HC Deb 15 June 1965 vol 714 cc391-400
Mr. William Clark (Nottingham, South)

I beg to move Amendment No. 318, in page 66, line 4, to leave out trading income from the trade and to insert "profits".

Although I do not want to labour it at this late hour, this is an extremely important point because, as the Bill stands, for the purpose of Corporation Tax a loss can be set off against trading income from the trade. In Income Tax circles, "the trade" is very difficult to define. What is the position if one is running a composite business? How can we define "the trade"? One could have someone running a dyeing and cleaning business, and perhaps making a loss on the dyeing side and a profit on the cleaning part. I understand that as the Bill is drafted the loss on the dyeing business could not be set off against the cleaning sides' profits. A particularly germane example is the departmental store with a clothing department and other departments. It could also run an estate agency business as many of these stores do. I have no doubt that the Minister can think of other examples.

We should have a clearer definition of "the trade". If a trader makes a loss on one part of the business there should be no question but that he should be able to set off that loss against any profitable part of the same business although it is not necessarily the same trade. I hope that the Minister will say something about that.

I understand that it would be convenient to discuss at the same time Amendment No. 599, in Clause 51, page 62, line 6, at end insert and so far as in any accounting period there still exist allowable losses, they shall be allowed as a deduction from the company's total profits in that accounting period".

The Chairman

Yes, I think that would be convenient.

Mr. Clark

My hon. Friends will elaborate on this, but the point on Amendment No. 599 is that what happens under the Corporation Tax is that the Chancellor has said that, as far as companies are concerned, it makes no difference where they get their income from, whether from trading activities or from capital appreciation or realisation. It is all put into the same pot and 35 per cent. Corporation Tax is payable.

If one takes the premise that for a business one considers all its income, trading or capital, as the income of the company on which 40 per cent. is paid, one allows trading losses against that combined profit. Surely it is logical to allow capital losses against that total income. If a company dealing in property at the moment makes a capital appreciation the Chancellor knows that there are many tax cases in our legislation where we have many companies which over four or five years may have sold a house or bought a house, and one or two such sales or purchases can make them liable as dealers. If they are brought in as dealers, then their income from capital realisation is allowed, they pay the ordinary tax or, in this case, Corporation Tax on it. In that case, the Revenue is also giving any capital losses against such dealing companies' profits.

I should have thought—indeed, I hope—that the Inland Revenue had overlooked this point. I am sure that it could not be the intention of the Chancellor to penalise companies as opposed to partnerships, for example, more heavily than any other taxpayer in the same field. By the very fact that a company has a limited liability, I should not have thought it was the intention of even this Government to penalise that sort of venture. I hope that the Minister will be able to give some indication that the same trade does in fact allow for composite trade within the company, and that capital losses against capital profits and trading profits can be put into the same pot and the Corporation Tax charged on the net amount.

I have tried to be brief and I hope the Minister has taken the two points I have made. The reason I have been brief is because of the long debate we have just had. I assure the Committee that it is an extremely important point for companies. It is regrettable sometimes that late at night during the Committee stage of a Finance Bill one gets to an important point of principle and, because of the lateness of the hour, the matter is brushed aside. I assure the Minister that this is an extremely important point not only for companies but for the successful operation of the Corporation Tax. I am sure he will agree that if it is felt that any tax is unfair in its application, this brings that tax into more disrepute than a tax that appears and is in fact equitable.

I hope, therefore, that the Minister will give us some assurance on the two points. Obviously, I am sure he would not hide or shelter behind the fact that these Amendments may not be in the draftsman's jargon that would be acceptable to the Government. We on this side of the Committee would not mind if the wording were changed provided the spirit of our Amendment was subsequently put down.

