§ Motion made, and Question proposed, That the Clause stand part of the Bill.
§ 3.33 p.m.
§ Mr. Douglas Houghton (Sowerby)
This Clause is designed to deal with what I may describe as the conventional form of tax avoidance, if there is a conventional form of tax avoidance. It is designed to stop financial operators from making money out of the Inland Revenue.
I should like to remind the Committee of words used about this Clause by the Chancellor of the Exchequer on 3rd May, when he said:Clause 25 deals with a device of a rather different nature.His reference to the difference in nature was to earlier Clauses dealing with forms of tax avoidance.Financial operators are able to make a profit out of pretending that they are entitled to a dividend on stock when they are not by using the recognised Stock Exchange machinery for sales of stock. The result is that a voucher is created for a taxed dividend, tax on which is never, in fact, paid."—[OFFICIAL REPORT, 3rd May, 1960; Vol. 622, c. 894.]I do not think that there is any difference between that and putting one's hand in the till. This is claiming back tax which has never been paid. That is more than a pretence; that is a fraud on the Inland Revenue, and the taxpayer foots the bill. It is the taxes of the great mass of the people in the Exchequer which are raided by those who are operating this device.
The Attorney-General had some strictures to make on the abuse which Clause 25 is designed to stop. He said:I am sure that the House is united in thinking that ought to be stopped."—[OFFICIAL REPORT, 3rd May, 1960; Vol. 622, c. 1033.]Time prevented the Attorney-General, that day, from taking the House through the long and dismal story of the efforts made by the House to check this and 448 similar forms of abuse. It is a reflection upon the gentlemen, if that is the term to apply, who are in a position to utilise the buying and selling of shares for making a profit out of the Inland Revenue by getting back tax which has not, in fact, been paid. We hope that this Clause will be effective in stopping this abuse.
I ask again whether Clause 26 will stand guard over any possible loopholes in Clause 25 and in earlier Clauses. If not, I fear that the Committee will have to turn its attention once more to finding means of preventing a new form of trickery which may be perpetrated upon the Exchequer. I am sure that the Committee fully accepts the assurance of the Stock Exchange that it has done its best to stop this, but is powerless to prevent abuse where people are not using the recognised Stock Exchange machinery. The culpability of those concerned is no less for that; indeed, it is more.
We on this side of the Committee, therefore, strongly support the attempts to check this abuse under Clause 25. At the risk of wearying the Committee once more, I wish to protest against the abuse on the great mass of the taxpayers which is perpetrated by a few in a privileged and responsible position in the nation's financial dealings and operations. I have no doubt that these persons are regarded as creditable members of golf clubs and social gatherings of one kind and another. They no doubt present challenge cups for competitions among their friends. Yet they are making money, as the Attorney-General said, out of the provisions of the Statute.
We on this side of the Committee once again register our protest against these repeated examples of this form—it is worse than tax avoidance—of pretence and trickery upon the Inland Revenue. We hope that the Clause will be effective and that the Committee will unite in condemning these practices and give the Chancellor every support if it is necessary in the future to carry this further. We have been at this for five years and we have not succeeded in stopping it. I hope that this is the end of a dismal and humiliating chapter by this House in its efforts to stop measures of this kind. If it is not, then I think that there is full justification for the bolder proposals which the Chancellor is making in the next Clause.
§ Mr. John Diamond (Gloucester)
Much earlier today I suggested an Amendment to the Clause, and I apologise to the Committee for the fact that in doing so like most hon. Members here at the time, was more than half asleep, and, no doubt, did not do justice to the case for the Amendment or raise some question which I wanted to raise. We have reached the Question "That the Clause stand part of the Bill", and we ought to have a good deal more information about it before we part with the Clause.
As my hon. Friend the Member for Sowerby (Mr. Houghton) said, this is totally different from the previous tax avoidance Clauses which we have been discussing. To quote the AttorneyGeneral—not even to quote my hon. Friend, but to quote the AttorneyGeneral—this is not simply a matter of tax avoidance. To be quite blunt, this is a straightforward fraudulent tax evasion, the creation of a document which fraudulently persuades the Inland Revenue to give money where money is not due. Surely we are entitled to some information as to how this can happen, and why it is being dealt with in this way and not in other ways, too.
How could it happen on the Stock Exchange? The Chancellor said that the Stock Exchange is blameless. He therefore owes it to the Stock Exchange to explain why it is blameless. Surely the Stock Exchange should have it said on its behalf that it has done everything it can, but that, somehow or other, rules have been broken. My information is that no rules have been broken and that it is in compliance with the normal machinery of the London Stock Exchange that these vouchers come into existence. It may be a breach of one of the Stock Exchange minor rules about selling shares in advance of acquiring them, but this is much more fundamental than that.
In plain terms, this is defrauding the Inland Revenue of money which is not due to the person who puts in the claim in the first place or the person who signs the tax deduction certificate in the first place. I therefore cannot understand why the matter is being treated so lightly. The Attorney-General says that this is not simple tax avoidance, but it seems to me to be plain and simple fraud. May we be told why it is not 450 fraud and why proceedings have not been taken under the appropriate provisions against fraud to protect the Revenue?
This is not a question of arranging one's affairs within the ambit of the Income Tax Acts to avoid a liability arising; this is the filling in and signing of an entirely fictitious document, which states that one is deducting tax and, on the basis of that document, enabling another person to claim tax back from the Revenue.
How is it that the Stock Exchange knows nothing about this? If, as I am told, it can happen only with the knowledge and connivance of an authorised broker, how can it happen without the knowledge of the Stock Exchange? It can happen only with the knowledge of a broker, and the broker is authorised by the Stock Exchange. How can the Stock Exchange, therefore, to use the Chancellor's own words, be entirely "blameless in this matter"?
