HC Deb 21 June 1965 vol 714 cc1347-54
Sir John Hobson (Warwick and Leamington)

I beg to move Amendment No. 671, in page 96, line 37, to leave out from "year" to the end of the subsection and to insert: and shall for the purposes of income tax be deemed to have ceased to possess that source on the 5th day of April 1966 and shall for the purposes of corporation tax be deemed to have acquired that source on the 6th day of Aril, 1966". We are grateful to you, Mr. Grant-Ferris, for the impact which you had on the Committee and the shortness of discussion which it produced.

Under the Bill as it stands, on the transition from Income Tax to Corporation Tax there will be a measure of double taxation, and the Amendment is designed to obviate that feature. The Amendment deals with subsection (2), which provides that for sources of income other than those chargeable on a current year basis the Corporation Tax charge first applies to income arising after the end of the 1965–66 basis period. For example, the Accounts to 30th April, 1964, of a company whose accounting date is 30th April will have formed the basis of the period for the assessment for the year 1965–66 and under subsection (2) income arising from 1st May, 1964, will become liable to Corporation Tax assessment on the basis of the actual profits for each accounting period. But Income Tax will have been paid already for both 1964–65 and 1965–66 and there will therefore be an overlap, because the Corporation Tax assessment will also cover the period from 1st May, 1964.

I acknowledge that there are provisions under which the payment of the Corporation Tax is postponed so that one gets a sequence of annual charges, and this may appear to be fair, but only until one gets to the position in which there is a cesser of trade, because, a company put on Corporation Tax in this way may on the cesser of trade pay one extra year's tax, or, in extreme cases, even two years' extra tax, and no allowance will be made for the opening year which has been brought into tax not only for the first, but for the second and possible the third year of taxation. One must look forward to the possibility that a business may cease to trade. The Income Tax on such a cesser ran only up to the date of closing down and therefore under Income Tax some profits escaped assessment under the existing Income Tax closing down provisions, because one year had already been used twice, or perhaps three times, as the basis of assessment to Income Tax when trading started.

11.0 p.m.

But under the present provisions for Corporation Tax on the basis of the actual profits, no such relief will apply and the company will lose the corresponding relief arising from profits of its opening years which have been brought into charge upon one, two or possibly three years, whenever it ceases to trade, which it would have got if the Income Tax provisions had still continued.

Companies therefore with an accounting date early in each financial year will have been assessed for the combination of Income Tax and Corporation Tax for a longer and greater period on the basis of its first year's profits than in the case of a company whose accounting date is near the end of the fiscal year. The startling illustration was given in a letter on 29th May this year in a periodical called The Accountant which makes the point clearly. I will not trouble the Committee with the letter at the moment, but if the Chief Secretary has not already seen it, I should indeed be grateful if he would look at it and consider it.

Under the Income Tax basis of assessment a company with an early accounting date would have got a longer period of relief on cessation, and this will now be lost and more companies will be taxed for more years than the number of years they have existed due to this overlap in the introduction of Corporation Tax. The Amendment we have put down proposes to deal with this position by providing that all companies should be assessed for Income Tax purposes as though they had ceased to trade on 5th April, 1966, so they would have the benefit of the Income Tax cesser provisions then, and they should be assessed to Corporation Tax from 6th April, 1966, as though they had started to trade on that date.

If the principle of this Amendment is accepted there will, of course, I acknowledge, have to be some arrangements for the provisional payment of tax on 1st January in each year. I believe that in Australia such provisions are made which can be dealt with on the basis of the earlier year's trade and until adjustments of any actual profits are discovered. If there are difficulties over that there must be some other provisions that will deal with this problem. If the Government are not prepared to accept the principle of this Amendment, and we very much hope they will, then what other proposals do the Government have to deal with this problem and a situation in which it would be grossly unfair that a company after 1966, and perhaps after 1967, may have paid Income Tax and Corporation Tax for more years than it has actually traded? We very much hope that the Government will accept our proposals with such amendment or improvement as they think desirable or, if not, that they will tell the Committee what they think is the correct way to deal with this situation.

