§ 7.30 a.m.
§ Mr. Diamond
I beg to move Amendment No. 611, in page 84, line 13, to leave out "one month" and to insert "three months".
This Amendment has been tabled to accommodate the Co-operative societies, which are required to make certain returns under the Clause and which have made representations that the one-month period prescribed would not be entirely adequate. A period of three months is therefore suggested instead.
§ Mr. David Price (Eastleigh)
We are grateful to the Chief Secretary for that explanation, but I should like a little more information as the Amendment seems to amend what is in fact an Amendment. Subsection (2) of this Clause itself seeks to amend subsection (4) of Section 443 of the Income Tax Act, 1952. In that subsection (4), no period of time was laid down—returns had to be made to the Revenue by 1st May in each year. In this Clause, which the Chief Secretary now seeks to amend, the Government moved over from the date of 1st May to giving industries and provident societies… one month after the end of any accounting period for corporation tax …".Presumably, the intention was to bring industrial and provident societies into line with the same rules relating to the accounting period as applied to companies under Clause 47.
I assume that to be the reason, but it is interesting to observe that in extending the period from one month to three months and giving the societies freedom, as I understand it, to choose the appropriate accounting period, under the Provident and Friendly Societies Act of this year the time by which, normally, a registered society has to make its returns to the Chief Registrar is not later than 31st March in each year. As the general returns of the societies include fairly substantial accounts—as can be seen by Section 37 of this year's Act—would it not have been more convenient for all the societies concerned to have had the same period for the purposes of taxation? Perhaps the Chief Secretary will let us have his observations on that idea.
§ Mr. Diamond
As I have already indicated, I understand that the proposed arrangements resulted from representations made by the societies themselves, from which I would assume, although I do not know, that they are, by and large, acceptable to them. However, I see the force of the hon. Gentleman's suggestion, and if he will give me the opportunity to look into it. I will be very glad to do so.
§ Amendment agreed to.
§ Mr. Diamond
I beg to move, Amendment No. 696, in page 85, line 14, at the end to insert:(8) Where in accordance with a scheme approved under section 5 of the Housing Act 1964 the Housing Corporation acquires from a housing society the society's interest in all the land held by the society for carrying out its objects, or where after the Housing Corporation has so acquired from a housing society all the land so held by it the Corporation disposes to a single housing society of the whole of that land (except any part previously disposed of or agreed to be disposed of otherwise than to a housing society), together with all related assets, then both parties to the disposal of the land to the Housing Corporation or, as the case may be, by the Housing Corporation shall he treated for purposes of corporation tax in respect of chargeable gains as if the land and any related assets disposed of therewith (and each part of that land and those assets) were acquired from the one making the disposal for a consideration of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the one making the disposal.The purpose of the Amendment is to deal with the particular difficulty which has arisen in a very narrow sphere. Representations have been made to us that there would be difficulty with housing societies which get into trouble, as sometimes happens. It is normal for them to amalgamate themselves or be taken over by another society. In such cases, no Capital Gains Tax arises. But where there is a situation where a society in difficulties could not be taken over because there is no suitable recipient—no other society that can suitably take it over—one has to have an organisation to hold it until it can be added to another society. There is then a double transfer. In the present form of the Bill it is not provided that there shall be exemption from Capital Gains Tax through that transfer.
The purpose of the Amendment is merely to make it possible for such a situation to be catered for without a 770 housing society having any of its funds reduced in the way that would happen if it was amalgamated or taken over by another society in the ordinary way. I hope that with that explanation the Committee will feel that this accords with what everybody desires. I have no doubt that the drafting gives effect to it.
§ Mr. David Price
I am sure that we on this side of the Committee welcome the Amendment. I think we have had another example of points coming up after the Bill has been drafted. As I understand it, subsection (6) of the Clause endeavours to maintain and carry on, with regard to the new Corporation Tax, the privileges dispensed to the housing associations in terms of Section 43 of the Finance Act, 1963.
When one looks at the situation that was envisaged under Section 5 of the Housing Act, 1964, we find that the Housing Corporation comes in and buys back the land and, if necessary, related assets of those housing associations which have run into difficulties or are generally considered to be failing. Subsection (6), as it was drafted in the Bill, was inadequate to deal with the situation.
