HC Deb 06 July 1960 vol 626 cc599-616

10.30 p.m.

Mr. Powell

I beg to move, in page 24, line 23, after "transactions" to insert: irrespective of the form thereof". This Amendment raises a point of real importance, and I hope that my right hon. and learned Friend the Attorney-General, even if he feels unable to accept it, will give a very clear assurance on the effect of the subsection as it stands.

The House will recall that, where a taxpayer finds himself within the circumstances set out in subsection (2) as a result of a transaction in securities, then the tax consequences, namely, the annulment of the tax advantage which the remainder of the Clause brings about, fall upon him unless he can show certain things set out in subsection (1), that is to say, that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments "— that is the first, and the second is that none of them had as their main object"— incidentally, that is faulty English because "none" is singular and the word should be "its"— or one of their main objects, to enable tax advantages to be obtained". I believe it to be common ground on both sides that the citizen is entitled, in going about his legitimate affairs and in carrying out legitimate transactions, to do them in such a way as to minimise his tax liabilities. He is entitled to have regard, in the way he goes about his legitimate business, to the tax consequences of what he does. What he is not entitled to do, and what this Clause among others is intended to prevent him from doing is to make a business of tax avoidance. There is a very clear distinction between the two operations.

It seems to me that there is a real danger, as the subsection is drawn, that consideration might be directed not to the matter of the transaction, so that the taxpayer would have to show that the underlying purpose of the transaction was not mainly tax avoidance, but to the form of the transaction, with the result that, although his object was a perfectly legitimate one and the transaction had a perfectly correct business motive, nevertheless the fact that he had chosen to do it in one way rather than in another simply because that one way gave a greater tax advantage, might lead to his being caught, since it would be the main object of his choosing the one method rather than the other of the legitimate transaction that he thereby secured a tax advantage.

I cannot believe that this is the purpose of the subsection or of the Clause. I feel sure that the object the whole House has in mind is to ensure that we protect cases where the taxpayer has been going about legitimate business for which there is a good and sound reason even though he has prudently and properly carried it out in the most advantageous, or least disadvantageous, way. As I say, I hope that my right hon. and learned Friend will either accept these words to make that clear or will give the House an assurance that the result which I apprehend will not flow from the words of the subsection as they stand.

The Attorney-General

I think that I can give my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) the assurance that he wants, and I should like to give it in the clearest possible form. I cannot advise the House to accept the Amendment, first because I think that it is unnecessary, and secondly because it might have consequences which none of us desires. In the first place, I remind the House that as a result of efforts in Committee and on Report, subsection (2) has been redrafted—or will be redrafted by later Amendments—so as to cover only such transactions and their consequences as are prima facie likely to lead to tax advantages of the kind at which the Clause strikes.

If there should be a case of a genuine commercial transaction, in which some of the circumstances specified in subsection (2) are present but the tax advantage could be shown to be merely incidental, the taxpayer would be able to make his case out by reference to the substance of the transaction, whether or not the Amendment were accepted. Even if it were disposed to put forward the contention that someone was brought within the scope of the Clause because if he had adopted another form of carrying out his business transaction he would have been liable to pay more tax, and even if there were evidence of that, I cannot believe that the Revenue would succeed either before the Special Commissioners or before the Tribunal.

Of course it is right to say that the form in which a transaction is carried out may be some evidence of the object of the transaction, but if I correctly understand the Amendment, my hon. Friend is concerned whether the Revenue will be able to make the Clause operate and to bring persons within its scope merely by saying that if they had carried out their transaction in another way, they would have been liable to pay more tax. There again, it comes right down to the substance of the matter.

If the transaction comes within subsection (2), then whether the person concerned can bring himself within the let-out provision depends upon the substance and not upon the form of the transaction. Where the substance is purely a genuine commercial object and where, if there is any tax advantage, it is incidental, then obviously the taxpayer will not find it difficult to discharge the onus of satisfying the Revenue or the Commissioners or the Tribunal that this transaction or series of transactions had not as one of its main objects the securing of a tax advantage.

