ORDERS OF THE DAY (Hansard, 13 July 1966)

HC Deb 13 July 1966 vol 731 cc1467-686 1643

§ Mr. Speaker
I think that it will be for the convenience of the House if with Amendment No. 60 we discuss new Clause No. 5, "Corporation tax-loss relief", and Amendment No. 57, in page 79, line 40, at end to insert: 10.—(1) At the end of the first paragraph of paragraph 20(1) of Schedule 15 to the Finance Act 1965 there shall be added: Provided that the said section 20 of the Finance Act 1954 shall apply in relation to claims by a company for losses sustained in 1965–66 if the company is assessable for that year in respect of trading profits under the provisions of section 128 or section 129 of the Income Tax Act 1952. (2) In paragraph 20(1) of the said Schedule 15 after the words "so sustained, shall not" there shall be inserted the words "except as provided in sub-paragraph (1A) below", and at the end there shall be inserted:— (1A) For the purposes of section 341 of the Income Tax Act 1952 the amount of the loss which has been sustained in a trade in 1965–66 by a company which is within the charge to corporation tax in respect of the trade for the whole or part of that year shall he computed as if the allowances in respect of capital expenditure which fall to be given for a period under this Part of this Act were a trading expense incurred in the period".

§ Mr. MacDermot
Amendment No. 60 implements an undertaking given in Committee when we were discussing an Amendment moved by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin). Amendment No. 57, in his name and the names of some of his hon. Friends, is similar to that which we had in Committee. Amendment No. 60 is also designed to meet the point involved in new Clause No. 5, put down by the hon. Member for Shipley (Mr. Hirst) and his hon. Friends.
The points arise out of the transitional provisions on the changeover to Corporation Tax which, as they stand, do not allow a company to take capital allowances into account in determining the amount of loss in its trade in 1965–66 for the purpose of relief from Income Tax on its other income for that year.

1644

§ The Amendment removes that prohibition.

§ Amendment agreed to.

§ Mr. Patrick Jenkin
I beg to move Amendment No. 61, in page 82, line 29, at the end to insert: 17.—(1) Paragraph 5(b) of Schedule 18 to the Finance Act 1965 (associate of participator to include trustees of settlements of which the participator or a relative is the settlor) shall not apply to the trustees of any settlement which is

(a) a trust relating exclusively to a fund or scheme approved under section 379 or section 388 of the Income Tax Act 1952 (superannuation funds and retirement schemes) or to a scheme the whole of which is an "excepted provident fund or staff assurance scheme or other similar scheme" as defined in section 390 of that Act, or

(b) a trust exclusively for the benefit of the employees, or the employees and directors, of the company or their dependants (and not wholly or mainly for the benefit of directors or their relatives).

§ Mr. Speaker
I think that it will be convenient if with Amendment No. 61 the House discusses Amendment No. 118, in page 83, line 3, at end to insert: Provided that the words "and could not as a result of the operation of the trust become" shall not apply to any trust created before 3rd May 1966.