Subsection (6) deals with the relationship between a housing association and its tenants and members. This Amendment, as I understand it, is dealing with transfer—the sale of the assets back to the Housing Corporation. I think that the Committee should be clear that although it will not be subject to Corporation Tax as a result of this Amendment, if it is carried, the housing association will still be subject to Capital Gains Tax. I hope that the Chief Secretary will correct me if I am wrong. Looking back over our discussions on the Capital Gains Tax, I do not think we mentioned this subject. When I assume that the housing association would be subject to this tax, I may be wrong and I hope the Chief Secretary will clarify this. At the moment, I cannot see how the housing association would be relieved of Capital Gains Tax.
May I finally make a point that in the drafting of this new subsection (8), the intention is not quite clear. I ask the Treasury Bench why, instead of the very elaborate wording and double negative in the latter part of the subsection, one cannot have simple words saying that 771 these deals shall not be chargeable to Corporation Tax? At the moment the subsection reads:… both parties to the disposal of the land to the Housing Corporation or, as the case may be, by the Housing Corporation shall be treated for purposes of corporation tax in respect of chargeable gains as if the land and any related assets disposed of therewith … were acquired from the one making the disposal for a consideration of such amount as would secure that on the disposals neither a gain nor a loss would accrue to the one making the disposal.Would it not be easier to say that it would not be chargeable to Corporation Tax?
§ Mr. Diamond
The first question related to the Amendment and the second to the Clause. Dealing first with the Clause, I think I am right in saying that because of its mutuality this is not an organisation which would bear Capital Gains Tax. Therefore, the answer to the question is, no. What the Amendment provides is that with a transfer of the kind that we are considering to a housing association to be held until another housing association can amalgamate with it or take it over there is no Capital Gains Tax arising because the transaction takes place in such a form that none would arise, and the wording is merely to give effect to that. I doubt if we could have clearer and simpler wording; it makes the position clear. The hon. Gentleman fully understood it, and I am sure he would feel that most people would understand it. Perhaps in the circumstances—although it is only courteous for me to say, as I do, that I will look at the words to see if they can be reduced in volume, which I think is what the hon. Gentleman is after—I should say that I think they are clear and the meaning is clear.
§ Amendment agreed to.
§ Question proposed, That the Clause, as amended, stand part of the Bill.
§ Mr. Hendry
Many people regard the Clause with very mixed feelings. It seems to be an example of the partiality of the Government in encouraging any sort of Socialist trading and discouraging private enterprise. I do not know what happens in the south of England but I know what happens in the north of Scotland—and has been happening for years. It is not a case of a little co- 772 operative society setting up and requiring tax advantages. The great co-operative organisations based in Glasgow and Manchester are deliberately setting up shops in villages in opposition to privately-owned shops. A great deal of disquiet has been caused by their coming along and trading with tax advantages which are not available to ordinary people.
It is vastly unfair to have an organisation, which may be a very large one, carrying on trading throughout the country, carrying on a banking business and an insurance business, which, simply because it is incorporated under one Act of Parliament, can have advantages which are denied to trading organisations on a very much smaller scale which happen to be incorporated under the Companies Acts. It is completely illogical that the Clause should begin by providing that the distribution, or what would be the distribution in the case of any ordinary incorporation, is not a distribution at all in the case of such an incorporation as is mentioned in the Clause.
If it were confined to share interest there might be some sense in it. One might have the idea of people with their shillings and pounds setting up a small society in a village and getting some tax relief on their small share interest. But that is not happening. Branches are being set up in country places by the great central institutions, and they are financed not by the shares and capital of the customers in the villages but by loan capital provided from Glasgow, Manchester and other places far away with no local connection. The Clause seeks to give certain relief and benefits to loan capital of that type because loan interest is specifically mentioned. I think that these advantages enjoyed by these great organisations should come to an end. and that they should suffer tax in the same way as any other of Her Majesty's citizens.
