HC Deb 16 June 1965 vol 714 cc640-715
Mr. R. W. Elliott (Newcastle-upon-Tyne, North)

I beg to move Amendment No. 454, in page 78, line 27, after "authority" to insert: and a statutory water undertaker".

The Temporary Chairman

We can discuss at the same time Amendment No. 455, in page 78, line 27, after "shall" insert "each";

Amendment No. 457, page 78, line 29, after "income" insert: (but subject to subsections (5) of this section)"; Amendment No. 458, in page 78, line 30, after "and" insert "subject as aforesaid neither";

Amendment No. 459, in page 78, line 30, leave out "not";

Amendment No. 460, in page 79, line 20, at end add: (5) Nothing in this section shall exempt a statutory water undertaker from liability to tax under section 43 of this Act. (6) For the purposes of this section "statutory water undertaker" means any body corporate (other than a local authority) incorporated by private Act of Parliament and carrying on a water undertaking (including an undertaking for the supply of water in bulk).

Mr. Elliott

The purpose of this Amendment is to safeguard the interests of water consumers in areas supplied by statutory water companies by giving to those companies the same treatment as regards Corporation Tax as is to be given to water undertakings operated by local authorities and joint boards.

There are three types of statutory water undertakers. First, there are local authorities operating individually; secondly, there are local authorities combined to form joint boards; and, thirdly, there are statutory water companies.

There is, however, a fourth category on which I should appreciate a little enlightenment from the Chief Secretary. Although Clause 62 makes quite clear the position of the local authority water undertaker in that such an undertaker will not be subject to Corporation Tax, and makes just as clear that the statutory water company will be subject to Corporation Tax, there is a fourth category of water undertaker, usually called a joint water authority, which includes local authorities and water companies. An example is the Coquet Water Board in Northumberland. Are such joint concerns to be subject to Corporation Tax or not?

I will principally refer to statutory water companies. They now supply about one-fifth of the population of England and Wales. They are, by any test which can be applied to them, among the most efficient undertakings in the country. Since 1956 the Ministry of Housing and Local Government has actively encouraged the amalgamation of water undertakings throughout the country, and it should be emphasised that this policy has at all times had the full support of the water industry and has, in consequence, been highly successful. The number of undertakings has been reduced from 1,186 in 1945 to less than 400 today.

The criterion which is adopted in amalgamations—and this is particularly important in terms of the Amendment—is, and has been, efficiency, irrespective of the type of undertaking. The most efficient undertaking has in all cases been accepted by both sides, local authorities and companies, as the nucleus. In some cases companies have taken over local authority undertakings and in others the reverse has taken place. Small under- takings have been eliminated and the number of companies is now 40.

The all-important point which I wish to make in moving the Amendment is that those companies which have survived have done so because they have been regarded as the most efficient organisations to supply water in the areas concerned. That has certainly been the case in my area of Newcastle-upon-Tyne, in Sunderland and in South Shields in the north-east of England. Statutory water undertakings are, unfortunately, usually misunderstood by the general public in that there is a prevalent misconception that they are private companies exploiting a natural element for profit. This is just not so. They are very different from ordinary commercial concerns and they render an essential service for a strictly limited return on the invested capital.

It is necessary and desirable, in seeking the addition of exemption from Corporation Tax of statutory water companies, to emphasise the statutory controls to which these companies are subject. First, there are limitations on their charges for domestic supplies. Secondly, their rates of dividend are fixed at a minimum. Before the war the maximum on ordinary capital was 5 per cent. and even now it is only 7 per cent. When we think of some of the earlier discussion we had on the Bill we see that this is certainly not a rate to attract speculators. Thirdly, when additional share capital needs to be raised, it must be raised by tender to ensure that the best price available in the market is obtained. Fourthly, the maximum and annual amounts that can be allocated—

Mr. Diamond

Before the hon. Gentleman proceeds, would he say, since he is referring to the maximum rate of interest on capital, what is the maximum rate of interest on borrowed money, loan capital?

Mr. Elliott

I am not certain but I believe it is 7 per cent.

Mr. W. F. Deedes (Ashford)

It is 7 per cent.

Mr. Elliott

My right hon. Friend informs me that it is 7 per cent.

As I was saying, the maximum and annual amounts which can be allocated for reserve and contingency funds are restricted, as are the amounts for carry forward, and any surpluses must be devoted to reducing water charges. Because of these statutory controls, any increase in taxation of the statutory water companies must eventually mean an increase in charges, since there are no other resources available to meet it.

During the past decade and more, there has been a tremendous increase in the public demand for water in this country, and the water companies have had an enormous capital expenditure programme. The pre-Bill basis of taxation for statutory water companies has encouraged them to raise the necessary capital in the form of ordinary and preference capital, the capital allowances on this further capital expenditure having meant a servicing cost to the consumer on the additional capital of little more than the net dividends on ordinary and preference capital, as compared with the possible alternative of gross interest on borrowed money, such as mortgages and debentures. This has come about because, whereas the companies had to pay tax deducted from interest paid under Section 170 of the Income Tax Act, 1952, capital allowances could be set against the profit out of which dividends on ordinary and preference capital were paid. The result has been that a substantial proportion of the tax deducted from dividends was retained by the companies, and it is my submission that this has been largely responsible for keeping charges to the consumer low.

But this capital policy enabling costs to be kept down will no longer be to the companies' advantage under the Corporation Tax proposals because, although it is proposed that borrowed money will be allowed as a charge before arriving at Corporation Tax, dividends on ordinary and preference capital will not only be subject to Income Tax on distributions under the new Schedule F but they will also be payable out of profits subject to the full rate of Corporation Tax. The highly unfair consequence will be that water consumers supplied by statutory companies will automatically face increased charges under the Clause as it stands.

I appeal to the Chief Secretary to give this matter his earnest consideration. By accepting the Amendment, the Government will do no more than place the statutory board in the same taxation position as the local authority undertaking, and I urge them to do this in the name of justice.

1.0 a.m.

Mr. Deedes

These Amendments are designed to cover a singular situation. The industry which we are discussing is uniquely represented by this curious trio of the statutory companies, the local authorities and the joint boards. I can think of no parallel to this sort of arrangement. In terms of what has been our general water policy, it has been the practice to give all three equal esteem and treatment, and I think that this policy has obtained right from the days immediately after the war when Mr. Aneurin Bevan took the first action designed to bring water undertakings to the sort of shape we are moving towards now.

As far as I know, there has never been any difference on this score. It has always been agreed that these three separate types of bodies should be given parity of esteem and treatment. As a result, we still have about 40 companies remaining, and they have expanded rather than otherwise in following the process described by my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott). I claim an interest here. I have a water undertaking in my constituency, the Mid-Kent Company, with about 300,000 customers and covering an area of about 800 square miles. It has gone ahead and absorbed a number of water undertakings.

I would mention here that companies operate within defined limits. There are still very important limits in the supply of water. They cannot be regarded as commercial companies for reasons of the restrictions imposed upon their charges, rate of dividends and allocation of reserve and contingency funds.

For this reason we believe that this Clause must indirectly lead to an increased charge to the consumer. In the case of the Mid-Kent Company, this would mean something like 15 per cent. over the next 15 wonths, and probably a great deal more in the following year. I would submit to the Chief Secretary that, no doubt unwittingly, this is contrary to the policy which we pursued in respect of water undertakings over a great many years, and it is for this reason that I support the Amendment.

Mr. Webster

I rise to support this Amendment. The Bristol Water Works Company has a maximum interest rate of 7 per cent. In case the Chief Secretary should suggest that the return should be greater than this, I would point out that since the Bill was published the rate of interest would be 8. per cent. because the price of the 7 per cent. maximum stock has now gone down to about 91 per cent. This bears out what my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) said so eloquently in moving this Amendment. There is a great reluctance today to buy stocks in these companies, and it is a very serious matter. A Morton's Fork is hanging over them which limits the maximum interest they can pay. The maximum interest of any company quoted on the Stock Exchange is the Felixstowe Company with 7½ per cent., but I do not think this is a statutory company. For a statutory company the maximum rate is 7 per cent. As my hon. Friend has said, this limits the amount which can now be paid out to shareholders. There is no question of speculation here.

The only thing that will happen if the companies are to raise their extra money is that it will have to be at greater expense, because there will have to be lower tender prices or else, and probably also, it will mean that people will have to pay a higher rate, although that also is in many cases tied to the rating of the hereditaments in which they live.

In my constituency we have the case of the precept raised in the water rate because my local undertaking, the Weston-super-Mare undertaking, was taken over some years ago. At that time the Bristol Corporation was the water works undertaking and it was extremely worried and undertook, in effect, to subsidise the water rate it was charging people in my constituency. As we all know, no one is grateful for a subsidy. It so happens that when the rating reassessment came through several years ago the subsidy ran out in Weston-super-Mare. This was a double blow and my post bag was extremely full on this point.

In addition to this, we had the embarrassment that the Bristol Water Works Company decided to build very fine new offices on the main road into my constituency, which was noted by my constituents who thought that the directors were building themselves fine premises. I know that the undertaking is of the highest order and one of the most efficient and nothing dishonourable was done.

In the years ahead we shall move very rapidly into a period of acute water shortage. When we eventually get back to power there will be a very intensive industrial expansion which will require tremendous supplies of water. We regularly have Bills dealing with water for Manchester, and we know that the problem of water supply is increasing for local authorities and that there may be a time for a national approach that will require maximum expenditure.

If nothing is done to alleviate this provision, it means that water undertakings will have to raise their money by very high percentage tenders or that the consumer will have to pay very much more than now. What my hon. Friend asks is very reasonable, and I am sure that the Chief Secretary will accede to it without the necessity of a Division.

Mr. John M. Temple (City of Chester)

I am sure that the Committee is obliged to my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) for moving this Amendment. He brought it before us in an exemplary manner and did not overstate his case. I only want to add a few points of some complexity, because I believe that this is not a simple matter.

The main point of the Amendment, is to put statutory water companies in the same position as other statutory water undertakers, and if the Amendment is not accepted then statutory water undertakers will be in a position in which they will have to put up their charges very considerably while others will not have to do so. Therefore, private enterprise water undertakings will be penalised, together with their consumers, because of the taxation being imposed by the Government. I wonder sometimes how much co-operation there is between the Chief Secretary and the Secretary of State for Economic Affairs. The latter is always urging that prices be kept steady while the Treasury Ministers are continually, through their taxation policies, putting prices up. My hon. Friend mentioned that there were four types of statutory water undertakers. I submit that there are five.

Mr. Diamond indicated assent.

Mr. Temple

A new type of statutory water undertaker has appeared under the Water Resources Act, 1963. That being so, then a very strange position has arisen. Under that Act, the river authorities are deemed to be local authorities and, because they are capable of levying a precept, they are put in the special position of being able to be exempted from Capital Gains Tax and also, under this Clause, from Income Tax as well.

Perhaps I can look forward to a later Amendment, the effect of which would be nullified with regard to statutory water undertakers if this Amendment were accepted. Indeed, all local authorities would be exempted from Capital Gains Tax as well. The strange position with regard to river authorities is that their water conservation functions are not to be financed through precept at all they are to be financed by water charges. Thus we shall have statutory water undertakings—the river authorities—just because some part of their services are financed by precept, in the most favoured position with regard to water conservation functions because, in this Clause, the Government have taken the definition of a local authority to be a local authority as defined in the 1875 Act.

I believe that this in itself is a strange position, and I would like the right hon. Gentleman to comment particularly on the inclusion of the water conservation functions of the river authorities within the ambit of this Clause. This is a matter of some substance because it will be within the knowledge of most hon. Members that river authorities are to be the biggest water undertakers of the future. Their task is to construct impounding works in various parts of the country in order to be wholesale purveyors of water.

1.15 a.m.

It is right that they should have these advantages, but I can see no reason whatsoever why the statutory water undertakers, who also have to construct impounding works, should not be in exactly the same position. As I have explained it is due to a strange series of chances that river authorities find themselves in this position in regard to their conservation functions.

I have been thinking a good deal about this Amendment and its effect with regard to Corporation Tax. If this Amendment is accepted it will give the advantages of a remit of Capital Gains Tax as well if the next Amendment, No. 561, which is in the name of the Government, is accepted by the Committee. I thought it wise to bring this forward at this juncture, Dr. King. If it be your wish that I should not pursue this matter, then I will not do so, but I think it is germane to my argument, and certainly the effect of accepting this Amendment would be to put statutory water undertakers in the position where they would be able to take advantage of the following Government Amendment.

I would draw the attention of the Chief Secretary to the position of statutory water undertakers with regard to Capital Gains Tax. The Chief Secretary will know from his experience of the extraordinary difficulty of valuing a statutory water undertaking. I have no need to go into the extremely difficult problem of cumulo values of water undertakings under which all the pipes and flumes under the ground, are valued as a part of that undertaking. This is the case, and unless this Amendment is accepted a statutory water undertaking is subject to Capital Gains Tax. If that is the case and a small part of a statutory water undertaking is either sold or compulsorily acquired, then in order to arrive at the rate of Capital Gains Tax on that particular small portion of the authority's premises, the whole cumulo value of the water undertaking will have to be valued. This would happen each time a small portion of the undertaking is taken away. I could hazard a guess that the valuation of the water undertaking would be a greater task and a greater cost to the community than the actual value of the land which was being acquired, because the complexities of a complete revaluation would be a most formidable task. It would be extremely wise of the Government, therefore, to accept this Amendment, the effect of which would be to exempt statutory water undertakings from the operation of the Capital Gains Tax.

My hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) mentioned the capital structure of water undertakings. He mentioned preference capital, and I would endorse the importance of preference capital, particularly under a Corporation Tax. I do not think I need go into this, because I think it is accepted on all sides that a company which has a large proportion of preference capital is penalised very severely under the Corporation Tax.

I was very surprised that the Chief Secretary asked my hon. Friend the Member for Newcastle-upon-Tyne, North, what the market rate of interest was on loan capital. This has nothing at all to do with the argument. Whatever the date of interest charged on loan capital, there will be no effect with regard to Corporation Tax. I would not say that in respect of Income Tax, because I do riot knew the position in respect of that, but certainly for Corporation Tax purposes this is true. The determining factor with regard to Corporation Tax is the amount of ordinary and preference capital, and this is the matter with which statutory water undertakings are particularly concerned.

Statutory water undertakings have a lot of perpetual preference stocks. As my right hon. Friend the Member for Ashford (Mr. Deedes) said, statutory water undertakers have a long and respected history, and their capital structures go tack almost into the mist of time, and that is why they have raised their capital in this form. I would submit that unless this Amendment is accepted they are going to be very severely penalised, and it is not in this case just the companies which will be severely penalised; it is all the people who are being supplied with water by the undertakings.

My hon. Friend the Member for Newcastle-upon-Tyne, North has estimated that the increase in water charges may be anything between 15 and 40 per cent., due to the proposals of the Government. I myself hope that this is not an operation of nationalisation by the back door. Frankly. I am extraordinarily suspicious about all the motives of the present Government, and unless they accept this Amendment I cannot but believe that what they are trying to do is to put statutory water companies in an almost impossible position in which they will suffer so much criticism which should be applied to the present Government and not to themselves. I hope very much, therefore, that this Amendment will be accepted; otherwise I shall he extremely suspicious that private enterprise is being penalised and that, as I say, nationalisation by the back door is coming in.

I happen to have a statutory water undertaking in my own area, an extraordinarily efficient company, the Chester Water Works Company, which has been judged by successive Ministers as being extraordinarily efficient, and which was judged to be efficient enough to take over a local authority water undertaking. This is not an unique position, but a position which has not occurred very often.