If it is blameless, has an appropriate attempt been made to bring the names of brokers to the attention of the Stock Exchange Committee? After all, if the Stock Exchange makes rules for the conduct of its business and, as a result of the infringement of those rules, a fraud is perpetrated on the Revenue, surely the Stock Exchange does not want to continue to authorise those individuals to act as brokers. Surely the Stock Exchange, like any other professional body, would wish to dismiss from membership, if this is the case, any broker through whose connivance a tax deduction certificate of this kind has come into existence.
If what I am saying is not correct, then I am glad that I have raised the issue so that the Government Front Bench can clear the Stock Exchange and explain how it is that the Stock Exchange is completely blameless in this matter of fraudulent tax evasion.
We ought also to be told how much is involved. Nobody has any idea of the size of this malpractice unless the Government give some indication of it. I know that it is very difficult—this is an argument which has been used on other occasions—for the Chancellor to know how much tax he is not collecting, but 451 surely some estimate can be made of the amounts involved in cases which have come to light—the amounts on which payment has been avoided, or the amounts which have been repaid as a result of this practice.
Finally, I draw the Solicitor-General's attention to the fact that this is the first Clause dealing with tax evasion which does not rest upon the principle that there is a division between our money which is available for spending, part of it being called income and part of it being called capital. If the Solicitor-General re-reads the Chancellor's Budget speech as I recommend him to re-read it, he will find that the Chancellor described the previous Clauses in explicit terms as being Clauses which deal with the problem of income being turned into capital. This, I am happy to say, is not such a Clause, and I need not, therefore, irritate the Solicitor-General with the speech which I made seven times on this issue. This is the eighth such Clause, and it is the first which does not depend upon our lack of a proper system of taxation.
§ The Financial Secretary to the Treasury (Sir Edward Boyle)
I think that the Committee may possibly be relieved to learn that they are not to hear that speech by the hon. Member for Gloucester (Mr. Diamond) for the eighth time this afternoon. But I do not regret the fact that we are spending a little time on this question, because I think that the Clause is important. I will try to answer some of the questions which the hon. Members for Sowerby (Mr. Houghton) and Gloucester have asked.
I agree that we are not here dealing with normal tax avoidance, as I shall show to the Committee. There is, however, no question of criminal conspiracy of any kind. We are dealing with what the ordinary layman could fairly describe, I think, as a swindle at the expense of the honest taxpayer. As the Committee is aware, we are dealing with a device, as the Inland Revenue often tactfully describes it, by which financial operators make a profit out of pretending that they are entitled to a dividend on stock, when, in fact, they are not, by using the recognised Stock Exchange machinery for sales of stocks and shares. In effect, they contract to sell stock cum-dividend and they acquire stock to meet the contract ex-dividend.
452 They are not entitled to the dividend, and to satisfy the purchaser they account to him through the ordinary channels of the Stock Exchange for a sum in cash equal to the dividend less Income Tax at the standard rate prevailing at the time. They can do this and make a profit because the difference between the cum-dividend price and the ex-dividend price of the stock is more than the net amount of the dividend after deduction of tax. They make their profit by putting the Revenue to risk of repaying tax which has never reached and will never reach the Exchequer.
I do not think that I can give an estimate of how much the Revenue has at stake. I do not think that it would be unknown for an operator to make a profit of about £700 to £800 on a single day through this means. We have to think in terms of the size of the individual profits which are being made rather than the total, which, I think, it would be impossible to estimate.
Clause 25 requires a person who sells stock cum-dividend, in such circumstances that he accounts to the purchaser for a net sum equivalent to the dividend after deduction of Income Tax at the standard rate, to account also to the Revenue for the Income Tax, unless he can produce a bona fide voucher showing that he was, in fact, entitled to the taxed dividend which he sold. This should kill that type of transaction, because the tax on the manufactured "dividend" will more than swallow up the profit which is at present available on the deal. The fact that he will have to pay tax on the "dividend" which has been artificially manufactured will swallow up the profits which have been made.
The hon. Member asked, quite fairly, where the Stock Exchange stands in all this. Let me make it plain, first, that as far as I can see the brokers are completely innocent in this affair. They cannot be brought into it at all. The Clause does not apply to Stock Exchange jobbers for a perfectly simple and proper reason. It is part of the Stock Exchange tax arrangements that all through the market amounts paid to and by jobbers in satisfaction of net dividends on stocks bought or sold cum-dividend rank as genuine dividends for tax purposes, even though, in particular cases, the jobber who sells a security cum-dividend may not have 453 the security cum-dividend in his possession, and he thus has to complete the deal by purchasing and delivering a security ex-dividend, plus an amount equal to the net dividend.
But there are already perfectly good arrangements in our tax code which regularise the position of jobbers, who are the key figures here. They are required to keep what is called a "separate interest account"; and if during the year the amount of dividends paid away by jobbers exceeds the amount of dividends they receive, they have to account to the Revenue for Income Tax at the standard rate.
The operators, the people against whom this Clause is directed, take advantage of the position of the jobbers by selling a net, manufactured, "dividend" to the jobber, but they, for their part, do not have to account to the Revenue for tax on the "dividend" as they are not themselves jobbers.
I think that the two key subsections of Clause 25 are subsections (1) and (2). Subsection (1) applies Section 170 of the 1952 Income Tax Act to the payment of a pretended dividend by a seller who is not entitled to it, and so ensures that he will have to account to the Revenue for tax. Perhaps just as important is subsection (2), which excludes any case where the Stock Exchange rules already require the seller to pay over the dividend in full.
