HC Deb 22 June 1965 vol 714 cc1677-702
Mr. van Straubenzee

I beg to move Amendment No. 472, in page 207, line 26, to leave out or of participators who are directors".

The Temporary Chairman

With this Amendment the Committee should discuss Amendment No. 473, in page 207, line 41, to leave out or among participators who are directors".

Mr. van Straubenzee

The world outside will take a very jaundiced view of important provisions in this Schedule being dealt with by the Committee at 1.25 a.m. after the Committee sat until 3.15 a.m. yesterday. But I want to make it clear that my hon. and right hon. Friends who have been studying these matters are quite prepared to give them careful attention for as long as is required. [HON. MEMBERS: "Hear, hear."] Since we appear to be agreed on that, let us get on with the job.

This brings us to Schedule 17, and the definitions of a close company. Subparagraph (1) as drafted brings in any company of which the directors and their associates have control. I think that it is important to clear up one misapprehension before we go any further. There is a widespread feeling throughout the country that the definition of a close company by the provisions of this Schedule means a company controlled by five or fewer people. This is not so, and this point is brought out by the Amendment. In fact, because of the combination of this Schedule and other parts of the Bill, and particularly the definition of the word "associate", a great many more people than that can be brought in, and it is as well that the world outside should appreciate that point.

The object of the Amendment is to remove the provisions by which a company becomes a close company if it is controlled by participators who are directors. It retains—and this is an important point to make—the provision that if a company is under the control of five or fewer participators then it remains a close company.

Let me give an example of the sort of thing that I have in mind. If a company of this kind had eight directors, it would not be affected by the first part of the provision, but they might easily, by virtue of the definition of "associates", control 51 or more per cent. of the company, with the rest of the shareholdings widely scattered. This is a possible combination. The Clause as drafted would bring a company of that kind within the close company provisions. I suspect that the reasoning behind the Clause as at present drafted is based on the director-controlled company provisions for Profits Tax purposes, namely, the restriction on directors' remuneration to which Clause 69 refers.

I draw the attention of the Committee to the fact that the Surtax legislation did not contain a reference to control by directors, and we on this side of the Committee are seeking to say that that is the precedent which should be followed, and that we should retain the purpose and object of the legislation by the provision of control by a small number of persons as defined by the Bill, and it need not be by reference to their being directors.

In deference to the other side of the Committee, I have sought at this late hour to move the Amendment as briefly as possible.

Mr. Diamond

The hon. Gentleman has made his point with his usual clarity. I think, however, that the Committee would be well advised to leave the Schedule as it stands. The hon. Gentleman will recollect that under the present law there are in effect two definitions, admittedly for different purposes. One deals with a company which is controlled by its directors, and we have to have that in connection with the maximum allowances for directors' remuneration in computing profits for Profits Tax purposes. The other one is the more usual one, the control by five or fewer persons which we have to have regard to in dealing with company Surtax.

1.30 a.m.

This Bill, adopting the argument of simplicity which has been mentioned before, prefers one definition which is clearer, more easily to be remembered and, if I may say so, does not cause any hardship of any kind, even having regard to the Amendment which the hon. Gentleman himself moved.

I can think of very, very few cases—there must be an extraordinarily small number of cases—of companies which are controlled by their directors but not controlled by five or fewer participators within the Corporation Tax meaning of that term. Having regard to the fact that the Amendment would affect, as far as I can see, very, very few companies, having regard to the fact that the definition in the Bill is straightforward and simple, and having regard to the fact that the close companies in any event are merely subject to this slight temporary inconvenience that they have to satisfy the inspector of taxes in certain cases that they are concerned to put by reserves for the development of their business and are not concerned to use their resources as cash boxes in which their profits shall lie, I do not think the Committee would be well advised to accept this Amendment.

Mr. Barber

I think that the proposals in the Bill, as contrasted with the terms of the 1952 Act, present to the Committee a retrograde step. The Chief Secretary has admitted that the definition of a director-controlled company is necessary for one particular purpose, and that the definition of what I might loosely call the Surtax company was required for another purpose. He has brought the two together because he thinks this is tidy, but he has admitted to the Committee that by doing this there will be a few companies, albeit not many, which, as my hon. Friend has pointed out, are controlled by directors but not within the definition of a company controlled by five or fewer persons.

We can see perfectly well why, in line with the proposals already accepted by the Committee, whether one agrees with them or not, the fact that a company is a director-controlled company has some relevance to those provisions dealing with directors' remuneration. I agree with my hon. Friend entirely that these considerations are not relevant for determining whether or not a company is a close company. The comparable provisions in the 1952 Act are contained in Section 256, which says: Section two hundred and forty-five of this Act shall apply to any company which is under the control of not more than five persons and which is not a subsidiary company or a company in which the public are substantially interested. There is no reference to director-control there. My hon. Friend is perfectly right when he says the provision concerning shortfalls should apply only to close-controlled companies. This is what most people in the country thought Clause 72 would apply to. These provisions should not apply to a company merely because it is director-controlled.

