§ Sir H. d'Avigdor-GoldsmidI beg to move, in page 19, line 5, after "company", to insert:
other than securities which are offered for sale to the public by the dealing company and acquired by the first-mentioned company on the same terms and conditions as the public".
§ The Deputy-ChairmanIt may be convenient with this to discuss the Amendment in page 19, line 7, after "asset", insert:
other than securities to be offered for sale to the public".
§ Sir H. d'Avigdor-GoldsmidI should, first, make it clear that we have now left the realm of metaphysics in which we have been dwelling on the last four or five Clauses and we now deal with something which is intelligible to all hon. Members. I also see from the distinguished array on the Front Benches that this is a topic which occupies the best brains on both sides of the Committee.
When my right hon. Friend moved the Second Reading of the Finance Bill he referred to Clause 23 as being
…designed to ensure that profits which would ordinarily have been liable to tax do not escape tax as a result of purely artificial manipulations within a group of dealing and investment companies."—[OFFICIAL REPORT, 3rd May, 1960; Vol. 622, c. 893–4.]Clause 23 is an implementation of that wish.In its present form, I am afraid that the Clause has a weakness in that, to use a phrase which I used last year, it throws out the baby with the bath water.
In fact, although Clause 23 is designed to cope with the situation which I have referred to already as "shunting", when associated companies which include a dealing company and an investment company move shares between them in such a way as to lessen their tax liability, 374 that also can cover a large number of entirely innocent transactions. I will try to develop that point.
11.15 p.m.
Let us start on the basis that the dealing company is a company which can offset capital losses and, therefore, is in a position if it incurs a capital loss to put that against other earnings. On the other hand, an investment company, which by definition has the holding of investments as its fixed assets, cannot distribute capital profits from the realisation of its investments. The basic assumption, consequently, is that the company which controls those activities moves an investment on which it expects to see a capital profit from the dealing company to the investment company so that, when the appreciation does come, it is realised free of tax to the investment company. At the same time, it is also able to move an investment which it sees is liable to depreciate in value, from an investment company which is unable to claim compensation if it suffers loss, to a dealing company. The dealing company can claim.
Of course, if everything went on in water-tight compartments in that fashion there would be nothing to do but applaud this Clause which stops up the loopholes. But it puts the issuing house, which is an essential part of the structure of the City and which now has an almost more important part to play than ever before, in a very unfortunate position. There is no definition in the Bill of the words "associated company," but from the Income Tax Act of 1952, Section 469, one learns that transactions between associated companies are when
the buyer is a body of persons over whom the seller has control or the seller is a body of persons over whom the buyer has control or both the seller and the buyer are bodies of persons and some other person has control over both of them.I hope the Committee will notice the word "control." It does not mean that the beneficial interest is the same in all three cases and the transaction caught by this Clause—and which this amendment is designed to meet—is as follows.If an issuing house, which has an associated company which is an investment company, makes the issue of a share to the public, it prejudices its own investment company, which it controls, from buying those shares; because, 375 under this Clause, if an issuing house sells those shares to the public and in part to its own investment company, that investment company will be caught for a special capital gains tax if it subsequently realises the shares at a profit.
Consequently, we get the anomalous position that Lazard's, for example, would, in making a public issue, prejudice its own investment company if it allowed the issue to be made to the public. On the other hand, if the issue were in the hands of Messrs. Morgan, Grenfell, Lazard's investment company could participate and no tax liability would thereby be incurred.
This is really not a proposition we can accept. It really makes nonsense of what we are trying to do to clarify and make sense of this body of legislation, and that is why my hon. Friends and I put down these two Amendments, which seem to me to clarify the position. They seem to me to be right in equity. It cannot be right in equity that an investment company is prejudiced by reason of the fact that the shares it buys are shares which are sold to it by its own associated issuing company.
This Clause has as its object the prevention of manipulations. In public issues, in which large issuing houses take part, the word "manipulations" really has no place. This is a public issue. It is for the public to subscribe or not as they think fit. Presumably, the issuing house undertakes the issue only if they consider that it is money's worth, that it is probably going to be a success. With that idea, they would normally expect their own investment associate companies to participate in the issue.