I am very concerned about this Clause, and in particular subsection (7). I may be particularly stupid, but I cannot think what it means, except that there will be some tremendous advantage given to these co-operative organisations. The subsection says:(7) If in the course of, or as part of, a union or amalgamation of two or more industrial and provident societies, or a transfer 773 of engagements from one industrial and provident society to another, there is a disposal of an asset by one society to another, both shall be treated for purposes of corporation tax in respect of chargeable gains as if the asset were acquired from the one making the disposal far a consideration of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the one making the disposal.That seems to me to be an extremely serious thing, that one society, possibly a branch of one of the great wholesale societies, might make a substantial profit and at some stage or other will dispose of that profit, possibly making the disposal to one of its constituent societies. That society will make a profit, or do something tantamount to making a profit, without suffering any tax at all. It will dispose of that profit to some constituent society and no Corporation Tax will arise at any point.
The excuse for this may be mutuality of trading, and if there is mutuality of trading it seems to me that neither society will suffer either Corporation Tax or Capital Gains Tax. I hope the right hon. Gentleman will explain this to me, if that is not the true intent and meaning of the Clause. If this sort of thing happens and one society transfers assets or cash to another, there might be a complete round robin. The assets and cash might come back to where they started, and by means of a whole series of "fiddles" the society might get out of paying Corporation Tax and Capital Gains Tax. I admit that I am not very clever in these financial transactions, but ii seems to me that that is precisely what is intended.
I am extremely suspicious of the Clause, because it seems to me that the Government are trying to confer on these co-operative institutions advantages which are denied to any other trading organisation. I may be wrong; if I am. I hope the right hon. Gentleman will explain where I am wrong.
I now want to ask two questions. The first question, which is of great interest to many people, particularly small traders, is: how much is the Revenue going to lose by way of tax as a result of the special provisions in subsections (1) and (2)? Under subsection (1) societies are permitted to deduct distributions, or what would be distributions, from their profits for the purposes of Corporation 774 Tax, and under subsection (2) there is a certain relief to members, who might be member societies for that matter, up to £15 in any one year either on loan interest or share interest. In other words, how much of a subvention is being given to these societies which are being specially favoured in comparison with small traders?
My second question is what will subsection (7) cost the Treasury where one society can transfer assets to another society without suffering either Corporation Tax or Capital Gains Tax?
§ Mr. David Price
I appreciate the concern of my hon. Friend the Member for Aberdeenshire, West (Mr. Hendry), but, as I interpret the Clause, it attempts to continue in respect of Corporation Tax the tax privileges which have been accorded for a very long time to industrial and provident societies. They are to be found in Sections 442 and 443 of the Income Tax Act, 1952, which is current legislation. But it also continues the privileges accorded to housing associations, which, I understand, were originally accorded under Section 43 of the Finance Act, 1963. I should have thought that these two aims would meet with the Committee's general approval, because they have certainly met with the approval of our predecessors going back a very long way in the history of this Committee.
My hon. Friend the Member for Aberdeenshire, West is right to direct attention to the fact that where Parliament has bestowed, and is continuing to bestow, tax privileges on industrial and provident societies, we should, first, keep under review the current activities of these societies to ensure that they continue to behave in the manner which has appealed to the Committee in the past; and, secondly, to review the qualifications for registration. These societies are, not entirely, but in the main, co-operative societies.
The Committee may be interested in the scale of their activities. The latest Report of the Chief Registrar of Friendly Societies relates only to 1963, but, according to that Report, there were in that year 7,257 societies. But what will interest my hon. Friend, I think, is the fact that 828 of these societies were in the supply of general stores, and they 775 did well over £1,000 million worth of turnover in 1963. Therefore, it is right that we should, in considering this Clause, have a general look at their activities.
The point which must concern us is how this privilege is defined in the Clause. The beginning of the Clause states thatshare interest or loan interest paid by a registered industrial and provident society shall not be treated as a distribution",and so on. What do the Government mean by "registered industrial and provident society"? For this purpose, one goes naturally to the consolidation Act, the Industrial and Provident Societies Act, 1965, from which one sees that there are, broadly speaking, three conditions which have to be fulfilled for a body to be a registered society. Therefore, if the Bill is passed, such a society will have the privileges offered by the Clause.
