HC Deb 24 May 1960 vol 624 cc322-56
The Solicitor-General

I beg to move, in page 14, line 13, after "is" to insert "the appropriate proportion of".

The Deputy-Chairman

Is it convenient for the Committee to discuss, at the same time, the Amendments in line 17, to leave out from the second "the" to the end of line 18 and to insert: proper consideration for all the issued shares in the company".

In line 19, to leave out "the appropriate proportion of".

In line 23, to leave out "the appropriate proportion of"?

The Solicitor-General

I thought that we could discuss the first five Amendments—the four which you have mentioned, Sir William, and the Amendment in page 14, line 39, after "section" to insert: the proper consideration for all the issued shares in a company shall be the actual consideration for the sale of shares mentioned in subsection (1) of this section increased (unless that sale was of all the issued shares) in the proportion which the total number of issued shares bears to the number of shares sold: Provided that where the issued shares of the company are not all of the same nature or do not all have the same rights attaching thereto, the proper consideration for all the issued shares in the company shall be ascertained for the purposes of this section by aggregating the value of the trading stock of the company. ascertained as on a sale in the open market at the time of the sale of shares, and the values mentioned in paragraphs (a) to (c) of the foregoing subsection and deducting therefrom the aggregate amount of the liabilities of the company at that time. (6) for the purposes of subsection (3) of this section the appropriate proportion, in relation to any sale of shares, is the proportion which the actual consideration for that sale bears to the proper consideration for all issued shares in the company, so however that where the proviso to the foregoing subsection has effect".

The Deputy-Chairman

There is a little difficulty in taking the Amendment in line 39 at this point, because there is an Amendment to that Amendment in the name of the hon. Member for Gloucester (Mr. Diamond). I think that it will be best to take the first four Amendments and then to deal with the Amendment in line 39, at which point the hon. Member for Gloucester can move his Amendment to it.

The Solicitor-General

I shall be in great difficulty, in any event, in telling the Committee what these Amendments mean and I think that I should find myself helpless if I could not refer to the Amendment in line 39.

Mr. Mitchison

The position, I take it, is that the Solicitor-General will be speaking to the Amendment in line 13 and that he may also refer to the Amendments in line 17, line 19, line 23 and line 39, to the last of which my hon. Friend the Member for Gloucester (Mr. Diamond) will, in due course, move an Amendment.

The Deputy-Chairman

That is so.

The Solicitor-General

I am obliged to you, Sir William.

This Clause deals with a type of tax avoidance which has had no defenders at all, and in the public comment on it and on some of the subsequent Clauses which attach to it there has been general approval of what we have done. May I show how it works? Assume that in the ordinary way of business a company is formed to put up a large block of offices and at the conclusion of its operation to sell those offices to a company which intends to hold them as an investment. Obviously, for the company which is putting up the building, the building is its trading stock and it will pay tax on the profits which it makes on putting up and selling the building.

8.45 p.m.

What has been happening is this. Instead of the company which puts up the building selling its building, its trading stock, when the building is completed or almost completed the shareholders in the company that has put up the building sell their shares to the company which is to hold the building as an investment. By that very simple device, the first company has converted what is a trading profit into a tax-free capital gain in the shape of the payment for the shares.

That is not only susceptible of being carried out by companies that are dealing in buildings or land. It is obviously susceptible to extension to any case where the trading stock in the first company comprises some very large single item. I suppose that a large generator or anything like that would be equally capable of being used for the purpose of carrying out this avoidance device. It is, of course, obviously grossly unfair that one type of trading company should be able to dispose of its trading stock in such a way as to avoid the usual taxation payable on the profit arising on the disposal of trading stock, and thereby avoid paying its appropriate share of taxation, at the expense of other taxpayers—and of other traders, in particular.

Having said that, I must explain how the Clause operates. I apologise for wording that I admit is very difficult of apprehension. I can only pray in aid what the Royal Commission said about this type of case: We accept that there are several valid reasons why income tax legislation should be difficult and obscure. Not infrequently, its conceptions represent an attempt to dress what are really mathematical formulae in the vesture of English prose. I regret to say that that particularly applies to the subsections we are now seeking to amend. If it were not so, I should have asked the Committee to take on trust what the subsections do as amended, but I think that I owe the Committee an explanation of how the Clause works. I hope that if I give an explanation on the Amendment it may save time on the Question, That the Clause stand part of the Bill—

Mr. Mitchison

Perhaps I may ask a question of the Solicitor-General now—and also take the opportunity of thanking him for dealing with the matter in this way. I am sure that he is enlightening all of us.

Suppose company A owns a site, let us say, and puts up a building on that site. It thereby has an increase in its assets. Its shares are then sold to company B—or, at any rate, to someone else. What happens to the building? It still remains the property of company A. Perhaps the Solicitor-General will explain that.

The Solicitor-General

Yes. Company A has passed into the ownership of company B, and the shareholders of company A, who financed the building or, perhaps, part of it, instead of having to pay tax on the profit that has been shown on the disposal of their trading stock, take it in the form of a capital appreciation in the purchase price of their shares. The hon. and learned Member for Kettering (Mr. Mitchison) has realised that what is sold are the shares belonging to the shareholders in the first company. It is the sellers with whom we are concerned.

Mr. Mitchison

Let us take the state of affairs which the hon. and learned Gentleman has explained. Company A still owns the appreciated asset. At some time or another, that appreciated asset will pass to someone else, dealt with in some way or another— or is that not so? Does the shell, so to speak, the form of company A, remain permanently in the hands of the purchaser of the shares?

The Solicitor-General

The whole essence of this operation is that the purchaser intends to hold the asset. It works only in that case. Instead of buying the building as he would normally do, when completed, holding it as an investment and letting it for offices and flats, he holds the shares which control the company which still owns the asset.

Subsection (1) describes the kind of company, sales of which are within the Clause. Also, it lays down the first condition for the operation of the Clause, that is to say, that there must have been a sale of the shares of a trading company of such a prescribed type to a person who either at the time controls the company or will control it after the sale.

Subsection (2), in effect, lays down the second condition for the operation of the Clause, that is to say, that after the sale of the shares the trading stock will not have been disposed of in the course of trade. In other words, it will be held, as I tried to make clear to the hon. and learned Member for Kettering (Mr. Mitchison). The subsection works in bringing the Clause into operation unless it is shown that all the trading stock belonging to the company at the time of the sale will continue to be used as trading stock thereafter. If that is not shown, the seller will be liable to tax on his share of the profit which the company would have made if the transaction had been carried out in a straightforward manner, in other words, if the trading stock had been sold in the usual way instead of there having been the colourable transaction in the shares of the company.

We then come to what I regret to say are complicated subsections, subsections (3) to (5), which are designed to ascertain what is the seller's share of such profit. The first task is to ascertain what would have been the profit on the sale of the trading stock if it had been straightforwardly sold. That is obviously not the whole of the purchase price of the shares because the purchase price may have been increased by there being net assets other than the trading stock or reduced by there being net liabilities.

