Clause 18.—(TAXATION OF CAPITAL GAINS.)

HC Deb 25 May 1965 vol 713 cc250-90

Mr. John Hall (Wycombe)

I beg to move Amendment 274, in page 14, line 10, to leave out "person" and to insert "individual".

The Chairman

With this Amendment we propose to take Amendment No. 291, in page 14, line 12, leave out subsection (2) and insert: (2) For the purposes of this Part of this Act, a person shall not include a company as defined in subsection (4) of section 42 of this Act. and Amendments 275, 276, 277, 278, 279, 280, 281, 282 and 283.

4.15 p.m.

Mr. John Hall

We have now left the short-term provisions and come to the main meat of the capital gains provisions. Clause 18 which, personally, I regard as the charter Clause to the legislation covering capital gains, imposes tax on long-term gains of all forms of property and, by so doing, introduces a new element into our tax law. We shall have something to say about this new form of tax later.

The Amendment I now move, and the consequential Amendments, are designed to exclude a company as is defined in subsection (4) of Clause 42 of the Bill. The Amendment will not have the effect of relieving the ultimate beneficiary from the liability to capital gains tax, but it will have the effect of avoiding double taxation and will also have the effect that the gain realised by the ultimate beneficiary will be taxed at 30 per cent. and not at the higher rate of Corporation Tax. At present, unit trust shareholders suffer a tax of 40 per cent., a higher rate than they would otherwise suffer if they were direct shareholders. I hope that we shall discuss this later and that there will be changes.

Clause 31 is defective, as has been shown by the number of Amendments tabled. The fact that this relief is given under that Clause for the reinvestment in the proceeds of the sale of certain assets provided that they are reinvested in assets of the same class does not in any way weaken the argument that the imposition of a capital gains tax on a company and then, later, on the shareholder who sells his shares or in voluntary liquidation constitues double taxation.

Let us consider the position which will arise. I will ignore the special rate of 35 per cent. tax which is to be imposed in the case of capital gains enjoyed by companies in the first year and take the 40 per cent., or even more Corporation Tax, which may be more normal. Take a company which sells an asset and renders itself liable to Capital Gains Tax and does not reinvest it in an asset of the same class and, therefore, is liable to the tax. It will pay 40 per cent. or more capital gains. There would be left as an accretion to assets 60 per cent. of the realised capital gain.

This will mean that the asset valuation will be increased by that amount. The company will have sold a capital asset and gained a certain capital gain that will be taxed at 40 per cent. and the rest of the 60 per cent. of that capital gain, will add to its asset value. To that extent the value of those assets in its balance sheet is increased and it will increase the value of the shares in the hands of those various shareholders.

There are various ways in which shares can increase in value and this is one of them. When the shareholder comes to dispose of his shareholding the assumption is that the increase in the asset value is reflected in the value of his share which he sells either in the market or in liquidation or at death. He will then be called upon to pay a further tax at the rate of 30 per cent. This means that the total tax borne on that capital gain will be 58 per cent. We have always tried to avoid taxing income, or a receipt, which has already borne tax.

I am not sure whether, through the long history of fiscal legislation in this country, we have always succeeded, but one scans one's memory to find examples where we have strayed from the path of strict rectitude in this matter. As a matter of principle, in this House, we have always been strongly opposed to the whole conception of double taxation. The Government itself have accepted this principle in attempting to avoid the double tax on capital gains which might otherwise have occurred as a liability on the shareholders of investments of unit trusts and they have tried to cover this in Clause 34, line 63.

As they have realised that there is an element of direct taxation in some part of their proposals for Capital Gains Tax, and have taken steps to try to mitigate the effects of this in so far as it affects unit trust or investment trust holders, why are they proposing to impose it as between companies and their direct shareholders? I can think of only one reason. It must be because the Government regard a company as a completely separate and, indeed, different entity from its shareholders. I cannot accept this view.

A company is, basically, the property of its shareholders. They elect a board to conduct the affairs of the company on their behalf. They can replace all or any of the directors if they think fit. Any increase in the asset value, whether through the retention of profits not paid to shareholders or through an increase in the value of existing assets, does not benefit the company; it benefits the shareholders inasmuch as that increase in value is reflected in the value of their shares either on the market or on voluntary liquidation. Incidentally, it also benefits the employees in so far as an increase in financial strength enables the company to go on expanding and developing.

If real capital is destroyed by penal taxation it is not the company but the shareholders who suffer. It is they who will lose their money and the workers who will lose their jobs. A company is an inanimate thing. It cannot starve. It cannot feel heat, cold or pain. Indeed, it is completely lifeless without the shareholders to give it financial strength and the workers to operate it. When we tax a company, we tax its shareholders—those who give it life.

If the taxation is penal, it also probably affects the long term future of the employees. However, whether the taxation be penal or moderate, it should not be imposed twice. The Capital Gains Tax should be imposed at the point of ultimate realisation—that is, when the shareholder disposes of his shares or at death. To place a double burden on the shareholder is both unjust and contrary to our normal taxation philosophy. It is an encouragement to look for other ways of saving and investing which do not attract double taxation. If the Corporation Tax goes higher, it may have a serious effect on companies seeking financial support in the market or which seek to float themselves for the first time.

This is a comparatively narrow point, although I am sure that many of my right hon. and hon. Friends will have something to say about it, because it concerns only this one element of double taxation. It does not lead to an evasion of Capital Gains Tax, because in the end it is taxed in the hands of the ultimate beneficiary, the one who is able to obtain benefit by the gain which accrues from the sale of assets in the hands of a company.

It is, therefore, a question, not of evading tax, but of trying to avoid double taxation and maintaining as far as possible in this imperfect world the principle of not imposing double taxation on any form of income or receipt.

The Chairman

Before I call the next hon. Gentleman, may I suggest that it would be excellent if hon. Members followed the lead given by the hon. Member for Wycombe (Mr. John Hall) and confined their remarks strictly to the Amendment in view of the fact that we shall have a debate later on the Question, "That the Clause stand part of the Bill".

Sir Tatton Brinton (Kidderminster)

I will endeavour to follow the example of my hon. Friend the Member for Wycombe (Mr. John Hall) by sticking to the Clause and emulating his admirable brevity.

When considering any tax, particularly a new tax, there are three criteria on which we should judge it. The first is fairness; the second is what I would describe as efficiency—in other words, whether the yield from the tax is likely to be worth the trouble both to the tax collectors and to the public—and the third is what its overall economic effect is likely to be. On all these criteria, I would say that the extension of Capital Gains Tax to the internal operation of companies fails completely.

My hon. Friend the Member for Wycombe dealt fully with the aspect of fairness. Double taxation will fall on shareholders when a capital gain is made by their company, which as my hon. Friend said is particularly unfair in the case of investment trusts and unit trusts. Although the Government have provided a method in Clauses 34 and 63 whereby certain investors in investment trusts and unit trusts will be able to use part of the Capital Gains Tax already charged to set off the capital gain which they may incur by selling their units or shares, there is a gap of 5 per cent. between the 35 per cent. to be charged in the coming year on companies and the 30 per cent. personal tax. This is liable to rise to 10 per cent. or possibly more if Corporation tax is set at a higher level than 40 per cent.

Moreover, it should not be forgotten that many of the investors in investment trusts and the holders of units are institutional investors of the charitable type. This sort of institution, particularly charities, is not liable to Capital Gains Tax. Therefore, presumably, they will simply lose on the capital gain which has been charged within their investment trust and will not be able to recover anything because they were not liable in the first place.

How efficient will this tax be in respect of manufacturing companies? It introduces a complexity in the economic affairs of this country which is quite unnecessary. The Government have had to admit the logic that if a manufacturing company disposes of, say, a factory which is no longer required at a substantial capital gain and then replaces it with another factory in another place and reinvests the money, it shall not, at that point at any rate, incur liability to pay Capital Gains Tax. This overcomes the immediate objection raised by many financial writers when the tax was first proposed. It merely defers the liability for capital gains to a much later point. The fact that exemption had to be introduced underlines the inefficiency of this tax.

If I may digress for a moment, the assumption of this exemption is that the financing of industry is solely related to fixed assets. This is not the case. It may well make very good economic sense for a company to dispose of a fixed asset in order to provide finance for its current requirements. Expansion does not come only out of bricks and mortar and machines. It may also come out of the increased finance required to carry on an enlarged operation.

Therefore, the Government, in proposing this exemption, have already created what obviously is an anomaly economically in that they say, "Provided you make a capital gain, but reinvest it in bricks and mortar and machinery, you do not pay, but if you say that you are desperately short of working capital and that you wish to dispose of one factory to increase the efficiency of another, you are mulcted." This produces a foolish anomaly.

4.30 p.m.

By the exemptions which the Government have had to introduce to bring some logic into what is basically an illogical tax, they have made so many exceptions to the bite of the tax that the amount realised by the tax will be relatively low.

On the other hand, they are introducing into the conduct of a business an element which would be far better kept out. They are bringing in the trouble of constant valuations and the complexities envisaged in Clause 63 in the case of investment trusts and unit trusts, where certificates will have to be given to all shareholders once a year to show how much capital gain is included in the value of their shares, which they can then reclaim.