I am not entirely happy about the draft of the definition of a registered society. Since there is a common aim between the Chief Secretary and myself, may I refer him to Section 1(2) of the Industrial and Provident Societies Act, which says that the conditions which have to be fulfilled are(a) that the society is a bona fide co-operative society;(b) that, in view of the fact that the business of the society is being, or is intended to be, conducted for the benefit of the community, there are special reasons why the society should be registered under this Act rather than as a company under the Companies Act 1948".Those hon. Members familiar with the Prevention of Fraud Act will see a certain familiar ring in those words. I find the words "special reasons" vague, but I pass over that phrase and come to subsection (3), which raises doubts in my mind, for it states:In this section, the expression 'co-operative society' does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person".I had doubts when I read that subsection and compared it with the wording of the Clause we are discussing. I have been confirmed in those doubts as a result of one of my hon. Friends, who is a distinguished member of the Scottish Rugby Football Union, having received 776 a letter from the Union's accountant in which the situation had been interpreted to mean that in future they would have to pay the Corporation Tax, whereas in the past they came under the general provisions. It may be that the let out lies in the word "mainly", and I should be grateful if the Chief Secretary would give his views on the subject.
I assure the right hon. Gentleman that I am not trying to make a point against him. I wish to ensure that the privileges which the Government are seeking to give in the Clause are applied. I have discussed the matter with some of my colleagues who are in the legal profession and they confirm that I am raising a valid point. I am sure that the right hon. Gentleman is anxious to see that all the societies which in the past benefited from these privileges should continue to do so.
§ Mr. Diamond
I readily respond to the informed speech of the hon. Member for Eastleigh (Mr. David Price). As he correctly said, the purpose of the Government—which is enshrined in the Bill—is to adapt the Corporation Tax to the special circumstances of registered industrial and provident societies—that is, co-operative societies—and certain co-operative housing associations.
The hon. Gentleman's main concern is about the definition. The definition in the Bill is the same as the definition in Section 26 of the Finance Act, 1958. The Bill had to adopt the existing Finance Act definition because the Industrial and Provident Societies Act, 1965, had not been passed when this Finance Bill was being drafted. Thus, exactly the same definition applies as previously and the same advantages will arise as previously.
If the hon. Member for Eastleigh is anxious about a certain rugby club, if he will write to me and let me have the details, I will be only too glad to look into the matter. We are, I believe, achieving what both he and I want to achieve; a carry over into the Corporation Tax arrangements of the same advantages as exist at present.
The hon. Member for Aberdeenshire, West (Mr. Hendry) is still showing the shadows that were here five or six hours ago but which have gone as a result of the dawn and the sunlight. He is anxious about co-operative societies and the damage he fears that they are going to 777 inflict on other forms of trading. I invite him to relax. There is no evil design in the Bill. We are merely applying for Corporation Tax purposes the existing situation.
He asked me to comment on the cost, by which I understand him to mean the operative cost—in terms of the Bill as opposed to the existing situation—of the two subsections. If that is his question, then in each case the answer is "Nil", because all that we are doing is carrying forward an existing situation.
The hon. Gentleman also asked me to explain shortly what subsection (7) means. It means that there will be no Corporation Tax charge on capital gains in consequence of amalgamations. I am sure that the hon. Gentleman read the Clause with his usual care, but I wonder whether he noted the first line,If in the course of, or as part of, a union or amalgamation of two or more industrial and provident societies. …All that the subsection provides is that, where there is an amalgamation of two co-operative societies, either by union or by transfer of engagements, it is to be treated for Corporation Tax purposes as taking place at such a price as gives rise to no gain or loss to the transferor. The values are taken over by the transferee, and, as there is no difference in value, there is no question of any realised gain subject to Capital Gains Tax.
I hope that I have satisfied the hon. Gentleman that this is a Clause which, as the hon. Member for Eastleigh said, incorporates all the provisions in our existing law, merely bringing into the Corporation Tax what already applies for income Tax and Profits Tax.
§ 8.0 a.m.
§ Mr. James Scott-Hopkins (Cornwall, North)
I wish to pursue a point raised by my hon. friend the Member for Eastleigh (Mr. David Price) when he asked whether co-operative societies came within the ambit of the Clause. This is a most important point for co-operatives. The right hon. Gentleman will know that my interest is in agricultural co-operatives, and, although there is a later, Amendment about them, it will hasten our consideration of the matter in due course if we can have the question answered now.