For example, if a company had as its trading stock a building worth £500,000 and net liabilities of £300,000, and all the shares were sold, the purchase price would be £200.000, because the purchaser would have taken over the liabilities as well as the building. Thus, if one wishes to ascertain the value of the trading stock, in this case the building, one must add to the purchase price of £200,000 net liabilities of £300,000 to reach the figure of £500,000. Equally, on the other hand, if a company has net assets, apart from the building in question, these must be deducted from the purchase price.

Again, perhaps it might help the Committee if I gave an example. Let us take a building worth £500,000 and other net assets worth £300,000. The purchase price would be £800,000. To arrive at the value of the building, one deducts the net assets other than the building, namely, £300,000, from the purchase price to arrive at the £500,000. These are calculations laid down by subsection (3, a) and subsection (3, b).

To make these calculations, the first thing to do is to value the other assets. The way to do this is laid down in subsection (4).

Let me give a simple example. Take the case where there are no liabilities and a purchase price of £500,000 for the shares. It would obviously be unfair to take that as the value of the trading stock alone. In the first place, it might contain an element paid in respect of plant and machinery. That is dealt with in subsection (4, a). Secondly, the purchase price for the shares would contain an element for goodwill. That is allowed for if the goodwill had been paid for on a previous purchase of the business. That is dealt with in subsection (4, b).

Mr. Denzil Freeth

Will the figure of goodwill in the balance sheet be taken into consideration in relation to subsection (4, b), or will the valuation be entirely separate from the value given in the last balance sheet?

The Solicitor-General

I think that I am right in saying that it does not matter at what figure it stands in the balance sheet. The test is: what has been paid for it? Perhaps I will have an opportunity to check that point before we come to the Question, "That the Clause stand pant of the Bill". If what I have said is wrong, I will correct it.

The third item is assets other than the trading stock or the assets on which capital allowances are given—things like securities and cash at the bank. These are valued at market valuation and are taken into account in subsection (4, c). If each of those assets under paragraphs (a), (b) and (c) of subsection (4) is valued at £100,000, there is a total of £300,000 under subsection (4).

Mr. Freeth

I am sorry to interrupt my hon. and learned Friend again, but these are important points. My hon. and learned Friend has referred to the value of the sale of other assets. If those assets include shares in non-quoted companies, will the same procedure be adopted for their valuation as in the case of shares in an unquoted company in a deceased's estate?

The Solicitor-General

The test is sale in the open market. I think that that is the same test as in the case that my hon. Friend has given. I do not like answering these points "off the cuff" and, again, I will check what I have said, but I think that my hon. Friend is right.

I have taken the case so far where the other values under subsection (4) amount to £300,000. The next thing that one has to consider is the liabilities. With aggregate liabilities of, say, £100,000, by deducting them from the other assets to which I have referred one arrives at the net assets other than the building in question. That transaction is carried out under subsection (3, a). As amended it will read reduced by … any excess of the aggregate of the values specified in the following subsection over the aggregate liabilities at the time of the sale. We have then got to the net assets, and by deducting the net assets from the purchase price one arrives at the proper purchase price ascribable to the trading stock. Again, that is what subsection (3, a) says. The value of the net assets is deducted from the proper consideration for the shares.

"The proper consideration" is defined at the beginning of Amendment No. 67, in page 14, line 39. In the case that I have given where all the issued shares are sold, it is the actual consideration. The Committee will not want me to go through the same rigmarole with regard to net liabilities. I think it follows that, in the case of net liabilities, subsection (3, b) is applied as against subsection (3, a) in the case of net assets.

What we have so far is enough for the simple case where the shares have been sold. We have what would be the proper price for the trading stock if the whole of it had been sold. Of course, only part of the shares may have been sold. That introduces a complication. Take, for example, the case of a temporary which wants to use the building and has already paid for half the shares in the company, the other half of the capital having been put up by the builder. If the user buys the builder's half he is, in effect, buying only half the building and the builder is getting only half the profit on the trading stock.

9.0 p.m.

What we have to get at is the profit ascribable to the trading stock, which is the profit assessable to tax. We have to assess the appropriate proportions of such profits attributable to the parcel of shares sold. That is Amendments Nos. 63 and 64 and the following three Amendments. which are consequential. The Amendments say that we must take the actual consideration paid and then multiply it so that it would be the proper consideration for all the issued shares in the company. That is in Amendments Nos. 67 and 64. Amendment No. 67, line 3, states: . increased … in the proportion which the total number of issued shares bears to the number of shares sold We are then back to our earlier case where we worked out what was the proper consideration for all the issued shares and we make the adjustments to that figure in accordance with subsections (3) and (4), in the way I described. That gives the proper purchase price for the whole of the trading stock. We work out from that what would be made on the sale of the whole of the trading stock—-that is, lines 13 to 17—and all that we have to do then is to work out the appropriate proportion attributable to the seller's parcel of shares. In other words, if he sold half the shares he would he taxed on half the profits. That is Amendment No. 63 and the first part of the new subsection (6) in Amendment No. 67.

There is still one other complication which is taken care of in the proviso to Amendment No. 67 and the end of subsection (5) as it appears in the Bill. The shares may not be all of one class. Amendment No. 67 provides for this in the proviso. It works, first, by aggregating all the assets of the company, that is to say, the trading stock plus the assets mentioned under subsections (4, a), (4, b) and (4, c), and deducting the aggregate liabilities, that is, lines 11 and 12. That represents the value of all the shares. From that we get the profit on the sale of the trading stock. We then go to the new subsection (6), line 15, starting with the words, "so however" to the end of the present subsection (5), and this provides that the profit on the whole of the trading stock shall be divided among the various classes in such proportion as may be just.

Again, I apologise for the complexity of these Clauses. It is inherent in the situation when we are striking against a very complicated device and we do not want to go further than we must to bring it to an end. Secondly, we are, trying to translate what the Royal Commission said were, in effect, mathematical formulae into legal terms, and that makes the wording complicated.

Mr. Mitchison

I am obliged to the hon. and learned Gentleman. I appreciate the arrangement for finding the appropriate proportion when the shares are of different kinds, but the arrangement involves comparing the actual consideration with what, in all probability, would be a larger figure, the proper consideration for all the shares.

Is there not a difficulty there? Suppose that the actual consideration is rather high or rather low and, therefore, does not bear a true proportion to the proper consideration, which is arrived at in a different way. Will the hon. and learned Gentleman consider this and let me know whether the difficulty is, or can be, met? I hope I have made myself clear.

The Solicitor-General

I am sure that the fault is mine, but I do not gather the case which the hon. and learned Member is putting. If the shares are all of one class, to find the profit that would have been made on the sale of the trading stock, when all the shares were sold, one looks at the actual consideration that was paid for all the shares, deducts the net assets, including the assets which are not ascribable to the trading stock, and one arrives at the trading stock.

