§ Mr. Diamond
I beg to move Amendment No. 199, Clause 69, in page 42, line 11, after "remuneration", to insert:or for investment allowances".The Amendment provides for investment allowances to be added back in calculating the profits of a close company by reference to which the 15 per cent. limitation on allowable directors' remuneration under the Clause will apply. The Clause as it stands might conceivably work harshly in a case in which a company spends heavily during a period on new plant and machinery ranking for investment allowances and then finds that its taxable profits have been greatly reduced on that account. The Amendment is introduced to remove that possibility of unfairness.
§ Amendment agreed to.
§ Mr. Diamond
I beg to move Amendment No. 200, Clause 69, page 142, line 13, at the end to insert: 134Provided that for any accounting period for which the company so elects this subsection shall apply with the substitution for the reference to fifteen per cent. of the company's profits for that period of a reference to fifteen per cent. of the profits of a period of the same length, computed as aforesaid but according to the average of the three years preceding the acounting period, or of such part (not being less than twelve months) of those three years as falls after the company commenced to carry on business or became resident in the United Kingdom, so, however, that in arriving at the average for a period beginning before the year 1966–67 there shall be brought into the computation profits arising from the company's trade or business which are chargeable to profits tax, computed as for that tax, together with any such franked investment income (within the meaning of that tax) as would not, if received in like circumstances after the year 1965–66, be treated as coming from within the company's group.It would be convenient if the House discussed Amendment No. 201, at the same time.
§ Mr. Diamond
These Amendments are intended to help a close company which finds that the 15 per cent. of profits limit on allowable directors' remuneration hits it hard when it has a bad year in which its profits drop heavily or it incurs a loss. The effect of the Amendments is that a company may elect that the 15 per cent. limit shall be applied by reference to the average profit of the three preceding years.
The second Amendment provides for the necessary apportionments where not all the previous accounting periods which are brought into the average are of one year's duration and it is necessary to make the appropriate adjustment to get the relevant figure.
§ Mr. Barber
I rise only to express my thanks to the Chief Secretary for the gratitude which he, in turn, expressed to my hon. Friends for having raised this point.
§ Mr. Bruce-Gardyne
I join my hon. Friend the Member for Altrincham and Sale (Mr. Barber) in thanking the Chief Secretary for the benefit contained in the Amendment, but it does not seem to me to go as far as it might. I am particularly concerned about the position of a close company within the meaning of the Bill which in all good faith entered into a service contract with its managing director who has a shareholding of, let us say, 135 10 per cent. in the equity of the company. In view of the squeamishness of hon. Members opposite on this matter I must declare right away that I have no interest whatever to declare. Did the Chief Secretary wish to interrupt?
§ Mr. Diamond
I apologise for interrupting the hon. Member from a sedentary position. I merely said, as has been said in relation to other Amendments, "But one might have in the future".
§ Mr. Bruce-Gardyne
I am grateful to the right hon. Member for that intervention.
Will he consider the position of a company which in 1961 entered in all good faith into a 10-year service contract with its managing director which entitled him to a salary of £8,000 a year. It seems to me that while the Amendment is a move in the right direction, it does not cover the point completely. The company may run into a period of heavy weather which might not be confined to a single financial year. As a result it may find that the salary of £8,000 a year which it is bound under the service contract to pay to its managing director, who also has a substantial interest in the equity of the company, has to be paid out of taxed profits.
As my hon. Friend the Member for Altrincham and Sale said in Committee, in those circumstances a salary of £8,000 a year would attract tax at the rate of 20s. in the pound under Corporation Tax. No doubt the Chief Secretary will tell us that this was liable to be the case under the previous rules about Surtax direction. We have gone over that many times, and he has been told on many previous occasions that the net has been drawn very much wider in the case of the close company provisions of the Bill. I appreciate that we cannot discuss Amendments to Schedule 17 at this point, but we are bound to note that the net will have been somewhat widened if one Amendment proposed by the Chancellor is made later.
Nevertheless, the fact is that a great many companies which are not liable for Surtax direction will be liable to the close company provisions. I suggest to the Chief Secretary that it is precisely 136 these companies, with 35 per cent. public interest in the equity, who are liable to have full-time service directors holding substantial shareholdings in the company and who may have entered into these service contracts; and these are precisely the companies which may be harshly dealt with if during a difficult period they honour their legal obligations to pay the salary to which their managing director is entitled under a service contract.