The point is that the racket, if one can so describe it, has gone on hitherto because the position about jobbers has been different, from the legal point of view, from that of operators. As I said last night, in answering an Amendment moved by the hon. Member for Gloucester, the Clause will also exempt brokers on provincial stock exchanges who are authorised to deal in specified securities, if they operate under an arrangement with the Revenue for accounting for tax on dividends similar to that for jobbers on the Stock Exchange.
I repeat the point made by my right hon. Friend in his Budget speech. I do not think that here the Stock Exchange can be regarded as having been guilty in the past. The position of jobbers has already been fully regularised by law, and we hope that the Clause will 454 regularise the position and make it impossible for operators to operate as they have done in the past.
§ Mr. Douglas Jay (Battersea, North)
Can the Financial Secretary explain who the operators are who, he says, are neither jobbers nor brokers?
§ Sir E. Boyle
They are people who are working this particular racket. I cannot identify them any more closely, but I have no reason to think that they particularly abound in golf clubs or in any other part of the community.
§ Mr. Diamond
That is the whole point. My information is totally at variance with what the Financial Secretary has just said about brokers. The hon. Gentleman said very little indeed, but this goes to the heart of the matter about brokers. I accept completely that jobbers may be completely unaware of this kind of transaction, but my information is that one cannot conduct a transaction of this kind without a broker becoming aware of it. That is for the simple reason that the figures are such, and the margin is such that one has to deal in gilt-edged, and in very large figures.
The difference is so small that one has to deal in millions. As the Financial Secretary appreciates, the only advantage lies in the difference and, the difference being so small, one has to cover oneself. Therefore, at the time one sells, one buys. One cannot buy that day, so one has to arrange to buy the following day, when the stock goes "ex-div." That cannot be done except with the cooperation of a broker. That is what I am told.
The hon. Gentleman has said only a word about brokers. He has not explained why they are not involved, and has not told my right hon. Friend the Member for Battersea, North (Mr. Jay) who the operators are. This goes to the heart of the matter, because, if brokers are involved, the Clause still leaves this enormous nucleus in the provinces, because brokers in the provinces will continue to be excluded from the provisions of the Bill.
455 The London Stock Exchange broker is not thought to be sufficiently unaware of these transactions to be left out of the Bill. Let us be quite clear. The London Stock Exchange broker will no longer have the same freedom after the Clause is passed, but the provincial broker will be allowed to continue to make out these tax vouchers, and will be in direct touch with the operator. I therefore do not think that this is a satisfactory freedom at all.
§ Sir E. Boyle
I still believe that the hon. Member for Gloucester (Mr. Diamond) exaggerates the part that the broker can play in this, because it is of the very essence of a broker that he merely acts on his client's instructions. I will check the question of who the operators can be, but I do not think that one can identify them more closely except to say, as I think the hon. Gentleman indicated, that a good deal of this racket has gone on through borrowed money, because the sums involved are large. One cannot possibly identify operators more closely than that, except to say that anybody who has the opportunity of access to the borrowing of large sums of money could operate the racket. But as a result of the operation of the Clause I am quite convinced that he will no longer be able to do so.
§ Mr. Harold Wilson (Huyton)
As my hon. Friends the Members for Sowerby (Mr. Houghton) and for Gloucester (Mr. Diamond) have pointed out, and as the Financial Secretary has confirmed, this is a very different type of Clause from those which we have been debating earlier. This is not an ordinary form of tax avoidance, but a particularly unscrupulous one, and, in its outward form, a particularly dishonest one. As my hon. Friend the Member for Sowerby said, it is a demand for the repayment of tax that has never been paid.
Practices in other walks of life come to the knowledge of the House from time to time, but this practice gives rise to a degree of immorality that we would not contemplate in other directions. For example, if one of our constituents were to put in his Income Tax form a claim for an allowance for a child who did not exist, the Revenue would prose- 456 cute that person, and rightly. We would all support the prosecution, because the person would be claiming a tax remission for something that did not exist.
If one of our constituents, perhaps rather hard up, were tempted, on the death of a parent, to continue to draw retirement pension on the book of the deceased, we would, again, regard that not only as illegal, but as highly immoral, and that person would be "jumped on" with the full severity of the law. Again, there have been cases mentioned in the House of widows and mothers who have been very hard pressed financially and got National Assistance by all kinds of false declarations which claimed a state of affairs to exist that did not exist. In some of those cases, the women have been sentenced to terms of imprisonment. Yet this class of case, which is simply no more than a demand for a repayment of tax that has not been paid, has not only been regarded, apparently—until this year—as moral and legal but has been condoned by the Government, whose attention has been drawn to it year after year by my right hon. and hon. Friends.
We can think of other cases. We often read of the tragic case of a local councillor who has put in a claim for travelling expenses—a few pounds—for going to a conference which, it turns out, he has never attended—or some other journey alleged to have been undertaken—
§ Mr. Wilson
Yes, claiming first-class fare when he only travelled second on alleged council business.
The law stamps on those cases very heavily. Those concerned nearly always get very stiff sentences and, of course, it is the end of their public life as councillors. Yet in the case of these City "gents" about whose identity the Financial Secretary seems to be so obscure, it is regarded as a perfectly legitimate form of business—until this year, when the Chancellor finally decided to introduce a Clause which the Government hope will be effective.
457 We are by no means certain that it will be effective and, like my hon. Friend the Member for Gloucester, I find it interesting to see that this will only apply in London and not in the provinces, which is either a sad reflection on the morality of those in London or a very naive faith in the belief the this sort of practice will not spread. If it is to be permitted in provincial stock exchanges, we shall find this tax avoidance system decentralised.
