Amendment made: Schedule 10, in page 179, line 9, at end insert:
for the use of money so advanced".—[Mr. Diamond.]
§ Mr. van Straubenzee
I beg to move Amendment No. 265, Schedule 10, in page 179, line 13, after "to" to insert:a director who is not a whole-time service director but is".200 Adopting the words of the Chief Secretary, we now move into the nice, simple and straightforward matters of Schedule 10. I do not need to remind the right hon. Gentleman that we always seem to discuss this subject late at night, although, mercifully, at an earlier hour today than on the previous occasion in Committee.
Originally, paragraph 9 of the Schedule prohibited entirely any deduction for tax purposes of interest paid to a participator, whatever the status of that participator might be. This was substantially amended in Committee so that paragraph 9(1,a) now reads as we have it before us in the Bill. The short point of the Amendment is to import into the prohibited payments under 9(1,c) the same provisions as the Chief Secretary accepted, under pressure from this side, in 9(1,a). I concede to the Chief Secretary that I would much have preferred it if our Order Paper had been so arranged as to have allowed us to hear first what he had to say about his own Amendment next on the Paper; that is, No. 214. It would be quite churlish of me not to appreciate that when we get there he will go a quite considerable way towards meeting my point.
However, I think it important that we should make it clear that we are seeking to import the same principle—although I will not delay the House by going over the argument in any detail—in having agreed to the previous subsection. I am certain that the Chief Secretary will have noticed that there is a technical difficulty, which we have noticed, in the sense that this does not deal with associates as they were dealt with in the earlier Amendments which were accepted, but I will not dwell on that point. It is something which could be put right if the Chief Secretary would accept the spirit of the Amendment.
§ Mr. Diamond
I appreciate the spirit of this Amendment, which is to limit, in effect, the disallowance under paragraph 9(1) of royalties for intangible property and unreasonable rents for tangible properties in cases where the recipient is both a director and a participant on the same principle as regards loan interest. What the hon. Gentleman has to remember is that loan interest at an excessive rate is disallowed in the case of all companies, and not only close companies.
201 The only thing with which we are dealing here is interest not exceeding the commercial rate, and when we come to rent and royalties we are not concerned only with reasonable amounts, but with any amount. It is unlikely that a company which is not a close company would pay excessive rent or royalties, but there is the possibility that such companies would make such payments to its own shareholders. I do not suppose that anyone would dispute that an excessive rent to a shareholder should be disallowed as an expense, but the hon. Gentleman's Amendment would disallow it only when paid to a director. This would open up an invitation to avoidance.
Copyright royalties are in a different category. In later Amendments which we shall discuss, these will be treated as tangible properties and will be disallowed only in so far as they are excessive. Without going into a lot more detail, I hope I have said enough to convince the hon. Gentleman why we cannot accept his Amendment.
§ Amendment negatived.
§ 11.30 p.m.
§ Mr. Diamond
I beg to move Amendment No. 214, Schedule 10, in page 179, line 14, after "property", to insert:or of copyright in a literary, dramatic, musical or artistic work within the meaning of the Copyright Act 1956 (or any corresponding right under the law of a country to which that Act does not extend),".This Amendment and a following one, No. 215, in Schedule 17, page 221, line 34, after "property", to insert:or of copyright in a literary, dramatic, musical or artistic work within the meaning of the Copyright Act 1956 (or any corresponding right under the law of a country to which that Act does not extend),",which I hope it will be convenient to discuss at the same time, Mr. Deputy-Speaker, meet a criticism that copyright royalties paid by a close company to a shareholder are treated under the Bill as distributions and, therefore, not allowable as deductions in computing the profits of a close company for Corporation Tax purposes. It will normally be possible to measure a reasonable level of copyright royalties, and it is not necessary, therefore, that a royalty paid by a publishing company which is a close company should be disallowed if the copyright owner has shares in the company. The 202 Amendments, therefore, treat the copyright royalties as though they were tangible and not intangible property.
§ Mr. Deputy-Speaker (Sir S. Storey)
It will be convenient to discuss at the same time Amendment No. 215, and the Amendments in the name of the right hon. and learned Member for Chertsey (Sir L. Heald) to the proposed Amendments No. 214 and No. 215.
Question proposed, That those words be there inserted in the Bill.
