was an entirely undesirable procedure. It would enable other safeguards in our tax law to be introduced which would give the Commissioners of Inland Revenue power to judge motives, and it might enable some of the anti-avoidance Clauses to be more tightly drawn so that the innocent, on proving their innocence, would escape and the Inland Revenue would be the judges subject to the provisions of appeal to a higher authority. It is, however, a new feature of the administration of the Income Tax, and I am sure the Chancellor will approach it with considerable caution, to say the least of it. We shall be interested to hear what the Paymaster-General has to say about it.

Mr. Maudling

I do not want to enter into the question of the "main purpose" point, because our experience of legislation which refers to the main purpose of a transaction leads one to suppose that in practice it is not easy to interpret.

I suggest to my hon. Friend the Member for Sevenoaks (Mr. J. Rodgers), who moved the Amendment, that he has slightly misconceived the purpose of the Clause, which does not have the effect that he imagines. My hon. Friend was making the case for the position in which a company which is trading buys another company which has a loss and offsets that loss against its trading profits. There is nothing in the Clause to affect that position in any way. I can, therefore, set my hon. Friend's fears at rest. I agree with him that the question of acquiring companies with a loss and offsetting that loss against existing profits is an important feature, but the Clause does not affect that in any way.

The purpose of the Clause is a different one. It has its effect when the company that is doing the buying has a loss and the company which is bought has liquid assets and those liquid assets are then transferred to the buying company and the buying company claims against the loss which it is making the grossing-up of the tax on the dividend it receives from the company which it has bought. That is an entirely different operation. I assure my hon. Friend that the point he has in mind about the acquisition of companies which are making a loss—and it is a legitimate point—is not affected by the Clause.

It is, I agree, conceivable that the Clause might interfere with legitimate business dealing, but my hon. Friend will find that it is drafted to ensure that ordinary trading concerns which buy companies with liquid assets as a matter of legitimate and normal business are safeguarded, because the Clause contains the same safeguards as were in the original 1955 legislation on this subject.

There are two safeguards. First, any normal dividend paid by the company which is bought to the buying company within a year of the transfer is excused from scrutiny by the Inland Revenue. Secondly, dividends paid after the acquisition by the company that is bought to the buying company and which fall within the scope of the dividend-stripping legislation will not be caught except to the extent by which they exceed in the aggregate the whole of the profits made after the acquisition of the company which are available for such dividends. In other words, dividends paid by the acquired company to the acquiring company, as my hon. and learned Friend the Financial Secretary explained on an earlier Amendment, would not be caught by the Clause except in so far as they are dividends paid out of assets accumulated by the acquired company before the act of acquisition.

The whole point of this legislation is to prevent the payment of dividends out of those already existing reserves and the claiming of a tax refund of an artificial character on those reserves which had accumulated before the act of acquisition. My hon. Friend will find that the Clause is adequately designed to ensure that, where there is a legitimate acquisition by one company of another company with large cash assets, any dividends passing from the acquired company to the acquiring company in the normal way of business will not fall within the mischief of the Clause. The main point, however, to which my hon. Friend referred—the acquisition by a company making a profit of a company making an accrued loss—is not affected in any way by the Clause. The purpose which he has in mind is, therefore, achieved without the Amendment.

Sir Keith Joseph (Leeds, North-East)

I support my hon. Friend's main contention, and I am sure that he will be as glad as I am to hear my right hon. Friend's general acceptance of the intended thesis of this Amendment. What my right hon. Friend has said is extremely satisfactory. I would ask him only to make absolutely sure, before Report, that in this relatively uncharted field the legitimate transaction he has himself accepted as absolutely proper is sufficiently protected.

My right hon. Friend limited the exemption from the Clause to the situation in which the acquired company's dividend to the acquiring company did not transcend the post-acquisition profits made by the acquiring company. He went on to say what is a slightly different thing, it seems to me, that in that case the post-acquisition profits might be drawn from pre-acquisition assets.

