Clause 22.—(SUPPLEMENTARY PROVISIONS AS TO SS. 19 TO 21.) (Hansard, 24 May 1960)

§ Mr. Barber
I beg to move, in page 18, line 45, at the end to insert: and the creation of an interest in favour of a company under a person's control, or in favour of his nominee, shall be treated as the creation of the interest in his favour. The Amendment is really consequential to my right hon. Friend's Amendment to Clause 20, which has already been accepted by the Committee. The Committee will remember that that Amendment was designed to prevent the avoidance of the provisions of the Clause by the device of selling the company's building in anticipation of the sale of the company's shares to the same purchaser.
Subsection (3) of this Clause, as drafted, provides that: For the purpose of this and the three foregoing sections a sale to a company under a person's control, or to his nominee, shall be treated as a sale to him. My right hon. Friend's Amendment to Clause 20 dealt not only with the sale of an interest in the building but also with the creation of an interest in favour of an intending purchaser of the company's shares, and it is therefore necessary to extend subsection (3) in this way.

§ Mr. Mitchison
I say no more than this: these Clauses have ceased to be a net and have become a piece of what is known as broderie Anglaise—full of holes and embroidered by the English.

§ Mr. Millan
This Clause is easy to understand by comparison with the Clauses which have gone before it, and on first reading I thought that it was admirably drawn, but in view of what was said in the discussion of Clause 19, it seems to me that there is a fundamental fault in this Clause, and I hope that the Government will take an opportunity at a later stage to stop up the loophole which the Clause as drafted seems to leave. The intention obviously is to prevent the manipulation of the sale of shares from reaching a position in which the provisions of Clauses 19–21 do not come into operation until about half the shares of the company have been sold. In effect, we can have the position that the sellers under Clause 19 of shares in the company have complete control of the company and yet only half the profits which they make by the manipulation under Clause 19 will be caught.
The position under this Clause seems to be that if, just prior to the point at which control passes from the seller to the purchaser, there is interposed an independent person holding only a nominal holding of shares, then the previous sales are not covered by the Clause. That is my understanding of what the Solicitor-General said on Clause 19. He said that if 49 per cent. of the shares were sold and some outside person held the 2 per cent. of shares which would give control to the purchaser, then the 49 per cent. would not be covered by Clause 19. It seems to me that on a strict reading of this Clause that will happen, although that does not seem to be the intention. We ought to have the point cleared up before we go beyond this Clause.

§ Mr. Barber
I am not sure that I follow that example, but if it refers to the aunt from Basingstoke about whom we heard a good deal on Clause 19, the hon. Member will recollect that my hon. and learned Friend undertook to look into that question in the hope that we might be able to take action to satisfy the aunt.

§ Mr. Millan
It is not a question of satisfying the aunt. That was not the point. It was not a question of the aunt holding the nominal shareholding being caught because an illegitimate profit had been made. If an innocent party is involved in the transaction there is no 367 reason why the innocent party should not pay tax on the profit accruing to her. The point I am making is that if, by a process of manipulation, the sale of the shares of the innocent party forms the operative sale and brings the Clause into effect, then it is wrong that the previous sales by the people who control the company, up to 49 per cent., should escape. That is the point about which we are not clear. From a close reading of the Clause it seems that the holders of the 49 per cent. of the shares in this hypothetical case might escape tax.

§ Sir K. Pickthorn
I should like to ask two questions to which, I think, the answers should be known. One of them I should, perhaps, have asked on Clause 19, and it applies also to Clause 23, and is the case where there may be some importance in the exact date of the sale. I do not know whether it needs special provision, or whether it is plain that the sale takes place when the contract or other commitment is entered into, and not at the moment when it is completed.
The second question concerns associated shares. I quite see that there may be ways of finding out whether there is a partnership or not, and that it is ascertainable that they are or are not partners, but how is it presumed, or known, that people are relatives, and how is it presumed, or known, that they keep each other informed of their dealings, and that, therefore, not only are they related to each other but that their shares are related to each other, too?

