Commons Sitting of 21 June 1966

Preamble
The House met at half-past Two o'clock
PRAYERS
[Mr. SPEAKER in the Chair]
MESSAGE FROM THE QUEEN

  INCOME TAX
  The VICE-CHAMBERLAIN OF THE HOUSEHOLD reported Her Majesty's Answer to the Address, as follows:
  I have received your Address praying that on the ratification by the Government of the Kingdom of Sweden of the Protocol set out in the Schedule to the Order entitled the Double Taxation Relief (Taxes on Income) (Sweden) Order 1966, a Draft of which was laid before your House, an Order may be made in the form of that Draft.
  I will comply with your request.

PRIVATE BUSINESS
  BRADFORD CATHEDRAL AND CHURCHYARD BILL [Lords']
  Read the Third time and passed, without Amendment.
  LEEDS CORPORATION BILL
  Read the Third time and passed.
LOUGHBOROUGH UNIVERSITY OF TECHNOLOGY BILL [Lords]
  UNIVERSITY OF SURREY BILL [Lords]
  Read the Third time and passed, with Amendments.
LONDON TRANSPORT BILL
  SAINT MARY, EALING BILL
  As amended, considered; to be read the Third time.
  MERSEY DOCKS AND HARBOUR BOARD (SEAFORTH WORKS) BILL [Lords]
  To be read a Second time Tomorrow.
SCOTTISH UNION AND NATIONAL INSURANCE COMPANY BILL [Lords]
  HUYTON-WITH-ROBY URBAN DISTRICT COUNCIL BILL [Lords]
  Read a Second time and committed.
PETITION

  Rhodesia
  Mr. Wall: I beg to ask leave to present a Petition to this honourable House on behalf of the officers of the Congress National Union of Rhodesia. The Petition states:
  "That we Rhodesian Africans, whether by birth or adoption, do solemnly protest against the imposition of sanctions by the British Parliament and the world in general as it is resulting in great suffering to the African community increasing the already grave unemployment problem."
  The Petitioners pray that the economic sanctions against their country be ended.
  The Petition is signed by Mr. J. J. Rice, the president, and eleven officers of the union. Associated with the Petition, couched in slightly different terms, are, I am informed, the names of some 200,000 Rhodesian Africans which, I understand, the union has collected during the past six months.
  The Petition ends:
  "'… your Petitioners as in duty bound, will ever pray".
  To lie upon the Table.

ORAL ANSWERS TO QUESTIONS
  MINISTRY OF POWER

    National Fuel Policy
    1 and 2. Mr. William Hamiltonasked the Minister of Power (1) what progress he has made with his reassessment of national fuel policy in the light of recent developments;
    (2) if he will now make a further statement on the effects of recent discoveries of natural gas on the future of the coal industry.
    Mr. Albert Robertsasked the Minister of Power what are the likely energy requirements of Great Britain in coal

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    equivalent by 1970; and from what sources they will be satisfied.
    Mr. Nottasked the Minister of Power what is the result of his review of the effect the discovery of natural gas in the North Sea will have on the requirements for coal as outlined in the National Plan and the White Paper on Fuel Policy, October 1965, Command Paper No. 2798.
    Mr. Stratton Millsasked the Minister of Power if he will publish a revised White Paper on Fuel Policy.
    30 and 31. Mr. Biffenasked the Minister of Power (1) what proposals he has to revise the energy statistics contained in Chapter II of the National Plan;
    (2) what proportion of estimated inland fuel demand in the United Kingdom in 1970 is expected to be supplied by natural gas.
    Sir G. Nabarroasked the Minister of Power what estimate he has made of the impact of North Sea gas production upon the output of coal and mining manpower.
    Mr. R. W. Elliottasked the Minister of Power if he will now estimate the effects of the discovery of natural gas on the coal industry; and to what extent the requirements for coal envisaged in the National Plan will now need to be revised
    The Minister of Power (Mr. Richard Marsh): I have nothing to add to the reply I gave to my hon. Friend the Member for Bristol Central (Mr. Palmer) and the right hon. Member for Sutton Cold-field (Mr. Geoffrey Lloyd) on 24th May.
    Mr. Hamilton: Does my right hon. Friend think that there is any validity now in the figures in the White Paper on Fuel Policy as it was originally presented to the House? In view of the increasing exodus of miners from the industry, will he say whether he will consider making regular statements to the House about the prospects for the coal industry in view of recent developments in the North Sea?
    Mr. Marsh: There is a great deal of validity still in the original White Paper. As far as the prospects for coal miners are concerned, it cannot be said too often that one of our problems is a shortage of
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    coalminers and not too many of them. That is not attributable to developments in the North Sea but arises out of a system of full employment.
    Sir G. Nabarro: Would not the right hon. Gentleman concur that whereas North Sea gas can make an inestimable contribution to our national resources, it would be a grave mistake to allow the coal industry to run down further, especially where economic production from highly productive pits is concerned?
    Mr. Marsh: I am grateful to the hon. Gentleman. There are no factors or figures which lead one to suppose that the country will be able to dispense with its very large coalmining industry. North Sea gas is not an alternative. We want more coalminers.
    Mr. Elliott: Is the right hon. Gentleman now suggesting that the target of 180 million tons set out in the National Plan is too high? Does he appreciate that in the north-east of England, where coalmining is still a principal employment industry, it is necessary to revise that quantity?
    Mr. Marsh: May I make the point, first of all, that the figures in the Plan are estimates and not targets? I can only repeat that it is the Government's intention to maintain a viable coalmining industry. Work has been started on a review of fuel policy, and that is going ahead with full speed. But the problems are very complex, wide-ranging and long-term.
    Mr. Biffen: Is the right hon. Gentleman aware that at Question Time on 12th May his hon. Friend the Minister of State for Economic Affairs told me that the Government still stood by the figures for the coal industry contained in the National Plan? Is that also the view of the right hon. Gentleman?
    Mr. Marsh: It is far too soon to say at the moment what the outcome of the review of fuel policy will be in relation to the National Plan. The Government are still working to it.
    Mr. Hamilton: Can my right hon. Friend say what time schedule he has in mind for the production of the revised version of the fuel plan?
    Mr. Marsh: I would like to make a statement on the whole question of North Sea gas in the very near future. One cannot fix a firm time limit for the review of fuel policy. There is a great deal of work to be done. It is a complex issue, which will take a few months.
    Mr. Lubbock: Does not the right hon. Gentleman agree that four years is far too short a period on which to base a national plan for energy requirements? The White Paper on Fuel Policy was based, in the main, on capital decisions already made. Will he institute work to produce a White Paper for a ten-year fuel policy instead of a four-year policy?
    Mr. Marsh: With the enormous amounts of capital involved in the construction of such things as nuclear power stations, one has to look a long way ahead. One has to have a series of points within any policy to enable one to judge that far. We will go as far as we can. In the short term, within the period up to, say, 1970, one would obviously have a more accurate picture than in the longer term.
    Mr. Barber: Whilst appreciating the right hon. Gentleman's difficulties, will he not agree that the estimates set out in the While Paper published last October were based, first of all, on a growing economy, whereas since then there has been virtually no increase in industrial production; and, secondly, in the White Paper no allowance was made for the developments concerning natural gas? Will he assure the House that the revised White Paper will not be held up until he has received the report of his new economic adviser, who I understand was appointed only yesterday?
    Mr. Marsh: Speaking for myself, I am not too enthusiastic about more White Papers on the subject. One wants to have a longer-term estimate, and clearly the previous White Paper did not take into account North Sea gas because no one knew then and no one knows now what the full potentialities are. They will become apparent, and one would hope for a policy which took them into account. It would be a mistake to believe that anything that has happened in the North Sea completely invalidates the White Paper.

    North Sea Drilling Operations (Licences)
    Mr. Hector Hughesasked the Minister of Power if he will state the terms of the licences granted by him to persons or companies drilling for oil or gas in the North Sea relating to laying by them of oil and gas mains designed to carry oil and gas ashore, indicating the nature and foundations of the bed of such mains, their depth beneath the sea and provisions to protect shipping and fishing gear from danger caused thereby.
    The Parliamentary Secretary to the Ministry of Power (Dr. Jeremy Bray): These licences contain no terms relating specifically to the laying of oil and gas mains but do require that the licensee shall not carry out any operations in such manner as to interfere unjustifiably with navigation or fishing. Licensees must also comply with the provisions of the Coast Protection Act, 1949, and, for pipelines within territorial waters, with the provisions of the Pipelines Act, 1962. The pipeline to be laid for the British Petroleum Company will be buried at depths of between 4 and 10 ft. below the sea bed.
    Mr. Hughes: Does the Minister realise that fish are sensitive and fastidious creatures? These novel oil rigs are in use and it would be a disaster, not only for the fishing industry but also for the fish-consuming public, if fish were driven from the North Sea in shoals. Does he not agree, therefore, that it is his duty to adopt protective measures in order to ensure that that does not occur?
    Dr. Bray: My hon. and learned Friend will be reassured to hear that the problem seems to be to keep fish away from the oil rigs. Whether social or economic factors attract them, I am not altogether clear.

    North Sea Gas and Oil Supplies
    Mr. Hector Hughesasked the Minister of Power how many, and which, of the persons or companies acting under licence from him drilling for oil and gas in the North Sea, have successfully struck oil or gas, and to what extent; what

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    provision is made in the relevant licences for benefit accruing from those strikes to the national Exchequer; and what benefit will accrue to the national Exchequer in each of those instances.
    Mr. Wolrige-Gordonasked the Minister of Power what further information he has about the extent of the natural gas recently discovered in the North Sea; whether it is expected to extend towards the north of Scotland; and whether there is any likelihood of oil in that part as well.
    Mr. J. H. Osbornasked the Minister of Power if he will tabulate in the OFFICIAL REPORT how many strikes of natural gas have been reported to him, the location of each strike and the company or organisation making it, the depth at which natural gas has been reported, and the anticipated daily output in each case, respectively, to date; and if he will estimate the total flow which will be available for industrial and domestic consumption for each of the next four years.
    Mr. Marsh: All reports furnished to me under the provisions of licences are confidential. I am circulating in the OFFICIAL REPORT a summary of the information so far available about each strike. Further testing of all these fields is needed to assess the full significance of the discoveries, and I cannot estimate what quantity of gas will be available, nor the benefit which will accrue to the Exchequer. Methods for calculating payments to the Exchequer are explained in Appendix 3 of my Report for the year 1964–65 under the Continental Shelf Act. Licences have been granted for areas off the north of Scotland, but the existence of oil and gas there can be proved only by drilling.
    Mr. Hughes: Does the Minister not realise that it is quite wrong to treat these matters as confidential? They are a matter of national interest and it is his duty to make clear the profits and percentages and the persons who will make those profits out of these explorations. Will he kindly do so?
    Mr. Marsh: All the evidence at the moment is that the nation will receive
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    considerable financial benefits out of these explorations.
    Mr. Wolrige-Gordon: May I ask why this information has to be treated as confidential? Furthermore, is the right hon. Gentleman in a position yet to say what will be the kinds of advantages which will accrue to a community in the North of Scotland if oil or gas is discovered off its shore?
    Mr. Marsh: It is impossible to give the advantage to any community until one has a better idea of the extent of the deposits and the length of time that they will last.
    On the hon. Gentleman's point as to why some of the figures have to be confidential, if we want to encourage commercial companies to carry out these explorations one has to recognise levels of commercial secrecy. Most of the matters about which there is a level of secrecy are highly technical, anyhow. I am circulating as much information as is available, and I am sure that hon. Gentlemen will find that of some help.
    Mr. Osborn: Is the right hon. Gentleman aware that we are anxious to know when it will be taken from the sea to the land, and that we would like some indication of what the flow will be? The fact that he cannot give this information will be a disappointment to many.
    Mr. Marsh: I am sorry, but nobody in the country knows how much is there. I cannot say the rate at which it will be landed. The first amount will be landed at Killingholme early next year at a rate of about 20 million cubic feet a day.
    Mr. Michael Foot: Is my right hon. Friend confident that there are no Communists at the bottom of this gas strike?
    Mr. Hughes: In view of the unsatisfactory answer to this set of Questions which are of great public interest——
    Mr. Speaker: Order. The hon. and learned Member must be brief when giving notice.
    Mr. Hughes: —I give notice that I shall raise this matter on the Adjournment at the earliest opportunity.
    Following is the summary of information:—

    STRIKES OF NATURAL GAS REPORTED FROM SEPTEMBER, 1965 TO JUNE, 1966

    Location of strike

    Licensee

    Depth of strike

    Flow of gas tested in exploration well

    North Sea Block 48/6

    BP Petroleum Development Limited.

    Approaching 10,000 feet

    More than 10 million cubic feet a day. (Company has agreed to supply Gas Council at least 50 million cubic feet a day by 1st July, 1967.)

    Lat. 53° 42' 30" N.

    Long. 1° 08' 22" E.

    North Sea Block 49/17

    Continental Oil (U.K.) Limited.

    Not disclosed

    Up to 3·6 million cubic feet a day, not sufficient for commercial production.

    Lat. 53° 26' 40" N.

    Long. 2° 19' 55" E.

    North Sea Block 49/26

    The Shell Company of the United Kingdom Limited.

    Not disclosed

    Not disclosed. Find stated to be "of considerable importance".

    Lat. 53° 05' 17" N.

    Long. 2° 07' 46" E.

    Esso Petroleum Company Limited.

    North Sea Block 49/6

    Phillips Petroleum Exploration U.K. Limited.

    Below 11,000 feet

    Up to 17 million cubic feet a day.

    Lat. 53° 42' 19" N.

    Long. 2° 05' 03" E.

    Fina Exploration Limited.

    AGIP Exploration (U.K.) Limited.

    Century Power and Light Limited.

    Plascom (1909) Limited.

    Halkyn District United Mines Limited.

    Oil Exploration Limited.

    North Sea Block 49/18

    The Gas Council.

    Not disclosed

    Up to 25 million cubic feet a day.

    Lat. 53° 23' 38" N.

    Amoco U.K. Petroleum Limited.

    Long. 2° 31' 42" E.

    Amerada Exploration Limited. Texas Eastern (U.K.) Limited.

    Lockton, Yorks.

    Home Oil of Canada Limited.

    More than 7,000 feet

    Between 5 and 10 million cubic feet a day.

    BP Petroleum Development Limited.

    South Godstone, Surrey.

    Esso Petroleum Limited.

    Not disclosed

    Not disclosed.

    BP Petroleum Development Limited.

    Gas and Electricity Services (Competition)
    Mr. Dempseyasked the Minister of Power what steps he proposes to take to cut out the wasteful competition between the gas and electricity services, especially in the field of consumer services; and if he will make a statement.
    Dr. Bray: The proper co-ordination of the fuel industries is a major aspect of the current fuel policy review.
    Mr. Dempsey: Is the Minister aware that we have these elaborate and expensive gas and electricity showrooms provided virtually side by side? Is not this wasteful competition, and has not the time come to bring economic prudence to bear on the minds of these administrative bodies?
    Dr. Bray: The possibility of co-operation in such matters has been examined from time to time, but in the past the balance of advantage has appeared to lie in showrooms, billing, and so on, being the responsibility of each industry. At the moment we are reviewing rather more fundamental aspects of co-operation.
    Mr. Biffen: Is this one of the subjects to which Mr. Michael Posner will be invited to devote his attention in his capacity as economic adviser to the Ministry?
    Dr. Bray: He will be dealing with the fundamental economics of the fuel industries in the first place.

    Steel Bill
    Mr. Fletcher-Cookeasked the Minister of Power when he will publish the Steel Bill.
    Mr. Marsh: Shortly.
    Mr. Fletcher-Cooke: As we are still in a state of economic crisis, will the Minister try once again to negotiate a compromise with the steel industry in this matter instead of dividing the nation in these difficult times by pursuing the old-fashioned White Paper nationalisation policy?
    Mr. Marsh: The argument for nationalising the steel industry is precisely that it will aid the nation's long-term economic plans. I would have thought that, having waited for such a long time—right

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    until 10th May—before proposals arrived which it was obvious to everyone were totally unacceptable, there was not much point in going on much longer.
    Mr. Park: As in two successive General Elections the people of this country have expressed their clear support for the principle of nationalisation, does not my right hon. Friend agree that the Steel Bill should be introduced as soon as possible?
    Mr. Marsh: I think it is fair to say that there has never been a Bill before the House on which, whether hon. Gentlemen opposite like it or not, this side of the House has been given a clearer mandate at two successive General Elections, and we intend to discharge it.
    Mr. Barber: Does the Minister realise that the evidence shows that the majority of the electors of this country are not in favour of steel nationalisation? [HON. MEMBERS: "NO."] Secondly, does not the—[Interruption.]
    Mr. Speaker: Order. We cannot debate the Steel Bill now.
    Mr. Barber: On the question of timing to which the right hon. Gentleman referred, does he realise that at a time when Britain is in the midst of a dangerous economic crisis, and becoming increasingly reliant on overseas support for the £, it is the height of irresponsibility to press on with steel nationalisation?
    Mr. Marsh: There is no evidence that the nationalisation of the steel industry would have an adverse effect on the nation's economy.

    Electricity and Gas Supplies (Connection Charges)
    Mr. Fletcher-Cookeasked the Minister of Power if he will give a general direction, in the public interest, to electricity boards to suspend their practice of imposing initial charges for electricity connections on new housing estates, pending his discussions with the gas and electricity industries on initial charges policy.
    Sir J. Edenasked the Minister of Power when he expects to complete his discussions with the gas and electricity industries on the present system of initial connection charges.
    Mr. Hall-Davisasked the Minister of Power if he is aware that area electricity boards are specifically discriminating against gas in their connection charge policy; and what is his policy regarding this practice.
    Dr. Bray: As my right hon. Friend announced on 16th May, he is discussing this matter with the gas and electricity industries. He hopes to complete these discussions as soon as possible, but in the meantime, it would be wrong for me to anticipate the outcome.
    Mr. Fletcher-Cooke: Since the Electricity Board has a virtual monopoly of the supply of light to consumers, is it not an abuse of that power to use that weapon to distort competition in the supply of heat?
    Dr. Bray: Someone has to pay the connection charges, and it is important that the connection charges plus the subsequent tariff should economically reflect the cost of the supply. These matters are now being discussed with each of the industries.
    Sir John Eden: How much longer does the hon. Gentleman expect these negotiations to take? Will he do his best to ensure that the interests of the consumer are taken fully into account here, and that the ultimate agreement will preserve the consumer's freedom of choice?
    Dr. Bray: Yes, Sir.
    Dr. Hugh Gray: Will the Minister encourage the Gas Board and Electricity Board to collaborate in the production of a joint gas-electricity domestic stove? All cooks, whether Members of Parliament or housewives, know that one form of heat is better for producing some dishes and another for producing others?
    Dr. Bray: I think that this might come in the same category as the suggestion that postmen should deliver the milk.

    Steel Piping (Supplies)
    Mr. Ian Lloydasked the Minister of Power how many firm contracts have been placed by the Gas Council for pipelines to convey natural gas from the North Sea to the national grid; and what is in each case the length of the pipeline, the diameter and the date on which contracts are expected to be completed.
    Mr. Nottasked the Minister of Power what quantity of steel piping was used in the existing trunk pipeline distributing Algerian natural gas running from London to Leeds and elsewhere; how much of this piping was provided by the British steel industry; and how much piping will be required to join the British Petroleum off-shore gas strike near the Humber to the existing trunk pipeline.
    Dr. Bray: About 330 miles for the Algerian gas pipeline, all of whom was provided by the British steel industry. About 90 miles of 24 in. pipe will be required to make the connection to this line from the landing point where the gas from the B.P. find will be delivered to the Gas Council. Of the 90 miles, 28 will have to be imported. The contractual arrangements for these supplies are matters for the Gas Council.
    Mr. Lloyd: Can the hon. Gentleman say whether his inquiries have shown that it will be necessary to import all of this balance of steel, and were these orders for the residual 28 miles placed after all attempts had been made to obtain steel from our own industry?
    Dr. Bray: Yes, certainly.
    Mr. R. W. Elliott: Is the hon. Gentleman aware that, following the statement which was reported in The Times of 25th May that Ministers were unhappy because they felt that the British steel industry would be unable to supply sufficient piping, the two principal steel firms were extremely irritated in that they felt that the capacity required would be well within their reach?
    Dr. Bray: That does not correspond with the facts as they have been presented to us by the steel firms themselves.
    Sir C. Osborneasked the Minister of Power what representations he has received that British industry is unable to make the pipes required to bring the North Sea gas to the mainland; and if he will make a statement.
    Mr. Patrick Jenkinasked the Minister of Power what estimate he has given to the British steel industry of the amount of pipeline that will be required to pipe the current sources of off-shore
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    gas strikes to consumers in the years 1967–68, and 1969–70, respectively.
    Mr. R. W. Elliottasked the Minister of Power if he is satisfied that an adequate supply of steel piping will be available to cope with the supply of natural gas from the North Sea; and if he will make a statement.
    Mr. Peytonasked the Minister of Power what has been the result of his discussions about the supply of steel tubes to convey natural gas from the North Sea.
    Mr. Marsh: I would refer the hon. Members to the answer I gave to my hon. and learned Friend the Member for Aberdeen, North (Mr. Hector Hughes) on 16th June.
    Sir C. Osborne: I have not the faintest idea what he said on that occasion—[Interruption.]
    Mr. Speaker: Order. The hon. Gentleman must put his question.
    Sir C. Osborne: May I put it this way, that we are aware that—[HON. MEMBERS: "Question."] Is the right hon. Gentleman aware that very few hon. Members behind him have any idea of what he said on that occasion? If British industry can produce these required pipes, is it not scandalous that the Press should be making statements to the contrary and denigrating what our people can do?
    Mr. Marsh: The hon. Member should get two things clear. On the initial orders, apart from about 28 miles of pipe, British industry will be able to provide the piping. There is certainly some doubt about the extent to which pipe will have to be imported from overseas in future.
    Mr. Jenkin: Was the right hon. Gentleman then himself responsible for the leak to The Times for that paper's article of 25th May, which said that Ministers were deeply shocked by the large quantities which would have to be imported? Is he aware that that had to be denied the following day?
    Mr. Marsh: I am never responsible for anything which appears in The Times, but certainly Ministers are concerned about the extent to which imports of steel pipe may be necessary in future.
    Mr. Peyton: Does the right hon. Gentleman not agree that what he said on 16th of June and what he has just said conflicts very sharply with that leak which was put out from the Ministry of Power alleging a complete incapacity on the part of the steel industry, and that he is now being very much more restrained and cautious? However, will he be careful in future before he makes allegations which are highly damaging to an industry against which, I agree, he has the most improper motives?
    Mr. Marsh: No leaks were put out by the Ministry of Power—[HON. MEMBERS: "Oh."] I will repeat that. I am not sure what hon. Gentlemen are trying to say. If it is argued that this side of the House and Ministers are satisfied with the British steel industry and that it will be able to meet all the requirement on a large scale for large size steel pipe, I am sure that there are considerable doubts on this side of the House as to whether that is so.
    Mr. Barber: Is the right hon. Gentleman aware that he cannot ride off so easily on a matter of this kind? Will he answer this simple question? Is he aware that the political correspondent of The Times repeated that a Minister of Her Majesty's Government had said that the inability of the steel industry to provide pipes showed that the case for the' nationalisation of steel was unanswerable? Is the right hon. Gentleman saying that that reference was completely untrue? If the right hon. Gentleman says that he was not responsible for the leak, will he make inquiries to find out which of his right hon. Friends was responsible?
    Mr. Marsh: I repeat that there was no leak from Ministers about the extent to which we shall be able to meet all our steel requirements.
    Mr. Bessell: Would the right hon. Gentleman state the diameter of the proposed B.P. pipe and whether it will be possible to manufacture pipe of the required diameter by the British steel industry?
    Mr. Marsh: This is where the confusion arises, because there are two sets of orders. It may be necessary in the
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    initial stages to import limited quantities of the B.P. pipe which, I understand, is 24 in. in diameter.

    Natural Gas (Equipment Conversion Costs)
    Mr. J. H. Osborneasked the Minister of Power what information he has to the estimated total cost of converting domestic and industrial equipment to use natural gas as against manufactured town's gas; and to what extent this will be borne by the consumer, the Gas Council and the Exchequer, respectively.
    Dr. Bray: The cost of this conversion is one of the matters being investigated in the studies in hand on the utilisation of natural gas. Under the provisions of the Gas Act, 1948, the cost of conversion would fall to be borne by the area board in whose area the consumers are situated.
    Mr. Osborn: To what extent will natural gas be used in domestic industry and to what extent will it be converted into a form of manufactured gas?
    Dr. Bray: I am sure the hon. Member appreciates that this is a matter which needs the most thorough technical investigation and will be different at different stages of the transition. This is what we are considering at the moment.

    Drax Power Station, Selby
    Mr. Alisonasked the Minister of Power whether, in the light of its nearness to the Humber off-shore gas finds, he has received proposals for the conversion of the new power station under construction at Drax, near Selby, to burn natural gas.
    Mr. Marsh: No, Sir.
    Mr. Alison: Will the Minister consider taking the initiative and inviting such a proposal? Does he realise that if we fire Drax through gas we could export the coal which is at present planned to be brought into this station, so that it would be more economical to send the coal to Hamburg and bring the gas to Drax?
    Mr. Marsh: Before many more hon. Members work out how we should use the natural gas which we have not yet got they should wait to see how much is

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    there. One cannot in the present position talk about where one sites power stations on the basis of an as yet unknown quantity, when we are not sure of how we would like to use it.

    Gas Industry (Capital Investment)
    Mr. Alisonasked the Minister of Power what departure from the figures given in the National Plan for capital investment in the gas industry he expects as a result of the recent natural gas strikes in the North Sea.
    Mr. Marsh: Until more is known about the availability of gas from the North Sea, it is impossible to estimate its effect on the gas industry's future investment.
    Mr. Alison: Does this mean that the Minister will simply bury his head in the sand and make no provision whatever?
    Mr. Marsh: I am beginning to despair of ever putting this simply. No one, anywhere, knows how much gas is in the North Sea at the moment. The most commonly used figure is comparatively a very small one and, until one does know how much is there, one cannot estimate its effect on the gas industry's future investment.
    Mr. Lubbock: Is the Minister aware that, apart from the discovery of natural gas in the North Sea, the consumption of gas increased between 1964 and 1965 by 11 per cent., which is considerably higher than the rate expected by the National Plan? Is it not, therefore, likely that the capital expenditure spent in the industry will have to be revised up?
    Mr. Marsh: It is a feature which is frequently overlooked that the increased energy requirements between now and 1970 are considerable—33 million tons of coal equivalent by 1970. On the most optimistic figures, we shall not get half of that from the North Sea.
    Mr. Shinwell: Does my right hon. Friend not realise that many people-not in the House but outside—want to know whether there is any future in natural gas because they want to put their money into the right company?

    Natural Gas Supplies (Responsibility)
    Mr. Dickensasked the Minister of Power if he will introduce legislation to make the exploration for, and subsequent supply of, indigenous natural gas a responsibility of the Gas Council and the area gas boards.
    Mr. Marsh: No, Sir.
    Mr. Dickens: Does not my right hon. Friend agree that the present terms under which natural gas will be supplied to the public sector are highly disadvantageous to the public sector? Does he not feel that it would be in the national interest to take indigenous natural gas under public ownership?
    Mr. Marsh: The last point is a separate one, on which there is a later Question. It has to be borne in mind that oil and gas exploration is a highly speculative enterprise. It would not be wise for hon. Members on this side of the House to want to place the whole of the risk on the nationalised gas industry, even if it were physically practicable for the industry to take on the job.
    Sir J. Eden: Would the right hon. Gentleman ensure that the terms agreed with the producers are such as will encourage them to press on as rapidly as possible with further exploration?
    Mr. Marsh: Obviously, the actual terms which are agreed will be negotiated between the Gas Council and the oil companies. As has been said before, the only figure so far agreed—I think that my hon. Friend was referring to this—is certainly no precedent for any future negotiations.

    Commonwealth Countries (Seconded Personnel)
    Mr. Tilneyasked the Minister of Power if he will give a general direction, in the public interest, to nationalised industries boards to second their personnel for a tour in overseas countries of the Commonwealth and to ensure that those volunteering to go will not lose promotion in their home-based jobs.
    Dr. Bray: No, Sir, but the boards' attention has been drawn to the White Paper on Overseas Development in

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    which it was said: "We should like to see it widely accepted in this country that a professional career should normally include a period of work overseas in a developing country …" The boards have indicated that they will continue to do their best to help.

    North Sea Gas
    Mr. Whitakerasked the Minister of Power whether he will seek to secure the benefits of the North Sea gas field for the nation by introducing legislation to take it into public ownership.
    Mr. Marsh: No, Sir. I refer my hon. Friend to the Answers given on 1st December, 1964 and 6th April, 1965.
    Mr. Whitaker: Since God gave the land to the people and since the steel industry will, we hope, shortly be returned to them, how can my hon. Friend differentiate between the sea bed and natural gas?
    Mr. Marsh: At least half of the areas licensed will revert to the Crown after the initial licence period of six years. The terms and conditions of further exploration in these areas can be decided at that time. This gas can be sold to the Gas Council only with the agreement of the Minister, and I think that it would be undesirable, from the point of view of the nationalised industries—even if it were physically possible for them to take on this job—to leave it solely to them.

  COAL

    Coking Coal (Delivery Costs)
    Mr. Edward M. Taylorasked the Minister of Power what information he has regarding the cost to industrial users of coking coal in Scotland and the various regions of England.
    Mr. Marsh: I have no information on delivered costs.
    Mr. Taylor: Is the Minister aware that Scottish firms in the central belt are paying as much as 30s. a ton more than their competitors in the North of England, and that in the case of one Scottish steelworks it is imposing extra costs of £3 million a year compared with a works in the North of England? That differen-
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    tial more or less removes the advantages of being in a development area.
    Mr. Marsh: I do not know from where the hon. Gentleman gets his figures. The question is in terms of delivered costs. I have no power to make the steel companies report their actual delivered costs. All that we have available in the Ministry are pithead prices. There is no power to require steel companies to disclose their delivered costs, and I do not know what they are.

    Scotland (Pit Closures)
    Mr. Edward M. Taylorasked the Minister of Power what information he has regarding the number of Scottish coalpits which will be closed in each of the next three years.
    Mr. Marsh: It is the National Coal Board's policy, approved by the Government, to close grossly uneconomic pits as quickly as possible, but the timing of closures under the colliery classification list published on 18th November, 1965, is flexible and the actual closures in any particular period are decided by the Board in the light of circumstances and in consultation with the Unions. Four of the 33 category "C" collieries in Scotland have so far been closed. Another two closures have been notified to the unions as likely to take place in the near future.
    Mr. Taylor: Does the Minister not realise that that does not say a great deal? The morale of Scottish coalminers is very low. The only clear indication is that 48 of our 74 mines are under the threat of closure.
    Mr. Marsh: The actual timing of the closures is a matter for the Coal Board to negotiate with the unions, which it is doing. There is no dispute within the industry or the House that one can only have a viable coalmining industry by closing some of the less economic pits.

    Domestic Fuels (Price Equalisation)
    Mr. Besssellasked the Minister of Power whether he will now introduce legislation to provide a scheme to equalise the price of domestic fuel throughout the country.
    Dr. Bray: No, Sir.
    Mr. Bessell: Is the hon. Gentleman aware of the considerable difference in the price of domestic fuel in Cornwall and the rest of the country? Does not he regard it as harsh injustice that people should not obtain fuel at an equal price from a nationalised industry? Will he look at this matter again?
    Dr. Bray: Costs vary considerably from one part of the country to another, taking into account transport and so on. It is only right that prices should reflect costs.
    Mr. Edward M. Taylor: If certain pits are kept open in certain areas for social reasons, why should the entire cost of that be put on the people who live there?
    Dr. Bray: It is not.

    Opencast Mining
    Mr. Kenneth Lewisasked the Minister of Power whether he proposes to stop opencast coal operations in view of the reduced tonnage now required from the coal industry.
    Dr. Bray: No, Sir. We need all the coal that can be produced at an economical price from deep mines. At the level of 7 million tons a year stated in the White Paper on Fuel Policy, opencast coal provides a valuable and economic supplement to deep-mined production.
    Mr. Lewis: Does not the hon. Gentleman think that it is somewhat ridiculous that we should be tearing the country apart to the disadvantage of the agricultural industry, when his right hon. Friend said a minute ago that what we want is a viable underground coal-producing industry?
    Dr. Bray: We want coal at a cheap price, and, as the hon. Gentleman knows, the National Coal Board takes the greatest care to look after agricultural interests and to preserve local amenity.

    Exports
    Sir J. Edenasked the Minister of Power whether he will cause the target figure for coal exports in the National Plan to be revised upwards at the next review of the Plan.
    Mr. Marsh: These are estimates, not targets: we would wish to sell abroad as much as we can at economic prices.
    Sir J. Eden: Why is the target published in the National Plan below the objective set by the National Coal Board itself? Would the right hon. Gentleman not agree that we should aim to increase exports? How does he explain the difference between the Coal Board and himself? Who is the boss of this industry?
    Mr. Marsh: One of the problems with the estimates, of course, is that the fall in exports—there has been one in this respect—is the result of intense competition for markets. It also has to be borne in mind that in many cases the prices obtainable are not commercially attractive.
    Mr. Barber: Does the right hon. Gentleman agree with the President of the Deputies' Association, who was reported this morning as saying that unless the loss of trained miners is halted we shall be short of coal next winter? Obviously, this will affect our exports.
    Mr. Marsh: One can go on saying this, of course. I do not think that this picture of a coalmining industry being in a tremendous crisis is helpful to the industry or to halting the drift of miners from the pits. There is a great future for people who are prepared to work in coal mines and a great need for them.

    Distribution Costs (Selective Employment Tax)
    Mr. Pavittasked the Minister of Power what is his estimate of the additional cost of distributing solid fuel arising from the proposed payroll tax.
    Dr. Bray: Representations from some retail distributors suggest that if the tax is not absorbed by increased efficiency the additional cost may be in the range of 1s. 6d. to 3s. a ton. But the purpose of the tax is to encourage economies in the use of manpower in the distributive trades and I hope firms will absorb much of it.
    Mr. Pavitt: In view of the need to contain prices if incomes are to be retained, will my hon. Friend look at the possibility of exempting coal distribution from the Selective Employment Tax?

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    Will he make representations to the Chancellor of the Exchequer to that end?
    Dr. Bray: My hon. Friend knows that the examination of detailed cases is necessarily limited by the speed with which this tax has been introduced, but it would plainly be contrary to the purpose of the tax if exceptions were made in matters with which it is specifically intended to deal.
    Sir G. Nabarro: Would the hon. Gentleman explain to the House why agriculture and horticulture should be given preferential treatment over coal and oil, when all of these things are basic to our national economy? Why will he not be a little more helpful to his hon. Friend on the Private Parliamentary Secretary Bench?
    Dr. Bray: That sounds to me like a Question for the Minister of Agriculture and the Chancellor of the Exchequer.

    Coal Industry (Output, Manpower and Stocks)
    Sir G. Nabarroasked the Minister of Power in view of the continuing decline of coal output and related manpower, whether he will state his revised tonnage for 1966, and the anticipated further manpower decline; and whether stocks of domestic coal in all grades are adequate to meet summer pricing demands.
    Mr. Dickensasked the Minister of Power if he will state the estimated inland demand for coal in 12 months to the end of March 1967, and the estimated output of deep-mined coal in the same period.
    Mr. Marsh: I hope to be able to say something about prospects before the Summer Recess. Supplies should be generally adequate to meet demand during the period of summer prices, but may be affected in places if the seamen's strike is prolonged.
    Sir G. Nabarro: Would the right hon. Gentleman have a talk with the Leader of the House and point out to him that it is now five years since the report and accounts of the National Coal Board were debated in the House of Commons. As this matter is long overdue, and because there is anxiety in every part of
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    the House about the run-down of the coal industry and the departure of 1,000 miners a week, should not we have a debate on the subject before the House rises for the Summer Recess?
    Mr. Marsh: I am authorised by my right hon. Friend to say that he would have no objection to the Opposition using one of their Supply Days for this purpose.
    Mr. Dickens: Would my right hon. Friend bear in mind the need thoroughly to examine again the amount of coal held in stock by the National Coal Board, remembering that some of it is eight years old and may not be fully usable?
    Mr. Marsh: This is a matter for the National Coal Board. I will certainly look at the point my hon. Friend makes. At the end of 1965–66 the N.C.B.'s undistributed stocks totalled 18½ million tons. I have no information about the quality of the coal in stock.
    Mr. Mendelson: Since more miners are leaving the coal industry than was estimated in the recently-published White Paper, would it not help the campaign which my right hon. Friend has been carrying on in recent speeches—for example, in his speech at the Yorkshire Miners' Gala—and give confidence if he called a halt for the time being to the accelerated closure programme?
    Mr. Marsh: The timing of closures is a matter for the National Coal Board, in consultation with the unions concerned. Such inquiries as I have been able to make so far lead me to doubt the extent to which this drift from the pits is caused by loss of confidence in the industry and how much is caused simply by the result of alternative employment being available in a period of full employment.
    Mr. Peyton: Is the right hon. Gentleman aware that the very caution with which he is answering these Questions carries its own message of gloom and pessimism? Does he recall that last winter, in respect of various fuels, the National Coal Board only just marginally got by and that the prospects for this winter are much darker than that? Are these prospects not bad enough to alarm the right hon. Gentleman and his colleagues?
    Mr. Marsh: I can think of few things more likely to cause a crisis in the coal

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    industry than that sort of remark—[Interruption.]—presumably made with the authority of his right hon. Friends.
    Sir C Nabarro: In view of this series of replies on the coal industry, I beg to give notice that I shall seek to raise the matter on the Adjournment at an early date.

    CHANCELLOR OF THE EXCHEQUER (SPEECH)
    Mr. Stratton Millsasked the Prime Minister whether the public speech of the Chancellor of the Exchequer at the National Savings Jubilee Ceremony at the Guildhall on 19th May on the subject of national savings represents the policy of Her Majesty's Government.
    The Prime Minister (Mr. Harold Wilson): Yes, Sir.
    Mr. Mills: Is it not clear that the prolonged period of inflation has caused savers gradually to move away from the traditional method of National Saving and that this trend cannot be met purely by leapfrogging interest rates? Would he say what consideration the Government have given to new methods and techniques of National Savings?
    The Prime Minister: I am aware of the great interest which the hon. Gentleman takes in the whole question of the National Savings Movement. He will be aware that personal savings last year equalled the figures for the previous year. Although there was some falling off in the National Savings element in the first quarter of this year, there has been a very satisfactory pick-up since the introduction of the new certificate at the end of March.

    MINISTRY OF HOUSING AND LOCAL GOVERNMENT
    Mr. Ripponasked the Prime Minister whether he will publish a White Paper on the Reorganisation of the Ministry of Housing and Local Government.
    The Prime Minister: No, Sir. I do not think that a White Paper could add significantly to the full information which has already been made available to the House.
    Mr. Rippon: Is the right hon. Gentleman aware of the growing concern at his continuous and, one might say, ineffectual changes in administration without adequate explanation? What further changes are contemplated and what are the Government going to do to stop the serious downward trend in housebuilding and the record increases in costs?
    The Prime Minister: I think that this was fully explained, so fully that the right hon. and learned Gentleman was able to base the greater part of his speech in the recent housing debate on that explanation. No further changes are in contemplation in this area, so far as Departmental responsibilities——
    Mr. Rippon: No more Ministers?
    The Prime Minister: The right hon. and learned Gentleman I am sure understands that we had to end the civil war between his old Department and the Ministry of Housing and Local Government, and it has now been ended. As to the deep concern, I am aware of some of the rather extravagant statements which were made over the weekend, and my right hon. Friend has challenged their authors to debate them with him on television.
    Mr. Murton: Has the right hon. Gentleman seen a particular statement referring to trouble-shooters? Would it not be a good idea, if there are to be trouble-shooters, that they should shoot at the trouble caused by the mess and muddle of his Administration in the housing sphere?
    The Prime Minister: I am not sure to which statement about trouble-shooters the hon. Gentleman is referring. We had a very serious situation with which to deal. I recognise that there was a very difficult marginal argument as to whether certain responsibilities should be in the Ministry of Public Building and Works or the Ministry of Housing and Local Government. We decided on the Ministry of Housing and Local Government, which was a view taken during the greater part of the term of office of the Conservative Administration.
    Mr. Heath: When is the Prime Minister going to abandon his complacency about the failure of his housing policy in a

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    situation in which prices are steadily rising—and are being increased by the S.E.T.—in which mortgages are running at their highest level and in which the number of houses built has been falling steadily in the last six months? Will he realise that these kind of organisational changes are not meeting need? Will he therefore get some new policies and a new Minister and sack the present Minister in the autumn?
    The Prime Minister: These organisational changes are, in our view, desirable and necessary for dealing with the situation. The right hon. Gentleman will be aware that, despite the serious situation in February, there is now—I think all of us recognise this—a pick-up in the housing situation and—[Interruption.]—the right hon. Gentleman, like the rest of us, had better wait to see whether this is reflected in next month's or the next two months' housing figures.
    Mr. Heath: Is the Prime Minister aware that in eight of the nine months the figures for housing completed have fallen compared with those of the previous year and that this is causing hardship and misery to the people of this country?
    The Prime Minister: The position is that the number of houses under construction is still almost at a record level. The right hon. Gentleman is certainly right if what he is suggesting is an extension in the period from start to completion. One reason has been the labour position. If we had not taken the measures we took it would have been a great deal worse last year. He also knows that there is still a surprising and somewhat unexplained failure on the part of private enterprise housing to complete houses when, as the whole House knows, the amount of mortgage finance available for producing those houses is at a record level.
    Mr. Woodburn: Is my right hon. Friend aware that all house building depends in the first instance on the capacity of the building trade and resources in materials for the building of those houses? Can he say whether the Government have at any time restricted the building trade or curtailed the number of houses to be built, or been in any way responsible for any shrinkage?
    The Prime Minister: There is of course no restriction. As the House knows, when
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    we took office the planning by the right hon. Gentleman the then Minister of Works was such that there were not the bricks or materials necessary—the right hon. Gentleman knows that that was the position—not on the labour side, because of their violently inflationary programmes which we have dealt with.

    MINISTER FOR REGIONAL DEVELOPMENT
    Mr. Kenneth Lewisasked the Prime Minister whether he will appoint a Minister for Regional Development.
    The Prime Minister: The hon. Member will know of the responsibilities of my right hon. Friend the First Secretary of State and Secretary of State for Economic Affairs.
    Mr. Lewis: Will the Prime Minister ask the First Secretary of State to make some effort to co-ordinate the activities of various Ministers concerned on a regional basis where the geography of the regions with which they are concerned seems to vary but there is no rationalisation between the regions and the Government?
    The Prime Minister: It is very difficult to be responsible for variations in geography, but it is precisely because of those variations that we have set up the economic planning boards and economic councils in each region representative of those with best knowledge of each region so that we can take account of variations, geographical, social and economic. It is also a fact that we have been recently decentralising a number of Government Departments so that they may be more responsive to the needs of those areas.
    Mr. Heath: Will the Prime Minister look into the activities of the First Secretary, if he is responsible, because he will then find that the First Secretary is failing to carry out the policy of the Government? There has been no decision about the South-East Plan, no decision on the two studies already on the North-West and Midlands which we put in hand, on industrial building in the North-East and the Northern Region and the South-West, which are two of the most delicate areas, and the actual amount of industrial building has gone down compared with that

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    of the previous year, which is a failure of the development policy.
    The Prime Minister: The right hon. Gentleman will find that, despite then-spurt in the last two of their 13 years, the proportion of new factory building in the development areas is running at a very much higher figure than when the right hon. Gentleman left office.

    VIETNAM
    Mr. Winnickasked the Prime Minister whether, in pursuance of Her Majesty's Government's initiative to seek peace in Vietnam, he will arrange to visit the United States of America to consult President Johnson with a view to ending the Vietnam war.
    The Prime Minister: I shall be meeting President Johnson next month and no doubt Vietnam will be discussed.
    Mr. Winnick: Is the Prime Minister aware that there are many people in this country who would like him to do precisely what Attlee did in 1950—to urge commonsense on the Americans? Will the Prime Minister inform President Johnson that the majority of British people have no stomach for this colonial war that the Americans are engaged in?
    The Prime Minister: I was a member of the Cabinet when my noble Friend, Lord Attlee, went to Washington to deal with a very serious situation caused by a statement that the atom bomb was to be used in North Korea. I believe that intervention was decisive. It is a point that at that time we had troops in Korea. We do not have troops in Vietnam; we are opposed to having troops in Vietnam. So far as the views of this country are concerned, as I interpret them, they have been regularly explained to the President of the United States and to this House. I took a little time last week explaining them in a meeting upstairs where I think my hon. Friend might have been present.
    Mr. Blaker: Has the idea of keeping in existence the Commonwealth Peace Mission so that it could be ready if useful been dropped? If not, is it not rather odd that over the last four months it has contained only one member apart from the Prime Minister himself? What
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    is being done to replace Dr. Nkrumah and the late Prime Minister of Nigeria?
    The Prime Minister: The hon. Member was worried about this yesterday. The position is that if it becomes possible for the Commonwealth Peace Mission to visit the capitals that we asked that it should visit, it would be possible very quickly to activate it by quick discussion with other Commonwealth Prime Ministers to see who would represent the Commonwealth. That could be done very quickly indeed. The hon. Member knows that what prevented us getting "airborne" last year was the refusal of Hanoi not merely to come to the conference table but even to receive a completely representative mission from the whole of the Commonwealth.
    Mr. Maxwell: Will my right hon. Friend tell the House what recent representations Her Majesty's Government have made in Moscow with a view to getting the joint Chairmen to reactivate the conference on Vietnam? Can he further tell the House what representations Her Majesty's charge d'affaires in Peking has been making recently in order to get the Chinese to be a little more amenable so that this ghastly war can be brought to an end?
    The Prime Minister: As I think the House knows, pressure on our Russian co-partners as co-Chairmen in this matter has been almost continuous, certainly to my knowledge since February, 1965, and I pressed it very strongly on my recent visit to Moscow. This suggestion is still being pressed. We all understand the Soviet Government's difficulties about it. So far as China is concerned, we have repeatedly made clear our point of view. It was regrettable that, whatever our differences of view, the Chinese Government did not agree to welcome this very representative Commonwealth Mission a year ago.
    Mr. Goodhew: Is the Prime Minister aware that the vast majority of people in this country would sooner that he did not go rushing off to Washington every other month but stayed here and sorted things out at home?
    The Prime Minister: I am grateful for the hon. Member's statement of confidence in this matter. I think it right—

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    this has been the view of previous Prime Ministers—that there should be regular consultation between the Prime Minister of this country and the President of the United States. Certainly when the whole House, I know, feels that this Vietnam situation is not only, as my hon. Friend said, a ghastly war but is capable of escalation to great danger, it is important that we should keep in closest touch by meetings as well as by other means.
    Mr. Michael Foot: Before he goes to Washington, will the Prime Minister undertake to study the growing evidence of methods of barbarism resorted to by our American allies in Vietnam, methods which go far beyond even those against which the Foreign Secretary protested when in the United States at one time? Will he study further how much resort to these methods derives from the totalitarian nature of the régime in South Vietnam which our American allies, and unfortunately ourselves, appear to be supporting?
    The Prime Minister: I am afraid that all modern war involves barbarism. So far as the Vietnam war is concerned, I have said many times that there is a great deal of atrocity on both sides. Therefore, the only answer is to get the war ended. I do not think we shall do very much in the way of civilising a war of this kind. Certainly the methods of which my hon. Friend has complained— and I know he would be equally condemnatory of methods used on the other side by infiltrating North Vietnamese troops —are inevitable in the conditions of this war. They are not in any way related to the political complexion of the Government of South Vietnam and I have said on more than one occasion that we regard the political situation in South Vietnam as an entirely different matter.
    Mr. Doughty: Will the Prime Minister point out to the President of the United States that the best way of bringing the war to an end is to win it, unless Peking and Hanoi come to the conference table?
    The Prime Minister: One thing is clear. I have said that this war will never end in a military victory for anyone. There has to be a political solution. The problems will not be solved, certainly by the kind of policies advocated which simply represent a victory for Com-
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    munism and there would not be victory for the other side either. This has to be settled by a political solution, by all parties coming to the conference table. Then let us get to Geneva and get a political settlement within the ambit of the 1954 Agreement.
    Mr. Thorpe: In view of the dangers of escalation mentioned by the Prime Minister from this extremely senseless and sordid war and, further, in view of the mandate which the Prime Minister has now obtained—on a limited basis—for his east of Suez policy, would he at least make one point clear to President Johnson, namely, that our contribution to the settlement of this affair is that we no longer offer training facilities for South Vietnam soldiers, in order to exercise our neutrality as co-Chairman?
    The Prime Minister: I do not go round hunting for mandates. The mandate for the Government's defence policy was given in the vote in the House when we had a two-day debate on the Government's Defence White Paper. It has been explained to the House a number of times that the question of training is on a very limited scale. It is certainly nothing inconsistent or incompatible with our duty of co-Chairman. If that were the case, one would have to say that the Soviet co-Chairman, who are very much more involved with this war by the supplying of munitions than we are, would also not be behaving in the right way. It was always accepted that of the two co-Chairmen, one represents generally a Western point of view, the other an Eastern point of view. We are certainly not in any way prejudicing our position as co-Chairman.
    Mr. Mendelson: In view of the expressed wish by growing numbers of the people in South Vietnam for an immediate end to the war and the repressive military measures taken by the Ky Government, would the Prime Minister now, in the light of the statement made by President Johnson last Saturday that he intends to step up the bombing operations against North Vietnam closer to the population centres, make it clear that Her Majesty's Government are totally opposed to any such policy?
    The Prime Minister: Sir, I am in no doubt at all that all the population of South Vietnam and, I believe, of North

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    Vietnam, too, would like to see an end of this war, because the fighting has been continuous over 20 years. This is but one reason for Her Majesty's Government trying to get the conditions for a settlement.
    With regard to various reports I have received from Washington, I should want to study them very carefully to see exactly whether they will bear the interpretation put upon them by my hon. Friend, but I have made clear repeatedly in the House that we should be opposed to the bombing of the big centres of population.
    Sir J. Langford-Holt: The right hon. Gentleman said in reply to a supplementary question put by one of his hon. Friends that his most recent statement on the policy of the Government in Vietnam was taken—I believe the expression was—in a meeting upstairs. Is not the House entitled to a copy of the Prime Minister's speech and should it not be laid in the House?
    The Prime Minister: I think that it is not out of accordance with past practice that there are sometimes meetings upstairs. On this occasion, I think to the hilarity of some hon. Members opposite, I took the unusual step of making sure that an accurate version of what I said is available. If it is not in the Library, I will put it in the Library. It has been fully published in the Press. If the hon. Gentleman would like to study it, I should be very glad to send a copy to him.
    Mrs. Anne Kerr: Does not the Prime Minister appreciate that very large sections of British public opinion are utterly sick at heart with the continuation of the British Government's support of America's policies in Vietnam? Will he make it absolutely plain to the House and to the nation that the only people who are carrying out bombing raids are in fact the Americans?
    The Prime Minister: I think that the great mass of the British people— including, I am sure, my hon. Friend— agree with Her Majesty's Government that what we want to do is to bring this ghastly war to an end. We believe that the policies we have undertaken are best directed to achieve that. We have had many disappointments. We have called,
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    with the Commonwealth Prime Ministers, for an end of the bombing and an end of the infiltration by North Vietnam. I think that these two do go together. The only reason why we have not had success is because of the refusal of one side to the dispute, even during 37 days of bombing pause, to come to the conference table.
    Mr. G. Campbell: In view of what the Prime Minister has been saying, should he not seek to reactivate the Commonwealth Peace Mission now? Yesterday we were informed that it was appointed ex officio and that its membership could be varied only by the Conference of Prime Ministers. As there is now no President of Ghana and no Prime Minister of Nigeria, what is its present membership?
    The Prime Minister: The hon. Gentleman will be aware that contacts between Commonwealth Prime Ministers do not depend only on annual conferences or on conferences at infrequent intervals. If we had been given any encouragement at all for the view that the Mission would be received, we could within a matter of 24 hours reach agreement on the composition of the Mission.
    Mr. Heath: I am sure that the whole House agrees with the Prime Minister that this country wants to see a political settlement of what is a very horrible and cruel war, as I believe do the whole American people and the American Administration. Does the Prime Minister agree that such a political settlement is unlikely to be achieved until the Viet-cong and the North Vietnamese, and indeed the Chinese, recognise that they cannot win? This is different from a victory on either side. Therefore, while he presses his objection to the bombing of centres of population, will the Prime Minister make it quite clear that he does not object to the bombing of fuel tanks which are enabling the North Vietnamese to send their forces down into South Vietnam?
    The Prime Minister: What the right hon. Gentleman has said about the feeling of some people that they are going to get a military victory is what we have all been saying. We said it a year ago. One reason we felt then as to why the Commonwealth Peace

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    Mission was not accepted was that with the monsoon season coming on perhaps the North Vietnamese and the Vietcong thought that victory would come quickly. I am certain that it will not come quickly. I am certain that there will be no victory, only possibly by the end of the day almost total annihilation. This is why we want to get the parties to the conference table.
    In regard to bombing policy, we have made it clear that we would totally oppose any bombing involving Hanoi or Haiphong.
    Several Hon. Members——
    Mr. Speaker: Order. We are well past Question Time.

SEAMEN'S STRIKE
Mr. Deedes: I rise to ask leave to move the Adjournment of the House under Standing Order No. 9 for the purpose of discussing a definite matter of urgent public importance, namely,
"the Prime Minister's statement to the House yesterday that pressures are being brought to bear on the Executive Council of the National Union of Seamen by certain individuals."
Being aware of the very close restraints which the Standing Order opposes upon you, Mr. Speaker, and upon the House, may I briefly submit these considerations? This is emphatically a matter of urgent public importance. Its urgency, after 48 days of the strike and the fresh light which what the Prime Minister said yesterday has thrown upon it, is, I think, beyond question.
So, I think the House will accept, is its public importance. There could hardly be a matter of greater public gravity.
There remains only the qualifying word "definite". On this, you will recall, Sir, that the Prime Minister was quite specific. He told us that what he was saying was not based on rumour or on secondhand report; he was clear as to what his statement should mean. It was emphatically not a matter involving hypothetical circumstances.
Finally, I should add that I am aware that this is a matter which might have been raised 24 hours ago immediately after the Prime Minister had spoken and on this ground you, Mr. Speaker, may
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see fit to rule it out of time. I submit that the circumstances are rather unusual.
The Prime Minister's words were most properly guarded and carefully chosen. They were elaborated only a little towards the end of a series of questions and answer. Their full impact was appreciated only after the event and in the light of what we have all read this morning. The charges and the counter-charges to which they have given rise constitute part of the matter and underline the need for further clarification, under the heading of "urgency".
On these grounds, Mr. Speaker, I submit that this is a matter falling within the ambit of Standing Order No. 9.
Mr. Speaker: The right on. Member for Ashford (Mr. Deedes) seeks leave to move the Adjournment of the House under Standing Order No. 9 for the purpose of discussing a definite matter of urgent public importance, namely,
"the Prime Minister's statement to the House yesterday that pressures are being brought to bear on the Executive Council of the National Union of Seamen by certain individuals."
I am grateful to the right hon. Gentleman for intimating to me this morning, with his characteristic courtesy, that he would be seeking to raise this matter under Standing Order No. 9. May I also say to the House that I examine most sympathetically all applications for leave to move the Adjournment of the House under Standing Order No. 9. But, as the House now knows, almost painfully, I am bound by the judgments and precedents set by my predecessors.
I am afraid that I cannot find this application within Standing Order No. 9. In the first place, even if the subject itself was such as the rules would allow it to be raised, it should have been raised at the earliest opportunity, which was yesterday. I listened carefully to the right hon. Gentleman's explanation as to why it was not raised yesterday, but that cannot affect my Ruling. I refer the right hon. Gentleman to the Ruling given by my predecessor on 11th May, 1949, Vol. 460 of the OFFICIAL REPORT, col. 116 and the reference made to that Ruling on page 365 of Erskine May. Such a Ruling is quite categorical.
In the second place, the strike has been going on for some time and the fact

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that new information about it has been given to the House does not in itself make it a matter of urgency in the sense required by Standing Order No. 9. Again, I would refer the right hon. Gentleman to another Ruling given by one of my predecessors on this very aspect of the matter. It is reported in the OFFICIAL REPORT of 71st July, 1951, Vol. 490, col. 641, and also referred to in the list of precedents on page 365 of Erskine May.
I would also remind the right hon. Gentleman that there will shortly be an opportunity to debate the subject of the seamen's strike when the new Emergency Regulations come before the House, as I understand that they are to do so next week for the House's approval. I am sorry that I must decline to agree to the right hon. Gentleman's request.
Mr. Paget: On a point of order, Mr. Speaker. Without seeking to argue with you—one could not argue that this application could possibly be in order under any construction of the rule—may I ask whether you have observed on the Order Paper a Motion, tabled by myself—
[That Mr. Speaker shall be at liberty to disregard rulings of his predecessors which in his opinion unduly restrict the
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original intention of Standing Order No. 9 as expressed by Mr. Speaker Peel.]— which has now been signed by nearly half the hon. Members of the House and which requests you to be guided by Mr. Speaker Peel's original statement rather than by the later precedents?
As that Motion has been signed by more than half the House, will you take that as a release from those subsequent Rulings, Sir?
Mr. Speaker: I am grateful to the hon. and learned Member for Northampton (Mr. Paget) for raising that point so ingenuously. But this is the kind of question, about Motions on the Order Paper, that he must put on Thursdays to the Leader ot the House, not to Mr. Speaker.
I can inform the House that I do read the Order Paper and have seen the Motion to which the hon. and learned Member referred. I cannot however, comment on it, except to suggest that Mr. Speaker Peel's Ruling was perhaps not quite so broad and generous as the reformers of Standing Order No. 9 would have us believe. This, however, is a matter not for Mr. Speaker, but for the House itself. It must either consider or not consider the Motion and must decide the issue. I am the servant of the House. If I get instructions from it, I follow them.

ORDERS OF THE DAY
  WAYS AND MEANS
  [20th June]

  INCOME TAX, CAPITAL GAINS TAX AND CORPORATION TAX (REORGANISATION OF COMPANY'S SHARE CAPITAL, ETC.)
  Resolution reported,
  That charges to income tax under Case VII of Schedule D and to tax in respect of chargeable gains, including charges in respect of past acquisitions or disposals of assets, may be imposed by provisions relating to the apportionment of the cost of acquisition of any asset, including any new holding of shares or securities resulting from a reorganisation or reduction of a company's share capital or a conversion or exchange of securities.
  Resolution read a Second time.
  Question, That this House doth agree with the Committee in the said Resolution, put forthwith, pursuant to Standing Order No. 90 (Ways and Means Motions and Resolutions), and agreed to.
  Instruction to the Committee on the Finance Bill that they have power to make provision therein pursuant to the said Resolution.

  FINANCE BILL
  Further considered in Committee [Progress, 20th June].
  [Sir ERIC FLETCHER in the Chair]

  FINANCE BILL

    Clause 24.—(RATE OF CORPORATION TAX FOR FINANCIAL YEARS 1964 AND 1965, AND PROVISIONAL COLLECTION OF CORPORATION TAX.)
    3.45 p.m.
    Mr. Iain Macleod: I beg to move Amendment No. 4, in page 25, line 35, to leave out "40" and to insert "37½".
    The Chairman: With this Amendment may be discussed Amendment No. 183, standing in the name of the hon. Member for Barry (Mr. Gower), in page 25, line 35, leave out "40" and insert "36".
    Mr. Macleod: This is perhaps the most important single Amendment we shall be discussing during the Committee
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    stage of the Bill. It is always desirable in these cases that the Committee should have a clear picture of what the Government are proposing and of the alternative proposals of the Opposition. The figures are clear already. The Government propose 40 per cent, and we propose 37½ per cent. The mathematics behind them are often rather confusing. If we turn to Table 3 of the Financial Statement laid before the House on Budget day, we see the estimate for Corporation Tax put as £1,000 million both before and after the Budget changes.
    I would have thought that there were a number of changes in the Budget that would have affected the calculation, but the more important point is that it is very difficult to see where this figure comes from. Clearly, it is a guess. It cannot be a coincidence that such an admirably round figure as £1,000 million is included. If we turn back to the 1965–66 Budget Estimate and Out-turn, which are in neighbouring columns, we see that Corporation Tax does not exist, so we are £1,000 million down. About £333 million of the £1,000 million comes from the severe drop in Profits Tax through the change from the old to the new system, and about £80 million or so comes from Income Tax.
    That does not form even half of the £1,000 million and, making all allowance in the world for the buoyancy of the Revenue and other factors, I would like the Chief Secretary to explain a little more, if he can, this very odd figure of £1,000 million.
    However that may be, on the day after the Budget, in my speech commenting on the Chancellor's proposals, we started a probe. The right hon. Gentleman will remember that my key question was what level the new system of Corporation Tax and Schedule F would have to be in order to produce the same Revenue as under the old system of Income Tax and Profits Tax. Originally, the figure was 35 per cent, and this figure was the one most frequently used in discussion of the Finance Act, 1965. But a number of concessions, or perhaps acknowledgments, were made by the Government during the course of the passage of that Act, and, as a result, the figure is higher than 35 per cent.

