HC Deb 02 July 1962 vol 662 cc141-52
The Attorney-General

I beg to move, in page 21, line 15, at the end 'to insert: (5) There shall be exempt from tax chargeable under Case VII any gains which accrue to an assurance company (within the meaning of Part XX of the Income Tax Act, 1952) from its acquisition and disposal of investments of its life assurance fund, but which by reason of the mutual nature of the company's business or part of it do not accrue as profits of a trade. During the Second Reading debate there was some discussion about the position of mutual life insurance companies contrasted with non-mutual or proprietary life insurance companies. In Committee my hon. Friend the Economic Secretary said that we would table Amendments to put the mutual life insurance companies in precisely the same position—so far only as life insurance was concerned—as the proprietary life insurance companies. The Amendment does that.

Mr. Mitchison

That was a very succinct explanation. How complete it was remains to be seen. As I understand it, we are dealing with the life insurance funds of mutual companies, and so far as I know there is no express provision in the Bill about the life insurance funds of non-mutual companies—what I might call ordinary companies. I take it that the reason is that life insurance funds of ordinary companies, treated in accordance with the Act, are taken as separate units of assessment, and are bound to attract what one of my hon. Friends has called the "badge of trade". I suppose that the ordinary company is accordingly liable to pay tax on the profits its makes from the purchase and sale of investments, and that there is no question of its being dealt with under Case VII. I trust that I am right so far.

Here we have a rather different case. As I understand it, there is no badge of trade in connection with the business of a mutual company, even in connection with the management of its life insurance fund, Consequently, there are no profits of trade, and it is being given a particular exception from tax chargeable under Case VII—that exception which is not necessary and is not given in respect of other life insurance companies because they attract tax by way of the carrying on of a trade.

I should like to know the reason for this. Why is a mutual life insurance company especially exempt on the profit, or margins, whatever we call them, which accrue from the purchase at one price and sale at a higher price? There is no question of motive in this tax. It is. I understand, a tax which falls simply and wholly on profits or margins, whichever word one uses, between purchase and disposal of stocks and shares. These life insurance funds of mutual companies certainly attract margins. We call them profits in this instance because it is connected with the fact of whether they carry on a trade or not. There is no question that there is an increase due to the change in the value of shares, but for some reason or other that increase is not to attract this tax.

I hope that the Attorney-General will make clear not only the meaning of the proposed subsection, but what the object is and why there should be what appears to be wholly exceptional treatment for one group of people. I am not very sorry for life insurance companies. Later in the Bill we shall consider a case where the Government appear to be in somewhat unsuccessful competition with them in selling Government annuities. I shall not go into that now, but broadly speaking, they do not do too badly.

The reasons for an exemption, I think, can hardly be charitable ones. I trust that we shall be told what they are, bearing in mind that there is no intention in this Bill to tax people because of their intentions or motives but purely on the basis of something acquired and disposed of after a tolerably short interval.

The Attorney-General

I certainly hope that I did not disappoint the Committee in moving the Amendment briefly for the reason that this was the subject of considerable discussion on Second Reading. I dealt with it in winding up that debate and posed the problem which confronted the House with regard to this matter. The Economic Secretary during the Committee stage explained what we were proposing to do and said that we would table an Amendment on Report. This is the Amendment we have tabled to carry that out.

That being so, I did not think that the Committee would want me to cover the ground which has been already covered on two previous occasions when this is merely carrying out a pledge which has been given and was fully explained at the time. If the Committee wishes I shall of course explain it shortly, because I do not think we need spend very much time on it.

The hon. and learned Member was quite right in principle. In the case of a general non-life insurance business the proprietary company's gains on the realisation of investments form part of the profits of its trade which are included under Case I of Schedule D. That being so, no question of liability under Case VII arises in respect of those profits because under Clause 9 (1) the Case VII liability does not apply to gains which accrue as profits of the trade. There are one or two exceptions to the general rule but in those few cases there will be a liability under Case VII for any gains realised within the relevant time limit.

As the hon. and learned Member pointed out, mutual concerns carrying on general insurance business, since they do not make trading profits, will be within the new charge to tax under Case VII. We are not altering the position in regard to insurance other than life insurance. In life insurance a proprietary life insurance company is theoretically liable to tax under Case I of Schedule D on its profits. A mutual life insurance company is not so liable for the reasons the hon. and learned Member gave. In the case of a proprietary life insurance company's gains on realisation of investments, these fall to be taken into account in computing the Case I profits, but where the Case I charge applies it is by law limited to exclude amounts allocated to policy holders.

9.0 p.m.