A ridiculous situation will arise, because such an accountancy cannot take into account the fact that people may buy and sell their units or their shares at varying periods during the year, so that they will lose or gain according to the state of the accounting. I may be wrong about this, but no doubt I shall be corrected if I am.

If an accounting period runs to 31st December, and at that date certain capital gains are included in the certificate which is given to the holder of shares, by 30th June that certificate will be out of date. Further accruals or losses may have occurred between then, but no certificate will be able to be issued until the next accounting period, so that anybody acquiring shares halfway through the financial year may be a winner or a loser.

The Chairman

Order. I regret having to interrupt the hon. Member, but he is wandering all over the Bill at the moment.

Sir T. Brinton

Dr. King, I was trying to show that, in relation to Amendment No. 291, by which we seek to exempt all companies, the sort of anomalies being created are neither worth while nor sensible, nor will they lead to efficient working, and it is in the light of that that I was drawing attention to the complications which have had to be introduced to meet some of the more obviously ridiculous features of the Bill. I am sorry if I appeared to be wandering from the Amendment, but I was giving an illustration of what this means and why we think companies should be excluded from the tax.

Taxation is already enough of a problem for the businessman. Far too many of his decisions are affected not by the direct relationship of efficiency, profit earnings, turnover, or productivity, but by the possible tax effects of it, and the bigger the businessman, the truer this becomes. Not long ago I was talking to a big businessman. He said that he spent half his time worrying about taxation, and he was indignant about suggestions made by hon. Gentlemen opposite that the effect of the investment allowances was not sufficiently taken into account by businessmen in deciding their business. I assure hon. Gentlemen opposite that that is not the case.

Mr. Edmund Dell (Birkenhead)

Surely these suggestions are not being made only from the Government benches? They are being made by the National Economic Development Council.

Sir T. Brinton

They were made from those beaches, as well. If we complicate investment decisions which have to be made by introducing a tax element at every point, we will distort the delicate mechanism of investment on which the progress of this country depends. If we make it so unattractive from a tax point of view to change the investment which an investment trust holds because it might incur liabilities for Capital Gains Tax, that institution will not fulfil the proper purpose which I am sure both sides of the Committee wish it to fulfil, namely, to reflect accurately the market opinion of the efficiency or inefficiency of the companies in which it invests its shares.

If these investments are to be governed as much by tax liability as by a proper appreciation of the prospects of development, or of failure to develop, we shall lose a valuable asset which we have at the moment. This tax, thrown into the company pool, probably producing a low yield in relation to the enormous amount of accountancy and worry that it will cause, and of doubtful economic benefit—in fact I suggest of definite economic dis- advantage as it will distort investment decisions—is a terrible mistake.

In equity, there is no case for it. It is double taxation, and surely the basic idea on which a Capital Gains Tax can be made acceptable to the people, including many on my side of the Committee, is that it is to redress the balance between the capitalist who can make money in capital gains by the possession of capital, and those who depend on income which is heavily taxed. Up to that point I am with hon. Gentlemen opposite. Beyond that point, if we introduce a tax, the intention of which is to bring Capital Gains Tax to bear at every possible point in the economy every time a transaction takes place within companies, outside companies, and within families, then I am not with hon. Gentlemen opposite.

I think that in what the Government have represented as an effort at social justice, they have introduced an appalling spanner into the works. In other words, they have gone about this whole business by monkeying about with future investment in this country with all the finesse of an all-in wrestler taking a pick-axe to a wrist watch.

Mr. Geoffrey Hirst (Shipley)

My hon. Friend the Member for Wycombe (Mr. John Hall) rightly made the point that we were coming to a departure in our tax system, and it is very important that that remark should have been made when considering this Amendment, because it has a fundamental effect in principle.

It is surprising that in a matter of this kind right hon. Gentlemen opposite have not been a little more cautious. There is a good deal of good will about the overall intention to have some form of long-term Capital Gains Tax. The great thing in this country is that people will take quite a lot provided they know that a thing is reasonably just. It is when they do not think it is just that the trouble starts.

A principle is at stake here, and my hon. Friend drew attention to it in his speech. In all the years that I have been here—and this is the seventeenth Finance Bill in which I have taken part—I have fought for one or two definite things. I am sure that I need hardly say that one of the things that I have fought against, and which is an anathema to me, is double taxation, or even a smell of it. Whatever the argument may be for trying to catch every miserable mouse in the country in the same trap, I do not think that it is any excuse for violating a principle as deep and profound as that under which we operate, by introducing double taxation. We will not get a dividend from it, because people can smell the injustice in it at every turn.

I think that my hon. Friend's mathematics are right. This is an important factor, and there is another point that I wish to underline. If there is a tax which, in the opinion of most people—and I think that such an opinion is a fairly reasonable denominator in this case—is becoming penal, one gets a sense of injustice. I am the first to admit this fact because I have had to talk once or twice, not so severely as this, but mildly, to my own Government about this when they have been in power. When the rate of taxation gets over the 50 per cent. margin—because a line has to be drawn somewhere—then, quite frankly, there is not only that sense of injustice, but a feeling of an attempt to avoid it and a sense of extravagance, based on the fact that, rather anonymously, the Government are paying most of the bill. We all pay for it in the end. The Government have no money, except what we give them. The element is there, with the result that it leads to expenditure which all goes into costs, into competition in our business and trading, which otherwise would not be there, and the people responsible for it are the members of the Executive, by putting this burden on the nation. I only ask them to think about this matter very seriously.

In departing on to a new tax they make a great mistake in thinking that they can get it right the first time. What a mistake, what an unholy mess this will be! Rates apart, as we cannot discuss them, why not try to be reasonable and give people the sense that there will be fairness in this matter? Then possibly there will not be a great deal of trouble. Otherwise, it will be unworkable because people will be given the idea that it should not be worked. If the Government are able to give them the idea that it should be worked and there is something wrong with double taxation, in my opinion they would meet any demand by the Government.

I do not know when the concessions are coming. There has been no sign of them. I hope that this item will produce the first of a shower of concessions of which we heard so much last night. This question of double taxation may be a small point in the debate, but by Jove, it is a big point in principle.

Mr. Hugh Fraser (Stafford and Stone)

I hope, with my hon. Friend the Member for Shipley (Mr. Hirst), that this will be the first opportunity for one of those glittering and golden concessions we have heard about. As my hon. Friend the Member for Kidderminster (Sir T. Brinton) said, the intentions of the Government in this matter are good. They wish above all to see that the national economy is advanced, but precisely because they bring in this sort of taxation they have to ring it about with all sorts of arrangements such as Clause 31 to see that it does not fall unfairly on those who are replacing assets.

As my hon. Friend the Member for Kidderminster said so well, this type of Clause, which is to mitigate the full effect of taxation both on companies and individuals, is a totally impracticable one. When we look at the other so-called concessions written into the Bill to mitigate the effect on unit trusts and investment trusts we see that much the simplest thing would be to accept the Amendment, which was so well put forward by my hon. Friend the Member for Wycombe (Mr. John Hall), so that the Chancellor may rid himself of the big difficulties which otherwise will be put not only on the Committee, but on those trying to run the business of the country.

Clause 31, in general, deals with replacement of business assets. The money so derived must be put into precisely the same sort of asset. Otherwise, one would be guilty of a capital gain. This is precisely the sort of thing which prevents the reorganisation and modernisation of a company. I now have something to do with company reorganisation. I assure hon. Members opposite that this proposal will cause immense difficulties in the reorganisation of companies where assets are not fully employed. Hon. Members opposite must remember that quite often shareholdings are local. In the process of time there is a constant shifting of investment. "King Cotton", which was the general description of the cotton industry before the 1914–18 war, now provides a minor investment in the country. It is precisely this type of taxation which makes it immensely difficult for companies to move their assets. It makes it immensely difficult for them to provide working capital by sales of assets.

All the way through the various helps which the Government seem to intend to give to industry they appear to fall into the sort of errors which are contained in Clause 31. That makes it difficult, if not almost impossible, for people to shift and to re-employ assets. I hope that the Chief Secretary will accept that, having set out on this effort to tax not just the individual where the final gains would accrue but the company and to impede companies in their activities, the best way out of the mess which the Government are creating would be to accept this Amendment.

4.45 p.m.

Mr. Harold Lever (Manchester, Cheetham)

The hon. Member for Wycombe (Mr. John Hall) said that it was the shareholders who gave life to a company and that they and not the company were being taxed. I do not want to enter into a metaphysical argument about the philosophy of companies and their shareholders, but of course it is not the shareholders who give life to a company. It is the State which gives the corporate entity life. The limited company is a thing created by the State. If we are to assess—[Interruption.] If anyone wishes to make an intervention which is audible and intelligible, I shall give way.

Hon. Members

Speak up.

The Chairman

Order. May I ask the hon. Member for Manchester, Cheetham (Mr. Harold Lever) if he will speak up, as it is difficult for the Committee and for the Official Reporters to hear what he says.

Mr. John Hall

I was able to hear the remarks of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) quite well from the Opposition Front Bench, although they may not have been so audible on the back benches. He said that the State gives the company life. It is true that the State provides the framework, but the shareholders have to breathe life into that framework.

