HC Deb 24 June 1965 vol 714 cc2063-73

Preliminary

1.—(1) This Schedule has effect for the modification of section 78 of this Act ("the principal section") in relation to companies, being bodies corporate, which are members of a group of companies.

(2) For purposes of this Schedule, save as otherwise provided therein,—

  1. (a) two companies shall be deemed to be members of a group of companies if one is the subsidiary of the other or both are subsidiaries of a third company;
  2. (b) "subsidiary" has the meaning assigned to it for certain purposes of the profits tax by section 42 of the Finance Act 1938, and subsections (2) and (3) of that section shall apply as they applied for purposes of that section;
  3. (c) "dividend" does not include a capital dividend.

(3) References in this Schedule to a company apply only to companies resident in the United Kingdom; and in determining for purposes of this Schedule whether one company is a subsidiary of another, the other company shall be treated as not being the owner—

  1. (a) of any share capital which it owns directly in a body corporate if a profit on a sale of the shares would be treated as a trading receipt of its trade; or
  2. (b) of any share capital which it owns indirectly, and which is owned directly by a body corporate for which a profit on the sale of the shares would be a trading receipt; or
  3. (c) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.

Company paying dividends within the group

2. Where in the year 1965–66 a company pays a gross amount in dividends greater than the standard amount, but any of those dividends are paid to another member of the same group of companies, the amount to be treated under subsection (1) of the principal section as dividends paid in the year 1966–67 shall be such part only of the excess as is proportionate to the gross amount of the dividends (if any) paid otherwise than to members of the same group.

Company receiving dividends from within the group

3.—(1) Subject to paragraph 4 below, where a company's profits in the financial year 1965 (as ascertained for purposes of the principal section) include dividends paid in the year 1965–66 by a member of the same group of companies, and that member pays in the year 1965–66 a gross amount in dividends greater than its standard amount, then there shall, except as provided in sub-paragraph (2) below, be deducted from the said profits as so ascertained an amount equal to such part of the excess as bears to the whole the same proportion as the gross amount of the part of those dividends which is included in the profit bears to the gross amount of all the dividends paid by the said member in the year 1965–66.

(2) Sub-paragraph (1) above shall not apply to the computation of a company's profits in the financial year 1965 unless the profits include a gross amount of dividends received by it from members of the same group of companies in excess of one-third of the gross amount of the dividends received by the company in its standard period from companies then being members of the same group of companies (or if the standard period is less than three years, an amount bearing to the dividends last mentioned the same proportion as one year bears to the standard period); and where in computing a company's profits for the financial year 1965 a deduction would fall to be made under sub-paragraph (1) above, the company may elect that instead there shall he made a deduction equal to the excess referred to in this sub-paragraph.

(3) This paragraph shall apply where for purposes of the principal section a company's profits in the financial year 1965 are ascertained by reference to some period ending in that year, but not where its profits for another period are substituted for its profits in the financial year 1965

(4) Any election under this paragraph shall be made by notice in writing given to the inspector before the end of the year 1966–67.

Alternative treatment of company receiving dividends from within the group

4.—(1) Where in the year 1965–66 a company has one or more subsidiaries and is not itself the subsidiary of another company, the company may elect that the following provisions of this paragraph shall apply to it, and if it does so, paragraph 3 above shall not apply.

(2) Where this paragraph applies to a company, the company's standard amount of dividends for purposes of the principal section shall be arrived at—

  1. (a) by aggregating the dividends paid by the company in its standard period with those then paid by the companies which are from time to time its subsidiaries in that period, but excluding such of those dividends as are paid by one of the companies concerned to another; and
  2. (b) by aggregating the share capital of the company in any period with that of the companies which are from time to time its subsidiaries in that period, but excluding any share capital which is directly owned by any of the companies concerned (and disregarding any share capital so owned in the application of subsection 6(a) and (b) of the principal section); and
  3. (c) by treating as profits or losses of the company in any period the profits or losses of the companies which are from time to time its subsidiaries in that period, but disregarding in the computation of any such profits or losses franked investment income (within the meaning of the profits tax) received from any of the companies concerned.
For purposes of paragraph (b) above the initial capital of a subsidiary in relation to any period, if it became a subsidiary during the period, shall be ascertained as at the time when it did so.