§ Sir Lionel Heald (Chertsey)
I beg to move, as an Amendment to the proposed Amendment, at the end to insert:or of a patent, registered design or trade mark.The object of the Amendment to the proposed Amendment is to remedy what appears to my hon. Friends and myself to be an obvious point which has been overlooked in the Chancellor's Amendments. As the Chief Secretary has already explained, we are concerned here with the definition of a distribution in the case of a close company. As he indicated, we pointed out that copyright had not been allowed for.
Briefly, the purpose of my Amendments is to put upon the same basis as copyright, which it is now admitted ought to be taken into account here, other forms of property coming under the heading of industrial and artistic property, sometimes known as incorporeal rights, such as patents, designs and trade marks. The reason why I say that I think there may have been an obvious slip is that, as was made clear in a newspaper the other day, the rights of authors ought to be considered. No doubt they have had the great advantage in this Government of having the support of hon. and right hon. Members of this House who are themselves authors and who, therefore, in the exercise of their proper rights and duties as Members of Parliament took steps to see that those of whose work they had very intimate knowledge and of which they could speak with great skill and experience had proper protection. I am sure that everyone would agree that that was admirable. They have, of course, the advantage that in the present Cabinet there are, I believe, two or three or more authors. Therefore, they had the very best possible advice on the subject.
203 In those circumstances it is perhaps, in the haste of this business of dealing with this vast number of Amendments, quite pardonable that other quite clearly similar rights were omitted. I have heard it suggested that there is some distinction between industrial and artistic property, such as the difference between a patent right and a copyright. It has been suggested, I believe, that one is more difficult in some way or other to evaluate than the other from the point of view of royalties. I have had little experience of these matters, and I am afraid that I cannot follow that at all. It seems to me to be quite fallacious. But, fortunately, I do not have to rely on my own experience in this matter, because we have the best possible authority provided by the Government themselves in another part of the Finance Bill. It is interesting to look at Clause 3—"Valuation for purchase tax of goods containing copyright material." The basis of that Clause is that, in the Purchase Tax Act, 1963, provision was made for the case where the valuation for Purchase Tax could include a charge for a royalty in respect of a patent or design but it did not include copyright. Thereupon, no doubt the authors said, "We think this matter of copyright must be dealt with in order to get everything on the same basis."
Thus the House has already, in the passage of this Bill, added copyright to trade marks, designs and patent rights in the earlier Purchase Tax provisions because they were considered pari passu in every way. All we ask is that the Chief Secretary, with his incomparable logic, should apply a logical principle and carry it into effect. Surely it would be mere impertinence of me to add any argument to that provided by the Government in their own Bill in amending the Purchase Tax Act, 1963.
It is a very clear case indeed and I think that we understand how it comes about. Fortunately, there are also people who know about trade marks and patents and things of that kind as well as others and therefore we can, I think, take all of them into account.
§ Mr. Patrick Jenkin
I wish to support my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), who has a very great knowledge of these 204 matters of copyright, patent designs and trade marks. I regard the Government Amendment as yet another example of the wrong way in which matters of this sort should proceed. On 22nd June, we were told that it was impossible to value any of these intangible rights so as to allow a reasonable rate to be regarded not as distribution but as a charge.
Following the item in the Financial Times to which my right hon. and learned Friend has referred, an exception was made for copyright. There is a rumour that the way in which this was achieved was that the Chairman of Butter-worth's, having discovered that participators in publishing companies who were themselves authors and who might receive a royalty from that company were to be penalised by paragraph 9 of Schedule 10. He therefore bought 100 shares in Pergamon Press which, I understand, is a close company—I have, incidentally, given notice to the hon. Member for Buckingham (Mr. Maxwell)—and proceeded to a settlement in favour of all the authors under contract to the Pergamon Press.
That would have included the hon. Member himself and the situation gave rise to considerable anxiety on his and other fellow-authors' part, whereupon the hon. Member jumped into his Rolls Royce, seized his razor, rushed to the Treasury and made strong representations to the Chancellor. I am told that this settlement has been concluded but, as a result of the Government Amendment, its purpose would be foiled. I fail to see why author-publishers should be in any different position from that of inventors.
Suppose an inventor has an invention which he licenses to a company in return for a royalty and takes in addition a small share in the company so as to have a share in the equity as well. Why should the royalty paid to him be treated as distribution and no part allowed as a charge, whereas copyrights to authors are allowed to mount to a reasonable rate of royalty? It cannot be suggested that it is impossible to value a patent right in these circumstances so as to allow a reasonable rate in view of the cogent reasons given by my right hon. and learned Friend and because of the effect of the Patent Act itself.
