HC Deb 21 June 1965 vol 714 cc1203-325

4.1 p.m.

The Chairman

Before I call the next Amendment, I have two announcements to make. In addition to the list which I have had published in the "No" Lobby and in the Ways and Means corridor, I have, as the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) will be pleased to note, reconsidered and selected his Amendment No. 779.

The right hon. Member for Bexley (Mr. Heath) and his right hon. Friend made representations to me about Amendment No. 785. I am now proposing to take that with the Government Amendments No. 754 and No. 417. We are now coming to Amendment No. 745, with which it is proposed that we should take Amendment No. 464 and Amendment No. 77. Amendment No. 464 is in page 92, line 36, to leave out "shall" and to insert "may", and Amendment No. 77 is in page 93, line 5, to leave out from "say" to the end of Clause and to add: a reasonable proportion of its profits, as determined by the following subsections of this section. (3) In determining under the last preceding section whether any company has or has not made such a distribution of its actual income as is therein mentioned, the Commissioners shall have regard not only to the current requirements of the company's business but also to such other requirements as may be necessary or advisable for the maintenance and development of that business. (4) For the purposes of the said last preceding section, any such sum as is hereinafter described shall be regarded as income available for distribution among the members of the company and not as having been applied or being applicable to the current requirements of the company's business or to such other requirements as may be necessary or advisable for the maintenance and development of that business, that is to say—

  1. (a) any sum expended or applied, or intended to be expended or applied, out of the income of the company, otherwise than 1204 in pursuance of an obligation entered into by the company before the fourth day of August, nineteen hundred and fourteen—
    1. in or towards payment for the business, undertaking or property which the company was formed to acquire or which was the first business, undertaking or property of a substantial character in fact acquired by the company; or
    2. (ii) in redemption or repayment of any share or loan capital or debt (including any premium on such share or loan capital or debt) issued or incurred in or towards payment for any such business, undertaking or property, or issued or incurred for the purpose of raising money applied or to be applied in or towards payment therefor; or
    3. (iii) in meeting any obligations of the company in respect of the acquisition of any such business, undertaking or property; or
    4. (iv) in redemption or repayment of any share or loan capital or debt (including any premium on such share or loan capital or debt) issued or incurred otherwise than for adequate consideration; and
  2. (b) any sum expended or applied, or intended to be expended or applied, in pursuance or in consequence of any fictitious or artificial transaction:
Provided that this subsection shall not operate so as to make the said last preceding section apply as respects any company unless it appears to the Commissioners, not only that income of the company has been or is to be expended or applied for one or more of the purposes mentioned in this subsection, but also that the company has not in fact distributed a reasonable part of its actual income in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of surtax. (5) For the purposes of subsection (4) of this section, share or loan capital or debt shall be deemed to be issued or incurred otherwise than for adequate consideration if—
  1. (a) it is issued or incurred for consideration the value of which to the company is substantially less than the amount of the capital or debt (including any premium thereon); or
  2. (b) it is issued or incurred in or towards, or for the purpose of raising money applied or to be applied in or towards, the redemption or repayment of any share or loan capital or debt which itself was issued or incurred for such consideration as is mentioned in paragraph (a) of this subsection or which represents, directly or indirectly, any share or loan capital or debt which itself was issued or incurred for such consideration,
and references in this subsection and the last preceding subsection to money applied or to be applied for any purpose shall be deemed to include references to money applied or to be applied in or towards the replacement of that money".

Mr. Patrick Jenkin (Wanstead and Woodford)

I beg to move Amendment No. 745, in page 92, line 35, to leave out "If" and to insert: With a view to preventing the avoidance of the payment of income tax through the withholding from distribution of income of a company which would otherwise be distributed, where it appears to the Commissioners of Inland Revenue that". May I begin by expressing my gratitude for the latitude, Dr. King, with which you have agreed to the selection of Amendments, particularly—

The Chairman

In case I forget, I should say that we are not selecting the hon. Gentleman's similar Amendment No. 784, in Schedule 17, page 211, line 7, at the end to insert: 7. A company may in respect of any financial year during the whole of which it is a close company elect by notice in writing to the inspector within twelve months of the end of such financial year that it shall be assessed to income tax as though it were a partnership consisting of its participators and directors and that it shall be exempt from corporation tax for that financial year and in such circumstances the company's income shall be deemed to accrue to its participators and directors as partners in such shares as may be just having due regard to their rights to participate in the income of the company or to remuneration from the company.

Mr. Jenkin

That was the second barrel of my gun. I should be very happy to fire the first at hon. Members opposite.

We start the proceedings of the thirteenth day of the Committee stage of this Finance Bill and I am bound to say that as we plough our way forward the matters with which we are concerned seem to become more and more complex. We have a long way to go, but I hope that on the subject of close companies we shall be able to make fairly swift progress today.

With my Amendment we come to the heart of this part of the Bill, which deals with close companies. Clause 72 contains the sting which imposes Income Tax where a company does not make a reasonable distribution. The Clause imports the concept of shortfall, and this is the word which appears throughout.

The pattern is broadly that of the Surtax legislation originally in Section 22 of the Finance Act, 1931, and re-enacted in Section 245 of the Income Tax Act, 1952, but it has to be recognised—and I am sure that the Committee is well aware of this—that although the general pattern of those Sections has been followed, there are now a number of significant differences, and it is to some of those differences that the Amendment is directed.

First, in the Clause the direction is mandatory. There are cases where a direction of less than the norm of 60 per cent. is regarded as permissible. The Amendment No. 464 is to substitute the word "may" for the word "shall" in subsection (1) so as to indicate and make it clear that the Revenue does not have to make a direction if it does not consider that appropriate. That is the first difference. Under the old Income Tax Act, with Section 245 companies this was always regarded as being discretionary.

Secondly, for the first time there is now provided what one might call a standard, so that unless a company can show to the contrary—and we are dealing with trading companies—it will have to distribute at least 60 per cent. of its net profits after payment of Corporation Tax. This, as it were, sets a maximum, but in certain respects it could also be said to establish something in the way of a norm and it is the fear of a number of us on this side of the Committee that what is intended to be a maximum will turn into the starting point, or the norm, where assessments are being made.

The third difference—and I appreciate that the Amendment of the Chancellor of the Exchequer may have gone some way to relieving our worries on this score—is that the burden of proof has been shifted to some extent. Under the old Section 245, the burden of proof was squarely on the Commissioners to establish that the company had not made a reasonable distribution of its income. As the Bill is now drafted, the burden is clearly shifted to the taxpayer to establish that he has made a reasonable distribution. The Chancellor's Amendment may have gone some way to move half way back, but not the whole way. Our Amendment makes some difference.

The fourth distinction between the old Sections and the Bill is that under the old Sections administration was entirely in the hands of the special commissioners, I mean the assessing special commissioners, who have their headquarters at Thames Ditton, which were described not unfairly, and may still be described, as not unlike a concentration camp or prison hutments, whereas under the Bill administration is to be in the hands of local inspectors.

There are thus these four differences, that it is mandatory, that there is the 60 per cent. norm, that the burden of proof is largely on the taxpayer, and that the administration is not now centralised but in the hands of local inspectors.

All the time the Chief Secretary has been trying to persuade the Committee and the country that these provisions in some way represent a concession to close companies. He says that the difference is that the norm of 60 per cent. has to be compared with a maximum possible distribution of 100 per cent. under the old provisions. But that is misleading and does not represent the facts of the case. In the small hours of Thursday morning I wrote something a good deal more pungent when I came to that comment, but, in the hope of keeping proceedings this afternoon sweet, I have moderated my language.

When a Surtax direction was made, a company paid Income Tax and Surtax, the Profits Tax liability being removed. A company did not pay Income Tax, Surtax and Profits Tax, so that in a sense Surtax and Profits Tax were alternatives. Under the new provisions, a company starts by automatically paying Corporation Tax and is then obliged, if a direction is made, to pay Income Tax on the distribution, and the Surtax, and one has to bear in mind that there is also a potential liability to Capital Gains Tax on retentions.

Mr. Harold Lever (Manchester, Cheetham)

But is not the fair comparison what actually happens under a direction under this provision and a direction under the old Section? Was not the direction under the old provision more onerous in toto than any direction which could be made under this?

Mr. Jenkin

The hon. Gentleman is, for the first time in the history of this Committee, supporting his right hon. Friends. With respect, this is the point. One might perhaps put down a Question to find out just how many trading companies ever had 100 per cent. Surtax direction imposed. I think very few. In the vast majority of cases the revenue accepted something substantially less. The sort of standard on which the thing has tended to group over the years has been that the company would be left with a third of its profits as retentions and would be expected to distribute the rest of them on that basis.

There is no doubt about it that if the 60 per cent. norm is applied a company is substantially worse off. One cannot adopt a new system of corporate taxation which is intended for ordinary companies, to penalise distributions and to encourage retentions and, at the same time, in the case of these close companies, impose compulsory distributions and not expect them to be worse off. The two things are wholly inconsistent and that is why the Chief Secretary's constant reiteration that it represents a concession to these companies has been taken with several handfuls of salt by all those concerned with its administration.

It is against this background we come to the Amendment. The fears of my hon. Friends and myself about this new set-up as it applies to close companies are twofold. The first fear is that the inspectors who will have the administrations of these classes for the first time, will tend to regard the 60 per cent. provision as the starting point and they will feel, "Now, at any rate, we will make an assessment of 60 per cent. unless we are satisfied that something less should be allowed."

It will be a sort of guiding light and it will be up to the company to establish less. This must be comparative with provisions that have applied previously where the amount has been at large. In spite of what the Chief Secretary says about the 100 per cent. being notional, the maximum amount of the distribution has been at large and the commissioners have always been prepared, as a first step, to discuss with the companies their business needs and from that to arrive at what a reasonable distribution should be. This is starting at the other end and we are afraid of what the effect that this might have.

The second point arises from the change of administration. There is bound to be a margin of discretion with the Inland Revenue inspectors, whoever they may be, as to how the section is to be administered. Inevitably, they will have to exercise their own personal judgment on this and this will lead to wide variations in treatment between different tax districts. Hitherto it has all been dealt with by the commissioners. Now it is to be deal with by the inspectors.

I now come to the Amendment on the Notice Paper. We would like to state firmly, since it does not appear in the new legislation and did in the old Section 245, that the whole of these Sections, from Clause 69 to 74, are all anti-avoidance Sections and have no other purpose. Section 245 of the Income Tax Act started with a provision to this effect and so does our Amendment. It starts off: With a view to preventing the avoidance of the payment of Income Tax through the withholding from distribution of income of a company which would otherwise be distributed. It is important to get this on record. We must do so, otherwise the Inland Revenue and the taxpayer at large would lay themselves open to all sorts of activity by those who conduct their operations through these small companies. This would make it quite clear that the Sections should not be used as some sort of fiscal device to squeeze private companies until, as some people say, the pips squeak.

The second point is one of more substance and would require the local inspectors to obtain the sanction of the special commissioners before they put a direction into effect. The Amendment reads: … where it appears to the Commissioners of Inland Revenue that. We would envisage that the inspector should refer a case where he and the taxpayer have not been able to reach agreement on the proper distribution. The commissioners would have to be satisfied that a prima facie case was made out. If the taxpayer has tried to play canny with the Revenue and has not disclosed all the material facts then it is quite right that the powers should be there and available.

But there may be perfectly genuine cases where the inspector and the taxpayer cannot agree on what is a reasonable distribution and where in the interests of standardisation and further reasons which I have mentioned, it would seem to be desirable that the inspectors should get prior sanction of the commissioners before making a direction.

4.15 p.m.

We have three objectives in mind in suggesting this. First, it limits the possibility of unreasonable assessments, unreasonable distributions being demanded by tax inspectors, particularly in the early years, when they have not had any experience in dealing with these matters and when they may be over-enthusiastic and overworked. In those circumstances, one needs to have some sort of long-stop to make sure it is not always the 60 per cent. provision which is automatically applied, leaving the taxpayer to appeal against it.

The second objective is that this would ensure some measure of standardisation. There is a wide measure of discretion to be exercised in administering these classes and by requiring that the matter should be referred to the special commissioners one could, to some extent, ensure standardisation between the practices in different tax districts.

One could envisage, and I am not being fanciful, that companies would choose to set up their registered offices in tax districts where it was recognised that tax inspectors took a reasonable view of these things and to avoid districts where the inspectors took an unreasonable view.

The Chief Secretary to the Treasury (Mr. John Diamond)

I am sure that the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin) will realise that inspectors are continually on the move so as to avoid anything like this happening.

Mr. Jenkin

I recognise that. But they do stay for a number of years in a particular place, perhaps four, five or six years, and in the early years it will be difficult for them to establish any sort of standing practice against which to set their sights.

Mr. Raymond Gower (Barry)

It might be feasible that a company would follow a good inspector around.

Mr. Jenkin

They would be following a very good precedent. It is well known that firms of moneylenders follow lenient county court judges around the country because they recognise that some county court judges are more tender to moneylenders than others.

This provision of requiring the special commissioners to be satisfied has the effect of shifting, to some extent, the onus on to the Revenue. They must first make up their minds that avoidance is being perpetrated, that there is excessive retention and only if they are so satisfied, and they must be reasonably satisfied, can the commissioners give the inspector the go-ahead. This is a limited but valuable safeguard. It is limited because in the last resort the Revenue must have the right to assess the company and to leave the taxpayer to prove that he has, in fact, made reasonable distributions. This is valuable in that it makes sure that the Revenue has an opportunity to satisfy itself that it is right that the whole provisions of the classes should be put into effect.

Finally, I would remind the Committee that this is an anti-avoidance provision and that, as such, the Revenue must be satisfied avoidance is being perpetrated. The taxpayer has to prove he is making reasonable distributions. This is rather like the criminal in a court of criminal law having to satisfy the jury that he is innocent, that there is otherwise an assumption of guilt. I am certain it would be wrong that we should import anything of that sort up to a certain point in a taxing Statute.

I suggest that for the reasons which I have given this is a reasonable Amendment. It does not detract from the avoidance provisions of the Bill, but it puts some matters right, and I hope that the Government will be able to consider it sympathetically.

Mr. Harold Lever

I observe that when I candidly and objectively find it right and appropriate that I should praise a Government action, this gives rise to howls of indignant rage from some hon. Members opposite, as if they had come to depend upon me as an ally for all kinds of irresponsible criticism. There is nothing in my attitude which justifies this. I have spoken with complete candour when I have been critical of the Government, and I propose to go on doing so.

Sir Tatton Brinton (Kidderminster)

On a point of order. Could the hon. Gentleman speak with complete clarity? He is very difficult to hear.

Mr. Lever

I am grateful to the hon. Gentleman, because I do not want any of my words to be lost.

I was protesting against the attempt to elevate matters of administrative convenience, good sense and good business sense and reasonable fairness in the administration of tax legislation into political issues or to make them matters of ideology. This is an entirely spurious and bogus point of view.

When my right hon. Friend the Chancellor of the Exchequer listens, as he often has done throughout these lengthy debates, to criticism from the front and, sometimes less conveniently, from the rear, and has, in his open-minded and fair way, come to see that some improvement man be made, I lament very greatly that hon. Members opposite feel that they have lost a political weapon and that they cannot exacerbate further the relationship between the Government and business people who are concerned with this legislation and vent their indignation on my right hon. Friend by personal insult and abuse.

Hon. Members


Mr. Lever

I have attended these debates, and every time that my right hon. Friend weighs up a matter carefully, and then makes a concession which he thinks will be an emollient and will help the legislation to be acceptable to the Committee and to the taxpayer, the invariable result is that the right hon. Member for Bexley (Mr. Heath), or one of his team or relay of the Conservative Party doing duty at that point, tells the Chancellor that he must have been utterly incompetent for putting the provision in question in its original form in the first place. As I have pointed out before, he is caught on the fork of the right hon. Member for Bexley.

I welcome the steps taken about this Clause, to which my attitude broadly is this. It should have been even more improved than it has been, but, in view of the Amendments which have been made by the Chancellor of the Exchequer, it is probably, on balance, less harsh to business people than the existing legislation which has been operated so long without complaint or without excessive complaint by the business community and certainly without any attempt having been made to amend it during the 13 years of office of the Conservative Party.

The old position was this. Under Section 245, if the commissioners thought that a dividend should have been paid greater than that which had been paid, they made a direction, and if the taxpayer thought it right that he should have an impartial decision of the special commissioners on this point and exercised his right under the Statute to appeal and lost, every penny of the company's income was deemed to be Surtaxable income in the hands of its members. This was particularly objectionable as many a citizen would compromise his claim inevitably because it was too much of a gamble to go before the special commissioners and have his rights judicially established.

I assert that when a citizen has a right he should never be penalised by having it judicially established by the machinery of the Statute. Here no such penalty is exacted on the citizen and I am happy to welcome the removal by the Chancellor of the Exchequer of a gross injustice which must have affected many business people for many years, namely, that they were told, and constantly had to be told by their advisers, that they could fight the issue but that if they did not settle with the Inland Revenue and lost, 100 per cent. of the profits would be deemed to be the income of the shareholders and, hence, Surtaxable.

Sir T. Brinton

I am sure that the hon. Gentleman is wrong on this point, which has come up before. The liability to be assessed on 100 per cent. of one's profits was the case until the Chancellor of the Exchequer, I think in 1961, took away the Surtax umbrella, and from then on one was assessable only on what the Revenue maintained one should have paid. Is not that the case?

Mr. Lever

The hon. Gentleman said that he was sure that I am wrong. There is nothing more distasteful to me than to remove any certitude about anything, but in this case, reluctant as I am to disturb the complacent situation in which the hon. Gentleman has been all these years, I can do it with less reluctance because the evil situation is to be remedied by the Government, since in this Clause that can no longer happen.

The hon. Gentleman will find that this is so. It is not a matter of dispute or of opinion. Until now, if a citizen was served with a direction under Section 245, and if he appealed to the commissioners and lost, the whole of the income was deemed to be the income of the shareholders for Surtax purposes. This is a very unfair rule because directors of companies might say, "We cannot pay a dividend this year", and the special commissioners might say, "You could have paid 10 per cent. this year".

They are deemed to have paid a 100 per cent. dividend because the commissioners said that 10 per cent. was appropriate. Equally, up to now, if a company paid 40 per cent. and the special commissioners thought that they should have paid 60 per cent., the consequence was they paid Surtax, not on 60 per cent. but on 100 per cent.

All that illogicality of an oppressive character is being brought to an end. I a sure that right hon. and hon. Members opposite wish to be fair to the Chancellor of the Exchequer and to the Government in this matter, and I should welcome it if they would at least express some satisfaction that this oppressive illogicality, which, alas, has been in our fiscal system for a long time, is now to be brought to an end. I am very grateful that this is so.

I leave it to my right hon. Friend the Chief Secretary to do the arithmetic, because that is not my strongest point, but I think that the Committee will find that something approaching a quarter of the gross income of a company can always be retained after tax and added to the company's capital, no matter what direction is made on the company or how severe the consequences. About 24 per cent. of the company's income net will remain in the company. That was not so before.

Mr. Patrick Jenkin rose

Mr. Lever

If the hon. Gentleman wants to commit himself, let him do so.

Mr. Jenkin

Would not the hon. Gentleman agree that under Section 245 the normal practice was that companies were allowed to retain on average about 33⅓ per cent.?

Mr. Lever

I was not talking about the normal practice under Section 245. I was talking about the worst which could happen under the new legislation, which is that something approaching a quarter of the company's profits will be available net of all tax and left in the company to be added to the assets of those who own it. Under this "dreadful" legislation, which is so often said to be inspired by malice against the business community and whose intention is to destroy family and private companies, the worst which can happen is that 24 per cent. of the profits, after all tax, can remain in the company and be added to the company's assets. Under the old legislation, nothing of the kind could be guaranteed.

4.30 p.m.

The worst which could happen under the present legislation is a great deal more severe. I do not know the figures. I shall not pledge myself on the arithmetic, but it is considerably less than 24 per cent.—probably only half that figure—which could be left in the worst circumstances under the present legislation. I am dealing with the worst circumstances first. It is interesting, if we are trying to get an insight into the mind of the Government, of the Chancellor and his Ministers and to see whether there is some justice in the complaint that the Government are trying to destroy private companies, to start off by examining the facts.

The first fact which I wish to establish is that every director of a family company or a close company knows today that, in the worst circumstances under the new legislation, he will be able to add probably over twice as much to the company's assets as would be the case in the worst circumstances under the existing law.

Mr. Gower

Will the hon. Member deal with the fears of those who feel that what was done, certainly not as general practice, but rather in exceptional cases, will now tend to be the general practice?

Mr. Lever

I will deal with that.

The next question is: what is likely to happen in the general run of cases? We are assured that, in the general run, no such thing as a 100 per cent. of distribution was the rule. That is absolutely true, and nobody would challenge it, but why should anybody suppose that 60 per cent. will become the rule now? I will submit that this will not be so, for two reasons.

I will take the first point and go back to the original situation under the present legislation. Under the present legislation, the reason that the rule is not 100 per cent. is that the Commissioners of Inland Revenue thought it reasonable that companies should have money for their business in pursuance of the provisions of the Act. Of course, if a company made a profit and did not pay it all out in dividends, the special commissioners would decide whether this was justified. It was not as an act of philanthropy in the past that they did not declare 100 per cent. available. It was done in conformity with the law and with the 1952 Act.

The present position is that we can call it a concession—the Opposition now call it a concession—that if the special commissioners did not enforce 100 per cent. dividends as the rule—as they could have done in certain circumstances—it was because they were obliged by Statute to have regard to the requirements of the business. They will still be obliged by Statute to have regard to the requirements of the business. It is not the case that, in the past, they were feeling generous to shareholders and will now be told to be ungenerous. They will be in exactly the same position in deciding what might be paid under the new law as they were under the old, except in one respect, that of burden of proof, which I shall come to in a moment.

Leaving aside the question of the burden of proof, the special commissioners who behaved decently and fairly to taxpayers under the existing law will be obliged to behave fairly to taxpayers under the new law in precisely the same manner, with the added advantage for the taxpayer that the special commissioners were compelled in the past by Statute and the illogicality of the Statute to be harsh and oppressive to taxpayers, who brought the matter to trial. When the taxpayer lost, even though the special commissioners thought that a 60 per cent. would suffice, a 100 per cent. dividend was automatically exacted. Under the new law, the special commissioners will be turned away from the worst circumstances to the average run of case. They will be governed by the same principles as before, but they will not be obliged—as they were before—to inflict penal consequences on the taxpayer who lost his case on appeal.

It seems that there is a greatly exaggerated excitement about this Clause in the mind of the Opposition, and this is genuinely so. I can well understand their concern. It is very appropriate that they should be concerned about it, because we have often talked about double taxation and about the fact that the House of Commons is here as a watchdog. The House has to see that there is no oppression of the citizen. I do not complain—I do not think that the Government should complain—when the Opposition are vigorous to see that the taxpayer is not oppressed by oppressive legislation.

I am sure that, with these Amendments, it has become clear that this Clause, far from arousing the taxpayer's anxiety, will be a boon to him. This is important, because it is not only the enforcement of the law which matters, but the taxpayer's state of mind. The average businessman wants to get about his business without having to worry his head about whether he will be subject to a penal direction which will cause him anxiety. I hope that it will go out from the Committee—I hope that the Opposition will play their part in insuring that it does—that in many important respects this Clause is an advantage to the businessman, compared with the ones it replaces.

The other points mentioned did not seem very valid. There is no guiding light of 60 per cent.; there is, as I see it, an absolute limit of 60 per cent. I deny that it is a guiding light for inspectors of taxes. The question of standardisation between districts is also a false point, because, of course, one can never standardise any court which has to have many judges. We cannot standardise the behaviour of our High Court judges, nor could we do it with the special commissioners. If special commissioners or inspectors of taxes sit on all these cases, we shall have to recruit a substantial team to do this work.

It is one of the facts of life that if one has 100 judges one will have 100 different directions in the operation of the law. We have to provide a particular guiding principle which seems fair and reasonable and I think that the Chancellor has done that in this Bill.

The other point—that we need a "long stop" to protect people and that the special commissioners should give the direction and not the inspectors—is a bad point basically by reason of practice. The suggestion is that if we do not have this long stop, inspectors of taxes will pepper the citizen with these directions and they will be left to appeal. If the inspectors are foolish enough to do this, they will bring the whole operation of the Clause to a very convenient standstill. It is not conceivably possible that any tribunal of special commissioners could be set up by the Government which could cope with the appeals. They already have the greatest difficulty in getting these appeals heard in a reasonable time under the present law.

If the inspectors were to pepper the citizen with unfair directions from which there would be hundreds of appeals, the first time the Revenue would collect any taxes in respect of 1966 would be about 1975, because there would be such a queue of cases waiting for trial and confirmation. Head offices would soon see that an inspector was issuing too many directions in relation to his area or to the kind of profits which were coming in and he would have a polite note. I know nothing of the procedure—

Mr. Anthony Barber (Altrincham and Sale)

Would the hon. Member say what it is that he finds objectionable about the Amendment?

Mr. Lever

I do not find the Amendment objectionable. What I object to are the speeches and comments of hon. Members opposite. I would find the Amendments not unreasonable in themselves. They did not enlist my passionate enthusiasm. I hate to admit this in public, though it is well that I do so now, but I cannot swear that I have examined every comma and every phrase in the Amendments. Therefore, I do not want to commit myself in detail on this. I do not find them obnoxious. What I think ought to be said, and has not been said by the Opposition so far—I think that they have a moral duty to say it—are the kind of things which I have been saying in relation to this Clause and not the kind of things which were said so ably by the hon. Member for Wanstead and Woodford (Mr. Jenkin), in implying that it was oppressive.

I conclude on a slightly cavilling note. My own Amendments are down and I am still hopeful that they will catch the attention of the Chair at some point. This is not altogether to be regarded as a certainty. The net effect of my Amendments—

The Chairman

If the hon. Member's Amendments are selected by the Chair, and he is called, he will be able to talk about them. He should not talk about them now, however.

Mr. Lever

The last thing in my thoughts, Dr. King, was to talk about my Amendments before they are called.

I was about to mention the one point on which I have a degree of sympathy with the Opposition. That is the question of the onus of proof.

I wish that the Government would budge on this matter and give a great deal of satisfaction to many people as well as myself. I am told that the reason for disturbing the existing rule, whereby the onus of proof is on the Revenue and not on the taxpayer, is that it does not make any difference in practice. If it does not make any difference in practice, for goodness' sake leave the rule as it is. It makes a great deal of difference emotionally for the taxpayer to feel that the onus of proof is on the Revenue.

I cannot understand why my right hon. and hon. Friends dig their heels in on this matter. We have worked the system adequately under the old rule with the onus of proof on the Revenue. It ought to be on the Revenue. Practice has shown that to be reasonable and there is no reason why it should not continue that way.

I add just one argument why the onus should be on the Revenue. An onus of proof means, in the end, that if there is any reasonable doubt in the matter the benefit is given to the one who is the beneficiary of the onus of proof. If the onus of proof is upon the taxpayer and there is doubt in the matter, if the special commissioners honourably enforce the legislation, as I think they will—because they are one of the most immaculate and fair-minded tribunals in the land—if the special commissioners think that possibly the money is required for the purposes of a business but the onus of proof has not been discharged and there is substantial doubt in the matter, it means that the benefit of doubt must be given to the Revenue, the Surtax direction must be made, the Income Tax direction must be made and, as a result, money must be paid out from the company which may—I put it no higher—reasonably be needed by the company but probably is not needed by the company.

If there was doubt whether the company would be prejudiced by the payout or retention of the funds, undoubtedly the benefit of the doubt should be given to the taxpayer, because it would not be a disaster if the Revenue did not get the Income Tax and Surtax but it might be a disaster to the company if the Revenue got it.

