HC Deb 22 June 1965 vol 714 cc1621-4

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

Mr. Barber

There are two questions I would like to put to the right hon. Gentleman the Minister without Portfolio about this Clause. This Clause amends what is Part 4 of the Finance Act, 1940, under which Estate Duty is payable in respect of a company and the Estate Duty is imposed on an assets basis. This is effected by reference to the company's net income. In the past that income has been determined on Income Tax principles but in future it will be determined on Corporation Tax principles. This is obviously different otherwise there would be no point in having these provisions.

The first question I want to ask is what will be the effect of this change, in the generality of cases, on the quantum of Estate Duty which will be payable under Part 4 of the 1940 Act. Is the Estate Duty likely to increase or decrease, or is the purpose here simply one of convenience for the company, which will in future be computing its tax liability on Corporation Tax principles for all purposes? The second question is this. The Chancellor considers it necessary to have an extended definition of a close company, bringing many more companies within the ambit of the close company provisions. Why does the right hon. Gentleman consider that the old definition under Section 245 procedure is adequate for the purposes of Part4 of the 1940 Act but not for other taxation purposes?

Sir Eric Fletcher

It is difficult to estimate what the position would be, and I am afraid I cannot give the right hon. Gentleman the Member for Altrincham and Sale (Mr. Barber) any further information. The object of this somewhat complicated Clause is to try to conserve the position as it is under the Estate Duty provisions in the Finance Act, 1940, and is intended to carry forward into the Corporation Tax scheme the provisions of Section 46 of the Finance Act, 1940, which was introduced as an anti-avoidance measure, designed to meet cases where a person who has transferred property to a company controlled by five or fewer persons and has enjoyed, or has power to enjoy, any of the income or assets of the company during the five years preceding his death, then arranges his affairs so that no adequate element of capital becomes chargeable for Estate Duty.

Mr. Barber

Obviously there will be some difference in liability to Estate Duty under this provision as compared with the existing provisions, because in future the net income of the company will be computed on Corporation Tax principles whereas hitherto it has been computed on Income Tax principles. This is bound to make some difference and all I wanted to know was how much in total was involved and whether it is likely to involve a decrease in liability to Estate Duty or an increase, or whether it is purely a changeover in order to make life simpler for those people concerned with companies which in future will only be concerned with computation on Corporation Tax principles.

10.45 p.m.

The second question, which is important and I should like an answer to it, arises from subsection (5), which reads: Nothing in this Part of this Act or in the repeals consequential thereon shall effect the operation of Section 58(1) of the Finance Act 1940.… The Chancellor of the Exchequer has decided in his wisdom—and we on this side of the Committee are opposed to it—to bring in all kinds of public companies within the definition of a close company for a variety of taxation reasons. As the companies with which the Clause is concerned are companies as defined for the purposes of Section 245 of the 1952 Act, one would have thought that the right hon. Gentleman would have changed over to the new definition of close companies. But he is specifically preserving the old definition for this purpose. There must be some very good reason for this, but it is odd, and it has troubled one or two of my hon. Friends apart from myself. We cannot understand why this has been done.

Mr. Patrick Jenkin

I reinforce the remarks of my right hon. Friend the Member for Altrincham and Sale (Mr. Barber). The jungle of tax legislation through which the directors of companies that fall broadly within this net have to steer is very tangled. Questions of whether they are close companies and come under the definition in Schedule 17, whether they are director-controlled companies or Surtax companies under the old Section 245 are very difficult to determine. It must add to the complications of life for these companies that they should come into two different taxation systems, namely, the Estate Duty system and the Corporation Tax system.

If the Government insist that even companies which have a substantial public shareholding are, nevertheless, to be regarded as close companies, I can well understand that it would be inappropriate that those companies should fall within the provisions of Sections 46 and 55 of the Finance Act, 1940. But this would seem to me to be a reason not for having two different definitions, but for modifying the definition of a close company for the purposes of the Bill so that the same definition could conveniently apply both for Estate Duty purposes and for tax purposes. This would produce some measure of simplification which the Chief Secretary has never been tired of telling us is one of the great virtues of the Bill. This Clause is an indication of the measure of the absence of simplicity and of a duplication of definition which will make life more difficult.

I hope that the Government, even if they insist on maintaining public companies within the close company net, will consider doing something in future to harmonise these two provisions.

Sir Eric Fletcher

To revert to the first question which the right hon. Member for Altrincham and Sale (Mr. Barber) asked, it is impossible to see what the precise result will be until some specific cases arise for the attention of the Estate Duty Department. But the intention is that as little change as possible should be produced.

The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) referred to this anti-avoidance legislation as a jungle. No one disputes that it is complicated, but the ingenuity of those who try to avoid paying tax is so great that it is inevitable that it should be complicated. What we seek to do by subsec- tion (5) is to retain for Estate Duty purposes the existing definition of a close company.

The hon. Member said that it is inconvenient that there should be two definitions. On balance, it might be said to be more convenient that the existing definition of a close company for Estate Duty purposes should be retained. It is a balance of argument which is more convenient. We consider it unnecessary, as indeed it is, to change the definition of a close company for purposes of Estate Duty under the Finance Act. That is why subsection (5) is included. I think that on balance this will be found to be more convenient.

Question put and agreed to.

Clause ordered to stand part of the Bill.