I should give notice that unless the hon. Gentleman can tell us that he will have a look at this again and look into these cases of the few companies to which he referred and which will be affected by this, we shall want to return to this Amendment on Report stage.

Mr. Patrick Jenkin

I want to put one point to the Minister. It is quite possible for any company which is not controlled by more than five people, but is a director-controlled company, to take itself out of the provision by making sure that the relevant individuals are not made directors. When I was practising at the Bar some years ago I remember asking a client, "Are you a director of a company?" and his saying, "Good heavens, no. Nobody is a director of a company these days. You incur all sorts of penalties." These people who stand behind companies can obviously use their influence in cne way or another and yet avoid the penalties by simply not being directors.

Surely the tax situation should not be used as a reason for putting a cloak round the management of a company. It is desirable in the public interest that everybody should know who is running a company, and all sorts of duties are imposed under the Companies Acts on people who are directors. Their obligations are wide and varied, and they are subject to stringent penalties for not complying. It is therefore desirable that there should be an incentive to encourage people to declare their directorships openly.

The Chief Secretary is not telling the full story when he says that it is a question of directors' remuneration. It is not; it is a question of the disallowance of loan interest and disallowance of deductions for property other than tangible property. It is not only a question of ploughback for Income Tax; it is also a question of Surtax. All the things that follow from a company being a controlled company are intended to affect companies which are closely within the control of five or fewer people.

To extend the provisions to companies which are in the control of substantially greater numbers, merely because they are directors, is extending it beyond reasonable limits. Therefore I warmly support the Amendment, and hope that the Government will give it sympathetic consideration.

Amendment negatived.

Mr. Barber

I beg to move Amendment No. 362, in page 208, line 9, at the end to insert: (4) A company is not to be treated as a close company if the public are substantially interested in it and the public shall be deemed to be substantially interested in a company if shares of the company (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) carrying not less than 25 per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the relevant accounting period beneficially held by the public and any such shares have in the course of such year or other period been the subject of dealings on a stock exchange in the United Kingdom and the shares have been quoted in the official list of such a stock exchange.

The Chairman

With this Amendment we can take Amendment No. 230, in page 207, line 34, at end insert: (d) to a company authorised to make a return as a bank to the Inland Revenue. Amendment No. 461, in line 34, at end insert: (d) to a banking or discount company as defined in paragraph 23(3) of the Eighth Schedule to the Companies Act 1948. Amendment No. 596, in line 34, at end add: (d) to a company the ordinary shares of which are quoted on any stock exchange.

Mr. Barber

Yes, Dr. King. We come now to what I suppose is the most important single Amendment since we completed Clause 79 some hours ago—an Amendment which deals with the definition of a close company. Although the issue is important it is not difficult to comprehend. I can best put the matter in this way: the provisions of the Bill impose on close companies most stringent obligations, and in certain circumstances may increase the liability to tax, on both the close company and the shareholder, by what can fairly be described as a near-penal extent.

I do not dispute that some provision should be made in respect of closely controlled companies, but my hon. Friends and I are resolutely opposed to the Chancellor's definition of a close company, which, let it be marked, brings within the ambit of these stringent and frequently restrictive provisions the great majority of British companies on which the prosperity of our people depends.

Now this is a major change from the existing position under the Income Tax Act, 1952. That is why it is of such importance. What is most significant is that it is a change which has nothing whatever to do with Corporation Tax. We say that, whatever its merits, this is a deliberate move by a Socialist Government to give the Inland Revenue much greater control over the commercial and financial decisions of the great majority of British companies. One cannot emphasise too greatly the importance of this move—the significance of it.

The Amendment is almost self-explanatory. It would exclude any company in which the public is substantially interested; that is to say, where not fewer than 25 per cent. of the shares are held by the public. There are two main reasons why we are opposed to the Chancellor's definition, and the first is that the various provisions governing close companies which we have discussed at length will be wholly inappropriate for very many of our great public companies which will now be caught in this net. I am thinking of the control over the allowable remuneration of managerial and technical directors and the disallowance of loan interest to a participator—to which reference has just been made—and the provisions which the Chancellor has laid down for distribution policy which are, at once, detrimental to the future of those companies and completely in conflict with the Chancellor's avowed intentions of encouraging retentions.

Secondly, as a simple matter of practice, this just will not work. The law governing what we will call Surtax companies is difficult enough, but now the situation will become not only vastly more difficult, but ludicrous. Unless our Amendment is accepted, dealings on the Stock Exchange which are quite disconnected will have the effect of moving companies in and out of the close company definition; and this will happen through no fault of the company and, indeed, without the knowledge of the directors. The provisions of this Schedule providing, in effect, that nominee holdings and share options are to be treated as the holdings of those people beneficially entitled, and this will make a mockery of the underlying principle which the Chancellor has adumbrated that the board of directors are supposed to know if their company is or is not a close company.