Much as I agree with my right hon. and hon. Friends about the beneficial character of the Clause, with that one saving criticism, I beg them to look again at this matter and to place the onus of proof where it always has been without disturbing the financial solvency of the State or turning the world upside down. Why not put the onus where it was before, reassure many taxpayers and business men throughout the country and make the Clause a real advance in our fiscal legislation?

Mr. Geoffrey Lloyd (Sutton Coldfield)

In supporting the Amendment of my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) I should like, first, to welcome what the hon. Member for Manchester, Cheetham (Mr. Harold Lever) has just said about the onus of proof. This is an important matter. Many hon. Members in the Committee regard it as important and there is no doubt that multitudes of small and medium sized businesses throughout the country regard it as an important point.

In supporting my hon. Friend's Amendment, I should like to bring to the notice of the Chief Secretary an example, which is not a bad one, of the kind of anxieties which seriously afflict a large number of serious business people all over the country. The firm in question is a confirming house which provides credit for firms overseas purchasing goods from the United Kingdom. It has furnished me with these figures, which I will give as simply as I can. I am sure that the Chief Secretary, with his experience, will seize them quickly.

Over the last 10 years to 1960, the firm's profit was £1,175,000, of which £545,000 was paid in tax—it is a Surtax company—£155,000 was distributed in dividend and £475,000 was retained. The company went on well, but in 1961 it unexpectedly incurred a heavy loss of £351,000 in South Africa.

The managing director is anxious as a result of making the following calculation. Admittedly, he has made his calculation on the basis of a 40 per cent. Corporation Tax. I know that the Chief Secretary has continually insisted on a figure of 35 per cent., but he will understand that because his right hon. Friend the Chancellor mentioned a figure of 40 per cent., everybody in business is calculating on 40 per cent. because that is the only safe conservative thing to do. At least, I make it clear that the figure is based upon 40 per cent. Corporation Tax, plus 60 per cent. compulsory distribution.

4.45 p.m.

Had Corporation Tax been enforced in those years, the company calculates that there would have been a profit of £1,175,000, minus Corporation Tax of £470,000, leaving £705,000, of which 60 per cent. distribution would have meant distributing £423,000, leaving a balance of £282,000. That is £193,000 less than the £475,000 which the company had in hand at the end of 1960 and out of which it was enabled to meet the loss of £351,000. I am sorry to inflict these figures on the right hon. Gentleman, but I am sure that he seizes the point. The main point of it is perfectly clear.

Perhaps I may make the point more simply by quoting the letter from the managing director, who states: This is a private company which over the years has been successful by virtue of the fact that succeeding generations of management have steadfastly pursued a policy of prudent husbandry—a consistent policy of building up reserves combined with conservative dividend payments. However, five years ago this company took a very serious loss in South Africa which substantially exceeded its capital. Had it not been for the prudent and cautious policy referred to, this company would have been unable successfully to overcome its difficulties and would have been bankrupted. Had the proposed legislation been in force since 1945, there is no doubt that it would have failed, whereas it not only withstood the heavy blow suffered, but has successfully made a comeback to a sound financial position. This is the kind of anxiety which many serious people feel.

Mr. Harold Lever

Why should the firm suppose that after this legislation is passed the special commissioners should enforce a greater dividend than they would have accepted prior to this legislation? These retentions were possible only because the special commissioners allowed them. Why should they not allow them after the Clause has been passed into law?

Mr. Lloyd

This is one of the reasons why I raise the point. It may give the Chief Secretary the possibility of making it clear that that is not the intention of the Government under the Clause, although my hon. Friend the Member for Wanstead and Woodford, in moving the Amendment, was quite clear that he had anxieties about the fact that it might become law. This is the point about which we are anxious.

If I may develop one further final point which is strictly related to the matter, I think that the Chief Secretary has waved aside too easily the point about the transference of the administration of these provisions from the special commissioners to the local inspectors. It is not my purpose to say anything against the local inspectors; I well know that they are an extremely efficient and good body of public servants of the best internal revenue service in the world. The point is, however, that the special commissioners, in their special section dealing with these matters, have built up an expertise such that business people have known that when they have consulted them they were consulting people who thoroughly understood the points.

With the best will in the world, I must point out to the Chief Secretary that it is asking a lot of the local inspectors to think that they could possibly become experts in a matter like this, which involves the distribution policy of companies, within a very short space of time. This is wholly alien to any of the work that they have hitherto been asked to do. It is an entirely new departure.

The Chief Secretary is, I am sure, well aware that the distribution policy of a company is one of the central features of the strategy of a company's development. It is an extremely important point. It is something on which business people and boards of directors spend a great deal of time. It is not exactly a matter in which one can always say by rule of thumb exactly what should be done. It is something in which the creative instinct of business men is of great importance. Business men have the feeling that they may have to submit a case to people—local inspectors—who are not at all practised in this kind of thing, whereas they would have confidence in the special commissioners. I hope that the Chief Secretary will be able completely to relieve these anxieties, although he is likely to find it difficult to do so.

Mr. George Y. Mackie (Caithness and Sutherland)

I wish to stress the importance of the case of the very small company just starting up; the man who is transferring his business from being on his own to a limited liability company—not to limit his liability, but to help him to build up his company. It is to people of this sort that we in my constituency and the parts of Scotland with which I am particularly concerned are looking to replace the established industries which are dying. These are the people who can bring new life, industry and energy to these areas.

The hon. Member for Manchester, Cheetham (Mr. Harold Lever) was concerned to defend the Chancellor's good name and to express the Chancellor's concern for the private section of business, particularly the small company. If the hon. Member for Cheetham agrees on the question of the onus of proof, I suggest that he has gone a long way towards agreeing that the Chancellor has begun to damage his name by making it appear to the small company that while the big company can retain all its profits if it wishes to do so after the payment of Corporation Tax, it is mandatory on the small company to prove that it may not distribute up to 60 per cent. of its profits.

I know many companies which are concerned about this matter. I will instance one. It is an engineering company in the north-east of Scotland which employs 300 people and exports its products throughout the world in competition with the Germans, Americans and others. The company began in a small way, with the directors virtually sleeping beside the machines and working them after the men had gone home. Far from wanting to distribute all their profits, they took very little money themselves; hardly enough to live on.

People of this type are extremely valuable to us. I hope that the Chancellor did not mean what he has been understood to mean in his references to this subject. If he did mean it there would appear to be at least a sign of incompetence on his behalf and an indication that what the right hon. Member for Bexley (Mr. Heath) said was right. The Chancellor must go some way to assist, by means of the taxation system, the energetic and, perhaps, some might say, slightly stupid individuals who do not want to enjoy the fruits of their labours but are more interested in their businesses. If we are to continue to have these people the Chancellor must encourage them to plough money back, borrow more money and go on doing their good work.

I could instance many cases of companies throughout the north of Scotland, the area which I know best, where these energetic activities are taking place—companies which are providing the only sign of real life in the area—where the big, established old industries have grown too fat to develop or have become too lazy and, which, perhaps, need something done in the Surtax direction to slim them down.

The people who matter are the ones who are starting new industries from scratch. If the Chancellor would accept the suggestions, certainly the Amendment dealing with the onus of proof, and say that it is reasonable for such people to plough money back and build up their businesses, he would go a long way to keeping these people energetically in business. After all, the right hon. Gentleman should be only too pleased to tell such people that they can have their money until they are dead or sell out.

Mr. Diamond

It might be convenient to the Committee if I answered the debate thus far. If any hon. Member wishes, at the end of my remarks, to pursue any matters further, he will be at liberty to do so and I, will attempt later to clear up any further points. I am encouraged by the desire of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), from which I do not dissent, that we should make progress consistent with the thorough discussion of important points. This is one such point.

I come immediately to the question asked by the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) to put the matter in its appropriate philosophical background. The Government are most anxious that the very kind of encouragement to which he referred should apply universally. Everyone should be encouraged to plough back in the real sense of that term—that is, the development of his business by using his realised profits for the purchase of new plant and so on so as to get greater efficiency and more productivity. These are the very things which my right hon. Friend wishes to encourage, and I repeat "universally".

There is no distinction to be drawn, as the hon. Member for Caithness and Sutherland drew, between the big and small company. It is the desire of my right hon. Friend that all companies, big and small, should adopt the practice of ploughing back as much as possible. The hon. Gentleman said there should be a kind of tax system to encourage this, and we are bringing in Corporation Tax to do that very thing. It would be wholly inconsistent with the whole philosophy, background and approach of Corporation Tax if we said, on the one hand, that we want to encourage plough-back and, on the other, that we do not want to leave businessmen with the money they need to buy new plant to expand. I will, therefore, explain why the present situation serves those requirements best and deals fairly with all companies.

Mr. Eric Lubbock (Orpington)

If what the right hon. Gentleman says is true, how did this 60 per cent. compulsory distribution figure get into the Bill in the first place?

Mr. Diamond

The answer is that it does not exist. I hope that the hon. Gentleman will allow me to make my speech, when I am sure that I will remove any anxieties he may have.

I assure the Committee that all the fears, which have been widely expressed—not only in the Committee, but throughout the country—are based on misapprehension, not only of the intention of the Government, but because of misunderstanding of the enactment proposed. The Amendments which my right hon. Friends are introducing do nothing to alter the law, but make it more clear and comprehensible. However, we are not dealing with those Amendments at present.

Starting on that basis, I will endeavour to explain why it is wholly consistent with our attitude that there should be every possible encouragement to plough back, by which I mean utilising realised profits, cash funds, to purchase new plant, premises and so on and to have such money available for working capital to expand, extend and be more efficient. It would be wholly wrong, however, if such a procedure were to be used by companies which wished merely to avoid taxation. We are at one in wishing to take steps to prevent avoidance. So I repeat that there is a stage between distribution and plough-back. That is retention; idle, passive retention.

A company which has made profits, has realised cash, may do three things with it. First, it may distribute it by way of dividend to its shareholders. Secondly, it may plough it back, buy new plant and machinery and so on. Or, thirdly, it may leave it idle in the bank or invest it in, say, portfolio investments because it has no business use for it. It is that third use which has not come out clearly in previous legislation and which is the new idea we are inserting in this legislation.

It is that which we want to avoid, as well as pure tax avoidance. The legislation therefore moves on the basis that businessmen shall be encouraged to either distribute by way of dividend or, and we hope more so, to plough back—not as the right hon. Member for Bexley (Mr. Heath) said, to grow fat; that is what this legislation is here to avoid. This is the survival of the fittest and not the fattest.

5.0 p.m.

Mr. Gower

The right hon. Gentleman has dealt with the stages of distribution, retention, and what he calls ploughing back, but can he relate his argument to the provision of reserves to meet the sort of situation mentioned by my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd)? That is something that cannot be easily foreseen even by the tax inspectorate.

Mr. Diamond

Yes, I shall come to that. I have made very careful note of what the right hon. Gentleman said, and I will deal with it. In fact, if it is helpful to the Committee I will deal with it at once.

Sir Douglas Glover (Ormskirk)

I am very grateful to the Chief Secretary for giving way, as he has done, because I have a great deal of sympathy with his argument on this matter. It is in the case of the firm that is getting fat that the onus-of-proof point worries me. A firm may plough back its profits this year, next year, and the year after, but it will take a lot of explaining to the inspector of taxes. It may take the view that in five years' time it will have enough capital to build a factory, but that is something very difficult to explain. Such a company may have Surtax charged before it has the capital it wants.

Mr. Diamond

Both the hon. Member for Barry (Mr. Gower) and the hon. Member for Ormskirk (Sir D. Glover) have expressed the same anxiety about what I have referred to, for the sake of simplicity, as using realised profits in the form of cash to invest. What they both ask is, "What about adding to your reserves against the need for a further cash investment of a large sum in a year's time, or two or three years' time?"

The answer is, of course, that there will be no difficulty in satisfying the inspectors on this point, because we are using exactly the same form of words and exactly the same criteria as have hitherto applied, and which have satisfied the constituent of the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd). The right hon. Gentleman demonstrated that because this particular company, which needed working capital in the form of cover for its liabilities and guarantees, was able to satisfy the Surtax commissioners—it being a Surtax company, as he said—it was entitled to withhold profits amounting to about £500,000 out of £1⅛ million over a period of 10 years. It was able to do that for that very reason.

I say to the right hon. Gentleman, and I am sure that he realises it, that the same criteria are being adopted, the same words have been imported into this legislation, and the same judgment will be made. The right hon. Gentleman was trying to compare the result of applying those criteria with the maximum distribution that any individual company could be required to make under the proposed legislation. That does not represent a fair comparison. The fair comparison is practice in the past with practice in the future, and I say that practice in the future must coincide with practice in the past in this respect because the same words are being used and the same criteria are therefore involved.

I am grateful to have the opportunity to repeat that the 60 per cent. is a method of eliminating from discussion a whole host of cases. No longer will it be necessary, as it is today, for a company to satisfy the Revenue that it has made a reasonable distribution if it has distributed 60 per cent. of its net profits, because there is no longer any opportunity of argument. The law will state that a 60 per cent. distribution ends the argument. That is what it is about. I say that it is a relaxation, and it is a relaxation—that is the whole purpose. A vast number of companies that might otherwise have been put to the trouble of, perhaps, no more than writing a letter to the inspector of taxes explaining the position—or having an interview with him—will no longer have that trouble. They will be completely out of the way.

I repeat that the figure is 60 per cent. net; that is to say, with a 40 per cent. Corporation Tax, it means a 36 per cent. distribution only, and with a 35 per cent. Corporation Tax, it means a 39 per cent. distribution only. That is the amount of the distribution that will put an end to all possible argument. One bears in mind the way the thing works. A company makes a profit, it decides on its dividend policy, it sends the balance sheet to the inspector, and, at the moment, a letter goes with it, saying, "The reason why the dividend is only so much is as follows." That will happen in the future.

It is only when there is disagreement between the Revenue and the taxpayer on whether there has been reasonable distribution that the rest of this provision comes into account. It is only then that consideration has to be given to the 60 per cent. In those circumstances, there is no possibility of the 60 per cent. being regarded as a norm. It is the ceiling. It is the maximum. It is the figure which removes a whole host of cases. I therefore hope that hon. Members will no longer have any anxiety on this score.

I repeat that, (a), it was the intention and the instruction to the Revenue that there should be this kind of relaxation; (b) the words of the Clause carry this out and. (c), the only difficulty arising out of this is the question of the onus of proof, because under the present situation we have a penal sanction. Because it is a penal sanction, the courts have not interpreted these words which the Amendment seeks to introduce as themselves putting the onus of proof on to the Revenue—because it has been held that the words are purely descriptive, and there is a decided case on the point.

It is because of the penalty that the courts have said that, where we have a penal provision of that kind, it is only right that the onus of proof should be put on the Revenue. That, in practice, has been the position. In practice, what has happened is that there has been discussion between the Revenue and the taxpayer. In practice, the same thing will happen.

Some hon. Members have expressed anxiety that it will happen with a gentleman called an inspector instead of with a gentleman called a special commissioner. I doubt very much whether there is anything in that point at all—I really do. If there was, we would be only too happy to deal with it. But it will meet the convenience of the taxpayer if, instead of having to go to some part of London—it is Wimbledon, I think, with regard to this particular section—from all over the provinces and from Scotland—because in this unusual respect Scotland does conform to our fiscal legislation—the taxpayer could call on his local inspector of taxes, who is continually talking to businessmen all day long.

I do not understand the argument that the inspector of taxes is not aware of the needs of business. Talking to businessmen about their problems, seeing their balance sheets, is his daily nourishment. It is that with which he is conversant in particular. He does not see one single aspect of the matter, as may the special commissioners, who are concerned purely with Surtax on companies, but sees the whole field. I should have thought that on every possible ground he would be the right man to go to, bearing in mind that if there can be no final agreement there is the same appeal machinery open on all sides.

Mr. Patrick Jenkin

Before the hon. Gentleman leaves this point, will he not accept that there is some merit in the suggestion that where the taxpayer and the inspector have been unable to agree the inspector should seek the prior sanction of the special commissioners before proceeding further?

Mr. Diamond

When there is a dispute with the inspector of taxes it is open to the taxpayer to appeal to the general commissioners or to the special commissioners. The general commissioners are versed in the activities of the business community, to which the hon. Member has referred. These are the people whose criterion he said is the right criterion. They are the people who should know about these matters. It would be most unfortunate to deny to the taxpayer the right to air his case before that kind of body.

Mr. Jenkin

Speaking from memory, is it not right that under Section 245 the appeal lay only to the special commissioners? Secondly, is there any distinction to be made between the assessing special commissioners—the Wimbledon people—and the general commissioners?

Mr. Diamond

The point I am making is that we are not denying any rights of appeal to anyone, but are adding to them by allowing the taxpayer to appeal to the general commissioners if he desires. That is the very body described by the hon. Member when speaking on his Amendment, to which at the moment that kind of opportunity does not lie. We are giving the taxpayer a convenient opportunity which does not exist at the moment.

Mr. Harold Lever

There are two sets of people called "special commissioners", but they are two entirely different bodies. I am not sure that my hon. Friend has persuaded me and I have an open mind on this matter. What he is saying is that without prejudice to the right of the taxpayer to appeal either to the special or to the general commissioners against an assessment, he thinks there should be no assessment until the special commissioners who are very experienced in this matter of assessing what is a reasonable percentage and are more detached and sophisticated than the local inspectors should be able to deal with the affair. That was the point which I thought the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) was seeking to make and it is a point to which I should like to have an answer.

Mr. Diamond

I got the point and my Friend is quite right, but I was trying to deal with the matter in stages. The hon. Member for Wanstead and Woodford was talking about appeals. The taxpayer must have the right of appeal to the general commissioners and the special commissioners. If he says that prior to the inspector of taxes making an assessment he should refer to some other body which had previously had considerable experience in this field, I think that is quite unnecessary and would not add anything at all. I can assure the hon. Member that if I thought it would add anything I should be only too happy to agree, but it would merely clog up the machinery for no useful purpose whatever.

It is far better that the inspector and a dissatisfied taxpayer should have the opportunity of meeting at the same table and talking to each other much more than they do at present. That facility, plus the fact that a whole section of queried cases under the present legislation will be removed by the 60 per cent. formula, will make life a great deal easier and simpler for businessmen in future. I hope that the hon. Member will now allow me to deal with the question of onus of proof.

5.15 p.m.

Mr. Robert Maxwell (Buckingham)

Before my hon. Friend deals with the onus of proof, will he bear this in mind? I am sorry to disagree with my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) on this issue, but the onus of proof in this matter must lie with the taxpayer, not with the Revenue, for a very simple reason. The taxpayer or businessman is peculiarly in possession of and has knowledge of why he wishes to retain surplus. The tax inspector and the commissioners do not know this. That is the reason why onus of proof should lie with the taxpayer and not with the inspector. Even in criminal law one has to be proved guilty by the prosecution except where the individual is peculiarly in possession of all the facts. Then it is up to him to prove the contrary. For that reason the businessman and the taxpayer should be required to bear the onus of proof.

Mr. George Y. Mackie

Hon. Members might be more satisfied about this if we were to have a copy—or, even better, a tape recording—of this afternoon's proceedings, sent with a copy of the Act to those concerned.

Mr. Diamond

I speak with knowledge of the official duties I am privileged for the time being to carry out. I wish to deal with the question of onus of proof and I welcome the intervention made by my hon. Friend the Member for Buckingham (Mr. Maxwell). On the ground of common sense, of consistency, of common law and of criminal law, I should have thought there could be only one answer to this question, and that is what is provided in the Bill. On the ground of common sense we have the situation, which my hon. Friend so clearly pinpointed, that knowledge of the circumstances will be peculiarly within the possession of one individual, one authority alone. It will not be possible for the inspector of taxes unaided to know what is in his mind.

Mr. Harold Lever

How have they managed so far?

Mr. Diamond

My hon. Friend follows an argument without it being expressed with such ease that he jumps to a conclusion before allowing me to get there. If he will allow me to state the arguments, then with the greatest pleasure I will answer any question he puts to me.

The practice at the moment is that it is the taxpayer, often through his professional representative, who makes his case to the special commissioners, because, of course, he is the only person who knows his case and it is to his interests to establish it. The technical onus is on the Revenue only when there is a dispute and it goes to the courts because of the penal provision to which my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) referred.

On the ground of consistency it would be only right to continue that situation in practice under which it is the individual taxpayer who says, "I am proposing to issue guarantees in respect of South Africa. They may go bad on me. Things are difficult in South Africa and I may be caught out. I need extended assets to cover my liabilities." The reply given to the company to which the right hon. Member for Sutton Coldfield referred would be, "We understand that" and the same understanding would be applied by any inspector of taxes or special commissioners.

They could not possibly know that a particular business was proposing years ahead to develop in a particular way unless the taxpayer said so. How can an inspector know that plans are already laid for a particular factory to be established in three years' time and for the business to be extended? How could the inspector know that 100 per cent. of those profits would be needed over the three years? There is nothing in this legislation to compel any company to issue 1 per cent. by way of dividend. If it needs the whole of the profit to be ploughed back it can plough back every single penny. That is the purpose of this legislation.

Mr. Geoffrey Lloyd

The right how Gentleman is a little wrong in saying that the company would say to the inspector, or to the special commissioners, as it was in the past, "Times are difficult in South Africa. Therefore, we are having to look ahead". It was not like that. The company did not realise that things would be difficult. If it had realised that things would be difficult, it would never have made the investment. It came on the company unexpectedly. This is what may be more difficult to establish with the local inspector of taxes than with the special commissioners.

Mr. Diamond

Neither the right hon. Gentleman nor I know exactly what conversations took place. One assumes that the representations were made generally—"Having regard to the needs of my business, it is necessary to retain so much", and over the 10 years so much was accumulated. It might, in other circumstances, be a particular project, such as building a new factory, which might take one or two years or more, for which funds must be accumulated for the future.

Once the decision has been made and properly minuted and the matter is moving, there is no reason why the company should not start putting funds by for the purpose. The company must plan on what it is likely to spend in the future, what it will make in net realised profits in the future and, therefore, what it can afford to distribute. The company may come to the conclusion that it cannot afford in that year to distribute a penny.

Therefore, this is within the knowledge of the taxpayer alone. On grounds of common sense and of consistency, it is right that he, the taxpayer, should have the responsibility of explaining the circumstances. I go further and say that I am advised that this is a principle of the common law. My hon. Friend the Minister without Portfolio is here to assist me in this, in case, which I hope will not prove to be so, the Committee does not find it sufficiently satisfying to listen to what I shall say. Where a matter is peculiarly within the knowledge of an individual, the onus of proof is put upon him. I go further and say that I am advised, also, that it is an accepted principle of the criminal law, and there are several examples of it. Where the circumstances are peculiarly within the knowledge of an individual, he has the onus of proving his case.

Therefore, on all these grounds, it will work well and sensibly and as both sides of the Committee would want it to, avoiding fatness, encouraging fitness, encouraging plough-back, and placing the responsibility where it properly lies, if we accept the Bill as it is proposed. I therefore hope that it will not be thought necessary to pursue the Amendment.

Mr. Barber

I rise at this stage only because it is probably for the convenience of the Committee that I should do so. I have no intention of deterring any of my hon. Friends who wish to follow me. Obviously, I would not dream of doing that. Later, we shall debate the whole question of the 60 per cent. which appears in the Bill, and there is an Amendment to delete 60 per cent. and insert 40 per cent. We shall most certainly have various points to make on the general policy concerning close companies when we debate the Question, "That the Clause stand part of the Bill". I have been most disappointed at the Chief Secretary's reply.

Mr. Maxwell


Mr. Barber

I will explain why.

We have been debating these two very moderate Amendments for more than an hour. If, when my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) moved the first Amendment, the Chief Secretary had said, "These Amendments may not be worded exactly as we would like them, but, nevertheless, we think that they will do no harm and may do a certain amount of good and we are prepared to introduce something similar on Report", the whole matter could have been disposed of within about 20 minutes. We could then have got on to the general principles concerning close companies which still have to be considered.

I can see the necessity for some special provision dealing with closely controlled companies to prevent the avoidance of tax. The Chief Secretary knows full well that, whatever may be the merits of the particular proposals in this group of Clauses, it is nonsense to say, as he said, that there is consistency between the general policy of the Corporation Tax, which is to encourage retentions, and the particular policy relating to close companies, which is to insist on a certain limit of distributions.

The Chief Secretary said that, under the proposals of the Chancellor of the Exchequer in the Bill, a close company, if it can show good reason, need not distribute even 1 per cent. of its profits. This is true, but this was the position also under the 1952 Act. There is no change.

The Chief Secretary went on to talk about the opportunity to appeal. He talked about the opportunity of taxpayers to discuss these various matters with inspectors of taxes. If these two Amendments were accepted, they would not affect any of the rights of appeal to the special commissioners or to the general commissioners; nor would they affect the opportunities for individual companies to discuss these matters with inspectors of taxes.

Mr. Maxwell

Why are the ears of right hon. and hon. Members opposite deaf on this issue? Why do they continually charge the Government with inconsistency? Where does the inconsistency lie? The Government are introducing a Corporation Tax which will simplify matters. Someone running a close company might use profits to invest in new plant, to pay better wages, to buy or build a better factory. If the close company is accumulating the money, surely the Government are justified in knowing why it is accumulating it. How is that inconsistent? Surely after all these weeks we on this side, and the country generally, are entitled to know where the inconsistency lies, if it is not just propaganda.

Mr. Barber

I do not wish to detain the Committee. The interventions of the hon. Member for Buckingham (Mr. Maxwell) and of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) at times seem to be designed to prolong our proceedings.

The hon. Gentleman is talking about distribution. He will know, if he has looked at the Amendments, that we are not concerned with that point. That point arises on the next series of Amendments. I certainly do not want to take up the time of the Committee unnecessarily. I will only add very briefly, in answer to the hon. Gentleman, that there seems to me to be something inconsistent between the general policy of the Corporation Tax, which it has been said time and again is to encourage retentions, and the particular policy of these provisions relating to close companies, which is to insist on a certain distribution. I am not saying that on the merits this is necessarily wrong. I am saying that the two policies seem to me to be inconsistent.

I am sorry that the hon. Member for Cheetham has left the Chamber. He said that when he rose to speak he was greeted by howls of indignant rage from hon. Members. This was not so. For our part, this was not our greeting. Our greeting was merely one of surprise that he should, for a change, be supporting the Government—particularly that he should be supporting the Government when the Committee is discussing an Amendment as reasonable as this.

However, he is not here at the moment. Therefore, I will not weary the Committee by referring to the various points he made. He said in passing that he had not considered every comma of the Amendment. The brains of a lawyer are not required for an analysis of the Amendment. To use the phrase of the Chief Secretary in another context, the Amendment is simplicity itself.

What is the purpose of the legislation concerning close companies which we are now considering? Is it to give some relief to the taxpayer? It is not. Does it have some subtle and deep economic purpose? It does not. Is it to prevent the avoidance of tax. The answer is, "Yes". As the whole purpose of this legislation is to prevent the avoidance of tax, why will the Government not accept the words in the Amendment, which read: With a view to preventing the avoidance of the payment of income tax through the withholding from distribution of income of a company which would otherwise be distributed, where it appears to the Commissioners of Inland Revenue that"? 5.30 p.m.

The right hon. Gentleman, at an earlier stage, interrupted me to say that the arrangements for considering these matters would be the same as before. Of course, this is true so far as the appeal procedure is concerned, but it is by no means true from the point of view of the consideration of these matters in practice. While I can see the advantage of the managing director of a company being able to go just round the corner and talk to an inspector of taxes, I think that the right hon. Gentleman was less than fair when he appeared not to appreciate the disadvantages of switching from consideration by a central body of special commissioners to the inspectors of taxes throughout the country.

