§ The Solicitor-GeneralI beg to move, in page 15, line 1, after "that", to insert "the value of".
Would it also be convenient to take with this Amendment the next Amendment in line 4, Sir?
§ Mr. SpeakerYes, if the House so pleases.
§ The Solicitor-GeneralIt is indeed consequential on the Amendment which I am moving.
Subsection (1, b) brings within the Clause sales of shares of a company carrying on a trade if the trade is such that any one object forming part of the company's trading stock forms a substantial part of its assets. My hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) in Committee drew attention to the practical inconvenience of a test of this sort which might provide a very fruitful source of litigation, and urged that we should introduce a platform instead of the phrase "a substantial part".
The purpose of the Amendments is to substitute as a test the provision that the value of any one object forming part of the company's trading stock should amount to one-fifth or more of the value of its assets. The point was discussed in connection with Clause 21 on recommittal yesterday when the Committee approved of this change, and I commend it to the House in respect of this Clause.
§ 7.45 p.m.
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)Once again I have the pleasure and privilege of thanking my 540 hon. and learned Friend for accepting a suggestion which I made seeking to clarify the English language and thereby presumably reducing the potential livelihood of his brothers in law. I am grateful to him.
§ Mr. MitchisonI would only say that it is comparatively rare for an hon. Member to be able to thank the Government twice for one suggestion.
§ Amendment agreed to.
§
Further Amendment made: In page 15, line 4, leave out "forms a substantial part of the" and insert:
amounts to one-fifth or more of the value of the net".—[The Solicitor-General.]
§ The Solicitor-GeneralI beg to move, in page 15, line 12, to leave out from "If" to "that" in line 13, and to insert:
on the surveyor certifying to the Commissioners having jurisdiction in the matter particulars showing that the case falls within the foregoing subsection, and giving notice thereof in writing to the seller, it is not shown to the satisfaction of those Commissioners".Subsection (2) of Clause 20 as drafted brings the Clause into operation if it is not shown to the satisfaction of the Commissioners having jurisdiction in the matter that all trading stock belonging to the company at the time of the sale of shares within subsection (1) will be disposed of in the ordinary course of trade. This Amendment introduces a new condition before the Clause can run, namely, that the inspector must certify to the Commissioners having jurisdiction particulars showing that the case falls within subsection (1) and notifies the seller that he is doing so.The Amendment serves two purposes. The first is to save unnecessary hearings by the Commissioners. The transactions in question might be clearly outside the scope of the Clause and it is undesirable that every such case should have to be brought before the Commissioners. The Amendment enables the formalities to be dispensed with in appropriate cases, because the inspector can refrain from certifying the particulars to the Commissioners.
The Amendment also serves the purpose of paving a way for the Amendment to page 16, line 34, to insert a new subsection (8), which we put down in response to a suggestion—indeed, a plea—by my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell), 541 which enables a prospective vendor of shares to approach the Commissioners of Inland Revenue jointly with the prospective purchaser and apply for a clearance in relation to the provisions of subsection (2). That provision would not work if the Commissioners of Inland Revenue could not give a binding clearance, and of course they could not do so if in every case the question had to be taken before the appropriate body of General Commissioners.
§ Mr. MitchisonOn the face of it, this Amendment stands by itself and, although it is, no doubt, preparatory to a later Amendment, we can, perhaps, discuss the later Amendment better when we come to it. On this Amendment I have nothing to say except just to inquire who the appropriate commissioners are in cases of this kind. Is it the case that, where there is no specific reference, it means the General Commissioners having jurisdiction in the area, or does it include the Special Commissioners?
§ The Solicitor-GeneralIf the House will permit me to speak again in response to the hon. and learned Gentleman's question, the appropriate body of commissioners is defined in a later Amendment.
§ Amendment agreed to.
§ The Solicitor-GeneralI beg to move, in page 15, line 24, at the beginning to insert:
Subject to the next following subsection".This Amendment goes with the two following Government Amendments, in page 15, lines 32 and 36. Perhaps you would permit the House to discuss them together, Mr. Deputy-Speaker.
§ Mr. Deputy-Speaker (Major Sir William Anstruther-Gray)Yes, I think that it would be for the convenience of the House.
§ The Solicitor-GeneralThese Amendments introduce a new subsection to deal with possible hardship which might arise in certain cases where a seller of shares would, apart from the new subsection, be charged with his share of the company's notional trading profit, which is calculated normally by reference to the consideration for the shares, but where he has, in fact, made less out of the transaction than his share of the company's notional trading profit.
542 The House will recall that the broad scheme of Clause 20 is to take the price paid by the future controller of the company for the shares sold to him first of all as a base, to work out from that what would be the sale price for all the issued shares of the company, to treat that amount as the price received by the company for its trading stock, subject to certain adjustments, so as to arrive at a notional profit, and then to allocate an appropriate proportion of that to the shares which were sold and to tax that appropriate proportion of the profit as income of the seller of the shares.
In the ordinary way, of course, an operator will be charged with no more than the difference between what he subscribed for the shares originally and what is paid for them by the purchaser, but it is possible that that may not work in certain cases. For example, one might have an independent person who happened to buy some shares from one of the operators half way through the period when the building was in course of erection. He would then probably have to pay more than the original subscription. In those circumstances, his share of the trading profit might well prove to be more than the difference between what he paid for the shares and what he got for them. That is the first of the cases with which the new subsection is designed to deal.
There is also a possibility that, under the legislation as it stands at present, the same trading profit might, in effect, be taxed twice. For example, there might be a sale of control of a company which purported to have put up the building by way of investment. The effect of Clause 21 in such a case—Clause 21 being the one which bites on that case—would be that, if the building were to continue to be held as an investment. a charge on the sellers would be imposed under Clause 20. If the person who had acquired control on that occasion decided to sell his shares in the company to somebody else, Clauses 20 and 21 together would operate all over again.
Further, the Committee passed yesterday an Amendment to Clause 23, in page 20, line 36, designed to prevent avoidance by the device of selling shares to the ultimate controller of the company through an intermediary. In that case, it is possible that the original seller of the shares would be charged under 543 that Amendment and the intermediary, unless he were a dealer, could make himself liable to pay tax on the appropriate share of the company's national trading profit under Clause 20.
We have really two cases here. The first is the minority shareholder getting caught up, so to speak, in one of these colourable transactions. The second is the double charge. Paragraph (a) of the new subsection brings within its scope a seller who had, at the time of the sale, less than 5 per cent. of the shares issued by the company. The object of keeping the figure as small as that is to give a measure of protection to owners of a quite small minority of the shares. They are the people likely, we feel, to become unwittingly involved with the operators of the avoidance device in such circumstances that they do not realise a full share of the profit—the sort of case which I described a few moments ago. Paragraph (b) deals with the possibilities of a double charge and brings within the subsection any sale of shares where subsection (2)
has had effect in relation to all or any of the same trading stock on a previous sale of the shares".The scheme of the new subsection is to give a seller who comes prima facie within its provisions the right to apply to the Commissioners of Inland Revenue for relief. In the case of the minority shareholder, he has to show that he did not acquire the sharesin pursuance of arrangements for transferring control of the company to another person".He is, of course, the only person who is in a position to establish that fact. The Commissioners are to give such reliefas may be reasonable and just".This follows an existing scheme under Section 66 of the Income Tax Act and, in the ordinary way, of course, the just relief will be such an adjustment as to reduce the charge to the difference between the price which the seller paid for the shares and the price for which he got them. I hope that that deals with the main points of the new subsection.
§ Mr. Bruce Millan (Glasgow, Craigton)We are doing in Clause 20 something similar to what we did in Clause 25 544 yesterday. In the discussion on Clause 25 I said that I thought that what the Government were doing was not right. In my view, this is even more so when we come to Clause 20 and the Amendment that we are now considering.
I wish to deal particularly with the position of the seller whose shares amounted to less than 5 per cent. of the shares issued by the company. There has been confusion here of two quite unrelated things.
Perhaps it would be easier to explain it by giving a small example. If someone buys a number of shares, any sort of shares, for a certain figure, expecting a certain dividend from them, and then receives that dividend, and finds that the dividend is not quite what he expected when he bought the shares, and that the shares have come down in value, it has never been argued that the loss of value of the shares should be set off against the dividend. The dividend is a revenue profit and is taxable, but any reduction in the value of the shares is a capital loss, which is not allowed as a deduction against the taxable income. I am speaking from the ordinary point of view of a person who is not dealing in shares. That is only fair, because a capital gain, an increase in the value of the shares, is also not taxable.