Mr. Mitchison

I am obliged to the hon. and learned Gentleman. I apologise if I did not make myself clear. May I give an instance? Let us assume a company with a complicated capital structure and that not all the shares are sold. We then have to sort out the appropriate proportion by comparing the amount of the consideration with what is called, in the Amendment, the proper consideration for all the issued shares in the company". I see how that works where all the shares are similar. Where they are not similar, however, we are left with two figures, one of which is arrived at on the basis of the actual consideration and the other is arrived at on the basis of the proper consideration.

The hon. and learned Gentleman has told us how the proper consideration is arrived at. Surely, the proportion is the proportion of one thing to another and we are comparing ultimately two in-comparables.

The Solicitor-General

The case cited by the hon. and learned Member is the one raised by the following Amendment of the hon. Member for Gloucester (Mr. Diamond). I am sure that we shall have a chance of discussing it then, when, I am happy to say, my hon. Friend the Economic Secretary will be dealing with it.

5 "the proper consideration for all the issued shares in a company shall be the actual consideration for the sale of shares mentioned in subsection (1) of this section increased (unless that sale was of all the issued shares) in the proportion which the total number of issued shares bears to the number of shares sold:
10 Provided that where the issued shares of the company are not all of the same nature or do not all have the same rights attaching thereto, the proper consideration for all the issued shares in the company shall be ascertained for the purposes of this section by aggregating the value of the trading stock of the company, ascertained as on a sale in the open market at the time of the sale of shares, and the values mentioned in paragraphs (a) to (c) of the foregoing subsection and deducting therefrom the aggregate amount of the liabilities of the company at that time.
15 (6) For the purposes of subsection (3) of this section the appropriate proportion, in relation to any sale of shares, is the proportion which the actual consideration for that sale bears to the proper consideration for all issued shares in the company, so however that where the proviso to the foregoing subsection has effect".—[The Solicitor-General.]

Question proposed, That those words be there inserted.

Mr. Milan

I beg to move, as an Amendment to the proposed Amendment, in line 7, after "thereto", to insert: and the sale was not of all the issued shares".

Mr. Stevens

On a point of order. I seek your guidance, Sir William. While I much appreciate the procedure which my hon. and learned Friend the Solicitor-General has followed in taking us through the whole Clause and having a general discussion on Clause 19, will that exclude a short debate on the Question,

Mr. Denzil Freeth

I should like to refer to page 14, line 40, and ask Who decides as to the proportion which may be just between different classes of shareholders. Is it to be the shareholders themselves? There can be occasions when the interests of different classes of shareholders can be diametrically opposed.

The Solicitor-General

That will be decided, if necessary, on appeal to the General or Special Commissioners. Obviously, for the reason given by my hon. Friend, it is not susceptible of decision by the shareholders themselves.

Amendment agreed to.

Further Amendments made: In page 14, line 17, leave out from second "the" to end of line 18 and insert: proper consideration for all the issued shares in the company".

In line 19, leave out "the appropriate proportion of".

In line 23, leave out "the appropriate proportion of".—[The Solicitor-General.]

Amendment proposed: In page 14, line 39, after "section", insert:

"That the Clause stand part of the Bill?"

The Deputy-Chairman

We have not got that far, because we are now turning to an Amendment in the name of the hon. Member for Gloucester (Mr. Diamond) which is being moved by his hon. Friend the Member for Glasgow, Craigton (Mr. Millan) and there is to be a separate debate on that.

Mr. Millan

The Solicitor-General has given us a short explanation of what the Clause is about and I am sure that we are all indebted to him so far as we have understood what he has been saying. The problem is to find the value of the trading stock and the hon. and learned Gentleman has said that that is done by a process of elimination, by eliminating from the assets and liabilities of the company all the assets and liabilities, except the trading stock, and then deducting the net assets from the proper consideration, which is defined in the Clause.

One of the problems is to get a value for the proper consideration. When there is only one class of share, that is a matter of pure arithmetic, in that one takes the actual consideration which has been given for the number of shares which have actually passed in transfer and grosses it up to get the actual consideration, which is then defined as the proper consideration for the whole of the shares of the company.

But when there are different classes of shares, it is very much more difficult to gross up and get the assumed total consideration. Therefore, under the proviso of the Chancellor's Amendment, a special procedure is laid down in a case where a company has shares which are not of the same nature and which do not have all the same rights attaching thereto. One can see that there may be circumstances in which that special proviso is required.

The special proviso makes a considerable change in the whole procedure, because, instead of getting the value of trading stock by a process of elimination, the proviso introduces the principle that the trading stock will be ascertained as on sale in the open market, whereas the rest of the Clause is designed to prevent the necessity of having to get the value of the trading stock as ascertained on a sale in the open market, presumably, because that is something which in normal circumstances will give rise to considerable difficulty.

We therefore want to consider whether the proviso is sufficiently restrictive, in other words, whether it is in fact restricted to circumstances in which the proper consideration cannot otherwise be calculated. It is my submission that in fact the proviso is too wide and that it includes certain cases where the proper consideration could well be calculated in terms of the Clause taken as a whole, because, if all the issued shares in the company are sold, then the question of grossing up does not arise and the actual consideration is known and is, therefore, the proper consideration, and there seems to be no necessity for the proviso in that case.

The purpose of my Amendment is to eliminate from the proviso cases in which all the issued shares in the company are actually sold and to restrict the proviso to cases of companies having different classes of shares where not all the shares of the company are actually involved in the transaction.

It would be possible to get the proper consideration with a company with different classes of shares, even if the circumstances were only such that a certain number of each category of shares was involved in the transaction, because one could then gross up each category of shares individually and add the gross amounts together to get a total consideration, which would then become a proper consideration under the terms of the Clause. Unless, therefore, I am misunderstanding the Chancellor's Amendment as it is in its present farm, the proviso is far too widely drawn and he ought to be able to accept my Amendment. This is a technical point, and no political considerations are involved. My Amendment would improve the Government Amendment.

9.15 p.m.

The Economic Secretary to the Treasury (Mr. Anthony Barber)

Perhaps I may be allowed to congratulate the hon. Member for Glasgow, Craigton (Mr. Millan) on the exposition of his Amendment. As he realised full well, and as my hon. and learned Friend the Solicitor-General made clear, under the Chancellor of the Exchequer's Amendment the amount on which tax is payable is derived from various factors, one of which is the proper consideration for all the issued shares, which is referred to in the new subsection (5) which results from the Amendment moved by my hon. and learned Friend.

Normally, of course, this will be based, as the hon. Member for Craigton said, on the actual consideration for the shares sold. Obviously this is the simplest method of making the calculations. Clearly, as accepted on all sides, such a calculation, by reference to the actual consideration for the shares which are sold, would be quite inappropriate in a case where there were different classes of shares, or where all the shares did not have the same rights. So it is that my right hon. Friend the Chancellor of the Exchequer has proposed the method of calculation which is covered by the new proviso. I need not refer to it in detail.