After all, uniformity is of great importance in these matters, and it is well known by those people who were concerned with them in practice that when they discussed these matters with the special commissioners they received a uniform approach. There was a body of practice built up and they knew pretty well what was likely to be the reaction of the special commissioners to the individual cases with which they were concerned.

As my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) so rightly said, the question of distribution policy is of the utmost importance to companies. It is not an easy matter to determine. With the greatest respect to the inspectorate, one wonders whether it will really be able to deal with these very important questions as well as they could have been dealt with by the special commissioners.

Mr. Joel Barnett (Heywood and Royton)

Surely the right hon. Gentleman will appreciate that under the original arrangement an accountant would have to go with a director, often together with counsel and a solicitor. This involved four reasonably busy people having to go to Wimbledon to deal with the matter, when it could have been dealt with locally by the local inspector of taxes.

Mr. Barber

I can meet that argument by saying that I recognise that under the legislation as it is now drawn up in the Bill, because there will be so many additional cases involved, it is necessary that these matters should be considered by the local inspectors and not by the special commissioners. For practical reasons it would not be possible for all these cases to be considered by the special commissioners. I accept that this must be so. But it is because we are faced with this position that it seems to me that the words which we propose to insert at the beginning of Clause 72, which make it necessary for an inspector, before he proceeds, to ensure that the matter is considered by the Commissioners of Inland Revenue, are of importance.

In other words, if of necessity one is changing to a system whereby the inspectors of taxes rather than the special commissioners deal with the matter in the first instance, I think that in the interests of uniformity and for the various reasons which were referred to by my hon. Friend in moving the Amendment, it is highly desirable that there should be this provision whereby the case has to be referred to the Commissioners of Inland Revenue before action is taken.

What seems to me to be the most compelling reason of all for accepting the Amendment is that the words in the Amendment are almost identical with the opening words of Section 245 of the Income Tax Act, 1952. I see the point made by the Chief Secretary concerning the difference between the provisions in Section 245 and the provisions in the Bill. Nevertheless, I should like to read the opening words of Section 245. I do this in the light of the fact that the Chief Secretary has made great play of the undoubted fact that many of the provisions which were applicable to the old Surtax companies are also applicable to close companies. He said, in particular, that the criteria concerning retentions are broadly the same in the Bill as they are in this Act.

The opening words of Section 245 of the 1952 Act are: With a view to preventing the avoidance of the payment of surtax through the withholding from distribution of income of a company which would otherwise he distributed, it is hereby enacted that where it appears to the Special Commissioners that any company to which this section applies has not distributed to its members a reasonable part of its actual income, the commissioners may issue a Surtax direction.

Compare those words with the words in this Amendment, which read as follows: With a view to preventing the avoidance of the payment of income tax through the withholding from distribution of income of a company which would otherwise be distributed, where it appears to the Commissioners of Inland Revenue that". These words are almost identical. The right hon. Gentleman said that he did not think they added much. But what possible harm can they do if they are accepted? This is what worries me. After listening to the right hon. Gentleman, I am beginning to think that there is something subtle underlying his rejection of this Amendment, because it can do no harm whatsoever. Whatever views one may have about the onus of proof—and certainly I would not wish to go as far as the hon. Member for Cheetham went—nevertheless I would have thought it was reasonable to accept the Amendment, which does something, albeit in a modest form, for the aggrieved taxpayer.

In those circumstances, in the light of what the Chief Secretary said, I could not possibly advise my hon. Friend to withdraw the Amendment and I hope that we shall take it to a Division.

Sir T. Brinton

I support my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) in pressing for the Government's agreement to the acceptance of this Amendment. The Government owe the business community every reassurance that they can give. The original wording of the Clause struck an absolute chill in the heart of every businessman who was affected by it. I appreciate that there are many hon. Members opposite who have never even run a whelk stall, but those of us who have to run something like that, or something bigger, do, in distinction to what is often suggested, keep a sharp eye on the taxation that we are likely to incur as a result of Government action.

The importance to the business community of reassurance is this. They started out with the assumption—and it will take a long time to get it out of their heads—that this Clause was a very direct attack on the smaller companies and those in which there was any considerable family interest. One point which has not been made today, curiously enough, is that the reason why it is essential that the Clause should be drafted to reassure people is that the Government have brought into its ambit a very large number of companies which were not in the original net under Section 245 of the 1952 Act.

I must here declare an interest. My own company is a close family company, and it was and still is a Surtax direction company. In my own industry two at least of the very largest manufacturers in the country now find themselves caught by Clause 72. In their opinion, certainly one of them and probably the other as well, both nationally-known household names, suddenly find themselves caught by this Section with the prospect that their investment decisions will be affected by the action of the tax inspector or the commissioners. These people need all the reassurance that can be given to them, and this Amendment is designed to provide some reassurance.

Moreover, on the question of onus of proof this would also be of great reassurance to the business community. I thoroughly agree with the hon. Member for Manchester, Cheetham (Mr. H. Lever) that if the onus of proof can be put even theoretically on the Revenue in such cases it would be some consolation to these companies. Obviously, it can be done. I accept what the Chief Secretary said—that ultimately, in practice, the managing director has to justify his attitude when an attempt is made to raise an assessment on him, but there is a distinct difference between having the onus placed upon him and having it placed upon the Revenue.

The Chief Secretary made a great point of the fact that the only reason for the onus being placed on the Revenue under Section 245 of the 1952 Act was the penal nature of the tax which might be incurred in the event of the case going against the taxpayer. What worries me and many other businessmen is that as far as the Revenue is concerned it is probable that the amount which might be in question would be greater under this Clause than it was under Surtax direction.

Here we have a pay-out which bears a rate of tax equivalent to something like 60 per cent. additional on the money which otherwise would have been retained. The amount which the Revenue will have at stake in any argument under this Clause will be greater than it ever had in the usual case under Surtax direction. The Revenue has a duty to collect the maximum amount of tax and it would naturally occur to any businessman that there is a strong temptation to the tax inspector to take a stricter view under this Clause than was taken of Surtax direction under Section 245.

I accept that the Government have greatly alleviated the apparent intention behind the Clause by means of Amendment No. 707 without altering the position and we ask them for this further concession. We ask them to accept this small alteration in the onus of proof.

Mr. Alan Hopkins (Bristol, North-East)

It will be useful possibly to go back to the real nature of close companies. The Chief Secretary will be aware that the vast majority of them are small and are mostly family companies employing 20 to 30 people. These companies suffer a disadvantage compared with the larger ones, and certainly with public companies, in that the source of funds available to them, other than the initial capital put in by the families, is limited to bank borrowing. It is not open to the small private company to go to an insurance company or some other institution to raise a substantial sum of money in the form of debentures or something of that kind for expansion of its business.

Under the rules operated by the special commissioners in Wimbledon, if a private company which is clearly a close company in furtherance of an expansion programme has incurred a substantial bank overdraft it is unlikely that any requirement will be made about the distribution even of a token dividend from the company's profits. As I read Clause 72, it seems fairly certain that the burden of proof will be largely changed from what it is at present. In the first place, the benefit of the expertise in Wimbledon will no longer be available. I can understand the point made by the Chief Secretary, but this new proposal is an imposition on a businessman, who normally leaves it to his accountants to go to Wimbledon to clarify his position and obtain a clearance. There is no advantage in going to the local inspector, who may even be a busier man than those in Wimbledon.

It is possible to get a tax clearance in Wimbledon where there is all the expertise. If the Chief Secretary will not give way, I hope that it will be made quite clear that the local inspector of taxes, upon whom will now fall the burden of determining whether or not the company is a Surtax company and what level of distribution must be made by it, will have in mind the same rules as now apply in the minds of the special commissioners in Wimbledon.

5.45 p.m.

I declare an interest in that I am a director of three close companies. This is a real worry to people, particularly where a business is expanding and a great deal of that expansion is paid out of the profits of the business. There is the worry lest the present position should be challenged. I do not intend to go over the ground which has been covered so ably by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), but there is a real point behind the Amendment and if the Chief Secretary could think again about it life would be made much easier for the businessman.

Mr. Maxwell

I am glad that the Chief Secretary will not yield to this Amendment. I agree with the right hon. Member for Altrincham and Sale (Mr. Barber) that the words are extremely reasonable, but I should like to give the basic reason why the Amendment should not be accepted.

The purpose of the Budget is to encourage investment. Even hon. and right hon. Members opposite must admit that the country needs more investment if we are to right our balance of payments and become more competitive in exports. It is no good hon. and right hon. Members opposite saying that they agree that we need more investment and yet, every time that the Government introduce legislation which is likely to encourage businessmen to invest, make special pleas why they should be given exemption. Where is the patriotism and good sense of hon. and right hon. Members opposite that they try to have an Amendment of this kind accepted?

Businessmen who have been owning and running close companies have been too long largely concerned with building up cash balances or assets which they could sell sooner or later for capital profits. The purpose of the Budget is to say once and for all to businessmen who run those companies, "You are as free as the birds in the air to do what you like as long as you use the cash for productive investment, not for stashing away and paying out as capital gains."

Mr. Harold Lever

I hesitate to interfere with any flow of oratory on general matters which is not interfered with by the Chair, but I must draw my hon. Friend's attention to one point. None of us is attempting to defend the stashing away of cash. The narrow point we are discussing is whether the Revenue should prove that the taxpayer has been avoiding tax by retaining money in the company or whether the taxpayer should have the onus of proof. What we are worried about is only the question of onus of proof. The question of principle which my hon. Friend has been enunciating does not arise.

Mr. Maxwell

I mentioned the question of onus of proof in an earlier intervention. As a businessman, I am peculiarly in possession of the facts about what I wish my company to do in the next year or two, and, with the best will in the world, neither the tax inspector or the special commissioners can decide this. It is for me to explain to the tax inspector that I have certain commitments or plans for which I need these retentions. Since the inspector has been very reasonable with Surtax direction companies in the past in allowing this, where the taxpayer could make his case, and since the wording used in the Bill is almost identical with previous wording, why not leave it at that?

To suggest that the purpose of the Amendment is to introduce these words with the idea that the Clause is to deal merely with tax avoidance is not true. The purpose of the Clause as it stands is to encourage close companies to use their cash and resources to invest in the first instance. Right hon. and hon. Members opposite may not like it, but that happens to be true. If they care about the health of British enterprise and our economy, they should not be taking up two hours of this Committee's time on a matter which we could have disposed of in 20 minutes. The purpose of the Budget is to encourage investment. It will not interfere in any way with the freedom of any businessman to do precisely as he wants to do except stash money away and use it for non-productive purposes in the hope that, one day, he will get it out as a capital gain.

Sir Lionel Heald (Chertsey)

I must make a few observations about onus of proof. I should yield to no one in admiration of the Chief Secretary's knowledge of anything to do with taxation, but, when we come to questions of law, some of us are entitled to have views of our own. With great respect, I put it to the right hon. Gentleman that he has confused two matters. There is the onus of proof as regards specific facts, and there is the general onus of proof in a case, and an understanding of this is elementary to an examination of the question. We are concerned here with the general onus of proof, the benefit of the doubt. The facts having been proved by the people who can prove them, the commissioners have then to decide their view. It is very important to understand what will happen if the matter is left in doubt. On the question of onus of proof, there is a Latin expression, "Praesumitur pro negante"—the facts known to one person alone cannot be proved by another. Clearly, if a fact is not proved by someone who knows, it cannot be proved at all.

Mr. Maxwell

Hear, hear.

Sir L. Heald

That is quite different from the general onus of proof, and I am sure that, although he may not realise it, the hon. Member for Buckingham (Mr. Maxwell) does not really mean to say say "Hear, hear". He ought to accept the view of his hon. Friend the Member for Cheetham (Mr. Harold Lever) which I share.

Mr. Gower

I make a final appeal to the Chief Secretary. He has complained about unreasonable and unjustified fears entertained by businessmen concerned about close companies. He can remove some of these fears by accepting the Amendment. Businessmen suspect that he wants to do more than he says he is doing. He has said already that it would be wrong for this procedure to be used by companies to avoid taxation. Businessmen accept that, but they suspect that these provisions will do far more. They suspect that these provisions will hit close companies very harshly, more harshly than other taxation will hit larger companies.

All the right hon. Gentleman has to do to remove these unjustified fears is to accept the Amendment and insert a provision which has a respectable antecedent, a provision which has been enshrined in another similar Statute. If he does that, he will go a long way to remove or make unnecessary some of the fears which are felt.

The very fact that cases are now to be moved to inspectors rather than to the special commissioners gives rise to doubt. I share the view which has been expressed that the special commissioners have a long experience in dealing with these matters, and when the Chief Secretary

says, in effect, that inspectors will soon acquire similar experience and soon become equally able in dealing with these matters, he gives rise to a further fear. Some people see in this a sinister hint, that there are likely to be many more cases than under the old practice. Are there to be so many more cases, and, if so, why? The only answer is that this provision is going to be rather harsh on the companies which it affects.

The Chief Secretary has brought his hon. and learned Friend the Financial Secretary with him, and he said that, perhaps, his answer about onus of proof was not satisfactory. I hope that, in the light of what has been said by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), he will feel that it is quite unsatisfactory. It is no answer to say that, because a penal sanction has been removed, the change of practice is justified. If the previous practice as regards onus of proof in the former case was right, it is right now. The Revenue has all the big guns in dealing with the fairly small company. It has all the advantages except specialised knowledge of the matter in question.

The right hon. Gentleman must realise that in matters of this sort judgment is of great importance. The case put to him by my right hon. Friend for Sutton Coldfield (Mr. Geoffrey Lloyd) was not that the man had prior knowledge of the difficulty which would arise in the future. It was that the person running the affairs of his company in a careful and frugal way, based on his experience, made a provision which he might not have made had he been pressed by an inspector of taxes to make a disproportionate or very large distribution. I hope that the right hon. Gentleman will take all these matters into account.

Question put, That "If" stand part of the Clause:—

The Committee divided: Ayes 206, Noes 199.

Division No. 188.] AYES [5.58 p.m.
Abse, Leo Benn, Rt. Hn. Anthony Wedgwood Brown, Rt. Hn. George (Belper)
Allaun, Frank (Salford, E.) Bennett, J. (Glasgow, Bridgeton) Buchan, Norman (Renfrewshire, W.)
Aldritt, Walter Bishop, E. S. Buchanan, Richard
Allen, Scholefield (Crewe) Blackburn, F. Butler, Herbert (Hackney, C.)
Armstrong, Ernest Blenkinsop, Arthur Callaghan, Rt. Hn. James
Atkinson, Norman Boardman, H. Carmichael, Neil
Bacon, Miss Alice Bowden, Rt. Hn. H. W. (Leics, S. W.) Carter-Jones, Lewis
Bagier, Gordon A. T. Braddock, Mrs. E. M. Castle, Rt. Hn. Barbara
Beaney, Alan Bray, Dr. Jeremy Coleman, Donald
Conlan, Bernard Hunter, A. E. (Feltham) Pearson, Arthur (Pontypridd)
Corbet, Mrs. Freda Irving, Sydney (Dartford) Peart, Rt. Hn. Fred
Craddock, George (Bradford, S.) Jackson, Colin Pentland, Norman
Crossman, Rt. Hn. R. H. S. Janner, Sir Barnett Perry, Ernest G.
Cullen, Mrs. Alice Jay, Rt. Hn. Douglas Popplewell, Ernest
Dalyell, Tam Jeger, George (Goole) Price, J. T. (Westhoughton)
Davies, G. Elfed (Rhondda, E.) Johnson, Carol (Lewisham, S.) Probert, Arthur
Davies, Ifor (Gower) Jones, Dan (Burnley) Pursey, Cmdr. Harry
Davies, S. O. (Merthyr) Kelley, Richard Randall, Harry
Diamond, John Kenyon, Clifford Rankin, John
Dodds, Norman Kerr, Dr. David (W'worth, Central) Rees, Merlyn
Doig, Peter Lawson, George Rhodes, Geoffrey
Donnelly, Desmond Leadbitter, Ted Richard, Ivor
Driberg, Tom Lee, Rt. Hn. Frederick (Newton) Roberts, Albert (Normanton)
Duffy, Dr. A. E. P. Lever, Harold (Cheetham) Robertson, John (Paisley)
Dunn, James A. Lever, L. M. (Ardwick) Rodgers, William (Stockton)
Edwards, Rt. Hn. Ness (Caerphilly) Lewis, Arthur (West Ham, N.) Sheldon, Robert
English, Michael Lewis, Ron (Carlisle) Shinwell, Rt. Hn. E.
Ennals, David Lipton, Marcus Shore, Peter (Stepney)
Ensor, David Lomas, Kenneth Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Evans, Ioan (Birmingham, Yardley) Loughlin, Charles Short, Mrs. Renée (W'hampton, N. E.)
Fitch, Alan (Wigan) McBride, Neil Silkin, John (Deptford)
Fletcher, Sir Eric (Islington, E.) MacDermot, Niall Silverman, Julius (Aston)
Fletcher, Ted (Darlington) McGuire, Michael Silverman, Sydney (Nelson)
Fletcher, Raymond (Ilkeston) McInnes, James Slater, Mrs. Harriet (Stoke, N.)
Floud, Bernard McKay, Mrs. Margaret Slater, Joseph (Sedgefield)
Foley, Maurice Mackenzie, Gregor (Rutherglen) Small, William
Fraser, Rt. Hn. Tom (Hamilton) Mackie, John (Enfield, E.) Snow, Julian
Freeson, Reginald McLeavy, Frank Soskice, Rt. Hn. Sir Frank
Galpern, Sir Myer MacMillan, Malcolm Steele, Thomas (Dunbartonshire, W.)
Garrett, W. E. Mahon, Simon (Bootle) Stewart, Rt. Hn. Michael
George, Lady Megan Lloyd Manuel, Archie Stonehouse, John
Ginsburg, David Mapp, Charles Stones, William
Gourlay, Harry Mason, Roy Summerskill, Hn. Dr. Shirley
Greenwood, Rt. Hn. Anthony Maxwell, Robert Swingler, Stephen
Gregory, Arnold Mayhew, Christopher Symonds, J. B.
Griffiths, David (Rother Valley) Mellish, Robert Taverne, Dick
Griffiths, Rt. Hn. James (Llanelly) Mendelson, J. J. Taylor, Bernard (Mansfield)
Griffiths, Will (M'chester, Exchange) Mikardo, Ian Thomas, George (Cardiff, W.)
Hale, Leslie Millan, Bruce Thornton, Ernest
Hamilton, James (Bothwell) Miller, Dr. M. S. Tinn, James
Hamilton, William (West Fife) Milne, Edward (Blyth) Urwin, T. W.
Hannan, William Molloy, William Varley, Eric G.
Harper, Joseph Morris, Alfred (Wythenshawe) Wainwright, Edwin
Harrison, Walter (Wakefield) Morris, Charles (Openshaw) Walden, Brian (All Saints)
Hart, Mrs. Judith Morris, John (Aberavon) Walker, Harold (Doncaster)
Hattersley, Roy Murray, Albert Wallace, George
Hazell, Bert Neal, Harold White, Mrs. Eirene
Henderson, Rt. Hn. Arthur Newens, Stan Whitlock, William
Herbison, Rt. Hn. Margaret Noel-Baker, Francis (Swindon) Wilkins, W. A.
Hill, J. (Midlothian) Norwood, Christopher Willey, Rt. Hn. Frederick
Hobden, Denis (Brighton, K'town) Oakes, Gordon Williams, Clifford (Abertillery)
Holman, Percy Ogden, Eric Williams, W. T. (Warrington)
Horner, John O'Malley, Brian Willis, George (Edinburgh, E.)
Houghton, Rt. Hn. Douglas Oram, Albert E. (E. Ham, S.) Winterbottom, R. E.
Howarth, Harry (Wellinborough) Orme, Stanley Yates, Victor (Ladywood)
Howie, W. Oswald, Thomas Zilliacus, K.
Hoy, James Owen, Will
Hughes, Emrys (S. Ayrshire) Padley, Walter TELLERS FOR THE NOES:
Hughes, Hector (Aberdeen, N.) Park, Trevor (Derbyshire, S.E.) Mr. George Rogers and
Hunter, Adam (Dunfermline) Pavitt, Laurence Mr. John McCann.
Agnew, Commander Sir Peter Bossom, Hn. Clive Cooper-Key, Sir Neill
Alison, Michael (Barkston Ash) Bowen, Roderic (Cardigan) Cordle, John
Allason, James (Hemel Hempstead) Box, Donald Costain, A. P.
Anstruther-Gray, Rt. Hn. Sir W. Boyd-Carpenter, Rt. Hn. J. Courtney, Cdr. Anthony
Astor, John Boyle, Rt. Hn. Sir Edward Craddock, Sir Beresford (Spelthorne)
Awdry, Daniel Braine, Bernard Crosthwaite-Eyre, Col. Sir Oliver
Balniel, Lord Brewis, John Cunningham, Sir Knox
Barber, Rt. Hn. Anthony Brinton, Sir Tatton Curran, Charles
Barlow, Sir John Brooke, Rt. Hn. Henry Davies, Dr. Wyndham (Perry Barr)
Batsford, Brian Brown, Sir Edward (Bath) d'Avigdor-Goldsmid, Sir Henry
Bell, Ronald Bruce-Gardyne, J. Dean, Paul
Bennett, Sir Frederic (Torquay) Bullus, Sir Eric Deedes, Rt. Hn. W. F.
Bennett, Dr. Reginald (Gos & Fhm) Burden, F. A. Digby, Simon Wingfield
Berkeley, Humphry Buxton, Ronald Dodds-Parker, Douglas
Berry, Hn. Anthony Cary, Sir Robert Douglas-Home, Rt. Hn. Sir Alec
Bessell, Peter Chichester-Clark, R. Drayson, G. B.
Biffen, John Clark, William (Nottingham, S.) Eden, Sir John
Biggs-Davison, John Clarke, Brig. Terence (Portsmth, W.) Elliot, Capt. Walter (Carshalton)
Birch, Rt. Hn. Nigel Cole, Norman Elliott, R. W.(N'c'tle-upon-Tyne, N.)
Black, Sir Cyril Cooke, Robert Emery, Peter
Errington, Sir Eric Legge-Bourke, Sir Harry Ramsden, Rt. Hn. James
Eyre, Reginald Lewis, Kenneth (Rutland) Rawlinson, Rt. Hn. Sir Peter
Farr, John Lloyd, Rt. Hn. Geoffrey (Snt'nC'dfield) Renton, Rt. Hn. Sir David
Fisher, Nigel Lloyd, Ian (P'tsm'th, Langstone) Ridley, Hn. Nicholas
Fletcher-Cooke, Sir John (S'pton) Lloyd, Rt. Hn. Selwyn (Wirral) Ridsdale, Julian
Foster, Sir John Longden, Gilbert Roberts, Sir Peter (Heeley)
Fraser, Ian (Plymouth, Sutton) Lubbock, Eric Robson Brown, Sir William
Gammans, Lady Lucas, Sir Jocelyn Roots, William
Giles, Rear-Admiral Morgan McAdden, Sir Stephen St. John-Stevas, Norman
Glover, Sir Douglas MacArthur, Ian Sharples, Richard
Godber, Rt. Hn. J. B. Mackenzie, Alasdair (Ross & Crom'ty) Sinclair, Sir George
Goodhew, Victor Mackie, George V. (C'ness & S'land) Spearman, Sir Alexander
Gower, Raymond McMaster, Stanley Stainton, Keith
Grant, Anthony McNair-Wilson, Patrick Stanley, Hn. Richard
Grieve, Percy Maitland, Sir John Steel, David (Roxburgh)
Griffiths, Peter (Smethwick) Marten, Neil Stodart, Anthony
Grimond, Rt. Hn. J. Maude, Angus Stoddart-Scott, Col. Sir Malcolm
Gurden, Harold Maudling, Rt. Hn. Reginald Studholme, Sir Henry
Hall-Davis, A. G. F. Mawby, Ray Talbot, John E.
Hamilton, M. (Salisbury) Maxwell-Hyslop, R. J. Taylor, Edward M. (G'gow, Cathcart)
Harris, Frederic (Croydon, N.W.) Maydon, Lt.-Cmdr. S. L. C. Taylor, Frank (Moss Side)
Harris, Reader (Heston) Meyer, Sir Anthony Thomas, Rt. Hn. Peter (Conway)
Harvey, John (Walthamstow, E.) Mills, Peter (Torrington) Thompson, Sir Richard (Croydon, S.)
Harvie Anderson, Miss Mills, Stratton (Belfast, N.) Thorneycroft, Rt. Hn. Peter
Hawkins, Paul Mitchell, David Thorpe, Jeremy
Heald Rt. Hn. Sir Lionel Monro, Hector Turton, Rt. Hn. R. H.
Heath, Rt. Hn. Edward More, Jasper van Straubenzee, W. R.
Higgins, Terence L. Morrison, Charles (Devizes) Walder, David (High Peak)
Hill, J. E. B. (S. Norfolk) Munro-Lucas-Tooth, Sir Hugh Walker, Peter (Worcester)
Hobson, Rt. Hn. Sir John Murton, Oscar Walker-Smith, Rt. Hn. Sir Derek
Hordern, Peter Nicholson, Sir Godfrey Wall, Patrick
Hornsby-Smith, Rt. Hn. Dame P. Noble, Rt. Hn. Michael Walters, Dennis
Howard, Hn. G. R. (St. Ives) Nugent, Rt. Hn. Sir Richard Ward, Dame Irene
Hunt, John (Bromley) Onslow, Cranley Weatherill, Bernard
Hutchison, Michael Clark Osborn, John (Hallam) Webster, David
Iremonger, T. L. Page, R. Graham (Crosby) Whitelaw, William
Irvine, Bryant Godman (Rye) Pearson, Sir Frank (Clitheroe) Williams, Sir Rolf Dudley (Exeter)
Jenkin, Patrick (Woodford) Peel, John Wills, Sir Gerald (Bridgwater)
Jennings, J. C. Percival, Ian Wilson, Geoffrey (Truro)
Johnson Smith, G. (East Grinstead) Peyton, John Wood, Rt. Hn. Richard
Johnston, Russell (Inverness) Pickthorn, Rt. Hn. Sir Kenneth Woodhouse, Hn. Christopher
Kerr, Sir Hamilton (Cambridge) Pike, Miss Mervyn Yates, William (The Wrekin)
Kershaw, Anthony Pitt, Dame Edith Younger, Hn. George
Kilfedder, James A. Pounder, Rafton
King, Evelyn (Dorset, S.) Powell, Rt. Hn. J. Enoch TELLERS FOR THE NOES:
Kirk, Peter Prior, J. M. L. Mr. Martin McLaren and
Lancaster, Col. C. G. Pym, Francis Mr. Dudley Smith.
Langford-Holt, Sir John Quennell, Miss J. M.
The Temporary Chairman (Mr. Grant-Ferris)

The next Amendment that I shall call is No. 707, in the name of the Chancellor of the Exchequer. It might be for the convenience of the Committee if I say that with it we can take the Amendment to the Chancellor's proposed Amendment—to leave out "sixty" and to insert "forty"—which is in the name of the right hon. Member for Bexley (Mr. Heath), but which, I understand, will be moved by the hon. Member for Nottingham, South (Mr. William Clark), and also Amendment No. 629, in page 93, line 5, after "say", insert: in the case of a trading company sixty per cent. of the distributable investment income and of the estate or trading income for the period and in any other case",

Amendment No. 78, in line 34, after "are", insert "not", Amendment No. 79, in line 34, leave out "not", Amendment No. 100, in line 36, after "business", insert: and provided that in such consideration by the Commissioners the position of companies in development areas will receive special consideration.", Amendment No. 80, in line 37, after "are", insert "not", and Amendment No. 81, in line 38, leave out "not".