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    I gave it in my speech as 36½ and the right hon. Gentleman said, the next day —on 5th May, 1966, in col. 1877 of the OFFICIAL REPORT—that he did not quarrel with my estimate. Curiously enough, that makes me rather suspicious. I think that that must mean that my estimate suited him, because otherwise he would have quarrelled with it. I begin to think that I might have pitched it a little high.
    However that may be, whether the figure is 36½ per cent, or 36 per cent., or some other more exact figure which perhaps the Chief Secretary will give us, he went on to justify the increase to 40 per cent, basically on two grounds. Not to put them in chronological order, the more important ground on which he rested was that as the new Schedule F tax does not have to be paid for a month after the date of payment, there will be only 11 months' receipt of the tax in the current year. The second and minor ground was that the increase in dividends last year as a result of forestalling would result in a fall in dividends this year.
    There is something of a flaw in both arguments. To take what might be called the eleven-twelfths argument, I should have thought that the Chancellor would get his money more quickly, particularly on interim dividends, because, according to the Twelfth Schedule to the 1965 Finance Act, tax on distributions will be paid 14 days after the end of the month in which the dividend is paid.
    The Chief Secretary did not tell us—I do not complain about this, because he was then giving a Second Reading answer and, in Committee, we can now discuss the matter in more detail—how much he expected to benefit from this, and there must be a benefit, and nor did he tell us—and this is a figure which I would very much like to have if it can be given—what he expected to get from Schedule F tax as a whole. Unless he gives us that, we cannot tell whether the eleven-twelfths argument is valid for upping the 36½ per cent., or 37½ per cent, which we suggest, to 40 per cent. On both these points more calculation seems to need to be done and more information, which the Committee can reasonably wish to have, should be given.
    If the figure of £1,000 million is right for 40 per cent., I suggest that as a
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    matter of arithmetic 37½ per cent, would cost £62½ million. I apologise for the complexities of my somewhat arithmetical introduction, but this is a matter on which the Chief Secretary was, naturally, somewhat short in his explanation and it is something which we would like him to expand when the time comes for him to reply.
    In the second part of my speech I turn to the wider considerations. The best comment I can make is to give two short quotations from an article in the Investors Chronicle of 6th May, three days after the Budget and the day after the Chief Secretary had spoken. The article is called,"… and 40 per cent. it is" and it starts by saying:
    "If you can sober up and stop throwing your hat in the air for a moment, you will realise that the failure to increase surtax and income tax is a snare and a delusion. Let's take a quick look at just what a 40 per cent, corporation tax means to companies and their investors."
    A few lines further on it added:
    "… it is a nice bit of double talk to give transitional relief with one hand and snatch it back with the other in the shape of a higher rate of corporation tax plus a payroll tax."
    As I understand the position—and I have said this before and not been challenged—the old rates combined amounted to a total of 56¼ per cent. The new rate is equivalent to 64¼ per cent, and by any standard that is a massive increase which must be justified by the Government.
    I take just one company to show the effects which this change could have, and I pick I.C.I. For I.C.I, the change between 35 and 40 per cent, means finding £4·3 million. It means that the dividend cover of this enormous firm drops from 1·06 times to 0·98 times, and for many companies, and I am thinking particularly of the stores who will have most serious problems in this respect and who are the companies which will be hurt most if the proposals for the Selective Employment Tax go through the House unamended, the difficulty may be even greater.
    Many companies during the year had to decide what sort of figure might be in the Chancellor's mind when he rose to make his Budget Statement, which this year was later than usual because of the General Election. A company of which

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    I am a director started by looking at its monthly accounts on the basis of 35 per cent, and moved, rightly as it has turned out, to 40 per cent, for about the last seven or eight months of the financial year. Most companies did that, and on the whole it was probably the wise and right course, but we are also entitled to remember that it was the figure of 35 per cent, which over and over again was bandied around the Committee and the House a year ago, and it is not surprising that many companies will find themselves in an even tighter liquidity squeeze as they try to "raise the wind" to meet the Chancellor's demands.
    This gives added importance to the necessity for the Chancellor to make clear fairly soon what sort of instructions he is to give to the banks about advances to be made to meet the S.E.T. in the autumn of this year. I do not ask for an answer now. As the right hon. Gentleman knows, we rather hoped to. get an answer in the debate on the Regulator on Clause 15, somewhat late at night towards the end of last week, but the Chancellor was charmingly evasive and had nothing to say about it. It is a matter to which he must be giving a lot of thought.
    This is an urgent matter from the point of view of a Budget judgment and to the banks and the companies who must know where they stand, and while I will say no more if the Chief Secretary does not want to comment on it today, I hope that, when he winds up the debate on the Second Reading of the S.E.T. Bill on Thursday, the Chancellor will say whether he can do so.
    The Chief Secretary will no doubt argue the cost of our proposal. I made my own views clear on another Amendment yesterday. On these great matters I would not put forward a proposal unless I felt it to be something which, if the shoes were reversed, I could reasonably accept. I myself do not believe in the doctrine of what might be called the alternative Budget, which is that every time the Opposition put forward a proposal which would reduce or alter the Chancellor's Budget judgments, there is an obligation on them to fill in the amount which might be left vacant if the Committee happened to agree with the Opposition. That is not a doctrine to which
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    I subscribed in government, except when I knew that I had a very bad case, and I used it in that sense from time to time, but that is not an argument which attracts me, particularly in opposition.
    Even leaving aside all the questions of I.R.C. and the Land Commission, and free drugs, and so on, even within the Chancellor's own Budget, our proposals in relation to the premiums for manufacturing industry would certainly more than cover this proposal.
    4.0 p.m.
    The last point that I want to make is that the two explanations which the Chief Secretary gave for increasing the figure from 36½ per cent, upwards and ending at 40 per cent, and, as he said, going fractionally beyond 40 per cent, to achieve the same mathematical result, are both, in essence, temporary measures. He will acknowledge that. It was a point made by my right hon. Friend the Member for Barnet (Mr. Maudling) and in response the Chief Secretary simply said that all factors would be taken into account next year. We have very little confidence in that and in the desire of the present Administration to reduce the burden of temporary taxation and therefore we move this Amendment.
    To summarise, first, it is quite clear that the mathematics, as they stand, are incomplete. Secondly, it is clear that the two arguments upon which the Chief Secretary most relied, anyway in his reply to me in the Budget debate, are temporary factors and we desire to put down a marker for him this year. We could have put down 36½ per cent. It would have been unreasonable for the Opposition to put down 35½ per cent, or even, to make allowances for special factors, the 36½ per cent, which otherwise would have broken even. We have gone to 37½ per cent, which is a full £30 million or so more than the 36½ per cent, which otherwise could be justified.
    That seems to be an entirely responsible attitude for the Opposition to take. A 40 per cent. Corporation Tax is disturbingly high and it will have its most serious effect upon investment. The Chancellor must have read with some anxiety the comments of the C.V.I., which my hon. Friend the Member for Oswestry (Mr. Biffen) brought before this Committee in a debate on the Regulator. It is said that

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    it might be that a dip was coming during the next 12 or 18 months. We believe that we have made out a formidable case on this Amendment and that the Government are on the wrong tack in this matter. We will certainly, in the absence of a miraculous change of mind which I do not expect from the Government, wish to press this Amendment to a Division.
    Mr. Joel Barnett: The right hon. Gentleman the Member for Enfield, West (Mr. Iain Macleod), is being a trifle disingenuous here. Of course, anyone would want to see a slightly lower rate of any form of taxation. I would have liked to have seen a rate lower than 40 per cent., but to suggest that we can save £62½ million and to make the point about the arithmetic accuracy, or how it has or has not arisen, is really to stretch this rather amusing point rather too far; as it is also to say that, while one has made a formidable case to reduce the revenue by £62½ million, one will not present to the Committee any other way in which this sum might be raised.
    Most economists in all sections of the community, seem to have recommended that the amount taken as by the Chancellor this time, of about £242 million to £300 million is about right. As I said in the Budget debate, I would not have gone quite so far, but as I understand we are in agreement that this was about right. It is not being very responsible to suggest that £62½ million of revenue should be raised in one direction, without suggesting how it could be raised in another.
    Mr. Iain Macleod: I hold to the doctrine that when the Chancellor has presented his proposals we must judge and seek to amend them. In this case I made it clear that on the S.E.T. Bill we will move to strike out the premiums on manufacturing industries, which are more than twice the amount involved in this Amendment.
    Mr. Barnett: That is an entirely different point. The right hon. Gentleman knows that I would have preferred the amount given in premiums to be used in a different way, perhaps not in quite the same way as the right hon. Gentleman. I do not wish to say any more about that. I would simply like to add a
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    question to those posed by the right hon. Gentleman to the Chancellor about the enormous deflationary effect of S.E.T. and the liquidity position of companies as a result of the, approximately, £100 million a month being taken out from September onwards.
    I noted the Chancellor saying that he would make something extra available to companies by way of special deposits, so reducing the amount that companies need to give by special deposits. I do not quite know what he has in mind, but I am particularly concerned about the small companies which are already borrowing to the hilt, and I would like to know what he proposes to do. It may be that this proposal could have the effect of putting into liquidation many of these small companies.
    This may not have been the intention of the Chancellor, but I can see that, no matter what instructions he gives to banks, they may not be inclined to lend more to the small company, to whom they are already lending up to the hilt. I will be very interested to hear how he proposes to deal with this. As far as the Amendment is concerned, I am glad to note that the right hon. Gentleman is not advising his hon. and right hon. Friends to press it to a Division.
    Mr. Iain Macleod: I am.
    Mr. Barnett: Then I hope that it will be overwhelmingly defeated.
    Mr. Raymond Gower: I think that the hon. Gentleman the Member for Heywood and Royton (Mr. Barnett), would admit that even if an Opposition, or a number of critics of a Finance Bill, could agree a global amount of revenue, they would not necessarily accept in toto the allocation or proportion of that revenue to be collected in various ways. It is legitimate to suggest, as my right hon. Friend has done, that less be apportioned to one section of the collection of the revenue and compensated for in another manner. That is based on the assumption that an Opposition or a group of members agrees entirely with the exact apportionment prescribed by a Chancellor.
    I trust that the Chief Secretary will not think that we are being unreasonable in looking critically, to put it no higher,

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    at this particular figure. To oversimplify the matter, the first thing that we have to look at is the broad comparison between the former combined amount collected in company Income Tax and Profits Tax, and the amount which will now be collected in the combination of Corporation Tax and the Income Tax on company dividends. As my right hon. Friend has pointed out, we have a very big margin between the old combined rate of 56¼ per cent, and the new combined rate of 64¼ per cent.
    Mr. Barnett: This figure was mentioned before by the hon. Gentleman's right hon. Friend. It is assuming that all public companies will distribute 60 per cent.
    Mr. Gower: If the hon. Gentleman had listened to me carefully, he would have noted that I said that we are faced, in the first place, with this broad comparison and I emphasise the word broad.
    Mr. Barnett: It is not fair.
    Mr. Gower: It is fair. In the first place, these are the stark broad figures with which we are faced, although there may be variations within them. This is the first thing that we have to look at critically. During the debates on last year's Finance Bill—and the Chief Secretary was here practically all the time and played an enormous part in them—he will recall that throughout those debates, during the latter part, at any rate, there was a general impression that it would be a lower figure than this.
    My hon. Friends will recall that 35 per cent, was constantly referred to. I remember the Chief Secretary saying that it might be 35, 36 or 37 per cent. I admit that he was never bound down, but he rarely said that it might be 40 per cent. The gravamen of his argument was that it would be 35 or 36 per cent., and he never talked in terms of 39 or 40 per cent.
    The right hon. Gentleman is entitled to say that, after that, certain things happened. Certain concessions were made, but we respectfully submit that the Government must do one of two things. They must either be able to establish that the subsequent adjustments and tax changes justified the higher rate,
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    or they must say clearly that they intend that companies should bear, and will in the future bear, a much heavier burden of taxation. The emphasis so far has been not that the companies should bear heavier burdens of taxation, but that the higher rate is called for by changes made during and after the passage of last year's Finance Bill.
    If the Government say that companies are to bear a heavier burden of taxation, they must go further and justify not only the need for such a heavier burden but its value in the future. It is wrong that companies should in the future bear a much heavier burden of taxation.
    We have had arguments about the general burden of taxation, and I should like to relate those arguments particularly to companies in all sections of industry, which includes not only the so-called productive industries, but also the service industries. The Chancellor has placed most companies in a very difficult position. There have been many involved and difficult tax changes, of which this is merely one. There is the new Selective Employment Tax, the change from investment allowances to investment grants, and the inter-relationship between these different things. It is extraordinarily difficult for the most skilled company advisers to calculate with any accuracy the cumulative effect of them all.
    In this context, it is not unreasonable for us to press the right hon. Gentleman either to justify the raising of the rate or to explain that it is called for by some of the changes to which he referred last year and this. I support the Amendment.
    Mr. Frederic Harris: I shall speak for only a few minutes, because my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) made such an interesting speech that I am waiting keenly to hear the Chief Secretary's reply.
    I was called shortly after the Chancellor of the Exchequer delivered his last Budget speech, and I remember only too well how so many right hon. and hon. Members left the Chamber feeling, with a sigh of relief, that everything was going rather well. I took a very different view very soon afterwards, because it appeared to me, as I tried to calculate the situation with a 40 per cent. Corporation Tax, that on a general basis, apart

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    from the individual cases which can be cited, company tax was going up by about 15 per cent. That was a terrific increase, and a very heavy burden for companies to stand.
    In his speech this afternoon, my right hon. Friend the Member for Enfield, West referred to it as a massive increase, which is the right description. As my hon. Friend the Member for Barry (Mr. Gower) has reminded us, when the Corporation Tax was first announced a year ago the reference to 35 per cent, came out time and time again in our discussions. But I also remember that the Chancellor said on at least one occasion that 40 per cent, would be the absolute maximum, or words to that effect.
    4.15 p.m.
    I cannot find the relevant reference, but this was the indication which he gave. Knowing what a Socialist Chancellor would do, I automatically assumed the maximum, as chairman of a public company, when we were making our calculations before this Budget. I assumed that he would do the worst, and go to the full 40 per cent., and he did. I was even so unfair to him as to think that he might go above 40 per cent.
    As has been rightly pointed out, on a broad basis of a 60 per cent, distribution, combined company tax is going up, in effect, from 56¼ per cent, to 64¼ per cent. This means that two-thirds of the profits of the main companies upon whom we depend for so much, particularly exports, will go in taxation. This is a fantastic burden, and, in common sense, there must be a limit to how far one can go.
    It is all very well for us in industry to be constantly told that we can step up our efficiency by some mythical means to ease the burdens, or, increase production in one way or another. The real answer is that, sadly, people have to put two and two together and find the answer in the end, and the pressure comes on for increases in costs and prices, both of services and goods. Such a heavy burden of company taxation tragically means increases in costs. This goes on and on, and we return to the hopeless spiral from which everybody is constantly suffering, chasing after higher and higher prices all the time. Industry has no alternative but to do that.
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    I therefore support the view of my right hon. Friend the Member for Enfield, West that 40 per cent, is far too high. I trust that when we have a Conservative Administration again this percentage of Corporation Tax will be reduced. I realise that although it is right that we should force the Amendment to a vote this afternoon we shall get no change from the Chancellor for the moment. I cannot imagine that he intends to give us satisfaction on this point.
    The Chancellor of the Exchequer (Mr. James Callaghan): Satisfaction, but not a reduction.
    Mr. Harris: The Chancellor is very kind, but the two go hand in hand as far as I am concerned. I am waiting for the time when we have a Conservative Chancellor and can see a reduction in this fantastically massive rate.
    Mr. Rafton Pounder; I could not help being amused when my hon. Friend the Member for Croydon, North-West (Mr. Frederic Harris) said that he based his calculations of the tax on the maximum. Equally, one should proceed on the assumption that it is permanent. Consequently, I am interested but not impressed by the Chief Secretary's reference to the possibility of the tax not being permanent. There is no precedent from his party for this.
    It is an acknowledged maxim of fiscal legislation that a tax should be easy to collect. This can, and does in a case such as we are discussing, result in a tendency for the Chancellor to increase a tax not because the category concerned should necessarily have its tax increased, but merely because it is the easiest way of raising additional revenue. I find myself in some difficulty, therefore, in drawing a distinction between taking the heat off the economy and raising revenue for expenditure purposes. If one wishes to take the heat off the economy, to go about it through an increase in Corporation Tax is somewhat strange. I should have thought that Income Tax, or, for that matter, Corporation Tax would be increased only when Government expenditure was directly intended.
    On occasions such as this, I cannot help recalling the occasion when a distinguished visitor was being shown round a re-equipped and modernised

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    factory in my constituency by one of the company's directors. The director said, almost tearfully, that, as a result of the modernisation programme the company was employing only half the number of people it had been employing, say, a decade or so before. What the director did not say, and what he should have said, was that, but for the modernisation, it probably would not have been employing anyone at all.
    Modernisation is largely financed from retained company profits. Therefore, to increase Corporation Tax in this way is to do no more than penalise a company's ability to re-equip and modernise itself. A company, though it may be a corporate entity, must not be regarded as a broad and lucrative back which can be shaved at will. How can we hope to achieve the industrial modernisation which is the prerequisite of economic progress, and which everyone on both sides of the Committee agrees is necessary, if we are to have a savage increase in an already savage company tax bill?
    Mr; John Nott: There is another important matter arising out of this Amendment. I refer to the erosion of the Corporation Tax base. The suggestion that the rate should be 40 per cent, rather than 37½ per cent, is the first evidence of what I call the erosion of the tax base. As hon. Members know, the financing of companies has been made very much more expensive since the introduction of the Corporation Tax from the point of view of equity financing as opposed to debt financing. This applies to preference stock as well.
    Since the introduction of the Corporation Tax, more and more companies have resorted to the loan capital market rather than the equity market to finance their expenditure. In due course, this will result in the erosion of the base upon which the Corporation Tax is levied. Equity financing is contracting and debt financing is expanding, and this process will continue from now on.
    The Chief Secretary will know that one of the reasons for the high debenture rates in the market now is that companies, since the introduction of the Corporation Tax, have had far greater resort to loan capital finance. As this process continues, so will the Corporation Tax base shrink,
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    and so will it be necessary year by year to raise the rate of Corporation Tax, as has happened on this occasion, in order to bring in a commensurate amount of revenue.
    This situation will be seriously aggravated if the Government go ahead with the nationalisation of steel. This is closely -relevant to the Amendment now before us. If the nationalisation of steel comes about, it will take £600 million or so of equity out of the market, which, in terms of Corporation Tax yield, at 40 per cent, related to that £600 million, will represent £24 million. Thus, if steel nationalisation goes ahead, the base of the Corporation Tax will be further eroded, with the consequence that the rate will have to be raised again to bring in a commensurate amount of revenue. All the time, with a narrowing base and a rising rate, there will be a vicious circle.
    I hope that the right hon. Gentleman will accept that what is going on now calls in question the whole basis of the Corporation Tax as a system of taxation. The base on which it is levied will narrow the whole time because debt financing is a charge for Corporation Tax purposes whereas equity dividends and preference dividends are not, and so the rate will have to rise year by year in order to bring in the same amount of revenue.
    My question to the right hon. Gentleman is simply this: would I be right in saying that one of the principal reasons for the rise in the Corporation Tax rate is that, since the Chief Secretary announced a rate of 37½ per cent, as being the equivalent to the old basis of Income Tax and Profits Tax, the base upon which the Corporation Tax is levied has shrunk considerably? Is this not one reason why the rate has had to be raised to 40 per cent, on this occasion?
    Mr. Norman St. John-Stevas: My intervention, too, will be brief, but brevity must not be taken as any reflection upon the importance of this Amendment. I respectfully agree with my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) that this is one of the most important, if not the most important, Amendments to the Finance Bill.
    The importance which we on this side attach to the Amendment is shown, first, by the restrained manner in which it was

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    moved by my right hon. Friend, and, second, by the modest reduction of 2½ per cent, which we propose. It is a modest reduction both in itself and when taken in the context of the Chancellor's general budgetary measures, which are highly deflationary and which will almost certainly have the economy moving sharply towards recession by the autumn.
    In an intervention a few minutes ago, the Chancellor said that he would give the Committee satisfaction but not a reduction. Plainly, the only complete satisfaction we could have would be a reduction, but one can say that we should be less dissatisfied if, as a result of this Amendment, we were given additional information on how the Chancellor's figure has been arrived at. So far, we have been vouchsafed very little information on how this most important figure has been reached.
    The burden of proof in justifying a level of 40 per cent, rests squarely upon the Government. The only figures we have had are the ones provided by my right hon. Friend. His calculation was that to maintain a rate of taxation equivalent to the previous Income Tax at 8s. 3d. and Profits Tax at 15 per cent., the Corporation Tax should have been at 36½ per cent. How is the gap between his figure of 36½ per cent, and the Chancellor's proposed 40 per cent, to be accounted for?
    The Chancellor's rate of Corporation Tax is, moreover, a means of increasing taxation by stealth. Although the figure of 35 per cent, was bandied about when the Corporation Tax was first presented to the House, it was widely rumoured before the Budget that the tax would be higher, and people were psychologically conditioned to a rate in excess of 40 per cent. When the actual figure of 40 per cent, came out, there was a feeling of relief, which may have been psychologically justified but was certainly not statistically justified.
    The effect of this high rate of tax on small companies has been referred to already by the hon. Member for Heywood and Royton (Mr. Barnett). It will be felt not only by small companies but, in particular, by new companies. This point was implicit in the important intervention made by my hon. Friend the Member for St. Ives (Mr. Nott), on which
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    we hope that the Chief Secretary will comment.
    This high rate of taxation is part of the dirigisme which the Government are attempting to impose upon the economy —obviously, quite unsuccessfully with their incomes policy, but only too successfully with their fiscal policy. With a 40 per cent, tax it will be almost impossible for the distribution of dividend by new and untried companies to take place at a level which will attract adequate risk capital. It will also greatly increase the difficulties of our overseas companies which contribute so much both in the short term and in the long term to our economic prosperity.
    These bad effects are inherent in the tax itself. The merit of the Amendment is that it would to some extent limit these ill-effects. We cannot cure the evil of this tax entirely, but the Amendment is a responsible attempt to limit its bad effects.
    4.30 p.m.
    Sir Tatton Brinton: I, too, will be. brief in following up the points made by several of my hon. Friends about the effect of this tax, particularly in relation to dividends. The dividend receiver seems to be regarded these days as someone who merits no encouragement or assistance from the Government.
    I should like to point out the effect of Corporation Tax on that part of the profits which are paid out in dividend. Until the introduction of Corporation Tax but taking the existing standard rate of Income Tax of 8s. 3d., for a shareholder to receive £1 after tax paid by the company, the company had to earn 45s. 8d. With Corporation Tax at 35 per cent., to pay out a net £1 after deduction of Income Tax, the company would then have to earn 52s. 4d., or an increase of 6s. 8d. in the amount which must be earned for that net payment. Under the rate of Corporation Tax now proposed at 40 per cent., to pay a net £1 to a shareholder after deduction of Income Tax, the company will have to earn 56s. 9d.
    The result of this rate of Corporation Tax upon the shareholder and upon the company compared with the effect of the former system of Income Tax plus Profits Tax has, therefore, been that for every £1 paid after tax to a shareholder a company has to earn no less than an extra 11s. 1d.
    The Chief Secretary to the Treasury (Mr. John Diamond): Nobody could possibly complain about the speeches which have been made on this issue. They have been short and to the point, and have dealt with a relevant and important question. I hope, therefore, that I shall have an opportunity of answering all the questions which have been put to me.
    I hope that the right hon. Member for Enfield, West (Mr. Iain Macleod) will forgive me if, at the beginning of my reply, I take it that he was putting forward a probing Amendment. On that basis, all the questions raised by the right hon. Gentleman were fully justified. We will come later to the question whether a reasonable consequence of what the right hon. Gentleman said concerning his probing Amendment is a Division.
    Let us, however, treat the Amendment as a probing Amendment to begin with. I will give the right hon. Gentleman the information for which he asked in detail and then deal more generally with some of the principles, some of them, alas, forgotten since they were discussed so regularly and with such persuasiveness from this side of the Committee and acceptance from the opposite side as to the Corporation Tax.
    The £1,000 million is, admittedly, a round figure, to indicate two things. The first is that there is this year for this item a larger measure of doubt and error than is normally the case with taxes which have been levied year after year and where the circumstances have settled down. We are dealing with a quite unusual set of circumstances in this first year. Therefore, it was right to insert a figure which, by its lack of precision, would not mislead people into thinking that one could calculate to the nearest 1d. or, indeed, to the nearest £1.
    It is not right to conclude from that that we are calculating to the nearest £1,000. It is the best estimate that we can put forward. If instead of a figure of £1,000 million we had put forward a figure of £1,002 million, it would have been misleading as to the accuracy with which one felt that the Revenue could calculate it.
    I have been asked what Schedule F tax is estimated to produce as a whole, because that is the key to the figures
    308
    which I have put before the Committee and which is well understood. The estimate for Schedule F tax—there is no reason why I should not be perfectly happy to give it to the Committee—is £575 million.
    If we now do a little arithmetic—I know that the Committee does not like arithmetic, but it is the key of the right hon. Gentleman's speech—£575 million represents eleven-twelfths, having regard to the periods, of collection, of a full year's revenue. If we therefore add one-eleventh to get to twelve-twelfths, we are adding about £52 million—in round figures, £50 million. Fifty million pounds is approximately 5 per cent, of £1,000 million. If we add on 5 per cent., we are by this one item alone more than fully accounting for the difference between the right hon. Gentleman's figure of 36 or 36½ per cent, and the figure of 40 per cent. In short, this one item alone fully accounts for the difference.
    Let me deal a little more carefully with the difference. The hon. Member for Barry (Mr. Gower) and some of his hon. Friends have talked about figures being bandied about. No figures were bandied about. No figures were bandied about last year. What I said in reply to the many questions put to me was that for the Committee to understand fully how a new system of taxation compared with an old system of taxation, it was vital to know at what rate the yield would be the same. I gave that rate several times in the initial stages of the debate as being 35 per cent.
    When the concessions were asked for and made by my right hon. Friend the Chancellor, I said, and it was easily understood, that that 35 per cent, would, therefore, go up somewhat so that the same yield should be provided by a new system of taxation as compared with an old system of taxation. That was purely a mental process to understand what we were debating.
    A second and separate issue is the rate which my right hon. Friend then said would apply this year. He made it clear that it would be wise to have regard to a figure of 40 per cent. That was what my right hon. Friend said in that context. The 35 per cent, was the figure which I gave in my context.
    The 35 per cent, then went up to 36 per cent, or so. The right hon. Member

    309
    for Enfield, West calculated that figure himself, and I agreed with it. Five per cent, on top of that would produce a figure of over 40 per cent. I said, and I repeat, that the best estimate which we have today is that comparing like with like, one would need to have a figure in excess of 40 per cent, to produce for the coming year the same revenue as was produced by the old system.
    Of course, 36 per cent, and 5 per cent, makes 41 per cent. The general market estimate, based on that calculation, not on our psychology—it is not a difficult calculation to make—was 42½ per cent. When my right hon. Friend announced the figure of 40 per cent., he pleased those in the market because it was less than they expected and because it imposed a smaller burden than would have been the case under the old system had the rates remained unaltered at 41¼ per cent, for Income Tax and 15 per cent, for Profits Tax.
    Mr. Frederic Harris: The Chancellor told the Committee last year that 40 per cent, would definitely be the maximum. I distinctly remember his saying that it would be the maximum. He did not give 40 per cent, as a general guide. There were many interchanges at that time on the point.
    Mr. Diamond: There is nothing different in what I am saying compared with what the hon. Gentleman is saying. Nobody denies that the Chancellor referred to 40 per cent. Nobody denies that I referred many times to 35 per cent, as being the equivalent figure. I hope that I have satisfied the Opposition that the comparable rate would be in excess Of 40 per cent. The reason is very easy to see. The figure of 40 per cent, represents a lighter burden on industry, as industry and, indeed, the Stock Exchange fully recognised when my right hon. Friend made his announcement.
    Mr. Gower: The right hon. Gentleman is asserting that the Chancellor was fairly clear and unequivocal in his assessment of 40 per cent, as a wise figure. Can he explain why quite responsible large companies made provision for Corporation Tax at a lower rate than 40 per cent.?
    Mr. Diamond: The evidence is that they made provision at the rate of 40 per cent. I am not putting any new
    310
    words in the mouth of the Chancellor of the Exchequer. If the hon. Gentleman wants to know what my right hon. Friend said, he can look it up in HANSARD.
    I return to the 56¼ per cent., which is the comparison with last year, and the 64¾ per cent, which the Opposition—and I am surprised that the right hon. Gentleman should do this—support. I should have thought that for intelligent discussion we should compare like with like. It is nonsense to compare 64¾ per cent, with 56¼ per cent., as the right hon. Gentleman knows, and I hope he will forgive my saying so. The first figure to take into account is 40 per cent.
    If a company proceeds to plough back all its taxed profits and does not distribute any dividend, its total burden of taxation is 40 per cent, compared with 56¼ per cent, under the previous system. If it proceeds to pay a dividend of 40 per cent, it will be on level pegging under the two systems. If it distributes more than 40 per cent.—for example, 55 per cent., a very high distribution—it would pay more. That is the intention of the Act. The intention of Corporation Tax is to encourage companies to plough back so as to achieve faster growth and greater efficiency.
    The main argument produced by the Opposition in support of the theory that one should distribute to the shareholders and that the shareholders would in turn invest in new companies is totally destroyed when one considers the facts and statistics I gave them all last year.
    Mr. Patrick Jenkin: They are quite untrue.
    4.45 p.m.
    Mr. Diamond: I am sorry that the hon. Gentleman has said that. I gave them last year and I repeat them now. I will write to the hon. Gentleman giving all the calculations and all the sources. I will expect a public letter from him saying whether they are untrue in this or that respect, or a withdrawal of what he has said.
    Mr. Jenkin: The right hon. Gentleman is making too much of an intervention which should not have been made from a sedentary position. I am most grateful to him for his offer to write to me setting out the figures. I hope that he will show

    311
    exactly where Harold Wincott went wrong in his articles in the Financial Times, which were diametrically opposed to what the right hon. Gentleman has been saying.
    Mr. Diamond: I have already written to Harold Wincott and told him. I will accept that I am taking too seriously into account an intervention made at a moment's thought and from a sedentary position, which is not the ideal position in which to think clearly. I hope that I have made it clear that a fair comparison is with a dividend of 40 per cent., which is an average dividend. We agree that the company which pays a higher dividend would pay a higher tax. But this is what the Corporation Tax is all about.
    I hope that I have satisfied the Committee, first, that the figures are reasonably calculated; secondly, that we are absolutely honest in giving a comparison between the new system and the old system; and, further, that the Chancellor of the Exchequer, as he said when he first mentioned the tax, was not proposing to introduce penal taxation, but merely wanted to modernise the taxation system and to introduce a tax which encouraged efficiency, plough-back and development.
    That was my right hon. Friend's purpose. He has carried it out by imposing a rate involving a somewhat lower burden of taxation than would otherwise have been the case. I repeat that it was absolutely right that we should have had this discussion, but if the Opposition wish to pursue to a Division an Amendment which would reduce the revenue for the current year by £67 million, I would regard that as a wholly irresponsible act.
    Mr. Geoffrey Hirst: What the Chief Secretary said has not satisfied me. I do not want to go over all the ground again. I do not question the right hon. Gentleman's sincerity, but it is not good enough to advance today one set of arguments, the thesis of which happens to fit in somewhat conveniently with his appreciation of what the effect on industry will be after he used last year a totally different set of arguments, at least as they were so understood by hon. Members, so as to justify a totally different figure. I am not saying that the right hon. Gentleman set out to do this. He knows that I do not
    312
    accuse him of things of that sort. I am merely saying that that is the effect.
    In several discussions last year on Corporation Tax, I sought to pitch my arguments and calculations—unfortunately, the HANSARD index is not up to date and it is difficult to find the references quickly —on the basis of a Corporation Tax of 40 per cent. Each time, the right hon. Gentleman, the Financial Secretary, or some other Government spokesman "shot me down in flames" by saying that the equivalent rate was 35 per cent. I cannot understand why the right hon. Gentleman keeps on talking about 40 per cent.
    I am no judge of the truth of the matter, because I have not enough knowledge to know the truth of it, but the Committee does not wholly consist of relatively inexperienced people in these matters. Everyone on this side of the Committee truthfully got the impression which has been the basis of our argument today. If the truth of the matter, which I have not yet quite arrived at in the calculations, which are getting too technical and I want to deal with the principle, is more on the lines of what the right hon. Gentleman has said today, then unintentionally, of course, he grossly misled the Committee during the discussions on last year's Finance Bill. Certainly, he misled a very large number of companies who thought that they were making a reasonable provision on the basis of 35 per cent., although they recognised that there might be a liability up to 40 per cent. The right hon. Gentleman cannot have the argument both ways, to fit in conveniently with "shooting us down" on Amendment after Amendment last year, and then advance a totally different argument on the same basis so as to try to "shoot us down" this time.
    I do not see how we can proceed to a Division, which, I think, would be very proper, until the position has been sorted out a little more. If any figures pass across the Committee to my right hon. and hon. Friends, I hope that I shall be supplied with a copy, because I wish to go into them as well.
    A vast number of people were misled, and it is most improper for us to be challenged today when we base our arguments on those put to us from the Treasury Bench last year. It is very disturbing

    313
    and I am not satisfied that we have the true position. Certainly, the country should have it, and quickly, and companies are entitled to know why they were misled. It is a very serious matter.
    I want to refer briefly to the question of small companies, to which the hon. Member for Heywood and Royton (Mr. Barnett) also drew attention. He did not refer to what I am about to say, but to the fact that there is a burden on small companies. Under the previous law, at a time when Income Tax and Profits Tax were involved, in many instances they did not qualify for Profits Tax. They now all qualify for Corporation Tax, and I am not aware that the Government are doing anything to meet their case.
    Take a company making a profit of £1,000. Under the old system, if it paid a. gross dividend of £400 it would suffer Income Tax on the £600 retained at 8s. 3d., or a taxed figure of £247 10s. The same company making the same profit now would have to pay £400 Corporation Tax plus Income Tax at 8s. 3d. on a dividend of £400, which is £165, making a total of £565, which is getting on very nearly for double. That is a grave disadvantage to smaller companies which, as far as I can see, do not find any place in any Amendment put forward by the Government.
    I am seriously concerned with the picture which has been put across the Floor today. It is different from the one which the right hon. Gentleman gave us last year, or, at any rate, different from the only reasonable and proper interpretation that vast numbers of people could put upon his speeches on these occasions.
    Mr. Iain Macleod: My hon. Friend the Member for Shipley (Mr. Hirst) is right in saying that the Chief Secretary's explanation has been entirely unsatisfactory. As I hope to show in a moment, there is an elementary flaw in his argument. First of all, we did not expect to come to agreement on the matter, and he must not think that because I moved the Amendment in a relatively peaceable manner it is not a subject on which I feel deeply. It is.
    There were some questions on the mathematics which I thought well worth probing. The Chief Secretary said, if I remember, that it was an intellectual
    314
    nonsense in a discussion not to compare like with like. At one point in his speech, I wished that he could have looked round and seen two of his hon. Friends who, I think, saw the pitfall into which he dropped.
    The right hon. Gentleman was talking about two quite different things. He said that because £50 million, the eleven-twelfths argument, is one-twentieth or 5 per cent, of £1,000, that alone explains the difference between the old figure and the new. That is quite untrue. It is a different 5 per cent., as anyone can see.
    The increase from 35 per cent, to 40 per cent, is an increase of one-seventh, or 14 per cent. What the Chief Secretary has done is to commit an error into which a primary schoolboy would not have fallen. He has taken the 5 per cent, of the £1,000 and equated that with a 14 per cent, increase from 35 to 40 per cent.
    Another way of proving that his figures are falsely based is that he claimed that the £50 million more than made up the 5 per cent, difference, and then he went on to say that the cost of our Amendment, which is 2½ per cent., is £67·5 million. With respect, the Chief Secretary ought not to put those sorts of arguments before the Committee and assume that we are not quick enough to take up the particular point that he made.
    I do not want to go into his other points today. He said that the Stock Exchange was satisfied with the 40 per cent, and that prices rose accordingly. But the Stock Exchange has such a brilliantly delicate mechanism of discounting that, long before the event, it takes account of all these things. I often think that if an atom bomb fell somewhere, prices would rise the next day because it would have been discounted on the Stock Exchange and it could argue that only one bomb had fallen instead of two. The right hon. Gentleman knows that the mechanism of the City of London is so delicate that these matters are taken into account, and, therefore, there is no argument whatever.
    I have shown that the right hon. Gentleman's mathematics are wrong, even though I had no advance notice of the points that he would make. I believe that his philosophy is wrong, too. He

    315
    says, finally, that the Amendment is irresponsible. I should have thought that we had proved yesterday that we on this side do not take an irresponsible attitude in these matters.
    I said yesterday that I could not recommend my right hon. and hon. Friends to vote for a particular Amendment simply because I knew that I could not have accepted what it involved if I had been Chancellor of the Exchequer. If
    I were Chancellor today, I honestly believe that 37½ per cent, is where I should have sought to put the figure for this year. That being so, I think it right that my right hon. and hon. Friends should divide the Committee.
    Question proposed, That "40" stand part of the Clause:—
    The Committee divided: Ayes 248, Noes 173.

    Division No. 35.]

    AYES

    [4.58 p.m.

    Abse, Leo

    Doig, Peter

    Johnson, Carol (Lewisham, S.)

    Allaun, Frank (Salford, E.)

    Donnelly, Desmond

    Johnston, Russell (Inverness)

    Alldritt, Walter

    Dunn, James A.

    Jones, Dan (Burnley)

    Allen, Scholefield

    Dunwoody, Mrs. Gwyneth (Exeter)

    Jones, J. Idwal (Wrexham)

    Archer, Peter

    Dunwoody, Dr. John (F'th & C'b'e)

    Judd, Frank

    Armstrong, Ernest

    Eadie, Alex

    Kelley, Richard

    Ashley, Jack

    Edelman, Maurice

    Kenyon, Clifford

    Atkins, Ronald (Preeton, N.)

    Edwards, Rt. Hn. Ness (Caerphilly)

    Kerr, Dr. David (W'worth, Central)

    Atkinson, Norman (Tottenham)

    Edwards, Robert (Bilston)

    Lawson, George

    Bagier, Gordon A. T.

    Edwards, William (Merioneth)

    Ledger, Ron

    Barnes, Michael

    Ellis, John

    Lever, Harold (Cheetham)

    Barnett, Joel

    English, Michael

    Lewis, Arthur (W. Ham, N.)

    Baxter, William

    Ensor, David

    Lomas, Kenneth

    Beaney, Alan

    Evans, Albert (Islington, S.W.)

    Loughlin, Charles

    Benn, Rt. Hn. Anthony Wedgwood

    Evans loan L. (Birm'h'm, Yardley)

    Luard, Evan

    Bennett, James (G'gow, Bridgeton)

    Faulds, Andrew

    Lubbock, Eric

    Bessell, Peter

    Fernyhough, E.

    Lyone, Edward (Bradford, E.)

    Bidwell, Sydney

    Finch, Harold

    Mabon, Dr. J. Dickson

    Binns, John

    Fitch, Alan (Wigan)

    McBride, Neil

    Bishop, E. S.

    Fletcher, Raymond (Ilkeston)

    McCann, John

    Blackburn, F.

    Fletcher, Ted (Darlington)

    MacColl, James

    Blenkinsop, Arthur

    Floud, Bernard

    MacDermot, Niall

    Boardman, H.

    Foot, Michael (Ebbw Vale)

    Macdonald, A. H.

    Booth, Albert

    Forrester, John

    McKay, Mrs. Margaret

    Boston, Terence

    Fowler, Gerry

    Mackenzie, Alasdair(Ross&Crom'ty)

    Bowden, Rt. Hn. Herbert

    Fraser, John (Norwood)

    Mackenzie, Gregor (Rutherglen)

    Braddock, Mrs. E. M.

    Fraser, Rt. Hn. Tom (Hamilton)

    McMillan, Tom (Glasgow, C.)

    Bradley, Tom

    Galpern, Sir Myer

    McNamara, J. Kevin

    Bray, Dr. Jeremy

    Gardner, A. J.

    MacPherson, Malcolm

    Brooks, Edwin

    Garrett, W. E.

    Mahon, Peter (Preston, S.)

    Brown, Rt. Hn. George (Belper)

    Garrow, Alex

    Mahon, Simon (Bootle)

    Brown, Hugh D. (G'gow, Provan)

    Gordon Walker, Rt. Hn. P. C.

    Mallalieu, E. L. (Brigg)

    Brown,Bob(N'c'rle-upon-Tyne,W)

    Courlay, Harry

    Mallalieu,J.P.W.(Huddersfield,E.)

    Brown, R. W. (Shoreditch & F'bury)

    Gray, Dr. Hugh

    Manuel, Archie

    Buchan, Norman

    Greenwood, Rt. Hn. Anthony

    Mapp, Charles

    Buchanan, Richard (G'gow, Sp'burn)

    Griffiths, David (Rother Valley)

    Marquand, David

    Butler, Herbert (Hackney, C.)

    Griffiths, Rt. Hn. James (Llanelly)

    Mason, Roy

    Callaghan, Rt. Hn. James

    Griffiths, Will (Exchange)

    Mayhew, Christopher

    Cant, R. B.

    Grimond, Rt. Hn. J.

    Mendelson, J. J.

    Carmichael, Neil

    Hale, Leslie (Oldham, W.)

    Mikardo, Ian

    Carter-Jones, Lewis

    Hamilton, James (Bothwell)

    Millan, Bruce

    Chapman, Donald

    Hamilton, William (Fife, W.)

    Mitchell, R. C. (S'th'pton, Test)

    Coleman, Donald

    Hamling, William

    Molloy, William

    Concannon, J. D.

    Hannan, William

    Morgan, Elystan (Cardiganshire)

    Conlan, Bernard

    Harper, Joseph

    Morris, Alfred (Wythenshawe)

    Cousins, Rt. Hn. Frank

    Hattersley, Roy

    Morris, Charles R. (Openshaw)

    Craddock, George (Bradford, S.)

    Hazeil, Bert

    Moyle, Roland

    Crawahaw, Richard

    Healey, Rt. Hn. Denis

    Murray, Albert

    Crossman, Rt. Hn. Richard

    Heifer, Eric s.

    Neal, Harold

    Cullen, Mrs. Alice

    Herbison, Rt. Hn. Margaret

    Noel-Baker,Rt.Hn.Philip(Derby,S.)

    Dalyell, Tam

    Hooley, Frank

    Oakes, Gordon

    Darling, Rt. Hn. George

    Homer, John

    Ogden, Eric

    Davidson, Arthur (Accrington)

    Howarth, Harry (Wellingborough)

    O'Malley, Brian

    Davidson, James (Aberdeenshire,W.)

    Howarth, Robert (Bolton, E.)

    Orme, Stanley

    Davies, G. Elfed (Rhondda, E.)

    Howie, W.

    Oswald, Thomas

    Davies, Harold (Leek)

    Hoy, James

    Owen, Dr. David (Plymouth, S'tn)

    Davies, Robert (Cambridge)

    Hughes, Emrys (Ayrshire, S.)

    Owen, Will (Morpeth)

    de Freitas, Sir Geoffrey

    Hughes, Roy (Newport)

    Page, Derek (King's Lynn)

    Dell, Edmund

    Hunter, Adam

    Paget, R. T.

    Dempsey, James

    Jackson, Colin (B'h'se & Spenb'gh)

    Palmer, Arthur

    Dewar, Donald

    Jay, Rt. Hn. Douglas

    Pannell, Rt. Hn. Charles

    Diamond, Rt. Hn. John

    Jeger, George (Goole)

    Pardoe, J.

    Dickens, James

    Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)

    Park, Trevor

    Dobson, Ray

    Jenkins, Hugh (Putney)

    Parker, John (Dagenham)

    Parkyn, Brian (Bedford)

    Shinwell, Rt. Hn. E.

    Watkins, David (Consett)

    Pentland, Norman

    Shore, Peter (Stepney)

    Wellbeloved, James

    Perry, Ernest G. (Battersea, S.)

    Short.Rt.Hn.Edward(N'c'tle-u-Tyne)

    Whitaker, Ben

    Perry, George H. (Nottingham, S.)

    Silkin, John (Deptford)

    Williams, Alan Lee (Hornchurch)

    Price, Christopher (Perry Barr)

    Silverman, Julius (Aston)

    Williams, Clifford (Abertillery)

    Price, Thomas (Westhoughton)

    Skeffngton, Arthur

    Williams, W. T. (Warrington)

    Probert, Arthur

    Slater, Joseph

    Willis, George (Edinburgh, E.)

    Pursey, Cmdr. Harry

    Small, William

    Wilson, Rt. Hn. Harold (Huyton)

    Rankin, John

    Spriggs, Leslie

    Wilson, William (Coventry, S.)

    Reynolds, G. w.

    Steel, David (Roxburgh)

    Winnick, David

    Rhodes, Geoffrey

    Steele, Thomas (Dunbartonshire, W.)

    Winstanley, Dr. M. P.

    Roberts, Albert (Normanton)

    Summerekill, Hn. Dr. Shirley

    Winterbottom, R. E.

    Robinson, W. O. J. (Walth'stow, E.)

    Symonds, J. B.

    Woodburn, Rt. Hn. A.

    Rodgers, William (Stockton)

    Thornton, Ernest

    Woof, Robert

    Roebuck, Roy

    Tinn, James

    Yates, Victor

    Rose, Paul

    Tomney, Frank

    Zilliacus, K.

    Ross, Rt. Hn. William

    Variey, Eric G.

    Rowlands, E. (Cardiff, N.)

    Wainwright, Richard (Colne Valley)

    TELLERS FOR THE AYES:

    Shaw, Arnold (Ilford, S.)

    Walker, Harold (Doncaster)

    Mr. Grey and Mr. Whilock

    Sheldon, Robert

    Wallace, George

    NOES

    Alison, Michael (Barkston Ash)

    Hall, John (Wycombe)

    Munro-Lucas-Tooth, Sir Hugh

    Allason, James (Hemel Hempstead)

    Hall-Davis, A. G. F.

    Murton, Oscar

    Astor, John

    Hamilton, Michael (Salisbury)

    Nabarro, Sir Gerald

    Atkins, Humphrey (M't'n & M'd'n)

    Harris, Frederic (Croydon, N.W.)

    Noble, Rt. Hn. Michael

    Awdry, Daniel

    Harrison, Brian (Maldon)

    Nott, John

    Baker, W. H. K.

    Harvey, Sir Arthur Vere

    Onslow, Cranley

    Balniel, Lord

    Harvie Anderson, Miss

    Orr, Capt. L. P. S.

    Batsford, Brian

    Hawkins, Paul

    Orr-Ewing, Sir Ian

    Beamish, Col. Sir Tufton

    Hay, John

    Osborn, John (Hallam)

    Bennett, Sir Frederick (Torquay)

    Heald, Rt. Hn. Sir Lionel

    Osborne, Sir Cyril (Louth)

    Biffen, John

    Heath, Rt. Hn. Edward

    Page, Graham (Crosby)

    Biggs-Davison, John

    Heseltine, Michael

    Page, John (Harrow, W.)

    Birch, Rt. Hn. Nigel

    Higgins, Terence L.

    Pearson, Sir Frank (Clitheroe)

    Black, Sir Cyril

    Hiley, Joseph

    Peel, John

    Blaker, Peter

    Hill, J. E. B.

    Peyton, John

    Bossom, Sir Clive

    Hirst, Geoffrey

    Pike, Miss Mervyn

    Boyd-Carpenter, Rt. Hn. John

    Hooson, Rt. Hn. Sir John

    Pink, R. Bonner

    Brewis, John

    Hogg, Rt. Hn. Quintin

    Pounder, Rafton

    Brinton, Sir Tatton

    Holland, Philip

    Powell, Rt. Hn. J. Enoch

    Brown, Sir Edward (Bath)

    Hordern, Peter

    Prior, J. M. L.

    Bruce-Gardyne, J.

    Howell, David (Guildford)

    Pym, Francis

    Buchanan-Smith, Alick(Angus,N&M)

    Hunt, John

    Ridley, Hn. Nicholas

    Bullus, Sir Eric

    Hutchison, Michael Clark

    Ridsdale, Julian

    Campbell, Gordon

    Iremonger, T. L.

    Roots, William

    Chichester-Clark, R.

    Irvine, Bryant Godman (Rye)

    Rossi, Hugh (Hornsey)

    Clark, Henry

    Jenkin, Patrick (Woodford)

    St. John-Stevas, Norman

    Ctegg, Walter

    Jennings, J. C. (Burton)

    Scott, Nicholas

    Cooke, Robert

    Johnson Smith, G. (E. Grinstead)

    Sharpies, Richard

    Cooper-Key, Sir Neill

    Jopling, Michael

    Shaw, Michael (Sc'b'gh & Whitby)

    Cordle, John

    Joseph, Rt. Hn. Sir Keith

    Sinclair, Sir George

    Craddock, Sir Beresford (Spelthorne)

    Kaberry, Sir Donald

    Smith, John

    Crawley, Aidan

    Kershaw, Anthony

    Stoddart-Scott, Col. Sir M. (Ripon)

    Crosthwaite-Eyre, Sir Oliver

    Kitson, Timothy

    Talbot, John E.

    Crouch, David

    Lancaster, Col. C. G.

    Tapsell, Peter

    Cunningham, Sir Knox

    Langford-Holt, Sir John

    Taylor, Sir Charles (Eastbourne)

    Dalkeith, Earl of

    Legge-Bourke, Sir Harry

    Taylor,Edward M.(G'gow,Cathcart)

    Dance, James

    Lewis, Kenneth (Rutland)

    Taylor, Frank (Moss Side)

    Dean, Paul (Somerset, N.)

    Lloyd, Ian (P'tsm'th, Langstone)

    Temple, John M.

    Deedes, Rt. Hn. W. F. (Ashford)

    Longden Gilbert

    Thatcher, Mrs. Margaret

    Dodds-Parker, Douglas

    Loveys, W. H.

    Tilney, John

    Doughty, Charles

    McAdden, Sir Stephen

    Turton, Rt. Hn. R. H.

    Eden, Sir John

    MacArthur, Ian

    Walker, Peter (Worcester)

    Elliot, Capt. Walter (Carshalton)

    Maclean, Sir Fltzroy

    Wall, Patrick

    Errington, Sir Eric

    Macleod, Rt. Hn. Iain

    Walters, Denis

    Eyre, Reginald

    McMaster, Stanley

    Ward, Dame Irene

    Farr, John

    Macmillan, Maurice (Farnham)

    Weatherill, Bernard

    Fisher, Nigel

    Maddan, Martin

    Webster, David

    Fortescue, Tim

    Maginnis, John E.

    Wells, John (Maidstone)

    Fraser.Rt.Hn.Hugh (St'fford & Stone)

    Mathew, Robert

    Whitelaw, William

    Gilmour, Ian (Norfolk, C.)

    Maude, Angus

    Wills, Sir Gerald (Bridgwater)

    Clover, Sir Douglas

    Maudling, Rt. Hn. Reginald

    Wilson, Geoffrey (Truro)

    Glyn, Sir Richard

    Maxwell-Hyslop, R. J.

    Wolrige-Gordon, Patrick

    Goodhart, Philip

    Maydon, Lt.-Cmdr. S. L. C.

    Woodnutt, Mark

    Goodhew, Victor

    Mills, Peter (Torrington)

    Worsley, Marcus

    Cower, Raymond

    Mills, Stratum (Belfast, N.)

    Younger, Hn. George

    Grant, Anthony

    Mitchell, David (Basingstoke)

    Grieve, Percy

    Monro, Hector

    TELLERS FOR THE NOES:

    Griffiths, Eldon (Bury St. Edmunds)

    Morrison, Charles (Devizes)

    Mr. R. W. Elliott and Mr. More.

    Gurden, Harold

    Mott-Radclyffe, Sir Charles

    Question proposed, That the Clause stand part of the Bill.
    Mr. Cower: The Clause as it stands prescribes that
    "For the financial years 1964 and 1965 the rate at which corporation tax is charged shall be 40 per cent."
    When the Chief Secretary was dealing with our proposed Amendment to the Clause he seemed to imply that companies were lucky to get away with a figure of 40 per cent. I thought that this had ominous tones for the future. I hope that this is not so.
    We accept that this form of taxation has been integrated into our tax system, but we remain critical about the rate. We do not take the view that companies in this country are "lucky to get away with it" if they have to pay a rate as high as this.
    Question put and agreed to.
    Clause ordered to stand part of the Bill.

    Clause 25.—(AMENDMENTS OF CORPORATION TAX ACTS.)
    Mr. Patrick Jenkin: I beg to move Amendment No. 324, in page 26, line 11, at the end to add:
    (2) A trading company which throughout the relevant year of assessment has not more than 10 registered shareholders all of whom are resident in the United Kingdom may in respect of any financial year during the whole of which it is a close company elect by notice in writing to the inspector within two years of the end of such financial year that it shall be assessed to income tax in respect of its income for that financial year and the next four succeeding financial years as though it were a partnership consisting of its participators and directors in and in such event—

    (a) it shall be exempt from corporation tax for the financial years covered by the election;

    (b) the provisions of section 74, 77 and 78 of the Finance Act 1965, shall not apply to it for the period covered by the election;

    (c) its income for the period covered by the election shall be deemed to accrue to its participators and directors for the purpose of computing their total income for income tax and surtax as though they were partners owning the assets and carrying on the trade of the company in such shares as may be just having due regard to their rights to participate in the income of the company or to remuneration from the company; and

    (d) any distributions made in respect of its income for the period covered by the election shall be exempt from income tax and surtax:

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    Provided always that—

    (i) such election shall cease to have effect in respect of any year during which the company shall cease to be either a trading company or a close company, and

    (ii) this subsection shall only apply where the written consent of the participators and directors is obtained for the relevant year of assessment

    Having heard my right hon. Friend's reply to the last debate, I can see why the Chief Secretary reacted so violently to my sedentary suggestion that his figures were possibly wrong. His indignation stemmed, we can now see, from an acutely guilty conscience. Any man— an accountant to boot—who tries to persuade us that 5 per cent, of £1,000 million means that one may have 5 per cent, of 35 per cent, must indeed have a guilty conscience about his figures. I can give the right hon. Gentleman some comfort, in that the Amendment I have moved will entail my quoting hardly any figures. We on this side, a journalist and two lawyers, are unable to bandy about figures with quite the aplomb and skill which Mr. Bill Clark employed last year in our debates on the Finance Bill and I will not try to emulate his virtuosity.
    One of our Amendments last year— this Amendment is directed to the same point—dealt with an important point, which arose on the administration of the Corporation Tax as it affected close companies. The Committee will recollect that perhaps the biggest single cri de coeur which came from business at the introduction of the Corporation Tax was from the proprietors of those small and medium-sized businesses under the control of five or fewer participators, described as close companies.
    It always struck me as astonishing that, when the Government introduced a system of taxation expressly designed to encourage companies to retain their profits and not to distribute them as dividends—penalising them, so that if they distributed fully the increase in taxation went up from 56½ per cent, to 64 per cent, of the whole profits—they should, in the same Bill, introduce legislation compelling close companies which complied with certain conditions and did not satisfy certain other tests to distribute fully or to a high proportion and then have the effrontery to tell the Committee and the country that they ought to be jolly glad as they were better

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    off than under the old legislation. Manifestly, this was not true, and the experience since the Act became law has shown that it was not true.
    Of course, the great majority of the companies which had distributable profits are worse off. When one adds to that the penalties imposed on close companies with regard to directors' remuneration, the new 60 per cent, ratio of the standard profits, the disqualification of (he payment of loan interest to directors, and other payments which we shall reach later on, it can be seen that close companies were significantly penalised by last year's Finance Act.
    The point of the Amendment was picked up very quickly by the Press in their consideration of the effect of the Bill on business. As early as 19th June last year, an article appeared in the Economist from which I should like to quote one relevant extract:
    "Indeed, because of the double taxation inherent in Mr. Callaghan's proposals, smaller companies will be worse off than they would be if they were taxed as partnerships. The cable "— a table of figures was appended—
    "shows the different tax bases now, under a corporation tax, and on a partnership basis. The option of partnership is allowed in the United States and France which are (or in the case of France were) the only major countries still to impose the old-fashioned form of corporation tax introduced by Mr. Callaghan."
    It was about the same time, on 21st June, that I moved in Committee an Amendment intended to give certain small companies an option, because of this discrimination against them, to pay tax as if they were partnerships. The debate was reported in HANSARD, column 1328 and following.
    5.15 p.m.
    My general purpose was to give these companies the opportunity to choose to be taxed either as companies, with the whole rigour of the close company provision, or to forgo the opportunity to get Income Tax and Surtax exemption on their retentions and to pay Income Tax and Surtax on the whole of their profits as if they were partnerships.
    I supported the Amendment then, on three grounds. I quoted figures to show the extent of the disparity between different levels of profits. The figures
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    were striking and it happened that they were the same figures which had appeared in the Economist article at about the same time. In fact, for a single man—various other assumptions were made—in a company earning profits between £10,000 and £15,000 a year, the additional tax which that man and his company would pay simply by being a company and not trading as sole trader could amount to some hundreds of £s. The penalties were that high.
    Of course, for two directors, participators or two partners, the levels of profits are much higher and the tax can be higher. There was a significant penalty, therefore, incurred simply by trading as a company.
    My second point was that, on the whole, the limited liability company is a highly desirable form of commercial organisation, which has brought immense benefits to this country over the centuries. My third point was to cite parallels—which were followed by some of my hon. Friends—from other countries with legislation of a pattern comparable to that which we are now introducing, all of which have found it necessary to give this option to small companies in order not to stifle enterprise and prevent them taking advantage of incorporation and limited liability.
    To this argument, the Government gave a number of answers. Their first argument was that the whole of the case made from this side was fallacious, that a close company is a company and cannot expect to have it both ways. Their second point was that incorporation should be regarded as a privilege and that if a business chose to carry on its business in the form of a company and take the privileges which go with it, it must equally readily expect to bear the disadvantages which also go with it.
    The third point, which was perhaps slightly surprising, was that it is not always in the public interest that two or more people should incorporate themselves to carry on business in a limited company and that, in some circumstances, a partnership might be a more desirable form. This was the justification for retaining this tax discrimination.
    Their fourth point was that any firm has the option to decide whether to trade as a partnership or to incorporate itself. It can make this choice and cannot at the

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    same time have the choice of how it will be taxed in a different way. The Government spokesman said that he was not concerned with what went on in other countries, which was slightly surprising when one considered the extent to which the pattern of tax particularly in the United States, where they have a partnership option, was used as a justification for the introduction of the whole system. Their sixth argument was the hoary old annual which comes up every time— administrative convenience.
    I suggest that some of these arguments can be dismissed as irrelevant—for instance, the one about it not being in the public interest that businesses should incorporate or that incorporation is a privilege. If there are some businesses which it is desirable should not be carried on by limited liability companies, but by partners or individuals trading as sole traders, or by men in partnership, that is a matter for a Companies Act. It is a matter which should be dealt with, as many comparable matters are dealt with, in a Companies Act. Of course, if such a provision were to be introduced, there would have to be very strong reasons. It should certainly not be determined as a sort of by-product, a sort of accident, of the introduction of a new tax system.
    Incorporation is indeed a privilege, but it is attended with a great many duties, and legislation is pending to increase the number of duties imposed on those who choose to take advantage of incorporation. There are also Revenue duties to be paid by such companies and the Measure introduced last Session, had it been passed, would have substantially increased some of those duties. This is not a matter which is of any relevance to the subjection to Corporation Tax of businesses which carry on as corporations.
    The real questions—and the debate at this point should be directed to these factors; I propose to devote the remainder of my remarks to them—are, first, equity and, secondly, administrative convenience. On the first, I can only assert—although I will not quote figures because the Chief Secretary will accept my assertion; the figures are well known —that there is a substantial tax penalty on small companies which trade as companies; that if they cease to be companies and the individuals trade as sole traders
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    or partners, they pay substantially less tax.
    The situation can be reached in which, with two identical businesses being carried on side by side and making identical profits, one a company and the other a partnership, the company will pay substantially more tax—and at certain levels and in certain circumstances the difference can be hundreds of thousands of £s. I am referring to small businesses and the discrepancy arises at very low levels. And the minute the individual's Surtax liability reaches anywhere near the top rate, the extra penalty of trading as a sole trader or partnership outweighs any advantage.
    As well as applying to very small companies, the Amendment makes a further limitation which we did not introduce last year and which may go some way towards meeting some of the objections put forward by the Government on that occasion. We are proposing to limit the option to companies with 10 or fewer shareholders. The word "shareholders" is important here because a close company can be a close company with many more shareholders than 10, because the test is participators and participators and their associates are together counted as one. Thus, a participator may have any number of associates who are all shareholders. Companies which have fewer than 10 shareholders will be entitled to take this option and this should go a long way to meeting the objections raised by the Government last year. Small companies will, therefore, be covered and furthermore, this will apply to small companies with a very limited number of shareholders. This is a direct copy of the American pattern of legislation, which also states that there must be less than 10 shareholders before the option applies.
    Another point which it is relevant to bear in mind and which was open, as it were, when a similar Amendment was moved last year, is that unlike Profits Tax, Corporation Tax has no reduced rates for very small companies. It was my hon. Friend the Member for Wimbledon (Sir C. Black) who introduced an Amendment to try to get a form of graduated tax for small companies, but the Government rejected his efforts and, as we now know, the rate of 40 per cent, under this tax is payable, however small

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    a company, on profits. There can be no doubt that, as a result of this, many small companies have been hit very hard.
    At the end of the debate last year, Mr. William Clark, from this Dispatch Box, stated:
    "Have the Government made any assessment of the number of small companies which, because of the rejection of this Amendment, will now turn themselves back into partnerships? This is an important point, and the Minister has not addressed himself to it. It is probable that many small companies, because of the tax penalty now on them as compared with sole traders, will become sole traders".—[OFFICIAL REPORT, 21st June, 1965; Vol. 714, c. 1343.]
    It was hardly surprising that there was no answer to that question, and on that occasion the Committee immediately proceeded to a Division. However, we now have quite a good idea of what is happening about incorporation.
    Mr. Robert Sheldon: Would the hon. Gentleman not agree that it is not only the small companies which might benefit from the Amendment but that the larger companies, which are subject to Surtax direction, would also benefit? I worked the figures out and, while I do not have them with me, I estimate that, at the £20,000 to £30,000 a year earnings level, such companies could take advantage of the proposal.
    Mr. Jenkin: I suggest, with respect, because the hon. Gentleman has great knowledge of these matters, that at that level of profit a company could not be described as a large company. By comparison with the vast majority of British industry, it is very small indeed. However, I re-emphasise that this would apply only to companies with ten or fewer shareholders.
    Mr. Barnett: Would the hon. Gentleman not agree that companies ploughing back the bulk of their earnings would not suffer in the way he describes and that this applies to the great majority of small close companies?
    Mr. Jenkin: This opens up the whole question of the way in which distribution policy will be apportioned by the Revenue, and we have had little experience of this so far. I take the hon. Gentleman's point and it may be that there are companies which will be able to satisfy their inspec-
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    tors—remembering that they are inspectors now and not commissioners—that distribution should be at a sufficiently low rate to enable them to trade as companies, but I will deal more fully with that later. I was dealing with the question of a number of companies which have manifestly found that that would not be so, and many of them went into voluntary liquidation before 5th April of this year.
    Mr. Barnett: Would the hon. Gentleman not agree that the great majority of companies which have gone into voluntary liquidation have been mainly property and investment companies and not trading companies?
    Mr. Jenkin: The point is well made and will be well taken. I am perfectly certain that if the hon. Gentleman studies the matter with care he will realise that the Amendment, which begins with the words
    "A trading company which throughout …"
    takes into account the point he is making. In any case, nobody can seriously have a great deal of sympathy for families which incorporate themselves as investment companies and then find themselves worse off. I am directing my attention to the trading company. That is the one at which the Amendment is expressly directed, and the Amendment proposes nothing to help the small investment company.
    Mr. Harold Lever: Why does the hon. Gentleman say that one should have no sympathy for the family investment company which decides to incorporate? Why should not the benefits and conveniences of incorporation be available to such companies? Why should they not be given this option if there is a moral case for granting it?
    Mr. Jenkin: The hon. Gentleman used the phrase "a moral case for granting it" and I think that he stood condemned out of his own mouth. I appreciate that he may have a great deal of sympathy for the small private family investment company, but one must recognise that such companies were formed to avoid taxation —[Interruption.]—and if they find that the taxation system has changed, that is too bad; and no damage whatever is done-to the economy of the country.
    Mr. Harold Lever Mr. Harold Lever rose ——
    Mr. Jenkin: I have already given way a number of times.
    Mr. Lever: The hon. Gentleman——
    The Deputy Chairman (Mr. Sydney Irving): Order. The hon. Member must resume his seat if the hon. Member who is speaking is not prepared to give way.
    Mr. Lever: The hon. Gentleman said that these companies were formed to avoid taxation. His knowledge of the tax law must be sigularly limited if he thinks that there is an advantage tax-wise for a family which puts its property into an investment holding company. These companies are formed for convenience—of assigning shares from one member of the family to another and so on—and there is no question of tax avoidance necessarily being involved.
    5.30 p.m.
    Mr. Jenkin: Perhaps the hon. Member will be able to pursue that point later in the debate. I am sorry that he did not put down an Amendment to our Amendment to leave out the word "trading". Our Amendment concerns trading companies.
    Under the headline:
    "4,500 firms go out in 9 weeks"
    an article in the Sunday Times of 24th April said:
    "Over 4,500 British companies reckoned to be worth £45 million have ceased to exist in the past nine weeks.
    In an unprecedented scramble which started at the end of February and accelerated into a full-scale rush over the last two weeks of the financial year the number of companies going into voluntary liquidation rocketed."
    The article went on to say:
    "Behind the rush lie Corporation Tax and Capital Gains Tax. Midnight, April 5, was the deadline for companies who wanted to wind up, transfer their business and start afresh with a new structure—perhaps in the form of a partnership …"
    The article pointed out, as the hon. Member for Heywood and Royton (Mr. Barnett) has pointed out, that many of those companies were small investment companies, but undoubtedly there were small trading companies among them. There have been trading companies in my constituency which have done just this.
    Mr. Stratton Mills: Perhaps my hon. Friend saw the Answer
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    of the President of the Board of Trade a few weeks ago in which he was unable to give details about close companies.
    Mr. Jenkin: I saw the reply to a Question by my hon. Friend, but it was not very helpful.
    The subject of liquidations has also been mentioned in an article in the Director in which the author felt it necessary to warn companies not to rush too headlong into liquidation but to continue trading as partnerships because, as he pointed out, they might be jumping out of the frying pan into the fire. Although fiscal considerations were very important they were not necessarily the only consideration to be taken into account.
    The article in the Director said:
    "There are and will be many cases where liquidation is a solution "
    but it went on to warn that they may be throwing away other advantages by disposing of part of the business.
    I draw the attention of the Chief Secretary, who I understand is to reply, to the point of the Amendment. What an intolerable choice to pose for the proprietors of a business that they should either go into liquidation, or continue trading without the benefits of incorporation, or continue to bear substantially additional tax burdens.
    It is perhaps significant that in one of the very few articles in the bank reviews and learned journals which has had anything substantially good to say about the introduction of Corporation Tax last year —an article in the National Provincial Bank Review by a lecturer in accounting of the University of Hull, Mr. R. J. Briston—the author in his general panegyric of the tax made the point that close companies might have a justifiable complaint. He wrote:
    "In cases where a close company would be worse off the obvious concession that the Inland Revenue might make would be to allow such a company to elect to be taxed as a partnership, following the American system."
    He also suggested as an alternative which we do not prefer:
    "Another modification would be to adopt the profits tax rules whereby profits of up to £12,000 bear lower rates of tax."
    The Government argued last year that it would be quite impossible, for a company would be jobbing in and out, a partnership one year and a company the next.

