Clause 78.—(DIVIDEND INCREASES IN 1965–66.)

HC Deb 21 June 1965 vol 714 cc1370-432

Mr. Diamond

I beg to move Amendment 749, in page 101, line 11, after "shall" to insert: (as regards that company)". We are now dealing with the Clause which relates to forestalling and measures where there is any forestalling by taking, as it were, a standard period and reckoning the dividend in that period and comparing it with a dividend paid during the year 1965–66. This Amendment is to make it clear that when a company is required to account for Income Tax in respect of an excess of dividends paid in 1965–66 over the standard amount, as I have described, a company which receives the dividend will not be entitled to bring any part of the dividend into its own account so as to use Income Tax paid as cover for Income Tax due on its own dividend which it may pay out after 1965–66.

The interpretation of the Clause previously was not absolutely clear. It could have been interpreted as referring not only to the receiving company but also to the paying company. If that interpretation prevailed, the purpose of the legislation would be frustrated in so far as excess dividends are paid to company shareholders. The Amendment makes the position clear. Only the company paying the dividend is to bring it into account under Clause 43(3), and Clause 44—that is in order to secure that it accounts for the Income Tax.

Mr. William Clark

I do not want to detain the Chief Secretary for too long, but does this Amendment affect the position of investment trusts at all? Can he say whether, on the standard period, they have to pay out 90 per cent. of income, and will still have to pay out 90 per cent. in subsequent years?

Mr. Diamond

I speak from memory but I can say clearly that this does not affect investment companies. There is a later stage where we can clear the ground on investment companies. This has no reference to that particular problem.

Amendment agreed to.

Mr. van Straubenzee

I beg to move Amendment No. 625, in page 101, line 15, to leave out from "year" to the end of line 16.

As the Chief Secretary will appreciate, this Amendment is directed to the election provisions under an earlier Clause, Clause 44, the standard dividend provision. As I understand it, a company may pay dividends during the year 1965–66 in excess of its standard dividend as defined by the Clause, and the recipient will incur no tax in respect of the excess, except possibly Surtax. But the excess is regarded, so far as the paying company is concerned, as dividend paid on 6th April, 1966. The consequence is that the paying company is obliged to account to the Revenue for Income Tax at the standard rate in respect of the excess.

The effect of the subsection we are now discussing produces, it is suggested to the Chief Secretary, an anomaly for subsidiary companies. Clearly under Clause 44(3) in later years they can effectively pay a dividend gross to the parent company but an election under that Clause does not seem to be effective so far as the excess of a dividend over the standard dividend in 1965–66 is concerned.

I put it to the Chief Secretary that this is particularly difficult for wholly-owned subsidiaries which are expanding where profits are increasing sharply, since the parent company is denied the benefits of the increasing profitability for a period of 12 months. Since dividends paid by the parent company to their shareholders will already be restricted under the Clause, there seems to be no particularly good object in applying this restriction to dividends paid by subsidiaries to parent companies, particularly because Section 44 will later apply. That is the short point of the Amendment. To follow the Minister without Portfolio, it is a clarifying Amendment to clarify even further an already clear Clause, and I hope that in that spirit the Chief Secretary will accept it.

12.15 a.m.

Sir Eric Fletcher

I am afraid that I cannot advise the Committee to accept the Amendment, and I hope that the hon. Member for Wokingham (Mr. van Straubenzee) will agree, if he has had an opportunity to study Amendment No. 750 in the name of the Chancellor of the Exchequer, which is a paving Amendment to a new Schedule. It proposes to insert at the end of line 16 on page 101: Provided that, in relation to the cases dealt with by the Schedule (Supplementary provisions about dividend increases in 1965–66) to this Act, this section shall have effect subject to the provisions of that Schedule. I understand that the hon. Gentleman may not have had an opportunity of studying the details of the Schedule which is introduced by my right hon. Friend's Amendment. I am afraid that it is a somewhat lengthy and elaborate Schedule. When we reach it, I think that he will find that we have gone a long way, if not all the way, to meet the point which he has in mind. The Chancellor's Amendment and the new Schedule provide new rules under which dividends paid by a subsidiary to a parent or another company which is a joint subsidiary of a common parent are kept outside the forestalling provisions altogether.

The present Amendment, therefore, loses its force in relation to the cases dealt with by the Chancellor's Amendment. I do not think that I should be doing my duty if I did not point out that there are still a few marginal cases which the hon. Member would probably wish to be covered which are not in fact covered by the Chancellor's Amendment and that, I think, arises from the fact that in our provisions regarding a company which is a subsidiary we have introduced the 75 per cent. test whereas the hon. Member would have preferred the 50 per cent. test, but if we are to keep the provisions regarding subsidiaries in line, we must adhere to the 75 per cent. test. But with that qualification, which I should be failing in my duty if I did not mention, I think that we have substantially met the point.

Mr. van Straubenzee

I am grateful, as always, to the Minister without Portfolio for that explanation. I am sure that he in turn will understand that our Amendment was on the Order Paper for a considerable time before the Chancellor's Amendment. That is why it is being moved in this form. It long preceded the new Schedule—the new and very complicated Schedule which the Chancellor seeks to add.

I accept the Minister without Portfolio's point that there are certain considerable limitations to the acceptance of the principle put forward in this Amendment, in the Schedule to which we shall come later. It goes a considerable way to meet the point, and in view of the fact that the Government have moved a considerable way to meet us, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Patrick Jenkin

I beg to move Amendment No. 779, in page 101, line 16, at the end to insert: provided that in computing the gross amount of such dividends paid in the year 1965–66 there shall be disregarded the gross amount of any dividends paid in respect of shares in the capital of the company which entitle the holders thereof to a dividend at a fixed rate or to a dividend at a rate varying with the standard rate of income tax but to no other right to share in the profits of the company, in so far as such dividends represent arrears of dividends due in an earlier year". This is a very short point and I must confess to some surprise that it is not one that has been taken by the Government. I hope they will be able to be as forthcoming on this as they were on the last Amendment I moved. The point concerns arrears of preference dividends. A company, broadly, has no choice as to whether or not it shall pay a preference dividend, except in the circumstances where the company's profits are not sufficient to allow it to pay one. In this situation it may pass the dividend altogether or it may pay something less than the full amount of the preference dividend.

The Amendment is intended to cover the case where, during the standard years, a company paid something less than the full preference dividend and then for the year in question, what one might call the forestalling year, it paid a full dividend, including, perhaps, arrears of the preference dividend. It would seem to be extremely hard in that case that a company should be charged to Income Tax under the new system on the arrears of the preference dividend, which, had the company had profits, would have been paid in the earlier years. The point is as brief as that and I cannot elaborate on it. I hope that the Chief Secretary or whoever replies will give some indication that this is a problem which the Government can look at with some sympathy.

Mr. John Harvey (Walthamstow, East)

I should like to extend the argument that has been put forward by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and urge the Front Bench opposite to give this Amendment not only favourable consideration but perhaps to look even more fully at this problem between now and Report. As the hon. Member for Wanstead and Woodford said, a company has really no choice but to pay a preference dividend unless its lack of profits make it impossible to do so.

Following that reasoning my attention has been drawn to a case where in the opening year a company, of which I can supply details, was unable to pay its full preference dividend. Consequently, it now finds itself penalised because what happened was that during the basic period the shares, which were £1 shares entitled to 6½ per cent. non-cumulative preference dividend, received nothing because there were no payments. Last year the company managed to pay 2¾ per cent. on the preference dividend and this year, other things being equal, it would normally pay 6 per cent., which represents the whole of its earnings at the moment, but is still less than the fixed amount. The very fact that it is going to pay 6 per cent. already involves the company in a heavy liability to the new tax, but I reiterate that it is still short of the amount that it should be paying under the preference arrangement whereby it should be paying 6½ per cent. The Finance Bill in this Section hits at a company placed in this position, and I cannot really believe it was intended to do so. I feel that this is probably one of those points that must have been missed and I ask the Chief Secretary to look at it most carefully between now and Report.

Sir Eric Fletcher

I can be equally brief. We have sympathy with this proposal. We realise that there may be companies which turn the corner shortly after 1965–66 and so will be in a position to pay arrears of preference dividends, and we agree that if that is the case, they should be enabled to do so without penalty. On the other hand, a general provision might be an incentive to some companies to endeavour to pay off arrears of preference dividends even though the circumstances were such that commercial prudence would not recommend that course.

What I suggest, therefore, is that if the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) withdraws the Amendment, I undertake on behalf of my right hon. Friend the Chancellor that having given the matter sympathetic consideration, we will bring forward on Report an Amendment designed to give effect to the substance of what the hon. Member has in mind, although, perhaps, couched in somewhat different language, to prevent the possibility of abuse.

Mr. Patrick Jenkin

I shall be incurring the jealousy of some of my right hon. and hon. Friends. I do not quite know how many Amendments I have had to seek leave to withdraw because we have had such favourable and friendly response from the Treasury Bench. In view, however, of what the Minister without Portfolio has said, I am happy to beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Sir Eric Fletcher

I beg to move Amendment No. 750, in page 101, line 16, at the end, to insert: Provided that, in relation to the cases dealt with by the Schedule (Supplementary provisions about dividend increases in 1965–66) to this Act, this section shall have effect subject to the provisions of that Schedule. This is the Amendment to which I referred a moment ago and which is a paving Amendment to the new Schedule.

Amendment agreed to.

Sir Eric Fletcher

I beg to move Amendment No. 751, in page 101, line 19, after "dividends", to insert "unless and".

I hope that it will be convenient, Sir Samuel, to take at the same time the next Amendment, No. 752, in line 21.

The Deputy-Chairman indicated assent.

Sir Eric Fletcher

I can explain the Amendments shortly and I hope that they will be acceptable to the Committee. They are relieving Amendments and their purpose is to ensure that the standard amount which a company may pay by way of dividends in 1965–66 shall not be lower than the amount of the standard dividends, although it may be higher. In other words, although the standard can be raised, it cannot in any circumstances be reduced. This is, therefore, a relieving Amendment for the benefit of the taxpayer.

Amendment agreed to.

Further Amendment made: in page 101, line 21, leave out from beginning to "the" and insert: (3) Except in the case of a company not carrying on business earlier than December, 1963, if the amount ascertained in accordance with this subsection is higher than the amount of the standard dividends.—[Sir Eric Fletcher.]

Mr. Diamond

I beg to move Amendment No. 746, in page 101, line 23, to leave out "five" and to insert "seven and a half".

The Deputy-Chairman

I think that with this Amendment we can conveniently discuss Amendment No. 416, in line 23, after "capital", insert: or, at the option of the company, the capital employed by the company". and Amendment No. 418, in page 103, line 17, at end insert: (7) For the purposes of this section the capital employed by a company shall be arrived at by taking the amount by which the value of the company's assets, computed in accordance with the provisions of paragraphs 2 lo 9 of the Eighth Schedule to the Finance Act 1952, exceeds the amount of its liabilities so computed and adding the capital value of the company's investments computed by multiplying by twenty the company's franked investment income for the relevant financial year and deducting the cost of such investment.

Mr. Diamond

Amendment No. 746 quite simply raises the minimum amount which a company may pay by way of dividend in the year 1965–66 without a "forestalling charge" from 5 per cent. of its share capital in 1965 to 7½ per cent. of it. It means that, whatever the level of the profits for 1965, a company may pay out this amount without penalty under the Clause. The previous figure was 5 per cent. Representations were made that that was too low and that 7½ per cent. would be more realistic.

12.30 a.m.

Mr. Higgins

Rather than the Government Amendment, the proposals contained in Amendments No. 416 and 418 should be accepted and enshrined in the Clause, because it seems that the objective is to set a limit above which one can reasonably say that forestalling may have taken place.

The way in which this has been attempted by the Government would not be supported by Dr. Kaldor, because it has been based largely on an accounting convention approach to the whole problem. If we want some criterion of normality between dividends in one period and another, I suggest that what we want is not an arbitrary accounting convention but an indication of what is the real economic magnitude of the capital involved.

As originally drafted, the Clause was based purely and simply on the idea of share capital, an accounting convention, with an arbitrary figure, originally 5 per cent., to indicate what might be regarded as a normal dividend. The Government have relented somewhat in the severity of the Clause by saying that they will raise from 5 per cent. to 7½ per cent. the amount of dividend, expressed in terms of a percentage over and above the share capital, which they are prepared to accept.