Mr. Ridsdale

It has happened elsewhere, too. It has happened in my constituency with the Tendring Hundred Water Company.

Mr. Temple

It has happened in certain other parts of the country.

Just because the water undertaking of Chester Rural District Council has been taken over by the Chester Water Works Company the people in the area of Chester Rural District Council will not get the taxation advantages which are being offered in this Clause, but if that little undertaking had remained on its own and not grouped for efficiency purposes in a larger organisation then they would have got the advantages.

Are the Government going to say they prefer fragmentation, or do they prefer efficiency through larger organisations? Previous Ministers of Housing and Local Government have always taken the view that it was beneficial to the community to group water undertakings in order that they could be mutually self-sufficient, but the present Government, with these taxation proposals, are putting the clock back. It seems to me that if this Clause is put through in this form there will indeed be a case for splitting up once again the Chester water undertaking, and giving the original powers back to the District Council so that it can operate its own water undertaking. I challenge the Chief Secretary to say, if that were the case, that Chester Rural District Council water undertaking would not be in a better position than the Water Works Company.

This is, I believe, a major anomaly. I believe it can be put right by the Government's accepting these Amendments tonight. I can see no reason whatsoever why small water undertakings of local authorities which have been grouped should in effect be penalised, but that is what will be the effect of this Clause, unless our Amendments are acceded to. Frankly, by the number of letters I am getting from my own area at present, I can tell the Chief Secretary that the people of Chester are quite fed up with the enormous increases in prices going on at the present time.

This is just another increase in price which will be handed on to the consumers of water in these areas which are covered by statutory water undertakings. I hope very much, but I am not optimistic, that the Chief Secretary will accept the Amendments. If he had been thinking of accepting them, he would have leapt to his feet much earlier, but I hope that when I sit down he will leap to his feet and accept them, and by so doing give encouragement to those who live in areas covered by statutory water undertakings.

Mr. Ridsdale

I do not wish to make a long speech, because many of the technical points have been dealt with by my hon. Friend the Member for Newcastle-upon-Tyne. North (Mr. R. W. Elliott) and my hon. Friend the Member for the City of Chester (Mr. Temple).

I find myself in much the same position as my hon. Friend the Member for Chester, in that I, too, have in my division a private company which has taken over a local authority undertaking, and it may be that this game of box and cox will have to go on if this company is to take advantage of the Bill as it it at present drafted. I am most disturbed that the statutory companies are not to be given the same exemption as regards Corporation Tax as the local authority and joint boards.

I have one such company in my area, the Tendring Hundred Water Company, which looks after the water resources of the whole of my division. Does the Minister realise that at one fell swoop this Bill will increase its charges by between 20 per cent. and 25 per cent.?

Do the Government really intend to do this? Does the right hon. Gentleman realise the grave effect that this will have on the many retired people living in north-east Essex? I am sure that it is not the Minister's intention to do anything like this. At one moment we find the First Secretary appealing for stability in prices, and at the next moment we have the Chancellor increasing prices by, as my hon. Friend the Member for Newcastle-upon-Tyne, North said, anything between 15 per cent. and 40 per cent. For my authority the figure will be about 20 per cent. I am speaking moderately, but I should like to assure the Chief Secretary of my very strong feelings about this imposed increase in charges to people who cannot afford to bear any further increases because they are living on small pensions.

As my hon. Friend the Member for Newcastle-upon-Tyne, North said, these statutory companies are not run for profit. They are different from commercial concerns. They render an essential public service, for a strictly limited return on the invested capital, and by virtue of the statutory restrictions on dividends, reserves and surpluses, any increase in taxation imposed on them can be met only by increased charges to the water consumers.

I hope that the Chief Secretary has listened very carefully to the pleas which have been made by my hon. Friends. I hope the right hon. Gentleman will show he is a man of considerable sympathy for the retired people about whom I am concerned. I hope that he will not be hard or harsh on them, and that he will accept the Amendment.

1.30 a.m.

Mr. Lubbock

Having listened to the arguments, I am a little surprised that the Chief Secretary has not already accepted them.

Mr. Diamond

I do not regard that as a most encouraging remark. I have been trying to be courteous and listen to every hon. Member who has wanted to speak; otherwise I should have risen long ago. I shall remember it in future—especially as the hon. Member himself came to me yesterday, and he knows the conversation that took place, and what happened.

Mr. Lubbock

I do not mean to discourage the Chief Secretary from being accommodating in replying to the Amendment, but I would have thought that if he had had anything to say in reply to the arguments that have been put from this side of the Committee so far he would have intervened and not waited until several speeches had been made.

He knows the arguments about the water companies, and he could have risen before this. It is half-past one o'clock, and I do not suppose he wants to go on very late into the night any more than the rest of us—

The Chairman

Order. I shall be grateful if the hon. Member will come to the Amendment.

Mr. Lubbock

I am sorry, Dr. King. I was only taking up the point made by the Chief Secretary. I shall not pursue it in view of your Ruling. I do not wish to antagonise the Chief Secretary, but in my view the arguments that have been put from this side of the Committee are quite reasonable. I came into the debate without any great knowledge of the problems of water companies, and I have listened to the arguments with great care. There is much in what has been said, especially in the arguments put forward with respect to the increase in costs.

If it is true, as the hon. Member for the City of Chester (Mr. Temple) said, that increases in charges of about 15 per cent. will be imposed on the consumers of water—and the hon. Member for Harwich (Mr. Ridsdale) said that in his constituency the increase would be between 20 per cent. and 25 per cent.—it is a very serious matter. I agree with the hon. Member for Harwich that in considering this matter we must have regard to the pronouncements and policies enunciated by the First Secretary.

We must consider the effect that this will have in the areas where those increases are imposed, and what is likely to be the effect on the demands which the people who live in these areas will make in respect of wage and salary increases, and so on. If we want an incomes policy, it must start with prices. I agree with everything that the First Secretary has said. In a small way the Chief Secretary has an opportunity to set an example by accepting the Amendment to prevent unnecessary increases in prices.

Mr. Diamond rose

Mr. Lubbock

Does the right hon. Gentleman wish to speak?

Mr. Diamond

As the hon. Member was repeating what has already been said, and as he said that he came into the debate without a great deal of knowledge of the subject and was most anxious for me to reply to the debate, I misunderstood; I thought that he was resuming his seat.

Mr. Lubbock

I certainly was not resuming my seat. I have one or two things to underline. As far as I know there is no rule which prevents any Member who wishes to take part in the debate from doing so. This is the Committee stage of the Finance Bill, and I am told that anyone who wishes to raise points has every right to do so. I hope that the Chief Secretary is not going to produce some new doctrine designed to shut people up. I do not speak very often in the House, as you know, Dr. King. I may be excused for taking part in a debate on a subject which is of such great importance to many people.

These statutory water undertakings are in a position similar to that of local authorities. They have a public obligation. That distinguishes them from the other sort of company on whom Corporation Tax and Capital Gains Tax is being levied. They make no distribution. I understand that the whole of their capital is in the form of fixed interest stocks. These are either loan stocks or preference shares, and there is no way in which they can increase their distributions, or in which, on a winding-up, capital gains can be made by the persons who have invested in these undertakings.

There seems to be a very serious anomaly here. If a water undertaking is owned by a local authority it is not subject to either Corporation Tax or—if the next Government Amendment is accepted—Capital Gains Tax. The situation in another area may be precisely the same for the consumer who is getting water through a tap, but because the undertaking is a statutory water undertaking it will be liable to this taxation. Therefore, the charges will be greater in that area than in the area where the company is owned by the local authority.

I want to ask the right hon. Gentleman a question which is of some importance in my part of the world. I understand that under the previous Government it was the policy for the Greater London Council to take over the Metropolitan Water Board and that it would then be, in effect, a department of the G.L.C. What is to happen now? If the Metropolitan Water Board is taken over by the G.L.C., does that mean that it will be relieved of taxation which might otherwise be imposed under this Bill? If so, are we not in a very curious situation, in that we are dependent on legislation which may or may not be introduced by this Government? I do not know what their policy is. I certainly knew that it was the policy of the previous Government that, ultimately, the Metropolitan Water Board would be a department of the G.L.C. Although I was opposed in many respects to the London Government Bill, I thought that this was a sensible move. I hope that it will take place and that the delay has only been a result of pressure on the time of the House, and that that is the reason that no Bill has yet been introduced.

I think that this highlights the anomaly with which we are faced under this Bill, that in one area water undertakings which are statutory water undertakings—we are dealing with them in this Amendment—are subject to this taxation, whereas in another area where they happen to come under a local authority they are not—and this situation may be changed overnight by legislation as in Greater London—and there is no difference whatsoever between one type of area and another from the consumer's point of view.

This is why I say to the Chief Secretary that I was surprised that he did not get up earlier and say that he would either accept the Amendment or bring forward on Report words which incorporated the same principle. I am very disappointed at his reaction, at his getting up at the beginning of my speech and saying that the only reason is that he wants to listen to what is said. He knows very well the principle and the idea behind the Amendment. He has been listening to the debate just as I have, and he could have understood it and come forward with something before now.

We could expect that the Chief Secrethe hon. Member for the City of Chester tary, having listened to the arguments of and those of the hon. Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) could have said that he was prepared to accept at least the spirit of the Amendment and come forward with an Amendment of his own on Report, even if he does not accept these precise words.

Mr. Diamond

The Amendment was moved in the most acceptable terms by the hon. Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) and supported by a number of his hon. Friends, including the hon. Member for the City of Chester (Mr. Temple), who speaks with great authority on all these matters. It is because the matter is not free from complication, and because, on examination, it reveals a situation which I doubt that all of us had expected that I hope I will have the attention of the Committee in explaining the underlying facts about these statutory water undertakings. The situation is by no means straightforward, and has given concern to a number of hon. Gentlemen. Indeed, it has given concern to me and to the Government.

Perhaps I might start where the hon. Gentleman himself started, and say that there are some forty of these statutory undertakers or water companies which will, without question, be affected by the incidence of Corporation Tax. What I shall say, and I am justified in saying it, is that one of the advantages of Corporation Tax is that it reveals anomalies and inconsistencies. This is one of the anomalies that is being brought to light, and I hope that we can examine it calmly and carefully before deciding what remedy, if any, should be adopted.

The reason why Corporation Tax impinges particularly on these companies is not that they are of the same nature as local authorities—they are not. Local authorities do not have capital which they have to service. They carry out a similar service in many respects, but they are not corporations of the same kind at all. Corporation Tax impinges on these statutory water companies in particular because of their method of servicing their capital, and making their charges to their consumers.

They are legally bound by maximum dividends, so their pricing policy is based on the minimum price that will achieve the dividend they are able to pay, and not more. Therefore, what determines their pricing policy is their dividend policy. What determines their dividend policy is, to a large extent, the investment allowances that have been given hitherto and the anomaly that exists under the present Income Tax.

As the Committee knows, investment allowances mean that the companies with large capital undertakings—and these are such—get an allowance for tax purposes of more than 100 per cent.—130 per cent. under the present rates. That means that a water undertaking of this kind has, in effect, two balance-sheets; one, the balance-sheet it prepares and distributes to the public, and the other, its balance-sheet for tax purposes. In its balance-sheet for tax purposes, it has a much larger profit than in the other, because in its published balance-sheet it depreciates its assets in the ordinary way by 100 per cent. over their lifetime. But, in the other balance-sheet, it depreciates its assets by 130 per cent., so the depreciation is greater and the balance of profit is more.

Out of its additional balance of profit is able to pay a larger dividend than can the ordinary commercial company because it has these large investment allowances. Perhaps I should not speak of an "ordinary commercial company", because a shipping company is in the identical situation—but I refer now to these 40-odd companies. So when the company pays its dividend, having regard to the present structure of Income Tax, the fact that it has never been the policy of the Government, nor is it the law, to have a balancing account with the company to make sure that the tax which the company alleges it is deducting from its dividends and handing to the Inland Revenue it is in fact handing to the Inland Revenue, produces a situation in which a company is able to pay the whole of its profits away as a net divi3end and not to account to the Revenue. The secretary of the company issues a dividend warrant saying, in effect: "I undertake that the tax shown here as deducted has been, or will be in due course, handed to the Inland Revenue." Of course, it is not.

This was never a problem until we had the investment allowance at 130 per cent., but it is the problem today.

1.45 a.m.

Let me give the figures as they affect the 40 companies that have profits on which they pay tax on distributed dividends. They distribute approximately £4 million in dividends. From those dividends they purport to hand over to the Exchequer £1,650,000. That is the standard rate on dividends. In fact, that tax paid by these companies, including Income Tax and Profits Tax, amounts to roughly £400,000. So, these companies pay £400,000 in tax and, because of the elements I have described—the investment allowance and the method of paying dividends net—although they only pay £400,000 in tax, they issue dividend warrants under which £1,650,000 of tax are alleged to have been paid. If those dividend warrants went to people who are not liable to tax the whole of the £1,650,000 would be reclaimed.

In short, the position would be that these 40 statutory water undertakings would have paid out £400,000 in tax and the Inland Revenue and general body of taxpayers would have repaid four times that amount. The general body of taxpayers would have contributed £1,200,000 to the benefit of these water companies, perfectly legally, as a result of the anomalies under the existing system.

This is a matter on which it is not for me to express an opinion. But I would remind the Committee of what was said in the Fourth Report of the Public Accounts Committee in paragraph 10: The Treasury stated that they regarded this anomaly"— and that is the kind of anomaly to which I have been referring— as an incidental consequence of the investment allowance system, which was considered to be an important instrument of economic policy. Your Committee cannot, however, agree that this judgment either justifies or disposes of a loss to the Revenue which cannot apparently be quantified but is clearly substantial. They consider it their duty to draw the attention of Parliament to the situation that exists under the law as it now stands, including the risk that tax avoidance may develop and the prospect that, with the further encouragement of industrial development by means of investment allowances, these repayments are likely to increase both in area and in scale. The point I am making is that the present capital structure and taxation principles concerning these companies results in their paying £400,000 in tax and under issued dividend warrants individuals can reclaim four times that amount and, therefore, in general, the taxpayers contribute up to £1,200,000 to finance all these companies. Through that they are able to keep their water charges down with the net result that the water consumers of these companies have been paying less than the economic cost and the general body of taxpayers stand—and are doing so up to date—to contribute the balance up to the amount I have described.

Mr. F. V. Corfield (Gloucestershire, South)

With due respect, the right hon. Gentleman has not been replying to the Amendments. I refer him to Amendment No. 460, which specifically preserves the position that the Government want with regard to the repayment of Income Tax on dividends. The argument to which the right hon. Gentleman has been directing himself is not that to which the Amendments are directed. They are entirely directed to the argument about Corporation Tax. The argument that the right hon. Gentleman has put forward applies to all companies. There is no specific application to the water companies that they are, or have been, in the fortunate position of being able to hold back the tax due on their dividends because they paid them net and not gross and put them against their capital allowances. In Amendment No. 460 we make it clear that we are not seeking to make the water companies an exception in regard to repayment of Income Tax which is deducted from their dividends.

Mr. Diamond

I am fully seized on the hon. Gentleman's point. He must distinguish carefully between Income Tax and Corporation Tax. It is the case of those who tabled the Amendments—and it is very valid—that the incidence of Corporation Tax now brings this to light because these companies can no longer pay gross dividends without deducting tax and accounting for it to the Inland Revenue. Under Corporation Tax, upon a dividend being paid the tax deducted has to be accounted for in the appropriate period. Just as Pay-As-You-Earn is deducted from an employee's salary, the tax deducted has to be accounted for to the Inland Revenue. In the present situation—this is the nub of the problem—there is no such compulsion under Income Tax upon these companies, and they are, therefore, able to service their capital without accounting to the Revenue for this money. Therefore, they reach a situation in which the general body of taxpayers have, in effect, been paying for part of the water charges of the consumers who have taken the water from these undertakers.