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    It might often be better to be a company in the first year and a partnership in the next. There would be reopening of old assessments and never any finality in taxation of profits. I suggest that that was pure scaremongering. It is not beyond the wit of the Revenue to provide the necessary administrative safeguards.
    We have provided three very important safeguards which I hope will go a very long way to meeting the Revenue's objections. First, we insist that the 10 or fewer shareholders should all be U.K. shareholders. We say that this should be irrevocable for five years. That follows the German pattern. There would also be no restropsective election.
    I believe that I have answered the Government objections raised to the Amendment which we put forward last year. I think this is a fair, practical and necessary provision. It is fair because it substitutes a genuine option for taxation for a really harsh dilemma which is facing numbers of these companies at present. It puts company proprietors on the same basis, if they wish, as partners and sole traders. I believe it is practicable and certainly feasible. It is nothing like so complicated as many of the provisions of last year's Finance Act, or indeed of the Bill we are considering. It is necessary because, if small trading companies are to survive and grow, they must not be subject to tax penalties substantially greater than their competitors, trading as incorporated businesses, have to face.
    Limited liability companies have provided a springboard for enterprise over the centuries. It would be very sad indeed if they were no longer available for many businesses throughout the country.
    Mr. Harold Lever: I had not intended to intervene and I will not make the general case which I made, at any rate to my own satisfaction, last year. I believe the convenience and advantages of incorporation are very considerable. A very doubtful case is made for inflicting a tax penalty on that particular choice of conducting business. There are many social advantages in having businesses run within the framework of a company. There are equally advantages which for a long time have existed in relation to non-trading companies.
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    Everything said by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) applies equally well to any small investment company or property holding company. His dramatic rhetoric—what a dreadful choice with which to confront the proprietors, liquidation or harsh extra taxes to pay, what a grim dilemma faces them —applies equally to any small family company which holds investments. I do not think the hon. Member for Shipley (Mr. Hirst) was present when his hon. Friend said this. His hair would have stood on end at the harsh way in which the small family investment company was dismissed, not only from the Amendment but in words. There was total lack of sympathy and, one might add, total lack of understanding.
    There is no reason why a family which has put its savings into a company should be forced out of that convenient deal and have to hold those savings in another manner which is not to the advantage of the State or to the family. There seemed a very solid case there, but, worse than indifference, there appeared to be ignorance about it. It seemed that the family would be deprived of the whole of its income whether it held the property in a joint company or privately. Why should hon. Members opposite who criticise the weaknesses of a Finance Bill have taken care to exclude the small property owner? They are supposed to be the champions of the small property owner and indeed of families who for convenience hold property in that form.
    Mr. Barnett: I am sure my hon. Friend would not wish to overstate the case unnecessarily. I am sure he will agree that there is some saving of Surtax.
    Mr. Lever: I am sure that I would agree with no such hopeless proposition. There is no saving of Surtax whatsoever by holding property in the small family company. My hon. Friend ought to know that the very opposite is true. A small family company of the type which would come within the Amendment, but for the harsh way in which the Amendment is, worded, has its entire income apportioned to its shareholders automatically every fiscal year or every accounting year, whichever the Revenue thinks is more advantageous to the Revenue.
    Mr. Patrick Jenkin: Before the hon. Gentleman carries this argument too far, may I point out that he must not forget the question of administrative expenses in such companies, the fact that the proprietors can pay themselves salaries up to a certain amount. The fact of the matter is that these companies have had some tax advantages in the past.
    Mr. Lever: The hon. Gentleman puts his foot deeper into the mire with every intervention he makes on this subject. Now I understand that the reason for excluding the small family property or investment company is that the hon. Gentleman wants it to be deprived of the allowance against tax of the ordinary, reasonable management expenses which are all that they were allowed by the Revenue before the Corporation Tax came into being. The hon. Gentleman is certainly more vicious towards these companies than any of my right hon. Friends. The hon. Gentleman seems to think that it is in the nature of an illegal tax avoidance which must be chastised that one forms one's family assets into a company and can thereby pay oneself a salary, this salary to be approved as reasonable by the Revenue, covering the management expenses of the property concerned.
    The hon. Gentleman has shown his total lack of sympathy with the smaller property owner who has chosen corporate status. If sometimes my right hon. Friend's err to a minor extent, at least they never err to the major extent which has been shown by the hon. Member. I cannot give support to an Amendment which is couched in such selectively partisan terms, plainly motivated by a sense of political propaganda rather than by moral virtue.
    Mr. Hirst: The hon. Member for Manchester, Cheetham (Mr. Harold Lever) has been enjoying himself in his well-known style. I admit that I was not in the Chamber for one minute, but I left merely to look up a reference.
    Mr. Harold Lever: I was not complaining.
    Mr. Hirst: I know that the hon. Gentleman was not complaining. With the brilliance nearly always displayed by the hon. Gentleman, he has somewhat unusually managed to make a certain
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    amount of my speech for me. For this I am grateful. I did not see my way through the similar discussions we had last year. I was hoping to be able to congratulate my right hon. and hon. Friends on finding the answer. In fact, they have found the answer.
    One of my party's peculiar habits, about which I used to have to grumble so much year in and year out when I was a Government back bencher, is that it is always leaning over backwards trying to be reasonable. My party tries to treat people in a nice way. There is nothing reasonable about me. I do not believe in such tactics. A person who believes in something should have the courage of his convictions and say so. I have been doing this for the last 16 years. It has not got me anywhere, but I am still an honourable Member in all senses of the word. For this I am thankful. When the time comes in the year 2000 for me to retire, I shall apply that epitaph to myself.
    I must apologise to the Chair and to the Committee for having mildly anticipated the Amendment in making comments on the last Amendment. I confess that I got slightly carried away. I am interested in the subject matter of the Amendment and its purpose. Although the Clause is too harsh in its nature, I definitely feel that the purpose behind it is good. I hope that, even if the Government cannot accept the Amendment—I myself should like an alternative to it— they will come forward with some suggestion. The proposition that a company should be allowed in these circumstances to select its method of assessment has much to commend it.
    A little while ago I gave an instance of how the tax position of a small company changes with Corporation Tax as opposed to the old days under Income Tax and Profits Tax, although in view of the nature of its profits it did not pay the latter. I stated the difference to be the very marked one of 85 per cent. It would be stupid if companies had to go through the process of winding themselves up or turning themselves into partnerships to get a reasonable tax position, one which has been always accepted as reasonable. I am sure that the new system is not supposed to be unreasonable. I hope that the Government will come forward with a suggestion.

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    We have not gained much by way of concessions so far The only concession we have so far won is in respect of backgammon. So far it has been a rotten Finance Bill. It is about time we were granted another concession. This is a matter of real injustice and disadvantage to small companies.
    I should like to see my right hon. and hon. Friends indulge a little less in the process of leaning over backwards to meet right hon. and hon. Members opposite. I assure the Government that, even if that is what they want, they will not be treated by me in that way. They know that full well. However, I hope that they will meet me, because I am being as reasonable as I can in saying that the purpose of the Amendment is clear and just. A Government who do not want to be accused of being unjust should do something to meet a just case.
    5.45 p.m.
    Mr. Charles Fletcher-Cooke: The Amendment raises the whole question of the philosophy of the Government that, in future, incorporation is to be regarded as a privilege to be paid for, and to be paid for much more dearly than in the past. There is to be a definitive drive in favour of partnership—that is to say, in favour of unlimited liability, for that is the substantial difference between the two methods of trading. I can understand this point of view, though I do not share it.
    To what extent are people taking advantage of this to give the appearance of unlimited liability whereas in fact they are avoiding it by means of the device of the limited partnership? I gather that the limited partnership will not attract the greater rate of tax which companies will but that it will nevertheless provide nine out of ten of the partners with complete limitation of liability. For a limited partnership only one partner with unlimited liability is necessary. It is not beyond the wit of various sharp gentlemen to select as that unlimited partner a man of straw.
    It would be indeed ironic if, because of the Government's insistence that there should be an increase in unlimited liability among traders, creditors and others trading with such organisations were deceived into thinking that they were getting unlimited liability from those
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    with whom they were contracting whereas in fact they were getting no such thing.
    I wish to ask the Government some questions. First, am I right in saying that a limited partnership will get the benefits fiscally which small companies will not get? Secondly, have the Government any information about the growth or trend of growth in such units, and what are they doing to ensure that the public will be protected against this sort of thing? I can see the hon. Member for Manchester, Cheetham (Mr. Harold Lever) anxious to put me right.
    Mr. Harold Lever: I am a little concerned to wonder why people dealing with limited partnerships will not know that they are limited partnerships and why the hon. and learned Gentleman thinks that one can carry on business as a limited partnership without disclosing that fact to one's creditors and to others.
    Mr. Fletcher-Cooke: People in limited partnerships, knowing, that there is unlimited liability, at least to the extent of one or may be more partners, may well be deceived into thinking that they may have greater resources behind them than would a limited company in the usual way. I would not like to see such a trend in the organisation of our trade although, of course, the fiscal advantages, unless the Amendment is accepted, will be very great. It would be a lamentable alteration and perversion of the normal trading arrangements if limited partnerships became popular—and I fear that they will. Therefore, I should like to know whether there is any indication so far that they are becoming popular and, if so, what the Government propose to do to prevent this happening. The simple way to prevent it is to accept the Amendment.
    Mr. Diamond: Perhaps I may first deal with the question just put to me by the hon. and learned Member for Darwen (Mr. Fletcher-Cooke). No new figures are available. The figures are published by the Board of Trade every three months and there is no indication in those published so far of any trend of the kind that he and hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) have suggested. Of course, it may be that such a trend would be too recent for those figures in my possession to reflect.

    335
    I was asked about the treatment of limited partnerships. I reply shortly that a limited partnership does not get earned income relief and is not treated as a partnership in the ordinary sense. As my hon. Friend the Member for Manchester, (Mr. Harold Lever) pointed out, limited partnerships have traded for a long time and continue to trade by giving notice of the limited extent of the liabilities of certain of their members. If the hon. Member for Wanstead and Woodford says that this is not a proper method, that has nothing to do with Income Tax. He must refer the matter to my right hon. Friend the President of the Board of Trade and make such representations to him as he thinks necessary about strengthening the law. It has nothing to do with what we are discussing, which is whether one can give an option to a company in certain circumstances to have its tax treated in a way appropriate for a partnership but not for a limited company.
    I would say to the hon. Member for Shipley (Mr. Hirst) that I can hold out no encouragement of this Amendment. But if we were to advance quickly—to rush—through the Order Paper, it is not inconceivable that I might cheer him up during the course even of today. I hope that I can do so. But I cannot hold out, on this Amendment, any hope of the Government changing their mind.
    As the hon. Member of Wanstead and Woodford said, the matter was fully discussed last year. The arguments were given then and it is unnecessary for me to repeat them. The main point is that the hon. Member proposes that certain companies should have the right to have their tax assessed either as companies or as partnerships and so choose obviously, which suits them the better. This has never been part of our philosophy before. It has never been claimed before that, where a company has to pay more tax than a partnership—a partnership which wanted to carry on as a partnership and did not want to become an incorporated body—it should, by some philosophy of comparing two different organisations, seek to have itself assessed at the more beneficial liability which, in these circumstances, might well attach to a partnership.
    336
    No one has ever claimed that before, but now it is being claimed that, if a company finds itself having to pay more tax than a partnership, it should have the right to reduce its tax liability and pay as a partnership. That is something one cannot accept. A number of persons have the right to carry on business either in partnership or incorporated as a limited company. It is up to them to choose which they want. If, finding that they are a company and that it does not suit them for tax purposes, they prefer to be a partnership, the Inland Revenue has no objection. Indeed, it has no right to object. It is a matter for individuals to decide for themselves how they want to carry on the trade.
    They have to take a number of points into account, such as the advantages of incorporation or of unlimited partnerships. The professional man does not carry on as a company. The Lloyds underwriter does not. The whole foundation is that there is no basis of limited liability. There are advantages in having no limited liability and various advantages in not being limited. It is for the individual to choose, in the knowledge that, in certain circumstances, the tax bill may be higher where it would otherwise have been lower.
    All sorts of things come into the calculations—for example, Surtax, the earned income relief on the managing director's reasonable remuneration in relation to the managing of his property and so on. All these things have to be taken into account and the taxpayer makes his own choice. One could not recommend a system under which, albeit allegedly for a period of years, election is made by the taxpayer on the basis, "heads I win, tails you lose", changing as soon as it is advantageous for him to do so. He could change into at least six methods open to him and under which he could have his tax treated in the way he wanted. We do not believe there is any basis for this now any more than in the past. We cannot recommend a method under which a particular taxpayer would be allowed to say, "heads I win, tails you lose" in dealing with his assessment.
    Mr. Hirst: But it would be perfectly fair in the ordinary way of business, which is the line the right hon. Gentleman is adopting. The tax dilemma arises from direct action through Government policy,

    337
    which places smaller companies in a disadvantageous position. It is not merely a question of choosing in the ordinary way. By their actions, the Government have to use their unfair dilemma and have forced firms to try to get out of that dilemma by taking action which they would not otherwise have had to take.
    Mr. Diamond: The hon. Gentleman's points are always very reasonable even if his manner is the kind of manner acceptable to a fellow Yorkshireman but perhaps not to everyone else because of its frankness and direct method. Even if the hon. Gentleman were right in his claim that this is a dilemma that has been forced upon limited companies because of changes in the basis of taxation, I would still say that this is not a case where the Government could recommend acceptance of the Amendment.
    In some cases the close company is acting as a money box. Where it is, it is the policy of the Government to force out that money, quite properly, into further investment progress. Where a company is progressing and ploughing back—and I have said this so many times that I need not repeat it—it need not distribute one penny of dividend and thus can completely escape. The difference between now and the previous arrangements, which were well understood, is merely that, once a close corporation distributes up to 60 per cent, it does not even have to satisfy the Inland Revenue that it has made a reasonable distribution having regard to business needs. Either it is developing and is not prejudiced as to its tax position, or it is not developing and is being used as a money box, and to that extent it might in certain circumstances find itself landed with an additional tax liability which, I should have thought, was in the best interests of the country.
    I therefore could not possibly recommend acceptance of the Amendment.
    6.0 p.m.
    Mr. Stratton Mills: Hon. Members may well reflect that in every answer which the right hon. Gentleman presents at the Box he appears to get more and more slippery and difficult to pin down. On this occasion he summarised, somewhat inaccurately, some of the arguments of my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and
    338
    then stood back and looked at them in astonishment and went on to say that, as he had dealt with all the other arguments last year, he would not wish to burden the Committee with them again. But that is not the proper way to deal with the very detailed arguments which my hon. Friend put forward this afternoon after much greater reflection than in the debate last year.
    The right hon. Gentleman's answer was basically unsympathetic. He has not yet fully grasped the point that the anomalies which are being created for these small businesses are anomalies which have been created by the introduction of last year's Finance Act, so that there is an onus on the Government to deal with this situation. They have to make it clear whether it is their wish to encourage small businesses in our community. By inference, the right hon. Gentleman's speech clearly answered that question. I am very concerned that over the coming months there will be many businessmen, as there have been over the past month, wasting valuable time considering whether to be incorporated or to go back to being a partnership. This time-wasting operation induced by last year's Finance Act cannot be in the national interest.
    The right hon. Gentleman did not place very much emphasis on the arguments which he used last year about anomalies, but my hon. Friend dealt very fully with the situation in the United States, Germany and in France and I do not see why if in those countries, free-enterprise countries, it is possible to give this inducement to small businessmen, it is not possible to do so in this country. I hope that we will take this matter to a Division and vote against the right hon. Gentleman's unsympathetic reply.
    Mr. Patrick Jenkin: I must emphasise our great disquiet with the unforth-comingness of the Chief Secretary's reply to the Amendment. He made a number of statements almost without foundation. Perhaps the most surprising was that this had never been done before. Of course it has never been done before in this country, because the situation has never arisen before. By their introduction of last year's Finance Act, the Government have given rise to a harsh dilemma, and

    339
    I repeat the words and make no apology for them. It is a harsh dilemma which faces a company whether to carry on as a company and pay some hundreds of pounds in additional taxation, or wind up and trade without the benefit of limited liability and incorporation.
    Mr. Eric Lubbock: The hon. Gentleman speaks of a harsh dilemma and on a similar Amendment last year he spoke of a very severe tax penalty which would be imposed on these companies. Would he give the Committee some figures to illustrate the effect of the proposal on some typical companies?
    Mr. Jenkin: The difficulty about giving figures—and the article in the Director gave some figures—is that the circumstances of different companies and different individuals vary so widely that figures might be far from being typical of the whole. However, the figures given by the author of the article in the Director in May, 1966, Mr. Hamway, showed that, taking profits before remuneration and taxation of, say, £12,000 a year, a one-man company paid a total tax of £5,446 and a sole trader an almost identical amount. I have not taken a very good example. I said that I did not intend to quote figures. Taking another example of £10,000 a year, the one-man company pays tax of £4,139 and the sole trader £3,990, a difference of more than £100. I am sure that the hon. Member for Orpington (Mr. Lubbock) will recognise that as the number of partners increases
    and the profits get higher, additional tax liability gets correspondingly higher. But I emphasise that individual taxpayers with other incomes might find themselves more hardly hit than taxpayers with no other income and it is unlikely that people in this position would not have investment or other income from other sources which would substantially increase their personal liability, or reduce it.
    The argument which the Chief Secretary has entirely failed to meet and which was put again forcefully by my hon. Friend the Member for Belfast, North (Mr. Stratton Mills), is that other countries have found it perfectly acceptable and even necessary to introduce a relieving measure of this sort where they have a taxation system similar—in the case of France, had such a system—to that introduced last year. Why have they found it necessary and desirable to introduce this provision and why is it so impossible to do so in this country? I believe that my hon. Friend gave the right answer. He said that those were free enterprise countries. We are now being run by a Socialist Government and Socialist Governments are basically hostile to small businesses of this sort and are not prepared as much to help them as to insist on anti-avoidance provisions and the protection of the revenue. For that reason, I must ask my hon. Friends to join me in voting for the Amendment, in the Lobby.
    Question put, That those words be there added:—
    The Committee divided: Ayes 159, Noes 243.

    Division No. 36.]

    AYES

    [6.7 p.m.

    Alison, Michael (Barkston Ash)

    Campbell, Gordon

    Fletcher-Cooke, Charles

    Allason, James (Hemel Hempstead)

    Chichester-Clark, R.

    Fortescue, Tim

    Astor, John

    Clegg, Walter

    Fraser,Rt.Hn.Hugh(St'fford&Stone)

    Atkins, Humphrey (M't'n & M'd'n)

    Cooke, Robert

    Gilmour, Ian (Norfolk, C)

    Awdry, Daniel

    Cooper-Key, Sir Neill

    Glover, Sir Douglas

    Balniel, Lord

    Cordle, John

    Glyn, Sir Richard

    Batsford, Brian

    Costain, A. P.

    Goodhart, Philip

    Beamish, Col. Sir Tufton

    Crawley, Aidan

    Coodhew, Victor

    Bennett, Sir Frederic (Torquay)

    Crosthwaite-Eyre, Sir Oliver

    Cower, Raymond

    Biffen, John

    Crouch, David

    Grant, Anthony

    Biggs-Davison, John

    Cunningham, Sir Knox

    Grieve, Percy

    Birch, Rt. Hn. Nigel

    Currie, G. B. H.

    Griffiths, Eldon (Bury St. Edmunds)

    Black, Sir Cyril

    Dalkeith, Earl of

    Gurden, Harold

    Blaker, Peter

    Dance, James

    Hall, John (Wycombe)

    Bossom, Sir Clive

    Dean, Paul (Somerset, N.)

    Hall-Davis, A. G. F.

    Boyd-Carpenter, Rt. Hn. John

    Deedes, Rt. Hn. w. P. (Ashford)

    Harris, Frederic (Croydon, N.W.)

    Brewis, John

    Dodds-Parker, Douglas

    Harvey, Sir Arthur Vere

    Brinton, Sir Tatton

    Eden, Sir John

    Harvie Anderson, Miss

    Brown, Sir Edward (Bath)

    Elliot, Capt. Walter (Carshalton)

    Hawkins, Paul

    Bruce-Gardyne, J.

    Errington, Sir Eric

    Hay, John

    Buchanan-Smith, Alick(Angus, N&M)

    Farr, John

    Heald, Rt. Hn. Sir Lionel

    Bullus, Sir Eric

    Fisher, Nigel

    Heseltine, Michael

    Higgins, Terence L.

    Maxwell-Hyslop, R, J.

    Rossi, Hugh (Hornsey)

    Hiley, Joseph

    Maydon, Lt.-Cmdr. S. L. C.

    St. John-Stevas, Norman

    Hill, J. E. 8.

    Mills, Peter (Torrington)

    Scott, Nicholas

    Hirst, Geoffrey

    Mills, Stratton (Belfast, N.)

    Shaw, Michael (Sc'b'gh & Whitby)

    Hogg, Rt. Hn. Quintin

    Miscampbell, Norman

    Sinclair, Sir George

    Holland, Philip

    Mitchell, David (Basingstoke)

    Smith, John

    Hunt, John

    Monro, Hector

    Stodart-Scott, Col. Sir M. (Ripon)

    Hutchison, Michael Clark

    More, Jasper

    Talbot, John E,

    Irvine, Bryant Godman (Rye)

    Morrison, Charles (Devizes)

    Tapsell, Peter

    Jenkin, Patrick (Woodford)

    Mott-Radclyffe, Sir Charles

    Taylor, Sir Charles (Eastbourne)

    Jennings, J. C. (Burton)

    Munro-Lucas-Tooth, Sir Hugh

    Taylor, Frank (Moss Side)

    Johnson Smith, G. (E. Grinstead)

    Murton, Oscar

    Temple, John M.

    Jopling, Michael

    Nabarro, Sir Gerald

    Thatcher, Mrs. Margaret

    Kaberry, Sir Donald

    Noble, Rt. Hn. Michael

    Turton, Rt. Hn. R. H.

    Kerby, Capt. Henry

    Nott, John

    Van Straubenzee, W R.

    Kershaw, Anthony

    Onslow, Cranley

    Walker, Peter (Worcester)

    Kitson, Timothy

    Orr, Capt. L. P. S.

    Ward, Dame Irene

    Lancaster. Col. C. G.

    Orr-Ewing, Sir Ian

    Wall, Patrick

    Langford-Holt, Sir John

    Osborne, Sir Cyril (Louth)

    Weatherill, Bernard

    Legge-Bourke, Sir Harry

    Page, Graham (Crosby)

    Webster, David

    Lewis, Kenneth (Rutland)

    Pearson, Sir Frank (Clitheroe)

    Wells, John (Maidstone)

    Longden, Gilbert

    Peel, John

    Whitelaw, William

    Loveys, W. H.

    Percival, Ian

    Wills, Sir Gerald (Bridgwater)

    McAdden, Sir Stephen

    Peyton, John

    Wilson, Geoffrey (Truro)

    MacArthur, Ian

    Pike, Miss Mervyn

    Wolrige-Gordon, Patrick

    Maclean, Sir Fitzroy

    Pink, R. Bonner

    Woodnutt, Mark

    Macleod, Rt. Hn. Iain

    Pounder, Rafton

    Worsley, Marcus

    Macmillan, Maurice (Farnham)

    Powell, Rt. Hn. J. Enoch

    Younger, Hn. George

    Maddan, Martin

    Pym, Francis

    Maginnis, John E.

    Ridley, Hn. Nicholas

    TELLERS FOR THE AYES:

    Mathew, Robert

    Ridsdale, Julian

    Mr. R. W. Elliott and Mr. Eyre.

    Maude, Angus

    Roots, William

    Maudling, Rt. Hn. Reginald

    NOES

    Abse, Leo

    Davidson, Arthur (Accrington)

    Hale, Leslie (Oldham, W.)

    Allaun, Frank (Salford, E.)

    Davidson, James(Aberdeenshire, W.)

    Hamilton, James (Bothwell)

    Alldritt, Walter

    Davies, G. Elfed (Rhondda, E.)

    Hamling, William

    Allen, Scholefield

    Davies, Harold (Leek)

    Hannan, William

    Archer, Peter

    Davies, Robert (Cambridge)

    Harper, Joseph

    Armstrong, Ernest

    Dell, Edmund

    Hattersley, Roy

    Ashley, Jack

    Dempsey, James

    Hazell, Bert

    Atkins, Ronald (Preston, N.)

    Dewar, Donald

    Heffer, Eric S.

    Atkinson, Norman (Tottenham)

    Diamond, Rt. Hn. John

    Herbison, Rt. Hn. Margaret

    Bagier, Gordon A. T,

    Dickens, James

    Hooley, Frank

    Barnes, Michael

    Dobson, Ray

    Horner, John

    Barnett, Joel

    Doig, Peter

    Houghton, Rt. Hn. Douglas

    Baxter, William

    Donnelly, Desmond

    Howarth, Robert (Bolton, E.)

    Beaney, Alan

    Dunn, James A.

    Howie, W.

    Bence, Cyril

    Dunwoody, Mrs. Gwyneth (Exeter)

    Hoy, James

    Benn, Rt. Hn. Anthony Wedgwood

    Dunwoody, Dr. John (F'th & C'b'e)

    Hughes, Emrys (Ayrshire, S.)

    Bennett, James (G'gow, Bridgeton)

    Eadie, Alex

    Hughes, Roy (Newport)

    Bessell, Peter

    Edelman, Maurice

    Hunter, Adam

    Bidwell, Sydney

    Edwards, Rt. Hn. Ness (Caerphilly)

    Hynd, John

    Bishop, E. S.

    Edwards, Robert (Bilston)

    Jackson, Colin (B'h'se & 8penb'gh)

    Blackburn, F.

    Edwards, William (Merioneth)

    Jackson, Peter M. (High Peak)

    Blenkinsop, Arthur

    Ellis, John

    Jeger, George (Goole)

    Boardman, H.

    English, Michael

    Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)

    Booth, Albert

    Enaor, David

    Jenkins, Hugh (Putney)

    Boston, Terence

    Evans, Albert (Islington, S.W.)

    Johnston, Russell (Inverness)

    Bowden, Rt. Hn. Herbert

    Evans, loan L. (Birm'h'm, Yardley)

    Jones, Dan (Burnley)

    Braddock, Mrs. E. M.

    Faulds, Andrew

    Jones, J. Idwal (Wrexham)

    Bradley, Tom

    Fernyhough, E.

    Judd, Frank

    Bray, Dr. Jeremy

    Finch, Harold

    Kelley, Richard

    Brooks, Edwin

    Fletcher, Raymond (Ilkeston)

    Kenyon, Clifford

    Brown, Rt. Hn. George (Belper)

    Fletcher, Ted (Darlington)

    Kerr, Dr. David (W'worth, Central)

    Brown, Hugh D. (G'gow, Provan)

    Floud, Bernard

    Lead ter, Ted

    Brown, Bob(N'c'tle-upon-Tyne,W.)

    Foot, Michael (Ebbw Vale)

    Ledger, Ron

    Brown, R. W. (Shoreditch & F'bury)

    Forrester, John

    Lee, Rt. Hn. Frederick (Newton)

    Buchan, Norman

    Fowler, Gerry

    Lever, L. M. (Ardwick)

    Buchanan, Richard(C'gow, Sp'burn)

    Fraser, John (Norwood)

    Lewis, Arthur (W. Ham, N.)

    Butler, Herbert (Hackney, C.)

    Fraser, Rt. Hn. Tom (Hamilton)

    Lomas, Kenneth

    Callaghan, Rt. Hn. James

    Gardner, A. J.

    Loughlin, Charles

    Cant, R. B.

    Garrett, W. E.

    Luard, Evan

    Carmichael, Neil

    Garrow, Alex

    Lubbock, Eric

    Carter-Jones Lewis

    Gordon Walker, Rt. Hn. P. C.

    Lyons, Edward (Bradford, E.)

    Chapman, Donald

    Gourlay, Harry

    Maben, Dr. J. Dickson

    Ccncannon, J. D.

    Greenwood, Rt. Hn. Anthony

    McBride, Neil

    Conlan, Bernard

    Grey, Charles

    McCann, John

    Craddock, George (Bradford, S.)

    Griffiths, David (Rother Valley)

    MacColl, James

    Crawshaw, Richard

    Griffiths, Rt. Hn. James (Llanelly)

    MacDermot, Niall

    Crosland, Rt. Hn. Anthony

    Griffiths, will (Exchange)

    Macdonald, A. H.

    Cullen, Mrs. Alice

    Grimond, Rt. Hn. J.

    McKay, Mrs. Margaret

    Dalyell, Tarn

    342

    343

    Mackenzie, Alasdair(Ross&Crom'ty)

    Page, Derek (King's Lynn)

    Spriggs, Leslie

    Mackenzie, Gregor (Rutherglen)

    Paget, R. T.

    Steele, Thomas (Dunbartonshire, W.)

    McMillan, Tom (Glasgow, C.)

    Palmer, Arthur

    Stonehouse, John

    McNamara, J. Kevin

    Pannell, Rt. Hn. Charles

    Symonds, J. B.

    MacPheron, Malcolm

    Pardoe, J.

    Taverne, Dick

    Mahon, Peter (Preston, S.)

    Park, Trevor

    Thornton, Ernest

    Mahon, Simon (Bootle)

    Parker, John (Dagenham)

    Tinn, James

    Mallalieu, E. L. (Brigg)

    Parkyn, Brian (Bedford)

    Tomney, Frank

    Mallalieu,J.P.W.(Huddersfield,E.)

    Pentland, Norman

    Variey, Erie G.

    Manuel, Archie

    Perry, Ernest G. (Battersea, S.)

    Wainwright, Edwin (Dearne Valley)

    Mapp, Charles

    Perry, George H. (Nottingham, S.)

    Wainwright, Richard (Colne Valley)

    Marquand, David

    Price, Christopher (Perry Barr)

    Walden, Brian (All Saints)

    Marsh, Rt. Hn. Richard

    Price, Thomas (Westhoughton)

    Walker, Harold (Doncaster)

    Mason, Roy

    Probert, Arthur

    Wallace, George

    Mayhew, Christopher

    Pursey, Cmdr. Harry

    Watkins, David (Consett)

    Mendeison, J J.

    Rankin, John

    Weitzman, David

    Millan, Bruce

    Reynolds, G W.

    Wellbeloved, James

    Miller, Dr. M. S.

    Rhodes, Geoffrey

    Whitaker, Ben

    Mitchell, R. C. (S'th'pton, Test)

    Roberts, Albert (Normanton)

    Whitlock, William

    Molloy, William

    Robinson, W. O J. (Walth'stow, E.)

    Williams, Alan Lee (Hornchurch)

    Morgan, Elystan (Cardiganshire)

    Rodgers, William (Stockton)

    Williams, Clifford (Abertillery)

    Morris, Alfred (Wythenshawe)

    Roebuck, Roy

    Williams, W. T. (Warrington)

    Morris, Charles R. (Openshaw)

    Rose, Paul

    Wilson, William (Coventry, S.)

    Moyle, Roland

    Ross, Rt. Hn. William

    Winnick, David

    Murray, Albert

    Rowlands, E. (Cardiff, N.)

    Winstanley, Dr. M. P.

    Neal, Harold

    Sheldon, Robert

    Winterbottom, R. E

    Noel-Baker, Rt.Hn. Philip (Derby, S.)

    Shinwell, Rt. Hn. E.

    Woof, Robert

    Oakes, Gordon

    8hort,Rt.Hn.Edward(N'c'tle-u-Tyne)

    Yates, Victor

    Ogden, Eric

    Silverman, Julius (Aston)

    Zilliacus, K.

    O'Malley, Brian

    Silverman, Sydney (Nelson)

    Orme, Stanley

    Skeffington, Arthur

    TELLERS FOR THE NOES:

    Oswald, Thomas

    Slater, Joseph

    Mr. Fitch and Mr. Lawson.

    Owen, Or. David (Plymouth, S'tn)

    Small, William

    Owen, will (Morpeth)

    Snow, Julian

    Clause ordered to stand part of the Bill.

    Schedule 4.—(AMENDMENTS OF CORPORATION TAX ACTS.)
    Mr. Patrick Jenkin: I beg to move Amendment No. 205, in page 71, line 33, at the end to insert:
    8. 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 of the Income Tax Act 1952.
    This Amendment is moved in a spirit of inquiry and clarification. I have no doubt that if the Chief Secretary can give a reasonable explanation, either to the effect that it is not necessary, or that it is necessary and that the Government will introduce something else on Report, we will be happy not to press it.
    The Amendment deals with paragraph 20 of Schedule 15 to the Finance Act, 1965, which contained a large number of provisions and details about the Corporation Tax, and particularly about the changeover to the new system of taxation. The paragraph dealt with the continuity of loss relief claims. Subparagraph 1 provided that Section 341 claims—that is claims which are trading
    344
    losses and can be set off against other income in the same year—may be made for losses incurred by the company in 1964–65 and set against income arising in 1965–66.
    The purpose of the paragraph was to ensure that one would not be able to set loss relief claims against income later than 1964–65. Therefore, Section 15(3) of the Finance Act, 1953, had to be excluded, because it provided for the setting off of losses against other income a year ahead. A remedy in most cases is that the losses are carried forward under what is now Section 58(1) of the 1965 Act to be set against future profits. Paragraph 20 also provides that what one might compendiously call unrelieved capital allowances may be added to the loss, and 1964–65 unrelieved capital allowances may be added to the loss and are also available for Section 341 relief.
    That is appropriate where the company is working, as under the old system, on a preceding year basis. The question which the Amendment poses by referring to Seotion 128 of the 1952 Act is, "What happens if the company is on an actual basis because it was starting for the first time in 1965–66?" If there is a trading loss, there is no doubt that that loss can be set off under paragraph 20 of Schedule 15, but if the loss is attributable to the existence of unrelieved capital

    345
    allowances, then, on one interpretation of the Schedule, as it exists, that loss cannot be relieved.
    I understand from one professional association that some inspectors appear to have been given instructions that in those circumstances those unrelieved capital allowances shall not be relieved against:he other income, and shall be available only for carry forward. It may well be that in a great many cases carry forward is an adequate relief, but there are undoubtedly cases where a company does not anticipate making anything like sufficient profits to absorb these unrelieved capital allowances in the year ahead, whereas it has adequate income from other sources to set them off in the year in question under Section 341 relief.
    I believe that this is a relief which should be available and which is intended to be available. But I understand that it is not always being available in all circumstances. It is in that spirit, more of inquiry than anything else, that I move the Amendment, and I hope that the Chief Secretary will be able to give us a reply on this quite narrow point.
    Another related point arises in the case of companies which are not starting. There is a proposed new Clause No. 32, "Corporation Tax loss relief," put down by my hon. Friend the Member for Shipley (Mr. Hirst), relating to capital allowances and a slightly different point, in which he proposes to put in a new sub-paragraph (2). No doubt we shall discuss that if the new Clause is selected.
    Mr. Diamond: I thought that both the manner and the content of the speech of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), in moving the Amendment, were amicable. I am only too glad to meet both. The hon. Gentleman has described the position with such clarity that there is no need for me to go over it. It is true that this section of the law as it stands provides for relief in the way which he has described and denies it in the way in which he says that it is in practice being denied.
    We take the view that that is the correct interpretation of the Act, and the relief is in those circumstances being denied at present. I agree with him
    346
    that it should not necessarily be denied and that, therefore, this is a matter which must be looked at.
    I cannot accept the Amendment as it stands, for the best possible reason. There is only one reason that a Minister can use which ever satisfies the whole Committee, and that is that the Amendment does not go far enough. In this case it does not deal with Section 129, the following Section, where there may be a current year assessment even though in the third year of trading. But that is a refinement. The principle is that which the hon. Gentleman has elucidated so clearly.
    The matter must be looked at, and I hope that he will be good enough to withdraw the Amendment on my undertaking to bring forward an appropriate one for the Report stage.
    Mr. Patrick Jenkin: I am very much obliged to the Chief Secretary, and hope that we may be able to proceed with the business before the Committee hereafter in as amicable and hopeful a manner. Before withdrawing the Amendment, I ask him whether he will undertake to consider—and I ask no more than that at this stage—new Clause No. 32 in the name of my hon. Friend the Member for Shipley (Mr. Hirst), which deals with a similar point. I hope that he might be able to consider that at the same time as the Amendment.
    Mr. Diamond: I only regret that the hon. Member for Shipley (Mr. Hirst), to whom I gave a very broad hint only a short time ago, is not in his place, because one needs such soft words for that hon. Gentleman as one can muster. The answer is that we shall certainly consider that, and with sympathy.
    Mr. Patrick Jenkin: I am much obliged to the Chief Secretary. In those circumstances, I beg to ask leave to withdraw the Amendment.
    Amendment, by leave, withdrawn.
    Mrs. Margaret Thatcher: I beg to move Amendment No. 64, in page 71, line 36, to leave out sub-paragraph (1) and to insert:
    (1) The limit on the rate of corporation tax imposed by section 69(6) of the Finance Act 1965 as it applies to chargeable gains shall be 37½ per cent, or such percentage as is represented by a rate equivalent to one-half of the

    347
    standard rate of income tax for the time being chargeable whichever is the lower.
    Now that we have embarked on the period of concessions which the Chief Secretary indicated were ahead, I have great hope that his soft words will not only be saved for my hon. Friend the Member for Shipley (Mr. Hirst), but that he might just have a few left for me on this Amendment.
    The Amendment concerns the rate of Capital Gains Tax charged on the funds of life assurance companies. By the Bill the Government have agreed to bring down the present rate to the maximum individual rate of 30 per cent. I understand that this is to bring life assurance funds into line with the rate charged on investment trusts, and it arises from a famous victory which we had on last year's Finance Bill.
    My point is that the rate has not been brought down far enough, because the funds due to policy holders are a case which warrants special consideration. I shall try briefly to make out that special case which rests on the principle of looking through the funds to the policy holders beyond.
    The looking-through principle is already very familiar in Revenue law. It is on this basis that charities are exempt from Income Tax and it is also on this basis that companies could be directed to Surtax. Therefore, the principle of looking through the company or organisation to those beyond is already applied either to relieve the beneficiaries from tax or to impose a greater tax upon them. We know the principle well.
    If one starts to look through the life funds which are due to policy holders—I emphasise that it is only that part of the life fund which is due to policy holders that we are considering—one comes to the following conclusion. Many people are policy holders today who would not pay the maximum individual rate of Capital Gains Tax if they put their savings into ordinary shares themselves. This is because their gains would be below the £5,000 a year limit and, therefore, they would opt to have the alternative basis of assessment and the chances are that they would pay Capital Gains Tax at a very much lower rate than the maximum of 30 per cent.
    348
    6.30 p.m.
    This applies to the majority of policy holders. It is true that there will be one or two who will make gains of as much as £5,000 a year, though I doubt it yet. In due time, of course, there will be. The vast majority, on the other hand, are quite ordinary folk who have taken out policies and who would pay at a low rate.
    I cannot say what is the average rate which would be payable by policy holders. No one could possibly do that. But some statistics about the number of policies held at present might be useful. At the end of 1964, there were in force about 10½ million ordinary policies with an average sum assured, including declared bonuses, of about £1,200 each. These are comparatively small policies, therefore. For new policies effected in 1964, the average sum was about £2,200. At the same date, the end of December, 1964, there were about 110 million industrial assurance policies, with an average sum assured for existing business of £45 and for new business of £90.
    Clearly, there is some duplication here, and the life offices have some indication of it. They believe that 70 per cent, of the population have some form of life assurance and, therefore, that, on average, a policy holder is likely to have three policies. But the sums assured are, comparatively, so small that this would not mean that policy holders were anything like wealthy people.
    I hope that I have said enough about the great number of policies in existence to show that the majority of people holding them must be quite ordinary folk. It is on this ground that one makes the case for reducing the rate of Capital Gains Tax on the funds which belong to those people. If one accepts that, one must agree that the rates should come down.
    The rate we propose is a rate equal to one-half of the standard rate of Income Tax for the time being chargeable. This rate, of course, has a historic reason behind it. It was the rate which the Inland Revenue itself proposed should be chargeable on life funds in a memorandum it submitted to the Royal Commission in 1925. I hope, therefore, that I should have some support from the Inland Revenue even if I do not get much from the Chief Secretary. However,

    349
    having made the broad assertion that the tax should be less on these people, I hope that the right hon. Gentleman will give us hope that the level of tax will be reduced.
    In reply to a slightly different Amendment last year, the right hon. Gentleman said that it could not be alleged that savings through life offices should be preferred to other forms of saving. I cannot wholly agree with him there. It seems to me that this is one of the most beneficial forms of saving. It is the only form which enables a man both to save and to provide at the same time against sudden tragedy.
    I believe that every married man should provide a good deal of life cover in the event of sudden death so that his wife and family are not bereft of husband and father and livelihood at one and the same time. On these grounds, therefore, there are strong reasons, quite apart from the looking-through reasons, for giving some tax incentive to this form of saving by way of reduction in the Capital Gains Tax charge.
    I hope that I have made the point clear to the Chief Secretary and that he is in one of his more benign and generous moods. I look forward to hearing him make a hopeful reply.
    Mr. Diamond: The function of the Chief Secretary is to help the Committee. I am not sure that he is paid to be generous, benign and all the other things that the hon. Lady the Member for Finchley (Mrs. Thatcher) suggested I should be.
    The hon. Lady described the purpose of the Amendment with complete clarity. She suggests that fife policies, under the general principle of life assurance, should be encouraged. Life assurance is, of course, encouraged. There is considerable relief given to everyone who pays life assurance premiums. But the question here is quite simple. The hon. Lady referred to the true situation at the beginning of her speech, when she reminded us of the occasion on which the
    Committee decided that 30 per cent, should be the appropriate rate of tax for unit and investment trusts. In his Budget speech this year, my right hon. Friend referred to this and said:
    "I have decided to bring life assurance companies into line with unit trusts and investment trusts."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 728, c. 1433.]
    That is the simple reason why we are bringing them in. We think that they are analogous. We think that they are in competition. We are sure that there would be a considerable scream and quite proper objection from the unit and investment trust managers if funds were encouraged away from them into life assurance companies. Because they are competitors, because their situation is analogous, and because the Government favour saving of all kinds, as we keep on saying, we are anxious to treat them equally and to give them the beneficial rate which, as the hon. Lady knows, we have not sought to remove. The rate was decided in what one might, perhaps, without heat, call unusual circumstances.
    The Government have not sought to alter it. They are merely bringing life assurance into line. There is, therefore, every justification for the 30 per cent, rate. I can see no argument for treating this particular category with exceptional and unfair generosity as compared with other equivalent forms of saving.
    Mrs. Thatcher: I am very disappointed with the right hon. Gentleman's reply, but I am not surpised at it. He has rejected the whole basis of the case and the looking-through principle which I put to him. I disagree that unit or investment trust managers would be dismayed if he were to accept the Amendment.
    The quickest and the most impressive way by which we can make our opinion felt is in the Division Lobby. I hope that my right hon. and hon. Friends will join me in supporting the Amendment.
    Question put, That the words proposed to be left out stand part of the Clause: —
    The Committee divided: Ayes 232, Noes 159.

    Division No. 37.]

    AYES

    [6.37 p.m.

    Abse, Leo

    Atkins, Ronald (Preston, N.)

    Bellenger, Rt. Hn. F. J.

    Allaun, Frank (Salford, E.)

    Atkinson, Norman (Tottenham)

    Benn, Rt. Hn. Anthony Wedgwood

    Alldritt, Walter

    Bagier, Gordon A. T.

    Bennett, James (G'gow, Bridgeton)

    Archer, Peter

    Barnes, Michael

    Bidwell, Sydney

    Armstrong, Ernest

    Barnett, Joel

    Blackburn, F.

    Ashley, Jack

    Beaney, Alan

    Blenkinsop, Arthur

    Boardman, H.

    Hale, Leslie (Oldham, W.)

    Ogden, Eric

    Booth, Albert

    Hamilton, James (Bothwell)

    O'Malley, Brian

    Boston, Terence

    Hannan, William

    Orme, Stanley

    Bowden, Rt. Hn. Herbert

    Harper, Joseph

    Oswald, Thomas

    Braddock, Mrs. E. M.

    Hattersley, Roy

    Owen, Dr. David (Plymouth, S'tn)

    Bradley, Tom

    Hazell, Bert

    Owen, Will (Morpeth)

    Bray, Dr. Jeremy

    Heffer, Eric S.

    Padley, Walter

    Brooks, Edwin

    Herbison, Rt. Hn. Margaret

    Page, Derek (King's Lynn)

    Brown, Rt. Hn. George (Belper)

    Hooley, Frank

    Paget, R. T.

    Brown, Hugh D. (G'gow, Provan)

    Horner, John

    Palmer, Arthur

    Brown, Bob(N'c'tle-upon-Tyne,W.)

    Houghton, Rt. Hn. Douglas

    Pannell, Rt. Hn. Charles

    Brown, R. W. (Shorctlitch & F'bury)

    Howarth, Robert (Bolton, E.)

    Parker, John (Dagenham)

    Buchan, Norman

    Howie, W.

    Parkyn, Brian (Bedford)

    Buchanan, Richard (G'gow, Sp'burn)

    Hoy, James

    Pentland, Norman

    Callaghan, Rt. Hn. James

    Hughes, Emrys (Ayrshire, S.)

    Perry, Ernest G. (Battersea, S.)

    Cant, R. B.

    Hughes, Roy (Newport)

    Perry, George H. (Nottingham, S.)

    Carmichael, Neil

    Hunter, Adam

    Price, Christopher (Perry Barr)

    Carter-Jones, Lewis

    Hynd, John

    Price, Thomas (Westhoughton)

    Chapman, Donald

    Jackson, Colin (B'h'se & Spenb'gh)

    Price, William (Rugby)

    Concannon, J. D.

    Jackson, Peter M. (High Peak)

    Probert, Arthur

    Conlan, Bernard

    Jeger, George (Goole)

    Pursey, Cmdr. Harry

    Craddock, George (Bradford, S.)

    Jeger,Mrs.Lena'H'b'n&St.P'cras,S.)

    Rankin, John

    Crawshaw, Richard

    Jenkins, Hugh (Putney)

    Reynolds, G. W.

    Crosland, Rt. Hn. Anthony

    Jones, Dan (Burnley)

    Rhodes, Geoffrey

    Crossman, Rt. Hn. Richard

    Jones, J. Idwal (Wrexham)

    Roberts, Albert (Normanton)

    Cullen, Mrs. Alice

    Judd, Frank

    Robinson, W. O. J. (Walth'stow, E.)

    Dalyell, Tam

    Kenyon, Clifford

    Rodgers, William (Stockton)

    Davidson, Arthur (Accrington)

    Kerr, Dr. David (W'worth, Central)

    Roebuck, Roy

    Davies, G. Elfed (Rhondda, E.)

    Leadbitter, Ted

    Rose, Paul

    Davies, Harold (Leek)

    Ledger, Ron

    Ross, Rt. Hn. William

    Davies, Ifor (Gower)

    Lee, Rt. Hn. Frederick (Newton)

    Rowlands, E. (Cardiff, N.)

    Davies, Robert (Cambridge)

    Lever, L. M. (Ardwick)

    Shinwell, Rt. Hn. E.

    Dempsey, James

    Lewis, Arthur (W. Ham, N.)

    Short,Rt.Hn.Edward(N'c'tle-u-Tyne)

    Dewar, Donald

    Lewis, Ron (Carlisle)

    Silverman, Julius (Aston)

    Diamond, Rt. Hn. John

    Lomas, Kenneth

    Silverman, Sydney (Nelson)

    Dickens, James

    Loughlin, Charles

    Skeffington, Arthur

    Dobson, Ray

    Luard, Evan

    Slater, Joseph

    Doig, Peter

    Lyons, Edward (Bradford, E.)

    Small, William

    Dunn, James A.

    Mabon, Dr. J. Dickson

    Snow, Julian

    Dunwoody, Mrs. Gwyneth (Exeter)

    McBride, Neil

    Spriggs, Leslie

    Dunwoody, Dr. John (F'th & C'b'e)

    McCann, John

    Steele, Thomas (Dunbartonshire, W.)

    Eadie, Alex

    MacColl, James

    Stonehouse, John

    Edelman, Maurice

    MacDermot, Niall

    Swingler, Stephen

    Edwards, Rt. Hn. Ness (Caerphilly)

    Macdonald, A. H.

    Symonds, J. B.

    Edwards, Robert (Bilston)

    McKay, Mrs. Margaret

    Taverne, Dick

    Edwards, William (Merioneth)

    Mackenzie, Gregor (Rutherglen)

    Thornton, Ernest

    Ellis, John

    McMillan, Tom (Glasgow, C.)

    Tinn, James

    English, Michael

    McNamara, J. Kevin

    Tomney, Frank

    Ensor, David

    MacPherson, Malcolm

    Varley, Eric G.

    Evans, Albert (Islington, S.W.)

    Mahon, Peter (Preston, S.)

    Wainwright, Edwin (Dearne Valley)

    Evans, loan L. (Birm'h'm, Yardley)

    Mahon, Simon (Bootle)

    Walden, Brian (All Saints)

    Faulds, Andrew

    Mallalieu, E. L. (Brigg)

    Walker, Harold (Doncaster)

    Fernyhough, E.

    Mallaiieu,J.P.W.(Huddersfield,E.)

    Wallace, George

    Finch, Harold

    Manuel, Archie

    Watkins, David (Consett)

    Fitch, Alan (Wigan)

    Mapp, Charles

    Weitzman, David

    Fletcher, Raymond (Ilkeston)

    Marquand, David

    Wellbeloved, James

    Fletcher, Ted (Darlington)

    Marsh, Rt. Hn. Richard

    Whitaker, Ben

    Floud, Bernard

    Mason, Roy

    Whitlock, William

    Foot, Michael (Ebbw Vale)

    Mayhew, Christopher

    Williams, Alan Lee (Hornchurch)

    Forrester, John

    Mendelson, J. J.

    Williams, Clifford (Abertillery)

    Fowler, Gerry

    Mikardo, Ian

    Williams, W. T. (Warrington)

    Fraser, John (Norwood)

    Millan, Bruce

    Willis, George (Edinburgh, E.)

    Fraser, Rt. Hn. Tom (Hamilton)

    Miller, Dr. M. S.

    Wilson, William (Coventry, S.)

    Gardner, A J.

    Mitchell, R. C. (S'th'pton, Test)

    Winnick, David

    Garrett, W. E.

    Molloy, William

    Winterbottom, R. E.

    Garrow, Alex

    Morgan, Elystan (Cardiganshire)

    Woodburn, Rt. Hn. A.

    Cordon Walker, Rt Hn. P. C.

    Morris, Alfred (Wythenshawe)

    Woof, Robert

    Gourlay, Harry

    Morris, Charles R. (Openshaw)

    Yates, Victor

    Grey, Charles

    Moyle, Roland

    Zilliacus, K.

    Griffiths, David (Rother Valley)

    Murray, Albert

    Griffiths, Rt. Hn. James (Lianelly)

    Neal, Harold

    TELLERS FOR THE AYES:

    Griffiths, Will (Exchange)

    Noel-Baker, Rt. Hn.Philip(Derby,S.)

    Mr. Lawson and Mr. Bishop.

    Oakes, Gordon

    NOES

    Alison, Michael (Barkston Ash)

    Bennett, Sir Frederic (Torquay)

    Bruce-Gardyne, J.

    Allason, James (Hemel Hempstead)

    Bessell, Peter

    Buchanan-Smith, Alick(Angus,N&M)

    Astor, John

    Biffen, John

    Bullus, Sir Eric

    Atkins, Humphrey (M't'n & M'd'n)

    Biggs-Davison, John

    Campbell, Gordon

    Awdry, Daniel

    Black, Sir Cyril

    Cary, Sir Robert

    Baker, W. H. K.

    Blaker, Peter

    Chichester-Clark, R.

    Balniel, Lord

    Brewis, John

    Clegg, Walter

    Batsford, Brian

    Brinton, Sir Tatton

    Cooke, Robert

    Beamish, Col. Sir Tufton

    Brown, Sir Edward (Bath)

    Cooper-Key, Sir Neill

    352

    353

    Costain, A. P.

    Hunt, John

    Pardoe, J.

    Crawley, Aidan

    Hutchison, Michael Clark

    Pearson, Sir Frank (Clitheroe)

    Crosthwaite-Eyre, Sir Oliver

    Irvine, Bryant Godman (Rye)

    Peel, John

    Crouch, David

    Jenkin, Patrick (Woodford)

    Percival, Ian

    Cunningham, Sir Knox

    Johnson Smith, G. (E. Grinstead)

    Peyton, John

    Curie, G. B. H.

    Johnston, Russell (Inverness)

    Pike, Miss Mervyn

    Dalkeith, Earl of

    Jopling, Michael

    Pink, R. Bonner

    Dance, James

    Kaberry, Sir Donald

    Pounder, Rafton

    Davidson, James (Aberdeenshire, W.)

    Kerby, Capt. Henry

    Powell, Rt. Hn. J. Enoch

    Dean, Paul (Somerset, N.)

    Kershaw, Anthony

    Pym, Francis

    Deedes, Rt, Hn. W, F. (Ashford)

    Kitson, Timothy

    Ridley, Hn. Nicholas

    Dodds-Parker, Douglas

    Lancaster, Col. C. G.

    Ridsdale, Julian

    Eden, Sir John

    Legge-Bourke, Sir Harry

    Roots, William

    Elliot, Capt. Walter (Carshalton)

    Lewis, Kenneth (Rutland)

    Rossi, Hugh (Hornsey)

    Errington, Sir Eric

    Loveys, W. H.

    St. John-Stevas, Norman

    Farr, John

    Lubbock, Eric

    Scott, Nicholas

    Fisher, Nigel

    MacArthur, Ian

    Shaw, Michael (S'b'gh & Whitby)

    Fletcher-Cooke, Charles

    Mackenzie, Alasdair(Ross&Crom'ty)

    Sinclair, Sir George

    Fortescue, Tim

    Macleod, Rt. Hn. Iain

    Smith, John

    Fraser,Rt.Hn.Hugh(Stafford & Stone)

    Macmillan, Maurice (Farnham)

    Steel, David (Roxburgh)

    Giles, Rear-Adm. Morgan

    Maddan, Martin

    Stoddart-Scott, Col. Sir M. (Ripon)

    Glover, Sir Douglas

    Maginnis, John E.

    Talbot, John E.

    Glyn, Sir Richard

    Mathew, Robert

    Tapsell, Peter

    Goodhart, Philip

    Maude, Angus

    Taylor, Sir Charles (Eastbourne)

    Goodhew, Victor

    Maudling, Rt. Hn. Reginald

    Taylor, Frank (Moss Side)

    Gower, Raymond

    Maxwell-Hyslop R. J.

    Temple, John M.

    Grant, Anthony

    Maydon, Lt.-Cmdr. S. L. C.

    Thatcher, Mrs. Margaret

    Grieve, Percy

    Mills, Peter (Torrington)

    Turton, Rt. Hn. R. H.

    Griffiths, Eldon (Bury St. Edmunds)

    Mills, Stratton (Belfast, N.)

    Van Straubenzee, W. R.

    Gulden, Harold

    Miscampbell, Norman

    Wainwright, Richard (Colne Valley)

    Hall, John (Wycombe)

    Mitchell, David (Basingstoke)

    Walker, Peter (Worcester)

    Hall-Davis, A. C. F.

    Monro, Hector

    Wall, Patrick

    Harris, Frederic (Croydon, N.W.)

    More, Jasper

    Ward, Dame Irene

    Harvey, Sir Arthur Vere

    Morrison, Charles (Devizes)

    Weatherill, Bernard

    Harvie Anderson, Miss

    Mott-Radclyffe, Sir Charles

    Webster, David

    Hawkins, Paul

    Munro-Lucas-Tooth, Sir Hugh

    Wells, John (Maidstone)

    Hay, John

    Murton, Oscar

    Whitelaw, William

    Heald, Rt. Hn. Sir Lionel

    Nabarro, Sir Gerald

    Wilson, Geoffrey (Truro)

    Higgins, Terence L.

    Noble Rt. Hn. Michael

    Winstanley, Dr. M. P.

    Hiley, Joseph

    Nott, John

    Wolrige-Gordon, Patrick

    Hill, J. E. B.

    Onslow, Cranley

    Woodnutt, Mark

    Hirst, Geoffrey

    Orr, Capt. L. P. S.

    Worsley, Marcus

    Hogg, Rt. Hn. Quintin

    Orr-Ewing, Sir Ian

    Younger, Hn. George

    Holland, Philip

    Osborne, Sir Cyril (Louth)

    Page, Graham (Crosby)

    TELLERS FOR THE NOES:

    Mr. R. W. Elliott and Mr. Eyre

    Mrs. Thatcher: I beg to move Amendment No. 12, in page 72, line 41, at the end to insert:
    Transitional relief for companies paying dividends out of pre-1966–67 profits
    In section 85 of the Finance Act 1965 there shall be added the following subsection—
    (2) (A) In the case of a company which carries on, whether alone or in conjunction with some other trade or business, a life assurance business or other long-term business as defined in section 33 of the Insurance Companies Act 1958 but including sinking fund and capital redemption insurance business (hereinafter collectively referred to as "long-term business") and has made or makes a valuation of its liabilities in respect of such business or businesses for the purpose of making a distribution of profits, and the company was liable to income tax and profits tax and not to corporation tax upon some or all of the profits allocated to its shareholders out of the surplus resulting from such valuation, then the amount ("the valuation period surplus") shall be calculated in respect of each year prior to the year 1966–67 in which such profits arose so that income tax on it at the standard rates for the said years may represent according to the rules prescribed by this section the proportion referable to the com-
    354
    pany's income arising in each such year which is subject to income tax and profits tax of the extra charge to those taxes as compared with a charge to corporation tax but so that the valuation period surplus shall not exceed the amount on which repayments of income tax under this section would equal the income tax paid by the company on distributions made by it in the period up to the next normal valuation date out of profits which were liable to income tax and profits tax as aforesaid less any distributions that have been made thereout to the shareholders prior to the 6th day of April 1966.
    The notional surplus in respect of such a company shall be the aggregate of the following—

    (i) whichever is the greater of the one year surplus, the three year surplus or the valuation period surplus in respect of its long-term business; and

    (ii) the notional surplus, determined according to the provisions of subsection (2) hereof, which that company would have had had it not carried on long-term business.

    In respect of a company to which this subsection applies the limitations to distributions provided for in subsection 1 hereof shall not apply and the words "but not after the year 1970–71" shall be substituted for the words which appear in parentheses in lines 2 and 3 of that subsection.
    This Amendment, also, pleads a special case for the profits of the life assurance companies. If I am to plead for special conditions, I obviously must attempt to make a case for them. I believe that there is a good case, which stems from the constitution of all these companies.
    In the constitution of every company which carries on life assurance business there will be somewhere a provision that none of the profits can be paid out to their shareholders until the policyholders have had their share. This goes right to the root of the constitution of the company, whether it was created under the Companies Act, by Charter or by Act of Parliament. In each of those three cases there will be a condition in the constitution providing that nothing shall be paid to the shareholders until the policyholders have had their share of profits.
    In going back to the beginning of these companies, one finds that it took a certain time to decide what the profits were. Clearly, in doing life asurance business the number of risks to be faced in the first year may be quite different from the number of risks giving rise to claims in the second year. Merely because in the first year of business one had, perhaps, rather few claims and, therefore, rather good results, does not mean that all those results could be allocated to profits. It was necessary to have quite a period of time to decide what the profits were.
    For that reason, companies did not decide upon their profits for a period of one year or two, three or five years. These periods became known as the valuation periods. At the end of whatever was the valuation period the company made a valuation of the funds to determine what profits were available. In fact, no profits were paid to shareholders for the duration of the first valuation period and therefore there was a gap from the start of the company to the end of its first valuation period in which nothing was paid to shareholders.
    At the end of the valuation period the funds are valued and then allocated. They are first allocated, usually to the tune of about 90 per cent., to policyholders. Those funds are added by way of bonus to the policies straight away. What is left goes to a special fund for the shareholders and the moneys in that fund are paid out during the next valuation period. This
    356
    is the crucial point. The funds which go out during the next valuation period are the profits of the last valuation period. They are not merely deemed to be the profits, or described as the profits, of the last valuation period. They are the profits of the last valuation period because of the constitution and process which I have described.
    It follows that if the position is left as it is some of the profits which will be paid during the next valuation period will have already borne their full whack of Income Tax and Profits Tax, but are not necessarily covered by Section 85. To the extent that they are not covered by Section 85, they will, in addition to the tax they have already borne, have to bear another slice of Income Tax at the rate of 41¼ per cent. That means that in so far as the dividends are not covered they would bear a total rate of tax of 72 per cent.
    When we discussed Section 85 last year, I understood that the principle was that in so far as dividends are paid out of funds which have borne their full share of Income Tax and Profits Tax they should be relieved from a further slice of Income Tax. That is the principle for which we are pleading today.
    The crucial difference between this type of company and others is first the period of valuation, and secondly, the fact that no profits were paid in the first valuation period of the history of the company. We are therefore still five, three or two years, behind whatever is the appropriate valuation period. Unless some relief is given in accordance with the terms of the Amendment, certain of the funds paid to shareholders will bear an extra slice of Income Tax which they should not bear. The special case could not be pleaded by any other company because the constitutions of the companies are different and the valuation is different.
    There was an attempt to debate an Amendment similar to this last year, but it was never fully debated. I understand that the Chancellor of the Exchequer wrote to Mr. William Clark, who, I am sad to say, is not here this year, in the following terms:
    "I do not think I could depart from the basic ideas of these reliefs in favour of a particular class of company and in particular I could not afford to allow companies to have relief on the basis that their 1966–67 and later

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    dividends ought to be attributed to past profits for this purpose because the company described them or regards them as having been paid out of past profits."
    That shows that the right hon. Gentleman never got hold of the point. These are not dividends which are merely attributed to past profits or described or regarded as having been pair out of past profits. Because of the process which I have described, they will be dividends which are, and must, because of the constitution of the company, be paid out of past profits.
    I hope that the point is clear and that the Chief Secretary will either agree to consider it or give some measure of relief.
    Mr. Diamond: I cannot meet the Amendment at all. We shall finish with the same disagreement. I regret to say, as the one with which we start, because the hon. Lady the Member for Finchley (Mrs. Thatcher) bases her case on an allegation which I cannot accept, that these are not the methods of calculating the profits, but are the profits. This is a difficult matter, but perhaps I could help the hon. Lady and the Committee by going over very shortly the circumstances in which the one-year and three-year surplus reliefs are given.
    As the hon. Lady rightly said, most companies carrying on this kind of business value their liabilities at intervals of more than a year. That is not true in very case. One of the biggest companies values them annually. Some value them every two years, some every three years and some every five years.
    The hon. Lady will realise that she is asking for a great deal. The essence of the difference between what she is asking for on behalf of life assurance companies and the generality of cases is that we are starting a new tax system. When we do that, we have to have what I can only call a clear-cut start. If every company were to be allowed to say that dividends should be labelled, or described, or calculated by reference to a year in which the old system applied and that therefore, for as long as there were any profits or reserve under the old system which could be used for dividends paid in the future, those dividends should not be called on to pay Schedule F Income Tax, then there would
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    be very little revenue coming in for a very long time.
    The Committee has agreed that there shall be a clear and clean start, but that in two exceptional cases relief of a transitional nature shall be given to cover the period of change from the old to the new system. One is the one-year surplus and the other the three-year surplus. Neither case fits the circumstances of the life assurance companies' claim, which I understand very well. The hon. Lady has put the case very clearly, and I have listened to it at first hand.
    However, I cannot recommend the Committee to accept the Amendment, mainly because the life companies would, be claiming for themselves exceptional treatment on a basis which has no relevance to the reasons which led to the treatment of all other companies, and, secondly because I do not accept what the hon. Lady says, namely, that these are the profits of those earlier periods. All that she has done is to describe a method by which profits are arrived at and a practice which holds good. But I still say that all that is happening is that the life assurance companies are, for these purposes, labelling their profits as being applicable to a previous period because when directors declare dividends they do so each year. When they pay it to their shareholders, they refer to it as a dividend of the year, which indeed it is.
    Of course it is. It is an almost impossible task to say that a particular dividend comes from a particular profit or a particular reserve. As we know, the whole thing is a pool of money which is fed by a number of different streams and rivers. It cannot be said that a particular distribution represents only certain pound notes which came in from a particular source. I am sorry to say. therefore, that I cannot hold out any hope of meeting the hon. Lady's case.
    The Chancellor described the matter very clearly in his letter. We have heard the case on many occasions, and we have listened to it with great sympathy. The hon. Lady has put it with force and clarity again. We know the whole argument and what is in the minds of insurance companies. We cannot distinguish,

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    for a different reason, life assurance companies from the generality of companies. Secondarily, we cannot accept the notion that, because there is this method of calculating liabilities from time to time, that necessarily puts such a stamp on the character of the dividends that they can be held to be the dividends in a previous period.
    I regret to say that I cannot recommend the Committee to accept the Amendment."
    7.0 p.m.
    Mrs. Thatcher: That is one of the most disappointing replies and one of the weakest that we have had from the Government. It is not merely a method of calculating the profits. If the Chief Secretary has not grasped that it is not, he has not grasped the argument at all. I described not only the valuation, but the procedure which takes place at the end of that valuation period and the way in which the funds are then allocated both to policy holders and translated into a special fund for shareholders.
    With all due respect, he was not listening very carefully, because he was chattering nineteen to the dozen to the Financial Secretary. I did not stop him, because I understand that consultation has to take place from time to time. But he is still answering me on the basis of a case which I did not make.
    These are not merely dividends which are described as having been paid out of past profits. They are dividends which are paid out of past profits. The proof of the matter is that, in the first five years, if that was the valuation period of the company, no dividends were paid out at all, and that during the next period, five to 10 years, the profits of the first five years were then paid up.
    That is the complete answer to the Chief Secretary's case. He is wrong. There is nothing unusual in that, but perhaps I can have the opportunity on another occasion of putting the case to him more effectively.
    The Temporary Chairman (Mr. George Rogers): Does the hon. Lady wish to withdraw her Amendment?
    Mrs. Thatcher: No, Mr. Rogers.
    Amendment negatived.
    Mr. Patrick Jenkin: I beg to move Amendment No. 206, in page 73, line 35, at the end to insert:
    (3) Section 55(1) of the Finance Act 1965 shall apply as if after the words "within the charge to Corporation Tax" in the first paragraph there were added "and so far as in any accounting period there still exist allowable losses, they shall be allowed as a deduction from the company's total profits in that accounting period".
    With this Amendment we leave for a moment some of the hideous complexities which surrounded the Amendment which my hon. Friend the Member for Finchley (Mrs. Thatcher) has just moved and to which we shall have to return when we come to the next Clause.
    We come now to something which I am sure that the whole Committee will recognise as an entirely intelligible and readily graspable point, which we attempted to make last year and got no change and which we are seeking to return to this year. It attempts to rectify what is a manifest injustice in the combination of the Capital Gains Tax and the Corporation Tax as it affects companies. It was raised during the Committee stage on last year's Bill on 15th June.
    The short point is: should a company be entitled to set off any capital losses that it may incur against any revenue profits that it may make so as to charge Corporation Tax only on the balance? The arguments which I put in the debate last year were at some length, and I do not think that it is necessary to rehearse them all again. I shall start simply by quoting what the Chancellor said in his Budget statement last year, where he referred to the rate of tax which a company was going to pay on its capital gains.
    The right hon. Gentleman said:
    "I propose that capital gains realised by companies—and this applies to both short-term and long-term gains—shall be subject to corporation tax at the corporation tax rate. A company is a continuing association which has as its main purpose making profits; whether those profits arise as trading income or as capital gains is immaterial, and I think that it is right that they should be taxed at the same rate."—[OFFICIAL REPORT. 6th April 1965; Vol. 710, cols. 250–251.]
    They should both be charged to Corporation Tax. It is immaterial that they arise in a different way, and they should be taxed at the same rate.
    As we know, Corporation Tax is charged on profits, and "profits" are

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    defined in Section 46 of the 1965 Act as "income and chargeable gains". It goes further. Section 46(4) of the Act of last year says:
    "A company shall not be chargeable to capital gains tax in respect of gains accruing to it so that it is chargeable in respect of them to corporation tax or would be so chargeable but for an exemption from corporation tax."
    The Act goes out of its way to say that it is Corporation Tax which is charged on the capital gains and not the Capital Gains Tax. In logic, they ought to be treated exactly pari passu. Computation is bound to be different, because, naturally, for something which is in the nature of a capital gain, special rules will have to apply, and I am sure that the Financial Secretary, who argued this ad nauseam last year, will accept that point. But the treatment when the gain has been arrived at after the special rules have been applied should be exactly the same; otherwise one gets what is really a ridiculous position, and it does a manifest injustice to the people concerned.
    Take the case of a trading company which makes a trading loss in any year and, in its effort to cut down its unremunerative activities, disposes of part of its assets in the shape of some land. If it happens to realise a capital gain because of the increase in the value of that land over the period that it has held it, it is not entitled to set off that gain against its trading loss. It is taxed on the gain and is only entitled to carry forward the loss to future years if it has no other income to set it against.
    One can imagine a company getting itself in serious difficulties, having suffered a series of heavy losses, and carrying out a series of realisations in order to get its business straight. Because of the length of time for which it has held its assets or because of the impact of inflation, there is a paper profit on the realisation of those capital assets, and it pays tax on that paper profit. As the legislation stands at present, it has no right to set off those gains against the trading losses that it is making. Yet the gains are realised in exactly the same state, namely, the business being carried on. It is the same enterprise, and no relief is given. Of course, I exclude dealing companies, because capital gains does not come into that sphere at all.
    Our taxing statutes sometimes go to great lengths to try and do justice to
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    particular taxpayers. Some of the highly complex transitional provisions which I fully concede the Government introduced last year were introduced as relieving measures, sometimes at the third or fourth attempt to give adequate relieving measures, and they have caused considerable headaches to companies and their professional advisers, all in the interests of equity.
    It is recognised that taxation should broadly be calculated on the basis of what people are able to bear. The taxable capacity of the taxpayer is what counts. If one looks at the history of Income Tax, one finds that for years it has been recognised that it is unfair to tax profits without giving relief for losses, and that successively over the years new provisions have been introduced to the Income Tax Acts effectively to give relief for losses.
    If a person has two taxable trades, and one makes a profit and one makes a loss, he strikes a balance and pays tax on that. If a person has other income arising in the same year, he can set losses on trade off against that other income. He can carry forward losses. He can carry back losses. Any number of provisions are made to recognise the truth that a company should pay tax on the net income left in its hands after it has had relief for any losses incurred.
    The only one which is at present outstanding, and it stands out like a sore thumb and gives rise to the injustice of which I complain, is that a company can still pay Capital Gains Tax, and still pay Corporation Tax on its capital gains, while it is making trading losses. I do not necessarily say that we have the drafting right, but the simple adjustment which is proposed will remove a manifest unfairness. Companies which find themselves in this position regard it as unfair, and I am certain that this is an Amendment which the Government ought to accept.
    Mr. Diamond: I am sure that the Committee is grateful to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) for moving the Amendment, because it shows that there is still a misunderstanding about the nature of the Capital Gains Tax. I hope that I

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    shall succeed in removing this misunderstanding, although many previous attempts have been made to do so.
    Let me go straight to the strongest part of the hon. Gentleman's argument. He says that where there are trading losses they are set off against other kinds of income—that is correct—and that where other kinds of income were added to by the new Capital Gains Tax it followed from the previous treatment that any trade losses should be set off against all other forms of taxable income, including realised capital gains. Thus, we have the situation which the hon. Gentleman rightly described, that a person can set off all trade losses against other forms of income, no matter of what kind. That is a wholly logical way of dealing with the tax position.
    I now invite the hon. Gentleman to consider non-trading losses. We have established the logical treatment of trading losses. There are now non-trading losses to be considered. There are three categories of non-trading losses, and the hon. Gentleman has mentioned only one. The first is Case VI of Schedule D, where there is a deficiency, but this cannot be called a non-trading loss.
    The second one is Case VIII of Schedule D, which refers to income from real property, where a person can have a minus quantity, a deficiency. The third one is capital gains where a person can have a capital loss, not a trading loss but a deficiency.
    In all these three cases we follow the same rule. The well-established rule which existed for Case VI was followed for Case VIII, and it is now being adopted for Capital Gains Tax, namely, that as these are not trading losses, but are of a separate category, we treat them justly by allowing losses to be set against surpluses, deficits to be set against surpluses, but we keep each one of them in its own compartment, which is the only sensible way of calculating and assessing.
    Case VI is kept in its own compartment. Case VIII is kept in its own compartment, and we keep capital gains less deficits in their own compartment by setting them against future realised
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    capital gains. I hope, therefore, that I have explained to the hon. Gentleman and to the Committee why it is logical that we should give trading losses the benefit of the tax relief in respect of income of all kinds including capital gains, and why it is logical that non-trade losses should, in the case of capital gains, be treated in the same way as the other two categories of Case VI and Case VIII, and be dealt with in their own compartments.
    In those circumstances, I am sorry that I cannot recommend the Amendment to the Committee.
    Amendment negatived.
    7.15 p.m.
    Mr. Patrick Jenkin: I beg to move Amendment No. 308, in page 74, line 43. to leave out "II" and to insert "I".
    This is a very short point. Indeed, I venture to suggest that it is the shortest point on the Bill, but it appears that something has gone wrong with the draftsmanship. There is a reference to Part II of the Eleventh Schedule to the 1965 Act. It appears that it really ought to be Part I. I believe that this is a correct Amendment, and I am certain that the Government will accept it.
    The Financial Secretary to the Treasury (Mr. Niall MacDermot): The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) is quite right, and the Committee is indebted to him. If it is not out of order, I should like to move that he go to the top of the class. With his eagle eye he has spotted a printing error which was not noticed by the various proof readers and others. The hon. Gentleman has thereby helped us to put right something which would otherwise have been omitted. The only time that I was in the happy position of being able to suggest a drafting error to the Government the Amendment was not selected. The Government moved it themselves, on Report.
    Mr. Patrick Jenkin: I am grateful to the hon. and learned Gentleman for his remarks. I did a similar thing last year. I was able to pull the Minister without Portfolio's leg, but last year we had a different sort of Finance Bill.
    Amendment agreed to.
    Mrs. Thatcher: I beg to move Amendment No. 204, in page 75, line 9, after "but" to insert "created by charter or".
    This is a short point. At present, chartered companies such as the London Assurance Company, or the British South-Africa Company, seem to be excluded from the relief given by paragraph 2 of Schedule 13 to the Finance Act, 1965. This sub-paragraph which we are considering makes some amendments to that Act, but the question is whether the amendments it makes will bring chartered companies within the relief provided by that Act.
    This sub-paragraph says:
    "In Part I of Schedule 13 to the Finance Act 1965 references to a company shall include references to any company resident in the United Kingdom but formed under the law of a country or territory outside the United Kingdom."
    The Financial Secretary may tell me that a company created by charter is a company formed under the law of a country, but the opposite case is arguable. I know that, in certain Other cases on the same Schedule, he himself has differentiated between the companies formed under the law of this country and companies created by charter. In a part of Schedule 5, both are expressly mentioned.
    I doubt whether it was the intention of the Committee last year to exclude companies created by charter from relief. I should be grateful if the Financial Secretary will tell me whether they are excluded or included in the term "formed under the law of a country". If it is necessary, I hope that he will accept the Amendment.
    Mr. MacDermot: The answer to the hon. Lady's questions is that chartered companies are not excluded at the moment and there is no reason why they should not be. We therefore look favourably on the point raised by the Amendment. Last year, this relief was originally given in the case of groups of companies, but was limited to groups of companies resident in the United Kingdom and companies within the meaning of the Companies Act. That excluded companies which, though resident here, were registered abroad. In that case, they did not come within the Companies Act and paragraph 15 of this Schedule removes that deficiency. There is no reason why
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    a company resident here should not be regarded as satisfying the test for the purpose of this relief.
    Oddly enough, the question of chartered companies has never been brought to our attention before. If it had occurred to us, we should have covered it. With all the many representations which we received last year—no doubt the interests of chartered companies were affected—none made representations to us. Otherwise, we should certainly have included it in the paragraph. As I said, we are favourably disposed towards the Amendment, but I would ask the hon. Lady to give us time to look further at it. At first sight, it appears to us that it may not go far enough. There are other companies which are incorporated, for example by special Act of Parliament or by letters patent, which do not come yet within the provisions.
    We are not yet certain of the right formula which would cover all the interested companies and we want to test the validity of the formula before bringing it before the Committee. If the hon. Lady would be good enough to withdraw her Amendment, I will gladly give an undertaking to bring forward a suitable Amendment on Report. We are grateful to her.
    Mrs. Thatcher: I am grateful to the Financial Secretary. I hope that this time he will manage to include all companies which he intends to include. I therefore beg to ask leave to withdraw the Amendment.
    Amendment, by leave, withdrawn.
    Mr. R. J. Maxwell-Hyslop: I beg to move Amendment No. 229, in page 76, line 3, at the end to insert:
    (c) if the trust is a charitable trust for the benefit of the employees or a trust which is established for charitable purposes:
    Provided also such trust or trusts shall be registered under the Charities Act, 1960.
    I think that it is the intention of the Government, in paragraph 17(1) of Schedule 4, to undo some of the side effects, probably quite unintentional, of last year's Finance Act. I want to draw the Committee's attention to a situation which I think the Government would not wish to be caught within the previous net and not released, although it does not exist very often.