It will be in order for the hon. Member for Nottingham, South to speak on his Amendment to the Chancellor's proposed Amendment at any time during the discussion when he catches my eye and move it formally at the end of the debate.

Mr. Diamond

I beg to move, Amendment No. 707, in page 93, line 5, to leave out from "standard" to "a" in line 8, and to insert: ; and the required standard is the distributable income for the period, less so much of that income (not exceeding, in the case of a company which is neither a trading company nor a member of a trading group, the amount of the estate or trading income) as the company shows could not be distributed without prejudice to the requirements of the company's business: Provided that the required standard shall in no case exceed the company's distributable investment income for the period plus sixty per cent. of the estate or trading income of the period, and for the purpose of this proviso in its application to". Perhaps it will be convenient, Mr. Grant-Ferris, if I move this Amendment shortly. A number of other discussions will take place and any point that I do not cover now can be referred to later on.

This Amendment puts the required standard for distribution in a different way. In effect, it makes it clear that the calculation proceeds not as was feared but on a normal practical basis of ascertaining what are the needs of the company. It then brings in the 60 per cent. of net trading income and the 100 per cent. of investment income as the greatest amount which can be required to be distributed under the Clause. I am sure that I do not need to delay the Committee on the question of 100 per cent. of investment income. That is the situation at the moment and it will continue to be the situation because, of course, it cannot ever be claimed that it is necessary to build up reserves of investment income prior to investing. Therefore, one is not concerned with anything less than 100 per cent. of investment income; but one may be so concerned with trading income, which means net trading income after payment of Corporation Tax.

The second Government Amendment brings in what is now paragraph 10 of the 17th Schedule. It is clear that it had escaped attention. I think that it was the right hon. Member for Bexley (Mr. Heath) who made the point that it was tucked away in a Schedule and that, as it had already been provided for, it was better to put it into this Clause and thereby get rid of any misunderstandings which had accumulated around this provision.

The third Government Amendment means that the substance of subsection (5) will be written into subsection (2). The remaining Amendments are consequential. I will listen very carefully to the comments about to be made on the Amendments under discussion with them.

Mr. William Clark (Nottingham, South)

I understand, Mr. Grant-Ferris, that it would be convenient and probably more in order, if the Amendment to Amendment No. 707 were moved at the end of the discussion. If you agree to that, then I will speak now to the Amendment to the Amendment, which would reduce the figure proposed from 60 per cent. to 40 per cent.

It would be as well to find out, if we can, why the Government decided on a 60 per cent. distribution as being the norm, if one might put it that way, of distribution for close companies.

Mr. Diamond

"Ceiling" would be better.

Mr. Clark

We can call it "ceiling" if the right hon. Gentleman does not like "norm". The position at the moment is that, if one has a profit of £100, under present legislation one pays 15 per cent. Profits Tax which leaves in hand £85 on every £100. The right hon. Gentleman will agree, I am sure, that under Section 245 of the Income Tax Act, 1952, it is usual, if one distributes about 40 per cent. of one's profit, for the Special Commissioners not to make a direction.

It is fallacious to say that the penalty of 100 per cent. distribution was there. Of course, we accept that there was a penalty of 100 per cent. Distribution; that is in the example I am giving of £85. But no professional man advising his client would allow him to put in any accounts to the Inland Revenue showing no distribution at all. He would advise his clients, "You are a Surtax company. If you do not put in some distribution you will be penalised and the penalty could be £85." According to my example, therefore, it would be 100 per cent.

Secondly, there has been built up a practice between accountants, taxpayers and the Special Commissioners that, where about 40 per cent. was distributed, this would leave sufficient to overcome Surtax direction. If we follow that in my example we get, under present legislation, £100 profit less Profits Tax of £15, leaving £85. Forty per cent. of that is £34. Consequently, if one were to advise the client to distribute 34 per cent. no Surtax would arise.

Under the new legislation, £100 provides 40 per cent. Corporation Tax, which leaves one with 60 per cent., of £60. If one had 60 per cent. distribution as a ceiling, this would leave £36 to be distributed. That is why the Government decided on a 60 per cent. distribution.

6.15 p.m.

I think that we have to look a little further to see what would be the practical effects of this Corporation Tax on such a comparison. Under the old system, one had £100 profit and from that profit one was entitled to deduct certain charges which are now not to be liable as deductions under this Bill; these are, for example, rent to a participator and certain interests to participators which were allowed under the present legislation.

One had abatement of Profits Tax at one-fifth of the difference between £2,000 and £12,000 gross profit. To consider the difference and take it into account between the old and the new legislation in this sense is misleading, because one does not have the deductions under the new legislation that one had under the old.

If, under the old system, one had £100 profit and charges were £20, which is not out of line with what charges normally are, this gave a profit of £80, on which Profits Tax of 15 per cent. was paid. This was £12, leaving £68. On that, one got a Surtax direction under Section 245 of about 40 per cent. If one takes 40 per cent. of £68, the total is £27, which must be distributed, and if the accountant had said that £27 is a distribution to obviate a Surtax direction this leaves the company with £41 actual profit on which it then pays 8s. 3d. in the £, making a total of £17, leaving it, on each £100, some £24 retention even after the Surtax direction.

Under the present legislation, we have £100 profit less the charges which are not to be allowed, which gives £80 profit. One will have to add Corporation Tax.

Mr. Harold Lever

Why does the hon. Gentleman say that charges will not be allowed before calculating profit, whereas in 99.9 per cent. of cases the interest charge will be allowed?

Mr. Clark

I should be ruled out of order if I anticipated the Schedules. The hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever) should realise that there is a fundamental difference between the application of Corporation Tax and the application of the old Profits Tax. For one thing, one has not the abatement between £2,000 and £12,000. One has a lower abatement but not a one-fifth abatement. One is not to be allowed now to pay legitimate charges to participators. However, I am sure that we can return to this point when we reach the Schedules. The Committee will appreciate the effect of the difference between 40 per cent. and 60 per cent. distribution on a company.

I should like to carry on with the figures which I was giving before the hon. Member for Cheetham interrupted. With a profit of £100, less charges of £20, giving £80, 40 per cent. of the £100—because charges are not allowed under this legislation—would give a net profit of £40. With the 60 per cent. distribution, which is £36, that leaves £4 retention as opposed to £24 retention under the present legislation. I urge the hon. Member for Cheetham to do a little arithmetic when he will see that even if he does not accept the figure of £20 for charges which are disallowed and taking even £10 or £5, the retentions are lower.

The tax payable under the old system was £12 Profits Tax, £17 Income Tax and Income Tax and Surtax of £13 on the Section 245 direction, a total tax of £42. The Chief Secretary can deny my figures if he wishes. Under the new system, with £100 profit, the Corporation Tax is £40 and Income Tax and Surtax—and for the purposes of calculation I have taken the same proportions in both examples, so that Surtax is at 10s. in the £—are £18, so that there is a total of £58 in tax as against £42 under the old system.

How can anybody—even adjusting those figures slightly—say that that is not penalising the small company? It is all very well for the Chief Secretary to say that there is the long stop of being able to prove to the local inspector of taxes that the 60 per cent. is far too high, but with his experience the right hon. Gentleman knows that the inspector will take the easy way out and raise an assessment of 60 per cent. distribution. There will be an argument between the inspector and the accountant and eventually the figure may come down.

Mr. Diamond

In view of his remark, the hon. Gentleman will not mind my saying that he must now be making a political speech and not drawing on his own practical professional experience.

Mr. Clark

The same point was made very validly by one of my hon. Friends in the last debate when he said that with so many inspectors throughout the country without the specialised knowledge of the special commissioners, they would often take the easy way out of saying that there should be a 60 per cent. distribution. I assure the Chief Secretary that this is not a political point, but purely an economic argument. I do not think that any hon. Member, particularly on this and subsequent Amendments, will make merely political points.

Mr. Maxwell

Is the hon. Gentleman saying that an inspector of taxes would act contrary to the national interest and instructions from the Treasury to encourage investment?

Mr. Clark

The hon. Gentleman, who listens and absorbs what he thinks he will absorb, has not listened to my examples. I showed that retentions under the new legislation would be much lower than under existing legislation, even if the figures are slightly adjusted. That is to penalise the small companies.

I have a few more examples which are relevant and I hope that the Chief Secretary will give some thought to them, as he always does. I have worked out these figures with great care. A married man, who is the director of a close company and who holds the requisite shareholding and so on and who has an earned income of £8,500 and an unearned income which has nothing to do with the company of £500, has a gross income of £9,000. Because of the disallowance of directors' remuneration, which we obviously cannot debate now, Corporation Tax will be on the difference between £8,500 and £3,500, namely, £5,000, and I have taken a rate of 8s. for ease of example and that gives £2,000 Corporation Tax. As a married man with an income of £8,500 plus unearned income, his Income Tax will be £2,748—I will not weary the Committee with the computation, but in fact it is £2,748 17s. 6d. His Surtax liability is £647 5s. His total tax is thus £5,396 2s. 6d. I am sure that the Chief Secretary would not suggest that the director of a close company earning £8,500 a year was being excessively paid.

On the last £1,000 of earned income of that director—and I think that the Committee will appreciate that it is the marginal rate of tax on any income level which provides the incentive or disincentive—he will pay Corporation Tax at 8s. giving £400, Income Tax of £366 and Surtax of £224, a total tax of £991 4s. 9d. which is an effective rate of 19s. 10d. in the £. I would have thought that that example alone would prove to the Chief Secretary that he will have to look at this matter again.

I will give another example of a man with an earned income of £7,500 and an unearned income of £10,000. Again I will not weary the Committee with all the computation. The effective rate of tax on his last £1,000 of earned income is 23s. 9d. There are other examples of a similar nature.

Mr. Maxwell

How many people in the country would fall under this provision?

Mr. Clark

The hon. Member speaks with his usual naivete. I know that he has great knowledge in these matters, but when he cannot understand, he always asks how many people are affected. All I can tell him is that the examples I have given would concern everybody earning £8,500 per annum in a close company, or £7,500 in a close company with an investment income of £10,000.

This provision will affect the growing companies, those companies which start from small beginnings. How else do we get public companies? How do we get the electronics companies, or whatever they may be, unless they start from small beginnings? This is another example of the Government's desire to have something which looks very nice on paper, but which they have not thought through.

Some of their own figures which they have quoted in answer to the debates have been difficult to understand. Last week the Chief Secretary gave us some figures about Capital Gains Tax. He covered himself and said that he would not give his certificate on the figures. I am sure that he would not. He said that some Amendments which had been suggested from this side of the Committee would cost £23,500,000, but Capital Gains Tax will produce only £12 million in the first year so how could those proposals cost £23,500,000?

Mr. Diamond

As the hon. Gentleman has quoted a figure, we ought to get it right. I did not say the first year and I did not say Capital Gains Tax. I made it quite clear that we were talking about Corporation Tax and a company which pays Corporation Tax on its capital gains.

6.30 p.m.

Mr. Clark

I accept that. But the Amendment moved by my hon. Friends dealt with Capital Gains Tax. When the Chancellor in his Budget speech said that 8s. 3d. in the £ plus the 15 per cent. Profits Tax was exactly the same as a rate of 35 per cent. Corporation Tax, he did not at the same time say that included in the Corporation Tax was the Capital Gains Tax element of Corporation Tax. This was never made clear and I am sure that between now and Report the Chief Secretary will deal with this.

To return to the reason why we want to reduce the ceiling of 60 per cent. to 40 per cent., it has already been proved by the various examples I have given that the 60 per cent. is not going to result in more retentions. If one makes the implication of Profits Tax exactly the same as Corporation Tax this would be true. This has not been done, however. This is why businessmen throughout the country are fearful of the effects of Corporation Tax. It is all very well for the Chief Secretary to make sympathetic noises and say that the small man has no need to worry, that he is going to help, and he wants them to plough back, the 60 per cent. is a ceiling and so on. Frankly, the ordinary businessman does not, as yet, accept this. The Chief Secretary must answer this, because a 60 per cent. ceiling is, in my opinion, higher than the ceiling we have at the moment and it is quite fallacious to say that the ceiling at the moment is 100 per cent. In practice it is only about 40 per cent.

The Chief Secretary says that no company is going to be penalised providing it does not distribute a lot of its profit if it is a large company. Close companies have to distribute a lot. For large companies, he says, one cannot distribute so much and they encourage one not to distribute. One cannot have it both ways. The Chief Secretary says that if one pays 51 per cent. of one's profit one does not lose under Corporation Tax. This is true, but what he has not said is that one does not pay a dividend on one's profits. One declares a dividend on one's share capital. It is dependent upon one's profits, but if a company has a profit of £100 at the end of the year and its capital is £1,000 it declares a 6 per cent. dividend and in fact distributes 60 per cent. of its profits. One would not have thought that a 6 per cent. distribution was high, particularly in view of the fact that another Government Amendment, which will be dealt with shortly, gives 7½ per cent.

I do not think that, as yet, the Government have made out a case, not only for the underlying principles of Corporation Tax, but, particularly, for the distribution of 60 per cent. We want to reduce it to 40 per cent. but we are not, obviously, arguing the 40 per cent. providing the Government will accept the validity of the argument. No one wants tax avoidance but what we do not want is for the Government to say that there are some people avoiding paying tax and that they will therefore make jolly sure that everybody pays more tax.

That is exactly what is going to happen under Corporation Tax. The other day the Chancellor said that we were turning the corner. I should have thought that, with this Corporation Tax, we were just about round the bend. We really cannot understand why the Government are so partisan in their approach to this. The last Amendment, which was a very reasonable Amendment, proved this. I hope that when the Chief Secretary answers this he will either refute the examples I have given or else prove conclusively that a 60 per cent. distribution is going to help small businessmen and to help them more than they are helped at present.

Mr. Harold Lever

Before referring to my own Amendment, I think that out of courtesy I might spare a word for the hon. Gentleman the Member for Nottingham, South (Mr. William Clark), who has just spoken. I observe that he invited the Committee to allow its flesh to creep and the businessmen's flesh to creep on the assumption that the interest charges that a private company or a close company pays will be disallowed. Even if the hon. Member is right the complaint should not be directed to this Clause, but to a later Clause.

When I say we should ignore the disallowance of interest charges in order to evaluate the quality of this Clause I must surely be on impeccable logical grounds because the whole case based upon the disallowance vanishes if, on the later Clauses, the Chancellor voluntarily, or upon the insistence of this Committee, in effect disallows the disallowance or corrects the disallowance of interest charges. In that situation the terrifying examples will only have force if we find that the Chancellor obdurately refuses to make the necessary modifications.

Dealing with interest charges, I have reason to suppose the Chancellor will do nothing of the kind. If we ignore that aspect of that, unless my arithmetic is wrong, and I am always ready to be corrected on arithmetic, it seems that even on the allegations of the hon. Member for Nottingham, South he has no cause for complaint. For my part, from my humble position on this side of the Committee, I welcome the zeal of hon. Members on both sides of the Committee in making quite sure that the taxpayer is not oppressed by the tax gatherer. I think that is one of the fundamental functions of this House and I shall never complain at anyone showing an excessive zeal in defending the taxpayer provided that it is an open minded zeal and not in search of party advantage.

On the basis of 40 per cent. Corporation Tax and an Income Tax of 8s. in the £ and a 15 per cent. Profits Tax, a company which earned £100 under the old legislation paid £55 in Income Tax and Profits Tax and £21 in dividends. Its total outgoings were £76 leaving it with the sum of £24 net. Under the new, penally wicked legislation, proposed by my right hon. Friend which upsets all of this in a most revolutionary manner, what would occur would be that a company would earn £100, pay £40 Corporation Tax and a maximum of £36 in divi- dends and, amazingly, would be left with precisely the same sum of £24. I am willing to be proved wrong. It seems that on any showing if this is right then this Clause marks an advance in the interests of the taxpayer and is not to his disadvantage.

Mr. William Clark

The hon. Gentleman will agree that if, under the new system, some of the payments are not allowed for Corporation Tax purposes, which will come on later as he says, then, quite obviously, the retentions cannot possibly be the same. I welcome with gratitude his avowed intention to support us if the Chancellor does not change his mind on Corporation Tax.

Mr. Lever

All I am inviting the hon. Member to realise is that his criticism is directed to the wrong Clause and the wrong thing. It is no good saying that the Clause is wrong, assuming that a penal and oppressive enactment occurs later. The answer is to fight the penal and oppressive enactment of disallowing interest charges later. I would not hesitate to say that this would be penal and oppressive and that we should fight it and take counsel together on how to persuade the Chancellor and my right hon. Friend the Chief Secretary and his legal advisers to withdraw this penal and oppressive Clause. I am sure that they would do, because they are not penal and oppressive men.

At present, we are not discussing those Clauses. We are discussing this Clause and one has no right to charge this Clause with being badly drafted if it becomes harmful and oppressive only in the light of subsequent badly conceived matters in relation either to directors' salaries or to interest payments. I sympathise a good deal with the hon. Gentleman's argument that there is something to be said for specialised people deciding these issues and not the Income Tax inspectors. The Thames Ditton special commissioners—lately removed to Wimbledon, I believe—enjoy a high reputation among professional men—lawyers, accountants and businessmen—for their impartiality, sophistication and general understanding of the taxpayers' needs. It may be that my right hon. Friends will think that there is something in the idea of arranging a similar specialisation under these Clauses.

I would say one word of consolation in case the matter is decided against them because I am inclined to the Opposition's view of this point. If the Chancellor of the Exchequer adheres to the view that the inspectors should deal with the matter, he might bear in mind how the special commissioners came by their flexibility, understanding and general expertise in dealing with these matters, namely, by practice.

It is not unreasonable to suppose that in precisely the same manner, after a reasonable time, the very fair-minded inspectors of taxes will be in the same position as the special commissioners. It is a confusion of the term which I tried to elucidate a little while ago, but the special commissioners about whom we are talking are nothing but inspectors of taxes exercising a specialised function.

Mr. Patrick Jenkin

The hon. Gentleman will recognise that the Section 245 legislation has been in existence since 1921 and that, therefore, the special commissioners have had a long time in which to acquire their present expertise and, further, have dealt with every case in the country. No doubt the hon. Gentleman can do more quickly than I the multiplication sum involved in multiplying 44 years by the number of tax districts to show how long it will take the inspectors to acquire the same amount of expertise.

Mr. Lever

In spite of the exceptionally rare compliment to my arithmetical powers, I am unsympathetic to the hon. Gentleman's point of view. We can discuss this point without a great deal of excitement or heat because, although I lean to the Opposition's view about the special commissioners, this does not seem to me a matter of great fundamental importance.

What seem to me to be much more important are the matters dealt with by my Amendments, the effect of which would be to throw the onus of proof on the Revenue before any direction was made. I will read the Clause as it would be if it were amended because I think that the very sound of the Clause in its proposed amended form has a note of sweet reasonableness and good sense which might commend itself to the Committee and, perhaps, to my right hon. Friends: Where, on an appeal by a company against an assessment made by virtue of this section, the Commissioners concerned are satisfied that the company could make distributions up to the required standard"— that is, 60 per cent.— without prejudice to the requirements of its business, the Commissioners may direct that there shall be disregarded so much of the shortfall as they are satisfied could be avoided without prejudice to those requirements. Although I am responsible for that version of the drafting I can hardly think of anything fairer or more reasonable to govern this matter, if it is not immodest to say so, than just to take out the "nots" and, if I may make a pun, untie a great many other knots of a different kind for my right hon. Friend the Chancellor.

By my proposal the commissioners concerned have to be satisfied that the company could make the distribution without prejudice to the requirements of its business. Surely that is what my right hon. Friend wants. He does not want a dividend to be forced from a company, although the commissioners are not satisfied that it will prejudice the company. Surely my right hon. Friend wants the commissioners to be satisfied that all will be well with the company after the direction has been made. Why should not the Revenue satisfy the commissioners on this point?

My right hon. Friend the Chancellor has given two reasons—both of them bad, I regret to say—for rejecting this notion of putting the onus of proof on the Revenue. My hon. Friend the Member for Buckingham (Mr. Maxwell), who injects a note of boyish enthusiasm into the argument which is often missing when he is not here, makes the point which is misconceived about the onus of proof. I hope that he will do me the honour of listening to me and then, as he is an open-minded man, he may come to the conclusion that he was wrong and that the purposes which he seeks to fulfil will be fulfilled by my Amendments.

6.45 p.m.

The first objection to the idea of throwing the onus of proof on the Revenue is that, though it was there before, it was there because of the penal nature of the Section and because the penal nature was all that was required by the Revenue to enforce the Section without having the onus of proof thrown on the taxpayer. We are left to believe by that reasoning that as the Revenue would be completely in the dark about the facts, which, it is said, are peculiarly within the knowledge of the taxpayer"— it does not matter whether there is a penal Section; it can act blindly by threatening penal action so that the taxpayer will have to settle.

This is not a convincing argument. Not only is it not convincing in logic; it has no relation to practice. The idea that the Revenue has been condemned to grope blindly and to collect Surtax because the taxpayer was the victim of a penal Section is a complete figment of the Treasury's imagination. It is very reassuring to know that the Treasury has imagination. We always think of it in a more prosaic vein, but this is a most inappropriate time to give vent to our thoughts. That does not seem to me justifiable.

When the courts decided that the onus of proof was on the Revenue, they did so because of the words used and not because of the extent of the powers conferred on the Revenue. If my right hon. Friend does not think that that is the case, I invite him to accept similar words and I will take a chance that the courts will give a similar interpretation to a Clause worded in a similar way in spite of the very different consequences which we both agree will result from a direction being made. Therefore, that argument will not do.

The second argument which is advanced is that these matters are peculiarly within the knowledge of the taxpayer". I thought that that argument was demolished, but rather drily, by the right hon. and learned Member for Chertsey (Sir L. Heald). As he rightly says, this rule—

Sir L. Heald

The hon. Gentleman would not want it done wetly, would he?

Mr. Lever

I meant that the argument, presented in a dry and learned manner by the right hon. and learned Member, was appreciated by the legal members of the Committee and that to them his points were irresistible. I am afraid that there may be other hon. Members who found the argument too terse, although I found it overwhelming. Certainly, my hon. Friend the Member for Buckingham may gain by some extension of or gloss on the argument. There is evidence which makes me so suppose.

On the individual matters of fact which arise in the course of a trial of what is or is not a reasonable distribution, it is right, and normally follows by automatic presumption of law, that the onus of proving facts which the taxpayer is required to prove in order to persuade the commissioners that his dividend is reasonable and which are exclusively and peculiarly within his own knowledge, it is right should be on the taxpayer.

I am sorry to take time on this, but it is a matter of tremendous importance to taxpayers whose minds are greatly exercised about it. Let me take a simple case. If there is £10,000 worth of profit left in the bank after the company has paid its dividend and the onus of proof is on the Revenue, this does not place on the Revenue the onus of proving that every conceivable way in which that £10,000 may be usefully expended for the extension of its business will be denied to the company.

No such onus of proof would rest, or ever has rested, on the Revenue. If the taxpayer wants to assert that £10,000 in cash has been accumulated for a particular purpose known only to him, then, in any case, the onus of proof is upon him and he must prove his assertion, under the present law, to the reasonable satisfaction of the special commissioners. So, in my respectful submission, my right hon. Friend has totally disallowed the taxpayer's right to persist in this obstinate way on the onus of proof by the reason which he has advanced for it.

What he is saying is that the Revenue is in the kind of difficulty which arises under the criminal law, where facts are exclusively and peculiarly within the knowledge of the defendant, and the defendant has to prove those facts if he wants the court to act upon them. That will be the case now so far as these hearings are concerned.

What I want is that the general onus of proof—which in all criminal cases, if one follows this analogy, is on the Crown—should remain where it always has been, on the Inland Revenue. It will soon be seen that it is very important to make this distinction. Supposing that all the facts are not in dispute. The result of the onus of proof would be on a question of opinion—this is a matter of opinion—whether a distribution is reasonable or whether a company will be prejudiced. It is not a matter of factual knowledge within the knowledge exclusively of the taxpayer. This is a matter of estimation by the special commissioners and the Revenue is in as good a position to argue this matter to the satisfaction of the special commissioners as the taxpayer is.

If I am a taxpayer and I have money in a company and I say, as was said to the right hon. and learned Member for Chertsey by the constituent who wrote to him, that I have kept back £100,000, but that I wanted to keep large sums because my company is in the nature of a banking business, nothing is in dispute here. The only thing which would have been in dispute in that case would arise if the Revenue said, "You do not need this cash." The company might say, "We may need it. We are not pointing to any specific reason, but in our estimation it is desirable and reasonable to keep that cash in the business and it will prejudice the business if it is forced out."

Under the old law, the Revenue would have to prove, to the satisfaction of the commissioners, that no damage or prejudice would result to the company by that cash being forced out. Under the new law, if the onus of proof is thrown upon the taxpayer, it will be for the taxpayer to satisfy the commissioners. If the commissioners are left in a state of real doubt on the matter, they will be obliged, in my opinion, on this new wording to say, "We are sorry. We think that there is some doubt in the matter. It may be that we are injuriously and oppressively injuring this company. We have no wish to do so, but we are obliged by the Section—because the onus of proof is upon the taxpayer and he has not completely removed all substantial doubts—to make the direction." That cannot be right.

It will not do for the Chancellor or any of his representatives to tell us that the Inland Revenue will be in a state of great difficulty if this position over the onus of proof is not put right. One may seriously wonder how anyone has the cool nerve to advance any such argument to the Committee. One wonders how the poor special commissioners have managed all these years when the onus of proof has been firmly and totally laid upon them. I say that it will not do for the Chancellor to say that the Revenue will be impossibly prejudiced if the onus of proof stays where it always has been.

I am particularly unsympathetic when I remember that this whole Corporation Tax brings to a new height the standard rate of Income Tax where there is a full distribution and that a very high rate of tax results when there is a high rate of distribution. This is defensible and has been defended by my right hon. Friends only on the grounds that companies will not be obliged to pay it out and will be encouraged to retain it. If they are to be encouraged to retain it, any doubts about distribution ought to be resolved in favour of the taxpayer.

In all these circumstances, I beg my right hon. Friends once again to do the image of the Government a power of good by yielding upon this. There is a point where there is misplaced pedantry and misplaced obstinacy. In my opinion, this is it. This is the moment when my right hon. Friends ought to realise that a political decision has to be made here in the interests of the taxpayer. In my opinion, it will not cost the Revenue a brass farthing and will reassure many taxpayers who are at present in a state of apprehension on this matter. I particularly urge this on my right hon. Friends, because if my right hon. Friend does not give way to my request that he should keep the onus of proof where it always has been, there will be a real danger of the taxpayer feeling apprehensive that he will be the subject of oppressive use of this Clause.

If my right hon. Friend gives way and moves the onus back to where it always has been, I will be able to say without any kind of insincerity or reservation that this Clause marks a real and handsome advance towards the protection of the taxpayer in relation to matters of Surtax direction. What a pity it is that this Clause, so splendid in many of is conceptions, should be marred by a blot which can only be justified by bad arguments, worse logic and misplaced obstinacy.

Mr. J. Grimond (Orkney and Shetland)

I feel that it would be ungracious if those of us on this side of the Committee who have benefited from the support of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) did not, in return, give him support in his Amendments. I would not attempt either to duplicate the figures which have been provided on these Amendments by a spokesman from the Conservative Front Bench, or to emulate the hon. Member's knowledge of the legal side of these matters. However, I can certainly testify to the anxiety which has been caused to business. I have received many letters from people who are genuinely apprehensive about this change of onus. One man in particular, who admits the abuse which has been made in the past by some private companies and who is, in general, quite favourable to the proposals in this Clause, nevertheless feels that to alter the onus in this way will hamper his business.