Mr. Diamond

This Amendment has been moved, as one would expect with moderation and charm by the right hon. and learned Gentleman the Member for Warwick and Leamington (Sir J. Hobson), but it hides a very dramatic proposal, to put it at its least. The right hon. and learned Gentleman draws attention to the complications which exist in the present system with regard to the opening years of a business. I am grateful to him for reminding the Committee of that complication, a complication which has always been with us but which we shall be getting rid of under the simplicities of the Corporation Tax. Once more life for the businessman will be simplicity itself. I am grateful to the right hon. and learned Gentleman for drawing attention to those difficulties.

I hope that I may go on to point out that when we reach Clause 81 we shall deal with the measure of relief to meet the problem which he has explained so clearly that I need not repeat it. That is the Clause which provides what I may call a fitting remedy, and if there are any suggestions which the right hon. and learned Gentleman has to make at that point, I shall be glad to listen to him carefully. It would be wholly wrong of me to anticipate that discussion in any way.

The Amendment bears some distinguished names of Members for distinguished constituencies. These include Wanstead and Woodford and Warwick and Leamington; these are powerful constituencies to attach to an Amendment of this kind. The Amendment would have the result of providing a tax holiday, with some startling effects. In 1965–66 the effect would be moderate; it would cost the Revenue about £100 million. In 1966–67 the Amendment would be less moderate and woud cost about £1,000 million. The cost would thus be £1,100 million, because the Amendment proposes a complete tax holiday. It proposes that no corporation shall be called on to pay Corporation Tax during the year immediately following the last year of payment of Income Tax. That is an Amendment which I could not describe as wrecking in any disorderly sense, but I could describe it as wrecking the Budget.

As it would cost £1,100 million and as there is another Clause which provides the remedy for the problem which the right hon. and learned Gentleman has explained, I hope that I may suggest to the Committee that the Amendment is not one which I can strongly support.

Sir J. Hobson

The right hon, Gentleman ignores the fact that I said that I was in no sense proposing a tax holiday, and that I recognised that it might be necessary to put down arrangements for the provisional collection of taxation in the two years until the actual trading position for each of those current years had been dealt with. It is wrong of him to suggest that the introduction of Corporation Tax produces a situation of simplicity which will solve all the difficulties, because it wholly ignores the situation that large numbers of companies are already in existence which have had the difficulty which I have pointed out of opening years trading on which they have paid Income Tax for two and possibly three years on a single year's profits which have been assessed to tax.

It may be that an argument arises on the company which starts trading after the introduction of this provision, and I will not re-open it, but it is false to suggest that the Bill does anything in relation to all those companies which are at present trading or obviates in any way the difficulties which arise because of the existing Income Tax provisions about the opening years of trading. I do not consider that the right hon. Gentleman has dealt with any of the principles of the proposal and I very much regret that.

Amendment negatived.

Mr. Patrick Jenkin

I beg to move Amendment No. 562, in page 96, line 43, at the end to insert: Provided always that a company shall not come within the charge to corporation tax in respect of a trade, if the company is no longer carrying on the trade at the end of the year 1965–66. This Amendment is not dissimilar to that moved by my right hon. and learned Friend the Member for Warwick and Leamington (Sir J. Hobson), but I think it arises on a somewhat different state of affairs. The main point on which the problem arises is because of the transitional effect of the change from the taxation of profits as they are now on the preceding year basis, to the taxation, as they will be under the new scheme, on a current year's basis. For the ordinary company continuing, the effect will be that instead of paying the tax during the year of assessment it will be paid nine months after the year of assessment so that the tax is not paid twice in the same year. The position with which this Amendment is concerned arises out of the last Amendment I moved which was so brusquely and lightly case aside by the Minister without Portfolio, namely the case of the company which is going to wind up and go back to being a partnership.