I understand the hon. Member for Craigton to be saying that this proviso, while he accepts it as being necessary in the case of shares of different classes, is not necessary in the case of shares of different classes in one particular circumstance—that is where all the issued shares are sold. He says that in that event one would not need to apply the same difficult calculation stated in the proviso, but could go straight to the more simple calculation which is made by reference to the actual consideration for the shares.

I appreciate the point which he has in mind, but I doubt whether, if his Amendment were to be accepted, it would in 'practice have the effect for which he hopes. A taxpayer who was disposed to sell all his shares could—if they were shares of varying classes and he saw some disadvantage in having his liability calculated by reference to the actual consideration, which is what the hon. Member's Amendment would mean, or, on the other hand, saw same advantage in having his liability calculated by reference to the market value of the trading stock, which would be the case if the proviso were left unamended—quite easily avoid the effect of the hon. Member's proposed Amendment by retaining in his possession one share.

Nevertheless, despite the fact that the principal object of the hon. Member's Amendment can be avoided quite easily by the taxpayer, I realise that there is a point here which should receive further consideration. I wanted to delay the decision until I had heard exactly what the hon. Member had in mind. I hope that on the assurance that we will give further consideration to what he said, the hon. Member will allow my right hon. Friend to decide whether in all the circumstances we think it is appropriate to introduce an Amendment on Report.

Mr. Diamond

I am sure that my hon. Friend the Member for Glasgow, Craig-ton (Mr. Millan) is grateful that the matter is receiving consideration. I rise to address the Committee only to make sure that that consideration will be on the right assumption. The consideration given will not be proper consideration if the Government misconceive one of the reasons behind the Amendment. The Economic Secretary to the Treasury has assumed a reason behind the Amendment which does not exist, namely, an attempt to avoid manipulation by a potential tax avoidance. That is not the purpose of the Amendment. Its purpose is to retain simplicity in all cases where one does not have to go into complexity. It rests on the proposition that even in a Finance Bill simplicity is better than complexity.

The simplicity is the machinery provided for the generality of cases under the Clause. The complexity is the single piece of machinery devised to meet awkward circumstances where one is selling part of the shares and those shares have different right or are of different categories. I am sure that consideration aught to be given to the Amendment but only for the purpose of retaining simplicity where that is possible.

Mr. Barber

I appreciate the point that the hon. Member has made and I realise that the purpose is to substitute simplicity in one class of case for complexity. The only point I was making was that if a taxpayer thought that complexity would pay him he could easily avoid the simplicity of the Amendment, but that is not conclusive by any means against the proposition put forward by the hon. Member for Craigton.

Mr. Diamond

A would-be manoeuverer could manoeuvre whether the Amendment were accepted or not. Therefore, the Amendment does not deal with possible manoeuverers. It has only the wholesome purpose of getting simplicity in a Finance Bill.

Mr. Millan

This is a question of simplicity. As the Clause as a whole has been drafted from the point of view of getting the value of trading stock by the process of elimination instead of getting a valuation as on the open market, that is presumably the simplest method and it is a method that should be used in all circumstances where it would give accurate results, and that is the whole reason for the Amendment. It is true that when dealing with transactions of this complexity and trying to provide legislation to deal with the different circumstances that may arise, one has to have some regard to the question of manipulation. The Economic Secretary seems to have that very much in mind and I am sure that all of us are very glad that it is so. On the generous undertaking which the Economic Secretary has given to look at this question, I beg to ask leave to withdraw the Amendment.

Amendment to the proposed Amendment, by leave, withdrawn.

Proposed words there inserted.

Mr. Mitchison

I beg to move, in page 15, line 36, at the end to add: (9) For the purposes of subsection (1) of this section the expression "a person" shall be deemed to include—

  1. (a) persons carrying on business in partnership,
  2. (b) persons acting together by agreement in order jointly to secure control of the company,
  3. (c) trustees of the same trust; and
  4. (d) a person and his nominee or nominees.

The Deputy-Chairman

Perhaps we could discuss also the Amendment in page 16, line 26, at the end to add: (4) Subsection (9) of the last foregoing subsection shall apply to subsection (1) of this section as it applies to subsection (1) of that section.

Mr. Mitchison

I respectfully agree. Clauses 19 and 20, and, indeed, Clause 21, are all a part of the Bill which deals, broadly speaking, with the same subject matter.

On the Amendment which I have moved, the operation of Clause 19 depends on a sale to a person who has, or in consequence of the sale will have, control of company A. Let us put it quite generally. Supposing there is a sale to a group of persons who have control as a result of the sale. Unless I have interpreted the Clause wrongly, it seems to me that in that event one may have all the mischief at which the Clause is aimed yet the purpose of it may be avoided by the sale being to a group of persons instead of to one person. That is the short and simple point which is intended to be raised by the Amendment.

In the Amendment we have suggested four likely groups, a partnership, a group of persons agreeing jointly to secure control of the company and acting to that end—they may or may not be partners and it does not matter very much that there will be overlapping cases—trustees, and someone and his nominee or nominees. I can see that the last category might conceivably be covered.

The second Amendment is simply to apply the same point to Clause 20, where again the Clause moves on a sale to a person who has, or in consequence of the sale will have, control of the company.

The only other matter that I need mention very shortly is that there are provisions in Clause 22, but I think I am right in saying that they do not cover this point. They cover other points that have some resemblance in some respects, but not much, and I hope that we shall hear from the Government that there is an answer to this difficulty. In one Finance Bill after another one seems to find cases where elaborate provision is made to cover a single person, but it does not always cover the case where there is more than one person acting together for some reason or another.

Mr. Barber

As the hon. and learned Gentleman says, the purpose of the Amendment is to cover a wide variety of cases in which shares in the company are sold to persons acting together to secure the use of the trading stock and control of the company. For reasons which the hon. and learned Gentleman will appreciate, I think it is somewhat doubtful whether the Amendment is necessary—and perhaps I can explain why—except perhaps in one of the four cases referred to in the Amendment.

9.30 p.m.

Paragraph (a) of the Amendment refers to persons carrying on business in partnership. It is a matter of general interpretation that the singular can be read as including the plural, and the words in subsection (1), shares in the company are sold…to a person… would thus include the case of a sale to two or more persons jointly. The acquisition by a partnership would therefore be covered.

I will leave paragraph (b) and go to paragraph (c), to which the same considerations apply. A joint acquisition by trustees on behalf of a trust is covered for the same reason. Turning to paragraph (d), the hon. and learned Member will find that that point is covered by Clause 22 (3). That subsection reads: For the purposes of this and the three foregoing sections a sale to a company under a persons' control, or to his nominee, shall be treated as a sale to him. The one category to which I have not yet referred is that covered by paragraph (b) of the Amendment. I agree that this possibility is not covered as the Clause stands. We have considered whether it is likely that it would be necessary to cover this sort of arrangement, and have reached the conclusion that it is unlikely, although I agree that it is possible, that two or more companies, or two or more individuals, might wish to share the use of a building or the other trading stock referred to in subsection (1) and might proceed by one of the devices which the Clause is intended to counter.

