§ Mr. Millan
I beg to move, in page 20, line 17, to leave out from "subsection" to "and" in line 20.
The purpose of this Clause is to deal with transactions by which shares in investment companies are sold to associated dealing companies at inflated prices, the intention being that the seller of the shares gets a capital profit which is untaxed, and the dealing company gets at least a potential capital loss which will be allowed for purposes of taxation. Subsection (3) seeks to eliminate this artificial profit by evaluating the two shares on an assets basis and taking the 392 actual sales price of the shares and saying that this profit is taxable. In other words, the artificial value is caught by taking the true value from the selling price.
So far as that goes, the Clause is perfectly all right, but it then seems extraordinary that the words—which my Amendment seeks to eliminate—should appear in subsection (2). I find it extremely difficult to understand why these words appear at all. Because of the profit made, as specified in subsection (3), there is attracted a consideration which the seller of the shares pays for them as issued when he sells. That seems to me to be quite irrelevant. The original price for the shares now being sold is quite irrelevant to the transaction with which we are here concerned, and to deduct from the profit, which is by definition a difference, can give a completely absurd position.
As a matter of fact, unless the profit was a substantial one, consideration for the shares in the first place would be considerably less than any profit made. The Clause would be perfectly well drafted, and would meet the intention desired of it, if these words were eliminated altogether.
I can produce no further argument because I frankly fail to see how these words got into subsection (2) at all. To me, they seem to negative completely the effect which the Clause seeks to produce.
§ The Solicitor-General
The effect of the Amendment would be to make a person who sells shares in an investment company under his control to a dealing company under his control liable to tax on the full amount of the consideration which he receives from the holding company instead of being liable only on the amount by which that consideration exceeds the price he paid for the shares in question. The profit made by the seller of the shares would be measured after taking into account everything he paid for the shares in the first place.
The Amendment in addition would lead to the most absurd results. Take, for example, a person who has subscribed £100,000 for shares in an investment company and decides to sell the shares to a dealing company also under his control when there has been a capital appreciation of a few hundred pounds 393 in the holdings of the investment company. He would be liable to tax not only on those few hundred pounds but on the £100,000 in addition. I cannot see how that result could possibly be justified, and I would, therefore, hope that the hon. Member would not press his Amendment, but if he does I could only advise the Committee to resist it.
§ Mr. Millan
Perhaps I just do not understand the Clause, but I am afraid that I still do not understand what the Solicitor-General has said. He said that if the Amendment were accepted the seller would in fact be liable to pay tax on the full consideration which he paid for the shares. That is not so at all. Subsection (3) defines the amount on which tax is to be chargeable as the amount of the profit, and it then goes on to define profit in terms which mean that the profit is the difference between the selling price of the shares and the actual value of the assets of the company which are attributable to the shares. The question of the consideration that the shares get is completely irrelevant to that point.
I should like to give a concrete example of someone selling 50 per cent. of the shares of a company, the true assets of which are worth £10,000. Therefore, the true value of the shares he is selling would be worth £5,000. He sells the shares at an inflated price of £6,000. Under subsection (3) he is due to pay tax not on the £6,000 but on the difference between that and the true value of the shares as assets, namely, £5,000; in other words, he pays tax on £1,000.
That is what the Clause does, and the question of what he originally paid for the shares is completely irrelevant from that point of view. We have to consider the point at which the shares are sold. What happened originally when the company was originally formed and the price at which the seller originally bought the shares is completely irrelevant from this point of view, in considering the selling price of the shares as compared with their true value on an assets basis. Subsection (3) deals with that perfectly well, and I submit, therefore, that the words in subsection (2) which I am seeking to delete are not necessary at all.
394 I cannot hope to persuade the Solicitor-General, because I think he thinks I am misreading the Clause. I do not think that I am, but if he would at least give me an undertaking that he would look into this point to see whether what I am saying has some substance in it, I could ask leave to withdraw the Amendment.
§ The Solicitor-General
I had better say straight away that the hon. Gentleman has stirred a little doubt in my mind, and I should like to consider the matter before Report.
§ Amendment, by leave, withdrawn.
§ Motion made, and Question proposed, That the Clause stand part of the Bill.
§ 12.15 a.m.
§ Mr. Denzil Freeth
I should be grateful for enlightenment on one point. We are here dealing with the case of the profit secured, which hitherto would have been a capital gain, being taxed as income. We are thinking particularly in terms of an asset which increases in capital value through ploughed back profit in the years gone by, or what one will. It appears to me from the Clause that the aim of the exercise is to tax that profit as though it had been profit earned wholly in one year, namely to add the profit on to the Income Tax and Surtax liability of the person who is liable to pay tax on that profit.
I should be grateful if my hon. and learned Friend the Solicitor-General would tell me whether I am right and I would ask whether, on reflection, he does not think that there is an injustice here, since capital value may well take some years to acrue. Would it not be fairer to let this amount of taxable profit be spread out during the years in which the shares were held?
§ Mr. Diamond
There are quite properly two points of view in the Committee. Hon. Members opposite are concerned that there should be no possibility of catching the innocent with the guilty and that there should be no possibility of preventing a legitimate deal. On this side we desire to strengthen the Clause so that those skilled in tax avoidance should not be able to obtain the benefit 395 of a transaction once the House of Commons has decided that tax relief should no longer be available.