While this represents a change in the amount, it in no way corrects the wrong principle on which the criterion has been based. We on this side of the Committee clearly feel that in this instance one should have a measure of the economic capital involved and, therefore, in Amendments No. 416 and 418 we suggested that we should relate the percentage dividend to the economic capital and give the firm concerned the option of taking this as the measure of the capital employed.

It is true that the Opposition Amendments would not go the whole way to meeting the objection to the criterion being based on economic reality, but had we done that we should have had to give a replacement cost estimate of the capital involved. Nevertheless, there is no doubt that our Amendments are better than that tabled by the Government.

Even if we accept the Government Amendment and increase the percentage to the amount suggested, the judgment as to whether or not there has been forestalling will be arbitrary in its effect. Suppose, for example, that there are two perfectly identical companies making in the initial period the same profits and with the same real capital employed in the business, and then we find a situation in which one has a nominal share capital quite different from that of the other. Then, of course, the basis on which one says that forestalling has occurred will be quite arbitrary. We are left in the situation where the firm with a different nominal capital from the other will have a different criterion applied to it.

This is complete nonsense. We should not simply accept the increase in the percentage which the Government, as a concession, are putting forward but question the whole principle underlying both the Clause and the Government Amendment. I suggest that the Committee supports our proposal, with the Clause being based on an estimate of the capital employed at the option of the firm concerned.

Mr. Ian Lloyd (Portsmouth, Langstone)

It will probably have been noticed that in the rehearsal at Covent Garden for the opera that is being put on there in a few days' time, a camel is alleged to have broken loose and stampeded through the scenery. I am sure that many hon. Members who are now becoming more than familiar with the terms of this Bill in the late hours of the night or the early hours of the morning would not be surprised to see camels stampeding out of its pages.

The word "capital" has a more emotive connotation for the politically committed than it has for accountants, and when profit is discussed in the same context the result is often analogous to the effect of lowering the last rod of uranium into a nuclear plant—a great deal of heat is generated. I here recall some remarks of Professor Peter Drucker who addressed the Institute of Management two or three years ago, and made a rather interesting comparison between his visit to Europe just before the war and in 1962. He made the point, which is relevant to our present discussions, that whereas the hostility to profit which was so apparent in Europe before the war had largely disappeared from the Common Market, it remained one of the most significant facts of life in Britain when he visited this country.

Capital and profits are inescapable parts of a capital-using system—in the United Kingdom, in the United States and in the Soviet Union. I was therefore surprised to read in The Times this morning, in an otherwise excellent article on British industry, that: The return on capital employed by the nationalised industries is low. Since their prime motive is the national interest rather than profit making, this is only to be expected. The author thinks that they do considerably better than the 10 lowest-yielding private enterprises. From that it would seem that the logical conclusion is that the lowest-yielding private enterprises have a more developed sense of the public interest than have those nationalised industries. Further it would seem that the highest-yielding private enterprises—which include Granada, A.T.V., Radio Rentals, Butlins and the London Brick Company—would serve the public interest better if they made less profits and paid less tax, and that those enterprises such as B.E.A. which have eliminated the need for subsidy have a much less developed sense of the public interest than those which have not.

The truth, surely, is that without high profit and enterprise in the private sector the country would soon be bankrupt—

Mr. Diamond

As I am to have the privilege of replying to the hon. Gentleman, and as there are many Amendments, I am anxious to know of which Amendments he is speaking. I should like to know, so that I might follow his argument the more closely.

Mr. Lloyd

The Amendment to which I refer is that which deals with capital employed, and I refer particularly to the definition of capital employed; and the remarkable ignorance of the subject which is displayed on the other side.

Without high-profit enterprises the burden imposed by the public sector on the private sector would be substantially greater. Where all is public sector—as exists in semi-paradises and demi-paradises endeared to the hearts of hon. Members opposite—the choice of whether profits are used or not is infinitely more difficult to apply. The profit motive in the U.S.S.R. recognises, if nothing else, that tests of economic efficiency must all be subservient to whether capital employed in one form of economic activity might be more profitably employed in another. We want profit to be employed in both the public and private sectors of the economy which are each consuming wealth.

Clause 78 says that there should be 7½ per cent. of share capital. The first of our Amendments substitutes "capital employed" for "share capital". The reasons for this are quite simple. Issued capital becomes increasingly irrelevant to th true economic circumstances of any enterprise that grows, and it is the wish of hon. Members on both sides of the Committee that all economic enterprise should grow. A growing enterprise does not only use share capital, but loan capital, supplier's credit and reinvested earnings. All these are sources of capital. Indeed, some of the most successful enterprises—

The Temporary Chairman (Mr. H. Hynd)

Order. I am trying to follow the argument of the hon. Member but finding it more difficult to relate what he is saying to any of the three Amendments which we are discussing.

Mr. Lloyd

Amendment No. 416 reads: after 'capital', insert 'or, at the option of the company, the capital employed by the company'. I am referring specifically to other types of capital employed by a company, which the Government should recognise in any system which seeks to impose a ratio on the capital of the company. This ratio should not be related solely to the share capital of any such company. I therefore referred to other types of capital.

The test of success is often a decline in the ratio of the share capital compared with other types of capital. Two companies each with a capital employed of £5 million would have these results. Company A would have a share capital of £½ million and reinvested earnings of £4½ million and a standard dividend of 7½ per cent., which would earn £75,500. Company B, with identical resources, would have share capital of £2½ million and reinvested earnings of £2½ million and standard dividend would amount to £187,500. I do not know if it is the deliberate intention of the Chancellor to be arbitrary in his dealing with this point, but it seems that, if it is desired to restrict, it would be difficult to imagine a more arbitrary manner of doing so.

Since investment income comes within the scope of Corporation Tax, the second Amendment seeks to cover cases where the cost of investment might be quite out of line with current investment. One may contrast the cases of two companies with an initial investment each of £100. One, being successful, might produce at 5 per cent. and turn the £100 into £1,000. It would not be correct to assume that the capital employed in that company was £100. By contrast, another company, making less successful investment, might keep to the figure of £100. The purpose of the Amendment is to enable a distinction which is perfectly legitimate and requires to be made to be in fact made.

12.45 a.m.

Mr. Edward M. Taylor (Glasgow, Cathcart)

I speak in support of Amendments Nos. 416 and 418, which I have had the pleasure of signing. I appreciate that hon. Members who have signed these Amendments are hon. Members who are particularly interested in the shipping and shipbuilding industries. We have tabled these Amendments, not because of the particular case of shipping, but because we believe that it affects this industry and others. One thing which has surprised me is how many of the Government's efforts in one direction seem to be frustrating their efforts in others. Throughout the discussion on earlier Clauses it was indicated that the Government were interested in encouraging industries and companies to invest as much as they could—in other words, to provide their capital from their own resources. Many industries and companies have been doing this for many years, but it would seem that this proposal will damage the interests of those industries which finance themselves from ploughed back profits.

This is not a question of detail but of principle. For that reason, we suggest that the relationship should be to capital employed and not simply to ordinary share capital. The relationship to share capital would appear to be very unfair, because there is a very low return on actual capital employed in some of the industries which have ploughed back a good deal of capital and whose profitability at present is not at all great.

I want to give one example of this related to the shipping industry. In 1962, according to the Economist quarterly returns of industrial profits, the profit return on capital actually employed was only 0.4 per cent. for shipping companies. In 1963 this had declined to 0.1 per cent. on the capital actually employed. In 1965 there was an improvement to 2 per cent. on capital employed. This shows, on the one hand, the low rate of profitability in the shipbuilding industry and, on the other hand, the enormous amount of fluctuation there can be from year to year. By all accounts, 1965 will be another year of low profitability for the shipping industry.

In these circumstances, it is unreasonable that we should look for a comparison on the return on share capital, because in the shipping industry, which has a tradition of ploughing back, the peculiar position arises that there is often a very small ordinary share capital but enormous assets employed. For that reason, particularly in this industry but in many other industries where there is a small share capital but a large amount of capital actually employed, because of the tradition of ploughing back, it is very unfair to offer this as one of the alternatives. I appreciate that this is but one of the alternatives and is not the only measure which companies have to adopt in such circumstances. If this is meant as a concession, it should take account of the circumstances of industries. In the case of shipping and other industries, this is in no sense a concession.

To increase it from 5 per cent. to 7½ per cent. is of no assistance to these industries. In Amendment No. 418 we put forward a definition of what we regard as capital employed. We have used as a starting point a definition which was in force for the computation of the excess profits levy but investment income has been included because this comes within the scope of Corporation Tax. Careful consideration should be given to whether the concession to increase it from 5 per cent. to 7½ per cent. will be of any assistance to those industries which have been praised in an indirect way by the suggestion that more industries should plough back capital. This will be of no assistance to industries going through a period of low profitability which have been following this suggestion. For these reasons, I hope that the Amendments Nos. 416 and 418 will be accepted.

Mr. Diamond

As to the general proposal, that instead of share capital one should take capital employed, I am afraid that this is something that I could not recommend because of its difficulty and complexity. It is absolutely essential that a board of directors, when it proposes to declare a dividend, when it reaches its decision about the dividend that it is going to propose to the shareholders, should know exactly what the position is and whether it is a dividend which would be caught under the forestalling provisions or not.

A calculation of capital employed would take a long time indeed. It could not possibly be accurately ascertained until some time after the period when it is proposed to declare the dividend in the ordinary way. But even if the delay were not a major consideration, the complexity is a major consideration and it is not the kind of difficulty that one would want to confront boards with.

As to the effect on the shipping industry, I should have thought the hon. Gentleman would be the first to agree that if we are dealing with an industry which is going through a period of low profitability, as he correctly says, the very fact that it is proposed to increase the minimum from 5 per cent. on capital to 7½ per cent. on capital is dealing very adequately, particularly with an industry which, as the hon. Gentleman says, is going through a period of low profitability and, therefore, of low dividends. To be able to declare a dividend of 7½, per cent. on the capital employed is a good average in today's circumstances and I should not have throught, therefore, that the hon. Gentleman should have any anxiety, as I previously said when we were discussing the shipping industry. My right hon. Friend has clearly demonstrated his anxiety about the industry and is considering with the industry ways and means of assisting it.

The proposal in front of us now to raise the minimum from 5 per cent. to 7½ per cent. without undergoing the risk of a forestalling charge would be absolutely adequate for the shipping industry and the hon. Gentleman has made it clear that that is the purpose of his Amendments. On the ground that they are unnecessary and complex, I do not think that I could recommend that Amendments Nos. 416 and 418 should be accepted by the Committee.

Mr. Higgins

I apologise for delaying the Committee a little longer, but I think we ought to go into this matter a little more deeply than the rather brief answer of the Chief Secretary would suggest. The right hon. Gentleman said that it would be too complex to get closer to the real capital employed by the firm concerned. But surely on a simple balance sheet basis, we can get closer to this than the arbitrary idea of going on share capital, which is a complete nonsense in this context.

Let us consider two companies where the real capital employed by both of them is £1 million. Let us say that in the standard period they have both been paying a dividend of £100,000 a year but the nominal share capital of one is £100,000 and the other £1 million. Are we seriously to find ourselves in the position where the amount of dividend which will be calculated for forestalling purposes, or in estimating whether it is forestalling or not, should be 7½ per cent per £100,000 in one case and 7½ per cent. of £1 million in the other?

It seems to me that to turn the whole definition on what the share capital happens to be in a particular firm, which after all may depend very much on when the firm was actually formed and what has taken place since, is wholly improper. I agree that we cannot get a perfect measure of economic capital, but we can get a great deal closer than the right hon. Gentleman is proposing.

Mr. Diamond

To reply to the hon. Member for Worthing (Mr. Higgins), I think that what is implicit in what he has said is that the proposal to increase from 5 per cent. to 7½ per cent. is the only proposal to measure the dividend. This is far from being the case. There is a variety of proposals. The hon. Gentleman is saying that share capital is not an accurate method of measuring capital in all circumstances and, therefore, we should use capital employed, which admittedly is a more useful measure of capital for certain purposes. Capital employed and share capital can vary widely as between companies. But what we are discussing here is not all the methods of arriving at a dividend which is free from a forestalling charge.

We are merely proposing that there shall be an irreducible minimum of 7½ per cent. where that suits the company best. If it does not suit the company best, where there has been a long period of standard profits and dividends it may be better to go along on that basis. Where the company adopts a minimum because it is more advantageous than the other basis, we say that that minimum should now be 7½ per cent. where previously it was 5 per cent. To have a complicated calculation based on capital employed instead of on share capital does not assist anybody at all.