We have had troubles here with people wearing two coats and trying to act in two capacities at once, but it is really quite incompatible, with all our ideas of common sense, that we should now create a new situation where a prudent manager of an investment trust could not purchase a share merely because in his other capacity as a prudent manager of an issuing house, he was issuing it himself.
That is the position we are faced with unless these Amendments, or some others on the lines of these, are accepted. I do not want to make heavy weather of this, but I stress most earnestly that com- 376 panies do this and ought not to be prejudiced. This is a matter which every Member of the Committee should understand, and we really would not like the Clause to go through in its present form.
§ Sir E. BoyleMy hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) has moved the Amendment in a very reasonable speech indeed, and I should like to make it clear at the outset of my remarks, which, I am afraid, will have to be a little more lengthy than I could have wished at this hour of the night, that we certainly think that this point he has raised is serious, and that this is an important Clause to which we should certainly give close attention. I myself saw a deputation from the Issuing Houses Association a day or two ago.
I think it is important to remember just exactly what the object of this Clause is and just exactly what is done by subsection (1), what are the points which have been raised by my hon. Friend, and just exactly where the problem lies in trying to meet them.
As I think the Committee will realise —and I agree with my hon. Friend that the Clause is a little less metaphysical than some of those we have been considering tonight—the Clause is designed to deal with cases where a dealing company and an investment company are under the same control, so that it is open to the controllers to pick out shares, as it were, owned by the dealing company which they expect, with their special knowledge, to appreciate in value, and put them in the hands of the investment holding company, when any appreciation in their value realised on their sale will not be taxable. That is a point made by my right hon. Friend in his Budget speech. I think it is realised that there is a perfectly genuine problem here. It is only right that we should deal with that in a Clause dealing with tax avoidance.
Subsection (1) of the Clause imposes a charge to tax on, among other things, any profit made by an investment company or other non-dealing company on disposing of assets it had acquired from the trading stock of an associated dealing company. The first of my hon. Friend's Amendments seeks to exempt from this charge profits made by a non-dealing company, normally an investment company, on realising securities 377 which it had acquired from an associated dealing company on the occasion of an offer for sale to the public by the dealing company, provided it had acquired the securities on the same terms and conditions as the general public.
As I understand the points made by the Issuing Houses Association, first of all it says that the Clause will apply where an investment company associated with an issuing house participates on the same terms as the public in a public issue by the issuing house, if the investment company sells the shares so acquired. Secondly, the Association has also made the point that the Clause ought not to apply where an investment company participates in the placing of shares by the associated dealing company. That is what my hon. Friend the Member for Walsall, South had in mind when he made the comparison between Lazards and Morgan Grenfells being concerned.
Where an investment company is merely participating in a placing, the issuing house can put investments in its way, the profits on the sale being taxable when the issuing house itself took them up but escaping if taken up by the associated investment company. There is however something to be said for excluding purchases made by the investment company where there is a public issue and it takes its chance in the issue on the same basis as the ordinary public. Where this happens the investment company can claim to be investing in the same way as if it had taken up shares in any other public issue.
My hon. Friend, in his very moderate speech, was considering the case where the investment company takes up shares in a new issue offered for sale to the public by way of ordinary Press advertisement. As the Amendment is drafted, it is rather wide and would allow for a number of other possibilities as well. It seems, for example, that it would cover a case where an issuing house sends out a private invitation not to all the public but to some members of the public to take up shares which it held in a private company. That is not a case that my hon. Friend was considering but it is a case that would be covered by the Amendment as drafted. Again there is the case where a dealing company chose to dispose of a block of 378 shares that it had held for some time by way of an offer for sale to the public.
The Amendment as drafted contains no safeguard against the possibility that a dealing company wishing to transfer investments to its associated investment company might want to dress up the transaction as being an offer for public sale. I agree that it is a fair point that we must be careful here in tackling this possibility of avoidance not to make the terms of the Clause such as to cover certain legitimate transactions. On the other hand, we must be careful the other way to see that it would not be possible for a dealing company simply to dress up the transaction as being an offer for public sale when in fact that was not the true state of affairs.
All I can say this evening to my hon. Friend on the first Amendment is that I agree that we should certainly consider the possibility of a let-out for a genuine participation by an investment company in an offer for sale of a new issue by its associated dealing company; but we must examine more closely the form any such let-out should take.
