Clause 15.—(SUPPLEMENTARY.) (Hansard, 2 July 1962)

§ Mr. Barber
I beg to move, in page 21, line 41, at the end to insert: and shares or debentures comprised in any letter of allotment or similar instrument shall be treated as issued unless the right to the shares or debentures thereby conferred remains provisional until accepted and there has been no acceptance". It has been pointed out that the existing definition of shares in subsection (1) is not satisfactory and the Amendment ensures that, for the purposes of Case VII, where a company proposes to issue new shares or debentures and proceeds by way of letter of allotment instead of issuing the shares and debentures directly, the same consequences shall follow as if they had been issued directly unless the allotment is provisional and has not been accepted. This is a sensible extension of the definition of shares and one which, frankly, we ought to have thought of at an earlier stage. I hope that it will be accepted by the Committee.

§ Mr. Barber
I beg to move, in page 22, line 11, to leave out from "separately" to "but" and to insert: and any partnership dealings shall be treated as dealings by the partners and not by the firm as such;". This Amendment would have been moved by the Lord Advocate if he had been able to be here this evening. The Amendment, to subsection (3), clarifies the position of partners under Case VII in relation to dealings of the partnership. It is necessary because of anomalies that would otherwise arise in relation to Scottish partnerships. The position so far as English partnerships are concerned is perfectly satisfactory as the Bill stands.
Under the Bill, as drafted, difficulties could arise because in Scotland a partnership is a separate legal entity to which the partnership property belongs, whereas in England it is not a separate legal entity and the partnership property belongs to the partners according to their shares. Under subsection (3) it is provided that gains accruing on the disposal of partnership assets shall in Scotland as well as elsewhere in the United Kingdom be assessed under Case VII on the partners separately, as in the case of other joint owners.
154 Subsection (3) was intended to secure for the purpose of Case VII that there should be identical treatment of partners in Scotland and the rest of the United Kingdom, but the subsection as drafted does not achieve this. The Amendment secures the desired result by deleting the reference to the case of other joint owners and providing instead that any partnership dealings shall be treated as dealings by the partners and not by the firm as such. It consequently secures that Case VII liabilities will be determined by looking through the partnership to the interests of individual partners in Scotland as well as elsewhere in the United Kingdom.

§ Mr. Mitchison
If I understand this aright, it comes to this. In England, partnership dealings are treated for taxation purposes as dealings by the separate partners. In Scotland, on the other hand, the partnership is assessable as such, and this Amendment is intended to withdraw from the Case VII arrangements any liability on the partnership as such and to substitute therefore liability on individual partners. I hope that I have it right.
I am glad, in a sense, to see that there has been an attempt to produce uniformity. As an Englishmen sitting for an English constituency, I find it difficult to appreciate the possible problems which this may cause in Scotland. Offhand, there might well be a difficulty if other taxes are to be assessed on the partnership as a unit in Scotland while this particular tax is to be dealt with on a special basis analogous to the English system. Am I right in thinking that taxes other than Case VII are now to be dealt with on the basis of an assessment on individuals rather than the partnership as such? I leave that question with the hon. Gentleman.
I put one further question to him, and I hope that he will give a full and detailed reply. What is to happen to these arrangements if we go into the Common Market?

§ Mr. Barber
I will draw the last point made by the hon. and learned Gentleman to the attention of my right hon. Friend the Lord Privy Seal, who will take due note of it
155 This Amendment, of course, relates only to tax charged under Case VII. The reason why it is not necessary to make similiar arrangements in respect of any other charge to Income Tax or Surtax in respect of a Scottish partnership is that we are concerned here only with the transfer of property, and it is only where there is a transfer of property giving rise to a charge under Case VII that difficulty arises. I think that I can best explain the matter by an example.
If a partner transfers his own property to the partnership, he is, under the law of Scotland, transferring the whole of the property to a separate legal entity although he is one of the partners. If the transfer involves the disposal of a chargeable assert within the relevant time from its acquisition, the partner will be liable to tax under Case VII on any gain he makes on the whole of the property transferred, whereas in England, because a partnership is not a separate legal entity, he will he liable only on the gain on the share of the property transferred to other partners.
The same sort of difficulty would arise where there was a new partnership. It might well be construed as being a transfer of the whole property from the old partnership to the new partnership, whereas, in fact, the partner concerned might still have retained the same share of the property.