Mr. Geoffrey Wilson (Truro)

Does not the right hon. Gentleman's argument mean that if his ideas are carried out the charges to these people who are receiving the water will go up? That is what he is saying.

Mr. Diamond

I am trying to explain what the situation is, because those who tabled the Amendment are, naturally, concerned about it and want to know the facts. When we have a change, it is open to every one of us to see why there is a change. When we have a new set of circumstances different from an old set of circumstances, one has to consider whether the new circumstances or the old ones are reasonable ones, and it is the general tendency to assume that the old set of circumstances are always the right ones. I am explaining that the existing circumstances are that the general body of taxpayers are at the moment contributing towards the cost of consuming water by various customers of the companies, and that the way to put that right is for the water consumers who have been consuming their water at the expense of the general body of taxpayers to pay their full charge, which they have not been doing hitherto.

Mr. Anthony Fell (Yarmouth)

There is one point that the right hon. Gentleman has made six times, that the statutory water undertakers are being subsidised out of general taxation, and he is saying that this is not fair. But does this not also apply to local authorities?

Mr. Diamond

We are not talking about local authorities.

Mr. Fell


Mr. Diamond

I am answering the question. The hon. Gentleman has no reason to treat me as if I were a dog. Who is he calling? Why does he not whistle if he wants to.

The Chairman

Order. I hope the right hon. Gentleman will address the Chair and speak up. I must hear whether he is in order.

Mr. Diamond

I was saying, Dr. King, that I am only too glad to answer any question that any hon. Gentleman asks Me. [Interruption.] I will come to the hon. Gentleman in a moment. When two Members interrupt, Dr. King, and you call one of them, it is not for me to interfere with your decision. Does the hon. Member for Orpington (Mr. Lubbock) wish to interrupt before I answer the previous question?

Mr. Lubbock

I have been waiting for the right hon. Gentleman to answer it.

Mr. Diamond

The reason that I am concentrating upon water undertakings and not upon local authorities is, as I explained at the beginning of my speech—I do not know whether the hon. Gentleman was present then—that there is an essential difference between a local authority and a statutory water company, namely that one is financed and pays dividends like any commercial concern, except that it is limited in the amount of dividend, and the other is not a profit undertaking of that kind. Corporation Tax applies to profits.

I hope, therefore, that I have now explained to hon. Gentlemen who are seriously interested in this matter how it comes about and that in order that there should be equity and that the water consumer should pay the full charge for what he is consuming, the rate should go up and the taxpayer should be relieved. The inequity up to today has been that the general body of taxpayers have been paying for the water consumer.

Mr. Lubbock

I am grateful to the right hon. Gentleman for giving way. I do not know what offence I have comrnitted against him that makes him so cross with me. I wanted to ask him one question about the figures which he quoted. He said that the taxation which was deemed to have been paid on the dividend was £1.65 million and the actual taxation which was accounted for in the Inland Revenue was £0.4 million. I take it that in giving us these figures he is integrating the figures of the statutory water undertakers over a particular year.

The question I wanted to ask was whether these figures took into account the taxation which was deferred by capital allowances and, if so, whether he could give us any figure of the net change in the amount of taxation deferred by capital allowances in the balance sheets of the statutory water undertakers in the year for which these figures were given.

Mr. Diamond

I cannot give the hon. Gentleman details of that kind which are not published in companies' balance sheets. It is not my job to do that. These figures are taken from the companies' balance sheets. This is perfectly open public information which I am giving, collected together and not referring to any company.

I hope I have made the situation clear. It is a situation which I do not think was anticipated and, therefore, one finds that it takes a little time to sink in. But the net result is that the introduction of Corporation Tax has revealed an anomaly on all fours with that which was criticised by a Select Committee of this House and, in those circumstances, one hesitates to take any action at all in order to avoid an anomaly being removed. What those hon. Gentleman who have put their names to these Amendments are asking is that the removal of an anomaly should not take place because it means a change in the present situation. It is an awkward situation, and I only wanted to explain it.

Having explained the situation—it is a difficult situation—I now want to go on to say that I think the current situation under the new Measure would be the right one. Nevertheless this would have a sudden impact on a number of consumers, to none of whom could one explain in detail what the cause of the change is. I think it therefore right that I should give further consideration to the speeches that have been made and see whether there is any way in which the problem can be met either temporarily or permanently.

2.0 a.m.

I am giving no undertaking that any concession will be made and incorporated in an Amendment or new Clause on Report. I could not possibly give such an undertaking. The logic of the argument is that the introduction of Corporation Tax puts matters right. It creates difficulties and sudden changes, and I am prepared to look into the matter further to see whether there is a way in which those difficulties can be alleviated.

Mr. W. Baxter

I hope that my right hon. Friend will bear in mind that most of the water undertakings in Scotland—

Mr. Archie Manuel (Central Ayrshire)

All of them.

Mr. Baxter

—all of the water undertakings in Scotland are under the control of the local authorities, and the percentage of grant allocated to local authorities and water undertakings in Scotland is based on a ratio applicable to Scotland as compared with England. Water is one of the factors which gets a proportion of the grant. If consideration is given to the suggestions of the Opposition, what they propose means that English local authorities would get an advantage over Scottish local authorities because they would get greater relief in respect of their water undertakings, and similar relief would not be given to Scottish water undertakings.

Mr. Diamond

I am grateful to my hon. Friend for drawing attention to one of the difficulties which beset this problem. It is a matter of very considerable difficulty. It has been revealed as a result of the application of Corporation Tax. I will take into account what my hon. Friend says. It has application not only to Scotland, but to many other parts, and it is the Government's job to see that there is fair play as between different bodies of taxpayer and consumer.

Mr. Corfield

I am only very slightly encouraged by the Chief Secretary's closing remarks. I do not think that he should be in any doubt that in explaining this matter to consumers there will be any real difficulty in persuading them that blame for higher water charges should be directed to the Government.

I had not intended to speak in this debate because I have been invited to become the President of the Water Companies' Association and I therefore thought that it might be presumed that I had an interest. I can only say that it is in no sense a financial interest.

I was astonished to hear the Chief Secretary say that local authorities do not have to service their capital. This is certainly a new doctrine to me. If it is a foretaste of what it is to come, the state of the economy will be even worse than it appears to be. I must take the Chief Secretary to task for directing the whole of his speech to the question of Income Tax. The Amendments are not directed to Income Tax at all. We went to great trouble to put in Amendment No. 460 a provision stating that Nothing in this section shall exempt a statutory water undertaker from liability to tax under section 43 of this Act". This was specifically put in to make it clear that the water companies, like everybody else, agree that the law on the retention of tax from dividends with no obligation to pass them as such to the Exchequer was an anomaly which was accepted despite the fact that with them, as with many other companies, it would affect their costs.

The Chief Secretary directed his remarks towards showing that this was a peculiarity of statutory water companies. It is not, and he knows that. A large part of the debate on the Bill has been on this subject, and the Royal Commission's Report referred to this anomaly over a much wider field. However, I stress that there is no question of any of these Amendments being designed to put water companies in any different Income Tax position from anybody else.

The Amendments are concerned with the Corporation Tax, and here the anomaly arises largely because that tax is, as I understand it, specifically designed as an incentive to companies to place more of their profits to reserve and less for distribution. In the cases we are discussing, however, the Government are using this weapon on an organisation which is statutorily barred from building up its reserves. There is a statutory control not only over the total reserves which can be built up but also on the amount which can be placed to reserve in any one year.

The Chief Secretary said, the charges for water determine their dividend policy, which, in turn, is determined by their capital allowances, but what determines their dividend policy is the maximum dividend that they are statutorily allowed to pay—and that amount, of 7 per cent. at present, must be approved by the Government and is designed to ensure that the water companies can raise the capital they require. It is at a figure which, certainly at present, if it were lowered in any way would make it almost impossible for them to raise any money. It is seldom much above such a level. So it is untrue to say that the dividend policy is determined by anything else than the statutory limit.

We therefore have a situation in which we have an organisation which is a public utility, which is controlled as to the amount of dividend it can pay, the amount it can put to reserve, the amount it can carry over the total amount of its reserves. To apply the Corporation Tax to this sort of outfit is entirely anomalous and for the Chief Secretary to refer to the anomaly in the way that he did was wrong because we are complaining about the creation of an anomaly, for here is a situation in which the extra tax can only be a direct burden on the water consumer. There is no ocher means by which the money can be raised.

I will give an arithmetical example. The new situation means that for every £100 in net dividends it is required to pay, with the Corporation Tax at 40 per cent. and Income Tax at 8s. 3d., consumers will have to meet charges of about £248. This is made up as follows; working the sum the other way round, with a profit of £284, 40 per cent. of that profit, which is the Corporation Tax, is, according to my calculations, £113 12s. From that must be deducted a further £70 8s. in respect of Income Tax. It will be seen that despite all the Chief Secretary's eloquence on the subject of Income Tax that the Income Tax element is very much smaller than the Corporation Tax element. It is, in fact, £70, as opposed to £113 in every £284. Thus, an income of £284 must be raised under the Bill to find every £100 of dividend, which is the servicing of the capital. That can only be a direct burden on the consumer.

My hon. Friend the Member for the City of Chester (Mr. Temple) said that the Government's tax arrangements would result in increased water charges. That is bound to be so because the water companies are under a statutory obligation to apply their resources to the reduction of water charges. If those reserves are taxed, the water charges will be higher than they would otherwise be, and in direct proportion to the amount of the tax. It is a direct tax on the consumers of water.

My hon. Friends have referred to the situation which has arisen in the reorganisation of water undertakings over the past ten or fifteen years. I had always understood that there was no difference between the parties on this. The principle adopted was to reduce the number of water undertakings by consolidating them in any one area around the most efficient unit. The fact that there are now 40 fairly large companies left is an indication that they are among the most efficient units in the whole country. At the General Election, we heard a great deal from the party opposite about efficiency, but now it seems that their doctrinaire devotion to an idea of nationalisation by which one makes things more difficult for private enterprise to compete has wholly befogged one of the few rays of light which had begun to strike through the haze which seems permanently to surround the First Secretary of State, among others.

I ask the Chief Secretary to realise that he is applying the Corporation Tax to a species of organisation entirely different from that for which it was designed. Whatever its merit or demerit in relation to an industrial company, it has no application whatever to an organisation controlled as water companies are. The right hon. Gentleman is not removing an anomaly; he is creating one.

Mr. Anthony Barber (Altrincham and Sale)

I did not rise when the Chief Secretary finished his speech because I was sure that the Committee would wish to hear my hon. Friend the Member for Gloucestershire, South (Mr. Corfield) who, as most people know, has considerable experience of these matters. But, after the extraordinary concluding observations of the Chief Secretary, it is not unreasonable to expect others of my hon. Friends to wish to speak in order to persuade the right hon. Gentleman to be a little more forthcoming.

This has been a remarkable debate. Apart from the Chief Secretary, there have been seven speakers, all on this side of the Committee, yet we are, on the Chief Secretary's own admission, concerned with increased charges for water for one-fifth of the population of England and Wales. This is a matter of importance to millions of people, yet we have had not a word from the benches opposite, apart from an interjected abstruse point about Scotland.

Mr. W. Baxter

It is strange that the right hon. Gentleman is unable to grasp the meaning of the Queen's English. All water undertakings in Scotland are under the control of the local authorities. The method of apportioning grants to local authorities is governed by what is known as the Goschen formula, which is worked in a way which is equitable to the local authorities of Scotland and England. In Scotland, it embraces water undertakings. In England it does not. Because it does not include water undertakings in certain parts of England, advantages accrue to the local authorities of England.

Mr. Barber

I shall not pursue the matter unduly, unless hon. Members opposite wish me to do so. I understood the hon. Gentleman at the beginning of his first intervention to inform the Committee that the overwhelming majority of water undertakings in Scotland were owned by the local authorities.

Hon. Members

All of them.

2.15 a.m.

Mr. Barber

All the Scottish water undertakings are owned by local authorities. It is of some significance that in the Clause which we are seeking to amend local authority water undertakings are not liable to Corporation Tax, Income Tax or Capital Gains Tax. In these Amendments we are concerned with a limited number of statutory water companies which will be liable to this taxation unless these Amendments are accepted. This is surely the whole issue.

I was somewhat surprised to hear the Chief Secretary in his opening remarks say that one of the advantages of the Corporation Tax was that it brought out the anomalies and inconsistencies. Surely the simple issue which we are now discussing is that before this Bill and before we had heard of Corporation Tax both statutory water companies and the local authorities were liable to Income Tax and Profits Tax and they were treated in precisely the same way.

As a result of Clause 62 the Government are relieving local authorities from any charge for Income Tax, Corporation Tax or Capital Gains Tax but allowing Corporation Tax and Income Tax to be charged normally in respect of statutory water companies which are fulfilling the same function as local authority water undertakers. This is the simple issue on which the Committee has to make up its mind. The right hon. Gentleman said that statutory undertakers were not of the same nature as local authorities. But they are certainly performing the same service to the consumer and they are providing water. He went on to quote from the Report of the Select Committee about investment allowances, but he knows perfectly well that that has nothing to do with the Corporation Tax. Had the previous Government or this Government thought it desirable to put this matter right they could have done so without the introduction of the Corporation Tax.

The purpose of this series of Amendments, as was so clearly put by my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) in what, if I may say so, was an admirable speech, is to equate the taxation of statutory water companies with the taxation of local authorities which are also water undertakers.

I would like to say this, because it is very relevant in considering what action we should take as a result of this debate. Because of the severe restrictions which are placed on statutory water companies, it is the case, as the Chief Secretary frankly admitted, that a consequence of Clause 62 as drafted will be that there will be higher charges for water than there otherwise would be for a substantial proportion of the population in England and Wales. My hon. Friends made it clear that the increases would range from 15 per cent. to 40 per cent. over the next five years. Some of my hon. Friends gave examples and my right hon. Friend the Member for Ashford (Mr. Deedes) gave the example of the Mid-Kent Water Company which expected to increase its charges by something like 20 per cent.

All this is highly relevant to the Government's policy for incomes and to the increases in the cost of living which have been experienced over the past few months. I would have thought that the Government would have at least learnt from the consequences of the increases in the petrol duty of last autumn. Here we have another example of the Government taking action which it could have avoided and which will deliberately push up the cost of a necessity to the consumer. There can be no getting away from this.

Although he posed it in jest, the question of my hon. Friend the Member for the City of Chester (Mr. John M. Temple) asked, as to whether the Secretary of State for Economic Affairs was consulted, was very relevant. It is no good the Chief Secretary talking about water companies as though they are the same sort of companies as any other commercial undertakings, because they are not. They are quite different.

Although it is true that when these points were put first there were only two Labour back benchers in the Committee, the whole Committee should recognise this fact. I therefore propose to remind the Committee once again of the sort of limitations which are imposed on statutory water companies, because if it were not for those limitations I dare say there would be something in the right hon. Gentleman's argument.

First, there is the limitation on the charges that these companies can make for domestic supplies. Secondly, the rates of dividend are fixed at a maximum designed to be no more than sufficient to attract ordinary investors. Then there are other points, into which I will not go in detail, concerning the raising of additional share capital and the maximum amount which can be allocated to reserves and contingency funds.

