HC Deb 13 July 1966 vol 731 cc1650-65

19. Section 75 of the Finance Act 1965 shall not apply to any loan or advance made by a close company to any person accountable by law for the payment of any estate duty due by reason of the death of a deceased participator in the said company in respect of any shares or other interest in the said company beneficially held or enjoyed by such participator at, or at any time within five years immediately prior to, his death:

Provided that this subsection shall not apply unless the inspector is satisfied—

  1. (a) that the said loan or advance is made bona fide and for a full consideration for the purpose of paying such estate duty as aforesaid, and is duly applied in or towards the payment of such estate duty as aforesaid; and
  2. (b) that the said loan or advance is reasonably necessary in order to ensure the payment of such estate duty as aforesaid without imposing hardship on any individual beneficially entitled to any interest in the said company or in the estate of the said deceased participator;

and it is hereby declared that hardship within the meaning of this subsection shall be deemed to include the loss of control of the said company enjoyed whether by the said individual alone or with other participators by reason of the disposal of any shares or other interest in the said company in favour of any person or persons other than the said individual or such other participators.

The Chief Secretary, with those eagle eyes of his, will no doubt have picked out the fact that this Amendment appeared in almost the same words 12 months and one day ago, at that time in the name of my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd), to whom we owe the inspiration for the Amendment.

With that equally sharp memory of his, I have no doubt that the Chief Secretary will recall that, at the time, in replying to the Amendment moved on 12th July, 1965, he made some positively encouraging noises. In place of the customary growl and the occasional bark which we have learned to expect from him, we had a purr; indeed, it went further, because the Chief Secretary recognised explicitly the genuine hardship involved in the case which we are trying to amend. He indicated that the Government proposed to try and provide by their own means some workable scheme to deal with the case in point.

We have seen no Amendment brought forward by the Government to try and redress the injustice which we feel exists under the Finance Act, 1965. For that reason, we now move the Amendment and hope that we shall get an equally sympathetic response from the Government.

Hon. Members will no doubt remember that Section 75 of the Finance Act, 1965, makes close companies liable to Income Tax in respect of certain advances and loans. When a close company makes a loan or advance to a participator or associate, under Section 75 the company is treated as if it had paid a dividend which, after deduction of Income Tax, leaves the same amount as the loan in question. In other words, under Section 75, the loan which a close company might make has to be grossed up and an equivalent and proper proportion of it handed over to the Exchequer in taxation.

The effect of the provision is to treat a loan or advance by a close company to an associate or participator as a distribution and not as a cost item which is available to set against Corporation Tax.

The object of Section 75 of the earlier Act was anti-avoidance. It sought to stop a device by which a close company might avoid payment of tax by lending money to participators or associates on an indefinite basis or, perhaps, waiving repayment. It was designed to nip that way of distributing funds in the bud.

We do not want to argue the merits or demerits of that anti-avoidance Section, but we want to argue a special case in which a close company should be allowed to make a loan or advance to participators without incurring the necessity of paying the appropriate amount of tax to the Exchequer. This special case arises when the loan or advance is made in connection with death duties. I am sure that we shall be able to engage the attention of the House on what is essentially a human interest point which deals not with the cold jargon of tax measures but with a human need arising in the case of an unexpected death.

Without this concession in the Amendment, it is possible that the close company, on becoming liable, through one of its participators dying, to pay death duties, would have to wind up and sell its assets to get the necessary money for death duties, or it might be necessary for one of the partners in the close company to take into partnership, or to lose control to, other people with whom he had no wish to enter into partnership.

I should like to illustrate the point with facts and figures given to me by an accountant friend of mine concerning a death which occurred in 1965. The man who died was director and participator of a close company. He left to his two sons, who had come into the company and were working in it, shares in the close company worth £50,000 as valued for estate duty. He had outside the close company a free estate worth £10,000, making a total estate valued for estate duty purposes at £60,000, on which the duty payable was between £20,000 and £30,000. It was possible for the executors of the deceased to raise out of the free estate of £10,000 about £6,000 for the settlement of death duties. Part of the free estate consisted of a private house which the widow was left. That could not be sold over her head. There was, therefore, left a balance of £14,000 payable in death duties which could be raised only by realising shares in the close company or by borrowing from the close company.