My hon. Friend has clearly summarised the purpose of the Clause. It is intended to apply to those who make a business of tax avoidance. If we were to accept the Amendment it might lead to difficulties in bringing a charge under the Clause home in a case in which it ought to be applied—that is to say, a case in which transactions were carried out in a form conferring a tax advantage precisely because the obtaining of a tax advantage was one of the main objects. An argument might even be raised to try to secure the exclusion of cases which undoubtedly ought to be vulnerable under the Clause.

Let us take the type of case which has come to be known as stock stripping. It might be said that the transaction was carried out to realise the stock to the best advantage of the shareholders, which is a bona fide commercial purpose, and that the form adopted to this end must be disregarded.

It is for those reasons that I cannot advise the House to accept the Amendment, although I hope that I have made it clear that it certainly is not the view of the Revenue that in considering the scope of the Clause attention has to be paid to the various forms in which the transaction may be carried out. It is my view, and I can say that it is the view of the Revenue, that attention must be paid to the substance of the matter and, in relation to that, while the form may be some evidence of the substance of the matter, it is not a governing consideration to regard one way in which the transaction might have been carried out as against another possible way.

Mr. Mitchison

With all due and no undue respect, I agree with every word that has fallen from the lips of the right hon. and learned Gentleman—for once. I would only ask one other thing. A slight point was mentioned by the hon. Member for Wolverhampton, South-West (Mr. Powell). The grammar of this Clause is unnecessarily bad. May I now, or at the appropriate moment, ask leave to insert two manuscript Amendments to substitute the word "its" for the word "their"?

Mr. Powell

I have listened very carefully to the reply of my right hon. and learned Friend, and it appears to me that he gave a most explicit declaration on the point of anxiety which my Amendment was designed to meet, stating quite clearly that it was to the substance of the transaction that the main objects, or one of them, would require to relate. That being so, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Mitchison

May I ask leave to introduce the following two manuscript Amendments—in page 24, line 26, to leave out the first "their" and to insert "its" and in the same line to leave out the second "their" and to insert "it"?

Mr. Deputy-Speaker (Sir Gordon Touche)

I would not be prepared to accept a manuscript Amendment unless it was generally agreed.

The Attorney-General

I would like to consider that. Views on grammar may differ. I do not think that the subsection would read very happily if we were to say … none of them had as its main object, or one of its main objects …

The Attorney-General

I beg to move, in page 24, line 30, to leave out from "if" to the end of line 31 and to insert: (i) the transaction or transactions in securities were carried out, and (ii) any change in the nature of any activities carried on by a person, being a change necessary in order that the tax advantage should be obtainable, was effected". This Amendment is designed to meet a point raised by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) who raised the question whether the provisions in the Bill, which were designed to avoid retrospective operations, were, in fact, entirely satisfactory. As I said to my hon. Friend, we were not entirely satisfied with the wording of the proviso and we could not accept his Amendment because we were also not entirely satisfied with the wording of that. I hope that this Amendment, which deprives the operation of this Clause of any retrospective effect will be satisfactory to my hon. Friend and to the House.

Amendment agreed to.

The Attorney-General

I beg to move, in page 25, line 16, to leave out from the beginning to "a" in line 17.

It might be to the convenience of the House to consider with this Amendment the Amendments in lines 19, 23 and 25 and the second Amendment in line 31. They are really related Amendments. I cannot describe the first three Amendments as consequential because they are, in fact, drafting Amendments to pave the way for the last two.

All these Amendments are to subsection (2, c). The House will recollect that the Clause as originally drafted came in for considerable criticism. Some of it, I must confess, appeared to be based on a misapprehension of the content of the Clause. In Committee we moved a revised version of the subsection and in the course of our discussions I said that my right hon. Friend the Chancellor and I would carefully consider any suggestions that might be made and, where possible, improve the subsection still further on Report. Since the Committee stage my right hon. Friend and I have, with our advisers, carefully considered what was said in Committee. It has been suggested that in the second part of paragraph (c), as revised in Committee, we were breaking new ground or entering a new field. This really is not so.

The House will remember that the main objects of Clause 27 are to stop the evasion of liability to tax by stripping a company of its assets in such a way that sums which ordinarily would be distributed by way of dividend are not so distributed and so avoid liability to tax.

10.45 p.m.

