§ 11.45 p.m.
§ Mr. du Cann
I beg to move, in page 19, line 17, to leave out "in the Republic of Ireland" and to insert "outside the United Kingdom."
As I suggested on another occasion, Clause 21 is a gain, in the sense that we hope that it will lead to the prevention of bond washing, but it is clear that businesses in London dealing in overseas securities, including Commonwealth stock, will be restricted if the Clause stands unamended. The Clause is a net aimed at those entitled under any enactment to an exemption from Income Tax. We are all agreed that that is important, but many people in the City think, and hon. Members may think, too, that the net is cast very wide in the sense that it is bound to catch the innocent as well as the guilty.
I refer to the position of bankers, brokers and all other agents acting on behalf of non-United Kingdom residents in the purchase and sale of overseas securities, including Commonwealth registered companies, and including foreign bonds, in London. I include agents responsible for the collection of dividends in respect of securities held in safe custody in the United Kingdom for customers resident abroad. These are wide-ranging categories and hon. Members may think them important. London is a growing market in overseas securities, a development which is to be warmly welcomed. It is becoming again the financial centre of the world and an important source of earning of foreign currency.
I should like to give an example of what in my judgment, and as I am advised, will happen if the Clause is unamended. Suppose a dealer in Paris instructs London brokers to buy stock of an overseas company, for example, a gold-mining share, cum-dividend in London. If, before the stock has been registered in his name, and within a month, he sells the stock, and then ex-dividend, the operation of Sections 120 and 190 of the Finance Act, 1952, 1288 which otherwise would give him the opportunity to reclaim tax, would be excluded by the Clause. Therefore, the dealer in Paris—and this would apply to any dealer in any other centre—would be unable to reclaim tax which the British Government would have collected and to which the British Government would not have been entitled.
In effect, therefore, as the Clause stands, a foreigner who decides in future to buy an overseas stock in the United Kingdom cum-dividend may not sell for a month unless he is prepared to suffer United Kingdom tax to which he is not liable on the dividend due to him. It needs also to be emphasised that one never knows whether physical delivery will take place cum or ex-dividend, as there are often delays in registering stock. The foreign buyer will certainly not appreciate, as we do, the Chancellor's motives in endeavouring to avoid bond washing.
Nor, I imagine, will he sympathise with my right hon. Friend. As hon. Members can probably imagine, what will happen will be that he will say, "In future I will deal elsewhere if I am liable to tax in this way", because there is a great deal of competition in this kind of business in securities in the European Common Market, in New York, and in Johannesburg where none of these restraints apply.
These deals have nothing whatever to do with bond washing. I do not believe that the ramifications of the Clause, unamended, are even now understood and I should like to ask my hon. and learned Friend a question on this important subject. What will happen if a British holder of overseas stock, which includes Commonwealth stock, sells it cum-dividend to a non-resident of the United Kingdom, assuming that the buyer sells it within a month and it becomes ex-dividend during that time? The buyer will suffer British Income Tax which he will be unable to reclaim.
It may well be that he will attempt to reclaim the tax from the British holder, that is to say, he will look to the British holder to supply him with the gross dividend. The British holder, of course, will have had not the gross dividend but the net dividend. I wonder what will happen if perfectly respectable people, institutions and pensions funds, and so 1289 on, sell some of these overseas securities and find themselves liable for a claim for gross dividend of that sort.
The Amendment would not involve tax evasion. As the law stands, any attempt made on behalf of a non-United Kingdom resident to bear payment of dividend or interest without deduction of United Kingdom tax must be accompanied by a declaration giving the name of the beneficial owner of the dividend or interest. Therefore, unless a false declaration is made, under present legislation it is impossible for a non-resident to be given as a nominee of a resident in the United Kingdom from the point of view of tax avoidance, so that the Amendment could not affect the Inland Revenue at that stage.
In an excellent article in the Financial Times, a few days ago, Mr. Harold Wincott said this:The bath water involved in bond washing is pretty dirty water. But that is no reason for killing the virtuous baby which is in the bath only by accident.If my hon. and learned Friend finds himself unable to accept the Amendment, I hope that he will undertake to watch the situation closely with a view to introducing amending legislation next year if it proves to be a fact, as I fear it may be, that we in Britain are losing business because of the operation of this Clause.
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)
I beg to second the Amendment.