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    The sections which are let out of the net from the point of view of the definition of an "associate" of close companies, covered by sub-paragraph (1, a and b), do not need arguing, but the case which does need to be put is that of a charitable trust for the benefit of the employees. This, surely, is at least as worthy an entity to facilitate in this way as is a trust fund, entirely concerned with superannuation or one exclusively for the benefit of the employees or their dependants—in other words, a trust fund established in order to deal with hardship in the first case, sometimes of unpredictable kinds, which overtakes employees of the company, or, secondly, charitable purposes within the meaning of the Act of 1960, which go even more wide than that. I hope that the Financial Secretary will feel disposed to accept the Amendment.
    It is only fair to say that this is not entirely a hypothetical argument. A case in point is John Heathcoat and Company in my constituency, which, as the hon. and learned Gentleman may be aware, pioneered, for instance, profit-sharing and superannuation schemes for its employees. It has a charitable trust which is not confined to superannuation, not entirely to employees. At the moment, however, it could be in difficulties, because of the definition of "associate" contained in last year's Act, of the burden of which they would not be entirely relieved by paragraph 17(1,a and b) in the Bill this year.
    That is not to say that it would be impossible so to arrange its affairs that, by restricting the scope of the trust, it could be brought within the provisions of sub-paragraph (1,a and b), but were it to do so, it would lose some of its beneficent nature, which would be a loss rather than a gain to the community.
    I am sure that the Financial Secretary will be aware that this question is not entirely dissociated either from the question of assessment of the shortfall, as it appears in Section 77 of last year's Finance Act. In order to achieve a great degree of uniformity throughout the country in the way in which these assessments are made, it is desirable that they should be undertaken by special inspectors rather than by local inspectors. This would result, one hopes, in far fewer
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    appeals and in a degree of consistency which would not otherwise be achieved. It is fair to say that the special inspectors are more familiar with the type of problem involved and that this would not be a type of business which the local inspector would in any way mind losing.
    I do not want to adumbrate this point at greater length. I hope that the Government, to use an expression which borders on a pun, feel charitably disposed towards it. The Amendment covers the objectives which I have tried to describe to the Committee. On the other hand, if the Government find that the actual drafting of the Amendment is faulty, but would undertake to introduce an Amendment to achieve a similar purpose themselves, that would in many ways be an equally happy solution. I should be grateful, however, for the practical sympathy of the Financial Secretary in this respect.
    7.30 p.m.
    Mr. MacDermot: The hon. Member for Tiverton (Mr. Maxwell-Hyslop) suggested that we had introduced paragraph 17 to try to undo some side effects of our legislation last year. That is not correct. What we have done in paragraph 17 is to try to bring forward proposals to meet some points which were raised in debates initiated by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) and the hon. Member for Wokingham (Mr. van Straubenzee).
    In response to those my right hon. Friend the Chief Secretary invited hon. Gentlemen opposite to give specific instances of cases of the sort about which they had been speaking which might produce the kind of hardship which, they had argued, could arise. No response was made to that invitation. Nevertheless, as the question had been raised, we sought to put into this paragraph provisions which would meet the theoretical point —and I emphasise that to us it is still a theoretical one—which had been raised.
    I should make it clear when the hon. Member for Tiverton is referring to charitable trusts, that it is not that we are seeking to draw any distinction between the validity or worthwhile nature of a charitable trust and that of the bodies referred to in paragraph 17 (a) and (b). We are not concerned here with the question of inflicting hardship or penalty or

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    of giving a tax advantage either to the superannuation schemes or employees' trusts as defined in the paragraph or to the charitable trusts to which the hon. Gentleman has referred. We are concerned with what is the right way to determine what companies are close companies and what are not, and which are controlled sufficiently narrowly to come within the definition of close companies.
    As is well known, for that purpose the holdings of associates are aggregated with the holdings of participators with whom they are associated. The argument put forward last year was that, in the application of these close company rules, one had cases where some of the shares were held on trust for employees, and that under those rules two or more persons interested in the shares of a company held on trust could be treated as associates of one another as regards that company.
    One effect of this would be that all the personal shareholdings in the company, together with the shares of the trust of which they were beneficiaries, would be aggregated and treated as held by a single person in determining whether the company was controlled by five or fewer persons. It was recognised that this could give rise to hardship in some cases. That is why my right hon. Friend the Chancellor brought forward this year in this paragraph these two specific cases; namely, broadly speaking, under subparagraph (a) that if the trust is either a bona fide tax approved superannuation scheme or, under sub-paragraph (b), is an employees' trust and the individual concerned does not hold more than 5 per cent, of the ordinary shares or receive remuneration of more than £4,000, then the person shall not be treated as an associate merely by being a fellow beneficiary of the trust.
    Since the hon. Member for Tiverton tabled the Amendment we have considered this problem in relation to charitable trusts, but we find it difficult to see the circumstances in which the kind of difficulty he described is likely to arise.
    The hon. Gentleman referred to a company which had instituted charitable trusts—and I assure him that I know of the pioneering work which this company has done in this sphere—but I did not gather from what he said that the effect
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    of the omission of charitable trusts from the categories of trusts in paragraph 17 would be to turn that company, it otherwise not being a close company, into a close company.
    If, however, this is the case, and it there is a practical example of this kind, then I can only repeat the invitation which my right hon. Friend made last year; that if we can be supplied with particulars of any instance we will gladly look at the matter sympathetically. But I must advise the Committee that, unless and until we have the argument supported by an actual case, we do not feel disposed at this stage to accept the Amendment.
    Mr. Maxwell-Hyslop: I understand that the case I gave, of John Heathcoat and Co., is not a hypothetical case but a real one. One of the trustees of that trust fund wrote to me suggesting the case I have adduced, and that resulted in my tabling the Amendment. Thus, it is not a hypothetical case but an actual example for which the hon. and learned Gentleman asked.
    Does what the Financial Secretary said mean that this will have to wait another year—another year from when he receives correspondence on the subject? Or did his words mean that if he receives the information within the next week or so an appropriate Amendment will be tabled on Report?
    Mr. MacDermot: The sooner we receive the information the sooner we can study it. If we are able to reach a conclusion on the matter by Report, and if we then thought it right to bring forward an Amendment, certainly one would be brought forward.
    Mr. Patrick Jenkin: The whole Committee is indebted to my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) for having raised what is obviously a point of great importance which, while it may not affect many companies, undoubtedly affects one and will almost certainly affect more. It is right, therefore, that these matters should be aired.
    I thought it rather disingenuous of the Financial Secretary to argue that what we now read in paragraph 17(1) is not in the provision to meet the real arguments which I and my hon. Friends

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    adduced last year. Indeed, it is not valid to suggest that the present provision was introduced otherwise than because of that pressure exerted by my hon. Friends and myself.
    If one considers the language used by the Chief Secretary in Committee on the 1965 Measure in replying to some points made by me, one sees that the right hon. Gentleman said that everything that I had said confirmed the wisdom and draftsmanship of the provision—in other words, that my arguments, so far from making any impression on him, had merely confirmed his view that the provision was properly drawn and that the difficulties and anomalies to which I had drawn attention were unreal. Indeed, when my hon. Friend the Member for Wokingham (Mr. van Straubenzee) raised the point again on Report last year the Chief Secretary said that, having considered the position very carefully, he still thought that there was no real hardship involved.
    I concede two points. The first is that the Chief Secretary did invite my hon. Friend the Member for Wokingham to submit any cases which might come to his notice. Being a solicitor, my hon. Friend is obviously more likely to come across such cases than I am. The right hon. Gentleman also said that if a case was brought to his attention he would consider it this year. He can, therefore, understand that we were delighted to see that the Government had gone part of the way to meet the difficulty to which we drew attention last year.
    Mr. MacDermot: All the way.
    Mr. Jenkin: No, part of the way. It would be out of order for me to attempt to discuss another Amendment which appears on the Notice Paper, Amendment No. 309, which has not been selected. However that was intended to deal with the case of a participator or an ancestor of his who was a trustee under a settlement, and considerable difficulty could be caused in that matter. However, I will not pursue that issue further, although we may be able to return to it at a later stage in our proceedings.
    On the paragraph we are considering, where the participator is interested in any shares or obligations of the company subject to any trust, in response to the
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    points the Government refused us last year, the Government have brought forward an Amendment this year. I believe the clue to the point which appears to be puzzling the Financial Secretary rests in the word "exclusively" in paragraph 17(1,b). A charitable trust is not exclusively for the benefit of the employees, if it contains a residuary clause containing a general charitable intention going far wider than the employees of the company. In that case the trust would not be one which could be excluded from the paragraph of the Schedule as
    "exclusively for the benefit of the employees."
    This would be a case on which it would be important that the Government should legislate.
    I strongly urge my hon. Friend the Member for Tiverton to allow the Government to have the precise example be has quoted to show that this is a point of some substance affecting one company, and it may be more. I found the Financial Secretary very forthcoming and accommodating. He is prepared to look at the case brought by my hon. Friend and others which may be put before him to see whether an Amendment is necessary and he will consider the matter most sympathetically. In those circumstances, my hon. Friend may feel it right to withdraw the Amendment. If we do not get satisfaction, we can return to the matter on Report.
    Mr. Maxwell-Hyslop: The advice which has been given to the Committee by my hon. Friend the Member for Wan-stead and Woodford (Mr. Patrick Jenkin) is very good advice. It was my inclination, having heard the Financial Secretary, to do precisely what he has suggested. I shall certainly let the Financial Secretary have a clear statement of the position as soon as possible. Quite apart from general provisions of law, it is always worth while having a specific example in mind when drafting legislation of any kind.
    The point my hon. Friend emphasised is very material indeed because this is an extremely tightly drafted paragraph and the words "exclusively" and "employees" are not elaborated as much as they might have been without going so far as I have suggested. For instance.

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    there is the case of ex-employees and those who have not yet become employees because they are undergoing full-time studies at a technical college. I shall send the information to the Financial Secretary as quickly as possible.
    I beg to ask leave to withdraw the Amendment.
    Amendment, by leave, withdrawn.
    Mr. Patrick Jenkin: I beg to move Amendment No. 114, in page 76, line 3, at the end to insert:
    (2) Sub-paragraph (1)(c) of paragraph 9 of Schedule 11 to the Finance Act 1965 shall only apply to so much of any royalty or other consideration paid or given by the company to a participator for the use of a patent, trade mark, or registered design as represents more than a reasonable commercial consideration.
    The Deputy Chairman: With this Amendment can be discussed Amendment No. 115, in page 76, line 17, at end insert:
    (3) Sub-paragraph (1)(a) of paragraph 9 of Schedule 11 to the Finance Act 1965 shall apply only to so much of such interest or oilier consideration as is therein mentioned, as represents more than a reasonable commercial rate of interest;
    and Amendment No. 100, in page 35, line 9, at end insert "as amended by this Act".
    Mr. Jenkin: It will be for the convenience of the Committee, I believe, if we can consider Amendment No. 115 with the Amendment I have moved as it obviously deals with a closely related point, and then if we wish we may have separate Divisions.
    7.45 p.m.
    Amendment No. 114 is directed to a very important point indeed, which has given rise to considerable disquiet since the Finance Act passed last year. Few provisions have given rise to more criticism than the treatment of royalties for the purposes of close company legislation by last year's Finance Act.
    The Deputy Chairman: Order. I ought not to allow the hon. Member to proceed on the assumption that there can be Divisions on Amendments Nos. 115 and 100. The Chairman has not selected those Amendments for Divisions.
    Mr. Jenkin: I appreciate the position and, of course, we accept your Ruling, Mr. Irving.
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    With close companies there are certain payments which, in the hands of an ordinary company, would be entitled to be treated as deductions for Corporation Tax purposes, in the hands of a close company must be treated as distributions. The Committee does not need to be reminded that that represents a swingeing tax penalty. Instead of being allowed to deduct profits before Corporation Tax, one is not allowed to do so and one must account for tax under Schedule F.
    Last year, I gave figures to show to what extent this represents a penalty. In the hands of an ordinary company £100 of interest gross costs the company £100, but in the hands of a close company loan interest of the sort I have mentioned costs the company no less than £166 13s. 4d. The reference is the OFFICIAL REPORT for 22nd June, column 1631. This was justified by the Chief Secretary, who replied to the debate on this point last year and said that it was necessary to protect the Revenue and to prevent tax avoidance. Of course we on this side of the Committee accept that a great deal of the close company legislation is necessary to protect the Revenue.
    The Chief Secretary will remember that I moved an Amendment at the beginning of the debates on the close company legislation intending to make clear that it was for the prevention of avoidance of tax. For a reason which I am still at a complete loss to understand, that Amendment was refused by the Government. Of course this is necessary to prevent tax avoidance. Otherwise, people who conduct their business through these companies could avoid substantial amounts of tax, but the point we have always to bear in mind is that we have to hold a balance and it is to this major point that this Amendment is directed.
    We moved a number of Amendments last year to try to bring into the framework of the legislation that although the particular payments concerned were made to participators and, therefore, ought to be regarded as distributions of profits, nevertheless where they took the form of deductions they should be allowed to be treated as deductions up to a reasonable commercial rate. We tried to move this for loan interest so that a close company

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    which borrows money from a participator —a relative of a shareholder or a director—and pays a reasonable commercial rate should be no worse off than if it had borrowed the money from the bank. If it pays more than a reasonable commercial rate, to the extent that it was a reasonable commercial rate the interest should be allowed as a charge and only the excess should be charged as a distribution.
    One form of payment embraced by Part II of Schedule 11 in last year's Act was patent royalties. It includes not only patent royalties, but royalties on trade marks and registered designs. There is no doubt that this has given rise to a great deal of resentment. Why, it is asked, should royalties paid to an inventor or designer who takes a stake in a company exploiting the invention or design be disallowed as a charge for Corporation Tax? Why should the whole royalty, although in the form of an annual payment always allowed under previous legislation, be treated as a distribution with the extra penalty of Schedule F tax which that implies?
    This is a very common transaction. An inventor hits upon a novel idea and the first thing he thinks of is to try to form a company with a view to raising some outside money to exploit the invention. If he himself remains a participator in the company and has shares in it —after all, nothing can be more natural or desirable than that—the whole of the royalty which the company pays him must be treated as a distribution and is not allowed as a charge against the profits for Corporation Tax purposes but is treated as though it were, in effect, a dividend paid to himself.
    Close companies are in a very anomalous position. If a company were not a close company, exactly the same transaction would have entirely different results. The Chief Secretary gave his answer at column 1641 on 22nd June. He was pressed by my hon. Friend the Member for Belfast, North (Mr. Stratton Mills) as to why the paragraph of the Schedule drew a distinction between tangible and intangible property, because, as anyone who has studied the Schedule will realise, if the interest is paid in respect of tangible property such as rent a reasonable com-
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    mercial rate is allowed. If it is intangible property—patents or copyright—it is not allowed. The Chief Secretary's answer was the impossibility of valuation. He said that it is impossible to value intangible property so as to arrive at a reasonable commercial rate.
    Then we had the curious sequence of events between the Committee stage and Report when somebody drew the attention of the public, through a letter in the Financial Times, to the fact that copyrights were caught if the author to whom they were paid happened to be a participator in a publishing company which was also a close company. Much to everybody's astonishment, the Government promptly tabled an Amendment to take copyright out of the mischief of the provision and to say that, as far as it was copyright, a reasonable commercial rate would be regarded as a reduction for Corporation Tax purposes and only the excess would be treated as a distribution.
    The Government continued to refuse patent royalties, trade mark royalties and royalties for registered designs. The Chief Secretary sought to justify this in these words:
    "I am not saying that the difference between copyright and patents is one between black and white. I am saying, however, that there is a difference, and that one falls on one side of the line as far as which we are prepared to go and the other falls on the other side of the line".—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 208.]
    The Chief Secretary refused to accept the Amendment. Most people who have anything to do with patents regard that argument as completely unconvincing.
    Recently, there was a letter in The Times from Mr. Nicholas J. Flower under the heading "Taxing Our Brains". Mr. Flower took up the statement of the Chief Secretary that there were no penal provisions whatever in the Corporation Tax for close companies. Mr. Flower wrote in this way:
    "Is this really so? When the profits of a close company are computed for Corporation Tax purposes no deduction can be made in respect of any patent royalties paid to a participator in the close company, or to any associate of such a participator …
    This strikes a particularly serious blow at the small company which wishes to get on its feet by developing and marketing a new invention with the aid of the inventor, the patent owner. Either the tax must be paid, or the company must forgo the services of the inventor

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    not only as a director but even as a shareholder. So an equally hard blow is struck at the small inventor himself."
    Mr. Flower goes on to talk of what he regards as "the absurdity of this situation". Mr. Flower is a chartered patent agent, so he knows what he is talking about. How can anybody seek to draw that sort of distinction between an inventor participator and an author-publisher? The distinction between copyright and patent is absurd.
    Mr. Barnett: I am interested in the hon. Gentleman's argument and I am following it very closely. Would he go on to tell us how he would arrive at a reasonable commercial value?
    Mr. Jenkin: This is a matter which must be left to those who have a very much greater knowledge of this subject than I have. I do not profess to be an expert in patents. [Interruption.] The Chief Secretary enjoins me to leave it to him. I have an unfortunate impression that I should still get the wrong answer. I am perfectly happy to leave it to my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), who, after all, must know more about this subject than anybody else in the country. I know that the subject will be very fully and expertly dealt with by my right hon. and learned Friend.
    Mr. Flower's letter to The Times was followed by a letter from the Secretary of the Institute of Patentees and Inventors, Mr. Cotterell, who pointed out that it was not just a question of hardship on the inventor. He points out that it is an actual positive discouragement to the exploitation of inventions. Mr. Cotterell, whose letter was published on 9th June of this year, wrote in this way:
    "By taxing the patent royalties and other payments made by companies employing an inventor as a director or shareholder, but having no such liabilities in respect of reasonable royalties paid for copyright, suggests that the Bill was drafted by those unaware of the resultant discouragement to these companies to introduce inventions and new products for the benefit of trade and export.
    "In fact, the proceedings of the Report Stage of the Finance Act, 1965, indicate clearly that this differentiation between invention and copyright was adopted deliberately, although no less an authority than Sir Lionel Heald pleaded against it.
    "It all adds to the difficulties experienced today by the inventor, whose chances of get-
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    ting assistance in the development and adoption of a commercially viable idea are becoming negligible in this country."
    Mr. Gower: Is there not the possible added danger that an inventor of this kind, who is prejudiced in this way and who sees little prospect of getting real advantage to himself from association with his own company, might be thereby greatly tempted to take his invention to another country?
    Mr. Jenkin: I have little doubt that that is true. I have no doubt that if one were to make inquiries one could find cases where just that had happened. Mr. Flower challenged Labour back benchers to attempt to justify the discrimination between copyright and patent. No doubt the hon. Member for Heywood and Royton (Mr. Barnett), if his intervention is any guide to go by, will attempt to take up Mr. Flower's challenge. He will be the first to have done so.
    I believe that representations on this matter have been made to the Chancellor of the Exchequer by the Chartered Institute of Patent Agents. Coming from that source, these are representations to which great weight should be attached. There is no doubt that this legislation in its present form tends to discourage inventors from offering inventions to close companies. It must tend to reduce the royalty rate and, therefore, the return from close companies. It must tend to discourage inventor participation in close companies. Above all, it must tend to discourage the formation of companies to exploit inventions.
    I do not want to exaggerate this case, because I do not believe that the case needs exaggeration in order to be made. In my previous sentences I used my words advisedly. I believe that the legislation tends to have these effects. In so far as it has an effect—I believe that it is an appreciable one—it is an effect in the wrong direction. It will tend to militate against the exploitation of inventions rather than in favour of it. I believe that it stems from the Government's shortsighted and prejudiced preoccupation with tax avoidance.
    It is no more difficult—here I take up the point made by the hon. Member for Heywood and Royton—to try to arrive at a reasonable rate of royalty for an invention than it is for a copyright. Last

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    year the Chief Secretary tried to prove that there was something special about books, papers, coupons and that sort of thing which made it much easier to arrive at a market rate. The fixing of market rates for inventions is an activity which is going on between companies all over the world. There is a rising tide of innovation resulting in intangible inventions for which companies all over the world are granting licences. The proprietors of such inventions rarely have any difficulty in arriving at a reasonable rate of remuneration between themselves. If there were a serious dispute between the Inland Revenue and the taxpayer, it could be determined by the expert evidence of people accustomed to handle these things on appeal in the ordinary course of events.
    8.0 p.m.
    Mr. Barnett: There is, in experience and practice over the years, a definite basis for the valuing of copyright. It is easier to value a copyright than a patent.
    Mr. Jenkin: I do not accept that. Because hon. Members happen to be more familiar with marketing books and articles they should not assume that copyright is much more amenable to valuation than things like patents. I do not want to pursue this point, because my right hon. and learned Friend the Member for Chertsey, who is extremely knowledgeable on the subject, can dispel any remaining doubts that the Chief Secretary may have.
    It cannot be right to maintain this distinction. The whole set-up tends to discourage the exploitation of royalties. We are concerned, quite rightly, about the progress of our economy, the difficulties that the country has in paying its way and earning sufficient money overseas, and with getting the sort of buoyant industry that we need for economic salvation. A country preoccupied with anti-avoidance, that is so deeply concerned to prevent any form of tax avoidance that it imposes provisions of this nature upon its taxpayers, does not deserve to work out its economic salvation.
    Of course, this is a question of degree. I am not saying that there is a mighty principle on which one is taking a stand. But on the question of degree, and backed by the authority of those learned gentlemen who felt so strongly that they wrote
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    to the newspapers and by the representation made by learned associations to the Chancellor, I submit that it is not right that the Government should adhere to this provision and continue to treat patent royalties as charges and make no allowance for a reasonable commercial rate.
    I hope that the Government will accept the Amendment or at least cover the same point on Report. As part of our economic effort, the activities of inventors and designers are crucial and anything which tends to hinder their work and the effectiveness of their contribution unnecessarily is not something that the country can afford to maintain.
    Sir Lionel Heald: I am pleased to have the opportunity of supporting my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and very glad that he has stressed the importance of this general subject of the encouragement of inventions. We in the House and the Government are too apt to dismiss it as a rather minor matter. But the subject is one in which a great deal more interest should be taken by the Board of Trade and the Ministry of Technology.
    We mentioned this point last year and when the matter was discussed then I had the impression that we might hope, for the first time apparently, that the Minister of Technology and those advising him would realise that patents were important and would do something about them. Unfortunately, up to now it appears that this is not the case and therefore we need not apologise for pressing this Amendment strongly and encouraging a thorough discussion upon it.
    I want to deal both with the principle and the merits. On the principle, we are asked to approve this provision by the Government as a guard against the paying of excessive royalties as a method of tax evasion. But I decline to believe that there is any evidence that such a thing is being done or that anyone is concerned to pay excessive royalties. I will deal with what I regard as the completely fallacious intervention by the Chief Secretary last year when, finding himself in difficulty—not having had much notice nor having done much homework on the subject—he said that it was impossible to value patents and licences. This was absurd.

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    The reason given by the right hon. Gentleman last year for not giving patent royalties the same treatment as copyright was, he said:
    "As between persons who are not at arm's length, it is too easy to fix a figure which, in effect, could scoop the pool. That is not the case with copyright."—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 208.]
    That would almost suggest that nobody ever did settle a patent royalty. That is a fallacy. Thousands of licences are dealt with each year.
    The difficulty of settling the precise figure has been grossly exaggerated. I heard a judgment in court today in which reference was made to the evidence that had been given from the experience of examining hundreds of licences. The evidence was given by an officer of the Ministry of Aviation who is responsible for the Government's dealings with patents. Tt was to the effect that there are, roughly speaking three classes of royalty.
    The first is the figure of 5 per cent., or thereabouts, which is the most frequent figure for ordinary straightforward commercial licences; the second is 7½ per cent., which applies when know-how or particular technical considerations can be advanced to justify a higher figure; thirdly, there are the few cases where one might get up to 10 per cent, or even more, particularly when dealing with a thing like a machine tool which is, as it were, once and for all, or with such matters as drugs, where it is justifiable to add a substantial figure for research.
    There have been a number of such cases during the last two or three years, particularly when the drugs are being used in the hospital service. There has been a great deal of discussion in this House and the matter has been the subject of decision by the Patents Appeal Tribunal and the divisional court of the High Court. Today, I came across a report of a case in which it was said that it had been suggested that there was great difficulty about evaluating licences. The Controller of Patents has considerable experience in these matters because a large number of compulsory licences have had to be dealt with. An account was given in the judgment of the sort of considerations the Controller had to have in mind. The figure of about 15 or 16 per cent, has become established for
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    drug patents and is being paid by a larger number of companies.
    I am very sorry to have to say that what was said by the Chief Secretary last year was just bunkum. I do not blame him, for he had not had much preparation. Apparently, the authors had got to work on the Government, who had decided that they must surrender to them, so that something had to be done in a hurry. The Chief Secretary was told that he must look after the authors, but not give away anything else, and as he had to say something, he said that it was almost impossible to say what should be the figure for patent royalties. That is not true.
    If that has gone, nothing is left. I hope to be moderate about this, but I am bound to say that everyone concerned was disappointed and that last year a number of people were angry about the way in which we were brushed off by the Chief Secretary on this matter. The HANSARD report of that debate shows that three hon. Members from this side of the Committee spoke, of whom I was one. We then had a very short statement from the Chief Secretary, which was a complete brush off, on the basis that there was a contrast between copyright and other kinds of royalty and the difference was that copyright could be valued, but that the other could not be. My right hon. Friend the Member for Altrincham and Sale (Mr. Barber), with his usual gentleness and strength in gentleness, then very moderately pressed the Chief Secretary to give us a little more of an explanation, but he got no reply. The Chief Secretary sat there and made no answer.
    Mr. Barnett: I have listened to the right hon. and learned Gentleman's argument with great interest. He quoted royalties of 5 per cent., 7½ per cent., and, in some cases, 10 per cent. In those judgments which in his great experience he has known, was the grant for the whole life of the patent, or in certain instances was it granted for a short period? For example, was it granted for up to a certain level of turnover? Was there any variation, or was it exactly the same in each case?
    Sir L. Heald: Almost invariably it was for the life of the patent, but, particularly in the case of the Crown user, there was

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    sometimes a sliding scale which was applied to large quantities. As I have been asked about this, perhaps I should enlarge on the matter a little by saying that the case in which the judgment was delivered today was concerned with important patents in connection with machine guns or, rather, with a gun called the Patchett gun. A very large claim was made with the Crown user, and a very substantial award was made.
    For the purpose of assisting the court, a very experienced official, who is one of the chief patent advisors of the Government and a Government servant, gave evidence that, in the course of his business in connection with exchange control and various other things, he had examined hundreds of licences, as a result of which he was in a position to produce a kind of graph with a series of towers, as it were, so that one could see the three big humps of 5 per cent., 7½ per cent, and 10 per cent. We were not talking in the air but about practical experience.
    After all, the Chief Secretary has better access than I have to that gentleman whose evidence was accepted by the court and he should consult him about this. I venture to think that no one who knows anything about patents has been consulted and I ask the Chief Secretary to tell the Committee whether anyone other than himself has been consulted.
    At the end of his speech, my right hon. Friend the Member for Altrincham and Sale said something which I want to quote, because the Chief Secretary must be asked to take this matter seriously. Last year he treated it almost as a joke. I can assure him that what my hon. Friend said was quite right and no exaggeration and that there is great indignation about this. My right hon. Friend said:
    "… I feel that this is a matter which should be looked into in the course of the coming year, and I hope that the Chief Secretary, with that fairness which he has shown on these matters which have no party political significance, will look into it in the coming year in the light of what my right hon. and learned Friend said."—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 210.]
    I understand that it is admitted, as it must be, that there has been, not pressure, but a request from several organisations and societies and people who know
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    about this subject for the matter to be carefully considered. I do not know what meetings or discussions there have been, but I have the impression that again those people have been virtually brushed off. That is not good enough and on this occasion we must ask the Chief Secretary to treat the matter a little more seriously.
    8.15 p.m.
    Mr. Barnett: I have a great deal of sympathy with the arguments of the right hon. and learned Member for Chertsey (Sir L. Heald) and I entirely accept that he would have a very strong case if one could arrive at a valuation. The right hon. and learned Gentleman is an expert in these matters and I listened with great care to his arguments, but they did not altogether persuade me. He used some very harsh words about my right hon. Friend the Chief Secretary.
    Mr. Diamond: He always does.
    Mr. Barnett: He used "absurd", "bunkum" and so on, but much of what he said amounted to not a great deal more than assertion. Much worse, he attempted to prove his argument by telling us that there were cases of payments of 5 per cent., 7½ per cent, and sometimes 10 per cent. As hon. Members will be aware, I am sure, 10 per cent, is precisely double a 5 per cent, royalty. That is a considerable difference. The right hon. and learned Gentleman went on to say that there were additional complications of differing scales, so that it was not quite so simple to arrive at these valuations as he seemed to suggest.
    I entirely agree that at times we seem to be obsessed—I do not think that that is too strong a word—with tax avoidance. Perhaps I should declare an interest as a practising accountant, but we do not wish to encourage tax avoidance. Certainly we should not have legislation which would encourage it and if we accepted the Amendment, unless there are some better arguments than those which I have yet heard, there would be a great loophole which it would be difficult for any Government to accept.
    Although the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said that he did not wish to overstate his case, after being in this place for some 18 months, I am beginning

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    to believe that it is normally the function of Oppositions to tend to overstate their case.
    In most cases, rather than receive substantial sums on which he would be liable to tax and Surtax, the inventor would very much prefer to take a rather heavier slice of the equity when a company is first formed, when he would then be subject only to 30 per cent. Capital Gains Tax on any substantial gain if his invention were highly successful.
    Mr. St. John-Stevas: Does not the hon. Gentleman agree that the vice of overstating a case applies to politicians in general and is not confined to Her Majesty's Opposition?
    Mr. Barnett: I should like to think that it does not apply to the hon. Gentleman or myself.
    Mr. Gower: The hon. Gentleman suggested that inventors could, as an alternative, take a larger proportion of the equity. Could he explain how many of these inventors are going to finance this, particularly if the long-term value of the invention has not been established?
    Mr. Barnett: This can be done as the hon. Gentleman should know by giving the inventor a large share in a small share capital at the outset, which would give him a very large stake in the equity, with the moneys required being lent over a period when the company becomes larger, in which case the loan interest would then be a charge. We can discuss this on another occasion.
    I should have thought that the inventor of the type that the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin) quoted would very much prefer to have his wealth staked on the invention, which he is certain is going to be so successful. Then he would have a very much bigger net return than he would have had if he took it in royalties. It is for these reasons that I feel that this Amendment cannot be accepted.
    Mr. Gower: If hon. Members of the Opposition are sometimes given to exaggeration, I would reply to the hon. Member for Heywood and Royton (Mr. Barnett) that the Government and their supporters are sometimes addicted to over-simplification, particularly with
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    reference to the last point about an inventor taking a larger proportion of the equity, which is not so easy in practice as it would seem from his explanation.
    I would have thought that the Chief Secretary, having heard the arguments, would now be straining at the leash to stand up and declare his acceptance of this Amendment. The arguments which have been adduced by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) are powerful.
    Whatever one may say about the course of the post-war economic history of this country, I would have thought that the Government, engaged in a stem battle, as any Government must be with our economic conditions, to sustain and improve the economy, would have been most anxious to encourage anything which would contribute to the strength and dynamic growth of our economy. I put it to the Chief Secretary that whatever else may be said, there exists a certain amount of disquiet at our apparent inability to capitalise many of our inventions.
    It is a fact that we are still a fairly inventive people, but far too often inventions which should be capitalised here are capitalised elsewhere. To this extent anything that can be devised in the context of a Finance Act to encourage the exploitation of our inventions by the British inventors should be deserving of ready acceptance by the Government.
    I agree that payments made as royalties for the use of patents, to shareholders and directors should not be a means for widespread evasion of tax. We all accept that, but I do not think that anyone on this side of the Committee would contend that what we have in mind is that kind of avoidance. What is important is that there has been a kind of acceptance of this principle, when the Government readily accepted an analagous principle in relation to copyright. I wonder how that was done so swiftly?
    It was amazing how quickly that was accepted. I applaud that decision, as I am sure do my hon and right hon. Friends. It was a proper decision and it should not be difficult for the Government with all their resources of draftsmen and advisers, to frame a formula in

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    the content of what was said by my right hon. and learned Friend. I concede that it may not be an easy task, but we have evidence, given by my right hon. and learned Friend, that this is not impossible. I hope that the Chief Secretary will be more forthcoming in this respect this year than he was able to be last year.
    Mr. St. John-Stevas: I have nothing to add on Amendment No. 114 and, having listened to my right hon. Friend the Member for Chertsey (Sir L. Heald), and the other speeches which have been made from this side of the Committee, it would be presumptuous of me to attempt to add anything to their arguments. I would merely like to associate myself with everything that they said.
    I want to confine myself to Amendment No. 115. This is a minor but important Amendment, and I am delighted that the Chancellor has arrived in time to listen to my argument upon it. I only regret that there are so few Members opposite taking part, even passively, in this extremely important debate. Family companies have contributed and are contributing very greatly to our industrial prosperity. They have been most unfairly treated by the Chancellor in the matter of Corporation Tax in general, and, in particular, on the subject with which Amendment No. 115 is concerned.
    Under existing law a family company which wishes to borrow from one of its participators can only do so by paying a penal rate of interest which, in practice, may well amount to 10 per cent, or more. This discrimination in relation to borrowing money is particularly unfair. It is not only unfair, but it is quite absurd. Why should not a director of a family company, if he has some surplus capital, be able to lend it to that company without the company's incurring this penal rate of interest?
    Yet that is the effect of not allowing the company to deduct the interest charges before being assessed for Corporation Tax. I should have thought it self-evident that this was the first and natural source of borrowing for such a company. It is perfectly natural for a director to put his own money usefully to work in his own company.
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    8.30 p.m.
    The next group of persons to look to for extra capital, again in the natural order of things, is other members of the family who have some spare capital available. Why should the company be penalised for using the most obvious source of capital? In some cases it may be the only source of capital available. There may be no choice open to the company, in which case the discrimination is even more unjust and arbitrary.
    Why should a man who wishes to keep some liquid resources, perhaps for death duties, also be encumbered in letting his capital out temporarily to work? If an individual in those circumstances deposits money with a bank, and the bank then lends the required sum to the company, bank interest charges are allowable as a tax deduction, but the director of the family company has to pay bank charges to facilitate this device.
    There is a further anomaly. If he borrows from the company, then the interest charges may be charged against both his personal Income Tax and Surtax. This is an extremely anomalous situation. What is the reason for persisting in this anomaly? I think that the hon. Member for Heywood and Royton (Mr. Barnett), if I may repay the gracious tribute which he, doubtless inadvertently paid me earlier, put his finger on the point, as he so often does, when he said that his right hon. Friend the Chief Secretary was obsessed with the question of tax avoidance.
    Mr. Barnett: Whether one likes the Corporation Tax is another matter, but I am sure that the hon. Gentleman will agree that in the case which he is putting with Corporation Tax in its present form, if one allowed directors and their families to lend money to the company, at will as it were, and allowed the interest charged, the loophole for avoidance would be enormous.
    Mr. St. John-Stevas: The loophole for avoidance could be enormous, but I think that there are other ways of closing the loophole rather than by establishing this arbitrary rule. The loophole could be closed quite easily by giving a discretion to the officers of the Inland Revenue and allowing them to use it intelligently. [HON. MEMBERS: "Oh."]

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    That seems to be controversial. Nevertheless, I think that it is a possible alternative.
    Mr. Barnett: Impossible.
    Mr. St. John-Stevas: I agree with the hon. Member for Heywood and Royton that the Chief Secretary seems to be obsessed with the question of tax avoidance. This has communicated itself to his colleagues, or perhaps they had this obsession already. After all, the Chief Secretary himself is an accountant and the Chancellor of the Exchequer made his career in the Inland Revenue. This has proved a particularly lethal combination, because again and again one gets this totally negative attitude to fiscal policy.
    They do not seem to care if 99 just people are penalised, provided that one sinner is brought to suffer condign punishment. Nowhere is this better illustrated than in the treatment, or ill-treatment, of family companies. Instead of their being encouraged in the invaluable work which they are doing, every obstacle is set in their path.
    The present law as it affects interest rates constitutes a very serious clog on the development and work of family companies. The Amendment would remove that artificial obstacle and in my view it therefore deserves the support of the Committee.
    Sir Eric Errington: I support what has been said already from this side of the Committee. These are reasonable and proper Amendments which would not create anything in the nature of a loophole. The suggestion with regard to a patent is that the amount should not represent more than a commercial consideration, and, as regards interest, there is nothing easier than to arrive at a reasonable commercial rate of interest.
    I regard this as a question of balance. I am much disturbed by the way some business of a constituent of mine turned out. I am fortunate in having in my constituency many inventors. The Royal Aircraft Establishment, at Farnborough, employs a good many people who subsequently make quite important inventions. The man I refer to was seriously contemplating forming a company with a view to exploiting the business which followed from his invention.
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    In spite of what the hon. Member for Heywood and Royton (Mr. Barnett) said, we all know that it is very difficult to find money at an early stage in the process of developing an invention. My constituent was forced to go to a member of his family who was better off than he, but, on taking advice, he was informed that, if the member of his family advanced money, he would be a participator. In these circumstances, the end of the story was that the invention went overseas.
    This is a serious matter and not one which can easily be laughed off. To catch the minnow of lost revenue we are losing the whale of inventive genius in some of our people. It is extremely difficult to borrow money, and in such cases as I have mentioned, under the arrangements made for participators, the financial consequences are quite intolerable.
    I do not understand, and I have not had an answer from the Government, why a reasonable commercial consideration or a reasonable commercial rate of interest would not offer a suitable method. I have noted what was said by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), and that helps, but I cannot believe that it is beyond the wit of man or the wit of the tax collector to say what is a reasonable rate of interest.
    With one hand the Government are exhorting and encouraging the inventor, the man who really produces the goods, and with the other they are slapping him down in a quite unforgivable way.
    Mr. Diamond: I hope it will be for the convenience of the Committee if I direct my remarks, first, to Amendment No. 115, which seemed to attract less discussion, though I do not know whether it would be regarded as less important, and then deal with the many points raised on Amendment No. 114.
    On Amendment No. 115, I hope that I can make our case clear in a few sentences. What we have to do is not to be obsessed with preventing tax avoidance, but to hold the scales fairly between all categories of taxpayer so that no taxpayer is called upon to pay an unfair share and no taxpayer is allowed to get away with not paying his fair share. That is all we are trying to do, to hold the scales fairly.

    391
    With regard to close corporations, everybody appreciates the reason why the ability to avoid tax under the new system could be much greater than it was before. One has, therefore, to look at the position with care but with a perfectly open mind. Everybody understands the distinction between interest on money borrowed and dividends on capital invested; but in the case of a close corporation we are not so much considering the rate of interest charged by a lender of money as considering the much more simple and fundamental point, to which my hon. Friend the Member for Heywood and Royton (Mr. Barnett) referred, that there is nothing whatever to prevent a person who is putting up share capital describing it as loan capital. Therefore, the whole or the greater part of what would go as dividend on shares goes as interest on loan. Even if the rate of loan was 1 per cent, below the market price, the point would still be the same.
    Everybody understands that in the normal course of events a dividend can be expected to be, at all events, at a minimum of X per cent. There is nothing to prevent a close corporation so arranging its affairs that the X per cent. part of the dividend is labelled "loan interest" and is of a rate which is well below any figure which could be challenged as being reasonable. In this most simple procedure, however, the majority of the dividend is transmuted theoretically into loan interest and what would be a distribution of profits and would attract the appropriate tax becomes—or it is hoped that it will become—a charge against profits and, therefore, avoids being taxed to the proper extent. It is just as simple as that.
    Until we can find a method of dealing with that situation, the door is so wide open to a taxpayer taking unfair advantage over the general body of taxpayers that it is the duty of the Revenue to protect the general body of taxpayers.
    Mr. Stratton Mills: If that is the point that is worrying the right hon. Gentleman, it is perfectly possible for people in a close company to have a very small equity capital and to borrow all the working capital from one of the joint stock banks on a personal guarantee
    392
    which is exactly the kind of circumstance about which the right hon. Gentleman is so worried.
    Mr. Diamond: If money is borrowed from a person who is not a participator— that is a wide description and I will not go into it in greater detail at the moment —that is borrowed money in the ordinary sense and the interest, whatever rate is charged, would be a deduction from profits. That is the answer on that Amendment.
    In spite of what has been said about the other Amendment, it received very careful consideration last year and has received consideration since then. I am open to suggestions and we should be glad to find a way of removing any cause for complaint, if there is any cause— we do not know of any cases yet. But I cannot recommend to the Committee that the Amendment should be accepted, for a variety of reasons, including the powerful one given by my hon. Friend the Member for Heywood and Royton.
    8.45 p.m.
    The distinction which we draw between the licence for use of tangible property and the licence for use of intangible property is very real. The advice that I have received—I will not particularise it; I am responsible for accepting it and therefore I do not put the blame for it on anybody's shoulders other than my own—and my own experience coincide completely. It is just not possible, without having argument upon argument and going to the courts, to arrive at a regularly accepted market price for patent royalties. Copyright is entirely different because what one is doing in most cases is writing a book which is printed time and again. As one would expect, the commercial consequence of that is that it is a regular transaction and produces a regular contract for royalties. One could almost guess beforehand what the remuneration would be and what the terms of the contract would be.
    The essence of a patent is that it is unique—[Interruption.] That is what I said last time. There is nothing like being consistent. I propose to repeat some of the things which I said last time because I have been accused of brushing people off. I was not aware of that. I thought that I had given the matter

    393
    careful consideration and very full thought. The situation has not changed as a result of all the advice we have received and the thought which we have given to the matter during the intervening period.
    The professional experience of my hon. Friend the Member for Haywood and Royton is exactly the same as mine. In the case of inventors and inventions, the variety of the terms of the contract and the ways in which the inventor could exploit the invention commercially are enormous. The greatest argument to the contrary which we have heard is that only today there was great argument on this matter in the courts and that the best evidence which could be produced to demonstrate that this matter was simple to a degree was that the rates could be 5, 7½, 10, 14 or 15 per cent.; that the rates would vary with the amount of turnover; that there would be variation and that the Crown, as a consumer, would expect a reduction after a certain period. This is also my experience.
    My professional experience also is that there could be enormous variety in the terms on which the inventor and his backer got together. There could be a whole host of terms as to whether there should be a minimum turnover on behalf of the exploiter who was paying the patent royalty, a very important consideration which would affect the rate. In my experience as an accountant, and the experience of my hon. Friend the Member for Heywood and Royton, and according to the advice given to me, it is just not possible to say in respect of any category of patent that there is a clearly defined rate which one could say is reasonable having regard to all the other terms, including the terms of exploitation and backing, and that any rate over and above it is wholly unreasonable.
    Mr. Gower: May I put two concrete examples to the right hon. Gentleman? When the late Somerset Maugham wrote the book "The Moon and Sixpence", it was subsequently published and the books were printed from time to time and the original copyright led to the publication of numerous editions of the book. Similarly, when the inventor of the safety razor had a form of patent on his invention, the razor blades were produced by the com-
    394
    pany which capitalised that in the same way as the books were printed. Can he really say that there is a complete dichotomy between the two things and that they cannot be reconciled in any way?
    Mr. Diamond: There is this difference between the hon. Gentleman and myself. I am relating my own professional experience, gained over a third of a century as a practising accountant. The hon. Gentleman is not drawing from his personal experience, but from reports. One does not know the details of the cases which he has mentioned.
    Yes, I aver that there is a total difference between the two kinds of cases. The book is something which is produced, and it matters little what the title is or what the length of it is. There is a regular market price for books. As one would expect, for inventions which are so varied and unique—otherwise they are not inventions—the patent royalties and the terms for them are of immense variety.
    I want it to be understood that we should welcome any way of getting over the difficulty, but it is a very real difficulty. The Government are most anxious to do everything that they can to help in the exploitation of good inventions. They are demonstrating that in every way through the Ministry of Technology, through the way that they treat inventions, and the way that they treat research for tax purposes. Research has equal top treatment for tax purposes; there is no expenditure which is treated more favourably than research expenditure. The Government do everything that they can to encourage it, and there has long been Government machinery for exploiting and developing inventions which have failed to be exploited because there has been no commercial support for them.
    Mr. Barnett: As my right hon. Friend has touched on the point of Government assistance which is given to research, may I point out that there is one sphere of activity in which they do not show a great interest? I refer to an inventor who carries out research prior to going into business. He may spend quite a large amount of money on research prior to starting up a business, and that expenditure is not allowed for tax purposes. Would my right hon. Friend look at that?
    Mr. Diamond: That is an allied point which I should be glad to look into. I have been caught on my flank, and though I am not sure whether my hon. Friend's point is in order, I shall be glad to look into it.
    Sir E. Errington: As I understand it, the objection by the Government is that there is a variation in percentages up to 14 or 15 per cent. I imagine that what is happening is that, in order to secure themselves, the Government are securing 100 per cent. It would seem reasonable to consider perhaps some half-way point between the 5 per cent, and the 15 per cent. It does not seem right that the whole thing should go by the board because it is impossible to get a figure which meets all situations.
    Mr. Diamond: I am grateful to the hon. Gentleman. He is coming with me, and I am anxious to follow his argument and go with him. He is saying, "Would it not be possible to fix a figure?" and, instead of saying "a reasonable figure", which is impossible to define, and would lead to enormous trouble and conflict in the courts, as we have heard, he suggests fixing a given figure and saying that that amount shall be treated as a deduction from profits and only the balance shall be regarded as a distribution. But I know of many cases where 2½ per cent. is a very full figure. It is a regular figure for a licence to use a not particularly large or unusual invention, especially where a large turnover is likely to result. The basic figure could not be a figure of more than 2 or 2½ per cent. I know of cases of 25 per cent. The right hon. and learned Gentleman the Member for Chertsey (Sir L. Heald) told us of a number of cases of 15 per cent, in connection with drugs. None of these people, the 5 per centers, the 7½ per centers, the 10 per centers, the 15 per centers, or the 25 per centers will be happy about an arrangement under which 2 per cent, is allowed.
    I do not think that we can solve our problem in that way. It is far better to say that there are arrangements which, at the maximum, would cost a small amount of tax, and under which inventions can be exploited without any of the inconvenience which hon. Gentlemen opposite would regard as unfortunate. The problem can be easily avoided in that way.
    396
    It would be contrary to the public interest to adopt the other alternative and say that whatever is paid for patent fees —and indeed we would have to allow whatever is paid as the licence fee for intangible property—should be a deduction for tax purposes. It would be unfair to the general body of taxpayers, and for these reasons I hope that the Committee will understand that, anxious as we are to help inventors, and to deal with this problem, I cannot recommend the acceptance of the Amendment.
    Mr. Ian PercivalThe right hon. Gentleman says that he would be only too pleased if some one could offer a way out of the difficulty. At the same time he brushes aside the obvious answer by airily talking about avoiding further contests in the courts. This is what the courts are for. This is what special commissioners are for. I hope that the right hon. Gentleman will listen to the argument.
    Does the right hon. Gentleman really think that special commissioners are not able to decide in any particular case whether it is a reasonable commercial arrangement, or whether it is a fiddle? This is what they have had to do in many other contexts. Is there any reason why they should not do the same in this case?
    Mr. Diamond: If the hon. and learned Gentleman's suggestion were adopted, there would be incessant references to the Commissioners.
    Mr. Percival: Nonsense. There are not incessant references to them now.
    Mr. Diamond: No, and the reason is that the structure of the tax is such that it is not likely to give rise to interminable arguments about one small section of the tax code. Of course we have thought about this. We have thought about the difficulties which the Commissioners would have, and the limitations on the Commissioners' powers to arrive at what would be reasonable in a very difficult context, and of treating the matter in some other way and putting it before the Commissioners and letting them have a discretion.
    We have not thought very much about the suggestions made by the hon. Member for Chelmsford (Mr. St. John-Stevas) that

    397
    every inspector of taxes should have a complete discretion and decide what the right amount of tax should be for each subject, the proposal would give rise to interminable difficulties and delays in the procedure and collection of taxes.
    Mr. Lubbock: Can the right hon. Gentleman answer the question put to him by the right hon. and learned Gentleman the Member for Chertsey (Sir L. Heald) about whether he had undertaken any consultation with bodies representing inventors during the past year since the debate on the same subject in last year's Finance Bill?
    Mr. Diamond: I do not know whether that was the form of the right hon. and learned Gentleman's request. I thought that he asked me a different question, which I specifically answered. The answer to this further question is that we have been at the receiving end of representations, and that we have taken them into account.
    Mr. Stration Mills: I am disappointed with the right hon. Gentleman's reply to the argument which has been put forward during this debate. The right hon. Gentleman's argument appeared to be that the danger was that in a close company participators would compile their working capital not in the form of equity capital, but essentially on the basis of loan capital. That seemed to be the burden of his argument and the main worry of the Inland Revenue. I can understand this being a matter of some concern, although I think that he possibly gave it undue emphasis.
    9.0 p.m.
    As I pointed out in my intervention in his speech, there is a danger as he sees it at the moment, that companies can have a very small existing equity capital, with the
    bulk of their working capital coming from the bank at a fixed rate of interest. This, of course, gives them a substantial gearing for their ordinary share capital. This is the other method of dealing with the point with which the right hon. Gentleman was concerned.
    The method by which families put into the family business loan capital is a normal, sensible, commercial practice. The reasons why equity shares are not issued are varied. Sometimes it is because the money is being kept only for a year or two. On other occasions there are problems which give rise to the question of what is the right price for issuing new ordinary shares. There are also problems about the watering of the equity capital, the balances between various members of the family and questions of control. Therefore, it is nothing other than a normal commercial practice.
    I understand, of course, that the real reason why the right hon. Gentleman might have objected to the Amendment was the danger that people would pay inflated rates of interest, for example, 24 per cent, per annum on loan capital. This could have been dealt with by some form of Amendment which would provide for a reasonable rate of interest on the basis of, say, 1 or 2 per cent, over Bank Rate and that that would be fixed in the Statute as the agreed maximum rate.
    I suggest to the right hon. Gentleman that this is a problem which will give a great deal of trouble both to the Revenue and to private close companies over the years ahead and that he might look at it again.
    Question put, That those words be there inserted: —
    The Committee divided: Ayes 141 Noes 208.

    Division No. 38.]

    AYES

    [9.3 p.m.

    Alison, Michael (Barkston Ash)

    Bruce-Gardyne, J.

    Currie, G. B. H.

    Allason, James (Hemel Hempstead)

    Buchanan-smith, Alick(Angus, N&M)

    Dalkeith, Earl of

    Atkins, Humphrey (M't'n & M'd'n)

    Bullus, Sir Eric

    Dance, James

    Baker, W. H. K.

    Campbell, Cordon

    Davidson, James(Aberdeenshire, W.)

    Balniel, Lord

    Cary, Sir Robert

    Dean, Paul (Somerset, N.)

    Batsford, Brian

    Chichester-Clark, R.

    Deedes, Rt. Hn. W. F. (Ashford)

    Bessell, Peter

    Clegg, Walter

    Dodds-Parker, Douglas

    Biffen, John

    Cooke, Robert

    Eden, Sir John

    Biggs-Davison, John

    Cooper-Key, Sir Neill

    Elliot, Capt. Walter (Carshalton)

    Birch, Rt. Hn. Nigel

    Costain, A. P.

    Elliott, R.W.(N'c'tle-upon-Tyne,N.)

    Black, Sir Cyril

    Crawley, Aidan

    Errington, Sir Eric

    Blaker, Peter

    Crosthwaite-Eyre, Sir Oliver

    Eyre, Reginald

    Brewis, John

    Crouch, David

    Farr, John

    Brinton, Sir Tatton

    Crowder, F. P.

    Fisher, Nigel

    Brown, Sir Edward (Bath)

    Cunningham, Sir Knox

    Fletcher-Cooke, Charles

    Fortescue, Tim

    Legge-Bourke, Sir Harry

    Peyton, John

    Fraser,Rt.Hn.Hugh(St'fford & Stone)

    Lewis, Kenneth (Rutland)

    Pike, Miss Mervyn

    Giles, Rear-Adm. Morgan

    Loveys, W. H.

    Pink, R. Bonner

    Clover, Sir Douglas

    Lubbock, Eric

    Pounder, Rafton

    Glyn, Sir Richard

    MacArthur, Ian

    Ridley, Hn. Nicholas

    Cower, Raymond

    Mackenzie, Alasdair(Ross&Crom'ty)

    Rossi, Hugh (Hornsey)

    Grieve, Percy

    Macleod, Rt. Hn. lain

    St. John-Stevas, Norman

    Griffiths, Eldon (Bury St. Edmunds)

    Maddan, Martin

    Shaw, Michael (Sc'b'gh & Whitby)

    Grimond, Rt. Hn. J.

    Maginnis, John E.

    Sinclair, Sir George

    Gurden, Harold

    Mathew, Robert

    Smith, John

    Hall, John (Wycombe)

    Maude, Angus

    Steel, David (Roxburgh)

    Hall-Davis, A. G. F.

    Maxwell-Hyslop, R. J.

    Stoddart-Scott, Col. Sir M. (Ripon)

    Harris, Frederic (Croydon, N.W.)

    Maydon, Lt.-Cmdr. S. L. C.

    Talbot, John E.

    Harvie Anderson, Miss

    Mills, Peter (Torrington)

    Taylor, Frank (Moss Side)

    Hawkins, Paul

    Mills, Stratton (Belfast, N.)

    Temple, John M.

    Hay, John

    Miscampbell, Norman

    Thatcher, Mrs, Margaret

    Heald, Rt. Hn. Sir Lionel

    Monro, Hector

    Thorpe, Jeremy

    Higgins, Terence L.

    More, Jasper

    Turton, Rt. Hn. R. H.

    Hiley, Joseph

    Morrison, Charles (Devizes)

    Van Straubenzee, W. R.

    Hill, J. E. B.

    Mott-Radclyffe, Sir Charles

    Walker, Peter (Worcester)

    Hirst, Geoffrey

    Munro-Lucas-Tooth, Sir Hugh

    Wall, Patrick

    Holland, Philip

    Murton, Oscar

    Ward, Dame Irene

    Hunt, John

    Nabarro, Sir Gerald

    Weatherill, Bernard

    Irvine, Bryant Godman (Rye)

    Noble, Rt. Hn. Michael

    Webster, David

    Jenkin, Patrick (Woodford)

    Nott, John

    Wells, John (Maidstone)

    Jennings, J. C. (Burton)

    Onslow, Cranley

    Whitelaw, William

    Johnson Smith, G. (E. Crinstead)

    Orr, Capt. L. P. S.

    Wilson, Geoffrey (Truro)

    Johnston, Russell (Inverness)

    Osborne, Sir Cyril (Louth)

    Winstanley, Dr. M, P.

    Jopling, Michael

    Page, Graham (Crosby)

    Wolrige-Gordon, Patrick

    Kaberry, Sir Donald

    Pardoe, J.

    Younger, Hn. George

    Kershaw, Anthony

    Pearson, Sir Frank (Clitheroe)

    Kitson, Timothy

    Peel, John

    TELLERS FOR THE AYES:

    Lancaster, Col. C. C.

    Percival, Ian

    Mr. Pym and Mr. Grant.

    NOES

    Abse, Leo

    Dickens, James

    Hoy, James

    Allaun, Frank (Salford, E.)

    Dobson, Ray

    Hughes, Emrys (Ayrshire, S.)

    Alldritt, Walter

    Doig, Peter

    Hughes, Roy (Newport)

    Archer, Peter

    Donnelly, Desmond

    Hunter, Adam

    Armstrong, Ernest

    Dunn, James A.

    Hynd, John

    Ashley, Jack

    Dunwoody, Mrs. Gwyneth (Exeter)

    Jackson, Colin (B'h'se & Spenb'gh)

    Atkins, Ronald (Preston, N.)

    Edelman, Maurice

    Jeger, George (Goole)

    Atkinson, Norman (Tottenham)

    Edwards, Rt. Hn. Ness (Caerphilly)

    Jones, Dan (Burnley)

    Bagier, Gordon A. T.

    Edwards, Robert (Bilston)

    Jones, J. Idwal (Wrexham)

    Barnes, Michael

    Edwards, William (Merioneth)

    Judd, Frank

    Barnett, Joel

    Ellis, John

    Kelley, Richard

    Baxter, William

    Ensor, David

    Kenyon, Clifford

    Bence, Cyril

    Evans, Albert (Islington, S.W.)

    Kerr, Dr. David (W'worth, Central)

    Bennett, James (G'gow, Bridgeton)

    Evans, loan L. (Birm'h'm, Yardley)

    Leadbitter, Ted

    Bidwell, Sydney

    Faulds, Andrew

    Ledger, Ron

    Bishop, E. S.

    Fernyhough, E.

    Lee, Rt. Hn. Frederick (Newton)

    Blackburn, F.

    Finch, Harold

    Lever, L. M. (Ardwick)

    Blenkinsop, Arthur

    Fitch, Alan (Wigan)

    Lewis, Arthur (W. Ham, N.)

    Boardman, H.

    Fletcher, Ted (Darlington)

    Lewis, Ron (Carlisle)

    Booth, Albert

    Floud, Bernard

    Lomas, Kenneth

    Boston, Terence

    Foot, Michael (Ebbw Vale)

    Loughlin, Charles

    Bowden, Rt. Hn. Herbert

    Forrester, John

    Luard, Evan

    Braddock, Mrs. E. M,

    Fowler, Gerry

    Lyons, Edward (Bradford, E.)

