HC Deb 22 June 1965 vol 714 cc1654-60

Amendments made: In page 194, line 39, at end insert: 7.—(1) As from the beginning of the year 1966–67, sections 491 and 492 of the Income Tax Act 1952 (which provide for adjusting under-deductions and over-deductions of income tax from certain payments made before the passing of an annual Act imposing the tax) shall be amended in accordance with the following sub-paragraphs. (2) For section 491(3)(a) (by virtue of which section 491(2) has effect where too little tax is deducted under section 184 from preference dividends) there shall be substituted:— (a) any preference dividend within the meaning of Part IV of the Finance Act 1965 from which a deduction of tax may be made under the said Part IV; and". (3) In section 492 (over-deductions by bodies corporate under section 169 from interest payments on securities or under section 184 from preference dividends)— (a) after the words "section 169" there shall be inserted the words "or section 170"; and (b) for the words "section 184 of this Act" there shall be substituted the words" Part IV of the Finance Act 1965"; and (c) at the end of the section there shall be added— In this section 'preference dividend' has the same meaning as in Part IV of the Finance Act 1965, and 'share' includes stock. In page 195, line 31, at end insert: (4) Where any period of account of a company beginning before the year 1966–67 is partly but not wholly comprised in an accounting period for corporation tax ending in that year, then the part not so comprised shall be treated for purposes of section 20 as a separate accounting period.—[Sir Eric Fletcher.]

Mr. MacDermot

I beg to move, Amendment No. 394, in page 196, line 17, at the end to insert: (b) for section 28(11) proviso there shall be substituted:— Provided that there shall be disregarded any amount received by a company by way of dividend from an associated company in so far as the dividend is paid out of income arising to the company paying it since the two companies became associated companies, and Schedule 16 to the Finance Act 1965 shall with the necessary modifications apply for determining the extent to which the dividend was so paid"; and. The Amendment corrects an inadvertant omission from paragraph 14 of this Schedule. It was overlooked that the proviso to Clause 28(11) contained a reference to the original dividend stripping legislation, which is now superseded by Clause 61, and the proviso should therefore be amended to take account of the change.

Amendment agreed to.

Mr. William Clark

I beg to move, in page 198, line 14, at the end to insert: (2) Where in any previous chargeable accounting period a company has sustained a loss as computed for the purposes of the Profits Tax and this loss has not been allowed against subsequent profits as computed for the purposes of profits tax, 15 per cent. of the amount of such loss shall be deducted from or set off against any profits arising in the year 1966–67 and up to the amount of the deduction or set off, those profits shall be excluded accordingly from any assessment to Corporation Tax (the relief in any year of assessment being given as far as may be against profits of an earlier rather than profits of a later accounting period). The idea of this Amendment is to relieve companies from a Profits Tax loss that has not been utilised. The Financial Secretary will appreciate that one can have the position of an Income Tax loss which can be used under Section 341 of the 1952 Act, as an almost immediate relief for Income Tax losses. In the case of Profits Tax, however, losses cannot be set off and relief claimed but must be carried forward. The position can arise where a company has a Profits Tax loss which has been unused.

The Amendment seeks to claim 15 per cent. of this loss, and this figure has been chosen because the Profits Tax rate was 15 per cent. We appreciate that this is a rough-and-ready yardstick, but we would not necessarily insist on the 15 per cent.

To get a more realistic figure of the Profits Tax loss that should be carried forward against Corporation Tax, if we aggregate the fraction of 41.25 over 56.25, that is, the 8s. 3d. rate over the 8s. 3d. plus the Profits Tax rate, and multiply that by the Income Tax loss, having found that figure, aggregate with that 15 over 56.25, that is, the Profits Tax element over the Profits Tax element plus the 8s. 3d., and you multiply that by the Profits Tax loss.

If I may give an example, if you work out the Income Tax loss on£100 it gives£73, but the Profits Tax loss on£100 gives£27. Aggregate those and it gives£100, and obviously there is no relief. But if you have a difference between the Income Tax loss and the Profits Tax loss,£480 Profits Tax loss on this formula gives you an allowance of£130 to be set off against Corporation Tax.

I think this is an extremely important point. I am sure it was not the intention of the Government to penalise companies who had Profits Tax losses which they thought they could use in the future. With the imposition of Corporation Tax they should be able to use at least some of those Profits Tax losses.

The Financial Secretary will see that the formula I have given now, rather than the straight 15 per cent., will in fact give equity to those companies with Profits Tax losses. We do consider this to be an extremely important point, and I hope the Financial Secretary is going to be sympathetic in his answer. I am sure that from the point of view of equity we must press this. But we look forward to the Financial Secretary saying he will consider a suitable Amendment on Report stage.