As we all know, this form of tax avoidance has a very long history. I mentioned in the early hours of this morning that a Clause to deal with one aspect of this system was incorporated in the Finance Act, 1937. I have not had a chance of looking at it, but I think it is Section 12. At various times since, we have queried whether that has been effective. Certainly, it is true that as a result of pressure from the Board of Inland Revenue, the Council of the Stock Exchange introduced new regulations in, I believe, August, 1957, to stamp out the practice so far as it could be stamped out by administrative action within the Stock Exchange itself.
But I well remember in the debate on the Second Reading of the Finance Bill—again I have not got HANSARD in front of me, and I am drawing on my memory, but I think that it was on 9th May, 1956, when the present Prime Minister was the Chancellor of the Exchequer—when I spent a long time on the subject of various kinds of legal tax avoidance and I had a lot to say about dividend stripping and bond washing, in particular. On that occasion I coined the generic term, which HANSARD always seems to get wrong, when I referred to "scrip teasing"—spelt with a "c" and not a "t".
The Chancellor of the Exchequer has had a go at dealing with scrip teasing in the Finance Bill. The then Chancellor, the present Prime Minister, took no action. It was authoritatively stated on the benches opposite that this was not a problem, that there was no real loss to the Revenue. Now we find this action taken. In our view, it should have been dealt with many years ago. Certainly, it should have been dealt with in 1956, when we raised the matter with the then Chancellor. But the then Chancellor, 458 even in those early days, was off into some fiscal stratosphere and could not be interested in matters of tax avoidance and the fortification of the Revenue.
I suggest to the Chancellor or to the Financial Secretary that many millions must have been lost to the Revenue as a result of the then Chancellor's failure to act in 1956. Presumably this practice leads to the loss of millions and not just hundreds of thousands of pounds. Could the Financial Secretary hazard an estimate? Does it run into millions, or tens of millions as the Chancellor mentioned in connection with another form of tax avoidance?
§ Sir E. Boyle
It is really impossible to give a figure for what has been lost, but I certainly agree that the device could run into millions if it were not dealt with by the Clause.
§ Mr. Wilson
Obviously, it has run into millions, and the Treasury has been very slow in finding out about it. Some of my hon. Friends have given details. It has been a grave dereliction of duty on the part of successive Chancellors and Law Officers in that they have not dealt with the problem but have been pottering about with smaller matters instead of dealing with this. The Financial Secretary explained that he cannot give us an estimate. I suppose that the reason is that the certificates do not say what kind of dividend it is on which tax is stated to have been paid. Will it be possible to get from the Stock Exchange any figures at all of the number of transactions, because apparently they require certification? Is it possible to know how many of these transactions have been taking place? Is it a sizeable proportion of Stock Exchange business?
When hon. Members opposite move their Amendments there is always one speech of which we are getting very tired. We heard it yesterday, and we shall, no doubt, hear it even more this afternoon on the various Amendments on Clause 26. The speech always begins with, "We are all against tax avoidance. This is a terrible group of people and we must get rid of them. We are trying to protect the taxpayer against their activities". Of course, we all are; but, coming from some hon. Members opposite who were responsible for the revolt against the Chancellor two years ago on dividend stripping—a revolt 459 which cost the country many millions of pounds—I have a feeling that there is a certain myopia in their approach.
They feel that anything which goes on at all in the City of London must be for the public good and that, therefore, on balance, if there is a choice between strengthening the Revenue against practices of this kind, on the one hand, or, on the other, of dealing with the possibility that a few people will get hurt—people for whom Parliament should have no sympathy at all—they always come down in favour of no action or of wrecking Amendments which defeat the force of the Chancellor's proposals.
We all recognise that many aspects of City operations are of great benefit to the country—this has been said on many occasions—particularly in terms of earning foreign exchange, although most of the figures quoted in that connection have turned out to be exaggerated. Nevertheless, the City has some very important functions to play in the financing of international trade, some aspects of commodity market dealings and in other directions. But it does not follow that everything that goes on in the City is equally worth while and valuable from the point of view of Britain's economic position. Any proposal to interfere with any part of that is regarded as red revolution, the Chancellor finds himself sitting on a hot seat and we have to come to his rescue.
I most certainly feel that a considerable proportion—I can no more put a figure on this than the Financial Secretary can—of Stock Exchange transactions in the last two or three years have been for the purpose of tax avoidance in one form or another, including the form which we are discussing this afternoon. The Government, knowing that as they must have known it, say, "We cannot touch the City. Only when it becomes a major scandal, and involves the loss of many millions to the Revenue, can we contemplate action." The Financial Secretary who cannot give an exact figure—and we understand his difficulty—has gone so far as to say that he thinks it would run into some millions if it were not dealt with.
We have heard the Chancellor talk about the loss of tens of millions in 460 another connection. A figure of £100 million has been mentioned as having been lost in tax avoidance—a figure which, we understand, has come from Treasury sources; £100 million is the potential loss from tax avoidance with which the Bill deals. If the Chancellor feels that it is a gross exaggeration I hope that he will tell us so. I do not think that he can deny it. He knows that figures of this kind are involved.
The Chancellor of the Exchequer (Mr. Derick Heathcoat Amory)
I just could not put a figure to the total tax avoidance. I think that I have made that clear before.
§ Mr. Wilson
I know that it has been getting completely out of hand, and I do not think the right hon. Gentleman feels confident enough to deny that it could be £100 million. This makes utter nonsense of the oft-repeated statement by the Prime Minister during the General Election campaign that all that we were proposing in connection with tax avoidance would come to a measly £250,000 a year. As we all know, the Prime Minister's view of the truth is a little elliptic at election times.
