§ 12.30 a.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
I beg to move Amendment No. 558, in page 77, line 1, to leave out from "dealer" to "for" in line 4.
§ The Temporary Chairman (Mr. H. Hynd)
It is suggested that with this Amendment we might take Amendment No. 559, in page 77, line 23, leave out subsection (6) and insert:(6) If the recipient is a company, any election made under section 44(3) of this Act shall not apply to the relevant distribution".
§ Sir H. d'Avigdor-Goldsmid
With this Clause we now depart from the broad uplands of national policy where we have seen pioneers struggling in the face of all climatic difficulties to earn profits to inure to the benefit of the country, to what might be called the crooked streets where devious transactions take place. I notice that the Clause bears the emotive rubric of "Dividend stripping, and bond washing", so I am not at all surprised that most right hon. and hon. Gentlemen have averted their faces from the horrid spectacle of these distasteful activities. Nevertheless, it falls within the purview of the Committee to look at all the Clauses in the. Finance Bill, even if they deal 634 with features of our financial life of which we disapprove, and although the time is perhaps not the most favourable, they deserve as close a scrutiny as possible.
The main purpose of the Clause is to translate into terms of Corporation Tax and Profits Tax enactments previously appearing on the Statute Book in terms of Income Tax only. Although I should like to refer to that aspect on the Question that the Clause stand part, I should now like to put to the Government one or two points that seem to me to arise in this context.
The Clause basically deals with the use made by avaricious people of exaggerated dividends which they have been able to pay out of accumulated and already taxed reserves. This was a type of transaction that I think was effectively stopped by the 1960 Act, but it might make what I have just said a little clearer if I explained what the transaction consisted of in a case that came within my cognizance.
This was the case of an overseas telephone company whose charter had come to an end and which therefore had nothing to do, but had accumulated a certain amount of taxed reserves, instead of going into liquidation which would, perhaps, have been the normal course, an institution thought that it could 635 use the assets to good purpose, so whereas the company had about £600,000 of reserves on which tax had been paid and total assets of about £650,000, the original shareholders were made an offer of something over £700,000, for which sum they were pleased to pant with their shares. The purchasers of the company declared a special dividend of £600,000 free of tax.
This free tax provision made a very great appeal to pension funds and other funds which were in a position to reclaim Income Tax which had been deducted; a dividend which had cost the company £600,000 was, in the hands of such a recipient, worth nearly £1 million, being grossed up for Income Tax. The net result was that the promoters of the transaction bought for £700,000 something which they were able to sell for between £850,000 and £900,000, taking advantage of the fact that the ultimate buyers were in a position to reclaim Income Tax which had been paid by the company many years before.
We discussed this fully in 1960 and there is no earthly point in bringing it all up again because no one in his senses would say that either side of the Committee would favour such transactions. I want to draw attention to the present position under Clause 61 in respect of such transactions. The Clause provides that the distribution by a subsidiary company in respect of profits accumulated before April, 1965, and exceeding the ordinary profits of the company shall be taxed in the following way: Under subsection (6) of Clause 61, that payment by the subsidiary company to the parent company cannot be made in gross terms. It has to be subject to Income Tax. When this is received by the parent company, under subsection (3), it is treated as capital receipt and is then subject to Capital Gains Tax. If the parent company then seeks to distribute this amount to its shareholders it has also to make a further deduction of Income Tax.
The net result is that tax is paid three times. So, taking that notional figure of £100,000 of accumulated earnings in the subsidiary company, there would be taxation at the Income Tax rate before paying it over to the parent company. That is £100,000 minus £41,000, which 636 is £59,000. The £59,000 in the hands of the parent company would bear Capital Gains Tax at 40 per cent. That leaves £35,000. £35,000, if distributed to shareholders of the parent company, would bear Income Tax again at 41 per cent., leaving a net sum of £20,000 distributed.
The Amendment I have put down is drawn so as to avoid double payment of Income Tax in transactions of this kind. None of us would wish to argue that Income Tax and Capital Gains Tax should not both be paid. But I do not see why Income Tax should be charged twice. If the Chancellor does not mean to make an improper gain at the expense of the general body of taxpayers it has been done in complete innocence.
In the legislation of 1960 we have made it impossible for such transactions to be carried out to the detriment of the general body of taxpayers. Therefore, in moving this Amendment, I put it to the right hon. Gentleman that justification for paying Income Tax twice does not seem to be clear and it does not seem to follow the previous legislation which this Clause embodies.
§ Mr. Diamond
I followed very carefully what the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) had to say. I am sure that he was relating it to the Amendment, and I am sure that his Amendment, although he did not explain quite why or how, sought in some way or other to remedy the defect to which he referred. Therefore, I really have to deal with the matter in two parts, first with his speech and secondly with the Amendment, because it is, after all, on the Order Paper, even though it was not strongly argued.
As to the hon. Member's speech, I am at the service of the Committee as long as hon. Members like to talk about dividend stripping, but as it is somewhat of a technical matter I can perhaps reassure the hon. Member by saying that his anxieties are without foundation. As he rightly said, what the general framework of the Clause does is to introduce into Corporation Tax as nearly as may be exactly the existing provisions with regard to dividend stripping for tax purposes—that is all it does—and it uses terms instead of legislation by reference—which is the normal pattern in this part of the Bill—which would be too complicated in 637 these technical provisions. With exceptions which are, technically, extremely minor ones, it merely reintroduces the existing provisions for dividend stripping.
