§ Sir H. d'Avigdor-Goldsmid
I beg to move, in page 15, line 37, to leave out "of or include", and to insert "wholly or mainly of".
§ The Chairman
It may be convenient to take, with this Amendment, that in page 16, line 5, to leave out "of or include" and to insert "wholly or mainly of".
§ Sir H. d'Avigdor-Goldsmid
After the "sharks" which we have been discussing when dealing with Clause 19, we now have an Amendment which deals rather with the minnows, but I hope that it will be none the less acceptable for that.
The purpose of the legislation in Clauses 19 and 20 is to deal with property companies. A situation could easily arise when a company which was not in essence a property company and which was engaged in a totally different form of business went into liquidation. As Members who have experience of this know, the position often arises, towards the end of a liquidation, that the company is left with an office and very little else. The Clause now statesWhere the activities of a company consist of or include the erection or the securing of the erection of a building…In my opinion it would be manifestly unfair to treat under the penal Clauses of this Bill a company which, although it was included in its articles of association that it should be entitled to erect a building, was in fact engaged in trade with the Far East or some other totally different kind of activity and was left, through liquidation, with that building only. If the Amendment were accepted the Clause would readWhere the activities of a company consist wholly or mainly of the erection or the securing of the erection of a building…The Amendment would in no way weaken the effect of the Clause as applied to the transactions to which it is intended to apply, but at the same time, it would prevent the Clause from applying to an innocent class which would otherwise be caught.
§ Mr. Barber
To appreciate the significance of this Amendment it is necessary that I should say something first of all about the purpose and ambit of the Clause. I hope that it may be for the convenience of the Committee if I make one or two general observations now instead of explaining the Clause at length when we come to any questions arising on the Question, "That the Clause stand part of the Bill". The Committee will recall that Clause 19 was concerned only with the sale of shares in a trading company.
Clause 19 refers to the case of a company carrying ona trade of dealing in securities or land or buildings, or of developing land, or…and then goes on to refer to trading stock. Clause 20 covers the special case of a building company—a building company only—which has its memorandum and its articles so drawn that it can, with some hope of success, contend that it is holding the building as an investment. Unless this sort of case were covered as it is by Clause 20, it would be the simplest thing in the world for any operator to avoid Clause 19, which, standing by itself would be quite useless.
I can best illustrate this by giving the example of a group of people getting together to form a company for the purpose of erecting a building. They have their memorandum and their articles so drawn that on the face of it the company can be seen to be an investment company only, because its objectives are consistent with the holding of the building as an investment and not as stock in trade. The building is then completed, and if, after perhaps two years, the company sells it at a profit, the Inland Revenue might well say in these circumstances that this was a trading venture and that any profit resulting from the sale should be subject to taxation. The company might contend that it had produced, in the erection of the building, an income yielding asset which should be treated as an investment.
It would, no doubt, say after two years that it had decided to sell the building and to put the proceeds into some other form of investment. It might say, "You have only to look at the memorandum and articles to see that we are clearly an investment company."
359 10.30 p.m.
So the company would go to appeal. The memorandum and articles which are drawn up in a form consistent only with an investment company would, before the Commissioners, be only one factor in these circumstances in determining whether the sale of the building was or was not a trading venture. The Appeal Commissioners might take the view that this was mere window dressing and so decide as a question of fact that the profit on the sale of the building was assessable to tax.
If one assumes the sort of case which is covered by this Clause the Committee will see that the position is very different. If one supposes that this same group of people, foreseeing that they might be liable to tax if they sold the building at a profit, decided instead to sell the shares, they would, if Clause 19 stood by itself, avoid any tax on the resulting profit arising from the sale of the shares. They would not be caught by Clause 19 because that Clause relates only to trading companies and imposes a deemed consideration for the sale of their trading stock. The result is that it would be a simple matter to avoid tax altogether unless Clause 20 is accepted by the Committee.
This Clause accordingly provides that where the activities of a company consist or include the erection or the securing of the erection of a building which forms a substantial part of its assets, the company shall be treated for the purposes of Clause 19 as trading with that building as trading stock if the company's shares—and this, I think, is an important qualification—are sold not later than six years after completion of the building. There is already provision in subsection (2) to deal with the case of a liquidation, but unless it is desired I shall not go into the details of that now.