8.0 p.m.
We have here a similar thing. By this Amendment, we are allowing a seller of shares to set off what really amounts to a capital loss against the profit to which he would otherwise be assessable under the terms of Clause 20. That really has the effect of allowing the seller in these circumstances to have some relief where the differences between the actual consideration for the sale of the shares and the consideration he originally paid when he bought them is less than the profit to which he is being made assessable under the present Clause.
We are here dealing with two completely different things. The Amendment which the Government made yesterday to Clause 25 and this Amendment which they are making today, dealing with this category of sellers of shares, are founded upon a misconception of the position, and I am sorry that the Government should have brought forward this Amendment to this Clause.
545 Quite apart from the fundamental objection in principle to what is being attempted here, there are one or two other points which are worth making. One of them is in regard to subsection (4,a) of the Amendment to line 36 which refers to the question of the number of
the shares belonging to the seller amounted to less than 5 per cent. of the shares issued by the company".When we deal with the question when control in the company passes to the purchaser, we have, in Clause 23, certain definitions of associated parcels of shares. I think that these definitions are necessary and acceptable, but these definitions of associated parcels of shares ought to be associated in some way with this Amendment. If we have a seller who has less than 5 per cent. of the shares issued, but who has nevertheless shares which are part of an associated parcel of shares, it is surely not the Government's intention that he should escape the full rigours of Clause 20? I think that the Amendment is defective in this respect.
§ The Solicitor-GeneralI want to follow the hon. Gentleman's point, but will he say whether he is dealing with the purchaser in this case, or with the seller?
§ Mr. MillanI am here dealing with the seller of shares. Under Clause 23, the shares are not necessarily dealt with individually. If the shares are associated, there is the provision for treating the shares as associated parcels of shares and for treating them as a whole. There is no similar provision in this Amendment. Each lot of shares sold by that particular individual is to be treated individually, but they may, of course, be associated parcels of shares, under the terms of Clause 23. I should have thought that the Government would have wanted to have this Amendment restricted to the categories of shares which are not part of associated parcels of shares. I am sure that that is what the Government intended, but it is not what we have got in the Amendment as it stands at present.
There is a reference in line 14 to the seller having to show
that he did not acquire his shares in pursuance of arrangements for transferring control of the company to another person.546 This does not meet the point, because here we are dealing not with circumstances in which the seller acquired his shares, which are important enough, but with the circumstances in which the seller sells his shares subsequently, which is the transaction which brings the whole operation of Clause 20 into effect.There is only one other point. In line 17, there is reference to adjustments being whatever may be "reasonable and just". The hon. and learned Gentleman said that this repeats words which appeared in Section 66 of the 1952 Act, but I should have thought that there was a nearer parallel, and that it is Clause 25 of the Bill with which we are dealing, because, as I said at the beginning, the kind of provision in these Amendments is roughly similar to one in Clause 25 which we made yesterday, and, therefore, the words "reasonable and just" do not apply at all. We have here a choice given to the person concerned to elect to substitute for the sum that would otherwise be chargeable the actual profit he made on the sale of the shares, as defined in exactly similar terms to the definition which is used in the first few words of this Amendment. It seems to me to be rather extraordinary that, in two cases dealing with roughly similar kinds of adjustments in the same Bill, we should get two different definitions of the adjustment that has to be made.
§ Mr. J. Enoch Powell (Wolverhampton, South-West)Whatever substance, if any, there may be in the points which the hon. Member has just made, I think that it would be right that, any rate in regard to the first of the two purposes of this new subsection, a word of recognition should be said. And perhaps this should be said on behalf of my hon. Friend the Member for Basingstoke (Mr. Freeth) and his aunt, for, if I am not mistaken, we are, in paragraph (a), dealing with the case which, in the deliberations of the Committee, we came to regard as the case of his aunt in Basingstoke.
The object here, I feel the House would agree, is a right object, and it is to take out persons who hold a minority interest—the aunt held only 2 per cent.—in the company in question, who might otherwise be within the mischief of these provisions.
§ Mr. MitchisonI regard this as an unsatisfactory Amendment, and I think it particularly regrettable that it should 547 be brought in at such a late stage. I agree with what was said by my hon. Friend the Member for Glasgow, Craigton (Mr. Millan), but I would add that, looking at this Clause and dealing for a moment with "Mrs. Five Per Cent."—"Mr. Five Per Cent." used to be the late Mr. Gulbenkian—I do not see what is happening. This relates to what I might call something like a dirty transaction from the point of view of tax avoidance.
Here is somebody who is innocently involved in it. There are two possible things to do in a case of that kind. One is to say, "We cannot draw quantitative lines; we cannot go into questions of innocence. The transaction is bad, and these people must take the unfortunate consequences", and then it is said that that is very hard on "Mrs. Five Per Cent". But why "Mrs. Five Per Cent"? Why not "Mrs. Two Per Cent." or, indeed, "Mrs. Ten Per Cent." or almost any other percentage? This is illogical, and I should have thought we could have taken any fixed figure in this case. It seems to me to show a reluctance by the Government to accept one or other of two propositions which are at any rate logical, and which I think could have been dealt with in other ways.
One of these propositions is that, the transaction being dirty, everybody involved must suffer the consequences. The other is that if one can show innocence in a dirty transaction, one should not suffer the consequences, but why because one happens to hold 4 or 6 per cent., as the case may be, of the shares in a company, the treatment should be different, completely passes my understanding. Now the Government say, "You have got to take your share in the sale no further". I can only believe that this is one of those cases where the Government must be going to their reactor or some similar machinery they keep in the Treasury and tossing up to find the figure. I agree it cannot be a majority, but short of that any figure could be defended on the same argument and with the same reactor.
Surely the right thing to do in a case of this kind is for the Government to make up their mind between the two alternatives. If we come to whether one is innocent or not, whether one is the 548 aunt, the whole aunt and nothing more, then one has to see what it is. The person in question has to show not later than six years after the transaction—a very long period for this sort of matter, I should have thought—
that he did not acquire his shares in pursuance of arrangements for transferring control of the company to another person".I wonder whether that is quite enough. I should have thought that in a transaction of this kind there might be degrees of innocence, as it were, and that the simplest thing to have done would have been to have made the proof in that case a good bit stricter.That is not the whole story. I have been talking about paragraph (a). I turn to paragraph (b). One has to remember that in these cases the trading stock may be all kinds of things. It is not necessarily securities or land or buildings. It may be anything within the pretty sweeping category indicated by Clause 20 (1, b). Apparently it is sufficient if subsection (2) of the Clause has had effect in relation to any of the same trading stock on a previous sale of the shares. Is that enough? I can see all kinds of combinations of stock in relation to some small part of which, on a previous sale of the shares, subsection (2) has had effect. I may be very bad at following these things, but, as to the shares: what shares? Shares amounting to 5 per cent. or 95 per cent., assuming a 5 per cent. holding? Or any shares?
§ The Solicitor-GeneralThe 5 per cent. relates only to paragraph (a).
§ Mr. MitchisonYes. Well, then, what does it mean? Does it mean any of the shares of the company or the whole lot? Or what? I really find this an extremely difficult Clause to follow. It may be clearer to my hon. Friends than it is to me, but I do not like it.
I turn from that to "reasonable and just." It is all very well to leave it all to the Commissioners, but I should have thought that the Tory Party would have been a bit critical of some of these administrative decisions of a sweeping character. I had the curiosity to look up rather rapidly Section 66 of the 1952 Act, and it is about errors and mistakes. What is "reasonable and just" for a case of that kind is clear by comparison with what may be "reasonable and just" in this case.
549 Here it may be as clear as mud, as the phrase goes, what was reasonable and just. I should have thought that, if one meant what the hon. and learned Gentleman told us it meant, that is to say, that they should be indemnified, as it were, for the consequences of this penal Clause in relation to them, he could have put that into the Bill. It is absolutely nothing to what was called "multiple top slicing." If he can define "multiple top slicing" he can certainly define what he told us today.
