HC Deb 07 July 1959 vol 608 cc1281-7
Mr. Simon

I beg to move, in page 19, line 3, at the end to insert: (5) Subsection (1) of this section shall not apply if the securities are overseas securities bought by the first buyer on a stock exchange outside the United Kingdom in the ordinary course of his trade as a dealer in securities and the following conditions are satisfied, namely—

  1. (a) the interest is brought into account in computing for the purposes of the Income Tax Acts the profits arising from or less sustained in the trade;
  2. (b) the first buyer has not claimed, and undertakes not to claim, any relief available to him in respect of the interest under section two hundred and one of the Income Tax Act, 1952 (relief from tax on dividends from overseas companies who have paid United Kingdom income tax); and
  3. (c) where credit against income tax or profits tax would fall to be allowed in respect of the interest under section three hundred and forty-seven or three hundred and forty-eight of the Income Tax Act, 1952 (double taxation relief), the first buyer elects that credit shall not be so allowed.
In this subsection "overseas securities" means securities of the government of, or of a body of persons resident in, any country or territory outside the United Kingdom and the Republic of Ireland. Clause 20 is the second of the Clauses which deal with bond washing. It is the one which relates to dealers in securities. The House will remember that, in Committee, the position of the arbitrageur was raised, and in reply, I think, to my hon. Friend the Member for Taunton (Mr. du Cann) I undertook to look further into the matter to make sure that, while making certain that we were not opening any door to a recrudescence of bond washing, we did not, consistent with that purpose, stop any legitimate business of any sort, including the business of dealing in internationally quoted stocks in more than one market. I subsequently had the advantage of representations, both by letter and by interview, from my hon. Friend the Member for Taunton and I am grateful for his help in the matter.

11.30 p.m.

In the result, my right hon. Friend has put down the Amendment, which, subject to fairly stringent safeguards, provides for the position of dealers who undertake the type of business of arbitrage that we discussed in Committee, and ensures that their business is not interfered with further than is necessary to prevent bond washing.

The Amendment gives a conditional exemption from the Clause for arbitrage deals in overseas securities. The limitations which it is necessary to impose are, first, that the cum dividend purchase, which was the first step in the deal, took place on an overseas stock exchange and, secondly, that the dividend obtained in the course of the deal is not made the subject of a claim for any sort of double taxation relief.

Paragraphs (b) and (c) of the Amendment deal with the two sorts of double taxation relief which might be claimed, paragraph (b) relating to a rather specialised type and paragraph (c) to the ordinary type. In paragraph (a), the interest on the dividend must be brought into account in the dealer's accounts for the purpose of assessing his profits to tax. The other limitations are that the deal must take place on a foreign stock exchange and in the ordinary course of the dealer's business as a dealer in securities.

I am ready to explain the matter further if the House should wish, but I hope that my hon. Friend the Member for Taunton and the House will feel that we have gone a considerable way to meet my hon. Friend's representations while, at the same time, making sure that the avenue was not open to renewed bond washing.

Mr. du Cann

I should like to thank my hon. and learned Friend, and, indeed, my right hon. Friend the Chancellor of the Exchequer, for recognising that there was substance in the earlier complaint made in Committee to the effect that those engaged in the legitimate business of arbitrage in securities were being unfairly treated—indeed, to some extent penalised—by the Clause as originally drafted. As my hon. and learned Friend said, the Amendment goes some way to meeting the objections that were quite rightly made at that time.

On the other hand, however, it is clear that those people who are engaged in arbitrage in securities will still be penalised to some extent by comparison with their overseas competitors, even though the Clause is being amended. That is doubly hard, for they are innocent people. There is no suggestion that they are bond washers. Indeed, they are positively virtuous in the sense that they are active in earning foreign currency for the country. It is true that not many firms are affected. Perhaps, if more were affected, we might have heard more on this subject. That does not, however, mitigate the hardship upon those concerned.

If, as I hope, the House accepts the Amendment, the Clause will have been twice amended. I am sorry that my right hon. Friend the Chancellor cannot go further, helpful though the Amendment is, because I still think that the Clause, even when amended, will have some restrictive effect on arbitrage in securities in the City of London. I know that that is not intended, but I feel certain that that is what is bound to happen.

I should like, very quickly, to give two examples of what I believe are the obvious defects of the Clause as amended. First, although there is the exemption for discount houses, jobbers and country brokers, there is no exemption for merchant bankers and brokers. They are the people who actually go out and get the business. On the face of it that seems somewhat unfair.

Secondly, I would like to refer particularly to the words on a stock exchange outside the United Kingdom. The fact is that much dealing in other parts of the world is not done on stock exchanges as we understand them in the United Kingdom. That is so on the Continent of Europe where, for example, if one wishes to deal in securities, one may go direct to the banks or institutions concerned rather than through a normal, orthodox stock exchange because they, as we understand them, do not exist.