Mr. Barber

The Chief Secretary talks about the proposal put from this side of the Committee as being instead of his own proposal of 7½ per cent., but if we suppose that my hon. Friend's proposal was one additional alternative then, despite its complexities, the directors could ignore it. It would obviously be an advantage in the case cited by my hon. Friend. Would the Chief Secretary therefore consider it?

Mr. Geoffrey Lloyd

The Chief Secretary has mentioned the delay. That has to be taken into account, but there are two methods which are commonly used by analysts in calculating the capital employed. One is concerned with capital employed at the beginning of the financial year and the other with capital employed at the end of that year. I should have thought that to employ the end of the financial year would have fallen within the Chief Secretary's condemnation, but if one took the beginning of the financial year the capital would be there already. It would not suffer from the question of delay and it would at least avoid the gross discrepancy which could arise under the present formula.

Mr. William Clark

We have the extraordinary situation that the Chief Secretary is now doing his best to shield directors from the complexities of capital employed in their business. The right hon. Gentleman would have been better employed in shielding them from the complexities of the Corporation Tax. I am sure that it will be noted with gratitude that at least in the Chief Secretary the directors have a friend in a Socialist Government.

The right hon. Gentleman spoke about the complexity of working out capital employed in a company, but as my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) said, the suggestion now made from this side of the Committee is an option and if it is too complex to work out the directors will not work it out. If it does not pay them to work it out, they will not work it out. It is another alternative. The Chief Secretary says that the increase from 5 per cent. to 7½ per cent. is not the only advantage or concession in the comparison of dividends and there are other concessions if the company has gone through a fairly lean time.

I was a little doubtful when my hon. Friend the Member for Worthing (Mr. Higgins) cast some aspersions on accounting functions and I was delighted when he resurrected himself from that position. He pointed out that the capital employed in a company is a far better guide than the nominal, the issued share capital, of a company. The Chief Secretary, who has great experience in accountancy matters, knows, as I do, that one can get a rough and ready idea of the capital employed in a business by looking at the balance sheet. If the right hon. Gentleman wishes to deny that, my hon. Friends will accept it from him if he will go part of the way by saying, "All right; take the issued share capital and the reserves". This would give a nearer figure for capital employed in a company, without bothering about revaluation of assets.

1.0 a.m.

The right hon. Gentleman has said that our proposal would be complex and people would not be able to work it out. Let us take the example of two companies starting 10 years ago, each with a capital of £1 million. They make profits over the years. They build up reserves. At 31st December, 1964, company A has accumulated reserves of £500,000. The Chief Secretary will agree that, other things being equal, its capital employed must be at least £1½ million. Company B, with precisely the same profits over the 10 years, has at 31st December, 1964, £1 million share capital and £500,000 worth of reserves, and it capitalises its reserves, at one for two. What is the position then? The 7½ per cent. will operate more advantageously for the company which capitalises its reserves instead of keeping them as reserves. The right hon. Gentleman must take this point.

At some time in the future, a Government will probably introduce legislation following the Jenkins Report. Whether shares of no par value will figure in that one does not know, but if one takes shares of no par value one is using capital employed in the business. This is a valid point, and I ask the right hon. Gentleman to reconsider it. We accept that admini- stratively it might be difficult for boards of directors to operate. The point about delay is not a runner at all. There is delay anyway in declaring a dividend until one knows the figures. Even without the Bill, there is a certain amount of delay before one declares a dividend, so the right hon. Gentleman could not have been really serious when he said that administratively there would be great difficulty and delay.

I am sure that my hon. Friends are not wedded to the words of their Amendments. With respect to their skill in drafting them, I think that Amendments Nos. 416 and 418 go far too wide. But the spirit behind them ought to be accepted by the Government. If the calculation of capital employed will be too difficult not only for boards of directors to work out but for the Inland Revenue to check, let us take the known reserves of a company, add them to the share capital, and apply the 7½ per cent. to that figure. If the right hon. Gentleman cannot accept the wording but he will, none the less, be sympathetic to its purpose, my right hon. and hon. Friends will be very pleased. We on this side of the Committee are in something of a dilemma on these Amendments. The Chair has called the Government Amendment which raises the rate from 5 to 7½ per cent., but we are procedurally precluded from dividing on the excellent proposals raised by my hon. Friends in their Amendments. We do not think that Government Amendment No. 746, which increased it from 5 to 7½ per cent., goes far enough.

On the other hand, I suppose that half a loaf is better than no loaf, and in this instance in the Committee stage I do not think that any of my right hon. and hon. Friends will want to divide against the Government Amendment. But I reiterate what I said to the Chief Secretary earlier, that there is a valid point here. Nobody wants to avoid tax or to help the tax avoider. But what one should not do is to change the legislation so that some taxpayers get an advantage and some do not. If the Chief Secretary would take the point of capital employed, not necessarily having a very detailed—even if one could get one—computation, but have a look at it and even take into account, for the purpose of computing the 7½ per cent., the share capital plus the known reserves of the company, presumably my right hon. and hon. Friends would not wish to return to this on Report.

Mr. Simon Wingfield Digby (Dorset, West)

I wonder whether the Chief Secretary could at least tell the Committee—he has told us very little about it—whether he has studied the memorandum submitted to the Chancellor by the Association of Certified and Corporate Accountants, on page 6 of which it says definitely that it is considered that employed capital would be a far better yardstick than that provided by Clause 78(6)? Is he saying that those people do not know what they are talking about?

Mr. Higgins

I hope that we shall have some reply from the Chief Secretary. I suggest that if we were to accept his Amendments, he might reasonably support ours. Be that as it may, I hope that we shall have a reply. I hope he will agree on the hypothetical example I posed to him, where one has two identical companies of this kind and the only difference is the nominal share capital involved, that the criterion will be totally different in one case from another, and if so, is it not nonsense and should not one accept the point made by my right hon. Friend that one should take account of capital employed?

Mr. Diamond

I am only too happy to reply again if it is thought necessary, if I did not make the position sufficiently clear. The reason why the Chair has selected these Amendments for consideration together is that instead of considering, as one does in the normal way, whether there has been an excessively high dividend by comparing that dividend with some kind of normality, one is at this point saying that, notwithstanding that the comparison with normality may result in an assumption or conclusion that the dividend in question was an excessively high one, if that dividend nevertheless comes within a maximum figure it will be treated as though it is not an excessively high one. If it came within the maximum figure of 5 per cent. on the share capital it would not be considered an excessively high one even though by comparison with previous practice it might be thought at first sight to be so.

But we are altering that to 7½ per cent., and what the Opposition are now saying, I understand, is that we ought to increase it above 7½ per cent.

Mr. William Clark

No.

Mr. Diamond

Yes. There is no point otherwise. What is being said is that where capital employed is greater than share capital—in the samples given capital employed might be roughly calculated as share capital plus reserves, and that is, therefore, greater than share capital—we should have the larger figure on which to base the 7½ per cent. Had we been thinking of it in those terms, my right hon. Friend would not have proposed an increase from 5 per cent to 7½ per cent. I am sorry, but my right hon. Friend is not prepared to increase the amount still further.

The hon. Member for Dorset, West (Mr. Wingfield Digby) is not too happy about this and quotes his authority. I do not want to raise the temperature of the Committee by answering the specific question he put as to whether I thought anyone knew what they were talking about in this case. I refer him to my hon. Friend who has made comments on this document in the past.

All that the hon. Gentleman is saying is that 7½ per cent. would be even higher, that we should apply it to a basic figure not of share capital but of capital employed if capital employed is the higher. We say that it would be too much. There is no need to have regard to this figure at all. If the company is paying high dividends and always has, then good luck to it. We are only concerned with comparisons, but where comparisons are inapt for one reason or another, a minimum figure is to be allowed and that is to be 7½ per cent. of share capital.

Mr. William Clark

Will the right hon. Gentleman answer the question I put? Supposing a company has capitalised its reserves and gets 7½ per cent. on share capital plus reserves. Does he think it fair that a company which did not capitalise its reserves should get only 7½ per cent. on the lower figure?

Mr. Diamond

The hon. Gentleman gave me an example of a company which had been going for 10 years and had paid dividend every year.

Mr. William Clark

I did not.

Mr. Diamond

I will not contradict the hon. Member, but I thought that he was saying that it had a long history of dividends and that, having that history, particularly for the three years in question, in the basis period it could provide normality against which one could measure dividend in the awkward year, 1965–66, and see whether that dividend was excessive. There was no problem in the example he put.

Mr. Barber

I think that we on this side of the Committee will have to attempt to return to this matter on Report stage because, here again, the right hon. Gentleman's reply has been unsatisfactory. When he replied first of all, he gave two reasons why our proposal was unacceptable. He said, first, that it was too complex and, secondly, that it would involve delay. At that stage there was no suggestion nor any reference to the fact that, in the right hon. Gentleman's mind, also was apparently the consideration that this would involve a greater concession to these companies. This was never even mentioned. Only two reasons were given—that the proposal was too complex and that it would involve delay.

It has been pointed out that what we are suggesting is that our proposal should be an alternative to the proposal of the Chancellor of the Exchequer. Thus, the argument of complexity and delay falls to the ground.

Mr. Diamond indicated dissent.

Mr. Barber

It does. Every company could adopt either the proposal of my hon. Friend the Member for Dorset, West (Mr. Wingfield Digby) or the proposal of the Chancellor.

On the right hon. Gentleman's argument about there being a greater concession, all I will say briefly is that it has been pointed out that the way in which the Chancellor's proposal works is quite arbitrary because, although we see the simplicity of using nominal capital, in fact it is not a realistic method of proceeding in the way capital employed is a realistic proceeding.

I am bound to say, therefore, that the right hon. Gentleman's two answers have not been satisfactory. Nor have they been consistent. We are not able to vote on our Amendments on this occasion. We could vote on the Chancellor's Amendment but as it is a minor concession in itself we would not wish to divide on it. We shall, therefore, have to return to the subject later.

Amendment agreed to.

1.15 a.m.

Sir Eric Fletcher

I beg to move, Amendment No. 753, in page 101, line 41, to leave out from "1965" to the end of line 43.

This is a paving Amendment to Amendment No. 754.

Amendment agreed to.

Mr. Peter Walker

I beg to move, Amendment No. 661, in page 101, line 43, at the end to insert: Provided also that where an insurance company which carries on life assurance business and carries out a valuation of its assets and liabilities for the purposes of distribution of profits as at 31st December 1963 or 1965, or any intermediate date, the profits of the last valuation period before 1st January 1966 shall at the option of the company be substituted for profits in the taxable year 1965.

The Temporary Chairman

It has been suggested that with this Amendment we should take Amendment No. 662, in page 102, line 15, at end insert: Provided that where an insurance company exercises its option under the proviso to subsection (3) above, the standard dividends shall be the average annual dividends paid in the valuation period referred to in such proviso.

Amendment No. 663, in page 102, line 21, at end insert: Provided that where a company exercises its option under the proviso to subsection (3) above the standard profits in subsection 4 (d) shall be the profits of such proportion of the valuation period preceding that referred to in the proviso to subsection (3) above as corresponds in length to the said valuation period. and Amendment No. 775, in page 103, line 19, leave out from "amount" to the end of line 27, and insert: of its profits computed according to the principles of commercial accounting provided always that in comparing one period with another a consistent basis shall be adopted".

Mr. Walker

When at a later hour than this I moved a series of Amendments on life assurance I was pleased to see the Chief Secretary in a good and genial mood towards at least some of the Amendments. I am sure that tonight I shall be supported by the hon. Member for Westhoughton (Mr. J. T. Price), who is well versed on the subject of life assurance and who made a valuable contribution on earlier Clauses. I am sure that he will quickly realise the purpose of these Amendments and especially No. 661 and No. 662.

I do not think that the Chancellor of the Exchequer would expect the life assurance industry to distribute dividends in such a way as for the Clause to need to be applied to it. Life assurance offices are responsible and are concerned with the long-term interests of the country and policy holders. They operate their finances in a way somewhat different from that of conventional companies in that they do not decide the profits of the company necessarily on a year-by-year basis, but tend to have three or five-year valuations of their various funds, deciding on that valuation what distribution to make to policy holders as profits on their policies and what is available in terms of surplus for distribution to shareholders. Such a valuation may be taken in 1964–65 and as a result of that valuation the dividends for the company would be fixed for the ensuing three or five years in accordance with the distribution for shareholders on the last valuation.