I have already given an illustration of the way in which this can be done. I need not repeat it. But one feature of some of these operations is to secure that a dividend is paid to a person or body exempt from liability to income tax. Where that happens, there is a claim for repayment by the Inland Revenue for tax notionally deducted on payments of dividend, so that a great deal, if not all, the tax paid by the company on its profits is recoverable from the Inland Revenue.

This Clause deals with dividend stripping and also with bond-washing. From the outset it was realised that it would be pointless to stop avoidance of liability to tax through dividend stripping if it left the possibility of achieving the same result by the use of the provisions of the Companies Act. I remind the House of what my right hon. Friend, the Chancellor of the Exchequer, stated in the Budget debate, when he said that the Finance Bill would cover getting profits or reserves or assets out of companies in such a way that, in the end, the Revenue would lose the tax that has been paid, or would fail to collect tax that ought to be paid."—[OFFICIAL REPORT, 7th April, 1960; Vol. 621, c. 691.] The last part of (c), as it stands in the Bill, endeavoured to stop evasion of tax by this form of stripping the assets of a company. On further consideration, we felt that it would assist in the comprehension of these provisions if we made provision by a separate paragraph for the stripping of the assets simpliciter. That is done by the Amendment to line 25, which gives a new sub-paragraph (d). Sub-paragraph (a) deals with cases where a person who is entitled to recover tax in respect of dividends received by him receives an abnormal amount by way of dividend.

Subparagraph (b) deals with cases where advantage is secured by persons entitled to deduct losses on securities in computing their profits. The first part of subparagraph (c)—and, if this Amendment is accepted, the whole—deals with the opposite numbers of the persons coming within (a) and (b)—that is to say shareholders who may, by surtax, benefit out of transactions in which another party gets a tax benefit, and transactions in which another party gets a tax advantage as a person entitled to repayment of tax or to relief for losses.

The Amendment proposes to leave out the words or in connection with the distribution of profits of a company …". It makes it clear that the person who receives the consideration specified in subparagraph (c) comes within subsection (2), and so if, as a result, he is in a position to obtain, or has obtained, a tax advantage, he may have that advantage nullified.

There is also this difference between the cases which come within (a), (b) and (c) and those which come within (d). In the former category the Revenue is in peril of losing both income tax and surtax, and in the latter it is primarily in danger of losing surtax, since company reserves which are extracted will normally have to hear income tax at the standard rate.

It has been suggested that the kind of practice in question, which was here involving profits or reserves free of Surtax, is only likely to be practised in the case of companies under close control, where shareholders were likely to be persons liable for income tax at the standard rate, and liable for Surtax also. We have studied very closely whether it would be possible to define more narrowly the scope of paragraph (d) without running the risk that that would lead to the door being opened to more tax evasion, and I would not move, nor would my hon. Friends support, any Amendment which opened the door to the continuance of tax evasion.

We considered whether we might not limit the operation of paragraph (d) to the class of company already defined by Section 245 of the Income Tax Act, 1952, but we concluded that that might leave the revenue at some risk. The definition in Section 245 of the companies which are controlled by five or fewer persons is very narrow, and there are excluded from that definition those companies which are under the control of five persons, but which have 25 per cent. or more of their ordinary voting shares quoted or dealt in on a stock exchange.

We did not think that it would be right or wise to exclude those companies from the scope of paragraph (d); we did not think that the line should he drawn there. There might be other small public or private companies where the securing of Surtax advantages could be very material.

We have given a lot of thought to this matter and we have reached the conclusion that paragraph (d) must apply, first, to what I might call the Section 245 companies, that is to say, companies under the control of five or fewer persons; secondly, to companies under the control of five or fewer persons, but with 25 per cent. or more of their ordinary voting shares in the hands of the public; and, thirdly, to all other companies which do not have their ordinary share capital quoted by and dealt in regularly, or from time to time, on a recognised stock exchange. To that there is one exception, namely, that paragraph (d) does not apply to a company under the control of one or more companies to which paragraph (d) does not apply.

The result of the last of these Amendments is to exclude from the operation of the Clause companies—or their subsidiaries—not controlled by five or fewer persons and whose shares are authorised to be dealt in and are regularly, or from time to time, dealt in on a stock exchange.