§ Mr. F. M. Bennett
I should like to put another question, not only relating to this Clause but to others as well. As the Treasury Bench knows, I am a wholehearted enthusiast for these Clauses in respect of property companies, but I am not quite clear at the moment as to what is the state of affairs if by one or other of these transactions a loss is incurred. If those concerned had two or three of these transactions in a year they might seek—but might not succeed—to set off the loss on one transaction against the profits in the others.
If challenged, could those concerned claim that they were specifically dealers either in buildings or in securities, or anything else? If so, under the existing law they would be able to gain the benefit, as dealers, of being able to set 368 off a loss in any one year against the profit in another. Would the Inland Revenue be able to choose to deal with them under this Clause, or might those concerned claim that it would be preferable for them to be dealt with as dealers?

§ Mr. Mitchison
And can the hon. and learned Gentleman say, in view of all that has been said this evening, whether it is on purpose that "related" and "relative" have been so confined as to exclude a conspiracy between an aunt and a nephew?

§ The Solicitor-General
Perhaps I might first answer the point put to me—I disregard entirely, I may say, the point put by the hon. and learned Gentleman the Member for Kettering (Mr. Mitchison)—by my hon. Friend the Member for Carlton (Sir K. Pickthorn), who has drawn attention to the date. I think that he is absolutely right. There is ambiguity as to what is the effective date, and we will put down an Amendment to clear up the matter before Report. I am grateful to him. My hon. Friend also asked about the associated persons. It is, of course, a matter to be proved that the people are related in blood in the way mentioned or, indeed, that they are associated in the various other ways set out in the Clause.
I am not quite sure that I followed the point about losses put to me by my hon. Friend the Member for Torquay (Mr. F. M. Bennett) but I shall, in any event, try to look into that further. If there is a general loss on the transaction as a result of the sum that is carried out under subsections (3), (4) and (5) of Clause 19, there is, of course, nothing to be taxed. It is only the profit that would accrue on the sale of the trading stock the deemed profit as allocated to the parcel of shares sold that would be the subject of taxation. If he is asking about a person who makes a practice of this particular kind of tax avoidance and continues doing it in spite of the Clause—a very unfortunate possibility to envisage—then, presumably, that person would be able to set off profits against losses. But I think I should like to consider that case further.
11.0 p.m.
The hon. Member for Glasgow, Craigton (Mr. Millan) asked about the case where 49 per cent. of the shares are sold 369 —I give the extreme case for the sake of argument and clarity—followed by a sale of 2 per cent. by the aunt of my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth), in all innocence, followed by the sale of another 49 per cent. There are two possibilities here. The first is where the sale of the first 49 per cent. is by A, the sale of the 2 per cent. is by B, and the sale of the second 49 per cent. is by C. In that case, it is the 2 per cent. and the second 49 per cent. which will be caught by the Bill as drawn, but not the first 49 per cent. That was the case into which I promised to look.
What I think the hon. Member was putting to me was a manipulated transaction whereby the first 49 per cent. is really sold by C or his nominee. In that case, he is caught. He is caught as to the 98 per cent. because when there are sales of associated parcels of shares being sales to the same person … and in consequence of any of the sales other than the first that person obtains control of the company, then for the purposes of any of the three foregoing sections any sales earlier than that in consequence of which he obtains control shall he treated as having all taken place at the time of that sale". Further, by subsection (2), For the purposes of the foregoing subsection parcels of shares shall be treated as associated if (either directly or through a nominee) they belong respectively to the same person"— and so on. By subsection (3) it is provided: For the purposes of this and the three foregoing sections a sale to a company under a person's control, or to his nominee, shall be treated as a sale to him". Again, I shall look into it further, but I read that as bringing in the case where there is a sale of the 49 per cent. which is a sale either by the person who sold the last 49 per cent. or his nominee.

§ Mr. Millan
I appreciate the point which the hon. and learned Gentleman has made, but the Clause as drafted reads: … in consequence of any of the sales"— the associated sales— other than the first that person obtains control of the company. … Let us take a case where 49 per cent. belonging to A is sold. Then 2 per cent. belonging to an outsider is sold, and 370 subsequently 49 per cent. also belonging to A is sold. The transaction by which the person obtains control of the company is not one of the associated sales but the non-associated sale. Therefore, the first 49 per cent. is out, on the strict interpretation of the Clause, and these provisions would not come in. I know that the intention was that the first 49 per cent. in this hypothetical case should come in, but I respectfully submit that the Clause as drafted does not, in the kind of case we have discussed, bring in the first 49 per cent.

§ Sir K. Pickthorn
I am sorry to go on about this, but is this device about association something of which Government Departments and courts of law have experience, or is it new here? Would it really be necessary for me whenever—it does not happen often—I buy or sell shares to inform all my grandchildren in order to be quite sure that we are not unwittingly turning into an association? Is it known how the thing works? How does authority watch it work?

