§ 6.15 p.m.
§ The Solicitor-General (Sir Harry Hylton-Foster)
I beg to move, in page 17, line 43, to leave out subsection (2) and to insert:(2) The foregoing subsection shall not apply if the first buyer—This is little more than a drafting Amendment. It seemed right to seek to define the scope of the exemption a little more closely. The persons exempted in subsection (2) are the discount houses and members of Stock Exchanges. The particular members of Stock Exchanges are lumped together in one category in the existing draft, that is to say, jobbers on the London Stock Exchange and dealers on provincial stock exchanges who are specially recognised by the committee of their exchange as carrying on the business in particular securities—for example, those quoted locally, but not elsewhere.
and the securities were bought in the ordinary course of his said business and, in the case of a dealer such as is mentioned in paragraph (c) of this subsection, were securities in which he was authorised by the said committee to deal.
- (a) is in the opinion of the Commissioners of Inland Revenue bona fide carrying on the business of a discount house in the United Kingdom, or
- (b) is a member of the London Stock Exchange who is recognised by the committee thereof as carrying on the business of a jobber, or
- (c) is a member of any other stock exchange in the United Kingdom who is recognised by the committee thereof as carrying on the business of a dealer,
For the sake of clarity the Amendment splits up the members of stock exchanges referred to. In the case of members on the London Stock Exchange those referred to are persons who deal, namely, the jobbers. The brokers are not included. That is made clear by paragraph (b). In the case of the provincial stock exchanges, the persons exempted are those who operate in a 1044 dual capacity, so to speak, in relation to certain securities. The terms of the Amendment make it plain in a convenient way that the exemption will be confined to those securities in which the dealers concerned are authorised to deal by the committee of their stock exchange.
§ Mr. Stevens
My right hon. and learned Friend has said that the Amendment seeks to define more clearly those who are legitimate dealers, and in the debate on Clause 18 my hon. and learned Friend said that the Government wished to avoid striking at legitimate dealers. That Clause specifies discount houses, and can refer only to the 12 officially recognised discount houses in the United Kingdom. It also refers to jobbers on the London Stock Exchange, and those recognised as dealers on other stock exchanges in the United Kingdom.
My hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) mentioned the case of the smaller banks, and I should like to know why my right hon. Friend the Chancellor decided to exclude them. Many of them have substantial foreign funds in their possession in this country. If they are affected by the Clause they will be able to offer only a low return, so that the foreign lender may be tempted to take his funds away from the country. That would do us serious hurt. What consideration was given to the position of those smaller banks, and why have they been excluded?
§ Mr. Simon
We have drafted the exemptions to the Clause to preserve what is strictly necessary for the proper functioning of the gilt-edged market. That can be restricted to the jobbers on the London Stock Exchange, the dealers in local securities on provincial stock exchanges, and the discount houses. There is nothing to prevent other institutions operating in the market. All we are saying is that they are not necessary to its functioning. If they wish to operate to buy cum-dividend and to sell ex-dividend there is nothing to prevent them, but if they do so we are providing that the dividend should rank against their taxable profit, so that they cannot, as a dealing concern, show a notional loss to set against their taxable profits in other ways.
1045 It is for that reason that we did not feel it possible to enlarge the scope of the Clause to bring in other sorts of dealing concerns. Once we brought any in it would be virtually impossible to draw the line. Therefore, we drew the line so as to include only those institutions which are necessary for the functioning of the gilt-edged market.
§ Mr. Edward du Cann (Taunton)
May I ask a question of my hon. and learned Friend? In replying to my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens), my hon. and learned Friend stressed that he is concerned with operations in the gilt-edged market. I take the point, which is tremendously important, and understand exactly what it is that he and my right hon. Friend the Chancellor are trying to do. But is it not the fact that these three categories of persons, discount houses, jobbers on the London Stock Exchange and dealers on any other stock exchange, could deal in securities other titan gilt-edged?
§ Mr. Simon
First, bond washing has been in gilt-edged. Secondly, the discount houses specialise in this respect in gilt-edged securities. The jobbers are those jobbers on the London Stock Exchange who are recognised as jobbers by the Committee of the London Stock Exchange and, presumably, there is no reason why the jobbers who job in other markets should not make a bargain in the gilt-edged market. But in so far as they do that, they help to provide the market and we think there is no reason, in fact it would be impossible, to try to differentiate.