We feel that it is inherently unlikely that companies in that category will engage in this kind of operation. Should we be wrong about that, then their actions are hardly likely to escape public notice, and further action can be taken. But, that being our considered view, we feel that we can safely narrow the scope of paragraph (d) without opening the door to tax evasion, and for those reasons I commend the Amendments to the House.

I apologise to the House for taking so long at this late hour to remind hon. Members of the structure of this Clause, which I thought essential to put the Amendments in perspective, and also in explaining what are rather lengthy Amendments.

Mr. Mitchison

Perhaps I had better not agree too much with the right hon. and learned Gentleman the Attorney-General, as that appears to have unfortunate results immediately afterwards. On this occasion, I see the point of what is being put forward, but I am not altogether clear about why this limitation is necessary, having regard to the provisions of the rest of the Clause.

If we are to deal with cases where these transactions happen in connection with the distribution of the profits of a company, why should it be limited—perhaps I missed something in the right hon. and learned Gentleman's speech—to companies of this class? It is obvious that the Government have had considerable difficulty in deciding exactly where the limits should be, and whenever that happens I feel inclined to say that somebody will be very ingenious just to get round the limit which the Government have sought to impose. Therefore, I feel some doubt about the necessity for this type of limitation. It was not suggested in Committee, and what appears to have happened is that the Government have said, "This is really a Surtax matter. We need only deal with companies where Surtax questions will arise," and have accordingly limited their Amendment.

But if it is only a Surtax matter is there any need to go into this definition of "companies"? An ordinary public company, where there is no question of an individual charge to Surtax, will not be affected. If, on the other hand, there is some possibility of an Income Tax benefit of a kind which it is desired to avoid by the earlier paragraphs it is clearly advisable not to have a limiting definition of this kind. I just do not see the object of this piece of ingenuity, and it strikes me that it is, if not an open invitation—since the Government apparently do not issue those—a sealed invitation to people to try to avoid it.

There is another point: I have always felt with these Surtax companies—to use a concise phrase—that although there is a statutory limitation its application is a matter of some difficulty, because the Revenue authorities may not always know the facts that bring a company within Section 256, which is the defining Section for the purposes of Section 245. Therefore, I would rather not have rested any more on that type of definition than was absolutely necessary.

For those reasons, although I see the object of the concession, I wish it had been more widely drawn. Here again, we have a case where, if we have to choose between "Aye" and "No," "Aye" to the Amendment is better than "No," but it is a pity that the introduction of an Amendment at so late a stage—even if it was occasioned by proceedings in Committee—makes it difficult to suggest any alteration which will have any practical effect.

Mr. Diamond

As I understood the right hon. and learned Gentleman, he said that the Government were deliberately leaving it open to a substantial public company to enter into transactions out of which a tax advantage of this kind might be gained, and in respect of which this Clause would not apply, because, being substantial public companies, owned by more than four persons, with their shares quoted, they would be in the public eye and not likely to do this sort of thing. We agree that that is so.

But I understood the right hon. and learned Gentleman to go on to say that if, however, he was wrong in that expectation, and they did enter into transactions of this kind, further action would be taken. I was listening very carefully, but I did not fully hear him when he went on to say that further action would be taken so as to catch such a company transaction as from today.

The Attorney-General

With the leave of the House I will reply to the hon. and learned Member for Kettering (Mr. Mitchison) and the hon. Member for Gloucester (Mr. Diamond). The hon. Member for Gloucester's hearing was quite accurate. For greater accuracy he can check my remarks in tomorrow's HANSARD.

Mr. Mitchison

This is a point of importance. At the end of it, does the right hon. and learned Gentleman mean, or does he not mean, that action will be taken retrospectively in this case?

The Attorney-General

I am not in a position to commit future Chancellors of the Exchequer as to what they would do should action be taken contrary to the belief of the Government as to its likelihood.

11.0 p.m.

I now turn to the question raised by the hon. and learned Member Of course, he is quite right in saying that this kind of stripping of assets is done primarily and I think nearly always, so far as one can see, solely for Surtax purposes. He is also, therefore, quite right in saying in relation to these big companies which we are excluding from the scope of the Clause that there is no real chance of their engaging in this operation.