Of the ways in which the extra money might be raised, it happened that the option of raising the money by selling shares in the close company or realising the whole of the close company assets to meet this extra sum due to the Inland Revenue caused real hardship. Apart from anything else, the fact that one has to sell shares in the close company to pay the residue of death duties involves one in extra Capital Gains Tax. It might involve the surviving partner or partners in a close company in losing control of the company by virtue of the fact that the executors of the deceased have to sell shares to some other interested party—for example, the Estate Duties Investment Trust.

1.0 a.m.

If, instead of having to sell assets of the close company it was possible for them to borrow out of the company, the loan be ng repayable over a period of time, simply for the purpose of topping up the residue of revenue out of the loan, everybody would be happy except the Government, under the provisions of Section 75 of the 1959 Finance Act, because under those provisions—which were anti-avoidance—not only would the executors have to raise the balance of, say, £14,000 extra death duty but would have to find another £10,000 in the form of a grossed-up loan, making about £25,000.

This would be a substantial extra sum, and it means that in order to pay death duties, if one is a participator in a close company, one has to pay the Revenue the net sum due on the estate and a net sum representing the grossed-up equivalent which Section 75 makes necessary, and the same sum would be paid to the same body.

This is totally unfair in the case of an occurrence like death, which is unavoidable and which often involves enough hardship already. We propose that in the case of a deceased participator in a close company the necessity to gross-up the loan from the close company should be dispensed with, in order to enable the death duty to be paid without hardship. I think that the Chief Secretary will agree that there are strong grounds in equity for preventing the hardship which may be involved where death occurs in this way. The right hon. Gentleman recognised this hardship last year, when he spoke on 12th July.

I would also point out that there are strong economic grounds why it is wrong for the Chancellor to insist on the grossing-up of loans in this way for the payment of death duty where a close company makes a loan to a participator, because it may force a perfectly profitable, live and satisfactory close company to go out of business. A small building business which was up against it already might be forced out of business in this way, and we do want that to happen. It could be argued that if the close company is able to make a loan without penalty to the executors of a deceased participator in the estate this has the effect of calling upon the reserves of the close company, possibly lodged at the bank in the shape of deposits, which will narrow the credit base of the economy and deflate it effectively by enabling the people to borrow out of close companies, whereas if it were necessary to sell the assets in the close company it could lead to some capital being released.

There is no. loss to the Revenue in this case. The Chancellor will not lose a penny. It simply prevents the paying of double tax to the same person. Admittedly one part can be paid back under Section 75, but there is a long time lag. The small close company which has to find practically double the amount of the loan in order to meet the tax requirement must find accommodation at the bank. In present circumstances of stringency this is very difficult.

On grounds of economy and equity the Chief Secretary should go the whole way—as he promised he would last year —and give us this humane concession on behalf of people who contribute to the economy of the country and ought not to be penalised.

Mr. Michael Shaw (Scarborough and Whitby)

I support the Amendment, which arises out of last year's legislation, but more generally because the incidence of Estate Duty is falling more and more heavily upon industry and its share, holders. There are many and varied instances of potential hardship. The Chief Secretary probably spent many happy and sometimes anxious hours advising his clients in former days how the incidence of Estate Duty could be minimised. But one piece of advice which our clients cannot follow is the advice to live for another five years.

There are many cases of calls for adjustments in businesses by way of Estate Duties. I am concerned not with the saving of the estate of the dead person, but with the living and with the business itself. The future of a company might be jeopardised, not through mismanagement but through the sudden demand for Estate Duty, because of the death of one of the main shareholders. This applies particularly to close companies and private family businesses, which have enough to put up with.

One often comes across examples of two kinds of case. One is that of a man with most of his wealth vested in the shares of a limited company which he built up. When he dies, there are few resources left apart from the shares. Either the shares have to be sold and the business jeopardised, or else the money has to be borrowed. With the present restrictions, probably the only place the money could be found would be in the business itself.

The object of the Amendment is not to relieve the beneficiaries from the liability to Estate Duty but to give them the chance to continue the business and the time to sort out the problem of paying the duty. In the old days, the money could be found from the business and arrangements made for the family to pay it back, and the company could continue for the benefit of the shareholders, the workpeople and the tradition it had built up.