Mr. George Y. Mackie (Caithness and Sutherland)

Is there not an analogy to be drawn from the fact that a child is registered by the State, but the State does not give the child life?

Mr. Lever

The analogy between a child and a limited company which seems so obvious to hon. Members opposite may not seem so obvious to those of us who have given a little time to analysing the situation which gives rise on the formation of a company. In fact company status and existence as a corporation is a fiction created by the power of the State upon one or more individuals banding together to form a commercial enterprise. This fiction causes certain benefits to accrue to those who participate under the rules provided by the State. It is in no way persuasive to argue that a company is nothing more than a compost of its shareholders.

The hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) was unwise to make an intervention in terms that too readily invite a reference to the infantile.

But there are other arguments which are not so obvious to me and which cannot be disposed of so easily. One is the question of double taxation. This is a term which is very often loosely used. I shall at once define the way in which I use it. That is applying the same tax twice to the same body of profits. That is double taxation and that is why Surtax is not double taxation of profits, because it is a different tax applied to the same body of profits. It is not double taxation at all but merely another tax applied because we wish to make taxation progressive. What is objectionable in double taxation—I am speaking only on my own behalf—is where the same tax is capriciously applied twice to the same body of profits.

If I may be allowed in an aside to correct my right hon. Friend the Chancellor, I believe that on Second Reading he appeared to be of opinion that Corporation Tax was a form of double taxation, anyway. That is not so. It is a different tax applied with Income Tax to the same body of profits. It is not double taxation because it is not the same tax applied to the same body of profits. I am sorry to be repetitive and apparently so pedantic, but it is important that we should know what we are talking about.

Very often a Chancellor is to be excused for not being meticulously equitable in the applications of his fiscal provisions because his main bent is to collect some revenue to pay for the running of the country so that we can enjoy battleships, schools and other amusements of modern society. But in the case of this tax the main motivation is to bring a sense of equity into the tax system and to give people the feeling that things are being more justly done.

It therefore follows that any argument, as to ethics or equity, about the consequence of a tax has a force, in relation to this tax, which must be especially moving to the Chancellor, and he cannot resist these arguments on the basis of pure ethics as he can resist arguments in relation to so many other taxes, by saying that what he is about is to practise a necessarily rough and ready method of raising revenue. The Government owe the Committee some explanation why they cannot do more to avoid double taxation, in the sense in which I define it, namely, the same tax applied twice to the same body of profit.

Since the Capital Gains Tax is not the sort of tax that I would have liked to see—which is a tax upon the ownership of capital, admittedly at an annual rate very different from 40 per cent.—but is a tax upon realised capital gains, why is it necessary to impose any tax at all upon capital gains which are retained by companies, since they are not realised in any true sense of the word? Such gains remain innocuously in these companies, whether or not they are expended in financing one or other aspects of the company's business.

Given the kind of provisions that exist in the other parts of the Bill, it means that a person cannot borrow from his company or obtain an indirect benefit from its assets. All these detailed measures are properly taken to ensure that companies' profits are retained without a shareholder being able to enjoy their benefit by way of loan or other indirect form of assistance. So long as these capital gains are retained in the hands of a company they are unrealised capital gains, according to my definition.

Secondly, as a matter of justice, could not any company be given an option? If the Chancellor cannot accept my argument that retained capital gains are not realised capital gains, cannot companies be given the option that if they realise a capital gain and pay it out to their shareholders the shareholders will bear the tax and the company will bear no tax, because it will immediately have paid to its shareholders the capital gain that it has realised? As the matter stands at present there is grave danger of multiple taxation. I do not know the way in which the hon. Member for Wycombe arrived at his 58 per cent. —

Mr. John Hall

It is very simple.

Mr. Lever

It may be simple, but simplicity and accuracy are not always bedmates.

I ask my hon. Friend the Chief Secretary, who is a man of great moderation, to tell us what objection there is to giving companies the option of unloading their capital gains upon their shareholders, willing or otherwise, so that they may be immediately assessed and therefore have a means of relief—not an ideal one, but a better one than is available under the existing proposals.

Secondly, I would very much value the opinion of so fair-minded and knowledgeable a man as the Chief Secretary on the question why we cannot treat the gains of companies as unrealised capital gains so long as they are retained by those companies for any purpose whatever other than for the benefit of their individual shareholders.

Mr. A. P. Costain (Folkestone and Hythe)

It is always interesting to follow the hon. Member for Manchester, Cheetham (Mr. Harold Lever), because we get the impression that he thinks very much as hon. Members on this side of the Committee think. Unfortunately, his feet do not follow his words. This is a question of double taxation, as the hon. Member has made quite clear. I would point out to the Chief Secretary that the first basis of taxation for the Chancellor to learn is that he can shear a sheep once a year, but if he skins it there is no more wool to collect.

This sort of taxation creates a lack of growth in companies. It presents boards of directors with a problem. They have to consider where their proper duty lies. If they are to sell assets to make capital profits, all well and good; we have been given previous examples by my hon. Friend the Member for Kidderminster (Sir T. Brinton) and my hon. Friend the Member for Wycombe (Mr. John Hall). In a progressive company the assets are being changed all the time, and if a company realises some of its assets for profit it becomes liable to taxation under the Clause. On the other hand, when a company's assets appreciate the shareholders themselves eventually become liable for tax. I object to the fact that the burden of taxation falls upon a shareholder most heavily when he realises his assets.

I put this point particularly to the Chief Secretary, because on many occasions shares are realised only when people really need money. Many shares are held by small shareholders, and have been so held for many years. It is only when such people really require cash, because of illness or bereavement, that they realise their assets. We are now to have this double taxation, which will be imposed at a time when it hurts most. Rich shareholders or corporations, who have no need to realise their shares, escape this form of taxation.

The Chief Secretary must make up his mind how he wants to collect this tax. Does he want it to be a progressive tax, which encourages initiative? I suggest that this sort of taxation does not achieve that object. This is a case in respect of which the concessions that we were promised late last night would be well justified. I am sure that the Chief Secretary wants to make progress with the Bill, and I suggest that he now has an opportunity to get on with the job by accepting the strength of my hon. Friend's arguments and saying that he agrees with them.

Mr. Barnett

I have a great deal of sympathy with some of the arguments put forward by hon. Members opposite, especially about companies which will have to pay tax on the replacement of fixed assets. Unfortunately, hon. Members opposite are in danger of overstating their case. If a company is replacing a fixed asset which at the moment is available for investment allowance or capital allowance, the balancing allowances and balancing charges which now exist mean that the company would not suffer in the way suggested. But in the case of the replacement of assets which are not available for capital allowances there is a case for my hon. Friend to consider the question of a concession.

I was interested in the argument presented by my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever). I cannot agree with him at all. In my opinion this is a mixed-up argument. I cannot accept the case that has been made that this is double taxation. Once we accept the premise that we will tax an increase in capital together with, and in the same way as, an increase in income, Corporation Tax should become payable on realised increase of capital in the same way as a realised increase in income. I cannot accept the argument that it is, therefore, double taxation on a shareholder in a company if he has to pay Capital Gains Tax when he realises the shares of that company.

I therefore do not accept the argument advanced by my hon. Friend the Member for Cheetham, that is to say, his definition of double taxation as the same tax twice on the same body of profits. I believe that my hon. Friend has not accepted the premise with which most hon. Members on this side of the Committee would start, that we wish to tax, in fairness to all taxpayers, increases in capital gains in the same way as increases in income. Once that premise is accepted I do not believe that there is any question of double taxation entering into this argument.

5.0 p.m.

Sir Douglas Glover (Ormskirk)

We have had a very interesting debate. I am sure that hon. Members on this side of the Committee must have been impressed by the arguments advanced by the hon. Member for Manchester, Cheetham (Mr. Harold Lever). I know that it may be a slow conversion, but what he has said will have impressed most hon. Members on this side.

My right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) referred slightingly to the great cotton textile industry which, in 1914, was the largest in the country, perhaps in the world, and suggested that today it is small beer. Compared with 1914 that is true, but during the last seven or eight years there has been vast reorganisation in the industry. If the provisions in this Clause had been in operation I doubt whether any of that reorganisation would have taken place. The fact that certain things were worth a certain amount would have had to be put on paper and would have shown a capital gain. If the capital gain had had to be paid out by the company I do not think the reorganisation would have been proceeded with.

What will happen if this Clause is accepted in an unamended form will be a stulification and a slowing down of the tempo of modernisation in industry. Where firms would have amalgamated, which would have meant disclosing gains, such amalgamation and rationalisation will not take place. If this Clause is un-amended it will mark the day when we in this country began to eat the seed corn. If it is only to be a tax on the money paid out to individuals and does not involve the industrial growth of the nation, I think that most people, although they might argue about the rates, would feel that there was something to be said for some form of tax on that sort of gain.

But if the industrial machine is to be involved, it will involve the Inland Revenue in the most awful headaches and the accountants in a great deal of paper work and computations. If anybody is anxious to make a capital gain the best thing for them to do will be to buy shares in paper-making concerns, whose production is bound to go up enormously in an effort to meet the Government requirements.