My hon. Friend the Member for Taunton (Mr. du Cann) made an exceptionally clear speech and I do not wish to add any more, save to say that he rightly said that in an endeavour to snare the guilty one might accidentally embrace the innocent as well. Without the Amendment, the Clause does just that.
Although London is no longer the financial centre of the world, it is certainly the financial centre of the sterling area and is a very important part of the international trade and commerce of the world. I believe that in trying to ensnare the dirty water of the bond washers we have gone rather too far with the Clause and that we shall damage the international position of London. I very much hope that my right hon. Friend 1290 will consider the Amendment very carefully indeed.
§ Mr. Simon
The effect of the Amendment would be to put any non-resident person beyond the reach of the Clause which relates to the bond washing by cum and ex transactions in securities. This is the Clause relating to exempt institutions or persons. We have excluded only residents in the Irish Republic, because the tax law of the Republic of Ireland will contain bond washing provisions precisely corresponding to those which we have made in this year's Finance Bill. Therefore, in any event those residents will be covered by Irish legislation.
If we extend exemption beyond that, to other foreign residents, we open the Clause wide to bond washing possibilities. It is quite true that London is an important international exchange. It is very true that we do not want to do anything to interfere with that, provided that it does not open the way to abuses of our tax laws by foreign residents—and more than we wish to see it done through the bond washing operations of our own nationals.
If the foreign purchaser is a bona fide investor and holds the security for more than a month, Clause 21 does not bite and is, therefore, not likely to be a disincentive to his buying in London. If, however, he does not hold the security for a month, unless we bring him within the ambit of the Clause he can carry on precisely the sort of transactions at which we are aiming in the Clause; in other words, being an exempt person, buying a dividend, and, therefore, buying a tax exemption and a tax claim against the Exchequer. It seems to me that it would be just as mischievous to have a foreign resident who can make a business of buying up dividends, in effect, with the object of reclaiming the tax on them from the Exchequer as to have that happening in the case of any exempt institution or person resident in this country.
My hon. Friend said that the Amendment would not involve tax evasion. That seems to me in itself tax evasion. But one must also bear in mind that the foreign resident would be likely to be buying from a resident in the United Kingdom, and it would be possible for that person to have held the security for the bulk of the six months' period during which the dividend was accruing, only 1291 to sell it a few days before the stock went ex-dividend. In that case, it would be quite open for a Surtax payer in this country to sell the stock cum-dividend to a foreign resident and then to buy back a similar stock after that stock had gone ex-dividend.
The effect of that would be that he would get rid of the dividend on which he would be liable to pay a high rate of taxation, which would not be of much interest to him, but he would have made a capital profit by selling higher cum-dividend and buying back at a lower price ex-dividend, and that capital profit would not be taxable. Therefore, it seems to me that on that side, too, the Amendment would leave the way open for tax evasion.
Even in the case of a foreign resident who wants or needs to hold the stock for only a very short time, there is still a considerable incentive to buy in the United Kingdom rather than abroad. That is for a reason which my hon. Friend gave, that the cum-dividend price of an overseas security on the London Stock Exchange reflects the net dividend after deducting United Kingdom tax at the standard rate because the market price is made, by and large, by residents in the United Kingdom who are subject to United Kingdom tax; and, therefore, the foreign investor has still an incentive, it seems to me, to buy in this country as he will be buying more cheaply.
For those reasons, it seems to me that the Amendment is unacceptable, and I would ask my hon. Friend to withdraw it.
§ Mr. Mitchison
I congratulate the Financial Secretary upon his lucidity. In view of our satisfactory agreement with the Republic of Ireland, I stand convinced of the necessity to bite the dirty bath water.
§ Mr. du Cann
It seems to me that what my hon. and learned Friend has said serves well to emphasise the complexity of these matters. I would respectfully join issue with him on one or two of the things that he said. In particular, he said that there must be evasion of British tax. I do not see how there could be evasion of British tax—
§ Mr. Speaker
Order. The hon. Gentleman is not entitled to make a second 1292 speech on the matter. I thought that he was rising to ask leave to withdraw the Amendment. If not, I must proceed to put the Question.
§ Mr. du Cann
I was rising to do that, Mr. Speaker, but I was so carried away with the importance of the matter that I was about to make one or two points. I apologise to you and the House.
In view of what the Financial Secretary has said, I beg to ask leave to withdraw the Amendment. At the same time, I would ask my hon. and learned Friend to watch the situation very carefully, for it does require watching.
§ Amendment, by leave, withdrawn