Clause 79. (TRANSITIONAL RELIEF FOR EXISTING COMPANIES WITH OVERSEAS TRADING INCOME.)

HC Deb 22 June 1965 vol 714 cc1477-573

3.49 p.m.

The Chairman

Before I call the next Amendment, may I make one observation? I hope to have on the usual notice boards this afternoon the duplicated notice of the new Clauses which I have selected.

May I say to hon. Members whose proposed new Clauses I have not selected that I lave taken careful note of all representations that have been made to rue on the Clauses, as, indeed, I have taken very careful note of all representations made to me during the Committee stage on every Amendment before the Committee.

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

I beg to move Amendment No. 636, in page 104, line 13, to leave out "five" and insert "seven".

The Chairman

It will be convenient to take, at the same time, Amendment No. 675, in page 104, line 13, leave out from "in" to "calculated" in line 14 and insert: the year of assessment 1966–67 and any following year of assessment". Amendment No. 535, in line 13, leave out "of the five years" and insert "year".

Amendment No. 732, in line 13, leave out "of the five".

Amendment No. 733, in line 16, leave out from "source" to first "the" in line 17.

Amendment No. 536, in line 16, leave out "of those five years" and insert "year".

Amendment No. 537, in page 104, leave out lines 23 to 26, and the Government Amendments Nos. 637 and 638.

Mr. MacDermot

My hon. Friend the Member for Rutherglen (Mr. Gregor Mackenzie) has just given us a good example. If we can manage to address the Committee in such technical language as he has used, perhaps we will get our Amendments with equal facility.

The Amendment which I am moving is the first of a number of Amendments which the Government have put down to Clause 79, which deals with the transitional relief for companies with overseas trading income. These Amendments considerably enlarge the relief. They have been put down as a result of representations which have been made by interested companies and associations, many of whose viewpoints have already been argued during our debates in Committee and in the House.

If I may remind the Committee of the general object of this transitional relief, it is to give to companies who trade overseas the time and the opportunity to adjust themselves to the impact which the introduction of Corporation Tax will Make upon them. Domestic companies will receive the advantage—in many cases the considerable advantage—of the lower tax rate for their retained profits. This will help them to meet the problems with which they will be confronted in maintaining their distribution as a net distribution to their shareholders. Companies which are trading overseas will not necessarily get any comparable relief for retained profits because the level of taxation for them in the first instance will depend upon the level of overseas taxation.

Many of those companies which have been operating in countries with a corporation tax system which has a relatively low rate of Corporation Tax, as many of them have, will already have been enjoying the advantages which the domestic companies will enjoy under the new system in this country. That does not, however, alter the fact that they will still receive an impact as a result of the introduction of the Corporation Tax. They will still be confronted with the problem of the separation at home of the company taxation from the shareholders' taxation. It is to help these companies to tide over this period that this transitional relief is introduced. The general intention is to put them, certainly in the initial years, in comparable positions to purely domestic companies in the United Kingdom.

As hon. Members will know, the form of the relief is voted moneys which will be paid against claims made by the companies. The basis of the scheme is that a company will be able to select from certain past years a base year. The relief as framed in the Bill was to be a proportion of the amount by which the overseas taxes for which credit was allowed in that base year exceeds the credit which would have been allowed if Corporation Tax had been in force for that base year.

As a result of the representations that we have received, we are putting before the Committee today a number of Amendments. I will not seek to enumerate them all now; we will have the opportunity as we come to them to consider each one in detail. This first Amendment extends the period of relief from a five-year to a seven-year period. The particulars of the tapering are dealt with in the next set of Amendments. There is no need for me to say more about our Amendment at this stage.

We are discussing, at the same time, a series of Amendments which have been put down by hon. Members opposite. All I would say about them at this stage is that they all seek to make this overspill relief a permanent relief instead of transitional. As such, I must make it clear from the outset that those Amendments are unacceptable on principle and on principles which we discussed at great length in a debate lasting 5¼ hours last Wednesday when we considered Clause 60. I hope, therefore, that hon. Members will not find it necessary to seek to argue again at length the general principles which have already been decided by the Committee.

To restate our position in a sentence, we are not willing as a permanent feature of our tax system to favour overseas investors by insulating them permanently against the effects of the introduction of Corporation Tax or to give them a relief which other countries do not give to their overseas investors, nor, indeed, where they have a Corporation Tax, to their domestic investors.

The object of this transitional relief is to give relief to companies trading overseas against the hardship which would result if they had to receive the sudden, full impact of the change. It is our view, which is supported by the warm reception which the publication of our proposed Amendments has received, that with this increased relief companies trading overseas will be given a really substantial transition period. Assuming what I may call the normal growth in their business and in their profits over this seven-year period, they should be able, in most cases, to absorb the additional burden which is put upon them without having to diminish either their plough-back or their net distributed dividends.

Mr. Peter Emery (Reading)

We now come to the technical and quite involved working of the general provisions applying to Corporation Tax overseas. I am certain that we will attempt, as the Financial Secretary has suggested, as we did throughout yesterday and all the preceding days on the Bill, to try to keep as near as possible to the technicalities. It is with that object in mind that we on this side will be working specifically during the day.

I must in all honesty point out to the Financial Secretary, however, that we on this side are in some difficulty in trying to come to grips with all these points when we find that there has been put down this morning, for the first time, a starred Amendment in the form of an entirely new Schedule—(Supplementary provisons about dividend increases in 1965–66)—dealing with Clause 78. Its opening words specifically state: This Schedule has effect for the modification of section 78 of this Act". It is rather a nonsense to expect us to appreciate all these problems when that new Schedule was put down only this morning and we are debating the Clause this afternoon.

I say with great modesty to the Financial Secretary that if the Socialist Government would cast their mind back to their days in Opposition, he will agree that if the Conservative Government had done this kind of thing all hell would have broken loose from the Dispatch Box.

Mr. MacDermot

I am sure that the hon. Member does not want to be unfair. He will recognise that the new Schedule has been on the Notice Paper for a considerable time. It is starred because of slight alterations which have been made in its wording.

Mr. Emery

I am aware of that, but let us be quite fair. I came in here at noon to find a starred new Schedule. I had to plough through it line by line without the help of the Civil Service or a secretariat to see what all the alterations were. In fact, I have spent two hours, giving up part of my lunch-tune, to make certain what these minor alterations are. You have done the same, Dr. King, and it appears that hon. Members opposite have done so, too. Then it only goes to make a nonsense of the difficulties into which the Government are getting us all.

4.0 p.m.

Let me waste no more time on that point, but come particularly to the Amendments seeking to alter the five years to seven years. This is nothing like so simple as the few words in the Amendments would imply. Obviously, we on this side of the Committee are particularly pleased that the Chancellor has altered his mind from the original view that he took, and we welcome that, but it is slightly overstating the case to say that this proposal met with a warm reception when it was introduced. I would refer the Financial Secretary to the Financial Times of 2nd June, when the proposal was first published. That newspaper said: The concessions represent an achievement for the Conservative Opposition in Parliament… I feel that representations from many sources, as well as from these benches, have brought about these concessions.

In the same way, may I draw to the attention of the Chancellor the fact that warm reception is likely to be double-edged, particularly in the light of his roneod extra White Paper—a very helpful rundown of the reliefs which he has given—which states, in paragraph 2: The object of the transitional relief is to give these companies funds to compensate… That is not the way to begin getting the best feeling of these companies. The Government take away, and then suggest that by releasing some of the taxation that they intended to demand this is giving the companies something. This is the wrong type of approach. However, I do not want to make a meal out of that, for I am certain that the Chancellor will understand it.

While I am on this point of the concession, I think that we ought to be very careful in seeing that the Government do not overplay their hand, because, although we on this side of the Committee welcome the fact that they have gone as far as they have, they have still gone nothing like as far as we on this side of the Committee would normally suggest. Also we find it particularly galling to hear the suggestion that this is a direct relief to the shareholder in enabling him to receive the same form of dividend that was initially possible before the Corporation Tax came into existence.

To many people this would imply that the relief is to be directly to the shareholder, and this is just not so. The relief is to the company and it is taxable before it reaches the shareholder. Indeed, Income Tax on distribution will have to be paid on it. Therefore, it is nothing like as gallant an effort to give relief as many would suggest.

When the Chancellor is attempting to bend over to give relief to the shareholder—in other words, to enable the dividend to be rnaintained—if one follows the logic of the Chancellor's whole approach in this Bill, that there is a differentiation between the corporation and the shareholder, which we on this side of the Committee have always argued against, surely it would not be unfair of us to say that logically this concession ought to be given to the shareholder and not to the company. I specifically ask the Chancellor to consider this point and to consider that the relief should be given directly to the shareholder and not just to the company itself.

Coming to the Amendments proposing the insertion of seven years, I suggest that the Government have just looked at numbers and have picked one out of the sky. They had to settle on something in order to work out some relief, but why seven years? Why overthrow the whole concept of the double taxation relief? I am not going back into the arguments dealing with the whole principle, but, basically, the Amendment states that after seven years there will be an entirely new concept of double taxation relief.

The problem relating to the seven-year period is that if we had had this Corporation Tax for overseas income and overseas companies applicable during the last 18 years, at no place would we have found the same build-up in our overseas investment which we have got at the moment. Therefore, it seems to me that there can be no doubt—and I see some hon. Members opposite nodding assent—that this proposal makes it quite impossible to continue with the amount of investment overseas which is built up year by year to be able to provide our invisible earnings.

Surely it must be accepted by the Government that if our investment overseas was not running at the level of£1,400 million, as it is, but was perhaps double that amount, or perhaps£3,000 million, we would have no balance of payments problem whatsoever. It is in order to be able to work to that level that it is so essential not to ruin the long-term possibilities of investment overseas. Yet that is exactly what the Government's Amendments set out to do. My major criticism is that the proposal is using a long-term effect to try to deal with a short-term problem. It is because of that—although it is better than the original proposal in the Bill—and because it is still not getting away from that situation, that the proposal goes nowhere like far enough.

May I put this question to the Chancellor? Why have you not thought it worth while to grant relief from this tax for the period of your study, which you have already given an undertaking to bring into being—

The Chairman

Order. It looks as though the hon. Gentleman is addressing the Chancellor direct. He must not do that. He must address the Chair.

Mr. Emery

I apologise, Dr. King. I had no intention of doing that. I was perhaps getting carried away with the problem that is involved.

If I may say through you, Dr. King, I wonder why the right hon. Gentleman has not thought it worth while to allow a period while this study is being carried through. All sections of the Committee have urged this study on the right hon. Gentleman. The hon. Member for Birkenhead (Mr. Dell) has urged the great need for this study. As the relief is to be carried through for three years, why could we not have a relief from the operation of this tax for a two-year period until all the facts and figures have been produced? This seems quite a reasonable question to ask. If the Chancellor would do this, it would prevent this chopper hanging over the head of British industry. Secondly, does not the Chancellor realise that by doing it this way industry must be made to feel that, whatever the outcome of his study of investment overseas, we are committed to this provision as it is at the moment?

Will not the Financial Secretary, in reply, make it clear to industry that if his study throws an entirely new light on the problem of overseas investment, and if by misfortune the present Government are still in office, they will carry out a complete review of scaling and tapering? It seems to me obvious that many people have urged the Chancellor to make a statement that he would not bring in this provision for at least one year.

Will the Chancellor state clearly how many organisations have asked him to postpone it for a year? How many have approached him? I do not want him to be specific as to numbers. It is my impression that many firms have tried to impress upon him that he achieves nothing by carrying this provision through in the Finance Bill and that it should be postponed for at least one year. Will he confirm that a considerable number of firms have made this application to him?

I see that the opening of the historical note on the presentation of the Address in Westminster Hall this morning was to the effect that the word "Parliament" originally meant a conversation. I hope that our debates can he carried out with this in mind and as a matter of conversation. Because my hon. Friends wish to raise a number of questions on their Amendments, I will ask no more. But it should be clear that, although we accept that the Amendments are better than the Bill, they still do not go far enough in order to return to our initial concept that the whole idea of double taxation relief is still basically correct.

This Amendment does nothing to overcome the difficulty that investment overseas is still being taxed to a much greater extent than at any other time in the history of the country.

Mr. Grimond (Orkney and Shetland)

The last thing I want to do is to go again over the general ground which vie have covered fairly fully on the question of overseas investment, but as the Financial Secretary introduced the Amendment with some remarks about the background, and as he was followed by some observations from the Conservative Front Bench on the subject of overseas investment and double taxation and the need to treat companies fairly, may I say how I see the present position?

It was widely held outside the Labour Party that there was a problem over overseas investment. Many people would have said that it principally arose because of Government expenditure, but it was admittedly considered to be a problem. The Chancellor sought in the original Finance Bill to curtail overseas investment by measures which were designed in his view to remove what he understood was a discrimination in favour of it.

The first point which I would make is that I am wholly unconvinced that there was any discrimination in favour of overseas investment in so far as anyone, whether a company or an individual, making such investment would find that there was less tax to pay if the investment were made abroad than if it were made here. They would pay tax to a different tax gatherer, but from their taxation point of view there would be no gain, with the marginal exception of the very rich man in some places and with a marginal exception in favour of South Africa. Generally speaking, there is no discrimination.

But where the question is still open is whether from our point of view it is worth while to invest overseas. One is bound to admit that a country with heavy indebtedness must make out a very good case before it makes investment overseas. As I understand the position, the Chancellor has said, "I may be wrong about this. I am willing to have an inquiry into whether the total return to companies investing overseas makes such investment worth while. To enable that inquiry to take place in an amicable atmosphere and to ensure that there is no hardship on companies which have invested overseas I will extend the temporary arrangements to make them slightly more generous." It is for the purpose of having this inquiry that he has tabled these further Amendments—or that is one of the purposes. The hope is that this inquiry will be made in a non-controversial atmosphere.

4.15 p.m.

A very interesting discussion is going on in the journal called "Moorgate and Wall Street", between Dunning and Clay on the whole matter. From that has emerged a doubt about statistics and a doubt about the interpretation of the statistics—and a very considerable doubt about the proper basis of comparison. I believe that this is valuable in connection with the general inquiry which I understand the Chancellor wants.

Against that background the Committee have to consider the Chancellor's proposals to tide over the position of the overseas companies which it is admitted will be adversely affected by other proposals in the Bill. I have three points of detail to make. The first we may be able to discuss later, and it concerns the point of the base year for companies which have invested overseas, particularly in mines. They may have been having difficulty in bringing back profits to this country, they will be severely penalised in years to come when they may find themselves precluded from any of the benefits of the Clause; they may be unable to establish any profit during the base year. Perhaps the Government will look at that point. It should be possible to extend the base years.

It is clear from paragraph 2 of the Chancellor's memorandum that his intention was to assist shareholders. Perhaps I may read the opening words of paragraph 2, headed "Overseas Tax". These companies might find it necessary as a result to reduce their dividends, and this might cause hardship to the shareholders. The object of the transitional relief is to give these companies funds to compensate them in some measure for tax they have to deduct and pay over to the Revenue in respect of the dividends they pay, and thus to help them maintain their dividends. Nothing could be clearer than that. The object is to help them maintain their dividends. An example is given in the White Paper.

I am not at all clear how the present overspill arrangements will attain this object. It is clear, for instance, that if the Chancellor were to wish to assist dividends to the extent of£500,000 through this transitional relief the figure would have to be grossed up by the amount of the withholding tax. I am told that this would amount to£833,000. In fact, the companies would pay back in tax all except£500,000. Thus there will be a considerable difference between the gross and net figures. Is there to be any sanction on companies? Will they be at liberty to pay out this money or not? I am not sure how the Chancellor hopes to bring any influence to bear upon them.

The right hon. Gentleman says that this is not a matter for him. If it is not, the taxation position of companies will be made very different according to whether or not they pay it out. If a company does not, there is a gain to it. If it does, then it must pay withholding tax on it. Has this been appreciated by the right hon. Gentleman? As his object is apparently to assist shareholders, we should be given a clear understanding of his intentions and be told whether this is to be a general payment to companies, with which they can do what they like, or whether he has something else in view.

The Chancellor has extended the period to seven years and has been asked why he has selected that period. I appreciate his difficulty and that, whatever period the transfer takes, there will always be those who will say that it should be longer or shorter. I have said on previous occasions in this Committee that none of this is final and that the right hon. Gentleman or any future Chancellor will be at liberty to alter it next year or at a later date. We are discussing what is, in effect, a statement of the right hon. Gentleman's present intentions. That being so, it cannot bind this Committee or any future Chancellor. It is, as I say, merely a statement of his general intentions.

I believe that the Bill is too big and that the right hon. Gentleman should have postponed this part of it for a year, had his inquiry before introducing these proposals and then, if necessary, brought the matter to the Committee. However, at this stage it is too late to suggest that one of the major parts of the Bill should be struck out, although I appreciate that some might like to do that.

The matter could have been left for a year and have been brought in later—

Mr. Edward Heath (Bexley)

On Report.

Mr. Grimond

I do not know when the Report stage will be finished. I hope to get away before the end of August.

Having deliberately set out, and rightly so, in his further proposals to make it clear to companies that, to some extent, the Chancellor's mind is still open—that he is prepared to wait for the results of his inquiry and that he does not want unduly to penalise companies if they prove their case and show that their overseas investments are worth while—it would be worth his while to go further and say that if it can be proved that some companies under this transitional relief will not be as satisfactorily effected as he wishes, he will take further steps both as to the amount and the timing.

I have shown that several important points remain outstanding, including the one about shareholders, the base years and the fact that it may turn out that the period will need to be adjusted. I have pointed out that the period will be open for adjustment and review in subsequent years. I welcome the changes the Chancellor is proposing and I hope that he will confirm the purpose of them. I hope that he will reiterate his desire to have a proper and impartial inquiry into this matter so that he may further set at rest some of the misgivings which have been expressed and which, to some extent, continue, particularly among some of the largest companies operating overseas, which are the most valuable to this country.

Mr. R. H. Turton (Thirsk and Malton)

I take issue with the Financial Secretary. He said that we had had a long debate on Clause 60 and that, because of that, we should not go into this Clause in great detail. I recall that when we discussed Clause 60 and raised points of detail we were referred to Clause 79. Now that we are discussing Clause 79 we are pushed back to the discussion we had on Clause 60.

Mr. MacDermot

I was not objecting in the slightest to detailed points being raised or saying that hon. Members should not go into the details, merely that we had worked over the general principles very fully and that I hoped that the Committee would not find it necessary to go over all the arguments again.

Mr. Turton

Nevertheless, the lengthening of the taper does not meet this problem. We are making a great mistake in the Bill because of the way in which we are dealing with overseas investments. I wish to remind the Committee of the letter which was sent to the Chancellor by the President of the F.B.I., in which he stated: What we find difficult to understand is the decision to reduce overseas investment both in the long and in the short-term on the footing that it is imperative for the short-term needs of the balance of payments—and this in face of evidence that it may even aggravate our short-term imbalance". This is the real criticism of the way in which the Chancellor has dealt with this problem, not only in Clause 60 but also in Clause 79. If there is a short-term problem—and we all agree that there is—the method of giving a concession to companies for three years and then hitting them hard is the wrong way of dealing with the matter. This will have a serious effect on our export trade and on the whole or our expenditure and investment in the developing countries.

In this connection, I quote the words of the Chairman of the Associated Portland Cement Co. who stated in the company's annual report: Most of our overseas investments have been made to retain our share in export markets where no cement was made in former times and, quite apart from the value of the dividends remitted to this country, have been of great assistance to our export trade in that most of the plant in these Works was made in this country". He went on later to state: The future of your Company depends on expansion overseas just as much as at home and it would indeed be a disaster for the country if British Industry was to be kept in a strait jacket as far as overseas investment was concerned and thus leave the field clear for foreign competitors. In my view, those two quotations sum up the criticism of the way the Chancellor is dealing with the matter, both in Clause 79 and by the seven-year taper. It is wrong to try, by this means, to bind Parliament in 1969–70, as well as subsequent Parliaments.

I can see that a strong case might perhaps be made for changing over to the Corporation Tax method. There may be a strong case for selective control over overseas investments, but to use this method, which will take the heart out of investments particularly in the young developing countries, is a great mistake, especially in view of the survey which the Chancellor is instigating into this whole question.

I press the point made by my hon. Friend the Member for Reading (Mr. Peter Emery) that the right way to do this is to hold the matter over until the end of the review. Provided that this Committee lays down that for a certain period of years the provisions of Clause 79 will inure, so that the business will receive the double taxation relief for that period, the later years can be left open for future Parliaments after the survey.

It may well be that something like the provision for the last four years of the taper may have to be used for certain types of overseas investment, but not for those types of overseas investment which we wish to encourage—for example, in the young developing countries or the sort of investment which Mr. Reiss referred to in his annual statement to the Associated Portland Cement Company, where it is important to win for this country orders for plant. It should be remembered that in the cement industry investment is made in the face of great foreign competition, particularly in the young developing countries. It is important that special concessions should be given. Is there any reason why these matters should not await the completion of the survey?

Mr. Edmund Dell (Birkenhead)

The right hon. Gentleman referred to there view which will be undertaken by the Federation of British Industries. Would he agree that it would be desirable for the F.B.I., in undertaking this review, to undertake it in a rather more judicial frame of mind than was represented in the quotation from the letter which the right hon. Gentleman read?

4.30 p.m.

Mr. Turton

I have quoted with approval a letter from the Chairman of the F.B.I., and the hon. Gentleman will realise that I do not share his criticism of that letter. I very much hope that not only will the F.B.I. review the whole question of overseas investment but that the Chancellor will also do so—and I understood from our previous debates that it was his intention to do so.

If both sides are to review the question, it would be much better to wait until we have the result of the review rather than have the taper now published with its harsh effects for the years 1969–70 onwards. To hold up the idea of the taper until then would mean that there would be no deterrent to overseas investment at present. The damage the taper does is that it is a warning that in the time of a future Parliament—when, quite clearly, neither the Chancellor nor the Financial Secretary will be occupying those seats—there will be this threat to these overseas investments and these companies. The right thing for Parliament to do now is to make provision for this year and next year, and leave the future to take its course.

I agree with the right hon. Member for Orkney and Shetland (Mr. Grimond) that in Finance Bills we do not require statements of intent. One of the weaknesses of this very long Bill is that there are declarations and statements of intent in many of its Clauses. The right course for Parliament to adopt is to legislate now for the immediate financial year and to leave it to the future, the dim future, for other Parliaments to legislate as they think best for the Revenue and for our industries.

Mr. John Peyton (Yeovil)

The Financial Secretary very helpfully started his speech by repeating the Government's broad intentions in introducing these transitional arrangements, and amending them. I do not want to indulge in a general debate and discussion of these very difficult problems, but in the limited time that remains I ask the hon. and learned Gentleman and the right hon. Gentleman the Chief Secretary to give their very careful attention to a point which, I seriously suggest, is a grave weakness in the proposals. The weakness is that their impact is haphazard. It is really a question of an unlucky dip in which companies are obliged to take part; some companies come off quite desperately badly, with others doing "Quite nicely, thank you".

I should like to give an example of the kind of difference that can possibly occur between two companies. I will not bore the Committee with the full details of the accounts, although I will gladly let the Financial Secretary or his right hon. Friend have the figures if that should be desired. The first case is of a United Kingdom resident company with all income derived from overseas, paying foreign tax of 55 per cent., distributing half the profits as dividends, the other half being reinvested overseas. The shareholders in that company will receive compensation of£88,000 for a loss of£93,000.