I think that this is another example of the Government's tendency to put the suppression of tax avoidance before the encouragement of business enterprise. This has been mentioned before. I do not say that suppression of tax avoidance is not important—of course it is—but I hope that the Government spokesman will deal with some of the points made by the hon. Member for Cheetham. I think that he has demonstrated that it is not necessary to change the onus in this way, to take these steps to stop tax avoidance by close companies. It appears that many legitimate businesses, which are certainly not attempting tax avoidance, regard this as a threat to their expansion and efficiency.

We began this discussion on a proposal to reduce the rate from 60 per cent. to 40 per cent. The hon. Member for Cheetham pointed out that some of the objections to 60 per cent. would be overcome if Amendments were made in the later stages of the Bill. We are in some difficulty here. This may be true, but we are forced at this moment to debate the Bill as it is before us, and it would be wholly out of order to take into account putative amendments to Clauses which we have not yet reached—

Mr. Harold Lever

If the right hon. Member proceeds pedantically in this way, he will do his own argument an injury. The interest charges produce evil results which can be considered separately, but if the interest charges are removed, any argument based upon disallowance of interest will be fallacious. All that will happen is that the right hon. Member will be retrospectively made to look illogical, and even ridiculous, if the Amendments are made.

Mr. Grimond

I do not want to be made to look retrospectively illogical. But the hon. Member for Cheetham looks illogical now. This may be an important, illogical difference between us, and we have had many illogical arguments on this Bill, but it is a difficulty under our present procedures.

I agree with the hon. Member about this. I believe that the Chancellor's Amendments to this part of the Bill are a great improvement and it may be that taken in conjunction with such further concessions as the right hon. Gentleman intends to make, a reduction of from 60 to 40 per cent. may become much less necessary. The Committee should, however, bear in mind the points already made that the top rate of 60 per cent. is not as favourable as the Government have sometimes represented it to be.

7.0 p.m.

I do not know how the Chancellor will ultimately treat interest and other things which are chargeable to these companies. Again, I think it is true that directors' loans, for instance, can in some cases be made a method of tax evasion. There is a real difficulty here.

Mr. Harold Lever indicated dissent.

Mr. Grimond

The hon. Member shakes his head. The difficulty with him is that he is so busy in maintaining Cheetham's balance that he is anxious not to associate himself either with too many criticisms of the Government or, indeed, with too many favourable remarks to them. Perhaps I might set the hon. Member's mind at rest by saying that when we come to the further discussions on charges and interest which are chargeable against these companies, I take it that we will have his wholehearted support.

Mr. Harold Lever

More than a shake of the head is necessary. Nobody is suggesting that directors' loans have been used for tax avoidance. What the Bill clearly has in mind is that under the new system of taxation an obvious form of tax avoidable may be directors' loans.

Mr. Grimond

I hardly ever differ from the hon. Member on matters of this kind, but I have a letter from a director who claims to have operated directors' loans as a means of tax avoidance, although he goes on to excuse himself by other features of the tax system.

What the Committee should impress upon the Government is, first, that the change of onus is a serious matter and that we should support the Amendment—

Mr. Maxwell

It just is not possible to avoid tax by a director's loan account. It simply would not be allowed. I wonder, therefore, whether the writer was trying to mislead the right hon. Gentleman.

Mr. Grimond

If he was, he has misled a lot of other people, too.

On the serious question concerning the onus of proof, I hope that the Government will give way. On the point of a reduction of from 60 to 40 per cent. in the tax, this ties up with the general state in which the Clauses are left at the end of the day. All I can say is that if the Committee finds them unsatisfactory when they have all been examined, perhaps we shall have a further opportunity of examining them again on Report with the help of the hon. Member for Manchester, Cheetham (Mr. Harold Lever).

Sir Peter Roberts (Sheffield, Heeley)

If the Government persist in maintaining the onus of proof as they now have it, obviously the Amendment from this side of the Committee to reduce the 60 per cent. level is necessary. I agree entirely with the arguments which have been put forward. I want, however, to ask the Financial Secretary a question. None of us wants to assist tax avoidance, as is shown by the views that have been expressed concerning the onus of proof to deal with people who deliberately try to take advantage of any opportunities. They are very few.

The much larger proportion of people who are trying to run their businesses want to ascertain the proper proportion that they can get through the special commissioners, whose guidance they accept so that they may put the figures in their accounts. That is the normal way of doing business. All I want to assure myself is that it is the intention of the Government that that sort of procedure which has been used by the special commissioners will continue with the inspectors of taxes.

The problems which I have in mind concern the finances of a close company which wishes to ascertain the level at which it can make a distribution. It is an old Section 21 company. The existing position is that the company's accountant makes inquiries of the special commissioners, shows them the draft accounts, states that he recommends that the board should pay a distribution of £X and asks for guidance. The result is that before the final meeting of the company, the accountant can go back to the directors, tell them that he has had unofficial discussions and say that if they put in £X amount of dividend, he believes that it would be acceptable. All this happens before the annual general meeting of the company and before the accounts are published.

Sometimes, when a company's accountant does not go to the special commissioners, being a Section 21 company it puts a figure in its accounts and pays out its dividend. It may not be until a year later that the Wimbledon office writes to say that the distribution has not been sufficient and that a Surtax direction will be issued. Once that happens, the machinery operates right the way through and there can be an appeal. That is what one wants to avoid. The whole object of running the system as we now have it is that it is possible to go to the special commissioners, get guidance in advance, pay the dividend and more or less know that there will not be a Surtax direction thereafter.

If I am right so far, what will happen under the new procedure? Will it be that an accountant goes to the inspector of taxes and says, "The end of the company's year is in two months time. We want to have a board meeting in a month's time to finalise the accounts"? My experience is that when one goes to the local inspector of taxes with one's problems, a letter arrives to say that they will be looked at and a month later one telephones to discover what is happening. There is almost automatic delay on the part of the overworked inspectors of taxes.

The speedy procedure of Wimbledon may well slow itself down when it is operated by inspectors of taxes, so that the time when the accounts for the year have to be finalised and published passes before they can be completed. In such a case, the board of the company would have no informal advice and must insert its own figure. Once it puts in its figure and it is published, the procedure which we have been talking about starts to operate. This might not happen until six months later[...] There might be an appeal and eventually, if the matter goes wrong, complications will arise of going to all the various shareholders, some of whom may not be the five participators. There might be hundreds of other shareholders. All the tax problems of those individual shareholders must be gone through by the inspector of taxes to see whether a charge should be made. That is what I want to avoid. Obviously, no company wants to do it, nor, I believe, do the inspectors of taxes.

We know that under the proposed arrangements there must be a period of a month within which an answer must be given and also a two-month period. As I understand it, that does not apply to the unofficial approaches which accountants at present make to the special commissioners by means of which the board of a company is given the opportunity of putting a figure in its published accounts.

This is the crux of my question, because this is what will happen in 99 per cent. of cases. Will the Government give instructions to the inspectors of taxes that if an unofficial approach is made by an accountant on behalf of a company, they will give guidance as has been done in the past? Will they give guidance in time for it to be put into the published accounts? If this is not done, I believe that the complications and the extra work which will be forced upon inspectors of taxes will be far greater than the Financial Secretary imagines.

One has only to consider the case of one of the bigger companies, some of which have a large number of share- holders. It may be that only certain of them are Surtax payers and that certain of them are recipients of various assets. As I understand, the Inland Revenue will have to look at every shareholder's holding to assess whether or not it is a close company. The problems involved will be enormous.

The question I ask is, therefore, a practical one and the Government must have thought about it and understood it. Is the right hon. Gentleman able to say that the Government will give instructions to the inspector of taxes, as to the Wimbledon offices, and can we be assured that action will be taken to assess the amount so that an answer can be obtained before the finalising of the accounts? I appreciate that such an answer might be quite unofficial, something like, "We have looked at the accounts and it appears that the figure of such and such is reasonable". If we can get a practical assurance of that type it will be helpful, otherwise the Government will create a most awful situation.

I do not believe that the average board wishes to put in its accounts a figure which will be challenged—that is, unless it is trying to be a tax avoider. I am not arguing about that. I am talking of the reasonable people who, I fear, will be penalised because of this provision. I hope that the right hon. Gentleman will give an assurance that instructions will be given to inspectors to give priority to this matter, since there are times when at certain offices one cannot get a reply for some months. I hope that we can be given some guidance on this important matter.

Mr. Diamond

It might be convenient if I now reply to the comments which have been made and, in so doing, I hope to remove some of the anxieties which exist.

The hon. Member for Nottingham, South (Mr. William Clark) raised the question of the 40 per cent. or 60 per cent. As has been demonstrated by hon. Members on both sides of the Committee, in the normal case—and we will come to the abnormality shortly—the effect of the proposal in the Bill is that what has been practiced hitherto will now become the ceiling. In other words, we go from practice in the normal case to ceiling. I do not know how much more generous the Committee would want the Revenue to be, bearing in mind the Revenue's responsibility for seeing that everybody pays his fair share of taxation.

In short, a vast number of cases will be removed and in all the normal cases one might criticise the Revenue for going too far under the previous legislation, but certainly not for not going far enough. Therefore, I could not entertain the suggestion that there should be a ceiling which is well below the normal level of distribution in the straightforward case.

The hon. Member for Nottingham, South—who, I regret to see, is not in his place, but I am sure that he will acquit me of any discourtesy in replying in his absence—did what he has done on other occasions, and introduced the abnormality. As my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) wisely said, this does not help the argument. To answer the hon. Member for Nottingham, South, if he had in mind the kind of abnormality where a director was so running a company that there was being returned to him in the apparent form of interest what in fact was a dividend, then we immediately see that the tax includes the tax on the dividend. What is in the hon. Gentleman's example interest is, in fact, dividend—in effect, a return on the capital.

However, one does not get the matter much further by illustrating the exceptional case. Therefore, I repeat that the Government have gone very far in removing the whole of the cases which are comparable under the new tax system with the average case at present and which, after argument, is treated as being exempt from a Surtax direction.

7.15 p.m.

I come to the question of general guidance which the hon. Member for Sheffield, Heeley (Sir P. Roberts) raised. I am grateful to him for participating in this discussion, because he always speaks on the basis of a practical businessman running companies and the difficulties which arise. They are exactly the difficulties we want to remove. The hon. Gentleman's attitude is exactly the one we want to encourage. We want businessmen to know where they stand, completely free of uncertainty. The hon. Gentleman was talking about the straightforward man, just as I am. He was not speaking about the tax dodger, although, unfortunately, there are quite a few tax dodgers, against whom we must act so that those who are not tax dodgers are not called upon to pay an excessive share.

The hon. Member for Heeley asked if there could be general guidance in advance of finalisation. The answer is, "Yes". We will certainly see that, as far as possible, general guidance is given. This cannot be taken—and the hon. Gentleman did not ask for it to be taken—in the form of a legal clearance certificate, but there is general helpful guidance and that is what we want to give.

In a great variety of companies today a dividend is declared, the matter goes before the Surtax commissioners for discussion and, as a result of that discussion, an additional dividend relating to the period in question is agreed. This is generally how the matter is settled; by an additional dividend bringing up the level of the earlier dividend which was, admittedly and deliberately, too low to allow room for an additional dividend. We would not wish, in practice, to put any bar to the smooth running of straightforward businesses and boards of directors and their having as clear an indication as possible, with the information available at that time to the board and the inspector. I assure the hon. Gentleman that I will see to it that everything possible is done in terms of administration, to achieve that result.

Mr. Barber

Would the right hon. Gentleman give a further assurance, flowing from what my hon. Friend the Member for Sheffield, Heeley (Sir P. Roberts) said? Is he able, in view of the increased burden that is likely to be imposed on the tax inspectorate, to give an assurance that informal guidance of the kind my hon. Friend referred to will be forthcoming as quickly as it has been in the past from the special commissioners?

Mr. Diamond

That was implicit in the assurance for which the, hon. Member for Heeley asked. He was anxious that this information should be available between the time of preparing draft accounts and the publishing of them, which may be a matter of up to six months. I therefore repeat that it was in my mind in saying what I said to the hon. Member for Heeley that time was an essential consideration.

We are, I am afraid, left with the question of the onus of proof. I will take the Committee, step by step, through what will now happen. There will be the preparation of the accounts. The accounts will be submitted to the inspector of taxes in the ordinary way and there will be discussions with the inspector, verbally or by correspondence, as to whether the proposed dividend is adequate. Representations will be made by, or on behalf of, the taxpayer demonstrating that it is as much as could be afforded.

Or it may be that the alternative tactic is adopted, which is regularly adopted, of saying, "I recognise that this is a modest dividend to start with and I recommend an additional dividend to £X". The inspector perhaps then says that it should be a figure of £Xx, a discussion takes place and agreement is reached. If agreement is not reached the assessment is raised and the taxpayer, if he does not want to pay that assessment, goes to appeal.

Then the facts must be established. But he must establish the facts, because the facts are within his own knowledge. It is not possible for the inspector of taxes to say what the facts are; what the future intentions of the businessman are with regard to developing his business. It is not possible for anyone other than the businessman himself to say, "I could not distribute more because I needed the balance for these perfectly good reasons and needs of the business".

Therefore, it is inevitable, if I may say so, in common sense and not just because of the law—and on that I will give way immediately to my hon. Friend—in a general principle, because we are dealing purely and exclusively with the limited problem of proving this particular piece of factual evidence, namely, that the money is needed for a particular kind of expansion, and that the expansion is afoot or in contemplation—

Mr. Harold Lever

Since it is inevitable that this onus should be thrown on the taxpayer, thereby implying that unless it is thrown on the taxpayer the Revenue simply could not prove its case, will my right hon. Friend tell me how the Inland Revenue operated in this parlous position where the inevitability of the onus being thrown on the taxpayer was not recognised in all the years past?

Mr. Diamond

The answer to that is (a) what I have previously said, and (b) what my hon. Friend has also previously said: the threat of the penal sanction of declaring 100 per cent. of the undistributed profits.

Mr. Harold Lever

My right hon. Friend has not understood my question. It is not what happened before in cases that did not come before the special commissioners—where the threat worked—butsince my right hon. Friend thinks it impossible for the Revenue to prove its case if the onus is put upon it, what happened where the question did come for hearing before the special commissioners? The Revenue, faced with this impossible task, presumably lost every single case it brought, and if it presumably lost every single case it brought, on this assumption no one would dream of settling a case with the Inland Revenue because they would know that all they had to do was to lodge an appeal, and that it was an impossibility for the Revenue to discharge this onus.

Mr. Diamond

I do not think that my hon. Friend is applying his mind to the different procedures that exist at present, and are proposed in the future. I gather that in relation to the future procedures he is now satisfied that in order for the appellant, as he would be, against an assessment raised by the Revenue, to prove that the assessment was excessive in terms of distribution, it was necessary for the appellant to produce the information which only he had. I therefore gather that my hon. Friend is satisfied there.

In the past, the procedure has been different. As my hon. Friend realises, there has been a direction by the Surtax commissioners who, by using the implied—not the explicit, but the implied—threat of 100 per cent. distribution, have been able to extract from the taxpayer the whole of the relevant information, because it was in the taxpayer's interest to produce that information—

Mr. Harold Lever

I do not want to keep breaking in on my right hon. Friend—

Mr. Diamond

I know that my hon. Friend does not, and I do not want to keep giving way either, so we are at one, as we always are—

Mr. Harold Lever

I am entitled to make my point.

Mr. Diamond

My hon. Friend is fully entitled to make his point. I did not know that he felt that he was fully entitled to intervene whenever and as often as he felt so disposed.

Mr. Harold Lever

This is the ordinary courtesy of Committee debate.

My right hon. Friend has so far persisted in misunderstanding the point I have made. Sooner or later he must answer it—and not the point I am not making—and I must ask him to do so. His case is that before the special commissioners the Revenue, if my Amendment is accepted, will not be able to discharge the onus I would throw upon it. What I have submitted to him is that that is exactly and precisely the onus at present upon the Inland Revenue under the old system.

So any taxpayer who, under the old system, came before the special commissioners, was not obliged to produce any documents under any threat of 100 per cent. or any other distribution. He would simply say, "The onus of proof is on the Inland Revenue. I will not produce any documents—you must discharge the onus." If my right hon. Friend is right, the Revenue cannot discharge that onus because the facts are within the knowledge of the taxpayer. In those circumstances, how can that be right? All I urge my right hon. Friend to do is to recognise that if he accepts my Amendment, the Revenue will be in precisely the same position as it is under the existing legislation when such a matter comes before the special commissioners.

Mr. Diamond

I do understand, as far as I am capable of understanding, what my hon. Friend says. I have understood it all the way through, because he makes his point with clarity and persuasiveness. There is a limit to my capacity to comprehend, and it may be that that limit has been reached. All I say to my hon. Friend, and I hope that he will not take this amiss—because he took an earlier intervention amiss—is that I understand, I think, what he is saying. I think that he is mistaken. I am advised that he is mistaken. I am not relying on my legal knowledge—I am advised by those who are there to advise Her Majesty's Government on these matters that my hon. Friend is mistaken, but—

Mr. Barber rose

Mr. Diamond

Do let me finish; I am still in the middle of a sentence if it helps the right hon. Gentleman—but inasmuch as it is possible that notwithstanding my desire and willingness to understand my hon. Friend's point, and inasmuch as we are completely at one in the desire to remove misapprehension, if there is a misapprehension, I will gladly—and this is what I wanted to say, and why I did not want to delay my hon. Friend—once more consult those who are there to advise us, because I do not wish to be guilty of the charges of blind obstinacy which were thrown at me.

I will see whether there is any doubt as to the view previously held, and whether there is any real need to amend the legislation as it is at present proposed. If there is, I will unhesitatingly come back on Report with whatever Amendments might be appropriate. Nevertheless, I repeat that this has been very carefully considered. It is not a question of doing anything inadvertently, but part of the deliberate machine of making the tax collection work smoothly and fairly, and of eliminating all possible trouble for the straightforward business man and taxpayer.

I do not think that I have been wrongly advised, but I tell my hon. Friend that I will look at the point once more, take further guidance on it and, if it is necessary, bring forward an Amendment on Report. But I must repeat that, at the moment, I am advised that the legislation as it stands serves the purpose it was intended to serve.

Mr. Barber

We have spent a very considerable amount of time on the question of onus of proof, and listening to the difference of view of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and the Chief Secretary. I do not share the view of the hon. Member, for a particular reason, but this dispute has taken a very considerable amount of our time. My experience has been that when the Committee has discussed these sort of matters at this stage of the Finance Bill, it has sometimes helped if one of the Law Officers has been available to deal with such difficult questions as onus of proof.

I do not suggest for a moment that we should now delay our proceedings merely because a Law Officer is not here, but later, when we come to the Question, "That the Clause stand part of the Bill", it might be convenient to the Committee if one of the Law Officers were available to deal with the matter, when it would be cleared up once and for all.

As I understand it from the Chief Secretary, if the point is not cleared up now we shall want to return to it on Report. I thought that I was perfectly clear on the position but, having listened to the Chief Secretary, I now wonder whether I was right in taking a view different from that of the hon. Member for Cheetham.

7.30 p.m.

Mr. W. R. van Straubenzee (Wokingham)

My right hon. Friend the Member for Altrincham and Sale (Mr. Barber) has reminded us of the inordinate amount of time we have necessarily taken, largely in discussion from the benches opposite, on this matter. I think it would be useful to move away from the very important, but limited, point which been discussed so much because these Amendments which we are discussing together deal with much wider matters as well as with the important question of the onus of proof.

The first matter to which I draw the attention of the Committee arises on Amendment No. 707. What I think is fascinating to inquire into is why this Amendment has been proposed. It is very important first to make quite clear that the impression given in some sections of the technical Press that Amendment No. 707 writes a very substantial concession into the Bill and that in some way the tax applied to close companies has been very substantially recast and quite new provisions are put into the Bill, is not an accurate impression. I can derive authority for that statement from the Chief Secretary himself, who not only explained this briefly—I make no complaint about the brevity—in moving the Amendment, but at a much earlier stage was the person more than anyone else who made the point that the same provisions were contained in Clause 10.

What interests me is why this has been moved. I think that the reason is in the background of the presentation of this tax. The Chief Secretary said at an earlier stage of our discussions on this Amendment that very widespread anxiety had been caused to many people outside the House by this proposal. That was the masterly understatement of the year. Those of us who are lucky enough to have contact with one or other aspect of the business world have hardly known a time at which so much time has been taken up in innumerable large and small board rooms trying to make up their minds about the effect of the close company proposals on individual companies. Quite an inordinate amount of utterly wasted time has been taken up by individual companies and their innumerable advisers and often it has taken them from other work at a time when we need every effort in every individual company to work on something of a constructive nature.

If it was necessary to extricate these provisions and almost entirely reproduce them from an obscure Schedule to the body of the Bill it was because by the inept presentation of these provisions the Government have no one but themselves to blame for the resultant confusion in the business world. At least we can say that there is merit in bringing them out into the open in this way, but there would have been a deal more merit if they had been better presented in the first place. I repeat that it is most important to make the point that Amendment No. 707 moved by the Chief Secretary does not in fact recast the tax substantially from the position it held originally when the Bill was presented.

There has not been a major concession on this matter made by the Chancellor. Those who advise companies and run companies affected would be well advised to look again closely at this point.

Mr. Diamond

The hon. Member is of course right in saying that these provisions were, as he suggested, tucked away in a Schedule, but he is not right in saying that the position was not made clear. The White Paper, Command 2646—I refer not to the more detailed part but the summary at the beginning, which surely is the minimum that any interested party would read—states at the top of the page 6, under the heading: Closely-controlled companies … (ii) Shortfall in distributions. A closely-controlled company which makes inadequate distributions will be charged Income Tax on the shortfall, except to the extent that it can show that retention of profits is necessary or advisable for the maintenance and development of its business … Right in the opening paragraph that is made absolutely clear.

Mr. van Straubenzee

Subsequently, when individual boards and advisers sought to give substance to that point—and, what was very much more important, those who write about these matters—found it extremely difficult to look at the different Clauses and Schedules of the Bill as one constructive whole. The result—this is indisputable, because the Chief Secretary himself says so—was very widespread confusion about the corporate effect of these provisions.

Mr. Diamond


Mr. van Straubenzee

The Chief Secretary ask why. Is he asserting that here there was a malicious attempt by the Press to denigrate these proposals? In the kind of technical Press of which I am thinking in this instance I do not think that considerations of that sort were generally applied.

Mr. William Clark

A conspiracy?

Mr. van Straubenzee

As my hon. Friend says, a conspiracy.

We have spent much time on these Amendments, important as they are, and we have much more to go through. It seems strange at a time when it is generally agreed by many reports of one kind and another that one of the difficulties of what will become close companies will be the raising of necessary money for development that the average dividend covered by quoted companies should be thought sufficient for a company which by definition cannot go to the market for its finance. I think it will be found that if, as I suspect, the 60 per cent. does become the norm at least in the first instance—I must honestly say to the Chief Secretary that nothing in his fervour so far has ruled that thought from my mind—the provisions will prove in a large number of cases to be quite insufficient for an expanding business.

Many of those in this Committee—there has been one example among hon. Members opposite—in favour of these proposals are frankly people who have got into the "club" already themselves and are not sufficiently thoughtful of those thrusting, growing small companies upon which in so many technical fields our prosperity depends. It may be that in future years we shall be able to look back upon the Chief Secretary's words and say that he was proved entirely right and that our anxieties and fears were entirely unjustified, but at present that is not the view which has found general acceptance in very wide business circles.

Therefore, it seems that a very strongly argued case can be made for the Amendment to the proposed Amendment, proposed by my hon. Friend the Member for Nottingham, South (Mr. William Clark), which in essence would have the effect of ensuring that if one has to have a designation of this sort approximately at least a third of the profit would be available for plough back. This, I should have thought, was far more in line with the kind of procedures which have been applied up to now. [HON. MEMBERS: "No."] This must be a matter for judgment. If confess that I have found it very difficult to take careful advice on this point and to some extent I draw on my own modest experience, but, in consulting a number of people who deal very extensively with these matters, I find that they dispute fairly strongly some of the figures given about the working of the close companies system as it is at present. For these reasons, on the assumption that there is to be this figure, a strong case has been established for the Amendment to the Amendment, a case on which I very much hope that the Committee will have an opportunity of expressing itself in due time.

Mr. Barnett

I believe that the way in which the case was presented by the hon. Member for Wokingham (Mr. van Straubenzee) is one of the reasons why businessmen have been confused. Much of what the hon. Gentleman said will be picked out for headlines and will lead to confusion in the minds of businessmen. I frankly admit to being prejudiced in favour of the ordinary, average, decent taxpayer. I would want to see him helped in every possible way. I believe that, if politics were to be separated from the issue, both sides of the Committee would want to see a fair and reasonable system applied to close companies in particular.

I want to take up, first, the arguments presented by the hon. Member for Nottingham, South (Mr. William Clark) on the question whether the distribution should be 60 per cent. or 40 per cent. I believe that on further examination the hon. Gentleman would agree that the case he presented was without foundation. He first assumed a Corporation Tax of 40 per cent., whereas, if an equal comparison were made with the existing system, a 35 per cent. rate should be taken. Then he disallowed from his £100 example £20. Again, this is a supposition which cannot carry any weight. In logic, the case must be argued as it exists, not as it might exist in some extreme example. The hon. Gentleman went on to say that this will affect growing companies. He gave some examples of the amounts of distribution to directors. Perhaps we shall have an opportunity on Report to look again at directors' remuneration, for I certainly am not satisfied with the situation as it still exists.

But it would be very rare that a director in a close company would want to take £11,000. In by far the largest number of cases of very small companies, about which hon. Members have been speaking and in which there are perhaps just a husband and his wife, the directors would not want to take more than £5,000 between the two. They would want to keep inside the Surtax limit and plough the rest back. One of the confusions in the minds of many hon. Members is the difference between retention and plough back.

The hon. Member for Nottingham, South, took as his example the situation, in the case of his £100, where under the existing system 60 per cent., which is the maximum, would have to be distributed. He then took the 40 per cent. in the other case as it exists on average today. There is no reason to suppose that companies will not under the new close company situation also be able to distribute as little as 40 per cent.—indeed much less. Most close companies which are ploughing back their profits, as opposed to retaining them merely to avoid Surtax, will be able to pay no dividend at all, not even 1 per cent. It is completely misleading to cite as an example the existing situation of a 40 per cent. company and the new situation which might apply of a maximum of 60 per cent. This misinterprets the situation which will apply in practice.

In practice, the Surtax commissioners rarely give the 100 per cent. direction. Very rarely is 100 per cent. of profits distributed, because no adviser would allow a company to find itself in that position. Equally, no adviser would allow his company under the new situation to pay the maximum of 60 per cent. He would be able to negotiate either with the Surtax commissioners or, as is now the case, with the inspector.

7.45 p.m.

Mr. Harold Lever

Is it as rare as my hon. Friend supposes that 100 per cent. was exacted under the old legislation? Surely under the old legislation 100 per cent. was automatically exacted in cases of liquidation—in the last year before liquidation and in several other such contingencies. It was not as rare as is alleged that 100 per cent. was exacted.

Mr. Barnett

In all cases of liquidation, naturally. Just what percentage there are of cases where companies are in liquidation is a question which my hon. Friend would perhaps want to ask my right hon. Friend the Chief Secretary.