11.15 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

The purpose of Amendment No. 599 in the names of some of my hon. Friends and myself is to make it quite clear that realised capital losses can be set against revenue profits. It would be out of order if I harked back to Part III of the Bill which deals with capital gains taxation, but it would be right to say that a point which was pressed but refused by the Government on this was to allow in the case of individuals capital losses to be set against other income. Although it was grossly unfair that it should be so refused there was a certain logic in that. After all, these are different taxes in the case of individuals—Income Tax and Capital Gains Tax. They are charged on what are for the individual different kinds of "enrichment" at different rates and subject to different reliefs and exemptions. But the position of companies is exactly the reverse, for here in fact we are dealing with the same tax.

Capital gains in the hands of a company and revenue profits are treated in exactly the same way and taxed at the same rate. They have the same treatment as far as dividend paid by the company out of profit is concerned. This represents a change in the law for capital dividends. Although the rules of computation of capital gains and revenue profits are entirely different, the taxation of the resultant enrichment, whether a capital gain or of income on the plane of revenue, is identical. What, then, is the argument for refusing to allow capital losses to be set against revenue income? Alternatively, why cannot trading losses be set against capital gains?

The whole elaborate structure of our taxation system as evolved over the years has been to try to make sure that taxes are paid according to the taxable capacity of the taxpayer. Great efforts are made to ensure fairness between one taxpayer and another. Taxes are paid on the true assessment overall of the relative profits and gains made by the taxpayer. Relief for losses is an essential part of this and it is entirely contrary to this broad concept of the system that relief for losses should be limited in any way. For practical reasons there has, of course, to be a limit on the length of time over which they can be carried back, but reliefs for losses should be as widely drawn as they can be.

To exclude loss relief in the circumstances which I have described is entirely inconsistent with the Chancellor's own description of his new Corporation Tax in his Budget speech when he said: I propose that capital gains realised by companies—and this applies to both short-term and long-term gains—shall be subject to corporation tax at the corporation tax rate. A company is a continuing association which has as its main purpose making profits; whether those profits arise as trading income or as capital gains is immaterial, and I think that it is right that they should be taxed at the same rate."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 250–1.] If that is immaterial it is entirely wrong that capital losses should not be allowed against profits.

It is also interesting that any limits of loss relief almost inevitably press more hardly on small companies than on big companies. I derive support for that proposition from what may be regarded by hon. Members opposite as a somewhat unlikely source, a Fabian pamphlet, "Capital Gains Taxation—A Study mainly of American Experience", by Mrs. Kathleen Langley.

Mrs. Langley examined the American practice in considerable detail, and, in discussing the effect of different provisions for loss relief which have applied from time to time in America, she came to the conclusion that limitations on loss allowances are likely to be especially hard on the small investor, who is less likely to have gains or income (if losses can be offset against income) against which he can make use of his loss allowances". On page 15 of the pamphlet, she goes on to say: He may have his capital wiped out by a succession of losses. Statistics reveal that the middle and lower income groups were the main victims of loss limitations. It would appear that capital gains taxation does not always tend to reduce the inequality of capital holdings as much as might be expected. This conclusion is not surprising, and I submit that it carries considerable weight coming from that source.

Mrs. Langley was writing about individuals, but exactly the same applies to small businesses. A company which makes a loss in any year may be forced to realise its capital assets in order to cover its commitments, and, in the course of realising those assets, it may realise capital gains as there is no relief for inflation. It would be a ridiculous situation to find a company having its capital wiped out, as Mrs. Langley said, by a series of losses but having to pay Capital Gains Tax to the Treasury all the time. This would be a monstrous injustice, and any businessman faced with such a situation would regard the system as one of gross inequity. The Government have a chance here to put the inequity right, and I hope very much that the Minister will accept the Amendment.

The Minister without Portfolio (Sir Eric Fletcher)

The hon. Member for Nottingham, South (Mr. William Clark) asked what would be the position as regards a trader who carried on a composite trade. He need have no fears on that score. If a company makes a loss in trading, it is entitled to set-off against any income, and this would, of course, include the profits of any other trade. In other words, what we are seeking to do in this Clause is to carry over into the scheme of the Corporation Tax the exactly similar provisions which now apply under the Income Tax Act with regard to the trader who carries on a composite business. If there are two entirely separate kinds of trading carried on, different considerations might arise; but there will be no difference in the practice which operates under the Corporation Tax code from that which exists for the Income Tax code.

