HC Deb 16 June 1965 vol 714 cc793-7

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

Mr. David Price

I do not want to interrupt the increasing pace of our financial "teach-in", but I would like some clarification of this Clause. As I understand, the object is to extend the tax privilege at present enjoyed by companies carrying on mutual business or not carrying on a business. These privileges are embodied in Section 444 of the Income Tax Act, 1952, but, as the Committee knows, their origin can be traced much further back to 1893. There is no mention in this Clause on that question of liability to, or exemption from taxation, of trading surpluses arising out of mutual business.

This is a matter which the Committee will recall was discussed fully last year in this Committee. The original Clause 19 of last year's Finance Bill had two main objectives—one was to deal with a form of tax avoidance, the possibility of which was shown by a Lords' judgment in 1963; and, secondly, to implement the recommendations of the Royal Commission on Taxation that surpluses operating from mutual trading should be taxed.

The second objective of my right hon. Friend the Member for Barnet (Mr. Maudling) came under considerable attack from all sides. As a result, on Report my right hon. Friend withdrew his original Clause and introduced a new Clause with the limited object of stopping up the possible loopholes for tax evasion. That is now Section 21 of last year's Finance Committee. It was made clear that all sides of the Committee wanted the trading surpluses out of mutual trading to remain untaxed.

I seek an assurance that Clause 67 will not lead to the surpluses arising from mutual trading being subjected to Corporation Tax. It relates to distributions. There is no mention of trading surpluses. Because of the provisions of Clause 49, which applies the general Income Tax rules to Corporation Tax, I assume that the status quo will be maintained and that trading surpluses on mutual trading will not be subject to tax.

However, in view of the considerable concern shown by the Committee last year and the general agreement that it was right that trading surpluses arising out of mutual trading should not be subject to tax, we ask for an assurance that that position is being maintained. If it were not, and if it were to be the intention of the Government under the Clause to subject the surpluses arising out of mutual trading to Corporation Tax, I am certain that my right hon. Friends and I would want to move on appropriate Amendment at a later stage, and I am certain that it would meet with very considerable support on the Government side.

I do not think that the Treasury Bench want to do this, but I am a little suspicious because over a long history the Inland Revenue has made various attempts to persuade the Government of the day and Parliament to change their view. The most recent instance was the Royal Commission.

Sir Eric Fletcher

I can assure the hon. Member that his fears are quite unfounded. There is no change whatever from the present position. The status quo is being maintained. As he says, the present position is that the surpluses arising from mutual trading are not charged to Income Tax or Profits Tax. The position will be precisely the same; they will not be charged to Corporation Tax. Therefore, distributions out of surpluses on mutual trading will not suffer any tax.

The whole object of the Clause is to carry over into the Corporation Tax scheme the existing provisions of the Income Tax arrangements. There has been no attempt, as the hon. Gentleman rather ungenerously suggested, on the part of the Inland Revenue or anybody else to deprive those who participate in the activities of these mutual trading concerns of the benefits which they already enjoy.

Mr. Hector Monro (Dumfries)

I seek clarification of a small point touched on by my hon. Friend the Member for Eastleigh (Mr. David Price) and the Chief Secretary on Clause 65. This concerns amateur sports clubs and mutual trading, which really comes under Clause 67. Many sporting associations, such as hockey and rugby clubs, run their accounts on the principle of mutual trading, and this is accepted by the tax inspectors, so that it is not necessary to pay tax on gate money within an association. If Corporation Tax has to be paid on the surplus, the large amount of money that the clubs have been able to plough back into the game, for the improvement of facilities and so on, will be lost.

I think that it is generally agreed by accountants that this is so. In fact, I have the accounts of a very well-known sporting body, and the auditor, who is a well-known accountant in Scotland, has signed the accounts saying that provision has been made for Corporation Tax which, if it is deducted, will become payable on this body's surpluses for the year.

I would be grateful if the Minister would confirm that amateur sports clubs —and I stress the word "amateur", because there is no profit attached—will in no way be liable to Corporation Tax.

Mr. Scott-Hopkins

I have no intention of keeping the Committee long. I am grateful to the Minister for what he said confirming that the position is not changed as far as surpluses from mutual trading are concerned. I have had representations about this matter. But I should like the Minister to explain, as briefly as he wishes, where this is contained in the Clause. I have looked through it as carefully as I can, and, although I accept what the Minister has said, I cannot see where the assurance which he has given to the Committee is contained in the Clause. I shall be grateful if he will tell us where it is to be found.

Sir Eric Fletcher

The reason that I did not elaborate or attempt to spell out the provisions in the Clause was that I thought hon. Members would be satisfied with the assurance which I gave, and which I repeat, that so far as these clubs, associations and all involved in mutual trading are concerned, there will be no change whatever in the present system.

If the hon. Member is really concerned, I invite him to look at Clause 67 (1) where it is reasonably clear. It says: Subject to subsection (2) below, where a company carries on any business of mutual trading or mutual insurance or other mutual business, the provisions of this Part of this Act relating to distributions shall apply to distributions made by the company notwithstanding that they are made to persons participating in the mutual activities of that business and derive from those activities …"— these are the operative words— but shall so apply only to the extent to which the distributions are made out of profits of the company which are brought into charge to corporation tax or out of franked investment income (including group income). I shall not read subsection (2), because it would weary the Committee, but it provides that in the case of a company carrying on mutual life business the provisions of the Bill relating to distributions shall not apply to distributions made to persons participating in the mutual activities of that business and derived from those activities. The position is perfectly clear. The distributions which are made to members out of surpluses of mutual trading will not be charged to tax. The only benefits that will arise to tax as at present are any proceeds from investment income, or, of course, any activities, if there be such, of a non-mutual trading kind. In the case of athletic clubs and sports clubs, to which the hon. Member referred and with which we are mostly concerned, there is nothing but mutual trading and in the ordinary case there is no investment income; therefore, no question of Corporation Tax arises.

Mr. David Price

I do not think that the Minister without Portfolio has got our point. The Clause is clear when it relates to a distribution that is made to members. We are concerned with the case where the surplus of trading is held and is not distributed to members. This goes back to the point to which the Royal Commission objected. It said that the mutual trading company had built up reserves. The members may have changed. One of the reasons that it was required to tax the surplus was a feeling that the company had lost the basic simplicity of the mutual trading identity. This was a view which was rejected last year by this Committee.

9.0 a.m.

We accept assurances from the Minister without Portfolio, but learned judges who have to interpret Acts take them in the way that they are drafted. They do not go by assurances given by occupants of the Government Front Bench.

Sir Eric Fletcher

I have gone into this matter. The operative provisions are contained in Clause 67, with which should be read the provisions in Clause 49, which are the general rules for the computation of income. Hon. Members need have no misgivings about this matter.

Mr. Monro

I thank the Minister for trying to help. Is the income from investments within sporting bodies and ploughed back into the bodies for group facilities excluded as well?

Sir Eric Fletcher

No. Income from investment is subject to tax.

Mr. Monro

Not Corporation Tax?

Question put and agreed to.

Clause ordered to stand part of the Bill.