All of this puts these companies in an entirely different position from normal commercial companies. All the Chief Secretary was saying, when concerned with investment allowances, about examples in the shipping industry was quite irrelevant when considering undertakings which have this sort of restriction placed upon them.

Mr. Diamond

It is right that we should understand this fully. This is not a party matter because it affects water consumers all over the country. The right hon. Gentleman said these com- panies are entirely different from an ordinary commercial undertaking. Could he tell us, from the years of experience he had at the Treasury, what difference there was in the treatment of a water company for taxation purposes as com pared with ordinary commercial companies?

Mr. Barber

The right hon. Gentleman has completely missed the point. When I was at the Treasury, ordinary commercial companies, water companies and local authorities were all treated in precisely the same way. Now the Chancellor has deliberately decided to take action concerning local authorities which, on the ground of equity, puts the statutory companies at a serious disadvantage.

Mr. Diamond indicated dissent.

Mr. Barber

It is no good the right hon. Gentleman shaking his head. This is the case. The one is to be relieved of taxation and the other is to pay Corporation Tax, with the taxation consequences that he outlined. It is the case that, at present, the statutory water companies are among the most efficient in the country. There has been a very considerable amount of rationalisation and amalgamation, and I have never heard any complaints about these companies by any Minister of Housing and Local Government since I have been a Member of the House of Commons. The right hon. Gentleman even went so far as to say that we were not concerned with the local authorities.

Mr. Diamond indicated assent.

Mr. Barber

The right hon. Gentleman nods. But this cannot be so, because one is bound, when considering the functions of statutory water companies and the functions of the local authority water undertakings, to consider also the treatment of the one as compared with the other.

Mr. Diamond

I am grateful to the right hon. Gentleman for yielding again. It would not make the slightest difference in the burden of taxation if the local authorities had to pay tax because of their interest position. No matter what one does to local authorities, it does not alter the situation of the companies to which the Amendment refers.

Mr. Barber

I do not accept that. I realise that local authorities are in a special position because of the way in which they are able to reduce their taxation position by setting off by one means or another. But there is the highly relevant point that the principal consequence of the Chancellor's proposal will be to increase the charges for water. The right hon. Gentleman says this is not a party matter because it affects large areas of the country. That, of course, does not make this a non-party matter. What makes it clear that this is a party matter is that the only hon. Members who have spoken in support of this Amendment have come from this side of the Committee. Conservative Member after Conservative Member has followed each other, and then at a later stage in the debate, the hon. Gentleman the Member for Orpington (Mr. Lubbock) said that he had come into the debate, as I understood it, not knowing very much about the argument, in order to make up his

mind, and was convinced by what we had said. I think this is the way in which the arguments would have affected anyone listening to this objectively and with an open mind. The fact is that at the end of the Chief Secretary's speech, he went so far as to say that the whole logic of this situation, so far as these companies were concerned under Corporation Tax, was, in his view, right.

The right hon. Gentleman has had plenty of time to consider the effect on these companies. He has not given us the slightest idea of what he thinks might be done, and he went out of his way to stress the single argument he could find for maintaining the position in the Bill. In those circumstances, I am bound to say I hope my hon. Friends will press this Amendment to a Division.

Question put, That those words be there inserted:—

The Committee divided: Ayes 135, Noes 146.

Division No. 181.] AYES [2.26 a.m.
Agnew, Commander Sir Peter Gilmour, Ian (Norfolk, Central) Monro, Hector
Alison, Michael (Barkston Ash) Gilmour, Sir John (East Fife) Morrison, Charles (Devizes)
Allan, Robert (Paddlington, S.) Glover, Sir Douglas Munro-Lucas-Tooth, Sir Hugh
Allason, James (Hemel Hempstead) Glyn, Sir Richard Murton, Oscar
Anstruther-Gray, Rt. Hn. Sir W. Goodhew, Victor Neave, Airey
Awdry, Daniel Grant, Anthony Noble, Rt. Hn. Michael
Baker, W. H. K. Gresham Cooke, R. Onslow, Cranley
Barber, Rt. Hn. Anthony Grieve, Percy Osborn, John (Hallam)
Barlow, Sir John Griffiths, Peter (Smethwick) Page, R. Graham (Crosby)
Batsford, Brian Grimond, Rt. Hn. J. Peel, John
Bell, Ronald Hall, John (Wycombe) Percival, Ian
Berry, Hn. Anthony Hall-Davis, A. G. F. Peyton, John
Bessell, Peter Hamilton, Marquess of (Fermanagh) Pounder, Rafton
Bingham, R. M. Hastings, Stephen Powell, Rt. Hn. J. Enoch
Blaker, Peter Hawkins, Paul Price, David (Eastleigh)
Box, Donald Heald, Rt. Hn. Sir Lionel Prior, J. M. L.
Boyle, Rt. Hn. Sir Edward Heath, Rt. Hn. Edward Pym, Francis
Brinton, Sir Tatton Hendry, Forbes Redmayne, Rt. Hn. Sir Martin
Brown, Sir Edward (Bath) Higgins, Terence L. Ridley, Hn. Nicholas
Bruce-Gardyne, J. Hirst, Geoffrey Ridsdale, Julian
Buck, Antony Hobson, Rt. Hn. Sir John Roberts, Sir Peter (Heeley)
Buxton, Ronald Hordern, Peter Roots, William
Carlisle, Mark Hornby, Richard Scott-Hopkins, James
Carr, Rt. Hn. Robert Hunt, John (Bromley) Sharples, Richard
Channon, H. P. G. Jenkin, Patrick (Woodford) Shepherd, William
Chataway, Christopher Johnston, Russell (Inverness) Sinclair, Sir George
Chichester-Clark, R. Kerr, Sir Hamilton (Cambridge) Smith, Dudley (Br'ntf'd & Chiswick)
Clark, William (Nottingham, S.) Kershaw, Anthony Steel, David (Roxburgh)
Cordle, John King, Evelyn (Dorset, S.) Studholme, Sir Henry
Corfleld, F. V. Kirk, Peter Summers, Sir Spencer
Crawley, Aidan Langford-Holt, Sir John Taylor, Edward M. (G'gow,Cathcart)
Curran, Charles Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield) Taylor, Frank (Moss Side)
Dalkeith, Earl of Longbottom, Charles Turton, Rt. Hn. R. H.
Davies, Dr. Wyndham (Perry Barr) Longden, Gilbert van Straubenzee, W. R.
Dean, Paul Lubbock, Eric Walder, David (High Peak)
Deedes, Rt. Hn. W. F. Mackie, George Y. (C'ness & S'land) Walker, Peter (Worcester)
Eden, Sir John McLaren, Martin Ward, Dame Irene
Elliot, Capt. Walter (Carshalton) Maclean, Sir Fitzroy Webster, David
Elliott, R. W.(N'c'tle-upon-Tyne,N.) Macleod, Rt. Hn. Iain Whitelaw, William
Emery, Peter Marples, Rt. Hn. Ernest Wilson, Geoffrey (Truro)
Errington, Sir Erio Mathew, Robert Wise, A. R.
Eyre, Reginald Maude, Angus Yates, William (The Wrekin)
Fell, Anthony Mawby, Ray Younger, Hn. George
Fletcher-Cooke, Charles (Darwen) Maxwell-Hyslop, R. J. TELLERS FOR THE NOES:
Fraser,Rt.Hn.Hugh(St'fford & Stone) Maydon, Lt.-Cmdr. S. L. C. Mr. Ian MacArthur and
Fraser, Ian (Plymouth, Sutton) Mitchell, David Mr. Jasper More.
Allaun, Frank (Salford, E.) Garrow, A. Miller, Dr. M. S.
Alldritt, Walter George, Lady Megan Lloyd Morris, Alfred (Wythenshawe)
Allen, Scholefield (Crewe) Gourlay, Harry Mulley,Rt.Hn.Frederick(SheffieldPK)
Armstrong, Ernest Gregory, Arnold Murray, Albert
Atkinson, Norman Grey, Charles Norwood, Christopher
Baxter, William Griffiths, Will (M'chester, Exchange) O'Malley, Brian
Bence, Cyril Hamilton, James (Bothwell) Oram, Albert E. (E. Ham, S.)
Benn, Rt. Hn. Anthony Wedgwood Hamilton, William (West Fife) Orbach, Maurice
Bennett, J. (Glasgow, Bridgeton) Hamling, William (Woolwich, W.) Paget, R. T.
Binns, John Hannan, William Palmer, Arthur
Bishop, E. S. Harper, Joseph Pannell, Rt. Hn. Charles
Blenkinsop, Arthur Hattersley, Roy Parkin, B. T.
Boston, T. G. Hazell, Bert Pentland, Norman
Bradley, Tom Heffer, Eric S. Prentice, R. E.
Bray, Dr. Jeremy Herbison, Rt. Hn. Margaret Pursey, Cmdr. Harry
Brown, Hugh D. (Glasgow, Provan) Hobden, Dennis (Brighton, K'town) Rees, Merlyn
Brown, R. W. (Shoreditch & Fbury) Horner, John Reynolds, G. W.
Buchanan, Richard Hughes, Emrys (S. Ayrshire) Richard, Ivor
Butler,Herbert (Hackney, C.) Irving, Sydney (Dartford) Robertson, John (Paisley)
Butler, Mrs. Joyce (Wood Green) Jeger, Mrs. Lena (H'b'n & St. P'cras, S.) Sheldon, Robert
Callaghan, Rt. Hn. James Johnson, Carol (Lewisham, S.) Shore, Peter (Stepney)
Carmichael, Neil Johnson, James (K'ston-on-Hull, W.) Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Coleman, Donald Jones, J. Idwal (Wrexham) Silkin, John (Deptford)
Conlan, Bernard Jones, T. W. (Merioneth) Silverman, Julius (Aston)
Corbet, Mrs. Freda Kelley, Richard Skeffington, Arthur
Crawshaw, Richard Kerr, Mrs. Anne (R'ter & Chatham) Slater, Mrs. Harriet (Stoke, N.)
Crosland, Anthony Lawson, George Small, William
Cullen, Mrs. Alice Ledger, Ron Snow, Julian
Dalyell, Tam Lee, Rt. Hn. Frederick (Newton) Steele, Thomas (Dunbartonshire, W.)
Davies, G. Elfed (Rhondda, E.) Lever, Harold (Cheetham) Strauss, Rt. Hn. G. R. (Vauxhall)
Davies, Ifor (Gower) Lipton, Marcus Thomson, George (Dundee, E.)
Dell, Edmund Loughlin, Charles Tuck, Raphael
Diamond, John Mabon, Dr. J. Dickson Varley, Eric G.
Dodds, Norman McBride, Neil Wainwright, Edwin
Dolg, Peter McCann, J. Walden, Brian (All Saints)
Driberg, Tom MacDermot, Niall Wallace, George
Duffy, Dr. A. E. P. McGuire, Michael Watkins, Tudor
Dunn, James A. Mclnnes, James Wells, William (Walsall, N.)
Dunnett, Jack Mackenzie, Gregor (Rutherglen) Whitlock, William
Edelman, Maurice Mackie, John (Enfield, E.) Wilkins, W. A.
Edwards, Robert (Bilston) MacMillan, Malcolm Williams, Mrs. Shirley (Hitchin)
English, Michael Mahon, Peter (Preston, S.) Woodburn, Rt. Hn. A.
Evans, Albert (Islington, S.W.) Mahon, Simon (Bootle) Woof, Robert
Fletcher, Sir Eric (Islington, E.) Manuel, Archie Wyatt, Woodrow
Fletcher, Raymond (Ilkeston) Mapp, Charles Yates, Victor (Ladywood)
Floud, Bernard Mason, Roy Zilliacus, K.
Foley, Maurice Maxwell, Robert
Foot, Michael (Ebbw Vale) Mayhew, Christopher TELLERS FOR THE NOES:
Freeson, Reginald Mellish, Robert Mr. Alan Fitch and
Garrett, W. E. Mendelson, J. J. Mr. William Howie.
The Minister without Portfolio (Sir Eric Fletcher)

I beg to move Amendment No. 561, in page 78, line 29, at the end to insert "and capital gains tax".

The object of the Amendment is to make it clear beyond all doubt that the exemption from Corporation Tax which this Clause confers on local authorities is to extend also to Capital Gains Tax. The Committee will appreciate that the Clause as it stands exempts local authorities from Corporation Tax. Clause 77 excludes local authorities, and of course companies, from the scope of the charge to short term gains tax imposed by the Finance Act, 1962, but Clause 77 does not impose tax at the special 35 per cent. rate, since this tax is imposed on a com- pany, and Clause 62 excludes local authorities from the expression "companies".

In view of the form of exclusion of local authorities from Corporation Tax under this Clause, it might have been argued that they were nevertheless subjected to the long-term Capital Gains Tax by Clause 18. That was not the intention, and the object of the Amendment is to make the position free from all ambiguity.

Mr. Temple

Those Members of the Committee who were here during the previous debate will remember that I asked the Chief Secretary about the position of a river authority with regard to Capital Gains Tax, but he dodged that question. I do not hold anything against the right hon. Gentleman for that, because it was not particularly relevant on that Amendment. Nevertheless, I had the permission of the Chair to bring the matter in at that time.

It will be within the knowledge of the Committee that for the purpose of this Clause, and for the purpose of this Amendment, a river authority is a local authority. It is only under the Water Resources Act, 1963, that river authorities, by reason of the fact that they are precepting authorities, are brought within the ambit of this Clause, and they now have two separate functions.

One set of functions is what I call their old functions, and the other is their new function with regard to water conservation. Under their conservation function, river authorities are charged with the construction of impounding reservoirs, and they will therefore have to buy large tracts of land to construct these impounding reservoirs.

If I understand the Amendment correctly, the effect of it will be to exempt from Capital Gains Tax that section of the accounts of a river authority which is devoted to the conservation functions. The conservation functions of a river authority are going to be financed entirely out of the water charges account, and that account has nothing to do with the functions which are financed through the precept. I am asking whoever is to reply to the debate to give a clear answer as to whether the Amendment is relevant to the impounding functions of river authorities.

I think that the Minister was here during the previous debate and will have heard my drawing an analogy between the impounding functions of a river authority, under its conservation powers, and the impounding functions which also exist for statutory water undertakings. I said that it would be extraordinarily difficult to value, for Capital Gains Tax purposes, the amount of land which was acquired either compulsorily or otherwise by a statutory water undertaking. [Interruption.] I have no objection to the amount of noise, so long as the Government Front Bench can hear what I am saying.

Mr. Maxwell

Out for a duck!

Mr. Temple

There is a definite similarity between the functions I have mentioned, and I therefore ask whether the two bodies will be similarly treated.

I would draw the attention of the Minister to the fact that it is extraordinarily difficult to deal with the properties of a statutory water undertaking. It is well known that it is a very complex problem to value those properties, because one has to take into consideration not only what is overground but what is underground.

For the avoidance of doubt I hope that the Minister will be able to clear up this point and say whether the conservation works of river authorities, and all that goes with them, will be exempted from Corporation Tax.