§ Mr. Patrick Jenkin
I shall try to deal with the point briefly, in view of the late ness of the hour, but in doing so I hope that nobody will think that it is unimportant. Amendment No. 61, like the Amendment moved by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) a short time ago, deals with close companies. It is concerned with the extended definition given to the concept of participator and of the associate of a participator.
I remind the House that all these provisions relating to close companies are anti-avoidance provisions. Therefore, we agree that it is right that they should be strictly—not to say stringently—drawn, in order to make sure that the Revenue is protected. But, at the same time, one must hold the balance and make sure that they are not so tightly drawn and restrictive as to interfere with perfectly legitimate arrangements and impose quite unreasonable penalties.
The concept of participator and associates in the extended definitions is designed, broadly, to bring under one roof, so to speak, those who might be regarded 1645 as within the family, that is, the relations and anyone who might reasonably be regarded as being within the influence of the main shareholder, the participator, so that it could be said that the shares would be held, and the policy exercised, in accordance with his wishes. But one must not strike so wide as to bring within the net shareholders who could not by any stretch of the imagination be held to he within the influence of the main shareholder, the participator.
The Government have gone some way to meet the arguments we put last year on paragraph 5 of Schedule 18 to the 1965 Act, but, unfortunately, they have not gone far enough. Paragraph 5 of Schedule 18 has three sub-paragraphs, (a) dealing with relatives—we have no point on that—(b) dealing with the trustees of a settlement where the participator or any relation of his, living or dead, was a settlor, and (c) dealing with trusts where the participator was a beneficiary.
The Government have dealt with subparagraph (c) and have taken out two obvious cases, the pension scheme and a trust for the benefit of employees, but for some obscure reason they have failed to make the same exceptions in relation to paragraph (b). It is to this that Amendment No. 61 is directed. It takes exactly the same exceptions, namely the pension fund and the employees' trust, out of the definitions, in order that such a trust holding shares in the company will not be lumped together with the participator so that they are all regarded as one.
If this is not done there will be ludicrous results. Consider the example of a pension fund set up many years ago by the founder of a business who was the present participator's grandfather. Under the definition, that grandfather was the settlor, but because he was the ancestor of the present shareholder and was at the same time the settlor of the trust, any shares in the company held by that pension fund have to be grouped together with those of someone who may be one of the proprietors of the business. If the result is to make the company a close company, all the penalties follow automatically.
If it is right to exclude such a trust or pension fund, which has to be set up and approved under the Income Tax Act, 1646 1952, under subparagraph (c), where the participator is a beneficiary, why is it not equally right if his grandfather happened to be the settlor? The distinction is completely illogical. There is no possibility of any greater influence being exercised in that case, and one might well argue that, because he is not a beneficiary, the influence might be less. The connection is very remote indeed.
Similarly with employees' trusts. Between the Committee stage and this Report stage, I was given a letter which dealt with the question of a co-partner-ship trust set up for the benefit of employees. I shall read an extract because it illustrates the point admirably: The company has been a co-partnership since 1951 when, after an experimental period of three years with a small scheme, the then director-shareholders set up trusts for the benefit of the employees and parted with control. Four directors survive and each still owns some shares (whose value is stripped to par for the benefit of the co-partnership's shares). The hardship alleged arises from close company status. The company becomes ' close because the co-partnership trusts' holdings are aggregated with those of their settlors (F.A. 1965 Schedule 18, Paragraph 5(b)). This is utterly ludicrous and strikes at the heart of an arrangement which I am sure both sides of the House would wish to encourage and see more widely spread. For this reason, we feel that there is a strong case in favour of the Amendment.
The purpose of the other Amendment is to void a minor retrospective effect which has come to light in practice. One might have a trust in existence for many years which contained a provision which could in certain circumstances, for instance on the termination of the trust, result in the participator owning more than the limit of 5 per cent. contained in the Schedule. The question of the participator perhaps becoming the owner of more than 5 per cent. of the shares in a trust has never been a relevant factor before. It became so only under last year's Act. It cannot be changed because such a trust might well be irrevocable, and so the company is caught simply because there is this residuary power.
It might well be right—I do not know; I will not argue the case now—that the words in brackets in the Schedule should be included in the case of new trusts, but it would impose an unreasonable 1647 burden and operate in a sense retrospectively to include it in the case of pre-Budget trusts. The Amendment is designed to take those trusts out of this provision.
I believe that there is a strong case for both Amendments. I hope very much that the Government will be able to meet us on the one that I have moved.