The hon. and learned Member asks why draw the line now? The answer simply is that we do not want to have the scope of a Clause like this larger than is necessary to meet the evil. We feel that by making this Amendment, which is narrowing it, we can do something to dispel the unnecessary alarm which has arisen and at the same time preserve what we want of this Clause, namely, to ensure that if those likely to try to carry out this kind of operation seek to do so in the future, they will receive no tax advantage from so doing. That, I think, we have done.

Amendment agreed to.

Further Amendments made: In page 25, line 19, after "company", insert "in question".

In page 25, line 23, leave out "(in any case)".

In page 25, line 25, at end insert: or (d) in connection with the distribution of profits of a company to which this paragraph applies, the person in question so receives as is mentioned in paragraph (c) of this subsection such a consideration as is therein mentioned".—[The Attorney-General.]

The Attorney-General

I beg to move, in page 25, line 31, at the end, to insert: but the assets mentioned in paragraph (c) of this subsection do not include assets which (while of a description which under the law of the country in which the company is incorporated is available for distribution by way of dividend) are shown to represent a return of sums paid by subscribers on the issue of securities". This Amendment is designed to take out of the scope of Clause 27 payments which are, in effect, returns by overseas companies of subscribers capital. Paragraph (d) of the Clause, as amended, is only intended to catch the considerations as defined in paragraph (c), representing in effect profits which the person in question receives in non-taxable form. It ought therefore to have no application to what is, in effect, a return of subscribed capital.

The possibility that the Clause can go too wide in this respect arises in the company law of an overseas country, because that law may have the effect that certain amounts subscribed for shares are available for payment of dividends. For example, under South African law amounts subscribed for shares and put to the share account before 1952 are available for payment of dividends and would attract liability to tax as dividends if paid in this way to shareholders in the United Kingdom. If the South African company sought to escape this tax liability by making a bonus issue out of the share account the Clause would apply to impose a tax on capital paid in by the company subscribers, and it is the purpose of the Amendment to prevent that from happening.

The Amendment accordingly says that assets mentioned in paragraph (c), assets available for distribution as dividends, do not include assets shown to represent a return of sums paid by subscribers on the issue of securities, although those assets might be of a description which was or would have been available for distribution by way of dividends under the law of the country in which the company is incorporated.

Mr. Mitchison

In relation to this and to the other Amendments, one has to remember that these are considerations of the kind mentioned in subsection (1) of the Clause and that the whole transaction is thus subject to the taxpayer being able to show that the transaction or transactions were carried out for bona fide commercial reasons and so on, and that none of them had as its main object, or one of its main objects, to enable a tax advantage to be obtained.

I should have thought that in the type of case which the right hon. and learned Gentleman has in mind there would be no difficulty in showing that. Therefore, I wonder whether this Amendment is necessary. If it is not, it is a question of relieving the taxpayer of an unnecessary onus of proof. When I look at the Amendment I see that he still has to prove something in connection with this Amendment and I wonder whether a complicated proof of this kind is necessary in a subsection which follows on the subsection I have quoted, the latter subsection (1) being the main governing subsection of the Clause.

I say that for this reason. This is a very complicated Bill and this is a fairly complicated Clause in it. The more these specific cases are put in, the more we come to cases which are just on the borderline. I can see such cases in connection with foreign law. The more we come to borderline cases the more we open the door to possibilities as much of doubt as of avoidance. I therefore would have preferred to have left the matter to the provisions of subsection (1) instead of complicating it in this way with a feeling that there would be no cases where this Amendment would apply where the taxpayer would have any difficulty in discharging the burden. If in fact it is the case that these were the transactions the main object of which was to enable tax advantages to be obtained, I feel a little doubtful whether this Amendment is right.

The Attorney-General

I speak again by leave of the House. I assure the hon. and learned Member that this is necessary for this reason. If he will look again at paragraph (c)—I think it is convenient to look at it in the Bill—the consideration is something which either is, or represents the value of, assets which are … available for distribution by way of dividend. That is the difficulty. Under the law overseas, as I gave the illustration, certain capital could be available for distribution under the law there by way of dividend.

That brings the case clearly within paragraph (c). This makes it quite clear that where the sum being distributed, or which is capable of being distributed, by way of dividend which is in fact a return of capital to subscribers, that does not come within the scope of paragraph (c). We have proceeded on the basis of trying to define subsection (2) as closely as possible. We feel, in view of the use of the words "by way of dividend" in Clause 27, it is essential to make this Amendment, which can apply only to companies of the character to which I have referred, so as to make quite clear where there is a return of capital it does not come within the scope of paragraph (c) because it could be distributed "by way of dividend".