11.30 p.m.
I give my hon. Friend an assurance that we will most certainly seriously consider the possibility of introducing a suitable Government Amendment on this point when we get to the Report stage of the Bill.
If the patience of the Committee will allow, I must now go to the second Amendment, because my hon. Friend saw this as a sort of corollary to the earlier Amendments, and in the course of the representations that have been made by the Issuing Houses Association, complaint was made that the Clause prevented an investment company wishing to dispose of a block of shares to the public from doing this through its associated issuing house. That is not a true description of the position. What the Clause does is to make the non-dealing company subject to tax on any profit it derives from the transfer of the shares to its associated issuing house.
I have no doubt it has been urged already, and it will be urged again, that it is common for a financial group acting in the normal course of City business to "nurse" a family-owned company by taking up capital in that company, and such a case was pointed out to me when 379 I received a deputation from the Issuing Houses Association. These shares are often taken up by an investment company in the group, and when the public quotation is made the investment company holding is sold to the dealing company in the group engaged in issue business. Indeed, it may be essential for the dealing company to take over the investment company's holding so that it may have a large enough block of shares to offer to the public.
If the issue were made through a dealing company not associated with the group, the investment company would realise its profits tax free, and it is particularly anomalous to impose a charge to tax where the issue was made through the associated dealing company since the family company has only acted in the most natural way possible by going to the associated dealing company to arrange the public flotation.
Once the general proposition is accepted that an investment company should be liable on profits it makes out of selling assets to the associated dealing company, it seems rather difficult to see whether there is sufficient ground for exempting this type of transaction, because it seems clear that in any such case the shares will have been put into the investment trust to hold while they appreciate, and if they had been held by a dealing company the appreciation would attract tax when realised.
It is difficult to see any sufficient reason why in this type of case the group should continue to be able to realise the appreciation from all tax simply by putting shares into the investment trust. That is why at first sight I feel rather less sympathetic to the second of the two Amendments.
I suggest to my hon. Friend that here we have an important Clause, with important considerations involved, and I think that there is a real case on the first Amendment. We must look carefully at the drafting of this before we put down an Amendment ourselves on Report. From what I have said I hope that my hon. Friend will accept that we are looking carefully at the Clause and its effects on normal City business. With that explanation I hope that he will be ready to withdraw the Amendment.
§ Mr. PowellI welcome the way in which the Financial Secretary has responded to the point contained in the first Amendment. When he is examining this to consider how effect can best be given to this point, I ask him to take into consideration at the same time the cognate case of the associated investment company underwriting part of the issue of the associated dealing company. There is, I think, no difference in principle between the two cases, and perhaps my hon. Friend will consider them in conjunction with one another.
§ Mr. MitchisonI rise to ask the Government to consider the form in which the Clause should be redrafted. It is very unsatisfactory at present. There is no definition of "associated company", and the Section of the 1952 Act to which the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) referred does not contain the word "associated" except in the head-note. Therefore, one is left entirely at large as to what "associated company" means. There should be a definition in cases like this.
Secondly, on the question of a dealing company, one finds in Clause 40—the definition Clause at the end of this Part of the Bill:
dealing company' means a company dealing in securities, land or buildings".Through the whole discussion tonight we have not heard a word about land or buildings, and if it is not intended to deal with land or buildings it would be better that they should be left out—and then we shall probably seek to put them in again. I hope that that side of the matter will be considered as well as the purely investment and issue house side to which the hon. Member for Walsall, South referred.There is one other matter which occurs to me, and which I think has occurred to the Economic Secretary. Lately there has been trouble about placing securities in London. It ought not to be possible for an issuing house or brokers acting in that sort of capacity to place shares with some investment company with which they are associated, when the placing is done on rather special terms and it is pretty common knowledge that those shares are likely to increase in value. I am not objecting to the value of the shares increasing, but there should 381 not be any tax advantages gained as a result of the transaction. I think the Economic Secretary had this point in mind in what he said in relation to the second of the Amendments we have been discussing. We must wait to see what the Government produce, but we shall look at it closely, and we earnestly hope that it will be clearer and better defined than the Clause is at present.
