§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
I beg to move Amendment No. 317, Clause 58, in page 123, line 17, at the end to insert:Provided always that where a claim under this section relating to section 48 or 53 is made by an investment company as defined in 106 section 53, paragraph (b) of this subsection shall not apply, and the company may require the reduction to be made in the amount treated as profit chargeable to corporation tax under this section rather than in profits chargeable to corporation tax.I am not quite sure whether this is a narrow or a broad point. It is, in fact, a very basic point which affects only a rather limited number of cases. But, limited or not, the case is one that is 107 generally accepted. The point, in simple terms, is that when relief is granted from taxation that relief is granted in respect of the top slice of the taxpayer's income.
The easiest example is the Surtax payer whose relief is taken against his highest liability for Surtax. In the same way with a public company, the relief is allowed against income charged for tax at the full rate and only secondly against income charged at less than standard rate. This is a well-established principle but the Clause in its latest form contradicts the principle in respect of the rather limited but not negligible class of investment company in this country which holds investments in subsidiary companies operating abroad.
Under the Clause as drafted an investment company in these conditions which has a surplus of franked income may also have a claim for repayment of tax in respect of charges on income as allowed under Clause 48 or for management expenses under Clause 43. It draws the major part of its income from an overseas subsidiary, but Clause 58 as drafted provides that the relief to which it is entitled goes against the franked income which it receives from abroad rather than the income which it receives in this country. This is the point.
If one takes a holding company whose subsidiary is operating in the United States, where the withholding Corporation Tax is 28 per cent. and it receives a sum in franked income from the United States, it qualifies for tax relief in respect of management expenses and servicing prior charges, and at the same time it claims double taxation relief in respect of the 28 per cent. United States withholding tax.
The object of the Amendment is to allow the company to put the expenses of management against the income which it draws from the United Kingdom, where, of course, it qualifies for Corporation Tax at whatever the United Kingdom rate may be, which would be certainly more than 28 per cent. We have been talking about a notional figure of 35 per cent. or 40 per cent. Corporation Tax, but this does not vitiate my argument that the claim for repayment should be placed first against the income which bears the higher 108 rate of tax, that is, the United Kingdom Corporation Tax and that only in so far as the United Kingdom income is not sufficient to meet the amount of the claim in respect of management or the servicing of prior charges should it be put against the income derived from the United States subsidiary where the tax deduction is only 28 per cent.
I shall not bother the House with the arithmetical calculation but I can easily put it to the Minister without Portfolio if my remarks, though amply clear to me, have left him in some dubiety. With a zero knowledge of the law, but with a reasonable acquaintance with arithmetic, I put it to the hon. Gentleman that my argument is correct in respect of the tax suffered by the company. I draw his attention particularly to the point with which I started, namely, that the Clause seems to me to bring in a point which is new to our practice—that relief in respect of tax is not allowed against the highest rate but against the lowest rate of tax imposed.
§ 7.15 p.m.
§ Sir Eric Fletcher
I have understood perfectly well what the hon. Member for Walsall, South (Sir H. d'Avigdor Goldsmid) has in mind, although it is a complicated matter. I say with respect to the hon. Member that he put his case very clearly and that I understood the point at which it is directed. At the same time, I must tell him that the point which he explained to the House would not be met by the Amendment. I need not go into the reasons for that, but I will deal with the substance of the view which he has expressed and explain why the Government are unable to accept the Amendment, apart from the reason that it does not give effect to what the hon. Member has in mind.
The hon. Member began by saying that the rule, as we have it in Clause 58, violates what he described as an accepted principle that if a taxpayer is entitled to relief he is entitled to set that off against the top slice of his income. Incidentally, that does not apply universally even to personal Income Tax, so I cannot accept that there is violation of such a rule here. We are dealing with a separate matter, namely, whether the expenses of management of a company should be set against income, subject to Corporation Tax, from unfranked income derived from, for 109 example, overseas investments or should be set against franked income. It seems to us logical that since we are dealing with Corporation Tax payable by corporations the expenses of management should be set in the first place against revenue subject to Corporation Tax.