I was interested to note last year that the right hon. Gentleman sympathised with the objectives of the Amendment. Like all these Amendments, it might need adjustments, but the intention is clear. I hope that he will accept it in that spirit, perhaps with alterations and the insertion of a period of years during which the advance should be repaid. I I am sure that we would agree to this. The main point of the Amendment is to see that a period of time is given to the beneficiaries by the advancement of money by the company—a period in which they can make adequate arrangements to settle the debt and to allow the business to continue.

Mr. A. G. F. Hall-Davis (Morecambe and Lonsdale)

I wish to speak for two or three minutes only to bring out one aspect of the problem. My hon. Friend the Member for Barkston Ash (Mr. Alison) has referred to the debates last year. It is not unfair to say that since those debates the Government have given the impression that they would not be sorry to see the steady elimination of small businesses such as those which the Amendment seeks to help continue as independent entities. If they do not wish to see them eliminated or their numbers drastically reduced, the Amendment gives them an opportunity to demonstrate their understanding of the difficulties which their recent legislation has placed in the way of the continued existence of these small independent companies.

For this type of business—the small close company—Estate Duty cannot be considered, and increasingly as the years go by will not be considered, in isolation without reference also to the impact of Capital Gains Tax, which will fall to be levied at the time of the death of the participator. The Amendment refers only to Estate Duty, but as the years go by it is likely that at the same time as Estate Duty has to be paid, a Capital Gains Tax will be levied as a result of the increase in the participator's investments from the basic date of 5th April, 1965.

I do not think that the effect of this on small private businesses has yet been fully appreciated. The Chief Secretary offers us many figures and I am sure that he will follow my example rapidly if it is accurate. Take a man whose business on 5th April, 1965 was worth £5,000. Some years go by, he dies and his share of the business is then worth £20,000. I calculate that the combined effect of Capital Gains Tax and Estate Duty would require a levy of £4,700 or about 23½ per cent. on the total estate. This is almost exactly the same percentage as the simple Estate Duty on an estate of £40,000. If there is an estate worth £40,000 which has not appreciated, it will pay just the same rate as the estate of a man who built up a business over the years to a value of £20,000, because percentagewise the effect of Capital Gains Tax and Estate Duty is as heavy proportionately for him as for someone with twice his estate.

We shall increasingly have to bear this in mind, if there are no amendments to financial legislation, and I suggest to the Chief Secretary that if on top of Estate Duty and Capital Gains Tax money has to be withdrawn from this type of business to pay Income Tax at the same time, there will be real difficulties, because these small businesses will find it very difficult to raise outside liquid resources to meet these dues. To impose on top the obligations of the 1965 Finance Act as it stands will make the continued existence of these businesses very unlikely.

1.15 a.m.

Mr. Diamond

The three hon. Gentlemen opposite who have spoken in support of the Amendment have made the difficulty that arises clear, and the hon. Member for Barkston Ash (Mr. Alison) said that while it was not usual for me to speak sympathetically, I had spoken with some sympathy on this topic a year ago.

First, one must consider the extent of the hardship which one is endeavouring to alleviate. Hon. Gentleman opposite have clarified the issue and the hon. Member for Barkston Ash referred to it as the need, with regard to an estate, to see that a person whose main wealth is his business, which is money tied up in shares and who has precious little else, has provision made so that money can be readily realised to meet the duties that arise, and the hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis) mentioned the increasing duties which would fall to be paid in the course of time.

The hon. Member for Barkston Ash was really pointing out that we are considering a difficulty which has very little to do with the Amendment but which is a common difficulty; that of paying Estate Duty when one has not made provision for it. He cited the case of an estate which was wholly unbalanced, so to speak, with, say, £50,000 in shares and £10,000 outside the shares, with a £4,000 to £6,000 house in which the widow lived and which, therefore, was not free, and £3,000 or £4,000 available to deal with the whole problem of Estate Duty, so that the other money was tied and was not easily realised capital.