Moreover, a point which has been made many times but which should be made again is that the rate of Corporation Tax is far higher than the rate of Profits Tax which has been in operation for many years. The two cannot be compared. I hope that in answering this short intervention the Chief Secretary will not use the arguments which we have heard so often in Committee.
§ 8.30 p.m.
§ Mr. Diamond
The hon. Member or South Angus (Mr. Bruce-Gardyne) has already deployed most of the arguments, so I will merely say "ditto" to them. He asks me to accept that £8,000 is a not excessive salary. I am not suggesting that it is—in appropriate cases. I have heard of salaries which go far beyond that, even running into levels of £250,000 or so. I have even heard, although I do not know whether or not this is authoritative, that it is possible for managing directors with service agreements to forgo part of their salaries when they are thought to be excessive, having regard to the level of company earnings. There may be precedents for that being done.
The hon. Member for South Angus will recognise that what we are doing here is going a good deal further than has ever been done before in circumstances which, if not exactly comparable, are not wholly unlike one another. I believe that we are going as far as one needs to go and I suggest that most managing directors who are at the level of responsibility to receive salaries of £8,000 a year, which is the appropriate remuneration of men carrying very responsible tasks, would, if the companies under their managing directorship struck a period of more than three years of lack of profitability, themselves feel disposed to suggest to their boards that there should perhaps be a reduction in their salaries. 137 I suggest that that would be a normal and responsible act.
I suggest in all seriousness that that is what would happen in the circumstances described by the hon. Member for South Angus, particularly when one is considering a company which is justified in entering into a service agreement at the rate of £8,000 a year with a managing director and is not able to make the kind of profits which justify that for as long a period as 15 years.
To put it the other way round, the hon. Gentleman will immediately appreciate that all that need be done to avoid the provisions limiting the remuneration to close corporations is for the company to enter into an agreement with a managing director who is not a whole-time service director to give him a salary and say, "You are safe, whatever the level of profits. Whether they exceed 15 per cent. or not, you will be safe". That would make complete nonsense of the close corporation provisions. I hope, therefore, that the hon. Gentleman will agree that the Amendment is reasonable and will meet most cases.
§ Amendment agreed to.
Further Amendment made: Clause 69, in page 142, line 17, at the end insert:
and, where the proviso to this subsection has effect, the amount of the profits of the three years there mentioned or the relevant part of those three years shall, if the case requires, be arrived at by division and apportionment or aggregation of profits or losses for periods of account wholly or partly comprised therein".—[Mr. Diamond.]
§ Mr. Diamond
I beg to move Amendment No. 202, Clause 69, in line 19, to leave out "£3,500" and to insert "£4,000".
I suggest that it would be convenient for the House to discuss, at the same time, Amendments Nos. 203, 204, 205, 206, 207, 208 and 303.
§ Mr. Diamond
This Amendment and the others which you have kindly suggested we should discuss at the same time, Mr. Deputy-Speaker, make a substantial increase in the limits on the allowable directors' remuneration of a close company and are based, in effect, on the number of full-time working directors not being whole-time service directors. We have discussed these definitions and I am sure that the House will not wish me to go over them again today.
138 To quote my words when we discussed the matter last, I said:My own opinion is that the figures we suggest—£3,500 for one director … are about right".I went on to say:I do not say … that one could measure it exactly and no other figure could be right. I do not want to be as dogmatic as that …"—[OFFICIAL REPORT, 17th June, 1965, Vol. 714, c. 824–5.]We have considered the matter further. The suggestion made at that time was an amount of £5,000, which the Committee rejected. We are accordingly bringing forward proposals which substantially improve the situation. I think that it would be the fairest way to compare the proposed figures with the existing statutory figures—not with the proposed figures in the Bill. If, therefore, we move from the present situation under the Finance Acts to the Amendments, we get these comparisons: for one full-time working director, where, at the moment, the maximum is £3,000, it goes up to £4,000, an increase of 33⅓ per cent. For two full-time working directors it goes up from £5,000 to £7,000; for three, from £7,000 to £10,000; and for four or more, from £9,000 to £13,000. These are very substantial increases.
