§ Paragraph (c) of subsection (1) of section thirty-five of the Finance Act, 1947, shall be amended by the insertion after the word "period" in the third line the words "but before the first day of April, nineteen hundred and fifty-eight".—[Mr. Stevens.]
§ Brought up, and read the First time.
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)
I beg to move, That the Clause be read a Second time.
The Report of the Royal Commission on Taxation of Profits and Income has been quoted on a number of occasions and I make no apology for quoting it again. One of the recommendations of the Commission was that the two rates of Profits Tax should be amalgamated, in other words, that there should be the same rate of tax payable on profits which were distributed as on profits which were not. When my right hon. Friend the Chancellor of the Exchequer announced in his Budget statement last year that he had put an end to the two different rates of tax, most people thought that he meant what he said, but subsequent experience, in a limited number of cases but on an important number of occasions, seems to have indicated that what he said was not wholly true. In the case, for example, of a company which had ceased to trade before 31st March, 1958, but made a distribution subsequent to that date, the distribution was liable, or we seem to have found that it was liable, to Profits Tax at the higher rate.
It is a fact that for a certain number of years, certainly ever since the Royal Commission presented its Report, a good many companies which were wholly-owned subsidiaries of a parent company have not been put into liquidation because those who were directing the fortunes of those companies realised that at some time in the future a Chancellor of the Exchequer would implement the recommendations of the Royal Commission and marry the two rates of Profits Tax. Having heard what the Chancellor had to say last year, having heard what the Financial Secretary had to say in the course of the Committee stage, and having understood that the two rates of Profits Tax had been amalgamated, they proceeded to rationalise their financial 178 set-up, to liquidate the subsidiary and to distribute the proceeds, only to find that they were liable to a distribution charge.
No question of trickery arises, because in the case of a 100 per cent. subsidiary company the assets were available to the principal company in any case, but the situation is really one of those which sometimes make one feel that the law is an ass. If no distribution were made after 31st March, 1958, and the company, which may have been dormant, which may have ceased trading for some years, starts up a new trade or business, it is beyond question—[Interruption.]
I am delighted to find the "Shadow Chancellor", the right hon. Member for Huyton (Mr. H. Wilson), so very interested in matters of finance. It gives one real hope about the future of the country in the hands of a Chancellor who is so interested in financial matters that he carries on a domestic conversation during an interesting debate. But that is by the way.
Mr. H. Wilson
If the hon. Gentleman will forgive me, I am very concerned, as I am sure all Members in the Committee are, that some of the new Clauses are fully and adequately debated. It takes a little consideration and organisation, after so many hon. Members with a very real interest in the last Clause have spoken, to ensure that some of the important new Clauses in the names of hon. Members on this side of the Committee are also adequately debated.
§ Mr. Stevens
As a relatively new Member of the Committee, I must, of course, yield to the right hon. Gentleman and his knowledge of procedure. It occurs to me, as a relatively new Member, that matters of that kind are better discussed off the Floor of the House rather than in the middle of a debate, but the right hon. Gentleman knows more about manners and things of that sort than I do. I readily yield to him in that respect. Surely I could not be more generous than that.
As I have said, the position is rather ridiculous, because a remedy exists. If a company, though it has been dormant and has ceased to trade for some years, starts up a new trade or business sub- 179 sequent to 31st March, 1958—a trade or business which may have no relationship whatever with the trade or business which it previously carried on—and has then a chargeable accounting period ending wholly after 31st March, 1958, and then goes into liquidation, it can make a distribution at the present single rate of 10 per cent. without any distribution charge being involved. The situation seems to me to be ridiculous and anomalous.
My Clause seeks to give effect to what I think most people thought were the Chancellor's intentions, to have a flat rate of Profits Tax and to put an end to the distribution charge as from 31st March, 1958. The Clause seeks to clear up that situation, which I think was unwittingly created, and I hope that it will prove to be acceptable to the Government.
§ 10.45 p.m.
§ Mr. Erroll
Despite the persuasive way in which my hon. Friend has introduced his new Clause, the fact is that in last year's Finance Bill it was made clear that liabilities in respect of past chargeable accounting periods would not be affected although the provisions relating to the differential scheme were repealed. Moreover, Section 27 (1, b) of the Act expressly extended the time limit for the making of assessments in respect of distributions in cases where trading had ceased before that date.
I think my hon. Friend will agree that on the merits of the proposal surely the line drawn in 1958 is the right one. If a company ceased to carry on a trade or business before 1st April, 1958, so that it never had any trading profits which were chargeable to Profits Tax at the flat rate, there does not appear to be any good reason why it should be given the benefits which flowed from the introduction of the flat rate. Trading ceased and perhaps liquidation was begun in the full expectation that tax at the higher rate would be payable on any subsequent distribution of past profits, and it would be giving an uncovenanted benefit to the company to give this tax up.
It is possible to say that perhaps immediately before the introduction of the flat rate all companies expected that sooner or later some such provision 180 would be introduced, and it is wrong that somecompanies should be relieved of this retrospective liability just because they continued trading after 31st March, 1958, while those which had ceased trading do not share this benefit. On the other hand, companies which finally ceased trading on 1st April, 1958, were never subject to the flat rate of Profits Tax, and it seems right that they should be all treated alike, whether they completed their distributions before or after that date.
I should like to explain to my hon. Friend that it is possible for a company which ceased trading before 1st April, 1958, and did not go into liquidation, to escape the liability to Profits Tax on the higher rate on subsequent distributions if it resumes trading. My hon. Friend suggested that this might give rise to anomalies. I do not think so. It is quite fair that if the company resumes trading it should be able to distribute at the new flat rate in the period now when the flat rate of Profits Tax is properly attracted to the profits so earned.
If the law were now amended on the lines which my hon. Friend suggests, and distributions made after the end of March, 1958, by companies which had ceased to carry on a trade or business before that date were relieved of Profits Tax at the higher rate, a number of cases which have been settled since March, 1958, would have to be reopened. Moreover, tax would be given up in cases in which the distribution of the companies' accumulated profits has been delayed until after 31st March, 1958, only by reason of a dispute about the tax liability, and these companies would secure a benefit. But some of these companies have been guilty of tax avoidance, including dividend stripping, and it would be unjustifiable to give these companies yet a further benefit which they might undoubtedly secure through the acceptance of this proposed new Clause.
I hope, therefore, in view of this explanation, which I hope my hon. Friend will agree is fair, he will withdraw the Clause.
§ Mr. Stevens
I still think an anomalous position exists in respect of a certain number of companies, but I see the difficulty, not least in respect of those 181 companies where the liabilities have been agreed. For that reason, I beg to ask leave to withdraw the Clause.
§ Motion and Clause, by leave, withdrawn.
Mr. H. Wilson
On a point of order, Mr. Blackburn. I think it would probably be for the convenience of the Committee at this stage were I to say that, after consultation with my hon. Friends whose names appear on the Notice Paper—and after having had a brief consultation, I might add, with the hon. Member for Huddersfield, West (Mr. Wade)—we do not now propose to move the new Clause entitled "Reduction of rate of profits tax in certain cases." In saying that, perhaps I might express the hope, on behalf of my hon. Friends, that it will be favourably looked at on Report, should we put it down.
§ The Temporary Chairman (Mr. F. Blackburn)
That is a matter for Mr. Speaker. I understand that permission has been given for a Division on the new Clause "Additional personal relief for widowed householders."