In the majority of cases it would be immaterial how the relief was obtained, but the hon. Member said that there may well be a small number of cases in which an investment company has such a glut or surplus of franked income that the amount of franked income would exceed the distribution which it wanted to make. Therefore, it is perfectly true that in those limited number of cases the company would be at some disadvantage if this rule obtains. But apart from the fact that this rule is the logical application of the Corporation Tax principle, there is the further difficulty about accepting the Amendment that it would give the investment company in question an uncovenanted option.
As I read the Amendment, in the case supposed by the hon. Member, the company would be able, at its option, to choose either the one method of getting relief or the other. The company, being able to take advantage of that option, would be enabled to reduce its distribution below its franked investment income in the years where it suited it, whereas in other years it could pay dividend which exhausted its franked investment income and set its relief against overseas income. There does not seem to be any particular merit in providing that they should have a choice of that kind, and to introduce such a provision would, I suggest, do violence to the general scheme of the Corporation Tax.
I must, therefore, advise the House that the Government cannot accept the Amendment.
§ Mr. William Clark
The Minister without Portfolio said that it is not a principle of our Income Tax law that one sets allowances against the top slice of income. I put it to him that any allowance given under our tax structure automatically goes against the higher slice of income. For example, if one's personal allowance goes up by £120 if one gets married, it is against the top rate of tax that the allowance is set. Therefore, the point made by my hon. Friend the 110 Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) is valid. I think that there is no need to canvass his general argument on the Amendment.
I cannot understand the Minister's point that companies will want to swap about, that they will say, "It pays us to take franked income sometimes and at other times unfranked income, so we shall swap about".
§ Sir Eric Fletcher
I was saying that that would be the effect of what would happen if the Amendment were accepted.
§ Mr. Clark
I shall come to the wording of the Amendment in a moment. To take the Corporation Tax rate at 40 per cent., for the sake of argument, if one receives dividends from abroad and the tax abroad is 50 per cent., all one can get over here is the allowance of 40 per cent., so one is still back with the 40 per cent. I cannot see any point in the Minister's suggestion that companies would swop from one year to another acording to whether it paid them or not.
This is a highly technical point. With the greatest respect, I think it possible that the Treasury Bench may have further thought about it. There is every justification for looking at the matter again. I appreciate that, at this stage, they cannot introduce an Amendment to this Finance Bill, but, without in any way trying to extract a categorical undertaking, I should like the Minister to say that he will look at the point between now and next year, if the Labour Government are to introduce a Budget next year.
If there is hardship and the point my hon. Friend has raised is seen to be one of substance, they can remedy it in the next Finance Bill, and, if the hardship is sufficient, make the remedy retrospective. I am not asking for an undertaking, but I should like that to be said.
§ Mr Harold Lever
I rise to assist, not to prejudice, the purpose of the Amendment. Following the terms used by the hon. Member for Nottingham, South (Mr. William Clark), I do not expect the Minister to give an undertaking about it, but, as I understand the matter—I confess that I have not studied it closely—the point brought out by the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) is this. If a company has income 111 which is not franked from gilt-edged investments and income which is franked from abroad but franked to produce a repayment of less than 40 per cent., its management expenses, as the Bill is now drafted, will produce relief against the lower rate and not the higher rate.
I wish to go on record as saying that this is unjust and ought to be remedied. I suppose that the Minister, with the vast resources of Treasury briefing behind him, may be able to show anomalies to parallel this, but that will not impress me favourably. It is contrary to the spirit of our tax law in general that this should be the result. The justice of such a case is this. If a company receives income from gilt-edged securities and has a management expenses loss, it should set off the management expenses loss against the tax liability which would arise from the gilt-edged.
If that be the position—I think I see the hon. Member for Walsall, South, nodding agreement—I hope that the Government will look at the matter again and give the company the relief intended by the Statute, namely, relief at the current rate of Corporation Tax against the management expenses loss.
§ Amendment negatived.