The right hon. Gentleman the Chief Secretary—he is not "right hon." but he ought to be, although he is very rarely right—is always listened to with a great deal of interest. Unlike a number of hon. Members opposite, the hon. Gentleman has a good deal of business experience. He has more experience of what I might call the accountancy side of business than of the actual industrial growth of companies, and so I hope that he will advise his colleagues that what we are discussing today is vital to the future of Britain.

Hon. Members on this side of the Committee are not being ideologically foolish. We are trying to persuade the Government to modify a Bill which, in all conscience, is complicated enough. It will take the Inland Revenue and the tax gatherers all their time to work out what is due from individuals, without having all the ramifications of companies with which to be concerned and which will overload the tax machine. There is the new Corporation Tax coming in. Surely it should be the object of the Government to try to keep this as simple as possible, which is what we ask.

We cannot escape the fact that if companies are included, there will be a definite form of double taxation on the disposal of a company asset when eventually it goes to the recipient shareholders. Had the assets not been realised to provide funds for the company, its shares would have been pushed up in value and payment would have been made on the price. Without doubt, it is a double payment on this operation.

I ask the Chief Secretary to look at this again before the Report stage. All the arguments have been in one direction whether they were made from one side of the Committee or the other. With the exception of the hon. Member for Cheetham, who contributed weightily to our discussions, this is about the first time that we have had two or three speakers inclining more to the view of hon. Members on this side of the Committee than to that of the Government. For these reasons I ask the Minister to have another look at this before the Report stage.

Mr. A. E. Cooper (Ilford, South)

I am surprised that the Chief Secretary should lend his support to this Clause, bearing in mind his long experience in industry. He knows perfectly well that the arguments adduced by hon. Members on this side of the Committee are irrefutable. This is the test of whether this Government wish to see the modernisation of British industry. I have heard it said that this Bill was intelligible in the original Hungarian, but that it has lost a lot in the translation.

We have to face the fact that in this Clause there are a number of new proposals. The Government have had second thoughts regarding later stages of the Bill and have brought forward all sorts of safeguards against the Clause, so that they must be very unhappy about it. This Clause represents a positive bar to the modernisation of British industry. It will take away the funds which companies will need to have in order to buy new plant and machinery or to erect new buildings, or even to acquire more land. When endeavouring to secure facilities from the bank, an industry will find itself in a parlous condition. The result will be that the directors will decide to "soldier on" with their existing plant and machinery.

Mr. Barnett

I am sure that the hon. Member wishes to be fair to the Committee. He will realise that a company which sells a piece of plant and makes a profit will be subject to a balancing charge and will pay Income Tax and Profits Tax upon it.

Mr. Cooper

I am aware of those considerations, but we are talking of different things. We are talking about taxation at a much higher level anyway, and about a situation where the sale of a particular asset, in order to attract any relief under Clause 31, must roughly be replaced by a new asset.

This will be a bar to the modernisation of industry, because in all sorts of industries there is a continuous scientific development. A standard process in 1965 may be superseded in 1970 by something entirely new. This sort of development will be stopped if the Government have their way with this Clause.

Let us take one very big industry which is situated particularly in Scotland, the linoleum industry. This industry has to have considerable capital investment. Over the years, and particularly in the last five or six years, there has been a movement away from the standard form of linoleum which we all knew in our younger days. The linoleum industry today makes an entirely different type of floor covering. They are slowly getting rid of the old plant, which cost them a good deal of money, but which today they may be able to sell at a higher price than they paid for it, for no other reason than that the price of metals has gone up in the interim and these plants are huge and the tonnage of metal is great. To replace this plant, they need plant which is completely different. By no argument could it be called the same type of plant as they are replacing. The net result will be that scientific development will not proceed at anything like the pace that it is at present.

It is quite wrong that this form of taxation should be imposed on industry at any time. It is even worse that it should be imposed at the present time when there is such a shortage of funds in companies and they cannot seek the resources which they need for development.

Mr. Frederic Harris (Croydon, North-West)

I shall keep the Committee for only a few moments. I think that my hon. Friend the Member for Ilford, South (Mr. Cooper) was wrong to assume that the Chief Secretary will automatically turn down this Amendment, especially with his background of accountancy. I go along with the hon. Member for Manchester, Cheetham (Mr. Harold Lever) in this matter. I have listened to every part of the discussion and there is no question that the mistake here is for the Chancellor, to save the capital tax arising, to tie the problem down to having to use capital appreciation to purchase an asset of a similar kind. Obviously, in all commerce, one is constantly broadening the base of one's business, and one turns to various moves which will be helpful to the company and its employees. One should be free to undertake those developments.

If the tax is tied with capital distribution only because of some capital gain which has been made by the company, this is the right move. I can say that we should go along with such a proposal. If I can myself declare a vested interest in this matter—because we were told yesterday several times to declare our interests—I am chairman and managing director of a public company which, years ago, sold a factory for a considerable sum of money and made a capital gain. Virtually all that money was ploughed back into the company for other further developments and it is now playing an important part in financing and handling exports from this country to certain under-developed countries. That would not have been possible if we had not been fortunate enough to make the money from the sale of these premises.

It seems to me entirely wrong that we or any similar company might be precluded from undertaking such beneficial moves—from the point of view of the country—of exporting overseas, merely because of the application of such a Capital Gains Tax as is now proposed.

Mr. Harold Lever

Is it not a fact that if the money retained is not reasonably required for the purposes of the business, we have the powers to compel a dividend from it, thus attracting Income Tax and Surtax?

Mr. Harris

I am not denying that. The hon. Member for Cheetham is an able accountant—

Mr. Lever

Barrister.

Mr. Harris

He is a barrister with a knowledge of accounts.

I appreciate his points, but I was instancing the case of a company which sells certain assets for the redeployment of its interests, to everyone's benefit. This seems a very sound move to encourage. However, if the company obtains unusual liquidity because it has disposed of certain of its assets, I then agree that there should be a Capital Gains Tax charged upon the distribution. This is the point, as I understand it, which the hon. Member for Cheetham was putting across to the Committee, and I am completely in agreement with him upon it.

5.15 p.m.

Sir Lionel Heald (Chertsey)

I am most anxious to follow your injunction, Dr. King, and keep the detailed arguments till later. I think that it would be appropriate, however, to make clear that there are a number of my right hon. and hon. Friends as well as myself who, if we were not to have the opportunity of dealing with these matters on more detailed lines, would wish to speak at this stage, because this is a fundamental point. I was delighted, though not surprised, to hear the hon. Member for Manchester, Cheetham (Mr. Harold Lever) express the view quite definitely that, in the practical sense of the word, double taxation is involved. I think that it is worth while reminding ourselves that, in the Report of the Royal Commission on the Taxation of Profits and Income, there was a very clear parting of the ways between the majority—a very large majority—and the minority of three, Mr. Kaldor, Mr. Woodcock and Mr. Bullock.

That minority definitely approved of double taxation, and said so. The majority did not. That was the cleavage between them. I take the view, as, I know, do a number of my right hon. and hon. Friends—we are delighted to know that some hon. Members on the Government benches take the view—that double taxation is being adopted here. Its ramifications and developments will be found as we go through the various Clauses. I think that sometimes the word "double" is somewhat misleading, that it is cumulative taxation in a sense. It is difficult to find proper language, but I hope that I did not misunderstand the hon. Member.

I should also remind the Chief Secretary of what was said by the majority in the Report and their general feeling about this type of tax: There was a danger that its general effect would be to tax a very large number of persons without the justification of any equitable design. I think that we are entitled to have now a full, clear, proper and logical answer from the Chief Secretary so that we may bear that in mind and make use of it for the purpose of getting the discussion on the right lines when we come to later Clauses. This is the fundamental approach to the whole matter.

In view of what you said, Dr. King, I do not think that I should develop this any further. There should not be the slightest doubt, however, that this is only a very general, preliminary discussion, and that the same arguments will have to be developed very much more fully later on.

Mr. David Webster (Weston-super-Mare)

I too have a great desire to agree. In view of what the Chancellor said at close of play last night about certain concessions and what the Prime Minister said during the election—that this Government were coming into office pledged to modernise our society and economy—I hope that this will be the first concession. Modernisation depends entirely on mobility of investment. In the case which my hon. Friend the Member for Ilford, South (Mr. Cooper) discussed—that of the linoleum factory which has to change its processes to keep up with modernisation and which sells its equipment as scrap in an inflationary period—that company will suffer as a result of any capital gain on a company. It is essential that companies should be able to shift investments and be thoroughly mobile in the form of modernisation.

My hon. Friend the Member for Croydon. North-West (Mr. Frederic Harris) referred to the company which moves its factory. One would wish also to consider the company which sells its factory, at the behest of the Government, in order to move it to a development district. If it makes a profit in so doing, it does it public-spiritedly, and it seems certain that it would be penalised. On all these grounds, I hope that this concession will be made, so that we can get the modernisation which we were told about at the election.

The Chief Secretary to the Treasury (Mr. John Diamond)

I have been invited to give a clear, precise, logical and, I imagine, persuasive answer. I will try to do as many of those things as are within me, but certainly I am conscious of the fact that there is a good deal of common ground between the two sides of the Committee.