The purpose of the Amendments is to give life offices an option to use a formula for the purposes of the Clause which would be based on the three or five-year valuations which they make and the distributions which they decide as a result thereof. Amendment No. 661 refers to the valuation as such and Amendment No. 662 to the method of the dividends. I should have thought that these were reasonable Amendments which the Government could accept as being appropriate to this important industry.

Sir Eric Fletcher

We appreciate that there are special conditions affecting insurance offices, particularly life assurance offices, and therefore special considerations as to the basis of taxation which should be applicable to them. It is true that most insurance companies engaged in life assurance business adopt the principle of having valuations every three or five years and that on that basis they calculate what proportion of the profits is applicable to the policy holders and what proportion to the shareholders.

We are sympathetic to making an Amendment to the Bill to give insurance companies certain options. I cannot say at this stage that we are disposed to accept the Amendments, but we feel that some provision can be introduced to deal with this matter. We want to consider whether in making concessions for insurance companies we would open the door to other companies in the general field which might claim that they had fixed their dividends for a period of years instead of on an annual basis. But, subject to such qualifying considerations, we will give sympathetic consideration to the matter between now and Report.

Mr. Peter Walker

In view of the assurance of the Minister without Portfolio that he will consider the matter—and we regard the concession as being confined to life offices and have obviously attempted to draft the Amendment accordingly—I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Diamond

I beg to move, Amendment No. 754, in page 101, line 43, at the end to insert: (3A) In the case of a company not carrying on business earlier than December, 1963, the standard amount shall be whichever is the higher of—

1. (a) seven and a half per cent. of the company's share capital in the financial year 1965; and
2. (b) one-half the amount of the company's profits in the financial year 1965.

(3B) Where in the year 1965–66 a company pays a dividend for a period ending in the financial year 1964, being a period of account of not more than twelve months, then if the company so requires subsection (3) above, or in the case of a company not carrying on business earlier than December, 1963, subsection (3A), shall have effect in relation to the company with the company's pofits in that period of account substituted for those in the financial year 1965.

The Temporary Chairman

I suggest that we should discuss at the same time Amendment No. 417, in page 101, line 25, leave out from beginning to first "the" in line 26.

Mr. Diamond

Would it be convenient to discuss also Amendment No. 785, in page 104, line 4, at end add: (11) This section shall not apply to any dividends paid before the first day of April, 1966, in respect of which the company paying such dividends shows to the satisfaction of the Commissioners that the main purpose, or one of the main purposes of paying such dividends was not the avoidance of the payment of any income tax in respect of such dividends which would, apart from this subsection, have otherwise been payable by the company. (12) A company aggrieved by a decision of the Commissioners under the last preceding subsection may appeal to the Special Commissioners and all the provisions of the enactments relating to appeals against assessments to the corporation tax shall have effect with respect to any appeal to the Special Commissioners under this subsection.

The Temporary Chairman

If that is for the convenience of the Committee.

Mr. Diamond

The second and main part of Amendment No. 754 introduces a further option to the company. It provides that where in this relevant year 1965–66 a company pays a dividend for a period of account of not more than 12 months ending in the financial year 1964, it can choose to take the profits of that period of account as a measuring rod to see whether by reference to them an increased dividend in 1965–66 over the standard dividends can be justified. This is in lieu of the profits of the financial year 1965 or the profits of a year ending in the financial year 1965 for which the Clause already provides. I think that this is a reasonable provision. Representations have been made that dividends are frequently declared out of accounts for a period of some considerable time prior to that date of declaration of the dividend. My right hon. Friend feels that it would be right to meet this point and provide this addition option.

We are considering also Amendment No. 417 on which I have no doubt one or other of the hon. Members who has put his name to it would be anxious to speak, and Amendment No. 785 to which I should be only too glad to listen to the arguments that any right hon. or hon. Member wishes to put. But I think it would be convenient if I said to the Committee that the Government have considered this matter very carefully and are very sympathetically disposed towards the final Amendment.

We are dealing with the problem of good faith, whether a dividend declared in a year which has obvious advantages is declared in this particular year as opposed to a later year and whether a dividend declared in this particular awkward year 1965–66 is a dividend which is reasonable and is a dividend which the company has paid in good faith.

The normal method of arriving at the good faith of the motive is to test it by reference to actions in the past and to see how actions in the period under review compare with past actions and to draw reasonable conclusions from that. That is the basis on which the Clause is drawn. What is suggested under the Amendment in the name of the right hon. Gentleman the Member for Bexley (Mr. Heath) and his right hon. and hon. Friends is that there should be incorporated into this legislation the same kind of test as to motive which has already been incorporated into tax legislation previously, broadly the Profits Tax legislation which hits at avoidance devices.

Broadly equivalent provisions are in Section 28 of the Finance Act, 1960, dealing with the cancellation of tax advantages from certain transactions in securities. In these cases the same point is the question of motive and good faith. It is a difficult concept to try to define and to say what is in the mind of a particular person or board of directors when reaching certain conclusions.

One would not wish to have recourse to this kind of provision in more than that strictly minimum number of cases. But it has to be remembered that what we are dealing with is a particular year only, not a continuing situation—merely what the motive was in declaring a dividend for this particular year; and the Government feel that it is reasonable to have regard to this somewhat difficult kind of provision for that year and therefore wish to bring in a Clause similar to but not in precisely the same words as Amendment No. 785. A number of hon. and right hon. Gentlemen are concerned with possible hard cases, and a provision of the kind which we are discussing, and for which we are indebted to the Opposition, would provide a method of dealing with it.

I therefore hope that this will give an indication to the Committee of the attitude which my right hon. Friend brings to bear on these difficult matters.

Mr. Edward M. Taylor

May I speak briefly in support of Amendment No. 417? It refers to special circumstances which could arise with particular companies, causing special hardship. I appreciate that such cases could well be covered by Amendment No. 785, which the Chief Secretary is considering favourably, but Amendment No. 417 would remove one more general cause of difficulty. Subsection (3) could help a great deal in cases of difficulty, but all the help which it could give would be removed for a company which has a financial loss in the year under consideration. Some of the companies so affected could well receive no benefit under subsection (3,a).

I am thinking particularly of a company which has been paying steady dividends over the years and then pays a declining dividend because of reduced profitability. It might be paying about 8 per cent. on the actual share capital. This bears no relationship to the actual capital employed by the company because, owing to the financial circumstances at the time it was looking for capital, it may not have raised fresh capital in the usual way. It may be self-financing or it may have obtained money on a fixed interest basis. In such circumstances the company may have no benefit from the provisions of paragraph (3,a).

Subsection (3,b) would help in the majority of such cases to make a reasonable concession but there would be no concession for a company which made a financial loss during the year. These circumstances could arise in a business in which the profits fluctuated a great deal from year to year, and to remove one further anomaly it would help if Amendment No. 417 were accepted. It does not seek to provide a loophole, and I cannot see that any great difficulty would arise from accepting it. It is designed for the special case of a company which tries to stabilise its dividends over the years and which may be paying dividend in excess of 7½ per cent. on the ordinary share capital.

Mr. Wingfield Digby

I hope that the Government will give some attention to Amendment No. 417. In computing the standard amount of dividend, the Amendment provides for the omission of the words up to the amount of the company's profits in the financial year 1965. In earlier stages of the Committee we have stressed some features of the ship- ping industry and the fluctuation to which it has been subjected. We have also stressed its low profitability and the high capital investment there is in the merchant fleet. We have laid stress on the need for the shipping industry to maintain its dividend in order to be in a position to attract new capital for the replacement of the fleet. There was some reference to this point in an article in the Sunday Times last Sunday which said: The market, I am glad to see, is not getting particularly enchanted about the current improvement in shipping freight rates. It went on: One understands, of course, the attraction of shipping shares … there is always the temptation to think at any rate share prices cannot go lower. It continued: … no shipping share is a good investment for the man who might want his money out in a hurry. 1.30 a.m.

It therefore follows from these fluctuations that it is important for shipping Companies to maintain high dividends if they can, in bad years as well as in good years. We certainly hope that there are going to be more good years to come. It seems perfectly reasonable that this provision should be made and that they should not lose the advantage of their dividend because all of it is not covered by profits in the current year.

I hope that the Government will look at this point, which is a serious and valid one applying to industries other than the shipping industry. It would apply, for instance, to mining industries where the particular product's world price varies from year to year.

Mr. Lubbock

I should like to follow what the hon. Gentleman the Member for Dorset, West (Mr. Wingfield Digby) has said about the fact that there are two alternative methods. I still think that there is a case here for having another look at the matter. There could be a situation where in the three base years a company may profit to the extent of, say, £1 million, but in either the financial year 1965 or the company's 12 months' accounting period ending in the financial year 1964, which could be used as an alternative under the Chancellor's Amendment, it might have made a profit of only half a million pounds. The directors might quite justifiably wish to distribute the same amount in dividend as they had done in the three years, in the full knowledge that they were to return to full profitability.

This situation will already be known at the time the dividend is declared and what we are saying is that if, in neither of these two alternatives it can be shown that the profits were as much as in the three best years, this will place a limitation on the amount which could be distributed.

I think that the Amendment has been drafted very clumsily, because if subsection (3) is read from the beginning, the words after up to the amount of the company's profits in the financial year 1965 which it is proposed to be left out, do not follow at all easily on the words which come before, and one has to read it several times before one can understand what it means. Although I have not put down an Amendment on this point, I should like to suggest to the Chief Secretary that if one deleted those words, as is proposed in Amendment No. 417, and then one put in at the end of subsection (3): and provided that in no case shall the standard amount exceed the company's profit in the financial year 1965 that is not altering the sense of it at all but merely putting the words at the end of the Clause instead of in the middle and making it much easier to read and understand.

Mr. John Harvey

In view of the difficulties of trying to follow these highly technical matters at this hour of the morning, I hope that I am right in assuming that when the Chief Secretary said that he looked with favour upon Amendment No. 785, this could be very helpful to a number of companies which find themselves in difficulties.

I have in mind, for instance, a company which increased its dividend in 1964 and which, for obvious reasons, wishes to maintain that increase in 1965 but could be heavily penalised for doing so unless the Government take action of the kind which we suggest. It is of the utmost importance that a device should be found whereby a company could select for its standard the highest amount of dividend paid in any one of the standard years. Would I be right, at this unearthly hour, in assuming that this is the sort of provision that the Chief Secretary was thinking about when he expressed sympathy for the aims of Amendment No. 785?

Mr. Barber

The Chief Secretary said that he was prepared to listen to arguments in support of Amendment No. 785. If one is to have any regard whatsoever to equity in matters of taxation, the Chief Secretary will agree that the Clause is particularly important. Incidentally, the fact that we are having to spend a fair amount of time on the Clause is no fault of the Opposition, because we are dealing with a Clause which the Chancellor either has sought or is seeking to amend in 15 places, as well as adding a new Schedule to enable us to understand its workings.

The purpose of the Clause is obviously to prevent the avoidance of tax. Certainly, so far as it is necessary to safeguard the Revenue, none of my hon. Friends would quarrel with the right hon. Gentleman's proposals. Once again, however, it has been left to the Opposition to explain the practical consequences of the Chancellor's proposals, and in this case they can be put simply.

First, any company which is declining and is, therefore, suffering decreasing profits and smaller dividends will not in general be touched by the Clause. Secondly, however, any company which is forging ahead, expanding its turnover, increasing its profits and providing a commensurate increase in dividends is put in the dock and may well find itself liable for a double dose of taxation under the Clause. I know that there is an element of oversimplification in this, but if one had to sum up in a phrase what the Clause does, in many cases it can be said that it will impose a penalty on success.

Take the simple case of a company on a rising trend of profits over the last three years and assume that the trend continues into this year. In the normal case, where the company is pursuing a reasonable and prudent dividend policy, it will suffer a penalty in respect of its dividend which is paid during the present year, 1965–66.

The trouble arises because the Chancellor of the Exchequer, in an attempt to counter deliberate tax avoidance, which is a perfectly reasonable objective, has so concocted the provisions that in the nature of things he is also bound to penalise innumerable companies which, first, are making no attempt to avoid tax and, secondly, are acting in accordance with sound commercial and financial criteria.