The second case is again that of a United Kingdom resident company. It is a United Kingdom parent company with a 100 per cent subsidiary resident overseas. The subsidiary pays foreign tax at the same rate of 55 per cent., distributes 50 per cent. of its profits, the other 50 per cent. being retained in the business for reinvestment overseas. The shareholders in that company will receive compensation of£44,000 against the same loss of£93,000. I will repeat those figures. The compensation in the one case is£88,000 and in the other it is£44,000, and the loss in both cases is£93,000. It is a quite intolerable discrepancy.

I recognise that the Government's intentions in this matter are good and sound, but it is not open for them to say, "We have done our best. We admit that there are certain discrepancies left, but we cannot do any more about it." It is incumbent on them to look very seriously at this quite appalling problem facing some very big and important companies.

You will correct me if I am wrong, Dr. King, but I understand that the Chancellor of the Exchequer's Amendment—

The Chairman

Order. If right hon. Gentlemen wish to converse, I hope that they will do so quietly.

Mr. Peyton

I understand that Amendment No. 638, in the name of the Chancellor of the Exchequer, is being taken with the Amendment moved specifically by the Financial Secretary. Is that correct?

The Chairman

Yes.

Mr. Peyton

No. 638 is being taken as well?

The Chairman

Yes. Order. I am very sorry to be late in answering. It distracts the attention of hon. Members who are speaking—and, indeed, the attention of the Chair—if right hon. Gentlemen talk loudly when having private conversations.

Mr. MacDermot

On a point of order, Dr. King. I understand that we are discussing Amendment No. 636, which I moved, together with a group of Opposition Amendments, and that you are to call Amendment No. 638 later. Have I misunderstood the position?

The Chairman

My understanding is—and I can withdraw the Amendments from discussion if it is desired—that with this group of Amendments we are also taking Government Amendments No. 637 and 638.

Mr. MacDermot

I am very content, Dr. King. I had not understood that, but I am very glad to hear it. When I moved this Amendment I did not out-line the detailed provisions of Amendments No. 637 and 638, and if there are any points in them with which hon. Members wish me to deal I will, of course, happily do so.

The Chairman

The hon. and learned Gentleman will have an occasion to do so later in this debate.

Mr. Peyton

I am obliged to you, Dr. King, and to the Financial Secretary, for clearing up the position.

I come now to a point that I find extremely difficult, and not being as deeply steeped in tax law as are so many of my right hon. and hon. Friends I proceed only with greatest wariness, and ask the Financial Secretary to give me the most lucid and clear answers the Treasury Bench can afford.

I understand that the Government intend for the first time to introduce a very serious alteration to the double taxation relief system which has been in force for so very long in this country, and intend to do so by doing away with a company's ability to deduct excess foreign tax. Paragraph 5 of Schedule 15 provides that this shall be done on a date which Parliament shall hereafter determine; in other words, Parliament will lay down in due course that, for Corporation tax purposes, on such and such a date paragraph 7 of Schedule 16 to the Income Tax Act, 1952, shall no longer apply. That is to happen at some future date.

In the Government's Amendment No. 788 there is provision that the calculation shall be made without deduction for any unused credit for foreign tax. It therefore seems to me that the Chancellor is now doing for the purpose of Clause 79 what the Schedule appears to say will not be done until some later date. The result is that the amount of overspill that can be claimed may well be reduced. If a company is no longer allowed to take account of excess foreign tax, the unused credit for foreign tax referred to in Clause 79 will be reduced below the amount which is computed under the law as it is at present.

I hope that the Financial Secretary will give this point his attention when he replies. In particular, I would ask that between now and Report he will concentrate on the very considerable measure of injustice being inflicted on one company as against another, on one lot of shareholders as against another lot, by the very haphazard impact of the Amendment—and, indeed, of the original provisions.

Mr. MacDermot

Perhaps I ought to intervene at once to explain the provisions which I did not explain, but should have done in my opening speech. I am not seeking in any way to close the debate, not that I could do so even if I wanted to.

Turning to Amendments Nos. 637 and 638, the latter, in particular, provides three things. First, it covers tapering provisions over the new seven-year period and provides that there shall be full relief for the first three years and tapering will then take place over a four-year period instead of a three-year period. Consequently, the drop will be by fifths instead of quarters during the tapering years.

Secondly, the Amendment grants full relief for the full amount by which the tax credit and the base year exceeds the credit which would have been given if Corporation Tax had then been chargeable. It removes the restriction there was in the Bill limiting relief to the proportion of profits which would have been paid out as dividends during the year.

Thirdly, it makes three corrections of defects which have come to light in the original drafting.

The first is in favour of the taxpayer.

hope that it deals with the point raised by the hon. Member for Yeovil (Mr. Peyton). I should like to make clear that it is in favour of the taxpayer. This deals with the case where the relief period for calculating the grant on unused credit fell in the year 1965–66 but the company's income for that year was not within the charge to Corporation Tax. That would be because it was charged to Income Tax on the current year basis for that year. What the Amendment provides is that the overspill shall be completed as if the profits had been charged to Corporation Tax and not to Income Tax and Profits Tax. This will give a greater measure of overspill.

The second of the corrections is that the Amendment provides that where the foreign tax is at over 56¼ per cent., that is to say, in excess of Income Tax and Profits Tax at the current rates, the excess is to be disregarded. This is obviously right in principle, because there would not have been any effective credit for that extra tax under the old system. Thirdly, it provides that in measuring the unused credit no deduction is given for unused credit in ascertaining the income for United Kingdom tax purposes. Unless this had been done the overspill relief would put the shareholder in a company operating overseas in a more favourable position than a shareholder in a wholly domestic company. I can illustrate that with an example if hon. Members wish, but as often as not I find that a mass of figures serves rather to confuse than to clarify a point.

That, in effect, is a short outline of the effect of the provisions in Amendment No. 638 which, I hope, will be of assistance to the Committee. While I am on my feet I shall seek to reply to the specific points I have been asked in the debate so far. The hon. Member for Reading (Mr. Peter Emery) said that it had been stated in the publicity issued when these Amendments were published that they were to afford relief to the shareholder. He stressed that the moneys which will be payable will be payable to the company and that this will be relief to the company. That is absolutely correct; it will be entirely for the company to decide. This, in part, answers the right hon. Member for Orkney and Shetland (Mr. Grimond), the Leader of the Liberal Party. There is something a little artificial in our trying to say whether the assistance given will go to help the shareholder or the company for retentions.

If the company does both we can either regard the money obtained from foreign trading sources as being money which goes to the shareholder and the assistance given to the company would help it to plough back, or we could look at the matter the other way round. As most of the complaints have been that companies will find it difficult to maintain their net dividend, the answer was made that it was hoped that this help given during transitional period would assist companies in the object of maintaining the net dividend.

We are not, of course, saying that the assistance will necessarily in every case be effective to achieve that object, because we do not intend all these transitional provisions to put overseas companies in a more favourable position than an entirely domestic United Kingdom company. The effect of Corporation Tax will largely be to assist the low distributors more than to assist the high distributors. The transitional provisions will not serve to cushion a high distributing overseas company from the full effects of the introduction of Corporation Tax.

4.45 p.m.

Mr. Grimond

If it is the Chancellor's desire, as set out in the memorandum, to help the shareholders, has the Treasury considered, when it pays this money, deeming it to have paid withholding tax? That would prevent the company gaining any advantage by withholding payment from the shareholders.

Mr. MacDermot

For the reasons I have given, we cannot say that it would be more assistance to the companies or to the shareholders. A company has committed itself to payment of a dividend and it receives assistance. It can use the moneys it receives in order to help it to maintain the dividend and the plough back.

Mr. Peyton

There seems to be a fundamental mistake here. The Government say that they want to compensate people who have suffered and they admit that those who have suffered are the shareholders. I cannot understand why the Government are content to say that they have given everything they can and then leave the shareholders out of the calculation.

Mr. MacDermot

I did not imply that the people who have suffered are the shareholders. Some of the arguments made earlier were that the effect would be that the companies would retain their net dividends to shareholders and that this would slow down plough back and investment by the companies. It is perfectly correct to say that the effect of the relief will be to assist investment by those companies.

I was asked why the seven-year period had been selected. Originally, we selected a five-year period, which we thought on the advice we then had would be a sufficient period to help companies to tide over the effect of the introduction of this complete change in the taxation system. As a result of representations received, my right hon. Friend concluded that that was not a long enough period and that there ought to be one more year of full relief and tapering should be over seven years. That is how we arrived at the seven-year period.

A number of references have been made to the study which the F.B.I. has decided to set in motion. The suggestion is made that the extension of these transitional relief provisions was in some way attributable to the introduction of that study. That is not so. The two things are separate and not dependent upon each other in any way. The reason for the introduction is that we have been impressed with the arguments put forward as to the reasons why the original five-year proposals would not provide a sufficiently fair measure of relief. My right hon. Friend has said that he is willing to give all the assistance he properly can to the F.B.I. in any way in the researches which it is making.

We were asked what would be our attitude if the result of the inquiry were to produce new facts, new information, which might indicate need for a change the proposals which we are proposing should be in this Bill. Well, of course, vie are introducing a permanent change into the taxation system and we must introduce in connection with that proper transitional provisions as matters stand at this time.

If, as a result of either this survey or any other—if at any time—new facts come to light which throw a new light upon the decisions which have been taken, of course we will consider them, and will reconsider the position in the light of those facts. We have taken these decisions on the basis of a judgment, which we have explained to the Committee, about the level and effect of our present overseas investment.

This leads me to the other matter which has been touched upon by a number of hon. Members, which is really going back to one of the major issues which divides the Committee, which is whether we can properly regard the level of our overseas investment in relation to our balance of payments as a purely temporary problem, or whether there is a fundamental underlying imbalance here which needs correction. We think that there is.

The right hon. Gentleman the Member for Orkney and Shetland suggested that this is primarily a Government problem rather than of private overseas investment. I would remind the Committee again of the figures. Our net balance on current account has been£25 million on average over the last 10 years. As against that we have been investing overseas in private investment alone£80 million a year on average, over three times the amount of our surplus. The total figure, Government and private, has been running at£170 million. These are consistent figures on average, year in and year out, and during these 10 years we have now run into our third balance of payments crisis and we cannot feel that this is a situation which we can just regard as something which can be dealt with by a mere temporary expedient.

So I have been drawn into what, Dr. King, you have been urging hon. Members not to do, to go back over the arguments.

The Chairman

I hope that hon. Members will not pursue the general question of overseas trade operations which we discussed on an earlier Clause.

Mr. Heath

I wonder, Dr. King, whether I may have your guidance upon one point. We are discussing Government Amendment No. 638 in conjunction with others. Are we also discussing the Amendments down to the Government Amendment, Amendments standing in the names of my hon. Friends the Members for Middleton and Prestwich (Sir J. Barlow) and the Member for Yeovil (Mr. Peyton)? Are they selected or not selected?

The Chairman

They are not selected. I am sorry if the right hon. Gentleman has not been made aware of this. There must have been a slip-up in communications.

Mr. Geoffrey Lloyd (Sutton Coldfield)

I shall, of course, observe your Ruling, Dr. King, and merely remark that we are completely in disagreement with the Financial Secretary over overseas investment. We think that his approach is wrong.

The point I want to put is this. The Financial Secretary has said that if facts come to light later they will be taken into account, to ease the impact of this tax. I would like him to take account of the facts which we already know. I want to put to the Committee one series of facts and to ask the Financial Secretary how he thinks this matter should be dealt with.

In general, I would say that we do not at all accept his doctrine that an extension of the period of relief by two years is a generous act of the Chancellor giving extra compensation. We look at it completely differently. We think that the Chancellor has broken one of the maxims of proper taxation practice, in that he has introduced a fundamental change in the taxation system without proper prior inquiry. He should know that tax authorities in the world at large accept that a tax system, after adjustment over many years, is something which is related to the economic life of a country which practices it, and that to make a change is to run the risk of producing a very large number of anomalies.

This is the point which my hon. Friend the Member for Yeovil (Mr. Peyton) so well brought out this afternoon, and this is what I want to pursue a little.

I want to pursue it in particular with regard to what I think the Committee will agree is the most important national interest, namely, the efficiency of our great oil industry. It is natural that I should instance this. I have no financial interest in any of the companies, but for about 10 years I was the Minister responsible for this industry, including the time of the war, when it rendered such tremendous service.

I instance the effect on the two great companies which together do between one-third and one-half of the total business in oil in the world. As I have said before, oil is the commodity which, both by value and by volume, is the most important commodity entering into international trade. Therefore, the magnitude to our national interest can be appreciated.

I understand that the effect on these two great companies is absolutely different. I understand, with regard to the Shell Company, for example, that shareholders, as a result of this tax change, will he about£17 million to the bad, and I understand that under this Clause which the Chancellor is seeking to extend by another two years there would be about£10 million of relief, which itself has to bear tax of 41¼ per cent.,£4 million, and, therefore,£6 million is the net amount of relief on the loss of£17 million. That is about one-third of the loss.

With regard to the other great company, British Petroleum, the loss is£12 million and I understand that under this Clause, which is to be continued further by the Amendment, the relief is getting on to that amount.

So we have the two great companies which are, so to speak, the great twins of the British effort in the world's oil trade, the one deeply injured, and the other relieved to almost 100 per cent. This is the point I want to put to the Financial Secretary, because it is this we are seeking to improve by some of the Amendments now being considered with the Government's Amendment.

Mr. John Harvey (Walthamstow, East)

Without wishing, Dr. King, to trespass for one moment on your injunction to us, I would take issue with the Financial Secretary in saying that what divided us was this fundamental approach to the underlying imbalance. What really divides us is that the same blunt instrument is being used at a time when, perhaps, some curtailment is needed and being used on investment which has already taken place. Our feeling on this side of the Committee is that one should still try to find a formula whereby one can curb new investment without our injuring the old. That is what many of us are trying to achieve by these Amendments.

It becomes more and more difficult, with a Bill which changes its character day by day and night by night or early morning by early morning, for a layman to follow all the various changes which are taking place, and the various commitments the Government have given to re-examine things between now and Report.

What worries us is the Financial Secretary's statement of a few moments ago that one of the reasons for Amendment No. 638 is to correct defects which have come to light in the original drafting. One cannot help wondering how many other defects there are in the original drafting, and, indeed, how many of them will go into the Act as a result of the pace at which this enormous Measure is being forced through, and because of the lack of consideration which so much of it is receiving, despite all the consideration which we are trying to give it.

I ask the Financial Secretary whether I am right, as I think I am, in assuming that it is still the case that overspill relief is being calculated on the basis which compares foreign tax credit received in a previous year with credit which would have been received if gross overseas income for that year had been charged to Corporation Tax at a rate which the Chancellor still has to fix for the current year or a future year, when the circumstances of the company can, of course, be very different from those in which the original profit was made. Despite the relief that is now to be granted, it seems that if any of this relief is given to the shareholders in a company, the Government will immediately get back 40 per cent. of it.

5.0 p.m.

Mr. Eric Lubbock (Orpington)

Can the hon. Gentleman tell me where in the Bill he finds the levying of Corporation Tax on this overspill relief?

Mr. Harvey

I was just asking the Financial Secretary whether I was right in understanding that that was the case. This is how many people outside the Committee see the position, and it would be of great help if the point could be clarified. If the case that I have outlined is not correct many people will be glad to hear it.

That brings me to the point made by my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd), that even under such concessions as have been made—I dislike having to use that word, but it is the simplest way of describing the fact that the Government proposes to take less from people than they first thought of taking—it remains true that some companies will be treated vastly differently from others. Companies which to all intents and purposes earn their money in the same way, and contribute the same amount to the balance of payments, will, as my right hon. Friend suggested, he treated differently.

My right hon. Friend cited the two giants of the oil industry, but this sort of pattern could be repeated again and again in the whole structure of our economy, with varying effects on overseas investment, and, whatever may divide us, surely we are all concerned to see that the levels of overseas investment already made are maintained and are able to make their contribution to our future balance of payments.

Mr. Lubbock

I want to follow the point made by my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) when he referred to paragraph 2 of the Chancellor's memorandum which was issued when the new Amendments were put down. The sense of this part of the memorandum was that in putting down the Amendments the Government were helping these companies to maintain their dividends. Would the hon. and learned Gentleman be good enough to look at the example of an overseas company which is given on page 30 of the White Paper, The Corporation Tax, Cmnd. 2646, and tell us whether this company—I did not select it, it was the Government's choice—is able to maintain its dividends?

Perhaps I could through the figures for the benefit of anyone in the Committee who has not got the White Paper before him. This is a company which is trading wholly overseas and has selected 1963–64 as its base year. Profits in that year were£20,000. It paid overseas tax on them at 50 per cent. amounting to£10,000. Its United Kingdom tax bill would have been 53¾ per cent. of£20,000, that is 7s. 9d. Income Tax plus 15 per cent. Profits Tax. That comes to£10,750, against which it would have received a credit of£10,000 for overseas tax. As I understand, it would, therefore, have been liable to only£750 taxation in this country.

The example says that it paid a net dividend, after tax, of£6,000 to its shareholders, so we have£10,000 paid to the overseas Government,£750 paid to the United Kingdom Government, and£6,000 net dividends to shareholders, leaving a retention of£3,250. It goes on to say: If the rate of Corporation Tax is 40 per cent., the amount which it would have paid on the income of the base year would have been£8,000,"— that is 40 per cent. of£20,000— and the relief is a proportion of the amount by which the credit actually given"— which w as£10,000— exceeds£8,000, i.e., a proportion of£2,000. After giving the arithmetic on this it comes out with a figure of£1,297 relief. I would be grateful if the Financial Secretary would deal with the point about Corporation Tax on the relief, because I have looked at Schedule 15, which, I think, refers to this, but I am at a loss to make head or tail of it.

If the company paid the same dividend of£6,000 net after tax, it would have to account for it to the Inland Revenue. I have grossed that up at 8s. 3d., and according to my calculation it is£10,210. Thus, if the company makes the same profit in the year that we are considering, and the rate of taxation in the overseas country is still the same, it is unable to maintain its dividend because the sum of the overseas taxation and the grossed-up dividend paid in this country comes to more than£20,000, leaving aside the relief amounting to£1,297. If the Corporation Tax is levied on that, it reduces to£780, and the company is just about able to maintain its dividend by paying out the whole of its profits and having no retentions whatsoever.

I think that in considering this matter we ought to make a comparison on the basis that everything else is equal, because the Financial Secretary said that one can look at this relief as being given to the shareholder, or, alternatively, as being put to retentions. I think that the hon. and learned Gentleman ought to deal with the overall effect, assuming that everything else—profits, and the amount of dividend which the company is paying—is the same as it was in the base year.

Sir John Barlow (Middleton and Prestwich)

The object of the Chancellor's Amendment is to extend the death period of overseas trading corporations by five years, and it has been suggested that this should be considered as a great concession. I do not regard it as that at all. It merely extends for a short time the period of strangulation of many of these companies.

I have tabled two small Amendments which would improve the Bill enormously, but I gather that they are not likely to be taken to a Division. It seems to me that the abolition of O.T.C.s. and the period through which they will go before their complete abolition, have been insufficiently considered by the Government, who have received representations from different influential quarters to show the good work which these O.T.C.s do. Special tax legislation for them was provided in the Finance Bill of 1957, and it has worked admirably.

The Financial Secretary has pointed out more than once the increasing amount of private capital going abroad and the relatively small amount of revenue coming back. This may be true in certain cases, but if he wants to remedy the situation I suggest that the method proposed by the Government is not the proper way to do it. Last week, I quoted large groups of companies which invested many years ago. By ploughing back profits they have modernised and increased their holdings abroad, and they now bring in very substantial sums of revenue every year, not only by way of dividends, but by way of export orders for machinery, technical help, banking, insurance, and so on.

That is of very great value. If the Government wish to prevent too much private capital going abroad—and I sympathise with them in this, in certain cases—this is not the way to do it. The proposal to extend the death period from five to seven years in no way meets the situation.

This may well lead to retaliation by many other countries. It may lead to a tax war, which would be very unfortunate. We know the importance of tax wars. We have seen them in the past, and know how dangerous they can be. This method of O.T.C.s, which has been working satisfactorily for several years, is to be strangled in another seven years. I urge the Government to consider other means of meeting this large export of private capital.

Furthermore, we may lose important raw materials. They could easily go to other countries. We have little time to discuss this subject today, and I merely urge the Government to consider it again before Report, because there could be severe consequences.

Mr. MacDermot

I apologise for rising a third time. I do so purely to answer the specific question whether the payments of this relief would themselves be subject to Corporation Tax in the hands of a company. The answer is, "No". It is to be found in lines 35 and 36, on page 105. The right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd) drew attention to a point about which there has been considerable publicity, namely, the different effect of this proposal—owing to the different structure of the companies—upon B.P. and Shell.

It has been said throughout, in respect of both our original proposals and our latest proposals, that B.P. derives proportionately more advantage than does Shell. This is an illustration of the point to which the hon. Member for Yeovil (Mr. Peyton) drew attention originally. It is perhaps inevitable that a scheme of this kind operates somewhat haphazardly and has different effects upon companies in different situations.

I have been trying to follow the figures mentioned in the case referred to by the hon. Member for Orpington (Mr. Lubbock), but I could not see the reason which produced the result. I shall be glad to study it further, however, and if the hon. Member would like to give me further information I shall be happy to consider it. I concede that any major tax change of this kind—whatever we do by way of relief—will assist some companies more than others. It was for this sort of reason that we felt it right to extend the relief, so as to give a fairer measure of that relief to companies who were particularly badly hit before.

Mr. Lubbock

Can the hon. and learned Gentleman say whether the hypothetical company quoted in the Government's own White Paper would be able to maintain its dividends?

Mr. MacDermot

I have not got the White Paper with me. I should like to go into that matter and write to the hon. Member, if I do not have an opportunity of answering the point in Committee today.

Mr. John Harvey

Will the hon. and learned Gentleman answer the point that I raised? I was not in any doubt about Corporation Tax. I asked whether, if a company passed on all of that relief to its shareholders, Income Tax would mop up 40 per cent. of the relief and bring it hack to the Government.

Mr. MacDermot

Yes. That is perfectly clear. If we regard the relief as money passed on to the shareholders, in so far as it is passed on to a shareholder it will become subject to tax in his hands, depending upon what his rate of taxation is. For the reasons that I have given, one can equally regard this as money that would help a company if it were retained.

Sir Edward Boyle (Birmingham, Handsworth)

We have been discussing Government Amendments for nearly one and a half hours, and the Committee may feel that the time has come to reach a conclusion. Having addressed the Committee at some length last week on the main principle of this subject I do not propose to speak at length today, but it is fair to say that ever since the introduction of the Budget—and certainly since the publication of the Finance Bill—particularly strong pressure has been put upon the Chancellor to ease the position of companies operating abroad. It cannot be disputed that the Government Amendments that we have been discussing this afternoon will have the effect of softening the blow for a number of those companies which are most severely affected.

I do not wish to underrate the importance of another aspect of these Amendments, namely, the decision that where credit is paid in the first three years this will be the full amount and not the proportion related to the dividends paid. Many criticisms were specifically related to that point. None the less, it should he made clear that the fact that these reliefs have been given and these important changes have been made in this Clause in no way alters our general feeling about the operation of the Corporation Tax in its overseas form.