Mr. Millan

Would a payment of that sort be in any way taxable without this Amendment? I should have thought it would be attributable to the return of capital and could not be taxed in any case. Is the Attorney-General saying by implication that this is something which could be taxed?

The Attorney-General

I speak again by leave of the House. I was not saying anything by implication but merely dealing with the position of overseas companies.

Amendment agreed to.

Further Amendment made: In page 25, line 31, at end insert: and the companies to which paragraph (d) of this subsection applies are any company under the control of not more than five persons, and any other company which does not satisfy the condition that its shares or stock or some class thereof (disregarding debenture stock, preferred shares or preferred stock) are authorised to be dealt in on a stock exchange in the United Kingdom, and are so dealt in (regularly or from time to time), so however that the said paragraph (d) does not apply to a company under the control of one or more companies to which that paragraph does not apply; and subsections (2) and (3) of section two hundred and fifty-six of the Act of 1952 (which define for the purposes of that section the circumstances in which a company is to be deemed to be under the control of not more than five persons) shall apply for the purposes of this subsection as they apply for the purposes of that section"—[The Attorney-General.]

The Attorney-General

I beg to move, in page 27, line 18, to leave out from "no" to "in" in line 19 and to insert: notice under subsection (3) of this section ought to be given. This is a drafting Amendment consequential upon the Amendment made to Clause 3 in the course of the Committee stage when we changed the wording from "directions" to "giving notice."

Amendment agreed to.

Further Amendment made: In page 27, line 38, leave out "paragraph (a) of."—[The Attorney-General.]

The Attorney-General

I beg to move, in page 28, line 2, at the end to insert: so however that an amount shall not be treated as abnormal by virtue only of this paragraph if during the six months beginning with the purchase of the securities the recipient does not sell or otherwise dispose of, or acquire an option to sell, any of those securities or any securities similar (within the meaning of section twenty-three of the Finance Act. 1959), to those securities. The Amendment arises out of a promise of consideration during the debate in the Committee stage on an Amendment moved by my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth). The object is to ensure that a body entitled to tax exemption—for example, a charity or a superannuation fund—shall not be hampered by the fear of action under Clause 27 when it is contemplating a legitimate "switch" of its investments.

I need not remind the House of the history of this matter in any detail. The definition in the Amendment applies only to Clause 27 (10, a), and we have, after considering the arguments advanced by my hon. Friend and others, come to the conclusion that there is a good case for letting out of the scope of this definition purchases of fixed dividend securities if the facts of the case tend to show that the purchase was the normal purchase of an investment. For this purpose we think it is possible to take as a test that the recipient of the dividend continues to hold the securities for at least six months from the date of purchase. In the legislation of 1959 directed against specific forms of bond-washing the same six months' test was used. A cum-dividend purchase of securities was excluded from that legislation if the securities were not in any way disposed of until at least six months had passed.

The Amendment provides that a fixed dividend is not to be considered as "abnormal" under paragraph (a) of the definition if the recipient refrains from disposing of the securities for at least six months from the date of purchase. The Amendment is so worded as to impose various safeguards.

One is that if the purchaser, without actually selling the securities, takes out an option during the six months' period which would entitle him to sell them as a "pegged" price after its expiry, the let-out will not operate.

A second is that if the purchaser already owns a holding of the securities he cannot claim the benefit of the let-out for a further purchase cum-dividend merely by selling the original holding and keeping the further purchase until the six months have run out. This follows from the reference to selling any securities … similar to those securities". A third is that the definition of "similar" securities which is borrowed in this way from the 1959 Act is wide enough to cover cases where two holdings of securities are really equivalent for all practical purposes notwithstanding differences of outward form.

I think that we have gone as far as we can go to meet the fair point made by my hon. Friend the Member for Basingstoke and that this Amendment is an improvement to the operation of the Clause.

Mr. Denzil Freeth (Basingstoke)

It would be churlish if I let this go by without saying "Thank you" to my right hon. and learned Friend. He said that the Government have gone as far as they could go in putting down the Amendment. They have not gone quite as far as I hoped they would go, but I am most grateful to them for going as far as they have gone.