I must remind the House that £3,000 is exactly the same figure as existed under the Profits Tax provisions and has been in operation since 1959, and the increase from £3,000 to £4,000 is substantial. As I said on an earlier occasion, it is recognised that this figure is not one to be put in for all time, but one that we shall obviously have to discuss from period to period, and bring up to date in the light of the circumstances of the time. I therefore hope that it will be felt that although this proposal does not reach the very maximum figure considered on an earlier occasion, and a figure that one could not help feeling was put forward with, perhaps, a fraction less than certainty—
§ Mr. Diamond
Every Amendment has been well argued. I am talking of the actual words and moods of which I took very careful note at the time. I therefore hope that this half-way house would be regarded as reasonable and satisfactory to the House.
§ Mr. William Clark
The Chief Secretary says that all these Amendments have been well argued, and I should be inclined to agree with him if he said that they were well argued from this side. The right hon. Gentleman keeps trying, on a wholly fallacious argument, to compare Corporation Tax with Profits Tax. He said that under Profits Tax the first director is allowed £3,000, and that the Government proposed to increase the amount to £4,000. He omitted to say, however, that under Profits Tax there was a £2,000 exemption limit which we do not have in the Corporation Tax.
In Committee, and in our present Amendment, we have said that a more realistic figure would not be £3,500, as it was originally in the Bill, but £5,000. The Chief Secretary says that he has come half way but, if I may say so, his arithmetic is a little wrong; the difference is £750, so the halfway mark should have been £4,250. However, I suppose that, as the Government have shown a certain amount of sense in that they have, on the initiative of my hon. Friends, increased the ceiling to £13,000 and have also taken the five year average, we must accept it.
We are not happy about the figure of £4,000 but it is better than £3,500, and no doubt we can come back to this point on some other Finance Bill when even the Government will realise that £4,000 is not a realistic figure, but that it should be £5,000. At this late stage of the Bill we probably have no option but to accept the £4,000, which is given with the so-called bounty of a Socialist Government, although I would have called it the niggardliness of a Socialist Government.
§ Mr. Barnett
One should not exaggerate the case as hon. Members opposite tend to do, but it is important to understand that in far and away the majority of small, close, family, husband-and-wife companies, the husband and wife would not wish between them to draw more than £5,000, so they would be amply covered by this provision. At the same time it is unnecessary to penalise the very small companies if at the same time we are not giving opportunities for any great degree of tax avoidance. I do not need to remind the House that there is a method of avoidance by avoiding paying the withholding tax under the provisions of Corporation Tax, but it is important 140 to understand the two types of avoidance there could be.
The first case is where the company is not ploughing back. Here, it has to make a distribution on top of whichever salary we allow, so it would not be avoiding Surtax but paying the same amount of Surtax. The only avoidance is on the amount of earned income relief they get on the additional salary, which is comparatively small although the amount of avoidance would be in the sense that it would reduce the amount of distribution available. I should be interested to hear if my right hon. Friend has any figures on this.
The other type of company is where there is a plough-back. The only extent of avoidance here is upon earned income relief on the extra salary. The amount of tax avoidance made possible by allowing slightly more would be very trivial.
Far and away the greatest disadvantage in this anti-avoidance measure is that it could positively discourage boards from enabling bright young men—the technocrats—from acquiring shares and joining the board. This is precisely the opposite of what I want to achieve and what I think my right hon. Friend wants to achieve. What we need is new young blood on the many old boards.
My criteria of when it is necessary to act against avoidance I am afraid has not been satisfied in this case. The extent of lost revenue by way of avoidance if Amendment No. 303 was accepted would be amply compensated by the good will that this would show towards the small close family company. The amount involved would be small. I am therefore sorry that my right hon. Friend has not seen his way clear to accept the Amendment.
§ Mr. Patrick Jenkin
I am encouraged by the speech of the hon. Member for Heywood and Royton (Mr. Barnett) to make a few remarks about Amendment No. 303. I am confident, in view of what he has said, that he, and perhaps his hon. Friends the hon. Members for Birkenhead (Mr. Dell) and Ashton-under-Lyne (Mr. Sheldon), will come with us into the Lobby if and when we divide on that Amendment.
