Clause 25.—(SALE OF SHARES IN INVEST-MENT COMPANY TO ASSOCIATED DEAL-ING COMPANY.) (Hansard, 5 July 1960)

§ The Solicitor-General
I beg to move. in page 22, line 27, to leave out "issued" and insert "acquired by the seller".
Would it be convenient, Mr. Blackburn, if with this Amendment we took that in line 30?

§ The Temporary Chairman (Mr. F. Blackburn)
Yes.

§ The Solicitor-General
Broadly speaking, Clause 25 applies where a person sells shares in his own investment company to his own dealing company. Instead of applying to sale of shares issued after the beginning of the year 1960–61, it will apply to sales of shares acquired after the beginning of that year.
The Amendment picks up a point which was made—

§ Mr. Diamond
Hear, hear.

§ The Solicitor-General
I am glad to acknowledge this. I hope that I acknowledged it in the case of the hon. Member for Glasgow, Craigton (Mr. Millen) on the last Amendment. I think that I did so. I certainly acknowledge it in the case of the hon. Member for Gloucester. (Mr. Diamond) on this Amendment. He pointed out a weakness in the Clause as drawn, although, as I said, it seemed to me that his suggestion to put it right went much too far in that it involved major retrospection.
The Amendment is necessary because, as the Clause stands, it would be possible for an operator wishing to practise the device at which the Clause is aimed to dodge it by buying up companies whose shares were issued before the beginning of the year 1960–61. The Amendment is designed to anticipate and prevent that device.

§ The Solicitor-General
I beg to move, in page 22, line 41, to leave out from "seller" to "and" in line 43, and to insert: so elects, up to the full amount of the said consideration reduced by the amount of the consideration (if any) paid for the shares or for the alteration of the rights". 318 Again, this picks up a point to which the hon. Member for Glasgow, Craigton (Mr. Millan) drew attention in Committee. The hon. Member and I had a rather sterile discussion in which I think that we were both right to some extent and both wrong to some extent. At any rate, it has been useful to be able to reflect on the point to which he drew attention and which I think the Amendment meets.
As I have said, Clause 25 deals with a person who sells shares in his own investment company to his own dealing company and provides that he is to he charged to tax on an amount equal to the profit which the investment company would have made if it had sold the underlying assets which the shares represent to the dealing company for the consideration which that company paid for the shares. In certain circumstances, that profit could be more than the difference between the amount which the seller paid for the shares in the investment company and the amount for which he sold them.
Perhaps it would be easiest to give an example. Suppose that the person who sells the shares had originally paid £10,000 for them but the underlying assets which that represented were worth only £9,000—in other words, he paid more because he anticipated the appreciation which would take place in the underlying assets and, therefore, in the value of his shares. Suppose that when he sells the underlying assets are worth £12,000 and he, therefore, sells for £12,000. The company's profit would be £3,000, but that is too much to charge him with 'because he has, in fact, made a profit of only £2,000 on the deal.
The way in which we have tried to deal with that problem is to give him an option to pay the tax on the £2,000, since he will exercise that option only where the profit which he has made is smaller than the profit which the company would have made if one looks to the underlying assets. That seems to me to meet the point which the hon. Gentleman made without falling into some of the difficulties which I pointed out at the time and which I have tried to put more clearly today.

§ Mr. Millan
One point arises when we consider the matter from the viewpoint of the associated dealing company 319 that is buying the shares. The transaction is a sale at an inflated price of shares in an investment company to an associated dealing company. The reason for bringing the sale and the profit on it into tax is that any difference between the true value of the shares and the inflated price can be shuffled off by the dealing company which buys the shares as a trading loss and as a deduction from the profits.
The way in which the Amendment will work is that it can be something less that is assessable from the point of view of the investment company than what is gained as a reduction in taxable profit on the part of the associated dealing company. To that extent, there is something to be said for my original proposal in Committee when compared with what the Government are doing now. Nevertheless, the amended Clause will be a considerable improvement on the Clause as it was before. Therefore, I am glad to support it. I would still have preferred, however, that my earlier suggestion had been accepted that all that was necessary was to omit the words which are now being omitted in subsection (2) and not to put anything in their place.

§ The Solicitor-General
I beg to move, in page 23, line 15, at the end to add: (5) References in subsection (1) or (4) of this section to the sale of shares to such a dealing company as is therein mentioned include references to the sale of the shares to a person not being such a dealing company in any case where the shares are subsequently acquired by such a dealing company in pursuance of arrangements for their eventual acquisition by it made not later than the sale to the said person, and in any such case the shares shall be deemed for the purposes of this section to have been sold to the said person for the consideration paid for them by the dealing company. The Amendment is designed to ensure that the Clause could not be dodged by arrangements for the sale of shares in an investment company to a dealing company through an intermediary. This picks up a point made to me in Committee by my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth), when I said that a transaction through a jobber at arm's length would not be caught by the Clause. I still think that that is right, and, of course, we are not concerned with that type of transaction.
320 The possibility remains, however, that arrangements might be made with an intermediary for a purchase and resale by him in such circumstances that it was not possible to establish that the intermediary's intervention was, to repeat the phrase I used before, merely colourable, and that the provisions of the Clause would thus be avoided. The new subsection (5) is designed to strike at that possibility of avoidance.

§ Mr. Diamond
Having regard to the acceptance of one of the Government Amendments, we are now in the position that instead of the whole of the difference of £3,000 quoted by the Solicitor-General in the price of the assets going free of tax, £2,000 is to be taxed and £1,000 goes free of tax. The Government are meeting my hon. Friend the Member for Glasgow, Craigton (Mr. Millan) up to a certain point. I am quoting the Solicitor-General's own figure to repeat the case in its simplest form.
On the figures given by the Government, they have met our point as to 66⅔ of the way. I do not know how one divides one point into one-third or two-thirds. Assuming that it is mathematically possible, the Government have met us two-thirds of the way. If, however, the figures were different, it might be seen that the Government were looking after the Revenue instead of meeting us.
We welcome the fact that the Government have to some extent met the point. We hope that if we continue to press it, they will concede the whole point. Bit by bit, we get there. Little by little we hope in time with patience to help the Government to do their job of protecting the Revenue. I have made the point sufficiently clearly. Had my hon. Friend's original Amendment been accepted, we would have caught the £3,000 to which the Solicitor-General has referred. As the Clause is amended, we catch £2,000 of it. I am all for catching the whole lot.

§ The Solicitor-General
This argument goes back to the Amendment which I moved earlier. The Committee must appreciate the reason for what we have 321 done. The fact remains that in the example I gave, the person who bought the shares in the investment company and sold them to his own dealing company made a profit of only £2,000 on those shares. It would be grossly unfair to tax him as if he had made £3,000. Thai is an example of what could well happen.
I gave a much more extreme case in the previous discussion, when I instanced a person who had subscribed £100,000 for shares in an investment company and who had later sold the shares to his own dealing company when there had been a capital appreciation of a few hundred pounds in the holding of the investment company. Such a person might find himself liable to tax, not only on the few hundred pounds, but on the £100,000. That could arise if the shares had been issued on special terms so that the £100,000 was a payment for an already existing capital appreciation in the hands of an investment company. That is an extreme case, but it marks a genuine point which we have tried to meet at the same time as meeting the perfectly valid point to which the hon. Member for Craigton (Mr. Millan) drew attention.