There is a further complication here in that the Revenue is entitled to claim tax, as an alternative, on the basis of the company's investment income less its expenses of management, and that, in practice, is how tax is ordinarily claimed, except in the case of companies carrying on industrial life insurance business. Proprietary companies nearly always—I would say almost inevitably—pay tax under this alternative basis for reasons which I need not go into.

A mutual life insurance company. although it is not chargeable under Case I of Schedule D, is, like a proprietary company, liable to tax on its investment income less management expenses. The two types of life insurance companies therefore already suffer the same method of taxation; the same system is applied to them. The effect of the Bill as it stands is to impose a charge to tax on the short-term gains of mutual life insurance companies, to which the gains do not accrue as profits of a trade, but not on those of a proprietary life insurance company, to which the gains do accrue as profits of a trade, even though tax is paid on the alternative basis of investment income less management expenses and there is no Case I assessment on which the gains arc computed.

I have gone through the matter shortly, and I hope that the Committee will not mind. It would be unfair to the mutual life insurance companies to leave the position as it now is under the Bill, for that would discriminate unfairly against the mutual life insurance companies. It is for that reason that the Amendment is proposed. Its effect will be to put the mutual life insurance companies in the same position as the proprietary life insurance companies, as far as life insurance only is concerned, in relation to Case VII. It seems to me right and fair that as they are dealt with similarly by taxation on their investment income less expenses in both cases, they should receive similar treatment under Case VII, which they do not receive at the moment.

Mr. Mitchison

I am sorry to trouble the Committee again. The position as adumbrated by the right hon. and learned Gentleman—and he did it in some detail at an earlier stage—is true. In the long run it saves a lot of time, in a case of this sort, particularly where the subject matter is very complicated, for the Opposition to wait to discuss it until they see what the Government put on the Notice Paper. That is what we have done in this case.

I am still not satisfied about this. Let me try to explain to the Attorney-General what is troubling me. The opening words of this part of the Bill accept what I will call loosely profits of trade. It is said that the proprietary insurance companies' life profits fall under that head because they are profits of trade. The intention, I understand, is that profits of trade should be chargeable for tax, but in these very peculiar cases these profits are not, in that form at any rate, chargeable to tax at all. The proprietary insurance companies paytax on a basis which does not involve the question whether these profits on investments are or are not profits of trade. They pay tax on a completely different basis.

What is said about the mutual insurance companies—still dealing with life insurance—is that they ought to be treated Like the other insurance companies. In that form I should be disposed to accept the proposition, but the fact is that they are not so treated in many cases. They are treated as not carrying on a trade for many purposes, because they are mutual companies and they benefit by it. Now an exception is being made in their favour in relation to Case VII assessments, these margins or profits between acquisition and dis- posal. It is being made in a very curious form. It is being made in relation to life assurance.

I am a little puzzled about this. Many of these mutual companies are marine insurance companies. They, too, have funds which they carry on from year to year and in respect of which they presumably have the same position as regards Case VII. There will be acquisitions and disposals. I have in mind bodies like the Shipowners' Association. The right hon. and learned Gentleman will remember the McArthur case about marine insurance.

Why is it being done in only this one case? Why is this exception being made? Why is it not extended to marine insurance? Have the Government thought out the merits of what they propose? If they were treating the two classes of life insurance companies in a similar way, I should see the point, but I am not clear that they are. They are certainly not in cases where the mutual companies carry on business other than life insurance.

The Attorney-General

I said that it was confined to life assurance. Questions of marine insurance do not touch this. I reiterate that the effect of the Amendment is to bring the two types of company into line as regards tax treatment under Case VII. As I pointed out to the hon. and learned Gentleman, dealing solely with the life insurance activities of both sets of company, leaving Case VII on one side, they are both taxed now under the same system —taxation of investment income, less management expenses.

The Revenue has an alternative, if it wishes to use it, of taxing the proprietary companies on the profits of a trade. That being the alternative to the system applied in relation to proprietary companies for life insurance, I think that it would be wrong to make them subject to Case VII, as their liability under the alternative system is higher when it is taxed on the investment income, less management expenses. Therefore, it would be quite wrong to discriminate against mutual life insurance companies—mutual companies in relation to life insurance only—by keeping them within the scope of Case VII.

For that reason, we have tabled the Amendment to bring parity of treatment to the two.

Amendment agreed to.