The hon. Gentleman will recognise that the effect of the Amendment is totally different and raises far wider questions. As the Clause stands, the position is that trading losses can, at the option of the taxpayer, be set against all profits in the same year as well as all profits in the previous year, whether from trading, capital gains or investment income; or, if the taxpayer does not desire that, he can carry forward his trading losses against trading profits for any subsequent year. The effect of the Amendment would be to enable the trader to carry forward trading losses in a given year not only against trading profits in subsequent years but against all other profits in subsequent years whether derived from investment income, capital gains or any other source.

I am sure that the hon. Gentleman appreciates that that would be open to great objections. The whole principle on which trading losses should be carried forward in subsequent years was examined in considerable detail by the Millard Tucker Committee and by the Royal Commission on the Taxation of Profits and Income. In its Final Report, the Royal Commission expressly adopted the recommendations of the Millard Tucker Committee with regard to relief for losses, the appropriate references being found in paragraph 488 on page 148. Therefore, the Amendment as it stands is quite unacceptable to the Government and, I believe, contrary to the advice which has been given on this particular subject about relief for losses.

Mr. William Clark

Is not this exactly the same position with a dealing company at the moment? A dealing company can carry forward those losses and set them off against subsequent profits, whether trading or carry forward.

Sir Eric Fletcher

Different considerations apply with regard to dealing companies. We are discussing the position of trading companies and I am explaining that the effect of the Amendment would be to enable a trading company to carry forward trading losses against subsequent profits derived not from trading but from other sources and would expose itself to the mischief to which the Royal Commission drew attention.

Mr. William Clark

The right hon. Gentleman has not really answered my point. I am not talking about a dealing company dealing solely in securities or properties. I am speaking about a company which is held to be a dealer in something apart from its normal trade. It might be a trading company and might be caught, if that is the right word, as a dealer for tax purposes as far as selling and buying houses or factories, or whatever it may be, is concerned. In that case it is treated as income of that company and it is not a question solely of dealing companies in securities. It is a company held to be a dealer for some other part in this business.

Sir Eric Fletcher

I appreciate what the hon. Gentleman is saying but I do not think that in any way affects the argument I was putting to the Committee that, for the reasons given by the Royal Commission, this Amendment is quite unacceptable.

To turn to the arguments addressed to the Committee by the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin). It was indicated that, with this Amendment, we could also discuss Amendment No. 599, which is an Amendment to Clause 51, which has already been passed by the Committee and so is an Amendment which cannot be moved. Nevertheless, I think I ought to explain why, if the Amendment had been selected when we were discussing Clause 51, it would not have been acceptable to the Government and why I should have been obliged to invite the Committee to resist it. The position does not in my view produce any inequitable results under the Clause as drafted.

The hon. Member referred to the words which my right hon. Friend the Chancellor used in reference to the proposition that the rate of tax payable by a company on capital gains should be the same as the rate of tax on its trading profits. The hon. Member quoted what my right hon. Friend said in column 250 of the OFFICIAL REPORT of 6th April of this year. I do not agree with the deductions which he drew from my right hon. Friend's observations.

My right hon. Friend was submitting that in the case of a corporation it was manifestly sensible that the same rate of tax should be paid by a company in respect of its profits whether they arose in the course of trade as trading income or whether they arose from capital gains. My right hon. Friend was arguing that the same rate should apply. In my view, it by no means follows that, because two categories of receipt attract the same rate of tax, they ought on that account to be treated as interchangeable for the purpose of setting off losses. The principle enunciated in the Bill is that capital losses should be set off against capital gains. As the hon. Member himself indicated, that is the rule in regard to individuals and rightly so. It would be very curious if capital losses could be set off against the other income of an individual and it would produce obviously undesirable results for the Exchequer and all other taxpayers.