I want now to deal with the question whether this matter should be dealt with by inspectors or by the Surtax commissioners. This is perhaps a limited point, but in practice it is important. The hon. Member for Sheffield, Heeley (Sir P. Roberts) made the valid point that inspectors are busy people and that there might be unnecessary and unreasonable delay. I want here to pay credit to both inspectors of taxes and to the commissioners. I have dealt with both. Both types of people are very reasonable men and women, because there are women inspectors of taxes, too. Speaking as a provincial Member—there are more provincial Members than there are London —I would far rather deal with my local inspector, if only as a matter of convenience. In negotiation, as opposed to the simple straightforward case, it is necessary to go to Wimbledon. The accountant, a director and counsel have to go. As counsel cannot be taken without a solicitor, at least four people have to go all the way down to Wimbledon.

Sir D. Glover

The hon. Gentleman and the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and I could get together and form a cabal on our own. I have disagreed with hardly anything that the two hon. Members have said. Does he not realise that his statement that four people must go all the way to Wimbledon implies that the case must be sufficiently complicated that it is what I would call a High Court case rather than a magistrates' court case? By saying that a director, the accountant, a solicitor and counsel are needed, he is in fact saying that the case being dealt with is one which should be put before an expert and not before the ordinary run of tax inspector in a district.

Mr. Barnett

With respect, I do not know that I would be at all happy in a cabal with the hon. Gentleman. I am not sure that he will agree with everything that I propose to say hereafter. I will come later to the question whether in difficult cases it would be better to deal with somebody with specialised knowledge. At present, even in the simple cases, the accounts must be sent down to Wimbledon to get clearance and agreement. The hon. Gentleman's mention of specialised knowledge overstates the case. Exactly what is meant by "specialised knowledge"? A set of accounts is studied and the decision must be taken whether 60 per cent. or 40 per cent., or 30 per cent. or 20 per cent., should be distributed. It is true that the Surtax commissioners deal with this type of thing and nothing else, but it is not accurate to suggest that it is necessary to have some specialised knowledge, other than being able to understand a set of accounts, to decide whether there should be 40 per cent. or 30 per cent., or 20 per cent. distribution. It is difficult to believe that the average inspector of taxes would not easily be able to decide with reasonable fairness, in conjunction with the accoun- tant involved, what was a reasonable distribution. I feel that it is to overstate the case to suggest that it would be better to have some body with specialised knowledge. However, I have known cases myself where there have been lengthy delays in getting replies from inspectors. After all, they are very busy people. I have seen their desks even more overloaded than my own and it sometimes takes them a long time to find a particular file, let alone to reply to correspondence.

At the moment there is a visiting inspector who goes around from one district to another in a sort of supervisory way, and it might be possible to have touring inspectors going from district to district, if necessary dealing simply with this point. But generally, with the cooperation of the inspectors and with the sort of recommendations which I understand my right hon. Friend suggests that he would give to the inspectors, I do not believe it would be very difficult to get the sort of co-operation needed with inspectors of taxes.

To deal shortly with the question of onus of proof, in practice most cases will be settled as between an accountant and the inspector. Therefore, any further disagreement will apply only in a very limited number of cases. Speaking for myself, as I said at the outset, I am prejudiced in favour of the taxpayer. But the case is overstated if it is said that the taxpayer is worried about the situation as it exists at present. The taxpayer does not understand whether the onus of proof works this way or that way. Under the existing system most taxpayers say to their accountant, "What is my tax liability?".

Mr. Patrick Jenkin

Would the hon. Gentleman not agree that what might have worried a large number of taxpayers is the sentence in the White Paper referred to by the Chief Secretary at page 24: The required standard is normally the whole of the distributable investment income for the period, plus 60 per cent. of the estate or trading income for the period"? Does the hon. Gentleman not think that that is what worries the taxpayer?

Mr. Barnett

I suggest that there are very few taxpayers who have read it. [Laughter.] That is my opinion.

Mr. Kenneth Lewis (Rutland and Stamford)

Would not the hon. Gentleman accept that many people who run small businesses have had clearly indicated to them by their accountants that they are worried? As a professional accountant, the hon. Member ought to understand that the businessman accepts the accountant's view of his accounts.

Mr. Barnett

I was saying that it is unlikely that the taxpayer had read that particular sentence, and I will stick by that. If it is suggested that the average taxpayer has read the 226 pages of the Finance Bill or of any other Finance Act I would not agree. I am sure that taxpayers read very little of these Measures. The question which taxpayers ask is, "What is my tax liability?" and they do not bother with the niceties of phraseology in Bills or White Papers.

Mr. William Clark

Would the hon. Gentleman say "Yes" or "No" to the question whether accountants are worried about this quotation from page 24 of the White Paper? I think he will agree that it is the accountant who advises the client. Whilst the taxpayer may not have read the 226 pages of the Bill, the accountant will tell his client "I think"—or "I do not think"—"you will be penalised under this particular provision."

Mr. Diamond

As we have had a selected extract—

Mr. Harold Lever

And misleading.

Mr. Diamond

—a misleading extract, as my hon. Friend has said, from a particular paragraph in the White Paper, may I ask the hon. Gentleman to read an earlier paragraph which states: … and the shortfall is not justified by the needs for the maintenance and development of the business.

Mr. Barnett

I thank my right hon. Friend. If an accountant, having read and understood the relevant provisions relating to close companies, were to suggest to his client that the close company legislation as such will adversely affect a growing company ploughing back its profits, I would suggest that the accountant was misleading his client, because this is not the case.

On the question of onus of proof, this is a very limited point, and if it gives the slightest satisfaction and makes the taxpayer feel a little better, I should like my right hon. Friend to give way on this. It will cost the Revenue nothing. It will help to dispel some of the confusion thta exists and, therefore, I hope my right hon. Friend will look at this again. Even if he feels that it is still not very important and that the point is covered anyway, all the more reason to bend over backwards to dispel some of the confusion, however mistaken, which exists.

There has been so much confusion on the effect on close companies that I want to make it clear, I would not be a party to any legislation which hurt this type of company. In the larger companies the rate of growth that one can expect is comparatively small, but the rate of growth that one can expect in a close company can be explosive. I therefore think it cannot be stressed strongly enough that close companies ploughing back their profits have a great deal to gain from this Bill.

Sir Frederick Bennett (Torquay)

Many of the remarks of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) were so helpful, illuminating and fair that it seems churlish to make any criticisms at all.

However, before coming to the main theme of my remarks, I must say that he did not do justice to himself in the suggestion that if the Chancellor did not give way on the question of individual inspectors tackling these matters instead of the special commissioners, he would like to give the Committee a little consolation because as time went on the former would do better and gain the experience which they have not had up till now.

This is a little odd, because it suggests that hardship and unfairness to the taxpayer is all right so long as it lessens over the years. It follows that this would clear up during the years ahead—

Mr. Harold Lever

I never count hardship by numbers or by point of time. What I was suggesting as a consolation to those of us who lean in the direction of the hon. Member is that the special commissioners get their expertise very quickly.

Sir F. Bennett

I thought the hon. Gentleman accepted the fact that this is built up over a period of 40 years. In fact, expertise has been built up. Anyway, if the hon. Gentleman says that he is leaning in our direction I should like him to lean a little bit more heavily than he has done up to now.

The main reason why we are taking so long over this subject is, without any intention of discourtesy to the Chief Secretary, that he did not reply adequately to the various points made by my hon. Friend the Member for Nottingham, South (Mr. William Clark). He did only two things during his remarks which have led those of us who had not wanted to intervene to come in at this stage of the debate to try to obtain further clarification.

8.0 p.m.

First of all, he said about my hon. Friend's remarks that "as usual"—and I thought that that was a little discourteous—he relied on abnormalities to justify his case, but he did not say a word about what was abnormal and he did not refute or deal with any of the figures which my hon. Friend gave. Secondly, he dealt with the onus of proof in such a way that everybody in the Committee is now more confused than they were before he spoke. In the absence of Front Bench counter-arguments to my hon. Friend, all I have to deal with is the intervention by file hon. Member for Cheetham and the intervention by the hon. Member for Buckingham (Mr. Maxwell), who I am sorry to notice is not now in his place.

The hon. Member for Cheetham tried to say that the fears expressed by my hon. Friend the Member for Nottingham, South and the figures which he gave to illustrate those fears would be real only if at a later stage the disallowance charges were put in such a way that those fears would be realised. We have come to a point when we are having debates on the assumption that the Chancellor will do something later which at present he has shown no sign of doing. If this is to be the procedure, we can have no useful discussion on any Clause, because the reply to our arguments will always be that something better will be done later. We must have proof that the figures which my hon. Friend gave are unreal before we are told by the Government that we should not worry about them. To say that even if the figures are valid now they will not be valid by the time proceedings on the Bill are completed makes nonsense of debate.

The hon. Member for Buckingham did not rely on abnormality or the later good intentions of the Chancellor. He simply talked about how many people would be affected. He said that it would be a small number and therefore we should not worry about them. To say that is grossly unethical. It would be a most unfortunate tendency in this Committee and in the House if it were to be said of a Finance Bill that it does not matter what it does because only a limited number of people would be hurt by it. This is in direct contradiction of my experience in the many years that I have spent in the House of Commons during which time I have heard one Socialist Member after another dealing with any proposed reduction in direct taxation by pointing to the not only abnormal and unusual but wholly mythical bachelor on £100,000 a year and pointing out what would be done for him.

Apart from the detailed figures which my hon. Friend the Member for Nottingham, South gave, the theme behind his speech was the Government's attitude towards close companies. As far as I can understand, the Government's attitude at the moment, with such reservations of alterations as we may be able to extract in Committee, is that generally such companies should distribute as much as possible of their own profits.

Mr. Diamond indicated dissent.

Sir F. Bennett

If that is not so, I do not know what we are arguing about. Everybody in the country has noticed the serious difference between the Government's attitude towards close companies and their attitude towards large companies. The close companies must distribute as much as possible. The big companies must reserve as much as possible, and we have a situation in which these two things at one stage or another become wholly conflicting.

The simplest possible example can be gathered if one takes the definition of a close company as one in which 51 per cent. of the holding is in the hands of five separate people. Just one more shareholder, putting the control of the company in the hands of six wholly separate people, immediately stops the company being a close company and the Government say, "You must stop distributing profits and keep back as much as possible". Is it sensible to develop these two things, one with the other, and to say that on the one hand a company of just a certain size must behave in one way and another company of just a certain other size must behave in another way?

This leads one to the inevitable conclusion that the Government, although wanting close companies to develop into big companies, as they have said, and to form a much wider share ownership and have expansion take place, propose at the same time to take steps precisely to prevent that process coming about. I hope that at some stage a further explanation will be given of the incompatibility of this attitude, otherwise I warn the Government that there will be a number of contributions from this side of the Committee to this same effect.

Mr. Patrick Jenkin

I propose to be brief because we have had a very long discussion on this Clause. I would draw the Chief Secretary's attention to the passage on page 24 of the White Paper dealing with the Clause. I will not read it but I respectfully suggest that the quotation which I put in an intervention to his hon. Friend the Member for Heywood and Royton (Mr. Barnett) was not as selective as the Chief Secretary suggested. If one reads the first, second and half of the third paragraph on that page the combined effect is perhaps a good deal more stringent than the explanation which the Chief Secretary gave earlier today. If that had come first and those paragraphs had come later perhaps the great anxiety which has been aroused might have been much less.

In opposing the Amendment to reduce the 60 per cent. to 40 per cent., the Chief Secretary argued that what was being proposed by the Bill was to turn the present practice into a new proceeding. The whole of his argument was based on that, but I question whether this is so. As my hon. Friend the Member for Wokingham (Mr. van Straubenzee) said, it is difficult to collect impressions from accountants, lawyers and so on of what is the normal requirement of the special commissioners now, but the information which I have been able to acquire from different sources is that the figures are of an order to allow the retention of about one-third of the gross profit.

It may well be more or may be less, but in an ordinary case it appears that about one-third may be retained. Compared with 60 per cent. distribution, when Corporation Tax is 40 per cent. the amount retained is not one-third but just under one-quarter, or 24 per cent., and when Corporation Tax is only 35 per cent. that takes retention up to 26 per cent.—again substantially below the present practice. The right answer is that it ought to be considerably higher than the present practice because, as my hon. Friend the Member for Torquay (Sir F. Bennett) said, there is this fatal and fundamental conflict between the treatment of the small companies and the treatment of the large companies. The large companies are being encouraged to retain when they are the ones who should be forced to go to the market and justify their investment, whereas the small companies ought to retain. This provision in the Bill is the wrong way round. If the rate of distribution is reduced to 40 per cent., as proposed in the Amendment, then, with Corporation Tax at 40 per cent., the distribution becomes 24 per cent., allowing a retention of 36 per cent.; and with Corporation Tax at 35 per cent. the retention rises to 39 per cent. This seems a reasonable proposal in the context of the whole Bill, which is designed to encourage companies to plough back.

A word now about Amendment No. 629, which relates to the distinction drawn in the case of a trading company between investment income and trading income. This Amendment was intended to equate the two for the purposes of treatment under the Bill. The Committee will know that trading income is, broadly, income which for an individual would be earned income, and investment income is income which would not be earned income. The Chief Secretary, in moving his Amendment, made quite clear that it was still the Goverment's intention to adhere to what has always been the practice, that investment income must be regarded as distributable up to 100 per cent., and trading income was to be subject to the test of the needs of the business. It seems to me that for a trading company this is not a sound procedure.

It may well be that a trading company holds investments and derives income from them with a view to future expansion. It is sometimes necessary to collect investments over a period of years and to add to them in order finally to be in a position to indulge in, say, a major expansion which can, possibly, lead to a private company going public. I seriously question whether, in the context of the Corporation Tax and the new arrangements here, it is not right for the Revenue, in the case of a trading company, to be entitled to say that the company is not held to distribute the whole of its investment income but it can look at its investment income in relation to future requirements for expansion and development of the business. Perhaps it is right that the power to direct that the whole be distributed should be retained, but that the Revenue should be entitled to allow a company, if necessary, to retain the whole of its trading and investment income.

I hope that I have understood aright the point in the Government Amendment and that I am not tilting at windmills or pushing at an open door. As I understand it, the way that it has been drafted still requires the automatic direction as regards the whole of a trading company's investment income. It seems to me that that is probably not justified, and I hope that the Government will deal with the point.

Mr. Harold Lever

I wish merely to say that, although the only time I have ever had any conflict with my right hon. Friend the Chief Secretary is in this Chamber during our debates, as he has gone so far as to say that he will consider the points which I have raised, I wish to ask leave to withdraw the Amendment in my name.

The Temporary Chairman (Mr. H. Hynd)

That Amendment has not been moved, so it is not necessary to withdraw it.

8.15 p.m.

Mr. Barber

We still have to consider the general purport of the Clause on the Question, "That the Clause stand part of the Bill." so I shall be brief in summing up the Opposition's case on this series of Amendments.

I agree with my hon. Friend the Member for Wokingham (Mr. van Straubenzee) that the Chancellor's Amendment, about which he sought to make so much when his Amendments first appeared on the Notice Paper, makes no difference of substance whatever. In the first place, the figure of 60 per cent. appears in the original Clause and it appears also in the Amendment. There is no change. The criterion to be adopted, where there is less than 60 per cent. distribution, is stated in the Amendment to be by reference to such income … as the company shows could not be distributed without prejudice to the requirements of the company's business. All that the Chancellor has done has been to lift virtually the same words from subsection (5) of the Clause, which refer to a distribution which could not be made without prejudice to the requirements of its business". Again, there is no change of substance between the Clause and the Amendment.

The proviso to the Amendment sets the limit above which a company is in the clear, and precisely the same limit appears in the original Clause. There is no change. There is no change of significance as regards the onus of proof, which remains firmly on the shoulders of the company. Again there has been no change. All that the inspector has to do in present circumstances is to raise an assessment and then the onus of proof is firmly on the company.

Yet when these Amendments appeared on the Notice Paper—I do not believe that it was a conspiracy on the part of the Press—one newspaper after another, presumably because they had guidance to that effect, printed words which indicated that in some way or other the Chancellor had made a concession to companies coming within the definition of close companies. The truth is that these particular Amendments do no such thing. I agree with my hon. Friend the Member for Sheffield, Heeley (Sir P. Roberts) that it is impossible to divorce the, percentage in this Clause from the question of onus of proof.

I have already said, because I felt it fair to the Committee to do so, that I do not go so far as the hon. Member for Manchester, Cheetham (Mr. Harold Lever) does in the remarks which he made. I intervened and expressed my view on that, so I shall say no more about it. But it follows that the percentage in the Clause becomes of paramount importance when one is considering the burden of work on inspectors of taxes. If it is right on merits—I should not suggest doing it on any other grounds—to reduce the percentage as we propose that it should be, there will be the practical consequence of making lighter the burden of work on inspectors of taxes.

I agree that, if one is to accept the Chancellor's general scheme as set out in these Clauses, some percentage must be specified. Whether it should be 60, 50 or 40 per cent. is, perhaps, a matter for argument and opinion. The Clause at present proposes 60 per cent. I quite understand when the Chief Secretary says that, because of Schedule 17, this does not mean that 60 per cent. of gross profit must be distributed. As a result of the way in which Schedule 17, Part II, works, with the definition of distributable profits, what a company will have to distribute in the normal case, if the 60 per cent. is applied, is about 36 per cent. or 39 per cent. depending on whether the Corporation Tax is 35 per cent. or 40 per cent.

Mr. Diamond indicated assent.

Mr. Barber

I see the Chief Secretary nods assent to that. But, if this is so, one cannot go on logically to argue that, under the provisions of the Bill a company will, in the normal case, be able to retain 40 per cent. of its profits because, in the light of the definition of distributable profits in Schedule 17, a company will be able to retain only 24 per cent. or 26 per cent. of gross profits on which Corporation Tax is to be paid. It is really this range of percentages, 24 per cent. or 26 per cent., which we are arguing about. In other words, the question is whether this is enough in the normal case.

Mr. Diamond

I intervene because the right hon. Gentleman keeps on referring to "the normal case". He has used those words four times. It is a ceiling. It is not the normal case.

Mr. Barber

The right hon. Gentleman says that it is a ceiling, but I believe—[Interruption.] Does the hon. and learned Gentleman wish to interrupt?

The Financial Secretary to the Treasury (Mr. Niall MacDermot)

It is a ceiling. The right hon. Gentleman cannot get away from that fact. What he is trying to suggest is that the ceiling is the norm. I do not know on what he bases that. He cannot get away from the fact that it is a ceiling.

Mr. Barber

I was about to say that I entirely agree with what some of my hon. Friends say about the way this will work out in many instances in practice. I believe that in many cases with small companies which will not put up with the expense of appealing, in the normal case it will work out in this way—

The Minister without Portfolio (Sir Eric Fletcher)


Mr. Barber

It is no good the Minister without Portfolio just sitting there muttering. We have now had three of the Ministers on the Government Front Bench intervening. I hope that they will allow me to put my case. This has been put to me by reputable accountants who have told me that they believe—it is not my view—that, in practice, what will happen is that in innumerable cases companies will feel that they have to distribute 60 per cent. if the inspector tells them that they should do so and they will not feel that they are in a position to challenge the suggestion made by him.

If the right hon. Gentleman had given us a convincing case for the percentage in the Bill I am sure that my right hon. and hon. Friends would not have wished to press the Amendment. If, alternately, the right hon. Gentleman had said that he was at least prepared to consider a smaller percentage, to look at this again, we would not have pressed the Amendment. I accept the fact that 40 per cent. may not be right, although, on the information that we have been given it seems to be about the right percentage. However, we were open to argument on the point.

We have had no convincing justification for the percentage in the Bill. We have had no answer to the compelling factual arguments of my hon. Friend the Member for Nottingham, South (Mr. William Clark). All we were told was that my hon. Friend was dealing with exceptional cases and that we need not worry about companies which happened to be exceptional. We have had no promise whatever on behalf of the Government that this matter will be reconsidered. In these circumstances, we shall feel obliged to vote in favour of the Amendment in the name of my hon. Friend.

There is one other matter on which I wonder whether the Chief Secretary could give us an explanation. If in view of the shortage of time he is unable to do so, I shall understand. There appears to be something odd about Amendment No. 708 It refers to Sections 246 and 258 of the Income Tax Act, 1952, and the proviso to Section 246(2) is excepted and is not to apply in the new legislation. What troubles some of us is that the proviso was put in to the advantage of the taxpayer.

I can appreciate that because of the new wording in the Bill and reference to "a reasonable part of its actual income", which is in the proviso, might not be appropriate. It might be that one would have to substitute the words "re-

quired standard". However, it seems that this proviso for the benefit of the taxpayer has been dropped for reasons which I could not quite understand.

Mr. Diamond

I am advised that this is not because there is any sinister or subtle reason connected with the drafting, as the right hon. Gentleman suggested it might be. It is simply because it has been found not to have any practical effect, so there is no point in bringing it forward again.

Question, That the words proposed to be left out stand part of the Clause, put and negatived.

Question proposed, That the proposed words be there inserted.

Amendment proposed to the proposed Amendment, to leave out "sixty" and to insert "forty".—[Mr. W. Clark.]

Question put. That "sixty" stand part of the proposed Amendment:—

The Committee divided: Ayes 191, Noes 169.

Division No. 189.] AYES [8.25 p.m.
Abse, Leo Dunn, James A. Irving, Sydney (Dartford)
Allaun, Frank (Salford, E.) Edwards, Rt. Hn. Ness (Caerphilly) Jay, Rt. Hn. Douglas
Alldritt, Walter Ennals, David Johnston, Russell (Inverness)
Armstrong, Ernest Ensor, David Jones, Dan (Burnley)
Atkinson, Norman Fernyhough, E. Kelley, Richard
Bacon, Miss Alice Fitch, Alan (Wigan) Kenyon, Clifford
Bagier, Gordon A. T. Fletcher, Sir Eric (Islington, E.) Lawson, George
Barnett, Joel Fletcher, Ted (Darlington) Leadbitter, Ted
Beaney, Alan Fletcher, Raymond (Ilkeston) Lee, Rt. Hn. Frederick (Newton)
Benn, Ht. Hn. Anthony Wedgwood Floud, Bernard Lever, Harold (Cheetham)
Bennett, J. (Glasgow, Bridgeton) Foley, Maurice Lever, L. M. (Ardwick)
Bessell, Peter Fraser, Rt. Hn. Tom (Hamilton) Lewis, Arthur (West Ham, N.)
Bishop, E. S. Freeson, Reginald Lewis, Ron (Carlisle)
Blackburn, F. Galpern, Sir Myer Lomas, Kenneth
Blenkinsop, Arthur Garrett, W. E. Loughlin, Charles
Boardman, H. George, Lady Megan Lloyd Lubbock, Eric
Bowden, Rt. Hn. H. W. (Leics S.W.) Ginsburg, David McBride, Neil
Bowen, Roderic (Cardigan) Greenwood, Rt. Hn. Anthony McCann, J.
Boyden, James Gregory, Arnold MacDermot, Niall
Braddock, Mrs. E. M. Griffiths, David (Rother Valley) McGuire, Michael
Bray, Dr. Jeremy Griffiths, Rt. Hn. James (Llanelly) McInnes, James
Broughton, Dr. A. D. D. Grimond, Rt. Hn. J. McKay, Mrs. Margaret
Buchan, Norman (Renfrewshire, W.) Hale, Leslie Mackenzie, Alasdair (Ross & Crom'ty)
Buchanan, Richard Hamilton, James (Bothwell) Mackenzie, Gregor (Rutherglen)
Butler, Herbert (Hackney, C.) Hamilton, William (West Fife) McLeavy, Frank
Callaghan, Rt. Hn. James Hannan, William MacMillan, Malcolm
Carmichael, Neil Harper, Joseph Mahon, Simon (Bootle)
Carter-Jones, Lewis Harrison, Walter (Wakefield) Manuel, Archie
Castle, Rt. Hn. Barbara Hart, Mrs. Judith Mapp, Charles
Coleman, Donald Hattersley, Roy Mason, Roy
Conlan, Bernard Herbison, Rt. Hn. Margaret Maxwell, Robert
Corbet, Mrs. Freda Hill, J. (Midlothian) Mendelson, J. J.
Craddock, George (Bradford, S.) Hobden, Dennis (Brighton, K'town) Millan, Bruce
Miller, Dr. M. S.
Crossman, Rt. Hn, R. H. S. Holman, Percy Milne, Edward (Blyth)
Cullen, Mrs. Alice Hooson, H. E. Molloy, William
Dalyell, Tam Horner John Morris, John (Aberavon)
Davies, G. Elfed (Rhondda, E.) Houghton, Rt. Hn. Douglas Murray, Albert
Davies, Ifor (Gower) Howie, W. Neal, Harold
Davies, S. O. (Merthyr) Hoy, James Newens, Stan
Diamond, John Hughes, Emrys (S. Ayrshire) Noel-Baker, Francis (Swindon)
Doig, Peter Hughes, Hector (Aberdeen, N.) Norwood, Christopher
Donnelly, Desmond Hunter, Adam (Dunfermline) Oakes, Gordon
Duffy, Dr. A. E. P. Hunter, A. E. (Feltham) Ogden, Eric
O'Malley, Brian Robertson, John (Paisley) Thorpe, Jeremy
Oram, Albert E. (E. Ham, S.) Rodgers, William (Stockton) Tinn, James
Orme, Stanley Rogers, George (Kensington, N.) Tomney, Frank
Oswald, Thomas Sheldon, Robert Urwin, T. W.
Owen, Will Shinwell, Rt. Hn. E. Varley, Eric G.
Padley, Walter Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.) Wainwright, Edwin
Park, Trevor (Derbyshire, S.E.) Silverman, Sydney (Nelson) Walden, Brian (All Saints)
Parker, John Slater, Joseph (Sedgefield) Wallace, George
Pearson, Arthur (Pontypridd) Small, William White, Mrs. Eirene
Peart, Rt. Hn. Fred Smith, Ellis (Stoke, S.) Whitlock, William
Pentland, Norman Soskice, Rt. Hn. Sir Frank Wilkins, W. A.
Perry, Ernest G. Steel, David (Roxburgh) Willey, Rt. Hn. Frederick
Popplewell, Ernest Steele, Thomas (Dunbartonshire, W.) Williams, Clifford (Abertillery)
Price, J. T. (Westhoughton) Stewart, Rt. Hn. Michael Willis, George (Edinburgh, E.)
Probert, Arthur Stones, William Winterbottom, R. E.
Pursey, Cmdr. Harry Summerskill, Hn. Dr. Shirley Wyatt, Woodrow
Randall, Harry Swingler, Stephen Yates, Victor (Ladywood)
Rankin, John Symonds, J. B.
Rees, Merlyn Taylor, Bernard (Mansfield) TELLERS FOR THE NOES:
Rhodes, Geoffrey Thomas, George (Cardiff, W.) Mrs. Harriet Slater and
Richard, Ivor Thomson, George (Dundee, E.) Mr. Harry Gourlay.
Roberts, Albert (Normanton) Thornton, Ernest
Agnew, Commander Sir Peter Glover, Sir Douglas Mott-Radclyffe, Sir Charles
Alison, Michael (Barkston Ash) Godber, Rt. Hn. J. B. Munro-Lucas-Tooth, Sir Hugh
Allason, James (Hemel Hempstead) Goodhew, Victor Murton, Oscar
Anstruther-Gray, Rt. Hn. Sir W. Gower, Raymond Noble, Rt. Hn. Michael
Astor, John Grant, Anthony Nugent, Rt. Hn. Sir Richard
Awdry, Daniel Grieve, Percy Osborn, John (Hallam)
Balniel, Lord Griffiths, Peter (Smethwick) Page, R. Graham (Crosby)
Barber, Rt. Hn. Anthony Gurden, Harold Pearson, Sir Frank (Clitheroe)
Barlow, Sir John Hall-Davis, A. G. F. Peel, John
Batsford, Brian Hamilton, M. (Salisbury) Percival, Ian
Bell, Ronald Harris, Frederic (Croydon, N.W.) Peyton, John
Bennett, Sir Frederic (Torquay) Harris, Reader (Heston) Pickthorn, Rt. Hn. Sir Kenneth
Berkeley, Humphry Harvey, John (Walthamstow, E.) Pike, Miss Mervyn
Biffen, John Harvie Anderson, Miss Pitt, Dame Edith
Biggs-Davison, John Hawkins, Paul Pounder, Rafton
Birch, Rt. Hn. Nigel Heald, Rt. Hn. Sir Lionel Powell, Rt. Hn. J. Enoch
Black, Sir Cyril Heath, Rt. Hn. Edward Prior, J. M. L.
Bossom, Hn. Clive Higgins, Terence L. Pym, Francis
Box, Donald Hill, J. E. B. (S. Norfolk) Ramsden, Rt. Hn. James
Boyd-Carpenter, Rt. Hn. J. Hobson, Rt. Hon. Sir John Rawlinson, Rt. Hn. Sir Peter
Boyle, Rt. Hn. Sir Edward Hornsby-Smith, Rt. Hn. Dame P. Renton, Rt. Hn. Sir David
Brewis, John Howard, Hn. G. R. (St. Ives) Ridley, Hn. Nicholas
Brinton, Sir Tatton Hunt, John (Bromley) Ridsdale, Julian
Brown, Sir Edward (Bath) Hutchison, Michael Clark Roberts, Sir Peter (Heeley)
Bruce-Gardyne, J. Iremonger, T. L. Robson Brown, Sir William
Bullus, Sir Eric Irvine, Bryant Godman (Rye) Roots, William
Burden, F. A. Jenkin, Patrick (Woodford) Scott-Hopkins, James
Buxton, Ronald Jennings, J. C. Sharples, Richard
Chataway, Christopher Kaberry, Sir Donald Sinclair, Sir George
Chichester-Clark, R. Kerr, Sir Hamilton (Cambridge) Smith, Dudley (Br'ntf'd & Chiswick)
Clark, William (Nottingham, S.) Kershaw, Anthony Spearman, Sir Alexander
Clarke, Brig. Terence (Portsmth, W.) King, Evelyn (Dorset, S.) Stanley, Hn. Richard
Cole, Norman Kirk, Peter Stoddart-Scott, Col. Sir Malcolm
Cooke, Robert Langford-Holt, Sir John Studholme, Sir Henry
Cooper-Key, Sir Neill Legge-Bourke, Sir Harry Talbot, John E.
Cordle, John Lewis, Kenneth (Rutland) Taylor, Edward M. (G'gow, Cathcart)
Costain, A. P. Litchfield, Capt. John Teeling, Sir William
Courtney, Cdr. Anthony Lloyd, Ian (P'tsm'th, Langstone) Temple, John M.
Craddock, Sir Beresford (Spelthorne) Lloyd, Rt. Hn. Selwyn (Wirral) Thomas, Rt. Hn. Peter (Conway)
Crosthwaite-Eyre, Col. Sir Oliver Longden, Gilbert Turton, Rt. Hn. R. H.
Cunningham, Sir Knox McAdden, Sir Stephen van Straubenzee, W. R.
Curran, Charles MacArthur, Ian Walder, David (High Peak)
Davies, Dr. Wyndham (Perry Barr) McLaren, Martin Walker, Peter (Worcester)
d'Avigdor-Goldsmid, Sir Henry McMaster, Stanley Walker-Smith, Rt. Hn. Sir Derek
Dean, Paul McNair-Wilson, Patrick Wall, Patrick
Digby, Simon Wingfield Maitland, Sir John Ward, Dame Irene
Dodds-Parker, Douglas Mathew, Robert Weatherill, Bernard
Elliott, R. W.(N'c'tle-upon-Tyne,N.) Maude, Angus Webster, David
Emery, Peter Maudling, Rt. Hn. Reginald Whitelaw, William
Errington, Sir Eric Mawby, Ray Wills, Sir Gerald (Bridgwater)
Eyre, Reginald Maxwell-Hyslop, R. J. Wilson, Geoffrey (Truro)
Farr, John Maydon, Lt.-Cmdr. S. L. C. Woodhouse, Hon. Christopher
Fisher, Nigel Meyer, Sir Anthony Younger, Hn. George
Fletcher-Cooke, Sir John (S'pton) Mills, Peter (Torrington)
Foster, Sir John Mills, Stratton (Belfast, N.) TELLERS FOR THE NOES:
Fraser, Ian (Plymouth, Sutton) Mitchell, David Mr. Jasper More and
Gammans, Lady Monro, Hector Mr. Geoffrey Johnson Smith.
Giles, Rear-Admiral Morgan Morrison, Charles (Devizes)