Therefore, I do regard this as a most unsatisfactory Clause. I should have liked to have had the opportunity not merely to put down Amendments to it but to allow the Government to take it away and think over it again, but, of course, it is brought forward on Report. What are we to do? Accept it on the ground that it is rough and unsatisfactory justice, but that it may be on the side of justice rather than injustice? Or turn it down and leave the aunt to stew?
I feel that, on the whole, we have probably got to accept the thing, but I really do not know; and I am a little bit moved by my two hon. Friends the Members for Craigton and Gloucester (Mr. Diamond), who do not want to accept it. They think that it is such a muddle. And why not? Let us see what the views of the House are on the matter.
§ 8.15 p.m.
§ Mr. DiamondI am grateful to the Solicitor-General for deferring his reply to allow me to speak. I was about to appeal to my hon. and learned Friend the Member for Kettering (Mr. Mitchison) not to adopt his usual compromising and gentle attitude with the Government, but to fight for the rights of the Opposition.
This is a muddle-headed Clause at least, and at worst it is a deliberate attempt to fog the House and to insert into a Bill a method under which a capital loss, for no proper reason at all, is set off against a profit and, therefore, avoids tax. That is something which, in principle, which is a very important principle, we should oppose. There are various reasons for opposing this, but I will deal, first, with what my hon. Friend the Member for Glasgow, Craigton (Mr. Millan), with his critical mind, picked on immediately, and which is the same point which occurred previously.
550 I hope that the Government are aware that although we are objecting to it we are not objecting on grounds of drafting, however unsatisfactory the drafting may be as a result of the Government's continually vacillating and changing their mind from moment to moment and being pushed all over the place by their back benchers instead of sticking to sound tax principles. We are not objecting on those grounds, but we are objecting on the very simple ground which my hon. Friend has illustrated and which I will illustrate by the simplest arithmetic.
Let us take a figure which I am sure the Solicitor-General will understand. I buy shares at £10 each. Let us suppose they rise in value to £12 each at the point of time at which I sell them at a value of £14. For the purposes of this Clause I am then taxed on £2, the difference between the sale price and the value, in effect. The difference is £2. I do not pay tax on the increase in value from £10 to £12 because the increase is a capital increase which is not caught by this Clause.
Let us reverse that position, because this is what we are complaining about. We are not complaining at the moment that this treatment is given under which a normal rise in value is not regarded as taxable. We are complaining about the reverse a this, where the Government seek to introduce an entirely novel principle, namely, where the opposite happens, and the shares which I bought at £10 each drop in value to £9 each and I sell them—shall we say?—for £12.
According to the Government's proposals I pay tax only on £2. In fact, I have done two things. I have sustained a capital loss of £1 and I have made a revenue profit—for this purpose, taxable profit—of £3. There is no question about having made a taxable profit of £3. There is no question of having a taxable loss of £1. The point is that where I make a capital loss of £1 the Government say, in their sense of fairness, "We will allow you to set that off"; but where I make a capital loss of £1 they say, in their sense of fairness, "If you make a capital profit you pay tax on it"
They cannot have it both ways. I do not think that I have misunderstood it, however difficult it is to apply to these words such intelligence, even perhaps limited intelligence, as I have and in the 551 certainly limited amount of time. That is the effect of it. The Government are combining those two.
As to treating capital profits as tax-free and capital losses as deductible for taxation purposes, I suggest to my hon. and learned Friend that that is not a principle to be swallowed in any circumstances on this side of the House. I suggest that we should object to that in the strongest terms. If it is too late for the Clause to be taken away, then we should get rid of our steam in the appropriate way, which is in the "Aye" or "No" Lobby as the case may be. That is the material point I wish to make.
There are other points of drafting which I should like to make if there were an opportunity for making the alterations. Subsection (4) reads:
Where the said amount exceeds the difference between …As I read the Clause, what it is intended to mean is not the difference between two things but the excess of the first over the second. The assumption apparently is that the difference will always be a profit, but it need not be; it could be a deficiency. This difference has a limiting effect on the amount later brought into tax. It is, therefore, conceivable that the Government's intention will be defeated by using the word "difference", which could be a difference up or down, as opposed to the word "excess", which can mean only one thing.For these reasons, mainly of principle and partly of drafting, I strongly object to the Clause. I endorse what has been said by my hon. and learned Friend. I, too, have looked at the errors and omissions Section in the 1952 Act, and I did not think that on this occasion the Solicitor-General was as helpful as he normally is in making only the slightest passing reference to Section 66 of the 1952 Act without telling us, at the same time, that it was an utterly irrelevant Section and has nothing to do with the principle. We are dealing here with equity—what is right and fair. Section 66 of the 1952 Act is what happens when a mistake has been made and it is necessary to put a person back into the position in which he would have been if certain events had not taken place and the years had not rolled by; and it is an almost impossible situation.
552 Apparently the Government have made an attempt to work it out, but have failed. They have said, "We cannot work it out and we will leave it to the Commissioners to decide what 'may be reasonable and just'." This is continuing the principle of saying, "We cannot cope with Income Tax and we will, therefore, hand it over to the executive, and somebody else will do it." That, too, is a principle to which I object.
If those are not sufficient grounds on which to vote against the Clause, I also have the strongest possible objection to the last line, for there is a full stop at the end of the line which should not be there.
§ The Solicitor-GeneralIf the House will permit me, I should like to say a few words in reply to the points which have been made. The earlier points seemed to be little more substantial than the last, made by the hon. Member for Gloucester (Mr. Diamond), which, no doubt, the officials of the House will put right. I am sorry that the hon. Member threatened to vote against the Clause without waiting to hear the answer to the points which he made.
First, the hon. Members for Glasgow, Craigton (Mr. Millan) and Gloucester say that what we are doing is to allow a capital loss to be set off against taxation. There is no question here of a capital loss. The case is not, as the hon. Member suggested it was, that the seller sold for too little; it is that he bought for too much. It would be grossly unfair, when we are fixing a notional profit, to tax him on a profit which he did not make. If he can show that he bought at price A and sold at price B, it is the profit between price A and price B that we should tax.
§ Mr. MillanThe hon. and learned Gentleman says that the seller bought at too high a price, but that does not necessarily follow. If I buy shares at £100 and they fall to £90 it does not necessarily follow that I paid too high a price for them, any more than it necessarily follows that if I buy at £100 and the shares rise to £110 I paid too low a price. The hon. and learned Gentleman is assuming a stability in the price of shares which has no relation to actuality.
§ Mr. DiamondAnd also assuming that the Tory Government will not put up the Bank Rate every other day.
§ The Solicitor-GeneralI must not be led away from the Clause, which is already difficult enough, to discuss the Government's fiscal policy. What we are saying is that, ordinarily speaking, we intend to convert into a taxable profit what is a capital gain under the law at the moment. We do that in what I confess is an artificial way. It is necessarily artificial, but, on the whole, it works.
In the ordinary way, the people who have been perpetrating these claims are those who have put up the building with the intention, in effect, at the end of getting rid of it—to use a neutral term—to an investment company. If they sold the building in the normal way to the investment company, they would be taxed on the profit which they made on the building because it would be the profit which they made in disposing of their trading stock. Instead, they sell the shares, and we have in some way to convert the price paid for the shares into the trading profits.
The Clause does that in the necessarily complicated way which we have discussed. For the operator, the man who puts up the building and who has probably planned this from the start, the scheme works quite reasonably, because he will be charged on no more than the difference between what he subscribes for the shares and what are paid for them by the purchaser, for the money subscribed will either have gone in expenses or capital expenditure allowed to the company in arriving at its profit or, at the end of the day, will be represented by the fixed assets of the company, the value of which is deducted, as the Bill stands, in subsection (4, a), in arriving at the notional trading profit.
It works all right in that case, but there may be an independent person who comes in half-way through the erection of the building. If he buys some shares from one of the operators half-way through the period during which the building is being put up, he will probably have to pay more than the original subscription. In those circumstances, the formula which we have laid down, and which works perfectly well in the case of the original subscriber, works unfairly, because ex hypothesi he will have paid more than the original subscription price. His share of trading profit in 554 these circumstances may prove to be more than the difference between what he paid for the shares and what he should get for them. It is for that reason that we think it right that he should be taxed on the profit that he did make.
§ 8.30 p.m.