The utterly ludicrous nature of the provisions does not end there. Let me give the Committee an instance of what will happen. Let us take a company where the shares are held as follows—and I hope that the Chief Secretary will make special note of this. The shares are held in the proportion of 11 per cent. by "the family", 40 per cent. by four institutional investors—let us say banks, insurance companies, and so on—and 49 per cent. by 10,000 small investors. These are shares ob- tained on the Stock Exchange or on public offer. The company is, therefore, under the control of five persons; the members of the family being treated as one person, and each of the four institutional investors and, since the institutional investors have not control of the company, it will not be excluded from the definition in this Schedule of a close company.

1.45 a.m.

If this company fails to make what the Inland Revenue considers to be a sufficient distribution, the shortfall will be apportioned as follows. First, the inspector will have to obtain particulars of the total income of each member of the family, and, remarkable and almost fantastic though it may sound, of each of the 10,000 small holders. Very few of these will be making Income Tax returns in the district of the inspector of taxes concerned. Therefore, he will have to obtain particulars in each of the 10,000 cases from the respective tax districts throughout the country, which number, between 1,000 and 2,000. What could be more nonsensical than this? Yet this is the sort of practical consequence which could follow from the right hon. Gentleman's proposal which, in our view, is inept and inappropriate. It is a proposal which we believe, in the case of these companies which are for the first time brought within this net, will hinder modernisation and deter technological advance, which is the avowed aim of the Government. It is a proposal which ignores the practical difficulties and consequences. In short, it is a typical Socialist proposal.

Because the Government are in difficulties with their Parliamentary programme, this most important Amendment, on which there has been considerable comment and a great deal of criticism in all sections of the Press, is being taken at a quarter to two in the morning. I again give notice that, because this Amendment is of such importance and because it merits full discussion at a reasonable hour of the day, because there is great public interest in this, we shall, naturally, listen to what the Government Chief Secretary has to say tonight, but if we are not satisfied—bearing in mind the hour of the night—we shall certainly wish to return to this important matter when we come to Report stage.

Mr. Diamond

In view of what the right hon. Gentleman has said, I think that it would be convenient if I were to reply immediately. I shall reply shortly. The right hon. Gentleman will not, of course, mind my saying that it was open to him, had he preferred to have the discussion at another time, to have withdrawn the Amendment. That is no doubt something which the Chair will take into account when it makes its selection at a later stage. I mention this only because it is well within the recollection of both Front Benches that this is a practice which has frequently been adopted at this stage when getting towards the end of the Committee stage—to withdraw Amendments which could well be usefully considered during Report stage, if the Chair thought fit so to do.

Mr. Barber

There is one difficulty about that. If I had withdrawn the Amendment we should never even have heard the Government's view on this. I recollect that very little has been said in the past—in Budget debates or anywhere else—about this important proposal. If we had withdrawn our Amendment at this stage and put it down again on Report, and it had then been shown to be technically inaccurate in some way or other, we should have been in the greatest difficulty in getting it accepted.

Mr. Diamond

These are, of course, all valid considerations. It is my duty to explain the Government's view, to the extent that it has not already been explained in speeches and indications by my right hon. Friend and in the White Paper and in the Bill itself.

It is not to be denied that the net now goes wider than it did before. The reason is perfectly simple—the need to protect the Revenue is greater now than it was before, because the avoidance of tax by inadequate declaration of dividend has a greater impact on the Revenue than it did before, and also because it is part of my right hon. Friend's desire, in framing the Corporation Tax, to encourage investment which does not mean retention, it means investment. The word implies using funds which are either needed for the business, in which case they are invested, or, if not needed, distributed, so that the recipients of the dividends can decide—as the right hon. Gentleman explained at an earlier stage —into which other companies the money could be more usefully and fruitfully employed. That is part of my right hon. Friend's intention, and that is why the Corporation Tax is introduced and why we have this consequence of the need to widen the net.

There are no major difficulties whatever for the company which finds itself a close corporation. If it is concerned to expand its business, not to avoid tax in the way indicated, it will have my right hon. Friend's full support and encouragement. This is what the Bill is for. It is quite wrong for the right hon. Gentleman to say that this provision goes against the Chancellor's desire for companies to expand. Quite the contrary. We have made the position clear so many times.

I have demonstrated time and again how it will be for the convenience of the taxpayer to be dealt with not particularly on a Surtax matter but on tax matters by inspectors of taxes and how the procedure will be made homogeneous all over the country, the great expertise and knowledge which previously resided in the special commissioners being spread through he whole country through the agency of the inspectors of taxes. Time and again, we have been over the real purpose here—either invest or distribute, but in no circumstances retain. It is not right to suggest that my right hon. Friend's point of view as regards close companies is different from his view on open companies. His desire is that every company should expand, increase its capacity to produce, and spend its funds for that purpose if it can find a fruitful outlet for them.

The right hon. Gentleman now produces a new argument and says that our proposal will not work, that there will be a ridiculous situation on the Stock Exchange where, completely outside the control of the company, shares will be bought and sold on the public market and the directors will not know from day to day whether control is so placed that they are a close corporation. In short, of course, it will be a situation exactly the same as it is now, which has gone on for years and years under the right hon. Gentleman's own Government under the 25 per cent. for Surtax companies. For the Surtax company, which is what we are making the comparison with, there was a let-out if it had 25 per cent. public participation. The complaint is that this no longer applies. From day to day, shares could come and go; yet we have managed to live with that situation, and in the same way we shall manage to live with the new situation.