    Bradley, Tom

    Fraser, John (Norwood)

    Mahon, Dr. J. Dickson

    Brooks, Edwin

    Fraser, Rt. Hn. Tom (Hamilton)

    McBride, Neil

    Brown, Hugh D. (G'gow, Provan)

    Cardner, A. J.

    McCann, John

    Brown,Bob(N'c'tle-upon-Tyne,W.)

    Garrett, W. E.

    MacColl, James

    Buchan, Norman

    Garrow, Alex

    MacDermot, Niall

    Buchanan, Richard (G'gow, Sp'burn)

    Gourlay, Harry

    Macdonald, A. H.

    Callaghan, Rt. Hn. James

    Grey, Charles

    Mackenzie, Gregor (Rutherglen)

    Cant, R. B.

    Griffiths, David (Rother Valley)

    McMillan, Tom (Glasgow, C.)

    Carter-Jones, Lewis

    Griffiths, Rt. Hn. James (Llanelly)

    McNamara, J. Kevin

    Castle, Rt. Hn. Barbara

    Griffiths, Will (Exchange)

    Mahon, Peter (Preston, S.)

    Concannon, J. D.

    Hale, Leslie (Oldham, W.)

    Mahon, Simon (Bootle)

    Conlan, Bernard

    Hamilton, James (Bothwell)

    Mallalieu, E. L. (Brigg)

    Cousins, Rt. Hn. Frank

    Hannan, William

    Mallalieu, J.P.W.(Huddersfield,E.)

    Craddock, George (Bradford, S.)

    Harper, Joseph

    Manuel, Archie

    Crawshaw, Richard

    Hattersley, Roy

    Mapp, Charles

    Cronin, John

    Hazell, Bert

    Marquand, David

    Crosland, Rt. Hn. Anthony

    Heffer, Eric S.

    Mason, Roy

    Cullen, Mrs. Alice

    Herbison, Rt. Hn. Margaret

    Mayhew, Christopher

    Dalyell, Tarn

    Hooley, Frank

    Mendelson, J. J.

    Davidson, Arthur (Accrington)

    Homer, John

    Mikardo, Ian

    Davies, G. Elfed (Rhondda, E.)

    Houghton, Rt. Hn. Douglas

    Millan, Bruce

    Davies, Robert (Cambridge)

    Howarth, Robert (Bolton, E.)

    Miller, Dr. M. S.

    Dempsey, James

    Howie. W.

    Mitchell, R. C. (S'th'pton, Test)

    Dewar, Donald

    Dunwoody, Dr. John (F'th & C'b'e)

    Molloy, William

    Diamond, Rt. Hn. John

    Eadie, Alex

    Morgan, Elystan (Cardiganshire)

    400

    401

    Moyle, Roland

    Rankin, John

    Tinn, James

    Murray, Albert

    Reynolds, G. W.

    Tomney, Frank

    Neal, Harold

    Richard, Ivor

    Varley, Eric G.

    Oakes, Gordon

    Robinson, W. O. J. (Walth'stow, E.)

    Wainwright, Edwin (Dearne Valley)

    Ogden, Eric

    Rodgers, William (Stockton)

    Walden, Brian (All Saints)

    Orme, Stanley

    Roebuck, Roy

    Walker, Harold (Doncaster)

    Oswald, Thomas

    Rose, Paul

    Watkins, David (Consett)

    Owen, Dr. David (Plymouth, S'tn)

    Ross, Rt. Hn. William

    Weitzman, David

    Owen, Will (Morpeth

    Rowlands, E. (Cardiff, N.)

    Wellbeloved, James

    Palmer, Arthur

    Sheldon, Robert

    Whitlock, William

    Pannell, Rt. Hn. Charles

    Shinwell, Rt. Hn. E.

    Williams Alan Lee (Hornchurch)

    Park, Trevor

    Short, Rt.Hn.Edward(N'c'tle-u-Tyne)

    Williams, Clifford (Abertillery)

    Parker, John (Dagenham)

    Silverman, Julius (Aston)

    Willis, George (Edinburgh, E.)

    Parkyn, Brian (Bedford)

    Skeffington, Arthur

    Wilson, William (Coventry, s.)

    Pentland, Norman

    Slater, Joseph

    Winnick, David

    Perry, Ernest G. (Battersea, S.)

    Snow, Julian

    Winterbottom, R. E.

    Perry, George H. (Nottingham, S.)

    Spriggs, Leslie

    Woodburn, Rt. Hn. A.

    Price, Christopher (Perry Barr)

    Steele, Thomas (Dunbartonshire, W.)

    Yates, Victor

    Price, Thomas (Westhoughton)

    Swingler, Stephen

    Zilliacus, K.

    Price, William (Rugby)

    Symonds, J. B.

    Probert, Arthur

    Taverne, Dick

    TELLERS FOR THE NOES:

    Pursey, Cmdr. Harry

    Thornton, Ernest

    Mr. Lawson and

    Mr. Charles R. Morris.

    Mr. Patrick Jenkin: I beg to move Amendment No. 116, in page 76, line 17, at the end to insert:
    18. The proviso to subsection (2) of section 77 of the Finance Act 1965 (which makes provision for abatement of the required standard of distributable income of certain small close companies) shall apply as if the words "not having any associated company" were omitted, and there were added, at the end of the proviso, the words "but if the company has one or more associated companies, the relief under this proviso shall be computed as if the estate or trading income of those companies were aggregated; and if the aggregate of such income is less than £9,000, then the relief shall be shared between the company and its associated companies in proportion to their respective estate or trading incomes.
    I seem to remember that about this time on a similar occasion last year the Government were run very close until, in the small hours of the morning, we on this side of the Committee triumphed. We looked forward to achieving the same success this year. This Amendment is one on which I am sure even more hon. Members opposite will join us in the Lobby.
    We are still dealing with close companies, and very small close companies. We have had a number of shots at including an Amendment we moved earlier from this side of the Committee, which, I regret to say, was not accepted. This Amendment is designed to provide for groups of close companies the same sort of treatment which is at present available to a small close company on its own.
    It will be remembered that one of the Clauses in last year's Finance Bill which caused very widespread dismay and disquiet among close companies and their
    402
    proprietors and advisers was what was then Clause 72 and is now in the Act as Section 77. It established the concept of a required standard of distributions which a close company had to make if it failed to persuade the inspector that a lower measure of distributions was appropriate in the circumstances. The Committee will recollect the long debates we had on the question of where the burden of proof should lie. It is true that during the course of the Bill through Parliament last year the Chancellor introduced a number of minor alleviations, but I am sure that the Chief Secretary agrees that the main structure of the Clause remained intact, and we have it today.
    9.15 p.m.
    It is too early—I concede that, if, indeed, it is a concession—to see how the Clause will work in practice. There has not yet been time for inspectors to make the assessments of the shortfalls which will give an indication whether all the bland assurances which were poured on the Committee from the Government Dispatch Box will turn out to be justified. Certainly, those assurances were regarded with considerable scepticism, coming from right hon. and hon. Gentlemen opposite, so that when Professor Kaldor gave exactly the same assurances—I can tell the Committee that they were exactly the same, because I was at the meeting of the Economic Research Council which he addressed—about the way in which the Section would be applied, it was greeted as if it were an entirely new revelation which he had made on the operation of the Section.
    Still, it is not necessarily too early to look at some of the provisions which we

    403
    might put into the Bill to alleviate the position for very small companies. The Clause contained—and right from the outset, as the Bill was originally drafted, it contained—a very minor relieving provision relating to the required standard of distribution of estate and trading income of companies whose income was below a certain level. The Committee will remember that the normal standard was to be all the investment income and 60 per cent, of the estate and trading income, but small companies with a trading income below £9,000 were entitled to have the figure of 60 per cent, reduced.
    If the profits are below £1,500 it can be ignored completely and for those between £1,500 and £9,000 the figure is reduced by one-fifth of the difference between the actual income and £9,000. If the profit is £4,000, then one-fifth of the difference between £4,000 and £9,000 is £1,000, and the 60 per cent, is applied not to £4,000, but to £3,000.
    There was one very curious restriction applying to this alleviating provision, namely, that the provision is to be applied only to a company not having any associated company, that is to say, a company which, as I explained earlier, stands entirely alone and with no other associated company in a group. This point was raised last year not by an Amendment, because the Amendment was not selected, but on the Question that the Clause stand part of the Bill. On 21st June—for the benefit of the hon. Member for Orpington (Mr. Lubbock) who is no longer in his place; my speech is reported at column 1309— the Chief Secretary replied to the point which I had made to him then, and it was evident from his reply that he had totally misunderstood the point which was being made.
    I should like to make it clear that we are not seeking to claim in the Amendment—which, I hope, has been carefully drafted to make this quite clear —that the abatement should be applied to each member of a group of companies. This was the point to which the Chief Secretary devoted most of his speech last time. I then intervened and said that this was not the purpose.
    It is that where there is a group of companies, two or more, then if the total income—estate and trading income—of
    404
    all the members of the group is below the level which qualifies for the abatement when aggregated, the abatement should be applied to them all and should be apportioned between them in the proportion in which their incomes exist to each other. This Amendment is intended to make that clear. It is drawn even more stringently than the Amendment tabled last year.
    The abatement should not be lost merely because a number of businesses which are operated as a group are run in separate companies rather than under one hat. It is possible to imagine where, for reasons of management, organisation or even the accident of history, two businesses are operated together, perhaps even under a single management, but are treated as separate businesses and where the combined trading income is below £9,000, thus getting abatement. But where they happen to be limited companies and run by a parent company or a subsidiary, relief does not apply.
    The Amendment would not open any threat of evasion or possible avoidance. All that would happen is that companies which are now denied it—companies with very small profits and a stated trading income of less than £9,000— would get the abatement. To that extent, there would be a minimal cost to the Inland Revenue. The cost would be small because we are dealing here only with very small companies. Nevertheless, this would give the help to very small companies that the present Act denies them. I hope that if the right hon. Gentleman cannot accept the Amendment because of the drafting, he will make forthcoming noises on its principle.
    Mr. Diamond: I have, at all events, understood this time. I am sorry if I did not understand the last time, although I do not know whether that was a true description of events. As I have said, I fully understand what the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has said tonight. I am sorry that I cannot be persuaded by it.
    I deal first with a minor point. The drafting is interesting and, if one follows it through its complicated length, one finds that every company controls every

    405
    other company and one gets into the most glorious tangle of inconsistency. I do not make a great deal of that, because one can always revise drafting, but I mention it to clear it out of the way at once.
    The major point is the use of entitlement to abatement for a group. I want to correct one word that the hon. Gentleman used, for it is a key word. He talked about the "normal" 60 per cent. I invite him in future to use the term "maximum" 60 per cent. That is the maximum distribution which has to be declared in order to demonstrate that there is no need to go to the Revenue and put forward any reason as to why a higher distribution was not made.
    The object of the abatement arrangement is merely to get rid of a lot of footling little cases where there might otherwise be argument as to whether an adequate amount had been distributed. I agree that we are dealing with very small companies and very small profits and that one has to have a figure proportionately larger than might otherwise be the case. The essence of the matter is that this is a method of clearing the ground for a number of small businesses. Once they are groups, they cease to be the kind of company for which the abatement procedure was devised. What the hon. Gentleman proposes deals with the kind of company for which it was not the intention of the legislature to give help at all.
    The hon. Gentleman talked about minimal advantage but there would be a distinct advantage. This would encourage the splitting up of businesses into more than one company, thereby affecting the tax position. In any case, there is no need for all this complicated structure. At the moment there is a simple arrangement. The splitting and apportioning as suggested by the hon. Gentleman could be very complicated. It is a complicated matter to try and draw a subsection dealing with control and association. It is complicated to apportion tax and there is no need to have any sophisticated provision of this
    kind when the matter is being dealt with perfectly satisfactorily and happily as it is at the moment.
    I agree that neither side has gone far enough to be able to say that there is no problem at all. The hon. Gentleman has spoken about our attitudes and I hope that he will forgive me if I talk about the unnecessary anxieties which were displayed by hon. Members opposite. Hitherto, there has been no justification for any of those anxieties. Certainly, if, in the years ahead, one found that there was justification, one would consider whether anything needed to be done; but the present position is that the system is working perfectly satisfactorily, as we thought that it would. There is no need to complicate a simple system, the essence of it being that we want to keep it simple.
    Mr. Patrick Jenkin: That was a very disappointing reply. The case which we were making was not that this provision would encourage the splitting up of companies. With the greatest respect to the right hon. Gentleman, I would have thought that that was a lot of nonsense. One is here dealing ex hypothesi with very small companies trading individually and independently and whose profits are less than £9,000 and, if there happen to be two or more in a group, whose aggregate profits are less than £9,000. I cannot imagine in those circumstances that these petty tycoons—I suppose that they may be called that—will start manipulating companies for tax avoidance purposes as some of the big ones might be tempted to do.
    The fact of the matter, as the right hon. Gentleman has said quite plainly, is that it is not the intention of the legislation introduced by his Government to help the cases aimed at in the Amendment. All I can say is that it is our intention to help those cases and I ask my hon. Friends to express their intentions by joining me in the Division Lobby.
    Question put, That those words be there inserted:—
    The Committee divided: Ayes 131, Noes 217.

    Division No. 39.]

    AYES

    [9.27 p.m.

    Alison, Michael (Barkston Ash)

    Balniel, Lord

    Birch, Rt. Hn. Nigel

    Allason, James (Hemel Hempstead)

    Batsford, Brian

    Black, Sir Cyril

    Atkins, Humphrey (M't'n & M'd'n)

    Biffen John

    Brewis, John

    Baker, W. H. K.

    Biggs-Davison, John

    Brinton, Sir Tatton

    Brown, Sir Edward (Bath)

    Hall-Davis, A. G. F.

    Nabarro, Sir Gerald

    Bruce-Gardyne, J.

    Harris, Frederic (Croydon, N.W.)

    Noble, Rt. Hn. Michael

    Buchanan-Smith, Alick(Angus, N&M)

    Harvie Anderson, Miss

    Nott, John

    Bullus, Sir Eric

    Hawkins, Paul

    Onslow, Cranley

    Campbell, Cordon

    Hay, John

    Orr, Capt. L. P. S.

    Cary, Sir Robert

    Heald, Rt. Hn. Sir Lionel

    Osborn, John (Hallam)

    Chichester-Clark, R.

    Higgins, Terence L,

    Page, Graham (Crosby)

    Clegg, Walter

    Hiley, Joseph

    Pearson, Sir Frank (Clitheroe)

    Cooke, Robert

    Hill, J. E. B,

    Peel, John

    Cooper-Key, Sir Neill

    Hirst, Geoffrey

    Percival, Ian

    Costain, A. P.

    Holland, Philip

    Peyton, John

    Crawley, Aldan

    Hunt, John

    Pike, Miss Mervyn

    Crosthwaite-Eyre, Sir Oliver

    Irvine, Bryant Godman (Rye)

    Pink, R. Bonner

    Crouch, David

    Jenkin, Patrick (Woodford)

    Pounder, Rafton

    Crowder, F. P.

    Jennings, J. C. (Burton)

    Ridley, Hn. Nicholas

    Cunningham, Sir Knox

    Johnson, Smith, G. (E. Grinstead)

    Rossi, Hugh (Hornsey)

    Currie, G. B. H.

    Jopling, Michael

    St. John-Stevas, Norman

    Dalkeith, Earl of

    Kershaw, Anthony

    Shaw, Michael (Sc'b'gh & Whitby)

    Dance, James

    Kitson, Timothy

    Sinclair, Sir George

    Dean, Paul (Somerset, N.)

    Lancaster, Col. C. G.

    Smith, John

    Deedes, Rt. Hn. W. F. (Ashford)

    Legge-Bourke, Sir Harry

    Stoddart-Scott, Col. Sir M. (Ripon)

    Dodds-Parker, Douglas

    Lewis, Kenneth (Rutland)

    Talbot, John E.

    Eden, Sir John

    Lloyd, Ian (P'tsm'th, Langstone)

    Taylor, Frank (Moss Side)

    Elliot, Capt. Walter (Carshalton)

    Loveys, W. H.

    Temple, John M.

    Elliott, R.W. N'c'tle-upon-Tyne,N.)

    MacArthur, Ian

    Thatcher, Mrs. Margaret

    Errington, Sir Eric

    Macleod, Rt. Hn. Iain

    Turton, Rt. Hn. R. H.

    Eyre, Reginald

    Maddan, Martin

    Van Straubenzee, W. R.

    Farr, John

    Maginnis, John E.

    Walker, Peter (Worcester)

    Fisher, Nigel

    Mathew, Robert

    Wall, Patrick

    Fletcher-Cooke, Charles

    Maude, Angus

    Ward, Dame Irene

    Fortescue, Tim

    Maxwell-Hyslop, R. J.

    Weatherill, Bernard

    Fraser,Rt.Hn.Hugh(St'fford & Stone)

    Maydon, Lt.-Cmdr. S. L. C.

    Webster, David

    Giles, Rear-Adm. Morgan

    Mills, Peter (Torrington)

    Wells, John (Maidstone)

    Glover, Sir Douglas

    Mills, Stratton (Belfast, N.)

    Whitelaw, William

    Glyn, Sir Richard

    Miscampbell, Norman

    Wilson, Geoffrey (Truro)

    Gower, Raymond

    Monro, Hector

    Wolrige-Gordon, Patrick

    Grant, Anthony

    More, Jasper

    Younger, Hn. George

    Grieve, Percy

    Morrison, Charles (Devizes)

    Griffiths, Eldon (Bury St. Edmunds)

    Mott-Radclyffe, Sir Charles

    TELLERS FOR THE AYES:

    Gurden, Harold

    Munro-Lucas-Tooth, Sir Hugh

    Mr. Pym and Mr. Blaker.

    Hall, John (Wycombe)

    Murton, Oscar

    NOES

    Abse, Leo

    Cronin, John

    Garrow, Alex

    Allaun, Frank (Salford, E.)

    Crosland, Rt. Hn. Anthony

    Gourlay, Harry

    Alldritt, Walter

    Cullen, Mrs. Alice

    Grey, Charles

    Archer, Peter

    Dalyell, Tarn

    Griffiths, David (Rother Valley)

    Armstrong, Ernest

    Davidson, Arthur (Accrington)

    Griffiths, Rt. Hn. James (Llanelly)

    Ashley, Jack

    Davidson, James (Aberdeenshire, W.)

    Griffiths, Will (Exchange)

    Atkins, Ronald (Preston, N.)

    Davies, G. Elfed (Rhondda, E.)

    Grimond, Rt. Hn. J.

    Atkinson, Norman (Tottenham)

    Davies, Robert (Cambridge)

    Hale, Leslie (Oldham, W.)

    Bagier, Gordon A. T.

    Dempsey, James

    Hamilton, James (Bothwell)

    Barnes, Michael

    Dewar, Donald

    Hannan, William

    Barnett, Joel

    Diamond, Rt. Hn. John

    Harper, Joseph

    Baxter, William

    Dickens, James

    Hattersley, Roy

    Bence, Cyril

    Dobson, Ray

    Hazell, Bert

    Bennett, James (G'gow, Bridgeton)

    Doig, Peter

    Heffer, Eric S.

    Bessell, Peter

    Donnelly, Desmond

    Herbison, Rt. Hn. Margaret

    Bidwell, Sydney

    Dunn, James A.

    Hooley, Frank

    Binns, John

    Dunwoody, Mrs. Gwyneth (Exeter)

    Homer, John

    Bishop, E. S.

    Dunwoody, Dr. John (F'th & C'b'e)

    Houghton, Rt. Hn. Douglas

    Blackburn, F.

    Eadie, Alex

    Howarth, Robert (Bolton, E.)

    Blenkinsop, Arthur

    Edelman, Maurice

    Howie, W.

    Boardman, H.

    Edwards, Rt. Hn. Ness (Caerphilly)

    Hoy, James

    Booth, Albert

    Edwards, Robert (Bilston)

    Hughes, Emrys (Ayrshire, S.)

    Boston Terence

    Edwards, William (Merioneth)

    Hughes, Roy (Newport)

    Bowden Rt. Hn. Herbert

    Ellis, John

    Hunter, Adam

    Braddock, Mrs. E. M.

    Ensor, David

    Hynd, John

    Bradley, Tom

    Evans, Albert (Islington, S.W.)

    Jackson, Colin (B'h'se & Spenb'gh)

    Brooks, Edwin

    Evans, Ioan L. (Birm'h'm, Yardley)

    Jeger, George (Goole)

    Brown, Hugh D. (G'gow, Provan)

    Faulds, Andrew

    Johnston, Russell (Inverness)

    Brown,Bob(N'c'tle-upon-Tyne,W.)

    Fernyhough, E.

    Jones, Dan (Burnley)

    Buchan, Norman

    Finch, Harold

    Jones, J. Idwal (Wrexham)

    Buchanan, Richard (G'gow, Sp'burn)

    Fitch, Alan (Wigan)

    Judd, Frank

    Callaghan, Rt. Hn. James

    Fletcher, Ted (Darlington)

    Kelley, Richard

    Cant, R. B.

    Floud, Bernard

    Kenyon, Clifford

    Carter-Jones, Lewis

    Foot, Michael (Ebbw Vale)

    Kerr, Dr. David (W'worth, Central)

    Castle, Rt. Hn. Barbara

    Forrester, John

    Leadbitter, Ted

    Concannon, J. D.

    Fowler, Gerry

    Ledger, Ron

    Conlan, Bernard

    Fraser, John (Norwood)

    Lee, Rt. Hn. Frederick (Newton)

    Cousins, Rt. Hn. Frank

    Fraser, Rt. Hn. Tom (Hamilton)

    Lever, L. M. (Ardwick)

    Craddock, George (Bradford, S.)

    Gardner, A. J.

    Lewis, Arthur (W. Ham, N.)

    Crawshaw, Richard

    Garrett, W. E.

    Lewis, Ron (Carlisle)

    408

    409

    Lomas, Kenneth

    Oakes, Gordon

    Spriggs, Leslie

    Loughlin, Charles

    Ogden, Eric

    Steel, David (Roxburgh)

    Luard, Evan

    O'Malley, Brian

    Steele, Thomas (Dunbartonshire, W.)

    Lubbock, Eric

    Orme, Stanley

    Swingler, Stephen

    Lyons, Edward (Bradford, E.)

    Oswald, Thomas

    Symonds, J. B.

    Mabon, Dr, J. Dickson

    Owen, Dr. David (Plymouth, S'tn)

    Taverne, Dick

    Mr.Bride, Neil

    Owen, Will (Morpeth)

    Thornton, Ernest

    McCann, John

    Palmer, Arthur

    Thorpe, Jeremy

    MacColl, James

    Pannell, Rt. Hn. Charles

    Tinn, James

    MacDermot, Niall

    Pardoe, J.

    Tomney, Frank

    Macdonald, A. H.

    Park, Trevor

    Varley, Eric G.

    Mackenzie, Alasdair (Ross&Crom' ty)

    Parker, John (Dagenham)

    Wainwright, Edwin (Dearne Valley)

    Mackenzie, Gregor (Rutherglen)

    Parkyn, Brian (Bedford)

    Wainwright, Richard (Colne Valley)

    McMillan, Tom (Glasgow, C.)

    Pentland, Norman

    Walden, Brian (All Saints)

    McNamara, J. Kevin

    Perry, Ernest G. (Battersea, S.)

    Walker, Harold (Doncaster)

    Mahon, Peter (Preston, S.)

    Perry, George H. (Nottingham, S.)

    Watkins, David (Consett)

    Mahon, Simon (Bootle)

    Price, Christopher (Perry Barr)

    Weitzman, David

    Mallalieu, E. L. (Brigg)

    Price, Thomas (Westhoughton)

    Wellbeloved, James

    Mallalieu,J.P.W.(Huddersfield,E.)

    Price, William (Rugby)

    Whitlock, William

    Manuel, Archie

    Probert, Arthur

    Williams, Alan Lee (Hornchurch)

    Mapp, Charles

    Pursey, Cmdr. Harry

    Williams, Clifford (Abertillery)

    Marquand, David

    Rankin, John

    Willis, George (Edinburgh, E.)

    Mason, Roy

    Reynolds, G. W.

    Wilson, William (Coventry, S.)

    Mayhew, Christopher

    Richard, Ivor

    Winnick, David

    Mendelson, J. J.

    Robinson, W. O. J. (Walth'stow, E.)

    Winstanley, Dr. M. P.

    Mikardo, Ian

    Rodgers, William (Stockton)

    Winterbottom, R. E.

    Millan, Bruce

    Roebuck, Roy

    Woodburn, Rt. Hn. A.

    Miller, Dr. M. S.

    Rose, Paul

    Yates, Victor

    Mitchell, R. C. (S'th'pton, Test)

    Ross, Rt. Hn. William

    Zilliacus, K.

    Molloy, William

    Rowlands, E. (Cardiff, N.)

    Morgan, Elystan (Cardiganshire)

    Sheldon, Robert

    TELLERS FOR THE NOES:

    Moyle, Roland

    Short, Rt.Hn. Edward (N'c'tlc-u-Tyne)

    Mr. Lawson and

    Murray, Albert

    Skeffington, Arthur

    Mr. Charles R. Morris.

    Neal, Harold

    Slater, Joseph

    Mr. Barnett: I beg to move Amendment No. 67, in page 76, line 31, at the end to insert:
    19. In section 74(2) of the Finance Act 1965, leave out "£4,000" and insert "£5,000".
    In section 74(3)(a) of the Finance Act 1965, leave out "£13,000" and insert "£20,000."; leave out "£10,000" and insert "£15,000"; leave out "£7,000" and insert "£10,000".
    In section 74(3) of the Finance Act 1965, leave out paragraph (b) and the definition of "the highest paid such director" and insert paragraph (b) as follows—
    "a limit of £5,000 on the remuneration of any one such director".
    The Chairman: I suggest that it would be convenient if, with Amendment No. 67, we discussed the following two Amendments: Amendment No. 66, in line 17, at the end to insert:
    18. In section 74 of the Finance Act 1965 there shall be added a further subsection as follows—
    (7) Notwithstanding anything to the contrary in the foregoing provisions of this section, a close company may elect that, in computing its profits for corporation tax for any accounting period, the deduction to be made for the remuneration of any director shall be so much of any remuneration paid to that director as is commensurate with the services he performs for the company.
    Amendment No. 68, in line 35, at the end to add:
    Provided that paragraph 19 of this Schedule shall have effect from 6th April 1966.
    Mr. Barnett: Amendment No. 67 stands in the names of my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), myself, and the hon. Member for Gosport and Fareham (Dr. Bennett) whom I do not see in his place, but who, I have no doubt, will agree with all that I say as well as with the Amendment which we have tabled.
    The Amendment is of an exploratory nature because I am not well versed in the art of Parliamentary draftsmanship. No doubt, for technical or other reasons, the Chief Secretary may find some other method at a later stage of altering it to fit in with what I have in mind.
    There is no need to go over all the arguments which we rehearsed at great length in the very early hours of the morning last year, round about 9 a.m. I should like to make my own view quite clear. I believe that the Opposition——
    Sir Douglas Glover rose ——
    Mr. Barnett: Perhaps he will allow me to go on. I am sure that the hon. Gentleman will have his opportunity of getting in, it's nearing ten o'clock.
    I believe that the Opposition has often grossly and mischievously overstated the case for this type of Amendment. In so doing, they do themselves and the case

    411
    great harm, because there is a case here. I am mainly concerned with the goodwill that the Government can have in the business world generally, and, in particular, among people in small close companies, by accepting an Amendment of this nature.
    The major reason why there has been a good deal of confusion is that there are two different types of company affected. There is the investment and property type of close company, which my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) was concerned to defend today, and the close company which I like to feel is the genuine close family company. I am not greatly concerned with the property and investment type of company in the close company world. On the other hand, I am sure that my hon. Friend the Member for Cheetham will agree that the Amendment is not really affected by the argument he was making earlier today because, in the case of the property and investment close company, there is in any event difficulty in proving to inspectors of taxes that the remuneration is truly earned, earned, that is, in the Income Tax sense of the word, and, therefore, allowable as remuneration even up to the existing level.
    My Amendment is not intended to help that type of company, and, indeed, if the spate of voluntary liquidations in that sector of the close company world continues, as was suggested from the benches opposite earlier today, I shall not be particularly concerned.
    Last year, many examples were given of the difficulties of small close companies as a result of the level of remuneration allowed. I am sure that all hon. Members who were present will recall the debates which we had in the early hours that morning last year, or they will have read the report of them, so I shall not go over all the details again. A large percentage of those examples, however, were far from typical of the average small family close company, though this does not mean that there is not a strong case.
    A good many companies are penalised by the levels fixed. I am concerned, for instance, not to discourage the executive who may be offered a directorship as well as more than 5 per cent. of shares in a
    412
    close company. I feel that it would be wrong to discourage this type of person from taking a greater stake in the company. One has to accept that the Amendment would not altogether remove that discouragement, but it would help. I am sure that it would help in the case of a genuine small close company. I said last year that there was need for young blood in and among the old boards in this country, and I consider this to be just as true today.
    One of the worst features of the present legislation is that it is to a considerable extent becoming like the Estate Duty legislation. This is now something of a voluntary tax because it can be readily avoided. Because, for example, the formation of associated companies is not too difficult. I have no wish to encourage the already over-large industry of producing new companies. What with this and the Selective Employment Tax with its built-in incentive to create new employers even for only one employee—I hope that this will be amended in due course—we are, as it were, helping to manufacture new companies. I do not know what my right hon. Friend has in mind or whether he intends to increase our average rate of productivity by increasing the rate of productivity in forming new companies.
    My final point—I wish to be as brief as I can—is on the cost argument. In answer to a recent Question, I was told that the estimated cost of an Amendment of this kind would be about £5 million. I hope that it will not be argued that this represents, as it were, a rise and that we cannot do it because of the prices and incomes policy. The major reason for that estimated cost must surely be—my right hon. Friend will correct me if I am wrong—that the companies would not be paying the tax on the present disallowed proportion. And if it is argued that more remuneration would be paid than is being paid now, the answer is that it would not bring in less revenue. Indeed, it is likely to bring in very much more because, with the payment of that extra slice, although there would not be the 40 per cent. Corporation Tax on it, there would be Income Tax at the standard rate plus Surtax on the individual director. No case, therefore, should be made on grounds of cost.

    413
    I hope that my right hon. Friend the Chief Secretary will look benignly upon the Amendment, as he has been doing at others, throughout the day. The concession for which I am asking is only a minor one. Although I feel sure that my right hon. Friend will accept the Amendment, I hope that he will at least make a considerable gesture towards it if he does not go all the way.
    9.45 p.m.
    Sir D. Glover: I congratulate the hon. Member for Heywood and Royton (Mr. Barnett) on what I regard as one of his best speeches in the House of Commons. I agreed with every word of it, so much so that I was forced to intervene in the debate and convey my congratulations to the hon. Member.
    I have spent the whole of my working life in what would be termed a close company which is covered by these provisions. The hon. Member's proposal in the Amendment would be of tremendous value to an enormous number of family businesses. I support the hon. Member very much when he talks about these family businesses bringing on to the board the younger executives, which at present they have difficulty in doing. That is how a family business remains virile and strong. There should not, therefore, be the difficulty which exists in providing decent remuneration for that sort of person to be brought on to the board, whatever amount of shares is given in a family business because of the service that a person has rendered to it in previous years.
    I always thought that the old provisions about distributions in family businesses were grossly unfair. I am glad that as a result of what happened in last year's Finance Bill there is not now quite the same danger from the 100 per cent. Surtax direction. Sixty per cent. is an improvement. A heavy burden is still caused, however, by the small amount which is allowed for directors' remuneration before the full rate of tax is incurred.
    I support the hon. Member when he says—and I think that he is right—that to bring in an Amendment that would give benefit to hundreds of companies and, at the same time, probably bring increased revenue to the Exchequer must be about the most extraordinary Amendment ever
    414
    moved in the House of Commons. If it has both those advantages in producing benefits where we want them and bringing a larger off-take for the Chancellor of the Exchequer, the hon. Member has performed a miracle. It must be about the only time that this has happened in a Finance Bill.
    I do not, however, think that the Chief Secretary will accept that his hon. Friend is right. I regret this, because the right hon. Gentleman never seems able to accept reasonable Amendments. He always tells us afterwards that the case has not been made, whereas a great many hon. Members are convinced that the case has been overwhelmingly made. Many of the technical debates opened tonight from the Opposition Front Bench on previous Amendments have been persuasively and cogently put, but the Chief Secretary has not been able to grasp the point.
    I am sure that even on this Amendment the right hon. Gentleman will not be able to grasp the point. However, if the hon. Member for Heywood and Royton wants any assistance in the Division Lobby, I assure him that I shall be only too happy to be a Teller with him and to support him in forcing what I believe to be one of the best Amendments on the Notice Paper to a Division.
    Mr. Sheldon: The Amendment seeks to allow a maximum of four directors to draw up to £5,000 each. Section 74 of last year's Finance Act allowed £4,000 to be paid to the first director in director's remunerations and £3,000 to each of three subsequent directors. We are not trying to increase the level of distribution. Acceptance of the Amendment, moved so ably by my hon. Friend the Member for Heywood and Royton (Mr. Barnett), would not mean that each company had to pay these amounts of remuneration. We want to leave it more to the individual company to make its own decisions.
    There are many circumstances in which a company may wish to increase its disbursements to suit changing circumstances. It may wish to give rewards to a director who has been trying out a new product in very adverse circumstances and putting in a great deal of effort. It may wish to reward, by means of an incentive, a director who has been having difficulty in opening up a new market.

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    We are trying to bridge the gap between the more favourable concessions given to the larger companies, which are allowed to give up to 15 per cent, of their profits in directors' remuneration, and the smaller companies. For a company earning very large profits, this is much more advantageous relatively than for the smaller company. The small company is very much more hedged in. We are leaving alone the bigger fish so as to catch, if not the tiddlers, some of the smaller fish. We are attempting to correct the balance.
    When the company makes a distribution, it is not a free distribution. The directors who get the increased salary or bonus, or whatever it may be, have to pay Income Tax and, where applicable, Surtax. We must, therefore, look for the reason why a suggestion on the lines of the Amendment was not accepted last year. We know the real reason, namely, to prevent distributions to try to obviate the Section which separated Corporation Tax from Income Tax. The effect of this would be small. The figure quoted by my hon. Friend was £5 million. There is some doubt as to how this was worked out and whether it took account of the Income Tax and Surtax which might be paid by the director receiving the remuneration.
    Some play has been made of encouragement to liquidate caused by Corporation Tax. I know of one case in which this happened. A company might be earning, per shareholder, £20,000 to £30,000 profit and, because of the incidence of Income Tax and Surtax when no distributions are made, depending on the state of the company, it may well elect to go into liquidation. I do not consider this as much a disaster as some hon. Members. In certain cases, this is a straightforward option which a company may choose to exercise. But I do not think that legislation should tend necessarily to come down on the side of the fence favouring such liquidation. It is difficult to say what should be the absolute level or remunerations. When we take account of the varying circumstances of companies, it becomes even harder.
    We have tried to put down a reasonable Amendment to give a little more discretion to companies in this situation,
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    and I hope that my right hon. Friend will give it every consideration.
    Mr. Michael Shaw: I support the Amendment wholeheartedly, though I would couch it in rather more restrained terms than those of my hon. Friend the Member for Ormskirk (Sir D. Glover), if only to try to avoid endangering the support of the hon. Member for Ashton-under-Lyne (Mr. Sheldon) or his right hon. Friend. It has not always passed unnoticed that too much support from this side may perhaps do a disservice to the cause to which we both aspire. Although I keep my terms more modest than those of my hon. Friend, I can sincerely say that I support him wholeheartedly.
    In the Amendment, there are three types of directors to whom I should like to refer. First, there are the full-time directors earning more than 5 per cent, of the equity. Having had some practical experience of working out the various permutations and computations, we now know how the various members of a family, no matter what their positions in the firm, provided that there is some element of management in the jobs that they do, always seem to be caught under the directorship heading. It is very difficult for them to know how much they can pay themselves. In general terms, in view of present-day rates of remuneration to which top executives feel themselves entitled and which they can claim, the amounts laid down in the Bill last year are too low. On that score, I welcome the Amendment.
    Secondly, there is the case of the part-time directors. I must not say a lot about them, because I cannot conveniently fit them into the Amendment. Nevertheless, in certain circumstances, they can benefit from the Amendment, in that it raises the minimum limit to £5,000.
    Sir D. Glover: May I help my hon. Friend? With the Amendment, we are discussing Amendment No. 66. Under that, I think that he can talk about part-time directors.
    Mr. Shaw: In that case, I may be encouraged to expand a little on that point.
    Close companies, varied as they are both in size and in the types of tasks

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    that they have to undertake, have a real need in many cases to attract men and women who will not spend the whole of their time in the service of those companies but who have, through business experience of one kind and another, valuable contributions to make to those companies. I believe that such companies should have the benefit of their services by having them on their boards. At the moment, they are discouraged from having part-time men on their boards, because, in addition to paying them directors' remuneration, in most cases they have to pay the 40 per cent. Corporation Tax. Here again, any help that we can give to encourage part-time directors to serve on the boards of companies, in appropriate cases, the better it will be for those companies.
    10.0 p.m.
    Finally, we come to the whole-time directors, and here I wholeheartedly agree with the hon. Gentleman, because we want to make sure that members of the staff of all companies in all businesses are encouraged to work their way right up to the top on to the board, and the Bill as it stands is a positive discouragement to this end. It is also a discouragement if they reach the board, because if they have less than 5 per cent, of the share capital they are denied the opportunity of acquiring a further equity interest in the company.
    I believe that by taxation we are once again distorting the natural development of the pattern of companies. Where taxation distorts the development of companies, and distorts shareholdings in this way, it is bad for industry, and, therefore, unless there are very good reasons to the contrary, this is a bad principle of taxation.
    For all those reasons, I wholeheartedly support the Amendment. I hope that at the end of this debate we shall all be able to agree that this is a good Amendment, and that, possibly with the assistance of the Chief Secretary, we shall be able to agree some amended form of Amendment, if amended form is necessary.
    Mr. St. John-Stevas: I, too, should like to join in the paeans of praise from this side of the Committee, which are doubtless deafening and alarming the hon. Member for Heywood and Royton (Mr. Barnett). I am glad to see that his
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    Amendment is supported by an hon. Member who sits on this side of the Committee, and I trust that he will not think that I am in any way underestimating the importance of this political ecumenism if I leave his Amendment and concentrate my remarks on Amendment No. 66 because, whereas I think that the hon. Gentleman's Amendment is good, I think that Amendment No. 66 is better.
    This Amendment seeks to remove an unfair restriction on family companies. I raised this matter with the Chancellor earlier this year, and no one will be surprised to hear that I received a highly unsatisfactory answer. The limit on directors' fees which are chargeable before the levy of Corporation Tax is fixed at the entirely arbitrary figure of £13,000 per year, or 15 per cent, of the profits before the levy of Corporation Tax, whichever is the larger.
    The motivation behind this state of the law seems to be to catch the person who is abusing the procedure, or might abuse it, and take advantage of it for his own private gain. This is another example of the Chief Secretary's obsession, which quite rightly has been referred to today, with tax avoidance. The vast majority of directors of family companies are honest and straightforward men, willing to pay their fair share of taxes, and not seeking to subvert the Revenue.
    These directors are being treated by the Chancellor and by the Chief Secretary as though they were potential criminals, when, in fact, they are the very people who are making one of the major contributions to our economic survival. Many of them have been decorated by the Queen on the advice of the Prime Minister for services rendered to the export drive, when it would be much more equitable——
    The Chairman: It is contrary to all the rules of order to introduce the name of the Monarch into these debates.
    Mr. St. John-Stevas: I was introducing the name of the Monarch only in so far as she was acting on the advice of the Prime Minister——
    The Chairman: Order. It is out of order to introduce the name of the Monarch or references to honours.
    Mr. St. John-Stevas: I should have thought that it would have been much

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    more equitable and more effective, instead of seeking to reward a family director in a roundabout way, if he were allowed to draw a fair remuneration from the company commensurate with the services which he was or is rendering it. That is precisely what the Amendment suggests should be done. It was Walter Bagehot who, when analysing the constitution, abandoned the theory of how it was said to operate and looked instead of what was actually happening, closely and for himself. As a result, he wrote a classic work.
    We are suggesting that the Inland Revenue officials should be allowed to do something similar. That does not mean that they should be allowed to indulge their literary aspirations at the taxpayers' expense, but that they should be allowed to look at the actual situation of family companies as it is and pass a judgment accordingly. The inspector of taxes, in other words, instead of being bound by a rigid theoretical rule, should be able to look at the effects and see what, in reality, the individual director is doing for his own company.
    This would involve the exercise of a discretion but it would be a discretion controlled by the words of the Amendment. Surely, therefore, the Amendment is based purely on common sense. One hopes that, for that reason, it would appeal to the Chief Secretary. However, in view of his attitude to other Amendments today, which were equally soundly based, I fear that this very common sense gives one grounds for belief that it is unlikely to be accepted by the Chief Secretary.
    Mr. Gower: We have frequently heard Government spokesmen in these debates assert that they are most interested in the welfare of smaller companies, but far too often those excellent words have been associated with actions which to some of us seem positively injurious to the smaller companies. However, the hon. Member for Heywood and Royton (Mr. Barnett) and some of his hon. Friends have not only made these protestations but shown by their attitudes that they would go a good deal further perhaps than Government spokesmen towards sustaining the smaller close companies and family companies which mean so much in our economy.
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    However, I hope that the protestations and assertions of Government spokesmen mean what they seem to mean and that they are concerned that these companies should be lively and successful and should form the units from which the great public corporations of tomorrow will develop. That is in the interests not only of the companies themselves but of our economy in the forseeable future.
    I agree with the hon. Member for Heywood and Royton that it is in the interests of those companies that the provisions for the remuneration of their directors should be altered as he suggested. I agree with my hon. Friend the Member for Chelmsford (Mr. St. John-Stevas) that there are one or two aspects of the other Amendment which might appear more attractive, and I think that he would agree that its acceptance would also confer a valuable benefit in this respect. I hope that my hon. Friend the Member for Ormskirk (Sir D. Glover) was being unduly pessimistic when he suggested that the Chief Secretary would not accept the Amendment. Let us give the hon. Gentleman the benefit of the doubt.
    Mr. Hirst: Not for too long.
    Mr. Gower: I hope that the right hon. Gentleman will be convinced, not only by the arguments of my hon. Friends and I but by the informed judgment of some of his colleagues, and will be prepared to take a new look at this whole matter. I trust that he will not be governed by statements made a year ago but that he will feel that an adequate case has been made out for the Amendment to be accepted.
    Dame Irene Ward: A constituent of mine is a well known chartered accountant in the North of England. He has sent me a great many communications about the problems affecting close companies and while I will not enter into the arguments on this issue, I have, in the light of our democratic form of representation, sent a large number of these letters to the Government. I am bound to say that I have been surprised—because this correspondence from my constituent has been going on for some months—that although during this time I have asked for replies to these letters, I have not received any—[HON.

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    MEMBERS: "Disgraceful."]—It really is not good enough.
    However busy the Chief Secretary or the officials of the Inland Revenue may be, I would appreciate a detailed answer being sent so that I might hand on to my constituent the views which the Chief Secretary holds on this subject. Having listened to a part of this discussion. I imagine that the comments and criticisms of my constituent have not been acceptable to the right hon. Gentleman. However, that does not allow him not to answer these letters.
    I do not know whether my constituent supports my party. For all I know, he may support the Labour Party or even the Liberal Party. In any case, this is a democratic assembly and I require an assurance that, before long, all the complicated letters on this subject from my constituent will receive an answer, and I will, of course, draw my constituent's attention to this discussion.
    Mr. Diamond: I will, first, deal with the complaint of the hon. Member for Tynemouth (Dame Irene Ward) about some letters which apparently she sent, I take it to me or to the Treasury, some time ago.
    Dame Irene Ward: To the right hon. Gentleman's colleagues.
    Mr. Diamond: I assume that the hon. Lady means that she sent them to the Treasury.
    Dame Irene Ward: No. I mean to the right hon. Gentleman and his colleagues.
    Mr. Diamond: The hon. Lady would surely not be challenging me here, in this Committee—having talked about the Chief Secretary—unless she means that the letters were sent to the Treasury.
    Dame Irene Ward: Yes.
    Mr. Diamond: According to the hon. Lady, the letters went to the Treasury. She did not tell me before she spoke that she would raise this matter. Had she done so I would have been only too happy to look into the whole question and give her an answer here and now. However, although that is the normal procedure and one normally takes such action before raising a matter of this sort, I have been having the matter looked into. Since she mentioned it a
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    moment ago I have had inquiries made and I can only say to her, that, on recollection, and obviously I cannot be definite about this without notice, my office has no recollection of letters of the type to which she referred being long outstanding——
    Dame Irene Ward Dame Irene Ward rose ——
    Mr. Diamond: I will give way in a moment.
    Dame Irene Ward: The right hon. Gentleman——
    The Chairman: Order. Unless the letters to which the hon. Lady refers relate to this particular Amendment——
    Dame Irene Ward: Of course they do.
    The Chairman: Order. Unless they refer to this particular Amendment it is quite out of order to continue this discussion.
    Dame Irene Ward: Of course the letters relate to the Amendment. That is why——
    Mr. Diamond: I had not given way. I will give way later.
    Dame Irene Ward: I will not have you attacking my integrity.
    The Chairman: Order. The hon. Lady must not accuse me of attacking her integrity.
    Dame Irene Ward: On a point of order. Perhaps you were, Sir Eric, because you were asking if the letters were in connection with the Amendment. We have discussed close companies and the letters do refer to close companies. The First Secretary said that I had not sent any letters. That is a gross misstatement of fact.
    10.15 p.m.
    The Chairman: The hon. Lady is under a misconception. We are not, on this Amendment, discussing close companies but directors' remuneration.
    Dame Irene Ward: That is the same thing, after all.
    Mr. Diamond: Perhaps, Sir Eric, I could leave this with a short repetition. As I said before, we have no recollection of any such letters. Of course, the hon. Lady may have sent letters——
    Dame Irene Ward: Months ago——
    Mr. Diamond: We have no recollection of any such letters or reminders. I am not sure whether the hon. Lady is asking about letters sent to my colleagues. I shall certainly make a point of seeing tomorrow what letter the hon. Lady has sent which allegedly has been unanswered.
    Dame Irene Ward: Deplorable.
    Mr. Diamond: Perhaps we could deal with the Amendment which has been put forward by my hon. Friend the Member for Heywood and Royton (Mr. Barnett) and the various speeches which have been made about it. The first point upon which we can all agree is that there is no difference of principle between any hon. Members in the Committee. Everybody is saying that there should be some limitation with regard to directors' remuneration in close corporations. One group of hon. Members suggests that the limitation should be defined. Others suggest that it should be left for definition by a different procedure. I am bound to say that the latter suggestion would lead to a great deal of confusion and delay and would be a very unsatisfactory way of attempting to define what is extremely difficult to define.
    If we are to have a restriction, as everybody in the Committee agrees we should have, it is far better that it should be a definite restriction of the kind proposed and supported by my hon. Friends. Perhaps, therefore, I can now concentrate on the Amendment they have put forward suggesting an adjustment in the figures.
    Everybody realises the need for a restriction and, therefore, I have no need to go over that. I am sure that hon. and right hon. Members recollect the three different categories to which these restrictions are related. There is, first, the minimum limit which my hon. Friend has suggested should be increased from the present figure of £4,000 to £5,000. I repeat that we are not talking about whether there should be a limit, but what the size of the limit should be, the size of the figure, and whether it should be proposed and adopted now. I repeat that now because I have never suggested
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    that these figures should remain unaltered for all time.
    My hon. Friend will recollect that when I was speaking on this matter from this Box last year I said that it would be appropriate that these figures should be reviewed from time to time. All that we are debating is the timing and the scale and no principle at all. First, there is the proposal of £5,000, an increase of £1,000 on the £4,000, a 25 per cent, increase on a figure which was debated a year ago and agreed by the Committee a year ago.
    The whole story is that two years ago this figure was £3,000 for Profits Tax purposes, a very similar definition. We proposed originally that it should be increased to £3,500. Amendments were put forward and we finally accepted a figure of £4,000. The increase would be either £1,000–25 per cent, in 12 months —or alternatively £2,000—two-thirds, or 66 per cent, in the course of two years. I would regard an increase of that order as inappropriate at present—too large, too soon.
    The next limitation is that with regard to the percentage on the profits. My hon. Friend does not propose any change there. It only remains for me to remind the Committee that under that limitation directors can receive a total of 15 per cent, of the profits, no matter how large a figure that is. There used to be a ceiling, first of £15,000 and then of £25,000. There is no ceiling now. Therefore, directors can receive all told 15 per cent, of the profits, no matter how high a figure that may result in. Therefore, we agree that this element of bonus —the greater the profits made the more it can be assumed that directors are earning it and, therefore, the greater their remuneration should be—is a proposition which should be accepted.
    Mr. Stratton Mills Mr. Stratton Mills rose ——
    Mr. Diamond: I think that it would be more appropriate if I finished by dealing with the third one in the scale. Then I will gladly give way.
    The other is the individual limitation if there is more than one full-time director. I am sure that there is no need for me to remind the Committee that a whole-time service director—that is, somebody with less than 5 per cent. of

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    the shares who works full time—can have whatever remuneration his colleagues on the board decide is appropriate, without a ceiling of any kind. However, with those who do have a stake in the company and who work full time the remuneration is £5,000 a director, to put it simply, according to the proposal put forward by my hon. Friend, going up to a maximum, if there are four or more, of £20,000. That £20,000 would compare with £13,000 a year ago, or with £9,000 two years ago. So the scale of the advance which is being suggested by my hon. Friend is from £9,000 two years ago, a figure adopted by the Tory Government, to £20,000 today, an increase of more than 100 per cent. It would more than double the figure in the course of two years.
    Of course, we are prepared to look at the need for increases from time to time, but increases of this scale are quite out of tune with the needs of the times. It is too early to reconsider this matter, which was so fully, carefully and sympathetically debated only a year ago. We agreed on a minimum figure a year ago for one director of £4,000. I think that that is art appropriate figure today. We agreed on £7,000, £10,000 and £13,000, a further £3,000 per director. I think that is an appropriate figure today, as opposed to my hon. Friend's suggestion of £5,000 a director.
    My hon. Friend said that this was an exploratory Amendment. I am not sure whether the third name added to the proposal is also of the view that it should be treated as an exploratory Amendment. His interest has not been so close as to command his presence here at any time during the discussion.
    I hope that I have answered my hon. Friend's inquiries and given him the reason why, although we are, as I said a year ago, always ready to look at this from time to time, because obviously the figure cannot stay fixed for all time, the Government as a whole and my right hon. Friend the Chancellor of the Exchequer in particular are of the opinion that it is not the appropriate time to propose increases, certainly not in this case.
    Mr. Stratton Mills: How long had the £3,000 figure for a single director under the Profits Tax system been in operation?
    Mr. Diamond: Perhaps I may intervene and give that figure a little later. I think that it was fixed in 1959. It may have been 1957.
    Mr. Shaw: The comparison between the Corporation Tax basis and the Profits Tax basis is false. The percentage tax allowed shows the difference. The Profits Tax was imposed as a tax on top of Income Tax. Therefore, under the old basis for directors' remuneration, no matter how much was paid, there was an allowance of 41 per cent, on directors' remuneration. There was a disallowance in certain cases to the extent of 15 per cent. In the case of Corporation Tax there is a full disallowance of 40 per cent.
    So here we have the case of a disallowance of 40 per cent, whereas under the old system there was an allowance of 41 per cent, with a disallowance of 15 per cent. Under the old system there was far greater allowance. Under the new system there is a far greater burden on the company than under the old.
    Mr. Diamond: I rise not to respond to the hon. Member for Scarborough and Whitbv (Mr. Michael Shaw), but to confirm the date 1959.
    Mr. Patrick Jenkin: I do not rise to close the debate. I am sure many of my hon. Friends wish to express their view on this important Amendment. One of the nice aspects of our proceedings is that, from time to time, both sides are able to agree that a change should be made and to join in pressing it upon the Government, with all the more effect because of their collaboration.
    The Chief Secretary's reply was depressing. He returned to the point he tried to make last year and which, as he said, arose at about 9 o'clock in the morning when we had some rather bad-tempered exchanges. I agree with my hon. Friend the Member for Scarborough and Whitby (Mr. Michael Shaw) that the analogy with Profits Tax is false. Not only was one dealing with 15 per cent. Profits Tax compared with 40 per cent. Corporation Tax but with a different category of companies, director-controlled companies. The whole scope of close company legislation has brought in thousands of companies which were never within the limits of director-controlled

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    companies for Profits Tax purposes. All these have had limitations imposed on them for directors' remuneration.
    I agree with one point made by the right hon. Gentleman. When we dealt with this subject last year I made this point and I repeat it because I believe it is right. Where one is dealing with movement of income from a close company to a director or a participator, it is right that, for the protection of the Revenue, the tax legislation should make it clear that that which goes to him, if he is an employee, in the form of remuneration should be distinct from that which goes to him in his capacity as a proprietor. This applies also to the other forms of participation one might have in the profits of a close company. I therefore agree with the right hon. Gentleman that there should be this limitation. The question is, what should the limitation be? Have we the right figures?
    Having refreshed my memory before the debate of the curious sequence of events which occurred during the passage of the 1965 Act, I would suggest to the right hon. Gentleman that he would be a brave Chief Secretary who would say, "This is the right limit and I am not prepared to change it". He said that twice last time and a change followed after each occasion.
    First of all, a £25,000 limit was swept away after being fiercely criticised. Then the right hon. Gentleman said that £3,500 was an appropriate limit and that he could not change it. Subsequently, it was raised. He has just said again that he considers the £4,000 limit to be appropriate and that the increase proposed in the Amendment would be too large and too soon. As he pointed out, a 25 per cent, increase in 12 months.
    10.30 p.m.
    It is important to realise exactly what these figures are, particularly the figures which are in the latter part of the hon. Gentleman's Amendments. They are really, in a sense, floors and not ceilings, in the sense that the 15 per cent, limit on the amount which can be spent on directors' remuneration is quite unrealistically low in the case of small companies. The figures are, therefore, put as levels below which the 15 per cent. does
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    not apply. It is a sort of cut-off figure which is to be the limit of remuneration to be paid for directors of those companies.
    I agree completely with what the hon. Member for Heywood and Royton (Mr. Barnett) said, when he said one is dealing with a number of small family trading companies. I very much welcome his support for the case which has often been made from these benches about the value of these companies to the economy of the country. I am reminded of the celebrated remark which no Member of this Committee should ever forget, when it was pointed out during our debates last year that the close company legislation would mean the end of the small family company. The then Economic Secretary, now the Minister of State, Department of Economic Affairs, said, "And good riddance", or words to that effect—"about time, too".
    This was the attitude of a number of hon. and right hon. Members opposite. They regard the small companies as thorns in the flesh, as sand in the machine, not amenable to Government pressure, not prepared to fall in with national plans and the rest of it. Some—not all—hon. and right hon. Members opposite would gladly see them out of the way.
    One of the measures which can be brought to squeeze the small private company is to make it uneconomic for men of managerial and technical talent to serve it without incurring swingeing tax penalties. That is the case for raising these limits. The limits in the Bill and in the Act of last year are unrealistically low, bearing in mind the salaries which are daily being offered in the advertisements in the quality Press, particularly in the Sunday Press, for managers and technical men of all sorts. To suggest that they should be limited to these low figures or be subject to substantial tax penalties is a real disservice to this sector of our economy. It is the case for the increase in their remuneration.
    So far as part-time directors are concerned there is a difficulty which the Chief Secretary ought to look at. If there is a part-time director who is a part-time director of a number of companies and cannot be expected to devote his attention all his time to any one of them the remuneration which is paid by all

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    those companies, as I understand it, is disallowed to the extent it exceeds £4,000. If there are several part-time directors none of that remuneration paid to them can be allowed. This is a situation which ought to be looked at, and I hope the Chief Secretary will be prepared to look at it again.
    As to full-time service directors, there are two points. In the first place, is the 5 per cent, limit the right figure? Ought this not to be increased to 7½ per cent. or even 10 per cent, so that the issue to such persons of shares or a stake in the companies—a reasonable stake, not merely nominal—does not bring them into the category of full-time service directors to whom these limits apply?
    The other point always to be remembered is that, however much the Chief Secretary says that the whole-time service director is outside the scope of Section 74 of last year's Finance Act if he is associated with somebody who is a participator—such a man may have worked up the business and may be a full-time professional technical manager—but if he happens to be a relation of somebody who is a participator, he is brought within the mischief of the provision.
    Those are matters to be considered in the issue of the level of remuneration. A strong case for the Amendment has been made by hon. Members on both sides of the Committee and I am, therefore, happy to advise my hon. Friends to go into the Lobby to support the hon. Member for Heywood and Royton.
    Mr. Martin Maddan: I must echo the view that the Chief Secretary's reply was very disappointing. The fact that he built his case on the complete irrelevance of Profits Tax shows that he knows what an empty argument he has. Last year, the Government brought about substantial amendments of all the taxation provisions surrounding companies and especially close companies and they might now feel that, even with the help of the Committee, they would be extremely lucky if they had all the right answers. They should not take the view that it is beyond the pale even to start thinking about amendments a year later.
    Not one voice has been raised against the Amendment except the right hon. Gentleman's own. I wonder whether that
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    causes him to feel that he is defending the line unjustifiably. If he had said that too much money was involved, and that the Government could not afford the Amendment, that would have been the sort of argument which we might have understood, but not even that well-worn defence was open to the right hon. Gentleman. His reply was disappointing not only to both sides of the Committee but outside, especially to the small companies which are so important to the economy, as has been said.
    Should not the right hon. Gentleman take into account the fact that last year's Finance Act had the curious effect of encouraging the large public corporations to get larger and fatter while at the same time the smaller companies, about whom we are now talking and which are essential for growth and enterprise, have been deliberately discouraged and penalised? If the protestations of right hon. Gentlemen opposite about wishing to see these companies play their proper rôle in the economy mean anything, perhaps the Chief Secretary will be able to say, perhaps out of his discretion and wisdom and great personal experience of these things, or from something written on the back of his brief, that he can offer the encouragement of assuring us that, if not now, then at a later stage he will reconsider the matter.
    I must say that I was surprised that an Amendment which has the support of both sides of the Committee, and has not found a single hon. Member to rise against it, except from the Treasury Bench, should be turned down so flatly, with arguments so hollow.
    Mr. Gower: I want to make one point. I would certainly not accuse the Chief Secretary of deceiving, or seeking to receive the Committee, but it may be that inadvertently his argument would have that effect. He said that there was no conflict of principle in this; that it was merely a matter of degree—the right amount at the right time. Then he produced two, in my submission, completely fallacious comparisons.
    One is the largely irrelevant comparison with profits tax and the second was the comparison with a figure in the Profits Tax legislation which he suggested was at a certain figure two years ago. The whole inference was that this figure had

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    been fixed two years ago but, as was pointed out, that figure was fixed in 1959. It was quite misleading for the Chief Secretary to produce a proportion of increase between now and two years ago. Surely it is as relevant to say that the figure was a much smaller increase between 1959 until now.
    I was just frightened that the hon. Member for Heywood and Royton (Mr.
    Barnett) might have been convinced by this argument, but I believe that he could not have been convinced by these quite irrelevant comparisons and for these reasons I feel sure that he will lead us into the Division Lobby.
    Question put, That those words be there inserted: —
    The Committee divided: Ayes 132, Noes 184.

    Division No. 40.]

    AYES

    [10.43 p.m.

    Alison, Michael (Barkston Ash)

    Glover, Sir Douglas

    Murton, Oscar

    Allason, James (Hemel Hempstead)

    Glyn, Sir Richard

    Nabarro, Sir Gerald

    Atkins, Humphrey (M't'n & M'd'n)

    Cower, Raymond

    Noble, Rt. Hn. Michael

    Baker, W. H. K.

    Grant, Anthony

    Nott, John

    Balniel, Lord

    Grieve, Percy

    Onslow, Cranley

    Batstord, Brian

    Griffiths, Eldon (Bury St. Edmunds)

    Orr, Capt. L. P. S.

    Bennett, Sir Frederic (Torquay)

    Grimond, Rt. Hn. J.

    Osborn, John (Hallam)

    Bessell, Peter

    Gurden, Harold

    Page, Graham (Crosby)

    Biffen, John

    Hall, John (Wycombe)

    Pardoe, J.

    Biggs-Davison, John

    Hall-Davis, A. G. F.

    Pearson, Sir Frank (Citheroe)

    Birch, Rt. Hn. Nigel

    Harvie Anderson, Miss

    Peel, John

    Black, Sir Cyril

    Hawkins, Paul

    Percival, Ian

    Brewis, John

    Heald, Rt. Hn. Sir Lionel

    Peyton, John

    Brinton, Sir Tatton

    Higgins, Terence L.

    Pike, Miss Mervyn

    Brown, Sir Edward (Bath)

    Hiley, Joseph

    Pink, R. Bonner

    Bruce-Gardyne, J.

    Hill, J. E. B.

    Pounder, Rafton

    Buchanan-Smith, Alick(Angus,N&M)

    Hirst, Geoffrey

    Pym, Francis

    Campbell, Gordon

    Holland, Philip

    Ridley, Hn. Nicholas

    Chichester-Clark, P..

    Hunt, John

    Rossi, Hugh (Hornsey)

    Clegg, Walter

    Irvine, Bryant Godman (Rye)

    St. John-Stevas, Norman

    Cooke, Robert

    Jenkin, Patrick (Woodford)

    Scott, Nicholas

    Corfield, F. V.

    Johnson Smith, G. (E. Grinstead)

    Shaw, Michael (Sc'b'gh & Whitby)

    Costain, A. P.

    Johnston, Russell (Inverness)

    Sinclair, Sir George

    Crawley, Aidan

    Jopling, Michael

    Smith, John

    Cresthwaite-Eyre, Sir Oliver

    Kitson, Timothy

    Steel, David (Roxburgh)

    Crouch, David

    Lancaster, Col. C. G.

    Stoddart.Scott, Col. Sir M. (Ripon)

    Crowder, F. P.

    Legge-Bourke, Sir Harry

    Talbot, John E.

    Cunningham, Sir Knox

    Lewis, Kenneth (Rutland)

    Temple, John M.

    Currie, G. B. H.

    Lloyd, Ian (P'tsm'th, Langstone)

    Thatcher, Mrs. Margaret

    Dalkeith, Earl of

    Loveys, W. H.

    Thorpe, Jeremy

    Dance, James

    Lubbock, Eric

    Turton, Rt. Hn. R. H.

    Davidson,James(Aberdeenshire, W.)

    Mackenzie, Alasdair(Ross&Crom'ty)

    Van Straubenzee, W. R.

    Dean, Paul (Somerset, N.)

    Macleod, Rt. Hn. Iain

    Walker, Peter (Worcester)

    Deedes, Rt. Hn. W. F. (Ashford)

    Maddan, Martin

    Wall, Patrick

    Dodds-Parker, Douglas

    Maginnis, John E.

    Ward, Dame Irene

    Eden, Sir John

    Maude, Angus

    Weatherill, Bernard

    Elliot, Capt. Walter (Carshalton)

    Maxwell-Hyslop, R. J.

    Webster, David

    Elliott, R.W.(N'c'tle-upon-Tyne,N.)

    Maydon, Lt.-Cmdr. S. L. C.

    Wells, John (Maidstone)

    Errington, Sir Eric

    Mills, Peter (Torrlngton)

    Whitelaw, William

    Eyre, Reginald

    Mills, Stratton (Belfast, N.)

    Wilson, Geoffrey (Truro)

    Farr, John

    Miscampbell, Norman

    Winstanley, Dr. M. P.

    Fisher, Nigel

    Monro, Hector

    Wolrige-Gordon, Patrick

    Fletcher-Cooke, Charles

    More, Jasper

    Fortescue, Tim

    Morrison, Charles (Devizes)

    TELLERS FOR THE AYES:

    Fraser,Rt.Hn. Hugh(St'fford & Stone)

    Munro-Lucas-Tooth, Sir Hugh

    Mr. Younger and Mr. Blaker

    NOES

    Abse, Leo

    Blackburn, F.

    Cousins, Rt. Hn. Frank

    Allaun, Frank (Salford, E.)

    Blenkinsop, Arthur

    Craddock, George (Bradford, S.)

    Alldritt, Walter

    Boardman, H.

    Crawshaw, Richard

    Archer, Peter

    Bootn, Albert

    Cronin, John

    Armstrong, Ernest

    Boston, Terence

    Crostand.Rt. Hn. Anthony

    Ashley, Jack

    Braddock, Mrs. E. M.

    Cullen, Mrs. Alice

    Atkins, Ronald (Preston, N.)

    Bradley, Tom

    Ralyell, Tarn

    Atkinson, Norman (Tottenham)

    Brooks, Edwin

    Davidson, Arthur (Accrington)

    Bagier, Gordon A. T.

    Brown, Hugh D. (C'gow, Provan)

    Davies, G. Elfed (Rhondda, E.)

    Barnes, Michael

    Brown, Bob(N'c'tle-upon-Tyne,W.)

    Davies, Robert (Cambridge)

    Barnett, Joel

    Buchan, Norman

    Dempsey, James

    Baxter, William

    Buchanan, Richard (C'gow, Sp'burn)

    Dewar, Donald

    Bence, Cyril

    Callaghan, Rt. Hn. James

    Diamond, Rt. Hn. John

    Bennett, James (C'gow, Bridgeton)

    Cant, R. B.

    Dickens, James

    Bidwell, Sydney

    Carter-Jones, Lewis

    Dobson, Ray

    Binns, John

    Concannon, J. D.

    Doig, Peter

    Bishop, E. S.

    Conlan, Bernard

    Donnelly, Desmond

    Dunn, James A.