205 When the Crown wishes to take a compulsory licence under patent, as has recently been done in the case of certain drugs by the Minister of Health, it has no compunction whatever in paying a proper rate of royalty on those drugs. When it is a question of the Crown taking something, it is perfectly prepared to make the necessary exercise to value those rights. When it is a question of the Crown making some reasonable relief for people like inventors, and so on, it apparently finds it, in the Chief Secretary's words "impossible to demonstrate that a particular relief was unreasonable".
I find that a very strange and unconvincing distinction to draw between copyright on the one hand, and other forms of tangible property on the other. I cannot believe that this is seriously intended to be the basis of paragraph 9 of Schedule 10 and I hope very much that the Government will be able to accept the Amendment to the proposed Amendment.
§ Mr. Robert Cooke (Bristol, West)
I should like to support the Amendment proposed by my right hon. and learned Friend the Member for Chertsey (Sir Lionel Heald), and to say that I am just as much concerned with those who have rights under copyright. This may be something we can all understand, while these other rights are perhaps not so easy for some of us to understand, although my right hon. and learned Friend the Member for Chertsey is a most distinguished explainer of the difficulties in this particular field.
I was taken by some of the remarks made by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), and I am sorry that the hon. Gentleman the Member for Buckingham (Mr. Maxwell) is not here, with all his complex tax problems. Perhaps my hon. Friend the Member for Wan-stead and Woodford realised that the hon. Gentleman the Member for Buckingham has now taken up foreign affairs in a big way and has not, perhaps, so much time to devote to domestic matters. I hope that he will continue with foreign affairs.
If my right hon. and learned Friend's Amendment is accepted trade marks and designs will be put on all fours with 206 copyright. I think it is right that it should be so. I see that the hon. Member for Buckingham has entered the Chamber and I might explain to him that I referred to him in his absence, because another hon. Member had referred to him. I merely said, and I am sure he will not dissent from this, that his interest in foreign affairs is greatly appreciated by a number of hon. Members, and that is, perhaps, why he was not able to give voice to the difficulties of the owners of copyright, though perhaps now he will catch your eye, Mr. Deputy-Speaker, at a later stage.
Creative rights should not be limited to those who are interested in the printed and written word. The inventor must be protected, and surely he is just as much a creative individual as a writer. The industrial designer too, must fall into this category.
In Bristol we have, ranking alongside the great library founded in the days of Queen Elizabeth, a prodigious patent library, which is evidence enough of the importance which a great commercial city like mine attaches to this subject. I am sure that the House would do well to accept the Amendment of my right hon. and learned Friend the Member for Chertsey. If it is not accepted we might have the position of the designer or the inventor holding back and not giving the community the benefit of his work for fear of being caught by another of the pernicious provisions of this Finance Bill. That would be a bad thing all round.
I was glad that my right hon. and learned Friend the Member for Chertsey drew the attention of the Treasury Ministers to the fact that the case is given away in Clause 3 of the Bill, where the Purchase Tax and royalty charge matter is dealt with. I hope that they will see the error of their ways when they study that point.
Throughout this debate we have the difficulty of unravelling this complex problem, but it is a complex problem not of our creation. The Government might do well to ponder that, even at this late stage of the Bill. Procedurally, I believe that they could still recommit the Bill and take out some 207 of the provisions which should not be in it.
In conclusion, I feel that I can speak with some feeling—
§ Mr. J. T. Price (Westhoughton)
On a point of order. May we get back to Schedule 10, Mr. Deputy-Speaker? The hon. Member seems to be roaming all round the world. I understood that we were discussing an Amendment to Schedule 10. Can we get back to it, please?
§ Mr. Cooke
I am grateful to you, Mr. Deputy-Speaker, for that protection. I feel fully confident that had I strayed outside the Rules of Order, you would have drawn my attention to that in your own good time without the help or intervention of hon. Members opposite.
I say this in support of the Amendment. I can speak with some feeling as an author-publisher, whose first major work, although it found favour with the community, did not bring much reward to myself, and as an inventor, as a dedicated do-it-yourself—because in this modern world one has to learn to do it yourself; one simply cannot afford to pay other people to do the work—and as a dedicated inventor who has not yet registered his design or process and is somewhat reluctant to do so unless my right hon. and learned Friend's Amendment is accepted.