§ Mr. Denzil FreethWhen my hon. Friend considers the position of placings through the Stock Exchange in relation to the Amendment he will probably try to see if it is possible so to frame an Amendment as to provide that the companies associated—however defined—with the dealing company shall be able to secure, without contingent tax liability, shares in a placing, provided that in aggregate they do not thereafter possess more than a given percentage of the total number of shares, or the total number of shares at that moment being placed.
This is not the time of night to discuss with the hon. and learned Member the pros and cons of the method of the Stock Exchange in placing shares—and I am a stockbroker and have certain views on the subject—but we must pay attention not only to the Amendment which my hon. Friend seems to have accepted in principle but also to the two cognate matters of placings and underwriting.
§ Mr. MitchisonI must apologise to the Committee for having omitted to notice that there is a definition of "associated companies" in Clause 40 (1) of the Bill.
§ Sir E. BoyleI was going to draw the hon. and learned Member's attention to that point if he had not risen.
I will take into account the points which have been raised, in particular the point raised by my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell), when we are looking at the Clause and considering what Amendment may be needed on Report.
§ Sir H. d'Avigdor-GoldsmidI cannot do better than accept the invitation of the Financial Secretary, couched in such friendly terms. I would only say that I hope that the Government draftsmen will be able to insert a better word for "public" than "public." I un- 382 fortunately used the word "public," which does not mean "public."
I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Sir E. BoyleI beg to move, in page 19, line 25, at the end to insert:
(3) Where a company, not being a dealing company. acquires as mentioned in paragraph (a) of subsection (1) of this section any assets being shares in or debentures of a body corporate, or by virtue of subsection (2) of this section falls to be treated as if it had so acquired any such assets, and shares in or debentures of the same or any other body corporate are issued, or any night to acquire any such shares or debenture is granted, to the company as the holder of the first mentioned shares or debentures, the company shall be treated for the purposes of the said paragraph (a) as if it had acquired the shares or debentures so issued, or the right granted, from an associated company being a dealing company.In this subsection the reference to an issue being made or right being granted to the company as the holder of shares or debentures shall be taken to include any case in which an issue or grant is made to the company as having been the holder of those shares or debentures, or is made to it in pursuance of an offer or invitation made to it as being or having been the holder of those shares or debentures, or of an offer or invitation in connection with which any preference is given to it as being or having been the holder thereof.This is a rather technical point which I can explain briefly. This Clause imposes a charge to tax on any profit made by a non-dealing company on disposing of assets which that company acquired from the trading stock of an associated dealing company. The reference in subsection (1) to the disposal of assets so acquired would not cover the case where, for example, the assets in question were shares acquired from an associated company whose trade was dealing in securities, there was a bonus issue after the shares were acquired from the dealing company, and the non-dealing company disposed of the bonus shares.Similarly, it would not cover the case where there was a rights issue after the acquisition of the shares and the non-dealing company sold its rights. The proposed new subsection accordingly provides that the acquisition of any such bonus shares or of rights should be treated as if it had been the acquisition of an asset from the dealing company.
383 I hope that the Committee agrees that if we are to have the Clause, this is a gap in the original draft which clearly must be filled.
§ Amendment agreed to.
§ Motion made, and Question proposed, That the Clause, as amended, stand part of the Bill.
§ Mr. PowellI wish to put to my hon. and learned Friend the possibility, as it appears to me, that under the Clause there may be double taxation of the same profit. I apprehend that it might arise in the following way. The dealing company might sell assets to its associated non-dealing company at less than the market price. If that happens, then apparently the transaction would be caught by Section 469 (1) of the 1952 Act, which reads,
in computing the income, profits or losses of the seller—that would be the dealing company—for income tax and profits tax purposes, the like consequences shall ensue as would have ensuedif the assets had been sold for open market value. Later the non-dealing company sells the assets and the whole of the difference between the artificially low purchase price and the selling price is treated as income and is brought into tax. If that is so, then the difference between the market value and the sub-market value has been taxed twice over, once in the hands of the dealing company and again in the hands of the non-dealing company. Perhaps my hon. and learned Friend will resolve this doubt.
