Clause 37.—(NON-RESIDENT COMPANY.) (Hansard, 31 May 1965)

§ Sir Eric Fletcher
I beg to move Amendment No. 151, in page 42, line 9, after "be", to insert "equal to".
This is really a minor drafting Amendment to remove a slight inelegance in this Clause. As the Clause stands, it provides that United Kingdom resident shareholders in a company which is not resident in the United Kingdom would be in a close company which would be charged on a proportionate part of the gains realised by the company.
Subsection (3) of the Clause defines the part on which United Kingdom resident shareholders shall be charged as that part which would be a proportion of the assets to which the shareholders would be entitled on the liquidation of the company. But the part on which the United Kingdom shareholders should be charged would be the proportionate part of the whole gain corresponding to the proportionate part of the assets of the company to which they would be entitled on liquidation. In other words, that part shall be equal to that proportion of the assets.

§ Mr. Norman Cole (Bedfordshire, South)
Since we appear to be concerned with correct English, is the Minister without Portfolio satisfied about the wording of subsection (3)? I was always taught that "That part" did not stand by itself. I know what it means, but I suggest it might well read, "That part referred to in subsection (2) shall be equal to, etc.".

§ Sir Eric Fletcher
I do not think that there is any ambiguity about this. "That part", in subsection (3), quite clearly refers to the part at the end of subsection (2), and I suggest that it would have been tautologous to have repeated it as the hon. Gentleman suggests.

§ Sir Eric Fletcher
I beg to move, Amendment No. 438, in page 42, line 12, at the end to insert: (4) If the part of a chargeable gain attributable to a person under subsection (2) of this section is less than one-twentieth, the said subsection (2) shall not apply to that person. The Committee will appreciate that Clause 37 is an anti-tax avoidance Clause. Since it was originally drafted, representations have been made by the Federation of British Industries and the Association of British Chambers of Commerce that the position of minority shareholders under the Clause as it stands would give rise to difficulties. We have considered that view with sympathy and consider it appropriate to meet the point which has been made on behalf of minority shareholders that this Clause shall not have any application in the case of persons holding fewer than one-twentieth of the shares in a company.
I hope that the Committee will accept this as a reasonable Amendment on behalf of a large number of shareholders.

§ Mr. Charles Fletcher-Cooke
Will the Minister without Portfolio explain why any minority shareholder should be liable in this case? It is difficult to discuss the Clause because we do not yet know how the definition of a close company will finally emerge, and we are given to understand that, one way or another, it may be very sharply amended by the time we reach it. But assuming that it remains as at present, why should a minority shareholder—not the man in control of the company, not a man with 1345 any connection with the control of the company—be subject in this way? I can well understand the misgivings of the chambers of commerce.
It seems agreeable but lacking logic to fix the minority shareholding at one-twentieth. Will the Minister explain why a minority shareholder should be caught and, when he does so, will he give some justification for the figure of one-twentieth, which seems to have been picked out of a hat?

§ Sir Eric Fletcher
It is obvious that a minority shareholder as such ought not to be penalised. The difficulty is to define what is a minority shareholder, and when he ceases to be a minority shareholder and becomes one of a group which controls the company.
The hon. and learned Member said quite rightly that we have not yet reached a discussion of the definition of a close company. We shall reach that in Clause 69 and subsequent Clauses. If the hon. and learned Member looks at Clause 73 he will find a somewhat similar provision for the apportionment of Surtax of a close company's income. In Clause 73(6) there is a definite provision that a minority shareholder shall not be charged to Surtax on income from a company if it amounts either to £100 or more, or to 5 per cent. or more of the amount the company has distributed. The figure of 5 per cent., which is the same as the one-twentieth which we are introducing into Clause 37, is not, as the hon. and learned Member suggested, a figure taken haphazardly or at random; it is chosen to bring it into line with the definition of close corporations in the latter part of the Bill, and it seems to us consistent with this provision.
Although one has to have a rough-and-ready test as to when a minority shareholder ceases to be a minority shareholder, we thought that it would be appropriate to fix it at 5 per cent., and in so doing we met the representations made to us by the Federation of British Industries and the Association of British Chambers of Commerce.

§ Mr. Charles Fletcher-Cooke
Why is not one-tenth or one-seventh or one-fifth a minority?

§ Sir Eric Fletcher
Why not equally say that 49 per cent. is a minority?

Hon. Members
It is.

Mr. Gresham Cooke
I confess that I have not made a study of the Clause, but I should like to ask the Minister two questions about it. If we have a nonresident company registered overseas and a capital gain accrues to that company, is it correct that a resident in this country has to pay Capital Gains Tax, even though the gain has not accrued to him? Does he pay tax even though he has not realised that gain? If so, is that fair?
Moreover, it appears to me that a resident of this country would not be able to charge losses against the capital gains which accrue to the non-resident company. If so, is that right? It seems an extraordinary state of affairs that a resident in this country should be caught by the Capital Gains Tax on something which has not accrued to him and, also, that he should not be able to set off his losses. Will the Minister explain the position?

§ Mr. Lubbock
On an earlier Amendment which we had put down to Clause 34, to insert a provision that capital gains accruing to a company were not to be chargeable again in the hands of the shareholder, the Chief Secretary said that, if a company made a capital gain from the disposal of an asset, this did not necessarily result in an equivalent change in the value of the shares in the hands of the shareholders, and one had to view these things quite separately. In this Clause, there is provision that a capital gain made by this particular type of company is to be treated as though it had accrued to the shareholders in proportion to their respective holdings.
What is the logic in it? In one Clause, the Government say that there is no connection between capital gains made by a company and those which ultimately accrue to shareholders, and in the other they say precisely the reverse.

§ Sir Eric Fletcher
There is no discrepancy between this Clause and Clause 34. Clause 37 is an anti-tax avoidance Clause. The Committee will 1347 appreciate that, in the ordinary way, liability for Capital Gains Tax is restricted to persons resident or ordinarily resident in the United Kingdom. If the tax is not to be widely avoided, it is esssential to provide against arrangements under which persons in this country set up companies resident abroad merely for the purpose of holding their assets, thus keeping them outside the scope of the Capital Gains Tax.
A device of that kind would be easy to organise and would lead to wholesale tax avoidance. The tax advantages would be quite obvious if persons were able to form companies nominally resident abroad as a channel through which they could operate and acquire capital gains over a period which would not attract tax at all.
I am sure that I have the whole Committee with me in our desire to close as many loopholes for tax avoidance as possible. That is what this Clause is designed to do. In answer to the hon. Member for Twickenham (Mr. Gresham Cooke), there is no conflict whatever with the provisions of Clause 34, which we have already passed.

Mr. Gresham Cooke
Will the Minister answer the point about setting off losses? Apparently, these arrangements are not allowed for setting off losses.

§ Sir Eric Fletcher
That is quite right. In an anti-tax avoidance Clause it is expressly provided that it would not be possible for the company to set off losses. Unless that were done, it would be the easiest thing in the world for a company to dispose of assets which produced a loss and retain assets which showed a gain, thereby deriving quite unjustifiable tax advantages.