I want to make two points on strengthening the Clause. First, paragraph (a) refers to shares issued after the beginning of 1960–61. Without raising the awkward problem of retrospection, especially at this hour of the morning, I cannot see why we should not deal with transactions entered into at the beginning of 1960–61 whether or not the shares were issued before that. I do not know why we have to restrict the Clause to shares issued after the beginning of that financial year. Consideration should be given to altering subsection (1, a) so that it will affect dealing with shares after that date, whether the shares are issued after the 5th April, 1960, or before that date.
Secondly, I very much doubt whether my hon. Friend the Member for Glasgow, Craigton (Mr. Millan) has misunderstood the Clause. The whole Committee will have been impressed by the fact that he is the one person here, with due deference to the Front Bench opposite, who seems to have understood everything all the way through. If my hon. Friend has misunderstood it, then I am delighted to be in his company. The point he has made is absolutely straightforward, namely, that it is utterly irrelevant to deduct the cost of shares under subsection (2) and therefore the last four lines of that subsection should not be there at all, because subsection (3) provides for the arithmetic and the arithmetic is on a basis different from the cost of the shares to which the last three or four lines of subsection (2) refer. I hope, therefore, that this matter will be looked at in a determined effort to understand the difficulty hon. Members opposite are having, especially as we are saying that it is not difficult to understand but rather quite easy to understand, but that it is utter nonsense.
This is something which arises very rarely indeed with regard to the drafting of a Finance Bill, but perhaps a misunderstanding has arisen as to how one arrives at a profit on shares.
Having said that, I draw attention to the fact that this is the second of two Clauses dealing with this group of tax avoidance transactions which, as the 396 Chancellor of the Exchequer said when he introduced the Finance Bill, are designed to prevent the avoidance of tax by persons who switch money from being an income liable to tax to a capital profit not liable to tax. This arises because of the tax structure where capital gains are not taxed, and to keep the arithmetic up to date, this is the seventh Clause in the Bill dealing with tax avoidance. This is due to the fact that income is taxed while capital gains are not taxed.
§ The Solicitor-General
The hon. Member for Gloucester (Mr. Diamond) has made the same speech, to which we have listened very patiently, on each of these Clauses. I merely say very mildly that he is utterly mistaken if he thinks that a capital gains tax is a foolproof specific against tax avoidance of this sort. I am sure that if he applies his mind—and perhaps he has—to some of the complications that would be involved, and to the fact that tax avoidance is practised in many forms by exempt institutions and by Surtax payers, he will see some of the shortcomings of a capital gains tax as a specific. I did not mean to say that, and I certainly do not want to evoke a debate on a capital gains tax at this hour of the morning, but I have finally been goaded beyond endurance.
Two main points have been raised. My hon. Friend the Member for Basingstoke (Mr. Denzil Freeth) raised the question of the spread of the appreciation. I see great difficulties in that, but I certainly will look into it before the Report stage.
The hon. Member for Gloucester mentioned the question of the relevant date. I think that the short answer is that his proposal would involve an element of retrospection very much on the lines of the very first Amendment that we discussed many hours ago today. The answer is that to tax a person on the profits made on selling shares in an investment company under his control to a dealing company which is also under his control, in a case when he first took up the shares in the investment company and expected that a profit made on selling them to the dealing company would be tax free, in our view would involve an element of undesirable retrospection. I do not therefore think that his proposal is acceptable.
§ Mr. Denzil Freeth
The Solicitor-General will recall that, in answer to a question relating to the previous Clause, my hon. Friend the Financial Secretary said that to dispose of an asset could mean to sell to a jobber. Will my hon. and learned Friend say whether the words in the Clausean investment company sells sharesmean merely the sale to a jobber, or whether they mean sale through a jobber to the dealing company, or whether in fact the chain is broken if the jobber is in possession of the shares even if only for a fraction of a second?
§ The Solicitor-General
I never like giving an opinion in law "off the cuff" on the construction of a Statute. I would prefer to consider that point. At first blush the intervention of a third party, other than a merely colourable one, would break the chain envisaged in the opening words of the Clause. In other words, if it is a sale to a jobber at arm's length and re-sale to a dealing company at arm's length the Clause does not apply; but I should like to give more thought to that and perhaps I could communicate with my hon. Friend.
§ Mr. Houghton
We are ready to part with the Clause, although my confidence in what we are doing is waning hour by hour. We started off thinking we had really got something in this and other Clauses; then we found a crop of Amendments put down by the Chancellor of the Exchequer, with the object of improving those Clauses, and now we are threatened with another grilling on Report, because time and again in the last hour or two points have been raised which the Solicitor-General has said will be considered before Report —there is a doubt in his mind about this, and there may be a snag about that. The whole thing is becoming a bit of a shambles.
What lies in the background, in the matter of administration, I do not know, but this has lifted the veil of security on the antics of these boys in the City. What are they up to? What are they contributing to the national well-being? It used to be said that a man cannot make a profit out of himself, but it is possible. If a person has control of an investment company he can make a profit if he sells to a holding company which is also controlled by him. It is 398 that transaction which the Clause is designed to catch.
The Solicitor-General may be quite right to chide my hon. Friend the Member for Gloucester (Mr. Diamond) by saying that a capital gains tax would not solve all these problems. It probably would not, but the Committee is confronting the country with a grave crisis in the principles and the basis of our taxation. The public does not realise how much tax avoidance is going on, and what manipulations can be deployed by people to avoid taxation. It is a pity that this debate is taking place at a very late hour, when the whole of the aggrieved taxpayers in the community are resting quietly in their beds, unaware of the attempts we are making to safeguard their interests; but it will be our duty at some time before the Bill is passed to make our protest while the public is still awake.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.