§ Mr. MillanI should like to raise two points on the Clause. The first is simple. Under subsection (4) there is special provision for "an investment company in liquidation". It is not very clear why this special provision is restricted to an investment company. This is the first time in the Clause that the phrase "investment company" is used, and I think that for consistency with the rest of the Clause the expression ought to have been
a company not being a dealing company".There may be a special reason why this restriction has been placed under subsection (4), but I think that the Com- 384 mittee ought to be given an explanation of it.The second point which I want to raise is similar to that raised by the hon. Member for Wolverhampton, South-West (Mr. Powell), only from the opposite point of view. I think there is a flaw in the Clause which will permit a profit which is intended to be caught by the Clause in fact to escape taxation. It arises from the conception of the term "profit" in line 9. So far as we are dealing with transactions under subsection (1, a), then the question of what a profit is can easily be ascertained, because if the company which has acquired the asset has paid a certain price for it but subsequently sells the asset, presumably the profit is simply the difference between what it has paid for it and the selling price.
11.45 p.m.
When we come to paragraph (b), the word "profit" is by no means so clear. Let us suppose that an investment company disposes of a security to an associated company—a dealing company. Suppose the investment company sells the security at an inflated price. In that case, any profit that the investment company makes on the artificially-manipulated transaction is capital profit and not subject to taxation, but the dealing company can sell the security at its true market value, thus making a loss which is allowable to it as a taxation deduction. That, presumably, is one of the transactions that (b) is meant to catch.
I think that there is a flaw in the use of the word "profit." One might have an artificial transaction of that sort in which the investment company selling the security, even at an inflated price, does not make a profit at all. If an investment company bought a security at a price of £100 and the market price of the security went to £80, it would still be possible for the investment company to sell the security to a dealing company at the inflated artificial price of £100 and not, under the Clause, make a profit at all.
Nevertheless, the manipulation is still there. It is still a sale at an inflated price, and would still allow the dealing company to resell the security at its true market value at a loss which would be allowable for taxation purposes. Therefore, in the type of transaction I have just illustrated the real concept of profit should be the difference between the 385 price at which the security has been sold and the true market value, and not necessarily the original cost price to the company selling the asset, because that cost price may no longer be relevant in the circumstances at the time when the sale takes place.
This could be a serious fault in drafting, because it is something that could be manipulated, as a matter of course, between an associated investment company and a dealing company. It would be possible for an investment company that suffered a reduction in the market value of its investments to sell all those investments, as a matter of course, at inflated prices—at the original cost price to the investment company—to the dealing company, thereby passing off what ought to be a capital loss to the dealing company and making it a revenue loss for that company.
The Financial Secretary may have noticed that we had an Amendment which would have defined "profit" in such a way as to catch that type of transaction, but it has not been called. This is not merely a technical point, but a point of substance. I think that there is a flaw in the drafting, and I hope that before the Bill is eventually passed, the Government will look at this matter.
§ Mr. John Hobson (Warwick and Leamington)Another point concerns the purely genuine transaction which seems to be caught by the present provisions of the Clause although there has not been any form of artificial manipulation. Let me postulate the case of a parent company that is a dealing company and has one or more wholly owned investment trust subsidiary companies. Those companies treat their capital as fixed assets, and by the very terms of their articles of incorporation they are prohibited from distributing any capital profits at all to their shareholders by way of dividends.
Moreover, the company cannot deal as such because, if it turns over more than about 25 per cent. of its shares in any one year, it will be treated as a dealing company and not as an investment company. In the example I have in mind, one of the subsidiary companies never in any one year turns over more than 2 per cent. of its total capital. But it does throughout the year acquire from time to time from the dealing company 386 certain assets. They are always transferred at the proper market price, and even if they were not, the dealing company could, of course, under Section 469, have the position rectified for tax purposes as though the transaction had been at the proper market price.
It seems to me that it would be perfectly possible, if the Clause as drafted is to be avoided, for a transaction merely to be put through jobbers and brokers. This is really the brokers' and jobbers' endowment Clause. If an investment trust company were to buy exactly the same shares on the market at the market price, it would, of course, pay the Stamp Duty, as it does now in any event, but it would have to pay the broker's and jobber's fee, but tax would then not be attracted if the shares it acquired appreciated and it subsequently disposed of them at a profit. But if it were to acquire direct, without the intervention of a jobber and broker—and their fees—an investment from the dealing company, it would be liable to pay tax in the future if it were to dispose of it at an appreciated price at any time.
