§ The Chancellor of the Exchequer (Mr. James Callaghan)There is another piece of jargon, "overspill", that is, the treatment of dividends paid by United Kingdom companies out of overseas income.
As I said in my statement in December last, it is a natural corollary of the Corporation Tax that credit for overseas tax paid by a United Kingdom company should be given only against the Corporation Tax for which the company is liable on its profits in this country. It should not be given against the Income Tax due from the shareholder on his dividends. The shareholder in a United Kingdom company will not get credit against the Income Tax chargeable on his dividend for the United Kingdom Corporation Tax paid by the company; and it would be absurd to give credit for overseas Corporation Tax. I have received a great many representations urging that the overseas tax paid by companies trading overseas should be allowed to "spill over" and qualify for relief against the shareholder's Income Tax. I am convinced that to make this spill-over relief a permanent feature of our new system would be inconsistent with the principles of the tax and contrary to the national interest.
But companies trading overseas and their shareholders have come to expect this relief; and I accept the argument 267 that a sudden withdrawal of it might create hardship. This could arise particularly where a company is anxious not to reduce the proportion of its profits put to reserve and would therefore be obliged to make a sudden drastic cut in its dividends. I intend to provide transitional relief by way of cash payments to companies affected: the relief will be related to past performance, will begin to taper off after the first two years and will disappear after five years, i.e., after 1970–71. These payments will be reduced if the company increases its dividends. A Financial Resolution will be required.