If this is going to happen to any company during this current year 1965–6, the position will arise, unless this Amendment is accepted, that the company will be charged to Corporation Tax in respect of any part of its operations which it carries on as a company during the year and then it will be assessed to Income Tax and Surtax on the same profits. The application of Section 17 of the Finance Act, 1954, to a business in these circumstances, when 75 per cent. of the ownership is in the same hands before and after the change from a company to a partnership, is that the partnership is taxed upon the profits of the preceding year as if there had been no change of ownership.

The result of the application of Section 17 will be that the partnership will pay tax on the profits of the year we are now in and the company will have to pay tax on the same lot of profits, so that the proprietors of the business will find themselves paying tax twice over on two different bases on the same profits. I cannot really believe that is intended. I have the highest admiration for the skill of the Inland Revenue when dealing with these very technical transitional points which occur on problems of this sort and I can only imagine that at some stage this was pointed out and the Treasury said "No, we will sting them twice, the shareholders and the company. The company will pay tax on the one hand and the partnership will pay tax afterwards."

Is this really what is intended to happen? It seems grossly unfair and I find it difficult to believe it is the case. I cannot see, having searched through the Clause and the Schedules, that this particular case is dealt with. In the last year the company will have to pay the Corporation Tax on one year and the same profits will come in again for Income Tax and Surtax in the hands of the partnership, succeeding the company. This seems most inequitable, and I sincerely hope that there is some explanation. If there is not, I hope that the Chief Secretary will accept the Amendment.

Mr. Diamond

The hon. Gentleman the Member for Woodford imagines a situation in which the Revenue comes forward with a careful proposal—

Mr. Patrick Jenkin

I am sorry to interrupt the Chief Secretary so early in his speech but I have one of my constituents sitting beside me and he reminds me that the constituency in which he resides is called Wanstead and Woodford.

Mr. Diamond

At the moment I cannot recollect what offence I committed, but at all events the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin) imagines a situation in which the Revenue with its usual care and diligence brings a complicated situation to the attention of the Treasury Ministers who get round a table and perform certain rites and then say with one voice, "Let the so and so pay twice over." That is not absolutely accurate. The hon. Gentleman has drawn attention to a situation which I could not anticipate clearly from reading the Amendment, because it could have covered a variety of situations and I did not know precisely what was in the hon. Gentleman's mind.

11.15 p.m.

The situation requires examination. I can say no more about it than that at present. I could not say offhand with assurance that the matter which the hon. Member has dealt with is adequately catered for. All I can do, therefore, is to ask him, as I could not accept the wording of the Amendment, to give me an opportunity of examining the matter carefully before Report by going through the usual process of being good enough to withdraw it.

Mr. Patrick Jenkin

In view of the very forthcoming approach by the Chief Secretary, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Diamond

I beg to move Amendment No. 342, in page 97, line 12, at the end, to insert: Provided that this subsection shall not apply unless the said interval is longer than nine months. The Amendment corrects an oversight in the drafting of subsection (3). Putting it shortly, assuming that a company has a regular accounting date, the tax on its profits would fall on 1st January year after year and no problem is created. The substitution of the alternative period which is suggested for the advantage of the taxpayer may not, however, be advantageous if the company's trade was set up so recently that the "preceding year" basis of assessment had not become fully applicable. This is the basis to which the right hon. and learned Member for Warwick and Leamington (Sir J. Hobson) referred earlier and which results in the regular payment 1st January after 1st January.

There could be a situation in which a company making up its accounts to, say, 30th June in each year would find itself expected to pay tax under its first Corporation Tax assessment only three months after the date when it had paid its last Income Tax assessment. Therefore, the purpose of the Amendment is to make it clear that there shall be an irreducible minimum period of nine months.

Amendment agreed to.

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