The consequence is that, first of all, one is differentiating for the very first time between different sorts of assets of an investment trust company according to the source from which they are acquired. If the asset is acquired from the parent dealing company, tax is attracted if the company sells it subsequently at an appreciated price. If it acquires it from any other source at all, even though there is an appreciation, however great, it does not pay tax, though it may be exactly the same sort of investment at the same price.
Moreover, the investment trust company becomes liable to tax on its fixed assets, on which it has never previously been liable for tax. It becomes liable for tax even though the transaction may be perfectly genuine and there is a perfectly genuine appreciation. Further, it does not have any power to set off any losses. Let us suppose that several investments are acquired from the parent dealing company. Some go up and some go down. It pays tax on the appreciated price of those which go up and it has no off-set at all in respect of those investments it acquires which go down.
It seems to me that this is a novel and unusual departure from the position 387 of investment trust companies hitherto, and I should be very much obliged if my hon. Friend could say whether he has considered this point, whether anything can be done on Report, and, in particular, whether it would be possible, for instance, to draw a provision under which tax would never be attracted where the associated companies deal only in one direction.
In the example I have in mind, the investment company acquires assets from the dealing company, but the reverse is never true. Each is, in fact, performing its proper function: the dealing company is selling, paying tax on its assets which it disposes of as part of its trading stock, and the investment company keeps its investments and, if it sells, it sells them in the open market and never back to the dealing company. Therefore, it would seem proper, in the circumstances, if two associated companies, one of which is a dealing company and the other of which is an investment company, transfer their assets only from the dealing company to the investment company, that that might be a case for excluding the attraction of tax under Clause 23.
Alternatively, would it be possible to put in some date so that if the investment company kept the asset acquired for a period of three years, or longer, if necessary, to show that it genuinely was acquiring the asset as an investment, it would not, merely because it had acquired it from a parent company, pay tax, remembering that it would never had attracted tax if it have bought on the market from a broker or jobber?
§ Mr. Denzil FreethI should like to take up a point made by my hon. and learned Friend the Member for Warwick and Leamington (Mr. Hobson) concerning the meaning of "disposes of an asset". If the dealing company sold through the Stock Exchange the shares to the non-dealing company, would that be regarded as disposing of the assets to the associated company? If each company used a different broker or if they used the same broker but put the shares in question in the name of the broker of the nominee company so that the names of the two associated companies did not appear on the same transfer, would those transactions be regarded 388 as disposing of an asset to an associated company? It is important to consider these matters, otherwise within a short time it will be found that a method has been devised to avoid the operation of the Clause.
I support my hon. and learned Friend's criticism that the Clause taxes capital appreciation and makes no allowance for any losses to be offset against the capital appreciation. There must be few occasions in our tax law when a business cannot offset losses against its profits. I shall be grateful if my hon. Friend the Financial Secretary will consider this. It is one thing for the Inland Revenue to be properly protected. It is quite another matter for the Inland Revenue to be in the position of saying "Heads I win, tails you lose".
Should there not be some kind of time limit beyond which the transferred asset ceases to be taxable in regard to profits? We are holding a sword of Damocles over the head of the company irrespective of any time limit, even unto liquidation should that occur a hundred years from now.
§ Mr. MitchisonIs the hon. Member not now speaking to an Amendment which was not selected, in Clause 23, page 19, line 5, at end insert
within five years of the acquisition"?
§ Mr. FreethI am asking my hon. Friend to look at the Clause in relation to the situation which I am postulating and to consider whether it might not be necessary to improve the Clause. This is a method which even the hon. and learned Member for Kettering (Mr. Mitchison) has from time to time used, because he, too, has suggested that certain Clauses in Finance Bills might be improved.
§ Mr. Harold Wilson (Huyton)We all want to make progress on the Bill. Is it not a fact, Sir Gordon, that we are debating what is in the Clause, and not what is not in it?
§ The ChairmanThat, of course, is the situation.
§ Mr. FreethI am sorry if I was out of order, Sir Gordon. I was trying to portray to the Committee that the situation that will exist under the Clause was not wholly satisfactory. The fact that there 389 is no time limit, which means that the sword of Damocles hangs for ever, even until liquidation, because the word "subsequently" is in the Clause, seems to me somewhat unsatisfactory.