    Jackson, Colin (B'h'se & Spenb'gh)

    Oswald, Thomas

    Dunwoody, Mrs. Gwyneth (Exeter)

    Jones, Dan (Burnley)

    Owen, Dr. David (Plymouth, S'tn)

    Dunwoody, Dr. John (F'th & C'b'e)

    Jones, J. Idwal (Wrexham)

    Owen, Will (Morpeth)

    Eadie, Alex

    Judd, Frank

    Palmer, Arthur

    Edelman, Maurice

    Kelley, Richard

    Park, Trevor

    Edwards, Robert (Bilston)

    Kenyon, Clifford

    Pentland, Norman

    Edwards, William (Merioneth)

    Kerr, Dr. David (W'worth, Central)

    Perry, Ernest G. (Battersea, S.)

    Ellis, John

    Leadbitter, Ted

    Perry, George H. (Nottingham, S.)

    Ensor, David

    Ledger, Ron

    Price, Christopher (Perry Barr)

    Evans, Albert (Islington, S.W.)

    Lee, Rt. Hn. Frederick (Newton)

    Price, Thomas (Westhoughton)

    Evans, loan L. (Birm'h'm, Yardley)

    Lever, L. M. (Ardwick)

    Price, William (Rugby)

    Faulds, Andrew

    Lewis, Arthur (W. Ham, N.)

    Reynolds, G. W.

    Fernyhough, E.

    Lewie, Ron (Carlisle)

    Richard, Ivor

    Fitch, Alan (Wigan)

    Lomas, Kenneth

    Robinson, W. O. J. (Walth'stow, E.)

    Fletcher, Ted (Darlington)

    Luard, Evan

    Rodgers, William (Stockton)

    Floud, Bernard

    Lyons, Edward (Bradford, E.)

    Roebuck, Roy

    Foot, Michael (Ebbw Vale)

    Mabon, Dr. J. Dickson

    Rose, Paul

    Forrester, John

    McBride, Neil

    Ross, Rt. Hn. William

    Fowler, Gerry

    McCann, John

    Rowlands, E. (Cardiff, N.)

    Fraser, John (Norwood)

    MacColl, James

    Sheldon, Robert

    Fraser, Rt. Hn. Tom (Hamilton)

    MacDermot, Niall

    Silkin, John (Deptford)

    Gardner, A, J.

    Macdonald, A. H.

    Slater, Joseph

    Garrett, WE.

    McKay, Mrs. Margaret

    Steele, Thomas (Dunbartonshire, W.)

    Garrow, Alex

    Mackenzie, Gregor (Rutherglen)

    Summerskill, Hn. Dr. Shirley

    Gourlay, Harry

    McMillan, Tom (Glasgow, C.)

    Swingler, Stephen

    Grey, Charles

    MCNamara, J. Kevin

    Taverne, Dick

    Griffiths, David (Rother Valley)

    Mahon, Peter (Preston S.)

    Tinn, James

    Griffiths, Will (Exchange)

    Mahon, Simon (Bootle)

    Varley, Eric G.

    Hale, Leslie (Oldham, W.)

    Mallalieu,J.P.W.(Huddersfield,E.)

    Wainwright, Edwin (Dearne Valley)

    Hamilton, James (Bothwell)

    Manuel, Archie

    Walker, Harold (Doncaster)

    Hannan, William

    Mapp, Charles

    Watkins, David (Consett)

    Hattersley, Roy

    Marquand, David

    Weitzman, David

    Hazell, Bert

    Mayhew, Christopher

    Wellbeloved, James

    Heffer, Eric S.

    Mendelson, J. J.

    Whitlock, William

    Herbison, Rt. Hn. Margaret

    Miller, Dr. M. S.

    Williams, Alan Lee (Hornchurch)

    Hooley, Frank

    Mitchell, R. C. (S'th'pton, Test)

    Williams, Clifford (Abertillery)

    Horner, John

    Molloy, William

    Willis, George (Edinburgh, E.)

    Houghton, Rt. Hn. Douglas

    Morgan, Elystan (Cardiganshire)

    Wilson, William (Coventry, S.)

    Howarth, Robert (Bolton, E.)

    Morris, Charles R. (Openshaw)

    Winnick, David

    Howie, W.

    Moyle, Roland

    Winterbottom, R. E.

    Hoy, James

    Murray, Albert

    Woodburm, Rt. Hn. A.

    Hughes, Emrys (Ayrshire, S.)

    Oakes, Gordon

    Yates, Victor

    Hughes, Roy (Newport)

    Ogden, Eric

    Zilliacus, K.

    Hunter, Adam

    O'Malley, Brian

    Hynd, John

    Orme, Stanley

    TELLERS FOR THE NOES:

    Mr. Lawson and Mr. Harper

    Schedule, as amended, agreed to.

    Schedule 5.—(ADMINISTRATION OF CORPORATION TAX ACTS.)
    Mr. MacDermot: I beg to move Amendment No. 241, in page 82, line 42, to leave out: "or the Special Commissioners".
    This is a drafting Amendment. The words survive from an earlier draft and should have been omitted.
    Amendment agreed to.
    Mr. MacDermot: I beg to move Amendment No. 242, in page 85, line 28, after "falls", to insert "the end of".
    I suggest that it would be convenient, Sir Eric, if we could consider Amendment No. 243 at the same time. The two are related and in the same terms.
    The Chairman: Yes, if that is the wish of the Committee.
    Mr. MacDermot: These, also, are virtually drafting Amendments, and their purpose is to clear up a possible ambiguity.
    Amendment agreed to.
    Further Amendment made: In page 85, line 29, after "falls", insert "the end of".—[Mr. MacDermot.]
    Mrs. Thatcher: I beg to move Amendment No. 311, in page 89, line 15, to leave out "from" and to insert "through".
    This is a probing Amendment. Looking through Schedule 5, one discovers that certain company secretaries might come under rather heavy liabilities. Paragraph 24 contains a devastating subparagraph (2) under which secretaries or treasurers of companies which are not bodies corporate may find themselves liable for the whole of the Corporation Tax of their companies. The closing words of the sub-paragraph provide that the secretary
    "may retain out of any money coming into his hands on behalf of the company sufficient sums to pay that tax, and, so far as he is not reimbursed, shall be entitled to be indemnified by the company in respect of the liability so imposed on him".
    But that would not be much consolation if the funds were not there out of which he could be indemnified.
    436
    I have no doubt that secretaries of companies limited by guarantee and the like might be rather worried, if they had read the Bill or knew about this provision, to know that their houses, their insurance policies and everything might be sequestered to pay the Corporation Tax due from their companies.
    Obviously, one did a little research to see whether anything similar appeared in the Income Tax Acts. There is a similar but not identical provision to the one we are seeking to amend now. This imposes upon a company secretary, or other officer of the company, a liability in terms for the tax. The previous provision with regard to Income Tax was rather more ambiguous and one did not necessarily read it as if there were a liability imposed on the company secretary. The previous provision is contained in Section 362 of the Income Tax Act and it did make the secretary or treasurer answerable for payment of the tax but did not impose a specific liability upon him.
    It seems that this particular paragraph has gone a great deal further than the former provision and it also seems rather hard on a company secretary or his family who might find himself in this position. I would be most grateful if the Financial Secretary could give the Committee his views and consider the point with a view to bringing something forward on Report.
    Mr. MacDermot: The Amendment which the hon. Lady has moved raises the question of the power which it is proposed to take in this paragraph of the Schedule. If I may say so, without appearing to be patronising, it seems to be a proper probing Amendment to move because, on the face of it, this looks to be a somewhat fierce power.
    Like the hon. Lady, I have also looked at the precedents. I think that I can say that the difference in wording to which she has drawn attention between this paragraph and Section 362 of the Income Tax Act is, in effect, a distinction without a difference. The chamberlain or other officer acting as treasurer under Section 362 has full personal liability. That is how I am advised. He has a personal liability and his asests are liable for the payment of the tax in default of payment by the unincorporated company.

    437
    This is a protection for the Revenue which has a long history. The 1952 Act was a consolidating Act and was merely reproducing provisions which had stood since 1842. I am not sure how that date relates to the earlier companies Acts, but it obviously goes back a long time. The practical point is that without a power of this kind the Revenue would be at the mercy of the man of straw being put into the position of being the proper officer —treasurer or whatever it may be—of an unincorporated body.
    The only way, therefore, to give the Revenue protection is to say that the person in the unincorporated body who is responsible for the handling of the company's income shall see that sufficient funds are retained for meeting the tax liability. One starts off, if one is dealing with a tax liability, with a body that has got an income which is liable to tax.
    The hon. Lady will know, as will other lawyers in the Committee, how difficult it sometimes is to effectively get at anyone in an unincorporated body. The problem of who to sue is a familiar one for lawyers trying to draft pleadings in cases of this kind. The same sort of problem can arise for the Revenue.
    11.0 p.m.
    I am advised that cases involving the application of these provisions are very rare, and no trouble seems to have arisen from applying them. By "trouble" I mean nothing that the Committee would regard as oppressive or anything smacking in any way of persecution or hardship falling upon an individual in one of these offices. If such a suitation were to arise, there might be good reason for us to reconsider the matter.
    In view of the long history of this provision, the fact that it affords a real protection for the Revenue and that, in practice, it does not appear to be giving rise to hardship of the kind which the hon. Lady feared might underlie these provisions, I urge the Committee that we should re-enact these provisions in the form in which they are contained in the Bill.
    Mrs. Thatcher: My first point in reply to what the hon. and learned Gentleman has said is that the provision was obviously nothing like so devastating in
    438
    1842, when the rate of Income Tax must have been fairly low at 3d., 6d., or something like that in the pound. Therefore, the situation is rather different now and it may be right that we should look once again at this provision.
    Secondly, the Financial Secretary said that the Revenue might be at the mercy of a man of straw. It seems to me that with a provision like this, when the personal assets of the company secretary are likely to be taken, the obvious thing to do would be to put a man of straw in that position so that there was not very much to be taken. This would be the greatest possible protection.
    Thirdly, the Financial Secretary said that if there has been no hardship, it does not much matter if we re-enact the provision. My view is that if there had been no hardship, it would not much matter if we took the provision out, because there may come an occasion when, if we leave it in, there would be hardship. If there has not been a great deal of difficulty of the kind which I envisaged and the Revenue has not needed to invoke this paragraph very often, would it not be advisable to remove it?
    Fourthly, it is probably rather more important that the wife and children of the company secretary should be protected from the Revenue rather than that the Revenue should be protected at their expense.
    Having made these few comments, I hope that the Financial Secretary will think about them again. Perhaps we can have a talk about them later. "Obviously, I do not want to divide on them tonight, as this was a probing Amendment. Although there might be a long history to the matter, time does not always sanctify things like this. I beg to ask leave to withdraw the Amendment.
    Amendment, by leave, withdrawn.
    Question proposed, That this Schedule, as amended, be the Fifth Schedule to the Bill.
    Mrs. Thatcher: I wish to speak about another provision which might also have been sanctified by time, but which we might look at again. I refer to paragraph 7(2) of the Schedule, concerning time

    439
    limits for making assessments, which states:
    "An objection to the making of any assessment to corporation tax on the grounds that the time limit for making it has expired shall only be made on an appeal against the assessment."
    I understand that the rule is, and has been for many years, that the Revenue cannot make an assessment either to Income Tax or to Corporation Tax later than six years after the end of the year to which the assessment relates. There has always been this six-year time limit. The only exception to that is if there is a case of fraud or wilful default, when an assessment can be made out of time. In practice, it can be made up to some 20 years back.
    Since the Income Tax Management Act, 1964, the inspector cannot, off his own bat, make an assessment out of time on the grounds of fraud or wilful default. Under Section 6 of the Act, for the Income Tax provision, he has to go to the General Commissioners to get permission to make an assessment out of time for fraud or wilful default. That is obvious protection. It would be wrong if the inspector could make an assessment out of time just on a hunch that something was wrong. He must have good grounds for believing that there has been fraud or wilful default. Then he can make an assessment out of time.
    Between those two things, the strict six-year time limit and the absence of any time limit in the case of fraud or wilful default, there seems to be a kind of no man's land whereby an assessment can be made out of time although there is no fraud or wilful default. That will arise, as one can see from the sub-paragraph, when, although the assessment is made out of time, the taxpayer has to go to appeal and establish that the assessment has been made out of time. It would seem that the law ought to be that, if the assessment is out of time, it is null and void from the outset, and the taxpayer ought not to have to go to appeal to say that it is out of time.
    If we keep the provision, it would seem that certain possibilities arise. The taxpayer might get to appeal, and the inspector might hope that at the appeal he will get something out of the taxpayer by probing, or that the taxpayer
    440
    will not spot that the assessment is out of time. It would have been a good deal better had we provided that, if an assessment is out of time, it shall be null and void. There would be adequate protection in the Income Tax Management Act for any case of fraud or wilful default, and that assessment could still be made.
    Obviously, I did a little research on the point, too. I know that the Financial Secretary will tell me that this has been hallowed by time, but I am sure that he will agree that there are all sorts of things in Revenue and other law which, although a number of us have had to consider it professionally in years past, we have never come across before, and, when we come across them for the first time, they are rather surprising. That is the time to consider them once again and see whether they are justified.
    The history of the sub-paragraph is to be found in Section 47(3) of the Income Tax Act, 1952, which provided an identical procedure in Income Tax to the one that the hon. and learned Gentleman is now proposing in Corporation Tax. I would ask the hon. and learned Gentleman to consider the matter again. Should the taxpayer have to make his objection to an out of time assessment on appeal? Should he not be able to write back to the inspector and say, "You are out of time. That is the end of the matter "?
    Perhaps he will consider the point and, either now or later, let me have his reply. However, I should be interested to hear his initial reactions.
    Mr. MacDermot: I can only give an initial reaction. Although the hon. Lady had her name to an Amendment raising the point it was not selected. Having much else to do, I have not gone into it with great care.
    I would not say that it has been hallowed by time. Although it has some history behind it, it goes back to 1952, rather than to 1842. The purpose of the provision in the 1952 Act was to ensure than an objection to an assessment on grounds that it was out of time should be raised by way of appeal rather than by some other form of legal proceedings, such as a writ of prohibition.
    My initial reaction is to say to the hon. Lady that what one has to settle is the convenient way of determining a dispute,

    441
    if there is a dispute. Sometimes, if a well-founded objection is taken, it will be seen to be well-founded. But there may be a disagreement about what is the accounting period and from what date the six-year period began to run. If there is an issue about that, it is one which has to be settled. The question is whether it is better for the taxpayer to dig in his toes and say, "I think that you are out of time", and then leave it to the Revenue to have to start proceedings against him to recover the tax, or make an assessment and then start proceedings to recover the tax; or whether it is more convenient for the taxpayer to be required to lodge an appeal.
    I imagine that it must be one of those two. We do not want to encourage them to go off to the divisional court on a writ of prohibition. But I will gladly accept the hon. Lady's invitation to look further at the point, although I do not know what conclusion I shall reach.
    Question put and agreed to.
    Schedule, as amended, agreed to.

    Clause 26.—(DIVIDENDS PAID OUT OF PRE-1966–67 PROFITS: GROUPS OF COMPANIES.)
    Mr. Patrick Jenkin: I beg to move Amendment No. 6, in page 26, line 12, leave out subsections (1) to (3).
    We have come now to the next Clause of the Bill. It is, I am sure the whole Committee will agree, an immensely complicated Clause. The Amendment seeks to amend perhaps the most complicated Clause in the whole of the 1965 Finance Act, and that is saying something. Indeed, when the authors of a well-known book on the Corporation Tax, Rowland and Talbot, came to Section 85 of the 1965 Act, they wrote, in one of the masterly understatements of the year, that this was not one of the more readily comprehensible provisions of Part IV of that Act.
    Having spent some hours over the last week or two trying to understand Section 85 and the Clause we are now considering, I can wholeheartedly endorse every word that Mr. Rowland and Mr. Talbot wrote.
    The point of the Clause and the Section last year was really to deal with quite a simple point. It is purely a tran-
    442
    sitional point that arises on the switch from Income Tax and Profits Tax to the new system of Corporation Tax, and it is to deal with what one might broadly call pre-Corporation Tax profits where they are used to pay post-Corporation Tax dividends.
    Clearly, the profits that have been earned under the old system had borne Income Tax, whereas dividends declared under the new system would bear Income Tax again by deduction for which the company would have to account to the Revenue. This is the Schedule F assessment.
    So the Section was passed to give some relief, and it is admittedly only relatively limited relief, on two alternative bases. One which is referred to in the Section is the one-year surplus, where a dividend is declared and there are no profits out of which it could be declared which have been charged with Corporation Tax, or secondly, if the pre-Corporation Tax profits have actually borne tax.
    Of course, the limitation was put in that the relief should only be available for a maximum of three years. The one-year surplus applies where the whole of the company's income is chargeable not to Corporation Tax but to Income Tax and Profits Tax, and if one has a company the whole of your income consists of dividends which have borne tax by deduction. That is the one-year surplus. The three-year surplus applies where the income of the company is so low that any dividends it declares must have been declared out of profits earned before the Corporation Tax came in.
    Now, this seems a quite reasonable if somewhat limited relief. But as the Chancellor said in his Budget statement, in relation to groups of companies, parents and subsidiaries, the provisions of Section 85 were quite unintentionally generous. Indeed, it is remarkably easy to take advantage of the unintentional generosity. The whole affair was laid bare in an article by Lex in the Financial Times of 31st January last.
    The Committee should be under no misapprehension as to what this means. The fact is that Section 85 was a monumental miscalculation. It means that a company can pay dividends without accounting for Schedule F tax if its income consists of dividends from its

    443
    subsidiaries, and of course a company can control the extent to which its subsidiaries pay dividends. The result is that the section offers a most lucrative field for holding companies.
    11.15 p.m.
    But that is not all, because the miscalculation goes a good deal further than that. During the passage of last year's Finance Bill an Amendment was introduced by the Government to what is now Section 83, which is the forestalling Section, the Section which provided that one could not bunch dividends before the new tax came in to escape the Schedule F tax. The Amendment excluded subsidiary companies from the effects of the forestalling section, so that subsidiaries could pay dividends to their parent company without coming within the limitation of the forestalling, and, one might almost have said, to prepare the parent, under Section 85, to be able to take the maximum advantage of the one-year or three-year surplus.
    This having been put into the Act, it is scarcely surprising to find that company after company, and indeed some of the biggest companies in the land, having looked at the Act, and having consulted their tax advisers, and in some cases having looked at HANSARD to find out what was intended, said, "It is clear that this was intended. The relief was given, and we are, therefore, in a position to take advantage of it".
    Because of that, last year many of these groups of companies paid their parent companies huge dividends substantially in excess of anything paid before. The result is that the parent companies have income, assets and funds with which they can continue to maintain their dividends over the years ahead, without having any income of their own necessarily within the charge to Corporation Tax. They will, therefore, be able to pay dividends without accounting for the Schedule F tax.
    In the case of the three-year surplus, it is the subsidiaries who will earn the profits, and they will pay no dividends to the parent company. The parent company has the funds, and will continue to maintain its dividends without any liability to Schedule F.
    The cost of this miscalculation— because it was a miscalculation—was
    444
    given by the Chancellor. In terms of the cost of the avoidance and anti-avoidance measures which we are considering, it amounts to the astronomical figure of £85 million, and £60 million in the current year alone. This is the result of putting a combination of these sections into last year's Finance Act.
    I am bound to make four points on that. As the Financial Times article pointed out, this is the penalty for not recognising throughout the discussions on the Finance Bill, and the structure of the Corporation Tax, that groups of companies should always be regarded as groups. They were regarded as groups for the purpose of Section 83, the anti-forestalling Section, but they were not regarded as groups for the purpose of Section 85. And, as the Chief Secretary will remember, they are not regarded as groups for the purposes of single assessment to Corporation Tax.
    Having moved an Amendment last year which would have dealt with that, I can, I think, chide the Chief Secretary for his reluctance to accept this point, in the interests, as he put it, of preventing the avoidance of tax. While I do not pretend that a group assessment to Corporation Tax would necessarily have avoided the mischief of what is now Section 85, had groups been recognised for all purposes under the Act, as they should have been, the chances of this particular miscalculation arising would have been very much less.
    It is all the more astonishing that the Government allowed themselves to be put into this position, because on the Report stage of the Bill the Chief Secretary himself moved an Amendment to Clause 85 dealing with groups of companies, parents and subsidiaries. This was actually put into the Bill, so that nobody can claim—this is the point which has made its impact on the minds of those concerned with deciding what was in the Government's mind—that the Government were not perfectly seized of what they were doing. They put in an Amendment dealing with groups of companies during the Committee stage of the Bill.
    The result was that some companies were led to believe that the relief, surprising though it was, was actually intended, and many of them acted upon

    445
    it. If there were in Parliament, as there is in the Chancery courts, a doctrine of equitable estoppel, the Government would be effectively prevented from doing anything about it, because they had led these companies to take the view which they have.
    This whole process and the Clause with which we are now faced is bound to bring the passage of legislation of this sort into disrepute. It is the penalty which the Government, the country and the companies are having to pay for the hasty, ill-conceived and ill-digested legislation with which we were faced last year. I hasten to add that I acquit the draftsmen and advisers of responsibility for this. Goodness knows, they did their best in the most impossible situation. It is the Government who are to blame for this, by introducing the Corporation Tax on which these monumentally complicated transitional provisions were bound to arise. They created a situation in which a miscalculation of this sort was almost inevitable.
    As the Committee will remember, during the passage of last year's Bill, we were faced with great new Clauses, Amendment after Amendment and new Schedule after new Schedule, so that by the time we considered the Bill on the Floor of the Committee, it was almost impossible to know where we stood. It is hardly surprising, in those circumstances, that the professional advisers of the Government should have been bewildered and unable to keep pace with what was going on.
    What we are considering tonight is the coming home to roost of all the instant government which we suffered last year. If the companies can ruefully contemplate the withdrawal of the tax allowances to which they were led to believe they were entitled, they can look with some chagrin at the remark of the Prime Minister about the "tomfoolery" which he alleged went on during the Committee stage of the Finance Bill last year.
    Perhaps we would have succeeded in avoiding this if we had not had to consider Clause after Clause and Schedule after Schedule at four, five, six and seven o'clock in the morning after having been sitting all night. If there is a charge of tomfoolery, we are entitled to ask:
    446
    who were the guilty men? Clause 26 stands as a mute but eloquent condemnation of the bungling mismanagement of the nation's affairs to which we have become accustomed over the past 20 months. It is in that sense that I commend the Amendment to the Committee.
    Mr. John Peyton: I was moved to speak by the eloquence of my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), whom I have seldom heard to better advantage. I should like to congratulate him on the eloquence of his speech and the moderation with which he phrased his condemnation of the Government. The Committee should be particularly indebted to him for reminding us of one of the sillier remarks of the Prime Minister, his reference during the election to "tomfoolery" during our debates last year—a remark which reflected directly upon the mental state and capacities of the Government at that time.
    We are confronted, basically, with a very simple position. Having realised their error in writing the wrong ground roots into their own tax, the Government are now saying, "We have misled industry and the House of Commons and we are rewriting the rules to suit ourselves". I cannot but ask the Government, even though the plea may be in vain, whether they realise the consequences for companies whose members are not taxation experts being bemused and befuddled into a state of complete uncertainty because this Government have neither the will nor the capacity to think through their idiotic proposals before they put them into legislative form.
    I am extremely grateful to my hon. Friend for making a fine speech. He deserves to be congratulated much more for his moderation than for anything else.
    Mr. Diamond: I am grateful to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) for the line he took, that a mistake had been made, which everybody realised was a mistake and which, it has been said many times, would be corrected when this Finance Bill came forward. It has been clearly said many times in the City that it was a mistake and would be corrected.
    Mr. Patrick Jenkin: I am grateful to the right hon. Gentleman for giving way, but I am sure that he would wish to place on record, so as to avoid any possible misunderstanding, that there was no warning from the Government or the Inland Revenue that they would act.
    Mr. Peyton: Does the Chief Secretary mean by that remark that everything said in the City will be relied on by the Government in making their case, because this is a two-edged weapon?
    Mr. Diamond: Perhaps I can repeat it. I am grateful for the line which the hon. Member for Wanstead and Woodford took, because a mistake had been made. This was the general view expressed and it was generally accepted in circles where this kind of matter is discussed that there would be an Amendment to put the matter right in this year's Finance Bill. That is what we are now discussing.
    The hon. Member is quite right in saying that this was an error. This was meeting a proposal for relaxation of certain provisions, and in meeting that proposal, as we met many other proposals where we thought them reasonable, we went too far, in opening the door for tax reductions of a kind which were not intended, and which the Committee did not intend. That is all that happened, and it is right that we should now put the matter right.
    There has been no loss, as far as we are aware, occasioned to any company. There is no retrospection involved in any sense at all. We have excluded from the effects of this clause any dividend declared prior to Budget day. All that has happened so far is that money has moved within groups of companies from the subsidiary to the parent company and the parent companies are now the possessors of those additional funds with which they can do what they wish. Companies have not been prejudiced. The Revenue would have been considerably prejudiced if we had not come forward and put the matter right in the way that we have. I take it the hon. Member was moving the Amendment in an exploratory sense and no more.
    I do not think it would serve the Committee, but it would delay it, if I went over the history of the Finance Bill last year. When one is introducing a new
    448
    tax, like the Corporation Tax, one is in the difficulty that one cannot disclose details until it is published in the Bill. It is right and proper to listen to all the representations and try, as far as one can, to meet all the proper needs of the citizens and of business conducted by them. That is what we were anxious to do.
    We were successful to an amazing extent, as last year's Finance Act shows, in getting everything right and in satisfying all reasonable requirements. But it is perfectly true that on this one occasion, in meeting a particular request for a relaxation, we went too far, and we are now putting the matter right. I take it, from the comments of hon. Gentlemen opposite, that they do not propose to press the Amendment. I am not recommending its acceptance to the Committee. However, it has served a useful purpose in getting this explanation on the record.
    11.30 p.m.
    Mr. Patrick Jenkin: The Chief Secretary must not be allowed to think that he can get away with that scandalous reply. He gave not a word of apology to the Committee or to the people who have been managing their businesses on the footing of last year's Finance Act. The right hon. Gentleman is treating the Committee and the whole commercial community with great discourtesy.
    I will not reiterate the points I made against this provision in my earlier speech, but only endorse everything said by my hon. Friend the Member for Yeovil (Mr. Peyton). Because of the Chief Secretary's complacent and smug reply, in which he offered no apology to anybody for the huge miscalculation which the Government allowed to take place, I strongly urge my hon. Friends to divide the Committee.
    Mr. Peyton: It might be worth while to press the Chief Secretary a little further before we take the course suggested by my hon. Friend the Member for Wan-stead and Woodford (Mr. Patrick Jenkin). The right hon. Gentleman is normally courteous and considerate to this and other Committeees. My natural charity leads me to suppose that either the right hon. Gentleman is under some alien influence, in which case we must give him time to reflect and maybe escape from this influence, or, alternatively, that we

    449
    must pause while he comes to himself, rises and apologises.
    The Committee is indebted to my hon. Friend the Member for Wanstead and Woodford for reminding hon. Members of one of the Prime Minister's more unsavoury observations at the time of the last election about the "tomfoolery" that took place in Committee. The Prime Minister's observations of this kind are habitual to him and perhaps we should forgive him, if not here then elsewhere. But I recollect feeling, during the election campaign, that here was another gambit of the Prime Minister, one which could not possibly have an answer but one which was calculated to be superficially understood by people who had not been present during the long debates on that ill-digested mess of pottage put in front of us in the guise of a Finance Bill last year.
    The Prime Minister knew very well what he was doing. My hon. Friends and I would not dream of asking the Chief Secretary to disavow everything the Prime Minister said. That would be too optimistic. But it is reasonable to ask him to confess, while not taking all the blame himself, with a certain amount of modesty on behalf of the Treasury, that a tiny error crept in.
    This is not too much to ask, because these tiny errors cause people great inconvenience. When I recall the number of occasions on which these people are accused of spending too much of their time and energy bringing their tax liability to a legitimate minimum rather than to a horrific maximum, I am entitled to express a measure of indignation with someone who is normally as courteous, civil, reasonable and restrained as the Chief Secretary.
    Therefore, though I repeat what I said at the beginning of my remarks, namely, that I think that my hon. Friend the Member for Wanstead and Woodford put the whole Committee in his debt for the eloquence, the mildness and the moderation of his reproof to the Government, nevertheless I do not believe that it would be right for the Committee to allow the Chief Secretary to ride away on the charity of my hon. Friend. Rather, he should take this opportunity to say frankly that an error has been made and that he is sorry for the inconvenience that has been caused.
    Mr. Lubbock: I had not intended to intervene in this debate, but I want to take up one point made by the hon. Member for Yeovil (Mr. Peyton), namely, that we are entitled to express our indignation. Indeed, this is true, but I have never heard anything quite so synthetic as the indignation expressed by the hon. Members for Wanstead and Woodford (Mr. Patrick Jenkin) and for Yeovil. They knew, as the Chief Secretary has explained, that everybody in the City who has taken cognisance of this matter was anticipating the Clause as we are discussing it today. They knew that it was impossible for the Government to allow to stand a provision which would have allowed as much as £85 million to leak away out of the revenue which had been expected when last year's Finance Bill was introduced.
    Is it seriously suggested by the Conservative Opposition that they will vote against the Chief Secretary purely on the ground that his reply has not given them the full satisfaction that they think they were entitled to? I thought that the Chief Secretary made an apology. I thought that he admitted to the Committee that the Government had made an error in drafting last year's Finance Bill. It was quite handsome of the right hon. Gentleman to come to the Dispatch Box and make that admission. [Laughter.] I am being serious. It is not often that apologies are made by Ministers in the House of Commons for errors they have made.
    It is most unhandsome of the hon. Member for Wanstead and Woodford to spurn the Chief Secretary when he has frankly admitted to the Committee that in their drafting of last year's Finance Bill the Government were slipshod and have had to clear it up in this year's Bill. We all knew that. We said at the time—the Liberal Party agreed with the Conservatives—that the Finance Bill, 1965, was very badly drafted and would need a good deal of correction in the years to come. So it has proved. It is being a little hard on the Government, when they bring forward the Amendments that we predicted would be necessary and put them in the Finance Bill a year later, to vote against the Chief Secretary on that account. This is entirely unreasonable. I hope that the hon. Member will think better of it.
    Mr. Patrick Jenkin: I can well understand the hon. Member for Orpington (Mr. Lubbock) taking the line he does. The Liberal Party having last year given the Government Clause after Clause and Schedule after Schedule, I can understand that he should now seek to defend the Government and feel that they are justified in what they have done and need make no further apology to the Committee.
    I disagree profoundly with the hon. Member for Orpington. The Government has been guilty of a very sad lapse from the usual high standards which the Treasury and the Inland Revenue manage to maintain. It was entirely the Government's fault through rushing these Departments, particularly the draftsmen, into hasty, ill-digested legislation so that nobody could keep pace with the Amendments which followed. The Government are to blame. They are the guilty men. That is why we intend to divide on the Amendment.
    Mr. Diamond: When one speaks at this Box, one does not recollect precisely every word one has used. I intended— and I am told by my hon. Friends that I did so-to use the word "error". I accepted that an error had been made. I have been invited to correct that to "tiny error". I do not call this a tiny error.
    I do not know what the rule is about keeping silent about figures. I believe one is to be criticised if one keeps silent about a figure one believes to be wrong if disclosure of that figure would make it appear that one was even more wrong.
    I am grateful to the hon. Member for Orpington (Mr. Lubbock). I tried to say what he understood me to say. I think that I did say it. He used the figure of £85 million. The latest calculation indicates that it is an understatement and that, if we are to be criticised, the
    measure of the criticism is not £85 million, but somewhat more.
    I hope that I never said one word impugning the ability of those who assist the Government in drafting or anything else. I hope I made it clear that Ministers accept full responsibility for everything that happens.
    Sir Gerald Nabarro: I apologise for missing some of the earlier part of this debate due to business outside, but I ask the Chief Secretary to recall that I intervened, and he very courteously gave way, during an earlier stage of the Bill to deal with this point of dividends paid and drew his attention to the fact that a substantial sum of money would find its way back to the Treasury due to the onerous Surtax assessments arising from the promise of so many interim dividends before 5th April.
    The right hon. Gentleman admitted that point but then said that the £85 million, to which he has again just alluded, was a gross figure and that the most reclaimed—if I may use that word —by the Treasury would be trifling on account of Surtax. I do not believe that that is true.
    The fact is that a substantial sum is given back in the form of Surtax from individual Surtax payers. As several weeks have elapsed since I made this point, and as he has again repeated that the figure of £85 million is, if anything, an understatement, the right hon. Gentleman should really go away and find out exactly what is meant by a figure of £85 million gross and by how much that will be diminished by reclamation by the Treasury on account of individual Surtax payments.
    Question put, That the words proposed to be left out, to "and" in line 17, stand part of the Clause:
    The Committee divided: Ayes 177, Noes 109.

    Division No. 41.]

    AYES

    [11.44 p.m.

    Abse, Leo

    Bence, Cyril

    Braddock, Mrs. E. M.

    Allaun, Frank (Salford, E.)

    Bennett, James (G'gow, Bridgeton)

    Bradley, Tom

    Alldritt, Walter

    Bessell, Peter

    Brooks, Edwin

    Archer, Peter

    Bidwell, Sydney

    Brown, Rt. Hn. George (Belper)

    Armstrong, Ernest

    Binns, John

    Brown, Hugh D. (G'gow, Provan)

    Ashley, Jack

    Bishop, E. S.

    Brown,Bob(N'c'tle-upon-Tyne,W.)

    Atkins, Ronald (Preston, N.)

    Blackburn, F.

    Buchan, Norman

    Atkinson, Norman (Tottenham)

    Blenkinsop, Arthur

    Buchanan, Richard (G'gow, Sp'burn)

    Bagier, Gordon A. T.

    Boardman, H.

    Callaghan, Rt. Hn. James

    Barnes, Michael

    Booth, Albert

    Cant, R. B.

    Barnett, Joel

    Boston, Terence

    Carmichael, Neil

    Carter-Jones, Lewis

    Heffer, Eric S.

    Moyle, Roland

    Concannon, J. D.

    Henig, Stanley

    Murray, Albert

    Conlan, Bernard

    Hooley, Frank

    Oakes, Gordon

    Craddock, George (Bradford, S.)

    Homer, John

    Ogden, Erie

    Crawshaw, Richard

    Houghton, Rt. Hn. Douglas

    O'Malley, Brian

    Crosland, Rt. Hn. Anthony

    Howarth, Robert (Bolton, E.)

    Orme, Stanley

    Dalyell, Tam

    Howie, W.

    Oswald, Thomas

    Davidson, Arthur (Accrington)

    Hoy, James

    Owen, Dr. David (Plymouth, S'tn)

    Davidson,James(Aberdeenshire, W.)

    Hughes, Emrys (Ayrshire, S.)

    Palmer, Arthur

    Davies, G. Elfed (Rhondda, E.)

    Hughes, Roy (Newport)

    Pardoe, J.

    Davies, Robert (Cambridge)

    Hunter, Adam

    Park, Trevor

    Dempsey, James

    Hynd, John

    Pentland, Norman

    Dewar, Donald

    Jackson, Colin (B'h'se & Spenb'gh)

    Perry, Ernest G. (Battersea, S.)

    Diamond, Rt. Hn. John

    Johnston, Russell (Inverness)

    Perry, George H. (Nottingham, s.)

    Dickens, James

    Jones, Dan (Burnley)

    Price, Christopher (Perry Barr)

    Dobson, Ray

    Judd, Frank

    Price, William (Rugby)

    Doig, Peter

    Kelley, Richard

    Reynolds, G. W.

    Dunn, James A.

    Kenyon, Clifford

    Richard, Ivor

    Dunwoody, Mrs. Gwyneth (Exeter)

    Leadbitter, Ted

    Robinson, W. 0. J. (Walth'stow, E.)

    Dunwoody, Dr. John (F'th & C'b'e)

    Ledger, Ron

    Rodgers, William (Stockton)

    Eadie, Alex

    Lever, L. M. (Ardwick)

    Roebuck, Roy

    Edelman, Maurice

    Lewie, Ron (Carlisle)

    Rose, Paul

    Edwards, Robert (Bilston)

    Lomas, Kenneth

    Rowlands, E. (Cardiff, N.)

    Edwards, William (Merioneth)

    Luard, Evan

    Sheldon, Robert

    Ellis, John

    Lubbook, Eric

    Silkin, John (Deptford)

    Ensor, David

    Lyons, Edward (Bradford, E.)

    Slater, Joseph

    Evans, loan L. (Birm'h'm, Yardley)

    Mahon, Dr. J. Dickson

    Steel, David (Roxburgh)

    Faulds, Andrew

    MacColl, James

    Summerskill, Hn. Dr. Shirley

    Fitch, Alan (Wigan)

    MacDermot, Niall

    Swingler, Stephen

    Fletcher, Raymond (Ilkeston)

    Macdonald, A. H.

    Taverne, Dick

    Fletcher, Ted (Darlington)

    McKay, Mrs. Margaret

    Thorpe, Jeremy

    Floud, Bernard

    Mackenzie, Alasdair(Ross&Crom'ty)

    Tinn, James

    Foot, Michael (Ebbw Vale)

    Mackenzie, Gregor (Rutherglen)

    Varley, Eric G.

    Forrester, John

    McMillan, Tom (Glasgow, C.)

    Wainwright, Edwin (Dearne Valley)

    Fowler, Gerry

    McNamara, J. Kevin

    Walker, Harold (Doncaster)

    Fraser, John (Norwood)

    Mahon, Peter (Preston, S.)

    Watkins, David (Consett)

    Fraser, Rt. Hn. Tom (Hamilton)

    Mahon, Simon (Bootle)

    Wellbeloved, James

    Gardner, A J.

    Mallalieu,J.P.W.(Huddersfield,E.)

    Williams, Alan Lee (Hornchurch)

    Garrett, w. E.

    Manuel, Archie

    Williams, Clifford (Abertillery)

    Garrow, Alex

    Mapp, Charles

    Wilson, William (Coventry, S.)

    Gourlay, Harry

    Marquand, David

    Winnick, David

    Griffiths, David (Rother Valley)

    Mayhew, Christopher

    Winstanley, Dr. M. P.

    Griffiths, Will (Exchange)

    Mendelson, J. J.

    Winterbottom, R. E.

    Grimond, Rt. Hn. J.

    Mikardo, Ian

    Woodburn, Rt. Hn. A.

    Hale, Leslie (Oldham, W.)

    Miller, Dr. M. S.

    Yates, Victor

    Hamilton, James (Bothwell)

    Mitchell, R. C. (S'th'pton, Test)

    Hannan, William

    Molloy, William

    TELLERS FOR THE AYES:

    Hattersley, Roy

    Morgan, Elystan (Cardiganshire)

    Mr. Neil McBride and

    Hazell, Bert

    Morris, Charies R. (Openshaw)

    Mr. Joseph Harper.

    NOES

    Alison, Michael (Barkston Ash)

    Fortescue, Tim

    Maude, Angus

    Allason, James (Hemel Hempstead)

    Fraser, Rt.Hn.Hugh(St'fford & Stone)

    Maxwell-Hysiop, R. J.

    Atkins, Humphrey (M't'n & M'd'n)

    Glover, Sir Douglas

    Maydon, Lt.-Cmdr. S. L. C.

    Awdry, Daniel

    Glyn, Sir Richard

    Mills, Peter (Torrington)

    Baker, W. H. K.

    Gower, Raymond

    Mills, stratton (Belfast, N.)

    Balniel, Lord

    Grant, Anthony

    Miscampbell, Norman

    Batsford, Brian

    Grieve, Percy

    Monro, Hector

    Bennett, Sir Frederic (Torquay)

    Griffiths, Eldon (Bury St. Edmunds)

    More, Jasper

    Biffen, John

    Gurden, Harold

    Morrison, Charles (Devizes)

    Biggs-Davison, John

    Hall, John (Wycombe)

    Murton, Oscar

    Black, Sir Cyril

    Hall-Davis, A. G. F.

    Nabarro, Sir Gerald

    Blaker, Peter

    Harvie Anderson, Miss

    Noble, Rt. Hn. Michael

    Brewis, John

    Hawkins, Paul

    Nott, John

    Brinton, Sir Tatton

    Heald, Rt. Hn. Sir Lionel

    Onslow, Cranley

    Brown, Sir Edward (Bath)

    Higgins, Terence L.

    Orr, Capt. L. P. S.

    Bruce-Gardyne, J.

    Hiley, Joseph

    Osborn, John (Hallam)

    Buchanan-Smith, Alick (Angus, N&M)

    Hill, J. E. B.

    Page, Graham (Crosby)

    Clegg, Walter

    Hirst, Geoffrey

    Pearson, Sir Frank (Clitheroe)

    Cooke, Robert

    Holland, Philip

    Peel, John

    Corfield, F. V.

    Hunt, John

    Percival, Ian

    Crawley, Aldan

    Jenkin, Patrick (Woodford)

    Peyton, John

    Crosthwaite-Eyre, Sir Oliver

    Johnson Smith, G. (E. Grinstead)

    Pike, Miss Mervyn

    Crouch, David

    Jopling, Michael

    Pink, R. Bonner

    Crowder, F. P.

    Kitson, Timothy

    Pounder, Rafton

    Currie, G. B, H.

    Lancaster, Col. C, G.

    Pym, Francis

    Dean, Paul (Somerset, N.)

    Legge-Bourke, Sir Harry

    Ridley, Hn. Nicholas

    Deedes, Rt. Hn. W. F. (Ashford)

    Lewis, Kenneth (Rutland)

    Ridsdale, Julian

    Eden, Sir John

    Lloyd, Ian (P'tsm'th, Langstone)

    Rossi, Hugh (Hornsey)

    Elliot, Capt. Walter (Carshalton)

    Loveys, W. H.

    Scott, Nicholas

    Farr, John

    Macleod, Rt. Hn. Iain

    Shaw, Michael (Sc'b'gh & Whitby)

    Fisher, Nigel

    Maddan, Martin

    Sinclair, Sir George

    Fletcher-Cooke, Charles

    454

    455

    Smith, John

    Ward, Dame Irene

    Wolrige-Gordon, Patrick

    Taylor, Edward M.(G'gow,Cathcart)

    Weatherill, Bernard

    Woodnutt, Mark

    Thatcher, Mrs. Margaret

    Webster, David

    Younger, Hn. George

    Van Straubenzee, W. R.

    Wells, John (Maidstone)

    TELLERS FOR THE NOES:

    Walker, Peter (Worcester)

    Whitelaw, William

    Mr. R. W. Elliott and

    Wall, Patrick

    Wilson, Geoffrey (Truro)

    Mr. Reginald Eyre.

    Mr. Iain Macleod: I beg to move,
    That the Chairman do report Progress and ask leave to sit again.
    Hon. Members: Hear, hear.
    Mr. Macleod: Before my hon. Friends get too excited about that, I have moved this Motion just to ascertain the intentions of the Chancellor of the Exchequer. We have had some excellent debates. This is an important Clause and so is the next. After that, we may go a little more swiftly, but I always like to know where the finishing post is, even if it is some distance ahead. I therefore suggest that it might be convenient if we finish with Part III, which would be Clause 32, and not embark on the Amendments to Clause 33, the abolition of investment allowances, tonight.
    Mr. Callaghan: I am much obliged to the right hon. Gentleman for giving me an opportunity to say what is in my mind. I thank the Committee for the progress which has been made today. We have had good and well-conducted debates and much progress has been made. As hon. Members will appreciate, there is a great deal still to do. I am in the Committee's hands because the Committee can go as fast, or as slowly, as it chooses, but I ask for the co-operation of hon. Members in going rather further tonight.
    I understood the right hon. Gentleman to say that Clauses 26 and 27 were important. I entirely agree. If we can get to the end of Part III, to Clause 32, I would feel that we had done more than a fair day's work and would be happy to accept, or myself to move a motion to report Progress.
    Mr. Iain Macleod: I am grateful to the right hon. Gentleman and beg to ask leave to withdraw the Motion.
    Motion, by leave, withdrawn.
    Mr. Patrick Jenkin: I beg to move Amendment No. 140, in page 26, line 17, after "group", to insert:
    "in so far as such dividend is paid out of profits which have borne corporation tax and provided that where the first mentioned company has one or more subsidiary companies
    456
    then that company's one-year surplus shall be reduced by the amount of any undistributed profits of those subsidiary companies earned prior to 6th April 1966 which have borne corporation tax".
    The Deputy Chairman: With this Amendment we can discuss Amendment No. 196, in page 26, line 17, after "group", insert:
    "in so far as such dividend is paid out of profits which have borne corporation tax".
    and Amendment No. 141, in page 26, leave out lines 27 and 28 and insert:
    (c) to the extent that a member of a group of companies has received a dividend from another member of the group and such dividend has been paid out of income which has been included in ascertaining under section 85 of the Finance Act 1965 the one-year surplus of that other member of the group, such dividend shall be excluded from income taken into account in ascertaining the one-year surplus of the first mentioned company.
    Mr. Jenkin: Although the Amendment stands on the Notice Paper in the names of some of my hon. Friends, they have agreed to my moving it from the Dispatch Box. We are still on a subject which I am sure will be dear to the hearts of all hon. Members—the notional surplus of income. If their experiences are anything like mine, they will finish every year with a notional surplus of income. This Amendment is directed to the point that Clause 26, in removing much of the relief of the one-year and three-year surpluses from groups of companies, has gone rather further than the intention warrants.
    The original object of the Section, and it is worth while looking at it again, was referred to on 22nd June, when the Chief Secretary said:
    "… there should be taken into account the tax which had already been paid on the body of profits out of which, in effect, the dividend was being declared."—[OFFICIAL REPORT, 22nd June, 1965; Vol. 714, c. 1582.]
    This is, broadly, the point of Section 85. In other words, if dividends come from profits which have borne Corporation Tax, and not profits tax, then, and only then, should they be excluded under Clause 26(1). This was confirmed by the

    457
    Chancellor in his Budget Statement on 3rd May, when he said:
    "… the real position being that the subsidiaries which paid the dividends had paid only Corporation Tax on their 1965–66 profits." —[OFFICIAL REPORT, 3rd May, 1966; Vol. 728, c 1450.]
    That was the justification upon which he relied for introducing Clause 26, as we now have it, withdrawing the one and three-year surpluses. The Chancellor intends to exclude from the relief given last year cases where the dividends come out of the subsidiary's profits which have borne Corporation Tax. That is the purpose of this Amendment. The Section has gone too far; it makes no distinction between the profits of the subsidiaries which have borne Corporation Tax and that part of any profits which were pre-Corporation Tax and had not borne the Tax.
    The Amendment, and the alternative to it, Amendment No. 196, is aimed at limiting Clause 26 to the actual point covered by the Chancellor, namely, that only if the dividends are paid by subsidiaries, out of profits which have borne Corporation Tax, will they be excluded by Clause 26. If the dividends have been paid out of the profits which did not bear Corporation Tax, but bore the Income Tax and Profits Tax under the previous system, then it seems that the relief ought still to be maintained. Whether it ought to have been maintained if the Section had been properly drafted last year may be arguable. In the circumstances, the relief having been promised, it is right that the withdrawal of the relief should be limited to the point mentioned by the Chancellor.
    The purpose of Amendment No. 141 is to prevent the multiplication of reliefs. If one gives relief to all companies, when there is a chain of companies, the thing can be multiplied over and over again and the purpose of this Amendment is to make sure that the relief is given only to the first company.
    It is impossible, as I am sure the Chief Secretary will recognise, to attempt to assess the cost of limiting the withdrawal of the relief in this way, but the language used by the Chancellor in his Budget statement—obviously, it was most carefully considered—referring to the fact that the profits of the subsidiaries would have borne Corporation Tax, leads us to
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    believe that it is the intenion of the Government to withdraw relief only where dividends have come out of what I might call, briefly, Corporation Tax profits. This must leave untouched the vast majority of the cases where the relief is withdrawn by Clause 26. I should have thought, therefore, that the net cost of this was marginal bearing in mind the circumstances in which the Clause is introduced in the first place and the intention of the Chancellor.
    I hope that the Chief Secretary will be able to accept the Amendment.
    12 p.m.
    Mr. John Biffen: In the debates on last year's Bill the Chief Secretary said that, after the Corporation Tax, taxation would be simplicity itself. Those words were not believed on this side of the Committee on that occasion, and the fact that we have put down such Amendments as these is witness that we were right in our scepticism. I think that we shall be equally right in doubting the words of the Chief Secretary only a few moments ago, when he said that the Government had been successful to an amazing extent in getting everything right. I took down those words, because I was rather dumbfounded by the omniscience claimed by the right hon. Gentleman.
    It seems to me that we are now moving from controversy, because, after the Division that we have just had, my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) is holding out a hand of reconciliation. All that the Chief Secretary has to do is to accept the Amendment, which I very much hope that he will.
    I am prepared to accept that the relief that the Chancellor offered last year under Section 85 of the Finance Act has proved too wide, and I think that there would probably be a general view on that throughout the Committee. But it seems that the Chancellor has now, under Clause 26 as now drawn, excluded dividends from subsidiaries from the scope of the relief. This is not fair where the dividends come from profits that have borne Income Tax and Profits Tax.
    While it might be proper to exclude from the one-year surplus dividends which came from profits which suffered only Corporation Tax and dividends

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    which could have been paid out of profits which suffered only Corporation Tax, it is somewhat unfair to do as as the Chancellor now proposes. Therefore, I very much hope that the Chief Secretary will be able to accept the Amendment.
    Mr. Diamond: I hope that the Committee will shortly understand, when I have said a few words of explanation, why I cannot recommend the Amendment. The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) was absolutely right up to a point. He was absolutely right in explaining the essential basis of this limitation of relief, namely, that relief should be given where tax was going to be paid in excess of what was intended. Under the old system two taxes were paid, under Profits Tax and Income Tax. Under the new system two taxes are to be paid, Corporation Tax and Schedule F Income Tax. Under neither arrangement would it be right that three taxes should be paid.
    If there were no relief, there could be a situation under which two taxes were paid, namely, Income Tax and Profits Tax, and then Schedule F tax was paid when the dividends were distributed—a total of three taxes. These are different taxes, and the rates are different. I am, perhaps, over-simplifying the matter, but for purposes like this I should, perhaps, be forgiven for attempting over-simplification in an over-complicated field.
    The hon. Member for Wanstead and Woodford was absolutely right in saying that one either pays two taxes under the old system or two under the new system. But it was not intended that one should pay three taxes, and, therefore, appropriate relief was given so as to reduce the burden approximately to two taxes. This is quite right, he says. It is what was called the one-year surplus relief. Therefore, he argues, when one has paid two taxes prior to the year 1965–66, why not take them into account in giving relief subsequently under the new system? That is the point.
    In respect of dividends arising from profits prior to the 6th April, 1965, and passed from the subsidiary to the parent company, why should one not have the
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    relief which one would expect on those profits which have borne two taxes and are now, when distributed by the parent company, to bear a third tax?
    Mr. Patrick Jenkin: My point is that the two taxes which those profits would have borne would have been Corporation Tax, because the subsidiaries are within the charge to Corporation Tax in 1965–66, and Income Tax on the dividends going to from the parent. The relevant two taxes in this case are Corporation Tax and Schedule F Income Tax, and it is these to which the Amendment is directed.
    Mr. Diamond: I think that we are on the same point. Shortly, the hon. Gentleman is asking me why the relief is not given in respect of income arising before 6th April, 1965, income which has borne its duty and is now to be called upon to bear duty again.
    The answer is that it was never intended that the one-year surplus relief should be calculated in any other way than it has been calculated. To go back one stage, when starting a new tax, one has to have a point of demarcation. But it is right that there should be a transitional relief so that (a) one does not put too big a burden on the company which would otherwise be called upon to bear three taxes, and (b) one does not deny a normal return to the Inland Revenue. If there were no point of demarcation, the loss of revenue would be quite considerable because, for a long time, one would continue to say that these dividends came out of profits which had borne two taxes and should not, therefore, bear the third tax.
    I repeat that the argument is perfectly solid so long as it refers to the one-year surplus, so long as one does not carry back more than one year. But, once one goes back more than one year, one gets outside the intention of the one-year surplus relief, and it matters not what tax has been borne by the income in the period prior to 6th April, 1965, because that is easily taken into account in the calculation of the one-year surplus relief. I hope that I have clarified the matter as much as one can. At least, I have tried to do so.
    I have met the hon. Gentleman's point and said that there would be a case for

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    giving relief if one were going back further than one year. But one is not doing that. There are two types of relief, as the Committee knows, either the three-year surplus relief, which is looking forward, or the one-year relief, which is looking back one year. But in no case does one go back prior to 6th April, 1965. Otherwise, one could go back endlessly and, in short, could maintain that the whole tax reserves of a company could be used for paying dividends to shareholders without accounting for Schedule F Income Tax. It would in some cases be years and years, and in the average case quite a long time, having regard to the size of most companies' tax reserves, before any money would be flowing into the Revenue at all.
    Mr. Patrick Jenkin: I am quite sure that the Chief Secretary is not attempting to tell the Committee that that would be the effect of the Amendment. Manifestly, that is not so. I am not at all sure that he is seized of the point of the Amendment. I appreciate that he was working carefully to his brief, and so am I, but I happen to have written mine, which is probably more than he can say.
    The point is that a subsidiary is within the charge of Corporation Tax. Section 46(1) of last year's Finance Act refers to the financial years 1964 and 1965, that is, as the Chief Secretary will appreciate in 1964, which is the year ended March 1965, and, correspondingly, 1965 is the year ending in March 1966. Corporation Tax will actually be payable though nine months after the end of the accounting year. Nevertheless, the profits earned in that year are subject to the Corporation Tax.
    That was why I tried to intervene to insist that the circumstances in which it was unjust that the one-year surplus relief should be withdrawn are where the profits of the subsidiary have not borne Corporation Tax. In other words, it is only to the extent that the dividend has been declared out of profits which have borne Corporation Tax that it is right that the relief should be withdrawn. That is what the Chancellor's statement was all about.
    The passage which I read in my opening speech on the Amendment referred to the fact that profits of the subsidiaries had borne Corporation Tax. Of course,
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    we are not asking—and it would be entirely unreal to ask, on a change in the pattern of a tax of this sort—that one should empty the whole of the tank of the profits which have borne Income Tax and Profits Tax before one begins to regard the profits as profits on which it would be right to deduct Schedule F tax from the dividends. That would be quite wrong.
    The whole pattern of Section 26 is, broadly, that dividends are deemed to be declared out of profits which have borne Corporation Tax unless there are not enough of such profits available. Roughly, that is the position; when that overflows, one is then deemed to draw on profits which have borne Income Tax, but not Corporation Tax. Therefore, the point of the Amendment is quite simple and can be summed up in the terms of Amendment No. 196:
    "in so far as such dividend is paid out of profits which have borne corporation tax"
    This would seem to be all that is necessary in the way of the withdrawal of the relief to meet the Chancellor's intentions. If Clause 26 stands unamended, a greater relief is being withdrawn than was intended. The pendulum will have swung too far back. I did not attempt to argue in the last debate that we were voting to keep Section 85 as at present drawn. We were voting against the way the matter was handled. We recognise that it is necessary to protect the Revenue in view of the size of the sums involved.
    If the Chief Secretary refuses to accept this Amendment, and I understand that he will, he is going further than the Chancellor said in his Budget statement was required. I would be grateful if the right hon. Gentleman would look at this again.
    12.15 a.m.
    Mr. Diamond: The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) described his Amendment as the simplest possible Amendment. I do not know whether that was an absolutely accurate description. I could think of simpler Amendments. It may be that the Amendment does not clearly express the intention behind it. It may be more likely that I have not fully understood what the hon. Member intended to propose in

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    his Amendment. I studied the Amendment carefully and I think that I understood it. I have explained why I could not recommend the Committee to accept it.
    The hon. Member is, clearly, not happy that I fully understood the Amendment. In those circumstances, I would be grateful if he would give me the opportunity of considering both the Amendment and his words with more care to make sure that I have fully understood it. If I have, there will be nothing more to do about it. If, on the other hand, I have not fully understood it and there was something in it which could be expressed differently and which the Government would like to see incorporated in the legislation, naturally there will be a later opportunity for dealing with it.
    I do not believe that to be the case. I do not believe, therefore, that the Government will need to trouble the House with this issue again—that is, assuming that the Amendment is not accepted. The hon. Member has, however, invited me to give the matter more careful consideration, and I will be glad to do so.
    Mr. Patrick Jenkin: I am extremely grateful to the Chief Secretary, who has taken a reasonable attitude. It is a highly complex matter and it is difficult to deal with these matters on the Floor of the Committee in this way. I believe that there is a point of substance. I do not say that the right hon. Gentleman should necessarily examine what I have said, because I am certain that that would merely make confusion worse confounded, but, if his advisers can examine what would be the effect of the Amendment in relation to the passage of the Chancellor's Budget statement which I have read, I think that it will be seen that there is a point at issue.
    However, the right hon. Gentleman has undertaken to consider the matter. We will, therefore, have another opportunity to deal with it on Report. If the Chancellor has not tabled an Amendment, we will do so ourselves. In those circumstances, I beg to ask leave to withdraw the Amendment.
    Amendment, by leave, withdrawn
    Mr. Diamond: I beg to move Amendment No. 254, in page 27, line 8, at the end to insert:
    (4) The one year surplus of a company carrying on life assurance business shall be computed without regard to any such part of dividends or other income from investments held in connection with its life assurance business as belongs or is allocated to, or is, reserved for, or expended on behalf of, policy holders, and without regard to the tax on such part of such income.
    The purpose of the Amendment is to prevent life assurance companies from being able to claim excessive one-year surplus relief. Life offices have large investment income and only a small fraction, often about 10 per cent., goes to the shareholders. A life office might have a claim that the whole of the investment income should be taken into account for the purpose of computing its one-year surplus.
    I hope I have made it clear that a life office might make that claim. No life office has claimed it; no life office has indicated that it would claim it, but one must get the law absolutely right. One has, therefore, to remove a possible loophole, even though nobody had the slightest idea of going through it. It is to remove that possibility and to make it absolutely clear that what everybody intends is expressed in the Act that I hope that the Committee will be good enough to accept this short Amendment.
    Amendment agreed to.
    Mr. Patrick Jenkin: I beg to move Amendment No. 7, in page 27, line 9, to leave out from the beginning to the end of line 20, and to insert:
    "This section shall have effect as if it".
    The Chairman: With this Amendment we can discuss also Amendment No. 8, in line 10, leave out "the said section 85" and insert: "section 85 of the Finance Act 1965".
    Mr. Jenkin: Yes, Sir Eric.
    We have already discussed and voted upon the question of the withdrawal of the one-year surplus relief for groups of companies. These two Amendments, and a number of consequential Amendments to the Sixth Schedule which have not been selected, were directed to the withdrawal of the relief of the three-year surplus. The point of Amendment No. 7 is to say that from the figures which the

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    Chancellor has given, and to which a gloss has been added tonight by the Chief Secretary, it appears that the bulk of the cost of the miscalculation that was made last year is attributable to the one-year surplus.
    A number of companies have made fairly major company reconstructions to be able to qualify for the three-year surplus. In those circumstances, it may well be right that, even though the one-year surplus relief has been withdrawn, the three-year surplus which is calculated on a different basis should still be retained. I will not attempt to explain how the three-year surplus is calculated. By common consent, and talking to those who have concerned themselves with it, it is so complicated that no one really understands it, and the textbooks do not attempt to work out examples, because their authors do not believe that there is any great point to it at present. Nevertheless, it could have some value to companies in those circumstances. It may be wrong to withdraw it from groups of companies, even though it may be right to withdraw the one-year surplus relief.
    I should be glad if the Chief Secretary could explain to the Commitee why it is necessary to withdraw both the one-year surplus relief and the three-year surplus relief.
    Mr. Diamond: Possibly the best method of dealing with the problem would be for me to write to the hon. Gentleman, or have a word with him if he has anxieties about it. As he says, it is an extraordinarily complicated situation.
    We cannot accept the Amendment. The explanation is a very long one and would be boring to the Committee. The hon. Gentleman can rest assured that we would take not the slightest advantage in any procedural sense of dealing with it in that way. I would be happy to discuss the matter with him fully if he was dissatisfied, to make sure that he had adequate opportunity of dealing with the matter in Committee or at a later stage, if he wanted to do so.
    Mr. Patrick Jenkin: The Chief Secretary has made an offer. It is a highly complex matter. Large numbers of my right hon. and hon. Friends are waiting to speak in debates on other matters, and it would be wrong to continue these
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    proceedings. I should be happy to take advantage of his offer.
    Mr. Peyton: The Chief Secretary has made a forthcoming offer to discuss the subject with my hon. Friend. That is all very well so far as it goes. It is rather a novel situation that the Committee should be by-passed completely while an important, if complex, matter is discussed between the right hon. Gentleman and my hon. Friend. I am casting no aspersions on either the integrity of the Chief Secretary or the ability of my hon. Friend, both of which I acknowledge. But it is a rather odd position if we are to get into the habit, in Committee on the Finance Bill, of relegating matters to private discussion between the two Front Benches.
    If there is to be such private discussion—[Interruption.] If my hon Friend the Member for Worcestershire, South (Sir G. Nabarro) would pause for a moment, I should like to go on. What I am seeking to find out is, if discussions should take place privately between the right hon. Gentleman and my hon. Friend, at what later stage is the Committee—I do not refer to the Report stage—to have an opportunity of hearing the consummation of their deliberations.
    Mr. Diamond: It is an unusual suggestion that I make. I had hoped that I was making it for the convenience of the Committee. It is a highly technical matter about which the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) wanted to be wholly- satisfied, and I did not think that every right hon. and hon. Gentleman opposite was burning to make a speech on the point. I did not know that they felt all that deeply.
    I hope that I made it clear that I was leaving it entirely to the discretion of the representative of the Opposition that we would afford any appropriate facility for discussion of the matter in public, if that was felt necessary.
    I hope that that meets the point of the hon. Member for Yeovil (Mr. Peyton).
    Sir D. Glover: I rise to support my hon. Friend the Member for Yeovil (Mr. Peyton). While I appreciate that my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and

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    the right hon. Gentleman are entering into a private arrangement purely for the convenience of the Committee, will their deliberations ever appear in print for the use of this or of subsequent Committees?
    It may well be that this matter could arise on the Finance Bill next year, and that, therefore, there would be only two hon. Members of this Committee who would have knowledge of what transpired, whereas quite a lot of other hon. and right hon. Gentlemen in the Committee next year might want to have the arguments adduced by my hon. Friend to convince the right hon. Gentleman, but these would not be available to them.
    Perhaps there is some way this can be put on the record. I would be satisfied if it were on Report, but as it is part of our debate on this Clause I think that some way ought to be found to get it on the record so that it is available to the whole Committee and not just to two Members.
    Mr. Diamond: I do recognise the hon. Gentleman's intense and natural interest in this topic. I was going to say that, having regard to that long-standing interest, I would be glad to write him a letter setting it all out. But he makes the more important point that this ought to be on the record for the benefit of any member of the public who wants to enjoy a night's light reading before going to bed. I will, therefore, not exclude the possibility of it being put on the record for that purpose.
    Mr. Peyton: I am not for one moment being hypercritical about this, and I hope the right hon. Gentleman will not overrate my ardour to take part in these matters. I do not find the endless details of this argument interesting at all. I find them undigestible and quite beastly —of this I am quite certain.
    But the point I am trying to make— and it is a perfectly genuine one—is that the argument should be publicly conducted and known and that the Government should stand committed publicly to a viewpoint. Charitably disposed as I am to the right hon. Gentleman, I am not disposed, in view of the record of the Government which he has the misfortune to support, to go too far along
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    this road to credit the Government's arguments always with that degree of trustworthiness that they can be taken for granted without being placed firmly on the record so that the more pertinacious members of the public, who really have a passion for punishment, can digest these beastly things.
    Amendment, by leave, withdrawn.
    Mr. Ian Lloyd: I beg to move Amendment No. 142, in page 27, line 21, at the end to add:
    (5) In arriving at the amounts of profits tax and income to be taken into account under subsection 3(a) and (b) 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 be deemed to have been first applied in reducing the amount of income tax chargeable in respect of the income and the profits tax and income tax charged shall be deemed to be adjusted accordingly.
    I am reluctant to bring the Committee back from a rather pleasant interlude of general principle to one of finite particular. Perhaps it was due both to the lateness of the hour and the fallibility of my memory—and there may well be some correlation between the two—that I had to ask the hon. Gentleman the Member for Oswestry (Mr. Biffen), a moment ago, to inform me whether it was Shaw or Dr. Johnson who coined the phrase that patriotism was the last refuge of scoundrels.
    Actually, it was Dr. Johnson. But Shaw was a much more contemporary man and had he been in the Chamber this evening I am sure he would have suggested the conclusion that taxation and its language is, indeed, the first refuge of the new school men. We no longer debate how many angels can balance on the point of a needle. What we do debate at very great length and in very great detail is how many unforeseen consequences can be anticipated from a fiscal measure. It is one unforeseen consequence of this character that I would like to refer the Committee to this evening.
    12.30 a.m.
    The Amendment refers to the one-year surplus provisions of Section 85 of the

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    1965 Act. As I understand it, and I do not pretend that my understanding is complete, the intention of that section is to give relief for the difference between Income Tax plus Profits Tax at combined rates of 56¼ per cent, and the 40 per cent, which would have been payable had the income concerned been charged to Corporation Tax.
    As drafted, the Clause discriminates against overseas income as distinct from United Kingdom domestic income. Under the 1952 Income Tax Act, double taxation relief has first to be applied against Profits Tax, and this has the effect of reducing the 15 per cent. Profits Tax component of the one-year surplus credit. The net result of this is that only a fraction of the 1·25 per cent. Income Tax element is available as transitional relief.
    All that the Amendment seeks to achieve is to bring the Profits Tax base on which the relief is calculated for overseas income into line with that for United Kingdom domestic income, and the method chosen is to provide that for this purpose, and this purpose alone, double taxation relief should first be set against Income Tax.
    The Chancellor has frequently suggested that he holds overseas income in great favour, that he does not propose to discriminate against it, and that these measures are not intended to discriminate against it. I think that this is a good opportunity for him to demonstrate his good faith on this point.
    Mr. Diamond: The Amendment is not clear, if the hon. Gentleman will forgive my using those words, but what he is referring to is quite clear. The Amendment is concerned with the details of the calculation of the one-year surplus relief, and it is concerned with it in the case where credit has been allowed for overseas tax against United Kingdom tax under a double taxation agreement, or unilaterally, and I gather that it is intended to change the provision in the company's favour.
    The Amendment is defective in several ways. One defect is that it starts by saying:
    "In arriving at the amounts of profits tax and income to be taken into account …"
    I do not know whether the hon. Gentleman can help me here and now, but I take it that he means Income Tax, and
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    not income, and that the word "tax" has been erroneously left out of the Amendment.
    The Amendment is clearly defective in that respect, and in other respects; but the hon. Gentleman is right in saying that the Chancellor and the Government have always had every desire to help the shipping industry where help is appropriate. I think that the best way of dealing with this matter is to ask the hon. Gentleman to allow me to study the proposal in the way that he has spoken to it, to see whether at a later stage I can put down some words which will meet the point which lies under the surface of the Amendment.
    I am sure that the hon. Gentleman will not misunderstand me. The Amendment serves a valuable purpose. It advises the Government of the point which the hon. Gentleman has in mind, and I am sure that we will be only too glad to try to devise some form of words which will be helpful, although not necessarily going as far as the hon. Gentleman would want to go.
    Mr. Lloyd: I am obliged to the Financial Chief Secretary, and beg to ask leave to withdraw the Amendment.
    Amendment, by leave, withdrawn.
    Question proposed, That the Clause, as amended, stand part of the Bill.
    Mr. Patrick Jenkin: There is a small point of detail in the Clause which concerns me. The Chancellor has righdy, when making this change in the law, and withdrawing the relief, made an exclusion for dividends declared up to the date of his statement on Budget day. Rather surprisingly, however, the Bill implies that the dividends should have been publicly announced. In relation to dividends declared by subsidiaries to their parents the process of public announcement is a strange one.
    The usual pattern is that the managers of the subsidiary write to the parent and say, "How much do you want?" and the parent says how much, because the whole matter is within the control of the group. At the next convenient board meeting, if necessary, a resolution is passed and subsequently confirmed at an annual general meeting which may be very much a formality. A public announcement, in the sense in which it

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    would be appropriate to a public company, has no relevance in this case.
    I am sure that it is not the intention of the Clause that it should be limited to subsidiaries which have for some reason to make a public announcement about their dividends. This might be looked at again, possibly with a view to putting in a definition of a public announcement or finding some other phrase which would be satisfactory. We know what is meant. It is a case of a company being committed to pay a dividend, and if it is a public company, a public announcement is appropriate. It is right that they should be excluded from the withdrawal of relief.
    But that would not apply to a subsidiary company. This is a point which should be considered between now and Report.
    Mr. Diamond: The hon. Member has asked a fair question, whether we have the circumstances right under which a commitment can be demonstrated with regard to a subsidiary declaring its dividend. It would be one of the family, as it were, and would not normally use any formal method of making this plain. We shall certainly look at this again.
    Question put and agreed to.
    Clause, as amended, ordered to stand part of the Bill.