The Financial Secretary said one thing that very much pin-points this fact, namely that the purpose of these transitional reliefs was to give the companies concerned time and opportunity to adjust themselves. I want it to be absolutely clear that quite apart from the differing treatment of different companies these proposals mean a major change, and are bound to affect most severely a number of corporations which are inevitably concerned with overseas investment and have always been in that business.

From the beginning the criticism has been that we are dealing with a Measure which does not selectively control future overseas investment but cracks down indiscriminately on the investment that already exists, not least in the case of those business which are bound to be particularly concerned with overseas investment—indeed, whose whole raison d'être is overseas investment.

5.15 p.m.

It is worth considering what is likely to happen during this transitional period. I put it strongly to the Government that we must approach this subject in a critical frame of mind and consider all the possibilities. First, I am certain—and the closing words of the Financial Secretary confirm my view—that in future Finance Bills we shall have to do a considerable amount of mopping up within the ambit of what has been proposed, although I hope that it will not be long before we are back in office and are able to consider the whole question of the right scheme for business taxation. Let everyone be clear that even within the ambit of what is proposed many anomalies and very difficult cases are bound to present themselves. My right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) has mentioned one of particular importance.

I mentioned last week, as my hon. Friend the Member for Walthamstow, East (Mr. John Harvey) pointed out today, that retaliation might take place during this transitional period. It is often a fault of the party opposite that it is somewhat insular and isolationist in its approach to these matters. It forgets the implications of its proposals for other countries, and their determination to see that we do not get certain advantages for ourselves from them.

During the whole of the next few years, and certainly in this transitional period, it will become more and more apparent that science and technology are of international importance and that, in general, a "little England" approach to the question of overseas investment cannot make sense. In my opinion, these points show that we are fundamentally opposed, as I have said on many occasions, to the operation of Corporation Tax so far as it affects companies trading overseas. We are fundamentally opposed to what is proposed in the Bill and, also, we believe that, during this transitional period, many of the disadvantages of the Government's proposals will become more apparent.

There is much more which I could say. For example, a number of hon. Members have touched on the fact that it may no longer be possible to expense-out present unrelieved taxation. One point on which I do not necessarily insist upon an answer now is one of which I will put a detail to the Financial Secretary. I am not clear what has happened to subsection (2) of the original Clause 79, but perhaps he might find a chance to answer that on a future Amendment. Meanwhile, let us recognise that the reliefs which we have been discussing during the past hour and a half are not unimportant. They will soften the blow. They meet a number of representations which have been made, but, none the less, we are discussing simply the suspended sentence of death.

We agree with all the criticisms made by my hon. Friend the Member for Middleton and Prestwich and we repeat our entire dissatisfaction with the basic scheme which has given rise to the need for these transitional and tapering proposals.

Amendment agreed to.

Sir E. Boyle

I beg to move Amendment No. 601, in page 104, line 15, at the end to insert: adjusted where appropriate to take account of any difference between the rates of United Kingdom taxes by reference to which the credit for foreign tax was calculated in the base year and the said current charge to corporation tax. This is a technical but, I think, quite important Amendment, which I hope to be able to explain fairly briefly to the Committee. The object of the Amendment is to secure that, for the purpose of calculating the transitional and tapering relief which we are considering in this Clause, we should make a true comparison between the foreign tax credit each rear allowed on the company's income is its chosen base year and the credit which would have been allowed in that rear if Corporation Tax had then been in force. As the Clause is at present drafted, the relief due under subsection (1) is the difference between the credit for foreign tax in the base year and the current charge of Corporation Tax.

Our case is that these two amounts should be calculated on the same basis, but this is not so under the Clause as it stands. What the Clause and the White Paper—which I shall be quoting from—say is that these two amounts may be calculated on the same income, which is not the same thing. The point is, surely, that if Corporation Tax had been in force in the base year, the amount of income assessable would not have been the same. It would have been less in all those cases where the foreign rate of tax exceeded the Corporation Tax rate. The reason for this is that, under the law as it will have applied in the base year and still applies at the moment, the amount of income assessable—the chargeable income, if hon. Members prefer—would have been reduced by deducting from it the amount of foreign tax for which credit could not be claimed.

If this had been done, the Corporation Tax chargeable on the overseas income would have been appreciably lower than the figure arrived at under the Clause as it is drafted, and the overseas overspill relief provided for by this Clause would be correspondingly higher. Let me give an example, which I will base on the simplified figures given in the Chancellor's White Paper. That is to say, I will consider, as the White Paper does on page 30, the case of a company with a foreign income of£20,000, paying foreign tax at 50 per cent., that is£10,000, and assuming a Corporation Tax rate, as the White Paper does, of 40 per cent.

I should like to make my point clear by taking the position of the company first of all in the base year, then tinder Clause 79 as at present drafted, and, thirdly, as it would be under my Amendment. In the base year, I think that we shall be on common ground. The company would have paid Income Tax and Profits Tax on an income of£20,000 at a rate of 53¾ per cent. It would have paid tax of£10,750 and, deducting credit for foreign tax of£10,000, it would have paid, therefore,£750 in tax. I come secondly, to Clause 79 as drafted. What the Chancellor says is that a Corporation Tax of 40 per cent. on an income of£20,000 amounts to£8,000 and that the excess, for purposes of Clause 79(1), is£10,000, the total of the company's foreign tax in the base year minus£8,000—that is to say£2,000.

We believe that that approach is not sufficient and our case is that if the United Kingdom rate of tax in the base year had been 40 per cent., that is to say, less than the foreign rate of 50 per cent., the amount of foreign tax for which credit could not be claimed would have been deducted in arriving at the amount of income assessable. The unrelieved foreign tax would have amounted, given the figures which I am assuming in this example, to£3,333, so that the assessable income would, in practice, have been not£20,000 but£16,667. At 40 per cent., the tax payable on that income would have been£6,667, which leaves us with an excess, or overspill, not of only£2,000 as provided for in the Bill but of£10,000 minus£6,667, which would have been£3,333.

If hon. Members ask, as they reasonably might, how this figure of unrelieved foreign tax is arrived at under the present system—it is a question which I asked myself—the answer is, if the Committee will forgive me, that this is a matter of fairly straightforward O-level algebra. If one still takes the Chancellor's model and says that£X is unrelieved foreign tax and£Y the element of foreign tax for which, under our existing system, credit is given, then X plus Y must equal £10,000, which is the total of foreign tax. Also, because the credit cannot be bigger than the United Kingdom tax assessment, the Corporation Tax of 40 per cent. or two-fifths will mean that Y must be equal to two-fifths of£20,000 minus X.

I apologise to the Committee, but I thought that I would explain this so as to show that I am not making up this figure of unrelieved foreign tax out of my head. There is a rationale for it. If we reduce the calculation on paper to two simultaneous equations:

X + Y =£10,000

Y = ⅔ (£20,000— X)

it will lead to the result that

3X =£10,000

or that X, the unrelieved foreign tax, is£3,333—

Mr. Grimond

It would facilitate the work of the Committee if the right hon. Gentleman would bring in a blackboard.

Sir E. Boyle

I have finished these calculations, but I had been puzzled by this myself and thought I should try to explain it to the Committee.

Coming back to the argument which I was developing just now, if the Corporation Tax had been in force for the base year the chargeable income would have been, as I have said, not£20,000 but£16,667. The excess or overspill to which the Clause relates would have been not just£2,000, as provided for in the Clause, but rather more than£3,000.

I claim that there is a real point of importance here. After all, the whole purpose of the overspill relief over the transitional reliefs which we are now considering is that, during the first few years when relief is at the full rate, the company should be left as near its present position as possible. I think that the principle which I have tried, I hope reasonably coherently, to explain—that when we are considering this relief we ought to consider the relevant amounts on the same basis and not just calculate them on the same income—is a point of substance. I therefore claim that the calculation of current charge to Corporation Tax for the purpose of Clause 79 should be based, in cases where the foreign rate of tax exceeds the Corporation Tax rate, not on the actual assessment in the base year but on what that assessment would have been had the tax then been payable at Corporation Tax rate.

This may seem a technical Amendment, but what I am proposing, I feel, is only right and equitable and is surely relevant to the detail of the scheme which the Government are putting forward in the Clause.

5.30 p.m.

Mr. MacDermot

I hope that I can be as successful as the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) was in making myself crystal clear to the Committee. The right hon. Gentleman has blinded us with what I might call O-level algebra. I hope that my reply does not sound too much like variable geometry. Before I turn to the Amendment, may I answer a question he asked me almost in parentheses at the end of the debate on the last Amendment. He asked me what has happened to subsection (2). I think that he will find it now in subsection (4) as amended.

Turning to the much simpler questions the right hon. Gentleman put to me, I think that the Amendment is based on a misconception of what would be the fair comparison. As I grasp the right hon. Gentleman's point, it is this. Under the existing law, the taxpayer who draws income from overseas has his statutory income for United Kingdom tax purposes determined by deducting from the gross amount of the foreign income any unrelieved overseas tax. In practice, I understand that the deduction is arrived at by accountants for companies by grossing up the net foreign income received. The deduction for unrelieved tax is then the difference between the grossed up amount of net income and the foreign income before payment of the foreign taxes.

The proposal in the Amendment is that this same principle should be applied in arriving at the current charge to Corporation Tax on the base year's income with which the credit given for the base year is to be compared. If I can put it in terms of an example, I ask hon. Members to suppose that a company in its base year had earned profits of£1,000 taxed overseas at 50 per cent. Its credit for the base year would then have been£500. The difference between this and Corporation Tax at 40 per cent. on£1,000, if I have followed the right hon. Gentleman, is£100. This is the amount of relief which would be due under my right hon. Friend's proposals.

The thesis in the Amendment is that, if Corporation Tax had been in force in the base year, there would then have been a deduction in computing the statutory income for Corporation Tax purposes, so that the statutory income would have been, not£1,000, but£500 grossed up at 40 per cent., which I understand is£833, on which Corporation Tax would be£333. The overspill relief then becomes the difference between£500 and£333, namely,£167, as opposed to the£100.

The fallacy of this argument is that, although at the notional charge to Corporation Tax there would admittedly be unrelieved tax in relation to the company's tax liability as such, there is, under my right hon. Friend's new proposals, no tax unrelieved at the end of the day, because the company is given an overspill payment equal to the amount of overseas tax for which it would, under the notional Corporation Tax calculation, not get credit. So all the overseas tax is effectively relieved, and to give a deduction for so-called unrelieved tax would, in fact, be to give the relief twice over.

It can easily be shown also that the proposal would be too generous by a comparison between a company operating wholly overseas and one operating wholly in the United Kingdom. This is a point of which I think the right hon. Gentleman lost sight when he said that the object should be to leave the overseas trading company in as near its present position as possible for the first three years of the transition period. That must be subject to the qualification that it should not be put into a more favourable position in relation to the introduction of Corporation Tax than a United Kingdom company would be.

I can give figures to illustrate this point, if the Committee wants them, but perhaps hon. Members have had a surfeit of figures at the moment. The point of principle involved is that there would be no justification for putting the overseas company in a better position than its United Kingdom counterpart.

For these reasons, I must advise the Committee to reject the Amendment.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I would not attempt for a moment to go into the realms of algebra entered by my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) and the Financial Secretary. Subsection (1, b) is incredibly complicated. Very few ordinary company accountants will understand what it is all about. I ask the Financial Secretary to try to think of a slightly more simple basis for working out this relief. The provision is hypothetical in two ways, because we do not know in any given year what the rate of Corporation Tax will be, nor do we know what the rate of foreign tax will be in any given year, Both of these factors are variable. So the Government have landed a company with two variables for the future which will make it extremely difficult for there to be any prediction as to what the relief may be in years to come. It is bad enough when there is one variable. When there are two variables it is much worse.

The figure is perhaps unfairly high. The present rate of Income Tax and Profits Tax is 56¼ per cent.; that is under the Socialist Government now existing. Under the Conservative Government not long ago the rate was only 53¾ per cent., but the Chancellor of the Exchequer put up Income Tax. In the past year, which is the year we have been considering, the rate was only 53¾per cent. That should surely allow a company to use that lower rate in computing its profits for the base year. This would give a lower rate of tax, if the Government were to adopt such a solution.

The next objection I have to the present system is this. As tax rates rise, the value of the relief will be eroded. If the Corporation Tax is at 40 per cent.—it may rise to 42 per cent. or 45 per cent., because right hon. Members opposite are famous for their ability to screw taxes up year by year—and at the same time Income Tax rises the value of the relief will dwindle in two senses. It will dwindle, first, in the hands of the company. It will dwindle, secondly, because any extra payments in the form of dividends to the shareholders will be reduced if Income Tax rises.

Not only is the whole system extremely complicated. It is rather unfair and it is very vulnerable if taxes rise again in future. I support what my right hon. Friend said. I hope that the Financial Secretary will think again about this subsection and see if he can devise something more simple and something which will more acceptably grant exactly the same terms of relief as at present, which I think the whole Committee feels is the object it would like to achieve during the transitional period.

Mr. Peyton

As I understand, the Chancellor and the Government have made use of the idea of a notional rate of tax in order to relieve the overseas trading corporation, but this does not cover the company which largely trades overseas in a non-technical sense. Would the Chancellor be good enough to look at this point and consider some of the companies—and Shell has been particularly mentioned—to see whether the device which he used to help overseas trading corporations could be used to help these companies. They are in an extraordinary position which I am sure the Government did not intend them to be in, and it would be helpful if the Government explored that line.

Mr. Geoffrey Hirst (Shipley)

The Financial Secretary has been amiable, but I am more perplexed now than I was before he spoke. The question of double relief is begging the point, unless I am slow on the uptake this afternoon. The comparison which my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) made was between the situation as it is and as it would be by reason of Corporation Tax. At the moment income derived from overseas trading companies would have been grossed up for tax purposes on the basis of an Income Tax and Profits Tax rate of something like 53¾ per cent., but for Corporation Tax they surely should be grossed up by reference to the Corporation Tax rate. The Clause is meant to be a relief Clause and is not supposed to impose a penalty. As I see it, it puts one more difficulty in the way of overseas trading companies.

If this is the Government's policy, and basically it is, we should know about it, but I am surprised that it should apply

in this Clause. I should like clarification of this. If it is the Government's policy to substantially under-rate relief in the process of dealing with the Clause we ought to know, and the companies concerned should know. If it is not, we should examine the matter more closely. I am not satisfied with the explanation given in reply to the extraordinarily clear speech of my right hon. Friend.

Mr. Peter Emery

Although my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) said that this is a technical Amendment, there is no doubt in anybody's mind that it is very important and is particularly relevant to a number of firms. The Financial Secretary followed through a slightly different example from that given by my right hon. Friend, but we come down basically to the fact that the income consists of dividends from an overseas country and they would have been grossed up for tax purposes in the base year by reference to Income Tax and Profits Tax rates totalling 53.75 per cent. We say that for Corporation Tax purposes they should be grossed up by reference to the Corporation Tax rate which would have been applicable.

Unless the Amendment is made we say that the base year gross income will be used for this purpose of calculating a notional Corporation Tax charge and that that relief will be substantially understated and overspill relief will not be properly given. The difference between the two sides of the Committee on this matter is that the Government hold to their argument that this must be exactly the same for companies trading in this country as for companies trading overseas. We have never accepted that argument, which is basically the only argument that the Financial Secretary has given to the Committee for opposing the Amendment, and therefore I would advise my hon. and right hon. Friends to divide the Committee.

Question put, That those words be there inserted:—

The Committee divided: Ayes 284, Noes 287.

Division No. 194.]	AYES	[5.44 p.m.
Alison, Michael (Barkston Ash)	Amery, Rt. Hn. Julian	Atkins, Humphrey
Allan, Robert (Paddington, S.)	Anstruther-Gray, Rt. Hn. Sir W.	Awdry, Daniel
Allason, James (Hemel Hempstead)	Astor, John	Baker, W. H. K.
Balniel, Lord	Gardner, Edward	Marten, Neil
Barber, Rt. Hn. Anthony	Gibson-Watt, David	Mathew, Robert
Barlow, Sir John	Giles, Rear-Admiral Morgan	Maude, Angus
Batsford, Brian	Gilmour, Ian (Norfolk, Central)	Mawby, Ray
Beamish, Col. Sir Tufton	Glover, Sir Douglas	Maxwell-Hyslop, R. J.
Bell, Ronald	Godber, Rt. Hn. J. B.	Maydon, Lt.-Cmdr. S. L. C.
Bennett, Sir Frederic (Torquay)	Goodhart, Philip	Meyer, Sir Anthony
Bennett, Dr. Reginald (Gos & Fhm.)	Goodhew, Victor	Mills, Peter (Torrington)
Berkeley, Humphry	Gower, Raymond	Mills, Stratton (Belfast, N.)
Berry, Hn. Anthony	Grant, A[...]hony	Miscampbell, Norman
Biffen, John	Grant-Ferris, R.	Mitchell, David
Biggs-Davison, John	Gresham Cooke, R.	Monro, Hector
Bingham, R. M.	Grieve, Percy	More, Jasper
Birch, Rt. Hn. Nigel	Griffiths, Eldon (Bury St. Edmunds)	Morrison, Charles (Devizes)
Black, Sir Cyril	Griffiths, Peter (Smethwick)	Mott-Radclyffe, Sir Charles
Blaker, Peter	Grimond, Rt. Hn. J.	Munro-Lucas-Tooth, Sir Hugh
Bossom, Hn. Clive	Gurden, Harold	Murton, Oscar
Bowen, Roderic (Cardigan)	Hall, John (Wycombe)	Neave, Airey
Box, Donald	Hall-Davis, A. G. F.	Nicholls, Sir Harmar
Boyd-Carpenter, Rt. Hn. J.	Hamilton, Marquess of (Fermanagh)	Nicholson, Sir Godfrey
Boyle, Rt. Hn. Sir Edward	Hamilton, M. (Salisbury)	Noble, Rt. Hn. Michael
Braine, Bernard	Harris, Frederic (Croydon, N.W.)	Nugent, Rt. Hn. Sir Richard
Brewis, John	Harris, Reader (Heston)	Onslow, Cranley
Brinton, Sir Tatton	Harrison, Brian (Maldon)	Orr, Capt. L. P. S.
Brooke, Rt. Hn. Henry	Harrison, Col. Sir Harwood (Eye)	Orr-Ewing, Sir Ian
Brown, Sir Edward (Bath)	Harvey, Sir Arthur Vere (Macclesf'd)	Osborn, John (Hallam)
Bruce-Gardyne, J.	Harvey, John (Walthamstow, E.)	Osborne, Sir Cyril (Louth)
Bryan, Paul	Harvie Anderson, Miss	Page, John (Harrow, W.)
Buck, Antony	Hastings, Stephen	Page, R. Graham (Crosby)
Bullus, Sir Eric	Hawkins, Paul	Pearson, Sir Frank (Clitheroe)
Burden, F. A.	Hay, John	Peel, John
Butcher, Sir Herbert	Heald, Rt. Hn. Sir Lionel	Percival, Ian
Buxton, Ronald	Heath, Rt. Hn. Edward	Peyton, John
Campbell, Gordon	Hendry, Forbes	Pickthorn, Rt. Hn. Sir Kenneth
Carlisle, Mark	Higgins, Terence L.	Pike, Miss Mervyn
Cary, Sir Robert	Hill, J. E. B. (S. Norfolk)	Pitt, Dame Edith
Channon, H. P. G.	Hirst, Geoffrey	Pounder, Rafton
Chataway, Christopher	Hobson, Rt. Hn. Sir John	Powell, Rt. Hn. J. Enoch
Chichester-Clark, R.	Hogg, Rt. Hn. Quintin	Price, David (Eastleigh)
Clark, Henry (Antrim, N.)	Hooson, H. E.	Prior, J. M. L.
Clark, William (Nottingham, S.)	Hopkins, Alan	Pym, Francis
Clarke, Brig. Terence (Portsmth, W.)	Hordern, Peter	Quennell, Miss J. M.
Cole, Norman	Hornsby-Smjth, Rt. Hn. Dame P.	Ramsden, Rt. Hn. James
Cooke, Robert	Howard, Hn. G. R. (St. Ives)	Rawlinson, Rt. Hn. Sir Peter
Cooper-Key, Sir Neill	Hunt, John (Bromley)	Redmayne, Rt. Hn. Sir Martin
Curdle, John	Hutchison, Michael Clark	Rees-Davies, W. R.
Corfield, F. V.	Irvine, Bryant Godman (Rye)	Renton, Rt. Hn. Sir David
Costain, A. P.	Jenkin, Patrick (Woodford)	Ridley, Hn. Nicholas
Courtney, Cdr. Anthony	Jennings, J. C.	Ridsdale, Julian
Craddock, sir Beresford (Spelthorne)	Johnson smith, G. (East Grinstead)	Roberts, Sir Peter (Heeley)
Crawley, Aidan	Johnston, Russell (Inverness)	Robson Brown, Sir William
Crosthwaite-Eyre, Col. Sir Oliver	Jones, Arthur (Northants, S.)	Rodgers, Sir John (Sevenoaks)
Crowder, F. P.	Joseph, Rt. Hn. Sir Keith	Roots, William
Cunningham, Sir Knox	Kaberry, Sir Donald	Royle, Anthony
Curran, Charles	Kerr, Sir Hamilton (Cambridge)	St. John-Stevas, Norman
Currie, G. B. H.	Kershaw, Anthony	Scott-Hopkins, James
Dalkeith, Earl of	Kilfedder, James A.	Sharples, Richard
Dance, James	Kimball, Marcus	Shepherd, William
Davies, Dr. Wyndham (Perry Barr)	King, Evelyn (Dorset, S.)	Sinclair, Sir George
d'Avigdor-Goldsmid, Sir Henry	Kirk, Peter	Smith, Dudley (Br'ntf'd & Chiswick)
Dean, Paul	Lagden, Godfrey	Smyth, Rt. Hn. Brig. Sir John
Deedes, Rt. Hn. W. F.	Lambton, Viscount	Spearman, Sir Alexander
Digby, Simon Wingfield	Lancaster, Col. C. G.	Speir, Sir Rupert
Dodrts-Parker, Douglas	Langford-Holt, Sir John	Stainton, Keith
Doughty, Charles	Legge-Bourke, Sir Harry	Stanley, Hn. Richard
Douglas-Home, Rt. Hn. Sir Alec	Lewis, Kenneth (Rutland)	Steel, David (Roxburgh)
Drayson, G. B.	Litchfield, Capt. John	Stodart, Anthony
		Stoddart-Scott, Col. Sir Malcolm
du Cann, Rt. Hn. Edward	Lloyd,Rt.Hn.Geoffrey(Sut'nC'dfield)	Studholme, Sir Henry
Eden, Sir John	Lloyd, Ian (P'tsm'th, Langstone)	Summers, Sir Spencer
Elliot, Capt. Walter (Carshalton)	Lloyd, Rt. Hn. Selwyn (Wirral)	Talbot, John E.
Elliott, R. W.(N'c'tle-upon-Tyne,N.)	Longden, Gilbert	Taylor, Edward M. (G'gow.Cathcart)
Emery, Peter	Loveys, Walter H.	Taylor, Frank (Moss Side)
Errington, Sir Eric	Lubbock, Eric	Teeling, Sir William
Eyre, Reginald	Lucas, Sir Jocelyn	Temple, John M.
Fair, John	McAdden, Sir Stephen	Thatcher, Mrs. Margaret
Fell, Anthony	Mackenzie, Alasdair (Ross&Crom'ty)	Thomas, Sir Leslie (Canterbury)
Fisher, Nigel	Mackie, George V. (C'ness & S'land)	Thomas, Rt. Hn. Peter (Conway)
Fletcher-Cooke, Charles (Darwen)	Maclean, Sir Fitzroy	Thompson, Sir Richard (Croydon,S.)
Fletcher-Cooke, Sir John (S'pton)	Macleod, Rt. Hn. Iain	Thorneycroft, Rt. Hn. Peter
Foster, Sir John	McMaster, Stanley	Tiley, Arthur (Bradford, W.)
Fraser,Rt.Hn.Hugh(St'fford & Stone)	McNair-Wilson, Patrick	Tilney, John (Wavertree)
Fraser, Ian (Plymouth, Sutton)	Maginn[...]s, John E.	Turton, Rt. Hn. R. H.
Galbraith, Hn. T. G. D.	Maitland, Sir John	Tweedsmuir, Lady
Gammans, Lady	Marples, Rt. Hn. Ernest	van Straubenzee, W. R.