§ Mr. DiamondPerhaps I may be allowed to put a rather lengthy question, as we are not allowed to speak twice on Report.
I revert to the example that the Solicitor-General gave, quite correctly, of converting back into a profit on the building what has been converted by the operators into a profit on the shares. A profit has been made on the shares and one wants to convert that back into a profit on the building. One only wants to do what the operators themselves did. They said. "We want a profit on the building of £X and we will put it on the shares." But when they come to it they do not put the £X on the original subscription cost, or the original price of the shares, but on the value of the shares at the time they conspired together to do this.
Whether, between the time when they conspire and the time when the deal is done and the £X are added to the cost of the shares instead of the building, there is a rise or a fall in the value of the shares, is either irrelevant or a capital profit that is not taxed, or is a capital loss on which no tax is allowed but is now proposed to be allowed by this Amendment.
§ The Solicitor-GeneralThere is no question here of a capital profit except under the existing law. If the original subscription price of the shares is £10 and a small shareholder, coming in halfway through, pays £12, and the ultimate sale is for £14, it is playing with words—is fanciful—to say that he has made a capital loss of the difference between the £10 and the £12. It does not represent what has happened. We know what profit he has made and it would be unfair to tax him on more than that. He has not made a capital loss. The Clause does not bite if he does
§ Mr. MitchisonThe operator carried out half of what he intended to do and evaded the Clause to that extent. He intended to sell at £14. He sold at £12 to 555 some independent person, and the difference between £10 and £12 went untaxed into the operator's pocket as part of the scheme which he intended. It is being paid for by the Exchequer handing back some tax which it would otherwise have collected if the operator had stuck to the shares throughout.
§ The Solicitor-GeneralThat is not what the Clause is designed to do. It is designed to strike at the circumstances in which, instead of the building being sold to somebody who is to hold it as an investment, shares are sold to somebody who is to hold the building as an investment. It has nothing to do with the sale of shares to somebody independently who merely comes into this scheme fortuitously.
That brings me to the point made by the hon. Member for Glasgow, Craig-ton (Mr. Millan) about associated parcels of shares. That is taken care of in lines 14 and 15 of the new subsection, because in the case of the minority shareholder it is incumbent upon him to show that he did not acquire his shares in pursuance of arrangements for transferring control of the company to other persons. Since the onus is on him, rightly, in this case, it seems to me to do every bit as much as is done by the definition of associated parcels of shares in Clause 23.
Before leaving that point, I shall answer the hon. and learned Gentleman, who asked why the figure of 5 per cent. had been chosen. One has to take a figure and that is a reasonable one. A little while ago the House was applauding me enthusiastically—perhaps that is a little exaggerated, but at any rate it was approving—for a proposal that instead of saying a "substantial proportion" of the assets we should say one-fifth. One might ask: "Why 20 per per cent.?" Everybody seemed to think yesterday when we discussed it, that 20 per cent was a reasonable figure. I suggest that it is perfectly reasonable to put down a specific figure of 5 per cent. for the reason which I gave—that one wants to limit it in the case of the small man in the circumstances I described.
The last point which was made by the hon. Member for Craigton, by the hon. Member for Gloucester (Mr. Diamond) and also by the hon. and 556 learned Gentleman was in reference to the words:
as may be reasonable and just.They are far more appropriate to the case we have in mind than the rigid formula which we wrote into Clause 25 yesterday. Section 66 of the Income Tax Act provides for relief for a person who has paid tax on a Schedule D or Schedule E assessment which was excessive by reason of some error or mistake in his Income Tax return and enjoins the Commissioners to do what is right and just in those circumstances.It seems to me to be every bit as appropriate in this case. In the ordinary way, to adjust relief will be such an adjustment as to reduce the charge for the difference between the price the seller paid for the shares and the price he got for them, but under this formula it will remain open to the Commissioners to take into account, for example, earlier transactions in the shares and to restrict relief if, for example, the holders of a small block of shares in a company set up for the express exploitation of the avoidance device benefit from the concession in the new subsection by selling their shares to each other before the time limit comes to make arangements for transferring control of the company to the ultimate purchaser.
It seems to give the requisite flexibility to prevent the concession, which we think it is right to make, being used for avoidance. It is not a case of handing over responsibility to the Executive, as was suggested. In the concluding paragraph of the subsection there is a provision for an appeal to the General Commissioners or to the Sepcial Commissioners and a further appeal to the courts on points of law. For all those reasons, I hope that the House will agree to the Amendment.
§ Mr. MillanThe hon. and learned Gentleman has explained why the words "reasonable and just" appear in this Amendment, but surely the same considerations also applied to Clause 25, with which we dealt yesterday. There is nothing in what he has said about this Amendment which does not apply with equal justice to Clause 25 where an entirely different form of words was inserted. Since some flexibility is 557 allowed, I hope that the Inland Revenue will conclude that a reasonable adjustment may be nil.
§ Mr. Deputy-SpeakerAs there appears to be some controversy, I propose to put each Amendment separately.
§ Mr. MitchisonOn a point of order. If we were to divide on the first Amendment that would get over the difficulty
§ and we should be understood by the House to be dividing against the three Amendments as a body.
§ Mr. Deputy-SpeakerI take that to be so.
§ Question put, That those words be there inserted in the Bill:—
§ The House divided: Ayes 227, Noes 147.
559| Division No. 135.] | AYES | [8.39 p.m. |
| Allason, James | Freeth, Denzil | McLaughlin, Mrs. Patricia |
| Alport, Rt. Hon. C. J. M. | Gammans, Lady | Maclay, Rt. Hon. John |
| Amory, Rt. Hn. D. Heathcoat (Tiv'tn) | Gardner, Edward | MacLeod, John (Ross & Cromarty) |
| Arbuthnot, John | George, J. C. (Pollok) | McMaster, Stanley R. |
| Ashton, Sir Hubert | Gibson-Watt, David | Macmillan, Maurice (Halifax) |
| Atkins, Humphrey | Glover, Sir Douglas | Maddan, Martin |
| Balniel, Lord | Glyn, Sir Richard (Dorset. N.) | Maginnis, John E. |
| Barber, Anthony | Godber, J. B. | Manningham-Buller, Rt. Hn. Sir R. |
| Barlow, Sir John | Goodhew, Victor | Markham, Major Sir Frank |
| Barter, John | Gough, Frederick | Marlowe, Anthony |
| Batsford, Brian | Gower, Raymond | Marshall, Douglas |
| Baxter, Sir Beverley (Southgate) | Grant, Rt. Hon. William (Woodside) | Mathew, Robert (Honiton) |
| Beamish, Col. Tufton | Green, Alan | Matthews, Gordon (Meriden) |
| Bennett, F. M. (Torquay) | Grimond, J. | Mawby, Ray |
| Berkeley, Humphry | Grimston, Sir Robert | Mills, Stratton |