    Schedule 6.—(THREE-YEAR SURPLUS OF MEMBERS OF GROUPS OF COMPANIES.)
    Mr. MacDermot: I beg to move Amendment No. 244, in page 91, line 18, to leave out from "references" to the end of line 19 and to insert:
    "to a part of the reduction which bears to the whole the same proportion as the amount of that other member's dividends at paragraph (a) of the said section 85(6) paid to the company bears to all those dividends except for any paid to persons who are not members of the group of companies."
    This Amendment corrects an error in one of the fractional calculations in Schedule 6, concerned with the three-year surplus relief. Paragraph 1 of the Schedule reduces a subsidiary company's three-year surplus relief on the amount of dividends which it passes to other companies in the group. Paragraph 2 is designed to make available to the parent or other group company its appropriate share of the amount of the reduction suffered by the subsidiary.
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    However, as sub-paragraph (2) is worded, it fails to produce this result if there are minority shareholders outside the group. All that is required is a form of words excluding dividends to subsidiaries on this point and this is what the Amendment provides.
    Mr. Patrick Jenkin: I would say to my hon. Friends the Members for Ormskirk (Sir D. Glover) and Yeovil (Mr. Peyton) that the reason I acceded to the suggestion of the Chief Secretary on the question of the three-year surplus was that I should otherwise have had to try to understand paragraph 2 of the Sixth Schedule. I suggest that anyone who succeeded in understanding that paragraph would deserve to be promoted Senior Wrangler, as it is even more unintelligible than many of the paragraphs in the earlier Act. I take the point that it seems to be appropriate and we are happy to accept it.
    Mr. Peyton: The mere fact that a Clause or Schedule is an unpalatable mess is no reason why the Government should be relieved of the tedious and tiresome business of explaining it. Indeed, the nastier the Schedule the more ought the Government to explain it. The duty is on them. The more they are obliged to go through these measures, the more I hope that their successors will be warned by the ghastly experiences they have gone through in exposing What they have done to the public gaze, standing there and going into detail as to what they mean.
    I do not see that there is any accompanying obligation on the entire Committee to follow them through every detail of that tedious process, but, nevertheless, I believe that Governments are under such an obligation and, although I accept that it was my hon. Friend's modesty that led him to accept the suggestion which the Chief Secretary advanced, I emphasise that when Governments put forward these intolerable monsters they should go through the process of explaining what they mean.
    Amendment agreed to.
    Schedule, as amended, agreed to.

    Clause 27.—(REGISTERED FRIENDLY SOCIETIES CARRYING ON LIFE OR ENDOWMENT BUSINESS.)
    Mrs. Thatcher: I beg to move Amendment No. 197, in page 27, line 27, to

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    leave out from "Act" to the end of line 40.
    The Chairman: With this Amendment the Committee can discuss the Amendments No. 198, in page 27, line 41, leave out subsection (2); Amendment No. 199, in page 29, line 1, leave out subsection (5); and Amendment No. 200, in page 30, line 29, leave out subsection (9).
    Mrs. Thatcher: I am sorry that we should come to this rather important Clause so late at night, particularly as the Financial Secretary is looking a bit tired and jaded, but I hope that we shall, nevertheless, give the Clause and the Amendment full consideration.
    Friendly societies form part of the group of voluntary benefit and thrift societies which, in the past, have served this country extremely well and have provided much relief from poverty when no other relief was available. Their sphere of activity has decreased to some extent as State provision has increased, because the State provided a large number of the benefits which the Societies formerly provided.
    The insurance activities of the friendly societies have continued, but in spite of the tax exemption they enjoy, they have not increased as much as one would have expected. I find, in reading the various annual reports of the Registrar of Friendly Societies, that their number has decreased considerably and their funds have only just kept pace with falling money values. So, in spite of considerable tax exemptions, their business has not increased greatly and I feel that now is the time that they need an injection of fresh money, if they are to perform their important function in modern society. What has given rise to this Clause is the activities of the new societies which have recently been registered, like the M & G and Tyndall Societies, which, at first, extensively advertised single-premium policies.
    I turn to the analogy that I shall use to compare with the single-premium policies offered by the friendly societies. The analogy I use is that of National Savings. Every time there is a new issue of National Savings Certificates any person can buy up to £500 worth of the new issue, for himself and for each and every member of his family. The attrac-
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    tion of buying the full issue at once is, of course, that tax relief is given as a result of the National Savings Certificate system. If such relief or exemption were not given, I doubt very much whether so many people would invest in National Savings.
    I wish to make it clear that a man can buy the full issue immediately for himself and each member of his family. He can do that every time there is a new issue. He can, therefore, have a considerable number of what could be called single-premium policies throughout his life, ensuring that at any rate he gets £500 on maturity, with the extra amount on maturity tax free.
    12.45.a.m.
    I contrast that with the relief given in respect of friendly societies. A man can have only one policy of £500 from the aggregate of all societies. I regard this as an absolutely crucial point. He cannot, under any circumstances, go from one society to another and take out a fresh policy ensuring a further £500. In fact, a man gets far less tax-free benefit through a friendly society than he can get from National Savings.
    I suggest, therefore, that the Chancellor is saying, in effect, "I want savings. I do not mind single-premium policies as long as you get them through National Savings and as long as you do not therefore avail yourself of the benefits of private enterprise and sound investment advice." When one invests in National Savings one risks a possible fall in the value of money, a greater risk than if one invests through the kind of bond which the new friendly societies were offering. I stress that had it been the law that one could go from society to society taking out £500 in policies here and there, the position would have been somewhat different.
    The policies and bonds offered by these friendly societies were widely advertised, in The Times, the Observer, the Daily Mirror, the People —indeed, in newspapers of all kinds. I understand that they got a number of applications from their advertisements in each paper and I have some figures from the M & G. The largest premium that a person could pay at the outset was £338 which would mature over 10 years to a minimum of

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    £500. However, the average, in response to the advertisements, was about £240.
    An interesting fact is that there was no significant difference, considering that average premium, between those who replied to the advertisements in the Daily Mirror and the People and those who replied to the advertisements in the Sunday Times and the Observer. Some of the money came in by cheque and some by postal draft, but the average seemed to be about the same, regardless of the place where the scheme was advertised.
    This seems to indicate that there are many funds available for savings if the appropriate encouragement is given. I should have thought that this could, be a logical extension of the work of the friendly societies which could give a new emphasis to the thrift side of their functions and could be a way in which those societies could be modernised.
    It should not be thought that it is only large sums which these friendly societies were advertising for. The smallest premium or bond that one could subscribe for under the M & G scheme was 50 bonds at a cost of £23 to mature to £50 over a 20-year period. So small sums could be applied for just as much as the large single-premium policies.
    As the Chancellor of the Exchequer knows, the scheme had tremendous success. Indeed, I think it was its very success which has led to the Clause. Between 28th January and 3rd May, about 42,000 people had subscribed about £10 million for the M & G. This should have pleased the Chancellor, but I am beginning to believe that there is a great difference between the Government and the Opposition——
    Sir G. Nabarro: Thank goodness there is, too.
    Mrs. Thatcher: —in their attitude to savings. The Chancellor says that he believes in savings whereas we believe in savings. That is one of the differences. One of the important features of these savings was the large number of children for whom bonds were bought. It provided a method by which many people could readily save over a definite period for their children.
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    Undoubtedly, the success of these schemes led to the Clause, and the Clause has led to our Amendment. Let us have a quick look at what the Clause does and what our Amendment would do to mitigate the full effect of the Clause. The Clause does three things. It stops all single-premium policies on the part of all friendly societies. It then stops all modern policies—that is, all tax-exempt policies now allowed under Schedule 7 for the lately registered societies. It discriminates against the recently registered societies and does not permit them to carry on any tax-exempt business of a kind which they had ready.
    As the Financial Secretary knows, after the single-premium policies they were ready with annual premium policies; but it now looks as though, if the Clause goes through unamended, they will not be able to embark upon annual premium policies of the kind permitted by Schedule 7 and allowed for tax exemption.
    The third thing the Clause does is to stop the older societies from increasing their tax-exempt business. This is again very indicative of the fact that the Chancellor does not want much competition with National Savings. The only way a person will be able to save tax-free is through National Savings, and that is often not the best bargain which can be obtained. Many people would much prefer to invest where they get the benefit of excellent investment advice and a fairly wide spread of investment, as they would get through this method.
    I am very much against stopping single-premium policies, but even if the Chancellor agrees to them we are even more against discriminating against newly-registered friendly societies. These societies could give fresh life to the whole friendly society movement. I believe that they would inject fresh life into the older friendly societies. Indeed, it is noteworthy that the Ancient Order of Foresters, perhaps urged on by the new societies, also had schemes ready. Indeed, it had an advertisement in the early editions of an evening paper the day after the Budget. The advertisement was withdrawn by the time the later editions appeared. The newly registered societies could have acted as a great spur to the older societies and also have increased their business.

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    In addition to the discrimination aspect of the Clause, which we are firmly against, there is another aspect to which I must refer. Subsection (5) gives wider powers to the Registrar of Friendly Societies than I have seen extended to any person with regard to taxation. It gives him powers to withdraw tax exemption from a friendly society if he thinks that it has begun to carry on tax exempt or life endowment business on a large scale.
    What the Registrar has to do is to look at some of the older societies, and if they are trying to modernise and get extra savings and increase tax exempt business he has the freedom, although they are allowed to have tax exempt business, to withdraw the tax relief. It is outrageous to give such power under the fiscal system. If it were possible, one would like to express one's views on subsection (5) separately from the rest of the Clause.
    For these reasons, we are against what the Chancellor is doing. Bearing in mind that only one £500 can ever be taken, it would be as well if that were used as a method of encouraging savings. If the Chancellor has made up his mind not to allow single-premium policies, we would wish that the new friendly societies were able to carry on business under Schedule 7. We dislike the Registrar's having this very wide power.
    Mr. Pounder: I wish to concentrate my remarks on Amendments No. 197 and No. 199. My hon. Friend the Member for Finchley (Mrs. Thatcher) has covered the ground particularly well. There appears to be an extraordinary vendetta against the single-premium policy friendly societies. There are only six of them. It seems odd that what has proved to be a satisfactory form of saving should be undermined by this somewhat dictatorial Clause.
    Under Section 22(3) of the Finance Act, 1956, self-employed people were enabled to set up their own pension funds. The percentage of earnings which they were permitted to put into them was restricted to a total of 10 per cent. But because of considerable fluctuations from year to year in their earnings, it was not found possible for them to lay down a conventional insurance policy with a regular fixed annual premium. They were, quite fairly, allowed to take
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    account of the fluctuations by effecting single-premium policies. The Act expressly empowered friendly societies to engage in this business. Now, just because it has become fairly successful, the Government have decided to clamp down on it.
    It seems to be arbitrary to fix a date like this. It strikes only at six companies. It will facilitate the creation of a further monopolistic practice. The mere fact that there is a restriction of £500 not on one policy, but on an aggregation of all policies individually entered into—which, by their nature and size, benefit the family man—these might have been expected to strike a sympathetic chord in the mind of the Chancellor.
    1.0 a.m.
    The point which is perhaps in the Chancellor's mind, that this has been the means of avoiding paying substantial revenue to the Exchequer, is not, I think, a valid one, if one looks at the powers he is taking under subsection (5), since the Revenue will not be prejudiced in any way because the matter would be subject to the Chief Registrar's discretionary powers.
    If the Clause were to take account of those societies which were registered 100 or even 10 years ago it would not, perhaps, be so bad, but it strikes just at those formed eight years ago, and prevents them from competing on equal terms for further business. No one will dispute the right of the Chancellor, if he feels there has been substantial loss of revenue, to take remedial action, but this Clause is picking and choosing between certain societies, and not right across the board. It does seem to be particularly unfair that those new societies should be placed in a particularly disadvantageous position vis á vis the older societies.
    Subsection (5) contains, the Committee can probably say, and I certainly say, the most vicious phrase in the Bill, because here we are dealing with a situation where the Registrar has absolute powers to interfere if the business is progressing and I quote from the Clause
    "on an enlarged scale,"
    or
    "of a new character."
    If he feels it necessary for the protection of the Revenue, then, off his own bat, he can remove the society from the protection it has had. In this Committee we

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    take particular exception to the delegation of powers, and specially of those removed from Parliamentary control.
    By this Clause the Registrar can act retrospectively, if he so desires, without any control by this Committee, against a society and prevent it from carrying out its business, and simply by an expression of opinion that it is necessary for him to do so to pretect the Revenue. We are not dealing with a strictly legal issue, because the courts are naturally reluctant to interfere with any discretionary exercise of functions. Quite honestly, I regard this provision as tantamount to a return to the Star Chamber.
    Mr. Anthony Grant: I make no apology to the Financial Secretary for intervening in the debate, because this is a most important Amendment, more important than it may appear on the surface to be. It is true that the friendly society movement started in a different age and in entirely different circumstances, and it was a rather declining band up to a few years ago until the M & G Tyndall Managers Ltd. schemes arose. The M & G scheme gave to the public for the first time unit trust investment with an assured minimum value on maturing. As my hon. Friend the Member for Finchley (Mrs. Thatcher) has said, in three months 42,000 people subscribed £10 million to this scheme, and on my arithmetic this works out at £230 to £240 per person.
    It was such persons whom the Chancellor, in his Budget speech, said were well-to-do investors. Whenever, in the mind of the Chancellor, well-to-do investors—with an average of £230 per person—emerge, then the red lights in the Treasury go on, the anti-avoidance team gets into action, and all the old restrictions and stops come out.
    The way in which the right hon. Gentleman has sought to stop this beneficial business is extraordinary. First, he puts a restriction singling out friendly societies doing single-premium business. I cannot see what is wrong with single-premium business. It is a means of saving, a means of long-term saving. People are much less likely to realise their savings, if they are well invested long term, and spend them on consumer durables.
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    Secondly, the Clause singles out for restriction the new, modern and efficient societies looking to the future and trying to bring this old and rather decaying movement up to date, the new as opposed to the old. In other words, it creates a monopoly of the inefficient. It is rather like allowing a bus company to have a licence to run its buses provided that they are horse drawn.
    The third thing which the Clause does is the most sinister of all. It gives extraordinarily arbitrary powers to the Registrar of Friendly Societies. Although the old friendly societies can indulge in this wicked single-premium business, the Registrar is given power to withdraw the exemption if it appears to him to be expedient to do so for the protection of the Revenue. Why does the Revenue need protecting? Why should it be the business of the Registrar, who owes no duty to Parliament, to protect the Revenue in this way? If it is the Government's intention to discourage savings, that is a matter of policy and should be dealt with in the Budget.
    Finally, the Clause gives an exemption to the new friendly societies when they are engaged solely in industrial life business. Why should this exemption be included? Why should it be that if a society engages in what is the most uneconomic form of insurance business, namely, industrial life business, where the expense ratio is about 35 per cent, compared with 10 per cent, of other business, exemption is then given? Is it because industrial life business is obtained by the man calling at the houses of people who would probably be Labour Party voters and who might make some rude remarks about the Chancellor if there were not this exemption?
    I hope that the Financial Secretary will deal with all of those issues. Why should single-premium business be wrong? Why should the Registrar have these powers? Why does the Chancellor discriminate against new friendly societies as opposed to the old? Why should industrial life business be all right, when other business is not?
    The proposal in the Clause is wrong on almost every count. It is wrong because it is blatant discrimination. It is wrong because it gives unnecessary and undesirable powers to the Registrar and

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    it is wrong because it is a direct disincentive to savings. I hope that my hon. Friends will divide the Committee against it.
    Sir G. Nabarro: I declare my interest at once, of course. To avoid taxation in a perfectly legitimate way, I purchased the maximum holding of £500 for myself and a further holding of £500 for my wife in M & G Family Bonds for £338 for the 10-year bond for myself and £338 for the 10-year bond for my wife, a total of £676, maturing 10 years' hence with capital appreciation free of Income Tax, free of Surtax and Capital Gains Tax. [An HON. MEMBER: "Brave of the hon. Gentleman."] Not brave at all. I have the fullest confidence in private enterprise investment and I believe in supporting all forms of tax-free investment available to me. Thus, I buy the maximum for myself and my wife of National Savings Certificates of every issue.
    I readily confess all this, because I believe in thrift and in minimising my own liability to taxation. I would be a fool to do otherwise. Only masochistic characters like the Chancellor indulge in the payment of maximum sums of taxation on their own account, so he told us yesterday. I doubt whether he was very accurate in what he said. This Amendment, and I have sat here until ten minutes past one in the morning, waiting for it, relates directly to the Amendment that I moved yesterday on Income Tax.
    I said then that if we could not have tax revenues we must have personal saving instead. All of my hon. Friends who have spoken have supported this thesis. Every Chancellor that I can remember, since Sir John Anderson during the war years, has supported precisely the same thesis. By what quirk does the Chancellor believe that there should be a monopoly of tax-free appreciation for investment of small savings in the form of National Savings? Why should there not be a private enterprise competitor?
    That is what the M & G Family Bonds are. I readily admit to the Chancellor that M & G Family Bonds and Tyndall, and others, have used friendly society legislation, going back to 1896, for the purposes of finding a method of
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    offering people a tax-free appreciation derived from successful investment in equities. That is all very desirable. Such methods are securing additional personal savings which the Chancellor of the Exchequer might not get were it not for private enterprise competition with the National Savings Certificate.
    Money has depreciated a good deal since 1555, over 400 years ago, when the first friendly society was formed in Scotland to collect very small sums of money on what we would call today a door-to-door basis, based on the very good Scottish habit, lost in antiquity, of encouraging thrift. In all parts of the country there are these friendly societies which have grown up over several hundreds of years. My hon. Friend the Member for Finchley (Mrs. Thatcher) mentioned one, the Foresters. The Royal Antediluvian Order of Buffaloes might also be mentioned as another: as might the Loyal Order of Rechabites, which is organised in local "tents".
    They are all very desirable institutions, which have fostered savings over the years, and I say to the Committee that the M & G Family Bond is the contemporary equivalent of the aggregation of very small sums invested over the years in the Loyal Order of Rechabites, through its "tents." The Chancellor should not grin at me. [Interruption.] One of my hon. Friends says that it is difficult not to do so. Yesterday, the Chancellor giggled at me; today, he is grinning at me. While he may not travel the same road with me in the matter of reducing Income Tax, he must pay a tribute to my enthusiasm for personal savings.
    Mr. Archie Manuel: What about clean air?
    Sir G. Nabarro: Clean air, yes, and many more magnificent causes that I have espoused during many years in public and political affairs.
    1.15 a.m.
    I have a passionate devotion to thrift and savings in all forms, and I find Clause 27 odious because it will suffocate a form of personal savings which the Chancellor of the Exchequer would not otherwise obtain. He will not get this money into National Savings. He will not get the Nabarros of this world

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    buying his Defence Bonds. The rates of interest are not good enough.
    I am the chairman—and I declare my interest at once—of the advisory panel of a unit trust. All unit trusts today, properly conducted, offer much more interesting terms for small savings than do Government-sponsored schemes other than National Savings Certificates.
    Even National Savings Certificates, with the present rate of inflation, are showing a net loss to the investor. Twenty shillings in a National Savings Certificate today, in the 12th issue, appreciated to 25s. after a period of five years. That is approximately, on a crude calculation, 5 per cent, per annum appreciation, tax-free.
    Let us look at the form of saving which the Chancellor seeks to suffocate by Clause 27, the M & G Family Bond. What does that do? It gives an estimated growth rate of 6½ per cent. per annum entirely free of any kind of tax, which is substantially better than the Chancellor can offer. That is why he is so jealous of it. That is why he wants to suffocate it. He does not believe in private enterprise competition with his National Savings Certificates.
    I take a very stern view of the Clause. I passionately support the Amendment, and when we come to the Question, "That the Clause stand part of the Bill", I want my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod), the shadow Chancellor, to rise in his wrath.
    Sir D. Glover: At this time of night?
    Sir G. Nabarro: Yes, even at this time of night. My right hon. Friend the Member for Enfield is a Highlander, and is capable of wrath. It is not simulated wrath, either. There is nothing synthetic about his wrath or about mine.
    I condemn the Chancellor root and branch for suffocation of private enterprise saving. [Laughter.] The hon. Member for Rother Valley (Mr. David Griffiths) may guffaw loudly, but he does not know the meaning of thrift and savings.
    Mr. David Griffiths: And the hon. Gentleman does, does he?
    Sir G. Nabarro: I do. I have been saving all my life, since I first earned
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    4s. a week as a boy, saving a per centum of my income. Even today, I save a per centum of my income. That is why I pay 18s. 3d. in the £ Income Tax and Surtax combined—[Laughter.]—on that part of my income, repeat, that part of my income, in excess of, repeat, in excess of, £15,000, repeat £15,000, per annum.
    The Chancellor cannot say, as he did yesterday, that I am exaggerating the implications. My case yesterday to the Chancellor was that we could reduce the standard rate of Income Tax if only he would take positive and dynamic steps by every possible method of support for public and private contributions to savings, through the wole gamut of National Savings and by magnificent schemes of the kind which Clause 27 will inevitably suffocate.
    I want a vote on this Amendment.
    Mr. Iain Macleod: There will be one.
    Sir G. Nabarro: I am delighted to have my right hon. Friend's support. He says that we shall have one.
    I want a vote also on the Question, "That the Clause stand part of the Bill." But I wish to address a final remark to my right hon. Friend the Member for Enfield, West, who has the same passionate interest in support of personal savings as I have. I want an undertaking from him, when he winds up the debate for this side, on the Clause itself, that immediately a Tory Government is returned to sit on those benches—[An HON. MEMBER: "Never."] Never? I have heard some arrogant cries of that kind before. The Tory Party has stood at the graveside of many political splinters in past centuries and will stand at the graveside of the bunch sitting opposite, or their successors.
    Mr. Manuel: What a conceited little man.
    Sir G. Nabarro: He is neither little nor conceited. He is both factual and prophetic.
    I want something more than two votes. I want my right hon. Friend to say unequivocally on behalf of my party that, when we resume our rightful place on the Government benches, he will repeal Clause 27 of this Bill, if it is finally enacted, for it may have a disastrous effect upon personal thrift and the accumulation of small savings in our country.
    Mr. MacDermot: It might help the Committee, in view of the criticisms which have been launched already, if I were to seek now to answer at least some of them on behalf of the Government and explain the reasons why we are bringing forward the Clause in this form.
    The hon. Member for Worcestershire, South (Sir G. Nabarro) began his speech with a frank acknowledgment that the single-premium friendly societies which have mushroomed recently have been making use of a tax exemption which was designed for a rather different type of society. I say at once that I do not suggest that they have done anything improper. I confess to admiration for the ingenuity which they have shown. As has already been said, some of the schemes launched recently, with such publicity, have had tremendous success. But I urge on the Committee that what we have to consider at the moment is whether this is a right use and exploitation of a tax exemption which we ought to allow to continue, producing as it does an imbalance in our whole savings system and our tax treatment of the savings media.
    This is not a question of a great battle between the Government and National Savings, on the one hand, and savings in the private enterprise sector, on the other. In the debate on the National Savings movement and national savings generally which we had before Christmas, I made perfectly clear on behalf of the Government that we wished to see both sides of national savings thriving and working and collaborating together. We want to see a prosperous savings movement, both in the National Savings movement and in the private sector. My right hon. Friend the Chancellor is very anxious to welcome any constructive proposals which may be brought forward as to how we can increase the volume of savings in this country.
    Turning now to the question before us, namely, what should be the proper scope of the friendly society exemption, I hope to convince the Committee that this recent development is something which no Government could allow to continue. We are not here discussing the tax exemption for National Savings, which is something to which Parliament has given repeated approval as a special case for exemption in order to attract savings lent to the Government.
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    Turning to friendly societies, as the hon. Lady the Member for Finchley (Mrs. Thatcher) reminded us they have a long and very important history and they have played a very important part in the social history of this country. Their origins were in the local sick and burial clubs rather than directly in the savings movement to which the hon. Member for South Worcestershire referred. Since then they have developed as mutual insurance societies to which poor people subscribed in providence for themselves and for their families particularly for sickness, death, endowment and old-age pensions. It was on the experience of these societies that the original Lloyd George insurance scheme was based and on which was based our National Insurance scheme.
    Friendly societies have enjoyed tax exemptions for over a century and the origin of the exemption was that the members of the society at that time were below the tax-paying level. Conditions, as has been pointed out, have changed very greatly since those days, but it still remains true in what I may call genuine friendly societies and old-established societies that there still exists a relationship which enables the society to assist its members in cases of hardship and encourages members to look to it for advice, sympathy and practical help when they are in difficulties. Many of them still have distress funds and benevolent funds for cases of need or for the relief of widows or orphans.
    Part of the benevolent work is industrial insurance business which is the collecting from door-to-door. Premiums so collected in 1964, the last year for which figures are available, averaged 8d. a week and the average weekly contribution in societies other than collecting societies, orders or branches was 1s. 7d. a week. The growth of these has been gradual and largely by personal recruitment and none of them were created overnight by means of advertising in national newspapers.
    It is clear to the Committee that there is very sharp contrast between the traditional friendly societies and the new commercial type of friendly societies which have mushroomed recently and at which this Clause is aimed. These societies have been created—and they frankly admit it—to get a tax exemption

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    on behalf of the ordinary investor who has up to a few hundred pounds that he can put down on a single premium to provide for himself, his wife, or children for up to 10, 15 or 20 years. Because of the tax exemption they are able to offer a gratuity substantially above the insured amount.
    Sir G. Nabarro: I am following this argument and I have a great deal of sympathy with the translation of this practice to the contemporary scene. Really, it is a false argument to say that this is on a single investment basis, as the Financial Secretary has suggested, when anybody can go and buy a single-premium life endowment policy and get all his appreciation tax-free in spite of this Clause. In addition, he can secure 3s. 6d. Income Tax relief. Why does Clause 27 not deal with that if he feels so severe about it?
    Mr. MacDermot: I was coming to the question of life policies. The exemption of which the hon. Member was speaking is another special exemption which is again long established and which has been sanctioned by Parliament over very many years. All I am seeking to do is to point out the contrast which, I suggest, exists between these societies and the type like M & G, which the hon. Member for Worcestershire, South, paying his 18s. 3d. in the £ tax, was suggesting a moment ago as being the modern equivalent of the Antediluvian Order of Buffaloes. He certainly, in friendly society terms, would qualify as an odd-fellow.
    1.30 a.m.
    I remind the Committee of the kind of appeal that has been put forward in the advertisements offering these bonds. I have several of them. The Tyndall Savings Fund states, in large letters in headlines:
    "Entirely free of tax. Choice of fixed or variable certificates. Each member of the family can hold up to £500 sum assured. Fixed certificates give growth rate equivalent to 8½ per cent, gross per annum if you pay tax at the current standard rate." The matter following goes on to say:
    "Because Tyndall Savings Fund is a friendly society there is the added advantage of freedom from all forms of tax."
    It adds, perhaps with wise precaution,
    "under present legislation".
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    Ulster Scottish Friendly Society offers
    "Seven-year savings policy units at 15s. 2½d. per £1 unit yielding 5 per cent, tax free, equivalent to 8·5 per cent, gross to a holder paying Income Tax at the standard rate. This is also free from Surtax, so that the gross return to a Surtax payer is even greater."
    Another one, the M & G Family Bonds, offered
    "An assured maturity value and estimated growth rate of 6½ per cent, entirely free of any kind of tax. How is this possible? M & G, who started the unit trust movement in Britain over 30 years ago, have formed the M & G Friendly Society, which can"—
    again the expression is used—
    "under present legislation offer you a combination of benefits unique in the investment world."
    The result was a landslide, application forms ran out, money was stated to be coming in at £100,000 a day, and a great deal of this was not the attraction of new money but the switching of savings from other forms. I suggest that it is a little naive to describe this legislation as an attack upon small savers. I suggest that this had to be stopped and that no one realised it more than the genuine friendly societies. Indeed, it is a fair assumption that the commercial operators themselves realised it from their references in their advertisements to "under present legislation". I think that they realised that this was something they might get away with for a short time, no doubt relying, with good justice, upon the Government's dislike of retrospective legislation to ensure the benefits for those who were quick enough off the mark.
    Thus far, the matter is fairly clear and straightforward. The difficulty arose in deciding how to stop this exploitation of the tax exemption without unduly restricting the activities of the genuine societies. We have had close discussions with and considerable help from the Friendly Societies Liaison Committee. I do not want to suggest that it agrees with and likes everything that we have done, because it would, in some ways, have liked us to have been less restrictive than we have been, but I think that it certainly wanted us to legislate, because it realised the dangers to its own movement of what was happening.
    The first thing to do was to stop the single-premium type of business enjoying the tax exemption, and this has been

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    done by Part I of Schedule 7, which provides, broadly, that future life and endowment policies will justify tax exemption only if they are for a 10-year term with the premium spread over the term but at not more than yearly intervals. We did not withdraw the tax exemption from all existing single premiums, because some of the old-established genuine societies had issued small single-premium policies which, we thought, ought to continue. But there were indications that some of the genuine friendly societies were being tempted or compelled by the activities of the commercially-minded societies to climb on the band-wagon. So we excluded all future single premium business in a way that would allow the normal friendly societies' life and endowment business to continue as before.
    The question underlying the Amendments which we are now discussing is, why is that not enough; why not stop there and just require friendly societies to comply with Part I of Schedule 7? The answer is that the indications are that the commercially-minded would then have turned their attention to exploiting the 10-year term policy, again for the purpose of exploiting solely this tax exemption in a field for which it was never intended and for which it was not granted. We are determined, if we can, to stop up all the holes in the warren.
    The likely development which we fear is that the unit trust companies would sponsor a host of new societies, offering small scale unit trust-cum-life assurance policies out of a tax exempt fund. We think that the older friendly societies would be tempted to follow their example, and the result before long would be that the whole nature of the friendly society movement would be completely transformed in a way which would be bound to call into question and jeopardise their long established tax exemption. That, also, would be a development which would put the life offices at a disadvantage, and they would be bound to follow suit in order to hold their own.
    Whatever proposals hon. Members may have—and, I repeat, we welcome proposals that may be made to try and find successful ways of increasing savings—I am sure that, on reflection, they would agree that the kind of develop-
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    ment which I suggest would result from allowing this to continue is not the kind of way that we would like: they would not wish to see the nature of these institutions artificially distorted by a tax exemption of this kind.
    Our approach has been to prevent the commercial type of society from doing any kind of life or endowment business. To achieve that, we have had to deny life and endowment business to any new societies, with certain exceptions which we are satisfied are not open to abuse. Subsection (1,a) provides that any society which was registered since 1957 and before Budget day and which did any single premium business in the three months before Budget day will not be allowed exemption on life, endowment or annuity business. That is in order to stop the recently formed commercial societies switching to other forms of business. The reason for that date is that, so far as our information goes, it was in 1958 that the first of these single premium societies, if I may call them that, was formed.
    We also propose to exclude from the exemption for life, endowment or annuity business any new societies formed after Budget day, with the exception of certain defined classes of business in subsection (2). That prohibition extends also to societies which were registered within three months before Budget day and which have not yet done any business. That provision is necessary, otherwise they will escape completely from the provisions of the Clause.
    The kind of business which we envisage may continue for new societies is industrial assurance or collecting societies, which is a special type of assurance that is predominantly sickness benefit assurance, but has a minor benefit of a small lump sum payable on death or at a specific age, and, thirdly, if one of our Amendments is accepted, a lump sum or annuity payable on death to a widow or an orphan. In addition to those measures, we have had to take steps to provide against new societies being formed and seeking to get round these restrictions by means of an amalgamation with or a takeover of an older society.
    I am afraid that this has resulted in some rather complicated provisions because we are also anxious to promote and enable to continue the movement towards amalgamations and more frequent

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    amalgamations. The hon. Lady referred to the fact that the number of societies had declined, and, in part, that is due to the fact that, encouraged by the Chief Registrar, there have been many amalgamations of older societies, and that we wish to continue.
    Broadly speaking, our intention is that the tax status of the old societies should not be lost when they amalgamate, and that they should be free to amalgamate, including with new societies. This is one of the reasons why we have had to provide in the subsection which has been much criticised for giving the power to the Chief Registrar.
    May I seek to reassure the Committee about this. We are anxious throughout not to impose any unreasonable restrictions on the continuation of the friendly society business. It is not possible for us to make a clear-cut distinction by way of legal definition between the class of business which is to be allowed to continue unrestricted and the class of business to which we think the tax exemption should no longer continue. We have had to do this by reference to the date of formation of societies.
    Although we cannot lay down a clear-cut definition, it is rather an old problem which I think Sir John Simon referred to in a famous speech at Geneva once when he said that it is not easy to define an elephant but that it is easy to recognise one when you see one. I think that there is one person who is qualified to recognise a genuine friendly society when he sees one, and that is the Chief Registrar. He is in an independent and impartial position, in very close touch with the friendly societies, and he will surely be the person best able to judge whether the expansion and development of friendly societies is something which is a normal expansion, a normal development of the kind we certainly do not want to try to impede or prevent, or whether it is in fact a conversion of the old friendly society into a new commercial type which is simply trying to exploit the tax exemption provisions.
    Sir G. Nabarro: But what right of appeal is there against this gentleman's adjudication? Should we not write into the Statute how the discrimination is to be made?
    Mr. MacDermot: If the hon. Gentleman will have patience, I am coming to that point.
    We have written it into the Statute in sub-section (9). The position is that the Chief Registrar, if he so thinks fit, will serve a notice upon the society of his view that there have been changes in the nature and character of the business which would lead to the withdrawal of the tax exemption.
    The society will then be able to make representations, and if it wishes it will have the right to be heard by the Registrar. The Registrar at that point—and then only—will make his decision. There is a right of appeal to the High Court, I understand, by lodging a notice of motion in the Chancery Division against the decision of the Chief Registrar.
    1.45 a.m.
    It is not a question of some arbitrary power being put in the hands of this official, with no right of appeal. He will have to exercise his discretion on a proper judicial basis. This is the way in which we feel that we will be able to secure the continued development and expansion of friendly societies, while, at the same time, affording an adequate long-stop protection against any recurrence of the kind of development which the Clause is aimed at restricting.
    I hope that what I have said is sufficient to show that we have not been animated by any feeling of spite or animosity against the societies which have taken the steps which have led to the inclusion of this Clause, but merely that we cannot, with a due sense of responsibility, allow this particular narrow field of exploitation of a tax exemption to continue for a class of investor for whom it was never designed or intended.
    The hon. Lady said that this is the time when friendly societies need an injection of fresh life. This is a proposition with which we agree, and is something which we have given them in Part II of the Schedule, which raises very substantially the limits of the business which friendly societies may do, on the understanding that the new business will be subject to tax, and that the limits for the tax exemption business remain as before.
    Sir D. Glover: I do not know about my right hon. and hon. Friends, but I

    493
    am not satisfied with the Financial Secretary's reply. I think that the whole thinking behind his reply explains why, when the party opposite was last in power, in 1951, savings dropped to £100 million a year, and in the years after that went up to more than £1,000 million.
    According to the party opposite, if something is new it must be wrong. It is significant that hon. Gentlemen opposite want to keep the friendly societies as they existed 100 years ago. Any modernisation must be wrong. Any change in their activities must be wrong, and yet this is the party which was returned to power on the claim that it would modernise Britain. The theme of the hon. and learned Gentleman's speech was a vicious attack on the fact that the friendly societies had changed. They were referred to as "so-called modern", and "so-called friendly" societies, and yet they are doing something which the Chancellor needs from them in the way of help.
    Last year was not a record year for savings. The Chancellor must surely be worried about the savings level for last year. Here is a field where ingenuity has produced a vast withdrawal of money from consumption into savings, to the benefit of the Chancellor and the country. The Chancellor asks how I know this. The answer is in the same way that we hope, but do not know, that anybody who buys £500 of the new issue of savings certificates is withdrawing money from consumption. We do not know. He may have sold some of his stock from a friendly society to buy his National Savings Certificates. We do not know what 52 million people do. We can only expect that they will work sensibly, as my hon. Friend the "Chief Druid of the Rechabites" said, for their own personal interest.
    People do not save, however much exhortation there might be, because the Chancellor thinks that it would be nice for them to save. People do not save, however much exhortation there might be, because it would be a nice thing for the State for them to save. People save because by saving they may get an income from the interest, and they may get some capital appreciation. This is why people have saved ever since any form of money exchange was developed
    494
    by civilised man. In this case, as the figures show, the money is not coming from a lot of bloated millionaires, despite the repeated explanations by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) of the rate of personal taxation. He is perhaps one of the exceptions. I am not saying that people like my hon. Friend, being frugal and wise, will not take advantage of it.
    The Chancellor has a strange picture of our society. The people who invested in these new schemes for a short period were not in the largest income group. They were a good cross-section of people who thought that this was a good way of saving, in which there was some capital gain, some tax-free benefit. That, of course, was why they were saving. With the problems of over-consumption and static production, the Chancellor, one would have thought, would have been delighted with any system which withdrew from circulation the surplus money which he has been trying to withdraw from circulation by increasing taxation by £1,000 million.
    This is the fundamental difference between the two parties. We say that the Socialist Party believes in high taxation. The Chancellor thinks that the way to put the country's problems right is to take the money off the people in taxation so that it is gone forever and their power to buy consumer goods is, therefore, reduced. We think that a far better way is to encourage those people to save that money so that it drifts through all those channels and rivulets into increased production and wealth for the nation. Therefore, that money is working for the people. In the old expression, it is left to fructify in the pockets of the people.
    That is the belief of the Conservative Party, which is why, when we were in power there was a continuous rise in savings, and taxation was reduced by £2,000 million. A great deal of the nation's effort was being backed by increased saving. This is a new way of saving. They are good savings which are to the benefit of the nation. Because it is new, because it is modern, the penny-farthing party opposite is against it.
    Mr. Nott: The Financial Secretary talked about continuing the expansion and development of the traditional societies. One or two facts in the 1964

    495
    Report of the Registrar of Friendly Societies show that the Financial Secretary's understanding of this expansion and development may be slightly awry. The membership of certain classes of sickness benefit societies declined by over 50 per cent, in the last ten years, of death benefit societies by 25 per cent., of accident societies by 22 per cent. In fact, the membership of nearly every kind of traditional society has declined, with the exception of the endowment assurance societies, which is what the new societies were catering for.
    It is no wonder that the traditional friendly societies have declined, because the most startling fact in the Registrar's Report for 1964 is that the book value of the quoted investments of these traditional societies was £115 million, whereas, in 1964, it stood at £97 million. These investments were bought sometimes years before, decades before, and now they stand below book value, at £97 million. There can be very few other groups of societies or pension funds of any sort which stand below their book value in such a way.
    Only 8 per cent, of the investments of the class of friendly societies to which I am referring are invested in equities, whereas local authority pension funds and practically every other fund in the country which looks after small savings have moved in equities.
    Mr. MacDermot: Can the hon. Member make clear which is the class he is referring to, because the figures he has given do not begin to tally with the figures I have for the total funds of all friendly societies?
    Mr. Nott: There are several classes, as the hon. and learned Gentleman is aware. I believe that the class to which I referred is the principal class referred to in the Report, that of the friendly societies without branches—
    Mr. MacDermot: —and other than collecting societies?
    Mr. Nott: That is right, and there is a note which says that the book value is £115 million against the current market value which stands at £97 million. For every £1 which goes into these traditional friendly societies, 3s. 2d. goes in management expenses, whereas, in the case of M & G the figure was 1s. 2d.; in other words, about half the expenses of the traditional friendly societies.
    There is no question of continuing the expansion and development of the friendly societies—they have been declining year by year. They are hopelessly badly managed and these new societies were bringing new blood into this movement and would have reformed it. The particular class of so-called investors and depositors to whom the Financial Secretary refers, the people with £300 to invest can still put money tax-free into the old traditional friendly societies. They can still get interest tax-free that way. Therefore, it must clearly be discrimination against the new ones, because the tax position has not been changed one iota.
    Question put, That the words proposed to be left out, to "below" in line 35, stand part of the Clause: —
    The Committee divided: Ayes 154, Noes 106.

    Division No. 42.]

    AYES

    [1.57 a.m.

    Abse, Leo

    Brooks, Edwin

    Dobson, Ray

    Alldritt, Walter

    Brown, Hugh D. (G'gow, Provan)

    Doig, Peter

    Archer, Peter

    Brown,Bob(N'c'tle-upon-Tyne,W.)

    Dunn, James A.

    Armstrong, Ernest

    Brown, R. W. (Shoreditch & F'bury)

    Dunwoody, Mrs. Gwyneth (Exeter)

    Ashley, Jack

    Buchan, Norman

    Dunwoody, Dr. John (F'th & C'b'e)

    Atkins, Ronald (Preston, N.)

    Buchanan, Richard (G'gow, Sp'burn)

    Eadie, Alex

    Atkinson, Norman (Tottenham)

    Callaghan, Rt. Hn. James

    Edwards, Robert (Bilston)

    Bagier, Gordon A. T.

    Cant, R. B.

    Edwards, William (Merioneth)

    Barnes, Michael

    Carmichael, Neil

    Ellis, John

    Barnett, Joel

    Carter-Jones, Lewis

    Ensor, David

    Bence, Cyril

    Concannon, J. D.

    Evans, loan L. (Birm'h'm, Yardley)

    Bennett, James (G'gow, Bridgeton)

    Conlan, Bernard

    Faulds, Andrew

    Bidwell, Sydney

    Craddock, George (Bradford S.)

    Fletcher, Raymond (Ilkeston)

    Bishop, E. S.

    Crawshaw, Richard

    Fletcher, Ted (Darlington)

    Blackburn, F.

    Dalyell, Tam

    Floud, Bernard

    Blenkinsop, Arthur

    Davidson, Arthur (Accrington)

    Foot, Michael (Ebbw Vale)

    Booth, Albert

    Davies, Robert (Cambridge)

    Forrester, John

    Boston, Terence

    Dewar, Donald

    Fowier, Gerry

    Bradley, Tom

    Diamond, Rt. Hn. John

    Fraser, John (Norwood)

    Bray, Dr. Jeremy

    Dickens, James

    Fraser, Rt. Hn. Tom (Hamilton)

    Gardner, A. J.

    MacDermot, Niall

    Price, William (Rugby)

    Garrett, W. E.

    Macdonald, A. H.

    Reynolds, G. W.

    Garrow, Alex

    McKay, Mrs. Margaret

    Richard, Ivor

    Griffiths, David (Rother Valley)

    Mackenzie, Gregor (Rutherglen)

    Robinson, W. O. J. (Walth'stow, E.)

    Griffiths, Will (Exchange)

    McMillan, Tom (Glasgow, C.)

    Rodgers, William (Stockton)

    Hamilton, James (Bothwell)

    McNamara, J. Kevin

    Roebuck, Roy

    Hannan, William

    Mahon, Peter (Preston S.)

    Rose, Paul

    Hattersley, Roy

    Mahon, Simon (Bootle)

    Rowlands, E. (Cardiff, N.)

    Hazell, Bert

    Mallalieu, J.P.W.(Huddersfield,E.)

    Sheldon, Robert

    Heffer, Eric S.

    Manuel, Archie

    Silkin, John (Deptford)

    Henig, Stanley

    Mapp, Charles

    Slater, Joseph

    Hooley, Frank

    Marquand, David

    Summerskill, Hn. Dr. Shirley

    Horner, John

    Mayhew, Christopher

    Swingler, Stephen

    Howarth, Robert (Bolton, E.)

    Mendelson, J. J.

    Taverne, Dick

    Howie, W.

    Mikardo, Ian

    Tinn, James

    Hoy, James

    Miller, Dr. M. S.

    Varley, Eric G.

    Hughes, Emrys (Ayrshire, S.)

    Mitchell, R. C. (S'th'pton, Test)

    Wainwright, Edwin (Dearne Valley)

    Hughes, Roy (Newport)

    Molloy, William

    Watden, Brian (All Saints)

    Hunter, Adam

    Morgan, Elystan (Cardiganshire)

    Walker, Harold (Doncaster)

    Hynd, John

    Morris, Charles R. (Openshaw)

    Watkins, David (Consett)

    Jackson, Colin (B'h'se & Spenb'gh)

    Moyle, Roland

    Wellbeloved, James

    Judd, Frank

    Murray, Albert

    Williams, Alan Lee (Hornchurch)

    Kelley, Richard

    Oakes, Gordon

    Williams, Clifford (Abertillery)

    Kenyon, Clifford

    Ogden, Eric

    Wilson, William (Coventry, S.)

    Leadbitter, Ted

    O'Malley, Brian

    Winnick, David

    Ledger, Ron

    Orme, Stanley

    Winterbottom, R. E.

    Lever, L. M. (Ardwick)

    Oswald, Thomas

    Woodburn, Rt. Hn. A.

    Lewis, Ron (Carlisle)

    Owen, Dr. David (Plymouth, S'tn)

    Yates, Victor

    Lomas, Kenneth

    Palmer, Arthur

    Lyons, Edward (Bradford, E.)

    Park, Trevor

    TELLERS FOR THE AYES:

    Mahon, Dr. J. Dickson

    Pentland, Norman

    Mr. Joseph Harper and

    McBride, Neil

    Perry, Ernest G. (Battersea, S.)

    Mr. Harry Gourlay.

    MacColl, James

    Price, Christopher (Perry Barr)

    Pardoe, J.

    NOES

    Alison, Michael (Barkston Ash)

    Gurden, Harold

    Pearson, Sir Frank (Clitheroe)

    Allason, James (Hemel Hempstead)

    Hall, John (Wycombe)

    Peel, John

    Atkins, Humphrey (M't'n & M'd'n)

    Hall-Davis, A. G. F.

    Percival, Ian

    Awdry, Daniel

    Harvie Anderson, Miss

    Peyton, John

    Baker, W. H. K.

    Hawkins, Paul

    Pike, Miss Mervyn

    Bainiel, Lord

    Hiley, Joseph

    Pink, R. Bonner

    Batsford, Brian

    Hill, J. E, B.

    Pounder, Rafton

    Bessell, Peter

    Holland, Philip

    Pym, Francis

    Biffen, John

    Hunt, John

    Ridley, Hn. Nicholas

    Biggs-Davison, John

    Jenkin, Patrick (Woodford)

    Ridsdale, Julian

    Black, Sir Cyril

    Johnson Smith, G. (E. Grinstead)

    Rossi, Hugh (Hornsey)

    Brewis, John

    Johnston, Russell (Inverness)

    Scott, Nicholas

    Brinton, Sir Tatton

    Jopling, Michael

    Shaw, Michael (Sc'b'gh & Whitby)

    Brown, Sir Edward (Bath)

    Kitson, Timothy

    Sinclair, Sir George

    Bruce-Gardyne, J.

    Legge-Bourke, Sir Harry

    Smith, John

    Buchanan-Smith, Alick(Angus,N&M)

    Lewis, Kenneth (Rutland)

    Steel, David (Roxburgh)

    Clegg, Walter

    Lloyd, Ian (P'tsm'th, Langstone)

    Taylor, Edward M.(G'gow,Cathcart)

    Cooke, Robert

    Loveys, W. H.

    Thatcher, Mrs. Margaret

    Corfield, F. V.

    Mackenzie, Alasdair(Ross&Crom'ty)

    Van Straubenzee, W. R.

    Crawley, Aldan

    Maoleod, Rt. Hn. Iain

    Wainwright, Richard (Colne Valley)

    Crosthwaite-Eyre, Sir Oliver

    Maddan, Martin

    Wall, Patrick

    Crouch, David

    Maude, Angus

    Ward, Dame Irene

    Crowder, F. P.

    Maxwell-Hyslop, R. J.

    Weatherill, Bernard

    Currie, G. B, H,

    Maydon, Lt.-Cmdr. S. L. C.

    Webster, David

    Dean, Paul (Somerset, N.)

    Mills, Peter (Torrington)

    Wells, John (Maidstone)

    Deedes, Rt. Hn. W. F. (Ashford)

    Mills, Stratton (Belfast, N.)

    Whitelaw, William

    Eden, Sir John

    Miscampbell, Norman

    Wilson, Geoffrey (Truro)

    Elliott, R.W,(N'c'tle-upon-Tyne,N.)

    Monro, Hector

    Winstanley, Dr. M. P.

    Eyre, Reginald

    More, Jasper

    Wolrige-Gordon, Patrick

    Farr, John

    Murton, Oscar

    Woodnutt, Mark

    Fisher, Nigel

    Nabarro, Sir Gerald

    Younger, Hn. George

    Fletcher-Cooke, Charles

    Noble, Rt. Hn. Michael

    Fortescue, Tim

    Nott, John

    TELLERS FOR THE NOES:

    Glover, Sir Douglas

    Onslow, Cranley

    Mr. Peter Blaker and

    Glyn, Sir Richard

    Orr, Capt. L. P. S.

    Mr. Anthony Grant.

    Grieve, Percy

    Osborn, John (Hallam)

    Griffiths, Eldon (Bury St. Edmunds)

    Page, Graham (Crosby)

    Mr. MacDermot: I beg to move Amendment No. 255, in page 27, line 35, after "(2)", to insert "and (2A)".
    Would it be convenient, Mr. Irving, if, with this Amendment, we discussed Amendment No. 256?
    The Deputy Chairman: Yes, if that is the wish of the Committee.
    Mr. MacDermot: These Amendments are in the nature of drafting Amendments to put into this part of the Clause the words which already appear in subsection

    499
    (7), to make it clear that this is a class of business which new societies will be able to continue to conduct with tax exemption.
    Amendment agreed to.
    Further Amendment made: In page 28, line 9, after first "or", insert:
    (c) contracts exclusively for the assurance of a gross sum or annuity payable on death to or for the benefit of the deceased's widow or dependent child.
    or business which falls within any two or all three of paragraphs (a), (b) or (c) above taken together.
    (2A) Subsection (1)(6) above shall not apply. —[Mr. MacDermot.]
    Mr. MacDermot: I beg to move Amendment No. 257, in page 28, line 11, to leave out from "society" to "and" in line 13.
    Would it be convenient, Mr. Irving, to discuss with this Amendment Amendment No. 260, in page 30, line 33, after "that", insert "(a)", and Amendment No. 261, in page 30, line 34, leave out from "if" to end of line 37 and insert:
    "at the time of the amalgamation all the friendly societies amalgamated were societies which, subject to satisfying the conditions of Part I of Schedule 7 to this Act, were eligible for the exemption conferred by section 440(1) of the Income Tax Act 1952 in respect of life or endowment business and at least one of them was a society not within subsection (1)(b) of this section,
    (b) in determining, as respects a society resulting from an amalgamation and coming within subsection (5) of this section by virtue of proviso (a) above, the questions in that subsection in the period immediately following the amalgamation, the activities of the amalgamated societies in the period immediately preceding the amalgamation shall be treated as if they were the activities then being carried on by the society resulting from the amalgamation."
    All three Amendments deal with related subjects.
    The Deputy Chairman: Yes, if the Committee so wishes.
    Mr. MacDermot: As I made clear earlier, our object is to ensure that on
    amalgamation of societies the tax status of any of the amalgamating societies shall not worsen. We also intend that on a transfer of engagements from one society to another there shall be no change in the tax treatment of existing tax-exempt contracts. It is that which is secured by Amendment No. 257.
    Perhaps I should explain a little more the provisions relating to amalgamations, which are covered by Amendments Nos. 260 and 261. An amalgamation introduces a new society. That is something carried over from existing law. Under subsection (1,b) the result would be that they would not be able to undertake any life or endowment business except for the limited class under subsection (2). Therefore, in subsection (9), we preserve the exempt status where all the amalgamating societies were entitled to an exemption. But we consider this too restrictive, because it means that old, pre-Budget day societies amalgamating with new societies would be restricted to subsection (2) type of business.
    We propose, therefore, to allow amalgamations to take place and to continue to have tax exemption, provided that all are eligible under the previous law, Section 440 of the Income Tax Act, 1952, and provided one of the societies is an old pre-Budget day society which is entitled to exemption in life and endowment business generally.
    Amendment agreed to.
    Further Amendment made: In page 28, line 29, leave out from "annuity" to end of line 31.—[Mr. MacDermot.]
    Amendment proposed: In page 29, line 1, leave out subsection (5).—[Mrs. Thatcher.]
    Question put, That the words proposed to be left out stand part of the Clause:—
    The Committee divided: Ayes 153, Noes 104.

    Division No. 43.1

    AYES

    [2.12 a.m.

    Abse, Leo

    Bagier, Gordon A. T.

    Blackburn, F.

    Alldritt, Walter

    Barnes, Michael

    Blenkinsop, Arthur

    Archer, Peter

    Barnett, Joel

    Booth, Albert

    Armstrong, Ernest

    Bence, Cyril

    Boston, Terence

    Ashley, Jack

    Bennett, James (G'gow, Bridgeton)

    Bradley, Tom

    Atkins, Ronald (Preston, N.)

    Bidwell, Sydney

    Bray, Dr. Jeremy

    Atkinson, Norman (Tottenham)

    Bishop, E. S.

    Brooks, Edwin

    Brown, Hugh D. (G'gow, Provan)

    Hannan, William

    Morgan, Elystan (Cardiganshire)

    Brown, Bob(N 'c'tle-upon-Tyne, W.)

    Hattersley, Roy

    Moyle, Roland

    Brown, R. w. (Shoreditch & F'bury)

    Hazell, Bert

    Murray, Albert

    Buchan, Norman

    Heffer, Eric S.

    Oakes, Gordon

    Buchanan Richard (G'gow, Sp'burn)

    Henig, Stanley

    Ogden, Eric

    Callaghan, Rt. Hn. James

    Hooley, Frank

    O'Malley, Brian

    Cant, R. B.

    Horner, John

    Orme, Stanley

    Carmichael, Neil

    Howarth, Robert (Bolton, E.)

    Oswald, Thomas

    Carter-Jones, Lewis

    Howie, W.

    Owen, Dr. David (Plymouth, S'tn)

    Concannon, J, D.

    Hoy, James

    Palmer, Arthur

    Conlan, Bernard

    Hughes, Emrys (Ayrshire, S.)

    Park, Trevor

    Craddock, George (Bradford, S.)

    Hughes, Roy (Newport)

    Pentland, Norman

    Crawshaw, Richard

    Hunter, Adam

    Perry, Ernest C. (Battersea, S.)

    Dalyell, Tam

    Hynd, John

    Price, Christopher (Perry Barr)

    Davidson, Arthur (Accrington)

    Jackson, Colin (B'h'se & Spenb'gh)

    Price, William (Rugby)

    Davies, Robert (Cambridge)

    Judd, Frank

    Reynolds, G. W.

    Dewar, Donald

    Kelley, Richard

    Richard, Ivor

    Diamond, Rt. Hn. John

    Kenyon, Clifford

    Robinson, W. O. J. (Walth'stow, E.)

    Dickens, James

    Leadbitter, Ted

    Rodgers, William (Stockton)

    Dobson, Ray

    Ledger, Ron

    Roebuck, Roy

    Doig, Peter

    Lever, L. M. (Ardwick)

    Rose, Paul

    Dunn, James A.

    Lewis, Ron (Carlisle)

    Rowlands, E. (Cardiff, N.)

    Dunwoody, Mrs. Gwyneth (Exeter)

    Lomas, Kenneth

    Sheldon, Robert

    Dunwoody, Dr. John (F'th & C'b'e)

    Lyons, Edward (Bradford, E.)

    Silkin, John (Deptford)

    Eadie, Alex

    Mabon, Dr. J. Dickson

    Slater, Joseph

    Edwards, Robert (Bilston)

    McBride, Nell

    Summerskill, Hn. Dr. Shirley

    Edwards, William (Merioneth)

    MacColl, James

    Swingler, Stephen

    Ellis, John

    MacDermot, Niall

    Taverne, Dick

    Ensor, David

    Macdonald, A. H.

    Tinn, James

    Evans, loan L. (Birm'h'm, Yardley)

    McKay, Mrs. Margaret

    Varley, Eric G.

    Faulds, Andrew

    Mackenzie, Gregor (Rutherglen)

    Wainwright, Edwin (Dearne Valley)

    Fletcher, Raymond (Ilkeston)

    McMillan, Tom (Glasgow, C.)

    Walden, Brian (All Saints)

    Fletcher, Ted (Darlington)

    McNamara, J. Kevin

    Walker, Harold (Doncaster)

    Floud, Bernard

    Mahon, Peter (Preston S.)

    Watkins, David (Consett)

    Foot, Michael (Ebbw Vale)

    Mahon, Simon (Bootle)

    Wellbeloved, James

    Forrester, John

    Mallalieu,J.P.W.(Huddersfield,E.)

    Williams, Alan Lee (Hornchurch)

    Fowler, Gerry

    Manuel, Archie

    Williams, Clifford (Abertillery)

    Fraser, John (Norwood)

    Mapp, Charles

    Wilson, William (Coventry, S.)

    Gardner, A. J.

    Marquand, David

    Winnick, David

    Garrett, W. E.

    Mayhew, Christopher

    Winterbottom, R. E.

    Garrow, Alex

    Mendelson, J. J.

    Woodbum, Rt. Hn. A.

    Gourlay, Harry

    Mikardo, Ian

    Yates, Victor

    Griffiths, David (Rother Valley)

    Miller, Dr. M. S.

    TELLERS FOR THE AYES:

    Griffiths, Will (Exchange)

    Mitchell, R. C. (S'th'pton, Test)

    Mr. Joseph Harper and

    Hamilton, James (Bothwell)

    Molloy, William

    Mr. Charles R. Morris.

    NOES

    Alison, Michael (Barkston Ash)

    Griffiths, Eldon (Bury St. Edmunds)

    Page, Graham (Crosby)

    Allason, James (Hemel Hempstead)

    Gurdon, Harold

    Pardoe, J.

    Atkins, Humphrey (M't'n & M'd'n)

    Hall-Davis A. G. F.

    Pearson, Sir Frank (Clitheroe)

    Awdry, Daniel

    Harvie, Anderson, Miss

    Peel, John

    Baker, W, H. K.

    Hawkins, Paul

    Percival, Ian

    Balniel, Lord

    Hiley, Joseph

    Peyton, John

    Batsford, Brian

    Hill, J. E. B.

    Pike, Miss Mervyn

    Bessell, Peter

    Holland, Philip

    Pink, R. Bonner

    Biffen, John

    Hunt, John

    Pounder, Rafton

    Biggs-Davison, John

    Jenkin, Patrick (Woodford)

    Pym, Francis

    Black, Sir Cyril

    Johnson Smith, G. (E. Grinstead)

    Ridley, Hn. Nicholas

    Brewis, John

    Johnston, Russell (Inverness)

    Rossi, Hugh (Hornsey)

    Brinton, Sir Tatton

    Jopling, Michael

    Scott, Nicholas

    Brown, Sir Edward (Bath)

    Kitson, Timothy

    Shaw, Michael (Sc'b'gh & Whitby)

    Bruce-Gardyne, J.

    Legge-Bourke, Sir Harry

    Sinclair, Sir George

    Buchanan-Smith, Alick(Angus, NAM)

    Lewis, Kenneth (Rutland)

    Smith, John

    Clegg, Walter

    Lloyd, Ian (P'tsm'th, Langstone)

    Steel, David (Roxburgh)

    Cooke, Robert

    Loveys, W. H.

    Taylor, Edward M.(G'gow,Cathcart)

    Curfield, F. V.

    Mackenzie, Alasdair(Ross&Crom'ty)

    Thatcher, Mrs. Margaret

    Crawley, Aidan

    Macleod, Rt. Hn. Iain

    van Straubenzee, W. R.

    Crosthwaite-Eyre, Sir Oliver

    Maddan, Martin

    Wainwright, Richard (Colne Valley)

    Crouch, David

    Maude, Angus

    Wall, Patrick

    Crowder, F. P.

    Maxwell-Hyslop, R. J.

    Ward, Dame Irene

    Currie, G. B. H.

    Maydon, Lt.-Cmdr. S. L. C.

    Weatherill, Bernard

    Dean, Paul (Somerset, N.)

    Mills, Peter (Torrington)

    Webster, David

    Deedes, Rt. Hn. W. F. (Ashford)

    Mills, Stratton (Belfast, N.)

    Wells, John (Maidstone)

    Eden, Sir John

    Miscampbell, Norman

    Whitelaw, William

    Elliott, R. W.(N 'c'tle-upon-Tyne, N.)

    Monro, Hector

    Wilson, Geoffrey (Truro)

    Eyre, Reginald

    More, Jasper

    Winstanley, Dr. M. P.

    Farr, John

    Murton, Oscar

    Wolrige-Gordon, Patrick

    Fisher, Nigel

    Nabarro, Sir Gerald

    Woodnutt, Mark

    Fletcher-Cooke, Charles

    Noble, Rt. Hn. Michael

    Younger, Hn. George

    Fortescue, Tim

    Nott, John

    TELLERS FOR THE NOES:

    Glover Sir Douglas

    Onslow, Cranley

    M. Peter Blaker and

    Glyn, Sir Richard

    Orr, Capt. L. P. S.

    Mr. Anthony Grant.

    Grieve, Percy

    Osborn, John (Hallam)

    Mr. MacDermot: I beg to move Amendment No. 259, in page 30, line 7, to leave out paragraph (b) and to insert:
    (b) shall not include the granting of any such annuities as are referred to in section 26(1) of the Finance Act 1956 (retirement annuities, etc.)."
    The Chairman: With this Amendment can be taken Amendment No. 124 in page 28, line 44, at end insert—
    Provided always that nothing in this section shall prevent any society carrying on pension annuity business from availing itself of the provisions of section 24(1)(a) of the Finance 1956 to set up a fund exempt from income tax in respect of that part thereof which is referable to pension annuity business.
    Mr. MacDermot: I begin by assuring the hon. Member for Belfast, South (Mr. Pounder) that the Government Amendment is designed to achieve what we understand to be the intention of his Amendment, namely, to ensure that the existing tax exemption under the Finance Act, 1956, for retirement annuity policies issued by friendly societies shall continue to remain unaffected by anything in the Clause.
    Mr. Pounder: The Financial Secretary has correctly assumed the intention of my Amendment to be that friendly societies should enjoy tax exemption for these annuity policies. All assurance offices and not just friendly societies have enjoyed tax exemption on their pension annuity funds and my Amendment is to ensure that a friendly society should not be deprived of this because, for instance, it does this business by means of single premiums rather than annual premiums.
    Amendment agreed to.
    Further Amendment made: In page 30, line 34, leave from "if" to end of line 37 and insert:
    "at the time of the amalgamation all the friendly societies amalgamated were societies which, subject to satisfying the conditions of Part I of Schedule 7 to this Act, were eligible for the exemption conferred by section 440(1) of the Income Tax Act 1952 in respect of life or endowment business and at least one of them was a society not within subsection (1)(b) of this section,
    (b) in determining, as respects a society resulting from an amalgamation and coming within subsection (5) of this section by virtue of proviso (a) above, the questions in that subsection in the period immediately following the amalgamation, the activities of the amalgamated societies in the period
    504
    immediately preceding the amalgamation shall be treated as if they were the activities then being carried on by the society resulting from the amalgamation.—[Mr. MacDermot.]
    Mr. Pounder: I beg to move Amendment No. 126, in page 30, line 43, after "made", to insert:
    "or for which valid proposals accompanied by the appropriate premiums were received by the society or its duly accredited agents".
    The object of the Amendment is quite simply to enable friendly societies to honour those proposals which were received together with cheques for premiums by the agents of the societies on 3rd May, but which, because of the intervention of the weekend and the Bank Holiday in Scotland on 2nd May, were not received by the societies until 4th May. It is as simple as that.
    Mr. MacDermot: In spite of its simplicity, I cannot accept the Amendment. The dividing line has to be drawn somewhere when tax exemption has to stop. As I indicated earlier, there would have been a substantial argument for saying that we would be entitled to levy tax in future upon bonds which had already been issued, but we felt that this was a case in which at least some if not many people who had taken out these bonds had done so in the belief that the tax-exemption would continue for the life of the bond and that in spite of those words in small print in the advertisements which I read to the Committee, the words "under present legislation", they may not have realised the full effect of those words as a warning that the tax position of the bonds might be changed.
    We therefore thought it right that where there were completed contracts before Budget day, the bonds should continue to enjoy tax exemption, but there is where the dividing line is drawn. If it is needed, we have a clear precedent in the action taken in 1956 when investment allowances were suspended generally.
    There was an exception for sums paid under contracts entered into not later than 17th February, 1956, which was the date when the decision to suspend was announced, but not for contracts which were under negotiation at that date. I appreciate that it might seem hard on the people who had sent in their application and their money, but I am afraid

    505
    that they did not have a completed contract, so they did not qualify.
    Mrs. Thatcher: My hon. Friend the Member for Belfast, South (Mr. Pounder) is right, and the Financial Secretary is wrong, but in view of the hour we can best express our objection by voting in a moment or two against the grant the Clause stand part.
    The Chairman: Does the hon. Member desire to withdraw the Amendment?
    Mr. Pounder: No, Sir Eric.
    Amendment negatived.
    Question put, That the Clause, as amended, stand part of the Bill:—
    The Committee divided: Ayes 153, Noes 102.