I agree that it is necessary that there should be some restriction in the scope of this Clause to meet the sort of case where a company may have erected a building quite genuinely to hold as a fixed asset, and where the company then falls on bad times, and before the six years are up, may have virtually nothing left but the building. On the other hand my hon. Friend will agree that his 360 Amendment as it stands is, perhaps not quite right, in the sense that it opens up possibilities of avoidance.
To give an example. If the opening words of the Clause were amended as my hon Friend suggests they would read:Where the activities of a company consist wholly or mainly of the erection or the securing of the erection of a building.If one considers the case of a company whose real business was the building or the developing of property it is conceivable that the company might indulge, for example, in large-scale transactions in securities at the crucial period which has to be considered so that it could argue that those transactions were the main part of its activities. If that were so the Clause would not bite. If one pursues this further one can conceive of cases where the company in question putting up this argument might have borrowed the money to engage in these transactions. There are other possibilities with which I will not trouble the Committee.
I readily admit that there is a point which should be met, and so, while I feel I cannot advise the Committee to accept the Amendment as it stands, we will give the point further consideration with a view to introducing a suitable Amendment on Report. I hope that in these circumstances my hon. Friend will not press his Amendment.
§ Sir H. d'Avigdor-Goldsmid
In view of the very clear assurance from my hon. Friend that weight will be given to the point I raised, I shall certainly not try to force a form of wording once again on the Parliamentary draftsmen. I, therefore, beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. Barber
I beg to move, in page 16, line 3, at the end to insert:(2) Where before the sale of shares mentioned in the foregoing subsection the company hasThe purpose of the Amendment is to close a loophole which was not foreseen when the Clause was drafted. I can best explain its purpose by considering, first, the cases where trading is clearly involved which falls directly under Clause 19. If that Clause stood on its own there obviously would be a way round it by arranging for the company to sell its trading stock cheap to the prospective purchaser of the shares before he bought the shares, and then no doubt the shares would be sold at a suitably inflated price. Clause 19 in that event would not bite on that transaction because the company would not have any trading stock left at the time it sold its shares.
the foregoing subsection shall apply as if the interest sold were still vested in the first-mentioned company at the time of the sale of 361 the shares, or, as the case may be, as if the interest had not been created as mentioned in paragraph (b) of this subsection, and as if any assets of the company representing the consideration for the sale or creation of the interest were not assets of the company.
- (a) sold its interest in the building to the person who is the purchaser of the shares or (if that person is a company) to an associated company, or
- (b) has created an interest in the building in favour of that person or any such associated company,
Under Clause 19 this problem can be met by the exercise of the powers conferred by Clause 26, but the relevant powers in that Clause refer only to trading stock and consequently that will not cover this sort of avoidance device pursued in respect of a building of a company which does not carry on a trade, because the shareholders could maintain that it was merely an investment company and had no trading stock and was therefore not within the ambit of that Clause. Therefore the loophole remains in that special case. The Amendment provides that if an interest in the building is transferred to the purchaser before he buys the shares, the Clause applies as if the interest in the building was still vested in the company at the time it sold the shares.
The Economic Secretary terrifies me. Here we have a very elaborate Finance Bill and between the time it was introduced and now holes have been found. We all know the Irishman's definition of a net as a number of holes with a bit of string round them. I am beginning to think that the Bill is rather like that. It has far too many holes in it. Some are being stopped up but I am alarmed as to what will happen later.
We have had a very unfortunate record with tax-avoidance Clauses. They have been introduced with sublime self-confidence by one Chancellor after another and found to be inadequate for 362 that purpose. I shall not anticipate, but that is one of the reasons why Clause 26 appears in the Bill. If gentlemen interested in tax avoidance have got so far and have run so much faster than the Treasury has been able to run, it is time that we considered new machinery, whether it is that in Clause 26 or consists of some of the other devices which my hon. Friends have suggested from time to time but which I should not be in order in discussing now.
I have no objection to the Amendment. I conclude by saying once more that there are far too many holes which have been discovered already to leave us with any confidence that there will not be more holes later. I am terrified by the Economic Secretary.
§ Amendment agreed to.
§ Motion made, and Question proposed, That the Clause, as amended, stand part of the Bill.
§ Mr. Diamond
This is the third anti-tax avoidance Clause, and it arises from the fact that we have a tax structure under which capital gains are not taxed and, therefore, all this procedure is necessary to prevent a man turning his income into notional capital and escaping taxation. I will not detain the Committee any further.
§ Question put and agreed to.
§ Clause, as amended, ordered to stand part of the Bill.