(3) There shall be aggregated the gross amount of the dividends paid in the year 1965–66 by a company to which this para- graph applies and by any companies which are its subsidiaries, but so that—

  1. (a) there shall be excluded dividends paid by one of the companies concerned to another; and
  2. (b) from the aggregate dividends paid by the subsidiaries otherwise than to any of the companies concerned there shall be deducted the amounts (if any) which under the principal section the subsidiaries are treated as paying in the year 1966–67;
and for purposes of the principal section the amount so arrived at shall be treated as the gross amount of the dividends paid in the year 1965–66 by the company to which this paragraph applies.

(4) Any election under this paragraph shall be made by notice in writing given to the inspector before the end of the year 1966–67.

Adjustments in respect of dividends received from overseas trade corporations

5.—(1) Where paragraph 3 or 4 above has effect in determining for purposes of the principal section whether in the year 1965–66 a company pays a gross amount in dividends greater than the standard amount, and the company's profits in the financial year 1965 include dividends paid out of exempt trading income by overseas trade corporations which are members of the same group of companies, then the gross amount of dividends which that company is apart from this paragraph to be treated under the principal section as paying in the year 1966–67 shall be reduced by the amount on which income tax at the standard rate for the year 1966–67 is equal to the income tax payable by those overseas trade corporations on exempt trading income in respect of dividends paid thereout to the company in the year 1965–66, subject, however, to the limitation imposed by subparagraph (2) below on the amount of the exempt trading income to be taken into account under this paragraph.

(2) The exempt trading income to be taken into account under this paragraph shall not exceed the following fraction of the gross amount of dividends which the company is apart from this paragraph to be treated under the principal section as paying in the year 1966–67, that is to say,—

  1. (a) where paragraph 3 has effect in relation to the company, the fraction obtained by dividing by the amount of the company's profits in the financial year 1965 (as ascertained for purposes of the principal section) the gross amount of the dividends included therein which are paid by any such overseas trade corporations as aforesaid out of exempt trading income; and
  2. (b) where paragraph (4) above has effect in relation to the company, the fraction obtained by dividing by the amount taken under paragraph 4(2)(c) above as the profits of the company in the financial year 1965 the amount included therein of exempt trading income of such overseas trade corporations as aforesaid.

(3) Where sub-paragraph (2) above has effect in the case of the company to exclude part of the exempt trading income of other members of the same group, the part to be taken into account shall be such as that company may select.

(4) In relation to a dividend paid partly out of exempt trading income and partly not, this paragraph shall apply as if the two parts were separate dividends, and any question how far a dividend is paid out of exempt trading income, or out of what exempt trading income a dividend is paid, shall be determined for purposes of this paragraph as it is determined for purposes of Part IV of the Finance Act 1957.

(5) Where for purposes of the principal section the company's profits in the financial year 1965 are ascertained by reference to some period ending in that year, references in this paragraph to the financial year 1965 shall be construed as referring to that period; but where the company's profits for another period are substituted for its profits in the financial year 1965, this paragraph shall not apply.—[Mr. Diamond.]

Brought up, and read the First time.

Mr. Diamond

I beg to move, That the Schedule be read a Second time.

I do not think that the Committee would expect a long explanation of this matter, because it is straightforward, the language is simple, and the notions underlying it are well understood by hon. Members on both sides of the Committee. It would, nevertheless, be courteous to refer to the matter shortly.

This Schedule relates to the Clause dealing with forestalling, that is to say the possibility of a company having decided to declare, in advance of Corporation Tax, a dividend in excess of what they would otherwise have done, with a view to escaping Income Tax which would otherwise be payable. The Schedule deals with the problem of subsidiary companies. Where a full subsidiary is concerned, it is not the philosophy of the Government to separate the subsidiary from the parent, but to regard a dividend paid by a subsidiary to a parent or a fellow subsidiary as an internal transaction, as it is.

The Schedule makes it clear that a dividend paid to a minority shareholder—not a dividend paid to a parent or a fellow subsidiary—would still, of course, be charged in respect of any excess dividend paid to that minority shareholder in the company if an excess dividend had been declared.

The Schedule goes on to describe the test of whether it is a subsidiary or fellow subsidiary and adopts the Profits Tax test of 75 per cent., direct or indirect ownership. This is a test which is adopted from Profits Tax, it is familiar to practitioners and it seems to be a reasonable test. There are other provisions with regard to grouping which are, perhaps, reasonably straightforward. The rest is in language which "he who runs may read", and it would not be right for me to detain the Committee any longer.

