§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Hugh Rees.]
§ 10.58 p.m.
§ Mr. Douglas Houghton (Sowerby)
This is an unpalatable task that I have imposed on myself tonight and I wondered several times lately whether I should go on with it, but I gave notice that I wished to raise this matter on the Adjournment, so I had better stick to that.
I am pursuing a matter which I raised at Question Time on 3rd December, and the exchanges between myself and the Financial Secretary to the Treasury will be found in columns 962 and 963 of the Official Report. I then raised a general question of tax avoidance with special reference to alleged abuses of the provisions of the Income Tax Act regarding trading losses, and in the course of my Question I named two firms. I am obliged to the Financial Secretary for advising me that in the case of one of them—Petrotium Securities Ltd.—which was dealt with in the Court of Appeal on, I think, 12th November, notwithstanding refusal by the Court of Appeal of permission to appeal to the House of Lords, the company is petitioning the House of Lords for leave to appeal. Therefore the sub judice rule, I understand, applies, and I must make no further mention of that particular case, but I can illustrate the point which I had in mind by reference to the general principle of the treatment of losses for tax purposes and how that can be abused and turned to the advantage of the taxpayer.
As the House knows, trading losses can be set off against investment income or other income of the same taxpayer, and a very common example, which was discussed in the House many times, was that of the so-called hobby fanner, who engaged in agricultural activities more for pleasure than for profit, and was either contriving to make a loss or was indifferent to making a loss, because the amount of his trading loss could be set off against tax paid on other income, earned or unearned. It was alleged that many farmers were enjoying life on the farm and giving generous hospitality to their friends and in general enjoying a hobby some part of the cost of which would be 1006 borne by the Chancellor of the Exchequer because of the set off against other income.
By the same principle, a company engaged in trading and which makes a loss can set off a trading loss against investment income, and there can be the case of a firm trading in securities which contrives to make a loss by selling securities at much less than their market value to a wholly controlled subsidiary. In the Chancery Division only last week there was a case, reported in the Guardian of 13th December, where a firm did sell securities to a wholly controlled subsidiary at about half the market value and thereby made a loss over that transaction. The subsidiary had not the money to buy the securities even at half price, so the parent company lent the money to the subsidiary to buy the shares at half price. This money was lent against debentures and the subsidiary company repaid the parent company interest on the debentures and deducted tax when paying interest to the parent company, but actually the amount of interest paid by the subsidiary company on the debentures exceeded the capital sum which it had borrowed from the parent company in the first place. Although it had received a loan from the parent company of only about £300,000 it repaid to the parent company £974,000 and deducted tax. That enabled the parent company to have in its hands large sums of interest from which tax had been deducted, and it asked for the loss on the original transaction to be set off against tax on the debenture interest. It was an artificial contrivance and the court held in favour of the Revenue.
There are similar cases where loans provisions under the Income Tax Acts are abused to get some tax advantage. Another case I have in mind was dealt with by the House of Lords on 5th and 6th February and 15th March, 1962, the case of Harrison (Watford) Ltd. v. Griffiths, Inspector of Taxes, and it is reported in Tax Cases, Vol. 40, Part 4. In the many pages dealing with the case one sees the essential features of it.
A company was trading in merchandise. It was doing badly. It made a loss of nearly £14,000. So it decided to go out of business. But before going out of business it thought that there was possibly a device which could be turned 1007 to its advantage. If it was going out of business and it had sustained a loss and it had no investment income, there was obviously no tax concession to be obtained for that loss. Had it had investment income, it could have had some relief from tax on the investment income on account of the loss.
So the company set about getting some investment income. How it did it was to look round for a company which had undistributed profits and which for reasons of its own was going out of business. It found such a company. It was a trader in cloth, and had made a profit of about £29,000 and had paid tax on it. For some reason best known to itself, it had also decided to go out of business. So there sat a firm with £29,000 of undistributed dividend, a sitting duck for a dividend stripper.
But before the firm of Harrison could pluck the chicken, it had to get hold of it, and before it could get hold of it, it had to buy it. But it had not got the money to buy it. So it borrowed the money, enough money to buy the firm with the undistributed profit. Having obtained control of the firm with borrowed money, it then distributed the whole of the dividend to itself, repaid the borrowed money out of that and then sold the securities for which it had paid £16,000. It sold them, having distributed the dividends to itself, for £1,000.
That meant that it had made a loss on that transaction. In order to contrive to do this, it had even altered its articles of association to enable it to trade in securities notwithstanding that it was not in its normal line of business. So the net result of this enterprise was first that it made a loss of £13,000 on its normal legitimate trade and, having bought shares in the other company for £16,000 and sold them for £1,000, it made £15,000 loss on that transaction. So it then had total losses of £29,000.