Sir E. Boyle

I beg to move, in page 21, line 18, at the end to insert: (6) Where assets of the British Transport Commission are, by virtue of or in accordance with any Act of the present Session providing for the dissolution of that Commission, transferred to any body corporate established by that Act, then—

  1. (a) the Commission shall not be chargeable to tax under Case VII by reference to the transfer in respect of its acquisition and disposal of any asset included in the transfer; and
  2. (b) the body corporate shall be treated as if the Commission's acquisition of the asset had been its acquisition of it (paragraph 16 of the Ninth Schedule to this Act applying for the purposes of this paragraph as it applies for the purposes of that Schedule).
The object of the Amendment is to provide that the British Transport Commission should not be chargeable by reference to the transfer of any of its assets to a successor body proposed to be set up by the Transport Bill, which is at present passing through another place. The Transport Bill provides that all the assets at present belonging to the Commission are to vest in four new boards or in the Holding Company on a vesting date. Under the provisions of the Bill as at present drafted, the new boards or the Holding Company will acquire the assets in question on the vesting date and so would become liable to tax under Case VII if they subsequently disposed of such chargeable assets within the relevant time limit from the vesting date.

For the purposes of Case VII the new boards, if we left the Bill as it is, would be treated as acquiring the assets at their actual market value, if I may use those words once again—that is, the price which the assets might reasonably be expected to fetch on a sale in the open market. In some cases one of the successor boards, on disposing of an asset within the relevant time limit, might find that the asset realised considerably more than its market value at the vesting date, and it would therefore make a gain chargeable under Case VII.

This matter has been drawn to our attention, perfectly fairly, by the British Transport Commission and, of course, the point is particularly important when one considers assets taken over by the Railways Board, which will be cutting down its activities and may be in a position to sell off redundant land for some profitable form of development for which there is no planning permission in existence at the vesting date.

The Amendment therefore provides—and I think that this is clearly reasonable—that transfers from the Commission to the successor boards should not give rise to Case VII liability; and that the successor boards to the Commission should be treated, in regard to the assets transferred to them from the Commission, as if the Commission's acquisition of the assets had been the successor boards' acquisition.

That seems to me to be entirely reasonable. The Transport Bill was introduced to this House months before these present proposals. I think that it has always been accepted by the House that, however much we may disagree about the Transport Bill and the Government's proposals with regard to the British Transport Commission, none the less, if the Bill is coming forward, the new successor boards must have a fair chance to do their work as well as possible.

In the circumstances of both the Transport Bill and this Finance Bill, I think that it would only be reasonable to use the machinery of Clause 14 for the purpose that I have outlined to the Committee; and to say that we should proceed as if the Commission's acquisition of the assets had been the acquisition by the successor boards. While with any subject concerning transport we are clearly on the verge of controversy, I would hope that the principle behind the Amendment was one that would commend itself to the Committee.

Mr. J. T. Price

Whilst I accept the Financial Secretary's statement, one or two comments ought to be made about the relationship of this Clause to the newly-defined activities of the British Transport Commission and its successors. It is true, as the hon. Gentleman says that the purpose of the Transport Bill, which is still passing through another place, is to create a Holding Company which will become the receptacle or residuary of all the Commission's investments and assets—other than railways, canals and docks, which are to be hived off to three separate organisations.

It is important, however, to point out that within the province of that Holding Company will come all the remaining assets of British Road Services and its subsidiaries; all the assets of a large number of bus undertakings in which the State has a more than majority share interest—a sort of mixed bag of private and public enterprise. Included in it are such organisations as Thomas Cook & Son, Ltd., Tillings, and a large number of other diverse bodies that are not generally recognised as nationalised bodies at all.

One of the things that has borne seriously on the consideration of my hon. Friends and myself in Standing Committee has been that a large body of investments in these bus undertakings, road transport undertakings and administrative services of the Commission will now come within the province of a Holding Company which is purely an administrative body, disconnected altogether from the functional activities of the companies to be taken over. What some of us fear is that, under the new dispensation, it may be much easier for many of these profitable elements of the Commision, which have been making some contribution to the coffers of the Commission generally, to be placed at a disadvantage when it comes to selling them.

9.15 p.m.

The Financial Secretary just said, in effect, that if the B.T.C. wishes to sell some of its land —land for which it has not found a good use under its truncated stature—at site values then the Clause will mean that the Commission will not be caught in the net and again penalised by having to pay the capital gains tax for realising on its assets. I hope that I have not misinterpreted the hon. Gentleman's words in putting it that way.

My hon. Friends and I are concerned that under this set-up, even though the B.T.C. may be excused the operation of the capital gains tax, a situation should not be created whereby there is a greater temptation, even greater than now, to sell publicly owned assets to speculators outside who have nothing but a penal interest in them. We cannot just say, "Thank you very much" to the Govern- ment for what is, after all, a minor concession when we fear that there may be created a situation in which it will be easier to dispose of nationalised property into the hands of other operators who have greedy eyes to see what is a good thing.