The Clause with which we are dealing—and I am glad that we did not have to cope with it at one o'clock this morning—relates to matters which the Financial Secretary admits involves millions. I thought I heard him say that this practice was not illegal, that it was not in the legal sense a fraud. But he did say that it was a swindle on the honest taxpayer. I am sure that the whole Committee will thoroughly endorse those words. If those words are true, we should still have an explanation of the failure of the Government over the last four years—I go back no further than 1956—to take action about something which the present Financial Secretary has described this afternoon as a swindle on the honest taxpayer.
We shall certainly not vote against the Clause. We support it. We believe that it ought to have been introduced several years earlier. We still fear that it will not go far enough and, as my hon. Friend the Member for Sowerby suggested, it may be necessary, in respect of this form of avoidance and others, to begin to operate the machinery which we shall soon be debating on Clause 26.
§ The Attorney-General (Sir Reginald Manningham-Buller)
I wish to reply to one or two of the observations made by the right hon. Member for Huyton (Mr. H. Wilson). He began by contrasting the provisions of this Clause and the treatment of those who engage in this kind of activity with the kind of treatment meted out to those who put forward false claims for relief, false claims for expenses, and so forth. The cases are by no means in pari materia, for this reason.
The beneficiary of this operation is not the person who claims back tax on the dividend he is the person who buys ex and sells cum and gets a profit on that which is reduced by the amount he pays out in the notional dividend. The actual recipient of this notional dividend may be, and ordinarily is, completely innocent of any misconduct because he is not aware of what the other party has done. The cases are not in pari materia at all and there is no ground for thinking that the actual recipient of the dividend is being treated unduly favourably.
The right hon. Gentleman went on to make some general criticisms of the City and matters of that kind. He was guilty, if I may say so, of one further inaccuracy when he suggested that the fact that legislation last year was not made retrospective had cost the Revenue many millions of pounds. That is what he said. He may not be aware of it, but this is not so at all. The position before that legislation was brought in has been the subject of litigation and, so far, up to the Court of Appeal, the Revenue has been entirely successful. The case is now on its way to the House of Lords and, of course, if the Revenue succeeds in the Lords there will be no loss to the Revenue by reason of the fact that last year's legislation was not made retrospective.
The right hon. Gentleman spoke a great deal about the loss of millions of pounds. He spoke, also, about potential losses. They are two very different things. We shall he discussing the dividend stripping Clause in a few minutes, so I shall not say anything about that now except to point out that there has been no delay in bringing in a Measure to deal with the new devices which have sprung up since the last legislation. I shall have something to say about the potential loss 462 on the next Clause. I agree that, unless action is taken in this Bill to deal with it, the potential loss might be very great indeed.
§ The Attorney-General
I will deal with that when we come to the dividend stripping Clause. It is probably more appropriate to put it in perspective in relation to that. It does not really come into this matter of sales of securities ex and cum-dividend.
I rose to deal with those two points which the right hon. Gentleman thought fit to make and one or two of his other minor observations. As I say, there is really no ground for complaint in the parallel he attempted to draw between the person who puts forward a false claim and the recipient of a dividend on purchase of a share after this operation has been effected. I join with the right hon. Member for Huyton in saying that I am sure that this is a very desirable Clause, though I differ from him in his belief that it will not prove wholly effective. I think that it will.
§ 4.15 p.m.
§ Mr. Ede
We have at the moment in the Committee the benefit of the presence of two Law Officers of the Crown. I have listened to this discussion with very close interest and I gather that there is a person who is a culprit, but who, according to what the Attorney-General told us, is not the person who, in some circumstances, might appear to be blameworthy. On the other hand, there is a gentleman who really has no interest in the proceeding at all except that he hopes to make something out of it, an operation described by the Financial Secretary—I adopt his term—as a swindle on the honest taxpayer.
On that assumption, why cannot the culprit—I hope that I do not need to identify him any more closely than that—be prosecuted under the Vagrancy Act for obtaining money by means of a trick? Admittedly, of course, one does not deal with respectable people under the Vagrancy Act, but it is very effectively used on certain occasions in respect of people who take part in shady transactions. Might it not be a very fitting way of approaching this matter 463 to increase the penalty under the Vagrancy Act and deal with it in that way?
§ Mr. H. Wilson
I should not have spoken again but for the intervention of the right hon. and learned Gentleman the Attorney-General, who rose with the idea of reproving me for one or two inaccuracies. I agree when he says that the two cases I put are not in every detail parallel, that is to say, the case of a man who makes a false return for National Assistance, National Insurance, or tax purposes, on the one hand, and the person we are concerned with here, on the other. That is quite correct; the cases are not in every detail the same.
The right hon. and learned Gentleman told us about two different people, one of whom may be a completely innocent party to the transaction. That may be so, of course, but I hope that he does not believe that there are no cases of collusion. Collusion was supposed to have been banned by the 1937 Act, but we know that in many of these cases there is collusion and conspiracy, although it is virtually impossible for the Revenue to prove it. Even in the other cases, it is a fact that one man can gain out of the other man's tax position and, obviously, the prices which are paid reflect what is done and the whole thing is based on that. If we dealt with this problem at the root, as the Government think that they are doing now, that would stop it being done by either of them.
The right hon. and learned Gentleman accused me of what he called a minor innacuracy. He referred to last year's legislation. Far be it from me to correct the right hon. and learned Gentleman, but, of course, it was not last year's legislation. It was two years ago, in 1958. The Chancellor will recall that it came in his first Budget, when he was pushed into full retreat by hon. and learned Members behind him.