11.15 p.m.

Mr. Mitchison

I take the same objection to this provision as I did to the one I last spoke to. The whole of these circumstances are subject to the taxpayer being able to show that the transactions were carried out for bona fide commercial reasons or in the ordinary course of making or managing investments. In the particular instance the right hon. and learned Gentleman gave, the facts almost proved themselves. A pension fund obviously comes within the definition of in the ordinary course of making or managing investments". Another fairly obvious instance is the aunt of the 'hon. Member for Basingstoke (Mr. Denzil Freeth). She would do no wrong, ex hypothesi. She is an honest old lady making and managing her investments.

Is it really necessary to put this in? It involves putting in a fixed period of six months. The trouble about any fixed period is that the person who has done it for 5 months and 29 days feels very aggrieved because he has to prove something which a person who has done it for 6 months and 1 day does not have to prove.

Mr. Freeth

I hope that the hon. and learned Gentleman is not assuming that my aunt is a gross fund.

Mr. Mitchison

I make no further assumptions about the hon. Gentleman's aunt, other than her impeccable and continuous honesty.

I have said what I want to say. It is late at night. I wish we had had the opportunity of hearing the right hon. and learned Gentleman's explanations about these Clauses at an earlier stage when we might have been less lenient towards them.

Mr. Diamond

I want to ask the Attorney-General only one question. Is he satisfied that the period of six months is sufficient? In introducing the Amendment he said that it followed on a period introduced in a Section in an earlier Act, of which no doubt the Inland Revenue has some experience. Does his experience lead him to believe—I have certain doubts about it—that six months is long enough? There is no objection to accepting the Amendment. Its purpose is understood, but it would have been a much safer Amendment from the point of view of the Inland Revenue if the six months period had been much longer.

The Attorney-General

With the leave of the House, my answer to the hon. and learned Gentleman is that his argument always supposes that most weight should be placed on the let-out. His answer to these proposed Amendments is to ask whether they are necessary. He says that the taxpayer could get out under the let-out.

Our approach is somewhat different. We are trying to shape the Clause so that many cases which ought not to come within its scope are excluded from its scope. The last Amendment was one of those cases. This Amendment amends the definition of "abnormal dividend". Subsection (2. c) says: the person in question receives, in consequence of a transaction whereby any other person—

  1. (i) subsequently receives, or has received, an abnormal amount by way of dividend. …"
Under our first choice of words many dividends would have satisfied that definition. It might be difficult for charities in some cases to operate the let-out Clause. But there was a real difficulty of definition, namely, what was meant by "abnormal". That is all the Amendment seeks to do. We have followed the precedent in that respect of holding for a six months period. We would not have done so if past experience in relation to that test had proved unsatisfactory.

Amendment agreed to.

The Attorney-General

I beg to move, in page 28, line 5, at the end to insert: Provided that there shall be disregarded any amount received by a company by way of dividend from an associated company except in so far as the dividend is paid out of profits accumulated before the two companies became associated companies; and the Third Schedule to the Finance (No. 2) Act, 1955, shall with the necessary modifications apply for determing the extent to which a dividend was so paid. This is a drafting Amendment.

Mr. Diamond

I am prepared to accept that this is a drafting Amendment, but if the learned Attorney-General Would—

The Attorney-General

I am sorry, Mr. Speaker, but I thought that we had gone a little farther than we have. It is correct to say that this Amendment is of a drafting nature, but I should like to say a word or two about it with the leave of the House.

It is an Amendment which merely provides that we let out of subsection 2 (a) abnormal dividends drawn by a loss-making company in a group on shares which it holds in another company in the group to the extent that the dividend comes out of profits accumulated after the dividend-paying company and the loss-making company become members of the same group. I should never have described that as merely a drafting Amendment, but I had temporarily lost my place.

Mr. Mitchison

The right hon. and learned Gentleman said "after", but I think he meant "before" the two companies had become associated companies. His sense of time seems to have become a little deficient.

Amendment agreed to.

Further Amendment made: In page 28, line 24, to leave out from "whether" to end of line 25 and insert: a notice under subsection (3) of the foregoing section should be given in respect of him".—[Sir E. Boyle.]