It has been revealed in our discussions upstairs that in many of the great road transport undertakings, including bus companies the West Yorkshire organisation and others, though I will not detail them all—there is a majority holding by the B.T.C. We are fearful that once we get this situation, coupled with the Clause, we may find that ultimately many of these holdings, which have been profitable to the public purse, will be disposed of in a way not in the public interest.

I am sure that my hon. Friends would not like this opportunity to pass, while thanking the Financial Secretary for the consideration embodied in the Clause, without drawing attention to the wider implications which I have detailed; that we may find that while we get this tax concession we may create a situation in which we shall lose assets in a way which will not be to the advantage of the country or the B.T.C.

Mr. Mitchison

I share the view of my hon. Friend the Member for Westhougton (Mr. J. T. Price) that the body that matters in this connection is the Holding Company. I do not think that the other bodies concerned are treated in any way but fairly. I also share his apprehension that if a concession of this sort is made it tends to facilitate the disposal of the bus companies and other interests which are very substantial in value and which comprise the holdings of the Holding Company.

As the Financial Secretary will he aware, there are substantial minority interests in practically all these cases. They are really almost on a half-and-half basis and the present position is that the profits of these companies, which are the assets of the holding company, go to the Treasury. They have been taken from the railway system which used to get them—to the extent of the railway holdings, say, half the profits—and the position is, from the Government's point of view, that the sale of these assets will mean a loss of a certain amount of income which may result in some considerable capital profit over the value at the time of transfer from the Commission. The other interests—that is to say, those of the bus proprietors—are in this position, that this is a transfer forced upon them so far as the Transport Bill is concerned, but they, too, may get some profit out of it.

I see the Treasury's point about this, but I am not at all happy about this Clause. The overriding consideration seems to me to be not to separate the Holding Company's assets—that is to say, the bus companies—from the rest of the transport system, and I think it would be a bad thing if those assets were sold off to private operators before we have had a chance of getting something more like an integrated transport system.

The result of this fiscal Measure seems to me, to the extent that it operates at all, to be an inducement towards the sale of the assets rather than their retention in the hands of the Holding Company. I hope that I have made my meaning clear. I quite agree that the assets of the Transport Commission that are handed over are handed over to the Holding Company itself, but they are the assets which will finally be sold by the Holding Company. Therefore. I think they are affected by this Clause, if I understand it correctly.

I express that anxiety in the matter and I notice that it is shared by my hon. Friend the Member for Westhoughton, who has had considerable experience of the Transport Bill in its difficult course through Committee. I am the less happy about it because one of the features of the Bill is that the value of the different properties concerned, the assets of the Transport Commission, can be varied quite considerably by the somewhat excessive—if I may use the word—administrative powers which the Minister of Transport has taken to himself for the purposes of the Bill.

Mr. Willis

I had not intended to intervene, but I thought that the Financial Secretary might have been able to say something which might have given us on this side of the Committee a little reassurance. I believe that the points which have been made by my hon. Friends express the genuine concern, held by a great number of people about this Clause, that it might be paving the way for further denationalisation of very valuable assets, as well as the point about other people benefiting as a result. These are very real fears and there is no doubt that the Clause has the effect which has been indicated.

I should have thought the hon. Gentleman might have been able to say something about this. We are placed in a difficulty because of the burden which is placed on the Transport Commission in view of the Bill which is at present passing through the House. At the same time, the fears to which I have referred are created and I should like the hon. Gentleman to reassure my hon. Friends.

Sir E. Boyle

Certainly. I did not rise, because I had the impression that the hon. and learned Member for Kettering (Mr. Mitchison) and the hon. Member for Westhoughton (Mr. J. T. Price) wished the Government to be more in the rôle of listener than speaker while they were making their points.

I certainly can give this assurance. This Amendment, which, after all, has a limited scope, will apply to a period of more than six months. It has a limited ambit. I can give an assurance that this Amendment will not act as an incentive to the Holding Company, or indeed to any other successor bodies, to sell off or dispose of its property. We are simply on the fairly narrow point as to whether the successor boards to the Transport Commission should find—if I can use the phrase without offence—this rather unexpected joker in the pack from the point of view of the successor boards and the Bill which was originally produced. It is really no more than that.

I should have thought that this was a fair Amendment from the point of view of those who will be running the country's transport and I cannot believe that saying, "You should not be liable to Case VII simply because of the arrangements which the Government are making in the Transport Bill" would act positively as an incentive to the Holding Company or to the Railways Board to sell off property quicker than it otherwise would have done so. That is an unreal fear though I know very well the anxieties felt by hon. Members on this matter.

Amendment agreed to.

Clause, as amended, ordered to stand part of the Bill.