The right hon. Gentleman and his Government made a practical limitation, and it worked perfectly well. All we say is that we have found out—the previous Government knew this just as well as we do—that the 25 per cent. did not fully serve its purpose of protecting the public purse. There is a sufficient number of examples of cases where the 25 per cent. has been used in order to avoid the provisions of the Surtax direction. It was an avoidance of the Surtax direction—no more and no less—in quite a number of cases. It can no longer be done.

There is no need to have difficulties at all. The present definition will work. We are not importing new difficulties. Any company which is concerned to expand and get on with its business need have no worries on this score. I cannot recommend the Committee to accept the Amendment.

Mr. Barber

The Committee will agree that for a subject of this importance we have had a very short debate so far. I referred earlier to the disadvantage of continuing a long debate at this hour of the morning. I do not know—it is not for me to influence my hon. Friends or hon. Members opposite who may wish to contribute—but I wonder whether my hon. Friends might think, because of the importance of the subject, that it might be as well if we were to let the matter pass at this stage. Perhaps I might ask leave to withdraw the Amendment, in the hope that, bearing in mind the hour and the fact that we have had a debate of only 15 minutes or so, Mr. Speaker would take these matters into account when considering which Amendments he wished to select on Report.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Peyton

I beg to move Amendment No. 679, in page 208, line 14, at the end to insert: 3. For purposes of the provisions of this Act relating to close companies, the Crown and any department of the Crown and any person holding shares on behalf of the Crown or any department of the Crown shall not be treated as a participator. I can move it shortly, and do so in the hope, which is now constantly with me, that the Treasury Ministers cannot but see the reason, justice and correctness in any Amendment which I move. This may be optimistic, but we have here a rather ridiculous position. At least, we have an uncertainty. At the moment it would appear that any company which is 51 per cent. owned by the British Government is likely to be a close company. I cannot believe that this is the intention of the Government. It would have the absurd result that a huge international concern such as British Petroleum would become a close company. This is too fantastic to contemplate. I do not believe that it can be the Government's intention.

The Amendment would, I think, be a satisfactory way of remedying the situation. If the Government do not like this way, I hope they will choose another. It is a very foolish position that because 51 per cent. of the shares of a company are registered in the name of the Treasury Solicitor he and the British Government should be treated as one participator and this absurd result should follow of the company being treated as a close one. I hope that the Government will accept the Amendment or table an acceptable alternative on Report.

Mr. Diamond

The hon. Member for Yeovil (Mr. Peyton) is right. As the Bill is drawn, companies of this kind, nationalised industries and companies in which the Crown has 51 per cent. of the shares, are covered. It did not seem at first sight as if there was any reason why they should not be covered because the main purpose of close corporations is to prevent tax avoidance and it is inconceivable that the Crown should be concerned in getting up to schemes to avoid paying its tax.

But I realise that there is force in what the hon. Gentleman has said, and if it were the wish of the Committee that companies of this kind should not be covered by the legislation, I would certainly be only too glad to look into it. Therefore, if the hon. Gentleman will be good enough not to press the Amendment I will give an undertaking that the matter will be looked at before Report, without necessarily any commitment about what will be put forward by the Government at that stage.

Mr. Peyton

I am obliged to the right hon. Gentleman for what he has said. I am advised that it is extremely difficult for companies of this kind to operate within the framework of close companies. I hope that the right hon. Gentleman will go even a little further than he has done. But on that basis I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Diamond

I beg to move Amendment No. 724, in page 208, line 34, at the end, to insert "or".

This Amendment and the immediately following one are to correct typing errors whereby a word was omitted.

Amendment agreed to.

Amendment made: In page 208, line 47, after "may", insert "be".—[Mr. Diamond.]

2.0 a.m.

Mr. George Y. Mackie

I beg to move, Amendment No. 595, in page 209, to leave out lines 23 to 27.

The Chairman

We shall consider at the same time Amendment No. 669, in page 209, line 23, after "person", insert except the Agricultural Mortgage Corporation and the Lands Improvement Company". Amendment No. 670, in page 209, line 23, leave out "the company" and insert a company not principally engaged in agriculture or forestry or the letting of agricultural or forestry land". Amendment No. 770, in page 209, line 26, leave out "of banking".

Amendment No. 518, in page 209, line 27, at end insert or in good faith at a reasonable commercial rate of interest". Amendment No. 771, in page 209, line 42, after "borrowed", insert otherwise than in the normal course of business". Amendment No. 772, in page 209, line 42, after "acquired", insert otherwise than in the normal course of business". Amendment No. 474, in page 209, line 49, at end insert— Provided that a creditor in respect of a loan for full value received by the company and at a commercial rate of interest shall not be a loan creditor for the purposes of sub-paragraph (1) above.