§ Mr. Houghton
On behalf of my right hon. and hon. Friends, I think that I may say that we find the Amendment acceptable. The explanation convinces us. It makes for security, especially with regard to members of the London Stock Exchange.
§ Amendment agreed to.
§ Mr. du Cann
I beg to move, in page 18, line 4, at the end to insert:(3) If the first buyer is engaged in carrying on a trade which consists of or includes dealings in securities and if eitherThe short discussions that we have had in relation to these extremely complicated subjects have served to illustrate their complexity and difficulty and I suppose it is the general wish of the Committee not simply to contain bond washing and dividend stripping together or separately as the case may be, but to prevent them. At the same time, it has been clearly emphasised that it is also the wish of the Committee not to penalise persons engaged in legitimate trade, nor to curtail their activities in any way.
then subsection (1) of this section shall not apply.
- (a) the purchase is effected on a stock exchange in the United Kingdom and the subsequent sale is effected outside the United Kingdom; or
- (b) the purchase is effected on a stock exchange outside the United Kingdom and the subsequent sale is effected inside the United Kingdom; or
- (c) both the purchase and the subsequent sale are effected on stock exchanges which are situate in different countries outside the United Kingdom,
I wish to draw particular attention to the position of firms and persons who, in my submission, are benefiting this country, and, indeed, the economic framework of the City of London as a whole, by dealing as arbitrageurs in foreign securities and earning invisible assets for our country. Because it is not the intention to penalise persons engaged in legitimate business we have certain exemptions which my right hon. and learned Friend the Solicitor-General has been defining and explaining, and we have agreed that it is right and proper that there should be those exemptions.
Everyone knows that over a period of years the City of London has engaged in a vast volume of international trade, in bullion and foreign exchange, and now I suggest to the Committee that it is beginning to deal more and more in investments and securities. I think that the Committee would agree that investment is becoming an increasingly international matter. This has come about largely because of the growth of ideas like the European Common Market, and so on.
The main examples of this increased international interest in investment have been the inclusion of British Commonwealth and European securities in the portfolios of American mutual companies, the establishment of European investment trusts and so on. Indeed, one of our own great domestic companies, the Shell Company, went to 1047 Switzerland a short while ago to raise money because it was convenient to do so. I suggest that there are many securities, British securities among others, which enjoy an international as opposed to a purely national market. I also suggest that that tendency is likely to grow in the future and bring with it a large potential earning of foreign currency if we play our cards right in the City of London.
An arbitrager is rather like a jobber: he matches a buyer with a seller and he will buy and sell in different markets. As the Committee will understand, according to the habit or practice of different markets it is possible in securities to go ex-dividend in different markets at different times. The practice may vary in London, New York and Paris and so on, and as a matter of fact that is very often the case. It may therefore happen—it will probably happen more often in the field of arbitrage—that the arbitrager may easily buy cum-dividend and sell ex-dividend. There is nothing improper or wrong or immoral about that. The arbitrageur is carrying out his ordinary business in dealing in securities. It is incidental to his ordinary business.
The arbitrageur in foreign securities—when I talk about foreign securities I include, also, Commonwealth securities—has, to date, been allowed to take credit for the gross amount of the dividend as ordinary trading revenue. That is perfectly fair and legitimate and no one is suggesting that he has taken anything which he should not. Under the Bill as it stands, and particularly after having dealt with the Amendment moved by my right hon. and learned Friend the Solicitor-General, this kind of dealer, or the jobbers on the London Stock Exchange or dealers on any other stock exchange, may continue to carry on this ordinary trading operation if they wish, but no one else may. No merchant bank or broker on the London Stock Exchange may do so. I am unable to understand the reason for this difference and the Amendment which I am moving is designed to remove it.
Emphasising, again, the complexity of this matter—it is a complicated and difficult matter—I do not suggest that this Amendment is necessarily right, but I feel that it goes some way towards dealing with this problem. The Amend- 1048 ment suggests that if the first buyer is carrying on a trade in securities, which I think is the fundamental point, then if the purchase of the security is effected on a stock exchange in the United Kingdom and the sale is effected outside, or if the purchase is effected outside and the sale is effected inside the United Kingdom, or if the purchase and sale are both effected on stock exchanges in different countries outside the United Kingdom the arbitrageur should be given exemption from the general operation of this Clause, or the two Clauses together.
