HC Deb 22 June 1965 vol 714 cc1634-41

10.—(1) This paragraph shall apply—

  1. (a) where any shares in a company which have passed on the death of any person, have on that death been valued for the purposes of estate duty in accordance with the provisions of section 55 of the Finance Act 1940, and
  2. 1635
  3. (b) where the assets of a company have to any extent been deemed for the purposes of estate duty to be included in the property passing on the death of any person under section 46 of the Finance Act 1940.

  1. (2) Notwithstanding anything elsewhere in this Act contained any estate duty (other that estate duty the cost whereof falls on the company) paid in respect of any such death as aforesaid shall in so far as the same is attributable to assets (or the value of assets) of the company which may at any time after such death fall to be treated as a distribution under the foregoing provisions of this Schedule, shall be treated as new consideration.
  2. (3) Where any payment of estate duty is treated as new consideration under the foregoing sub-paragraph, the new consideration shall be treated as given to and received by the company at such time and in consideration for such issue of share capital or securities or such transfer of assets as the person or persons on whom the cost thereof falls shall at any time within 10 years after the said death by notice in writing given to the Board elect.

This Amendment deals with the position of liability to tax which arises after death in having an assessment made on an assets basis valuation under Section 55 of the Finance Act, 1940, where allowance is made for the liabilities of a company with a few minor exceptions. Among the allowances made are contingent liabilities which have to be valued by such estimates as appear reasonable to the Commissioners.

The treatment of tax liabilities over this period which are likely to be incurred but which have not crytallised are governed by the ordinary tax liability which a company may incur under Section 30(3) of the Finance Act, 1954. This Section provides that, for the purpose of assessing contingent liabilities, any liability of the company arising, or which may arise, after the death of a person for taxation under the income or profits tax headings, shall be taken into account as if it was the …actual but contingent liability at the date of the death, in so far as the liability… is attributable to income or profit accruing before death.

I emphasise those words, because it is only the income arising before death with which we are concerned, and it is only with minor exceptions that this can be taken into account and where the liability arising after death can be considered only in so far as the after-death profits are un likely to be sufficient to meet the amount of the taxation. Therefore, there is a very restrictive Clause, which makes it unusual and exceptional that anybody should take into account, in reducing the assets of the company for these purposes, the liability in respect of taxation on income or profits arising after death. With the new Corporation Tax, retained profits will all be contingently liable to Income Tax, but that liability arises only if and when distributions are made. I am advised, and I think that it is correct, that Section 30(3) of the Finance Act, 1954, provides no relief at all for this tax liability.

Section 30(3) deals only with the income or profits of the company, and the liability in question is not a tax on the income or profits. Whether one takes the distinction before or after death, this liability is not a liability on the income or profits of the company. It is a liability only on the distributions. It may well arise—and almost certainly will—after death, if profits have been retained. The tax, therefore, on post-death distributions which give rise to the liability is not referable to income or profits arising before death, and therefore cannot be taken into account under Section 30(3) of the Finance Act, 1954.

Therefore, the Amendment is designed to cover the inequity which will result if the reserves in the company, undistributed profits, are, first of all, to be subject to Estate Duty payable in respect of the shares when the death occurs, and, subsequently, are to attract Income Tax, because that will be a liability which will arise on distribution after death. Therefore, those reserves will have been taxed to Estate Duty in the hands of the deceased and, if and when they are distributed, they will bear the full burden of the new Schedule F tax. The Amendment is designed to avoid disturbing the present basis of valuation under Sections 55 and 46. It is intended to ensure that the person who pays the duty attributable to the retained profits under the new Schedule F should be treated as paying a new consideration to the company for the purposes of paragraph 4 of this Schedule. The new consideration will be the amount of the duty attributable to the reserves.

The effect of that, of course, is that an amount equivalent to the duty which has already been paid in estate duty in respect of those retained profits should subsequently be taken from the company without incurring Income Tax liability on the amount so taken, as though it was a distribution. As an example, when A dies possessed of all the shares in a company and a proportion of the company's assets represents retained profits, on which assets his executors have to pay£5,000 in Estate Duty, if a bonus issue is made and subsequently redeemed or paid off, the first£5,000 of the redemption or payment off will not be treated as distributions under Schedule 10, but the balance of the£5,000 which has not already been taken by the Revenue as Estate Duty representing those retained profits will bear the ordinary Schedule F tax upon the distribution which is made.

It seems to me that, unless this arrangement, or—if the Chief Secretary wants time to consider it—some other arrangement is made, there may be a considerable inequity in the fact that people will have had what represents the retained profits or a proportion of them taken from them and, when they distribute them, tax will he paid on them again. This is a point which the Amendment would deal with satisfactorily, leaving the basis of valuation for Estate Duty undisturbed and producing equity between the taxpayer and the Revenue in the situation when Estate Duty has already been paid as an assessed value on death.

I hope, therefore, that the Chief Secretary will be able to accept at least the principle of the Amendment or assure us that he will consider it sympathetically and put down what best he can at a later at age.

11.30 p.m.

Mr. Diamond

The right hon. and learned Member for Warwick and Leamington (Sir J. Hobson) has raised a point which requires very careful consideration. The Amendment put down, which has been most carefully examined, did not on the face of it raise all the points which he has explained; and it was not possible, therefore, to give full consideration to what he has had to say; and I should like to do that. One cannot go further than to say that one would like to consider it very carefully.