Sir Eric Fletcher

The Committee has already reached a decision with regard to water companies. Nothing that the hon. Member said arises on the Amendment. The object of the Amendment is to make it quite clear that local authorities are exempted from Capital Gains Tax as well as Corporation Tax. The hon. Member asked about certain river authorities. It would be more appropriate to deal with that question on the subsequent Amendments which relate to the definition of a local authority. If the hon. Member will look at subsection (2) he will observe that there is a definition of a local authority. He will also observe that there are two further Amendments in the name of my right hon. Friend the Chancellor of the Exchequer—Amendment No. 634, in page 78, line 40, after "applies", insert: as being an authority having power to levy a rate as defined in section 379 of that Act". and Amendment No. 688, in line 45, leave out "the commissioners of a town" and insert: any other body of which all or substantially all the members are elected by local government electors and which is established for public local purposes and has power to raise money for those purposes by rates leviable on the basis of assessments in respect of land". —which affect the functions of a local authority, about which I shall have something to say in a moment. The hon. Member may find that it is not possible to give a precise answer which is applicable to every case that he has in mind. Some river boards were constituted in one way and some in another. In the case of a particular river board it will be—

Mr. Corfield rose

Sir Eric Fletcher

I do not want to give way in the middle of a sentence.

The Temporary Chairman (Sir Harry Legge-Bourke)

I should be grateful if the Minister without Portfolio could assist the, Chair in this matter. As I understood it, the hon. Member for the City of Chester (Mr. Temple) referred to the question of a river authority and the effect of the Amendment upon such a body. As I understand the subsection to which the hon. Member is now referring, deals with any authority which has power to levy a rate. Can the right hon. Gentleman help the Chair by giving it guidance to this extent: is the power to levy a rate the sort of power which a river authority would have?

Sir Eric Fletcher

I am only too anxious to help the Chair in any way I can—

Mr. Temple rose

2.45 a.m.

Sir E. Fletcher

Perhaps I could be allowed to reply to the question which the Chair put to me. This Amendment seeks to—

Mr. Baxter

On a point of order—

The Temporary Chairman

The hon. and leaned Gentleman is in fact commenting on a point which I put to him. Therefore, it is not in order for the hon. Member for West Stirlingshire (Mr. W. Baxter) to interrupt. When that is completed, T am prepared to hear the hon. Member's point of order.

Sir Eric Fletcher

The answer to the question which you put to me, Sir Harry, is that the Amendment is intended to have general application to other local authorities insofar as it extends the exemption from Corporation Tax to exemption from Capital Gains Tax. That exemption will apply to every local authority. The question put to me by you, and, I think, by the hon. Member for the City of Chester (Mr. Temple) was whether a particular river board is or is not a local authority. You were perfectly right. The definition of a local authority is an authority which has power to levy a rate.

Mr. Corfield

On a point of order—

Mr. W. Baxter

On a point of order. I think that I am entitled, like other hon. Members of the Committee, to know what conversations are taking place between the Chair and someone else. I am entitled to know what is going on, and it is impossible, sitting here, to hear general conversations taking place at that end of the Committee. I should like to know what is going on.

The Temporary Chairman

The hon. Member is not the only person in some difficulty sometimes in hearing what is going on in this Committee. In so far as the point which I put to the hon. and learned Gentleman is concerned, I was, fortunately, able to hear his reply, which was rather important, in view of the fact that there was a question of whether or not the hon. Member for the City of Chester's speech had been in order. I am now satisfied that it was in order and I should therefore be grateful if the hon. Member who wishes to put a further point of order would now put it.

Mr. Barber

I should like to make one point which is of considerable significance, in view of what the Minister without Portfolio has said. My hon. Friend the Member for the City of Chester (Mr. Temple) raised the question of river authorities generally in England and Wales on the previous Amendment. If I may say so with respect, he has made much the same speech again on this Amendment because he did not get a reply on the earlier one. I certainly expected that the Minister without Portfolio would reply on this Amendment, but he has just suggested that he might give a reply on the next two Amendments, which are Nos 634 and 688.

Those two Amendments are concerned with subsection (2) paragraphs (b) and (c), respectively. Paragraph (b) is concerned solely with Scotland and paragraph (c) solely with Northern Ireland. I should not like to reach the position—I am sure that the Committee would not—in which a reply to my hon. Friend on those Amendments would be out of order. I understood you, Sir Harry, to say that his speech was in order on this Amendment. I hope that we can get a reply now and get on with our business.

The Temporary Chairman

If it were the wish of the Committee in general to discuss these other two Amendments together with this one, the Chair would have no objection, but it is entirely a matter for the Committee.

Sir Eric Fletcher

On that point of Order. Would it be more appropriate to discuss this matter in a debate on Clause stand part? [HON. MEMBERS: "No."] May I, with great respect, submit that if we are to have a debate about whether any particular river board or other organisation is a local authority within the—

Mr. Corfield rose

Hon. Members


The Temporary Chairman

Order. I understood that the hon. and learned Gentleman was himself rising on a point of order. Therefore, it must not be interrupted until it is completed.

Sir Eric Fletcher

I am submitting to you, on a point of order, Sir Harry, that the purpose of this Amendment is of very narrow compass indeed and is intended merely to provide that all local authorities to which the Clause applies shall be exempt from Capital Gains Tax as well as from Corporation Tax—

The Temporary Chairman

Order. I understood that the hon. and learned Member rose originally on a point of order. It now seems to be part of a debating speech. Perhaps he would make it clear that he is speaking on a point of order and addressing the Chair.

Sir Eric Fletcher

My point of order is that if hon. Members wish to raise questions about whether or not particular organisations come within the definition of a "local authority", it would be a much more appropriate matter to be debated on the Question, That the Clause stand part of the Bill.

The Temporary Chairman

If I may say with all respect to the hon. Gentleman, that case could be sustained if Mr. Chancellor of the Exchequer did not have Amendments Nos. 634 and 688 on the Notice Paper, which will raise this very issue before we come to the Question that the Clause stand part. I therefore think that it is for the Committee now to decide whether, in view of those other two Amendments on the Notice Paper, the Committee would find it convenient to discuss all three Amendments—this one and the other two—together. If that is the wish of the Committee, the Chair is quite prepared to allow it.

Sir Eric Fletcher

If that is the wish of the Committee—

Hon. Members


Mr. Edward M. Taylor (Glasgow, Cathcart)

On a point of order. If I may say so, Sir Harry, Amendment No. 634 raises an issue of a particularly Scottish nature, and I think that the Scottish view is that it would be most inappropriate to discuss it with any general question.

The Temporary Chairman

I am sorry, but because of the reaction of the Committee to the hon. Member's remarks I was unable to hear them completely. Will he kindly repeat them?

Mr. Taylor

The point of order I was trying to put was that in the view of Scottish Members, Amendment No. 634 raises a point of a particularly Scottish nature which it would be inappropriate to consider with any general question.

The Temporary Chairman

That may well be, but the fact remains that it raises the question of local authorities and what is meant by "local authorities." Therefore, as those other two Amendments will be called in due course, it is inevitable that the issue of what is a "local authority" will be raised before we come to the Question that the Clause stand part.

The Minister without Portfolio suggested that it would be better to wait for the Question that the Clause stand part before dealing with this matter at all, but in reply to his point of order I have pointed out that because of the two Amendments standing in the name of the Chancellor of the Exchequer it is inevitable that we shall get on to the subject before we reach that stage. I should therefore be grateful to have some guidance as to whether or not it is the wish of the Committee to discuss all three Amendments together.

Hon. Members


Mr. Temple

As it appears that, possibly due to the ensuing noise, I was not able to make myself perfectly clear to the Minister without Portfolio, perhaps I may be permitted to try again, because this is the Government's own Amendment, which seeks to give exemption from Capital Gains Tax to local authorities.

I would remind the hon. Gentleman of the definition of a "local authority" because, with all due and proper respect to him, he did not get it quite right. He is quite right in saying that a local authority is an authority which has the power to levy a rate, but the definition also includes an authority which has the power to precept. River authorities do not have the power to levy a rate, but they do have the power to precept. The simple question I put was: does this Amendment, in fact, cover what I would call the water conservation powers of a local authority, which are entirely separate, from the ordinary point of view, from the erstwhile function of the river boards, and were added during the passage of the 1963 Water Resources Act.

The question is a perfectly simple one, and I hope that he will answer it. I must say that I do not think that I have ever been faced with a situation in which I have asked a perfectly simple question and not had an answer. The Chief Secretary to the Treasury acknowledged that I was on rather a difficult point when I raised it during our debate on the previous Amendment, but I submit that as I then raised it, the Government have had full warning so they must have information at hand. It is not a terribly difficult question, and if I do not get it answered I shall, unfortunately, draw the conclusion that the Government have entirely run out of steam tonight. I very much hope that they have not run out of steam and will give me a suitable reply.

Mr. Corfield

Could we suggest, in order to try to help the Government, that the Parliamentary Secretary to the Ministry of Land and Natural Resources should reply? He knows about these things and it is quite clear that the hon. Gentleman does not. The Minister without Portfolio said that the constitutions of the river authorities vary. They do not—the authorities were all set up under the one Act and are precisely the same. My hon. Friend the Member for the City of Chester (Mr. Temple) is entitled to an answer, if only because of the fact that he had the courtesy to raise the question earlier so that the Chief Secre- tary could send the little man to the Box to get the answer.

Is it not time that the Minister without Portfolio got up and answered, or at least had the courtesy to say that it is a difficult point and he will write to my hon. Friend, or even find out that answer and let us know later? [Interruption.]

The Temporary Chairman

Order. If the Parliamentary Secretary to the Ministry of Health (Mr. Loughlin) wishes to raise a point of order, I wish he would do so and not try to carry on a private conversation with the Chair.

The Parliamentary Secretary to the Ministry of Health (Mr. Charles Loughlin)

I was questioning whether it was in order for hon. Members of this House to refer to an hon. Member as a "little man who runs to the Box".

The Temporary Chairman

As far as descriptions which hon. Gentlemen give of each other to the House are concerned, it is normal for an hon. Member to refer to another as an hon. Member and only as an hon. Member. I always feel that when any variation from that takes place it can always be misconstrued. I am not prepared to consider what the hon. Member meant by that. I hope in future hon. Members will refer to other hon. Members as hon. Members.

Hon. Members


Mr. Corfield

May I make it clear that I meant absolutely nothing derogatory at all to the Parliamentary Private Secretary. What I intended to suggest was that the Government should try to find the answer. I think that ought to have been done.

Mr. Barber

My hon. Friend the Member for City of Chester asked a perfectly straightforward question. It was this: in view of the fact that the whole purpose of this Amendment is to relieve the local authorities from charge to Capital Gains Tax and, in view of the fact that for reasons mentioned by my hon. Friend river boards are in the same position as local authorities and are therefore apparently exempt from Capital Gains Tax, what is the position with regard to certain of their functions that are somewhat similar to the functions of a statutory water company? It is a perfectly simple question.

I can understand that it may be that the Minister without Portfolio does not know the answer. What I cannot understand is why, when my hon. Friend has made his speech twice and given notice, the Minister without Portfolio simply sits in his place. If he would care to get up and say that he does not know the answer now but he will look into it, this we would understand. If he continues to sit in silence I can only advise my hon. Friends to vote against the Amendment.

Mr. Callaghan

I hope that the right hon. Gentleman will not vote against it, because what he would be voting against would be a clarification without which there might be some doubt about local authorities being chargeable for Capital Gains Tax. That would not be a very effective form of protest. We are discussing the general question. I agree that the question is deceptively simple. It is clarity itself. But I regret to say we do not know the answer. It is one of those questions to which we have not been able yet to find the answer in spite of all the feverish researches that have been going on. I do not think I can give the answer now, but we will look into that esoteric point and give the answer to the hon. Gentleman in due course.

Mr. J. E. B. Hill (Norfolk, South)

While the right hon. Gentleman searches for the answer, will he consider whether an internal drainage board which levies drainage rates and is in a sense below a river authority is also a local authority?

3.0 a.m.

Mr. Callaghan

There is no limit to the ingenuity of hon. Gentlemen opposite, if they wish to pursue these questions, to raise abstruse issues, on which we will do our best to supply the answers in due course. I am very glad to be able to do so. However, the hon. Gentleman will be glad to know that, in response to his question, I can give him an affirmative answer. As regards water authorities, Section 87(4) of the Water Resources Act enables river authorities to precept local authorities, and they are, therefore, local authorities themselves.

Amendment agreed to.

Mr. Temple

I beg to move Amendment No. 325, in page 78, line 36, after "committee", to insert "or association".

The Amendment is in the names of hon. Gentlemen on both sides of the Committee, including the hon. Member for Southall (Mr. Pargiter). I am sorry that the hon. Member seems to have given up the chase in search of aid for local authorities. Earlier he and I had teamed up, but I think that he may have been a little disgruntled by the rather dusty replies from the Government Front Bench. I do not know whether that is why he is not here tonight.

The object of the Amendment is simple, to put the local authority associations in exactly the same position as local authorities with regard to Income Tax, Corporation Tax and Capital Gains Tax. It is, naturally, supported by all the local authority associations, and I would associate with that the Association of River Authorities, which, within the meaning of the Clause, is a local authority association.

I am not terribly optimistic that the Government will accept the Amendment because I have noticed a tendency to penalise associations of persons when individuals escape new forms of taxation. I noticed that when the Government were dealing with the position of the local authorities' mutual investment trust, although individual local authorities would have been able to take advantage of investing in a certain manner, once they became collective they were debarred from having that advantage. With regard to unit and investment trusts, as soon as people band together the Government do not seem to accept the same rules for them as for individuals.

This is exactly the same position. Local authority associations are purely organisations which derive their funds from the individual local authorities. There seems no reason why they should not be treated in exactly the same way for taxation purposes. I remind the Government that local authority associations are invaluable to all Governments of whatever party. They are entrusted with the task of negotiating very delicate subjects with regard to taxation and local authority finance. Every form of negotiation that takes place between the central Government and local government is normally conducted through local authority associations. Recognising their extreme value, and recognising that they are purely individual local authorities banded together for the purpose of putting a point of view, I see no reason why they should not be treated in exactly the same way for taxation purposes as those authorities which are providing their revenue.

The amount of tax which local authority associations are paying at present is small. It is mainly tax on their reserve funds. Those funds have been built up out of the subscriptions of local authorities. If the Government do not accede to this Amendment there will be a very simple way for local authority associations to avoid the tax which would otherwise fall upon them. They could do that eittier by deficit finance and by never having any reserve funds at all, or alternatively they could allow their reserve funds to be kept by an individual local authority. It is not for me to suggest how they could avoid paying this tax, but they could run on no accumulated balance and close their accounts with no profit or loss from year to year, and no tax whatsoever would be attracted.

I hope the Government will see the logic of this case and will seek to give the local authority associations exactly the same status for tax purposes as the individual local authorities have. I think this is a much simpler Amendment than those with which we have dealt recently.

Sir Eric Fletcher

I naturally approach this Amendment with a good deal of sympathy because I was until recently a vice-president of the Association of Municipal Corporations, and I share with the hon. Member for the City of Chester (Mr. Temple) and with my hon. Friend the Member for Southall (Mr. Pargiter), who unfortunately could not be here this morning, the admiration of the work which is done by these local authority associations.

I agree with the hon. Member that there does not seem to be any great princip'te involved in this matter. But I do not think I can agree with him that considerations of logic can be called in aid in support of the Amendment, merely because local authorities are exempt from Corporation Tax. These organizations can by no stretch of the imagination be called local authorities or can be embraced within the definition of local authorities as set out in the Clause.

I appreciate the fact that the work that these organisations do is of a very worthy kind, and is limited to rendering a useful service to local authorities, and it seems to me and my right hon. Friend the Chancellor of the Exchequer that to concede this Amendment would not involve any breach of a serious principle. So far as we can see, it would not lead to any undesirable repercussions. The amount involved is obviously small. There would, as the hon. Member observed, possibly be ways in which, if the Amendment were not conceded, these local authority organisations could circumvent the tax.

