Clause 76.—(WINDING UP OF THE PROFITS TAX.) (Hansard, 21 June 1965)

§ Sir Eric Fletcher
I beg to move Amendment No. 563, in page 98, line 23, at the end, to insert: and which are deductible for corporation tax". This Amendment corrects a flaw in the transitional provisions for Profits Tax and gives the taxpayer additional relief in the cases to which it applies.

§ Sir Eric Fletcher
I beg to move Amendment No. 488, in page 98, line 40, to leave out "1947" and to insert "1937".
This Amendment corrects a printing error and substitutes "1937" for "1947".

§ Sir J. Hobson
I hope that we will be told whether subsection (1,a) is really necessary. I believe that the matter has already been raised with the Inland Revenue and that several weeks ago the Federation of British Industries was given the impression that the Inland Revenue was sympathetic to its case and thought that it was a good one. However, when the Federation saw the Inland Revenue again on Friday, 11th June and pointed out that nothing had been done and that no Amendment had been tabled to the Bill, the Inland Revenue still said that it was sympathetic. By tonight still nothing had been done. Has further consideration been given to the matter, and do the Government intend to do anything about it?
The case arises where there is a company whose Case 1 assessment for 1965–66 is based on the year, say, to 30th September, 1964, and whose Case V assessment for that year is based on the 1355 year to 31st March, 1965. In those circumstances, Corporation Tax will commence for the former as from 1st October, 1964, and for the latter as from 1st April, 1965. The actual overseas dividends for the six months to 31st March, 1965, will, therefore, be included in the Case V assessment for 1965–66 and the actual overseas dividends for the six months to 30th September, 1965, will be included in the Corporation Tax assessment for the year ended on that date.
The Clause deals with the winding up of Profits Tax, but for Profits Tax purposes subsection (1,a) appears to provide that the income of the year to 30th September, 1965, will be apportioned on a time basis, where necessary. The distinction, therefore, is that instead of taking the dividends in the half year when they are received, they are taken for the full year and divided by two, which may produce very different results. Thus, half the overseas dividends for the year to 30th September, 1965, will, as the Clause stands, be liable to Profits Tax. It is suggested that the Profits Tax position should follow the Case V and Corporation Tax position. Then the actual dividends of the six months to 31st March, 1965, should be chargeable to Profits Tax.
Will the Government and the Inland Revenue consider the matter further and do they consider that this is the right way to deal with it; not only that one should apply to Profits Tax the same principle that has been applied to Corporation Tax but that it should be based on actual receipts and not on average receipts for the period? The Federation understood that it had had sympathetic consideration. Is it intended that on Report the Chancellor will do something about this? If not, we shall have to consider tabling Amendments on the subject.

§ Mr. Terence L. Higgins (Worthing)
I support the remarks of my right hon. and learned Friend the Member for Warwick and Leamington (Sir J. Hobson) in questioning the necessity of subsection (1,a) because, as I understand it, the general principle behind the Clause is that there should not be double taxation of profits in the sense that if they have already borne Income Tax and Profits 1356 Tax they should not then bear Corporation Tax as well.
To quote a different example from that given by my right hon. and learned Friend, it seems that a trading company with accounts ended on 31st December will become liable for Corporation Tax as from 1st January, 1965. Suppose a company has income in the form of dividends abroad, assessable under Case V, or interest, assessable under Case III. It seems that that income will be chargeable to Income Tax and Profits Tax to 5th April, 1965, and that it then comes in for Corporation Tax as from 6th April, 1965, onwards. It seems that there is a possibility of double taxation, because the company's chargeable accounting period will be for the year to 31st December, 1965, so that paragraph (a) comes into operation to decide how much of Case II or Case V Income Tax has to be brought into Corporation Tax computation.
But the subsection says that the income for the year is to be apportioned on a time basis. That means that three-quarters of this income arising in the period from 1st January to 5th April will be brought in for Income Tax. It will therefore be liable to double taxation and, therefore, it will be in conflict with the basic principle underlying the Clause. I should be grateful if the Government would indicate whether I am right in thinking that the basic principle underlying the Clause is that there should not be double taxation, and that paragraph (a) as it stands could create a situation in which double taxation could take place.

§ Sir Eric Fletcher
The right hon. and learned Gentleman the Member for Warwick and Leamington (Sir J. Hobson) and the hon. Member for Worthing (Mr. Higgins) have asked related questions. The first question is whether paragraph (a) of subsection (1) of Clause 76 is really necessary. The second question is whether certain representations made by the Federation of British Industries to the Inland Revenue have been considered by either my right hon. Friend or myself.
The answer to the first question is that we think that paragraph (a) is necessary. As the Committee will appreciate, this Clause provides some somewhat complicated—and necessarily complicated—provisions for the winding up of the 1357 Profits Tax, and deals with the transitional period during which companies may be liable to the full Corporation Tax or not. In effect, Clause 76 operates to secure that anything that is not taken into Corporation Tax for a particular year under Clause 75 is caught by Profits Tax under Clause 76, as, for example, interest on investments by a trading company.
The reason I think that the paragraph is necessary is that, in terms, it provides for apportionment where the Corporation Tax charged begins from a date in the middle of an accounting period. Suppose a company begins trading on 1st July, 1964, makes up its accounts to 31st December, 1965, and thereafter annually. The 12 months to 31st December, 1965, will be a chargeable accounting period for Profits Tax. The assessment to Income Tax under Case I of Schedule D for 1965–66 will be based on the profits of the first 12 months trading—that is, the 12 months to 30th June, 1965. At the same time, the trading profits from 1st July, 1965, onwards will therefore be chargeable to Corporation Tax and excluded from Profits Tax, whereas the trading profits for the first part of the chargeable accounting period ending on 31st December, 1965, will be chargeable to Profits Tax. It is not very easy to grasp the intricacies of this arrangement in an exchange across the Chamber.
Neither my right hon. Friend nor I myself has yet had an opportunity of considering the representations, to which the right hon. and learned Gentleman referred, made by the Federation of British Industries. We are not unsympathetic to those representations in so far as we understand them at present. Without giving any commitment, the position is that if any alterations in the Bill are required to meet those representations the appropriate way to meet them will not be by deleting paragraph (a) but by making some wider Amendment. The point raised by the right hon. and learned Member will be dealt with by making a special apportionment under Section 20 (4) of the Finance Act, 1937. If he and the hon. Member will allow me, I shall look into the matter carefully and sympathetically between now and Report and consider whether an Amendment to any other part of the Bill is required.

§ Sir J. Hobson
I am grateful to the Minister for giving an undertaking to look into the matter. I hope that when he has considered it he will think that it is a matter which requires to be dealt with. If, on the other hand, he does not, I shall be grateful if he will let me know so that we can consider what should be done.