Vaughan-Morgan, Rt. Hn. Sir John	Weatherill, Bernard	Wolrige-Gordon, Patrick
Vickers, Dame Joan	Webster, David	Wood, Rt. Hn. Richard
Walder, David (High Peak)	wells, John (Maidstone)	Woodhouse, Hon. Christopher
Walker, Peter (Worcester)	Whitelaw, William	Woodnutt, Mark
Walker-Smith, Rt. Hn. Sir Derek	Williams, Sir Rolf Dudley (Exeter)	Yates, William (The Wrek[...]n)
Wall, Patrick	Wills, Sir Gerald (Bridgwater)	Younger, Hn. George
Walters, Dennis	Wilson, Geoffrey (Truro)
Ward. Dame Irene	Wise, A. R.	TELLERS FOR THE NOES:
		Mr. McLaren and Mr. MacArthur
NOES
Abse, Leo	Evans, Ioan (Birmingham, Yardley)	Lee, Rt. Hn. Frederick (Newton)
Albu, Austen	Fernyhough, E.	Lee, Miss Jennie (Cannock)
Allaun, Frank (Salford, E.)	Finch, Harold (Bedwellty)	Lever, Harold (Cheetham)
Alldritt, Walter	Fitch, Alan (Wigan)	Lever, L. M. (Ardwick)
Allen, Scholefield (Crewe)	Fletcher, Sir Eric (Islington, E.)	Lewis, Arthur (West Ham, N.)
Armstrong, Ernest	Fletcher, Ted (Darlington)	Lewis, Ron (Carlisle)
Atkinson, Norman	Fletcher, Raymond (Ilkeston)	Lipton, Marcus
Bacon, Miss Alice	Floud, Bernard	Lomas, Kenneth
Bagier, Gordon A. T.	Foley, Maurice	Loughlin, Charles
Barnett, Joel	Foot, Michael (Ebbw Vale)	Mabon, Dr. J. Dickson
Baxter, William	Ford, Ben	McBride, Neil
Beaney, Alan	Fraser, Rt. Hn. Tom (Hamilton)	MacCo[...]l, James
Bellenger, Rt. Hn. F. J.	Freeson, Reginald	MacDermot, Niall
Bence, Cyril	Galpern, Sir Myer	McGuire, Michael
Benn, Rt. Hn. Anthony Wedgwood	Garrett, W. E.	Mc[...]innes, James
Bennett, J. (Glasgow, Bridgeton)	Garrow, A.	McKay, Mrs. Margaret
Binns, John	George, Lady Megan Lloyd	Mackenzie, Gregor (Rutherglen)
Bishop, E. S.	Ginsburg, David	Mackie, John (Enfield, E.)
Blackburn, F.	Gourlay, Harry	McLeavy, Frank
Blenkinsop, Arthur	Gregory, Arnold	MacMillan, Malcolm
Boardman, H.	Grey, Charles	Mahon, Peter (Preston, S.)
Boston, T. G.	Griffiths, David (Rother Valley)	Mahon, Simon (Bootle)
Bowden, Rt. Hn. H. W. (Leics, S.W.)	Griffiths, Rt. Hn. James (Llan[...]lly)	Mallalieu,J.P.W.(Huddersfield,E.)
Boyden, James	Griffiths, Will (M'chester, Exchange)	Manuel, Archie
Braddock, Mrs. E. M.	Gunter, Rt. Hn. R. J.	Mapp, Charles
Bradley, Tom	Hale, Leslie	Marsh, Richard
Bray, Dr. Jeremy	Hamilton, James (Bothwell)	Mason, Roy
Brown, Rt. Hn. George (Belper)	Hamilton, William (West Fife)	Maxwell, Robert
Brown, Hugh D. (Glasgow, Provan)	Hamling, William (Woolwich, W.)	Mayhew, Christopher
Brown, R. W. (Shoreditch & Fbury)	Hannan, William	Mellish, Rob[...]rt
Buchan, Norman (Renfrewshire, W.)	Harrison, Walter (Wakefield)	Mendelson, J. J.
Butler, Herbert (Hackney, C.)	Hart, Mrs. Judith	Mikardo, Ian
But[...]er, Mrs. Joyce (Wood Green)	Hattersley, Roy	Millan, Bruce
Callaghan, Rt. Hn. James	Hazell, Bert	Miller, Dr. M. S.
Carmichael, Neil	Heffer, Eric S.	Milne, Edward (Blyth)
Carter-Jones, Lewis	Henderson, Rt. Hn. Arthur	Molloy, William
Castle, Rt. Hn. Barbara	Herbison, Rt. Hn. Margaret	Morris, Alfred (Wythenshawe)
Chapman, Donald	Hill, [...]. (Midlothian)	Morris, Charles (Openshaw)
Coleman, Donald	Hobden, Dennis (Brighton, K'town.)	Morris, John (Aberavon)
Conlan, Bernard	Holman, Percy	Murray, Albert
Cor[...]et, Mrs. Freda	Homer, John	Neal, Harold
Cousins, Rt. Hn. Frank	Houghton, Rt. Hn. Douglas	N[...]wens, Stan
Craddock, George (Bradford, S.)	Howarth, Harry (Welling[...]orough)	Noel-Baker, Francis (Swindon)
Crawshaw, Richard	Howarth, Robert L. (Bolton, E.)	Noel-Baker, Rt.Hn.Philip(Derby,S.)
Cronin, John	Howell, Denis (Small Heath)	Norwood, Christopher
Crosland, Rt. Hn. Anthony	Howie, W.	Oakes, Gordon
Crossman, Rt. Hn. R. H. S.	Hoy, James	Ogden, Eric
Cullen, Mrs. Alice	Hughes, Emrys (S. Ayrshire)	O'Malley, Brian
Dalyell, Tam	Hughes, Hector (Aberdeen, N.)	Oram, Albert E. (E. Ham, S.)
Darling, George	Hunter, Adam (Dunfermline)	Orbach, Maurice
Davies, G. Elfed (Rhondda, E.)	Hunter, A. E. (Feltham)	Orme, Stanley
Davies, Harold (Leek)	Hynd, H. (Accrington)	Oswald, Thomas
Davies, Ifor (Gower)	Irvine, A. J. (Edge Hill)	Owen, Will
Davies, S. O. (Merthyr)	Irving, Sydney (Dartford)	Padley, Walter
de Freitas, Sir Geoffrey	Jackson, Colin	Page, Derek (King's Lynn)
Delargy, Hugh	Janner, Sir Barnett	Paget, R. T.
Dell, Edmund	Jay, Rt. Hn. Douglas	Palmer, Arthur
Dempsey, James	Jeger, George (Goole)	Pannell, Rt. Hn. Charles
Diamond, John	Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)	Park, Trevor (Derbyshire, S.E.)
Dodds, Norman	Jenkins, Hugh (Putney)	Parker, John
Doig, Peter	Johnson, Carol (Lewisham, S.)	Parkin, B. T.
Donnelly, Desmond	Jones, Dan (Burnley)	Pavitt, Laurence
Driberg, Tom	Jones,Rt.Hn.Sir Elwyn(W.H[...]m,S.)	Pearson, Arthur (Pontypridd)
Duffy, Dr. A. E. P.	Jones, [...]. Idwal (Wrexham)	Peart, Rt. Hn. Fred
Dunn, James A.	Jones, T. W. (Merioneth)	Pentland, Norman
Dunnett, Jack	Kelley, Richard	Perry, Ernest G.
Edelman, Maurice	Kenyan, Clifford	Popplewell, Ernest
Edwards, Rt. Hn. Nest (Caerphilly)	Kerr, Mrs. Anne (R'ter & Chatham)	Prentice, R. E.
English, Michael	Kerr, Dr. David (W'worth, Central)	Price, J. T. (Westhoughton)
Ennals, David	Lawson, George	Probert, Arthur
Ensor, David	Leadbitter, Ted	Pursey, Cmdr. Harry
Evans, Albert (Islington, S.W.)	Ledger, Ron	Randall, Harry

Rankin, John	Slater, Joseph (Sedgefield)	Wainwright, Edwin
Redhead, Edward	Small, William	Walden, Brian (All Saints)
Rees, Merlyn	Smith, Ellis (Stoke, S.)	Walker, Harold (Doncaster)
Reynolds, G. W.	Snow, Julian	Wallace, George
Rhodes, Geoffrey	Soskice, Rt. Hn. Sir Frank	Warbey, William
Richard, Ivor	Spriggs, Leslie	Watkins, Tudor
Roberts, Albert (Normanton)	Stonehouse, John	Weitzman, David
Roberts, Goronwy (Caernarvon)	Stones, William	Wells, William (Walsall, N.)
Robertson, John (Paisley)	Strauss, Rt. Hn. G. R. (Vauxhall)	White, Mrs. Eirene
Robinson, Rt. Hn.K.(St. Pancras, N.)	Stross,SirBarnett(Stoke-on-Trent,C.)	Whitlock, William
Rodgers, William (Stockton)	Summerskill, Hn. Dr. Shirley	Wilkins, W. A.
Rogers, George (Kensington, N.)	Swain, Thomas	Willey, Rt. Hn. Frederick
Rose, Paul B.	Swingler, Stephen	Williams, Alan (Swansea, W.)
Ross, Rt. Hn. William	Symonds, J. B.	Williams, Clifford (Abertillery)
Sheldon, Robert	Taverne, Dick	Williams, W. T. (Warrington)
Shinwell, Rt. Hn. E.	Taylor, Bernard (Mansfield)	Willis, George (Edinburgh, E.)
Shore, Peter (Stepney)	Thomas, George (Cardiff, W.)	Wilson, William (Coventry, S.)
Short, Rt.Hn.E.(N'c'tle-on-Tyne,C.)	Thomas, Iorwerth (Rhondda, W.)	Winterbottom, R. E.
Short, Mrs. Reéee (W'hampton,N.E.)	Thomson, George (Dundee, E.)	Wyatt, Woodrow
Silkin, John (Deptford)	Thornton, Ernest	Yates, Victor (Ladywood)
Silkin, S. C. (Camberwell, Dulwich)	Tinn, James	Zilliacus, K.
Silverman, Julius (Aston)	Tomney, Frank
Silverman, Sydney (Nelson)	Tuck, Raphael	TELLERS FOR THE NOES:
Skeffington, Arthur	Urwin, T. W.	Mr. McCann and Mr. Harper.
Slater, Mrs. Harriet (Stoke, N.)	Varley, Eric G.

Amendments made: In page 104, line 16, leave out "five" and insert "seven".

In page 104, line 19, leave out from "above" to end of line 33, and insert: Provided that the aggregate relief for all sources, as calculated apart from this proviso, shall be reduced by one-fifth in the year 1969–70, by two-fifths in the year 1970–71, by three-fifths in the year 1971–72 and by four-fifths in the year 1972–73. (2) The aggregate relief for any year of assessment, as calculated in accordance with subsection (1) above apart from any reduction under the proviso to that subsection, shall, where necessary, be reduced so as not to exceed the adjusted aggregate amount in the related period of the unused credit for foreign tax in respect of the company's income from overseas sources of trading income; and for this purpose the said aggregate amount is to be adjusted by computing the unused credit for foreign tax in respect of the income from any source—

1. (a) where the company is not within the charge to corporation tax in respect of the source, by treating the income as nevertheless chargeable to corporation tax and not chargeable to income tax or profits tax; and
2. (b) where the foreign tax is more than 56¼ per cent., by disallowing the unused credit in respect of the excess; and
3. (c) by calculating the income without any deduction for the unused credit.—[Mr. MacDermot.]

Mr. MacDermot

I beg to move Amendment No. 639, in page 104, line 38, after "amount" to insert: after deducting income tax borne by the company on franked investment income". Would it be convenient, Sir Samuel, if we discussed with this the next Government Amendment, No. 788, in page 104, line 45, to leave out from "sources" to the end of line 3 on page 105 and to insert: Provided that—

1. (a) the amount of any income shall for purposes of this subsection be calculated without deduction for any unused credit for foreign tax; and
2. (b) where in the related period or any part of it, the company is not within the charge to corporation tax in respect of any source of income, this subsection shall have effect in relation thereto as if income from the source (so far as of a description chargeable to corporation tax) had been charged to corporation tax and not charged to income tax or profits tax.

The Deputy-Chairman (Sir Samuel Storey)

Yes, if the Committee so wishes.

Mr. MacDermot

I am obliged.

These Amendments taken together make three alterations to the relief provisions in the Bill. Amendment No. 639 deals with the question of franked investment income, that is to say, dividends received from other United Kingdom companies, which can then be distributed to shareholders without further deduction of tax. Where a company claims relief in respect of franked investment income, the effect of the Amendment is to regard dividends paid out by the company as coming, first, out of the franked dividends received and, only when this fund is exhausted, as coming out of trading income. The object is to ensure that overspill relief payments shall not exceed the actual tax paid over to the Revenue on the dividends declared.

6.0 p.m.

Amendment No. 788 contains two provisos. The first corrects a drafting defect in the Bill and makes the correction in favour of the taxpayer. It ensures that in restricting the relief to tax on dividends which can be said to have been provided out of the overseas sources of income, any deduction for unrelieved foreign tax will be made in calculating the amount of the overseas income. This deals with the point to which the hon. Member for Yeovil (Mr. Peyton) referred earlier.

Proviso (b) extends for the purposes of subsection (3) the relaxation in Amendment No. 638 under which income which is not charged to Corporation Tax in the related period is nevertheless regarded as so charged.

The Deputy-Chairman

Before I call the next speaker, perhaps I might add that as we are discussing Amendment No. 788 with this Amendment, we should also discuss Amendment No. 524, in the name of the hon. Member for Yeovil (Mr. Peyton), in page 105, line 3, at end insert: (4) Notwithstanding paragraph 5 of Schedule 15 to this Act the provisions of paragraph 7(3) of the 16th Schedule to the Income Tax Act 1952 shall continue to apply in relation to the calculation of any of the amounts mentioned in this section.

Mr. Heath

We are grateful to the Financial Secretary for his explanation of Amendments No. 639 and No. 788. He has not, however, been entirely frank with the Committee in that he has not given us the history of this extraordinarily interesting Amendment. It would be for our benefit if he were to give us a little explanation of how this came about.

All we know is that we started with the Bill, and then on 1st June the Chancellor decided to rewrite Clause 79, and he tabled Amendment No. 639 and its colleague, which was then Amendment No. 640. But those of us who were then following the Order Paper closely found that on 15th June Amendment No. 640 was withdrawn and a fresh Amendment, No. 783, was put in its place. Obviously, this must have meant a serious change. First of all, there was the rewrite in Amendment No. 640, and then the Chancellor was dissatisfied with his own Amendment, and so he tore it out of the Order Paper and replaced it with Amendment No. 783. We thought that this showed a considerable rate of progress in quite a short time. The Chancellor became notorious for the rolling redraft not only of the Bill but of his own Amendments. Picture our astonishment when on 19th June Amendment No. 783 came to an early death and was replaced by Amendment No. 788.

I believe that the Financial Secretary ought to give us an explanation of the difference between the Bill, Amendment No. 640, Amendment No. 783 which replaced No. 640, and Amendment No. 788 which now replaces Amendment No. 783. I feel that if I were in a really vicious mood I should move to report Progress to allow the Chancellor to think further about whether he wishes to withdraw Amendment No. 788 and table any further Amendments in this progressive rewrite of Clause 79.

If this is what the Financial Secretary—I notice that he is in close conclave with the Chancellor—would like to happen, I am prepared to move to report Progress so that the Chancellor may have further time. After all, last night we had, without warning, the withdrawal of a Schedule, which has been replaced by another today, which is starred.

The Chancellor may wish to tear this Amendment out of the Order Paper, giving it an early demise, and bring forward another later. We are trying to help the Chancellor. I am giving the Financial Secretary time to look at his papers to discover what each Amendment does. We do not know whether the Financial Secretary has been given all the papers or only those relating to the latest version. We should like a word of explanation not only about the inadequacy of the drafting of the Bill and the incompetence of the Amendments that we have had put before us but about what the difference is before we reach our final, though still possibly temporary, resting place with Amendment No. 788.

Mr. Peyton

It will take me a moment or two to get over the shock of the remark of my right hon. Friend the Member for Bexley (Mr. Heath) that he could be vicious. When I have done that, I may be able to deal shortly with this extraordinarily complicated point. The Bill is complicated enough, but the Government keep on contributing more complexity to it by apparently contradicting themselves.

As I remarked earlier, I am slightly puzzled that the Schedule appears to say that at some future date Parliament will determine that paragraph 7(3) of the 16th Schedule to the Income Tax Act, 1952, shall no longer apply. Now, as I understand it, Clause 79 says that this shall no longer apply forthwith. It may well be that I have entirely misunderstood the point. However, the Amendment that we are discussing together with the hon. and learned Gentleman's Amendment would purport to leave that Schedule of the 1952 Act still operative, and this would give a very considerable fillip to the overspill relief available to companies. I hope that the Financial Secretary will be moved to accept my Amendment and that he will be able to clear up the slightly complicated problem to which I have referred and to which I do not see any answer except a contradiction which has been created by the Government themselves.

Mr. MacDermot

If I might relieve the right hon. Member for Bexley (Mr. Heath) of the great anxiety that he has found in trying to follow the alterations in the history of the Amendment on the Order Paper, perhaps I can tell him that the new proviso (b) replaces the original Amendment No. 640. As that was originally tabled, the words appearing in brackets: so far as of a description chargeable to corporation tax were omitted, and so the Amendment was tabled again, with those words included in the corrected version. That was in Amendment No. 783. We then had the additional proviso (a). It was felt convenient to bring the two provisos together. The result was that we withdrew the earlier Amendment and tabled this one. I do not feel that the right hon. Gentleman, who shows such great understanding of all the provisions of the Bill, can have been put in any very great difficulties by these changes.

I turn to the Amendment in the name of the hon. Member for Yeovil (Mr. Peyton) which we are discussing with the Government Amendments. It relates to the question of the deduction which is allowed under the present law when considering the question of the foreign tax excess. Under the present law, where the foreign tax is in excess of the United Kingdom tax the amount which cannot be allowed as a credit is allowed as a deduction in arriving at the measure of the income. Under the provisions of Schedule 15 of the Bill, the title to this deduction for Corporation Tax is to be withdrawn from a date to be determined in the future.

The hon. Gentleman's Amendment is designed to ensure that that deduction shall be given for the purposes of calculating overspill relief and shall continue to be given even when the title to that deduction is withdrawn under Schedule 15. The proposal is objectionable in principle, and it would inflate the overspill payments to amounts which could not be justified by comparison with the position of companies operating at home. It is similar to the point that we were discussing a moment ago. Whatever may have been the merits of the proposal earlier, now that, following Amendment No. 638, just passed by the Committee, which abolishes the restriction limiting the relief to a proportion of the excess credit, the whole of the excess credit is to be allowed, there can be no justification for this proposal, for the reason that there is now no unrelieved tax at the end of the day because the company is given an overspill payment which is equal to the whole of the amount for the overseas tax for which it would, under the notional Corporation Tax calculation, not get credit. So the whole of the overseas taxation is relieved and therefore to give deductions for the so-called unrelieved taxation would give the deductions twice over.

Mr. Peyton

I know that this is a very complicated matter but will the hon. and learned Gentleman tell us what overseas tax is thereby effectively relieved? This is something I find it quite impossible to accept on the evidence available to us.

Mr. MacDermot

What I am saying is that there is no unrelieved taxation at the end of the day. I am not taking account, of course, of matters which I referred to earlier as coming outside the calculation—where, for example, the foreign tax is above the total rate of 56¼per cent.—but any tax, as it were, which qualifies for relief will be relieved.

That leads me to the second point on which I know there are differences between the two sides of the Committee. We maintain the principle, have done throughout and, to be logical must do so again, that we should not, through these transitional provisions, put an overseas company in a more favourable position than its United Kingdom counterpart. I must advise the Committee to resist Amendment No. 524.

Mr. Geoffrey Lloyd

I think that the Financial Secretary would agree at least on the practical point, leaving all figures and technicalities aside, that Amendment No. 524 would certainly benefit the very hard case of the Shell Company that I mentioned earlier. I was rather shocked when the hon. and learned Gentleman earlier seemed to dismiss this as something rather unimportant. Perhaps I was doing him an injustice. I would rather say that I was perhaps mistaken in my impression, because I feel that both he and the Chancellor recognise that there is serious injury to a very great national interest.

The oil companies are as big a national interest as the shipping industry. They are very important indeed and something that the Chancellor would not like to impair. Amendment No. 524 would assist to overcome the grave disproportion between the two great parts of the British oil industry. If the Chancellor does not feel that he can accept Amendment No. 524, I hope that at least he will tell us that he will seriously try to do something more to avoid this very considerable anomaly.

Amendment agreed to.

Further Amendment made: In page 104, line 45, leave out from "sources" to end of line 3 on page 105 and insert: Provided that—

1. (a) the amount of any income shall for purposes of this subsection be calculated without deduction for any unused credit for foreign tax; and
2. (b) where in the related period or any part of it, the company is not within the charge to corporation tax in respect of any source of income, this subsection shall have effect in relation thereto as if income from the source (so far as of a description chargeable to corporation tax) had been charged to corporation tax and not charged to income tax or profits tax.—[Mr. MacDermot.]

The Deputy-Chairman

The next Amendment to be selected is No. 603, standing in the name of the right hon. Member for Birmingham, Handsworth (Sir E. Boyle), in page 105, line 4, leave out from beginning to end of line 12 and insert: (4) If, in any year of assessment for which relief is claimed, the net amount of dividends paid by the company and attributable to income from overseas sources of trading income exceeds the corresponding amount in the year 1964–65, then the aggregate relief, as calculated in the foregoing subsections apart from any reduction under the proviso to subsection (1) shall be reduced by two-fifths of the excess. At the same time the Committee can discuss Amendment No. 786, in the name of the hon. Member for Cardiff, North (Mr. Box) and Amendment No. 676 standing in the name of the right hon. Member for Orkney and Shetland (Mr. Grimond) and the names of his hon. Friends, in page 105, line 12, leave out "four-fifths" and insert "one-half".

Sir E. Boyle

I informed the Chairman earlier that we did not propose to move Amendment No. 603. We prefer instead to move Amendment No. 786 which overlaps with it.