But, of course, it brought a dividend into its business by the purchase of the other company. The dividend of £28,000 was just a little short of its total loss of £29,000. So it proceeded to ask the Inland Revenue to repay the £13,000 tax which had been deducted from the dividend. This really was a most blatant contrivance to take advantage of the 1008 Inland Revenue. Yet the Revenue lost the case all the way up to the House of Lords, and it stays lost. The Commissioners found in favour of the Revenue to begin with, but the judgment of the High Court, the Court of Appeal and the House of Lords went against the Revenue.
To come to the third—
§ The Financial Secretary to the Treasury (Mr. Alan Green)
Will the hon. Gentleman state the date of it?
§ Mr. Houghton
The matter was heard by the House of Lords on 5th and 6th February and 15th March, 1962.
§ Mr. Houghton
It was in 1953, I think.
I come to another case, which I must at once admit comes to me privately. I should make it quite clear that it does not come from any official source whatever. The information has been given to me by a man who informed the Inland Revenue of this transaction. Since I mentioned the name in my Question to the Financial Secretary, I must be quite open and straightforward and mention it again. The transaction relates to the Liebigs Extract of Meat Co. Ltd., to which I shall refer as Lemco.
This firm had a wholly-owned subsidiary, Sudan Meat Products Ltd, which was registered in the Sudan and was not, therefore, subject to United Kingdom Income Tax. Sudan Meat Products Ltd. suffered a loss for the year to 3lst March, 1958, of about £600,000. Part of that loss was the written-down value of the stocks of packing materials of which, because they had become damaged and virtually unsaleable, and had deteriorated, the firm wrote down, quite properly as far as I know, the value by more than half—from about 130,000 Sudan £s to about 50,000 Sudan £s.
This loss sustained by the subsidiary company in Sudan brought no benefit to the principal company so, in 1958 the parent company, which completely owned the subsidiary company, decided on a device that would bring some advantage to the parent company in the United Kingdom. The parent company 1009 instructed the subsidiary company in the Sudan to write up the value of this stock to the original value as it had appeared in the company's books. Then the Liebigs Extract of Meat Co. Ltd. bought this stock from its subsidiary at the original and inflated valuation, but then immediately wrote it down in value when the transaction had been completed. That, of course, reduced the profit of the parent company, and in this transaction the tax avoided amounted to no less than £24,000.
The man who informed me was a chartered accountant employed by one of the auditors of the parent company. Seeing what was going on he decided, in 1960, to resign his post with the auditors and make a full disclosure to the Inland Revenue, which he did. He put to the Inland Revenue all the documents, or copies, that he had in his possession. One of them was a copy of a letter written by the chairman of Lemco to Sir Robert Renwick, of the United Kingdom Industrialists Association Ltd. The letter was written on 14th September, 1959, and reads:Dear Bob,I enclose a cheque in respect of our Company's donation to the United Industrialists Association Limited which is usually paid about this time of year.The donation has been doubled because of the present special circumstances, signed Peter Carlisle.That was written on 14th September, 1959, and the General Election was on 8th October, 1959. The cheque sent with the letter was for £2,500. So, at the time when this company was indulging in artificial devices to get a tax advantage in the United Kingdom to the tune of about £24,000, this sort of letter was being written to an organisation that is usually believed—I think properly—to make donations to Conservative Party funds—
§ Mr. Speaker
I am following the hon. Gentleman with the greatest interest and attention, but I have not yet discovered what the remedy is, other than legislation. Perhaps the hon. Gentleman can help me.
§ Mr. Houghton
I shall come to that in a moment, Mr. Speaker. If you will bear with me for one more moment, I think that you will see that I am steering a pretty clear course through a thicket of 1010 difficulties. I only mention that letter. I do not suppose for a moment that that donation was allowed as a charge against taxable profits. I admit that I have introduced it as a matter of prejudice. I do not like to see these things going on, and when one hears about them one has a public duty to say something, but I cannot on this occasion suggest changes in the law which would deal with this situation.
We are always changing the law anyway, and every time we change it fresh devices are discovered of cheating the Revenue. All that I can do tonight is to ask the Financial Secretary whether the Inland Revenue is using its powers of discovery with sufficient determination and penetration. As the Financial Secretary pointed out in the course of replies to my questions, some of these cases do come to light, and when the Revenue gets to hear of them, and it believes that they should be fought in the courts, it fights them there, and where it believes they should be dealt with by negotiation and penalties, and so on, it pursues them as rigorously as it can. But it rather looks as if in the case of Lemco the Revenue depended on an informer to disclose this information, because it was somewhat after the event that this information was given to the Revenue, and indeed the Revenue, with conspicuous parsimony, paid the informer £200.
