Clause 40.—(INTERPRETATION OF PART II.) (Hansard, 26 May 1960)

§ Sir E. Boyle
I beg to move, in page 36, line 12, at end to insert: and includes any company whose profits on the sale of securities, land or buildings are part of its trading profits; This Amendment expands the definition for the purpose of Clause 23 of "dealing company" at present defined by Clause 40 (4, d) as: a company dealing in securities, land or buildings. Certain companies, such as banks, are not allowed to treat securities as trading stock so as, for example, to bring them in each year at the lower of cost or market value and so do not rank as dealing companies in the full sense. Any profits or losses realised on sales of securities are, however, taken into account in computing their taxable profits. The mischief aimed at by Clause 23 could equally arise where such a company had engaged in transactions with a non-dealing associate. This Amendment extends the definition so as to bring any such company within the ambit of Clause 23.

§ The Solicitor-General
I beg to move, in page 36, line 20, to leave out from "avoidance" to the end of line 21 and to insert: or reduction of an assessment to income tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way 827 that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains The Amendment provides a partially revised definition of tax advantage for the purposes of Clause 26. The reason for it, it might be argued, on past constructions of the latter part of the definition in the Clause as it stands, in some cases, such as those outlined by my right hon. and learned Friend yesterday, which are clearly intended to be within Clause 26, is that they involved no tax advantage. Perhaps I could put the argument in relation to one type of case.
Part of the original definition which has been replaced by the Amendment reads: 'Tax advantage' means … the avoidance of an assessment to income tax or the reduction of such an assessment. It seemed to us that it would have been arguable under that definition that no tax advantage was obained in certain cases, as where a shareholder of a company sold specially created shares to a stripper of current dividends in the way described by my right hon. and learned Friend. He obtains in the price of his shares a Surtax-free equivalent of the profits which were enjoyed by the stripper by way of special dividends for a few years—I think it was a period of six years in the example given by my right hon. and learned Friend. It would be possible to argue that what he had received was capital and therefore not chargeable to tax. The argument would equally apply to the case of a reduction of capital on a large premium to be paid out of tax reserves.
In order to counter that possible argument it is necessary to provide that a tax advantage is obtained not only if there is an avoidance of an assessment, the subject matter of which is in existence, but also if there is an avoidance of an assessment that would have been possible if circumstances had been otherwise.

§ Mr. Diamond
There is just one point I should like to draw to the attention of the Committee and ask for it to be considered by the Government. It is in 828 relation to the definition of "associated company" in subsection (1). An associated company is here defined rather narrowly and, of course, it has to be defined because previously in the Bill reference is frequently made to associated companies coming together to make arrangements whereby tax is saved and a tax advantage gained.
This definition is much too narrow because nothing is easier than that two companies which were not technically associated companies under the definition get together and make arrangements with one another, Those arrangements would not be arrangements in the ordinary course of trade, but would be concerned purely with creating a tax advantage. I should have thought, therefore, that there should have been a much wider definition to catch, not only associated companies defined in this way, but those which enter into transactions with one another for the purpose of getting a tax advantage. Otherwise it would be very easy for one company to enter into an arrangement with another, because it would be to their mutual advantage, and thus do damage to the Inland Revenue.
I cannot think of a better definition than the one used in other parts of this Measure, namely, entering into a transaction other than for bona fide commercial reasons. That would be a wide definition, but it is the only way to cover the purpose in the mind of companies when they work together in this way. I do no more than ask the Solicitor-General to give consideration to the point and ask if he is satisfied that having associated companies defined in this narrow way will be sufficient to prevent the malpractices which the Committee is anxious to prevent.

§ The Solicitor-General
I shall certainly look at that matter. I think that the safeguard lies in the very broad meaning of the word "control" in Part X of the Income Tax Act, 1952. Section 333 of that Act says: 'control', in relation to a body corporate, means the power of a person to secure, by means of the holding of shares, or the possession of voting power in or in relation to that or any other body corporate, or by virtue of any powers conferred by the articles of association or other document regulating that or any other body corporate, that the affairs of the first-mentioned body corporate are conducted in accordance with the wishes 829 of that person, and, in relation to a partnership, means the right to a share of more than one-half of the assets, or of more than one-half of the income, of the partnership. The hon. Member will see that that is a fairly wide definition which, I think, provides the safeguard, but of course, in answer to his request, I shall look at the matter again.

§ Mr. Millan
The definition which the Solicitor-General has just read depends on the question of the shareholders, but the point which my hon. Friend the Member for Gloucester (Mr. Diamond) was making was that the definition under the Clause does not preclude people from working together where there is no formal shareholding relationship between the companies concerned. We all appreciate the extreme difficulty of introducing a definition which would cover anything as indeterminate as that.
10.45 p.m.
Nevertheless, this is a very important point, because some of the particularly important Clauses rest on this concept of "associated company". I need mention only Clauses 23 and 24, in which we deal with transactions between associated dealing and investment companies. We had considerable discussion earlier on Clause 26, which instituted rather wider powers than are introduced in any of the other tax avoidance Clauses.Obviously, the efficiency with which Clauses 23 and 24, to repeat the example, will operate will depend on whether the tax avoiders are able to find a technical excuse for coming outside these Clauses, and the obvious technicality on which they can avoid the Clauses is to have some sort of association which is not founded on any formal shareholding association but on something considerably less than that.
If we want to make the Clause effective and to avoid the wholesale introduction of Clauses similar to Clause 26 in subsequent Finance Bills to deal with the questions which have been specifically dealt with in Clauses other than Clause 26, we shall have to look very carefully at the question of associated companies. It is not just a technical point and it is not a point which rests wholly on the shareholding angle. It is a question whether it is possible for tax avoiders to avoid the Clauses in the Bill by the kind of relationship which I have described.
830 Since we all support the idea that, as far as possible, we should avoid any sort of general powers under the kind of Clause we have in Clause 26, it will be worth while for the Government to look at the question of associated companies as carefully as possible and, if possible, despite all the difficulties of definition, to try to provide something more stringent that we have at present in this Clause.