I wish to quote from the City notes which appeared in The Times on this subject, although I realise that at the moment it is rather a touchy matter to quote The Times in this Chamber. I am quoting from the issue of The Times of Thursday, 7th May where, in the City notes, it states:… on general grounds, it is difficult to reconcile a reduction in arbitrage business in London with the lines of official financial policy.I believe that to be true.
Everything the Government are seeking to do, and which I warmly support, is an endeavour to liberalise trade and trading activities between one country and another. We depend on trade more than any other country in the world. In the past we have grown great by our skill in international dealings. At the risk of wearying the Committee I would repeat that I believe that there is bound to be increasing international interest in and awareness of investment. It seems to me that to penalise the small number of people interested in this subject is to do the country in general a disservice.
My hon. Friend the Member for Walsall (Sir H. d'Avigdor-Goldsmid) said in his excellent speech that in his opinion it was the general view in the City of London that my right hon. Friend the Chancellor had got this Clause in the Bill just about right. That, I respectfully suggest, is not the case. People who are acting as arbitrageurs, in the sense that they are dealing internationally, are not doing wrong. We should do well to foster their activities and encourage them, rather than say, "You shall do no more of this work". I hope that the Financial Secretary to the Treasury will say that he will look at this matter again.
§ 6.30 p.m.
§ Mr. Simon
This Amendment covers to a great extent the same ground as the earlier Amendment moved by my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens). At the conclusion of the debate on that Amendment my hon. Friend was good enough to say that I had convinced him, and he withdrew the Amendment. I hope that I shall have the same success with my hon. Friend the Member for Taunton (Mr. du Cann). The point is precisely the same even though the Amendment is slightly differently phrased.
The Amendment would exempt the arbitrage business from the Clause. As my hon. Friend pointed out, arbitrage is perfectly legitimate. There is nothing improper, immoral or wrong in it. It merely consists of buying internationally-quoted securities in one market, where they stand at a discount, and selling them in another where they stand at a premium, and making a profit on the difference in rates. That operation performs a useful economic function in bringing the rates together and in providing a super-market—if that is not a specialist term these days—in securities.
The main idea is to make a profit on the exchange rates, which is perfectly possible in the ordinary "cum" and "ex" dealing that we have been talking about. To make a profit out of the tax by buying cum-dividend in, say, Zurich arid selling ex-dividend in England, resulting in artificial loss, is exactly the same thing as we have been discussing on Clause 18. The artificial loss is set against the exchange profit. Even though that sort of transaction has a commercial justification, the cum and ex artificial loss is, from our point of view, of exactly the same character as that which the whole Committee has agreed that we should strike at. It is using a fiction of the law to derive a tax advantage.
It is true that jobbers on the London Stock Exchange and authorised and approved discount-houses all may carry on arbitrage business in the ordinary course of their business. My hon. Friend is wrong when he goes on to say that nobody else may carry on arbitrage business. Nobody is prevented from carrying on arbitrage business at all. All we are doing is to say that when this fictional loss is incurred on 1050 the arbitrage business in the case of a purchase cum and a sale ex, that loss shall not be deductible from the taxable income.
Therefore, it is, in my respectful submission, necessary to keep the arbitrage business, except when it is carried on by the discount houses and the jobbers, within the ambit of the Clause. I may be asked why we should exempt the discount houses and the jobbers. This is a point which the Committee has discussed and approved of. It is because those institutions are necessary to provide a market. There is this further reason that, providing a market, they have to take up stock as it is offered to them and as often as they are buying cum and selling ex they are selling cum and buying ex. The losses and the gains even each other out. I would therefore ask my hon. Friend to follow the excellent example which I have mentioned and to ask leave to withdraw the Amendment.
§ Mr. du Cann
I know that my hon. and learned Friend is fair-minded and that he will look again at this argument. If he feels that it has validity perhaps he will bring it forward for the next stage of the Bill.
I accept the correction that he made. I did not mean that all arbitrage was stopped, but it cannot be right to say to one section of people, "All right. You can go on doing it in that way", and to another section, "I am sorry. You cannot do it in this way". That is discriminating against perfectly reasonable people and does not seem fair or right. It is a great pity that we should do anything to militate against foreign investment in this country when we are voraciously hungry for capital, as the Cohen Report has shown. Anything that we can do to encourage people to invest in the United Kingdom will be of advantage to our economy.