In saying that I have in mind not only the remarks of my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), but the fact that several hon. Gentlemen opposite have said that some form of Capital Gains Tax is necessary—that it is wrong that those who earn their money by the sweat of their brow should pay large amounts of Income Tax while those who receive capital gains are not necessarily called upon to pay any tax at all. What I must try to do is to consider the Government's proposal and what would happen if the Amendment were accepted. It is against that general background that we must consider the Amendment.

I congratulate my hon. Friend the Member for Cheetham on the way in which he explained, with such clarity and persuasiveness, the fact that a company is really something totally different from an individual. This is a matter which he, as a lawyer of great experience, and as someone who speaks with great authority on these matters, knows full well. Anyone who thinks about the subject for more than two minutes must realise that what my hon. Friend said is certainly the case.

Sir Kenneth Pickthorn (Carlton)

I suggest that five minutes would be a more reasonable time.

Mr. Diamond

I did not quite understand the right hon. Gentleman's remarks.

Sir K. Pickthorn

I just thought that if the Chief Secretary had gone on for about five minutes, instead of stopping his process of thought at the end of two minutes, he would have found that the argument had come round again.

Mr. Diamond

I am not sure what bearing that has on the discussion. I stopped to allow the right hon. Gentleman time in which to elaborate on the intervention which he made from a sedentary position.

A company is, of course, a totally different entity and it is interesting that we should be still dwelling on this point, because what we are doing in the whole of the Corporation Tax—and I refer to it only in passing because I do not wish to stray out of order—is to introduce a scheme of taxation which recognises for the first time what has existed for a very long time; that a company is something totally different from its shareholders.

Unfortunately, we were in the position of having Income Tax first and companies second. When companies arose we tried to fit them into our preconceived ideas of the Income Tax system. It has been realised for a long time that this is a totally impracticable thing to do and that in our modern world we must have a tax system which takes account of the fact that a vast and increasing number of companies are being formed every day for carrying on business and for a number of other purposes. We are, of course, considering not exclusively companies which are carrying on business but corporations of other kinds.

I do not need to dwell on this aspect at length. I need not, to illustrate the difference between a company and an individual, go beyond saying—since one hon. Member spoke about the birth of a child in this context—that a shareholder can die but the company does on or that a company can be wound up, which is its legal death, but that the shareholder goes on. The shareholder may be a member of one body of people today and a totally different body of people tomorrow, or some of the shareholders might form one group of people today while tomorrow the group might be comprised of some of the present group and others.

When we come to consider close corporations I will be interested to hear if the Opposition will maintain that there is no difference between a company and its shareholders and that every company should, therefore, distribute to the hilt every penny it earns because that is the income of the shareholders, because it belongs to the shareholders, and that they should pay tax on it, just as a partnership does. In a partnership every partner pays tax on the basis that he has taken every penny of his share of the profits and has put them into his pocket. Even if 100 per cent. of it remains in the partnership's coffers, the same rule applies.

If hon. Gentlemen opposite want to say of companies, when dealing with close corporations, that the same arguments apply, I will be extremely interested to hear their remarks. But I realise that they will not say that. They are too intelligent. They realise as well as we do that there is a complete and utter distinction between a company and its shareholders. They are totally different things.

I come to the example given by the hon. Member for Wycombe (Mr. John Hall), who took for his example the figure of 40 per cent. Since this matter will arise throughout our discussion of the Corporation Tax, although it comes within the scope of the Capital Gains Tax part of the Bill, we should get the position clear. In introducing the Capital Gains Tax we are introducing a new system and not a new rate of taxation. A comparison in terms of rate is, therefore, that rate of Corporation Tax which, other things being equal, would produce the same revenue as is produced on like profits and income today under the existing system. That figure is 35 per cent. and no more. My right hon. Friend the Chancellor made this point perfectly clear. If one wants to talk about 40 per cent. one might as well talk about a different standard rate of Income Tax.

Several Hon. Members

rose—

Mr. Diamond

I will willingly give way shortly. I want the Committee to realise that we are talking about two totally different things. One is a change of one system of taxation for another. The other is an increase in the rate of taxation which produces increased revenue. This year, the following year or the year after that the Chancellor of the day—and let us be non-committal about this—will have the right to say, "I propose, in the circumstances of today, a rise of such-and-such". What we are now doing is to substitute a new method of taxation which, to produce the same revenue, requires a rate of 35 per cent. The Committee will understand why, throughout our proceedings—which may go on for a few days yet before we come completely to the end of the Bill—I will be referring to the figure of 35 per cent.

Mr. John Hall

I take up the narrow point of the rate of taxation which the Chief Secretary is discussing. I tried to make it clear in my opening remarks that I was ignoring the rate of 35 per cent. which will apply in the first year, because it is a special rate. I took the figure of 40 per cent., because that is the rate which was indicated by the Chancellor as the possible rate for the future. It was on that that I based my calculation.

Mr. Diamond

That is why I thought that the Committee would forgive me if I spent a little time making the point clear. My right hon. Friend the Chancellor mentioned the figure of 40 per cent.—I do not have his exact words at hand but they can be read in the OFFICIAL REPORT—in totally different circumstances. He spoke of 40 per cent. as being the rate beyond which he did not think the figure would be fixed next year. That was the figure, as far as he could see ahead, but it has nothing to do with the point we are discussing now.

To find a comparison between the Corporation Tax and Income Tax one must take a figure of not more than 35 per cent. because, on past information, we see that that figure would fully produce the same revenue as profits being taxed under the present system. Therefore, we are speaking about 35 per cent. and 30 per cent.—30 per cent. for the Capital Gains Tax and 35 per cent. for the Corporation Tax on companies' capital gains.

Mr. Frederic Harris

Did not the Chancellor in his Budget statement lead hon. Members and the country to believe that 40 per cent. was the sort of figure which he had in mind at that time? While we appreciate that it will not be until the next Budget—and goodness knows when that will be; it may be in a few months' time for all we know—that we will know precisely what the rate is, is not 40 per cent. the right figure on which to base our calculations? I assure the Chief Secretary that we in the business world would be delighted to know that it will be 35 per cent.

5.30 p.m.

Mr. Diamond

I am trying to be as helpful as I can, and I hope that I shall not bore the Committee by repeating what I have said. It is a very important point, and I, too, thought it worth making. What we are doing today is instituting a new form of taxation in place of an old form of taxation. If we are to compare like with like, as we all want to in this Chamber, we must take for Corporation Tax purposes a figure of 35 per cent. and no more, because that figure would fully yield as much as is yielded by existing rates of taxation under the existing system.

To answer the hon. Gentleman's point, my right hon. Friend the Chancellor of the Exchequer in his Budget Statement, referring to the rate, said: What I can say is that as I see it today there is every likelihood that the rate will not exceed 40 per cent. That is, next year. He also said with equal authority, though I do not have the quotation in front of me, that the figure that would produce the same revenue as is produced today under the existing system is 35 per cent. Therefore, let us be quite clear that if we compare like with like the figure is 35 per cent. —

Sir L. Heald

Just before the Chancellor of the Exchequer said that, he stated: Obviously, I cannot foretell today what the budgetary requirement will be next year and, therefore, I cannot say now the amount of tax which industry, like individuals, will be called on to pay. He then went on with the passage that the hon. Gentleman has quoted. Therefore, while it may be convenient for the hon. Gentleman's argument, I should think that the reality is that it is likely to be 40 per cent.

Mr. Diamond

I am grateful to the right hon. and learned Gentleman for interrupting me, because it gave me an opportunity to refer to what my right hon. Friend said immediately before that. He said: First, the rate. I have said before that it is not my intention to throw new burdens upon industry, but rather to redistribute the existing burden in a way more likely to meet the economic needs of the country. I have also said that a rate of 35 per cent. would bring in revenue equivalent to the combined yield of Income Tax at 8s. 3d. in the £ on undistributed profits and Profits Tax at 15 per cent. on total profits. That is the situation today."—[OFFICIAL REPORT, 6th April, 1965, Vol. 710, c. 256.] It could not be much clearer than that. It is extraordinary how hon. Members opposite react to a plain statement of fact that they have not thought of themselves—

Mr. Hugh Fraser

It is important to remember that the country has reacted to what is supposed to be a plain statement of fact by the Chancellor of the Exchequer by thinking of 40 per cent. What has been said today throws into fresh confusion what the right hon. Gentleman has said in the past. It is all very well for the hon. Gentleman to speak as he does, but there are two statements. One is that it will be not more than 40 per cent., but now the hon. Gentleman himself tells us that it will be not more than 35 per cent. We want this cleared up. No wonder the Government are falling into contempt amongst financial journalists.

Mr. Diamond

I do not know what the Committee would like me to do. I am happy to repeat the explanation ad nauseam. The right hon. Member for Stafford and Stone (Mr. Hugh Fraser) must have known that he was misquoting my right hon. Friend, because I have just referred to what my right hon. Friend said—

Mr. Fraser

He made a double statement.

Mr. Diamond

The Chanceller did not make a double statement.

Mr. Fraser

He did.

Mr. Diamond

If the right hon. Gentleman has not the intelligence to understand the difference between the two, I must leave it at that.

Mr. Raymond Gower (Barry)

If the Chancellor was able, as a result of careful assessment, to say that 35 per cent. would yield the same as the former rate of tax, why the need to refer to another and different rate of 40 per cent.?