§ Mr. MacDermot
I can say at once that we have an open mind on the points raised in the Amendments. We could not accept the Amendments as they stand for there are objectionable features about them.
The point raised in the main Amendment was put to us recently, and we invited the body which did so to put before us examples of actual cases where, in a way that was thought to be objectionable, a company was turned into a close company by reason of these provisions when it otherwise would not be. So far one case has been put before us for consideration, and it is being considered. But it seems doubtful whether, even with an Amendment on these lines, there would be any difference; in other words, the company would still be a close company. We are perfectly willing to look into it, and, if there is a real mischief here to be avoided, see what is the appropriate way of dealing with it.
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) asked why in paragraph 17 of Schedule 4 of the Finance Bill we deal with only one of the two situations involving trusts in this field and not with the one where the trustees of the settlement were to be treated as the associates of the settlors. The answer is that the point that we were asked to consider last year and to which this Amendment was directed was a point solely in connection with the other case and not with this case. No arguments were addressed to this case last year and no instances were put before us. But I extend to the hon. Gentleman and other hon. Members our invitation: if any hon. Members know of cases of this kind which they think would support the argument, we will gladly consider them.
As I have said, there would be objectionable features in the Amendment as it stands in any event. Trusts with flexible terms are notorious as a means 1648 for retaining de facto control and one would need fairly stringent rules to prevent abuse if an Amendment of this kind were adopted. I would like to consider what the hon. Member has said about Amendment No. 118 and his suggestion of its having retrospective effect. That is a new suggestion that I should like to consider, although, again, there would be objections to accept the Amendment in its present form. I hope that the hon. Member will, in view of what I have said, be content to leave this matter over for a year.

§ 12.45 a.m.

§ Mr. Patrick Jenkin
If I may have leave of the House, I very much welcome the conciliatory approach on this by the Financial Secretary. I hope that he will look at the matter and, if necessary, introduce relief to operate retrospectively. But I must correct him on one point. I recollect my hon. Friend the Member for Belfast, North (Mr. Stratton Mills) making quite a short speech directed solely to the question of Schedule 18 (5,b) of the 1965 Finance Act. Certain Amendments were not selected during the proceedings on that Act, but, having heard the hon. and learned Gentleman, I beg to ask leave to withdraw the Amendment.

§ Amendment, by leave, withdrawn.

§ Mr. MacDermot
I beg to move Amendment No. 127, in page 83, line 3, at end to insert: (2) In applying sub-paragraph (I)(b) above any charitable trusts which may arise on the failure or determination of other trusts shall be disregarded.

§ Mr. Speaker
It would be convenient to discuss at the same time Amendment No. 62 standing in the name of the right hon. Member for Enfield, West (Mr. lain Macleod) and the names of his hon. Friends: In page 83, line 17, at end insert— (3) A trust shall be deemed to be exclusively for the benefit of the employees or the employees and directors of a company, within the meaning of this paragraph, notwithstanding that there may be a gift over to charity or that in certain circumstances the income or assets of the trust may be applied in or towards charitable purposes.

§ Mr. MacDermot
Amendment No. 127 assures that the benefit of the relaxation which the Bill provides in the application to employees' trusts of close company 1649 rules about associates shall not be lost merely because such a trust includes a gift made over to charity. It meets a specific point raised by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) when we were discussing a rather wider provision proposed in Committee by the hon. Member for Tiverton (Mr. Maxwell-Hyslop).
We do not go all the way to meet what the hon. Member for Tiverton asked for. I do not think that any cases have been put to us which would justify us going a.; far as that. But there is clearly force in the point which the hon. Member for Wanstead and Woodford asked us to meet and that is what we seek to do in this Amendment.
Mr. Maxwell-Hyslop: I am grateful to the hon. and learned Gentleman for going as far as he has, but I remain somewhat unclear about what the effects of the Amendment, taken without Amendment No. 62, would be. Where a trust is for the benefit of employees but the trustees have the right to make philanthropic payments to people not confined to the employees of the company without winding-up the original trust—without its being determined—is it covered or not? It is by no means clear whether the original trust exclusive to the benefit of employees has to be wound up or ended before the Amendment can come into effect.

§ Mr. MacDermot
Perhaps I may intervene to clarify this point. What the hon. Gentleman the Member for Tiverton (Mr. Maxwell-Hyslop) had been ask-for was an extension to the case where the charitable trust was for the benefit of the employees or a trust which was established for charitable purposes—in other words, general charitable purposes—from the start. It was this that we thought would be objectionable.
The specific point raised concerned a trust which was for the benefit of employees but with a residual power in the event of the trust being exhausted, with power to make a gift over to charity. It is to meet that situation that the Amendment is framed.