Mr. Mackie

This is a simple Amendment. We think that this provision will lead to the ludicrous position in which anyone who wishes to back someone in a company and lends money quite innocently with no evil intent will immediately become a participator and subject to all the penalties thereafter. We come back again to the company starting up and to the entrepreneur whom we believe is very important. It very often happens that a young man or a group of young men starting a company are backed by someone whose motives are more kindly than commercial. With that simple explanation and because this is only commonsense, I move the Amendment.

Mr. Diamond

I am sorry that I cannot advise the Committee to accept the Amendment. I am sure that the hon. Gentleman appreciates that in tax avoidance it has been found that instead of a company being controlled by its shareholders it becomes controlled by loan capital. There is little difference, as we know. It can be financed by share capital or by loan capital. If the door is closed as far as the holder of share capital is concerned the alternative is to deal with it by way of loan creditors and one has, therefore, to treat them in the same way.

I do not know whether the hon. Gentleman has any particular case in mind. If he has I would be glad to consider it if he would write to me about it. On the general test, however, I could not recommend the Committee to accept the Amendment.

Sir Martin Redmayne (Rushcliffe)

May I draw the right hon. Gentleman's attention to Amendment No. 669, standing in my name? It would except the Agricultural Mortgage Corporation and the Lands Improvement Company. These surely cannot come under the heading the right hon. Gentleman describes. I cannot think that for this purpose it would be the wish of the Government to include them.

Mr. Diamond

The answer to that point is that Amendments Nos. 693 and 694 to Schedule 10, in the name of my right hon. Friend the Chancellor of the Exchequer, will allow low interest paid by close companies to be deductible unless it is paid to a director of the company or to an associate of such a director.

Mr. James Scott-Hopkins (Cornwall, North)

I am grateful to the right hon. Gentleman for what he has said but I do not follow how those Amendments to Schedule 10 will allow any such body as the Agricultural Mortgage Corporation to qualify for the purpose of Corporation Tax. As I understand the situation, it is only banking and banking interests that will qualify.

Mr. Diamond

The hon. Gentleman is describing the situation as it existed before my right hon. Friend decided on this change. We have now widened the matter very considerably. The present position is that helpful loans to directors or through an associate are, in effect, treated as loans of participators.

Amendment negatived.

Mr. Diamond

I beg to move Amendment No. 740, in page 210, line 13, at the end to insert: and 'relative' including a husband or wife)". The Amendment makes it clear that "relative" in line 9 includes husband or wife and is not limited to the blood relations mentioned in lines 5 and 6.

Amendment agreed to.

The Chairman

I understand that Amendment No. 84 in the name of the right hon. Member for Orkney and Shetland (Mr. Grimond) has been withdrawn.

Mr. Diamond

I beg to move, Amendment No. 726, in page 211, line 43, to leave out from "period" to the second "of" in line 44.

This Amendment deals with words accidentally left in from an earlier draft of the Bill which referred to a category of income no longer used in the Bill.

Amendment agreed to.

Mr. Diamond

I beg to move, Amendment No. 718, in page 211, line 46, at the end to insert: and, in determining the amount for any period of any description of income, any deduction from the company's profits for charges on income, expenses of management or other amounts deductible from profits of more than one description shall be treated as made from such profits, and in such proportions from those profits, as is appropriate". The relevant part of these words is in the final lines— and in such proportions…as is appropriate. The Amendment provides for the appropriate apportionment of a close company's outgoings between trading income and investment income. This apportionment has to be made because different rules apply to the distribution of investment income, which has to be distributed as to 100 per cent., and trading income. Therefore, when there are expenses which are common to both the earning of the trading income and the earning of investment income, there has to be an apportionment.

The Bill as it stands gives no guidance as to the allocation between trading and investment income on items such as bank interest, directors' fees and other outgoings which relate to the company's activities as a whole. It is not possible to lay down any hard and fast rules for such allocation and the Amendment follows the existing law in providing for it to be done as may be appropriate in the circumstances of each case. If there is disagreement, the usual right of appeal will apply.

Amendment agreed to.

Mr. Diamond

I beg to move, Amendment No. 719, in page 212, line 3, at the end to insert: company which exists wholly or mainly for the purpose of carrying on a trade and any other".

The Chairman

With this we can take Amendment No. 476, in page 212, line 4, leave out from "company" to "which" in line 5 and insert: which carries on a trade other than the holding of investments the income from". and Amendment No. 477, in page 212, line 13, at end insert: (a) it carries on a trade and has under its control one or more companies; or

Mr. Diamond

This Amendment will ensure that financial institutions, like banks and discount houses, which are close companies will be treated as trading companies and not as investment companies for the purposes of the close company provisions, even though their income may consist wholly or mainly of investment income. As I have already said, it is the normal provision that where a company is solely concerned with earning investment income 100 per cent. of it has to be distributed, for the very good reason that it does not need any reserves. But where a close company is carrying on the business of a bank or discount house, clearly it needs reserves for liabilities of a kind about which we have already heard. The simple way is to treat these as trading companies and all the normal provisions with regard to trading companies would apply.