Mr. MacDermot

The points which the hon. Member for Nottingham, South (Mr. William Clark) has raised are highly technical and I will certainly respond to his inviation to look with care at what he has said. But I must make it clear at the outset that the Amendment as it appears on the Order Paper would not be acceptable, and I rather gathered from what he said that the hon. Gentleman recognised that himself. The Amendment would allow a company to carry forward 15 per cent. of any accumulated losses as computed for the purposes of Profits Tax. In our view the Amendment appears to be misconceived, because in general a loss carried forward under Profits Tax rules is the same loss as that carried forward under Income Tax rules, and it would therefore involve double counting.

There are some circumstances in which a Profits Tax loss may rank for carry forward although there is no Income Tax loss unrelieved, but the typical case of that is where certain income, namely, United Kingdom dividends, is excused Profits Tax in the hands of a recipient company, although it is part of the company's taxable income for Income Tax purposes. In our view the carry forward of an Income Tax loss in such circumstances—already provided for in paragraph 20(1) of the Schedule—is all that the equity of the situation calls for.

The alternative formula which the hon. Member was proposing was mooted in an article in The Times on 14th June. If what he has in mind is merely an alternative formula for a general provision for carry forward we shall not be able to accept it. If the hon. Member has in mind specific cases where these losses are incurred, and he thinks there is a valid case for provision being made for their being carried forward, I will gladly consider them. I issue that invitation to him, if he wishes to supplement what he has said, but in any event I shall study carefully what he has said. This is a highly technical matter, but from what I have been able to gather from his argument I do not wish to give him any false hopes, because I do not think that this is an Amendment that we shall be able to accept.

Mr. William Clark

If, in my formula, we take the Income Tax loss to be equal to the Profits Tax loss there is no extra carry-forward. It is only where there is an excess of Profits Tax loss above Income Tax loss that there will be any further carry-forward. I assure the hon. and learned Member that there is an extremely important point here, but as he has promised to consider the matter and to see whether there is a valid argument for the proposal, we look forward to seeing what he proposes on Report. In view of his undertaking, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Peyton

I beg to move Amendment No. 683, in page 198, line 38, after "22" to insert "(1)".

The Temporary Chairman

With this Amendment we can take Amendment No. 684, in page 198, line 49, at end insert: (2) Where sub-paragraph (1) above has effect the company may by notice in writing given not later than twelve months after the end of the accounting period specified in the notice elect to treat such an amount of sums disbursed as expenses of management as is specified in the notice (being an amount not exceeding the total of the sums so disbursed in the said accounting period) as an amount unrelieved for the purpose of sub-paragraph (1), and where such a notice is given the amount so treated shall not be available for relief under section 425 of the Income Tax Act 1952.

Mr. Peyton

Yes, Mr. Steele. My recent comparatively happy experience with Treasury Ministers and my Amendments leads me to believe that they cannot come to any conclusion other than that they must accept these two, and on that basis—and only on that basis—I beg to move the Amendment formally.

Mr. MacDermot

The hon. Member for Yeovil (Mr. Peyton) is displaying a rare sense of confidence. I must leave it to the Committee to try to reach such conclusions as it is able why he should feel so confident. Undoubtedly this is a red letter day for the hon. Member for Yeovil. Although he has not explained his Amendments very fully, it is right to tell hon. Members that there are substantial arguments why it would be right to accept them.

Mr. Peyton

I am quite prepared to do so, if the hon. and learned Member wishes me to.

Mr. MacDermot

I will relieve the hon. Member of that burden by saying, in short, that the Amendments deal with a transitional situation, and their effect would be to add to the relief which would be afforded, during that period, to the taxpayer. The proposal in effect is to allow the company to choose how much of the management expenses disbursed in 1965–66 it will include for Income Tax relief for that year or which it will take forward for Corporation Tax. In the opinion of the Government this is fair and reasonable and I would advise the Committee to accept it.

Amendment agreed to.

12.30 a.m.

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

Mr. William Clark

I should like to ask one point for the purpose of clarification. In this Schedule the distribution for the accounting year is such that if one has a company within the Corporation Tax period which has made a loss of£100, but which in the second year has a profit of£100, there may be a difficulty about the 60 per cent. distribution.

I have had this point put to me by a number of people, and I would ask the Financial Secretary if he could say, categorically, that in such a case, so far as the 60 per cent. for a close company is concerned, there will be no distribution necessary for the simple reason that£100 will be carried forward. I have been advised that as the Bill is drafted for the purposes of distribution this needs to be referred back to the previous year when there was a loss. Could the Financial Secretary state if there will be no 60 per cent. of the£100 profit in the second year?

Mr. MacDermot

There are advantages, as the Committee well knows, in moving Amendments shortly; but sometimes, with a very highly technical matter, there are advantages to the Treasury Bench in not moving them shortly. Secondly, as my right hon. Friend the Chief Secretary set a good example earlier in the day by saying that he thought it wise to confess when one was ignorant, I should now say that I am in that situation at the moment. With his expert knowledge the hon. Gentleman doubtlessly finds this a very simple matter, but I cannot give him the categorical assurance he seeks. I will, however, take an early opportunity to find out the facts and let him know.

Question put and agreed to.