I am delighted to support my right hon. and learned Friend, because his Amendment would protect the creators of practical works, the practically creative individual as well as the aesthetically or artistically creative. Surely, they all have their part to play, they should all be put in the same category, and I hope that the Government will see fit to accept my right hon. and learned Friend's Amendment.
§ Mr. Diamond
I gather, although the matter has not yet been put to the test, that the Amendment which I have moved, judging by the comments which have been made, is broadly acceptable. When one decided that an Amendment of that kind should be moved, it was anticipated that 208 the door would be attempted to be pushed wider open and that other Amendments would be moved which would extend the principle or what was thought to be the same principle. It was inevitable that when one brought forward a concession, other concessions would be based upon it.
I am not saying that the difference between copyright and patents is one between black and white. I am saying, however, that there is a difference, and that one falls on one side of the line as far as which we are prepared to go and the other falls on the other side of the line. I am sorry that I am not prepared to recommend to the House that the Amendment which has been moved by the right hon. and learned Member for Chertsey (Sir L. Heald) should be accepted.
The whole point of a patent is that it is something unique. It simply is not possible for anybody to say with regard to a patent what effect it will have, what the rate should be and what it is really worth. It is worth, by and large, what the trade will carry.
I can only say from my experience—and I have had some experience in this—that negotiations for fixing a patent royalty are as wide as can be. There is nothing like a market rate, nor can there be, because the essence of a patent is its uniqueness. Therefore, it is not something of which it can be demonstrated easily that a reasonable, an unreasonable or a very unreasonable charge has been made. As between persons who are not at arm's length, it is too easy to fix a figure which, in effect, could scoop the pool. That is not the case with copyright. So many people are writing books the whole time which are similar in so many ways that there is a more-or-less standard market price. It does not alter considerably. It is not very difficult to say whether a royalty for a copyright has been fixed without regard to the market value. It is almost impossible to say that about patents.
I am sorry, therefore, but I cannot recommend the House to accept the Amendment proposed to my right hon. Friend's Amendment.
§ Sir L. Heald
Do I understand the Chief Secretary to say that the difference between copyright and patent is 209 that while there are several authors in the Cabinet, there are no inventors?
§ Mr. Diamond
Previously I thought it best to ignore the right hon. and learned Gentleman's remarks. May I ask what evidence of any kind whatever the right hon. and very learned Gentleman has about the pressure which he says was brought by my hon. and right hon. Friends who are authors?
§ Mr. Barber
I am sorry to intervene—if the Patronage Secretary wishes to intervene, I will give way to him.
§ The Parliamentary Secretary to the Treasury (Mr. Edward Short)
I am here representing an electorate just as much as is the hon. Member for Altrincham and Sale (Mr. Barber) and if I wish to speak I shall certainly do so.
§ Mr. Barber
That observation was quite uncalled for. If the Patronage Secretary wishes to get his business through, he should behave himself a little.
I am sorry to have to intervene, but when I listened to my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) deploying the case in favour of his Amendment I thought that he was making out a convincing case. It was apparent from the fact that the Chief Secretary did not immediately follow my right hon. and learned Friend that he did not intend to accept the Amendment. When I realised that this was the case I assumed that the Chief Secretary would put forward cogent reasons which had not occurred to me why my right hon. and learned Friend's Amendment was unacceptable either in whole or in part.
I can see that there might be difficulties over registered designs or trade marks, but I thought that it would be possible to do something to cover the case about patents. Most of my hon. and right hon. Friends will agree with me when I say that the argument put forward by the right hon. Gentleman were not at all convincing. I can see that it might be necessary to treat the matter in a somewhat different way from that suggested by my right hon. and learned Friend, and 210 I can see that there are differences between a patent and a copyright, but whether those differences are relevant to present considerations is another matter.
While, therefore, I do not suggest that my right hon. and learned Friend should press his Amendment, I feel that this is a matter which should be looked into in the course of the coming year, and I hope that the Chief Secretary, with that fairness which he has shown on these matters which have no party political significance, will look into it in the coming year in the light of what my right hon. and learned Friend said.
§ Amendment to the proposed Amendment negatived.
§ Proposed words there inserted in the Bill.