I am grateful to the hon. Member for Barkston Ash for dealing with that problem because advice must be given many times for people to make preparation for circumstances of that sort. The solution, however, does not concern the method of drawing out a loan— and I will come to that shortly—without attracting liability to Corporation Tax, but of making provision so that there will be assets readily realisable for the payment of Estate Duty.

As I promised last year, I have kept this matter under review. No serious cases of hardship with which the Amendment is designed to deal have come forward. Certainly cases arise where there is a liability to pay Estate Duty on an estate and the money is not readily available. I am sure I shall get no sympathy for saying this, but in those cases the people concerned discuss the matter with the Estate Duty Office, which is comprised of sympathetic people; human beings who are anxious to help and who want to enable these estates to meet their Estate Duty liability without undue difficulty. After all, it is their job to collect the revenue, but not to cause undue hardship.

I did undertake to look at this matter, and I have done so. My information corresponds exactly with the example the hon. Member for Barkston Ash gave; that the hardship is not related to the Amendment but is a hardship which arises through there being an unbalanced estate, so to speak. The hon. Gentleman's proposal is unsatisfactory because it would enable a loan to be made which could, in due course, be written off without any charge to Corporation Tax arising, as a result of which the accumulated profits on that business could be siphoned off to the owners of the business without any charge to, and therefore avoiding, Surtax and Income Tax because it has not be treated as a distributions which, in the course of time, it turns out to have been. I am therefore afraid that it is wholly unacceptable in its present form.

I cannot help the House, as I would like to, by saying that there is another form which is wholly satisfactory. There is not. One has not been able to find one. We shall continue to keep the matter under review to see if a particular hardship arises of which we are not aware at the moment, which we can meet in a similar way and where we can provide a form of words that is reasonable, which does not go too wide, and which makes it possible to administer the law without too much difficulty. One has not found that solution, but the matter will be kept under review. Because the Amendment goes so wide—and I am sure that that was not the intention of the hon. Gentleman—because it does not meet the problem that has been expounded, and because the problem should be met entirely differently, I am afraid that I cannot recommend this Amendment to the House.

Mr. Patrick Jenkin

I am sure that the Chief Secretary will recognise that we on this side regard that as a very disappointing reply. My hon. Friends dwelt at some length on the case that could arise where a sudden and unexpected liability to pay Estate Duty—and I emphasise the word "unexpected"; these things cannot be planned, and people die accidentally can impose hardship where, perhaps, the sole asset of the estate is an interest in a close company. Having had some experience of the administration of the Estate Duty provisions by the Estate Duty Office, I think I can say that nobody ever heard of a case where the Estate Duty Office—particularly under Sections 46 and 55 of the 1940 Act, which imposed these very stringent Estate Duty provisions—drove a company into liquidation.

When the Chief Secretary said that the Estate Duty Office would deal with cases sympathetically, he was right—the Estate Duty Office does—but he must appreciate that under the close company provisions of last year's Finance Act an entirely new element has been introduced. My hon. Friends have described very clearly

Division No. 118] AYES [1.24 a.m.
Alison, Michael (Barkston Ash) Biffen, John Chichester-Clark, R.
Allason, James (Hemel Hempstead) Birch, Rt. Hn. Nigel Clark, Henry
Astor, John Blaker, Peter Clegg, Walter
Atkins, Humphrey (M't'n & m.d.n) Boyd-Carpenter, Rt. Hn. John Cooke, Robert
Awdry, Daniel Brinton, Sir Tatton Crawley, Aidan
Baker, W. H. K. Bromley-D ayenport, Lt.Col.Sir Walter Dalkeith, Earl of
Balniel, Lord Brown, Sir Edward (Bath) Dean, Paul (Somerset, N.)
Batsford, Brian Bruce-Gardyne, J. Deedes, Rt. Hn. W. F. (Ashford)

how the hardship can arise—a hardship which the right hon. Gentleman recognised when he replied last year to the debate opened by my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd).

The Chief Secretary now comes along, first of all, with his anodyne solution that everyone should be able to prepare for these things; that an estate should be well planned, that funds should be available, that this is the right way to deal with the matter, and that the Amendment is not necessary. Quite apart from the fact that that may be totally impracticable—and, as I have said, death can happen unexpectedly and people can be caught without any preparation—that solution does not help.