The Amendment would have the effect of reopening the door to dividend stripping by non-dealing companies. I would not wish to spend a great deal of time on this because the hon. Gentleman did not say that this was his purpose. It is the effect of the Amendment. I am sure that it is not his purpose, and I am sure that it is not the purpose of the Committee. Therefore, perhaps I could just leave it at that, explaining that in those circumstances I could not possibly recommend the Committee to accept the Amendment.
However, Mr. Hynd, if it is your wish to take the decision of the Committee on Amendment No. 559, and in order to put the hon. Gentleman in a happy and satisfied frame of mind, I would say that that is an Amendment—to which, again, the hon. Gentleman did not speak at any great length—which on balance puts the position more simply than the Bill does, and we shall be glad to accept it.
§ Amendment negatived.
Amendment made: In page 77, line 23, leave out subsection (6) and insert:
(6) If the recipient is a company, any election made under section 44(3) of this Act shall not apply to the relevant distribution".—[Sir H. d'Avigdor-Goldsmid.]
§ Question proposed, That the Clause, as amended, stand part of the Bill.
§ Sir H. d'Avigdor-Goldsmid
As has been made abundantly clear, this is a Clause full of complications. Therefore, I should like to put very simply and clearly to the right hon. Gentleman the point that I want to make, which is that the Chancellor has been perfectly fair in everything that he has done in that he has said that there is no element of retrospection in the legislation in front of us. I tabled an Amendment which was not selected, and, therefore, it would not be appropriate for me to refer to it, but the effect of it was that I wanted to get in language intelligible to the Inland Revenue that this element of retrospection did not exist. What is said across the Floor of the House does not always carry the same weight if it is not actually embodied in the Statute—
§ 12.45 a.m.
§ The Temporary Chairman
Order. Perhaps the hon. Gentleman can make his point in some other way. He must now discuss only what is in the Clause.
§ Sir H. d'Avigdor-Goldsmid
In dealing with this Clause, I would be grateful if the right hon. Gentleman would confirm that it does exactly what he said, namely, that it translates into terms of Corporation Tax what is in the existing legislation.
There are certain subtle changes in language in this Clause compared with previous legislation. For instance, in subsection (1,a) the expressionan ingredient in a holdingis a new phrase so far as I am advised. It is defined in Paragraph 3 of the Schedule, so perhaps I should not touch on that as we shall come to the Schedule later.
Again in subsection (5) the wordsfor any trust or fundare new. I do not think they have appeared in previous legislation. Subsection (8) sets out the rules regarding normal dividends somewhat differently.
These are complicated and extremely technical matters. As the right hon. Gentleman fully appreciates, I am quite unqualified to deal with them, but I should like to have official confirmation that these do not by the back door introduce into our legislation any new principle.
§ Mr. Diamond
I am only too glad to give that confirmation because, as the hon. Gentleman says with force, what any one of us says in this Committee is what is written in HANSARD and not what is written in the Bill. What the courts have to decide upon is what is written in the Bill and only what is in the Bill.
I do not know how I can help the hon. Gentleman further, except by saying that there is only one possible subsection about which he may possibly have the slightest anxiety with regard to retrospection, and that is subsection (1) which refers to holdings acquired in or after 1960–61. That follows precisely Section 31 of the Finance Act, 1960. The point, as I am sure the hon. Gentleman will remember, is that in the original dividend stripping the Revenue was protected against operators who acquired companies and who stripped the dividend at any 639 time within six years. That brought us up to 1961, as it were.
Then the matter came before the House again in 1960 and was re-enacted on the basis that those who had acquired shares and who were waiting to strip the dividend after the six-year period were not going to have the benefit of stripping the dividend even after six years and so putting their hands into the till of the Revenue, which is all that this operation amounts to. The present legislation simply adopts the situation and merely converts from Income Tax terms to Corporation Tax terms.
I assure the hon. Gentleman that I have looked into this question of retrospection because it has been raised on the hon. Gentleman's unmentionable Amendment. I can assure him, therefore, that as far as I am able to say and, I am sure he will understand, as honestly as I can, I do not think there is anything of that aspect about which he need have the slightest anxiety.
§ Mr. William Clark (Nottingham, South)
I am sure that nobody wants to reopen a loophole which was effectively closed in 1960. We are grateful for the fact that again the Government have given way on the initiative of my hon. Friends in trying to improve the Bill.
I should like the Chief Secretary to explain the words in subsection (1,c)otherwise than wholly out of profits arising to the company since that time".What is the difference between that wording and the wording "since date of acquisition"? I am advised that there is some ambiguity about this, and I should be grateful if the right hon. Gentleman would clear it up. As has been said, it is not what is said in the Committee stage that affects court decisions on tax matters; it is what is written in the Bill. If the right hon. Gentleman cannot give an answer now, perhaps he will undertake to look at this point between now and Report. If the wording should be "since date of acquisition" perhaps he will table a suitable Amendment to avoid retrospection.
§ Mr. Diamond
I am able to deal with that point now, because the hon. Gentleman did, in a sense, give me warning about this matter, again in an unmentionable way. The possible ambiguity in 640 the hon. Gentleman's mind refers to the word "time". The question is whether it refers to a period or a point of time. In subsection (1,b) a definite point of time is mentioned. Therefore, I am advised that the words in paragraph (c) can refer only to a point of time and not the period of time referred to in the earlier provision.
I am advised that this is capable of only one interpretation, but the intention I am ascribing to this subsection is confirmed by the Schedule, which uses the phraseas made out of profits arising to the company since the time when the holding was acquired".That meets the hon. Gentleman's point completely. Having looked into the matter in advance, I can, I think, satisfy the hon. Gentleman now that his anxiety is not well founded.
§ Question put and agreed to.
§ Clause, as amended, ordered to stand part of the Bill.