Question put, That the proposed words be there inserted:—

The Committee divided: Ayes 190, Noes 168.

Division No. 190.] AYES [8.36 p.m.
Abse, Leo Hale, Leslie O'Malley, Brian
Allaun, Frank (Salford, E.) Hamilton, James (Bothwell) Oram, Albert E. (E. Ham, S.)
Alldritt, Walter Hamilton, William (West Fife) Orme, Stanley
Armstrong, Ernest Hannan, William Oswald, Thomas
Atkinson, Norman Harper, Joseph Owen, Will
Bacon, Miss Alice Harrison, Walter (Wakefield) Padley, Walter
Bagier, Gordon A. T. Hart, Mrs. Judith Park, Trevor (Derbyshire, S.E.)
Barnett, Joel Hattersley, Roy Parker, John
Beaney, Alan Herbison, Rt. Hn. Margaret Pearson, Arthur (Pontypridd)
Benn, Rt. Hn. Anthony Wedgwood Hill, J. (Midlothian) Peart, Rt. Hn. Fred
Bennett, J. (Glasgow, Bridgeton) Hobden, Dennis (Brighton, K'town.) Pentland, Norman
Bessell, Peter Holman, Percy Perry, Ernest G.
Bishop, E. S. Hooson, H. E. Popplewell, Ernest
Blackburn, F. Horner, John Price, J. T. (Westhoughton)
Blenkinsop, Arthur Houghton, Rt. Hn. Douglas Probert, Arthur
Boardman, H. Howie, W. Pursey, Cmdr. Harry
Bowden, Rt. Hn. H. W.(Leics, S.W.) Hoy, James Randall, Harry
Bowen, Roderic (Cardigan) Hughes, Emrys (S. Ayrshire) Rankin, John
Boyden, James Hughes, Hector (Aberdeen, N.) Rees, Merlyn
Braddock, Mrs. E. M. Hunter, Adam (Dunfermline) Rhodes, Geoffrey
Bray, Dr. Jeremy Hunter, A. E. (Feltham) Richard, Ivor
Broughton, Dr. A. D. D. Irving, Sydney (Dartford) Roberts, Albert (Normanton)
Buchan, Norman (Renfrewshire, W.) Jay, Rt. Hn. Douglas Robertson, John (Paisley)
Buchanan, Richard Johnston, Russell (Inverness) Rodgers, William (Stockton)
Butler, Herbert (Hackney, C.) Jones, Dan (Burnley) Rogers, George (Kensington, N.)
Callaghan, Ht. Hn. James Kelley, Richard Sheldon, Robert
Carmichael, Neil Kenyon, Clifford Shinwell, Rt. Hn. E.
Carter-Jones, Lewis Lawson, George Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Castle, Rt. Hn. Barbara Leadbitter, Ted Silverman, Sydney (Nelson)
Coleman, Donald Lee, Rt. Hn. Frederick (Newton) Slater, Joseph (Sedgefield)
Conlan, Bernard Lever, Harold (Cheetham) Small, William
Corbet, Mrs. Freda Lever, L. M. (Ardwick) Smith, Ellis (Stoke, S.)
Craddock, George (Bradford, S.) Lewis, Arthur (West Ham, N.) Soskice, Rt. Hn. Sir Frank
Crossman, Rt. Hn. R. H. S. Lewis, Ron (Carlisle) Steel, David (Roxburgh)
Cullen, Mrs. Alice Lomas, Kenneth Steele, Thomas (Dunbartonshire, W.)
Dalyell, Tam Loughlin, Charles Stewart, Rt. Hn. Michael
Davies, G. Elfed (Rhondda, E.) Lubbock, Eric Stones, William
Davies, Ifor (Gower) McBride, Neil Summerskill, Hn. Dr. Shirley
Davies, S. O. (Merthyr) McCann, J. Swingler, Stephen
Diamond, John MacDermot, Niall Symonds, J. B.
Doig, Peter McGuire, Michael Taylor, Bernard (Mansfield)
Donnelly, Desmond McInnes, James Thomas, George (Cardiff, W.)
Duffy, Dr. A. E. P. McKay, Mrs. Margaret Thomson, George (Dundee, E.)
Dunn, James A. Mackenzie, Alasdair (Ross & Crom'ty) Thornton, Ernest
Edwards, Rt. Hn. Ness (Caerphilly) Mackenzie, Gregor (Rutherglen) Tinn, James
Ennals, David McLeavy, Frank Tomney, Frank
Ensor, David MacMillan, Malcolm Urwin, T. W.
Fernyhough, E. Mahon, Simon (Bootle) Varley, Eric G.
Fitch, Alan (Wigan) Manuel, Archie Wainwright, Edwin
Fletcher, Sir Eric (Islington, E.) Mapp, Charles Walden, Brian (All Saints)
Fletcher, Ted (Darlington) Mason, Roy Wallace, George
Fletcher, Raymond (Ilkeston) Maxwell, Robert White, Mrs. Eirene
Floud, Bernard Mendelson, J. J. Whitlock, William
Foley, Maurice Millan, Bruce Wilkins, W. A.
Fraser, Rt. Hn. Tom (Hamilton) Miller, Dr. M. S. Willey, Rt. Hn. Frederick
Freeson, Reginald Milne, Edward (Blyth) Williams, Clifford (Abertillery)
Galpern, Sir Myer Molloy, William Willis, George (Edinburgh, E.)
Garrett, W. E. Morris, John (Aberavon) Winterbottom, R. E.
George, Lady Megan Lloyd Murray, Albert Wyatt, Woodrow
Ginsburg, David Neal, Harold Yates, Victor (Ladywood)
Greenwood, Rt. Hn. Anthony Newens, Stan
Gregory, Arnold Noel-Baker, Francis (Swindon) TELLERS FOR THE NOES:
Griffiths, David (Rother Valley) Norwood, Christopher Mrs. Harriet Slater and
Griffiths, Rt. Hn. James (Llanelly) Oakes, Gordon Mr. Harry Gourlay.
Grimond, Rt. Hn. J. Ogden, Eric
Agnew, Commander Sir Peter Batsford, Brian Boyd-Carpenter, Rt. Hn. J.
Alison, Michael (Barkston Ash) Bell, Ronald Boyle, Rt. Hn. Sir Edward
Allason, James (Hemel Hempstead) Bennett, Sir Frederic (Torquay) Brewis, John
Anstruther-Gray, Rt. Hn. Sir W. Berkeley, Humphry Brinton, Sir Tatton
Astor, John Biggs-Davison, John Brown, Sir Edward (Bath)
Awdry, Daniel Birch, Rt. Hn. Nigel Bruce-Gardyne, J.
Balniel, Lord Black, Sir Cyril Bullus, Sir Eric
Barber, Rt. Hn. Anthony Bossom, Hn. Clive Burden, F. A.
Barlow, Sir John Box, Donald Buxton, Ronald
Chataway, Christopher Hill, J. E. B. (S. Norfolk) Peel, John
Chichester-Clark, R. Hobson, Rt. Hn. Sir John Percival, Ian
Clark, William (Nottingham, S.) Hornsby-Smith, Rt. Hn. Dame P. Peyton, John
Clarke, Brig. Terence (Portsmth, W.) Howard, Hn. G. R. (St. Ives) Pickthorn, Rt. Hn. Sir Kenneth
Cole, Norman Hunt, John (Bromley) Pike, Miss Mervyn
Cooke, Robert Hutchison, Michael Clark Pitt, Dame Edith
Cooper-Key, Sir Neill Iremonger, T. L. Pounder, Rafton
Cordle, John Irvine, Bryant Godman (Rye) Powell, Rt. Hn. J. Enoch
Costain, A. P. Jenkin, Patrick (Woodford) Prior, J. M. L.
Courtney, Cdr. Anthony Jennings, J. C. Pym, Francis
Craddock, Sir Beresford (Spelthorne) Kaberry, Sir Donald Ramsden, Rt. Hn. James
Crosthwaite-Eyre, Col. Sir Oliver Kerr, Sir Hamilton (Cambridge) Rawlinson, Rt. Hn. Sir Peter
Cunningham, Sir Knox Kershaw, Anthony Renton, Rt. Hn. Sir David
Curran, Charles King, Evelyn (Dorset, S.) Ridley, Hn. Nicholas
Davies, Dr. Wyndham (Perry Barr) Kirk, Peter Ridsdale, Julian
d'Avigdor-Goldsmid, Sir Henry Langford-Holt, Sir John Roberts, Sir Peter (Heeley)
Dean, Paul Legge-Bourke, Sir Harry Robson Brown, Sir William
Digby, Simon Wingfield Lewis, Kenneth (Rutland) Roots, William
Dodds-Parker, Douglas Litchfield, Capt. John Scott-Hopkins, James
Elliott, R. W.(N'c'tle-upon-Tyne, N.) Lloyd, Ian (P'tsm'th, Langstone) Sharples, Richard
Emery, Peter Lloyd, Rt. Hn. Selwyn (Wirral) Sinclair, Sir George
Errington, Sir Eric Longden, Gilbert Smith, Dudey (Br'ntf'd & Chiswick)
Eyre, Reginald McAdden, Sir Stephen Spearman, Sir Alexander
Farr, John MacArthur, Ian Stanley, Hn. Richard
Fisher, Nigel McLaren, Martin Stoddart-Scott, Col, Sir Malcolm
Fletcher-Cooke, Sir John (S'pton) McMaster, Stanley Studholme, Sir Henry
Foster, Sir John McNair-Wilson, Patrick Talbot, John E.
Fraser, Ian (Plymouth, Sutton) Maitland, Sir John Taylor, Edward M. (G'gow,Cathcart)
Gammons, Lady Mathew, Robert Teeling, Sir William
Giles, Rear-Admiral Morgan Maude, Angus Temple, John M.
Glover, Sir Douglas Maudling, Rt. Hn. Reginald Thomas, Rt. Hn. Peter (Conway)
Godber, Rt. Hn. J. B. Mawby, Ray Turton, Rt. Hn. R. H.
Goodhew, Victor Maxwell-Hyslop, R. J. van Straubenzee, W. R.
Gower, Raymond Maydon, Lt.-Cmdr. S. L. C. Walder, David (High Peak)
Grant, Anthony Meyer, Sir Anthony Walker, Peter (Worcester)
Grieve, Percy Mills, Peter (Torrington) Walker-Smith, Rt. Hn. Sir Derek
Griffiths, Peter (Smethwick) Mills, Stratton (Belfast, N.) Wall, Patrick
Gurden, Harold Mitchell, David Ward, Dame Irene
Hall-Davis, A. G. F. Monro, Hector Weatherill, Bernard
Hamilton, M. (Salisbury) Morrison, Charles (Devizes) Webster, David
Harris, Frederic (Croydon, N.W.) Mott-Radclyffe, Sir Charles Whitelaw, William
Harris, Reader (Heston) Munro-Lucas-Tooth, Sir Hugh Wills, Sir Gerald (Bridgwater)
Harvey, John (Walthamstow, E.) Murton, Oscar Wilson, Geoffrey (Truro)
Harvie Anderson, Miss Noble, Rt. Hn. Michael Woodhouse, Hon. Christopher
Hawkins, Paul Nugent, Rt. Hn. Sir Richard Younger, Hn. George
Heald, Rt. Hn. Sir Lionel Osborn, John (Hallam)
Heath, Rt. Hn. Edward Page, R. Graham (Crosby) TELLERS FOR THE NOES:
Higgins, Terence L. Pearson, Sir Frank (Clitheroe) Mr. Jasper More and
Mr. Geoffrey Johnson Smith.

Further Amendments made: In page 93, line 14, at end insert: (a) regard shall be had not only to the current requirements of the company's business but also to such other requirements as may be necessary or advisable for the maintenance and development of that business, but for this purpose sections 246(2) and (3) and 258(1) and (4) of the Income Tax Act 1952, except section 246(2) proviso, shall apply as they applied for the corresponding purpose of section 245.

In page 93, line 32, leave out sub section (5).

In page 93, line 43, after "in", insert "respect of".

In page 94, line 17, leave out "for purposes of section 44 of this Act" and insert: in determining the income tax payable by the company in respect of distributions for the later period or, as the case may be, in arriving at any surplus of franked investment income"—[Mr. Diamond.]

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

8.45 p.m.

Mr. van Straubenzee

We have had a long and detailed discussion on important parts of the Clause, and I am sure that we do not need to take more than a few more minutes on it, but I do not think that it would be right to part with the Clause, as it has been amended, without considering certain aspects of it, some of which have, admittedly, been touched on. After all, this Clause is the pith, the absolute centre, of the close company provisions, and I must frankly say that I am very disappointed that the Question, "That the Clause, as amended, stand part of the Bill" should be proposed with the Clause in its present form. We have missed the opportunity of making substantial improvements in it.

As the Clause and all the close company provisions stand, the tax system will, I believe, bear proportionately much more sharply on those who decide to trade by way of limited company procedure which we all understand and acknowledge, which has stood us in good stead and from which many of our great and growing companies have stemmed. The provisions of the Clause are most startling when one considers the tax charged on individuals trading together rather than in the form of a limited company.

I do not want to bandy figures to and fro across the Committee, even if I am capable of doing so, but I would say that this is extremely well-illustrated if one takes the case of a business earning £30,000 a year which has three equal owners. If they trade as a partnership, the total tax per person is £4,027. As a close company, if they have a 60 per cent. distribution ceiling—a word which I use to please the Chief Secretary—the total immediate tax is £4,951. If one allows for an eventual sale and consequent tax arising by reason of earlier Clauses of the Bill, the tax will then be £5,467 in all. Therefore, even if we took a 40 per cent. distribution, a figure which we were arguing earlier, the immediate tax is £4,417.

These figures illustrate most strikingly how we are likely, by the provisions of Clause 72 and the other Clauses dealing with close companies—perhaps inadvertently—to hit proportionately much more hardly those who choose to carry on their commercial or business activities in this way. I believe that both the Chief Secretary and the Minister without Portfolio—both of whom have behind them very distinguished careers in what one might call civilian life—do not intend this result. I accept of course, without reservation, the protestations of their belief in this type of trading corporation at their face value.

What worries me is that the effect of this Clause and the other provisions will be very much more harsh than they have appreciated. Time alone will tell. We have argued this time and time again and we do not want to go back ad infinitum over the same arguments. We cannot part with this pith and central Clause in these provisions without it being said clearly not only that the business community itself has the greatest anxiety—though the result of protracted discussion on the Floor of the Committee may well have the beneficial result of clearing away certain anxieties—but that the result will be of a far more severe nature than those who propose that we should accept this Clause always appreciate.

Mr. Rafton Pounder (Belfast, South)

We have had a very long and, I think, fruitful discussion on what is one of the most important Clauses—if not the most important Clause—in the Finance Bill. The one type of remark which has recurred time without number during these debates has been the use by hon. Members of such phrases as "It would appear to me", "In my considered opinion", and "In practice it may work out as"—phrases which still indicate a substantial degree of uncertainty about the precise effect of many of the phrases embodied in the Clause. If I had to single out one thing which has pleased me in this discussion, it would be the deletion of subsection (5) from this Clause, because this was partly tied up in a small way with the onus of proof provisions.

We are now discussing this matter in terms of the Question that the Clause stand part. I should like to regionalise the discussions for a few moments. In an area like Northern Ireland, where the great bulk of the companies are within the closed catgeory—the overwhelming majority of companies in Northern Ireland are either small or medium-sized private concerns—there can be no doubt that the provisions of this Clause are likely adversely to affect the economic development of that part of the United Kingdom.

It has been contended repeatedly by hon. and right hon. Members opposite and by the Chief Secretary, within the last few hours, that one of the avowed aims of the Corporation Tax is to help companies to develop and extend by encouraging the retention of profits. It has also been said repeatedly that many hon. Members dislike monopolies and I would go along with that view. However, if we are to implement a form of taxation which will strike hard at the small private company, I would submit that, to a large extent, they are likely to be thrown, due to considerable degree of vulnerability, to the jaws of the larger units. The Clause and the effect of Corporation Tax on close companies could well result in many of them going to the wall. That would be regrettable.

If companies are to expand and are to go to development areas, as we all wish them to do, they need finance, in many cases substantial sums. This finance has—not exclusively, but in the main—come from retained profits. I am at a loss to understand how, under the terms of the Clause, private close companies will be able to retain anything like the volume of profits which is necessary for their continued expansion.

I go so far as to say that something like 90 per cent. of all companies in Northern Ireland are now within the category of close companies. I hope, therefore, that on Report the Chief Secretary will consider a way of alleviating the worst aspects of the Corporation Tax as it affects close companies in development areas.

Last week, innumerable references were made to certain of the promises concerning development areas that were made by the party opposite at the last election. I shall not bore the Committee by repeating them. I ask the Chief Secretary, however, to give the most serious consideration to these close company provisions as they affect development areas.

In a nutshell, I suggest that the ultimate effect of the Clause, even allowing for the Amendments made by the Chancellor of the Exchequer, will be to handicap initiative, to stifle expansion and to kill stone dead the possibility of the "rags-to-riches" success story. In all seriousness, I say to the Chief Secretary that the Clause could have extremely grave consequences for an area such as Northern Ireland.

Mr. Gower

The Chief Secretary will now be quite sure that we are unhappy about the form of the Clause. Our objections to it have not arisen from any desire to be awkward. The Chief Secretary knows that we have had no desire to obstruct the passage of the Bill or any part of it. The fact is that we are extremely anxious, and we are not alone in this.

The right hon. Gentleman knows that those who preside over the destinies of close companies, whether medium or small in size, are also deeply anxious. I have spoken to a number of those people during the weekend and I assure the Chief Secretary that they have been following the proceedings of this Committee with a good deal of attention. They are not inexperienced in these matters. Despite all the Amendments which have been made, and despite the importance of those Amendments, those who manage the affairs of close companies are not convinced that their anxieties need continue no longer. They are still apprehensive.

This is the opportunity for the Chief Secretary to answer the question which has been asked time and time again: why is it that in the view of the Government, retentions by the great public companies appear to be the supreme virtue and why, on the other hand, in the case of the close companies, does it appear that distribution is the finest quality of all? That is the question which the right hon. Gentleman has not answered. What he has said, in effect, is that the Clause will not have that result. We are convinced that it will, or that it is almost certain to have that effect.

9.0 p.m.

I fear that if the Clause is not amended it will be more difficult, if not impossible, for small firms to develop into the giant organisations which have meant so much to our economy. Indeed, I doubt if Marks and Spencers, Boots or G.U.S. could have grown into their present sizes had they developed with the kind of financial restrictions imposed by the Bill.

I am glad that my hon. Friend the Member for Belfast, South (Mr. Pounder) drew attention to the relationship between the impact of the Clause on close companies and the Government's avowed policy of helping the development districts. In many cases the large public companies are not the organisations which are bringing special aid to the development district. Often they cannot do so, partly because of the reduced labour force available in smaller areas, and the small family, close concern conveniently provides this sort of aid and development. I hope that the Financial Secretary will consider our fears in that light.

We leave the Clause reluctantly and with great anxiety. I hope that the right hon. Gentleman will not feel that the assurances he has given with such confidence are entirely correct. I hope that he will consider not only what we have said, but experienced opinion outside the Committee. These are matters of great consequence and the Government must consider them in that light.

Mr. Patrick Jenkin

I raise a matter which has not been touched upon, although an Amendment was tabled to cover it. Unfortunately, that Amendment was not selected. It arises out of the proviso to subsection (2), which gives an abatement to companies with incomes of less than £9,000. However, the provision is qualified by the reference to … a trading company not having any associated company …". and the Amendment which was not selected was designed to remove that embargo and enable a group of companies to be treated as one for the purpose of abatement.

The way in which the provision would have worked was simple. It would have had the effect of reducing, for the very small company, the required standard, as defined, to substantially low figures, much smaller than the ordinary 60 per cent. rule would produce. I hope that the Chief Secretary will consider this matter between now and Report with a view to amending the Clause.

It seems unfair that if a small company happens to have, say, one associated company, it should be automatically denied the benefit of this substantial relief. It would appear perfectly simple to treat groups of small companies so that the group as a whole could claim under the abatement scheme—that is, if their aggregate incomes comply with the £9,000 provision. Obviously, if the income of the group was above that level there would be no room for the operation of abatement. Since we have been told that the Government are anxious to help smaller companies, they should apply the provision to such groups.

I come to the question of the exclusion of the proviso to Section 246(2) of the Income Tax Act, 1952, as imported into the Clause by the Chancellor's Amendment No. 708. The Chief Secretary said that the proviso had been left out because it had never appeared to have had any practical significance. The proviso is intended to make sure that where a company makes a reasonable distribution of income, the fact that it has at some time engaged in any of the nefarious practices covered by Section 246(2), like redeeming preference shares, or redeeming loans, or engaging in imaginary or fictitious transactions should not lead to a Surtax direction being made. The Clause now applies this for Income Tax and Surtax in regard to a 60 per cent. ceiling instead of to a 100 per cent. ceiling.

One could imagine that with a 100 per cent. ceiling the proviso might have no application, but with a 60 per cent. ceiling a company might apply the 40 per cent. margin as it wished. If it applies the 40 per cent. in redeeming its preference shares this is to be disallowed under the Clause, and the norm applies when taking that into account. It may well be that the proviso would make a distinction if the company, at the same time, made what was considered to be a reasonable distribution.

I am not entirely convinced one way or the other, but I am not entirely happy that the mere fact that no company has had to import the protection of the proviso to Section 246(2) is necessarily any guide that it would not have perfectly valid reasonable need for this protection for the future. As it is expressly excluded by the Chief Secretary's Amendment, it is incumbent on him to give a little more explanation to satisfy the Committee that it would not apply in circumstances likely to affect these companies in the future.

Mr. Lubbock

I, too, would like the Chief Secretary to give a further explanation of this proviso. Although I am satisfied that we have made considerable improvements to the Clause, when I put down my Amendment No. 77 I did not think that the proviso was essential, and I had noticed that the Government's Amendment No. 707 had struck it out while putting in these criteria by which reasonable distribution is to be determined. At least we have got out of the Government a much more sensible approach to the subject than we had under the Clause as first drafted.

If I could be sure that the Chief Secretary's assurances on the way in which the 60 per cent. is to be looked at would be binding on the inspectors, I should feel perfectly happy about the Clause. The point is that we have large numbers of inspectors who will be looking at different cases, and I am afraid that many of them will not have read the Chief Secretary's words or, if they have, will not have understood that they are to be interpreted exactly as the special commissioners would have interpreted the approach to Surtax. We therefore have a position in which no company will be required by this legislation to distribute more than it would have been required to distribute under the previous legislation, and that is exactly what I would have hoped we would bring about in this Bill.

The Chief Secretary says that it is no part of the Government's case that one should force close companies to distribute—if I may put it rather crudely—more than is good for them, or more than is good for the health of the business. That is what we should all like to see. He said repeatedly in dealing with the Amendment that this is the Government's object. Therefore, as I say, I am very happy with some of the improvements that have been made to the Clause, and also with the expressions of the Government's intentions. It is rather a pity if that is the case that we could not have a concession on the onus of proof. This strikes me as being one way in which the Chief Secretary could have given enormous reassurance to companies affected by Clause 72. If it were not for that, I should be perfectly happy with this Clause.