The Chief Secretary has said that he will listen to the arguments. I should like to give him a simple example which was sent to me by a highly respectable and well-known London solicitor. I will not read the whole letter but just one paragraph of it, which states: I have a company"— referring to a client— which was developing and paid no dividends for several years, and then made good profits and paid a dividend in respect of the year 1963. It has made reasonable profits in 1964 and now wishes to pay a dividend in respect of those profits. However, there is no provision enabling repetition of a 1963 dividend to be paid in respect of 1964 without penalty. On the contrary, any dividend in this case in excess of one-third of the dividend paid in respect of 1963 is, in the first instance, treated as involving an excess, and it is not until the results for the financial year 1965–66 are available that it will be known whether in fact a dividend paid now of more than one-third of the last dividend would constitute an excess or not. All this results from the absurd scheme of leaving out of account the calendar year 1964 for purposes of calculation, whereas it is clear that 1964 should in most cases be the most important year determining the average and should indeed in many, perhaps most, cases itself be the yardstick without reference to any previous years. I do not go the whole way with the writer of that letter in the stress he lays on 1964, because I see the difficulties with which the Government are faced, but the sort of case which this solicitor has in mind is a perfectly reasonable one which should be covered by the legislation; in other words, which should be provided for in such a way that the penalty of additional taxation does not come into the picture. After all, there is nothing that that company is doing which is wrong. One is, therefore, bound to ask why it should risk being penalised for acting in what any normal person would agree to be a perfectly sensible way.

I hope that we will be assured by the right hon. Gentleman—and I will not trouble the Committee with other examples, although I could give others—that on Report he will introduce a new Clause or Amendment on the lines we suggest in Amendment No. 785. He should by now have been convinced that this is the right way of dealing with the matter and I trust that he will give a categorical assurance that he will amend the Clause.

The sort of cases with which I am concerned—and I will not weary the Committee by giving other examples—are cases where there is no question of unreasonable dividends or tax avoidance. The details of Amendment No. 785 are self-explanatory and I trust that the Chief Secretary agrees that they are fair and reasonable. After all, relief would be given only where the purpose was not to avoid tax and, as can be seen, the onus of establishing the position would be squarely on the shoulders of the company. As to any difficulty in regard to the commissioners not being satisfied or the case going to appeal, I do not believe that it is beyond the Chief Secretary and his advisers to redraft the Amendment in such a way as to achieve substantially our intention. I hope, therefore, that he will go further than he went before and say that on Report he will introduce the necessary Amendment.

Mr. Diamond

I think that I can go further than that. If I have not misunderstood the case put by the right hon. Member for Altrincham and Sale (Mr. Barber)—and one cannot be absolutely sure that after a short reference to a case one is dealing precisely with it—then Amendment No. 754 would meet that very point. The case appeared to mean that the firm in question thought that it had been left out for the year 1964. If the right hon. Gentleman wishes to meet the difficulty stated in the solicitor's letter, he can do so when you put the Question, Dr. King, for as I understand the position, Amendment No. 754 would meet the position precisely.

As to the earlier remarks, the situation is simply that if one has an increasing level of profits and increasing dividends, then having ascertained the average in the basic three years, one adjusts that by reference to the increased profits made in the year for which one says that, having made an increased profit, one wants to declare an increased dividend. There is no question of penalising the progressive company in any sense at all.

1.45 a.m.

There may be hard cases—cases of the kind which neither he nor I have thought about or counted up in our imagination—where there are difficult circumstances, and hard cases where the sensible way to meet the position is to provide, not a test of average, not a test of achievement of the past and the dividend pattern of the past, but the test of whether or not the dividend declared for the difficult year was a dividend declared in good faith. That will help to solve most of the problems and real difficulties we want to meet, and the Committee is at one in wanting not to encourage, but to prevent tax avoidance. I therefore think that we are meeting that point.

As regard the point which the hon. Gentleman raised, as far as I recollect it now, I do not know whether he appreciated that the average dividends paid in the three basic years, again as a result of Amendments introduced, provide an irreducible minimum standard, so that whatever happens in the year under consideration one does not have to get below that irreducible minimum standard in order to declare a dividend. That being so, I do not think that the points raised by the hon. Gentleman give any real cause for anxiety.

Therefore, having regard to the Amendments that my right hon. Friend has introduced, and is introducing, and to the very clear indication I have given in regard to Amendment No. 785, I hope that all real anxiety has been met, short of encouraging tax avoidance.

Mr. Barber

I hesitate to pursue the matter further, but I understand that the Amendment which the right hon. Gentleman says would have covered the case to which I referred is Amendment No. 754, which deals with the case of the company not carrying on business earlier than December, 1963. If that be the case, it would not have covered the case I mentioned. But I quite agree that it is fruitless to go into individual cases. If the right hon. Gentleman intends to introduce an Amendment on Report to deal with this matter on the lines we have suggested, I would not wish to pursue the matter any further.

Mr. Lubbock

I must be frightfully dense about all this, but as far as I can see from the Chancellor's Amendment all he has done is to give the company the option of inserting another criterion in subsection (3,b) so that the absolute restriction on the amount of distribution mentioned therein is not limited to the amount of the company's profits in the financial year to 1965, but that at the company's option it can be the amount of the company's profits in its accounting period ending 1964.

But the right hon. Gentleman said that all this did not override the dividends the company made in its past period as a standard, and that, suppose the profits in either of these two accounting periods—either the financial year 1965 or the actual accounting year in 1964—fell below the average dividend, and therefore the base years, the company would still be able to use the three base years as a criterion. He said that in some way Amendment No. 754 achieved that. I am sorry, but I cannot see that, and I should be grateful if the right hon. Gentleman would show how these words override subsection (3, b).

Mr. Diamond

I was referring to the Chancellor's Amendments to lines 19 and 21.

Amendment agreed to.

Mr. Stratton Mills

I beg to move Amendment No. 776, in page 101, line 43, at the end to insert: (4) Where

1. (a) in connection with a scheme for the reconstruction of any company or companies or the amalgamation of any companies a company (in this section referred to as "a merger company") has been incorporated in the United Kingdom or has increased its capital with a view to the acquisition either of the undertaking or of not less than 90 per cent. of the issued share capital of one or more existing companies (in this section referred to as "constituent companies") and the consideration for the acquisition has been the issue of shares in the merger company to the constituent company or companies or to the holders of shares in that company or companies; and
2. (b) the merger company commenced to carry on business or acquired the undertaking of or shares in any constituent company not earlier than 31st December 1963,

the standard amount in respect of the merger company shall be not less than the sum of the standard amounts of the constituent companies computed in accordance with the provisions of subsection (3) hereof. This is a small, but nevertheless an important, loophole. During the course of an amalgamation a new holding company may come into existence which has acquired the shares or undertakings of a number of trading companies and the provisions of the Clause may bear hardly in the special circumstances shortly after the formation. There may be no standard dividends available for comparison purposes and standard profits will be similarly unavailable as a standard of measurement. The remedy which my hon. Friends and I propose would give the holding company a standard equal to that which would have been the combined standard of the companies it has taken over. In the latter part of the Amendment it will be seen that we have done this by suggesting that: the standard amount in respect of the merger company shall be not less than the sum of the standard amounts of the constituent companies computed in accordance with the provisions of subsection (3) hereof.

Mr. Higgins

I wish to inquire about consistency. I understand that we are concerned with the standard amount to be taken into account when a merger takes place. In discussion of this earlier we were told that the basis on which standard amount is to be calculated is the dividend percentage in relation to share capital. We were further told that we could not go on a book basis. Would I be wrong in thinking that on a Monopolies Commission case we would take a case on a basis which we have been told cannot be used? Could the Government Front Bench tell us whether there is a degree of consistency in their approach to this problem?

Sir Eric Fletcher

Subject to your Ruling, Dr. King, I think I should be out of order in dealing with various Amendments to the Monopolies and Mergers Bill which we shall be considering on Report on Thursday.

I am prepared to accept the validity of the argument of the hon. Member for Belfast, North (Mr. Stratton Mills). I think he has made a valiant attempt at draftsmanship to meet the point he has in mind, but there are technical defects in the Amendment. I need not go into them for the reason that my right hon. Friend has indicated that the Government are disposed to accept in principle the object of Amendment No. 785. That Amendment indicates that the instances where avoidance of liability to account for Income Tax is not the purpose or main purpose of admission of a dividend ought not to be caught by the Clause.

If, as I hope, on Report a Government Amendment in the terms of Amendment No. 785 appears, it will effectively cover all the cases of the kind which the hon. Member has in mind. Clearly, mergers of that kind—no doubt there are certain ones in contemplation—may be completed in the near future. In the case of those mergers, it will be apparent that they are not designed for tax avoidance purposes. Therefore, I think they will be effectively covered by the Amendment we have in mind.

Mr. William Clark

We are grateful to the Minister without Portfolio for explaining the point and for saying that Amendment No. 785 will cover this Amendment. The Minister went on to say that it will cover all these cases. Has he any other cases in mind? For example, is he prepared to say now that Amendment No. 785 as drafted by the Government on Report will cover the point of a public company which has just gone public and which said in its prospectus that it would pay 7 per cent. or 8 per cent.? This is a valid point which should be covered by Amendment No. 785. Investment trusts, which pay 90 per cent. of their income in dividends, could also be brought in. Obviously, if their dividends from their investments rise from the standard period to this year or next year, the main object of paying an increased dividend is not for the avoidance of Income Tax.

I should like the Minister without Portfolio's assurance on these points. A company goes public and its prospectus, issued long before the Finance Bill was thought of, says that it will pay a certain dividend. A company might have declared a dividend long before the Budget but payable three months later. The reconstituted Amendment No. 785 should cover the case of a company which is committed to paying a dividend where the declaration of the future dividend was made before the Budget statement and certainly before the Finance Bill was published.

Sir Eric Fletcher

We are anxious to make progress. I think that I can simplify the discussions on the Clause if I make it perfectly clear, if indeed my right hon. Friend has not already done so, that the Clause is designed to prevent forestalling as a method of tax avoidance. A number of Amendments have been tabled, some by the Opposition, some by my right hon. Friend, to meet special circumstances. We have undertaken to look sympathetically at various cases which have been raised, both by interested parties and by hon. Members in the debate. We have said that we are attracted to the comprehensive nature of Amendment No. 785, because, although we may want to vary its terms, its spirit is to indicate that the Clause does not apply where dividends in excess of the standard dividends have been paid in such a way that the main purpose, or one of the main purposes, was not the avoidance of Income Tax. We think that an Amendment in those terms on Report will meet the legitimate points which have been raised about insurance companies, about mergers, about unit trusts—

2.0 a.m.

Mr. William Clark

And investment trusts.

Sir Eric Fletcher

—and investment trusts. Without committing myself absolutely, I hope the Committee will leave it to us to frame an Amendment on the lines of Amendment No. 785 which I confidently hope will dispose of the various points which have been raised, but if it does not dispose of them it will be open to hon. Members to raise the matter again on Report.

Sir Hugh Lucas-Tooth (Hendon, South)

There is a point which I thought might have been raised on the Question "That the Clause stand part of the Bill", but, in view of what the Minister without Portfolio has said, perhaps it should be raised now.

Under Section 245 of the Income Tax Act, 1952, the commissioners may deem the income of certain companies to be that of their members where it is considered that sufficient dividends have been declared. I understand that it is the practice for those representing the companies to negotiate with the special commissioners additional dividends for back years on the footing that the shareholders would accept liability in respect of those back years, notwithstanding that the additional dividends would be declared as soon as the negotiations have been completed. I think this is the type of case which the Minister has in mind. Obviously hardship could arise unless these cases were specially dealt with, and I ask the Minister to have regard to this type of case when considering the generality of cases to which he referred.

Mr. Stratton Mills

I am obliged to the Minister for a very helpful attitude in response to this Amendment, and I accordingly beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendments made: In page 102, line 14, leave out "five" and insert "seven and a half".

In line 20, leave out "ten" and insert "fifteen".

In line 33, leave out from first "period" to end of line 34.—[Sir Eric Fletcher.]

Mr. Diamond

I beg to move Amendment No. 756, in page 103, line 27, at the end to insert: nor to any investment allowances, initial allowances or balancing charges, to any scientific research allowance in respect of expenditure incurred after 5th November, 1962, or to so much of any annual allowance made at a rate determined under section 38 or 39 of the Finance Act, 1963 (free depreciation in development districts) as exceeds an allowance at a yearly rate of fifteen per cent. of the relevant amount of expenditure".

