HC Deb 03 June 1965 vol 713 cc2112-23
Mr. William Clark

I beg to move Amendment No. 286, in page 58, line 11, after "company", to insert: save as is hereinaftecr provided". This is a paving Amendment for the subsequent Amendments, which I understand it will be convenient to discuss with this one, namely, Amendment No. 287, in page 58, line 27, at end insert: (c) any dividends in respect of preference shares with cumulative dividends rights in the capital of the company. and Amendment No. 288, in Clause 83, page 113, line 39, at end insert: (h) "preference shares" means the issued share capital of a company the holders whereof have a right to a dividend at a fixed rate or at a rate fluctuating in accordance with the standard rate of income tax, but have no other right to share in the profits of the company".

The Temporary Chairman

That is correct. These two Amendments may be discussed at the same time.

Mr. Clark

They are inter-connected, and the question here is what should be allowable as a charge? The Amendments suggest that where there are cumulative preference shares these should be an allowable charge for Corporation Tax. The Chief Secretary realises that if it were debenture interest it would be an allowable charge, and perhaps I might ally cumulative preference dividends to debenture interest.

The reason why we refer to cumulative preference dividends in our Amendment is that this avoids the nonsense which one could have of cumulative preference dividends at, say, 50 per cent. or 70 per cent., and so on. If they are cumulative preference shares, the hon. Gentleman will appreciate that this means that the company has a continuing liability for the dividend.

We are not wedded to the wording of the Amendment. It may be that another stipulation is needed in it, such as that it should be at a reasonable commercial rate of interest. We would not object to that. Much of the financing of companies throughout the country—I am not speaking about equity capital—is done either by loan capital in the case of debenture interest, or by cumulative preference shares at a reasonable rate of interest. I ask the hon. Gentleman to give this matter sympathetic consideration because this is of major importance from the point of view of financing companies. If the hon. Gentleman cannot give an immediate reply, I hope that he will undertake to consider the matter sympathetically between now and Report.

Mr. Diamond

I am in a position to give an immediate reply, and to give the same reply which was given by right hon. Gentlemen opposite during the 13 years when they had to consider this problem, arid which the Royal Commission had to consider, namely, whether preference shares are share capital, or whether they are a charge on a company, like debenture capital. The Royal Commission considered it and came out clearly in paragraph 522, saying that preference dividends are not a charge against profits; they are in every sense a distribution of profit to one class of proprietors. This is a thoroughly well-established principle, which was challenged in the time of the Labour Government in 1945– 51 by the then Opposition, and challenged again, time after time, when the Conservatives came to power. But they left it, for Profits Tax purposes, in a sensible way, as a distribution of profits. Profits Tax rose to 30 per cent.—and we are now talking about a Corporation Tax of 35 per cent.—and what did right hon. and hon. Gentlemen opposite do when Profits Tax was at 30 per cent.? They continued to apply their intelligence to these matters and left this as a distribution of profits and not a charge against profits.

I would weary the Committee if I attempted to give it the full range of differences between the rights of debenture holders and the rights of shareholders, be they preference shareholders, ordinary shareholders or deferred shareholders. Those rights are totally different and distinct from the rights of debenture holders.

In those circumstances, I invite the Committee to have regard to the most authoritative and clear statement of the Royal Commission, and to the good sense which prevailed for 13 years, when the same problems were considered against the background of a Profits Tax of 30 per cent. I invite them to reconsider this matter and not to press the Amendment to a Division.

Mr. Lubbock

I cannot resist the opportunity of saying that the Chief Secretary is right, for once. But I would draw the Committee's attention to the possibility that companies which have preference shares could go to the courts and redeem them and replace them by some kind of secured or unsecured loan, and thereby deduct the interest from their profits obtained before taxation. I would point out that a great many companies with this type of capital structure will be doing this in the near future.

Mr. Patrick Jenkin

The fact that the hon. Member for Orpington (Mr. Lubbock) has agreed with the Chief Secretary convinces me that I am right. The arguments put forward by the Chief Secretary are wrong, because this is a matter of degree. In the case of the 30 per cent. Profits Tax we were talking about net preference dividends after tax; here we are talking about gross preference dividends to be taken after a 40 per cent. Corporation Tax. We are getting to the point where the burden on ordinary shareholders' funds and the ordinary equity of a company—because of the need to pay preference dividends—becomes very severe. It is the ordinary shareholder who will pay tax on the preference shareholder's dividend.