What my hon. Friend and I want to be sure of is that where the acquired company has no or only very slender assets the profits made by the acquiring company in co-operation with the acquired company can be fully set off against pre-acquisition losses of the acquired company. If my right hon. Friend can give that assurance it will bring great relief. May I ask my right hon. Friend whether he will look at this whole matter once again before Report, so as to make absolutely certain that the assurances he has given us cover the whole legitimate field?

Mr. Maudling

It is my normal practice, after making a speech in Committee on a complicated subject, to ask those who advise us whether I was right or not, and in this case I will certainly ask them again.

Mr. H. Wilson

Will the right hon. Gentleman take account of the fact that there is a new Clause on the Notice Paper which, as it appears for the first time only today, he may not have had time to study? Will he, before Report, have a look at that to see whether it does not give effect more fairly than any other proposition put forward to discriminating between illegitimate transactions which the hon. Gentleman wants to kill and the legitimate company he has in mind?

Mr. Maudling

If it is on the Notice Paper I shall hardly be able to avoid looking at it before Report.

Mr. J. Rodgers

I am very grateful to my right hon. Friend for his assurance, but I hope that he will make assurance doubly sure and look at this matter again before Report. I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

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

Mr. Houghton

I should like to ask the Paymaster-General or the Financial Secretary a question about the Clause. Clause 16 is attempting to close loopholes in the closure of the loopholes. It is a postscript to Section 4 of the Finance (No. 2) Act, 1955. This Clause 17 is dealing with a different form of dividend stripping. The original check on dividend stripping was directed against the acquisition of shares bringing liquid assets by finance companies, charities, which might claim exemption and get repayment of the tax and superannuation funds.

This Clause deals with a trading company which buys shares bulging with pre-acquisition profits or liquid reserves and then disgorges the gains from the company acquired; and in certain circumstances the firm which is acquiring the company can regard these dividends as taxed income and get the benefit of the relief by setting them off against their losses.

10.15 p.m.

Was this form of dividend stripping known to the Chancellor of the Exchequer in October, 1955? Is this something new that has occurred since? Is this the answer of some people to the 1955 legislation, or was it something that was known but was regarded by the Chancellor at that stage as not worth providing for by special legislation? If so, one might ask whether the Chancellor had this and possibly other forms of tax avoidance in mind when he uttered the warning. This is a perfectly innocent inquiry. There is no malice aforethought at all. I am not attempting to revive the passions of an earlier debate on retrospective legislation.

The Inland Revenue, with all its sources of information on the latest tax dodge, and the Chancellor, who has his ear to the ground in Somerset House, must be constantly informed of new developments. It seems to be odd that this provision should be necessary in 1958 when we saw no signs of it in 1955, and yet it is not something which could be undertaken only subsequent to 1955. The risk of this happening was there before, and possibly the first signs of it existed then.

It seems to us that sometimes the Chancellor's advisers are giving him danger signals of fresh forms of tax avoidance and saying, "Mr. Chancellor, we are bound to tell you that this is happening. It is not serious yet, but there are signs that it is growing and you ought to take notice of it." The Chancellor may say, "I have quite enough in the Finance Bill this time to take all the parliamentary time that is available. It must wait." Or he may say, "Is it serious enough at this stage to justify the introduction of preventive legislation?" I do not know what goes on between the Chancellor and the Inland Revenue, never having been privy to that kind of discussion. It would be quite improper for me to attempt to say what I think the Inland Revenue is telling the Chancellor, but these are quite important inquiries. How does this work? Who does what and when?

When, in years gone by, devices which subsequently have been checked by legislation have appeared, the Chancellor sometimes has felt unable to take steps until it was quite plain that there was either a racket or a loss to the Revenue with which he must deal. I remember distinctly that in the years before the war there were bogus dispositions in favour of minors. They were widely canvassed by those in the trade. One could send two guineas to a firm which would send back a form of words. One had to tell a neighbour that he should also apply for the form because unless the neighbour was in it it did not work.

Both the first applicant and his neighbour had to undertake these covenants in respect of their respective children in some kind of connivance, so that when the time came when it was desired to abrogate them it could be done by mutual consent. It was that kind of thing which the Chancellor left far too long before he took step to deal with it.

Mr. Page

As far as I can recollect, that existed for only two years, back in the 1930s.