I beg to move, Amendment No. 786, in page 105, line 4, to leave out from beginning to end of line 12 and to insert: (4) If, in any year of assessment for which relief is claimed, the net amount of the dividends paid by the company and attributable to income from overseas sources of trading income exceeds the corresponding amount in each of the four years of assessment 1962–63, 1963–64. 1964–65 and 1965–66, the aggregate relief, as calculated in accordance with the foregoing subsections apart from any reduction under the proviso to subsection (1), shall be reduced by two-fifths of whichever excess is the least: Provided that the net amount of the company's dividends in each of the four years of assessment 1962–63, 1963–64, 1964–65 and 1965–66 shall for the purposes of this subsection be treated as those dividends increased (when appropriate) in proportion to the increase in the company's income from all sources for the year of assessment for which relief is claimed as compared with such income for 1962–63, 1963–64, 1964–65 and 1965–66, respectively. We now proceed to subsection (4) of Clause 79 which, as the Chancellor's White Paper made clear—and this was before he put down his Amendments—provides that if, in any year for which relief is claimed, the net amount of the dividends paid by the company exceeds the net dividend paid in the base year, relief is not to exceed four-fifths of the excess. Our Amendment seeks to mitigate the harshness of the subsection and is one to which we attach importance.

There are four aspects that I would mention. First, our Amendment as drafted adopts the concession which has already been agreed to by the Chancellor and which we shall come to when we reach Amendment No. 642—that the excess to be used shall be whichever is least in relation to the four years 1962–63 to 1965–66. We have linked this Amendment to that concession.

6.15 p.m.

The second thing that our Amendment does is to confine the restriction of relief to dividends paid out of overseas income. As the Clause stands, a mixed company—one with home and overseas income—is particularly severely treated because a dividend increase flowing from increased home profits is likely to extinguish overspill relief which is relevant only to its overseas income. This is surely a relevant point in the context of the Bill because, in recent years, we have had a considerable increase in home investment and the Chancellor wants, by this Bill to encourage ploughing back and—although we have our disagreement about method—to encourage investment in productive industry. Surely the income from this investment must soon begin to flow in and it would be absurd if it were to affect overspill relief.

The third aspect of our Amendment is that it would reduce the restriction of relief from four-fifths to two-fifths. Finally it would also provide that, when income increased in the years of claim compared with earlier years, increased dividends could be paid without incurring this severe penalty. If, under the Bill as it stands, the dividends paid in 1966–67 are the maximum dividends which can be paid without penalty, any increase in those dividends in any of the years 1967–68 to 1972–73 inclusive will result in a deduction of relief. Such a freezing of dividend levels in this subsection is made mere serious by the decision of the Chancellor, which we otherwise welcome, to have a seven-year tapering period rather than five years. We feel that this is thoroughly wrong, for two reasons.

The first reason I touched upon in my speech a week ago. We feel strongly that it is in the public interest and not just in the shareholders' interest that a corporation should be able to go to the market on reasonable terms, not least because it is in the interest of our balance of payments that shareholders, even in this country, should act as it were as a catalyst to attract overseas borrowings. We are strongly opposed to anything that smacks of a compulsory dividend freeze over these years because we believe that dividends rising with income, increased capital expenditure and what I call the orderly expansion of great corporations are things that go together, and it is desirable that great corporations should be able to raise capital on reasonable terms.

There is a further point which we have constantly made—that anything which smacks over a long period of dividend limitation is open to very severe criticism. From time to time the name of Dr. Kaldor has been invoked in our debates, and it is relevant now to point out that I have seen nothing more scathing than his comments on freezing dividends which are to be found in volume 3 of his collected essays, made in connection with the Socialist White Paper Act, 1951. Again, I cannot help thinking of a quotation from the proceedings of Finance Act, 1951, which seems very relevant to the sort of issue we are now discussing. It was uttered on the occasion of the first Finance Act that I heard in this House: …if there is a social purpose to be accomplished of any importance, either the State should do it or the State should make it possible for private enterprise to do it; but what the State should not do is to be inert and to surround private enterprise with such inhibitions that private enterprise cannot do it."—[OFFICIAL RLPORT, 2nd July, 1951; Vol. 489, c. 1916.] Those prudent words were uttered by Mr. Aneurin Bevan on a Finance Bill Amendment in 1951.

This part of Clause 79 is too severe for mixed companies. I do not believe that with a long seven-year tapering period it is desirable to treat dividends as severely as the subsection does. On the contrary, if as I hope we have an increase in capital investment in this country as income rises, not least that of mixed companies, then surely it is only right and proper that this increased income should be reflected in some increase in dividends, which is bound up with the ability of many great corporations to develop as one would wish.

In order to anticipate a possible objection, I repeat a point which I made last week. The issue of the conditions in which corporations can expand and raise capital on reasonable terms is distinct from that of the distribution of the larger national income when we have it. I would certainly be one of those who wish to see a steady and, if possible, slightly rising proportion of the national income going to social purposes of one kind or another. But, none the less, we believe that as it stands this part of the Clause is too restrictive and I very much hope that the Chancellor will be able to say that under at least one or two of the headings in which I have endeavoured to argue the case he is ready to meet us a little more, and to make some concessions, as he has already done on so many other aspects of the Bill.

Mr. MacDermot

The Amendment makes a number of proposals. One of them is a proposal contained in an Amendment of my right hon. Friend which will be moved shortly, but I must advise the Committee that we do not find the others acceptable.

In order to answer the right hon. Gentleman's arguments, I must go back to restate the principle and thinking behind subsection (4). It is that if a company is able to increase its dividends, it is not a very eligible candidate for overspill relief, since the object of overspill is to assist a company which, as a result of the introduction of Corporation Tax, may be finding difficulty in maintaining its dividends during what would otherwise be a difficult transitional period, and thus avoid either hardship to the shareholders, or lack of a proper degree of plough back by the company.

Amendment No. 603 proposed that that principle should be applied only to dividends attributable to the foreign profits, but it ignored the realities. Either the shareholders would be receiving their increased dividends, or they would not, and if they were the relief should be cut down even though the increase in dividends was due solely to the increase in home profits. If the company could afford to increase its dividends, whatever the source of the funds used to provide the increase, it could not fairly be said to be in any hardship or in any need of help to maintain its dividends to shareholders.

The Amendment which the right hon. Gentleman moved and which was in the name of the hon. Member for Cardiff—

The Chancellor of the Exchequer (Mr. James Callaghan)

Cardiff, North.

Mr. MacDermot

I apologise to my right hon. Friend for attributing the whole of Cardiff to the hon. Member for Cardiff, North (Mr. Box). The Amendment which the right hon. Gentleman has moved goes even further and proposes that the dividends of the base years should be increased in the comparison by reference to the increase in the company's total income between the base year and the year of claim. In other words, it is argued that no account should be taken of an increase in dividends so long as it is merely proportionate to an increase in overseas income. This would be even more generous than the original Amendment. We take the view that to ignore this dividend increase would be entirely inconsistent with the purpose for which the relief has been given.

Mr. George Y. Mackie (Caithness and Sutherland)

I gathered that the whole point of introducing this permanent legislation was to persuade people to invest money at home so that there would be more social benefit and so on. If a company increases its dividends from investment at home, surely it is meeting the purpose for which the Chancellor of the Exchequer is introducing this legislation.

Mr. MacDermot

That is a complete travesty of everything my right hon. Friends and I have been saying about this tax. It is not that we are seeking to dissuade people from investing overseas. As my right hon. Friend has said over and over again, the importance of overseas investment is fully appreciated. All we are seeking to do is to take that action which we judge to be right to restore balance where there is lack of balance. We certainly want and intend that there shall be and continue to be a net increase in our overseas investments, but that that should keep pace with what the country can afford. We cannot accept the hypothesis which underlay the intervention of the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie).

Sir E. Boyle

What bothers me about the approach of the hon. and learned Gentleman is that he speaks of overspill relief as though it were primarily intended to be an assistance to shareholders during this period, but surely the point is—and it is wholly in accordance with the policy of both sides of the Committee—that businesses should not only plough back, but be able to extend their plant and attract new capital. I do not see how that can be done if mixed companies are treated as severely as the subsection proposes.

Mr. MacDermot

What we are saying is that mixed companies which are expanding are not in the same need of relief from these overseas provisions as companies which are not expanding. The purpose of the relief is to help them to tide over the interim period and not to put the overseas company in a more favourable position than the home company.

Mr. Peter Emery

Can I press the Financial Secretary on this issue, to which we obviously attach a great deal of significance? If the policy of the Government in dealing with companies which are investing overseas is instead to have them invest in this country, then, if the companies follow the Government's wish, they will find that their overspill position is worsened and they will be in a cleft stick, for although the Government wish to encourage companies to invest in this country, they are taking away some of their overspill relief which they would have had if they had not invested in this country.

Mr. MacDermot

The purpose of the relief is to help companies which are in a worse position and the hypothesis which we have been asked to consider is that of a company which, to the extent about which we are arguing, is not in a worse position.

The point upon which we are agreed is that the Amendment proposes that the base years which are to be used for the standard for comparison should not be limited to the three years originally provided, 1962–63, 1963–64, 1964–65, but should also include the fourth year, 1965–66. I will say no more about that now, because I shall shortly be moving an Amendment to give effect to that if the Committee rejects this Amendment.

6.30 p.m.

The final question is whether the restriction in the relief should be four-fifths of the excess, as the Clause provides, or two-fifths which is proposed in the Amendment. I suppose there is no absolute answer in logic, and if one were taking a strictly logical view the relief should be cut down by the whole of the excess. The proposal in the Clause is to cut the relief by four-fifths of the excess and that is intended to allow some measure of latitude. Any further reduction, such as suggested, would involve substantial payments out of public funds, payments which were designed to avoid hardship to shareholders in companies which would otherwise have had to reduce their dividends or their plough-back and would involve making these payments to companies which had shown that they could afford to increase their dividends.

For these reasons I must advise the Committee to reject the Amendment.

Mr. John Harvey

When the Financial Secretary talks of companies in a worse position, or companies not in a worse position, he could be talking about companies which are well managed and those which are not well managed. One of the things that worries us about so many of the provisions of this Bill is that it is the efficient company which so often seems to be the one most likely to be penalised and the most inefficient the one most likely to be helped. Is this really the image of greater efficiency that the party opposite has been seeking to create? This is the sort of thing which worries us very much in the provisions, and the Amendment which my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) has urged could be a powerful incentive to efficiency.

Mr. Donald Box (Cardiff, North)

There are just two short points I should like to raise in respect of the Amendment moved by my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle). It seems that companies with mixed income from home and overseas are treated extremely harshly under Clause 79(4).

My right hon. Friend the Member for Thirsk and Malton (Mr. Turton) referred earlier to the Associated Portland Cement Company. I understand that this company is enjoying a tremendous and overwhelming demand for its products, both at home and abroad. The demand has been so great that in recent months, even a year or two ago, it has had to import cement at considerable cost and sometimes at a loss to the company and certainly to the adverse effect of our balance of payments. This company has just completed a two to three year expansion programme and considerably increased supplies will be forthcoming. One hopes that will increase its increment revenue. It seems particularly hard on the company just when this expansion programme is bearing fruit that there will be some penalty, some reduction in the overspill relief.

The other point I wanted to raise was the fourth point taken by my right hon. Friend the Member for Handsworth, because it means in effect that the dividends of many of these companies are going to be virtually frozen for quite a long period unless they are going to increase them. Even though their revenue has increased, they will be able to increase the dividends only at a considerable penalty in the near future. It seems that without taking increased revenue into account this is a most unreasonable situation, and I think it is bound to lead to a further decline in the market values of the shares, to the obvious detriment of the shareholders, many of whom are elderly people with small amounts spread in a number of these companies who have already had to put up with the hazards of investing in overseas and Commonwealth countries where things are not as straightforward and stable as one would like.

It is bound to make it more difficult and more expensive to raise new capital in the future. I think that higher dividends should be allowed where higher profits justify it in the future. This is surely a principle which has already been established earlier in the Bill and I hope that the Chancellor will bear it in mind when he is considering the matter.

Mr. Peter Emery

As my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) said in moving the Amendment, it is a very relevant and important point, although we accept that it is one which will affect only a small number of companies. We have tried very hard in all the arguments we have put to make certain that everyone is considered fairly, and I am certain that is what the Chancellor of the Exchequer wants—that everyone's views should be aired properly and that they should feel, when this Finance Bill has been considered, that their particular problems have been voiced in this Committee.

What we are saying in this Amendment, if one comes away from the technical points and down to the simple English, is that first of all any restriction of relief should be confined to dividend paid out of overseas income. In other words, if investment at home is being encouraged, and that is what the Government have said they want to do, with a mixed company, it would surely be absurd if increased dividend could not be paid out of increased home earnings without losing on the overspill.

The Chancellor answers this point by saying that if there is a better position at home then dividends can be paid and there is no hardship. But this is only the second stage of three stages in this whole argument. If earnings at home allow an increase of dividends then the overspill falls and one is no better off. One is not able to show one's better working at home on one's domestic earnings and when the Chancellor says that everything is all right because the company is better off, the company has advanced in order to be able to mark time on its dividend payments. Where a company's total income has increased in the years of the claim as compared with the base years surely it should be possible to increase dividends pro rata. It seems that it is quite wrong that it should have to incur the four-fifths penalty. We believe that if there is a penalty it could certainly come down to the two-fifths level.

It is surely fair to argue that it is absurd to suggest we should have a dividend freeze. The Government would never at any time suggest that there should be a wage freeze over a period of seven years and that if there was not there would be penalties. We on this side of the Committee believe that, if the Government do not wish to say that, it is quite wrong for them to suggest that there should be a dividend freeze, whether on overseas or domestic dividends. This is a point upon which we have got no form of concession at all from the Chancellor and, because of this, it seems so important that I must ask my hon. Friends to divide the Committee in support of the Amendment.

Question put, That the words proposed to be left out, to the second "the" in line 6, stand part of the Clause:—

The Committee divided: Ayes 283, Noes 280.

Division No. 195.]	AYES	[6.39 p.m.
Abse, Leo	Evans, Albert (Islington, S.W.)	Lee, Rt. Hn. Frederick (Newton)
Albu, Austen	Evans, Ioan (Birmingham, Yardley)	Lee, Miss Jennie (Cannock)
Allaun, Frank (Salford, E.)	Fernyhough, E.	Lever, Harold (Cheetham)
Al[...]dritt, Walter	Finch, Harold (Bedwellty)	Lever, L. M. (Ardwick)
Allen, Scholefield (Crewe)	Fitch, Alan (Wigan)	Lewis, Arthur (West Ham, N.)
Armstrong, Ernest	Fletcher, Sir Eric (Islington, E.)	Lewis, Ron (Carlisle)
Atkinson, Norman	Fletcher, Ted (Darlington)	Lipton, Marcus
Bacon, Miss Alice	Fletcher, Raymond (Ilkeston)	Lomas, Kenneth
Bagier, Cordon A. T.	Floud, Bernard	Loughlin, Charles
Barnett, Joel	Foley, Maurice	Mabon, Dr. J, Dickson
Baxter, William	Foot, Michael (Ebbw vale)	McBride, Neil
Beaney, Alan	Fraser, Rt. Hn. Tom (Hamilton)	McCann, J.
Bellenger, Rt. Hn. F. J.	Freeson, Reginald	MacColl, James
Bence, Cyril	Galpern, Sir Myer	MacDermot, Niall
Benn, Rt. Hn. Anthony Wedgwood	Garrett, W. E.	McGuire, Michael
Bennett, J. (Glasgow, Bridgeton)	Garrow, A.	McInnes, James
Binns, John	George, Lady Megan Lloyd	McKay, Mrs. Margaret
Bishop, E. S.	Ginsburg, David	Mackenzie, Gregor (Rutherg[...]en)
Blackburn, F.	Gourlay, Harry	Mackie, John (Enfield, E.)
Blenkinsop, Arthur	Gregory, Arnold	McLeavy, Frank
Boardman, H.	Griffiths, David (Rother Valley)	MacMillan, Malcolm
Boston, T. G.	Griffiths, Rt. Hn. James (Llanelly)	Mahon, Peter (Preston, S.)
Bowden, Rt. Hn. H. W. (Leics S.W.)	Griffiths, Will (M'chester, Exchange)	Mahon, Simon (Bootle)
Boyden, James	Gunter, Rt. Hn. R. J.	Mallalieu,J.P.W.(Huddersfield,E.)
Braddock, Mrs. E. M.	Hale, Leslie	Manuel, Archie
Bradley, Tom	Hamilton, James (Bothwell)	Mapp, Charles
Bray, Dr. Jeremy	Hamilton, William (West Fife)	Marsh, Richard
Brown, Rt. Hn. George (Belper)	Hamling, William (Woolwich, W.)	Mason, Roy
Brown, Hugh D. (Glasgow, Provan)	Hannan, William	Maxwell, Robert
Brown, R. W. (Shoreditch & Fbury)	Harrison, Walter (Wakefield)	Mayhew, Christopher
Buchan, Norman (Renfrewshire, W.)	Hart, Mrs. Judith	Mellish, Robert
Buchanan, Richard	Hattersley, Roy	Mendelson, J. J.
Butler, Herbert (Hackney, C.)	Hazell, Bert	Mikardo, Ian
Butler, Mrs. Joyce (Wood Green)	Heffer, Eric S.	Millan, Bruce
Callaghan, Rt. Hn. James	Henderson, Rt. Hn. Arthur	Miller, Dr. M. S.
Carmichael, Neil	Herbison, Rt. Hn. Margaret	Milne, Edward (Blyth)
Carter-Jones, Lewis	Hill, J. (Midlothian)	Molloy, William
Chapman, Donald	Hobden, Dennis (Brighton, K'town.)	Morris, Alfred (Wythenshawe)
Coleman, Donald	Holman, Percy	Morris, Charles (Openshaw)
Conlan, Bernard	Horner, John	Morris, John (Aberavon)
Corbet, Mrs. Freda	Houghton, Rt. Hn. Douglas	Murray, Albert
Cousins, Rt. Hn. Frank	Howarth, Harry (Wellingborough)	Neal, Harold
Craddock, George (Bradford, S.)	Howarth, Robert L. (Bolton, E.)	Newens, Stan
Crawshaw, Richard	Howell, Denis (Small Heath)	Noel-Baker, Francis (Swindon>
Cronin, John	Howie, W.	Norwood, Christopher
Cropland, Rt. Hn. Anthony	Hoy, James	Oakes, Gordon
Crossman, Rt. Hn. R. H. S.	Hughes, Emrys (S. Ayrshire)	Ogden, Eric
Cullen, Mrs. Alice	Hughes, Hector (Aberdeen, N.)	O'Malley, Brian
Dalyell, Tam	Hunter, Adam (Dunfermline)	Oram, Albert E. (E. Ham, S.)
Darling, George	Hunter, A. E. (Feltham)	Orbach, Maurice
Davies, G. Elfed (Rhondda, E.)	Hynd, H. (Accrington)	Orme, Stanley
Davies, Harold (Leek)	Irvine, A. J. (Edge Hill)	Oswald, Thomas
Davies, Ifor (Gower)	Irving, Sydney (Dartford)	Owen, Will
Davies, S. O. (Merthyr)	Jackson, Colin	Padley, Walter
de Freitas, Sir Geoffrey	Janner, Sir Barnett	Page, Derek (King's Lynn)
Delargy, Hugh	Jay, Rt. Hn. Douglas	Paget, R. T.
Dell, Edmund	Jeger, George (Goole)	Palmer, Arthur
Dempsey, James	Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)	Pannell, Rt. Hn. Charles
Diamond, Rt. Hn. John	Jenkins, Hugh (Putney)	Park, Trevor (Derbyshire, S.E.)
Dodds, Norman	Johnson, Carol (Lewisham, S.)	Parker, John
Doig, Peter	Jones, Dan (Burnley)	Parkin, B. T.
Donnelly, Desmond	J0nes.Rt.Hn.Slr Elwyn(W.Ham,S.)	Pavitt, Laurence
Driberg, Tom	Jones, J. Idwal (Wrexham)	Pearson, Arthur (Pontypridd)
Duffy, Dr. A. E. P.	Jones, T. W. (Merioneth)	Peart, Rt. Hn, Fred
Dunn, James A.	Kelley, Richard	Pentland, Norman
Dunnett, Jack	Kenyon, Clifford	Perry, Ernest G.
Edelman, Maurice	Kerr, Mrs. Anne (R'ter & Chatham)	Popplewell, Ernest
Edwards, Rt. Hn. Nest (Caerphilly)	Kerr, Dr. David (W'worth, Central)	Prentice, R. E.
English, Michael	Lawson, George	Price, J. T. (Westhoughton)
Ennals, David	Leadbitter, Ted	Probert, Arthur
Ensor, David	Ledger, Ron	Pursey, Cmdr. Harry
Randall, Harry	Slater, Mrs. Harriet (Stoke, N.)	Varley, Eric G.
Rankin, John	Slater, Joseph (Sedgefield)	Wainwright, Edwin
Redhead, Edward	Small, William	Walden, Brian (All Saints)
Rees, Merlyn	Smith, Ellis (Stoke, S.)	Walker, Harold (Doncaster)
Reynolds, G. W.	Snow, Julian	Wallace, George
Rhodes, Geoffrey	Soskice, Rt. Hn. Sir Frank	Warbey, William
Richard, Ivor	Spriggs, Leslie	Watkins, Tudor
Roberts, Albert (Normanton)	Stonehouse, John	Weitzman, David
Roberts, Goronwy (Caernarvon)	Stones, William	Wells, William (Walsall, N.)
Robertson, John (Paisley)	Strauss, Rt. Hn. G. R. (Vauxhall)	White, Mrs. Eirene
Robinson, Rt. Hn.K.(St. Pancras, N.)	Stross,SirBarnett(Stoke-on-Trent,C.)	Whitlock, William
Rodgers, William (Stockton)	Summerskill, Hn. Dr. Shirley	Wilkins, W. A.
Rogers, George (Kensington, N.)	Swain, Thomas	Willey, Rt. Hn. Frederick
Rose, Paul B.	Swingler, Stephen	Williams, Alan (Swansea, W.)
Ross, Rt. Hn. William	Symonds, J. B.	Williams, Clifford (Abertillery)
Sheldon, Robert	Taverne, Dick	Williams, W. T. (Warrington)
Shinwell, Rt. Hn. E.	Taylor, Bernard (Mansfield)	Willis, George (Edinburgh, E.)
Shore, Peter (Stepney)	Thomas, George (Cardiff, W.)	Wilson, William (Coventry, S.)
Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)	Thomas, Iorwerth (Rhondda, W.)	Winterbottom, R. E.
Short, Mrs. Renée (W'hampton,N.E.)	Thornton, Ernest	Wyatt, Woodrow
Silkin, John (Deptford)	Tinn, James	Yates, Victor (Ladywood)
Silkin, S. C. (Camberwell, Dulwich)	Tomney, Frank	Zilliacus, K.
Silverman, Julius (Aston)	Tuck, Raphael
Silverman, Sydney (Nelson)	Urwin, T. W.	TELLERS FOR THE NOES:
		Mr. Harper and Mr. Grey.
NOES
Alison, Michael (Barkston Ash)	Courtney, Cdr. Anthony	Harris, Frederic (Croydon, N.W.[...]
Allan, Robert (Paddlngton, S.)	Craddock, Sir Beresford (Spelthorne)	Harris, Reader (Heston)
Ailason, James (Hemel Hempstead)	Crawley, Aidan	Harrison, Brian (Maldon)
Amery, Rt. Hn. Julian	Crosthwaite-Eyre, Col. Sir Oliver	Harrison, Col. Sir Harwood (Eye)
Anstruther-Gray, Rt. Hn. Sir W.	Crowder, F. P.	Harvey, John (Walthamstow, E.)
Astor, John	Cunningham, Sir Knox	Harvie Anderson, Miss
Atkins, Humphrey	Curran, Charles	Hastings, Stephen
Awdry, Daniel	Currie, G. B. H.	Hawkins, Paul
Baker, W. H. K.	Dalkeith, Earl of	Hay, John
Balniel, Lord	Dance, James	Heald, Rt. Hn. Sir Lionel
Barber, Rt. Hn. Anthony	Davies, Dr. Wyndham (Perry Barr)	Heath, Rt. Hn. Edward
Barlow, Sir John	d'Avigdor-Goldsmid, Sir Henry	Hendry, Forbes
Batsford, Brian	Dean, Paul	Higgins, Terence L.
Beamish, Col. Sir Tufton	Deedes, Rt. Hn. W. F.	Hill, J. E. B. (S. Norfolk)
Bell, Ronald	Digby, Simon Wingfield	Hirst, Geoffrey
Bennett, Sir Frederic (Torquay)	Dodds-Parker, Douglas	Hobson, Rt. Hn. Sir John
Bennett, Dr. Reginald (Gos & Fhm)	Doughty, Charles	Hogg, Rt. Hn. Quintin
Berkeley, Humphry	Drayson, G. B.	Hooson, H. E.
Berry, Hn. Anthony	du Cann, Rt. Hn. Edward	Hopkins, Alan
Bessell, Peter	Eden, Sir John	Hordern, Peter
Biffen, John	Elliot, Capt. Walter (Carshalton)	Howard, Hn. G. R. (St. Ives)
Biggs-Davison, John	Elliott, R. W.(N'c'tle-upon-Tyne,N.)	Hutchison, Michael Clark
Bingham, R. M.	Emery, Peter	Irvine, Bryant Godman (Rye)
Birch, Rt. Hn. Nigel	Errington, Sir Eric	Jenkin, Patrick (Woodford)
Black, Sir Cyril	Eyre, Reginald	Jennings, J. C.
Blaker, Peter	Farr, John	Johnston, Russell (Inverness)
Bossom, Hn. Clive	Fell, Anthony	Jones, Arthur (Northants, S.)
Bowen, Roderic (Cardigan)	Fisher, Nigel	Joseph, Rt. Hn. Sir Keith
Box, Donald	Fletcher-Cooke, Charles (Darwen)	Kaberry, Sir Donald
Boyd-Carpenter, Rt. Hn. J.	Fletcher-Cooke, Sir John (S'pton)	Kerr, Sir Hamilton (Cambridge)
Boyle, Rt. Hn. Sir Edward	Foster, Sir John	Kershaw, Anthony
Braine, Bernard	Fraser,Rt.Hn.Hugh(St'fford & Stone)	Kilfedder, James A.
Brinton, Sir Tatton	Fraser, Ian (Plymouth, Sutton)	Kimball, Marcus
Brooke, Rt. Hn. Henry	Galbraith, Hn. T. G. D.	King, Evelyn (Dorset, S.)
Brown, Sir Edward (Bath)	Gardner, Edward	Kirk, Peter
Bruce-Gardyne, J.	Gibson-Watt, David	Lagden, Godfrey
Bryan, Paul	Giles, Rear-Admiral Morgan	Lambton, Viscount
Buck, Antony	Gilmour, Ian (Norfolk, Central)	Lancaster, Col. C. G.
Bullus, Sir Eric	Gilmour, Sir John (East Fife)	Langford-Holt, Sir John
Burden, F. A.	Glover, Sir Douglas	Legge-Bourke, Sir Harry
Butcher, Sir Herbert	Godber, Rt. Hn. J. B.	Lewis, Kenneth (Rutland)
Buxton, Ronald	Goodhart, Philip	Litchfield, Capt. John
Campbell, Gordon	Goodhew, Victor	Lloyd, Rt.Hn. Geoffrey (Sut'nC'dfield)
Carlisle, Mark	Gower, Raymond	Lloyd, Ian (P'tsm'th, Langstone)
Cary, Sir Robert	Grant, Anthony	Lloyd, Rt. Hn. Selwyn (Wirral)
Channon, H. P. G.	Grant-Ferris, R.	Longden, Gilbert
Chataway, Christopher	Gresham Cooke, R.	Loveys, Walter H.
Chichester-Clark, R.	Grieve, Percy	Lubbock, Eric
Clark, Henry (Antrim, N.)	Griffiths, Eldon (Bury St. Edmunds)	Lucas, Sir Jocelyn
Clark, William (Nottingham, S.)	Griffiths, Peter (Smethwick)	McAdden, Sir Stephen
Clarke, Brig. Terence (Portsmth, W.)	Grimond, Rt. Hn. J.	MacArthur, Ian
Cooke, Robert	Gurden, Harold	Mackenzie, Alasdair (Rosg&Crom'ty)
Cooper-Key, Sir Neill	Hall, John (Wycombe)	Mackie, George V. (C'ness & S'land)
Cordle, John	Hall-Davis, A. G. F.	McLaren, Martin
Corfield, F. V.	Hamilton, Marquess of (Fermanagh)	Maclean, Sir Fltzroy
Costain, A. P.	Hamilton, M. (Salisbury)	Macleod, Rt. Hn. Iain