That is the effect of this provision. Unless the Amendment is accepted it will mean that in the case of some companies with a high yield of preference share capital there will be nothing for the ordinary shareholder. Take the case of the John Lewis Partnership, where the preference shareholders are those in the family business, and the ordinary shareholders are the people who work in the business. The differential rate of Profits Tax was a severe burden on that company, which was an excellent example of co-partnership. I should have thought that the hon. Member for Orpington would have recognised that it was an excellent example. The differential rate of Profits Tax, as it used to be, placed a severe penalty on that company, and it could do nothing about it. This will hit it harder. The Chief Secretary should recognise this fact and agree to reconsider the point.

Mr. Harold Lever

There may be good reasons for retaining this, but they are not those advanced by the hon. Member for Orpington (Mr. Lubbock). Serious practical inconveniences would result if companies with preference capital had to go to court and redeem it and afterwards had to go to an often unreceptive market to get loan capital to replace it. That will not do for an answer.

I am sad to see the disappearance of a particular form of financing. I should have thought that there was mutual agreement between parties in cases where companies finance themselves. I keep desperately trying to remove this argument from the realm of party politics. Party-politically it is neutral in the case of companies which have preference shares or loan capital, so it is rather a pity that they should not be allowed to have them.

11.0 p.m.

Mr. Diamond

I am sorry to interrupt but I thought I heard my hon. Friend say it is a pity that they should not be allowed to have them. No one is stopping them having them. I agree with him that this is not a partisan issue. It is merely a recognition of the facts of life.

Mr. Lever

I was pausing to catch my breath at the wrong moment—not a natural break, as they say on commercial television. I was going to say, with the Government penalising one form of capitalisation and not another, unless there is some very good reason why the Government would rather the companies operated on loan stock than on preference stock—but I hate to sound like the Treasury Front Bench.

I must tell the Chief Secretary that it would be absolutely right to say that there is no analogy between Profits Tax and the Corporation Tax, a theme we have heard from time to time on almost every Amendment. This is the one occasion where one can say with great emphasis that there is no relationship whatever between Profits Tax and this tax. Much more important is the analogy with Income Tax rather than with Profits Tax, because I believe that a minor injustice used to be worked upon preference shares by the system, when they were normally helped a good deal by the Income Tax provisions. So it was a relatively minor injustice, although my hon. Friend, with a respect for the venerable condition of our tax system, which has not always been in evidence, and rightly so, points to the 30 or more years in which we have operated this system in relation to Profits Tax.

If venerability is the case, we have operated the reverse system in relation to Income Tax for even more years than that. The venerability is not necessarily a matter that commends itself. In this connection the fact is that the Tory Party, both as Opposition and as Government, have taken the same view that the Chief Secretary now takes. I am not going to press this matter further, but it seems to me that, with due safeguards having been taken, it is a matter of supreme difference to me whether a company raises its capital by preference shares or by loan capital. As far as the Government are concerned, they ought not, in my respectful submission, to be partisan to either method. They should leave it to the company to choose the method with the same fiscal consequences in each case.

it is no good saying that the choice is being left to them. We do not actually lock company directors up if they raise money by preference capital, but we make it rather expensive for them to do so. I know that this is not an easy question, bedevilled by much support from the Conservative Party. My hon. Friend the Chief Secretary may be embarrassed about the number of Conservative arguments that have taken exactly the same position as he takes tonight. I want to relieve him of his embarrassment and urge that, while rejecting this Amendment, the terms of which are not satisfactory, for the hour is late, he should give some thought to the matter to see if there is some way in which we can preserve the right of companies to have this flexibility in the manner in which they have traditionally raised capital for their lawful business occasions.

Amendment negatived.

Sir John Hobson (Warwick and Leamington)

I beg to move Amendment No. 513, in page 59, line 16, after "138(1,a)" to insert "and(c)"

The oddity of the drafting is that by adding (c) one actually achieves the result of removing (b), but this is a subtlety I can perhaps explain, along with the consequences. This question raises a matter of some importance, particularly to many of the larger oil companies and the larger trading companies. They do raise, and increasingly are raising, loan capital by means of public issues, particularly overseas, on the continent of Europe. For the most part, such money is raised upon an unsecured basis. Undertakings are given that they will not, if they raise any further loan, give any better security to the subsequent loan than the existing loan which is granted. Apart from that, it is usually a straight, unsecured loan, arid they are able to borrow the money from an overseas lender without charging their assets, either in this country or overseas. The contracts are almost invariably the subject of foreign law and the United Kingdom borrowing company has in such circumstances up till now always been able to pay its interest gross and yet secure United Kingdom tax relief on the payment of such interest. The contract almost invariably provides that the interest shall be paid gross; that is, that it should be free of present and future United Kingdom tax.