Mr. Higgins

I do not want to detain the Committee more than a few moments, but there is one important point which I think should be made. The Chief Secretary has said that the policy underlying the Clause and the new Schedule is that one should not separate the parent company from the subsidiary. It is also true that the idea of having a standard profit and relating this to the increase in profits and the standard dividend to the increase in dividend is to prevent forestalling. I should like to draw to his attention the fact that the principle which he has outlined—that we should not separate the parent company from the subsidiary—appears to have been applied only in the case of subsidiaries within the United Kingdom.

I should be glad if he would confirm whether it is the Government's intention to separate subsidiaries overseas from parent companies in the United Kingdom, or whether the principle which he has enunciated is of universal application. An individual subsidiary in this country may have a standard dividend of 100 which subsequently go up to 130. If there is the same relationship in its profits—also 100 to 130—it would not be regarded as forestalling and would not come within the scope of the Clause 78. On the other hand, for a subsidiary overseas the situation as the Schedule is now drafted appears to be different. The total profit of a concern with a subsidiary overseas may be 100 in the standard period, and then go up to 130 in the period 1966–67. It should then be permissible for the dividend to be increased from 100 to 130 in the same way.

But if the parent company in this country has an increase in profits overseas and they are not all remitted as dividends from the overseas country to this country, we may find that the United Kingdom parent company will be penalised because of the way the Schedule is now drafted.

I will repeat the point because it is difficult to understand. The principal company in this country will be penalised if, although its profits have gone up from £100 to £130—both overseas and in this country—it does not remit all the profits to this country. It could be argued that in most instances it is possible to increase dividends from abroad, but that would result in the company being charged increased withholding tax in the country overseas.

In these circumstances, I suggest that the Chief Secretary should include in the Schedule a provision whereby if the parent company is located in this country overseas subsidiaries are treated in the same way as subsidiaries in this country. I hope that the right hon. Gentleman will clarify the position and say whether or not it is intended to treat overseas subsidiaries in the same way as United Kingdom subsidiaries.

Mr. William Clark (Nottingham, South)

I was hoping that the Chief Secretary would reply to the point made by my right hon. Friend.

Mr. Diamond

I will, after the hon. Gentleman has spoken.

Mr. Clark

This is a new Schedule of 131 lines and the Government were kind enough at the commencement of the Corporation Tax to issue a White Paper, Cmnd. 2646, which I have no doubt all hon. Gentlemen opposite read with avid interest and have understood all its points. I cannot understand why the Committee has not had a proper explanation of these 131 lines. It is regrettable that a complicated Schedule such as this should come up at this stage of the Finance Bill without our being given an adequate explanation of it.

The Chief Secretary, probably alone, knows the purpose of the Schedule and that it is to prevent parent companies from taking excessive dividends from subsidiaries in the year 1965, thus improving their standard dividend. However, if we consider a company whose year ends at the end of the calendar year, 31st December, 1965, in this instance, it is only the dividend received during the calendar year which should affect its standard dividend and I cannot understand why sub-paragraph 3(1) refers to dividends up to 5th April, 1966.

One could have the position where one is making up accounts to the end of December, 1965, for the standard dividend, but, as I read the Schedule, it takes it another three months from the point of view of dividends received. We have had a lot of talk about overspill in our discussion of the Bill. This, however, is taking a 12-month period, is taking dividends for 15 months, which is more like overkill than overspill. Will the Chief Secretary, between now and Report, have a look at this valid point to see whether in the new Schedule the year 1965–66 should not be deleted?

Sub-paragraph 5(1) refers to "income tax payable", but do those words mean only that the tax payable is the United Kingdom tax before the deduction of foreign tax credits? The right hon. Gentleman will appreciate that this could make a tremendous difference to the standard dividend of a particular group of companies. Sub-paragraph 4(2,c) states: … by treating as profits of the company as the profits of the companies in the year 1965. I assume, and I would like confirmation of the fact, that this merely means that the profits of the company include those profits which are treated as profits because of that sub-paragraph.

