HC Deb 24 June 1965 vol 714 cc2073-81

Application and interpretation of Schedule

1.—(1) This Schedule has effect for the modification of section 79 of this Act ("the principal section") in its application to companies which have been overseas trade corporations, and to companies (being bodies corporate) which are members of a group of companies or are otherwise associated with other companies; and in this Schedule "relief" (unless the context otherwise requires) means relief under the principal section.

(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) a company shall be deemed to be a subsidiary of another if and so long as more than one-half of its ordinary share capital is owned by that other company, whether directly or through another body corporate or other bodies corporate, or partly directly and partly through another body corporate or other bodies corporate;
  3. (c) the interest of one company in another shall be deemed to be proportionate to the part of the ordinary share capital of the other owned as aforesaid by that company.

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

  1. (a) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom; 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.

(4) References to ownership and to ordinary share capital in this Schedule shall be construed in accordance with section 42(3) of the Finance Act 1938; and, except in so far as sub-paragraph (3) provides otherwise, section 42(2) of that Act together with Part I of Schedule 4, shall apply for purposes of this Schedule as they applied for purposes of that section.

Overseas trade corporations

2.—(1) For purposes of the principal section a company which has at any time been an overseas trade corporation shall be treated as if it had never been an overseas trade corporation and, subject to sub-paragraph (2) below, as if it had been charged to income tax and profits tax, or corporation tax, and been given credit for foreign tax accordingly.

(2) Where a company is an overseas trade corporation in the year 1965–66, then

  1. (a) in respect of any amount taken into account by virtue of sub-paragraph (1) above as income in the base year there shall be treated as allowed credit for foreign tax equal to the income tax and profits tax treated by virtue of that sub-paragraph as charged in respect of it; and
  2. (b) in arriving for any year of assessment at the adjusted aggregate amount in the related period of the unused credit for foreign tax, the unused credit for foreign tax in respect of the income from each overseas source of trading income shall be computed as if the foreign tax were 56¼ per cent.

Groups of companies and associated companies

3.—(1) Where a company claiming relief for any year of assessment is a member of a group of companies, and in claiming the relief elects that this paragraph shall have effect in relation to a member of the group specified in the claim, then for the purposes of that claim the provisions of the principal section shall be modified in accordance with this paragraph.

(2) There shall be added to the relief (before abatement) that may be given to the company—

  1. (a) the appropriate fraction of the difference, if any, between—
    1. (i) the amount of the relief (before abatement) available to the other member of the group; and
    2. (ii) the amount of the relief falling to be given to the other member, before abatement in respect of dividends paid without deduction of income tax; and
  2. (b) if in the year of assessment the other member has paid to the company any dividends without deduction of income tax, such fraction of the amount at (a) (ii) above as the amount of those dividends is of the total amount of the dividends paid by the other member in the year.

(3) There shall be added to the adjusted aggregate amount in the company's related period of the unused credit for foreign tax the appropriate fraction of the amount, if any, by which the corresponding amount for the other member exceeds the amount of the relief (before abatement) falling to be given to the other member.

(4) The provisions of the principal section for reducing the relief by reference to the income tax deducted or deductible from dividends paid by the company claiming relief shall have effect subject to the following provisions:—

  1. (a) there shall be treated as an amount of income tax so deducted or deductible any amount by which the income tax deducted from dividends paid to it by the other member of the group (and not repaid to the company by virtue of section 58 of this Act) exceeds the appropriate fraction of the relief falling to be given to the other member in that year, before abatement in respect of dividends paid without deduction of income tax; and
  2. (b) there shall be taken into account in the case of the company as if it were its income charged to corporation tax, and as if it were its income so charged from overseas sources of trading income having an unused credit for foreign tax, the appropriate fraction of the amounts respectively falling to be taken into account as such in the case of the other member of the group, and there shall on the like principles be set against income of the company the appropriate fraction of any loss incurred by the other member of the group in a trade carried on by it so far as that loss is not taken into account as reducing the income of the other member.

(5) In applying this paragraph to a company and another member of a group of companies, account shall be taken of the operation of sub-paragraphs (2) to (4) above in relation to the other member in determining what, if any, relief might be given to the other member (or, if the other member does not claim relief for the year of assessment, then of the operation which this sub-paragraph would have on a claim by it containing an election duly made under this paragraph in relation to such companies as may be specified in this behalf in the company's claim); and for this purpose any amount falling by virtue of sub-paragraph (4) (a) above to be treated as income tax deducted or deductible from dividends paid by the other member shall be apportioned rateably between those dividends.

(6) For the purposes of this paragraph "the appropriate fraction" in relation to a company and to another member of the same group of companies is the fraction proportionate to the interest of the company in that other member, but for this purpose the company shall be treated as not being the owner of any share capital which it owns directly or indirectly in a third company if the other member and the third company are also members together of any group of companies; and, subject to sub-paragraph (5) above, "relief (before abatement)" means the full amount of the relief calculated in accordance with subsection (1) of the principal section apart from any reduction under the proviso to that subsection or under any later subsection, but reference to relief before abatement in respect of dividends paid without deduction of income tax are references to the relief calculated apart only from any reduction under that proviso or in respect of dividends so paid.

