§ The Chancellor of the Exchequer (Mr. James Callaghan)I now turn to a question on which have received many representations, namely, the treatment of dividends received by one United Kingdom company from another. A company will be charged to Corporation Tax on its income. The question is whether a dividend paid out of income on which Corporation Tax has already been paid should be charged to Corporation Tax again in the hands of a recipient company. At present, a United Kingdom company which receives a dividend from another United Kingdom company is not charged to either Income Tax or Profits Tax on the dividend. The dividend is 258 received under deduction of Income Tax, and for Profits Tax liability it is treated as franked by the Profits Tax paid by the paying company.
As I indicated in my previous statement, I do not propose to charge a parent company to Corporation Tax on dividends received from a United Kingdom subsidiary; and I think that it is clearly right to extend this same treatment to consortia, that is, cases where two or more companies jointly control another company which is not a subsidiary of any one of them.
As regards other types of case, I have found this a very difficult question. The arguments point in different directions. The experience of other countries which I have studied affords no clear guidance because some do one thing and some another.
Let me state the argument. First, we do not want to encourage trading companies to pile up superfluous funds for which they can find no use in their business, either immediately or in the foreseeable future. The purpose of the new tax is to encourage plough-back, not mere retention. We do not want, therefore, to provide through the tax system an incentive to companies to engage in passive investment by acquiring portfolio investments in other companies. On the other hand, all companies need reserves; and many companies must save up over a period of years to replace their fixed assets or to provide funds for expansion and development. The problem is how to steer a course which does not damage the company which is accumulating reserves for genuine business purposes but does not, at the same time, give a benefit to the company which is passively retaining unwanted money.
The solution that I propose is this. Dividends received by companies from other companies which are liable to Corporation Tax will not be chargeable to Corporation Tax again; in other words, the dividends will be franked for Corporation Tax purposes in the same way as they are now for Profits Tax. The dividends will, however, have had Income Tax deducted, for all companies will have to deduct Income Tax from all the dividends they pay whether they go to individual or to corporate shareholders. 259 My proposal is that, in the case of dividends received by companies, other than dividends from subsidiaries or jointly controlled companies, this Income Tax should not be repayable, but should be capable of being set off against the Income Tax which the company will have to deduct and account for when it, in turn, distributes dividends to its shareholders. This scheme, while not seriously affecting the ordinary case, will provide a safeguard against too great an accumulation of investments in the hands of companies.
I make it clear that I do not necessarily regard this solution as right for all time. There is a risk that the increasing tendency of companies to make substantial portfolio investments in other companies with which they have trade relationships can lead to undue rigidity in the structure of industry and to an unhealthy restriction on competition. This is a subject about which comparatively little is known at present; and my right hon. Friend the President of the Board of Trade, who is asking Parliament now for additional powers to deal with monopolies and mergers, is considering with me the desirability of promoting some research into this. Meanwhile, he will keep a watch on future developments; and if it appears that the system needs amendment, I shall propose further changes in the treatment of intercompany dividends.