§ Mr. Barber
I beg to move, in page 22, line 29, at the end to insert: (5) An underwriting member of Lloyds or of an approved association of underwriters shall be treated for the purposes of this Chapter (and in particular of subsection (5) of section eleven) as absolutely entitled as against the trustees to the investments of his premiums trust fund, his special reserve fund (if any) and any other trust fund required or authorised by the rules of Lloyd's or the association in question, or required by the underwriting agent through whom his business of any part of it is carried on, to be kept in connection with the business; but— (a) the trustees of any fund shall (subject to subsection (6) below) be assessed and charged to income tax at the standard rate as if this subsection had not been passed, and may, notwithstanding anything in any enactment or in the trusts of the fund, out of any gain accruing from the acquisition and disposal of an investment of the fund make good to the underwriting member any increase in the surtax or profits tax borne by him which is attributable to that gain; and 156 (b) in paragraph (a) of sub-paragraph (3) of paragraph 6 of the Twenty-first Schedule to the Income Tax Act, 1952 (which relates to the computation of the profits of an underwriter's business for the purpose of regulating payments into and out of his special reserve fund), the reference to income arising from the investments forming part of those funds shall include the amount of the gains chargeable to tax under Case VII which accrue in the underwriting year in question from the acquisition and disposal of any such investments, after deducting from those gains losses accruing before the end of that year from any chargeable acquisition and disposal of any such investments so far as those losses are not under this paragraph deductible from gains accruing in a previous underwriting year. In this subsection expressions used in section four hundred and eighty of the Income Tax Act, 1952, or in the Twenty-first Schedule to that Act have the same meanings as they have for purposes of that section or Schedule. (6) The assessment to be made on the trustees of a fund by virtue of paragraph (a) of subsection (5) above for any year of assessment shall not take account of losses accruing in any previous year of assessment, and if for that or any other reason the tax paid on behalf of an underwriting member for any year of assessment by virtue of assessments so made exceeds the tax for which he is liable, the excess shall, on a claim being made by him to the surveyor, be repaid by the Commissioners of Inland Revenue: Provided that if the surveyor objects to a claim for a deduction on account of losses allowable under Case VII, the claim shall be heard and determined by the Commissioners concerned in like manner as if it were an appeal against an assessment under Case VII, and the provisions of the Income Tax Act, 1952, relating to the statement of a case for the opinion of the High Court on a point of law shall apply. This Amendment adapts the provisions of Case VII of Schedule D to meet the special circumstances of underwriting members of Lloyds and other underwriters who maintain trust funds in connection with their business in conformity with Section 1 (6) of the Insurance Companies Act, 1958. The Amendment is long and somewhat complex, and it might be for the convenience of the Committee—indeed I owe it to the Committee—to give a fairly full explanation as this is a new matter. I hope that the hon. and learned Member for Kettering (Mr. Mitchison) will think it more convenient that I should do that at the outset rather than be asked detailed questions later.
Under Clause 9, the charge under Case VII is computed on the balance of the taxpayer's short-term gains in the relevant year from the acquisition and 157 disposal of chargeable assets after deducting any allowable Case VII losses accruing in that year or carried forward from earlier years. Clause 11 (5), which is a very relevant subsection in considering this Amendment, provides that, where assets are held by a nominee or bare trustee, one looks through to the beneficial owner of the assets in question for Case VII purposes; but other trustees are treated as an independent taxable entity for the purposes of Case VII.
I am sure that the Committee will agree—we discussed this at an earlier stage—that it is sensible and, indeed, only common sense that, when one is concerned merely with a bare trustee, one should look through the trustee to the actual beneficial owner. A Lloyds underwriter, or a "name" as he is sometimes known, has to put assets into the hands of trustees to ensure that funds are available to meet his underwriting liabilities. Most underwriters will have at least three separate trust funds. They will have more than that if they underwrite through more than one agent.
The trust funds fall into four classes—the Lloyd's deposit, the premiums trust fund, the special reserve fund and the premiums trust fund deposit. If asked to do so by hon. Members, I will explain the differences between the various trust funds, but I do not think that it will be thought necessary when I have explained the reason behind the Amendment.
As the Bill stands, liability under Case VII in respect of any short-term gains of each individual trust fund would be chargeable separately on the trustees of the fund, although, in fact, there may be only one underwriter concerned with a number of funds, and a net short-term loss of one fund of an underwriter would not be available for setoff against net short-term gains or other funds held for the same underwriter. In the computation of the Profits Tax, which is payable in respect of Lloyds underwriters' profits under the special reserve fund arrangements, it is the net short-term gains on all funds, after setting off any allowable losses, which will be taken into account.
This is clearly anomalous, and the anomaly arises because we are dealing with a type of taxpayer who is treated, for various reasons with which the Com- 158 mittee is familiar, in a quite unique manner. That the position is anomalous cannot be disputed, and it is obviously desirable that it should be put right. In particular, when a name belongs to three syndicates for which different underwriting agents act, a short-term loss for one of his premiums trust funds would not be available to set off against short-term gains of other such funds because he will have three separate premium trust funds.
On the other hand, if the same agent acted for all three syndicates, there would be only one trust fund and consequently there would be an effective setoff of short-term losses against short-term gains. Whether one has the position of three trust funds or of one trust fund is in a sense somewhat fortuitous. Consequently, here again is an anomaly which should be put right and is, in fact, put right by the Amendment.
Despite the apparent complexity of the subsection, it is really a matter of common sense in the end. The logical answer is that the Case VII liability should move through the trust funds to the name himself and that there should be a further right of set-off against short-term gains and losses of the underwriter in what I might call his private capacity. Underwriters are in this way put in the same position as other individuals who carry on business but who are not compelled by the nature of their business to subject their assets to these forms of trusts.

§ Mr. Mitchison
That was a clear explanation of a rather tangled and difficult matter. These trust funds were started, I think, as a result of the Harrison frauds at Lloyds, many years ago, and they have become more and more complicated. The actual position is that the name has really no voice whatever in the investments or in their disposal. They are almost entirely gilt-edged securities and things of that kind, or they used to be in the days when I knew about them, and I should have thought that there was not very much Case VII question likely to arise about them.
So far as there is any Case VII question, however, it seems logical that a man is compelled for reasons of public credit and public safety to put a quite substantial part of his assets into the 159 hands of trustees should not be penalised more than is necessary and, therefore, that he should be allowed to regard his property, whether forming part of those trust funds or not, as one whole. That, I understand, is what the Amendment proposes. I have no objection to it.