Mr. Houghton

Yes, but I believe, and I speak entirely from recollection, that by the time the Chancellor took steps to deal with it, close on 100,000 of these bogus dispositions had been received by the Inland Revenue. It may be only an indication of how that kind of avoidance spreads like a prairie fire, and maybe only one year was enough for such a device to gain wide currency.

I will now get back to the point I had made and the question I had asked, because that is the only purpose I have. It would be interesting to the Committee to hear a little of the inside story of Clause 17: how it got here, when it started, was it known when the Chancellor of the Exchequer uttered his warning, was it really this that the Chancellor was giving a warning about, have we misfired entirely by concentrating our debate on retrospection on Clause 16 and ought we to have directed our fire to the retrospective Amendment to Clause 17?

Mr. Maudling

The hon. Member is on an important point when he talks about the point at which Chancellors of the Exchequer act against tax avoidance, because there may well be circumstances where there is evidence of a small scale avoidance. To deal with that, however, there would have to be legislation of an irksome character affecting the entire business community of the country. Therefore, any Chancellor would hesitate to introduce that if the scale of the avoidance is small. So any Chancellor, in deciding to take action, must take into account not only the nature but the scale of the avoidance.

As regards this particular form of avoidance or tax device, this is one of the forms of dividend stripping which have grown up since the 1955 legislation and were not in the mind of the Chancellor of the Exchequer at the time of the passing of the 1955 legislation. That answers the principal point of fact which the hon. Gentleman asked.

On the question of how the Inland Revenue became aware of the development of anti-taxation devices, the hon. Gentleman is such a knowledgeable man in his sphere that he would not expect me to disclose, even if the Inland Revenue had told me, how it discovers these things, because the more one discloses how the Inland Revenue acquires information about tax avoidance the less are its chances of defeating it.

On the specific question, the answer is that this is one of the forms of dividend stripping which have emerged since the 1955 legislation.

Mr. Diamond

Before we leave this Clause, I hope the Paymaster-General can go a bit further and help us a little more. I am looking at the Second Reading speech of the Financial Secretary, and his words on dividend stripping are, if I may say so, much more knowledgeable and acceptable to this side of the Committee.

The Financial Secretary referred to these practices as avoidance tricks; that is, the practising of dividend stripping by a loss company of the kind referred to in this Clause are those who are concerned with avoidance tricks. The hon. and learned Gentleman said: Finally and this is where the most serious inroads are being made upon the Exchequer, dividend stripping has been practised on a large and increasing scale by companies with ordinary trade losses. He says farther down: …the income, as I hope I have made clew, is artificially contrived to milk the Exchequer."—[OFFICIAL REPORT, 12th May, 1958; Vol. 588, c. 42 and 44.] Those were straightforward, good, Anglo-Saxon words which we all understand and there was no such care in choosing his words as the Paymaster-General has shown. They show clearly where the Financial Secretary stands.

We are told that this was not known to the Chancellor of the Exchequer in the autumn of 1955, nearly three years ago. It is apparently known now and is creating serious inroads. It may not have been known to the Chancellor in 1955, but it was known then, and the point I am making is that here is a clear tax avoidance trick, to use the words of the Financial Secretary, making heavy inroads on the Exchequer, which was not known to the Chancellor in the autumn of 1955, has been widely practised ever since, and it is not until 1958 that it comes to the House of Commons and legislation is taken to deal with it. This is virtually a three-year lag in loss of Revenue as the result of something which the Financial Secretary called a trick, something which nobody in the Committee wants to support or even see.

What happens if the Clause does not prove satisfactory and further methods are found of overcoming its provisions? These actions are making heavy inroads, and they take three years to reach the official knowledge of the Chancellor and this Committee. What will the Chancellor do about it? Will he say that he will ensure that the intention of Parliament is carried out because we shall now have a Resolution and it will be a case of what Parliament decides and not merely of the Chancellor feeling entitled to run away from a number of leading Conservative Ministers and not carry out the obligations which they have previously undertaken.