Mr. Patrick Jenkin

Although the hour is late I cannot forbear making the comment that here is but one more Amendment which reflects exactly what was put down by hon. Member's on this side of the Committee earlier. Of course it must be that the test of whether a company is a trading company or an investment company should turn on what is the purpose for which the company has been formed and not purely on the nature of the company's income. Were it otherwise one would have the ludicrous situation that a company which had investment income could in certain years suddenly turn into an investment company because its income would be mainly from its investment and if the income from the trade fell away that would be a completely nonsensical situation. It is not only Amendment No. 632 which has now been overtaken by the Chancellor's Amendment. I would like to give notice on this point that Amendment No. 478 is covered by the same point and will not now be moved.

Amendment agreed to.

Mr. Diamond

I beg to move Amendment No. 711, in page 213, to leave out lines 13 to 21.

This is purely consequential.

Mr. van Straubenzee

May I make a very brief point? This point is covered by Amendment 465 of Clause 72 tabled by the Opposition.

Amendment agreed to.

Mr. Diamond

I beg to move Amendment No. 720, in Schedule 17, page 213, line 21, at the end insert: 10A.—(1) A close company may, at any time after the general meeting at which the accounts for any period of account are adopted, forward to the inspector a copy of those accounts, together with a copy of the report, it any, of the directors for that period, and such further information, if any, as it may think fit, and may request the inspector to proceed under this paragraph in relation to any accounting period comprised in that period of account: Provided that this sub-paragraph shall not apply if the company is neither a trading company nor a member of a trading group and has no estate or trading income. (2) Where the inspector receives a request made in accordance with sub-paragraph (1) above in relation to any accounting period, then subject to sub-paragraph (3) below he shall, within three months after receipt of the request, intimate to the company whether or not he proposes to make an assessment on the company in respect of the accounting period under section 72 of this Act. (3) On receiving a request made in accordance with sub-paragraph (1) above the inspector may, not later than three months after receipt of the request, call on the company to furnish him with such further particulars as he may reasonably require; and if he does so, the time for giving the intimation required by subparagraph (2) above shall not expire before three months after he has been furnished with those particulars. (4) Where the inspector receives a request made in accordance with sub-paragraph (1) above in relation to any accounting period, and does not within the time limited by sub-paragraphs (2) and (3) intimate his intention to make an assessment in respect of the period, no such assessment shall be made unless either—

  1. (a) the information accompanying the request, and any further particulars furnished to the inspector in connection therewith, are not such as to make full and accurate disclosure of all facts and considerations which are material to be known to the inspector; or
  2. (b) within twelve months of the end of the period paragraph 11 or 12 below has effect in relation to the company".
This Amendment removes any uncertainty as to whether a company dividend is going to be questioned for Income Tax and Surtax purposes. The Chancellor takes the view that it is wise in all possible cases that there should be certainty instead of uncertainty and it has been represented that there might have been uncertainty in certain cases. This procedure has therefore been adopted. It is a procedure which is familiar to most members of the Committee and is, broadly, that which existed for company Surtax purposes. There are one or two appropriate differences from that procedure. One is that the application for clearances will he dealt with by tax inspectors and not by the Surtax office. This is fully appropriate because we shall mainly be dealing now with tax and tax avoidance rather than Surtax avoidance. Another difference is that three months instead of one month is allowed to the inspector to ask for further information when he has received an application for a clearance.

2.15 a.m.

The final major difference is that there is no provision for the issue of a second formal notice which under the present law must be issued within six months after a notification that the Surtax Office intends to take action. One month has been found to be too short a period in which to decide what further information is needed in order to know whether there is a shortfall to be decided. It is this kind of removal of uncertainty which is what the Committee wanted, and therefore I hope that the Amendment is acceptable.

Mr. William Clark

The Chief Secretary was a little ungenerous when he said that there was widespread feeling about the question of clearance. What he should have said was that there was widespread feeling among members of the Opposition and that he had been impressed by the initiative of my right hon. Friend and hon. Friends in having tabled this Amendment first.

One thing which I cannot understand is this. When we were discussing Clause 72. the shortfall Clause, the Minister who replied said that a part of the Schedule had been lifted into the Clause for the simple reason that it had not been noticed in the Schedule. I cannot see why we are tucking such a large bit away in this Schedule. In view of the fact that the Chief Secretary, I am sure, would pay tribute to the initiative of my right hon. and hon. Friends, we do not oppose this Amendment.

Amendment agreed to.

Further Amendments made: In page 213. line 31, at end insert: and without any deduction in respect of the requirements of the business". In page 213, line 33, leave out from "and" to "that" in line 37, and insert "the company shows".

In page 213, line 39, leave out from "below)," to end of line 42 and insert: then for purposes of section 72 of this Act so much of the shortfall as the company shows could not be avoided without prejudice to those claims shall be disregarded". In page 213, line 45, leave out "(5)," and insert "(4)".

In page 214, line 25, leave out "continues to carry" and insert "carries".