§ The Solicitor-General
In reply to the point put by the hon. Member for Glasgow, Craigton (Mr. Millan), there is obviously a doubt, into which, as I have said, we will look before the next stage. In reply to my hon. Friend the Member for Carlton the tax law is used to the conception of associated transactions. I do not think these is any real danger in cases of this sort. In the nature of things, their number is comparatively small and they have to take place on a fairly big scale. I do not regard the extreme case that was put to me by my hon. Friend the Member for Basingstoke and which I thought it right to consider precisely because it was extreme, as likely to be met in practice.

§ Mr. Diamond
The hon. and learned Gentleman said that he would be good enough to look into the question of date in the Clause. At the same time, I should like him to be kind enough to consider the date as it affects the previous four Clauses. They all have a period of six years. As the hon. and learned Gentleman knows, we are shortly coming to a Clause in which we have made a time limit of six years and in which it is now realised that six years is not by any means a sufficient 371 bar to prevent people from undertaking a transaction in which they will get something for nothing. It is not surprising that it is not a sufficient bar, because to wait for a considerable sum of money—a small fortune—for six years is well worth doing. In these cases, small fortunes are involved in escaping liability to tax on substantial transactions.
It may be that on further consideration the hon. and learned Gentleman will come to the conclusion that it is better to anticipate the action which he might otherwise be compelled to take in five years' time as we are dealing, as we are about to do, with dividend stripping, and to provide for a longer and sufficient period at the same time. I hope that the Solicitor-General will consider this.
Having dealt with the four preceding Clauses, we are now saying goodbye to the series of five Clauses which deal with the difficulties of preventing tax avoidance by people who transfer income into capital. This fifth Clause deals with the difficulties which arise from not having a proper tax structure under which capital gains as well as income are taxed.

§ Mr. Houghton
I do not want to prolong the strain on the Solicitor-General. I merely give him notice of something to which I hope to get an answer in the course of further debate. The hon. and learned Gentleman has referred several times to the fact that certain people, in certain circumstances, will be caught by the Clause. Who will catch them, and how will they be caught? Unless there is the structure of administration behind all this, it will be a dead letter from the word "go".
It is not clear how it will all come to light, how the information will be obtained or whence it will be got. This is an elaborate network of legislative safeguards which it will be by no means easy to put into practice. I press the hon. and learned Gentleman no further now. If his right hon. Friend the Chancellor of the Exchequer is to be entertained by the inspectors of taxes on Friday, it will be interesting to know what he will tell them. Will he tell them 372 that he is bringing them a lot more work, more staff, more pay, or what? I am sure they will want to know.

§ Mr. William Ross (Kilmarnock)
I have been interested in the question of association. Subsection (2) states: For the purposes of the foregoing subsection parcels of shares shall be treated as associated if…they belong respectively to the same person or two or more related persons". The first thing that comes to mind is the question of what is meant by "related persons", and on reading this very tidy piece of draftsmanship we find exactly what is means—and there are some startling words and I want to know the reason for them. The Clause says: two or more persons shall be deemed to be related— strangely enough— if each of them, as respects each of the others, is a relative (that is to say an ancestor, lineal descendent, brother or sister) … So that we are told that if two people are brother and sister they are related. I am sure that without this piece of legislation no one would have come to that conclusion or been able to prove it. We go on, after a very important comma, or the husband or wife of a relative, of that other or of the husband or wife of that other. Exactly who is included and who is left out? Would it not be better to have a special Schedule in which we had a series of family trees drawn and in which we printed in black ink those deemed to be relatives and in red ink those deemed not to be relatives for some reason or other?
Another question is whether an ex-wife comes into the matter. There may well be business associations in which people who had been married still have continuing interests and might be considered still to have a certain relationship. Has that thought entered the Treasury's mind, and if not, will the Treasury start thinking about it and give us, if not now then later, the benefit of its cogitations?

§ Mr. Barber
I have listened with interest to the hon. Member for Kilmarnock (Mr. Ross). I point out that an ex-wife is almost at arm's length and, consequently, would not be included within the definition of a relative for these purposes. I cannot explain more clearly than is explained in the subsection what is meant by "relative" 373 beyond assuring the hon. Member, as I have already done, that an ex-wife is not included.