The Chairman

With this Amendment we can discuss Amendment No. 787, in line 27, at end insert: Provided that the profits of a company in a development district shall be taken to be its profit after normal capital allowance, excluding special extra depreciation given to companies in development districts.

Mr. Diamond

The purpose of the Amendment is to see that both for comparative purposes and, indeed, for absolute purposes, because both questions arise, the profits are calculated in a way so as to approach the calculation of profits on a commercial basis but still being sufficiently identified with the method of calculating profits for Profits Tax purposes as not to permit of any vagueness or dubiety.

At present the Clause moves on the basis that profits are calculated as for Profits Tax purposes with certain minor adjustments—franked investment income, directors' remuneration and so on, but, as is well known, these take into account certain non-recurring items which would invalid any proper comparison, such as exceptional capital allowances of a sort which a company would not take into account in computing its commercial profits. The comparison necessary for the purposes of this Clause ought not to be subject to distortion by reference to the incidence of special allowances in this way.

Mr. John Harvey

I hope that the Amendment will be welcomed, but I feel that it could go further. Would it not be possible for the deduction for all annual allowances to be restricted to an annual 15 per cent. of the relevant expenditure and not just 15 per cent. of the allowance for free depreciation in development districts as at present? I make this suggestion because annual allowances over the years have tended to increase. In particular, there was a statutory increase with effect from 5th November, 1962. There is a precedent for maintaining a statutory reduction in the Excess Profits levy legislation in Paragraph 3(1) of the Ninth Schedule of the Finance Act, 1952. Would the Minister give this matter further consideration between now and Report and see whether what is certainly welcome could be made even more acceptable?

Mr. George Younger (Ayr)

We are discussing also Amendment No. 787, which stands in the names of my hon. Friends the Member for Fife, East (Sir J. Gilmour) and myself. While one cannot help welcoming the Amendment which the Chief Secretary has moved as a step in the right direction, after his remarkably woolly explanation of what it was all about I should like to make a strong protest of disapproval from the development districts that the situation ever got into this condition.

I do not know whether the right hon. Gentleman fully realises how damaging to the development districts this Clause was before he produced the Amendment. It is not just a minor matter of working out how one computes profit before tax. The Clause could have been and is until the Amendment is passed extremely damaging to companies in development districts. I take as a brief and simple example of what the effect of the Clause as it stands would be a company whose standard of dividend as detailed in the Bill is £200,000, whose standard profit for Profits Tax is £500,000, and whose 1965 profit is £700,000.

As the Bill is drafted, there falls to be deducted from that normal depreciation and initial allowance of £50,000 and the special extra depreciation which is applicable to development districts only of £150,000, making a total of £200,000 to be deducted. Therefore, the profit of £700,000 has £200,000 taken off it, leaving a 1965 profit for Profits Tax purposes of £500,000. As the original standard profit was also £500,000, no increase in dividend would be permissible without payment of Income Tax on the increase. But—and this is the point—if the free depreciation for the development districts was not included, the 1965 profit for Profits Tax purposes would be £650,000, that is, £700,000 less only £50,000. Thus, the Bill as drafted is positively disadvantageous to a firm in a development district, which should be receiving benefits rather than be being cut back.

The Amendment removes all that disadvantage except for 15 per cent., but I hope that the right hon. Gentleman will not think me churlish if I still maintain that people in the development districts are fully entitled to be greatly dissatisfied at the way these allowances are being devalued, if only to a lesser degree. They have already had plenty of devaluation of the benefits built up in recent years. The special allowances for development districts introduced in the 1963 Finance Act were welcome on both sides of the House, but we are now beginning to wonder where the sympathies of the present Government really lie. For years, we heard from right hon. and hon. Gentlemen opposite how everything that the Conservative Government did for the development districts was a drop in the ocean and if only they could get power everything would be marvellous. I may be unfair to all hon. and right hon. Members opposite because I have seen only one end of things in recent years, but all I can say is that this is how we see the situation in Scotland. It is noteworthy that, again, when we are discussing the affairs of the development districts, there is no Scottish Member present opposite. Where is the interest shown before the election? Where are the fine policies and new ideas we were told about? All we have is a devaluation of ideas and policies put into effect by the last Government.

I hope that the right hon. Gentleman will excuse me if I get slightly heated about this, but the attitude of the Government and its supporters looks rather like a confidence trick. For years they led everyone to expect dramatic new ideas and improvements to create further development. At Question Time last week, the Secretary of State for Scotland actually tried to claim credit for improvements which were due to measures introduced by the previous Government which his own Government are now devaluing. The Chief Secretary must think about the development districts again and remove from them even this last disadvantage of the 15 per cent. If he does that, we shall all be very broadminded about it and feel that we have achieved something at least, putting firms in development districts back where they started before the last election.

2.15 a.m.

Mr. Hector Monro (Dumfries)

I support my hon. Friend the Member for Ayr (Mr. Younger). I represent a more remote constituency, and there and in Galloway we need an extra special incentive to bring firms to the development districts. I can say from the negotiations that I have had with various firms which might be coming to the development district in my constituency that one of the first questions they ask is whether they will be eligible for the free depreciation rates and what other incentives there will be. These incentives are vital. Firms have been brought to the development districts because of the advantageous tax concessions.

But tonight we hear of a devaluation of these concessions. I cannot emphasise too strongly how unfortunate it is that at this time when we are making our big drive continuing the drive of the late Government to bring firms to Scotland, we are having a pretty big stumbling block put in our path. The firms which are coming to the remoter development districts need these incentives. It might be easier for them to go to central Scotland which has other advantages in the way of cheaper fuel and so on. For the remoter development districts it is vital to have every possible concession. I warmly support my hon. Friend the Member for Ayr for putting forward the Amendment in the way he has.

Mr. J. Bruce-Gardyne (South Angus)

I also support the Amendment moved by my hon. Friend the Member for Ayr (Mr. Younger). This is a matter of considerable importance, particularly for development districts in Scotland. As usual, we find that there are no representatives of the Scottish Office on the Government Front Bench, and so far as I can see there are no Scottish Labour Members present.

Mr. James Hamilton (Bothwell)

The hon. Member should keep his eyes open.

Mr. Bruce-Gardyne

That is an attitude on the part of the Government to which we are getting all too used. It seems deplorable considering that we are discussing an Amendment of such importance to Scotland.

I want to draw the attention of the Chief Secretary to an article by Lord Polwarth in the Investors Chronicle last week in which he said: Scotland is moving into top gear and is beginning to realise the potential of which many have long known it to be capable. He went on: The most immediately effective measure taken in recent years was undoubtedly the introduction in early 1963 of standard grants for plant and machinery and buildings in development districts, coupled with freedom to allow depreciation of plant and machinery against taxation in these districts at any rate chosen by the manufacturer himself. As a development organisation the Scottish Council knows from its own direct experience just how much these financial measures have stimulated the rate at which new industry has flowed into Scotland from other parts of Britain and from overseas, and encouraged expansion by established Scottish firms. During the past two years the recovery of industrial activity throughout Britain has also, of course, had a strong influence. This is the point. These tax incentives introduced by my right hon. Friend the Member for Barnet (Mr. Maudling) marked a watershed in our efforts to attract additional industry and deal with the problems of the black spots of underdevelopment and higher levels of unemployment in the development districts. For the first time, we established the principle of differential taxation. Those who believe in the need for extension of this type of differential taxation must regard the decision of the Government to devalue these concessions in a most deplorable light. The meagre concession which the Chancellor has offered us is quite inadequate to our purpose. I hope that the Chief Secretary will look at this matter again and accept the suggestion by my hon. Friend the Member for Ayr and put this on a sensible basis so that we can continue to develop on the grounds laid so fruitfully by my right hon. Friend two years ago.

Sir D. Glover

I apologise for joining in what appears to be a Scottish debate, but Amendment No. 787 does not just apply to Scotland. I am appalled by the fact that not one hon. Member opposite representing the North-East Coast, or the Liverpool area—which is heavily represented on the benches opposite—has contributed to the debate, because it is deplorable that this Clause ever got into the Bill in its present form.

The Chancellor's Amendment goes some way to putting right the absolute enormity of what the Government did. Whether they did it without realising what they were doing, I do not know. It partly removes the disability that the Clause would have brought to development districts, but Amendment No. 787 would have put the development districts back into the position they occupied before this Bill.

One cannot but think of the nauseating hypocrisy of speeches made from this side of the Committee when right hon. and hon. Members opposite were sitting here. Month after month, they attacked what they called the inadequacies of our proposals for development districts. Then they cynically decided to bring in a Clause which would have devastated the growth of the new industries going to those districts. Only at the last minute, as a result of pressure from this side of the Committee and from outside, have the Government brought in an Amend- ment. But even that still leaves the development districts 15 per cent. worse off than they were.

I hope that, even at this late stage, the Chancellor will accept Amendment No. 787. If he does not, he will find that this 15 per cent. will be a severe disincentive to the growth of business in the development districts, although the Labour Party was committed to the hilt before the election to stimulating growth there. If the Chancellor does not accept Amendment No. 787, the people in the development districts will draw their own conclusions as to whether the Government really mean what they say about the need for expansion in those districts.

Mr. Diamond

Perhaps it will be convenient to reply now and to deal with the problem raised by Amendment No. 787 and with the wider question which hon. Members opposite from Scotland raised by referring to the devaluation of allowances. I hope that hon. Members who have spoken as to the generality of the topic without being tied too closely to the wording of Amendment No. 787 will not mind if I refer them to it a little more closely.

The Amendment seeks to provide that the profits of a company in a development district shall be taken to be its profit after normal capital allowances. The Government Amendment really deals with that problem completely, however, because the figure of 15 per cent. which has been adopted is the minimum normal rate of annual allowance for plant and machinery under the present Income Tax law. What hon. Members opposite are saying is that there are cases where certain plant and machinery qualify for higher allowances than 15 per cent. They therefore want a higher figure.

If they press me, of course I shall be glad to listen to any argument they make, but if they care to work out the conclusions of the Amendments, they will see that my right hon. Friend's Amendment suits their purpose better than their own. With my right hon. Friend's Amendment restricting the figure to 15 per cent., the calculation results in a higher figure of profit, which forms the basis of the percentage for this purpose. The hon. Members from Scotland have demonstrated their interest in their constituencies and their anxiety to make speeches at this time of the morning, and their inability to comprehend their Amendment. The hon. Member for Ayr (Mr. Younger) said that he hoped that I would not mind his being heated on this topic. I do not mind his being heated, but I would prefer him to be right.

I have considered the matter very carefully. The only result of altering the wording of my right hon. Friend's Amendment to correspond with the wording of the Amendment of hon. Members opposite is to reduce the figure of profit and therefore the figure of dividend which they want to be increased. If they repeat the argument on Report, against the interest of the development districts, then my right hon. Friend will have to give it very careful thought, but I doubt whether they will pursue that line.

The other matter is the complete misunderstanding, which they have repeated, about devaluation of the allowances for the development districts. In case the hon. Member for Ayr and his hon. Friends were not present when we discussed all this, may I say in one sentence that under the present law for Income Tax purposes there is a certain advantage to the business man who takes his business to, and invests in plant in, a development district and that that advantage is increased under Corporation Tax. I repeat "increased".

Mr. William Clark

I am sure that the Chief Secretary will accept that my hon. Friend the Member for Walthamstow, East (Mr. John Harvey) and my hon. Friend the Member for Ormskirk (Sir D. Glover) spoke to the Government Amendment and that that to which my hon. Friend the Member for Ayr (Mr. Younger) spoke has been called with it, but is not to be voted on. What the Chief Secretary has omitted to say and what my hon. Friends wanted to know was why the 15 per cent. had been left in the Government's Amendment. My hon. Friends will no doubt accept that the wording of their Amendment would not provide what they had in mind. Their idea was that free depreciation should be allowed, and we should like to know why it was thought right to leave the figure of 15 per cent. in the Government Amendment.