In those circumstances, I am authorised to say that if the hon. Member and those who support the Amendment will withdraw it—I do not think it is quite apt to give effect to the object which we all desire—I will undertake between now and Report that my right hon. Friend will put down appropriate Amendments to meet the point.

Dame Irene Ward (Tynemouth)

I also happen to be a vice-president of the Association of Municipal Corporations, and I thought that I would add my support to the Amendment.

I was delighted to hear the attitude of the Minister without Portfolio and of the Chancellor of the Exchequer, but I am a little surprised that on an Amendment which the Minister without Portfolio described as very simple and proper, it should be necessary to wait to have the matter re-dealt with on the Report stage. All the Ministers concerned with this Bill seem to want double flanking. They never seem to be able to speak for themselves straight away. I do not know whether they have to consult Dr. Kaldor. It may well be that the Amendment does not exactly fit what the Minister without Portfolio has in mind, but in a matter of this kind, having regard to the position which the Minister shared with myself and other Members, the Government might have acceded to our request straight away tonight without adding to the Committee's work on Report.

I wish that occasionally the Government would act straight away when something is acceptable to them. We just go on and on—talk, talk, talk. [HON. MEMBERS: "Hear, hear".] If some hon. Members opposite did a little more talking in support of the reasonable Amendments put forward from this side of the Committee, this would be a much better Bill than it is.

Although I very much welcome the Ministers' attitude, it is a pity that they did not do their homework so that they could gracefully accept the principle of the Amendment without making us work all over again. They might then have had the chance of making this appear to be their idea instead of that of my hon. Friends.

Mr. Temple

I am extremely obliged to my hon. Friend the Member for Tyne-mouth (Dame Irene Ward) for her very timely support. I am extremely grateful that the Amendment has found favour with the Government. I appreciate that the Government draftsmen always like the last word, and I well understand that it will be necessary to put our proposal into acceptable terminology on Report. I am glad that the Government have acceded to the principle of our Amendment, which, as they say, possibly does not have the strength of logic behind it, but which certainly has common sense and equity behind it.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Sir Eric Fletcher

I beg to move Amendment No. 634, in page 78, line 40, after "applies", to insert: as being an authority having power to levy a rate as defined in section 379 of that Act". Perhaps it would be convenient to discuss at the same time Amendment No. 688—page 78, line 45, leave out "the commissioners of a town" and insert: any other body of which all or substantially all the members are elected by local government electors and which is established for public local purposes and has power to raise money for those purposes by rates leviable on the basis of assessments in respect of land". As I have already indicated, both Amendments are designed to clarify the definition of "local authority" in subsection (2) of the Clause.

The first Amendment relates to Scotland and is required in order to exclude from the definition of a local authority the Scottish Gas and Electricity Boards, which are akin to nationalised industries and which, therefore, should not benefit from the tax exemptions conferred by the Clause.

On the other hand, Amendment 688 is required to bring the Belfast City and District Water Commissioners within the definition of "local authority". The language involved in this Amendment is somewhat circuitous because that authority is not wholly elected but has two ex officio members on it. The funds of the Commissioners are partly derived from rates, and they are classed with local authorities in a number of Northern Irish Statutes and, therefore, should be brought within the definition of "local authority".

3.15 a.m.

Mr. Corfield

I wish to put the parallel case of the Clewedog Water Authority. I am glad the Government have realised the existence of the Belfast Water Commissioners. As the Minister said, the Amendment is necessary because of the rigid way in which the Clause is drafted.

We have the absurd situation in which we have the Great Ouse Water Authority and the Clewedog Authority, both of which are made up of a number of public water undertakers which happen to include one or two companies. They are, therefore, ruled out of the benefits which the Clause seeks to give to the local authorities as defined in the Bill. This underlines, first, the stupidity of the distinction which the Clause draws and, secondly, the arguments which we adduced on earlier Amendments for including the water companies, which are totally different from ordinary companies. It seems absurd that the Clause should exclude water companies from the benefits merely because they are different. I welcome the Amendment and hope that the Government will see the stupidity of excluding Clewedog and Great Ouse.

Mr. Edward M. Taylor

I had prepared a considerable speech on the sub-jest covered by Amendment No. 634, for I had anticipated that the Government would not be prepared to change the application of the Clause. It appears, however, that a change in the application of the exemption procedure has beeen made.

I was amazed to hear the Minister say that the Amendment was designed merely to clarify the situation, for bearing in mind the provisions contained in the Local Government (Scotland) Act, 1947, if the hon. Gentleman feels that this is simply clarifying the situation—by excluding the Scottish Gas Board and Scottish Electricity Board—I suggest that he has not considered certain other things. No doubt my hon. Friends who re present Scottish constituencies will have more to say on this issue. The hon. Gentleman should have considered many other matters in relation to the scope of the Corporation Tax and the general exemption of local authorities. I have one case particularly in mind, but my hon. Friend the Member for Aberdeenshire, West (Mr. Hendry) will raise it later.

In Section 270 of the 1947 Act there is a definition of "a local authority". It refers to an authority which has the power to levy a rate and is given the power to create redeeemable stock. Section 270(4) of that Act points out: For the purposes of this section the expression 'rate' includes not only a rate as defined in … this Act but also water rates or rents, gas or electricity rates or rents and charges for the supply of water, gas or electricity or the hire of meters or fittings connected therewith. If, as the Government are now suggesting, we should take the definition as contained in Section 379 of the 1947 Act, then we have a restricted indication of what is meant by the word "rate", for that Section defines the word as follows: … any rate, charge and assessment the proceeds of which are applicable to public local purposes and which is leviable in respect of lands and heritages". One major statutory organisation which the Government may not have had in mind is the Highlands and Islands Development Board. What are the implications of the Corporation Tax on that body? Not only the Board itself. What about any kind of business undertaking which the Board might set up under the Highland Development (Scotland) Bill? This is a serious situation which the Government must consider. These undertakings are being set up in the Highlands to carry on normal business activities, financed by the Government, yet they are to be subject to the full rigours of the Corporation Tax and the Capital Gains Tax. I can only suppose that the Government did not have that in mind when making this simple change.

This is not the first time the Government have shown a lack of appreciation of Scottish law. The Amendment is not just a drafting matter. Apparently, the Government have not taken the trouble to read all the provisions of Section 270 of the 1947 Act, which was one of the principal Acts in Scotland. It is alarming to note that no one from the Scottish Office is present, but I suppose that we ought to be used to this sort of thing. The Government are having difficulty in obtaining Scottish Law Officers, but, in the absence of Scottish Law Officers, they have an obligation to examine with special care all matters affecting Scottish legislation. We have been completely taken aback. We considered that there was here a major change of policy, yet we find that the Government did not take the trouble to read the previous Act. It is not just confusion; they have completely ignored the provisions which really matter.

Mr. Forbes Hendry (Aberdeenshire. West)

This is an extraordinary state of affairs. The Government are proposing legislation which will affect Scottish local authorities, but no Scottish Minister is present, and it is quite evident that no Scottish Minister was consulted. The Minister without Portfolio said that the Amendment was necessary to exclude the exemption of the Scottish Gas and Electricity Boards, but it goes a great deal further than that. Without the Amendment, the British Waterways Authority, which comes within the scope of "local authority" as originally defined, would have been exempt from all these taxes. But, be that as it may, I am most concerned about the Clause as amended because the Government have shown utter ignorance of the Scottish local authority structure.

There will be a completely muddled situation as regards Scottish water authorities. Certain water authorities in Scotland are local authorities under the new definition. For instance, Glasgow Corporation is its own water authority. But there are a great many joint water authorities which have riot power to levy a rate and which, therefore, do not come within the definition of local authority for the purposes of the Clause. If the Amendment is accepted in its present form, some local authority water undertakings in Scotland will be exempt from taxation and others will not.

The same applies to drainage authorities and to fire authorities. Fire brigades are generally organised not by an individual local authority but by a combination of local authorities, and that combination of authorities does not have power to levy rates. Generally speaking, police authorities in Scotland are in the same position.

The position as regards cemeteries in Scotland will be quite extraordinary. Cemeteries are usually run by local authorities, but a great many are run not by a single authority but by a combination of local authorities. These combinations of local authorities will not be rating authorities and will not therefore be exempted from this tax. A cemetery which is run by a combination of local authorities will presumably make a profit out of interments and digging graves on which they will have to pay tax. There will be an extraordinary state of affairs in which in certain areas in Scotland it will be much more expensive to die. This may sound amusing, but it is a practical point on which the Government has not been advised. It is deplorable that there is no Minister from the Scottish Office present when matters of this importance are being discussed.

I suggest to the Minister without Portfolio that this Amendment as drafted is complete and utter nonsense. He should take it away and produce a better one after he has received proper advice.

Mr. Barber

There is just one small point which I would like to raise with the Minister without Portfolio. Section 171 of the Income Tax Act, 1952, which is concerned with the application of the interest payable by local authorities, contains a definition of a local authority. In Section 171 (4, c) appear words which are identical with those in Subsection (2) (iii) of this Clause, with one exception. The words "an education authority" appear in the 1952 Act but do not appear in this provision. Amendment 688 is to deal with the case of the Belfast City and District Water Commissioners. The hon. Gentleman said nothing about education authorities, and it does seem a little odd as in the 1952 Act there was a definition of local authorities which has been embodied in toto into this Clause.

We are entitled to some explanation as to why education authorities have been left out. I appreciate that the Minister may not have the answer immediately to hand, and if he has not we will understand but hope that he will understand that the best way of dealing with the matter would be to put down an Amendment on Report to include these words.

Sir Eric Fletcher

I will deal, first, with the point raised about Northern Ireland. I think the Committee will agree that it was right to put down this Amendment in order to deal with the case of the Belfast City and District Water Commissioners, who obviously should be brought within the terms of the exemption granted under the Clause. I had not noticed the distinction to which the right hon. Gentleman drew my attention between the definition of a local authority in Northern Ireland as laid down in Section 171 (4) of the Income Tax Act of 1952 and the definition in the Bill. I cannot say whether there is any significance in the distinction or whether it was deliberate, but I will look into it.

Both the hon. Member for Aberdeenshire, West (Mr. Hendry) and the hon. Member for Glasgow, Cathcart (Mr. Edward M. Taylor) referred to the Local Government (Scotland) Act, 1947, and suggested that the effect of Amendment 634 must be to produce certain consequences which we had not foreseen. All I can say is that between now and Report the Government will see whether the proposed Amendment has any unforeseen consequences.

3.30 a.m.

All the Government are seeking to do in this matter is to ensure that the words are used to secure an appropriate definition of a local authority so that public authorities will have the exemption from Corporation Tax and bodies that are not public authorities will not have it. It is important to get the right words of definition, and I think that we are all conscious in these matters that the law of Scotland does not follow the law of England. That is why the definition of a local authority varies according to whether it is applicable in England, Scotland or Northern Ireland. We are anxious to get the matter precisely right and we will look into it fully between now and the Report stage.

The hon. Member for Gloucestershire, South (Mr. Corfield) referred to the question of the Great Ouse undertaking. I am not sure which side of the line that falls, but we will look into the matter again between now and Report.

Mr. Corfield

These are, so to speak, wholesale water undertakings. This is a combination for the bulk supply of water, not direct to the consumers. Bath appear to be ruled out, and it seems an absurdity. I will be grateful if the hon. Gentleman will look at it again.

Amendment agreed to.

Further Amendment made: In page 78, line 45, leave out "the commissioners of a town" and insert: any other body of which all or substantially all the rnembers are elected by local government electors and which is established for public local purposes and has power to raise money for those purposes by rates leviable on the basis of assessments in respect of land".—[Sir Eric Fletcher.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Temple

At a late hour last night the Chief Secretary claimed that the Bill was a masterpiece of logic and clarity. All I can say is that he has, at least on this Clause, succeeded in baffling the local authorities and most of the Committee. I therefore ask only the simple question—all my questions are simple—about the position of local authority superannuation funds. Are the investment incomes of these funds, whether approved or not, exempt from all taxation under this Clause?

Mr. Barber

Perhaps I can raise a more general question. This is the first opportunity we have had of considering this very important Clause as a whole. It raises matters both of commercial importance and of equity as between one trader and another, and so that my hon. Friends and I may consider the position before the Report stage and whether we wish to amend the Clause I ask the Chief Secretary whether I am right in my understanding of the consequences of the Clause.

I start from the following propositions, which I think that all must accept. First, local authorities are already engaged in a considerable number of trading activities, such as catering, direct building and transport. Secondly, it is the avowed policy of many Labour-controlled councils to extend the trading activities of local authorities. Thirdly, many such trading activities are in direct competition with private enterprise.

So that we may consider the matter further before Report, let me put the position under the Clause as I understand it. Firstly, if a local authority engages in a trade within the scope of Case One of Schedule D, then, although it may be in direct competition with a sole trader or a partnership or company carrying on the same trade, that local authority will be exempt from the Income Tax payable by the sole trader, or the partnership and exempt from the Corporation Tax payable by the company. Secondly, my understanding of the Clause is that if the local authority, as an incidence of its trading activities, makes a capital profit, it will be exempt from the Capital Gains Tax, whereas the sole trader the partnership, or the company carrying on the same trade and making a similar capital profit would be liable to Capital Gains Tax, or Corporation Tax in respect of that capital profit.

I pose these very general questions and would like to know from the right hon. Gentleman the Minister without Portfolio whether I have understood the purport of this Clause correctly. Whatever the merits may be, it cannot be gainsaid by anyone considering this matter seriously that a most important principle is at stake here. So that we may consider the matter further before Report, I hope the hon. Gentleman will help us by telling us whether the propositions I have put forward are correct.

Sir Eric Fletcher

I entirely agree with the right hon. Gentleman the Member for Altrincham and Sale (Mr. Barber) that before the Committee parts with this Clause it should understand the reasons that lie behind it. The right hon. Gentleman in his analysis has stated with substantial precision the effect of the Clause. The Clause is designed to relieve local authorities from Corporation Tax. This may be the first opportunity the Government Bench has had to explain why this is proper. In substance no difference is produced by this Clause from the existing position, although in form there is a difference.

Local authorities, like any other corporations, have previously been theoretically liable to both Income Tax and Profits Tax on their trading profits, but in fact local authorities have been able to set off against their trading profits, any interest they pay on borrowed money. The result is that very few local authorities have ever been called upon to pay any Income Tax or Profits Tax at all. In a recent statistical investigation which was undertaken it has been shown that only 8 per cent. of all United Kingdom local authorities pay any net Income Tax liability on their own account. Similarly, only 4 per cent. of local authorities had any Profits Tax liability.

Therefore, although there is, by reason of this Clause, a change in theory, there is very little change in practice. The reason why my right hon. Friend the Chancellor has thought it proper to let the theory correspond with the practice is that under the existing system a great deal of unremunerative work and time is involved, both on the part of the Inspectors of Taxes and on the part of borough treasurers of local authorities in order to determine whether, in the case of a large number of authorities, there is any tax collectable or not. It is obviously desirable to reduce the unnecessary administrative work involved and for this reason, and bearing in mind that the amount of revenue collected from local authorities in those few marginal cases is extremely limited, we thought the sensible thing to do was to provide once and for all, that local authorities should be exempted from Corporation Tax.

Mr. Barber

I wonder whether the hon. Gentleman happens to know the amount of revenue involved. He gave us some interesting figures about percentages of local authorities. If he could give us the further information it would help us to consider this matter in an intelligent manner.