In page 215, line 29, leave out from first "to" to end of line and insert: Chapter III of Part IX of that Act of a reference to section 73".—[Mr. Diamond.]

Mr. Diamond

I beg to move Amendment No. 728, in page 215, line 35, after "is", to insert: at any time in the year". This Amendment and the following one, No. 729, in line 37, correct an oversight in drafting, which I can happily explain if the Committee so desires. If it does not, I will leave it at that.

Amendment agreed to.

Further Amendment made: In page 215, line 37, after "participators", insert "then".—[Mr. Diamond.]

Mr. Diamond

I beg to move Amendment No. 730, in page 215, line 38, at the end, to insert: (2) In relation to the year 1966–67 and later years of assessment—

  1. (a) in section 412(8)(d) of the Income Tax Act 1952 (which provides for amounts apportioned to a person under Chapter III of Part IX of that Act to be treated as his income for certain purposes) for the words "under Chapter III of Part IX of this Act" there shall be substituted the words" section 73 of the Finance Act 1965"; and
  2. (b) in section 414(4) of that Act (which relates to the information a solicitor may he required to furnish under that section about transactions resulting in transfers of income to persons abroad) for the words from The bodies corporate" onwards there shall be substituted the words—
The bodies corporate mentioned in the preceding provisions of this section are bodies corporate resident or incorporated outside the United Kingdom which are, or if resident in the United Kingdom would be, close companies, but not trading companies, within the meaning of Part IV of the Finance Act 1965". There are several references in the Income Tax Act, 1952, to a company to which Section 245 applies—that is, a company subject to Surtax apportionment. All these references have to be changed to references to close companies. These Amendments pick up two which were overlooked.

Amendment agreed to.

Mr. Diamond

I beg to move Amendment No. 706, in page 215, line41, after "included", to insert "as regards surtax".

Paragraph 14(2) of the Schedule provides that if part of the income of a company is apportioned to the members for Surtax purposes under Clause 73 and part of the amount is apportioned to the administrators of a deceased person's estate, it is to be treated as part of the income of the estate under the relevant part of the Income Tax Act, 1952, so as to attract Surtax where appropriate.

It is, however, possible that the paragraph could be taken to mean also that the beneficiaries could claim repayment of the Income Tax in respect of the amount apportioned to the estate. This would be wrong, since the shareholders themselves cannot make any such claim in respect of an apportionment under Clause 73. The Amendment makes the position clear and makes it clear that only Surtax is affected.

Amendment agreed to.

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

Mr. Stratton Mills

I wish briefly to refer to a small but important point on paragraphs 11 and 12 dealing with the cessation of trade and liquidation of a company. In these paragraphs, it is required that when a company ceases to trade in its main trade, it is to distribute the whole, and not merely 60 per cent., of the profits for its last trading year; and no deductions are allowed for the requirements of the businesss, which, in the nature of things, is fair enough as the business is ceasing.

That is, however, a purely superficial view of the situation. As the company has no further need to expand, the rules at first sight appear to be reasonable, but an important change is taking place from the position under the old law. Under the old law, the automatic Surtax direction wiped out the charge to Profits Tax, but under the new system this involves double taxation of distributed income. I hope that the Chief Secretary has taken the point. I could give a number of examples by comparing the two situations, but the hour is late. I content myself with saying that this involves quite considerably more tax against a company in its last year of trading under paragraphs 11 and 12.

I suggest that the system of Corporation Tax in the Bill is designed to benefit the company with high retentions and to penalise those which distribute, but in the last year of trading such a measure brings in double taxation and is, therefore, penal in its incidence. I hope that if the Chief Secretary has not had an opportunity to look carefully into the point, he will consider it before Report.

Mr. Patrick Jenkin

It must have been with some concern that hon. Members who are standing at the Bar and sitting on the Government back benches listened to the long tally of Government Amendments moved to this Schedule, most of them Amendments reflecting exactly the points contained in Amendments tabled by hon. Members on this side of the Committee, and so I hope that we are not going to hear any more of the suggestion which has been made that it is Members of the opposition who have been keeping the argument going on this Bill. One after another hon. Member opposite has approached me in the Lobbies and in the corridors and said, "It is a most extraordinary thing, but every time I go into the Chamber and listen to the Committee they are debating points of substance, aren't they?" Indeed they are. I have one more I should like to ask the Chief Secretary about on this Schedule.

It arises in paragraph 5(c), where there is a reference to shares or obligations of the company which are subjejct to any trust". The word "trust" is left entirely at large. In these circumstances, it would seem that the provisions of the paragraph—it is a question of defining an "associate"—could extend to a large number of cases where there would not seem to be any conceivable reason why they should apply. In an earlier debate somebody raised the question of a trust for employees' shareholdings where there was no question of any directors benefiting. Yet they might well come in here, if the word "trust" is left at large and undefined. So, indeed, might a trust for a dogs' home; if one of the trustees happened to be a participator he would come in. I cannot believe this is intended.

An Amendment we put down on this point to limit family trusts—

The Chairman

Order. The hon. Member cannot now, on this Question, "That this Schedule, as amended, be the Seventeenth Schedule to the Bill," propose Amendments to it.