McMaster, Stanley	Pike, Miss Mervyn	Teeling, Sir William
McNair-Wilson, Patrick	Pitt, Dame Edith	Temple, John M.
Maginnis, John E.	Pounder, Rafton	Thatcher, Mrs. Margaret
Maitland, Sir John	Powell, Rt. Hn. J. Enoch	Thomas, Sir Leslie (Canterbury)
Marples, Rt. Hn. Ernest	Price, David (Eastleigh)	Thomas, Rt. Hn. Peter (Conway)
Marten, Neil	Prior, J. M. L.	Thompson, Sir Richard (Croydon, S.)
Mathew, Robert	Pym, Francis	Thorneycroft, Rt. Hn. peter
Maude, Angus	Quennell, Miss J. M.	Tiley, Arthur (Bradford, W.)
Mawby, Ray	Ramsden, Rt. Hn. James	Tilney, John (Wavertree)
Maxwell-Hyslop, R. J.	Rawlinson, Rt. Hn. Sir Peter	Turton, Rt. Hn. R. H.
Maydon, Lt.-Cmdr. S. L. C.	Redmayne, Rt. Hn. Sir Martin	Tweedsmuir, Lady
Meyer, Sir Anthony	Rees-Davies, W. R.	van Straubenzee, W. R.
Mills, Peter (Torrington)	Renton, Rt. Hn. Sir David	Vaughan-Morgan, Rt. Hn. Sir John
Mills, Stratton (Belfast, N.)	Ridley, Hn. Nicholas	Vickers, Dame Joan
Miscampbell, Norman	Ridsdale, Julian	Walder, David (High Peak)
Mitchell, David	Roberts, Sir Peter (Heeley)	Walker, Peter (Worcester)
Monro, Hector	Robson Brown, Sir William	Walker-Smith, Rt. Hn. Sir Derek
More, Jasper	Rodgers, Sir John (Sevenoaks)	Wall, Patrick
Morrison, Charles (Devizes)	Roots, William	Walters, Dennis
Mott-Radclyffe, Sir Charles	Royle, Anthony	Ward, Dame Irene
Munro-Lucas-Tooth, Sir Hugh	St. John-Stevas, Norman	Weatherill, Bernard
Murton, Ossar	Scott-Hopkins, James	Webster, David
Neave, Airey	Sharples, Richard	Wells, John (Maidstone)
Nicholls, Sir Harmar	Shepherd, William	Whitelaw, William
Nicholson, Sir Godfrey	Sinclair, Sir George	Williams, Sir Rolf Dudley (Exeter)
Noble, Rt. Hn. Michael	Smyth, Rt. Hn. Brig. Sir John	Wills, Sir Gerald (Bridgwater)
Nugent, Rt. Hn. Sir Richard	Spearman, Sir Alexander	Wilson, Geoffrey (Truro)
Onslow, Cranley	Speir, Sir Rupert	Wise, A. R.
Orr, Capt. L. P. S.	Stainton, Keith	Wolrige-Gordon, Patrick
Orr-Ewing, Sir Ian	Stanley, Hn. Richard	Wood, Rt. Hn. Richard
Osborn, John (Hallam)	Steel, David (Roxburgh)	Woodhouse, Hon. Christopher
Osborne, Sir Cyril (Louth)	Stodart, Anthony	Woodnutt, Mark
Page, John (Harrow, W.)	Stoddart-Scott, Col. Sir Malcolm	Yates, William (The Wrekin)
Page, R. Graham (Crosby)	Studholme, Sir Henry	Younger, Hn. George
Pearson, Sir Frank (Clitheroe)	Summers, Sir Spencer
Peel, John	Talbot, John E.	TELLERS FOR THE NOES:
Percival, Ian	Taylor, Sir Charles (Eastbourne)	Mr. Dudley Smith and
Peyton, John	Taylor, Edward M. (G'gow,Cathcart)	Mr. G. Johnson Smith.
Pickthorn, Rt. Hn. Sir Kenneth	Taylor, Frank (Moss Side)

Mr. MacDermot

I beg to move Amendment No. 641, in page 105, line 6, to leave out from "in" to "then" in line 9 and to insert: each of the four years of assessment 1962–63, 1963–64, 1964–65 and 1965–66". Would it be convenient, Mr. Steele, if with this Amendment we discuss the following Amendment, No. 642, in line 12, which also appears in the name of my right hon. Friend the Chancellor of the Exchequer?

The Temporary Chairman (Mr. Thomas Steele)

Yes, if the Committee has no objection.

Mr. MacDermot

Thank you, Mr. Steele. The two Amendments relate to subsection (4), which we have been discussing and which is concerned with—[Interruption.]

The Temporary Chairman

Order. If hon. Members are leaving the Chamber, they might do so quietly.

Mr. MacDermot

If I may resume more quietly, the two Amendments relate to subsection (4), which is concerned with cutting down the overspill relief where a company increases its dividends. The general effect of the Amendments is that regardless of the year chosen by a company as the base year, the company's standard year for the dividend comparison will be the most favourable year of the years 1962–63 to 1965–66, subject only to the exclusion, which already appears in the Bill, in respect of a year in which there are exceptionally high dividends.

This high dividend exclusion in relation to the new year which we have added—1965–66—is achieved by prescribing that for that year any part of a dividend caught by the forestalling provisions in Clause 78 is to be left out of account. In relation to the earlier years, the Amendments in effect reproduce the rule which is contained in the Clause as drafted. In addition, the provisions in the Bill relating to increased capital are, in effect, reproduced in paragraph (c) of the new proviso.

Mr. Peter Emery

We are pleased to be able, at least partially, to welcome these Amendments, because they go towards doing some of the things which we asked the Committee to approve in our Amendment which was defeated by such a slender majority. The redrafted Clause looks rather like the Stars and Stripes if one marks in red the number of deletions and alterations. Of the 16 lines of subsection (4), perhaps three whole lines of the original draft remain. These Amendments are of some help, however, and they go a little way to meeting a number of the points which, I know have been put to the Chancellor by certain firms. We could repeat all the arguments that we made in the last debate on dividend limitation. I have no intention of boring the Committee in that way, although our arguments on the previous Amendment are equally applicable on this one.

There is one point which I wish to put to the Financial Secretary. I made passing reference to it ealier but did not get a reply. I should like him, with his right hon. Friend the Chancellor, to consider the four-fifths figure on dividend limitation. I accept that our Amendment included a level of two-fifths, but there is room for improvement between the two. I ask no more than that the point should be looked at again before Report, although I realise that an alteration such as we suggest might be slightly expensive. My researches have not been able to provide the likely figure of cost. If the hon. and learned Gentleman does not have the figure with him, I do not propose to press the matter now as I have not given notice of the point. I ask him, however, to consider whether the point that we have made could not be partially met by going one stage further and considering whether some other level would not be better for industry.

Mr. MacDermot

I should like to respond to the hon. Member in the spirit in which he has spoken, making it clear that there is no question of any commitment being involved. The immediate reaction of my right hon. Friend the Chancellor is that the four-fifths provision will be expensive and that any further reduction would be unacceptable. I do not, however, have with me the actual figures of the calculation. Perhaps that is an added reason why we should accede to the request which has been made, it being clear that we are not holding out any kind of hope or encouragement.

Mr. Peter Emery

I thank the hon. and learned Gentleman for what he has said. He has accepted my request in the spirit in which I made it. Perhaps, to have time on Report, he could let me have the figures when he has them and we can then consider what action, if any, we need to take.

Amendment agreed to.

Further Amendment made: In page 105, line 12, leave out from "of" to "as" in line 17 and insert: whichever excess is the least: Provided that—

1. (a) if the net amount of the dividends in any of the years 1962–63, 1963–64 and 1964–65 is higher than the corresponding amount for the year before that year, and is also higher than the corresponding amount for the year after (adjusted, if it is the year 1965–66, for the increase in the standard rate of income tax), the year to which this applies shall be left out of account, but if it applies to the year 1962–63, the year 1961–62 shall be substituted; and
2. (b) in determining whether there is any such excess in the case of the year 1965–66, or what is the amount of that excess, there shall be deducted from the dividends paid in that year any amount treated under section 78 of this Act as paid in the following year; and
3. (c) if between any earlier year of assessment and that for which relief is claimed there has been any increase in the paid up share capital of the company for any new consideration received by the company, then the dividends paid in the earlier year shall be treated as increased by such amount".— [Mr. Callaghan.]

Mr. MacDermot

I beg to move Amendment No. 643, in page 105, line 20, to leave out subsection (5) and to insert:

1. (5) Where, in any year of assessment for which relief is claimed, the company by virtue of an election under section 44 of this Act pays any dividends without deduction of income tax, then the relief shall be reduced in the proportion which those dividends bear to the total amount of the dividends paid by the company in that year or, if all the dividends so paid are paid without deduction of income tax, relief shall not be given to the company for that year.
2. (6) In relation to the cases dealt with by the Schedule (Supplementary provisions about transitional relief for existing companies with overseas trading income) to this Act, this section shall have effect subject to the provisions of that Schedule.

I can move the Amendment shortly. It does three things. First, it deletes the existing subsection (5), which is concerned with arrangements entered into between companies for relating dividends.

This subject is now dealt with in a somewhat amended form in paragraph (4) of the new Schedule. Secondly, in the new subsection (6) the Amendment introduces the new Schedule. Finally and substantively, in the new subsection (5) it introduces a new provision under which, where, because of an election under Clause 44, a company pays dividends without deduction of tax, the overspill relief is to be reduced in the proportion which those dividends bear to the total dividends paid by the company in the year. Where all the dividends are paid without deduction of Income Tax no overspill relief will be given. This, of course, is again in accordance with the principle which I stated to the Committee earlier, which is, that it is our intention that the relief should not exceed the actual tax paid on the dividends.

7.0 p.m.

Mr. Peter Emery

Again, I think we recognise what the Chancellor is trying to do, and much of this will come up again on the new Schedule. It seems to me that the two points which I have to make I can easily defer till the debate on the new Schedule, and to facilitate getting on with the Clause I will do no more now than say that we are not willing to oppose this but we shall have a number of points relevant to this and better raised, perhaps, for the convenience of the Chancellor and the Committee, on the new Schedule.

Amendment agreed to.

Mr. Peyton

I beg to move Amendment No. 527, in page 105, line 44, at the end to insert: (7) (a) Where a company has received such a sum as is mentioned in subsection (6), an amount equivalent to that sum may be paid by the company as a dividend which shall be exempt from income tax other than surtax and shall not be treated as a chargeable gain for the purposes of Part III of this Act; (b) where such a dividend as is mentioned in (a) above is received by a company, that dividend shall be treated for the purposes of this section (including any further application of this subsection) as if it were a sum received by the company under subsection (6). In the present atmosphere of great cordiality, and being conscious of the waves which have been flowing from the Treasury Bench, I move this Amendment with some confidence. I do not wish to inject any acid into the atmosphere, but I should like to observe that, in our view, the Government have most wrongly and improperly attempted to effect a notional divorce between a company and its shareholders. We believe this is wrong, and it makes nonsense of any thinking which goes on subsequently. The Government affect to believe that a shareholder is a useless animal, redundant as a rhinoceros, in the Chancellor's phrase, for the purposes of raising money, and that really he can be fleeced. I am sorry I have got a bit mixed up about the animals: I am not suggesting that a rhinoceros can be fleeced. However, the Government appear to believe that the shareholder is someone who can be fleeced without affecting the company itself.

I am sorry that the example of the Shell company keeps on occurring, but it does seem to me one of the main victims of these proposals. I remind Treasury Ministers of the fact that since their proposals were published the borrowing position of this immense company has been altered very much for the worse. I think I am right in saying—I speak without the book here—that before the Bill was published the yield at which Shell was able to borrow was 4½per cent. as compared with Standard Oil of New Jersey at 4½per cent. also and Texaco at 3¾ per cent. The position now, after the full effect of the Government's proposals has been felt and assessed, is that Shell can borrow only at 6½per cent. This is a very material weakening of the company's borrowing position, due to the swingeing blows which are dealt to shareholders.

The Government have talked about giving full compensation. I appreciate, and I would not dream of challenging them on this, that their intention was that people who suffered should in the transitional period be fully compensated. I do not wish to quarrel about the words of drafting, but the relief which is made available to the company is being passed on to the shareholder, subject, of course, to its being treated as a distribution and subject to Income Tax.

Indeed, I think I am right in saying, taking the Shell case—and I have not got the exact figures here—that the loss to the shareholders consequent upon the Government's proposals is some£17½ million. After the first flush of the proposals, without the Amendments, it would appear that the result was that Shell shareholders were compensated only to the extent of£4½million. Of course, they must pay Income Tax at the standard rate, which the company was obliged to deduct on paying.

This seems to us to be wrong. The effect of this is to raise that£4½million by£1 million or so to something like£5½million. I do not really believe that this is right or proper. I think the shareholder is very unfortunately regarded by many Members of the party opposite—I hope not Treasury Ministers—as being a wholly useless part of society. I hope they will remember that the private limited company has been very much at the root of the whole free enterprise system on which this country did grow great. To banish or to attempt to exorcise the shareholder from it at this stage of our development is, in our views, wholly wrong and shows a misconception of the position.

We have had this point coming up again and again on the Amendments, and I understand that if the Government move further the result may be to increase the compensation to some beyond what it ought to be. Of course, the Government find that a very useful argument, but on the other hand I believe that the powers of the Revenue are such that provision could be made to see that no shareholder is compensated over and above what he ought to be given.

I believe that the Government are really under some moral obligation in this matter. I think I ought to say—I confess I had not thought of this before this moment—that I am a very minor shareholder in Shell; only a minor one. I hope the Government will not think that that is what animates me in saying what I am saying now, but I believe that they are under a very strong obligation to be true to what many people thought they meant, namely, to see that all those who were damaged by these provisions were at any rate in the transitional period fully compensated for their loss. I hope the Government may be moved to consider this.

May I put it to them in this way. I am quite sure that a lot of people who are rather deep-rooted opponents of the present Administration would be surprised, and would take it as evidence of great open-mindedness, if the Government could see their way to accepting an Amendment of this kind. Of course, I would readily admit that there is no magic whatever in the words; and if the Financial Secretary or the Chancellor himself could say that they would look at this again and bring forward on Report some Amendment to meet this point, that of course, would be most welcome.

Here I am making a plea for a particular section of the free enterprise system which is not always the most popular. I recognise that, but on the other hand I believe it to be most important. I hope that before very long we shall have—this is not a particularly partisan remark—a Government in office who are pledged to the perfectly simple principle of reinforcing success wherever it may occur, and not seeking on all occasions to take swinging blows at it, and who will at least appear to treat it as though it were not a criminal offence. I move the Amendment in the hope that the Treasury Ministers may feel inclined to give it, at least, their very careful consideration.

Mr. MacDermot

Until the last sentence the hon. Member for Yeovil (Mr. Peyton) moved his Amendment with great moderation and put his argument as persuasively as I think it could be put, but, in view of the argument that we have had already, I do not think he will be surprised to hear me say that I think the moment has come for me to try to staunch the flow of generosity from the Treasury Bench, because although the hon. Gentleman has been arguing his case in relation to a particular class of shareholders who would perhaps be worse hit than others as a result of the introduction of these tax changes, the Amendment would go very wide indeed. It would enable a company, on receiving an amount of overspill relief, to pay out as dividend an equivalent amount which would be entirely free of Income Tax and of Capital Gains Tax in the recipient's hands; and were the recipient a company, the amount would not be taxable in its hands and would be treated in the same way as any overspill relief that it had itself received.

At the risk of wearying the Committee, I must remind hon. Members once again that the object of the overspill relief is to increase the funds of a company operating overseas out of which it can pay dividends to the same extent as, and not more, than the funds of a company operating at home will be increased by the reduction in the charge on its profits from 56¼per cent. to, say, 40 per cent. This is stating it broadly. I am not suggesting that that exact mathematical result will be achieved in every case. Just as it would be contrary to the basic principle of Corporation Tax to allow a company operating at home to distribute part of its increased funds tax free, so it would be equally objectionable to allow this to happen in respect of income earned overseas.

The effect of the Amendment would be to put the shareholders of an overseas trading corporation in a more favourable position than the shareholders of a domestic company trading purely at home. I have some complicated calculations and figures which would illustrate that convention, if anyone wants them; but, as I indicated before, I think that we have had our minds filled sufficiently with arithmetic for now. I must therefore advise the Committee to reject the Amendment.

Mr. John Harvey

We on this side of the Committee regret that the generosity has to be staunched. We have noticed that it is usually somewhere between midnight and three or four o'clock in the morning that the generosity seems to be a little more obvious, but looking at the clock now I doubt whether I could keep this one going that long in the hope that by then the Financial Secretary might give in.

I have one point to make about the difference between a shareholder receiving a dividend from a company trading in the United Kingdom and one trading overseas. It seems to me that where the dividend comes from a company trading overseas a shareholder suffers a disadvantage by virtue of the double taxation arrangements involved. I concede some of what the Financial Secretary has said about the possibility that this Amendment might be a little over-generous to the shareholder receiving a dividend from an overseas investment by comparison with an investment in this country, but surely it would not be beyond the wit of the Treasury to devise a formula whereby there was at least some sort of fair compensation to the shareholder in a company trading overseas which would give him something nearer the return to which he had been accustomed without penalising the company.

This has come up time and time again in these debates, and I wonder whether the Financial Secretary could look at this again, because it seems to me that there is not equality of treatment at present as between the investor in a British company and an investor in a company relying wholly or partly on profits earned overseas.

7.15 p.m.

Mr. Hirst

I agree with what my hon. Friend the Member for Waltham-stow, East (Mr. John Harvey) has just said. The Financial Secretary said that he could not accept the Amendment because it would not put things on an equal basis. I thought that this was merely for transitional purposes to compensate companies and shareholders for the form of the new taxation.

If it can be argued—and it may be—that a number of shareholders have benefited in the past from the O.T.C. arrangement—and I do not think that anybody would seek to argue against that—in this instance, by reason of the nature of this tax, they are to be adversely affected. That is the point. Surely the purpose of the Clause—and this Amendment in relation to it is trying to find its way through that purpose—is to compensate the companies and their shareholders—and, like my hon. Friends, I refuse to accept this complete separation which I think is a nonsense—for the circumstance of losing something which might have been to their advantage.