4.—(l) Where arrangements entered into between any companies make provision for relating to one another the amounts of the dividends paid to them respectively by companies under their joint control, relief shall not be given for any year of assessment to a company paying dividends regulated by that provision or to a subsidiary of it, except on condition that for the purposes of that provision the dividends are treated as not exceeding the amount (before deduction of income tax) of those dividends less the relief given to the company paying them and less the appropriate fraction of the relief given to any company of which that company owns ordinary share capital, whether directly or through another body corporate or other bodies corporate.

(2) In this paragraph "company" includes a company not resident in the United Kingdom, and "appropriate fraction" in relation to a company paying dividends regulated by any such arrangements and to another company means the fraction proportionate to the interest of the company paying the dividends in that other company.—[Mr. MacDermot.]

Brought up, and read the First time.

Mr. MacDermot

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

This is another series of somewhat complicated provisions which are required for the purpose of transition to lead us into the world of simplicity itself.

The provisions of general application in this new Schedule concerns the overspill relief for, firstly, the former overseas trading corporations and, secondly, groups of companies and associated companies. The Schedule also contains a revised version of the rules which were formerly found in Clause 79(5) which dealt with the case where companies have entered into arrangements providing for a particular relationship to be maintained between the dividends that each pays. I think these provisions will be of particular assistance to companies in the position, for example, of the Shell companies, which have been referred to a number of times during our debates, which have such an agreement, in their case with Dutch associates.

Hon. Members will have noticed that the Schedule as originally put down has been amended in a number of respects, and I should perhaps explain that the main reason for the amendment was to make the Schedule apply only if the company so elects. The automatic application of the grouping provisions could have worked to the disadvantage of some companies. The original Schedule also failed to allow an excess of unused credit in the related period to be carried out to a parent company, and this has now been provided for in paragraph 3(3).

I think that is all I need say in introducing the new Schedule. If hon. Members have any points to raise, I shall be glad to try at least to answer them.

Mr. Peter Emery (Reading)

This is the very last of the Amendments, new Clauses and Schedules which we have had to consider in Committee, and I am sure that this will be no cause for sorrow to many hon. Members. Dr. King, I am sure that everyone will wish to thank you very much for all that you have done during our proceedings in Committee. [HON. MEMBERS: "Hear, hear."] I know that all hon. and right hon. Members on both sides of the Committee feel this quite sincerely.

The point about automatic grouping which was raised on the original Schedule is dealt with quite adequately in the new Schedule, and we thank the Chancellor of the Exchequer for putting it down. However, the Chief Secretary's reference to "simplicity itself" allows me to draw the attention of the Committee—I had intended to do it anyway—to paragraph 2(1), which begins: For purposes of the principle section a company which has at any time been an overseas trade corporation shall be treated as if it had never been an overseas trade corporation … Obviously, this is simplicity itself, the sort of simplicity which, of course, keeps the Chief Secretary's profession well in business.

Seriously, on that point, I put this question to the Financial Secretary. Is it absolute that any O.T.C. may opt if it so desires? It has been put to me that there may be exceptions, and I should like it to be clearly stated that, as far as the Treasury knows, opting on grouping is definitely open.

This new Schedule means that the Treasury is now accepting the notional method of assessment in the calculation for transitional relief. Initially, we believed that the Government would not accept this. The question I put now is this: if they will have it in this case, why are they not willing to use the notional assessment in other cases where there is particular hardship? I shall not go over all the examples of hardship discussed during the debate on Clause 79, to which this Schedule relates, but we know of these cases, and it might well be that a notional assessment as an alternative would deal with the problem which they raise. As the Government have accepted notional assessment in regard to O.T.C.s for the purpose of transitional relief, why not get themselves out of their problem by accepting it in other instances particularly where hardship arises?

As I understand paragraph 3(1), it means that a company Z may, if it wishes, make an election in relation to company Y if company Y is one of a group of companies owned by company Z. This is plain enough as far as it goes, but what is not clear is whether company Y could elect to do exactly the same for one of its own subsidiaries, company M. I believe that this would be obvious if company M was directly related to the main company Z, but is it so if it could not be done directly between company Z and company M? This is a very technical point, but I have given the hon. and learned Gentleman notice of the question so that I am not taking him by storm in this instance.

9.45 p.m.

We have now had 153½ hours of debate in Committee on the Bill. For those who believe that one could glibly throw the Bill into Standing Committee, I suggest that if we did that with a Committee stage lasting 153 hours and the Standing Committee sat the normal two days a week and 2½ hours each of those days, it would take to the middle of December to get through the Committee stage.