There are various defects in the Amendment as drafted which it would be a waste of time to go into now. It has one or two effects which the right hon. and learned Gentleman did not refer to in his speech—I do not think they could have been intended—and which the Government would not be willing to accept. But the matters which he did raise are of a kind which any responsible Minister would wish to look into most carefully. I hope that he will give me the opportunity to do that by withdrawing the present Amendment, on my undertaking to look into the matter with close attention between now and Report.

Sir J. Hobson

I am most grateful to the right hon. Gentleman for his attitude. I assure him that the Amendment, however drafted, was not intended to go any further than to meet the point which I tried to explain. If it does go further, it ought to be removed, but I hope that the right hon. Gentleman will be able to find a solution to the problem which I have attempted to put before the Committee. I shall be grateful if he will let me know if he cannot, because we should then have to reconsider our position.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Question proposed, That this Schedule, as amended, be the Tenth Schedule to the Bill.

Mr. Stratton Mills

I have a point to raise on paragraph 9 (1, c) which deals with the payment by a close company to a participator for the use of property other than money. In the case of tangible property, the penalty applies to so much of any such consideration as represents more than a reasonable commercial consideration". Why has not similar treatment been extended to intangible property such as patents, copyrights, trade marks and so on? The Chief Secretary may reply that there is a problem of valuation of this kind of entity, but I suggest that the onus ought to be on the Revenue, when there is this kind of special penalty attached, and that the Revenue itself should have to prove the facts. I do not regard this sort of blanket provision as satisfactory.

Mr. Hirst

I am so much shocked by the Chief Secretary's lukewarm attitude to some of the Amendments moved by my hon. Friends that I must say something at this stage. The right hon. Gentleman might have been more forthcoming. The idea that a member of a family who helps out someone else at a normal reasonable commercial rate is likely to be a sort of tax dodger is one which I find difficulty to stomach, even at this hour of the night. The true commercial rate is defined in paragraph 1 (1, d, iii) of the Schedule. I never understand what a "reasonable" anything means at law, but it is accepted as being a known factor that a thing is reasonable. Surely it is known in many quarters that it means and accepts something which is fair.

It has been suggested that a person helping someone out in business, as mentioned by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), who could not get a loan through ordinary commercial circumstances—a man who goes to a member of his family and gets a loan at the ordinary commercial rate of 6½per cent.—is tax dodging. The right hon. Gentleman suggests that he would have to do some thinking about it, but he has given no undertaking that the matter will be put right on Report. That is treating the Committee rather shabbily. I do not share the view expressed about great generosity being shown.

There has been amiability about this, and I do not want to be other than amiable although I am very tired. However, I feel that it is not paying proper tribute to the Committee, which has studied the Bill, and the Schedule, in particular, with great reasonableness and very good temper, to insult it, by accident as it were, by the right hon. Gentleman saying that he has to do an awful lot of thinking about whether it would be perfectly reasonable for a relative to help somebody out in his business at the normal reasonable commercial rate laid down in the Bill. It is monstrous to suggest that that is something which needs a lot of thinking about. If they imagine that that will be understood in the country for a moment, right hon. and hon. Gentlemen opposite must be mad. Of course it will not.

I accept that there could be instances where there could be a certain amount of tax dodging, but, frankly, one cannot tax-dodge in these circumstances. If the reasonable commercial rate is 6½or 7 per cent., we have to thank the Labour Government for that. It may be a high rate, but they have established it.

This is not treating the Committee with the respect it deserves. I am still suspicious about putting this off till Report. It is impossible to imagine all these things being dealt with at that stage—and this provision has been on the Order Paper a long time. It is monstrous that we should pass the Schedule in this form with the very poor amelioration of the Government Amendment which nowhere meets the case, with the right hon. Gentleman saying that he has to do an awful lot of thinking about something which is a perfectly good, sound, decent thing to do in a family business, something which we ought to see honoured and respected. For the right hon. Gentleman to say that he has to do a lot of thinking about it is not creditable to him or the Committee.

Sir Knox Cunningham (Antrim, South)

I support what my hon. Friend the Member for Shipley (Mr. Hirst) has said. On all sides of the Committee we agree that we want to see people bearing a fair share of tax. However, there will be penalisation of close companies without our Amendments. It is not just a case of securing fair taxation; penalisation will be created.

The Chief Secretary said that he would look carefully at one Amendment as a matter of courtesy, and he accentuated that but did nothing further. I should like him to go further and look at it seriously as a matter of interest and not brush it aside on Report. He should look at it as a matter of principle, as it is, and treat it with serious concern. On these points the Committee ought to have some consideration.

Mr. Diamond

I agree with the hon. Member for Shipley (Mr. Hirst) that the Schedule has been discussed with care and courtesy on both sides; and I want to thank the Committee for that and also the hon. Member for his amiability. When he talks about insults and things being monstrous, we know how to interpret that. I assure him that everything he has said will encourage me towards the consideration I promised earlier, but I did cover rather carefully the point he raised and I do not want to add to or detract from what I previously told the Committee about it.

The hon. Member for Belfast, North (Mr. Stratton Mills) asked my reason for distinguishing between tangible and intangible assets. As the Bill stands, rent paid to a participator for the use of a tangible asset is to be included in computing a close company's profits for Corporation Tax to the extent that it exceeds a reasonable commercial consideration; but rent or royalty from an intangible asset is 10 be wholly disallowed for tax purposes.

The simple explanation is that it is almost impossible to find a reasonable commercial consideration for these intangible assets. For example, a patent owner can charge a royalty for a company he is closely concerned with at any figure he likes. It would be impossible for the Revenue to demonstrate that a particular royalty was unreasonable. Comparisons in commerce are so broad that there is no means of treating this in any other way and that is the reason for the distinction the hon. Member has picked on.

Question put and agreed to.