Mr. Diamond

I am only too glad to answer that question. My right hon. Friend did so because he was being asked by everyone—it was alleged that there was great uncertainty about it—what rate people would have to pay next year. That was asked for the very good reason that people's accountants were saying, "We are already in the period earning the profits which may attract the new kind of tax. Therefore, how much, as sensible people, should we reserve?" My right hon. Friend said, "As sensible people you should reserve"—

Mr. Hugh Fraser

Forty per cent.

Mr. Diamond

He did not. It is a pity that the right hon. Gentleman keeps repeating what he knows to be untrue.

My right hon. Friend said not more than 40 per cent., in order to help people make the reserve in their books, and I repeat, like with like, this year. We are not talking of next year. Perhaps the right hon. Member can understand the difference between next year and this year—I doubt it, but I hope so. This year, we are talking about the comparison between 8s. 3d. and 15 per cent. yielding a figure which, under the new system, requires a rate of 35 per cent.

Mr. Hirst

If the hon. Gentleman will forgive my saying so, he is indulging in special pleading. The Chancellor of the Exchequer gave notice that he did not imagine that the rate next year would be more than 40 per cent., which is, in effect, an invitation to people in the City to work out their circumstances, not in the certainty—thank heavens!—but in the possibility. But as if we are now legislating forward, I think that the hon. Gentleman might apply himself to the example we have given and tell us what would be the case were the Chancellor's prognostications to prove wrong. We do not want just this special pleading, and making out that our instance is not valid because circumstances are different.

Mr. Diamond

I am trying to compare—

Mr. Hirst

That is not the point.

Mr. Diamond

How can the hon. Member for Shipley (Mr. Hirst) say that that is not the point when he has not heard what I am trying to compare? I am trying to compare Capital Gains Tax or Corporation Tax rate on a given gain, because that is what this Amendment is about—purely on whether a given gain should be taxed at Corporation Tax rates, or at the Capital Gains Tax rate of 30 per cent. That is the rate this year for Capital Gains Tax. I do not know—and this is my answer to the hon. Member—what the Capital Gains Tax rate will be next year. If we did, and if we knew what the Corporation Tax would be next year, we might start to compare like with like for next year.

But what we do know for a fact is that 30 per cent. is the Capital Gains Tax rate this year, and what we do know for a fact is that 35 per cent. is the Corporation Tax rate to yield the same amount as is being collected in other ways this year. The comparison there is between 35 per cent. and 30 per cent.—a difference of 5 per cent. Neither I nor anyone else will attempt to indicate what the difference will be next year. It could be a larger gap or a narrower gap, or both might move, or either might move, or both might not move—nobody knows. I think that that is a fairly cautious statement.

Mr. Harold Lever

Is my hon. Friend aware that there are some of us who wish that he would not try to make his explanation at a speed capable of absorption by the most obtuse members of the class?

Mr. Frederic Harris

If the Chief Secretary's argument is followed through, is the statement of my hon. Friend the Member for Wycombe (Mr. John Hall) that it is only a difference between 58 per cent. and 54½ per cent. correct?

Mr. Diamond

I am talking about the difference provided for in the Amendment between Corporation Tax rate and Capital Gains Tax rate, which is a difference of 5 per cent. That is the measure of the great damage that will be suffered, as we have been told by several hon. Members. How is the damage to be suffered? It is because, they say, capital gains will be taxed in the same way as income and profits are to be taxed. If profits were not taxed at the present rate, there would be more money left over for reinvestment. If capital gains were not taxed, there would be more money left over for reinvestment.

What I want to do, and what my right hon. Friend wants to do, is to help the whole industry by providing the lower rate of tax at that point at which business men ask, "How much is left over for investment, for ploughing back, for buying new plant, for factories and for development? How much is left?" Therefore, we are bringing in a Corporation Tax which will provide approximately 50 per cent. more than is provided under the present system so that all business men can say, "Now that I have made my profits and paid my tax, I have about 50 per cent. more available to invest in plant if I want to do that. If I want to distribute dividends, that is a different matter. If I want to invest in plant, I have 50 per cent. more available". It is that modernisation which we are introducing, but not one right hon. or hon. Member opposite ever seems to be aware of it or to pay proper attention to it. That is the real thing we are doing.

Mr. Eric Lubbock (Orpington)

I remind the Chief Secretary that that is not what he is saying to close companies.

Mr. Diamond

Perhaps you will forgive me saying, Mr. Grant-Ferris, that if I have the opportunity of catching your eye later this evening when we reach that Clause—it is only a few Clauses ahead—I hope to answer the hon. Gentleman fully.

Mr. John Hall

On a point of order. The Chief Secretary seems to be directing his arguments exclusively at the moment to the effect of the Corporation Tax. My hon. Friends and I in our remarks attempted to confine ourselves to the Amendment, which deals with Capital Gains Tax and the double taxation effect of that. If the debate is to be widened into the whole effect of Corporation Tax, may we be told, because we should like to continue on a widened debate on that matter.

The Temporary Chairman (Mr. Grant-Ferris)

No, I think that the debate cannot be widened. What the Chief Secretary is saying at present is in order on the Amendment.

Mr. Diamond

We are discussing whether, as the Bill provides, these gains should be treated as part of Corporation Tax or whether they should be treated separately. Therefore, I must deal with Corporation Tax. I have been asked why these are being assessed. I am explaining in reply to the debate and in reply to appeals from hon. Gentleman after hon. Gentleman—they, as business men, have appealed to me because of my knowledge of business, as they say—why the best thing that can be done to modernise business and give it the opportunity to develop is to reduce the level of taxation which bears on it before dividends are paid. We are reducing it in such a way as to leave 50 per cent. more available for reinvestment.

Because we are doing that, we have a new tax system which looks at companies only and says that a company is a different thing from the shareholders, whereas the whole of the argument which has been advanced by hon. Members opposite is that it is the same. We say that a company is a different thing from its shareholders. We therefore have a Corporation Tax. It cannot possibly be a Corporation Tax if one thinks for one second that a corporation and the individual are the same, because the essence of Corporation Tax is to separate the corporation and charge a rate of tax on its profits and to separate the individual who pays separate and different taxation. That is why I have explained to the Committee that with a Corporation Tax the other thing necessarily follows.

It is no longer a question of why should this be treated specially. What we are saying is that Corporation Tax applies to a corporation. It is the function of a company to make profits. It does not matter at all to the company whether it makes its profits by way of realising capital gains or by way of realising income gains. It does not make the slightest difference. Its function is to make profits.

Here is the complete answer in terms of simplicity, which hon. Members appeal to me for the whole time. Why have too complicated a calculation when all that a company is doing is seeking to increase itself, either by income or by capital gains? Calculate the total increase, and on that total increase one rate of tax is paid. What could be simpler for the business man?

I am therefore saying—this is my reply to my hon. Friend the Member for Cheetham—that one does not start with a kind of concept of what is being doubly taxed or what is not. One starts with the philosophy that this is a corporation—a company—which seeks to increase its profits one way or the other and it pays tax. There is one calculation of its total increase in wealth during the course of a given period.

Mr. George Y. Mackie) (Caithness and Sutherland

Is the Chief Secretary separating the company and its managers entirely and completely from the shareholders? If so, he is saying in effect that when the board meets to consider the 70 per cent. or 65 per cent., or whichever it may be, which is left it has no obligation whatsoever to pay money to the shareholders. Surely the whole structure of company finance would break down if this were the attitude.

Mr. Diamond

That is a separate issue to the Amendment. The short answer I will give straight away is that a company could distribute 51 per cent. under a Corporation Tax rate of 35 per cent. and still be in the same position as it is today with the present rate of taxation. It would not bear a single pennyworth of extra tax if it distributed as much as 51 per cent., which is a very full distribution indeed as compared with what most large companies do which are growing and which want to plough back. Therefore, it is all part and parcel of the system. It is an inevitable part of the system of a Corporation Tax. There is no distinction to be drawn between capital gains and income quoad a company. Hon. Members on both sides see the justice of having a tax on realised increases in capital, and that is why I regret to say that I cannot advise the Committee to accept the Amendments.

5.45 p.m.

Mr. Peter Walker

We welcome the Chief Secretary on one of his first appearances during the Finance Bill. We gather from what he has said that he is concentrating on the Corporation Tax. That may explain his very unsatisfactory reply this afternoon to the debate on Capital Gains Tax. We were surprised at the tremendous concentration of more than half his speech on an attempt to persuade the Committee that there was nothing to be considered in the 40 per cent. rate of tax. One can only presume that he is rather ashamed of the 40 per cent. rate of Corporation Tax. We hope that his remarks this afternoon mean that, should the Government introduce another Budget, Corporation Tax will be at 35 per cent.

As my hon. Friend the Member for Croydon, North-West (Mr. Frederic Harris) pointed out, the whole result of the Chief Secretary's argument using 35 per cent. instead of 40 per cent. is that the element of double taxation works out at 54½ per cent. instead of 58 per cent. We on this side of the Committee still say that this is very much too high. Many arguments have been propounded. The argument advanced by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) was not answered by the Chief Secretary.