§ Mr. H. WilsonThe hon. Member can vote against it.
§ Mr. FreethI should like, frankly, to raise with my hon. Friend the Financial Secretary the fact that the Clause appears to tax any capital appreciation which may occur subsequent to the associated company acquiring the asset, even though that associated company is not in any way connected with the operation of the company whose shares it acquires from the original dealing company. It seems to me a slightly unfair method of taxation to tax in this way. Section 469 of the 1952 Act makes a taxation collection on the original sale. Here we appear to be allowing the taxation to overhang and not only to overhang, but the tax liability to increase if inflation occurs, or if the shares in question appreciate in value. I would be grateful to my hon. Friend if he would consider both those cases.
§ 12 m.
§ Sir J. BarlowI have two small points to mention, one following on what my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth) said about a time limit, which is very important but which I will not discuss further now.
The other is the possibly unexpected effect of subsection (3). It is very often the custom in developing mines and minerals for a mining finance house or a large company interested in that kind of work to set up a small company to develop a particular mine or a new mineral interest. It sets up that small company with very small capital and lends it money to work the soil and get on with the job. If it is a success, then the concern is developed in the usual way. If it is not a success—and a great many are not—the loss is usually set against the profits of the mining finance house and can obviously be set off against profits.
However, it seems that subsection (3) prevents those losses, which are genuine losses in development, from being set off against the revenue of the parent company. I hope that the Financial Secretary to the Treasury will look into the matter, as I do not think that the Government meant this to happen.
§ Sir E. BoyleI will, of course, consider all the points which have been raised by hon. Members in connection with this Clause. I would like very briefly to reply to three specific points raised by my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth). He asked what constituted disposal of a share. The answer is that for the purposes of the Clause, a sale on the Stock Exchange, if the share is sold through a jobber, is disposal of the share. It is the disposal which is the criterion.
The hon. Member for Glasgow, Craigton (Mr. Millan) asked about subsection (4). Incidentally, he referred to his own Amendment which would have had a much greater wrecking effect than he realised, had it met with your approval, Sir Gordon, and been selected. To reply to what he said about subsection (4), the Clause says that if an investment company is put into liquidation, the liquidator should be chargeable to tax in respect of any transaction within the purview of the Clause.
That is to prevent tax avoidance, because an investment company could otherwise possibly be set up with this one object in mind and conveniently be liquidated for the occasion of the profit and realisation of assets acquired from its dealing associate. The subsection is confined to investment companies because it is hardly likely that such a deliberate avoidance device would be adopted in relation to an ordinary trading or manufacturing company. It is for that reason alone that that part of the Clause is restricted to investment holding companies.
My hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) raised an important point about the chances of a possible double charge. If I may say so with respect, he got that point absolutely right. It is true that if a sale from a non-dealing company to a dealing associate was at a figure in excess of market price, the non-dealing company would be subject to tax under Clause 23 on any profit which it made from the deal but, in principle, at any rate, Section 469 (2) of the 1952 Act would also apply, so that the liability of the dealing company might in theory fall to be computed on the basis which would have applied if the purchase price had been the arm's length price 391 negotiated between two independent persons. However, I can tell my hon. Friend that Section 469, as I am sure he is aware, does not apply unless the Commissioners of Inland Revenue so direct, and I can assure my hon. Friend that the Section is not in practice applied if the amount of the tax involved is very small.
Having replied to those three points, I assure hon. Members that my right hon. Friend will take careful note of all the other matters which have been raised and I hope that in those circumstances the Committee will agree to the Clause.
§ Mr. DiamondMy hon. Friend the Member for Glasgow, Craigton (Mr. Millan) raised a very substantial matter when he dealt with the question of profit. I can deal with his point very shortly. The Clause deals with profit, but it does not deal with the absence of loss. Profit is one thing; absence of loss is an equivalent thing, but the Clause deals only with profit. There is a method which is quite easily available for including absence of loss in this part of the Bill.
§ Sir E. BoyleI understand the hon. Gentleman's point and I can say simply this. I will look at it, but my belief is that as the Clause is drafted, and as Section 469 of the Income Tax Act, 1952, stands, this point ought not to cause any difficulty.
§ Question put and agreed to.
§ Clause, as amended, ordered to stand part of the Bill.