| Bevins, Rt. Hon. Reginald (Toxteth) | Hall, John (Wycombe) | Montgomery, Fergus |
| Bidgood, John C. | Hamiton, Michael (Wellingborough) | Morgan, William |
| Biggs-Davison, John | Harris, Reader (Heston) | Mott-Radclyffe, Sir Charles |
| Bingham, R. M. | Harrison, Brian (Maldon) | Nabarro, Gerald |
| Bishop, F. P. | Harrison, Col. J. H. (Eye) | Neave, Airey |
| Bourne-Arton, A. | Harvie Anderson, Miss | Nugent, Sir Richard |
| Box, Donald | Hay, John | Oakshott, Sir Hendrie |
| Boyle, Sir Edward | Heald, Rt. Hon. Sir Lionel | Orr-Ewing, C. Ian |
| Brewis, John | Hendry, Forbes | Osborn, John (Hallam) |
| Bromley-Davenport, Lt.-Col. W. H. | Hicks Beach, Maj. W. | Osborne, Cyril (Louth) |
| Brooman-White, R. | Hiley, Joseph | Page, Graham |
| Browne, Percy (Torrington) | Hill, J. E. B. (S. Norfolk) | Pannell, Norman (Kirkdale) |
| Bryan, Paul | Hirst, Geoffrey | Partridge, E. |
| Bullard, Denys | Hocking, Philip N. | Pearson, Frank (Clitheroe) |
| Butcher, Sir Herbert | Holland, Philip | Percival, Ian |
| Campbell, Gordon (Moray & Nairn) | Holt, Arthur | Pickthorn, Sir Kenneth |
| Carr, Compton (Barons Court) | Hopkins, Alan | Pike, Miss Mervyn |
| Carr, Robert (Mitcham) | Hornby, R. P. | Pilkington, Capt. Richard |
| Channon, H. P. G. | Hornsby-Smith, Rt. Hon. Patriola | Pitman, I. J. |
| Chataway, Christopher | Howard, Gerald (Cambridgeshire) | Pitt, Miss Edith |
| Cole, Norman | Howard, John (Southampton, Test) | Powell, J. Enoch |
| Collard, Richard | Hughes-Young, Michael | Price, David (Eastleigh) |
| Cooper, A. E. | Hulbert, Sir Norman | Prior, J. M. L. |
| Cooper-Key, Sir Neill | Hutchison, Michael Clark | Prior-palmer, Brig. Sir Otho |
| Cordeaux, Lt.-Col. J. K. | Iremonger, T. L. | Proudfoot, Wilfred |
| Cordle, John | Irvine, Bryant Godman (Rye) | Ramsden, James |
| Corfield, F. V. | Jackson, John | Redmayne, Rt. Hon. Martin |
| Costain, A. P. | James, David | Rees, Hugh |
| Craddock, Sir Beresford (Spelthorne) | Jenkins, Robert (Dulwich) | Rees-Davies, W. R. |
| Critchley, Julian | Johnson, Dr. Donald (Carlisle) | Renton, David |
| Crosthwaite-Eyre, Col. O. E. | Johnson, Eric (Blackley) | Ridley, Hon. Nicholas |
| Cunningham, Knox | Johnson Smith, Geoffrey | Rippon, Geoffrey |
| Curran, Charles | Joseph, Sir Keith | Roberts, Sir Peter (Heeley) |
| Currie, G. B. H. | Kerans, Cdr. J. S. | Robinson, Sir Roland (Blackpool, S.) |
| Dalkeith, Earl of | Kerr, Sir Hamilton | Robson Brown, Sir William |
| Dance, James | Kimball, Marcus | Roots, William |
| d'Avigdor-Goldsmid, Sir Henry | Kirk, Peter | Scott-Hopkins, James |
| de Ferranti, Basil | Kitson, Timothy | Sharples, Richard |
| Donaldson, Cmdr, C. E. M. | Lancaster Col. C. G. | Shaw, M. |
| Drayson, G. B. | Leather, E. H. C. | Simon, Sir Jocelyn |
| Duncan, Sir James | Leavey, J. A. | Skeet, T. H. H. |
| Eden, John | Legge-Bourke, Sir Harry | Smith, Dudley (Br'ntf'rd & Chiswick) |
| Elliott, R. W. | Lewis, Kenneth (Rutland) | Smithers, Peter |
| Emery, Peter | Lilley, F. J. P. | Spearman, Sir Alexander |
| Emmet, Hon. Mrs. Evelyn | Lindsay, Martin | Steward, Harold (Stockport, S.) |
| Farey-Jones, F. W. | Litchfield, Capt. John | Stodart, J. A. |
| Farr, John | Longbottom, Charles | Storey, Sir Samuel |
| Fell, Anthony | Loveys, Walter H. | Studholme, Sir Henry |
| Finlay, Graeme | Low, Rt. Hon. Sir Toby | Summers, Sir Spencer (Aylesbury) |
| Fisher, Nigel | Lucas-Tooth, Sir Hugh | Talbot, John E. |
| Fletcher-Cooke, Charles | MacArthur, Ian | Taylor, W. J. (Bradford, N.) |
| Fraser, Ian (Plymouth, Sutton) | McLaren, Martin | Temple, John M. |
| Thomas, Leslie (Canterbury) | Wade, Donald | Wolrige-Gordon, Patrick |
| Thomas, Peter (Conway) | Wakefield, Edward (Derbyshire, W.) | Wood, Rt. Hon. Richard |
| Thompson, Kenneth (Walton) | Wakefield, Sir Waved (St. M'lebone) | Woodhouse, C. M. |
| Thornton-Kemsley, Sir Colin | Wall, Patrick | Woodnutt, Mark |
| Tiley, Arthur (Bradford, W.) | Watts, James | Worsley, Marcus |
| Turner, Colin | Wells, John (Maidstone) | Yates, William (The Wrekin) |
| Turton, Rt. Hon. R. H. | Whitelaw, William | |
| van Straubenzee, W. R. | Williams, Dudley (Exeter) | TELLERS FOR THE AYES: |
| Vaughan-Morgan, Sir John | Wills, Sir Gerald (Bridgwater) | Mr. Peel and Mr. Noble. |
| Vickers, Miss Joan | Wise, A. R. | |
| NOES | ||
| Abse, Leo | Herbison, Miss Margaret | Pavitt, Laurence |
| Ainsley, William | Hill, J. (Midothian) | Pearson, Arthur (Pontypridd) |
| Allaun, Frank (Salford, E.) | Hilton, A. V. | Peart, Frederick |
| Bacon, Miss Alice | Holman, Percy | Pentland, Norman |
| Baxter, William (Stirlingshire, W.) | Houghton, Douglas | Plummer, Sir Leslie |
| Bellenger, Rt. Hon. F. J. | Hoy, James H. | Price, J. T. (Westhoughton) |
| Benson, Sir George | Hughes, Cledwyn (Anglesey) | Randall, Harry |
| Blackburn, F. | Hughes, Emrys (S. Ayrshire) | Rankin, John |
| Boardman, H. | Hughes, Hector (Aberdeen, N.) | Redhead, E. C. |
| Bowden, Herbert W. (Leics, S.W.) | Hunter, A. E. | Reynolds, G. W. |
| Bowles, Frank | Hynd, H. (Accrington) | Roberts, Goronwy (Caernarvon) |
| Boyden, James | Hynd, John (Attercliffe) | Ross, William |
| Brockway, A. Fenner | Irving, Sydney (Dartford) | Short, Edward |
| Broughton, Dr. A. D. D. | Johnston, Douglas (Paisley) | Skeffington, Arthur |
| Brown, Thomas (Ince) | Jones, Dan (Burnley) | Slater, Mrs. Harriet (Stoke, N.) |
| Butler, Herbert (Hackney, C.) | Jones, Elwyn (West Ham, S.) | Slater, Joseph (Sedgefield) |
| Butler, Mrs. Joyce (Wood Green) | Jones, Jack (Rotherham) | Small, William |
| Castle, Mrs. Barbara | Jones, J. Idwal (Wrexham) | Snow, Julian |
| Corbet, Mrs. Freda | Jones, T. W. (Merioneth) | Soskice, Rt. Hon. Sir Frank |
| Craddock, George (Bradford, S.) | Kenyon, Clifford | Spriggs, Leslie |
| Cronin, John | Key, Rt. Hon. C. W. | Steele, Thomas |
| Crosland, Anthony | King, Dr. Horace | Stewart, Michael (Fulham) |
| Cullen, Mrs. Alice | Lawson, George | Stross, Dr. Barnett (Stoke-on-Trent, C.) |
| Davies, G. Elfed (Rhondda, E.) | Lee, Frederick (Newton) | Swingler, Stephen |
| Davies, Harold (Leek) | Lever, Harold (Cheetham) | Sylvester, George |
| Davies, Ifor (Gower) | Lever, L. M. (Ardwick) | Symonds, J. B. |
| Davies, S. O. (Merthyr) | Logan, David | Taylor, Bernard (Mansfield) |
| Deer, George | Mabon, Dr. J. Dickson | Thomas, Iorwerth (Rhondda, W.) |
| Dempsey, James | McCann, John | Thompson, Dr. Alan (Dunfermline) |
| Diamond, John | McInnes, James | Thomson, G. M. (Dundee, E.) |
| Dodds, Norman | McKay, John (Wallsend) | Thornton, Ernest |
| Driberg, Tom | Mallalieu, E. L. (Brigg) | Timmons, John |
| Dugdale, Rt. Hon. John | Mallalieu, J.P.W.(Huddersfield,E.) | Ungoed-Thomas, Sir Lynn |
| Ede, Rt. Hon. Chuter | Manuel, A. C. | Wainwright, Edwin |
| Edelman, Maurice | Mapp, Charles | Warbey, William |
| Edwards, Rt. Hon. Ness (Caerphilly) | Mason, Roy | Watkins, Tudor |
| Evans, Albert | Mendelson, J. J. | Weitzman, David |
| Fitch, Alan | Millan, Bruce | Wells, William (Walsall, N.) |
| Fletcher, Eric | Mitchison, G. R. | Wheeldon, W. E. |
| Foot, Dingle | Moody, A. S. | Whitlock, William |
| Fraser, Thomas (Hamilton) | Morris, John | Williams, D. J. (Neath) |
| Ginsburg, David | Mort, D. L. | Williams, W. R. (Openshaw) |
| Gourlay, Harry | Moyle, Arthur | Willis, E. G. (Edinburgh, E.) |
| Grey, Charles | Neal, Harold | Wilson, Rt. Hon. Harold (Huyton) |
| Gunter, Ray | Oliver, G. H. | Winterbottom, R. E. |
| Hall, Rt. Hon. Glenvil (Colne Valley) | Oram, A. E. | Yates, Victor (Ladywood) |
| Hamilton, William (West Fife) | Owen, Will | Zilliacus, K. |
| Hannan, William | Padley, W. E. | |
| Hayman, F. H. | Parker, John (Dagenham) | TELLERS FOR THE NOES: |
| Healey, Denis | Paton, John | Mr. Probert and Mr. Mahon. |
§
Further Amendments made:In page 15, line 32, leave out "the subsection" and insert:
subsection (5) of this section.