Nevertheless, in view of what the hon. and learned Member has said, I hope that he will allow us to consider the matter further to see whether it is necessary to bring in an Amendment on Report to cover this possibility, against the background of the sort of avoidance devices that we want to cover by the Clause.

Mr. Mitchison

On a point of this sort I should be very glad to accept the suggestion that the hon. Member has made. I see the force of the singular and plural point; indeed, I had it in mind. But where the whole Clause deals with the sale by a person who has control, or will have control as the result of the sale, it seems a little doubtful whether the Interpretation Act would apply. The foundation of the whole Clause is the question of control by a single person.

I am not particularly disturbed about trustees or the nominees; they are probably covered by the subsection to which the hon. Member referred. But I submit that the first two cases merit consideration. I would also point out that this has been a rather bad racket, and that the people engaged in it are not above making ingenious arrangements to get round the law by getting more than one person to act together. Indeed, I am afraid that the fact of put- ting down the Amendment and discussing it may make it even more necessary to provide against the operations of these persons.

I therefore hope that the Government will consider this point. I have the feeling that in this and other cases we are wrestling against odds, that time is on the side of the swift-footed crooks, and that the Treasury and hon. Members of the Committee are lagging a long way behind. That has been the experience of the past, and that is the reason for some of the other provisions in the Bill.

I thank the hon. Member for the promise that he has made, and I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Stevens

I beg to move, in page 15, line 36, at the end, to add: (9) If after the sale of shares, any asserts of which the value was determined for the purpose of this section in accordance with the provisions of paragraph (a) of subsection (4) are disposed of and the sale, insurance, salvage or compensation moneys exceed the value attributed to the asset under the said paragraph (a) of subsection (4), the excess shall be disregarded in determining any balancing charge to be made as a result of the disposal. My hon. and learned Friend, in his singularly lucid and helpful discourse on the various Amendments which were discussed en masse at the start of our consideration of the Clause, pointed out that in some cases, indeed I think in a very large number of cases, these companies whose main object is to construct buildings will, none the less, when the buildings are finally completed, have left in their possession certain assets such as plant and machinery, which would be the subject of capital allowances for Income Tax and Profits Tax purposes.

Subsection (4, a) lays down the basis upon which these assets would be valued; namely, their written-down value for Income Tax purposes. One has in mind that in these circumstances it is very probable that the plant and machinery would be disposed of. It would be sold or disposed of in some other way, possibly through an insurance claim, salvage or something of that kind, and the amount realised might be in excess of the written-down value for Income Tax purposes. Quite obviously, from that will follow a balancing charge in the ordinary way for tax purposes, and I want an assurance that in these circumstances we should not have the same higher value substituted for the value under subsection (4, a) and thus get a double charge, one the ordinary balancing charge for tax purposes and the other a balancing charge for the purpose of the Clause. I have put down this Amendment in order to clarify that position.

The Solicitor-General

My hon. Friend the Member for Portsmouth, Lang-stone (Mr Stevens) has explained the purpose of this Clause in terms which it would be presumptuous on my part to try to improve upon. My hon. Friend is perfectly right. This Clause as drawn at the moment is susceptible of charging the tax twice on plant and machinery under subsection (4, a) for the reason that he gave

The only trouble is that, although his Amendment is a perfectly correct way of dealing with that problem as an Amendment to the Bill as it is printed, it does not fit the Bill as it has just been amended in the Committee, because in the case where the company's share capital is not all of one class, the Clause does not work by reference to the actual consideration for the shares, but by the figure built up from the value of the assets, and the value of the assets is their written-down value.

If my hon. Friend, having drawn attention to this matter, for which we are very grateful, would be good enough to withdraw his Amendment, I should like to consider how that point can be met before another stage of the Bill.

Mr. Millan

I appreciate why the hon. Member for Portsmouth, Langstone (Mr. Stevens) has put down this Amendment, but it tells only half the story. It is perfectly true that, if an asset has been under-valued, at a subsequent date it will attract a balancing charge, and that has the effect of increasing the trading stock for the purpose of the Clause taken as a whole. On the other hand, if the capital asset has been over-valued, the effect has been to decrease the trading stock value for the purposes of the Clause as a whole. Therefore, I hope that if the Solicitor-General is to look at the question of inserting a provision of this sort into the Clause, he will not only look at it from the point of view of dealing with the balancing charge, but also from the point of view of dealing with the balancing allowances. If it is a question of inequity that someone should be charged tax twice, it is also a question of inequity that someone should get double allowances. That is what, in fact, will happen, unless an Amendment is drafted in such a way as to exclude the balancing allowances as well as the balancing charges.

I was surprised that the learned Solicitor-General was willing to accept this Amendment as it is drafted, or rather the spirit of the Amendment, without drawing attention to the effect of this extremely important aspect.

The Solicitor-General

I will certainly look into the aspect of the balancing allowances.

Mr. Stevens

In view of all the circumstances and the assurance given by my hon. and learned Friend, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Motion made, and Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Houghton

This is the first of a series of Clauses intended to check one of the biggest Income Tax scandals of modern times. Behind this placid debate, which has been a mixture of law and accountancy, lies a story of almost daylight robbery of the public by property sharks who are raised to the stature of national heroes; who appear on the television, who are interviewed in the newspapers and who say, "I made £1 million. I started with £10. Then I bought something and sold it. Then I bought something else and sold that. Then I bought something with money I had not got and sold it, and look at me now"—

Hon. Members

Broke.

Mr. Willis

That is why they are all here.

Mr. Houghton

This Clause catches income dressed up as capital and we begin to understand why these enormous blocks of buildings are going up and why they are built by one company which sells itself to another and the proceeds are treated as a capital gain in the hands of the vendor. For once in a way there is an ingenious device being used against an ingenious device. This Clause treats the substance of the vending company as its stock-in-trade. If that is not so, the price received by the seller is taxed as income.

I regard this as legislation in blinkers. One day, Sir Gordon, I think that it will be necessary for me to run away with the Mace in protest against the way in which we are asked to do our business in connection with the Finance Bill. First of all an unintelligible Finance Bill is published without a word of explanation. Then we have—

The Chairman

Order. I must ask the hon. Gentleman to relate his arguments to the Question before the Committee.

Mr. Houghton

I am coming to this very Clause in a moment, Sir Gordon.

I am saying that first a Finance Bill is published without a word of explanation. Then we get an explanation of the various Clauses, including this one. The next thing that happens is that Amendments are put down in the name of the Chancellor of the Exchequer altering the Clause which was originally explained without a single word of explanation about what the right hon. Gentleman is up to. I see that he is being taken to task by a reputable newspaper for this practice. I say that nine-tenths of the Committee look at this Clause in a state of more or less bewilderment, hoping that it will achieve its purpose but not being very sure that it will.

9.45 p.m.