Mr. Robert Maxwell (Buckingham)

Although I have not been in the Chamber today until now, and had not intended to intervene—[HON. MEMBERS: "Oh."] I cannot let this point pass. It would have been perfectly all right, surely, to have sent the old part of the Bill to a Standing Committee and to have dealt with the new legislation in this Chamber. That might have saved a tremendous amount of time for the House, as well as a great amount of strain on hon. Members.

The Chairman

Order. A passing reference, which the hon. Gentleman has made, the Chair would tolerate, but we cannot debate the issue.

Mr. Emery

I had no intention of debating the matter, Dr. King, because I knew that I should immediately be out of order.

It is important to realise that the Schedule does not correct the two main criticisms which are being made about transitional relief. It should be quite definite that on the matter of transitional relief the Schedule does not meet the point of being able to deal with the long-term position of investment overseas, because investment overseas will still suffer according to the Schedule.

Also, the Schedule does not meet the second main point that we make about transitional relief, and that is that it is not fair all the way across the board the way it implies. That is why I come back to the initial question that I asked. Would the Chancellor consider in the cases of hardship the possibility of the notional assessment being used for transitional relief in these instances? If I could have an assurance on that, we should not wish to divide the Committee on the Schedule, because it gives easement compared with the original Bill.

Mr. MacDermot rose—

Hon. Members

Hear, hear.

Mr. MacDermot

I can see that one has a measure of support when one comes to make one's swan song which is not always accorded on other occasions. I appreciate this. This is by far the most—

Mr. Heath

Do we understand that the hon. and learned Gentleman will be resigning before Report?

Mr. MacDermot

I feel like saying to the right hon. Gentleman, "No such luck". This is just the swan song for this particular chorus.

The hon. Member for Reading (Mr. Peter Emery) asked me a number of technical questions. He was kind enough to give me notice of one of them, and I think that on that I can give him a fairly precise answer, which is in the affirmative, that the relief to which he is referring can be followed through an intermediate holding company. I think that the provisions which secure this are to be found in paragraph (3,5) of the Schedule.

With regard to the powers of election of O.T.C.s, the hon. Gentleman referred to some fears that had been expressed about what the effect of the powers would be. He has not particularised the fears. All I can say in answering generally is that the intention, and, I believe, the effect, is to give the same kind of easement to O.T.C.s as provided for other companies. If the hon. Gentleman has some specific points in mind and cares to communicate them to me I would be glad to look at them further.

The hon. Gentleman also raised the question generally about the notional method of assessment for transitional relief. I do not see the need, from his remarks, for alteration but if he has any particular arguments that he would like me to look at, I will do so. The hon. Gentleman at the end reverted to some general remarks about the effect of the transitional relief, saying that it does not give permanent easement to overseas trading corporations. Of course, this would cease to be a Schedule dealing with transitional relief if it did.

One of the main questions which have divided us throughout the Committee stage concerns the effects of the Corporation Tax upon overseas investment. The Government feel, and have stated quite clearly, that it is necessary through the tax system to put some brake upon the extent of our overseas investment. We do not, of course, wish to dry up or stop in any sense overseas investment. It is a matter of the proper balance. I hope that these remarks may be sufficient in reply to the hon. Gentleman.

Question put and agreed to.

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

The Chairman

The Question is, That I do report the Bill, as amended, to the House.

The Chancellor of the Exchequer (Mr. James Callaghan)

I know that it is the practice of the Chair, Dr. King, to deprecate debate on this Motion and I would, therefore, not wish to risk incurring your displeasure. But I hope that you will allow me to say—and I know that I speak for all of us in saying this—that we thank you and your colleagues who have occupied the Chair for so long and for so many hours during this noteworthy Committee stage of the Bill.

We have reached a landmark in the passage of the Bill. We thank you and your colleagues and also, if I may say so, we extend our thanks to the staff for the services which they have rendered to us. I will say no more, because I do not wish to break the normal custom that debate on this Motion is to be deprecated.

Mr. Heath

I have already thanked the staff this afternoon, Dr. King, but I would like to join the Chancellor of the Exchequer in thanking you and your colleagues who have occupied the Chair during this long and complicated Committee stage.

I would not go so far as to say that this is a noteworthy point during the passage of the Bill—[HON. MEMBERS: "A landmark."]—or even a landmark. It may well be a rock or boulder for the future. We recognise that we still have further stages to go through, but that does not in any way lessen our gratitude to you and your colleagues for the way in which you have presided over our deliberations.

The Chairman

As the proceedings during the last two minutes have been out of order, perhaps the Chair can be out of order for a few moments so that I may say that I am happy to testify to the fact that the congratulations given by the two right hon. Gentlemen to the Chair I give to my deputy and to the team who have worked with me.

Hon. Members

Hear, hear.

Question put and agreed to.

Bill reported, with Amendments; as amended, to be considered Tomorrow; Parts IV and V and Schedules 10 to 19, as amended in Committee, and the added Schedules to be printed. [Bill 156.]