The right hon. Gentleman then says that the Amendment will not help because it offends against the whole principle of Corporation Tax and would give rise to substantial tax avoidance. The fact of the matter is that the company may be the only source from which funds are available for the payment of Estate Duty, and in such circumstances it is very harsh that the executors should have to incur—if they are to get the funds from the company—a substantial additional penalty when they take the funds in the form of a loan to pay taxation arising under a different head and payable to a different branch of the Inland Revenue.

This is something that the Government should look at again, and it is not good enough for the Chief Secretary just to say that no proper solution exists. I am sure that if the Government wanted to find a solution that would help these companies they could do so, and I can only advise my right hon. and hon. Friends to divide on this Amendment.

Question put, That those words be there inserted in the Bill:

The House divided: Ayes 93, Noes 155.

Dodds-Parker, Douglas Longden, Gilbert Powell, Rt. Hn. J. Enoch
Fortescue, Tim Loveys, W. H. Pym, Francis
Gilmour, Ian (Norfolk, C.) MacArthur, Ian Renton, Rt. Hn. Sir David
Glover, Sir Douglas Macleod, Rt. Hn. Iain Rossi, Hugh (Hornsey)
Glyn, Sir Richard Maddan, Martin Shaw, Michael (Sc'b'gh & Whitby)
Goodhart, Philip Marten, Neil Smith, John
Grant, Anthony Maxwell-Hyslop, R. J. Summers, Sir Spencer
Grant-Ferris, R. Mitchell, David (Basingstoke) Taylor,Edward M.(G'gow,Cathcart)
Gurden, Harold Monro, Hector Taylor, Frank (Moss Side)
Hall, John (Wycombe) Morrison, Charles (Devizes) Teeling, Sir William
Hall-Davis. A. G. F. Munro-Lucas-Tooth, Sir Hugh Thatcher, Mrs. Margaret
Harrison, Brian (Maldon) Murton, Oscar Turton, Rt. Hn. R. H.
Harrison, Col. Sir Harwood (Eye) Nabarro, Sir Gerald van Straubenzee, W. R.
Hawkins, Paul Nicholls, Sir Harmar Walker, Peter (Worcester)
Heseltine, Michael Noble, Rt. Hn. Walters, Dennis
Higgins, Terence L. Michael Nott, John Ward, Dame Irene
Hill, J. E. B. Orr, Capt. L. P. S. Weatherill, Bernard
Hunt, John Osborn, John (Hallam) Webster, David
Hutchison, Michael Clark Page, Graham (Crosby) Whitelaw, William
Jenkin, Patrick (Woodford) Pearson, Sir Frank (Clitheroe) Woodnutt, Mark
Joseph, Rt. Hn. Sir Keith Peel, John Wylie, N. R.
King, Evelyn (Dorset, S.) Pike, Miss Mervyn TELLERS FOR THE AYES:
Kitson, Timothy Pink, R. Bonner Mr. R. W. Elliott and
Knight, Mrs. Jill Pounder, Rafton Mr. Reginald Eyre.
Abse, Leo Griffiths, Will (Exchange) Murray, Albert
Allaun, Frank (Salford, E.) Hamilton, James (Bothwell) Newens, Stan
Alldritt, Walter Hamilton, William (Fife, W.) Noel-Baker, Francis (Swindon)
Archer, Peter Hamling, William Norwood, Christopher
Armstrong, Ernest Hannan, William Ogden, Eric
Bennett, James (G'gow, Bridgeton) Hattersley, Roy O'Malley, Brian
Bidwell, Sydney Hazel!, Bert Orem, Albert E.
Bishop, E. S. Heifer, Eric S. Orme, Stanley
Blackburn, F. Herbison, Rt. Hn. Margaret Oswald, Thomas
Booth, Albert Hobden, Dennis (Brighton, K'town) Parkyn, Brian (Bedford)
Boston, Terence Hooley, Frank Pentland, Norman