The consequences of the Bill appear to be that this opportunity will be removed for the future. Admittedly, the next Amendment which the Chancellor proposes would seem to bring into operation Section 132(1,c) of the Income Tax Act, 1952, but that, of course, applies and is useful only in the case of income not received in the United Kingdom. In those circumstances, there can be a deduction on account of the annual interest payable out of income to a person resident outside the United Kingdom, but the consequences of Clause 50(6), which seems to introduce Case 1 for the basis of assessment, would seem to remove any prospect in any event of relief under Section 132 of the 1952 Act.

In addition, there is the case of profits or gains of a trade which is carried on in the United Kingdom by a United Kingdom resident, the income of which is actually received in the United Kingdom. The annual interest charged for money borrowed unsecured overseas for the furtherance of such trade can be treated as a charge for the purpose of Corporation Tax under the Bill as it stands only if all the requirements of Section 138 of the 1952 Act are specified. These are very stringent indeed and, in practice, almost impossible to fulfil. The one which causes particular difficulty is Section 138(1,b), which requires that the interest payments should be in respect of a security mainly in respect of assets outside the United Kingdom.

Many of the large British companies are, in fact, United Kingdom parent companies of a group which do not themselves have any foreign assets. They do not themselves own or employ any assets outside the United Kingdom, and, of course, loans are unsecured in any event. And even if they had assets outside the United Kingdom, we are now talking about unsecured loans and, to that extent, Section 138(1,b) causes a difficulty which prevents a deduction of the interest charges on such loans.

The result is that, as the Bill is drawn, if one must fulfil all the conditions of Section 138(1), including Section 138(1,b), such United Kingdom companies will be effectively precluded from borrowing on the Continent. It cannot be the intention of Her Majesty's Government to make it more difficult, if not wholly impossible, for United Kingdom companies with overseas interests to borrow abroad when it is commercially and financially justified. Least of all can it be the intention of the Government to insist that United Kingdom borrowers must give security in support of borrowing abroad on their overseas assets when the lenders are perfectly prepared to give them the loans without any security at all in the United Kingdom.

For these reasons, while there may be other ways of dealing with the matter, I hope that the Chief Secretary—who I see nodding in understanding of the problem, though I know not with what results—will assure such companies which are anxious about this matter that the Government will either accept the Amendment or that some other method will allow the interest on unsecured loans raised on the Continent to be set off against income arising in this country for the purposes of Corporation Tax.

Mr. Diamond

The right hon. and learned Gentleman the Member for Warwick and Leamington (Sir J. Hobson) has made the point with the clarity and persuasiveness one would expect, and has demonstrated that what the Amendment seeks to do is to remove the restrictive effect of Section 138 (1, b). The proposal in the Bill as it stands is to incorporate the existing restrictions from the Income Tax provisions, and my right hon. Friend feels that these restrictions, although they have been within the standard code for so long, are too restrictive, and he would wish to accede, in general terms, in principle, to the views put forward by the right hon. and learned Gentleman.

There is, however, one reason why I cannot, at this moment, accept the wording of the Amendment. It is simply that I do not think that the Amendment goes far enough. Other representations are being made in a very special case which I feel my right hon. Friend might well want to meet at the same time. If, therefore, the right hon. and learned Gentleman would feel disposed, on that very clear undertaking, to withdraw the Amendment, we would undertake to introduce an Amendment on Report that would fit the circumstances so admirably described by him, and perhaps go a little wider as well.

Sir J. Hobson

I immediately express my gratitude to the Chief Secretary for his attitude, and assure him that I would never be wedded to my own drafting. I have no doubt that, if not the hon. Gentleman himself, at least the total resources of the Government in drafting something to cover not only this case, but other cases, will be perfectly acceptable. I am grateful to him for his assurance, and beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Diamond

I beg to move Amendment No. 339, in page 59, line 19, at the end to insert: or (c) the payment is one payable out of income brought into charge to tax under Case IV or V of Schedule D". This Amendment has been tabled to remedy an inadvertent omission from subsection (5). There are two methods by which relief of a kind given under the Clause is provided, and I need not detain the Committee with them, but a third method has been overlooked. That is the method of setting against tax under Case IV or V of Schedule D income from overseas, and the Amendment would add that further relief.

A mendment agreed to.