The Chancellor of the Exchequer told us at the beginning of the afternoon that there were many concessions and then he withdrew the word "concessions" and said that he was proposing to do several things which would cost money. How much will the provisions in Amendment No. 756 cost the Exchequer? Could the Chief Secretary also say how much would be the extra cost if the 15 per cent. were deleted and we had a free depreciation allowance instead? He will appreciate that what my hon. Friends want is free depreciation and, although the right hon. Gentleman is no doubt right in his view of the wording of the Amendment of my hon. Friends, we are concerned with the spirit behind it. In any case, he has still left unanswered the questions of my hon. Friends the Members for Walthamstow, East and Ormskirk. Could he, when replying, give the two costs—the cost of his own Amendment, and the cost if the 15 per cent. were deleted?

2.30 a.m.

Mr. Edward M. Taylor

I should like to comment briefly on the reply which the Chief Secretary gave to the Amendment advanced so ably by my three hon. Friends who represent Scottish constituencies. They made three principal points and I would suggest that none of these has been answered. One of the principal points which my hon. Friend the Member for Ayr (Mr. Younger) argued was that investment allowances had been devalued. We heard the same argument as on previous occasions from the Chief Secretary that, because of the change which has been made in the investment allowances being reduced, the element of preference, if we can call it this, in the development districts has been increased.

We can accept that in one sense this is true. But he must accept that when we reduce investment allowances for the marginal business, which is thinking not of investing in one place or another but whether it will invest at all, the reduction of investment allowances does have an adverse effect upon development areas. If the Chief Secretary were to say that they would abolish all the investment allowances completely, this would on his own argument increase the preference of the development districts. This kind of argument will not wash in Scotland or any other place.

What the right hon. Gentleman is saying is that by reducing one thing they are increasing that element of preference. This is a ludicrous argument and I hope we will not hear it again from him. What we are doing by reducing investment allowances is eliminating a number of potential marginal investments which, instead of investing at all, will decide just not to invest. We are not concerned with the question of preference but with the marginal firm which is deciding whether or not to go ahead. I suggest that, with regard to the special assistance we had for development districts to make certain firms decide to go ahead, they may not now do it at all.

The second question which my hon. Friend the Member for Dumfries (Mr. Munro) raised and which was not answered in any way was why, when this Amendment was known to be coming up and when it was of such interest and concern to Scotland, there was no one on the Front Bench representing the Scottish Office. It may well be argued that this is a question affecting the Treasury—that it is a Treasury Bill. On a question so vital to development districts and to Scotland in particular, we feel that we could at least have had some representation from Scotland on the Government Front Bench. It is noticeable that the great interest and enthusiasm that they shared on this matter in the previous Parliament has not been shown now. We feel particularly annoyed about this when we remember that in the election manifesto of the Scottish Labour Party it was put forward that their proposals would include an increase in the investment allowances and not a reduction.

The final point made, and again not answered, was why on earth this Amendment had proved necessary at all? Were the Government prepared to put forward a Bill without making any provision for relief in respect of these allowances? It seems to us incomprehensible. The only reason I am convinced why they put this forward at all was that the Chief Secretary and his hon. Friends heard that my hon. Friends were going to put forward this Amendment to draw the attention of the Committee and the nation to the fact that the Government were not concerned about the development districts. Until we get an answer to these three points the Chief Secretary has no right to deal with this Amendment in such an offhand and unkind way.

Mr. Younger

I am sorry to delay the Committee at this late hour, but this is of great importance. We are getting worried in Scotland that there is lack of drive in the real necessity to attract new industry to Scotland. It has been going terribly well over the last year or 18 months but there is a slackening off in the drive for new ideas.

The Chief Secretary did not appreciate the main point which I made, and that was probably my fault for not explaining it properly. These extra depreciation allowances for development districts as introduced in April, 1963, are supposed to be an incentive to persuade people to go to development districts who, for economic reasons, may not otherwise have been prepared to do so. They are supposed to be an attraction. There is an element in the Bill, even after the Chancellor's Amendment, which will make them less attractive.

The person who takes advantage of the extra depreciation allowance will suffer to some extent in these provisions in the computation of profits for this year. There is to be a deduction from his profits of the normal depreciation—that is not in dispute—and also deducted will be the special extra depreciation except for the 15 per cent. mentioned in the Amendment. That is a disincentive. I do not pretend that it is a big disincentive and we in the development districts—and I am delighted to include all other parts of the United Kingdom—will not be satisfied with anything which reduces to any extent the inducement to go to the areas until their problems are entirely solved.

Mr. Diamond

I have always said that the hon. Member is wrong. My right hon. Friend improves the situation, he does not imperil it. What the hon. Member asks me to do is to prejudice the profit ratio of a person carrying on a business in a development district. I do not want to do that.

Mr. Younger

I appreciate that. We shall probably save the time of the Committee if the Chief Secretary agrees to look in HANSARD at the example which I gave and to write to me with an explanation of it. That case shows clearly a loss of £22,500 of the amount of profits. Will he write to me about it?

Mr. Diamond indicated assent.

Amendment agreed to.

Mr. Diamond

I beg to move Amendment No. 757, in page 103, line 27, at the end to insert: (7A) For purposes of this section the amount of a company's profits for any period when it was an overseas trade corporation shall be computed as if it had never been an overseas trade corporation; and any amount treated by virtue of this section as dividends paid in the year 1966–67 shall be disregarded for purposes of section 26 of the Finance Act 1957 (under which an overseas trade corporation is chargeable to income tax by reference to dividends paid out of exempt trading income), and shall for this purpose be treated as comprising dividends paid later rather than dividends paid earlier".

This Amendment—

Mr. Heath

Is drafting or for clarification or consequential.

Mr. Diamond

As the right hon. Gentleman said, it is drafting or for clarification or consequential. I am reading my notes to see which. [Laughter.] There is nothing to be said against a little candour in the Committee from time to time.

The Amendment corrects two defects in Clause 78 as printed referring to overseas trading corporations. As the Clause was originally drafted the overseas trading corporations were prejudiced to a minimum extent. It was not intended to give them worse treatment under the Clause than other companies. The Amendment remedies the defects. It is an improvement in the situation relating to overseas trading corporations, and I hope that it is acceptable to the Committee.

Mr. Barber

I am grateful to the right hon. Gentleman. He was wise not to trouble to read the next paragraph. We follow it completely.

Amendment agreed to.

Mr. John Peyton (Yeovil)

I beg to move Amendment No. 680, in page 103, line 29, after "1965–66" to insert "after 27th April 1965".

The Temporary Chairman (Mr. Grant-Ferris)

With this Amendment it would be convenient to take Amendment No. 681, in page 103, line 38, at end insert: Provided that any capital dividend paid after 27th April 1965 shall be regarded for the purposes of this subsection as having been paid before that date if—

1. (i) it was declared by the company in general meeting before that date; or
2. (ii) it was declared in general meeting after that date but in accordance with a recommendation of the directors and the directors' decision to make that recommendation was, with the authority of the directors, publicly announced before that date; or
3. (iii) it was paid in accordance with a decision of the directors, and that decision was, with their authority, publicly announced before that date.

Mr. Peyton

I can assure the Committee that there lurks underneath all the verbiage a quite short and simple point and that I hope to be able to move it with considerable brevity. I am encouraged in doing so by this new mood of bountifulness which seems to have overcome the Treasury Bench.

The difficulty here is that it would appear from the Bill as drafted that all capital dividends, no matter when declared, which are paid during 1965–66 are caught. It seems perfectly reasonable to us for the Government to seek to discourage companies from forestalling the provisions of the Bill. We quite accept that, but it is quite another thing, very much more serious and unacceptable, to seek to punish companies for doing something which they already, or were already committed to doing, particularly where that commitment was of a public order from which they could not possibly resile.

The whole purpose of forestalling provisions is to stop a company doing something after a date on which a Government have announced a new policy. For the Government to seek to stop actions which have already been undertaken would be absurd. I feel confident that the Government will look at this and recognise that there is merit and substance in this point which they could not possibly refute. There is no magic in any particular date, the 5th of April or the 6th would be a perfectly convenient alternative to the 27th contained in the Amendments. I hope that the Government will accept this, or undertake to put down some alternative words of their own.

Mr. Diamond

The point is well made and is taken. Both Amendments are accepted.

Mr. Peyton

Perhaps I could say that I am obliged to the Chief Secretary.

Amendment agreed to.

Mr. Diamond

I beg to move Amendment No. 758, in page 103, line 32, after "it" to insert before that year and".

The Temporary Chairman

I suggest that it will be convenient to discuss, at the same time, Amendment No. 682, in page 103, line 33, after "business", insert calculated by dividing the aggregate of such dividend so paid since the beginning of 1962–63 and before the end of 1964–65 by the number of years in which such dividends were so paid in that period".

Mr. Diamond

This Amendment relates to the charge of an excessive capital dividend paid in the year 1965–66 over the average capital dividend in an earlier year. The Clause as drafted is not entirely clear, because subsection (8) might be read as providing that the average was to be the average of four years, including 1965–66. This was not the intention and the Amendment makes clear that the average is that of the three years before 1965–66.

This is a simple point and I hope that it will be acceptable to the Committee.

Mr. Peyton

I feel I need hardly mention the Amendment down in my name, because I cannot but believe that the Chief Secretary will not wish to maintain the splendid record he is establishing. The point is a short one and it is concerned with the whole nature of forestalling. If, over the three years which are dealt with in the subsection, a company has only declared a capital dividend once or twice that amount still has to be averaged over the three years. The total amount must be divided by three.

That seems to be unreasonable. If a company has paid a capital dividend in one or two years, it would surely be adequate if we were limited in future to an amount not greater than that paid in any one year. That would seem to me to protect the position which, I understand, the Government wish to establish and I commend it to the Chief Secretary with, I hope, seemly brevity as a point which deserves his respect and his welcome.

2.45 a.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I support Amendment No. 682 in the name of my hon. Friend, the Member of Yeovil (Mr. Peyton). As the Bill was drafted, it seemed strange that the year 1965–66 appeared to be included, which, in the case of an excessive capital dividend, would have raised the average, whereas no allowance at all is made for any of the years from 1962–63 to 1964–65. If in any of those years no capital dividend had been paid this would have the effect of putting the average down. Therefore, the Bill seems to be peculiarly self-contradictory. I thank the Chief Secretary for his Amendment, which at least clears up the point concerning 1965–66.

Whatever one may think about capital dividends and whatever may be their future treatment under Clause 43, it must be right that the average for this purpose should be only the average of those capital dividends which have actually been paid and that where there has been either one year blank or two years blank out of the relevant three years, it should be divided by only one or two, as the case may be. I hope that the Chief Secretary has taken the point. It is not a big one, but it is clearly one in which fairness is involved.

Mr. Diamond

I am sorry to say that although the point has been made with acceptable brevity and the argument is clear, it is not one which I can recommend the Committee to accept. First, we have the normal basis of the three years' average where, not capital dividends, but ordinary dividends were concerned, and we have all accepted that by now.

The Opposition now suggest that in the exceptional case of capital dividends, we should have regard not to the average, but that if there were, for example a dividend paid in one of the three years, the one year should equal the average of the three years. In short, that is to say, if a dividend of £1,000 was paid in one year and nothing was paid in the other two years, instead of taking the average as being £333 one should take the average of £1,000. I cannot recommend the Committee to do that, because I recognise the logic of the argument.

The logic of the argument is that capital dividends are not normal dividends and do not recur with normal frequency. I accept that they are not normal dividends. They should not be treated, therefore, as they have been treated with the special privileges which have attached to them. I should make it clear that we are doing what the Royal Commission recommended many years ago and what, regretfully, previous Governments were never prepared to do: that is, to treat capital dividends in exactly the same way as current dividends or dividends of a normal nature.

It is implicit in our attitude to that that we regard providing an average at all as a reasonable concession. One could take the view, as the Royal Commission recommended, that the payment of a capital dividend is an extraordinary thing. It results in the recipient receiving money free of Income Tax and Surtax. We take the view that the Royal Commission was absolutely right when it stated: … there is no sufficient ground for treating these 'capital profit' dividends as if their nature was different from that of other dividends". The majority and minority were agreed about that, and that is what is happening. We say that they should pay tax in the ordinary way; that they should have the basis of the three years drawn in the ordinary way, as for other dividends. I am, therefore, not prepared to recommend the Committee to accept the Amendment.

Mr. Peyton

I do not wish to detain the Committee. I am grateful to the right hon. Gentleman for admitting that there is a point here. Would he undertake to consider, between now and Report, the sort of situation where a fairly large sum of money has been owing to a company for some time and where the repayment of this capital debt has, for one reason or another, been postponed? Would he consider such a situation and the possibility of the company finding itself prejudiced by the provision?