§
In line 36, leave out "(4)The said "values" and insert:
(4) Where the said amount exceeds the difference between the actual consideration for the sale of the shares and the consideration for which the seller bought them (or, if he acquired them otherwise than by buying them, their value on a sale in the open market at the time when he acquired them), and—
then if not later than six years after the end of the year of assessment the seller applies in writing to the Commissioners of Inland Revenue for relief, and, in the case of an application made only by virtue of paragraph (a) of this subsection, shows to the satisfaction of those Commissioners that he did not acquire his shares in pursuance of arrangements for transferring control of the company to another
561
person, the Commissioners of Inland Revenue shall give, by repayment or otherwise, such relief (if any) as may be reasonable and just.Any applicant aggrieved by a decision of the Commissioners of Inland Revenue under this subsection may, on giving notice in writing within thirty days after the notification of the decision, appeal to the General Commissioners having jurisdiction in the matter of the assessment under this section, or if he so elects to the Special Commissioners, and the provisions of the Act of 1952 relating to such an appeal (including the provisions relating to the statement of a case for the opinion of the High Court on a point of law) shall apply with any necessary modification.
(5) The values referred to in paragraphs (a) and (b) of subsection (3) of this section.—[The Solicitor-General.]
§ The Solicitor-GeneralI beg to move, in page 16, line 34, at the end to insert:
(8) The following provisions shall have effect where in pursuance of this subsection a person proposing to sell shares in such circumstances that the sale would fall within subsection (1) of this section and the person proposing to buy the shares furnish to the Commissioners of Inland Revenue particulars of the proposed transaction, that is to say—In discussing this Amendment, I might perhaps be allowed to discuss the Amendment, in line 36, to leave out from "seller" to "and" in line 39 and to insert:and if the Commissioners notify the said persons that they are so satisfied, the surveyor shall not give a certificate under subsection (2) of this section in respect of a sale of shares in the company by the one of the said persons to the other which is carried out within six months after the notification by the Commissioners
- (a) if the Commissioners are of opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this subsection, they shall within thirty days of the receipt thereof notify to the said persons what further information they require for those purposes, and unless that further information is furnished to the Commissioners within thirty days from the notification or such further time as the Commissioners may allow they shall not be required to proceed further under this sub-section;
- (b) subject to the foregoing paragraph, the Commissioners shall within thirty days of the receipt of the particulars, or where that paragraph has effect of all further information required, notify the said persons whether the Commissioners are satisfied that the trading stock will be disposed of as mentioned in subsection (2) of this section;
if subsection (2) of this section had had effect".The new subsection provides that a person who proposes to sell shares in a company which is within subsection (1) 562 of this Clause can, together with the prospective purchaser approach the Commissioners of Inland Revenue for a clearance in respect of the question of whether or not the transaction would be caught under subsection (2) because the trading stock will cease to be used as trading stock after the sale we put down this subsection in response to an appeal as I mentioned earlier, by my hon. Friend the member for Wolverhampton, south-west (Mr. Powell), who referred to the uncertainly of a seller of shares about his position. I promised that this was one of the matters which would be considered before Report stage.We have had representations that people proposing to sell shares in a company which might fall within the Clause would not know how they stood and that they ought to be able to get a clearance before the transactions are completed. My right hon. Friend thinks that is a perfectly valid point, and we have sought to meet it by the clearance procedure which, of course, is well known to the House.
§ Mr. MitchisonI see the point of making some provision of this sort. The Government seem to do rather better when acting in pursuance of a suggestion made by the hon. Member for Wolverhampton, South-West (Mr. Powell) than when they are acting on their own, but that, of course, is always a matter of opinion.
No doubt they have considered the point, but are the Government quite satisfied that the thirty days, which is all that the Commissioners have to come to a decision in the matter, is really sufficient? If the Commissioners do nothing for thirty days, what happens? Is the result that a clearance is taken to have been given?
§ The Solicitor-General indicated assent.
§ Mr. MitchisonI thought so, but one is never certain in these hard times. With, no doubt, an insufficiency of staff at any rate in some tax offices, thirty days might be a little short. Is there any power to extend the provisions or notice, or anything of that sort, or are the Government convinced that this is really enough?
§ Mr. PowellThis Amendment introduces the same clearance procedure to which the House has already assented in Committee in regard to Clause 27 yesterday. I should have thought that if 563 the Commissioners were in any doubt as to whether they had before them all that was necessary for coming to a decision, the provision for calling for further information gave them everything they needed and it would be quite wrong to widen the limits of time which are set out. I am grateful to my right hon. Friend for providing in this way what is just and proper.
§ Mr. MillanThis Amendment repeats the provisions to which we agreed in Clause 27 yesterday. However, in Clause 27 there is a proviso which is not repeated in the Amendment we are considering. That proviso is that if the particulars which are given with respect to the transactions that are to be carried out do not represent a full and accurate disclosure of all the facts and circumstances, the clearance procedure is void. There is no similar provision in Clause 20.
Presumably, the Government are relying on subsection (8) which gives a certain power, but there is a difference there in that subsection (8), as far as I can see, comes into operation only after six years, whereas under Clause 27 the clearance procedure can be voided at any time if the Revenue discovers that there has not been a full and accurate disclosure of the facts. Would it not have been better to have had the same sort of provision in the Amendment as in Clause 27?
§ The Solicitor-GeneralPerhaps the House will allow me to answer two specific points. There is not a deemed clearance under the subsection, like the other one, if the Commissioners do not answer in thirty days, but, of course, since Parliament will have expressed its wish in this subsection if the Amendment is accepted, they are clearly bound to do so.
With regard to the point made by the hon. Member for Glasgow, Craigton (Mr. Millan), we feel that we have in this case got the longstop of subsection (8) and that that is sufficient.
§ Amendment agreed to.
§
Further Amendment made: In page 16, line 36 leave out from "seller" to "and" in line 39 and insert:
if subsection (2) of this section had had effect".—[The Solicitor-General.]
§ The Solicitor-GeneralI beg to move, in page 17, line 16, at the end to insert:
(10) If after the sale of the shares, in a case not falling within the proviso to subsection (5) of this section, a balancing charge falls to be made in respect of any asset of the company falling within paragraph (a) of subsection (4) of this section, the amount on which the charge is made shall not exceed the aggregate of—This is a rather difficult Amendment to follow. I will do my best to make plain what it is we are trying to do. The point arises out of the reference made by my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) during the Committee stage about the possibility of, in effect, a double charge to tax where a balancing charge arises.
- (a) the appropriate proportion of what would have been the maximum amount of the balancing charge if the asset had been bought by the company at the time of the sale of the shares for a price equal to the amount unallowed at the time of the sale of the capital expenditure actually incurred by the company on the construction or provision of the asset, the said maximum amount being ascertained on the footing that no initial allowance fell to be made, and
- (b) the amount which apart from this subsection would be the maximum amount of the balancing charge less the appropriate proportion of that amount.