The Attorney-General took rather too simple a view of what occurred on that occasion. He said that I was wrong to suggest that millions of pounds were lost as a result of the Government's retreat on retrospection. But, of course, what I referred to was not the direct result of that. It may well be that 464 cases are still before the courts—the Attorney-General can be presumed to have full details about them and about their prospects—and it would be improper to discuss them now. What I do suggest to him is that by the Chancellor's failure to honour the pledge given by the Government in 1955 that retrospective action would be taken, many devious practices introduced between 1955 and 1958 were condoned. Indeed, the Chancellor made it all the worse by looking as though he intended to honour the pledge to take action and then running away as a result of pressure from behind him.
We all knew—several of us said so—that there were many people who were working out at that time devious means of avoiding taxes both in relation to dividend stripping and to the practice covered by this Clause. Certain people who were doing that decided that it was not worth it because of the threat of retrospective legislation. When the Chancellor turned tail and scurried away from the pledge he gave in his Budget speech in 1958 many of these people then decided that it was worth while taking a chance. They thought that the Government would never again introduce retrospective legislation. The Government fell down on that and, therefore, because of their action in 1958 and their failure to do something, these devices were multiplied.
I am sure that the Attorney-General is right in saying that the problem may not be the taxes lost up to this year's Budget, but the taxes that would be lost as a result of further developments of these practices. The further developments that have been going on, however, were the result of the Government's pusillanimous attitude to these questions.
The last point on which I take issue with the Attorney-General is his statement that the Government have not failed to deal with these questions and that as each new system of tax avoidance has been developed the Government have taken action when it became clear to them. That simply is not true. I refer the Attorney-General to some of the tax and accountancy journals over a long period before the Government did anything whatever about dividend stripping. The position was certainly published and was general information eighteen months 465 before action was taken. The same is true about the practices which are referred to in the Clause.
If it is a fact—the Attorney-General cannot deny it—that on the question of cum- and ex-dividend dealing, which is dealt with in the Clause, I gave evidence of this in 1956, and as we have had to wait for four years before it has been dealt with, the right hon. and learned Gentleman cannot claim that the Government have acted with all possible speed. Moreover, if in 1958 the Attorney General had accepted the proposals that we then made for general powers to deal with each of these new practices as they arose, by statutory order or whatever it might be—which would have been less of a sledgehammer than Clause 26—we would have saved millions of pounds to the Revenue. Certainly, in 1955, £12 million was lost on one practice alone. That practice was not effectively dealt with and I would think that many millions more were lost.
It is no good, therefore, the Attorney-General coming along with this humbug of suggesting that the Government have always acted. They have acted when they have been pushed into it, either by pressure from this side of the Committee or, as in this case, when the Revenue was breaking down under the effects of these thoroughly immoral and dishonest depredations.
§ Mr. Bruce Millan (Glasgow, Craigton)
The Attorney-General's intervention in answer to the specific parallel drawn by my right hon. Friend the Member for Huyton (Mr. H. Wilson) was not in the least convincing. The right hon. and learned Gentleman has drawn a distinction between the seller who is admittedly the guilty party in the transaction and the recipient who might well be an innocent party, and he has said that the cases are not parallel simply because it is the recipient who makes any repayment claim that may arise out of the dividend received. That, however, is quite irrelevant to the point that we are making.
It is not a question of who makes the claim on the Revenue, but of who initiates the transaction in such a way that the Revenue stands to lose. Therefore, the person who initiates the transaction is the seller. Whether or not the seller carries out the transaction 466 with the collusion of the recipient or purchaser, the fact is that the seller certainly remains guilty of what the ordinary man in the street would consider to be a fraudulent transaction in so far as he gives a certificate which is not in accordance with the facts. He pretends to the purchaser, and through the purchaser to the Inland Revenue, that he has been entitled to a dividend to which he was not entitled. That is the point. The parallel drawn by my right hon. Friend was perfectly justified.
If this has not been, strictly speaking, an illegal practice, it certainly has been, at the very least, a most disreputable practice. That makes it all the more important that we should clear up the position of the broker in these dealings. The reply of the Financial Secretary to the Treasury concerning the broker was not completely satisfactory. The hon. Gentleman said that the broker might have been a completely innocent party acting simply on the instructions of his client and was not to know whether the client was trying to do something that would have the effect of depriving the Revenue of income.
It is extremely difficult to see that a broker in a transaction of this nature could be innocent of the motives for which the transaction was being carried out, because the amounts of stock being dealt with are in terms of millions of pounds. Any broker who was asked by a client to carry out a transaction which involved the sale of a large quantity of stock of that kind, which the seller did not in fact hold and which the seller was intending only to purchase at a subsequent date when the stock had gone from being cum-dividend to an ex-dividend stock, must very well have known what the seller was about and must have known that the seller was attempting to get a tax advantage to make a profit out of what amounts to a fraudulent transaction. Therefore, we want to be just a little more satisfied about the position of the broker in these transactions. We have not had a satisfactory answer so far.
A certain amount of blame seems to attach to the brokers. Obviously, there is no question of criminal proceedings, but if blame has attached to the brokers it is right that this Committee should know about it, should know that that 467 blame attaches, and that the people who have been operating this practice are not quite so anonymous as the Financial Secretary would have us believe but include a number of people who are actually brokers.
That brings us to the question of what is to happen when the Clause is passed concerning provincial stock exchanges. The position is quite unsatisfactory. If brokers in London have been involved in this class of transaction, there is no reason why brokers in provincial stock exchanges should not also be engaged in this form of transaction. It is extremely difficult to see why they should be excluded from the provisions of the Clause.