The purpose of the transitional payment is to compensate people over a certain period of time for a changeover to a tax which the Bill admits, and therefore the Chancellor admits, acts unfavourably against them in the first instance. It is therefore not a question of equity, but of seeking to give them some compensation for an inequality which the new form of taxation brings about by comparison with the taxation to which they were formerly subjected.

Mr. Peter Emery

We cannot leave this in the form that it appears it is going to be left. We can see that the Chancellor is somewhat concerned about this. There is no doubt that under this form of taxation the shareholder will be appreciably worse off in any distribution by these overseas companies than he was previously.

> I have an involved example which has been sent to me, and I could go through it, but I do not intend to do so. Using a foreign income of£20,000, it shows that under the old system the distribution, tax free, to shareholders would be about£9,000, while under the new system the amount received by shareholders after the tax overspill and the withholding have been taken into account will decrease to£6,860. If the Amendment were accepted that sum would be up not to anything like£9,000, but only to£7,964.

Sir Harmar Nicholls (Peterborough)

My hon. Friend is giving a specific example which can be understood. Is there any reason why the Financial Secretary should not tell us whether he does,

or does not, accept those figures? If they stand as put forward by my hon. Friend, that is clearly a point with which the Financial Secretary ought to deal. Does he accept the truth of the figures as the Bill stands?

Mr. Emery

I do not wish to speak for the Financial Secretary, but there is no doubt about the figures that I have given.

The case that we are deploying is that the shareholder will be that worse off. I have no intention of accepting the suggestion of my hon. Friend the Member for Walthamstow, East (Mr. John Harvey) that I might speak for another eight hours. After the admirable way in which the Amendment has been moved by my hon. Friend the Member for Yeovil (Mr. Peyton), the proper way to meet the position is to ask the Committee to divide on this point here and now.

Question put, That those words be there inserted:—

The Committee divided: Ayes 277, Noes 283.

Division No. 196.]	AYES	[7.20 p.m.
Alison, Michael (Barkston Ash)	Campbell, Gordon	Fletcher-Cooke, Charles (Darwen)
Allan, Robert (Paddington, S.)	Carlisle, Mark	Fletcher-Cooke, Sir John (S'pt[...]n)
Allason, James (Hemel Hempstead)	Cary, Sir Robert	Foster, Sir John
Amery, Rt. Hn. Julian	Channon, H. P. G.	Fraser,Rt.Hn.Hugh(St'fford & Stone)
Anstruther-Gray, Rt. Hn. Sir W.	Chataway, Christopher	Fraser, Ian (Plymouth, Sutton)
Ast[...]or, John	Chichester-Clark, R.	Galbraith, Hn. T. G. D.
Atkins, Humphrey	Clark, Henry (Antrim, N.)	Gardner, Edward
Awdry, Daniel	Clark, William (Nottingham, S.)	Gibson-Watt, David
Baker, W. H. K.	Clarke, Brig. Terence (Portsmth, W.)	Giles, Rear-Admiral Morgan
Balniel, Lord	Cooke, Robert	Gilmour, Ian (Norfolk, Central)
Barber, Rt. Hn. Anthony	Cooper-Key, Sir Neill	Gilmour, Sir John (East Fife)
Barlow, Sir John	Cordle, John	Glover, Sir Douglas
Batsford, Brian	Corfield, F. V.	Godber, Rt. Hn. J. B.
Beamish, Col. Sir Tufton	Costain, A. P.	Goodhart, Philip
Bell, Ronald	Courtney, Cdr. Anthony	Goodhew, Victor
Bennett, Dr. Reginald (Gos & Fhm.)	Craddock, Sir Beresford (Spelthorne)	Gower, Raymond
Berkeley, Humphry	Crawley, Aidan	Grant, Anthony
Berry, Hn. Anthony	Crosthwaite-Eyre, Col. Sir Oliver	Gresham Cooke, R.
Bessell, Peter	Crowder, F. P.	Grieve, Percy
Biffen, John	Cunningham, Sir Knox	Griffiths, Eldon (Bury St. Edmunds)
Biggs-Davison, John	Curran, Charles	Griffiths, Peter (Smethwick)
Bingham, R. M.	Currie, G. B. H.	Gurden, Harold
Birch, Rt. Hn. Nigel	Dalkeith, Earl of	Hall, John (Wycombe)
Black, Sir Cyril	Dance, James	Hall-Davis, A. G. F.
Blaker, Peter	Davies, Dr. Wyndham (Perry Barr)	Hamilton, Marquess of (Fermanagh)
Bossom, Hn. Clive	d'Avigdor-Goldsmid, Sir Henry	Hamilton, M. (Salisbury)
Bowen, Roderic (Cardigan)	Dean, Paul	Harris, Frederic (Croydon, N.W.)
Box, Donald	Deedes, Rt. Hn. W. F.	Harris, Reader (Heston)
Boyd-Carpenter, Rt. Hn. [...].	Digby, Simon Wingfield	Harrison, Brian (Maldon)
Boyle, Rt. Hn. Sir Edward	Dodds-Parker, Douglas	Harrison, Col. Sir Harwood (Eye)
Braine, Bernard	Doughty, Charles	Harvey, John (Walthamstow, E.)
Brinton, Sir Tatton	Drayson, G. B.	Harvie Anderson, Miss
Brooke, Rt. Hn. Henry	du Cann, Rt. Hn. Edward	Hastings, Stephen
Brown, Sir Edward (Bath)	Eden, Sir John	Hawkins, Paul
Bruce-Gardyne, J.	Elliot, Capt. Walter (Carshalton)	Hay, John
Bryan, Paul	Emery, Peter	Heald, Rt. Hn. Sir Lionel
Buck, Antony	Errington, Sir Eric	Heath, Rt. Hn. Edward
Bullus, Sir Eric	Eyre, Reginald	Hendry, Forbes
Burden, F. A.	Farr, John	Higgins, Terence L.
Butcher, Sir Herbert	Fell, Anthony	Hill, J. E. B. (S. Norfolk)
Buxton. Ronald	Fisher, Nigel	Hirst, Geoffrey
Hobson, Rt. Hn. Sir John	Meyer, Sir Anthony	Smyth, Rt. Hn. Brig. Sir John
Hogg, Rt. Hn. Quintin	Mills, Peter (Torrington)	Spearman, Sir Alexander
Hooson, H. E.	Mills, Stratton (Belfast, N.)	Speir, Sir Rupert
Hopkins, Alan	Miscampbell, Norman	Stainton, Keith
Hordern, Peter	Mitchell, David	Stanley, Hn. Richard
Hornsby-Smith, Rt. Hn. Dame P.	Monro, Hector	Steel, David (Roxburgh)
Howard, Hn. G. R. (St. Ives)	More, Jasper	Stodart, Anthony
Hunt, John (Bromley)	Morrison, Charles (Devizes)	Stoddart-Scott, Col. Sir Malcolm
Hutchison, Michael Clark	Mott-Radclyffe, Sir Charles	Studholme, Sir Henry
Irvine, Bryant Codman (Rye)	Munro-Lucas-Tooth, Sir Hugh	Summers, Sir Spencer
Jenkin, Patrick (Woodford)	Murton, Oscar	Talbot, John E.
Jennings, J. C.	Neave, Airey	Taylor, Sir Charles (Eastbourne)
Johnson Smith, G. (East Grinstead)	Nicholls, Sir Harmar	Taylor, Edward M. (G'gow,Cathcart)
Johnston, Russell (Inverness)	Nicholson, Sir Godfrey	Taylor, Frank (Moss Side)
Jones, Arthur (Northants, S.)	Noble, Rt. Hn. Michael	Teeling, Sir William
Joseph, Rt. Hn. Sir Keith	Nugent, Rt. Hn. Sir Richard	Temple, John M.
Kaberry, Sir Donald	Onslow, Cranley	Thatcher, Mrs. Margaret
Kerr, Sir Hamilton (Cambridge)	Orr, Capt. L. P. S.	Thomas, Sir Leslie (Canterbury)
Kershaw, Anthony	Orr-Ewing, Sir Ian	Thomas, Rt. Hn. Peter (Conway)
Kilfedder, James A.	Osborn, John (Hallam)	Thompson, Sir Richard (Croydon,S.)
Kimball, Marcus	Osborne, Sir Cyril (Louth)	Thorneycroft, Rt. Hn. Peter
King, Evelyn (Dorset, S.)	Page, John (Harrow, W.)	Tiley, Arthur (Bradford, W.)
Kirk, Peter	Page, R. Graham (Crosby)	Tilney, John (Wavertree)
Lagden, Godfrey	Peel, John	Turton, Rt. Hn. R. H.
Lambton, Viscount	Percival, Ian	Tweedsmuir, Lady
Lancaster, Col. C. G.	Peyton, John	van Straubenzee, W. R.
Langford-Holt, Sir John	Pickthorn, Rt. Hn. Sir Kenneth	Vaughan-Morgan, Rt. Hn. Sir John
Legge-Bourke, Sir Harry	Pike, Miss Mervyn	Vickers, Dame Joan
Lewis, Kenneth (Rutland)	Pitt, Dame Edith	Walder, David (High Peak)
Litchlield, Capt. John	Pounder, Rafton	Walker, Peter (Worcester)
Lloyd,Rt.Hn. Geoffrey (Sut'nC'dfield)	Powell, Rt. Hn. J. Enoch	Walker-Smith, Rt. Hn. Sir Derek
Lloyd, Ian (P'tsm'th, Langstone)	Price, David (Eastleigh)	Wall, Patrick
Lloyd, Rt. Hn. Selwyn (Wirral)	Prior, J. M. L.	Walters, Dennis
Longden, Gilbert	Pym, Francis	Ward, Dame Irene
Loveys, Walter H.	Quennell, Miss J. M.	Weatherill, Bernard
Lubbock, Eric	Ramsden, Rt. Hn. James	Webster, David
Lucas, Sir Jocelyn	Rawlinson, Rt. Hn. Sir Peter	Wells, John (Maidstone)
McAdden, Sir Stephen	Redmayne, Rt. Hn. Sir Martin	Whitelaw, William
MacArthur, Ian	Rees-Davies, W. R.	Williams, Sir Rolf Dudley (Exeter)
Mackenzie, Alasdair (Ross&Crom'ty)	Renton, Rt. Hn. Sir David	Wills, Sir Gerald (Bridgwater)
Maclean, Sir Fitzroy	Ridley, Hn. Nicholas	Wilson, Geoffrey (Truro)
Macleod, Rt. Hn. Iain	Ridsdale, Julian	Wise, A. R.
McMaster, Stanley	Roberts, Sir Peter (Heeley)	Wolrige-Gordon, Patrick
McNair-Wilson, Patrick	Robson Brown, Sir William	Wood, Rt. Hn. Richard
Maginnis, John E.	Rodgers, Sir John (Sevenoaks)	Woodhouse, Hon. Christopher
Maitland, Sir John	Roots, William	Woodnutt, Mark
Marples, Rt. Hn. Ernest	Royle, Anthony	Yates, William (The Wrekin)
Marten, Neil	St. John-Stevas, Norman	Younger, Hn. George
Mathew, Robert	Scott-Hopkins, James
Maude, Angus	Sharples, Richard	TELLERS FOR THE NOES:
Mawby, Ray	Shepherd, William	Mr. McLaren and
Maxwell-Hyslop, R. J.	Sinclair, Sir George	Mr. R. W. Elliott.
Maydon, Lt.-Cmdr. S. L. C.	Smith, Dudley (Br'ntf'd & Chiswick)
NOES
Abse, Leo	Brown, Hugh D. (Glasgow, Provan)	Delargy, Hugh
Albu, Austen	Brown, R. W. (Shoreditch & Fbury)	Dell, Edmund
Aliaun, Frank (Salford, E.)	Buchan, Norman (Renfrewshire, W.)	Dempsey, James
Alldritt, Walter	Buchanan, Richard	Diamond, John
Allen, Scholefield (Crewe)	Butler, Herbert (Hackney, C.)	Dodds, Norman
Armstrong, Ernest	Butler, Mrs. Joyce (Wood Green)	Doig, Peter
Atkinson, Norman	Callaghan, Rt. Hn. James	Donnelly, Desmond
Bacon, Miss Alice	Carmichael, Neil	Driberg, Tom
Bagier, Cordon A. T.	Carter-Jones, Lewis	Duffy, Dr. A. E. P.
Barnett, Joel	Castle, Rt. Hn. Barbara	Dunn, James A.
Baxter, William	Chapman, Donald	Dunnett, Jack
Beaney, Alan	Coleman, Donald	Edelman, Maurice
Bellenger, Rt. Hn. F. J.	Conlan, Bernard	Edwards, Rt. Hn. Ness (Caerphilly)
Bence, Cyril	Corbet, Mrs. Freda	English, Michael
Benn, Rt. Hn. Anthony Wedgwood	Cousins, Rt. Hn. Frank	Ennals, David
Bennett, J. (Glasgow, Bridgeton)	Craddock, George (Bradford, S.)	Ensor, David
Binns, John	Crawshaw, Richard	Evans, Albert (Islington, S.W.)
Bishop, E. S.	Cronin, John	Evans, Ioan (Birmingham, Yardley)
Blackburn, F.	Crosland, Rt. Hn. Anthony	Fernyhough, E.
Blenkinsop, Arthur	Crossman, Rt. Hn. R. H. S.	Finch, Harold (Bedwellty)
Boardman, H.	Cullen, Mrs. Alice	Fletcher, Sir Eric (Islington, E.)
Boston, T. G.	Dalyell, Tam	Fletcher, Ted (Darlington)
Bowden, Rt. Hn. H. W. (Leics, S.W.)	Darling, George	Fletcher, Raymond (Ilkeston)
Boyden, James	Davies, G. Elfed (Rhondda, E.)	Floud, Bernard
Braddock, Mrs. E. M.	Davies, Harold (Leek)	Foley, Maurice
Bradley, Tom	Davies, Ifor (Gower)	Foot, Michael (Ebbw Vale)
Bray, Dr. Jeremy	Davies, S. O. (Merthyr)	Fraser, Rt. Hn. Tom (Hamilton)
Brown, Rt. Hn. George (Belper)	de Freitas, Sir Geoffrey	Freeson, Reginald

Galpern, Sir Myer	McBride, Neil	Roberts, Goronwy (Caernarvon)
Garrett, W. E.	McCann, J.	Robertson, John (Paisley)
Garrow, A.	MacColl, James	Robinson, Rt. Hn.K.(St. Pancras, N.)
George, Lady Megan Lloyd	MacDermot, Niall	Rodgers, William (Stockton)
Ginsburg, David	McGuire, Michael	Rogers, George (Kensington, N.)
Gourlay, Harry	McKay, Mrs. Margaret	Rose, Paul B.
Gregory, Arnold	Mackenzie, Gregor (Rutherg[...]en)	Ross, Rt. Hn. William
Griffiths, David (Rother Valley)	Mackie, John (Enfield, E.)	Sheldon, Robert
Griffiths, Rt. Hn. James (Llanelly)	McLeavy, Frank	Shinwell, Rt. Hn. E.
Griffiths, Will (M'chester, Exchange)	MacMillan, Malcolm	Shore, Peter (Stepney)
Gunter, Rt. Hn. R. J.	Mahon, Peter (Preston, S.)	Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)
Hale, Leslie	Mahon, Simon (Bootle)	Short, Mrs. Renée (W'hampton,N.E.)
Hamilton, James (Bothwell)	Mallalieu,J.P.W.(Hudderstield,E.)	Silkin, John (Deptford)
Hamilton, William (West Fife)	Manuel, Archie	Silkin, S. C. (Camberwell, Dulwich)
Hamling, William (Woolwich, W.)	Mapp, Charles	Silverman, Julius (Aston)
Hannan, William	Marsh, Richard	Silverman, Sydney (Nelson)
Harper, Joseph	Mason, Roy	Skeffington, Arthur
Harrison, Walter (Wakefield)	Maxwell, Robert	Slater, Mrs. Harriet (Stoke, N.)
Hart, Mrs. Judith	Mayhew, Christopher	Slater, Joseph (Sedgefield)
Hattersley, Roy	Mellish, Robert	Small, William
Hazell, Bert	Mendelson, J. J.	Smith, Ellis (Stoke, S.)
Heffer, Eric S.	Mikardo, Ian	Snow, Julian
Henderson, Rt. Hn. Arthur	Millan, Bruce	Soskice, Rt. Hn. Sir Frank
Herbison, Rt. Hn. Margaret	Miller, Dr. M. S.	Spriggs, Leslie
Hill, J. (Midlothian)	Milne, Edward (Blyth)	Stonehouse, John
Hobden, Dennis (Brighton, K'town.)	Molloy, William	Stones, William
Holman, Percy	Morris, Alfred (Wythenshawe)	Strauss, Rt. Hn. G. R. (Vauxhall)
Homer, John	Morris, Charles (Openshaw)	Stross,SirBarnett(Stoke-on-Trent,C.)
Houghton, Rt. Hn. Douglas	Morris, John (Aberavon)	Summerskill, Hn. Dr. Shirley
Howarth, Harry (Weillngborough)	Murray, Albert	Swain, Thomas
	Neal, Harold	Swingler, Stephen
Howarth, Robert L. (Bolton, E.)	Newens, Stan	Symonds, J. B.
Howell, Denis (Small Heath)	Noel-Baker, Francis (Swindon)	Taverne, Dick
Howie, W.	Noel-Baker,Rt.Hn.Philip(Derby,S.)	Taylor, Bernard (Mansfield)
Hoy, James	Norwood, Christopher	Thomas, George (Cardiff, W.)
Hughes, Emrys (S. Ayrshire)	Oakes, Gordon	Thomas, Iorwerth (Rhondda, W.)
Hughes, Hector (Aberdeen, N.)	Ogden, Eric	Thomson, George (Dundee, E.)
Hunter, Adam (Dunfermline)	O'Malley, Brian	Thornton, Ernest
Hunter, A. E. (Feltham)	Oram, Albert E. (E. Ham, S.)	Tinn, James
Hynd, H. (Accrington)	Orbach, Maurice	Tomney, Frank
Irvine, A. J. (Edge Hill)	Oswald, Thomas	Tuck, Raphael
Irving, Sydney (Dartford)	Owen, Will	Urwin, T. W.
Janner, Sir Barnett	Padley, Walter	Varley, Eric G.
Jeger, George (Goole)	Page, Derek (King's Lynn)	Wainwright, Edwin
Jeger,Mrs.Lena(H 'b'n&St.P'cras,S.)	Paget, R. T.	Walden, Brian (All Saints)
Jenkins, Hugh (Putney)	Palmer, Arthur	Walker, Harold (Doncaster)
Johnson, Carol (Lewisham, S.)	Panned, Rt. Hn. Charles	Wallace, George
Jones, Dan (Burnley)	Park, Trevor (Derbyshire, S.E.)	Warbey, William
Jones,Rt.Hn.Sir Elwyn(W.Ham,S.)	Parker, John	Watkins, Tudor
Jones, J. Idwal (Wrexham)	Parkin, B. T.	Weitzman, David
Jones, T. W. (Merioneth)	Pavitt, Laurence	Wells, William (Walsall, N.)
Kelley, Richard	Pearson, Arthur (Pontypridd)	White, Mrs. Eirene
Kenyon, Clifford	Peart, Rt. Hn. Fred	Whitlock, William
Kerr, Mrs. Anne (R'ter & Chatham)	Pentland, Norman	Wilkins, W. A.
Kerr, Dr. David (W'worth, Central)	Perry, Ernest G.	Willey, Rt. Hn. Frederick
Lawson, George	Popplewell, Ernest	Williams, Alan (Swansea, W.)
Leadbitter, Ted	Prentice, R. E.	Williams, Clifford (Abertillery)
Ledger, Ron	Price, J. T. (Westhoughton)	Williams, W. T. (Warrington)
Lee, Rt. Hn. Frederick (Newton)	Probert, Arthur	Willis, George (Edinburgh, E.)
Lee, Miss Jennie (Cannoek)	Pursey, Cmdr. Harry	Wilson, William (Coventry, S.)
Lever, Harold (Cheetham)	Randall, Harry	Winterbottom, R. E.
Lever, L. M. (Ardwick)	Rankin, John	Wyatt, Woodrow
Lewis, Arthur (West Ham, N.)	Redhead, Edward	Yates, Victor (Ladywood)
Lewis, Ron (Carlisle)	Rees, Merlyn	Zilliacus, K.
Lipton, Marcus	Reynolds, G. W.
Lomas, Kenneth	Rhodes, Geoffrey	TELLERS FOR THE NOES:
Loughlin, Charles	Richard, Ivor	Mr. Alan Fitch and
Mabon, Dr. J. Dickson	Roberts, Albert (Normanton)	Mr. Charles Grey.

7.30 p.m.

Mr. MacDermot

I beg to move Amendment No. 644, in page 105, line 46, to leave out from the beginning to the end of line 2 on page 106.

This Amendment is consequential on Amendment No. 638, which the Committee agreed to earlier. It deletes the definition of the company's taxed income in the base year. This definition is no longer necessary, now that subsection (1) is to be amended so that the overspill relief is no longer restricted to the proportion representing the distributed profits.

Amendment agreed to.

Mr. MacDermot

I beg to move Amendment No. 789, in page 106, line 5, after "year" to insert: (omitting any amount on which relief from tax is allowed otherwise than by way of credit for foreign tax or on which the company charges the tax against any other person otherwise than under section 184 of the Income Tax Act 1952)".

The Temporary Chairman (Mr. Grant-Ferris)

With this Amendment, it would be in order to take Amendment No. 767, in page 106, line 3, to leave out from "income" to the end of line 7 and to insert from a source in the base year are references to income from the source as computed for the charge to income tax for that year, after deducting any relief under section 341 or section 425 of the Income Tax Act 1952 which was allowed against that income and any payments to which section 169 of that Act applied which were treated as having been made out of that income: (b) reference to the profits tax on the Income in the base year are references to the profits tax on the income of the period used in the computation of the income for the charge to income tax for the base year".

Mr. MacDermot

Amendment No. 789 corrects an uncertainty which exists in the Clause as printed, and corrects it in favour of the taxpayer. I think it covers the same point as Amendment No. 767, standing in the name of the hon. Member for Yeovil (Mr. Peyton) and some of his hon. Friends. It would be ungenerous of me not to recognise that that Amendment drew attention to this point. We think that perhaps our wording meets the point more satisfactorily. It makes it clear that the income in the base year on which there is a notional charge to Corporation Tax will be the amount of that income as computed before the charge to Income Tax less any amount on which relief from tax is allowed, or on which the company charges the tax against another person other than in paying a dividend.

I am afraid that sounds rather technical. In other words, it means that the income, taken as the income of the base year, will exclude those items which will be allowable as a deduction in future under the new Corporation Tax rules in arriving at the amount on which Corporation Tax is payable. As I said before, it resolves the uncertainty in favour of the taxpayer.

Mr. Peyton

All that remains for me to say is that I must have got my sense of timing wrong just now when I expected a generous reaction from the Treasury Bench, only to be sadly, suddenly and shockingly disappointed over a matter in which they could well and properly have made a generous concession, which would have been most welcome to us. However, they have now done it. The Financial Secretary has been good enough to say that we called his attention to a valid point. I gladly accept his assurance that the words which he has put down have achieved the purpose which we set out to achieve. I am very grateful to him for doing so.

Amendment agreed to.