§ Mr. Maxwell-Hyslop
In other words, unfortunately, it does not go nearly as far as I should have liked. Unlike the 1650 Financial Secretary, not being a lawyer I am not sure what is meant by for the benefit of an employee". If a payment is made, for instance, directly for the benefit of an employee's son or daughter who may need assistance from the Fund, can that be construed as being for the benefit of the employee? That is not immediately clear to me. Even taking a generation the other way, if it is for the benefit of someone who is no longer an employee or who is the widowed mother of an employee, would that be covered?
This is going half-way from being exclusively for the benefit of an employee towards general philanthropic and charitable purposes. The type of trust which I have in mind was fairly widely drawn so that, in cases of hardship where financial philanthropy could provide relief, the trust deed did not prevent the trustees being able to afford it. That is why I asked the Financial Secretary for a rather wider drafting, when he came to look at it, than he has applied in the Amendment.

§ Amendment agreed to.

§ Mr. Michael Alison (Barkston Ash)
I beg to move Amendment No. 64, in page 83, line 31, at end insert:

1666

§ Mr. Deputy Speaker (Mr. Sydney Irving)
Perhaps it will be to the convenience of the House if, with this Amendment, we discuss Amendment No. 104, in Clause 28, page 30, line 20, at end insert: (6) In arriving at the amounts of profits tax and income tax to be taken into account under subsection 3(b) and (c) of section 85 of the Finance Act 1965, where the profits tax charged in respect of any income has been reduced because of a credit for foreign tax granted under section 348 of the Income Tax Act 1952 or under a double taxation agreement having effect by virtue of section 347 of the Income Tax Act 1952, the credit shall deemed to have been first applied in reducing the amount of income tax chargeable in respect of the income and accordingly the profits tax shall be deemed to have been paid to such extent.

§ Mr. Diamond
This Amendment is again self-evident. It adds a new Part II to Schedule 7 to include certain detailed technical provisions about the one year surplus relief. It reproduces the words of subsection (4) of Clause 28—the one-year surplus of life assurance companies —and makes provision for computing the calculation of the one-year surplus relief in any case where double taxation relief is concerned. Although the hour is late, 1667 I could go into the matter at greater length if hon. Members desired, but I believe the Amendment is self-evident.

Mr. Patrick Jeukin
In one sentence, the Chief Secretary has not fully explained to the House that this was a point which was pressed on him by my hon. Friend the Member for Portsmouth, Langstone (Mr. Ian Lloyd). He undertook to look at the argument, and he found that it was a good one. He has therefore brought the Amendment forward. For that. I suppose, we must be grateful.

§ Amendment agreed to.

§ Schedule 10.—(CAPITAL GAINS.)