Sir L. Heald

I have taken part in discussion of this Clause only on the subject of onus of proof. I shall not say more about that, but the Question before the Committee enables me to speak with a little more detachment and to say that it should be on record that the efforts of the Opposition in this case have produced very substantial improvement in the Clause. There is no doubt at all that as the Bill was originally drafted this part of it would have been absolutely disastrous to the small man developing a company.

I was prepared and able to give in complete detail particulars of a very striking case in which a man has developed a remarkable business. It would not be appropriate to go into that now. His position, according to his expert advisers, of whom I am not one—I have no personal interest in the matter except close knowledge of the individual concerned—would have been rendered disastrous. I was anxious to know what was thought by the expert advisers. They have taken the view that the Amendments which have been made will have a considerable beneficial effect. I agree with my hon. Friends who say that this is not by any means certain yet, and with the hon. Member for Orpington (Mr. Lubbock) who said that it depends to some extent on the illustration of the way in which these matters are dealt with. We believe that the commissioners will deal with the matter in a fair and reasonable manner.

The fact remains that an improvement has been made, but we must not allow the Government and their spokesmen to say that they have been generous, have recognised justice and all that kind of thing. They have been forced by the strength and efficiency of the Opposition to make concessions. That is the way in which Parliament should operate in this Committee.

The other day I heard that there was a discussion on television. I did not hear it because I was otherwise engaged in this building. I understand that the Chancellor of the Exchequer took the view that people had been very unfair to him. He said, "You do not really think that I want to destroy these people with British initiative, like Lord Nuffield, in the past, and all that kind of thing. I do not want to do that, so, of course, I am making amendments". I understand that someone made the rather pointed comment, "Are you amending your own Finance Bill, or someone else's?" We must remember that the right hon. Gentleman and the Government were responsible for introducing this Bill, which contains provisions such as those we have been fighting against and many others on which we have not been able to get concessions. It is not their generosity, but the fighting force put in by my hon. and right hon. Friends and the logic of the case, which has produced these results.

Mr. Kenneth Lewis

I shall intervene only briefly, although I do not think we need apologise for time spent on this Clause, for it is a very important one. I do not know how much notice the Chief Secretary takes of his own back benchers. Having listened to some of the speeches that they have made, I do not think that he has taken a great deal of notice of them. There was an intervention earlier by one of his hon. Friends in which it was suggested that businessmen did not understand, or try to understand, what was being done by this Bill.

I can appreciate that they might have difficulty in understanding the Bill or keeping pace with the changes which have taken place in it, but to suggest that businessmen are not concerned about what is to happen to them at the end of 1966 when the Bill operates comes rather strangely from an hon. Member opposite who was an accountant. I doubt very much whether the Chief Secretary would accept this if he were not in his present position, but himself was acting as an accountant. Any businessman knows full well that when changes in taxation of this or any other sort take place in a Finance Bill he is bound for his own good to find out. If he does not try to find out for himself, his accountant will soon tell him that it will affect him.

The Temporary Chairman

I am waiting to hear the hon. Member mention Clause 72.

9.15 p.m.

Mr. Lewis

This was raised on one of the Amendments. The Clause has been considerably improved since the Opposition have had a go at it. It has been improved for the small businessman. Nevertheless, there is still concern about how it will affect the small business. Not even Liberal Members have pointed out that it often happens with a small company that there is a content of profit sharing. I have a small company. There is a profit-sharing content in it. What will happen if a firm distributes a considerable amount of its profit in bonus payments, in a profit-sharing exercise? It might say to the tax inspector, "What we have left is wholly required, or almost wholly required, or at least 30 per cent. required", which would be more than is permitted under the Bill; "We must have the right to plough back at least 30 per cent. because of what we have already paid out to our employees".

This can happen with many small companies. It is the kind of thing which I should have thought right hon. and hon. Members opposite would want to encourage. We have to be convinced that the tax inspector will look with favour upon such a situation. I hope that the Chief Secretary will tell us whether, in the distribution of profits, profit sharing will be taken fully into account.

My hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) has referred to the phrase not having an associated company. This is important, because there are companies which have associated companies which are not active. If a company is not active, is not trading, is not making money, but is an associated company, I presume that it will not have any effect upon the allowances which will be permitted to the close company concerned. If a company had a dummy associated company and that associated company was counted as affecting the kind of advantages to be given to the main company, a liquidation might have to take place. The company might have been created for a special reason, perhaps to maintain a name.

The Clause probably affects more people apart from the general taxpayer than any other. The number of large businessmen is small. We have spent a great deal of time debating the effect of the Bill on the large businessmen. The small businessman is the big businessman of tomorrow. We are dealing with the seed corn. We are dealing with the future exporter. Therefore, we ought to encourage the growth of the small business.

The Chief Secretary was very reticent on the question of onus of proof. If the businessman is worried about the effect of the Clause, the Chief Secretary can go a long way to help him by arranging that the onus of proof should be put back to where it was before: it should be on the commissioners. If there has been a change it is reasonable that the businessman outside should presume that there has been a change for a purpose. Therefore, if the Chief Secretary will not concede this, the businessman outside will naturally accept the fact that this change has been made so as to make things worse for him.

If on the other hand the Chief Secretary can come forward either now or on Report and say that he concedes that we should go back to the position as it was before then, as he knows these matters are reasonably sorted out as between the tax inspector, the commissioners and the businessman and there is not normally any difficulty about an amenable solution being found when questions of distribution are discussed, at least it will impress upon the businessman that the Government do not intend to have a special go at the small business but intend to encourage it.

Mr. Diamond

I will do my best to answer shortly all the questions that have been put to me.

The hon. Member for Wokingham (Mr. van Straubenzee) first alleged that the proposals in this Clause taken together with Corporation Tax would deal harshly with corporations. He said that we should not bandy figures and I agree that individual examples are not very conclusive. I will therefore deal shortly with the totality of the position.

The present situation is that we are proposing a new form of taxation to replace Income Tax and Profits Tax with Corporation Tax, which will, so far as all domestic companies are concerned, comparing like with like, result in an alleviation of tax to the extent of some £100 million approximately which, of course, is the amount which would have been suffered by companies trading abroad if certain Amendments had not been brought forward. All domestic companies, therefore, are sharing in the benefit of £100 million.

How do they share in it? Those which distribute less than 51½ per cent, get a benefit. Those which distribute more than 51½ per cent. have a heavier burden of tax to bear. That is the short situation. All that the hon. Gentleman has got to ask himself with regard to any company, be it affected by this Clause or not, is whether it is distributing more or less than that. He will bear in mind that the average distribution is about 50 per cent., so that if the present pattern continues the person making the average distribution is not prejudiced at all. He shares with every other company, to the extent of their profits proportionately, in the general benefit of £100 million.

That is the overall situation. There is nothing in this Clause which bears harshly on any company at all. It merely, as everybody recognises, protects the honest and straightforward taxpayer against that kind of taxpayer who seeks to avoid his fair share of the burden by keeping his profits in a cash box which he calls a company, and avoiding them coming into the daylight and being susceptible to taxation.

The hon. Member for Belfast, South (Mr. Pounder) said, among other things, that this Clause would result in small companies going to the wall. I do not think he would have said that if he had listened to the whole of the debate. However, perhaps he did not have an opportunity of doing so.

The special point that he made was in connection with development districts. This Clause provides for that very point. If a company trading in a development district has to have reserves greater than it would have had if it were not trading in a development district—that is the case which the hon. Gentleman was making—this is one of the relevant factors in satisfying the Inland Revenue as to the level of distribution.

That is introduced in the Bill. That is in the wording of the Bill itself. It would not be relevant otherwise, but if there are, as the hon. Member stipulates, special circumstances which affect a business trading in a development district of a kind which require additional reserves, that would be relevant. For example, the hon. Member may say that in a certain development district people are not very flush with money and are rather slow in paying their debts and that in that company it was necessary to have more capital to finance the turnover of the debtors. If that were the case it would be a relevant argument to put before the inspectors. I am glad that the hon. Member raised the point. It is specially covered in this Bill in this way.

The hon. Member for Barry (Mr. Gower) referred to the deep anxiety, which I recognised is there, and which I hope the debate has dissipated, that retention was regarded by the Government as the supreme virtue for the large company and distribution a supreme virtue for the small company. The answer is that neither statement represents the situation, which is that for a big company the supreme virtue is plough-back and for the small company the surpreme virtue is plough-back. In neither case is it pure retention or pure distribution. What we are saying is that there is no point in a company which does not need its realised profits for reserves or development hanging on to them—let the company distribute them; there is no wisdom in allowing a company which merely seeks to avoid tax to carry on in that way any more than it has been allowed to do it in the past 13 years.

The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) drew attention to the substantial relief in the abatement provisions. I am grateful to him, because that point was not brought out sufficiently clearly in the debate hitherto. But the hon. Member raised the point because he asked why we should not allow that substantial relief to each member of a group rather than a group as a whole.

Mr. Patrick Jenkin

Obviously I did not make myself clear to the Chief Secretary, for which I apologise. Knowing him, I know that it is my fault and not his. I suggested that the right approach is that where there is a group of companies they should be aggregated. If it turned out that the group should be entitled to relief then the relief should apply, but if the group as aggregated is not entitled to relief it would not be applicable. I agree that it would be quite wrong to apply relief to each individual company in the group.

Mr. Diamond

I am sorry if I misunderstood the hon. Member. As I understood him, I read into his remarks that intention, because I cannot see what advantage there would be otherwise in what the hon. Member proposes. He and I agree that if there is a group of compaines it would defeat the object of the Amendment to allow rebate to each member of the group, but if he proposes aggregation I cannot see where the advantage lies. Perhaps the hon. Member is referring to a discussion which might have taken place and did not, but I will see that the point receives as full consideration as if that discussion had taken place. The hon. Member also asked me to look at the point of protection afforded in the old Section 246(2). I shall be glad to do that at the same time. It may be that there are further arguments, having regard to what he said. The hon. Member for Orpington (Mr. Lubbock) also raised the point and I will look into it.

The hon. Member for Orpington said that he was less dissatisfied with the Clause now than he had been hitherto, but he wanted to be reassured, in a way in which speeches at the Dispatch Box cannot reassure him, that the Clause will be worked satisfactorily. My appearances at the Box are attempts at explanation. They have not in any way the force of law, but I assure the hon. Member that we shall see that the very thing which he wants is carried out. We shall see that the same knowledge and expertise now brought to bear by the special commissioners will be brought to bear by the inspectors of taxes, so that the taxpayer will have the best possible audience for his comments as well as the added convenience of getting to the Inland Revenue official without a lot of trouble.

9.30 p.m.

Of course, the way that is done, as he probably knows, is that there is a blue book or a brown book—I do not know which colour—distributed among all inspectors of taxes which contains the essence of the practice and wisdom which has been gained in any way. I shall make sure that the wisdom and expert knowledge of the special commissioners dealing with the Surtax direction is fully distributed to all inspectors dealing with the matter so that we shall have, as far as possible, the informed and consistent treatment which is what we all desire.

I do not know whether the right hon. and learned Member for Chertsey (Sir L. Heald) wanted me to reply to the point which he raised. I think that the best answer was given by his right hon. Friend the Member for Altrincham and Sale (Mr. Barber). The right hon. and learned Gentleman said that there were a lot of changes and these were entirely due to what the Opposition had forced upon the Government and in no sense was it a matter of our generosity. The right hon. Member for Altrincham and Sale made a more accurate point, if I may say so, saying that there was really no change at all in any of these Amendments; it was merely presentation. I quite agree. The right hon. Gentleman has done his homework carefully, as usual. But in the sense that it has helped towards an understanding of the purposes of the Government in the Clause, this is to be welcomed.

The hon. Member for Rutland and Stamford (Mr. Kenneth Lewis) asked me about a profit-sharing scheme. I gather from what he said that there were bonuses issued which would be taken in shares, in a sense, but these bonuses would be a charge against the profits of the company. All I can say is that 60 per cent. of profits reduced by those bonuses is a smaller figure than 60 per cent. before being so reduced, so he need have no anxiety on that score.

The hon. Member for Rutland and Stamford was anxious for the Government to encourage the growth of small companies. This is the Government's policy. We have every desire to encourage the growth of small companies and big companies. We want to encourage every company to become more and more efficient by using its resources and not sitting idly on them. That is the purpose of the Clause, which I hope that the Committee will now allow to pass.

Mr. Barber

We have had a fairly full discussion on several aspects of the Clause before coming to this Question, and I shall, therefore, try to be brief and to the point in my remarks. The whole Committee is grateful to the Chief Secretary for the patient way in which he has answered the several points raised during the debate or, in those cases where he was not sure of the answer, for promising to look into the matter between now and Report.

This is one of the most important Clauses of the Bill. It must be recognised that the Clause is not a mere by-product of the scheme of Corporation Tax which has been introduced. I say this because the Chief Secretary, at the outset of his reply, dealt in general terms with some of the principles of the Corporation Tax. The point to be recognised here is that, in this particular system, dealing with close companies, the Chancellor is breaking new ground, establishing new principles which are not an intrinsic part of the concept of a Corporation Tax.

Whether the Chancellor is right or wrong, the incontrovertible fact is that, taking the scheme for close companies as a whole, the right hon. Gentleman is seeking to extend the Inland Revenue's control of what the Economist termed last week the great majority of British companies. I say this advisedly. By virtue of the extended definition of close company, a wider definition than what we have understood as the old Section 245 company, the Economist is right in saying that, in future the great majority of British companies will now come within the ambit of these stringent and far-reaching provisions.

I want to make one thing clear. I see the necessity with certain types of company under the control of a limited number of people for some special legislation to prevent the avoidance of tax. I think that few, if any, of my hon. Friends will disagree with me. Therefore, it seems to me that the central issue in the debate on this Clause is whether the Clause sets about it the right way to deal with this matter.

We are now considering Clause 72, which is essential to the whole concept of the scheme for dealing with close companies. It is impossible to consider the Clause in isolation, without regard to the types of company on which it will bite and the extent to which it will bite on them. As the Bill is at present drafted—I have in mind particularly Schedule 17—the Clause is to apply to innumerable companies which never came within the ambit of the original Surtax directions under the present law. Secondly, Corporation Tax is to be levied at a uniform rate of 35 or 40 per cent., unlike the majority of foreign countries with Corporation Tax which at present have a lower rate in respect of distributions or are moving in that direction.

Thirdly—this is of great importance—where under the old system a Surtax direction was made there was no liability to Profits Tax. Under the Chancellor's new system the 60 per cent. in the ceiling case which is now to be taxed as personal income will in addition be liable to Corporation Tax. These are very important differences which must have a bearing on our approach to the Clause.

The whole scheme for dealing with close companies as set out in the Bill has rightly drawn protests from many people who have experience of industry and commerce. The reason is not difficult to see. It is because the scheme, when considered in its entirety, will I believe inevitably hamper the growth and the improving efficiency of thousands of companies on which our prosperity depends.

The only material alterations proposed by the Chancellor since the Bill was published are, first, the removal of the £25,000 limit on directors' remuneration, which we proposed, and, secondly, the provision for a clearance procedure, which we also proposed. But the criterion of 60 per cent. distribution still remains, the onus of proof, whatever view one takes on the merits, still remains on the taxpayer and the enlarged definition of a close company still remains.

In short, it can be said that the Chancellor has failed to meet the major criticisms made. It is not surprising, because those Ministers who are primarily responsible for our industrial and economic destinies simply do not understand the consequence of what they are doing, and, what is more important, I believe they do not understand the sensible approach of some of those who have made representations about the Clause.

I noticed that the Minister of State for Economic Affairs said the other day: We are used to attacks and we ought to be prepared to receive them, but we do really expect serious bodies, like chambers of commerce, professional bodies and institutes of

directors, to behave with a little more rationality than with the hysterics that some of them have been displaying."

That seems to me to be extraordinarily arrogant. After all, who is the Minister of State to talk about chambers of commerce and professional bodies behaving with hysterics? These are the very organisations which have been making representations about the Clause, but perhaps it is not surprising that the Minister of State took that view because it was he who, when my right hon. Friend the Member for Bexley (Mr. Heath) was talking about the break up of family businesses, interjected, "and about time".

There is much more that I could have said about the Clause. In due course we shall have an opportunity to debate the definition on close companies. Many public companies have now been brought into the net and these provisions will, in relation to those companies, be quite impracticable and inappropriate. It is because these provisions penalise the small family business and are inappropriate for the larger public companies that we shall vote against the Clause. My hon. Friend the Member for Barry (Mr. Gower) said that he will leave the Clause reluctantly. I only wish that I could say the same.

Question put, That the Clause, as amended, stand part of the Bill:—

The Committee divided: Ayes 188, Noes 165.

Division No. 191.] AYES [9.41 p.m.
Abse, Leo Coleman, Donald George, Lady Megan Lloyd
Allaun, Frank (Salford, E.) Conlan, Bernard Ginsburg, David
Alldritt, Walter Corbet, Mrs. Freda Greenwood, Rt. Hn. Anthony
Armstrong, Ernest Craddock, George (Bradford, S.) Gregory, Arnold
Atkinson, Norman Crossman, Rt. Hn. R. H. S. Griffiths, David (Rother Valley)
Bacon, Miss Alice Cullen, Mrs. Alice Griffiths, Rt. Hn. James (Llanelly)
Bagier, Gordon A. T. Dalyell, Tam Grimond, Rt. Hn. J.
Barnett, Joel Davies, G. Elfed (Rhondda, E.) Hale, Leslie
Beaney, Alan Davies, Ifor (Gower) Hamilton, James (Bothwell)
Benn, Rt. Hn. Anthony Wedgwood Davies, S. O. (Merthyr) Hamilton, William (West Fife)
Bennett, J. (Glasgow, Bridgeton) Diamond, John Hannan, William
Bessell, Peter Doig, Peter Harrison, Walter (Wakefield)
Bishop, E. S. Donnelly, Desmond Hart, Mrs. Judith
Blackburn, F. Duffy, Dr. A. E. P. Hattersley, Roy
Blenkinsop, Arthur Dunn, James A. Herbison, Rt. Hn. Margaret
Boardman, H Edwards, Rt. Hn. Ness (Caerphilly) Hill, J. (Midlothian)
Bowden, Rt. Hn. W. (Leics S. W.) Ennals, David Hobden, Dennis (Brighton, K'town.)
Bowen, Roderic (Cardigan) Ensor, David Holman, Percy
Boyden, James Fernyhough, E. Hooson, H. E.
Braddock, Mrs. E. M. Fitch, Alan (Wigan) Horner, John
Bray, Dr. Jeremy Fletcher, Sir Eric (Islington, E.) Houghton, Rt. Hn. Douglas
Broughton, Dr. A. D. D. Fletcher, Ted (Darlington) Howie, W.
Buchan, Norman (Renfrewshire, W.) Fletcher, Raymond (Ilkeston) Hoy, James
Buchanan, Richard Floud, Bernard Hughes, Emrys (S. Ayrshire)
Butler, Herbert (Hackney, C.) Foley, Maurice Hughes, Hector (Aberdeen, N.)
Callaghan, Rt. Hn. James Fraser, Rt. Hn. Tom (Hamilton) Hunter, Adam (Dunfermline)
Carmichael, Neil Freeson, Reginald Hunter, A. E. (Feltham)
Carter-Jones, Lewis Galpern, Sir Myer Irving, Sydney (Dartford)
Castle, Rt. Hn. Barbara Garrett, W. E. Jay, Rt. Hn. Douglas
Johnston, Russell (Inverness) Neal, Harold Small, William
Jones, Dan (Burnley) Newens, Stan Smith, Ellis (Stoke, S.)
Kelley, Richard Oakes, Gordon Soskice, Rt. Hn. Sir Frank
Kenyon, Clifford Ogden, Eric Steel, David (Roxburgh)
Langford-Holt, Sir John O'Malley, Brian Steele, Thomas (Dunbartonshire, W.)
Lawson, George Oram, Albert E. (E. Ham, S.) Stewart, Rt. Hn. Michael
Lee, Rt. Hn. Frederick (Newton) Orme, Stanley Stones, William
Lever, L. M. (Ardwick) Oswald, Thomas Summerskill, Hn. Dr. Shirley
Lewis, Arthur (West Ham, N.) Owen, Will Swingler, Stephen
Lewis, Ron (Carlisle) Padley, Walter Symonds, J. B.
Lomas, Kenneth Park, Trevor (Derbyshire, S.E.) Taylor, Bernard (Mansfield)
Loughlin, Charles Parker, John Thomson, George (Dundee, E.)
Lubbock, Eric Pearson, Arthur (Pontypridd) Thornton, Ernest
McBride, Neil Peart, Rt. Hn. Fred Thorpe, Jeremy
McCann, J. Pentland, Norman Tinn, James
MacDermot, Niall Perry, Ernest G. Tomney, Frank
McGuire, Milchael Popplewell, Ernest Urwin, T. W.
McInnes, James Price, J. T. (Westhoughton) Varley, Eric G.
McKay, Mrs. Margaret Probert, Arthur Wainwright, Edwin
Mackenzie, Alasdair (Ross & Crom'ty) Pursey, Cmdr. Harry Walden, Brian (All Saints)
Mackenzie, Gregor (Rutherglen) Randall, Harry Wallace, George
McLeavy, Frank Rankin, John White, Mrs. Eirene
MacMillan, Malcolm Rees, Merlyn Whitlock, William
Mahon, Simon (Bootle) Rhodes, Geoffrey Wigg, Rt. Hn. George
Manuel, Archie Richard, Ivor Wilkins, W. A.
Mapp, Charles Roberts, Albert (Normanton) Willey, Rt. Hn. Frederick
Mason, Roy Robertson, John (Paisley) Williams, Clifford (Abertillery)
Maxwell, Robert Rodgers, William (Stockton) Willis, George (Edinburgh, E.)
Mendelson, J. J. Rogers, George (Kensington, N.) Winterbottom, R. E.
Millan, Bruce Sheldon, Robert Wyatt, Woodrow
Miller, Dr. M. S. Shinwell, Rt. Hn. E. Yates, Victor (Ladywood)
Milne, Edward (Blyth) Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Molloy, William Silkin, John (Deptford) TELLERS FOR THE NOES:
Morris, John (Aberavon) Slater, Mrs. Harriet (Stoke, N.) Mr. Harry Gourlay and
Murray, Albert Slater, Joseph (Sedgefield) Mr. Joseph Harper.
Agnew, Commander Sir Peter Errington, Sir Eric Lloyd, Ian (P'tsm'th, Langstone)
Alison, Michael (Barkston Ash) Eyre, Reginald Lloyd, Rt. Hn. Selwyn (Wirral)
Allason, James (Hemel Hempstead) Farr, John Longden, Gilbert
Astor, John Fisher, Nigel McAdden, Sir Stephen
Awdry, Daniel Fletcher-Cooke, Sir John (S'pton) McLaren, Martin
Barber, Rt. Hn. Anthony Foster, Sir John McMaster, Stanley
Barlow, Sir John Fraser, Ian (Plymouth, Sutton) McNair-Wilson, Patrick
Batsford, Brian Gammans, Lady Maitland, Sir John
Bell, Ronald Giles, Rear-Admiral Morgan Mathew, Robert
Bennett, Sir Frederic (Torquay) Glover, Sir Douglas Maude, Angus
Berkeley, Humphry Godber, Rt. Hn. J. B. Maudling, Rt. Hn, Reginald
Biggs-Davison, John Goodhew, Victor Mawby, Ray
Birch, Rt. Hn. Nigel Gower, Raymond Maxwell-Hyslop, R. J.
Black, Sir Cyril Grant, Anthony Maydon, Lt.-Cmdr. S. L. C.
Bossom, Hn. Clive Grieve, Percy Meyer, Sir Anthony
Box, Donald Griffiths, Peter (Smethwick) Mills, Peter (Torrington)
Boyd-Carpenter, Rt. Hn. J. Gurden, Harold Mills, Stratton (Belfast, N.)
Boyle, Rt. Hn. Sir Edward Hall-Davis, A. G. F. Mitchell, David
Brewis, John Hamilton, M. (Salisbury) Monro, Hector
Brinton, Sir Tatton Harris, Frederic (Croydon, N.W.) More, Jasper
Brown, Sir Edward (Bath) Harris, Reader (Heston) Morrison, Charles (Devizes)
Bruce-Gardyne, J. Harvey, John (Walthamstow, E.) Mott-Radclyffe, Sir Charles
Bullus, Sir Eric Harvie Anderson, Miss Munro-Lucas-Tooth, Sir Hugh
Burden, F. A. Hawkins, Paul Murton, Oscar
Buxton, Ronald Heald, Rt. Hn. Sir Lionel Noble, Rt. Hn. Michael
Chataway, Christopher Heath, Rt. Hn. Edward Nugent, Rt. Hn. Sir Richard
Chichester-Clark, R. Higgins, Terence L. Osborn, John (Hallam)
Clark, William (Nottingham, S.) Hill, J. E. B. (S. Norfolk) Page, R. Graham (Crosby)
Clarke, Brig. Terence (Portsmth, W.) Hobson, Rt. Hn. Sir John Pearson, Sir Frank (Clitheroe)
Cole, Norman Hornsby-Smith, Rt. Hn. Dame P. Peel, John
Cooke, Robert Howard, Hn. G. R. (St. Ives) Percival, Ian
Cooper-Key, Sir Neill Hunt, John (Bromley) Peyton, John
Cordle, John Hutchison, Michael Clark Pickthorn, Rt. Hn. Sir Kenneth
Costain, A. P. Irvine, Bryant Godman (Rye) Pike, Miss Mervyn
Courtney, Cdr. Anthony Jenkin, Patrick (Woodford) Pitt, Dame Edith
Craddock, Sir Beresford (Spelthorne) Jennings, J. C. Pounder, Rafton
Crosthwaite-Eyre, Col. Sir Oliver Johnson Smith, G. (East Grinstead) Powell, Rt. Hn. J. Enoch
Curran, Charles Kaberry, Sir Donald Prior, J. M. L.
Dalkeith, Earl of Kerr, Sir Hamilton (Cambridge) Pym, Francis
Davies, Dr. Wyndham (Perry Barr) Kershaw, Anthony Ramsden, Rt. Hn. James
d'Avigdor-Goldsmid, Sir Henry King, Evelyn (Dorset, S.) Rawlinson, Rt. Hn. Sir Peter
Dean, Paul Kirk, Peter Renton, Rt. Hn. Sir David
Digby, Simon Wingfield Langford-Holt, Sir John Ridley, Hn. Nicholas
Dodds-Parker, Douglas Legge-Bourke, Sir Harry Ridsdale, Julian
Elliott, R. W.(N'c'tle-upon-Tyne, N.) Lewis, Kenneth (Rutland) Roberts, Sir Peter (Heeley)
Emery, Peter Litchfield, Capt. John Robson Brown, Sir William
Roots, William Teeling, Sir William Weatherill, Bernard
Scott-Hopkins, James Temple, John M. Webster, David
Sharples, Richard Thomas, Rt. Hn. Peter (Conway) Whitelaw, William
Sinclair, Sir George Turton, Rt. Hn. R. H. Wills, Sir Gerald (Bridgwater)
Spearman, Sir Alexander van Straubenzee, W. R. Wilson, Geoffrey (Truro)
Stanley, Hn. Richard Walder, David (High Peak) Woodhouse, Hon. Christopher
Stoddart-Scott, Col. Sir Malcolm Walker, Peter (Worcester) Younger, Hn. George
Studholme, Sir Henry Walker-Smith, Rt. Hn. Sir Derek
Talbot, John E. Wall, Patrick TELLERS FOR THE NOES:
Taylor, Edward M. (G'gow, Cathcart) Ward, Dame Irene Mr. Ian MacArthur and
Mr. Dudley Smith.