I want to press upon the Chief Secretary the option suggested by the hon. Member for Cheetham. If in a private company a capital gain is made and the directors of the company and the shareholders in the company decide to distribute that gain immediately, is the Treasury willing for the individual shareholders alone to be charged the Capital Gains Tax on that capital gain? Or will the Treasury decide to tax it 35 per cent. within the company and then 30 per cent. to the individual?

There was no doubt from the Chief Secretary's reply that this is what he intends to do. I point out the basic injustice of this system, which the hon. Member for Cheetham rightly tried to emphasise. I ask the Committee to consider the cases of two men, each owning two grocer's shops. One owns them within a company. The other owns them directly as an individual. The one owning them as an individual sells one of his grocer's shops. Upon that he pays just 30 per cent. Capital Gains Tax. The other man owning the shops through a company sells one of his grocer's shops. He has paid 35 per cent. within the company and if ever he obtains the use of the money he then pays 30 per cent. as an individual. There is no justice whatsoever in this, and for the Chief Secretary to suggest—

Mr. Diamond

In point of fact what the shareholder pays is on any realised increase on the sale of his shares.

Mr. Walker

The Chief Secretary is now trying to get off this on a small technical point. [HON. MEMBERS: "No."] Let us suppose that the two shops were originally priced at £5,000 and they are now worth £10,000. He sells one within the company for £10,000 and on that £5,000 capital gain he will pay 35 per cent. Capital Gains Tax within the company. If he then distributes the balance left after that, that in turn will be taxed at 30 per cent. Is that so?

Mr. Diamond

The hon. Gentleman is talking about distribution. It will not be taxed at 30 per cent., but at 35 per cent.

Mr. Walker

The man sells within the company. Therefore, for the value that is left in the company and for the value of the remaining shop, the Chief Secretary will agree, he has paid double taxation and twice as much taxation as compared with the individual owner.

Mr. Diamond indicated dissent—

Mr. Lubbock

Will the hon. Member for Worcester (Mr. Peter Walker) consider the case where the shops are owned by a trust and there is a compulsory valuation every 10 years? Let us suppose that the shop is disposed of and 35 per cent. tax is paid by the company and immediately afterwards there is one of these 10-year valuations. The remaining 65 per cent. of the £5,000 is capital appreciation on the value of the shares and will attract tax immediately.

Mr. Walker

The hon. Member is absolutely right and I am surprised at the Chief Secretary endeavouring to defend this point. This is something which in principle is so wrong and so much against the fundamental principles of British taxation. This results from the fact that the Government have introduced the Capital Gains Tax in a tremendous hurry. They introduce the Finance Bill and within a few weeks expect us to go through the Committee stage when tax reforms of these dimensions should be considered in detail over a considerable period. I am certain that if any Government that respected the basic elements of justice in British taxation had considered this over a long period they would have accepted this Amendment or something like it. I recognise that there are certain snags in the Amendment on the broad issue. The reason is that it is impossible in detail to amend the Bill to meet the basic injustices of principle brought about by this Measure.

The Chief Secretary has been thoroughly unsatisfactory in meeting the issue and he has failed to meet several hon. Members on both sides of the Committee who have raised it. I ask the Committee to look at the complications that follow from this system of double taxation, the complications with charities, with superannuation funds investing in such companies, and the results from the fact that the people whom one wants to exempt from Capital Gains Tax will not be exempt because within the companies capital gain is constantly taking place.

My hon. Friends the Members for Ilford, South (Mr. Cooper), Kidderminster (Sir T. Brinton), Stafford and Stone (Mr. Hugh Fraser) Croydon, North-West, and Weston-Super-Mare (Mr. Webster) have all raised the basic point that if we want to modernise industry we must encourage the maximum mobility of capital. Let us suppose that a company goes to a development district and sells a factory in London and leases one in the development district. The company would normally use the proceeds from selling the factory on new plant and machinery and on everything that is going on in the development district, but then the Government come along and impose a 35 per cent. Capital Gains Tax.

Mr. Cooper

May I point out also to the Chief Secretary that in a number of these development districts one can only lease factories, one cannot buy them?

Mr. Hugh Fraser

Perhaps the Chief Secretary will now make clear that the Capital Gains Tax next year on companies will not be more than 40 per cent?

Mr. Walker

There are many other instances which we have quoted in addition to that of the development district. There is the instance of factories suffering from a fire and being paid up by fire insurance and not using the proceeds in the identical way that the money was formerly used. The whole social object, the incomes policy argument, for a Capital Gains Tax is that certain individuals benefit as a result of large capital

gains. We are perfectly prepared for the tax to apply whenever the individual benefits, but it is wrong and it complicates industry and is against the whole theme of the mobilisation of labour and it completely lacks the basic element of justice in British taxation for the tax to be imposed in the way proposed. It is for these reasons that I hope that my hon. and right hon. Friends will divide the Committee.

Question put, That "person" stand part of the Clause:—

The Committee divided: Ayes 199, Noes 186.