Mr. Jenkin

I was not proposing Amendments, Dr. King. I was merely suggesting that an Amendment was inadequate to cover the point, and that that might well have been why the Amendment was not selected. But the point is that the word is undefined, and is altogether too sweeping, and I hope that the Chief Secretary will be able to look at this again before Report to see whether the thing can be defined rather more narrowly to catch those cases which, on both sides of the Committee, we are anxious should be brought into the net. These are anti-avoidance provisions. Family trusts can be used to avoid tax and, if they are, they should be caught, but they should not be caught where no question of avoidance arises.

Mr. Barber

I think that this is, perhaps, an occasion when we ought to give the Chief Secretary the last word. Listening to him moving, in his customary fashion, a succession of Government Amendments during the last few minutes, as time marched on, I thought—and I think I can speak on behalf of my hon. Friends in saying this—that the Chief Secretary really became more endearing every moment. Indeed, I heard one of my hon. Friends behind me refer to him as "Little Noddy". We are indeed making progress.

This Schedule of some nine pages really bristles with difficulties. There are innumerable questions which one could put to the Chief Secretary about them, but somehow, at this hour of the morning. I do not think it would be appropriate to deal with the matter in this way. There is, however, one general matter on which I think it would be helpful if the Chief Secretary felt he could make comment. It is a matter which arises under the existing Surtax legislation, although I think it assumes greater importance now, because of the extended definition of close company. It is a simple point to present but a comment on it would be useful.

2.30 a.m.

What is the position of a company and its directors where the close company provisions operate to increase the liability of the company to Corporation Tax but the directors, acting in good faith and with all due diligence, have no knowledge of the facts which give rise to the increased tax liability?

May I illustrate the point? Liability to tax depends on the definition of a participator. A participator includes any person who possesses or is entitled to acquire share capital or voting rights in the company". How are the directors to know whether I have an option to acquire shares in the company? An associate is defined as meaning a parent or remoter forebear, child or remoter issue"? How are the directors to know the actions of those remoter relations? A company is not to be treated as a close company where the control of it is in the hands of a company which is not a close company or of two or more companies none of which is a close company. How are the directors to be sure of the status of the controlling companies? They may know, but they may well not know.

To a lesser degree these points—although not quite the same—have arisen under the old legislation. All I am saying is that we on these benches have received a number of letters from people which have arisen out of the fact that the Chancellor is extending the net, and therefore people have been asking some of my hon. Friends, and certainly myself, what is to happen in those cases where for such reasons the directors cannot be sure whether the company is a close company. I know that the notice is short, but the point is important, and I should be glad if the Chief Secretary would make some observations about it, because it is causing some concern.

Mr. Diamond

It is not expected that there will be any increased difficulty at all in dealing with the situation. There will be a certain amount of uncertainty from time to time, as there has been in the past—not that it affects the efficient working of Surtax collection and all that goes with it. But there is nothing new in provisions of this sort. The right hon. Gentleman gave no specific example of what would happen and had not happened in the past, and I can think of no case—and I am thinking hard—in which there would be a different set of circumstances from the present position. We will gladly give the matter thought and see whether any situation which we had not taken into account might cause difficulty and uncertainty, which we are anxious to remove, but my first answer must be that the right hon. Gentleman found it possible to live with the present provision for a long time—and nobody had more direct contact with it and greater responsibility for it than he by virtue of his office in the last Government. I believe that we shall find, as he found, that there is no prticular difficulty in practice, but I will look into the matter carefully to see whether there is anything which we have not taken into account.

I give a similar reply to the hon. Member for Belfast, North (Mr. Stratton Mills). The point which he raised is technical and rather detailed. I will read it HANSARD what he said, and it will probably be a case of my writing a letter of explanation to him, although if anything further is required I will do it. The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) asked whether the definition had gone too wide. One has to have a definition. He thought that perhaps it had gone too wide and gave an example of a company where there was an employees' trust. This is a very good example of where, at first thought, it might be felt that the definition had gone too wide, but on closer consideration one realises that it has not done so.

In practice it is unlikely that the trustees of an employees' trust will have any real influence over the policy of that company, certainly nothing like the influence which those who are running the company have, and it is just this kind of situation therefore which ought to be included, not excluded as the hon. Gentleman thinks. I will see whether there is any other case where the definition has gone too wide, but the example which the hon. Gentleman gave confirms the wisdom and draftsmanship of this provision, and not the reverse.

I hope that with those few words it might be found convenient to let us have the Schedule.

Mr. Barber

The only reason why I raised these questions was because they had been raised with me. They were never raised with me under the old legislation. They were raised as a result of the publication of the Bill, and I did not know the answers to them. With respect to the right hon. Gentleman, it is apparent that he does not know the answers either, and I hope therefore that he will, as he said, look into them, and perhaps he will be able to say something about them on some future occasion to allay the concern which undoubtedly is felt by people who have looked at these provisions closely.

Question put and agreed to.

Schedule 18 agreed to.