To give an example, one might get the written-down value of the assets referred to in subsection (4, a) at, say, £800, with a market value of £1,000 and a price for the shares of £10,000. The payment is the £10,000 would, in effect, have comprised £9,000 for the trading stock, which is what we are trying to arrive at, and £1,000 for the capital allowance assets.
But under the Clause, the written-down value of £800 would be deducted from the total consideration to arrive at the price for the trading stock, so that the sellers would be charged the tax at £9,200 instead of £9,000. But the matter would go further, because on a subsequent sale of the assets, which would be for the £1,000—their market value—there would be a balancing charge of £200 on which there would be a liability to pay tax. It seemed, I think, to the whole Committee that my hon. Friend had a perfectly valid point there.
9.0 p.m.
The hon. Member for Glasgow, Craigton (Mr. Millan) followed that up by pointing out that there could be the 565 same anomaly by way of balancing allowance. To put that matter right by getting at the actual market value of the capital allowance assets would be a matter of appalling complication. We have therefore proceeded in a different way.
The aim is to limit the balancing charge so that the amount to be taxed under the Clause is not being taxed over again. So that we should not have to ascertain the market value of the capital allowance assets, which might be very many and very diverse, we have tried to get at it in a different way. The balancing charge is made up of two elements. The first is the annual allowance since the sale. That will not have been taken into account under the Clause. Therefore, paragraph (a) takes it into account for balancing charge purposes.
If hon. Members wish it I can spell out to the House the effect of paragraph (a), but the end product is that everything is hived off except the annual allowances which have been received by the purchaser since the sale. They obviously have not been taken into account for balancing charge purposes. It is perfectly fair to take them into account in seeking to arrive at the maximum amount of the balancing charge which may be made in the circumstances of this Clause.
In addition, where there is the sale of part only of the share capital, a proportion only of the capital allowance assets will have been effectually taken into account in the working out of the notional profit. Therefore, it is only with reference to that proportion that there is a liability to double taxation by way of balancing charge in the way that I have described.
To put it the other way round, the balance of the balancing charge not represented by this proportion should be taken into account. That is paragraph (b). What we have done is to say that paragraphs (a) and (b) should be added together to arrive at the maximum, which is the fair balancing charge, and by this means one ensures that there will be no double taxation element.
I appreciate that this is by no means an easy Amendment to understand. I think that it will be easier if I give an 566 example. Take a case where three-fifths of the shares were sold in a company which at the time of the sale had a capital allowance asset of a written down value of £1,000. Subsequent annual allowances of, say, £100 brought the new written down value down to £900.
§ Mr. DiamondAt what date does the new written down value obtain? This is an essential part of the whole transaction.
§ The Solicitor-GeneralThis is before the sale. It then sells the asset for £1,100. If the asset had been bought for £1,000, the maximum balancing charge would be £100 only. The appropriate proportion of this £100 is three-fifths, which is £60, and that is picked up under paragraph (a). The balancing charge which would arise in the ordinary way is £200. That £200 is reduced by three-fifths, leaving £80. That is paragraph (b). So under the Amendment the maximum balancing charge is £60 plus £80—£140.
§ Mr. StevensWhen I raised this point in Committee it seemed a relatively simple one. It seemed to me that, although we intended to tax certain people who by subterfuges were avoiding taxation, we did not intend to tax them twice. That seemed a simple kind of principle. It was not until the hon. Member for Glasgow, Craigton (Mr. Millan) raised the balancing charge that I realised that there were certain difficulties, and it was not until I saw the Government's Amendment on the Paper that I realised the immensity, the complexity and the difficulties involved. I am sure that I am speaking for the entire House, and for you, Mr. Deputy-Speaker, when I express very great gratitude to my hon. and learned Friend the Solicitor-General for having made the position crystal clear to everyone except myself. I am very grateful to him.
§ Mr. MitchisonThere is no accounting for taste, but personally I think that this Amendment, as explained by the Solicitor-General, was rather clearer than some of the Government's Amendments. I should like to say to the hon. and learned Gentleman that had he not been such a conspicuous success at the Bar and in this House, he would have done very well indeed as a teacher, particularly in an infants' school.
§ Mr. DiamondI congratulate the Solicitor-General on his very balanced statement. If he says that it is all due to the intervention of the hon. Member for Portsmouth, Langstone (Mr. Stevens), I can only suggest that his hon. Friend should go back into his bath or wherever it was he came from last night.
We are in this real difficulty, and we might as well face it. The hon. Member for Langstone raised a simple point of justice. He will not mind my saying that his disposition was to look at one side of the question only, and, quite properly, to see that the taxpayer did not get caught and have to pay twice in the case of a balancing charge. My hon. Friend the Member for Glasgow, Craigton (Mr. Millan), who has a much more objective mind and sees all sides of the question, raised the further question of the balancing allowances, and we now have this Amendment.
It fell to my lot to read and to try to understand this Amendment in case any comments had to be made on it at this stage. I studied it, I wrote out all sorts of examples and came to the conclusion that I was near to understanding, but was not fully there. I have listened to the hon. and learned Gentleman's explanation and I am now back to where I started from—if not a good deal further away than that.
To speak seriously, if this is the best that can be done we now have to take it on trust, because I am not capable of understanding the explanation given nor, as far as I know, is any other chartered accountant in the House—and I speak, at all events, for three chartered accountants. It will fall to the lot of my professional brethren outside to understand what this really means. In this House we have had the advantage of studying the Bill during its various stages and we know what it is all about. We have now listened to the explicit, clear and short statement of the Solicitor-General. How it will be operated outside, I just do not know.
Had we been at an earlier stage of the Bill, I would have suggested, with the greatest deference, that the Government might have thought about it again and found something capable of being worked by practitioners in the field. As my hon. and learned Friend the Member for Kettering (Mr. Mitchison) has said, all those who have to work in this field 568 find this without question the most difficult Amendment, or part of the Bill, we have yet met or, I think, ever will meet—and that includes all the problems of the "golden handshake" and the schedules thereto. In those circumstances, all one can do is to sit quietly when the vote is taken, but with the knowledge that I, for one, for the first time am utterly and completely beaten.
§ The Solicitor-GeneralBefore the hon. Member for Gloucester (Mr. Diamond) intervened, I should have added something to what I said. It strikes me that in reference to the point made by the hon. Member for Glasgow, Craigton (Mr. Millan) I may have misled the House because I omitted to say something. Although we have met the point raised by my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) we have not met that put by the hon. Member for Craigton, and I meant to tell the House why.
I think that it was implicit in what I said that to meet that point would have necessitated ascertaining the market value of the capital allowance assets. As I said, those would be extremely numerous, and it would introduce an appalling complication, in the administration of what is a lesser matter, into the drafting of a Clause which, heaven knows, is already difficult enough.
What really weighed with us was that we felt that in these days it was extremely unlikely that the industrial assets would be worth less than the written-down value. In these days of very generous capital allowances—which have recently been raised, with the approbation of all parts of the House—it does not very often happen that the industrial assets are worth less than their written-down value. The point made by the hon. Gentleman was perfectly valid, but we feel that when one looks at it on the ground it is minimal, and we did not think the complication of the alternative approach involved was called for.
§ Several Hon. Members rose—
§ Mr. Deputy-SpeakerMr. Cooper.
§ Mr. MitchisonI asked the hon. and learned Solicitor-General a question: is he willing to answer it, and—
§ Mr. Deputy-SpeakerOrder. I have called Mr. Cooper.
§ Mr. A. E. Cooper (Ilford, South)All I want to do at this stage is to enter a protest that, in this day and age, it is found necessary to introduce into the Finance Bill a Clause that is admitted on all sides to be almost incomprehensible. I am sure that we have reached a stage in Income Tax law when some serious attempt should be made to introduce legislation whereby the ordinary man in the street can understand what is going on.
Here we are, at the Report stage of the Finance Bill of 1960—the penultimate stage before it becomes law—and men and women in this House, who are of average and, perhaps, of above-average intelligence, are unable to understand what we are passing tonight. It is a deplorable state of affairs, against which I protest very sincerely.