§ Mr. John Rankin (Glasgow, Govan)
In his reply to my right hon. Friend the Member for Huyton (Mr. H. Wilson), the language of the Financial Secretary was remarkable. The hon. Gentleman was emphatic. He said that the Clause, which deals with these transactions, was trying to stop a swindle which was being perpetrated on the taxpayers. If there is a swindle, there must be a swindler and if there are swindlers, the position cannot be as vague as the Attorney-General seemed to indicate. The Financial Secretary emphasised the point by saying later that there was a racket. If there was a racket, there must be racketeers. Again, the Financial Secretary implies a definition which the Attorney-General seems to reject.
The Financial Secretary went on to tell us the rather arresting fact that in these transactions which the Clause is trying to stop, anything from £700 to £800 may be made in one transaction in one day. The Chancellor of the Exchequer will agree that these are alarming figures. The fact that money can be made so easily and quickly accounts, I have not the slightest doubt, for the increasing numbers of Bentleys and Rolls-Royces which are causing a great deal of trouble on the roads. It might help the Minister of Transport if this solution to overcrowding on the roads were to be added to the many which he is at present considering. These people are getting off scot free so far.
So far as I could judge, the Attorney-General seemed to be indicating that retrospective action could not be contemplated because of a case which is 468 now before the House of Lords. May we take it that if that case is decided in favour of the Treasury retrospective action will be contemplated? This is obviously a class of person with which we must deal. The Financial Secretary seems to be approaching nearer and nearer my description of these people in the House last Thursday which brought considerable protest from the benches opposite. I described them as a criminal class. I do not think that racketeers and swindlers can be adequately described in any other language than that which I used on Thursday.
I am glad to see that the Financial Secretary is beginning to approach my description. It may be that he will end up by accepting it, and without a word of protest from the benches behind him. Perhaps on reflection they, too, are coming to the conclusion that they have been supporting very bad company over the last four to five years in opposing Amendments proposed from this side with regard to these transactions and other malpractices.
My right hon. Friend the Member for Huyton described the difference between the treatment of this class and that of another class. Perhaps he had in mind a recent case in Scotland of an individual in public life who happened to make certain claims in respect of travelling expenses that were not legally justified, and who was damned completely for the rest of his life. The amounts involved were small. One does not condone this sort of thing, but, nevertheless, it is wrong that the law should operate so severely, exactly and relentlessly in some cases, and be so circumscribed—I do not say with encouragement, but at least as the result of no action being taken by the Government—and so easy in others. It would now seem that the Government propose to take action. Whether it will be sufficient or insufficient, I do not know. I hope that it will have some measure of sufficiency. If it does not, and if the Government do not act as we think they should act, they will have further Amendments from this side with which to deal. I hope that they will be warned by the situation in which they now find themselves.
469 Last Thursday, I quoted the sum, which I do not think has been disputed, that is lost to the Treasury by these malpractices. My right hon. Friend the Member for Huyton challenged the Chancellor of the Exchequer on the totality of that sum. I asked whether it was the case that about £100 million escapes the Treasury because of the activities of the dodger, the stripper and the waster. Even the use of those words caused the eyebrows of some hon. Members opposite to proceed towards the hairy part of the face. Since last Thursday the Government have had that figure before them. I assume that the right hon. Gentleman must have known something about it. He has had a chance to make inquiries. I feel that we on this side should have a more forthcoming answer to our questions than we have had so far.
What is the amount? The Financial Secretary agreed that millions of pounds are being lost to the Treasury. A few minutes later, the right hon. Gentleman, in reply to my right hon. Friend, did not deny that tens of millions might be involved. Can the auction go a little higher—to hundreds of millions? Which is the most accurate? The Government have been warned about what might happen in future. We may have more to say on this matter, depending on the reply of the Government. I hope that we shall have something more helpful from them than we have had so far.
§ Mr. Diamond
I want to make two suggestions to the Financial Secretary in the hope that he will be good enough to look into this matter a little more closely between now and Report so that we may be sure that the Clause will do what I am sure we all want done and about which the Attorney-General said:I am sure that the House is united in thinking that that ought to be stopped".—[OFFICAL REPORT, 3rd May, 1960; Vol. 622, c. 1033.]I suggest to the Financial Secretary that he is unaware of all the details of this matter because, to use his own words, this is a swindle. It is not likely, therefore, that he can get very accurate information about a swindle. I have found it very difficult to get information about this practice. However, I obtained it by going to someone I know who has many dealings on the Stock 470 Exchange and saying, "Have you ever heard of this sort of thing which is suggested in the Finance Bill?" He said, "Yes. My broker put it up to me". He then proceeded to describe in accurate detail the transaction which I have described and which the Financial Secretary has confirmed.
This is a case of what the Financial Secretary would call an operator being unaware of the manipulation of a tax deduction certificate until the scheme was put up to him by his broker. Of course, no Stock Exchange committee will admit that brokers are involved. Of course, no broker will admit it. But I ask the Financial Secretary to consider these figures and he will then see that brokers are involved.
Let us consider the case of an operator who deals in gilt-edged which are declared, shall we say, in the rare case, half yearly, more often quarterly. Let us take a 4 per cent. which is declared half yearly. Let us say that on £200 the tax involved is 15s. That is the amount of the profit in the bargain to this operator, less the cost which he has to incur for Stamp Duty, brokerage, and so on. It will immediately be seen that there is only 5s. or 6s. left to play with on £100. A person always sells before he buys because he sells on the previous date to buying. He sells when the market is "cum-div." and buys back when it is "ex-div." It is obvious that the seller must cover himself in order not to be caught in a transaction where the margin is as narrow as a few shillings for every £100.