If that is a sensible rule in respect of an individual it seems to follow that it is quite a sensible rule in respect of a company; and to have one rule in this respect for an individual and another rule in respect of a company would produce inequity as between one taxpayer and another which is something that we are anxious to avoid. Therefore, in the scheme of things that we are submitting to the Committee in connection with the Corporation Tax we think that it is right and logical to adhere to the principle that capital losses should be set off against capital gains only.

11.30 p.m.

Mr. Barber

In view of the hour I will say only a few words about Amendment No. 599 which is being discussed with the one which was moved, by my hon. Friend the Member for Nottingham, South (Mr. William Clark). It is an Amendment to Clause 51 and whether we agree with the Minister without Portfolio or not we have no means by which we can express our approval or disapproval. Therefore, I will say no more about it.

However, I certainly have some doubts about the Amendment before us, because there may be circumstances where a company is carrying on two entirely separate trades under Class I of Schedule D, not a composite trade, and we thought that the relief for trading losses as set out in Clause 54 for the purposes of the Corporation Tax differed from the system of relief in this respect for Income Tax purposes. However, the hon. Gentleman has assured us that this is not so and we will therefore consider what he has said. It may be that we have misunderstood the purport of the Clause. In these circumstances I am sure that my hon. Friend will wish to withdraw the Amendment.

Mr. William Clark

In view of what has been said, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Sir Eric Fletcher

I beg to move, Amendment No. 610, in page 66, line 10, after "income", to insert "or profits".

This is a drafting Amendment, but perhaps, in fairness to the Committee, I should shortly explain its effect. Subsection (1) provides a general rule that trading losses in an accounting period may go forward against trading income of subsequent periods. Subsection (2) provides another relief, which is an adaptation of Section 341 of the Income Tax Act of 1952, by allowing trading loses for any accounting period to be set against profits of any description of the period and of the preceding period of the same length. The last words of subsection (1) provide that the loss which a company may claim to carry forward is so much of the loss, as cannot, on that claim or on a claim (if made) under subsection (2) below, be relieved against income of an earlier accounting period. It seems to us, on reflection that the simple word "income" will not secure the objectives that we have in mind and the Amendment accordingly proposes that we should insert "or profits" to meet this point.

Mr. William Clark

I am sure that we will not fall out about this. Why did the hon. Gentleman not delete "income" and put "profits"? Clause 42, page 50, line 28, clearly says 'Profits' means income and chargeable gains"…. Is not the hon. Gentleman now saying "under subsection (2) below, be relieved against income and income and chargeable profits"? I cannot see it is necessary to have the double "income".

Sir Eric Fletcher

This is a highly technical matter. We concluded that it would make the subsection much more appropriate if we inserted the words "or profits". I do not think that the hon. Member will find that there is any inconsistency between having these words in the Clause and the earlier Clause which he mentioned.

Mr. William Clark

That earlier Clause is the definition Clause. It says that "profits" means "income" and so on. Should not this provision have said "profits as defined in the previous Clause"?

Sir Eric Fletcher

I do not think so. The phrase "income or profits" was intended to do two things. First, it was intended to ensure that losses carried forward were set against trading income of succeeding accounting period in turn, thus preventing the claimant from skipping a period. For that purpose the word "income" is good enough, because losses can be carried forward only against trading income, which is aptly enough covered by the term "income". Secondly, we want to ensure that what goes forward is reduced by what is allowed under subsection (2) against "profits of whatever description".

It should therefore be clear to the hon. Gentleman that in this context the word "income" will not suffice and that to make the matter clear we must add the words "or profits".

Mr. Barber

I wish to say only that I give notice that we shall go into this matter later, because we may wish to delete "or income". We shall have to consider what the hon. Gentleman has said.

Amendment agreed to.

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

Clause 55 ordered to stand part of the Bill.