Sir Eric Fletcher

The figure was given by the Financial Secretary. I think I am right in saying he indicated in the debate on the Budget Resolutions that the amount at stake would be about £¾ million. I think perhaps I ought to have added that the position being as it was when local authorities were theoretically liable to Income Tax and Profits Tax, of course now that Corporation Tax is being substituted for those two taxes it makes it all the more sensible that we should adopt this new method.

Mr. Corfield

I wonder whether the Minister could clarify one point. He gave figures referring to local authorities, and I am not sure whether they were local authorities in the narrow sense in which we normally use the term or whether he was using the term in the very wide sense in which it is used in this Clause. It is obviously important, especially in relation to the debate this evening, to know whether the term applies to joint boards and other associations of local authorities which operate water companies. If the Minister referred only to local authorities themselves, then the figures are really rather meaningless.

Sir Eric Fletcher

I do not think the figures are meaningless at all. The figures indicate quite clearly that the number of local authorities which pay any Income Tax is only 8 per cent. of all United Kingdom local authorities.

Mr. Corfield

Authorities under which definition? That is what I am asking.

Sir D. Glover

Are they water undertakers?

Mr. Temple

I am very disappointed that Ministers have failed to make any comment on the question I put to them. It is not a difficult question. It was the subject of an Amendment on the Paper, but it was not selected; but it is a perfectly fair question, and I think Treasury Ministers should make some effort to reply to the question whether superannuation funds of local authorities will be exempt from tax.

Sir Eric Fletcher

I apologise to the hon. Member. The answer is quite simple. It depends whether they are approved or not. If they are approved, they are. If they are not approved, they are not.

Sir D. Glover

I wonder whether I could have your guidance, Sir Samuel. I have sat through almost the whole debate in this Committee today, and I am becoming increasingly worried that we are going through a process in detail of passing Amendments or rejecting Amendments to this Bill when the whole process of Parliament is that you, Sir Samuel, are supposed to be presiding over a Committee which knows what it is doing, and the only—

The Deputy-Chairman

This does not seem to be a point of order at all.

Sir D. Glover

With the greatest respect, Sir Samuel, anybody in the Chair in a Committee of the House is supposed to be presiding over a Committee which is dealing with legislation. We are dealing today with legislation which is going to affect 48 million people in this country. The Minister without Portfolio, upon this Clause, has said three or four times that he does not know the answer 10 the points we have made—

The Deputy-Chairman

Order. That is not a point of order. The Question is—

Mr. William Clark

Could I ask the Minister without Portfolio one very simple question? He seemed to base his answer to my right hon. Friend's various points on the fact that this was only going to cost £¾ million in taxation of major local authorities and that the amount of administrative work put on inspectors of taxes and local authorities was quite nominal and not worth the collection of £¾ million. This was the burden of his argument.

3.45 a.m.

What extra administrative work will be put on local authorities? If they run a trading activity, presumably they keep an account of it, whether it is a café in a park, or a swimming bath somewhere else, or whatever the trading activity may be. They know what their profit or loss is on any particular department. They know precisely how much interest they are paying on various local loans. As far as the Inland Revenue is concerned, it is easy, provided that the accounts have been properly audited, and provided the proper apportionments have been made with regard to overhead expenses, to say, "This department or this trading activity has made £10,000". The accounts will show this, and all that one sets off is the interest payable, and that reduces the amount of tax. What does the hon. Gentleman mean when he says that a loss of revenue of £750,000 is not worth the administrative trouble of collecting it?

Sir Eric Fletcher

Being a chartered accountant of repute, the hon. Gentleman knows as well as anybody that for tax purposes a totally different set of accounts have to be prepared. If one is going to submit accounts to the inspector of taxes, they have to be prepared in a different way.

Mr. Edward M. Taylor

Is it a fact that under this Clause business enterprises operated by a local authority will be exempt from Corporation Tax but a business set up by the Highland Development Board will be liable to the full rate of the tax?

Hon. Members


Mr. Geoffrey Lloyd

May we have an answer from the Treasury Bench? Can we give them more time to think about this by continuing to press the queston? Or are they totally without resources?

Sir D. Glover

On a point of order. During the Committee stage of a Bill the Committee is supposed to hear arguments from both sides and then reach a conclusion. It is impossible for the Committee to reach a decision when the Government say that they do not know the answer to the questions which they are being asked.

The Deputy-Chairman

I have ruled that that is not a point of order.

Mr. Baxter

The Bill which the hon. Member for Glasgow, Cathcart (Mr. Edward M. Taylor) has in mind, the Highland Development (Scotland) Bill, is not yet on the Statute Book. It comes up for consideration tomorrow, and it may be that the House will reject it. The hon. Gentleman is, therefore, considering a hypothetical case. Until that Bill is on the Statute Book, the matter referred to by the hon. Gentleman does not arise.

Mr. Edward M. Taylor

This is a serious matter. The Bill in question has been given a Second Reading and has been considered in Committee. It proposes to set up a Highland Development Board, and presumably other bodies will be set up in the future. The Corporation Tax will not come into operation this year. The Highland Development Board will come into existence long before the Corporation Tax comes into effect.

Is it the case that a local authority enterprise is to be exempt from this tax while a similar enterprise, perhaps next door, operated by the Highland Development Board is to be subjected to the full rigours of the Corporation Tax? It is a simple question to which we must have an answer before we can accept the Clause.

Mr. Barber

It would help us to conclude our work on this Clause if we could have an answer from the right hon. Gentleman. I was saying that I thought it would help us if we could have an answer—if the hon. Member knows it. If he does not know it, I understand the position quite well, but at least he might do the Committee the courtesy of rising and saying that he does not know the answer, and cannot find it in time.—We should then understand, and proceed with the Bill. I would certainly understand, and I think that my hon. Friends would. But over and over again we have had this business of questions being put to Ministers and Ministers remaining silent. This is the Committee stage, and we are entitled to some answer.

I say, in the presence of the Chancellor, that I do not propose to adopt the attitude which, when I was a junior Minister of the Treasury, was repeatedly proclaimed from this Dispatch Box, that if answers were not forthcoming proceedings would have to go on a little longer. We have not proceeded in that way in this Committee so far. I beg the Minister simply to tell us whether he knows the answer. If he does not we shall understand and, I hope, agree to the Clause immediately.

Sir Eric Fletcher

I cannot help thinking that these observations are facetious. I have already said quite plainly on an earlier Amendment, that between now and Report I will consider the implications of the definition of "local authority" in relation to Scotland and all Scottish bodies in order to see whether any alteration is required in that definition. It must be quite obvious that that includes the Highlands and Islands Development Board, which is under discussion in a Bill coming up for Report later today.

Sir John Eden (Bournemouth, West)

I am not very happy about agreeing to the Clause in this situation. Although the hon. Gentleman has given us an explanation and has undertaken to consider the matter further, at this moment we are being asked to pass the Clause and have it written into the Bill. I am slightly alarmed by the opportunities which the Clause will bestow upon local authority activities. Recently we have seen efforts to extend local authority trading. I do not know where this is likely to end. It is possible that local authority activity will broaden into fields hitherto untried. If so, local authorities will have a substantial advantage over individual private companies trading and operating in the same field of activity. [Interruption.] If the Chancellor wishes to say something, perhaps he will rise.

Mr. Callaghan

If the hon. Member feels that way he should vote against the Clause.

Sir J. Eden

The right hon. Gentleman is treating the Committee exceedingly superciliously. He has shown no courtesy whatsoever in our proceedings and it ill becomes him to adopt a slightly offended manner when it is manifest to him that we have not had a sufficient explanation why the Clause is necessary. If he has any desire to get the Bill he should show greater consideration for the interests of the Committee and give a full explanation why these tax advantages are sought for local authorities. Perhaps he will have an opportunity to intervene later, but judging by the way in which the proceedings have gone on so far we have not had a proper explanation by Ministers who know what the Clause is about. No one seems to be able to give satisfactory answers to any questions. We are asked to take the Clause at its face value without any detailed explanation as to what its effect is likely to be. In view of the present trend towards the expansion of local authority activities I view the Clause with a great deal of suspicion.

The Parliamentary Secretary to the Treasury (Mr. Edward Short) rose in his place and claimed to move, That the Question be now put.

The Deputy-Chairman (Sir Samuel Storey)

I am not prepared to accept the Motion at the present time.

Mr. Webster

I support what my hon. hon. Friend the Member for Bournemouth, West (Sir J. Eden) has said, because we are alarmed not only at the extension of local authority trading and special privileges being given to them. We have at present a situation in which the private sector of the economy is being squeezed and local authorities have already borrowed half their total funds for the year. They are entitled to a total of £360 million in the year, and they have already drawn £156 million. Their drawings last year at this time were only £15 million, so it seems that not only are they being exceedingly privileged, but that they are not subject to the squeeze which is being put on the private sector. It appears that this Clause gives to the local authorities privileges widely beyond what the private sector is allowed. For that reason, I have the greatest reserve about this Clause.

Mr. J. Bruce-Gardyne (South Angus and Mearns)

I also am particularly concerned about the results of this Clause, particularly in view of what the Minister without Portfolio has just told us about the reconsideration which he will give to ensure that—

Mr. Peyton

On a point of order. Just now, I distinctly heard the Patronage Secretary, on leaving the Chamber, say, "Quite disgraceful", plainly referring to you, Sir Samuel, and to your conduct in the Chair. I followed him to ask whether it was correct and he said that it was "quite disgraceful" and that he had just said so. I told him that I would raise the matter, and I should be grateful for your comments.

The Deputy-Chairman

I did not hear what the right hon. Gentleman said behind the Chair but if he has any criticism to make about the conduct of the Chair he should put a Motion on the Order Paper.

Mr. Peyton

The point which I am raising on this point of order is that the Patronage Secretary was distinctly heard by myself and, I think, by other hon. Members to use the words "absolutely disgraceful" as applied to the Chair. I hope it is clear that I am not making any criticism of the Chair, but it seems very extraordinary that a remark of that kind should have come from the Patronage Secretary and that he should not now be here to withdraw it.

The Deputy-Chairman

The hon. Member says that the remark was made behind the Chair. I did not hear it. As I have already said, if the Patronage Secretary has any criticism to make of the Chair he must put a Motion on the Order Paper.

Mr. Bruce-Gardyne

I was saying that I was particularly concerned, in the light of the Minister without Portfolio's recent interjection. He told us that he will ensure that paragraph (b) of this Subsection is made to cover the Highlands and Islands Development Board. Of course, this Board is still under discussion in the House, and if it goes through later today we shall be giving it extremely wide powers to trade in the Highlands. It seems to me highly undesirable that we should also, by the provisions of this Clause, give it tax advantages which will strengthen its ability to compete—perhaps to indulge in unfair competition—with other industries in the Highlands.

I believe that, far from encouraging development in the Highlands, this would have precisely the opposite effect. I cannot share the view of my hon. Friend the Member for Glasgow, Cathcart (Mr. Edward M. Taylor) that we should ensure that the Highlands and Islands Development Board is covered by paragraph (b) of this subsection. On the contrary, I should like to ensure that it is not covered, because I think that there are very strong objections to extending these tax advantages to a board which is going into trade. I do not know whether the Minister is aware of the fact—I am sure that he is not, because we do not have that sort of co-ordination on the Front Bench opposite—that this Board, if the Highland Development (Scotland) Bill is passed by the House this evening, will have very wide powers to go into trading on its own account. The Minister without Portfolio is now telling us that it will also get tax advantages on all those operations, and I submit that that will be a very undesirable extension of its advantages which could have very serious effects on other companies operating in the Highlands.

4.0 a.m.

Sir D. Glover

Sir Samuel, we are now experiencing the strange change that comes into the mood of the House in Committee when the Government of the day do not treat the Committee with the respect that is due to it. I do not think that many of us were particularly antagonistic to this Clause when we started to discuss it, but I must say with the greatest possible respect that the Minister without Portfolio is not only without portfolio but without a great deal more—and, most importantly, without knowledge of the Bill and the Clause we are now discussing.

The reason why the Committee has got into a temper is that hon. Members consider the hon. Gentleman's explanations to be ineffective. They have clouded our knowledge, and we now know less about the Clause than we did when he began his explanations. Then the Chancellor of the Exchequer—who like Achilles sulks in his tent all day—makes an extraordinarily and quite unnecessarily rude remark to my hon. Friend the Member for Yeovil (Mr. Peyton) and immediately alters the whole temper of the Committee.

If the Chancellor thinks that this is the way to get his Bill through the Committee, I can assure him that it is just the way to delay it getting through the Committee, because a Committee of the House when considering such matters in detail has the right to expect proper explanations and proper treatment. At this stage we are supposed to be dealing with the detailed implications of each individual Clause, and therefore we have the right to expect that members of the Government Front Bench will make each Clause clear even to the hon. Member for Ormskirk—and I accept that that may be quite a heavy task from time to time. This Committee has no business to pass a Clause when the hon. Gentleman, in interjection after interjection, shows that he does not know the answers to questions.

We are dealing in detail with what this provision will mean once the Clause has been passed. You know, Sir Samuel, that on Report one can bring in only limited Amendments, because of the Committee discussions. The Minister without Portfolio has not clarified the situation one iota but has made it worse, and the only result of the Chancellor's interjections has been to upset the Committee, and not to clarify the position at all.

This Committee is quite right to view carefully any Clause in any Finance Bill that contains the possible implication of increasing the powers of local authorities for commercial trading contrary, according to the beliefs on this side of the Committee, to the national interest. My Scottish friends have spoken of what may happen when a certain Bill is discussed by us tomorrow. We do not know what will happen to that Bill—it may be that we shall reject it.

When dealing with the Finance Bill the Minister should have some idea of what repercussions may follow the Bill's receiving the assent of the House, but what has been happening is quite obvious, and has been throughout all our proceedings on this Bill. The Chancellor of the Exchequer has now brought in, I believe, some 220 Amendments. I am certain that he will beat Sir Leonard Hutton's score of 364 and will then probably, like Ken Barrington, be dropped from the Test team. I think the First Secretary would be very glad to see that happen at the present moment.

Coming back to this Clause, the Minister without Portfolio has placed the Committee in some difficulty. He has made us far more worried about this Clause than we were two hours ago when we started our discussion. This is a most extraordinary situation—that a Minister in a position of great distinction in the life of the nation and great distinction in the Government, having been given this great responsibility by the Prime Minister, is so inept in the performance of his duties that at the end of two hours debate we are here more clouded in our view than when we started.

The Minister without Portfolio has refused on several occasions to answer my hon. Friends because he does not know the answer. He said to my hon. Friend the Member for the City of Chester (Mr. Temple) on three occasions that he did not know the answer. Yet he is asking us to pass this Clause.

Now the Chancellor of the Exchequer says that we can vote against it. If the Chancellor of the Exchequer is really honest in his belief in democracy he will surely know that this is not really the answer. You do not vote against a Clause that you do not understand. You vote against it because it has been made crystal clear and you know exactly what you are about, but you do not agree with what the Government are doing. When even the Government do not know what they are proposing, how can we vote for or against it?

It is up to the Chancellor to report Progress and ask leave to sit again. We cannot go on debating a Clause when the Government Front Bench leaves us in this dreadful position that we are now forced to vote for or against something about which the Government do not know the meaning.

Surely, and here the Chair has some responsibility, on this 700th anniversary, we should not proceed with this nonsense but should have something that makes inherent sense.

The Temporary Chairman

The hon. Member is again getting back to what I have ruled out of order. I do not think that there is anything about Simon de Montfort in the Clause.