I am getting very tired of the Treasury Bench doing what I believe is called in 141 the Scottish courts approbating and reprobating—blowing hot and cold. When we are dealing with the problem of directors' remuneration we are told that the principles are the same as in Profits Tax, that this amount operated under the previous Administration and therefore a reasonable increase is being made because of the passage of time. When we dealt with a subject such as grouping this was said by the Minister without Portfolio on 3rd June:As I have said on other occasions, we do not want to draw any analogy with what was appropriate in the case of Profits Tax and argue that the same thing should apply to Corporation Tax. It is part of the basic philosophy of this part of the Bill that we are getting rid of both Profits Tax and Income Tax for corporations, and introducing a new, separate Corporation Tax to which different principles shall apply."—[OFFICIAL REPORT, 3rd June, 1965; Vol. 713, c. 2097.]The Government cannot have it both ways. Either there is to be something new, in which case it is appropriate to look at this matter de novo, or we should make Amendments applicable in relation to Profits Tax. Here we are getting something new, because the limitations on directors' remuneration as applied to Profits Tax apply only to director-controlled companies, whereas the limitations under this Bill apply to a very much wider range of companies, close companies which are controlled by five or fewer directors as well as director-controlled companies.
It has been the contention on this side of the House that the same principles do not necessarily apply and that it would be wise to go somewhat wider and be more liberal in regard to directors' remuneration because we may be dealing with directors who have as little as 5 per cent. of the equity of a company. For this reason, it would be right to look at this matter with more liberality and to allow £5,000, which is the figure at which Surtax begins. That is the point at what a man may be said to become so well off that precautions need to be taken against tax avoidance.
Turning now to Amendment No. 303, quite apart from the substitution of the figure of £5,000 for £4,000, I think that this is the one that the Government can accept. The business written into the Bill about how much may be paid to a second 142 director, how much less to a third director and how much less to a fourth director is the most fiddly nonsense. This is really the Treasury trying to dictate to companies about how much they should pay their participating directors. It seems to me to be a quite inappropriate use of the powers of the Executive, even to prevent tax avoidance, and that the purpose could be fulfilled by letting them have an aggregate amount up to a maximum of, we suggest, £5,000 per director. Let the remuneration be averaged out and the amounts paid to directors as the company thinks fit. After all, they are the people paying the directors, and they should decide how much should be paid to each director, without any tiresome, niggling limits which have applied to the Profits Tax and which the Bill now says should apply to close companies for the purpose of Corporation Tax.
I think that the Amendment is some thing the Government could accept, failing which I hope that it will be looked at during the year ahead, If it is thought that there is no opportunity for undue avoidance, as I feel quite sure is the case, it would be proper to introduce an Amendment at a later stage.
§ Mr. Raymond Gower (Barry)
When the right hon. Gentleman was making his last speech he said that he was sensitive to atmosphere, and felt somehow that those who advanced this point of view in Committee did not do so entirely with conviction in relation to the larger figures. I think that I was also sensitive to his last statement and that, while he was giving the appearance of being magnanimous, at the same time I felt that he was asking us to believe that it was just a question of this small amount.
I felt that the right hon. Gentleman was accepting the validity of the arguments adduced in Committee, but, in effect, all he was saying was that it would not be seemly to accept the amounts from this side exactly and that, consequently, he was giving something slightly less. I hope that he has taken note of the powerful arguments put forward by his own colleague, the hon. Member for Heywood and Royton (Mr. Barnett), particularly about the need to encourage younger men to come forward and take their seats on the boards of these companies.
143 Is it worth arguing about a small margin like this? As my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) has just said, it is niggling, and I hope that the right hon. Gentleman will look at it in that light.
§ Mr. Diamond
May I add a few comments to what has been said already? I pay the closest attention to anything my hon. Friend the Member for Heywood and Royton (Mr. Barnett), who speaks with great authority on these matters, contributes to our discussions. He knows and, indeed, he himself has said that what we are discussing is mostly the small companies. The larger companies have the percentage limitation and are not affected by these provisions. The small companies would mostly be amply satisfied by the proposed margins. If I may repeat this to the hon. Member for Nottingham, South (Mr. William Clark), on whose ability to add up and divide by two I would never attempt to cast aspersions at all, the half-way house between £3,000 to £5,000 is somewhere round about £4,000.
§ Mr Diamond
I did not start at £3,500, I made it perfectly clear that I was comparing the existing position in the Statute with the proposed position in the Amendment. Every single figure I gave was a comparison between the present situation and the new situation, and no one outside the House will be concerned or know anything about £3,500. It was a figure which arose during the course of our deliberations. The law of the land at the moment provides for £3,000. In future the law of the land will provide for £4,000, if the House sees fit to accept the Government's proposal and if the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) does not lead a revolt against those on his own Front Bench, who have said that it does not want to divide.