§ Sir Hugh Lucas-Tooth (Hendon, South)
I beg to move Amendment No. 71, in page 104, line 45 to leave out from "occasion" to "if" in line 47 and insert: of the termination of the trusts of the settlement as respects any part of the settled property by the exercise of a power for that purpose contained in the settlement or of a statutory power of advancement or by the surrender of a life interest in such a part for the purpose of advancement". During the Committee stage of the Finance Bill last year I raised the question of how what is now Section 25(4) of the Finance Act applied to advances out of trust funds. The typical sort of case I had in mind was of a man who died leaving his property to his widow during her life and after her death to their children either equally or as she might appoint. Very often cases arise where the widow wishes to make over part of the trust fund to one of the children by way of advancement, and it seemed to me that any such advancement would attract Capital Gains Tax upon the whole fund as a result of the Bill as it then stood.
I put the point to the then Minister without Portfolio, and he replied: The hon. Baronet is wrong about that. No such liability would arise. I am advised that, if in the case supposed the trustees make an advance of a capital sum, that does not give rise to any charge for a Capital Gains Tax."—[OFFICIAL REPORT 26th May, 1965; Vol. 713 c. 702.] On Report, my hon. and learned Friend the Member for Darwen (Mr. Fletcher-Cooke) and I again raised the point, and we were told by the Financial Secretary: 1668 …an advance of the kind…. described would not be a determination of an interest so as to be an occasion of charge—."—[OFFICIAL REPORT, 7th July 1965; Vol. 715 c. 1723.] I was still dissatisfied with those answers, and I wrote to the Chief Secretary, pointing out that there were several ways of making an advance and asking him to give me an assurance that the answer we had received in the House was correct. I received the following letter from the Chief Secretary: We have been considering carefully the points which you make in your letter and I am now advised that an advance out of settled property in any of the three ways you mention would result in the termination of a life interest in part of a settled property. The assurances which Ministers gave during the discussion of the Finance Bill in the House of Commons nevertheless still hold good. As a matter of practice it will not be the intention of the Revenue that modest advances out of trust funds, which are made for the usual purposes such as defraying the cost of educating the beneficiary, should bring about a charge under Section 25(4) of the Act. That answer seemed to me to be both extraordinary and of considerable public interest, and I wrote to The Times which, with some wit, put the heading," Tax On Trust ".
As a result of that decision, I have no doubt that the Inland Revenue receives a deluge of inquiries on this matter and that that led to the Chancellor's statement in his Budget speech this year and to the first paragraph of Schedule 10 of the Bill. But this is still defective, and does not carry out the intention fully. The paragraph refers to advances made in exercise of a power.
Such words would be sufficient to cover the case where there is an express power in the trust, enabling an advance to be made, and also the case where an advance is made under the statutory power for that purpose which eixsts. But there are many cases where advances cannot satisfactorily be made under a power. It may be, and often is, that there is no express power in the trust and the statutory power enables only half the expected share to be advanced. There are many cases in which an advance is made by the surrender of the life interest—the mothers' life interest in the example I gave—in part of the trust fund in order to enable the child to receive the whole immediately.
1669 The purpose of the Amendment is to rectify that defect. Unfortunately, it was not selected when the matter came before us in Committee, but I hope that we shall now be told that the Government accept it.

§ 1.45 a.m.

§ Mr. MacDermot
The House is indebted to the hon. Gentleman for bringing this matter forward and for the clear way in which he has explained it. On one reading of the wording as it stands, there is a possible ambiguity. The Amendment spells out in great detail what v, as our intention, and I am happy to adv se the House to accept it.

§ Amendment agreed to.

Mr. MacDerrnot
I beg to move Amendment No. 73, in page 106, line 50, at the end to insert:

§ Mr. John Hall (Wycombe)
In expressing our appreciation for this Amendment, which fulfils a promise made in the Committee, as the Financial Secretary said, I wish to clarify a sentence in the OFFICIAL REPORT Of Our proceedings in Committee. Without clarification, it may not be understood. My words were these: Mr. Irving, you will forgive me this sign of weakness…" —[OFFICIAL REPORT, 22nd June, 1966; Vol. 730, c 855] In the absence of an illustrated HANSARD, it is not clear that I had my handkerchief before my eyes, which were streaming with tears of happiness because this was the fourth concession which we had 1670 wrung from the Government that day. We are delighted that it is now enshrined in this Amendment.

§ Amendment agreed to.

§ Mr. MacDermot
I beg to move, Amendment No. 74, in page 107, line 18, to leave out" in "and to insert: at any time not later than the end of". At the risk of provoking another flood of tears from the hon. Member for Wycombe (Mr. John Hall), I recommend acceptance of this and the immediately following group of five Amendments., which are designed to meet a number of points put to us by the Opposition and others.

§ Amendment agreed to.

§ Further Amendments made:

§ In line 20, after "or", insert "of".

§ In line 23, after "Kingdom", insert "or elsewhere".

§ In line 27, leave out "in" and insert: at any time not later than the end of".

§ In line 36, leave out "after" and insert: (whether that day fell before

§ In line 37, after "effect", insert "or later)".—[Mr. MacDermot.]