I ask the Solicitor-General one question which I think is material to consideration of the Question, "That the Clause stand part of the Bill." It is whether Clause 26, in whatever form the Committee or the House may eventually pass it, will stand guard over Clauses 19 to 25. I seems that if Clause 26 is to stand guard over the attempts at closer definition of avoidance practices in these Clauses we have rather more assurance that dodgery will be checked, even if it might get through the actual terms of the Clauses concerned. If, however, each Clause stands by itself, and Clause 26 has no relationship to those which go before, we may well find that the same humiliation will come upon us in a year's time when the Chancellor will say, "Despite all our efforts last year, people are finding loopholes through our anti-avoidance legislation."

That, I think, is an important factor because here we have a Clause dealing with trading companies. We have a Clause which follows dealing with non-trading companies, another Clause after that dealing with holding companies, and another dealing with manufactured dividends. Unless Clause 26 is going to do something about the loopholes in these Clauses as distinct from dealing with new things which may be discovered apart from these Clauses, it will not be fully effective.

There I leave it. I have a mixture of indignation and contempt for the people who quite clearly have been robbing the Exchequer in recent years. I hope people outside will take note of the fact that the great mass of wage and salary earners in the country today are paying up to the hilt while these sharks are getting away with millions of pounds and depleting the Exchequer very seriously.

I should like to have an estimate from the Solicitor-General of the amount of money which has been lost altogether by these practices. I do not think it right, having regard to the gravity of the matter that we are discussing, that we should go on discussing it in the atmosphere of a pleasant Sunday afternoon. I know one has to bring dispassionate judgment and critical attention to the detail of Clauses of this kind, but there is a strong emotional background to all this and I do not think that we ought to ignore it, especially when we discuss the Question, "That the Clause stand part of the Bill."

Here we welcome once more the anti-avoidance devices which the Chancellor has put into the Bill. It makes us wonder, however, what would have happened to all this if the Chancellor had to occupy more of the Bill with current Budgetary legislation. I stress again that Clauses of this kind would be much more appropriate to a separate Bill, a taxes management Bill, which we could rely on the Government introducing in the normal course of the Parliamentary programme and not have to await the opportunity of putting proposals like this in a Finance Bill only when it is free from other encumbrances.

Some of these Clauses—and I am sure this is one—have been waiting for some time for the attention of the House and this Committee. Action upon them has been delayed, and while action has been delayed money has been lost. This fraternity probably thinks that it has already inherited the wealth and esteem of the country. I am glad that this Clause will put a stop at least to some of its malpractices.

Sir J. Barlow

Before the hon. Member sits down, will he say how he relates—

Mr. Houghton

I have sat down and I have said all I am going to say.

The Chairman

Order. I call the next speaker. Mr. Stevens.

Mr. Stevens

I sympathise with a good deal of the boisterous mood in which the hon. Member for Sowerby (Mr. Houghton) finds himself, on two grounds. First, I recognise the unfairness, as it seems to most of us on both sides of the Committee, when the "sharks"—if we can call them sharks—by clever devices change what he and I and you, Sir Gordon, would call income into nontaxable receipts. Secondly, I entirely share his views about the publication of an obscure Finance Bill and then, later, even more obscure Amendments. It would be of the greatest help if, at the time of the publication of the Finance Bill, there were also published a reasonably short note explaining the object of the exercise. This is not a new point, and I hope that the hon. Member's remarks have rubbed it in.

I want to raise two points about subsection (1, b) where reference is made to forming: a substantial part of the assets of the company. What is meant by "a substantial part"? That is important. I do not want to protect the "sharks" in any way, but I want to protect legitimate enterprises. [HON. MEMBERS: "Oh."] It is extraordinary how hon. Members opposite seem to have no wish to be just. They simply have a hunch, and they are not in the least interested whether it is carried out fairly or unfairly. We on this side of the Committee want to catch those who need to be caught, but we do not want to bring into the net those who are carrying on perfectly legitimate trading enterprises from which the constituents of hon. Members opposite benefit very much.

I have in mind groups of companies which form subsidiary companies for a specific project. It could be a large firm of public works contractors. I believe that it is common practice, too, in the cinematograph entertainments industry for a separate production company to be formed for specific films. Those companies are disposed of when the film has been produced and has passed into the hands of the exhibitors. It seems to me that the Clause as drafted would bring into the tax penalty—if penalty is the right word—or tax charge the disposal of shares of those companies in the normal process of amalgamation and reconstruction when their useful job as part of the whole undertaking has been completed.

I do not know whether my hon. and learned Friend has considered that point. I should like him to make some observations on it and on the other point which I have raised.

Mr. Millan

Like other hon. Members. I welcome the Clause. It is, I think, a valiant and honest attempt to deal with a very serious abuse. I simply wish to ask three questions for clarification.

There is a reference in subsection (3, a) to "aggregate liabilities". My hon. Friend the Member for Gloucester (Mr. Diamond) and I had an Amendment on this point, which was not called. May I ask the Solicitor-General what he has in mind under the term "aggregate liabilities"? It is noticeable that when it comes to a question of assets, first, the assets are defined and, secondly, indications are given as to how the evaluation of assets in different categories is to proceed. But there is no corresponding definition of liability. In the normal course of events liabilities are quite easily determined and there is no necessity for a great deal of definition, but there is the question of contingent liabilities, or liabilities which are known but the exact value of which cannot properly be ascertained. They ought to be taken into account.

If we are dealing with a building company, for instance, which is the sort of company which will often be dealt with under the Clause, the question of contingent liabilities might be very important from the point of view of common law claims for accidents by employees, and there might be quite substantial contingent liabilities if there were a particularly tragic accident on the site of a building. That would be material in calculating the net assets of the company for the purpose of the Clause.

My next point relates to subsection (4, b)—goodwill. I am not very clear about this, but from the Solicitor-General's previous answer I take it that goodwill enters into the reckoning only where there has, at some time or other, been an actual cash payment for it. That is very desirable, and I should like the hon. and learned Gentleman to confirm that that is the intention.

The third matter on which I should like some clarification appears in subsection (5), where the "appropriate proportion", in the case of a company with different classes of shares, is defined as …such proportion as may be just having regard to the number and nature of the shares sold and the rights attaching thereto… It is obviously impossible to lay down in this Clause all the different circumstances that might be expected to arise in particular cases. Nevertheless, this is just the sort of language that is bound to give the Inland Revenue a considerable amount of difficulty. It is, of necessity, rather vague, and the use of value terms such as "just" makes it all the more difficult of interpretation. I think that we need from the Government a clearer indication of how exactly they think this definition will be applied in practice.

Mr. Denzil Freeth

I should like to raise with the Treasury some points that were first brought to my attention through an article in the Financial Times of 10th May, signed, "Our Legal Correspondent". Although it is very important that we should, as the hon. Member for Sowerby (Mr. Houghton) said, catch all the sharks, for the sake of justice we want also to be careful that while catching the sharks we do not penalise the innocent minnow. I want to raise the case of the innocent shareholder, who might be the aunt, of either the hon. Member for Sowerby or of myself, who happens to be a shareholder in a company that has been going along placidly for many years until it enters into one of the particular occupations described in the Clause, and eventually a take-over bid is made for its shares.