Division No. 129.]	AYES	[5.56 p.m.
Albu, Austen	Freeson, Reginald	Mapp, Charles
Allaun, Frank (Salford, E.)	Galpern, Sir Myer	Mason, Roy
Allen, Scholefield (Crewe)	Garrett, W. E.	Mellish, Robert
Armstrong, Ernest	Garrow, A.	Mendelson, J. J.
Atkinson, Norman	Ginsburg, David	Millan, Bruce
Barnett, Joel	Gourlay, Harry	Miller, Dr. M. S.
Baxter, William	Grey, Charles	Milne, Edward (Blyth)
Bence, Cyril	Griffiths, David (Bother Valley)	Monslow, Walter
Bennett, J. (Glasgow, Bridgeton)	Griffiths, Rt. Hn. James (Llanelly)	Morris, Charles (Openshaw)
Bishop, E. S.	Griffiths, Will (M'chester, Exchange)	Morris, John (Aberavon)
Blackburn, F.	Gunter, Rt. Hn. R. J.	Murray, Albert
Blenkinsop, Arthur	Hamilton, William (West Fife)	Neal, Harold
Boardman, H.	Hannan, William	Noel-Baker, Francis (Swindon)
Boston, T. G.	Hart, Mrs. Judith	Noel-Baker,Rt.Hn.Philip(Derby,S.)
Bowden, Rt. Hn. H. W. (Leics S.W.)	Hattersley, Roy	Norwood, Christopher
Braddock, Mrs. E. M.	Hazell, Bert	Ogden, Eric
Bray, Dr. Jeremy	Heffer, Eric S.	O'Malley, Brian
Brown, Hugh D. (Glasgow, Provan)	Henderson, Rt. Hn. Arthur	Orbach, Maurice
Brown, R. W. (Shoreditch & Fbury)	Herbison, Rt. Hn. Margaret	Orme, Stanley
Buchan, Norman (Renfrewshire, W.)	Hill, J. (Midlothian)	Oswald, Thomas
Buchanan, Richard	Hobden, Dennis (Brighton, K'town.)	Owen, Will
Butler, Herbert (Hackney, C.)	Holman, Percy	Page, Derek (King's Lynn)
Callaghan, Rt. Hn. James	Howarth, Robert L. (Bolton, E.)	Pannell, Rt. Hn. Charles
Carmichael, Neil	Howell, Denis (Small Heath)	Park, Trevor (Derbyshire, S.E.)
Carter-Jones, Lewis	Howie, W.	Pearson, Arthur (Pontypridd)
Castle, Rt. Hn. Barbara	Hoy, James	Peart, Rt. Hn. Fred
Chapman, Donald	Hughes, Cledwyn (Anglesey)	Pentland, Norman
Craddock, George (Bradford, S.)	Hughes, Emrys (S. Ayrshire)	Prentice, R. E.
Crawshaw, Richard	Hunter, Adam (Dunfermline)	Price, J. T. (Westhoughton)
Crossman, Rt. Hn. R. H. S.	Hunter, A. E. (Feltham)	Probert, Arthur
Cullen, Mrs. Alice	Hynd, John (Attercliffe)	Pursey, Cmdr. Harry
Dalyell, Tarn	Irvine, A. J, (Edge Hill)	Randall, Harry
Davies, G. Elfed (Rhondda, E.)	Irving, Sydney (Dartford)	Redhead, Edward
Davies, Harold (Leek)	Jones, Dan (Burnley)	Rees, Merlyn
Davies, S. O. (Merthyr)	Jones, J. Idwal (Wrexham)	Reynolds, G. W.
de Freitas, Sir Geoffrey	Jones, T. W. (Merioneth)	Richard, Ivor
Delargy, Hugh	Kelley, Richard	Roberts, Albert (Normanton)
Dell, Edmund	Kerr, Mrs. Anne (R'ter & Chatham)	Roberts, Goronwy (Caernarvon)
Dempsey, James	Kerr, Dr. David (W'worth, Central)	Robertson, John (Paisley)
Diamond, John	Lawson, George	Robinson, Rt. Hn.K.(St. Pancras,N.)
Doig, Peter	Lee, Rt. Hn. Frederick (Newton)	Rodgers, William (Stockton)
Driberg, Tom	Lee, Miss Jennie (Cannock)	Rose, Paul B.
Duffy, Dr. A. E. P.	Lever, Harold (Cheetham)	Ross, Rt. Hn. William
Dunn, James A.	Lever, L. M. (Ardwick)	Sheldon, Robert
Dunnett, Jack	Lewis, Arthur (West Ham, N.)	Shinwell, Rt. Hn. E.
Edelman, Maurice	Lewis, Ron (Carlisle)	Shore, Peter (Stepney)
Edwards, Rt. Hn. Ness (Caerphilly)	Lipton, Marcus	Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)
Edwards, Robert (Bilston)	McBride, Neil	Short, Mrs. Renée (W'hampton,N.E.)
English, Michael	MacColl, James	Silkin, John (Deptford)
Evans Ioan (Birmingham, Yardley)	MacDermot, Niall	Silkin, S. C. (Camberwell, Dulwich)
Fernyhough, E.	McGuire, Michael	Silverman, Julius (Aston)
Fletcher, Sir Eric (Islington, E.)	McKay, Mrs. Margaret	Slater, Mrs. Harriet (Stoke, N.)
Fletcher, Ted (Darlington)	Mackie, John (Enfield, E.)	Small, William
Fletcher, Raymond (Ilkeston)	McLeavy, Frank	Smith, Ellis (Stoke, S.)
Floud, Bernard	MacMillan, Malcolm	Snow, Julian
Foley, Maurice	MacPherson, Malcolm	Soskice, Rt. Hn. Sir Frank
Foot, Sir Dingle (Ipswich)	Mahon, Simon (Bootle)	Stones, William
Fraser, Rt. Hn. Tom (Hamilton)	Manuel, Archie	Strauss, Rt. Hn. G. R. (Vauxhall)
Summerskill, Hn. Dr. Shirley	Wallace, George	Winterbottom, R. E.
Swingler, Stephen	Weitzman, David	Woodburn, Rt. Hn. A.
Taylor, Bernard (Mansfield)	White, Mrs. Eirene	Woof, Robert
Thomas, George (Cardiff, W.)	Whitlock, William	Wyatt, Woodrow
Thomas, Iorwerth (Rhondda, W.)	Wilkins, W. A.	Zilliacus, K.
Tinn, James	Willey, Rt. Hn. Frederick
Urwin, T. W.	Williams, Alan (Swansea, W.)	TELLERS FOR THE AYES:
Wainwright, Edwin	Willis, George (Edinburgh,E.)	Mr. George Rogers and
Walden, Brian (All Saints)	Wilson, Rt. Hn. Harold (Huyton)	Mr. Harper.
Walker, Harold (Doncaster)	Wilson, William (Coventry, S.)
NOES
Agnew, Commander Sir Peter	Glover, Sir Douglas	More, Jasper
Allson, Michael (Barkston Ash)	Goodhew, Victor	Morrison, Charles (Devizes)
Allason, James (Hemel Hempstead)	Gower, Raymond	Mott-Radclyffe, Sir Charles
Anstruther-Gray, Rt. Hn. Sir W.	Grant, Anthony	Munro-Lucas-Tooth, Sir Hugh
Astor, John	Gresham Cooke, R.	Neave, Airey
Atkins, Humphrey	Griffiths, Peter (Smethwick)	Nicholls, Sir Harmar
Awdry, Daniel	Grimond, Rt. Hn. J.	Noble, Rt. Hn. Michael
Barber, Rt. Hn. Anthony	Gurden, Harold	Nugent, Rt. Hn. Sir Richard
Barlow, Sir John	Hall, John (Wycombe)	Onslow, Cranley
Batsford, Brian	Hamilton, Marquess of (Fermanagh)	Orr-Ewing, Sir Ian
Berry, Hn. Anthony	Hamilton, M. (Salisbury)	Osborn, John (Hallam)
Bessell, Peter	Harris, Frederic (Croydon, N.W.)	Osborne, Sir Cyril (Louth)
Biggs-Davison, John	Harvey, John (Walthamstow, E.)	Page, John (Harrow, W.)
Birch, Rt. Hn. Nigel	Harvie Anderson, Miss	Page, R. Graham (Crosby)
Black, Sir Cyril	Heald, Rt. Hn. Sir Lionel	Pearson, Sir Frank (Clitheroe)
Blaker, Peter	Heath, Rt. Hn. Edward	Percival, Ian
Bossom, Hn. Clive	Hendry, Forbes	Pitt, Dame Edith
Box, Donald	Hill, J. E. B. (S. Norfolk)	Pounder, Rafton
Boyd-Carpenter, Rt. Hn. J.	Hirst, Geoffrey	Powell, Rt. Hn. J. Enoch
Boyle, Rt. Hn. Sir Edward	Hooson, H. E.	Prior, J. M. L.
Brewis, John	Hopkins, Alan	Pym, Francis
Brinton, Sir Tatton	Hordern, Peter	Ramsden, Rt. Hn. James
Bromley-Davenport,Lt.-Col.Sir Walter	Hornsby-Smith, Rt. Hn. Dame P.	Redmayne, Rt. Hn. Sir Martin
Brooke, Rt. Hn. Henry	Howe, Geoffrey (Bebington)	Renton, Rt. Hn. Sir David
Bruce-Gardyne, J.	Hunt, John (Bromley)	Ridley, Hn. Nicholas
Bryan, Paul	Hutchison, Michael Clark	Robson Brown, Sir William
Buchanan-Smith, Alick	Iremonger, T. L.	Scott-Hopkins, James
Burden, F. A.	Irvine, Bryant Godman (Rye)	Sharples, Richard
Buxton, Ronald	Jenkin, Patrick (Woodford)	Smith, Dudley (Br'ntf'd & Chiswick)
Carlisle, Mark	Jennings, J. C.	Smyth, Rt. Hn. Brig. Sir John
Carr, Rt. Hn. Robert	Johnson Smith, G. (East Grinstead	Stainton, Keith
Chichester-Clark, R.	Johnston, Russell (Inverness)	Stanley, Hn. Richard
Clark, William (Nottingham, S.)	Jopling, Michael	Steel, David (Roxburgh)
Cooke, Robert	Kerby, Capt. Henry	Stodart, Anthony
Cooper, A. E.	Kerr, Sir Hamilton (Cambridge)	Stoddart-Scott, Col. Sir Malcolm
Cooper-Key, Sir Neill	Kilfedder, James A.	Studholme, Sir Henry
Costain, A. P.	King, Evelyn (Dorset, S.)	Summers, Sir Spencer
Craddock, Sir Beresford (Spelthorne)	Kirk, Peter	Taylor, Sir Charles (Eastbourne)
Crawley, Aidan	Kitson, Timothy	Taylor, Edward M. (G'gow.Cathcart)
Cunningham, Sir Knox	Lagden, Codfrey	Taylor, Frank (Moss Side)
Dalkeith, Earl of	Lambton, Viscount	Thatcher, Mrs. Margaret
Dance, James	Lancaster, Col. C. G.	Thompson, Sir Richard (Croydon,S.)
Davies, Dr. Wyndham (Perry Barr)	Langford-Holt, Sir John	Tiley, Arthur (Bradford, W.)
d'Avigdor-Goldsmid, Sir Henry	Legge-Bourke, Sir Harry	Turton, Rt. Hn. R. H.
Dean, Paul	Lloyd,Rt.Hn.Geoffrey(Sut'nC'dfield)	Tweedsmuir, Lady
Digby, Simon Wingfield	Lloyd, Rt. Hn. Selwyn (Wirral)	van Straubenzee, W. R.
Dodds-Parker, Douglas	Longbottom, Charles	Vaughan-Morgan, Rt. Hn. Sir John
Doughty, Charles	Loveys, Walter H.	Walder, David (High Peak)
Douglas-Home, Rt. Hn. Sir Alec	Lubbock, Eric	Walker, Peter (Worcester)
Emery, Peter	McAdden, Sir Stephen	Walker-Smith, Rt. Hn. Derek
Errington, Sir Eric	MacArthur, Ian	Walters, Dennis
Eyre, Reginald	Mackenzie, Alasdair (Ross&Crom'ty	Ward, Dame Irene
Farr, John	Mackie, George Y. (C'ness & S'land	Weatherill, Bernard
Fisher, Nigel	McMaster, Stanley	Webster, David
Fletcher-Cooke, Charles (Darwen)	McNair-Wilson, Patrick	Whitelaw, William
Fletcher-Cooke, Sir John (S'pton)	Maginnis, John E.	Williams, Sir Rolf Dudley (Exeter)
Fraser, Rt Hn Hugh(St'fford&Stone)	Marples, Rt. Hn. Ernest	Wills, Sir Gerald (Bridgwater)
Fraser, Ian (Plymouth, Sutton)	Maude, Angus	Wilson, Geoffrey (Truro)
Gammans, Lady	Maydon, Lt.-Cmdr. S. L. C.	Wise, A. R.
Gibson-Watt, David	Meyer, Sir Anthony	Wood, Rt. Hn. Richard
Giles, Rear-Admiral Morgan	Mills, Peter (Torrington)	TELLERS FOR THE NOES:
Gilmour, Ian (Norfolk, Central)	Mills, Stratton (Belfast, N.)	Mr. McLaren and
Gilmour, Sir John (East Fife)	Monro, Hector	Mr. R. W. Elliott.

Clause ordered to stand part of the Bill.