I appreciate that these are technical points and that, at this hour, the right hon. Gentleman may not be able to answer them off the cuff. If not, I trust that he will consider them between now and Report and will, if there is any valadity in them, table an Amendment on Report.

9.30 p.m.

My hon. Friend the Member for Worthing (Mr. Higgins) raised a very valid point on this grouping Schedule. If there are five subsidiary companies, four of which are United Kingdom companies and one an overseas company, one can take only the four United Kingdom companies for the grouping. If one United Kingdom company has increased its dividend and another has decreased its dividend, the two are aggregated and, provided that does not increase the standard, it is all right.

As we read the Schedule the overseas company is excluded from the grouping. The reason for bringing forward this point is not at all for tax avoidance purposes. The whole question of forestalling under Clause 48 is a once-and-for-all standard set up under the Bill. If there are four United Kingdom companies and one overseas company and if we are to group the United Kingdom companies, there is no reason why we should not be able to group the five including the overseas company.

I have read paragraph 4 of the new Schedule many times, but I am still confused. Probably all other hon. Members understand it, but I find it extremely complicated. During the whole discussion on Corporation Tax the Chief Secretary and his colleagues on the Treasury Bench have made great play of the fact that this will simplify our tax system, but paragraph 4 is so complicated that if the Chief Secretary could give a brief explanation, not only would I be delighted, but I am sure that his hon. Friends and my hon. Friends would also be delighted to hear it.

Mr. Diamond

Perhaps I can deal first with the questions raised by the hon. Member for Nottingham, South (Mr. William Clark). He asked about the year 1965–66. The Schedule refers only to a proportion of 1965–66. There is no more than that and I do not think there is cause for any anxiety.

The hon. Member asked two other questions with his usual clarity, but, in order that I shall not possibly misunderstand a single syllable of what he said, I prefer to have the opportunity of reading very carefully the report of his speech in HANSARD. If there is any reason to do anything about it I shall, of course, either communicate with the hon. Member or put a clarifying, consequential Amendment down on Report.

On the point of substance raised by the hon. Member for Worthing (Mr. Higgins) one is not entitled to make the basic assumption implicit in his argument that dividends of an overseas company should be taken into account unless they are remitted. The hon. Member drew attention to the fact that we can have regard to a domestic company's dividends and asked why we should not include a non-domestic company's dividends and profits also. The non-domestic company's dividends may not affect the situation at all. Whether they are included or not it is a comparison of like with like.

What we are concerned with here is the possibility of forestalling for the purpose of tax avoidance in one year only. We are concerned only with one year, and because it is for one year only we were happy to accept the Amendment moved by the right hon. Member for Bexley (Mr. Heath) dealing with motive. Once we have dealt with the matter of motive we need not get bogged down with these considerations because that will solve the situation. Any dividend paid in the year that we are considering, which clearly was paid in good faith, is not a dividend to which the forestalling provisions would apply, where one would calculate the excess amount and charge tax in a way which otherwise would not arise—that is to say, account to the Revenue for tax because tax had already been deducted at source and paid in the ordinary way.

Therefore, in view of the Amendment to which I have referred, which has been incorporated in the Bill, all these problems are now put on one side. The complication of trying to take account of the tax legislation of foreign countries where subsidiaries might exist is far too difficult for us to bring into account, for a comparison which would be necessary, any of the figures involved. It would be far more simple and much more in the interests of the companies concerned that we should adopt the simple expedient—and I am grateful to the hon. Gentleman for reminding me of this—of having the motive test, and that will end the matter.

I repeat what I have said before, the businessman in future, once Corporation Tax is running, will for the first time know immediately and without any difficulty broadly what his tax liability is. He has never been able to know that up till now—never. He always had to consult professional colleagues to find out.

Mr. Geoffrey Hirst (Shipley)

He still will.

Mr. Diamond

My professional colleagues will be relieved in view of what the hon. Gentleman says.

I admit that this Schedule indicates by its length that there are one or two points to be taken into account in the transition from one system to another, and it is inevitable that in a transition of that kind there should be certain difficulties which one has to overcome, especially when we are dealing with it in a very short Bill—I repeat, a very short Bill—of taxation largely by reference. May I repeat yet again—for the future, when Corporation Tax is running, the life of the businessman for tax purposes will be simplicity itself.

Question put and agreed to.

Schedule read a Second time, and added to the Bill.