§ Mr. MillanApart from not following the Amendment at all, I particularly do not follow the Solicitor-General's argument about balancing allowances, especially when he says that these would involve taking into account or ascertaining the market value of the assets concerned. I do not follow why with balancing allowances there should be any particular difficulty that there is not in the case of balancing charges. On the other point about balancing—
§ Mr. DiamondBefore my hon. Friend leaves that point, does he not think It only fair to the Solicitor-General to say that if we did introduce what my hon. Friend wants to introduce it would, as the Solicitor-General said, make this a complicated Clause?
§ 9.15 p.m.
§ Mr. MillanI dare say it would. The other point, that balancing allowances do not often arise, is valid up to a point, but there must nevertheless be many occasions, particularly when we are dealing with assets which become obsolescent very quickly because of technical changes, when unfortunately the annual allowances have not kept up with the technological position.
Apart from that, I do not understand the Amendment at all, in common with everyone else, but perhaps I may ask one or two specific questions. First, with regard to "the appropriate proportion" which appears twice in the Amendment Presumably it is intended that 570 "the appropriate proportion" should have the same meaning as is ascribed to it in the rest of the Clause. I would point out that the definition in Clause 20 (6) specifically refers only to subsection (3). We are now dealing with subsection (10), which is not referred to there, and which is a subsequent subsection to subsection (6). I think it is rather unfortunate, because it is not absolutely clear that "the appropriate proportion" in this subsection is the same as the "appropriate proportion" in other parts of the Clause.
I would mention two other points. First, what exactly is the significance of the phrase
the maximum amount of the balancing charge"?I would have thought that just "the balancing charge" was sufficient without introducing the words "the maximum amount of".Also. I should like to know what is meant in paragraph (a):
… the said maximum amount being ascertained on the footing that no initial allowance fell to be made.What is the significance of mentioning "initial allowance" here? Among the many obscurities of this Amendment, this is one of the most obscure.
§ The Solicitor-GeneralThe hon. Gentleman asked me—
§ Mr. MitchisonOn a point of order, Mr. Speaker. Has the hon. and learned Gentleman asked the leave of the House to speak again?
§ Mr. SpeakerI did not know that the hon. and learned Gentleman had already spoken more than once. No doubt, he will ask leave. What will then happen I do not know.
§ The Solicitor-GeneralI have so far asked for leave on each occasion. I had been told that I need not do so when speaking to a Government Amendment. I assure the House that I intended no discourtesy, but if I do need leave I certainly ask leave to speak again.
The first question that the hon. Member for Glasgow, Craigton (Mr. Millan) asked related to the words "appropriate proportion". Undefined as it is, it simply means that whatever proportion is decided by the General Commissioners 571 or the court, as the case may be, if necessary. is appropriate. I think it perfectly clear that the interpretation of the Clause will be guided by the phrase in subsection (6), although that expressly refers only to subsection (3).
§ Mr. J. T. Price (Westhoughton)May I interrupt the hon. and learned Gentleman on what may be a matter of principle? How can there be equal application of the law if there is an unfettered discretion resting with the Commissioners to treat each case according to the circumstances? I always thought it was an overriding principle in all these matters that there should be equality of treatment between the various citizens dealt with. It seems to me that in these circumstances there is to be the widest discrepancy according to the whim and caprice of the people administering the law. Is that not so?
§ The Solicitor-GeneralNo, that is not so at all. We have just had a Clause containing the words "as is just and reasonable", and there is certainly no question of giving a discretion to the Commissioners or leaving it to their caprice in deciding what is appropriate. As I have said, subsection (6) will clearly colour the meaning of "appropriate proportion" in this subsection. What one is seeking to do, as in the example I gave, is to find what proportion of the total shareholding has been sold, and that will be the appropriate portion.
§ Mr. DiamondWill the hon. and learned Gentleman tell the House, as a lawyer, whether that is what happens in the courts? When there is in a Section a definition which specifically refers to a limited part of the Section, such as this definition in subsection (6) which is said to refer to the purposes of subsection (3), are the courts guided by that? Would not a court be likely to say that, whatever it means, it cannot mean that or Parliament would have said so directly and would have used words to include the purposes of subsection (3) and (10)?
Also, does the Solicitor-General recollect that the definition in subsection (6) is
such proportion as may be just"?What does the hon. and learned Gentleman mean when he suggests that the court would be guided by a reference to 572 what may be just? This is really very difficult to understand. Would it not be much simpler to say that this is a drafting error and there should be a reference to subsections (3) and (10)?
§ The Solicitor-General>I do not think that "appropriate proportion" here is susceptible of any meaning other than the meaning it has in subsection (6). The words which the hon. Member for Gloucester has quoted,
such proportion as may be just",do not refer to the appropriate proportion except in relation to the proviso to the previous subsection, which is the exceptional case of the sale of shares of of different classes.The second question which the hon. Member for Craigton asked related to the words "maximum amount". That follows Part X of the Income Tax Act, 1952. He will find it also, for example, in Section 293. A charge is limited to the aggregate of the allowances already given.
The hon. Gentleman had a final point on the concluding words of paragraph (a),
on the footing that no initial allowance fell to be made".The reason for those words is that what we want to limit paragraph (a) to in the way I described is the annual allowances. I think I gave an example to the House. Perhaps I can show how it would not work unless one left the initial allowances out. I instanced the case where there was a capital allowance asset with a written-down value of £1,000 and subsequent annual allowances of £100, bringing the new written-down value to £900. The asset is then sold for £1,100. On the sale of the asset, there would, of course, be a new initial allowance. It is that which one wishes to discount, and so one fastens only on the annual allowances which have not already been taken into account in the computation carried out under subsections (2), (3) and (4) of the Clause.Finally, I have very great sympathy with the point made by my hon. Friend the Member for Ilford, South (Mr. Cooper).
§ Mr. MitchisonIt was not a point; it was a bludgeon.
§ The Solicitor-GeneralWell, perhaps it was his rapier, as well as his bludgeon.
573 I have very great sympathy with his protest. On the other hand, the Royal Commission pointed out that in taxing Statutes we have to take a very narrow line, and, particularly in cases like this, where we want to make sure that the subject is not taxed twice in very complicated circumstances, the language is apt to be obscure. That is additionally so when we are trying to express in words what is very frequently a mathematical concept. I think that it was roughly in these words that the Royal Commission put it.
I may add that I think on one occasion Lord Simon, when Chancellor of the Exchequer, put himself in the hands of the House and said: "I am told that this is what the Clause means. I do not understand why it means that, but I hope that the House will accept it," and the House did. I feel very tempted to put myself in the hands of the House in the same way tonight.
§ Amendment agreed to.
§ The Solicitor-GeneralI beg to move, in page 17, line 16, at the end, to insert:
(11) In this section "the Commissioners having jurisdiction in the matter", in relation to any sale of shares in a company, means the Commissioners having jurisdiction with respect to the making of assessments under Schedule D on the company or, if more than one body of Commissioners has such jurisdiction, such of those bodies as the Commissioners of Inland Revenue may direct; and the Commissioners having jurisdiction in the matter shall in any case have jurisdiction with respect to the making of an assessment on the seller in respect of any amount in respect of which he is chargeable under this section.Clause 20 (2) as drafted depends for its operation on whether or not it is shown to the satisfaction of the Commissioners having jurisdiction in the matter that all the trading stock of the company in question will continue to be used as trading stock after the sale of the shares. In the context, the Commissioners having jurisdiction in the matter will be the Commissioners dealing with the tax affairs of the vendor of the shares. I think this was the point which the hon. and learned Gentleman is referring to earlier. There may, of course, be different vendors within the jurisdiction of different bodies of Commissioners, and it would obviously be highly inconvenient if different bodies of Commissioners formed a different view about the material question in subsection (2).574 In addition to that, it seems best to leave matters connected with the intentions of the company in question to be considered by the Income Tax Commissioners who normally deal with its position, rather than by any other body which is concerned with the tax affairs of vendors of its shares. Therefore, the Amendment provides that the Commissioners having jurisdiction in the matter shall be the Commissioners having jurisdiction with respect to making assessments under Schedule D on the company or, if more than one body, such of those as the Commissioners of Inland Revenue may direct. I am happy to think that this is an easier subsection to understand than the last.
§ Amendment agreed to.
§ Mr. SpeakerI understand that the Government do not desire to move the Amendment to page 17, line 30.