My hon. Friend the Member for Heywood and Royton considerably underestimates the amount of tax avoidance, or the cost of the Amendment. He will be surprised, as I was, to find that it will cost a minimum—I repeat "a minimum"—of £8 million to operate the Amendment 144 which I am proposing to the House. When I say "a minimum of £8 million", I refer to director-controlled companies in respect of which we have statistics. I am not referring to the bigger figure of close corporations, in respect of which we have not got figures. Therefore, I base myself only on the minimum figure of £8 million for those companies which were director-controlled and which will therefore be close corporations. That is the minimum cost of the Amendment I propose. The Amendment for which the hon. Member for Wanstead and Woodford seeks to get my support would cost some £30 million at a minimum. I repeat "minimum", defined in the same way by reference to director-controlled companies only.
§ Mr. Patrick Jenkin
I accept the right hon. Gentleman's meaning of the word "minimum". Would he confirm that he is assuming for the purposes of those figures that every company which he has included in the figures takes the maximum possible advantage of the change? Is not this a very unrealistic assumption?
§ Mr. Diamond
No, I am not assuming that at all. I am talking about the probable cost to the Revenue. If we had only close companies, defined in the way director-controlled companies are defined, the probable cost to the Revenue of accepting Amendment No. 303 would be £30 million. I ask my hon. Friend the Member for Heywood and Royton to remember that we spent a few days and nights discussing the Capital Gains Tax, which is estimated to yield in its first year £12½ million. This is an Amendment which would cost £30 million as a minimum in the first year.
§ Mr. Barnett
I am following my right hon. Friend's argument. I accept the figures he has stated. Obviously he has had some advice on this. Surely there must have been some considerable assumptions in arriving at those figures. How have the figures been arrived at without making certain assumptions as to the amount of directors' remuneration which will be paid?
§ Mr. Diamond
I repeat that this is the best estimate that the Revenue can arrive at of the likely cost. This is based on the same assumption as every Amendment is based on: it is the likely event. 145 It is what is likely to happen if the Amendment is accepted and what those happenings would be likely to cost in terms of lost revenue. I therefore repeat that it is an Amendment which would be surprisingly expensive. The reaction of the House confirms that. Hon. Members find it difficult to accept the figures and think that they must have been got out specially with a view to arriving at a large answer. It is not the practice of the Revenue to advise Ministers in that way. The practice of the Revenue is to try to get as near to the truth as it is capable of getting. Therefore, the figure has been put at its minimum, because it would be undoubtedly much more under the present wider definition of close corporations. I hope that I have made it clear that this limit is neither tiresome, nor niggling, nor little.
§ Mr. W. R. van Straubenzee (Wokingham)
Would the Chief Secretary illustrate one point? I realise that it is not easy always to follow these technical matters when there are exchanges across the Floor of the House. When he introduced that interesting figure which was given by the Treasury in its quasi-judicial capacity, as it were, I think that he used words to the effect that tax of that amount would be avoided if Amendment No. 303 were accepted.
§ Mr. Diamond
I do not think I used the word "avoided". I thought that I had used the word "lost". I certainly intended to use that word.
§ Mr. Geoffrey Lloyd
In other circumstances, I would certainly wish to probe this figure of £30 million and the assumption on which it is based. While accepting the fact that the Revenue put it forward in good faith, I should like to know the basis on which it is calculated.
I will content myself by saying that while I understand the point that the right hon. Gentleman makes about the large company and the small company, I fear that there is a middle company in between where his provisions are unduly restrictive and make it difficult to pay the £5,000 a year which is absolutely justified for certain of the participators who are engaged in this work.
It is a pity that the right hon. Gentleman has not been able to devise some scheme which, while preventing avoid- 146 ance, would have given greater flexibility to what I would call, in shorthand, the middle companies.
§ Amendment agreed to.
§ Further Amendments made: In Clause 69, in page 142, line 29, leave out "£11,000 "and insert "£13,000".
§ In line 29, leave out "£8,500"and insert "£10,000".
§ In line 31, leave out "£6,000" and insert "£7,000".
§ In line 33, leave out "£3,500" and insert "£4,000".
§ In line 34, leave out "£2,500" and insert "£3,000".
§ In line 36, leave out "£3,500" and insert "£4,000".—[Mr. Diamond.]