Braddock, Mrs. E. M. Howie, W. Perry, George H. (Nottingham, S.)
Bradley, Tom Hoy, James Price, Christopher (Perry Barr)
Brooks, Edwin Hughes, Emrys (Ayrshire, S.) Probert, Arthur
Brown, Hugh D. (G'gow, Proven) Hughes, Roy (Newport) Redhead, Edward
Brown,Bob(N'c'tle-upon-Tyne,W.) Hunter, Adam Reynolds, G. W.
Brown, R. W. (Shoreditch & F'burY) Hynd, John Rhodes, Geoffrey
Buchan, Norman Jackson, Colin (B'h'se & Spenb'gh) Richard, Ivor
Buchanan, Richard (G'gow, Sp'burn) Jackson, Peter M. (High Peak) Roberts, Gwilym (Bedfordshire, S.)
Butler, Mrs. Joyce (Wood Green) Jeger, George (Goole) Robertson, John (Paisley)
Cant, R. B. Jenkins, Hugh (Putney) Robinson W. 0. J. (Walth'stow E.)
Carmichael, Neil Johnston, Russell (Inverness) Rodgers, William (Stockton)
Carter-Jones, Lewis Jones, J. Idwai (Wrexham) Roebuck, Roy
Coe, Denis Judd, Frank Rose, Paul
Crawshaw, Richard Kelley, Richard Ross, Rt. Hn. William
Cullen, Mrs. Alice Kenyon, Clifford Rowlands, E. (Cardiff, N.)
Dalyell, Tam Kerr, Russell (Feltham) Ryan, John
Davidson, Arthur (Accrington) Lawson, George Sheldon, Robert
Davies, Dr. Ernest (Stretford) Leadbitter, Ted Shore, Peter (Stepney)
Davies, Harold (Leek) Ledger, Ron Silkin, John (Deptford)
Dewar, Donald Lestor, Miss Joan Slater, Joseph
Diamond, Rt. Hn. John Lever, Harold (Cheetham) Small, William
Dickens, James Lewis, Ron (Carlisle) Steele, Thomas(Dunbartonshire, W.)
Doig, Peter Lomas, Kenneth Summerskill, Hn. Dr. Shirley
Dunwoody, Mrs. Gwyneth (Exeter) Lubbock, Eric Thomas, George (Cardiff, W.)
Eadie, Alex Lyons, Edward (Bradford, E.) Urwin, T. W.
Edwards, Robert (Bilston) McBride, Neil Variey, Eric G.
English, Michael McCann, John Walden, Brian (All Saints)
Ensor, David MacDermot, Niall Walker, Harold (Doncaster)
Fletcher, Raymond (Ilkeston) McGuire, Michael Wallace, George
Floud, Bernard McKay, Mrs. Margaret Watkins, David (Consett)
Foley, Maurice Mackenzie, Gregor (Rutherglen) Wellbeloved, James
Foot, Michael (Ebbw Vale) Mackintosh, John P. Whitlock, William
Ford, Ben McMillan, Tom (Glasgow, C.) Willis, George (Edinburgh, E.)
Fowler, Gerry McNamara, J. Kevin Wilson, William (Coventry, S.)
Fraser, Rt. Hn. Tom (Hamilton) Mahon, Peter (Preston, S.) Winnick, David
Garrow, Alex Mahon, Simon (Bootle) Winstanley, Dr. M. P.
Gourlay, Harry Manuel, Archie Winterbottom, R. E.
Greenwood, Rt. Hn. Anthony Mapp, Charles Woodburn, Rt. Hn. A.
Gregory, Arnold Miller, Dr. M. S. Woof, Robert
Grey, Charles (Durham) Mitchell, R. C. (S'th'pton, Test) TELLERS FOR THE NOES:
Griffiths, David (Rother Valley) Morgan, Elysian (Cardiganshire) Mr. Joseph Harper and
Morris, Alfred (Wythenshawe) Mr. loan L. Evans


Amendments made: No. 65, in page 98, line 41, leave out from "period" to "after" in line 42.

No. 66, in line 45, leave out "so taken into account" and insert "to be taken into account as franked investment income or group income under paragraph (b)(i) of the said section 85(6)".

No. 67, in page 99, line 2, leave out from" period "to end of line 3.

No. 68, in line 8, at end insert" and shall be so ascertained whether or not the member is entitled to relief by reference to a three year surplus,".