Sir D. Glover

It is a pity that there 1.5 not, Sir Samuel. Then we might have Ministers who would be able to give us a reply as to what that Clause means. They have not been able to give us any clarification. While I do not wish to vote against the Clause, in view of that unsatisfactory nature of the Minister's replies and the arrogant way in which the Chancellor has dealt with our objections, I hope that we on this side of the Committee will, without hesitation, vote against the Clause.

Mr. William Yates (The Wrekin)

I am sorry to delay the Committee, but we have run into a serious principle. We are here to make quite certain that we do not bestow executive powers to individual groups or authorities. This Clause is going to bestow certain prerogatives and certain attributes to the disadvantage of the individual.

If this is the situation in which we are placed, we have a fundamental duty to oppose. It seems to me that on the Committee stage of a Finance Bill, where taxpayers' money or any other matter affecting taxation is concerned, when the Government cannot give the Opposition the answers which they must have, we must in principle oppose.

If the Chancellor or one of his Ministers can in the next few moments give some answers to the questions which have been raised, it will be more satisfactory. It is a new principle for the Chancellor to ask that we should accept the Clause and at a later date he will tell us more about it. That is not the way to conduct the Committee stage. I say with regret that on a direct matter of principle any Opposition Member must oppose the Clause unless we get a satisfactory answer. I am sorry that it has come to that, but I think that that is the situation which faces the Committee.

Mr. Anthony Kershaw (Stroud)

I am not sure that we have gone into the Clause long enough. My hon. Friend the Member for Ormskirk (Sir D. Glover) said that we had been considering it for two hours. But we have been on this Question only slightly over half an hour. It has seemed a long debate because we have been anxiously awaiting an explanation from the Government.

It is difficult for the Opposition to know whether they should pass the Clause or not. I imagine that we would not be against the Clause, but as the Government do not know what it is about, I am not sure whether we can take that position. It is very unfair for the Government to tell the Committee after debate "We do not know any of the important things about the Clause. We do not know what a local authority is, we do not know how much money it will cost, and we undertake to look at it again." In the circumstances, it would be better to withdraw the Clause for the time being so that the Committee should not be misled into passing something the meaning of which may be entirely different from what we think it is.

The Minister without Portfolio told my hon. Friend the Member for the City of Chester (Mr. Temple) that the provision would cost £750,000. That is what local authorities pay in tax for their various enterprises. From subsequent questions the Minister discovered that the local authorities to which he was referring were not the local authorities which my hon. Friend had in mind. We do not know whether the £750,000 is relevant to the debate or not. We have no idea how much it may cost. It may be a great deal more. If the local authorities are to be extended to include water undertakers, the Highlands and Islands and development undertakings which are likely to be set up in various regions, surely a great deal more than £750,000 will be involved. It is disgraceful that the Minister without Portfolio—I am certain that he did not wish to mislead the Committee—should be revealed as completely ignorant of whether the papers in front of him mean that it will cost £750,000 or not.

Mr. Maxwell

On a point of order. Sir Samuel. Would you be good enough to enlighten a new Member like myself as to why the Committee has to listen to all this amount of drivel when we have such important business in front of us?

4.15 a.m.

The Deputy-Chairman

The hon. Member is speaking to the Question. "That the Clause stand part of the Bill." If he is out of Order I will call his attention to the fact.

Mr. Kershaw

As I do not appear to have made my point clear to the hon. Member for Buckingham (Mr. Maxwell), I had better repeat it. I will start again. I was saying that I was disturbed by the ignorance of the Minister without Portfolio who was unable to say whether he envisaged local authorities, which he suggested would pay tax amounting to £750,000 on their various enterprises, as they are at present defined, or as they may in future be defined when we consider the enterprises they might undertake such as water undertakings, Highlands and Islands enterprises and regional development corporations. If we are dealing with that type of local authority with industrial interests, this Clause becomes a matter of the greatest importance and not merely a matter of £750,000. [Laughter.] The hon. Member for Buckingham laughs. I understand that £750,000 is not very much to him.

Sir D. Glover

Chicken feed.

Mr. W. A. Wilkins (Bristol, South)

Perhaps the hon. Member for Stroud (Mr. Kershaw) forgets that his hon. Friend the Member for Reading (Mr. Peter Emery) this afternoon described £2 million as peanuts.

Mr. Kershaw

I can understand that hon. Members opposite do not wish to be reminded of nuts.

Before I get ruled out of order by these interventions, I wish to call attention to the fact that under the Clause as it is at present drafted there may be very severe differences between the tax liability of local authorities and private enterprise operating the same sort of enterprise side by side. It may be known by the hon. Member for Bristol, South (Mr. Wilkins) that there are in Bristol modern car parks, some operated by private enterprise and some operated by the city corporation. Those operated by the city corporation, which are just as efficient as those operated by private enterprise, will pay no tax while the others will pay a great deal of tax. One will subsidise the other.

What is the reason for that? Why do the Government think that this is a good Clause if that is its effect? The car parks look exactly alike. They charge the same prices. But one suffers a heavy tax liability and the other does not. We are entitled to some sort of explanation of this state of affairs. The Clause should be looked at again, and I hope the Government will say something more reassuring than they have said so far.

Mr. Hirst

I rise to speak for only a moment. [HON. MEMBERS: "Oh."] If I want to speak for a quarter of an hour, I will, as you know, Sir Samuel, but as it happens I do not want to do so.

I share the concern which my hon. Friends have voiced about not getting answers from the members of the Treasury Bench. I have received a lot of dusty answers from the occupants of the Treasury Bench in my time, but never in all my experience of 17 Finance Bills have I ever known a Treasury Bench which was unable, time after time, to give answers to questions put by the Opposition when for weeks some of those questions have been in the form of Amendments on the Notice Paper. It is not good enough for the Government merely to say that they will do something about the matter before Report. I am getting deeply concerned about this matter. The number of things which have been left over for the Report stage is enormous. I hope that my right hon. Friends will give warning that we shall want a very substantial time in which to consider the Report stage so that our numerous objections may be dealt with as well as the hostages to fortune which the Chancellor of the Exchequer has given during the course of our consideration of the Bill.

I feel that when the Chancellor of the Exchequer and his associates cannot give answers to our points on this Clause it is impossible to vote for or against proposals. I do not know what my right hon. Friends think about this, but I believe that we cannot vote for or against something which the Government cannot explain. All that we can do is to make, as we have made for an hour or so, a very earnest protest. I hope that the Government have learned their lesson and that they will not indulge in this sort of impertinence in Committee on another occasion.

Mr. Hendry

As this debate continues, I become more and more alarmed about the possible repercussions of this Clause. The only justification for the Clause which has been given to us is that it will cost only the paltry sum of £750,000. That is no answer, but, in view of the Government's record, the prospect is very alarming.

My hon. Friend the Member for Glasgow, Cathcart (Mr. Edward M. Taylor) mentioned the possibilities of the Highland Development Bill. Instead of looking to that Bill, I should like to look at the present powers of local authorities. I am sorry that I cannot speak about England and Wales, but I can speak about Scotland. A great many local authorities in Scotland already have powers to run cattle markets. It may well be that these authorities will be encouraged by the Government to set up cattle markets in opposition to the established cattle markets throughout Scotland. If that happens, local authority cattle markets will trade, make profits and pay no tax in opposition to private enterprise markets which will suffer through having to pay Corporation Tax.

Various local authorities in Scotland, and I believe in England and Wales, have power to run transport undertakings; and they are doing so. In a great many cases they are run very inefficiently and make losses, but there is no reason why these transport undertakings should not make profits in competition with private enterprise. Throughout Scotland there are small companies running private enterprise bus services in the country. They are finding it extremely difficult to do so, but they are making a livelihood from them and are paying Income Tax on the profits that they make.

If a county council which is running an education authority exercises its present power to run a school bus and to carry passengers in it in competition with a private enterprise bus company, it will derive benefits which are not available to the private citizen. The private citizen, struggling to make a living and to pay his taxes, will be put out of business, and this will be encouraged by the Government unless they give a definite undertaking that they will not encourage local authorities to exercise the powers which they already have. I may be wrong in this, but if I am there is unfortunately no Minister responsible for local government here to put me right.

The Highland Development (Scotland) Bill envisages a situation in which local authorities will establish advisory services. What is to hinder a town clerk or country clerk giving legal advice, perhaps in competition with local solicitors who are paying Income Tax and, if they are lucky, Surtax? Local authorities will be able to provide these services without having to pay the tax which people trying to earn a livelihood must pay. The Highland Development (Scotland) Bill envisages the Highlands and Islands Development Board doing all sorts of things, not only acting as solicitors but as accountants. Is it the intention of the Government that local authorities should perform tasks of this nature while the ordinary citizens of this country are trying to earn a livelihood, doing precisely the same things, but having to pay Income Tax on what they earn?

The Government say, as though to excuse what they propose, that the saving would be only £¾ million. That may be a small amount in the view of the Treasury, but it will have great repercussions among the ordinary citizens. The Clause is utterly undesirable and should be struck from the Bill.

Sir D. Glover

Before my hon. Friend sits down—

Hon. Members


The Deputy-Chairman

Order. The hon. Gentleman had sat down. Dame Irene Ward.

Dame Irene Ward

It is obvious that the Treasury Ministers have met their Waterloo in our discussion on the Clause stand part. They have completely collapsed. They cannot answer our questions.

Having listened to the discussion, all sorts of new ideas and questions have sprung to my mind. For example, have the Government considered the position of the development districts under the Clause? This is important to the North-East Coast, Scotland, Wales and Northern Ireland. Having spent a long time yesterday listening to Treasury spokesmen saying what they were doing to protect the development districts from the operation of the Corporation Tax, what will happen to those areas which are for the time being, but not for long, under the control of Socialism? What will happen, considering the so-called incentives which the Government propose to give to industry, if local authorities decide to go in for municipal trading in the development districts? If we pass the Clause without knowing clearly where we are going, we shall do great injury to the development districts. I want to know from the Napoleon on this occasion what he has in mind for the protection of the development districts.

4.30 a.m.

Mr. Cyril Bence (Dunbartonshire, East)

All right, Josephine. [Laughter.]

Dame Irene Ward

It is always very encouraging, at half-past 4 in the morning, to know that the House of Commons can laugh, but, unfortunately, I cannot join in the laughter because I did not hear what the hon. Gentleman said. [Laughter.] I hear a lot of queer things in my time—

The Deputy-Chairman

Order. There is nothing about queer things in the Clause. The hon. Lady must get back to the Question.

Dame Irene Ward

I want the Government to give us a satisfactory assur- ance about the position of development districts under the Clause. In my part of the country, the North-East Coast, with the new regional development and other alarming growths of Socialist administration, it will be extremely difficult to encourage industry to come in if there is to be municipal trading of all kinds. Industrialists will much prefer to stay in areas where there are Conservative local authorities which do not believe in municipal trading. This is a most important matter. I want to know the answer. Let Napoleon arise and strike a blow for justice and fair administration.

Mr. Callaghan

As these historical analogies are flying about, perhaps I may be forgiven for preferring to assume the mantle of Nelson rather than Napoleon, as I have been trying for a long time to turn a blind eye to what has been going on. But I can never resist the hon. Lady the Member for Tynemouth (Dame Irene Ward), and I feel that I should give her a reply.

The position of local authorities in the development districts will be exactly the same as that of local authorities in all other areas, namely, that in respect of their trading activities they will be exempt from taxation. I hope the hon. Lady will not feel that that is likely to be deleterious to any other activities in the area the interests of which she always pursues so vigorously in this Chamber. I do not think that it will be particularly, and I hope, that she will share that view.

Although there have been some refinements raised, particularly with reference to Scotland, this is a comparatively simple matter. It was thought right, for administrative reasons as well as because of the small amount of tax at issue here, that local authorities should be exempt from the Corporation Tax. We understood that this view met with the approval of the association for which the hon. Member for the City of Chester (Mr. Temple) has been speaking, and I understand that it meets with the approval of a great many other hon. Members opposite. I think that probably the whole Committee will share the same view. At least, I hope so.

It is possible to raise bogeys or, indeed, legitimate fears about the extension of trading activities by local authorities. If it were thought that the extension of trading activities by local authorities on a wide scale was likely to be the direct result of their exemption from the Corporation Tax, then, no doubt, Parliament would wish to look at this matter afresh, because this would raise a new issue of principle. The hon. Member for The Wrekin (Mr. William Yates) and the hon. Member for Bournemouth, West Sir J. Eden) raised as an issue of principle how far local authorities should be entitled to go into the field of trading activities in order to see whether they cut across what are regarded as the legitimate activities of private traders. This is an issue on which I have no doubt the Committee would not now wish to come to a conclusion. This is not the purpose of the Clause, which is to deal with the activities of local authorities as they exist at the present time. Because of the labours and the great deal of work involved for everybody in these matters and because of the small amount of revenue, it seemed to us, and, I think, to a number of hon. Members opposite, that they should he exempt.

We are entirely in the hands of the Committee. You, Sir Samuel, in your wisdom have refused to accept a closure Motion as you think there has not been sufficient debate, so it is entirely up to the Committee how long the debate goes on. It is something for every hon. Member to make up his own mind about. It would rot be unfair to say that after two hours on the Amendment and the Clause it has had a fair run.

Dame Irene Ward

A fair run.

Mr. Callaghan

Yes, a fair run. After all, it was the hon. Lady who got me to my feet. I hope she does not want me to prostrate myself in front of her.

We have had a discussion which has been useful. The purpose of the Clause is quite clear, and I can only ask the Committee to come to a conclusion. I ask the Committee to take the view that it should not vote on the extension of local authority activities. I appeal to the Committee not to vote because I do not think this Clause raises any great issue of principle. If hon. Members decide to vote, then I think they will be depriving local authorities of a small but valuable concession and, in the present circumstances, it would not be appro- priate. I do not think that a great issue of principle arises on this Clause.

The Minister without Portfolio has given an undertaking to consider the Scottish position between now and Report, and I am bound to say that I think he has been courtesy itself throughout the whole of the discussion on this Clause. I think the whole Committee will agree with that. All I can say is that we have more work to do and we have had a good discussion. I therefore urge the Committee to come to a conclusion on this Clause.

Mr. Barber

I rise to urge my right hon. and hon. Friends to be influenced neither by the ill temper of the Patronage Secretary nor the depressing appearance of the Treasury Bench.

The attitude of the Government to the Amendment to this Clause and the debate on Clause stand part has been apparent to all of us, and I do not propose to enter into the depressing experience of trying to describe it. The fact is that this Clause does raise very important issues. It is no use the Chancellor, whichever side the merits may lie, getting up and appealing to the Committee and at the same time talking about bogeys.

It is not simply a question of competition between local authorities and private enterprise in trading activities. There is also the important question of the number and types of bodies which qualify for exemption. We have not had an answer to a number of questions on this point. I repeat, so that there shall be no misunderstanding about what I feel, that I do not blame the Minister without Portfolio for not knowing the answers to some of these points, and he has kindly said that he will consider them before Report stage, for which we are grateful.

It is all very well for the Chancellor to say that this is entirely a matter for the Committee. Of course it is, under your guidance, Sir Samuel. With a little more enlightenment earlier and a little more courtesy from the Chancellor earlier, we might well have completed our discussions on the Clause a long time ago.

I am sure that, despite the provocation we had from Government spokesmen earlier, we would be wise to consider the matter between now and Report and, in particular, to seek from other sources the information necessary to make up our minds. I hope that on this occasion my right hon. and hon. Friends will let the Clause go through and, if necessary, return to the matter on Report.

Question put and agreed to.

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