I regret any step in dealing with British securities that would have that effect but, bearing in mind that my hon. and learned Friend is fair-minded and will make further inquiry, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ The Solicitor-General
I beg to move, in page 18, line 11, at the end to add:(4) Subsection (1) of this section shall not apply if the interest is to any extent required 1051 to be brought into account under section four of the Finance (No. 2) Act, 1955, as if it were a trading receipt which had not borne tax, or would to any extent be so required to be brought into account but for the provisions of paragraph 2 of the Third Schedule to that Act (which exclude dividends at rates not unusually high payable on shares acquired during the preceding twelve months).The Amendment is required because there is a potential overlap between the legislation which the Committee is now considering and the anti-dividend-stripping legislation that we put on the Statute Book in 1955 and have extended since. If we did not have a provision such as this we might be subjecting the sinner to a double imposition in respect of his activity, to a double adjustment of his tax. It is not desired to produce that result.
It would happen, because one transaction caught by the 1955 dividend-stripping legislation would produce the tax result that the net result of dividend stripping would be brought into account as a trading receipt which had not borne tax by virtue of that legislation, and the very same transaction caught by Clause 19 of the Bill would have to have the purchase price of the securities which had been bought diminished by the pre-acquisition element of interest, for tax purposes; that is to say, a kind of double adjustment of one transaction under different heads, different anti-taxavoidance laws.
The Amendment gets rid of that difficulty. If the Committee will look at the words totrading receipt which had not borne tax",they will see that the first part of the proposed new subsection prevents the Clause biting in the case where the interest has already been caught under the 1955 legislation. The words that remain are there for a different reason. The buying up of shares may be a totally legitimate transaction in every way. When we were dealing with dividend stripping we did so on the basis, broadly, of treating the dividend, being tested, as though it were paid out of post-acquisition profits in so far as there were post-acquisition profits out of which it could have been paid.
The Committee will recall that there was a further exemption, so to speak, a further excuse. It works by express terms in relation to a dividend paid 1052 within one year and the conditions were, either, that the dividend should not materially exceed the annual rate of dividend on the shares in the three years before acquisition, or, if the shares were held by an issuing house in the ordinary course of its business, the dividend, though showing an increase over the annual rate of three previous years, is no more than a reasonable return on the working capital which the issuing house laid out on the purchase of the shares.
We put that in, so the Committee might remember—everyone in the Committee, not excepting the hon. Member for Gloucester (Mr. Diamond)—from the provisions of paragraph 2 of the Third Schedule in the 1955 Act. Clearly, there should be, one would think, parallel exemptions in relation to this legislation and for that reason the latter half of the proposed new subsection is where it is.
I hope that it will not be suggested that we are running some abnormal risk in this matter or enlarging the let-out too much because the dividend-stripping legislation applies to company shares. As the Committee knows, such specimens as we have encountered of this particular kind of bond washing—that is to say, the kind that the hon. Member for Gloucester says is not bond washing, but he will know what I mean—apply only, of course, to gilt-edged securities.
§ Mr. Diamond
I say straight away that I welcome this Amendment. I decided before I heard the right hon. and learned Gentleman that it was a good Amendment. Having followed everything he said most carefully, I could not think of anything he said sufficiently well to make me alter my views.
A number of colleagues in my profession, including the hon. Member for Portsmouth, Langstone (Mr. Stevens), to whom this appearance of double taxation came to mind, are interested in this matter. The hon. Member put forward an Amendment very similar to this and no doubt it prompted this one. I welcome it as further evidence of the fact that the Government realise that what they were talking of from the beginning was dividend stripping. If they had looked at the provisions straight away when drafting the Bill, this Amendment could have been made straight away.
§ Mr. Stevens
I must say that I have had more success with those of my Amendments which have not been selected than with those which have been selected and on which I have been smitten hip and thigh by both Front Benches. As Amendment No. 57 comes before Amendment No. 31 on the Notice Paper, and as my intention was the same as that of the Chancellor of the Exchequer, there is no difficulty in seeing which came first, the chicken or the egg. I thank my right hon. and learned Friend for expressing this matter in better language than I could have used.
§ The Solicitor-General
It was only because the Committee was groaning at the length of my observations that I, unhappily, forgot to thank my hon. Friend in this instance.
§ Amendment agreed to.
§ Clause, as amended, ordered to stand part of the Bill.
§ Clause 20 ordered to stand part of the Bill.