778 I am still perplexed by the definition in Section 1 (3) of the Industrial and Provident Societies Act, 1965:In this section, the expression 'co-operative society' does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited …and so on. This is the key provision. Unless I am mistaken, the majority of co-operatives—certainly those in agriculture—come under that exclusion and, therefore, Clause 65 would not apply to them, so that they would be excluded from these benefits and the operation of the revelant provision in Clause 43. In Clause 43 there is a specific reference to industrial and provident societies and bodies engaged in mutual trading with reference to bonuses deductible in computing income as mentioned in Section 444(2) of the Income Tax, 1952.
I noted what the Chief Secretary said about this, and I may have misunderstood; but I have come to the conclusion that co-operative societies in the main will be excluded from the benefits of Clause 65 as well as from Clause 43. Will the right hon. Gentleman make quite clear what the position is to be? I do not think that he can rest his case on the word "mainly". This is an important matter for co-operative societies, and I hope that we can have clarification of it now.
§ Mr. Diamond
I gladly respond to the hon. Member for Cornwall, North (Mr. Scott-Hopkins). As I understand it, the 1965 Act is purely a consolidation Act. It does not alter the law at all. Therefore, the situation is that the Corporation Tax adopts precisely the existing definition in the Finance Act, 1958, when, I suspect, the law was the same as has been consolidated by the new Industrial and Provident Societies Act. So there is no inconsistency. But, in any event, it is not that definition which affects these provisions. This definition is brought in from Section 26 of the Finance Act, 1958. I can tell the hon. Member for Cornwall, North that co-operative societies are included and do get the benefits about which he is anxious.
If he fears that there is any inconsistency between the statutory definitions, which is what I think is worrying him, I will look into that between now and 779 Report. What the Government intended to do and are doing is to treat the same societies in the same way and to the same extent.
§ Mr. Hendry
I should like briefly to clarify two questions which I asked the Chief Secretary because I think he misunderstood them. Firstly, what would be the resulting amount to the Treasury if co-operative societies were treated in the same way as ordinary companies registered under the 1948 Act? If the right hon. Gentleman does not know the answer perhaps he will tell me between now and Report. Secondly, the Chief Secretary, in his interpretation of subsection (7) omitted to notice that union or amalgamation is the alternative to transfer. As a result of the misunderstanding by the right hon. Gentleman there is ambiguity in this Clause.
Mr. Edward M. Taylor
I will ask one brief question on subsection (7). It is intended that, in the event of a transfer between two societies and the assets being disposed of, no Corporation Tax will be payable in respect of any capital gain. The obvious way of expressing that in the Bill is to say that they are exempt. But the subsection does not say "exempt". It goes into more detail and says that the position would be regarded as though no gain or loss had been made.
This raises the relevant question of what happens when an asset is transferred from one society to another at an increased price and then sold to a third party? Is this the reason for drafting the subsection in this way?
I will give an example of shop premises bought for £5,000 and transferred to another society for £10,000. There would be no gain or loss for the purposes of this tax although there would be an actual gain. If the premises were sold to a third party which was not a cooperative society for £15,000, would the gain be £5,000 or £10,000? Is this the reason why the subsection has been written in this way and, if it is not, could not the subsection have been drafted in a much more simple way?
§ Mr. Diamond
I will do my best to satisfy the hon. Member. I do not want to get involved in a long discussion with the hon. Member for Aberdeenshire, West (Mr. Hendry) about the comparative treatment of co-operative societies and 780 what he described as ordinary companies. I take it that he was referring to their treatment for tax purposes. Broadly they are the same and therefore the approximate answer to whether there is any saving or not is that the capital is treated as loan capital because that is the nature of it; the "divi" is returned to the purchaser and therefore deducted from the profits in the same way as an ordinary company might give a credit note. Profits are assessed in the ordinary way and the capital is deleted in the ordinary way and tax is paid on the balance.
I will look into the matter more closely if the hon. Gentleman wants me to do so but there is no difference at all. I will not say the hon. Gentleman has a bee, because he is not wearing his Scottish bonnet.
§ Mr. Scott-Hopkins
I am grateful to the right hon. Gentleman for his explanation. On reflection, although I have taken a little time because of my mental processes at this hour, I am still not entirely happy about some of the definitions but perhaps we can correspond about it and I can raise it at a later stage.
§ Question put and agreed to.
§ Clause, as amended, ordered to stand part of the Bill.