§ Mr. William Clark
I beg to move Amendment No. 302, Schedule 10, in page 179, line 52, at the end to insert:10. Where a close company satisfies the Commissioners that any payment made, consideration given, or expense incurred to which this part of this Schedule applies has been made, given or incurred bona fide, at arms length for reasonable commercial consideration so that the main purpose, or one of the main purposes, is not the avoidance of any taxation which but for this paragraph would otherwise be payable, then. notwithstanding anything in this Act contained, the Commissioners may in respect of any such payment consideration or expense as aforesaid or of any part thereof disregard the provisions of paragraph 9 of this Schedule so that such payment consideration or expense or such part thereof as the case may be shall not for the purposes of this Act be treated as a distribution.The House will agree that this is an extremely important Amendment, particularly for close companies. It proposes that where one has a close company and where that company pays interest, or whatever it might be, and that interest is bona fide—that is, there is no tax avoidance; and the commissioners will decide whether it is reasonable—we say that in such a case the close company should not be penalised from the distribution point of view. When we were discussing an earlier Amendment the Chief Secretary said that where a charge was disallowed for Corporation Tax purposes, it would mean that extra taxation would be paid by the company.
I do not wish at this late hour to go into the great many examples which 211 could be given. Suffice to say that there will be many cases of close companies where, because of the operation of the participator Clause, companies will be paying out legitimate charges, but they will not be able to charge them for Corporation Tax purposes. I should have thought that the Chief Secretary or the Chancellor had this in mind when the Clause was first drafted, because it means that if we are to have the Corporation Tax working smoothly—and everyone, I know, wants it to work as smoothly as possible—it is quite wrong to put in this penal effect because of participation.
This Amendment could be elaborated, but I hope that the Chief Secretary has the point. It is a wholly reasonable Amendment. There is no question of its having been put forward for any other purpose than to give justice. There is no question of tax avoidance, and I hope that the right hon. Gentleman will give it sympathetic consideration.
§ 12 m.
§ Mr. Diamond
I recognise the spirit in which the hon. Gentleman has moved this Amendment. I am grateful to him for what he said about his desire, which we all share, that the Corporation Tax shall have a good start and work smoothly. I would, therefore, have been anxious to accept the Amendment if it were necessary or if it were drawn in an acceptable form, but I am afraid that neither is the case.
I do not want to delay the House any more than did the hon. Gentleman, but if he will look at the effect of his Amendment on the different kinds of payment he will see that those payments can in almost all cases only arise when there is some question of tax avoidance. Loan interest, for example, to a director or a participator or one of his associates can hardly be said to be an arm's length transaction. To deal with annuities, if a close company pays an annuity to one of its shareholders for a commercial consideration the transaction can hardly be said to be at arm's length. It is almost invariably designed to transform income of the company into income of the shareholder for tax reasons.
If we think of royalties as intangible assets covering periodic payment for good will, trade marks, designs and patents, 212 apart from patents these are not assets that are normally leased, and periodic payments to the owner by the close company using them, being a company in which he is a participator, are almost certainly aimed at tax avoidance. Rents and royalties for the use of tangible assets are within Part II only to the extent that they exceed a reasonable rate, on which the Amendment would have no effect. If a company provides living accommodation for a shareholder, it is only reasonable that the expenditure should be treated as though an equivalent dividend had been paid.
It is clearly the case, therefore, that except for a few cases, all the payments to which Part II of Schedule 10 refers are tinged with tax avoidance, and Part II is necessary to stop close companies from attempting tax deduction for what are, in substance, distributions. It is not the case, therefore, that we are unwilling to meet what was in the hon. Gentleman's mind. I think he has provided a remedy for a situation that really does not exist.
In any event, the present Amendment—which, I imagine, he has modelled on the Government Amendment to Clause 68—is very different from that Government Amendment. There the company has to show that avoidance is not the purpose, or the main purpose; here, what it has to do is to show that certain conditions are satisfied, so that the main purpose, or one of the main purposes, is not avoidance. That suggests that if one of the main purposes is something other than avoidance, that is good enough; if another main purpose is avoidance, that does not seem to matter.
Therefore, as the Amendment does not meet the point the hon. Gentleman thought that it would meet as a result of the drafting, and as the purpose is not one that can usefully be served in this manner, I am afraid that I cannot recommend acceptance of the Amendment.
§ Amendment negatived.