Parliament will now decide against dividend stripping by means of the loss company, and various individuals will find ways of overcoming that. What will the Chancellor do about those methods of overcoming the present provisions during the next two or three years before he has been made fully cognisant of them and before he has decided that they have reached a sufficient volume for them to be dealt with publicly? We understand that as soon as one deals with them publicly one brings them to the attention of people who might not otherwise know about them. Therefore, the Chancellor, quite properly, cannot deal with the matter at his first suspicion that it is becoming a general practice.

This is another argument which supports the reason for the delay. We have suffered delay, and delay will arise again. We have Finance Bills every year, and we know that loopholes will be discovered. Having regard to the fact that this trick does nobody any good—not a single nut or bolt is produced—but merely takes something from the Revenue and adds it to the burden of the honest taxpayer, what will the Chancellor do in the future to ensure that effect is given to what we are about to determine?

Mr. H. Wilson

I am sure the Chancellor will agree that we have been extremely generous with him in curbing our natural feelings about dividend stripping and our natural oratory and eloquence to enable him to get this very contentious matter through in so short a time.

My hon. Friend the Member for Gloucester (Mr. Diamond) has made a very important point. While the present Government are in office we seem to get legislation of this kind every two and a half years. My hon. Friend has fairly asked the Treasury Bench what they intend to do about any new developments. In view of what has happened in the last two years we can have no confidence in their ability to tackle any of them, and despite our disappointing experiences over the past two or three years, we are entitled to ask the Chancellor to tell us that if new methods of tax avoidance on the lines mentioned by my hon. Friend are devised he will not hesitate in due course to recommend to whichever of his right hon. or hon. Friends becomes Chancellor next year—that is giving the right hon. Gentleman a very long run; we have had four Chancellors of the Exchequer in two and a half years—that legislation will be introduced immediately to deal with the problem, if necessary with retrospective effect.

Will the Chancellor give us that assurance tonight? We are entitled to ask for it. After all, the Lord Privy Seal four Chancellors ago—it is a long time in cancellarian time—gave that assurance, or authorised his junior Ministers to give it, with speed and alacrity. Our disappointment this afternoon was not at the inadequacy of the undertaking; it was at the failure to implement it. I hope that the Chancellor will give us the assurance that he will introduce legislation of the kind required, retrospective if necessary, but that he will think for a moment before he gives that assurance because we would like to know whether, in giving it, he will be sincere about recommending that it be implemented when the time comes.

Mr. Amory

I find no difficulty in giving the right hon. Gentleman the assurance that if there come to my notice in the future devices which are for tax avoidance or evasion of these types, and which seem to me to provide loopholes which should be closed, I shall bring forward amending legislation in due course. As to the form of that legislation, or whether it will be retrospective, I cannot anticipate my next three years' Budget statements.

10.30 p.m.

Mr. H. Wilson

That answer is extremely disappointing. I hope that the Chancellor will show a little more courage. After all, one could understand the Lord Privy Seal, two and a half years ago, being rather cautious about it because he may have foreseen that the right hon. Gentleman would be succeeding him, with two intermediate Chancellors and that any pledge given in the autumn of 1955 would not be fully carried out this year because the present Chancellor has not guts in this matter when he is attacked from behind him.

However, the right hon. Gentleman may be assured that by the time his promise comes to be implemented there will be a Chancellor from this side of the Committee, so I hope that he will think it possible to give an undertaking which will make certain that it will be carried out.

Mr. Stevens

Can the right hon. Gentleman give the Committee an assurance that the promise he has just made will be implemented?

Mr. Mitchison rose

Hon. Members


Mr. Mitchison

Can the right hon. Gentleman answer a point which does not involve any forecasts about his next one, two or three Budgets, if any? Does he still regard the undertaking given in 1955 as in force, or as discharged by breach? His right hon. and learned Friend the Solicitor-General will tell him that it is possible for an undertaking to be discharged by breach.

Mr. Amory

If the hon. and learned Gentleman is referring to the warnings given by the then Financial Secretary and the then Economic Secretary three years ago, I have already said that so far as those warnings are relevant to any question which arises in the future they will, no doubt, be one of the factors which I shall take into consideration when the time arrives at any stage during the next three, five or ten years.

Question put and agreed to.

Clause ordered to stand part of the Bill.