Mr. Diamond

Without entering into a commitment, I will, of course, as a matter of courtesy, look carefully at what the hon. Gentleman said.

Mr. Ridley

I am not satisfied with the right hon. Gentleman's reply. I agree that capital dividends are not particularly desirable and I have no objection to the proposed treatment of them. The law has hitherto been such that they have been permissible, although the right hon. Gentleman is suggesting that in some way they are not normal dividends. I entirely agree. However, that is no argument for treating them differently.

The Chief Secretary has shown that the more capital dividends are paid the better off will be the firm. If a company is paid only one capital dividend, it is divided by three. If it is paid three such dividends, it is still divided by three. The right hon. Gentleman is, therefore, defeating his own object. The logic of the case rests with my hon. Friend and me. I urge the right hon. Gentleman to consider the matter further.

Amendment agreed to.

Sir Eric Fletcher

I beg to move Amendment No. 759, in line 34, after "shall", to insert "as regards that company".

This Amendment has the same purpose as Amendment No. 749, which the Committee accepted.

Amendment agreed to.

Further Amendment made: In line 38, at end insert: Provided that any capital dividend paid after 27th April, 1965 shall be regarded for the purposes of this subsection as having been paid before that date if—

1. (i) it was declared by the company in general meeting before that date; or
2. (ii) it was declared in general meeting after that date but in accordance with a recommendation of the directors and the directors' decision to make that recommendation was, with the authority of the directors, publicly announced before that date; or
3. (iii) it was paid in accordance with a decision of the directors, and that decision was, with their authority, publicly announced before that date.—[Mr. Peyton.]

Mr. Patrick Jenkin

I beg to move Amendment No. 778, in line 38, at the end to insert: (9) Notwithstanding the foregoing provisions of this section the amount paid in dividends by a company shall be deemed not to exceed the standard amount to the extent to which it does not exceed the aggregate amount of the dividends received by the company in the year 1965–66 from another company or companies resident in the United Kingdom. I have detected a shortfall in the Treasury's good will during the last few minutes and I hope that in moving this Amendment I will be able to persuade the Government Front Bench to recover it.

This is a perfectly simple and straightforward Amendment which, I am sure, must prove to be acceptable. It deals with the problem of one company which has received dividends from another company which, if passed on to the shareholders of the recipient company may be in excess of the standard, and if the dividends which the paying company has received have exceeded the standard they will have paid the appropriate penalties. In those circumstances, there seems to be no reason why the dividends cannot be passed straight on free of any additional tax at all in the hands of the shareholders.

This is a simple point. It does not arise only in the case of groups and controlling interests but in any case where one company receives dividends from another. If the relief which this Amendment seeks is not given it means that the dividends can be charged to tax twice, or more than twice, as they are passed on. If the dividends which are received by the ultimate company are passed straight on, even if that exceeds the company's own standard contribution, it should not give rise to any additional charge to Income Tax.

Sir Eric Fletcher

I do not think that the hon. Member has made the meaning of his Amendment clear, nor is it clear from the text of the Amendment what he has in mind. There is no question of double taxation here. We are dealing with forestalling, and there is no reason why, in regard to forestalling, receipt of dividends should be treated differently from trading income. There is no question but that the case of dividends paid by one member of a group to another is covered. The hon. Gentleman will appreciate that in the case of dividends paid by subsidiary to parent or vice versa no question arises, but that the same principles relating to forestalling should apply with regard to the whole of the profits of the company whether derived from trading or whether derived from portfolio investment.

If it has been the practice of the company in the past only to pass on to its shareholders a certain proportion of dividends received, the principle should apply in the current year. There should not be any departure, because in so far as it was a departure it would be just as susceptible of tax avoidance as if an undue part of the trading profits were passed on. So, on this occasion, I would say, with respect to the hon. Gentleman's normal ingenuity, that this Amendment is misconceived, and cannot be accepted.

Mr. William Clark

I would ask the Minister without Portfolio to look yet again at this Amendment. With the greatest respect to the hon. Gentleman, what my hon. Friend seeks to do is absolutely clear. Let us suppose that we have a company which receives a number of dividends from a number of companies. If we take the base year—say, 1963—and assume that company A from the operation of the companies in which it has invested receives gross dividends of £1,000, that sum, for company A, is its standard in 1965–66. Company A, from the same constituent companies, receives income dividends of £1,500. It cannot pass on that £1,500 to the shareholders without incurring the penalty of forestalling. The spirit of the Amendment is that as the constituent companies must have increased their dividends from their base year to the base year we are speaking of, then, already, those constituent companies have suffered the penalty of forestalling. What my hon. Friend tried to make clear is that in a case such as that there would be no double taxation.

3.0 a.m.

It may be that this point is adequately covered by Amendment No. 785, which the Government have agreed to table on Report in an amended form. There is no question here of tax avoidance. Where a company receives dividends from constituent companies and passes them on to its own shareholders, the very fact that in the standard period the dividends were in my example £1,000 and in 1965–66 it receives £1,500, the Government have already collected the extra tax of the increased dividends of each of the constituent companies.

I am sorry that at this late hour neither my hon. Friend nor I have been able to make ourselves clear, but I assure the Minister that this is a very valid point, although it is a reasonably small one. In order not to delay matters, perhaps he will say that between now and Report he will look at this matter again and say that there is a point which may be covered by the tax avoidance Amendment to replace Amendment No. 785.

Sir Eric Fletcher

I can either deal with the text of the Amendment, or with what the hon. Member for Nottingham, South (Mr. William Clark) said is intended. The text of the Amendment is unacceptable because it goes far beyond what the hon. Member said it is meant to mean. It would enable a company to pay out not only its standard profits but also the whole of the profits derived from portfolio investment. There would be the same element of forestalling in that case as in any other case. If, on the other hand, all that the hon. Member has in mind is circumstances in which there is no tax avoidance, of course the company he has in mind would have the benefit of the comprehensive character of Amendment No. 785 which we intend to put down for Report.

Mr. Patrick Jenkin

In view of the Minister's remarks, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Sir Eric Fletcher

I beg to move Amendment No. 760, in page 104, line 4, at the end to add: nor shall this section have effect by virtue of section 69 of the Finance Act 1960 in relation to the trustees of a unit trust scheme". This Amendment is designed to exclude altogether from the Clause any authorised unit trust.

Amendment agreed to.

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

Mr. Barber

No one can say that the debates we have had on this Clause have not been useful. A considerable number of concessions have rightly been made by Government spokesmen and some of our Amendments have been accepted. In particular, because Amendment No. 785 is to be replaced on Report by a Government Amendment with the same purpose, we shall allow the Clause to pass without very much further discussion.

I wish to ask the Minister without Portfolio one question which troubles me. Am I right in thinking that a close company which does not need to retain profit for development or any current purpose and so is open under the legislation to distribute 60 per cent. of its profits to shareholders, if the trend of profits is rising may nevertheless be caught by Clause 78 and have to pay additional taxation despite the fact that it is forced to pay taxation under Clause 72?

This is a somewhat important matter which could obviously affect many companies. Although I would not wish to debate it now, it seems to me that this is the consequence of Clauses 72 and 78. If so, we would like to consider it.

Mr. Lubbock

May I briefly draw attention to one consequence of the Clause which, I think, was not expected and which I have already drawn to the Chancellor's attention? Subsection (3,b) would appear to allow a pro rata increase in the dividend paid according to the amount by which the profit exceeds the profit in the base years. I am sure that that was the Government's intention, because they say so in terms on page 29 of the White Paper, which talks about the standard dividends, scaled up by reference to increases in the company's profits". The amount of the increase in the profit above the standard profit may be nil when the actual profits are much larger than in the base year, because of the operation of subsection (4,d): the standard profits of a company are whichever is the greater of—

1. (i) one third of the company's profits for the standard period; and
2. (ii) fifteen per cent. of the company's share capital in the standard period."

I will try to make the matter clear by giving a simple numerical example. If the profit in the three years of the base period averages £1 million and if the company's share capital is £10 million, then 15 per cent. of the share capital is £1.5 million. Because that is larger than the profit earned in the base period, that is the standard profit according to the meaning of the Clause. Therefore, supposing that the profits increased to £1.25 million in the year to 31st December, 1965, one would have imagined, reading subsection (3,b) by itself, that the company would be allowed to pay a dividend 25 per cent. greater.

However, because the standard profit is £1.5 million and we are measuring differences between standard profit and the actual for the period, that is a negative amount and no increase in the dividend can be paid. I am sure this was not what the Clause intended. I hope that the Minister will clear this up.

Sir Eric Fletcher

I am sure that the hon. Member for Orpington (Mr. Lubbock) will appreciate that the provision in subsection (4,d,ii) is intended to deal with the case where in the past a company has paid large dividends, despite the fact that its profits were low. He will also appreciate that, without such a provision, an increase in profits in the current year might justify a very large dividend indeed, quite unwarrantably. I appreciate the point he has in mind. I will undertake on behalf of my right hon. Friend to look into the matter between now and Report and see whether there is any way in which that case can be met.

The rather more important point raised by the right hon. Member for Altrincham and Sale (Mr. Barber) was this. He asked whether there was some possibility of some inconsistency, or, indeed, injustice, arising by reason of the fact that the operation of the forestalling provisions in the Clause, coupled with the Clause dealing with close companies, might produce a situation in which, by reason of the fact that a close company had an uplift in profits, which it had to distribute, it might at the same time find itself caught by the deterrent effect of the forestalling provisions. No injustice of that kind would arise.

Under the Amendment on the lines of Amendment No. 785 which we will introduce on Report, the governing factor in considering forestalling will be motive. Therefore, where it was an inevitable distribution in excess of stan- dard profits, forestalling will not operate and the company will not be penalised.

Question put and agreed to.

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

Mr. Callaghan

I think that the Committee will agree that we have made considerable progress since midnight—[Interruption.] Let me put it in arithmetical form. Since midnight we have dealt with nine Amendments, on which there have been substantial debates, and that is good progress by comparison with the earlier hours.

Therefore, I beg to move—what is the form of words?— That the Chairman do report Progress and ask leave to sit again. I trust that we shall be able to make equally good progress tomorrow. If we do so there should be no reason why we should not see the glimmering of the dawn on the distant horizon.

Mr. Heath

I think that the Committee will be glad that the Chancellor managed to find the necessary words, after some effort. It would, indeed, be an ominous moment for the Committee if the Chancellor should ever forget the words entirely. In that case we should have to produce them for him.

It is just over three hours since I moved to report Progress in order to ask the Chancellor to state his intentions. I said at that time that were we to embark on Clauses 78 and 79 it would take us most of the night. We have had a concentrated discussion, a large part of which was on Amendments which the Chancellor has put down. The Committee has been greatly helped by the fact that the Chancellor and his colleagues have been able to accept or give undertakings about the remaining Amendments. Yet because of the nature of the points and the complex nature of the Bill, it has taken us over three hours to complete a Clause of the most complicated nature.

As it would take approximately the same time to deal with Clause 79, I think that we are in agreement with the Chancellor that, in view of today's ceremonies, this would be a convenient moment to report Progress.

Mr. William Yates (The Wrekin)

I would like to agree with the Chancellor, but it is very important that we should make faster progress with the Bill. I am sure he realises that there are many matters about which constituents are asking us, including the land sequestration Bill, the steel Bill and the cheaper mortgages Bill. There are many points on which we are being asked why the Government are not bringing forward their programme as laid down at the General Election.

Therefore, I hoped the Chancellor, rather than knock off now, would have continued at least till six o'clock to enable us to debate some of the things which people are asking us to discuss. I do not know what has happened to the steel Bill, but it is a matter of great anxiety to many of us—

The Temporary Chairman (Mr. Grant-Ferris)

Order. The subject which the hon. Gentleman is raising does not arise on this Motion. Will he please keep strictly to the Motion?

Mr. Yates

I quite agree, Mr. Grant-Ferris. All I am suggesting is that we should proceed with our discussion so that there can be more Government time on another occasion to discuss matters which interest our constituents more than this Bill does. It is interesting as it is, and I am glad that discussion has been exact, but I wish the Chancellor to make more progress with the Bill so as to give the House more time to discuss urgent matters, in particular, foreign affairs, which must be of as much interest to his side of the Committee as it is to ours.

Question put and agreed to.

Committee report Progress; to sit again this day.