I raised with the Chief Secretary to the Treasury the question as to the Inland Revenue practice in these matters, and I find that in the last 10 years only £812 has been paid in rewards to eighteen informers. The highest single amount was £200. This was paid only in two cases, and this informer was one. The Revenue points out that £200 for £24,000 is pretty good pay, because the other £200 was for a very much larger amount. Bat I am not really quarrelling with the principle behind this, because I do not think that informers should be paid on commission. Indeed, in general we do not like informers, but the police have to use them, and the authorities have to use them where that is probably the only way in which certain matters may be brought to light.
The record of the Inland Revenue shows that it does not exercise its powers to compensate informers either 1011 very frequently or very generously, but I ask the Financial Secretary, who I gather is a great deal more inhibited than I am, what comfort he can give us in this matter. Is he satisfied that the Revenue is using its powers, and is authorising its inspectors to look at books and examine papers where there is any ground for believing that this kind of transaction might be employed as a means of securing relief from taxation?
It is a sorry story. I am sorry to have had to raise it, and probably another occasion might have been more suitable. I agree that one's indignation at Question Time very often cools rapidly and substantially by the time the Adjournment comes on. But I have made the best of a difficult, self-imposed assignment. I regret that it has been necessary to raise it. I hope that these cases will be regarded by all who read these details as a stern reproach to the failure of some parts of industry who regard the Revenue as a milch cow to be cheated and twisted and fiddled. After all, millions of taxpayers pay their money up to the hilt without fuss or fiddle, and it is an insult to them that there should be paraded before the courts or in the House of Commons cases of this kind which are a reproach to the integrity of some sections of our business community.
§ 11.20 p.m.
§ The Financial Secretary to the Treasury (Mr. Alan Green)
I should like once again to reassure the hon. Member for Sowerby (Mr. Houghton) that I share his concern that there should not be avoidable tax avoidance—avoidable in terms of the Inland Revenue's ability to detect and take action on it. I share his concern for precisely the reason he gave—that if there is tax avoidance which is not detected but which is capable of being caught under the existing law; if people "get away with it," so to speak, on a reasonably high scale, the honourable and honest taxpayers, of whom, with him, I rejoice that the country is mainly made up, suffer and have to pay an undue proportion of tax.
I am desperately inhibited, as he is, in raising this matter tonight. We cannot talk about remedies, because any remedies over and above those that we already 1012 have involve legislation. I cannot speak about the Lemco case because the details have not been the subject of litigation. It is not therefore a matter of public knowledge, and I must not speak about it, otherwise I should be breaching the rule of confidentiality between the Inland Revenue and taxpayers in matters of that kind. The other two cases were cases in which an improper practice was stopped. I was discourteous enough to interrupt the hon. Member to ask him for the dates of the dividend stripping transaction to which he referred, and he gave me the date, in 1953. Since then, various Sections in Finance Acts have specifically dealt with the operation known as dividend stripping, and also with bond washing.
I accept that a slick operator, steering within the law, can from time to time find a device that defeats the intention, although not the letter, of the law. In that case we have to produce yet other anti-tax avoidance Clauses in our Finance Bills. What I can assure the hon. Member is that within the law I am certain that inspectors use their considerable powers successfully, intelligently and exhaustively. I have no doubt about that, but the only proof I can offer is that all the cases cited are cases in which avoidance has failed because the inspectors have spotted it.
But a taxpayer has a right of appeal from the inspector's decision, and so he should have. I do not think that anybody would wish to deprive a taxpayer of a right of appeal against what for most taxpayers is the terrifying executive army of the Inland Revenue. So we should not quarrel with the fact that appeals can be made from the decisions of inspectors. Nobody would want that appeal machinery to be destroyed. But the House is entitled to an assurance that inspectors use their powers within the law, and do their best to see that taxpayers pay their due and proper share. I am satisfied about that.
If other devices are invented—and man is very inventive—we shall have to deal with them as and when we discover them, because the only alternative is to provide—again by legislation—administrative means whereby an inspector can use his own discretion to decide for himself what the law is, and not have Parliament making clear laws and the courts 1013 interpreting them. That, I believe, would be complete disaster.
I know that the hon. Member realises the difficulties I am in, as I appreciate the difficulties he is in, but I cannot say more that would be of use than I have said tonight. Perhaps I may finish with this further assurance: if he has a special case in mind or comes across one later, I should be obliged if he would give me 1014 details. Then perhaps we can work together to see that the tax laws of this country are properly administered,—cleanly, honestly, vigorously and efficiently administered, as they should be in the interests of the vast majority of the honest taxpayers.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-five minutes past Eleven o'clock