Mr. MacDermot

I beg to move Amendment No. 790, in page 106, line 38, after "relief" to insert: (a trade exercised in more than one territory being for this purpose regarded as so many separate trades)". This Amendment is also designed to improve the drafting and to make it clear that where a trade is exercised in more than one territory—that may, for example, be in several territories abroad or may be a case of a company trading partly in the United Kingdom and partly in territories overseas—a trade is to be regarded as being so many separate trades, depending on whether it is at home or overseas. It corrects a drafting defect in the Clause because, without this Amendment, the position in relation to a trade carried on partly in the United Kingdom and partly overseas might have been open to doubt.

Mr. Peter Emery

I am somewhat concerned about what the Financial Secretary has said about this being mainly a drafting Amendment. I do not want to misrepresent the Financial Secretary, but it seemed to me that it goes much further than simply drafting. As I understood the Bill before, it was possible for this matter to be dealt with by companies being able, if necessary, to average between what was their tax position and their overspill country by country. This definitely spells out that that is impossible and that each country must be taken separately. If that is the case—it seems to me that it is—I should like to ask the Chancellor or the Financial Secretary two questions. First, why should overspill have to be taken country by country? Where an operation is being taken on a worldwide basis and the operation of the company is obviously based on worldwide operations, why, for this purpose, should there have to be a division country by country?

Secondly, if my suggestion is correct, I am informed that there would be certain definite difficulties for some companies in their operation. If indeed more difficulties would be created and if it would be much more simple for a company to operate in its worldwide position from this country, why make for what is a most complicated aspect of taxation by having sub-division? We should be very concerned about this matter. I should like to have replies to these questions before deciding what action my hon. Friend should take on the Amendment.

Mr. MacDermot

I emphasised the drafting aspect because I wanted to make it clear that it was not our intention to alter what we intended to be the sense of the original provision. The intention always was that "overseas source of trading income" should refer to the trading to the extent that it was carried on overseas. On the question why a particular source overseas should be treated independently and should not be averaged and treated all as one source, the representations we have received have been rather to the contrary sense of some which have apparently been made to the hon. Member for Reading (Mr. Peter Emery).

On the basis of the representations made to us in examining the problem, our view is that averaging would operate to the disadvantage of companies, the reason presumably being that there would be different reliefs available which must be related to what the level of tax is in different countries. With a given quantity of overseas income coming from a particular country, some will afford a greater relief than others. I am advised that averaging could, and indeed would, operate to the disadvantage of the company. It is for that reason that we propose to make perfectly clear what is the intention in the drafting.

Mr. Peter Emery

I thank the Financial Secretary for that answer. It clears up a point about which we on this side were not clear—that the Government wanted to do away with averaging. There is obviously a slight difference of view. I do not think it is necessary at this moment to ask the Committee to divide, but we shall have to study this matter a little more closely. I ask the Chancellor to look again at the representations he has received, because there may well be advantages in averaging.

As regards the O.T.C. position, averaging there was normally thought to be an evasion. Therefore, I find it strange that the Financial Secretary should now suggest that averaging might work against the general advantage of most companies. Both sides of the Committee need to examine this point again. We on this side were unable to know exactly what was in the Government's mind. We are now much clearer. We will return to this point, if necessary, on Report.

Amendment agreed to.

7.45 p.m.

Sir T. Barlow

I beg to move Amendment No. 735, in page 106, line 42, to leave out "quarter" and to insert "tenth".

Certain companies can obtain relief in some territories if they hold 25 per cent. of the shareholding of the company overseas. The figure of 25 per cent. is very arbitrary and it may be a very large proportion of a company. In the United States in comparable circumstances 10 per cent. has been chosen as a fair figure. In view of the size of concerns operating nowadays and in view of the immense cost of developing mines or plantations abroad, 25 per cent. is a very large proportion. There is a great difference between a portfolio investment and a management type of investment. There can be little confusion between the two. In many cases 10 per cent., or possibly less, may have great managerial value. Those of us who have sat here during the last few days have been told time and time again of the managerial value of overseas assets, in that they help exports, banking, insurance, shipping, and all kinds of things. For that reason, I suggest that 25 per cent. is far too large a proportion. The Amendment suggests 10 per cent. instead.

The Amendment has the added advantage of allowing these reliefs in all overseas concerns, whether they are inside or outside the Commonwealth. This may be rather important. In these days, when there are possibilities of our joining the Common Market in years to come, it is very invidious if there is one law for the Commonwealth and another for the Common Market. The United States law in similar circumstances make no distinction at all between countries in which companies have direct interests and other foreign countries. It is much better that we should be on the same basis.

Mr. MacDermot

I rise at this early stage only because I find that all my efforts to staunch the flow of generosity on the part of the Treasury are of no avail. It is better, therefore, that I should make clear what our position is from the outset. Hon. Members will no doubt have noticed that the Government have tabled an Amendment proposing, in effect, in relation to the Commonwealth only, what the hon. Gentleman proposes we should give world wide: namely, that the test of what constitutes a parent company for purposes of overspill relief should be a holding of one-tenth rather than of one-quarter.

On considering the matter further and having regard, in particular, to the considerations to which the hon. Gentleman referred, my right hon. Friend has come to the conclusion that it would be right to accept the Amendment, rather than to move his own.

I should explain briefly the reasons for the original decision and how my right hon. Friend has come to change his mind on this matter. The original view was—and I think that it will commend itself to the Committee as being reasonable—that it would be illogical if overspill relief were given on income as being from a trade investment where no relief for underlying tax was due for that income. It would have been difficult to tie legislation to future agreements yet to be made. Also, we were advised that the problem, to which I referred on an earlier occasion in our discussions, of companies with holdings of between 10 per cent. and 25 per cent., particularly mining companies where there was a number grouped together to form a consortium to control a joint subsidiary overseas, was of particular importance in relation to the Commonwealth. Therefore, it was for that reason that I indicated earlier that we were proposing to extend relief for underlying tax to 10 per cent. holding in companies in Commonwealth countries.

I made clear on that occasion that it had always been a principle not to grant unilateral relief to the Commonwealth where we were not prepared to negotiate and offer a similar relief on a reciprocal basis to other countries outside the Commonwealth. Now we have come to a position where it, is clear that we are prepared to accept this test on a reciprocal basis for other countries for underlying tax, and the principle in logic for not extending it to this interim relief goes. In addition, we have now received further representations which demonstrate that this same problem of a consortium of companies controlling an overseas trading operation jointly is not confined to the Commonwealth but that there are substantial investments overseas amounting to more than 10 per cent. but less than 25 per cent. of the voting power of companies in countries with which we have at present agreements providing for unrestricted relief for underlying tax. In those circumstances my right hon. Friend feels that it would be right to accept the Amendment.

Mr. Peter Emery

In accepting this Amendment, do I understand that the hon. and learned Gentleman will not be moving the Government's own Amendment on this matter? The hon. and learned Gentleman did not say so and I think that it appears to the Committee that it is quite plain that in the Amendment which we are now discussing we are covering the whole position. We are grateful that the Government have seen the sense in the Amendment which was so admirably and moderately moved by my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow).

On these matters, when we are considering the position of Burma and South Africa where we have considerable investments and where I am sure we want to be as liberal as possible, and when we consider the position in the United States which must have a definite bearing on whatever may be in the Chancellor's mind, we on this side of the Committee are most grateful to the Government for accepting the Amendment.

Sir J. Barlow

May I add my thanks to the Financial Secretary and the Chancellor of the Exchequer in that one has represented the thoughts of the other. We are most grateful for the concession, which I am sure is very sound and will be appreciated.

Amendment agreed to.

Sir J. Barlow

I beg to move, Amendment No. 736, in page 106, line 46, at the end to add: or (c) the investment in the company resident in a territory outside the United Kingdom was of a value at 6th April 1965 in excess of£1,000,000 or, if acquired since that date cost more than 11,000,000". This Amendment is almost consequential on the previous one. The Chancellor has wisely reduced the 25 per cent. requirement on these companies to 10 per cent., and the Financial Secretary has told us how many of these overseas development companies are financed in that a consortium of companies gets together here and each puts up 5 per cent., 10 per cent. or 15 per cent. and together they contribute perhaps 80 per cent. of the capital, and sometimes ordinary shares for the remainder are issued to the public. But the fact remains that some modern developments are so large that£1 million may be much less than 10 per cent. For some of these large developments£1 million, or 10 per cent., whichever is the less, should be the criterion for relief.

If, for example, there were a company of£100 million then 10 per cent. would be£10 million, whereas in a much smaller company£1 million might be a very substantial proportion and might attract overseas trade and exports. The Amendment, as I have said, is substantially consequential upon the first Amendment which the Government have been so wise to accept. I hope that they will do the same with this.

Mr. MacDermot

I have to tell the hon. Gentleman that the Treasury has once again got control of itself and is reverting to what the Committee tends to regard as its more usual attitude towards Amendments. There are weighty objections to accepting this Amendment compared with the last one. I appreciate that an investment of£1 million is substantial and significant. I do not want to be thought in any way to be trying to treat this matter lightly.

These are the objections. Firstly, it is very difficult to see, once the principle was accepted of making the test one of a given size of investment, where one could hold the line. If, as is now suggested, a figure of£1 million were adopted I think that hon. Members with experience in these matters will realise that immediately pressures would start for the adoption of a lower figure. One can think of many figures of less than£1 million which would still represent a substantial sum of money. Exactly the same type of argument could be used in support of lower figures as the hon. Member so persuasively used in support of£1 million.

Sir J. Barlow

The figure of£1 million is not produced any more easily than 10 per cent. If the Government accept 10 per cent. and stick to it, it is equally good to accept£1 million and stick to it.

Mr. MacDermot

If the hon. Member will listen to my argument he will see that I have the answer to the point which he is making. The real answer to his point—this, I think, is the main objection in principle—is that it would give to a wealthy company a relief which was not available to a poor company. When one takes the percentage test, on the other hand, one applies the same test and the same principle in respect of all companies, large and small. A small company which had invested£1,000, to take another round figure, in an overseas company might have committed quite as large a proportion of its resources as the giant investing£1 million.

8.0 p.m.

I am sure that all hon. Members accept that it is of the utmost importance in these Revenue matters to make one's provisions conform to principles which are applicable to all, great and small, and which are defensible on principle. It would seem quite indefensible to allow to a large company simply because of its size a form of relief which was not available to a smaller company in similar circumstances. The smaller company may be the energetic and growing one that we hear so much about in our conversations and which deserves encouragement.

Moreover, there is no logic in adopting a size test for trading investments in relation to overspill and not applying it in relation to relief for underlying tax. I know that this suggestion has not so far been made; but we feel sure that, if we were to accept the Amendment in relation to this interim relief, we should have pressure later to extend it as a test for entitlement to relief for underlying tax. That would mean writing into double taxation agreements, if the matter were carried to its logical conclusion, provisions for relief by reference to the size of investment in another country. To put it mildly, we think it unlikely that other countries would be ready to accept that such a provision was justified in principle. I am sorry to have to reject the hon. Gentleman's Amendment, but, for these reasons, which my right hon. Friend finds quite compelling, I must advise the Committee to resist it.

Mr. Stephen Hastings (Mid-Bedfordshire)

I am very disappointed that the Financial Secretary has refused the Amendment after having accepted the previous one moved by my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow). The second follows from the first, as my hon. Friend explained. A sum of£1 million seems to me to represent, to some extent, a dividing line between, what can be regarded as trade investment and portfolio investment, in this context, because investment trusts generally are required to spread their investment and would not go above this figure, whatever the size. This is one point in favour of the figure of£1 million or thereabouts.

My hon. Friend is concerned particularly in these two Amendments with mining companies, not oil companies overseas. The oil companies have grown in a very different way. They are so big that they own their deposits outright. The mining companies, on the other hand—Rio Tinto Zinc, Consolidated Goldfields and Selection Trust, for instance—have grown up in a different way. There are two reasons for this: first, the immense capital cost involved,£50 million being by no means excessive; secondly, the very great risk involved, more so than in a strike of oil. For these reasons, as the Financial Secretary admits, if I understand him aright, the risk is spread very widely and holdings are comparatively small although the companies themselves may be of considerable size. This is an argument for accepting this Amendment just as it was an argument in favour of the previous one which the Chancellor accepted.

Even though holdings of£1 million in this context may be regarded as small, the benefits which these companies bring to this country are considerable. First, through such holdings—we are arguing now about holdings of£1 million—they are in a position to place orders, and they do place very large orders, for machinery and plant in this country, and they employ British people on a fairly large scale through the influence they have as a result of investments of about this size. Second, and just as important, in times of shortage of raw materials—we have just been living through such a time when, for about two years, copper has been short—the control exercised through investment of this order ensures that industry in this country obtains the raw materials which it needs even though the risk of shortage may be great.

If the Amendment is not accepted and these companies start to slip on the London market—I know that this argument has been used before—and control begins to move from them to other than United Kingdom interests, there will be a real risk of these two large and distinct advantages to our economy being lost.

I think it most disappointing that the Financial Secretary is not prepared to accept the Amendment. The argument in favour of it is every bit as weighty as the argument which he accepted on Amendment No. 735, and I hope that my hon. Friend will advise the Committee to divide.

Mr. Peter Emery

The Financial Secretary seems to adopt a cyclical approach to our Amendments, sometimes blowing hot and sometimes blowing cold. Having just accepted one Amendment, he is now spoiling the generosity of which he has spoken.

I listened closely to the point which the hon. and learned Gentleman expounded about a large company, suggesting that, if the Amendment were accepted, it might put the larger company in a more favourable position than its smaller brethren which would have to meet the 10 per cent. requirement. I take that point, but I cannot accept that it is anything like as compelling as the hon. and learned Gentleman argued. My hon. Friend the Member for Mid-Bedfordshire (Mr. Hastings) underlined the real issue here, namely, the element of risk bearing.

Often, although it may not seem so much greater, some of the very large mining concession companies and other types of large-scale investment overseas bear a risk which, in my view—this must be to some extent a subjective judgment—is considerably greater. It may be argued by the Financial Secretary that the bigger company can more readily afford this amount of risk bearing, but that was not the argument which he used, and it is not an argument which I should accept. It seems to me that this Amendment is tied very reasonably to the previous Amendment which the Government have accepted. The criterion of 10 per cent. or£1 million is perfectly reasonable.

I say to my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) that I think that we should like to look at this matter closely, perhaps not dividing the Committee on it now. We are not neglecting the generosity shown by the Government in accepting my hon. Friend's previous Amendment, but we should like to look at this one and consider whether it ought to be brought back to the House on Report. I shall be guided by my hon. Friend, but it seems to me that we might well leave it for the moment, consider it further, and return to it later, if necessary.

Sir J. Barlow

In view of what has been said on both sides, I shall be perfectly willing to leave it at that level.

Mr. MacDermot

I would make it clear, in view of what the hon. Member for Reading (Mr. Peter Emery) has said, that I am not giving any encouragement on behalf of my right hon. Friend to further consideration of the matter. Our view is quite clear for the reasons that I have stated. What hon. Members opposite may do is their own affair.

Amendment negatived.

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

Sir E. Boyle

I do not wish to detain the Committee for long, but I think we ought not to part with this important Clause without a few more words from the Opposition. I calculate that, taking together the ten hours on Clause 16 and the four hours spent on this Clause today, we have spent about14 hours on the Corporation Tax in its external application.

Mr. Callaghan

And a lot of money.

Sir E. Boyle

I think the right hon. Gentleman will agree that we have not devoted an excessive proportion of our total time on the Bill to an aspect which must have caused him more trouble and concern than most other parts.

I have four points to raise on this Clause. None of us on this side will wish to underrate the value of the relief which the Chancellor has produced and the value of some of the rewriting that he has done as the Bill has gone through the Committee stage, but I feel that in certain respects the Clause must remain basically somewhat unsatisfactory. The first example is this. In a situation in which relief is calculated by reference to a base year, however liberally and fairly one tries to interpret the concept of the base year—I pay tribute to what the Chancellor has done about it—that concept must always be unsatisfactory. After all, companies these days develop very fast, their scale of operations is very large and the international links between one large corporation and another are growing all the time.

Whenever I hear someone speak about a base year or read a Clause which refers to a base year, I am reminded of Mr. Harold MacMillan's remarks about looking at last year's Bradshaw. That is to say, inevitably the operation of Clause 79 must have some reference to last year's Bradshaw. One is bound to admit that, however fair one tries to make the provisions of the Clause, they are bound to be somewhat unsatisfactory for that reason alone.

Of all the aspects of the Clause that we have discussed, I confess that the one that bothers me the most is the prospect of a seven-year dividend freeze for a number of companies unless they are prepared to see their overspill relief substantially reduced. I do not want to go over this again at length. I entirely understand the Chancellor's difficulty as the Clause is drafted, that he is paying, as it were, a direct grant from public funds to ease the position of companies which would otherwise be in difficulties. The Chancellor feels—I understand his attitude—that any company which increases its dividends cannot hope to qualify.

On the other hand, that really points to a basic defect in the scheme of Corporation. Tax in this Bill with regard to overseas operations. Surely a seven-year dividend freeze must in practice be restrictive, limiting the operations of a considerable number of companies whose future is, I believe, of very great importance to this country. I would just make the point again—I think that all of us on this side realise the importance of great corporations in terms of responsibilities to the nation—that, whatever view we take about the right boundary between the private and the public sectors, the fact remains that the proper treatment of great corporations by the Government is a matter of crucial importance whether we are talking about a developing country or an industrial country like Britain.

8.15 p.m.

It seems to me that the Bill as it has come to us and the operation of this part of it must prove damaging to a considerable number of major corporations of really great importance to the nation. I hope that the Chancellor will always [...]ear this point in mind and will be prepared to give further consideration to it. My own belief is that our Amendment to page 105, line 4, was the most important one. I confess that I felt disappointed that the Financial Secretary was not able le meet us on any of the aspects of it that we discussed.

This leads to my third point, which is that Clause 79 will undoubtedly have disparate effects on different companies. The example of Shell has already been quoted by my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd)—the difference in treatment under Clause 79, the difference in the consequences of the Clause for two of our most important oil companies. There are, of course, other companies which could have been quoted. The example of B.A.T. might well have been quoted. I am sure that the Chancellor will bear in mind the importance of justice appearing to be done in the case of all the major companies affected by the Bill.

There is one aspect of the Clause which we have not discussed during the debates. I refer to the position of new companies, new enterprises, trading abroad which have not, as it were, got a base year from which to start. I hope that the Chancellor will bear in mind the position of these companies. It is very important that in any scheme under which the payment of public money is linked directly to certain controls, those controls should not operate in too conservative a way. Some concern has been expressed about the position of companies operating abroad at present which have not got a base year from which to start.

Those were the four points which I was concerned at this stage to make. I cannot feel that the arrangements in the Bill expressed in Clauses 60 and 79 can remain unaltered. It seems to me that this is one aspect of the new taxes in the Bill which is bound to prove unsatisfactory for the future. I will not say more than that now, except again to state that we are basically dissatisfied with the Chancellor's Corporation Tax proposals in their external incidence. It would obviously be inconsistent of us to vote against Clause 79 because, by its nature, it is a Clause which gives certain easements, but we ought not to pass from this part of the Bill without the Government being perfectly clear that we are dissatisfied with this whole section of the Bill. We feel even now that there are parts of the Clause on which the Chancellor could have gone rather further to meet us.

Mr. Callaghan

I have just two or three comments to make on what the right hon. Gentleman has said. It would not be right to let the Clause go without my saying this. He is quite right in saying that the Clause has cost a great deal of time. I interjected "and money" because the reliefs which are conceded in the Clause are of a very substantial character. In the first three years there is relief which runs to the tune of scores of millions of£s. This may well be right—I think it is—but it is a very gradual process, the Clause is worth a very great deal to the companies affected.

I believe that we need have no fear that the interests of the great commercial concerns of this country are ever likely to be neglected either by Conservative or by Labour Governments. Certainly, they have been well represented here during the discussions that we have had. I say that in no particular spirit except one of indicating that people ensure that their views are heard. I have met many chairmen of companies and many representatives of groups of companies and single companies which are operating overseas, and I have, I hope, been unsparing of my time in this way to understand the problem. That is why I was ready to introduce a large number of Amendments, even though this meant practically rewriting the Clause.

The right hon. Member for Birmingham, Handsworth (Sir E. Boyle) said that the calculation by way of the base year is unsatisfactory. I agree with him. I think that any base year one selects is bound to be unsatisfactory of its nature. But the alternative would be very unpalatable and one that I would not advance. It would be that we should move over to the new system at once and then we would not have the difficulties which arise from using the base year. However, I do not think that course would be right and I do not believe that anyone else does. Of all the courses available if we are to give relief of this sort—and the Committee agree that it is right—the choice of the base year we have selected is really as fair—I would almost say "generous"—as anyone could hope for.

In relation to the new companies, I repeat what my hon. and learned Friend the Financial Secretary said. I have looked into this problem without really being able to get to grips with it. If there are practical examples of what the right hon. Member for Handsworth, spoke about I should be glad to look into them. I can see the theoretical difficulties which arise and I should like to know the practical consequence. If there are any, I will gladly look at them.

Then there is the question of the dividend freeze. Here is involved a choice between being fair to the company and being fair to the nation. I am, after all—although some might not think so after my concessions—the guardian of the nation's finances and I must consider carefully when I am helping shareholders—which is the purpose of the exercise—that I do not give away too much of the taxpayers' money in this regard. I have to try to hold the balance.

Of course, I would like to give away more, in one sense, to the shareholders, but I believe that I have not struck an unfair balance, given the Corporation Tax and its effects. The right hon. Gentleman said that he does not like the effects of the tax on overseas investment. That is a difference of principle between us and will no doubt remain so. As to how these provisions will be altered, that is a matter for time to show. I have shown that I am not stiffnecked in this in any way, but it is now for those who take the other view to prove their case. It is not my purpose to hinder or harm overseas investment. I want to see as fair a balance as possible between home and overseas investment. I am supported in this view, I believe, by the fact that similar provisions apply to other countries which have been successful. I do not want to repeat the arguments. We shall not convince each other, I suppose, but we shall see the results of the inquiries now taking place.

Of course, this provision will have a disparate effect on different companies. I think this is unavoidable when one makes tax changes of almost any sort. I could enumerate a dozen tax changes that could be proposed in relation to Income Tax and Profits Tax, all of which would have disparate effects on the different companies concerned. This is bound to be the result of any tax change, and I do not think this Committee could say that it must be restrained from making tax changes because of differing effects on differing companies.

The right hon. Gentleman put his views moderately. My view is, after the conclusion of 14 hours of debate on this aspect, that overseas investment will continue on a very substantial scale. I have no doubt of that. I am reinforced in that by the views of the chairmen of companies who have been in touch with me. Their fears have been of the effect on Stock Market quotations if they had to reduce dividends. The interesting thing is that nearly all of them have told me that they intend to continue with overseas investment, and that is the basis of the Bill. The shareholders will suffer, they say, but they intend to go ahead. I have quoted examples before.

I think that I am right in saying that what is happening is two-fold. First, companies have already made up their minds, broadly speaking, to go ahead with overseas investment, but they will be much more selective in future than in the past. A number of chairmen have said that they want to see the result of these provisions and see whether their decisions were marginally right or whether they will be marginally right in future. We must remember that we shall face a balance of payments problem for a long time, although we shall get over it.

Secondly, for a long period of years we are protecting shareholders from the consequences of our change of attitude towards overseas investment, and I believe that it will be found to be a fair balance. I do not say that it will not be altered in years to come. However, basically, I believe that the idea will stand for many years, whatever marginal alterations are made. I would be the last to resist such alterations if they seem sensible and make for the health of overseas investment and companies.

Question put and agreed to.

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