The shareholder to whom I refer, who might have been a shareholder for a very long time, finds herself in the position that if she was holding shares in a company manufacturing bull's eyes she would be able to accept the price offered by the would-be purchaser without incurring a tax liability, but because she happened, in all innocence and by chance, to hold shares in a company in the middle of erecting a building she is thereby immediately faced with a tax liability. This seems to me to be a danger.

Secondly, if the shares she holds are sold in the normal course of the management of her investments on the Stock Exchange—that is, if she sells them to a buyer of whose actual name she is ignorant until she receives the transfer—it may well be that the block of shares she sells to the purchaser is the block of shares that gives the purchaser the control of the company. Subsection (1) tells us that the Clause refers …to a person who has, or in consequence of the sale will have, control of the company… I feel that there should be some wording in the Clause—I know not what—to deal with this particular situation, however unlikely it may be deemed to be at the present time.

Thirdly, we have the question of how much tax a person caught up in this kind of thing need pay. It might be an amount which it would be very difficult for the seller to compute and it might be some time before the seller had full knowledge of it. As the article in the Financial Times said: If, for example, the company is one which carries on a trade dealing in securities or Land or buildings, or of developing land, it is possible for the seller of the shares to be regarded as notionally having received the proportion of the profit which the company would have made if it had sold its trading stock and distributed the profits by way of dividend. His liability would depend upon what the purchasers did with the company they had acquired. Finally, I should be grateful if the Treasury Ministers would look at the wording of subsection (6). The income chargeable under subsection (6) is to be deemed for the purposes of this subsection to be the highest part of his income". Therefore, we are dealing with a fairly substantial tax liability. Again, to quote the article in the Financial Times: It is true that Clause 19 provides that any tax which is so chargeable on the former shareholder and which is not paid by him shall be recoverable from the company concerned; but the initial liability is undoubtedly his. And on what grounds can he properly refuse to pay? It is possibly desirable that the Revenue should be in a position to recover tax both ways, but the circumstances in which it will be sought to be recovered from each ought surely to be more clearly defined. I have tried to see whether it was possible to put down Amendments to the Clause to highlight the particular difficulties to which I wished to draw attention, but I confess that my ingenuity was completely baffled in that attempt. While I do not ask for an answer tonight from whoever its to reply for the Government, I should be very grateful if the Treasury Ministers would look at the circumstances I have outlined.

10.0 p.m.

Mr. Diamond

In spite of what I said earlier about simplicity, I am bound to recognise that this Clause is a complex one. It covers two pages of 45 or 50 lines each, and it is necessary far us to consider it closely in order to deal with a particular tax-dodging device. It is not a satisfactory Clause in the full sense of the term.

As soon as a matter becomes really difficult, Parliament gives up its responsibility, saying "It is too difficult for us; we must leave it to the Executive." This is the second anti-tax avoidance Clause in the Bill, and it is the first of many Clauses in respect of which Parliament recognises its inability to cope with the difficulties of the situation, because of the kind of tax structure we have, and leaves things to the Executive.

We are not yet dealing with Clause 26, but on this Clause, which is very complicated, Parliament says that it shall be dealt with on whatever basis is just, leaving it to the Commissioners, the Executive, to decide what is just. We are continually forced into the position of being incapable of carrying out our proper function of legislating and deciding what we want, putting it in clear language so that our wishes can be followed. We are forced into this position constantly because of the basic anomaly of our tax structure.

When the right hon. Gentleman the Chancellor of the Exchequer introduced the Clause on the Second Reading of the Finance Bill, he was much more forthcoming than was the hon. Member for Portsmouth, Langston (Mr. Stevens), who said that the Clause arose because of the difficulty of dealing with people who transferred taxable receipts to nontaxable receipts. The Chancellor was much more forthright and said: …these Clauses are designed to ensure that trading profits are dealt with as trading profits for tax purposes and do not escape liability by being disguised as or turned into capital gains."—[OFFICIAL REPORT, 3rd May, 1960; Vol. 622, c. 893.] This is the second Clause dealing with tax avoidance. This is the second Clause which arises because there is the difficulty of preventing people from turning income into capital. We have this difficulty because of a tax structure under which part of money available for spending is called income and the other part of the money available for spending is called capital gains which are entirely free of tax. People are induced therefore artificially so to manipulate their affairs that that which is income would seem to be capital.

I propose, subject to catching your eye, Sir Gordon, on each Clause where we come up against this same difficulty to draw the attention of the Committee to it. I have tried persuasion by all sorts of means. I have tried prose and I have tried poetry. Whichever way I try I always seem to fail. I now propose to try to be persuasive by irritation and, when we come to the Question, "That the Clause stand part of the Bill", to draw attention to this frightful difficulty and to our inability to deal with the situation simply because we have a tax structure under which capital gains are free of tax.

Sir Kenneth Pickthorn (Carlton)

I agree with the remarks of the hon. Member for Gloucester (Mr. Diamond) about the undesirability of the House of Commons handing over parts of its duty in this connection to the Executive. I agree with the hon. Member for Sowerby (Mr. Houghton), who I must not call my hon. Friend, in his indignation against large evaders. I suppose that in strict morals we ought to be equally indignant against small evaders, and that would carry us a very long way indeed.

I also agree with the hon. Gentleman in his estimate, except I thought that it was perhaps generous, that in this matter nine-tenths of us are floundering in helpless obscurity. Since everyone else who has spoken on this Clause has been one of the saved 10 per cent., I have been half tempted for some time to illustrate the difficulties and, I hope, to earn the sympathy, not the contempt, of the hon. Member for Sowerby. I thought that I might illustrate the difficulties of those of us who are in the great majority. I was encouraged—I had almost given up thinking that I would be—by my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth). He half asked, or more than half asked, one of the questions that I wanted to put. That encouraged me to think that perhaps it might be worth putting it.

The whole matter turns on the words in line 40 and the following two or three lines. This is the question, or something like it: are there means of knowing so much about the sea in which the sharks about which we have heard so much swim that we know that they must be in collusion with each other? Otherwise, I am not clear about the relations between company "A" and company "B". Does the seller—here we come back to the aunt from Basingstoke—always know to whom he is selling? If not, is not the effect of the Clause to put upon the seller—he may be a National Provincial nominee—a heavy tax which he can avoid only by proving something which he cannot know and which would be in the knowledge and control of the buyer but not of the seller?

If that is the fundamental effect of the Clause—and I think that it is—then I am bound to say that, so far, we have had nothing like an attempt from the Government Front Bench to explain why it is fair to put either the seller or the buyer into the position that I have endeavoured to describe.

The Solicitor-General

May I, before replying to the specific points which have been asked of me, revert again to two questions which my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth) asked me when I was putting the original Amendment to this Clause to the Committee. I gave two answers "off the cuff" and said that I would check if they were accurate. I have given him the information, but I think it only right to say, for the record, that, fortunately, on the advice that I have been given, the answers which I gave were correct.