Mr. Patrick Jenkin

I beg to move Amendment No. 551, in page 59, line 24, at the end, to add: (7) Notwithstanding anything hereinbefore contained where a company receives any interest, whether yearly or for any shorter period, or any annual payment from another company (both being resident in the United Kingdom), and either

  1. (a) the company paying the interest or annual payment is a subsidiary of the other or of a company so resident of which the other is a subsidiary; or
  2. (b) the business of the company paying the interest or annual payment consists wholly or mainly of the carrying on of a trade or trades and three-quarters or more of the ordinary share capital of that company is owned between them by five or fewer companies, of which the company receiving the interest or annual payment is one and of which none owns less than one-tenth of that capital;
then the company receiving the interest or annual payment and the company paying the interest or annual payment may jointly elect that this subsection shall apply to the interest or annual payment received from the latter by the former, and so long as the election is in force any such interest or annual payment shall be paid gross and not under deduction of income tax but shall be treated as a charge on income provided that it would so qualify but for the fact that it is paid gross and not under deduction of income tax. (8) Subsection (7) above shall apply to the whole or such proportion of such interest or annual payment as the companies receiving and paying the same may jointly specify from time to time. Although this is a very important Amendment, and I hope that the Government will treat it as such, I can deal with it very briefly. We have discussed provisions already in the Bill for grouping for the payment of dividends, and we sought to amend them. This Amendment seeks to apply to interest and other annual payments the same provision for grouping as the Bill already provides for dividends. It appears to me essential that the same treatment should be extended, otherwise the mere fact of the organisation of groups of companies and consortia will affect the liability to account to the Revenue for tax deducted for annual payments.

One would comment that the position would be that the groups would be making what are tantamount to interest-free loans of tax to the Inland Revenue. I submit that that is undesirable, and that in principle there is no difference at all for this purpose between distributions—dividend payments, and so on—and annual payments other than distributions. We shall later see that in the machinery provisions in the Schedule these are dealt with together in the same paragraphs all the way through.

11.15 p.m.

I submit that grouping for interest and other annual payments is a perfectly reasonable and fair provision which could be introduced into the Bill and I hope very much that the hon. Gentleman will accept the Amendment.

Mr. Diamond

The hon. Gentleman would riot wish me to read out the four reasons why the Amendment as drafted is not adequate. I am sure that he would not wart to detain the Committee. The new arrangement, as he said, is somewhat different from the present arrangement and is assimilated closely to dividends. That is to say, tax is deducted at source and accounted for very much in the same way as Pay As You Earn and there is an advantage to the Inland Revenue in that there would be some acceleration of the payment of tax.

In the seat in which I am sitting, I find that not a wholly objectionable occurrence. I would not wish to forgo for the Government and the nation the advantage of the taxpayer paying tax a little earlier than he does now.

I appreciate that, where there is a payment that creates a grouping or a family, as it were, there would perhaps be inconvenience, although I would not say hardship. But there would be results which would not arise if groups were more closely connected and run under one company, taking money out of the left hand pocket and putting it into the right hand pocket.

For technical reasons, the Amendment is unsatisfactory and, for Treasury reasons, I would wish to encourage the payment of tax more quickly. I think, however, that the hon. Gentleman has made a valid point and if he will withdraw the Amendment I will undertake to look at the matter. I am not undertaking to bring in an Amendment to meet the point, but I am undertaking to look at it to see whether we can do anything to help him. I think that there is a valid point here, and I have given the argument both ways. Therefore, I hope that the hon. Gentleman will withdraw his Amendment.

Mr. Patrick Jenkin

I am grateful to the hon. Gentleman for what he has said, and I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Clause, as amended, ordered to stand part of the Bill.

Clauses 49 and 50 ordered to stand part of the Bill.

Mr. Diamond

I beg to move, That the Chairman do report Progress and ask leave to sit again. I think that this is an occasion for all of us, for our minds are on our constituencies and the relaxation which our constituents desire us to have. We have made extraordinarily good progress, and I am most grateful to all hon. Members who have contributed to the discussion and, above all, I thank them for their brevity.

Mr. Heath

We find ourselves in a very happy position, and, as the Chief Secretary has said, we have made very good progress. The debate has been remarkable in that the Chief Secretary has asked us to withdraw an Amendment on the ground, not that it goes too far but that it does not go far enough. The hon. Member for Manchester, Cheetham (Mr. Harold Lever) has completely convinced himself that the whole of the debates on the Finance Bill are nonparty and that he can freely take part. The Chief Secretary has paid what I may describe as a richly-earned tribute to the last Administration by saying that it governed wisely and well for 13 years.

As we are at the point where, when we resume, we start fairly promptly on the major subject of investment allowances, this is a suitable moment to accept the Motion that the Chief Secretary moved in such felicitous terms. He had his Treasury colleagues and the rest of the Administration can now embark on a recess, which, however short, they desperately require.

Question put and agreed to.

Committee report Progress; to sit again tomorrow.