There is nothing wrong with these markets and nothing improper, but they are not stock exchanges as we understand them. This is particularly so in the United States, where there is an over-the-counter market which deals in United States banking and insurance shares and even in Commonwealth stocks and foreign bonds.

What, in effect, the Clause will mean if unamended is that this sort of market is excluded from ordinary consideration. I suggest that that is not entirely reasonable, particularly when one bears in mind that the Bank of England recognises markets of this sort from the point of view of exchange control.

I have an Amendment on the Notice Paper which I had hoped would rectify this position. It was not for discussion this evening. Indeed, I would be out of order in discussing it further, but I would like to ask my hon. and learned Friend this question. What does it matter whether these securities are bought on a stock exchange or on a market of the sort I have described? I suggest that it does not matter at all. I hope very much that my hon. and learned Friend will either be able to tell me that the kind of market I have described is covered by the words on a stock exchange outside the United Kingdom or, alternatively, that he will watch the position as time goes on with a view to introducing amending legislation in next year's Finance Bill should that be found to be necessary.

Mr. Mitchison

Apparently there is no satisfying an arbitrager. I understand that he is an innocent person who never fails to make a profit in foreign currency. When he is introduced to the harsh machinery of Parliament he must really feel quite out of place. He would, perhaps, be happier in Taunton, or London, as the case may be.

I am bound to say that this sort of discussion frightens me a little. If distinctions of this kind are really as important as they appear to be and if we are dealing in such a nebulous atmosphere of what is and what is not legitimate and illegitimate, ought it not, perhaps, to be left to the sober opinion of those engaged in making profits out of the transactions?

This kind of thing makes me feel more and more the difficulty of drafting Clauses which will really meet the mischief aimed at without interfering with what general public opinion, as distinct from technical opinion, would consider to be proper trading and dealing. I am not going back on all that at this late hour. I really do not understand what is meant by "overseas securities." They are an integral part of the Clause, and, so far as they are securities of a foreign Government, I understand what is meant.

But what is meant by securities … of a body of persons resident in a foreign country? I suppose that a foreign company is a person, as it always is for Income Tax purposes, but a foreign partnership I do not know. What really is meant by a body of persons resident in a foreign country? Why should it always have to be "persons" in the plural? It appears to exclude a company, on the one hand; it appears to exclude any sort of entity of any kind. I cannot see what kind of thing it is.

I am not an expert in arbitrage. Why is it that this peculiar phrase is used, and what, in plain English, are the Government talking about when they put it in? I wonder whether the hon. and learned Gentleman can explain to us the meaning of this definition and, as I am sure he will, its complete sufficiency for the purpose he has in mind.

Mr. Simon

Perhaps I may speak again with the permission of the House?

My hon. Friend the Member for Taunton (Mr. du Cann) asked me two questions about, or rather, levelled two criticisms against, this Amendment. In the first place, he said that although the Amendment exempts jobbers it does not exempt merchant bankers or brokers. With very great respect to him, I do not think that he is right in that respect. It is perfectly true that, in so far as the domestic activities of the merchant bankers and brokers are concerned, they are caught by the Clause, but there is nothing to prevent them taking advantage of this Amendment in so far as they are dealing in securities in the ordinary course of their buying them on a stock exchange outside the United Kingdom. So that merchant bankers and brokers are within the Amendment.

My hon. Friend then asked me, why do we have the phrase "on a stock exchange"? I think that the first answer to that is that those words occurred in my hon. Friend's Amendment in Committee. So perhaps it was rather natural for us to think that that was the real mischief at which he was aiming. But I think it goes a bit further than that. The activity must be in a recognised and authorised and regulated market to ensure that the transaction is a genuine one and not a colourable one, say, between an English dealer and an agent or partner abroad.

I will consider carefully the case my hon. Friend mentioned of the rather irregular market which seems to exist in the United States and Canada, and if there is legitimate business in the sense that we have been discussing which would suffer from this Clause as drawn at the moment, and which should be exempted, we will consider the matter sympathetically before the next Finance Bill.

The hon. and learned Gentleman the Member for Kettering (Mr. Mitchison) asked me about the definition of "overseas securities." It means securities of the government of, or of a body of persons resident in, any country or territory outside the United Kingdom. That means a company or another body whose head office and seat and directing power is abroad. I understand that that is statutorily defined. The words are a statutory phrase which is defined in Section 526 (1) of the Income Tax Act, 1952.

Mr. Mitchison

May I ask the hon. and learned Gentleman which is resident somewhere else outside the United Kingdom? Is it the body or the persons?

Mr. Simon

No. The test is that the head seat and directing power is outside the United Kingdom, and I think that it is a question of fact, if necessary for the courts in any particular case.

Amendment agreed to.