The hon. Gentleman the Member for Sowerby (Mr. Houghton) said that he spoke from a strong emotional background. I have no objection to that so long as I am not the direct object of his emotion. I think that my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) is quite right when he says that there is great danger if indignation against manipulation of a tax code which is adjusted to ordinary straightforward trading should lead us to disregard the rights and interests of the ordinary trader who may get caught up in the net. One of the great dangers in dealing with the avoidance of taxation, as it has been practised in this and some other respects, is that ordinary transactions may be caught up in dealing with the reprehensible ones.

The hon. Member for Sowerby asked how much money had been lost in these transactions. I cannot give him an answer at all, because all of them are, of course, outside the tax net and, therefore, the information is simply not available. He asked me about the relation of Clause 26. I think that we had better postpone consideration of that until we come to it when, I have no doubt, we shall have to scrutinise it carefully.

My hon. Friend the Member for Lang-stone asked me about the phrase, "substantial part" in Clause 19 (1, b), the second limb of which states: the trading stock…forms a substantial part of the assets… That is a phrase which has been considered by the courts in a number of different contexts and it will be for the courts to determine what is "a substantial part". It obviously stands right away in contradistinction to an inconsiderable or immaterial part, but what is a substantial part will, of course, depend on the nature of the assets, on the nature of the work done by the company, and will vary with the size of the company and the nature of the assets.

I should like to consider whether, before another stage, it would be desirable to put a platform for what is a substantial part. On the other hand, it will still obviously leave, quite correctly, a large area of discretion for the Appeal Commissioners to decide.

10.15 p.m.

The next question raised by my hon. Friend was that of legitimate trading and ordinary amalgamations. That was also adverted to by my hon. Friend the Member for Basingstoke and my hon. Friend the Member for Carlton (Sir K. Pick-thorn). In the instance given by my hon. Friend the Member for Langstone, of a subsidiary formed for a specific purpose—say, of making a film—if when the film was nearing completion the shares in the film-making company were sold to the company that would hold the film as an investment, obviously the transaction would be caught, and rightly so, because it would be similar to the building transactions which we have considered.

On the other hand, the normal process of amalgamation and reconstruction mentioned by my hon. Friend would not be affected, because one of the tests which have to be satisfied is the test in subsection (2), that all the trading stock belonging to the company at the time of the sale has been or will be disposed of either in the course of its trade If that is not shown to the satisfaction of the Commissioners, it falls within the mischief of the Clause. Therefore, within the normal case of reconstruction and amalgamation, the trading stock will be taken over as trading stock by the new company and will not fall within the mischief of the Clause. Therefore, in was one of the matters which my hon. Friend the Member for Carlton also had in mind.

The hon. Member for Glasgow, Craig-ton (Mr. Millan) asked about the phrase "aggregate liabilities". I am prepared to advise the Committee that that would include contingent and unascertained liabilities. Obviously, something like a pending lawsuit or a pending claim at law against the company would be a liability of the company. That would be a difficult matter on which to put a value, but that difficulty is inherent even in the hon. Member's Amendment which was not called.

The hon. Member asked me to confirm that the goodwill is brought into account only when it is the subject of a previous sale to the sellers as affected in the Clause. That is so. Subsection (4. b) deals with the value of the goodwill to the extent…that consideration was given therefor on a transaction between independent persons dealing at arm's length. That was dealt with in my earlier answer to my hon. Friend the Member for Basingstoke that the value put on the goodwill in the balance sheet is immaterial.

The hon. Member then mentioned, as did his hon. Friend the Member for Gloucester (Mr. Diamond) and my hon. Friend the Member for Carlton, the phrase such proportion as may be just. That formula comes into effect only in the case where only part of the shares are sold and only when the shares are of different classes or have different rights. That phrase follows a well-established precedent, for example, where plant and machinery is used partly for business and partly for private purposes. The capital allowances in respect of the machinery to be given against the assessment on the business profits are such proportion of the full allowance as may be just and reasonable. With respect both to the hon. Member for Gloucester and to my hon. Friend, that is not handing over part of our duty to the Executive. The determination is made in the last resort by the Appeal Commissioners and not the Executive.

My hon. Friend the Member for Basingstoke asked a number of questions. He was kind enough to ask me to consider them rather than give a detailed answer at this stage, for which I am grateful, and I will do so.

There was another matter to which my hon. Friend the Member for Carlton also adverted to which I must refer, and that is the aunt from Basingstoke, as she is now known, who sells her shares in the open market, or as the result of a take-over bid. My hon. Friend asked whether the seller always knew to whom he or she was selling, and the answer is in the negative. In a number of cases, she will not know; but if the minor shareholder has had the benefit of what should have been a trading profit, it is by no means clear that the Clause ought not to affect the sale of the shares. My hon. Friend is entitled to say that it is very unfair that if his aunt is selling the 2 per cent. giving control she should be caught, whereas someone who may have sold 49 per cent. preceding that is not caught; but I should have thought that the approach to adopt is to consider whether, by Amendments to later Clauses, the seller of the 49 per cent. in that case should not also be included. However, in response to my hon. Friend I will consider that point along with others.

Mr. Denzil Freeth

Will my hon. and learned Friend not agree that it is also unfair between the aunt—be she from Basingstoke or elsewhere—who happens to own shares in a property company which is taken over and the aunt who has shares in the bull's-eye manufacturing company which is not hit by this legislation?

The Solicitor-General

The difference is that in the property company the Clause applies only where the company is being taken over in such circumstances that the trading stock is being converted into capital appreciation.

Mr. Enoch Powell (Wolverhampton, South-West)

My hon. and learned Friend will also appreciate that it is not only a question of unfairness—of any possible unfairness—but more particularly of uncertainty on the part of the seller, possibly for six years.

The Solicitor-General

I appreciate that and that is one of the matters which my right hon. Friend the Chancellor of the Exchequer and I will consider before Report.

Mr. Millan

May I raise the question of the minority shareholder whose sale of the small proportion of the shares brings the Clause into effect? I understood from Clause 22 that when there were sales of associated parcels of shares of a company sold to the same person, all the sales were taken as a whole and that the Clause with which we are now dealing would cover all the people who sold the shares. Am I to understand from what the hon. and learned Gentleman has just said that that is not so, and that those who sell the 49 per cent. will not, in fact, be covered?

The Solicitor-General

I think that we had better leave that until we reach Clause 22, but the position is as I have explained to the Committee.

Sir K. Pickthorn

What is the answer to the suggestion that we should put the tax on the buyer, who, presumably, will then take care when he buys so to arrange the purchase price as to make it fair to him? He has got the stuff and he knows what is to happen to it, because it is he who does it. There is no six years' uncertainty for him.

The Solicitor-General

I will consider that matter further, but it occurs to me that although the buyer in this type of transaction may get some advantage, it is the seller who gets the main advantage.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.