It follows that he must make arrangements through his broker to contravene the regulations of the Stock Exchange and to buy for the following day what he is selling today. Therefore, the broker must be involved and if he is involved it would obviously not be right to exclude from the operation of the Clause brokers in provincial centres who are dealers, not because they are dealers, but because they are brokers in direct contact with their clients who are the operators.
The first thing I ask the Financial Secretary to consider is whether he is absolutely satisfied that the broker cannot be involved and, therefore, on provincial stock exchanges it is safe in the interests of the Clause to exclude the 471 broker who, incidentally, is a dealer, too. Secondly, I ask him to consider the possibility of inviting certain stock exchanges to alter their rules. The whole of this difficulty arises from the fact that one starts with the issue of counterfeit money, because a tax deduction certificate is created and that is no more than counterfeit money.
There must be some cases as envisaged in the Bill where the rules of the stock exchange provide that in settlements of this kind the dividend is paid gross and not net. Where the dividend is paid gross, there is no need for a tax deduction certificate and if there is no tax deduction certificate, the fraud cannot arise. Why not ask the stock exchanges which do not have that rule to consider altering their rules to make them coincide with those of other stock exchanges so that settlements of this kind which are made through the stock exchange, and not direct between purchaser and seller, can be made by paying the dividend gross, in which case there would be no tax deduction certificate and no possibility of fraud to arise?
The Attorney-General must be mistaken about the facts, because if a tax deduction certificate were given direct to the buyer and the buyer put it into the Inland Revenue, the Inland Revenue would have a name and address. A tax deduction certificate is not an anonymous thing like a £1 note. It has the name and address of the person responsible for accounting to the Revenue for the tax. It is not dealt with direct in the way that the Attorney-General assumes. It is handed to the broker, who mixes it in with other certificates, and the brokers and jobbers make out new certificates incorporating those which they have received. That is why the original counterfeit certificate never reaches the Inland Revenue. I hope that the Financial Secretary will look into those two matters, so that when we come to Report he can confirm that the Clause should be altered, or that it is satisfactory as it is.
§ Mr. G. R. Mitchison (Kettering)
The Financial Secretary described this business as a swindle. I agree. A swindle always imports a swindler. The Clause provides, or is intended to provide, for the revenue being recovered, but if there 472 is a swindle and a swindler, and the practice continues, what penalty applies? If there is no penalty, do the Government intend to provide for stopping this practice by putting the appropriate penalty into the Bill, if necessary in another Clause?
§ Sir E. Boyle
I will, of course, take note of all the points which have been made about the Clause this afternoon. I repeat that this practice is what the layman would call a swindle at the expense of the honest taxpayer. It is not in the legal sense a criminal conspiracy as the practice is carried out at the moment, but we are determined to root it out and certainly, between now and Report, my right hon. Friend and I will consider whether any further tightening up of the Clause is required.
The hon. Member for Gloucester (Mr. Diamond) referred to provincial stock exchanges. His question is covered by subsection (3), which excludes jobbers and any dealing brokers, but only those dealing brokers on the provincial exchanges operating under tax arrangements similar to those applying to jobbers. It is limited to dealers on the provincial exchanges who work on those same tax principles.
I assure the Committee that we will study the Clause and make sure that it is effective because, quite apart from the revenue involved, there is obviously a moral principle. I repeat what I said in the Budget debate, that this is not a time in our national history, or in Western history, when one wants to encourage anything which leads to cynicism about the way in which our affairs are conducted. I can give a full assurance to the Committee that we will look again at the Clause to make certain that it is properly drawn to achieve the object which we all have in mind.
§ 4.45 p.m.
§ Mr. Houghton
Normally, when a person is paying interest to another person from which he deducts tax, as he is required to do by the Income Tax Act, he gives a certificate to the recipient that he has deducted tax from the interest paid. If the recipient then uses that certificate for tax repayment or adjustment, the Inland Revenue check back on the validity of the certificate of deduction of tax. It verifies it, as the term 473 goes, to ensure that the person who certifies that the tax has been deducted accounts to the Revenue. In the case of dividend vouchers, the company certifies that the tax deducted will be accounted for to the appropriate officer for the receipt of tax.
In this case, as I understand it, the purchaser receives a certificate of the deduction of tax. That certificate is given by the seller. He intercepts the tax, as it were, between the one point and the other and he does not, in fact, account for the tax to the Revenue. He does, however, create a certificate of tax deduction upon which the purchaser can rely for repayment of tax, or to claim adjustment of his tax.
Would it not be possible to tighten up the circumstances in which the seller hands over to the purchaser a certificate of deduction of tax? For example, if he were required to deposit with the Inland Revenue a certified copy of that certificate, it might be possible for the Revenue to check back on the seller to see that the tax was accounted for. There may be difficulties about that and the numbers may be large. I do not know, but it seems that there may be a simpler and more straightfordward operation to recover the tax than merely relying on the buyer to assess the difference under Section 170 of the 1952 Act.
§ Mr. William Ross (Kilmarnock)
Will the Financial Secretary give an answer to the direct question put by my hon. and learned Friend the Member for Kettering (Mr. Mitchison)? What are the penalties? Are there any? If there is none, do the Government intend to provide for penalties in respect of this swindle?
§ Sir E. Boyle
The penalty is to stop the racket being advantageous. As I explained earlier, we are dealing not with a criminal conspiracy, but with a racket, and we want to stop the racket bringing any advantage to the person engaged in it.
The hon. Member for Sowerby (Mr. Houghton) made a practical and interesting suggestion which we will certainly consider along with the other matters that have been raised.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.