No. 69, in line 13, at end insert: and (c) where the member itself is the beneficial owner of part of the ordinary share capital of a company which is another member of the group, or which is the member's subsidiary company, account shall be taken under paragraphs (a) and (b) above of the amendment of the said subsection (6)(b) made by sub-paragraph (1) of this paragraph, attributing under paragraph (a) above to the whole of any financial year any amount included by virtue of that amendment in that member's franked investment income or group income as the appropriate part of that other company's distributable profits of that financial year, or of any part of that financial year".—[Mr. Diamond.]

Mr. Patrick Jenkin

I beg to move Amendment No. 101, in page 100, line 28, at the end to insert: (6) Sub-paragraphs (1) to (5) above shall not operate so as to reduce the dividends received from that member taken into account under subsection (6)(d) of section 85 of the Finance Act 1965 to an amount which is less than any excess of the total income of that member for the three years to 5th April 1966 on which income tax was borne, calculated as for the said subsection (6)(d) after giving effect to sub-paragraph (2) of this paragraph, over the three year surplus of that member calculated in accordance with the said section 85 before applying such reduction thereto as is provided in paragraph 1 of this Schedule. I would defy any Member on either side of the House to explain to the Chief Secretary the effect of the Amendments we have just accepted, but if I were to say that they referred to the three-year surplus of income—the notional surplus which is a three-year surplus which we discussed on the Finance Act last year—that, of course, would explain everything.

This Amendment deals with exactly the same point, namely the three-year surplus. The three-year surplus is calculated as the excess of the dividends paid in the three years 1966–69 over the distributable profits in those years. But it has a ceiling. There is a ceiling imposed that the surplus must not be more than the grossed up equivalent of the tax actually paid during the three years before that, 1963–66.

That was the provision in Section 85 of the Finance Act, 1965. Paragraph 5 of Schedule 7 of this Bill introduces a new restriction and provides that in the last of these three years, 1965–66, the annual dividends which may be counted towards the limitation are the standard dividends, and that is a reference back to Section 83 of last year's Act which dealt with forestalling. That has the effect, therefore, of reducing the ceiling on the three-year surplus and therefore in effect making it less valuable. The effect of this is that it prevents, in the case of a group of companies, the parent company from getting the full benefit of the three-year surplus. This is a point I referred to in an argument I addressed to the Chief Secretary in an earlier debate this afternoon, because the assets of the subsidiary may have been entirely cleaned out by the payment of dividends last year and this may deprive the subsidiary of any chance of it getting the three-year surplus.

The purpose of the Amendment, which I will not attempt to explain in detail, is to right this injustice and to give the company the three-year surplus at any rate up to the level of its taxed income. The effect of the Amendment is once again to lift that ceiling in part.

We feel that this Amendment should be accepted as a measure of justice to relieve the rather harsh position which has been created by para. 5 of the Schedule. Since the whole of this position stems from the miscalculation for which the Government were responsible in last year's Finance Bill, it seems incumbent on them to do something to put the position right. This is a very small Amendment and it seems to me that it could perfectly well be accepted. I hope we can receive an encouraging reply.

Mr. Diamond

As the hon. Gentleman says, this is a fairly short point and perhaps I can deal with it shortly in reply. The Amendment, in effect, provides that if a subsidiary company has plenty of tax borne in the years 1963–66 more than it can use to cover the excess of its dividend of the last three years, the 1966–69 period, over the current income— it should be allowed by the 1965–66 dividend to pass up to the parent company the increased tax so that the parent can use it for itself.

The short answer, I am afraid, is that it was never the intention that the whole of the 1963–66 Income Tax borne by a group should be available in one way or another to the group to frank dividends of the Corporation Tax era. The intention was that the parent company should get relief measured by the normal dividends received by it from its subsidiary in those three years 1963–66, and that the subsidiary itself should get relief by reference to its income in those three years less the normal dividends. That is why paragraph 5(1) removes any forestalling element in the 1965–66 dividend from the reckoning of the parent's relief and leaves it to count for the subsidiary.

Therefore, sympathetic though I am to the point which the hon. Gentleman has made, I am afraid that this is not an Amendment which I can recommend to the House.

Amendment negatived.

Mr. Diamond

I beg to move Amendment No. 70, in page 100, line 28, at the end to insert:

Forward to