    Division No. 44.]

    AYES

    [2.26 a.m.

    Abse, Leo

    Fletcher, Raymond (Ilkeston)

    Marquand, David

    Alldritt, Walter

    Fletcher, Ted (Darlington)

    Mayhew, Christopher

    Archer, Peter

    Floud, Bernard

    Mendelson, J. J.

    Armstrong, Ernest

    Foot, Michael (Ebbw Vale)

    Mikardo, Ian

    Ashley, Jack

    Forrester, John

    Miller, Dr. M. S.

    Atkins, Ronald (Preston, N.)

    Fowler, Gerry

    Mitchell, R. C. (S'th'pton, Test)

    Atkinson, Norman (Tottenham)

    Fraser, John (Norwood)

    Molloy, William

    Bag er, Gordon A. T.

    Gardner, A. J.

    Morgan, Elystan (Cardiganshire)

    Barnes, Michael

    Garrett, W. E.

    Moyle, Roland

    Barnett, Joel

    Garrow, Alex

    Murray, Albert

    Bence, Cyril

    Gourlay, Harry

    Oakes, Gordon

    Bennett, James (G'gow, Bridgeton)

    Griffiths, David (Rother Valley)

    Ogden, Eric

    Bidwell, Sydney

    Griffiths, Will (Exchange)

    O'Malley, Brian

    Bishop, E. S.

    Hamilton, James (Bothwell)

    Orme, Stanley

    Blackburn, F.

    Hannan, William

    Oswald, Thomas

    Blenkinsop, Arthur

    Hattersley, Roy

    Owen, Dr. David (Plymouth, S'tn)

    Booth, Albert

    Hazell, Bert

    Palmer, Arthur

    Boston, Terence

    Heffer, Eric S.

    Park, Trevor

    Bradley, Tom

    Henig, Stanley

    Pentland, Norman

    Bray, Dr. Jeremy

    Hooley, Frank

    Perry, Ernest G. (Battersea, S.)

    Brooks, Edwin

    Horner, John

    Price, Christopher (Perry Barr)

    Brown, Hugh D. (C'gow, Provan)

    Howarth, Robert (Bolton, E.)

    Price, William (Rugby)

    Brown,Bob (N'C tle-upon-Tyne, W.)

    Howie, W.

    Reynolds, G. W.

    Brown, R. W. (Shoreditch & F'bury)

    Hoy, James

    Richard, Ivor

    Buchan, Norman

    Hughes, Emrys (Ayrshire, S.)

    Robinson, W. O. J. (Walth'stow, E.)

    Buchanan, Richard (G'gow, Sp'burn)

    Hughes, Roy (Newport)

    Rodgers, William (Stockton)

    Callaghan, Rt. Hn. James

    Hunter, Adam

    Roebuck, Roy

    Cant, R, B.

    Hynd, John

    Rose, Paul

    Carmichael, Neil

    Jackson, Colin (B'h's & Spenb'gh)

    Rowlands, E. (Cardiff, N.)

    Carter-Jones, Lewie

    Judd, Frank

    Sheldon, Robert

    Concannon, J. D.

    Kelley, Richard

    Silkin, John (Deptford)

    Conlan, Bernard

    Kenyon, Clifford

    Slater, Joseph

    Craddock, George (Bradford, S.)

    Leadbitter, Ted

    Summerskill, Hn. Dr. Shirley

    Crawshaw, Richard

    Ledger, Ron

    Swingler, Stephen

    Dalyell, Tam

    Lever, L. M. (Ardwick)

    Taverne, Dick

    Davidson, Arthur (Accrington)

    Lewis, Ron (Carlisle)

    Tinn, James

    Davies, Robert (Cambridge)

    Lomas, Kenneth

    Varley, Eric G.

    Dewar, Donald

    Lyons, Edward (Bradford, E.)

    Wainwright, Edwin (Dearne Valley)

    Diamond, Rt. Hn. John

    Mahon, Dr. J, Dickson

    Walden, Brian (All Saints)

    Dickens, James

    McBride, Neil

    Walker, Harold (Doncaster)

    Dobson, Ray

    MacColl, James

    Watkins, David (Consett)

    Doig, Peter

    MacDermot, Niall

    Wellbeloved, James

    Dunn, James A.

    Macdonald, A. H.

    Williams, Alan Lee (Hornchurch)

    Dunwoody, Mrs. Gwyneth (Exeter)

    McKay, Mrs. Margaret

    Williams, Clifford (Abertillery)

    Dunwoody, Dr. John (F'th & C'b'e)

    Mackenzie, Gregor (Rutherglen)

    Wilson, William (Coventry, S.)

    Eadie, Alex

    McMillan, Tom (Glasgow, C.)

    Winnick, David

    Edwards, Robert (Bilston)

    McNamara, J, Kevin

    Winterbottom, R. E.

    Edwards, William (Merioneth)

    Mahon, Peter (Preston S.)

    Woodbum, Rt. Hn. A.

    Ellis, John

    Mahon, Simon (Bootle)

    Yates, Victor

    Ensor, David

    Mallalieu,J.P.W.(Huddersfield, E.)

    Evans, Ioan L. (Birm'h'm, Yardley)

    Manuel, Archie

    TELLERS FOR THE AYES

    Faulds, Andrew

    Mapp, Charles

    Mr. Joseph Harper and

    Mr. Charles R. Morris.

    NOES

    Alison, Michael (Barkston Ash)

    Blaker, Peter

    Crouch, David

    Allason, James (Hemel Hempstead)

    Brewis, John

    Crowder, F. P.

    Atkins, Humphrey (M't'n & M'd'n)

    Brinton, Sir Tatton

    Currie, G. B. H.

    Awdry, Daniel

    Brown, Sir Edward (Bath)

    Dean, Paul (Somerset, N.)

    Baker, W. H. K.

    Bruce-Gardyne, J.

    Deedes, Rt. Hn. W. F. (Ashford)

    Balniel, Lord

    Buchanan-smith, Alick (Angus, N&M)

    Eden, Sir John

    Batsford, Brian

    Clegg, Walter

    Elliott, R.W.(N'c'tle-upon-Tyne,N.)

    Bessell, Peter

    Cooke, Robert

    Eyre, Reginald

    Biffen, John

    Corfield, F. V.

    Farr, John

    Biggs-Davlson, John

    Crawley, Aidan

    Fisher, Nigel

    Black, Sir Cyril

    Crosthwaite-Eyre, Sir Oliver

    Fletcher-Cooke, Charles

    Fortescue, Tim

    Maxwell-Hyslop, R. J.

    Rossi, Hugh (Hornsey)

    Glover, Sir Douglas

    Maydon, Lt.-Cmdr. S. L. C.

    Scott, Nicholas

    Glyn, Sir Richard

    Mills, Peter (Terrington)

    Shaw, Michael (Sc'b'gh & Whitby)

    Grieve, Percy

    Mills, Stratton (Belfast, N.)

    Sinclair, Sir George

    Griffiths, Eldon (Bury St. Edmunds)

    Miscampbell, Norman

    Smith, John

    Gurden, Harold

    Monro, Hector

    Steel, David (Roxburgh)

    Hall-Davis, A. G. F.

    Murton, Oscar

    Taylor, Edward M.(G'gow,Cathcart)

    Hawkins, Paul

    Nabarro, Sir Gerald

    Thatcher, Mrs. Margaret

    Hiley, Joseph

    Noble, Rt. Hn. Michael

    Van Straubenzee, W. R.

    Hill, J. E. B.

    Nott, John

    Wainwright, Richard (Colne Valley)

    Holland, Philip

    Onslow, Cranley

    Wall, Patrick

    Hunt, John

    Orr, Capt. L. P. S.

    Weatherill, Bernard

    Jenkin, Patrick (Woodford)

    Osborn, John (Hallam)

    Webster, David

    Johnson Smith, G.(E. Grinstead)

    Page, Graham (Crosby)

    Wells, John (Maidstone)

    Johnston, Russell (Inverness)

    Pardoe, J.

    Whitelaw, William

    Jopling, Michael

    Pearson, Sir Frank (Clitheroe)

    Wilson, Geoffrey (Truro)

    Kitson, Timothy

    Peel, John

    Winstanley, Dr. M. P.

    Lewis, Kenneth (Rutland)

    Percival, Ian

    Wolrige-Gordon, Patrick

    Lloyd, Ian (P'tsm'th, Langstone)

    Peyton, John

    Woodnutt, Mark

    Loveys, W. H.

    Pike, Miss Mervyn

    Younger, Hn. George

    Mackenzie, Alasdair(Ross&Crom'ty

    Pink, R. Bonner

    Macleod, Rt. Hn. Iain

    Pounder, Rafton

    TELLERS FOR THE NOES:

    Maddan, Martin

    Pym, Francis

    Mr. Jasper More and

    Maude, Angus

    Ridley, Hn. Nicholas

    Mr. Anthony Grant.

    Schedule 7.—(FRIENDLY SOCIETIES.)
    Mr. MacDermot: I beg to move Amendment No. 262, in page 93, line 44, to leave out from "being" to the end of line 45 and to insert:
    "an age which he will attain at a time not less than ten years after the beginning of the term of the policy of assurance".
    We have put down the Amendment in response to representations from the friendly societies that the present minimum age provision is too restrictive, that there should not be a requirement that premiums should cease on the attainment of a specified age, and that it should be sufficient to satisfy the ten-year test, even though there is a provision for the premiums to cease at a specified age lower than 60. We understand that a number of societies have such policies, and we see no objection in principle.
    Amendment agreed to.
    Mr. MacDermot: I beg to move Amendment No. 263, in page 95, to leave out lines 3 to 6 and to insert:
    The following limits shall be substituted for the limits imposed by section 41(1) of the Friendly Societies Act 1896 on the amounts which a member, or person claiming through a member, of a registered society or branch is entitled to receive from any one or more such societies or branches (taking together all such societies or branches throughout the United Kingdom).
    The Chairman: I suggest that it might be convenient to consider, at the same time, Amendment No. 266, in page 96, line 12, to leave out sub-paragraph (2).
    Mr. MacDermot: Yes, Sir Eric. I am obliged.
    508
    These Amendments are necessary to bring paragraph 5 of Schedule 7 into line with Section 41(1) of the Friendly Societies Act, 1896, which contains limits applying to the sums which may be paid to a member or person claiming through a member. The effect, for example, is that, where a policy is inherited, this does not affect the member's personal ration.
    Amendment agreed to.
    Mr. MacDermot: I beg to move Amendment No. 264, in page 95, line 20, to leave out from "registered" to the end of line 22 and to insert:
    "if it contracts with any person for the assurance of an annuity or of a gross sum in excess of".
    This is a minor Amendment to paragraph 5, which at present provides that a friendly society shall not be registered unless its rules specifically prohibit it from assuring a person a sum which contravenes the limits in paragraph 5. This is too restrictive because there are many societies which would have to change their rules in order to comply. It will be enough if the society observes the limit in practice, which is what the Amendment requires.
    Amendment agreed to.
    Mr. MacDermot: I beg to move Amendment No. 265, in page 96, line 2, after "Schedule" to insert:
    "otherwise than in pursuance of sub-paragraph (1) above".
    This Amendment deals with the power given to a committee of management of a society to amend its rules within a

    509
    limited period by a resolution of the committee in order to take advantage of the new provisions. The way the provision is drafted at present is unduly restrictive because it means that societies would have to make all the changes at one time, whereas they may wish to make amendments separately, on more than one occasion. So long as they are all related to the subject matter of the Schedule, there is no reason why they should not be dealt with in that way, and the difficulty is overcome by the Amendment.
    Amendment agreed to.
    Further Amendment made: In page 96, line 12, leave out sub-paragraph (1). —[Mr. MacDermot.]
    Schedule, as amended, agreed to.

    Clause 28.—(UNILATERAL RELIEF FOR UNDERLYING TAX ETC.)
    Mr. Patrick Jenkin: I beg to move Amendment No. 248, in page 31, line 42, to leave out "1966" and to insert "1971".
    We come now to what is not technically the next part of the Bill but a section of it dealing with an entirely different subject, the problem of double tax relief. There are several Clauses here which lead on from the major changes made in the law last year, partly as a result of the Corporation Tax and partly as a result of other measures taken expressly to discourage overseas investment, or, perhaps, to put it in a way more acceptable to the Chancellor, to ensure that the return to the country was more closely in relation to the return to the investor.
    The Corporation Tax itself, of course, reduced the amount of tax against which double tax relief could take effect, being at 40 per cent, as compared with 56¼ per cent, before. That by itself reduced the value of the double taxation relief apart from the provisions which were made for temporary overspill. It is not generally recognised, except by those people who have to study these matters professionally, or in their business, that the Government made other changes which were quite independent of the introduction of Corporation Tax relating in particular to the extent to which United Kingdom taxpayers could claim for what is called underlying tax paid by busi-
    510
    nesses in the overseas country. They have always been entitled to claim double tax relief on tax paid expressly in respect of dividends from overseas and there have been more limited reliefs for the underlying tax extended to the reliefs which have hitherto existed and which were clearly stated by the Financial Secretary at col. 573 on 16th June, 1965
    I will not go into detail on the three categories of case where relief for underlying tax applies except to say that no double tax agreement has ever refused relief for underlying tax in respect of any shareholders.
    The second category is where there has been a unilateral relief which would operate in favour of any shareholder who had invested in a Commonwealth country and whether by agreement or unilateral relief there has always been relief in respect of direct investment. In relation to this second point Section 64 of the Finance Act of last year contained a somewhat strange provision which was commented on in debate at the time. It gave, as it were, advance notice in statutory form that Commonwealth relief would be withdrawn some time in the future. Under Clause 28 that notice is being implemented and the Commonwealth relief is going; that is to say, the relief under a unilateral double tax relief provisions for underlying tax will not now apply after 5th April, 1966.
    The purpose of the Amendment is to substitute the year 1966 by the year 1971. The affect of the change in the law would mean that the only circumstances in which an investor in a Commonwealth country could get relief on underlying tax was if he held 25 per cent. or more of the investment. That was where, in the course of the Bill last year, the Government introduced an Amendment to reduce that figure to 10 per cent. But the point still remains that it will only be effective in respect of direct investment where the United Kingdom investor has 10 per cent, of the investment that there will be any relief for the underlying tax.
    The change is being made almost at the first opportunity since the notice was given last year. The Government seem to be falling over themselves in their haste to limit this double taxation relief. The advance notice is being acted upon

    511
    as soon as it can be and the consequent disadvantages for the British investor in these overseas Commonwealth territories is to take effect forthwith. The basic reason for limiting the relief is to try to stem the amount of investment and to improve its quality. This was the point made over and over again by British investors in these overseas countries.
    2.45 a.m.
    The criticism that was offered over and over again from this side was that it was not necessary to make all existing investment overseas less attractive for existing investors in order to discourage new investment going in. If the purpose is to discourage new investment, the rule should be amended to affect that new investment. It was not necessary to make all the existing investment, amounting to many hundreds, indeed thousands, of millions of £s of valuable assets— £7,000 million of the £11,000 million of which the Prime Minister boasted in New York last year—less attractive. The purpose behind the Amendment is to hammer home that argument which was put from these benches.
    Any increase in the double taxation of income is a retrograde step. The position from which one starts, the sort of primordial slime in this field of double taxation, is where both countries take their full meed of tax from the income that arises, but over the years the countries have succeeded in dragging themselves out of that highly unsatisfactory position, which militates keenly against any effective investment overseas, and increasingly double taxation relief has been granted on a basis latterly of the O.E.C.D. precedents. What this country has done is now reversing that process, giving rise to increased double taxation of investment where it is made by a resident of one country in the territory of another country. That is a retrograde step.
    It seems to me to be important that the very large companies with the substantial investments, particularly in things like the mining and oil industries and other primary industries of that nature, should have much longer to adapt themselves to the new environment in which they will be operating as a result of the
    512
    change in the law. This is bound to have a major impact upon the whole financial structure of these companies, many of which have existed since the last century on the basis of the law as it has existed hitherto.
    One consequence of this change in the law is that there has been a sharp increase in the number of important companies which have wanted to transfer their residence overseas. Already, one reads in the Press that relations are strained between our Government and the Governments of a number of overseas Commonwealth territories because the Treasury refuses point blank to consent to these important companies transferring their residence into the countries in which their main operations lie. This is bound to intensify. By withdrawing this underlying relief for investment in Commonwealth countries this year rather than in four or five years' time, that unfortunate result is being intensified.
    One has also to recognise that in the Budget the Chancellor made his announcement about the voluntary restraints on investment in certain overseas Commonwealth countries. These were to be operated voluntarily through the Bank of England, and, of course, there are no compulsory provisions. This, however, by acting more directly on new investment without in any way affecting the attractiveness of existing investment, would seem to be much more related to the very serious short-term problem with which the Chancellor is faced. It is difficult to understand why he feels it necessary so soon after giving notice last year to withdraw this relief, to the hardship of investors who have invested in the past on the basis of an entirely different taxation system.
    I believe that something must be done, and done swiftly, to improve relations between this country and the countries overseas in which these investments are made. It would go a long way to meet the objections of those countries if the withdrawal of this relief were postponed, as we propose in the Amendment, from 1966 to 1971. It would give longer to the companies to adjust. It would in no sense encourage new investment, because the knowledge that the relief was to be withdrawn in 1971 would mean that the companies or individuals contemplating investment would know what the position

    513
    was to be, and they would not invest money on the footing that they would get a return in the next two or three years. If they were to, there would be no objection, because they would be within the terms of the Chancellor's discretionary limitations.
    I strongly urge on the Government that they should postpone the operation of Clause 64 from 1966 to 1971, which the Amendment is designed to achieve.
    Mr. Peyton: In supporting the eloquent plea made by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), I do not believe that there is much chance of the Government acceding to his very reasonable request.
    Reflection upon this year's Finance Bill and last year's leads one to the belief that, whatever may have been the muddle, confusion and uncertainty with which the Government framed their proposals, the underlying purpose has been clear at all times. It is that they wish to knock on the head overseas investment. As to the folly of that, at this time of night I do not wish to expand, except to say that history will reveal that it was the highest act of folly perpetrated by a very foolish Administration.
    My hon. Friend has referred to the speech made by the Prime Minister to the Economic Club in New York, when he boasted of the fact that we had £11,000 million worth of overseas assets. Coupling together the provisions of the Corporation Tax and the denial of relief from double taxation, and the double taxation agreements which have consequently and subsequently been worked out with individual countries in almost indecent haste, one can see the really sinister design of the Government.
    The Government are out at all costs to achieve a temporary amelioration of the balance of payments—[Laughter.] I do not know why hon. Gentlemen below the Gangway opposite find that so funny. I only wish that I could laugh, too. I can assure them that, if they wish to participate in the discussion, I shall be only too glad to give way. On the other hand, if they see it as a subject for mirth, I cannot think that it will have any result other than prolonging the proceedings.
    514
    I believe that the Government have embarked upon a real rake's progress, which involves selling the pictures, pawning the silver, and the rest. Over the next three or four years they will be able to show proudly to the country a temporary amelioration in the balance of payments because they have squeezed overseas investments. They will have done it at the expense of operations which are of immense importance and consequence to the country. Some of our mining operations and our oil companies, the activities of which have made an enormous contribution in the past, are going to be squeezed.
    No doubt the Government will boast proudly that they have secured a temporary improvement in our balance of payments. What they will not admit, and explain to a public that does not want to be brought face to face with hard facts, is how they have done it; that they have sold for short-term purposes the assets which have been built up by long labour in the past and which have added almost immeasurably to the power and prosperity of the country as a whole.
    One of the most damning counts in the indictment which history will lay against them will be that feature of their policy.
    Mr. MacDermot: The only comment I would make on the speech we have just heard from the hon. Member for Yeovil (Mr. Peyton) is that I conceive that nothing we may say from these benches will dissuade him from the world of mythology in which he has wrapped himself.
    The hon. Gentleman repeats the time-honoured phrase that the Government are trying to knock overseas investment on the head. What we are seeking to do, and have been seeking to do since we have been in office, is to restrain overseas investment to a level which this country can afford.
    One of the factors—and it is only one—that has contributed to our balance of payments difficulties, three recurring crises in one decade, is that consistently we have invested overseas far beyond what we have been earning on both our visible and invisible current trade.
    This is one of things that has to be changed as part of the total measures

    515
    necessary to get us back into balance. The Chancellor has repeatedly made clear that he is not seeking to stop overseas investment and that we should continue to be net investors overseas, but that we should restrain it within the limits we can afford, and one of the measures is the subject matter of this Amendment.
    Mr. Peyton: If that is the case, can the hon. Gentleman explain why the Government, by their policy, are choosing to strike at investment which has already been made?
    Mr. MacDermot: That is exactly what I was coming to. I repeatedly find that it is a mistake to give way, because hon. Members ask me to say what I was about to say, namely, to explain to the hon. Member who moved the Amendment why we are proposing to withdraw this unilateral relief now enjoyed by portfolio investors in Commonwealth countries.
    The reason is that to continue this unilateral relief would be quite inconsistent with the principles of the major tax change introduced last year, the separation of company and personal taxation. If we continued to grant this unilateral relief to particular classes of overseas investors, we would be giving them an advantage which is denied to the investor in a United Kingdom company at home who now gets no credit on his personal liability to tax on the dividends of the company.
    It has been said over and over again in our debates, and it was decided last year, that although we should give notice in that Act in the most formal manner possible, namely, in the Statute itself, of our intention to withdraw the unilateral relief, we should defer the operation of it to a date to be determined by Parliament at a future time. We are now asking that it should be determined as from now. What is proposed in the Amendment is that we should defer that for a further five years, and I seek to explain why we think that is wrong.
    It was made clear that one of the main reasons why we could not decide then the date for the withdrawal was that it was necessary to make substantial progress in renegotiating our double
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    taxation agreements with other countries, particularly countries outside the Commonwealth, under which we were bound to give this relief. And as long as that continued it would obviously appear to be an unfair discrimination against investors in the Commonwealth to withdraw the unilateral relief from them.
    3.0 a.m.
    The position now is that we have made very substantial progress in the renegotiation of these agreements. By far the most important one, which involves over half the flow of dividends to this country from non-Commonwealth countries, is the United States agreement. The protocol has been signed, the agreement has been laid before the House, and we shall have an opportunity to discuss it on, I think, Thursday night. This agreement provides for the withdrawal of this relief.
    Similarly, the protocol to the Swedish agreement which achieves this result was recently approved by the House. The new agreement signed with New Zealand on 13th June has the same effect, and the Inland Revenue is making progress on the matter with a number of other countries as well.
    In those circumstances, my right hon. Friend considered that the time had come when it was proper to withdraw the relief for investors within the Commonwealth, and, of course, we had to have regard to our balance of payments position in taking that decision. There is a considerable amount of money at stake. It is about £20 million a year, and if the Amendment were accepted the cost over the next five years would be about £100 million.
    There is another aspect to this, which is that if, in these circumstances, we were to postpone the withdrawal of this relief for another five years, it would greatly weaken our bargaining position with other countries in relation to the renegotiation of the double taxation agreements which still have to be negotiated, because they would feel that if we were taking a decision to postpone this for five years, we were weakening in our resolution, and they would be less inclined to accept our proposals.
    For those reasons I must urge the Committee to reject the Amendment. I think that with this Amendment we are discussing Amendment No. 249, but I

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    think that it is consequential, because if the Committee accept our advice there will be no justification for it.
    Amendment negatived.
    Mr. Patrick Jenkin: I beg to move Amendment No. 191, in page 32, line 13, after "paid" to insert:
    Provided that where the whole of the overseas tax charged on the dividend represents tax which the company or the recipient would have borne if the dividend had not been paid, credit under paragraph 1 of Part 1 of the said Schedule 17 shall be allowed for one-half of that tax.
    This is another point which arises under the double taxation provisions. Subsection (2) deals with the taxes which will be able to be relieved by the double taxation reliefs, and they fall into three categories, A, B, and C. Category A refers to what can briefly be called withholding taxes. If the dividends in question were not paid, no tax would arise. Manifestly, this does not include the taxes about which we were talking on the last Amendment, the underlying taxes which are paid whether a dividend is declared or not.
    Category B relates to the underlying tax where 25 per cent., or a quarter, of the shares are owned by British investors, or in other cases one-tenth. One-tenth is Commonwealth, and one-quarter is other countries. Finally, category C is certain insurance companies with which we are not concerned.
    The Amendment is concerned solely with the question of the withholding tax. I am sure that the Committee realises that foreign countries can operate a variety of different systems of corporate taxation. Two systems are important, and they can be described briefly as the one that we used to have, and the one that we now have. The one that we now have is a Corporation Tax coupled with a withholding tax. We do not call it a withholding tax, but Schedule F Income Tax. It is, in effect, a withholding tax.
    The other is that the company pays income tax or company tax, or whatever it is called and the dividend is passed on and a substantial Credit is given to the shareholder for the tax which has been paid by the company. In the system which we used to operate, the company deducted and retained the tax on the dividend, in a sense recouping to itself
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    the tax which it had paid in respect of that share of the profits which had been distributed.
    Under sub-paragraph 2(a), if the tax which the foreign country deducts is a genuine withholding tax, either of the sort which we operate here, or of the sorts which arise under the agreements, or a 15 per cent, withholding tax, it clearly qualifies. But if the country operates the form of corporate taxation which gives a credit to the shareholder, that tax is not one which is payable only if the dividend is declared and paid. It is paid by the company in any event. If there is no dividend, there are no circumstances which give rise to the credit.
    In those circumstances, it seems wrong that the investor in a country which operates that system should not be entitled to relief for at least some part of the tax which has been paid by the overseas company. Clearly, some part of it must be attributable to the tax on the dividend. We suggest in the Amendment that the proportion should be one half. I do not nail my flag to that mast and do not necessarily say that one half is the right proportion. The right proportion may be something less, but that some concession should be made, that some part of the tax which has been paid by the company and for which credit has been given to the domestic shareholder in the country should qualify for double tax relief, seems to be clear beyond peradventure.
    It cannot be right that the extent of the double tax relief enjoyed by an investor in this country in respect of an investment overseas should vary so enormously in amount, depending on the system of corporate taxation which the overseas country operates. That is the purpose of the Amendment. As I said, I am not wedded to the particular proportion which we have chosen, but that something needs to be done, some concession made, is clear. I hope that my case is clear, and the Financial Secretary will be able to go some way to meet us on this.
    Mr. MacDermot: There is some substance in the hon. Member's point, but the solution proposed in the Amendment is not the right one. I take the point that when we are dealing with unilateral relief, which is granted at the moment

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    there is a distinction between that relief when the other country has some form of Corporation Tax, so that there is a separate withholding tax against which relief can be granted, and what we regard as an underlying tax, our old system. In the latter case, they would not qualify for relief.
    Obviously, there may be such varieties of circumstances and rates of tax that any attempt to take a proportion—a half or any other—of the profits would result in an anomalous situation. The right way of dealing with this would be to withdraw the unilateral relief. But, of course, we shall be negotiating double taxation agreements in nearly all cases with the countries concerned. The substance of the hon. Member's argument is something which may well have to be considered in arriving at an overall settlement in those agreements as to what is right and fair.
    I can give the assurance that, in the sense that it affects both the overseas countries and our investors in those countries, our negotiators will adopt a reasonably flexible approach to the question. With that assurance, perhaps the hon. Member will agree that that is a more satisfactory procedure than fixing an arbitrary percentage.
    Mr. Patrick Jenkin: I am sure that the Financial Secretary recognises that if we extend double tax conventions beyond the 74 which now exist to cover the countries which hitherto have relied on unilateral relief, this is bound to be a long process. The Financial Secretary indicated that three agreements had been re-negotiated of the 74 which exist. There are more than 100 independent members of the United Nations, which, presumably, eventually would have to be covered by double tax conventions. It would take years and if he does not accept an Amendment on these lines or with a similar effect, until the new agreements are negotiated, investors in territories which operate the pre-Corporation Tax system we had in the United Kingdom will get no relief for taxes paid by companies overseas.
    This is unsatisfactory and unfair. Now that relief is withdrawn, as we were discussing earlier, it cannot be right that there should be wide discrimination be
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    tween investors in the different countries, depending on the variety of taxation those countries operate. I should have thought that here was a case for doing something. The figures that he mentioned would, presumably, be a tiny fraction lost in revenue terms to the United Kingdom Treasury. If some concession were made on those lines, it would be a small sum, but it might mean a great deal to investors in the country concerned.
    I ask the Financial Secretary to look at this again before the Report stage. He concedes there is a point of substance, but refuses to do anything at all about it, and it is unsatisfactory.
    Amendment negatived.
    Question proposed, That the Clause stand part of the Bill.
    Mr. Patrick Jenkin: I will try to keep my point as short as possible. Subsection (2,6) of the Clause is the one-tenth 25 per cent, point.
    I indicated in the earlier Amendment that the pattern which the Government adopted last time was that this moving away was from the 25 per cent, concept for direct investment and, in the case of Commonwealth countries, to 10 per cent. That was widely welcomed as a realistic basis for many partnership companies who particularly operate mining concessions and many overseas installations.
    It now appears from the Swedish Convention which the Financial Secretary mentioned, and the United States Convention, that in the new pattern of double taxation relief that is developing, one tenth will be written into conventions. The position will be that over the whole Commonwealth, whether or not there is a convention, the figure will be 10 per cent., with the remaining non-Commonwealth countries with which there are conventions at 10 per cent. There will be a few stragglers. In non-Commonwealth countries, with which no convention has been operated, that figure will still be 25 per cent.
    The question arises: is it worth while trying to retain the 25 per cent, for those few cases? So long as there was that difference between Commonwealth and non-Commonwealth countries, one could

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    say that we were trying to help developing Commonwealth countries. But so long as they cannot say they are trying to operate that principle of discrimination the logic has disappeared and one is left with a few isolated cases where 25 per cent, is the rule.
    3.15 a.m.
    The question which the Government might consider between now and the Finance Bill next year is whether it is right to try to retain that 25 per cent, and whether, on this new pattern—by which only direct investments will qualify for the underlying relief—it should not now be 10 per cent, in all cases. The difference is between the figure of 10 per cent, and 25 per cent, in relation to what constitutes a direct portfolio investment. I should have thought that there was a case here, particularly now that we are trying to move closer to Europe and since it may be some time before all the conventions have been drawn up under the new basis, for taking this step.
    I trust that the Government will consider the matter in the coming year.
    Mr. MacDermot: This is an important point and I remind the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) that we are here discussing unilateral relief. There is a real distinction to be drawn between a relief granted unilaterally and one which is the result of negotiation, with give and take on both sides, where we give up something and get other benefits in exchange.
    At a time when we are renegotiating agreements—and we have a lot of these negotiations ahead of us—it is not a wise move to lower our sights, as it were, by lowering our unilaterally granted reliefs. The reduction from 25 per cent, test to the 10 per cent, test last year—I remember it well, particularly when answering questions about overseas mining companies in the Commonwealth—was an expressed exception granted to help those countries. They found themselves in difficulties because of the introduction of the Corporation Tax system. It was an exception to something which had been long established.
    I do not say that there will never come a day, when we have renegotiated these new agreements, when what is left of the unilateral system may not be ad-
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    justed to a level different from the prevailing one, but I do not think that this is the moment to seek to make such an adjustment.
    Question put and agreed to.
    Clause ordered to stand part of the Bill

    Clause 29.—(TRANSITORY PROVISIONS FOR COMPANY DIVIDENDS PAID TO NON-RESIDENTS.)
    Mr. MacDermot: I beg to move Amendment No. 239, in page 32, line 31, after "order" to insert:
    "contained in a statutory instrument".
    The Amendment remedies a fault in a technical definition. The Clause restricts United Kingdom tax on dividends paid by United Kingdom companies to residents of certain countries specified in Schedule 8. The provisions apply only for the years 1966–67 and 1967–68, and the Treasury may extend that period by order. We failed to provide in the Bill that the order should be published as a Statutory Instrument, which will ensure that all interested parties may find out where they stand.
    Amendment agreed to.
    Question proposed, That the Clause, as amended, stand part of the Bill.
    Mrs. Thatcher: A matter has been raised with me by one of my constituents and it was the subject of Amendment No. 99. It refers to subsection (1), which begins:
    "This section applies to dividends paid in the period comprising the years 1966–67 and 1967–68 …"
    The question is whether the word "paid" should be read to include "deemed to be paid". I doubt whether that interpretation would be correct.
    Some serious consequences would follow if it does not include "deemed to be paid," because the United Kingdom subsidiary of a non-resident parent company which had paid dividends in 1965–66 in excess of its standard amount would apparently be required to account for Income Tax at 8s. 3d. on the excess deemed to have been paid at April, 1966. If, however, the dividend had been paid at that date, the tax under Schedule F would have been at a considerably reduced rate.

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    If the words "deemed to be paid" need to be inserted, I have no doubt that the hon. and learned Gentleman will do so on Report. I should be grateful for some clarification. If the hon. and learned Gentleman is not in a position to give clarification now, perhaps he could give me the information by letter.
    Mr. MacDermot: I will gladly take advantage of that final suggestion. We were a little mystified as to exactly what the Amendment in question was aimed at. The hon. Lady has explained it very clearly. May I consider the point and let her know?
    Question put and agreed to.
    Clause, as amended, ordered to stand part of the Bill.
    Schedule 8 agreed to.

    Clause 30.—(TRANSITORY PROVISIONS FOR INTEREST AND ROYALTIES PAID TO NON-RESIDENTS.)
    Mr. MacDermot: I beg to move Amendment No. 240, in page 34, line 39, after "order" to insert:
    "contained in a statutory instrument".
    This is exactly the same point about publication of an order by Statutory Instrument.
    Amendment agreed to.
    Question proposed, That the Clause, as amended, stand part of the Bill.
    Mr. Patrick Jenkin: Subsection (2) is a slightly odd provision. The Clause is intended to relieve from tax chargeable under Schedule F certain interest and royalties which fall within the definition of Schedule 11 of the 1965 Act. It seems that this must imply that, because certain interest and royalties are included as distributions in Schedule 11, the nonresident treaty relief from United Kingdom companies with such interest and royalties is somehow circumvented.
    If this proposition is valid—it is a supposition rather than a proposition— all the other interest which has to be treated as a distribution under Schedule F will be denied treaty relief—for instance, bonus and convertible securities and other such securities. Subsection (2) is concerned only with treaty relief. In all the relevant treaties interest and
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    royalty are generally defined, so that it is not a question of having regard to the national law as to whether this will qualify for relief.
    It seems doubtful whether it is right that a country should seek to withdraw or imply the withdrawal of relief on certain forms of income passing between the two countries if the Convention expressly says that there should be relief. If the supposition is correct, people will place rather less faith in the Conventions than presumably is the intention of the Treasury when drawing them up. The whole point is based on a supposition or an implication which is to be drawn from the subsection. It may not be justified. If it is not, the whole point falls. If it is justified, it has some implications which it would be right for the Financial Secretary to explain.
    Mr. MacDermot: I am assured that the hon. Gentleman's point is based on a misunderstanding, but I do not pretend that I have an understanding of the misunderstanding. I can seek to explain to the hon. Gentleman what the purport of the Clause is if that is what he wants, but I think he appreciates the general purport. Perhaps the hon. Gentleman will allow me to write to him, giving him a full explanation.
    Mr. Peyton: Originally, I had no intention of intervening in this debate. I do not do so out of any desire to prolong the proceedings unnecessarily. I am not sure that when we are debating complicated matters it is right that such explanations as are available should be made by letter passing between a member of the Government and an Opposition Front Bench spokesman. This seems to me to be a complete denial of what the proceedings of this Committee are for.
    I do not wish to be unreasonable. I have every sympathy with the Financial Secretary in his difficulty in understanding exactly what is at issue between us. I ask him not to regard my intervention —my second tonight—as frivolous. But it would be much more satisfactory if he amended his undertaking and promised to give a clear exposition of what is involved when we reach the Report stage. Merely to say that the matter can be resolved by letter is wholly inadequate.
    Mr. Patrick Jenkin: I am sure that my hon. Friend the Member for Yeovil (Mr. Peyton) is right on this, as he was in his previous intervention. It was only my desire not to submit the Committee to the exposition which I am sure the Financial Secretary would have given us on Schedule 6, dealing with the three-year surplus, that I was prepared to accede to the hon. and learned Gentleman's suggestion in that instance.
    In this case, it seems quite possible to put down an Amendment on Report to allow the matter to be raised then. Clearly, I have raised a point to which the hon. and learned Gentleman does not immediately have the answer. I do not blame him, for these are complex matters. But my hon. Friend the Member for Yeovil is right. The point can well be explained to the House on Report. I suggest that, whatever may happen between the hon. and learned Gentleman and myself, that would be the right thing to do constitutionally.
    Mr. MacDermot: I agree with what has been said. There is no question of trying to conceal any matter from the Committee or of failing to give a public answer where it is required and would be helpful. But on Finance Bills it is common practice, in these technical matters, for the Government to make available an answer to an hon. Member who has raised a point. If it is a matter which he wants on record publicly, then, obviously, we can make suitable arrangements by putting down an Amendment from one side or the other in order to air it on Report if that is the right and necessary course.
    Question put and agreed to.
    Clause, as amended, ordered to stand part of the Bill.

    Clause 31.—(TRANSITORY PROVISIONS FOR DOUBLE TAXATION AGREEMENTS HAVING RETROSPECTIVE EFFECT.)
    Question proposed, That the Clause stand part of the Bill.
    Mrs. Thatcher: This is an extremely difficult Clause to understand. I think that the Financial Secretary will know what I mean when I say that the mischief at which a Clause of this nature is intended to strike should be apparent from the wording of the Clause, but it is
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    impossible to know the circumstances which brought the Clause into the Bill merely by reading it.
    Not only is this impossible for hon. Members, but it is, it appears, also impossible for those who are accustomed to handling double taxation agreements and those who are accustomed to putting out commentaries on Finance Bill Clauses. The only thing one can deduce from it is that it make retrospective provision for withdrawing relief which had been given retrospectively. The circumstances which gave rise to it are nowhere apparent, however.
    One therefore goes to the Chancellor's Budget speech to get a clue of what the Clause means and the only thing one can link it with is that it has something to do with the Swiss double taxation agreement. One tries to get hold of a copy of the agreement. I have not succeeded in getting one but I have succeeded in getting a little bit of intelligence about it. I ask the Financial Secretary to tell me whether my interpretation is roughly correct.
    I understand that, under this Clause, royalty payments have been allowed twice. Quite how that came about I am not quite sure, except that some people have told me they were allowed first against Income Tax and Profits Tax and then the same payments were later allowed against Corporation Tax.
    Quite what that has to do with double taxation agreements and why we need to alter an agreement retrospectively, I do not know. I should have thought we could have done that by a Clause in the Bill unrelated to a double taxation agreement. However, my complaint is that on the face of it one cannot begin to interpret the Clause, and I hope, therefore, that as it is an important one, giving very extensive and wide powers to the Government to put clauses in double taxation agreements which have retrospective effect—that is to say, they withdraw relief retrospectively —the Financial Secretary will give us a very full explanation of what it means.
    3.30 a.m.
    Mr. MacDermot: I will give as full an explanation as the Committee can bear at this hour. May I make clear, first, that it is an enabling Clause, that it is a machinery provision, which does not

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    itself alter anybody's rights at all. The point is that at the moment there is no machinery by which the House can give approval to a double taxation agreement or a protocol amending one which involves retrospective withdrawal of a relief, and the new protocol signed with the Swiss Government which has just been laid before Parliament——
    Mrs. Thatcher: Which day?
    Mr. MacDermot: I think on Monday —does contain such a provision. We shall have an opportunity to discuss that, of course, and the full details of it, when we consider that protocol, which will require approval. This Clause is merely laying the basis for the House to be able to consider it at all.
    No doubt the Committee would like to know why it is there is such a provision in the agreement. It does deal, as the hon. Lady said, with withdrawal in the protocol of a relief related to payments of interest and royalties by a United Kingdom concern to residents of Switzerland. The interaction of the existing convention and the Finance Act, 1965, produced the anomaly that relief may be given twice in respect of the same payment. This point was overlooked when the 1965 Bill was being drafted; it was a case of a manifest error.
    The general rule for Corporation Tax purposes is that a company which pays interest and royalties will be entitled under the Finance Act to a deduction for the payment against its total profits, but no Corporation Tax is due for interest and royalties paid before 6th April, 1966. If it were, a company would get effective relief for its payment twice over, as against Income Tax liability for the year of assessment in which the payment was made, and again against Corporation Tax charged on the profits arising during that year.
    The double taxation convention with Switzerland contains a provision that interest and royalties paid from a United Kingdom source to a Swiss resident subject to Swiss tax on them are exempt from United Kingdom tax, and that the United Kingdom payer is to be allowed the payment as a deduction for Profits Tax purposes. Consequently, if the United Kingdom were to remain bound by the terms of the convention we should get
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    the highly anomalous result following: United Kingdom companies which paid interest or royalties to Swiss residents would get Corporation Tax relief for payments made before 6th April, notwithstanding the fact that in effect they had already had relief from Income Tax. There is a quite substantial amount involved here with this anomalous relief, a total of about £3½ million.
    As I say, the protocol has now been signed and is now before Parliament, and we shall have an opportunity to consider it in detail. What this Clause does is to give us the power to consider it.
    Mrs. Thatcher: I am very grateful to the Financial Secretary for that explanation, but before we leave it I must point out that the Clause goes much wider than that explanation. We must look very carefully at the powers which it gives and we shall do so on Report. If the right hon. and learned Gentleman had had the experience, as I have had, of trying to construe how wide the Clause could go, without knowing the specific circumstances to which it was directed, he would be very alarmed at the wide powers which may be given. If need be, we shall return to this matter on Report.
    Mr. Peyton: One of the reasons why I have stayed to this hour of the night is that I have a lively curiosity about the meaning of the Clause. The Financial Secretary will not take it too much to heart, I hope, or regard it as a personal insult, if I say that I am not all that much wiser now. I realise very well that enabling provisions seen from the Government Front Bench are rather convenient and acceptable but, seen from where I am standing, are altogether less attractive and are objects of suspicion.
    The mere word "retrospection", when incorporated in a Finance Bill, arouses suspicions. One always has a feeling that year after year the Treasury tries to get a ration of retrospection into every Finance Bill just to keep it alive, so that Parliament will not be too rude when there is retrospection in the next year's Finance Bill when the Treasury will always be able to say that there was some retrospection in the previous year, thus trying to get away with it again by saying that there is nothing in retrospection which Parliament will not swallow in principle.

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    I would like the Financial Secretary to say to what extent the Clause is made necessary by double taxation agreements which have not yet been made. As I understand it, the Clause is necessary simply because of intended future agreements, and I imagine that the Swiss agreement is the chief of those. If that is correct, I do not understand why the Clause should not wait until such time as the agreements have been made and properly considered by Parliament.
    Mr. MacDermot: The agreement has been made and a copy can be obtained from the Vote Office. It has been formally laid before Parliament. The trouble is that under its own rules Parliament cannot consider that agreement and decide whether to approve it without a provision such as that in the Clause. The existing machinery for considering double taxation agreements does not allow for a situation where the agreement withdraws the relief retrospectively. If it grants a relief retrospectively, that is covered, but it does not cover this situation which has obviously not arisen before, or it would have been covered and we would have an enabling provision of this kind.
    Mr. Peyton: From what the Financial Secretary has just said, it seems that the rude remarks which I would wish to aim at the idea of retrospection are comments which I should save until we discuss the agreement.
    Mr. MacDermot: It is not for me to tell the hon. Gentleman when he is in order, but I think that he has here, quite legitimately, a double barrelled rifle. He is entitled to shoot a general bullet at the whole principle of retrospection here and, having made his protest, then to aim a more specific bullet at the specific retrospective provision when we come to it.
    Mr. Patrick Jenkin: The whole Clause is very disturbing. As drawn, it is nowhere near limited to dealing with the particular Swiss problem about which the confusion has arisen, the double relief on royalties. As I understand the matter, with the Convention that has been passed, perhaps years ago, granting a relief, it is open now to the Chancellor to come along and say "I think that this
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    has been such a tremendously favourable position to a particular class of taxpayer that we are going to take this relief back for, let us say, six years." It would be open to him, under this Clause, to make an Amendment which would require the taxpayer to repay a tax for which relief has been granted. If that is not so, would the Financial Secretary be good enough to point to the provision in the Clause which makes that limitation?
    The last few lines at the bottom of page 35 are completely general:
    "… notwithstanding that the relief so withdrawn is for periods which include periods before the making of the arrangements."
    That is to say, that one can go back for an unlimited period of time. Is not the right thing to do to put in some much more limiting provision so that it is only in very limited circumstances—the sort of circumstances that have arisen in the Swiss case that the Clause should grant this power?
    Mr. MacDermot: There is nothing in this Clause which would enable the Chancellor unilaterally to bring forward proposals to withdraw retrospectively a relief provided for in a double taxation agreement. First of all, he has to get the agreement of the other country, and that is a very important condition. It would only be in exceptional circumstances that two countries would agree to the withdrawal of a relief retrospectively. I have explained what the circumstances are here—that it is owing to an oversight in the drafting——
    Mrs. Thatcher: Someone made a mistake.
    Mr. MacDermot: Yes, someone made a mistake. Because of the manifest error in the Bill last year an anomalous result has been produced in that the same relief could be given twice over. Our Swiss friends readily recognised that this was something that ought to be put right. It is only in those circumstances that this applies. Even then all that this Clause does is to enable the matter to be brought before Parliament and Parliament can say that it is not prepared to agree to the withdrawal of the relief.
    Question put and agreed to.
    Clause ordered to stand part of the Bill.

    Clause 32.—(REGULATIONS RELATING TO DOUBLE TAXATION RELIEF.)
    Mr. Patrick Jenkin: I beg to move Amendment No. 291, in page 36, line 23, at the end to insert:
    (3) A company resident in the United Kingdom which has more than one source of foreign income may elect that in computing the credit for foreign tax to be allowed to it for any financial year, all the foreign taxes payable in respect of such sources of foreign income shall be aggregated and the credit shall be allowed against the due proportion of the corporation tax chargeable on the profits of the company attributable to the aggregate foreign income of the company from such sources.
    This will be the last discussion that we shall have this evening—[HON. MEMBERS: "This morning."] In HANSARD it will appear as yesterday. I approach this Amendment confident that we will be able to wend our way to our beds filled with the glow of satisfaction, not only work well done on the Bill as a whole, up to this point, but on this particular Clause.
    This Amendment covers an important point, which was viewed with considerable favour by Ministers, both in Committee and on Report last year. The point is that the effect of the limitation of double tax relief on companies, which operate through a large number of branches, not subsidiaries or separate companies, but branches, operating in overseas territories, will cause great difficulty to those companies. The remedy which has been put forward, and is contained in this Amendment, is that these companies should be permitted to lump the profits, and the overseas tax charged on those profits, of all the branches, into one great dollop.
    The advantage of this is that it would preclude the situation, which arises at present, where some branches, because of the high rate of tax charged in the countries where they operate, do not get full relief for the tax which has been charged against United Kingdom tax, and other branches, operating in countries with a different tax system get the relief and still have something over. For a great many of these companies, particularly the banking companies, it is quite unrealistic to take each branch separately. The proper way to deal with these businesses is on one world-wide basis.
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    3.45 a.m.
    Some of the banking companies which the Amendment would help to carry on their business in overseas territories operate as many as 30 or 40 different branches in different territories, and in one case the figure is more than 40. One can thus see the complexities that inevitably arise through the necessity to have to perform a separate computation for each branch, and the great simplicity and ease of working, for both the company and the Inland Revenue, if they were allowed to submit, as it were, one computation covering all the branches.
    As well as simplicity, it would have the effect of allowing the company to average out the relief from the double taxation, and would allow it to take greater advantage than at present of the relief available against those profits earned in branches where the actual tax charged overseas is at a fairly low rate.
    It must be remembered—this is really the economic case for the Amendment— that many of the overseas branches operate in direct competition with the indigenous institutions, banks or whatever they may be. Anything which imposes on the British banks operating overseas penalties of a fiscal or any other nature to hinder their operations must be to the disadvantage of not only the firms but also the country. Elsewhere, rather less than 24 hours ago, I was arguing about investment grants, particularly for computers in these overseas countries, but I got no change from the President of the Board of Trade.
    I am encouraged to think that the Government may well go some way towards meeting this point, because when Mr. Peter Emery, former Member for Reading, who played such a notable part in the debates on the Finance Bill last year, moved a similar Amendment in Committee, the Financial Secretary said
    "I want to make clear that I am not giving an undertaking that I will bring forward Amendments, but I shall be glad to consider the matter further."—[OFFICIAL REPORT, 22nd June, 1965; Vol. 714, c. 1664.]
    Being a man who is always as good as his word, this is what he did, and when he came to the Report stage he said:
    "We do not rule out on principle legislating on this subject. … On looking further into

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    it we do not feel it right to try to bring forward an Amendment at this time."
    At the end of his reply he said:
    "… and the Government have decided not to legislate on this matter this year but to look carefully into all the implications during the coming year."—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 221–2.]
    I am sure that the Chancellor and his advisers have done this. A strong case can be made out for it. It is a very limited form of grouping, not a grouping of companies but of profits, recognising the situation that exists, that it is one business which is carried on in a variety of territories all over the world.
    These businesses, particularly banking and other institutional businesses, bring immense value to the country in invisible foreign earnings and also play a notable part in the financing of our exports to overseas territories. The validity of the case was admitted last year, and I am certain that that validity is no less this year.
    I hope that we shall be able to go our way tonight in the knowledge that the Government are now prepared to meet this case, and that, if they do not like the drafting of our Amendment, they will be prepared to do something themselves on Report.
    Mr. MacDermot: I well remember the debates which we had on this subject last year. It is not quite right to say that we accepted the validity of the arguments, but we certainly accepted that there was much force in them and said that we would view the matter with sympathy to see whether we could find an acceptable solution.
    I said on Report:
    "The problem is complex and it would not appear to be right in principle to single out a class."
    That must clearly have been an allusion to the problem of the overseas bankers. I think that in Committee I had specifically acknowledged that their case was particularly strong.
    But I went on to say:
    "In any event, there are many difficulties to be overcome. There is no doubt that pooling provisions could not only offer scope for avoidance in the strict tax sense but might have undesirable economic consequences in serving as an inducement to companies in certain situations to invest abroad rather than
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    in this country when for other reasons it might be better for them to invest here."— [OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 221.]
    I undertook that we would look carefully into the matter, and this we have done. I regret to say that we have not got any farther. We have not found a solution which would overcome the difficulties. It behoves me, in spite of the hour, to give a little fuller explanation of why we have reached this conclusion.
    First, I reiterate the point I made last year, that we do not feel that it would be right to single out a special class of companies for extension of double taxation relief on the lines proposed and to grant it to them alone. This would lead to complaints by other companies which it would be difficult to resist. One must look at the whole class of companies.
    Next, the economic consequences. In some circumstances, the scheme proposed could provide an incentive to a company to invest abroad in a low tax country rather than to invest at home. For instance, a company already operating in a high tax country could get no relief for any excess of the overseas country's tax level compared with our own, but that excess could be used to reduce its overall tax bill if it invested in a third country where the rates were lower than in the United Kingdom. Equally, for companies operating in a low tax country, the disincentive to invest in a high tax country would be reduced.
    As I said last year, there are obvious tax avoidance possibilities. A concern operating in both the United Kingdom and several countries overseas, in some of which the tax rates were relatively high and in others of which they were relatively low, could avoid United Kingdom taxation by switching profits from a United Kingdom branch or subsidiary to its branches or subsidiaries in low tax countries. I do not want to make too much of this. I take the point which hon. Members have made several times during our debates, that we have an obsession about tax avoidance. But there is here a case in which the mere existence of tax avoidance possibilities presents a formidable administrative problem.
    While those possibilities existed, inspectors would have to investigate the amounts for relief put to them with an

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    eye to seeing whether the arrangements had been made in order to exploit those possibilities. In view of the very great burden which is put on inspectors, we do not feel that it would be right to impose an additional burden of this kind in consequence of a measure which, at best, is of doubtful merit.
    Bearing in mind, also, that this is a field in which our balance of payments is affected, we do not think it right to introduce a measure which would result in giving fiscal incentives to some companies to invest in low tax countries overseas rather than at home.
    I hope that, after this rather fuller explanation, the Committee will understand that there is a difficult problem here and that it would not be right to try to solve it by picking on a specific solution favourable to one class of company, in particular the banks, which, I agree, are harshly affected.
    Mr. Patrick Jenkin: Has the Inland Revenue had any consultations with representative bodies, the Overseas Bankers' Association or other bodies of that kind? I understand that the suggestion is that they have. I wonder if it would be any use in trying to follow this up. The banks in particular feel that they are being placed at a disadvantage.
    Mr. MacDermot: Last year I made it clear that we have had representations on this subject and there have been discussions at the Inland Revenue.
    Amendment negatived.
    Clause ordered to stand part of the Bill.
    The Deputy Chairman: Mr. Callaghan.
    Hon. Members: Come on.
    Mr. Callaghan: I beg to move,
    That the Chairman do report Progress and ask leave to sit again.
    I thought that there was another Schedule. I am delighted and relieved that there is not. The erudition, knowledge and research which has been soaring around my unwitting head during the last few hours has left me in the usual state of knowing more at the end than I did at the beginning.
    Some hours ago the right hon. Member for Enfield, West (Mr. Iain Macleod)
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    suggested that we should reach Clause 32, but as everyone seems to be so fresh I wonder whether that is right and whether we should not push on. However, as the right hon. Member suggested it, and I agreed, I am sure that we must keep to that arrangement. I hope you will report Progress, Mr. Irving, and that we will meet again very soon.
    Question put and agreed to.
    Committee report Progress; to sit againthis day.

    LOCAL GOVERNMENT (SCOTLAND) [MONEY]
    Resolution reported,
    That, for the purposes of any Act of the present Session to make further provision in relation to Scotland, with respect to the payment of grants to local authorities, valuation and rating, local authority expenditure and the classification and lighting of highways, and for other purposes, it is expedient to authorise the payment out of moneys provided by Parliament of: —

    (1) an increase in respect of the year 1966–67 (not exceeding £700,000) in the aggregate amount of general grants payable to local authorities under the Local Government and Miscellaneous Financial Provisions (Scotland) Act 1958;

    (2) grants to local authorities, for the year 1967–68 and each subsequent year, of an amount equal to the aggregate amount which the Secretary of State determines is to be available for that year for the payment of grants (other than housing subsidies) to local authorities out of such moneys, reduced by such portion of that aggregate amount as the Secretary of State estimates will be allocated to grants in respect of such services provided by local authorities as he may determine;

    (3) the expenses of the Secretary of State incurred under the said Act in paying:—

    (a) grants to local authorities in connection with the development or redevelopment of land, the use of land as a public open space or the reclamation or improvement of derelict, neglected or unsightly land;

    (b) grants to local authorities in respect of expenditure on staff which is attributable to the presence in their areas of immigrants from the Commonwealth,

    not exceeding in the case of grants mentioned in paragraph (a) above, one half of the amount which, under the provisions of the said Act or under section 89(4) of the Town and Country Planning (Scotland) Act 1947, is or is treated as, or as costs incurred on account of, expenditure' in respect of which the grants may be paid;

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    (4) any expenses incurred under the said Act by the Secretary of State in connection with his power as highway authority to provide lighting for the purposes of any road or proposed road;

    (5) any administrative expenses incurred under the said Act by the Secretary of State; and

    (6) any increase attributable to the provisions of the said Act in the sums payable out of such moneys under any other Act.

    Resolution agreed to.

    BUILDING METHODS (BAD WEATHER PRECAUTIONS)
    Motion made, and Question proposed, That this House do now adjourn.—[Mr. Howie.]
    3.57 a.m.
    Mr. Terence Boston: Midsummer may seem to be a strange time to raise the subject of bad weather building but it is quite useless to wait until the winter is upon us before we make preparations. In any case, it seems that bad weather is not confined to winter months. The failure to gear ourselves to bad weather working causes great losses to the nation as a whole and to thousands of individuals. It is clear from the excellent leaflet produced by the Ministry of Public Building and Works, "Winter Building Costs", that output falls by something like 10 per cent, during the winter. This also means that somewhere around 30,000 to 50,000 men are laid off during the period. Some people put the figure higher—at 60,000 or 70,000 men. It also involves a considerable loss in wages, and in a normal winter this is put between £6 million and £11 million. In a bad winter like that of 1962–63 160,000 men were laid off. Another measure of the loss to the nation is that in 1962–63 it is reckoned that about £12 million was paid out in unemployment and National Assistance benefits.
    Bad weather causes loss and hardship to workers in the industry and their families, a loss of profits for building firms and inconvenience and even hardship to people waiting for their homes to be built. It is of vital importance to maintain output if we are to reach the high targets for house building.
    This subject is of great concern in my area which is a brick manufacturing area
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    and it would be far better for it if there were a steady demand throughout the year. We tend in this country to accept disruption caused by the weather instead of countering it. In other countries building work hardly stops during the winter months—in Sweden, for example, Canada and other countries, like Russia. Our building industry is a vital frontline one doing first-class essential work, but part of the blame must attach to the industry itself for failing to adapt to new methods and techniques. It needs to be much more modernisation-minded. Vast chunks of it are rather too backward or, to put it kindly, too modest about its capabilities.
    That was startlingly revealed in the building industry's attitude to research into new methods as shown in the Answer by my hon. Friend the Parliamentary Secretary to a Question I put to him yesterday which showed that in 1964 whereas all industries spent an average of about 2·7 per cent, of total investment on research, the building industry spent only.3 per cent, of its total investment or gross output on research. That is a very small figure indeed.
    I know that much has been done both by my hon. Friend the Parliamentary Secretary and by my right hon. Friend the Minister of Public Building and Works, and by his predecessor, my right hon. Friend the Member for Leeds, West (Mr. C. Pannell), to get the industry to adopt bad weather building methods. Various excellent publications have been produced by my hon. Friend's Ministry, including a booklet called "Winter Building", which was issued in 1962–63 and was produced by the previous Government. It took the worst winter for a good many years to produce that booklet and to produce a committee on winter building.
    One point in passing about that booklet is that it contains a reference in its early pages to the fact that not all the material produced by the committee could be referred to and that this was to be evaluated and processed. I wonder whether my hon. Friend the Parliamentary Secretary plans to bring out a more up-to-date version of the booklet, because it is very useful, and whether he can say something about what has been done subsequently to assess the difficulties and to evaluate this material.

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    Perhaps I may raise a number of specific questions and put one or two suggestions to my hon. Friend. One serious problem which faces the building industry is the loss of men each year, and also the fact that it is quite difficult to recruit new men to the industry. If we are to get more recruits to the building industry, one of the essential needs is to improve conditions on the site. One of the main things in this respect is to improve protective clothing and to get it rather more extensively used. I have seen some fairly ghastly and cumbersome types of protective clothing. We are not asking for the new, young apprentice entrants anything like Carnaby Street, still less Savile Row, but in a good many cases firms could use rather more improved clothing which is more comfortable to wear and in which it is easier to move about. I am wondering what has been done in this direction. We could also do a great deal to improve site conditions by getting firms to install showers, changing rooms, and so on. This would be one positive way to help to improve the status of the building worker.
    A number of essential things, perhaps of a more concrete nature, also need to be done. I know that here again my hon. Friend and his Ministry have been working hard at this for a number of years, but one specific point which I would like to mention particularly is lighting on the site. Even if the weather in Britain is somewhat unpredictable, I should have thought that darker evenings are pretty regular in autumn and winter, and one should be able to predict and calculate at least for those. Can my hon. Friend say something about the effect that bad light or lack of lighting equipment has on output? What exactly has his Ministry been doing to encourage the use of lighting equipment more extensively? What is the extent to which lighting is being used on sites throughout the country? At the moment, one sees a great many sites that ought to be using floodlights and are not. Perhaps, too, my hon. Friend can say something about the cost, because one of the complaints which have been made recently is that the cost of such equipment is too high.
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    That brings me to the economics of winter building and the way that expenditure on equipment and materials affects the builder himself. Many of the big firms throughout the country have been using the new techniques for some time. If the Parliamentary Secretary has time to mention some of the actual technical developments, perhaps he could refer specifically to whether he is satisfied that, for example, new ways of concreting in frosty conditions are being used sufficiently.
    It is often said that equipment for lighting on the site, improvements on the site, and so on, are beyond the reach of the small man. I should have thought that the small man can hardly afford not to use these new methods, and that he would be in danger of being squeezed out altogether if he did not get himself up to date. I wonder whether it is possible to encourage small builders to group themselves together in order to invest in equipment like floodlighting and other plant, and even in mobile canteens and other facilities, in co-operatives rather in the way that farmers do with equipment like combine harvesters?
    I want now to refer to contracts. There is no doubt that some builders use bad weather clauses in contracts as an excuse to avoid keeping to completion dates. Although something has been done to tighten these up, I wonder whether my hon. Friend has carried out any further work in examining contracts, and whether there is further scope for tightening them up, more especially local authority contracts.
    What is being done to see that the local authorities themselves are fully alive to the methods that can be used to further building in bad weather? Are the local authorities being called together to discuss the subject? Are any exhibitions being arranged for them? I should have thought that travelling exhibitions or demonstrations might be used.
    Another factor which could help considerably is an extension of publicity. Apart from the booklet to which I have already referred and a number of very useful leaflets which have been produced, there is also an excellent film about winter building which has been produced by the Ministry. I wonder what other positive steps it is using to make publicity rather wider and not just passive.

    541
    For instance, has television been considered as a possibility?
    I want to say a brief word about financial incentives. It has been pointed out that, in a number of countries, financial incentives have been used to encourage builders to adopt winter building methods. This has been tried in Sweden and Canada. In view of one of our debates earlier this morning, this may be an appropriate time of the year to discuss these matters.
    I wonder why financial incentives have not been tried here. Various suggestions have been made, such as a subsidy for the use of labour in winter, and tax incentives for materials used particularly in bad weather building. Perhaps my hon. Friend might make a passing reference to those.
    One final point to which I should like to refer is the question of opening the eyes of the public to what needs to be done. As members of the public, we are all to blame because of our attitude. As customers, we tend to be reluctant about commissioning such work as painting, decorating and plastering during the winter because we feel that the work cannot be done in bad weather and is bound to come to grief, whereas it can in fact be done with new methods and new materials. I wonder whether the Ministry has any ideas about getting the customer used to this and allaying his former fears?
    Returning to painters and decorators for a moment, it is a fact, I believe, that unemployment affects that particular group of the industry more than any other group working in it.
    These are some of the points which I should like to put to the Parliamentary Secretary, and I would hope that he will be able to say something about what the Ministry has been doing.
    For some 18 months from October, 1964, I had the pleasure of sitting silently behind my hon. Friend in building debates in the seat now occupied by the hon. Member for Ashfield (Mr. Marquand), the Parliamentary Private Secretary, and although I am rather further behind my hon. Friend tonight I can assure him I shall be right behind him in any efforts his Ministry makes.
    4.11 a.m.
    The Parliamentary Secretary to the Ministry of Public Building and Works (Mr. James Boyden): Contrary to appearances, this is a timely debate. Bad weather is certain in a British winter, and the summer is the time when builders should plan their winter precautions and order their equipment to cope with frost, rain and darkness. My hon. Friend has shown considerable knowledge of the difficulties caused to the construction industry by bad weather, and I am grateful to him for raising this matter even at this late hour.
    I think that one of the essentials, as he suggested, is a much greater consciousness on the part of the public and the builders of the need to take precautions. As my hon. Friend said, there is a great deal of published material about this. The Ministry issues leaflets on concreting in cold weather, bricklaying in cold weather, weather and the builder, etc., and the industry itself has shown considerable responsibility in issuing material about it—the London Master Builders' Association has issued a comprehensive document on standard practice in winter working, and a catalogue of winter building equipment. So altogether there is a good deal of material about, and the task in front of us is to get that material into the hands of every builder.
    As my hon. Friend has said, not only is it necessary for the builders to have full information about what they can do in bad weather, and particularly winter weather—it is necessary for the clients and the professions to have the same so that they can, through their contract arrangements, encourage continuity of working through bad weather and the winter.
    The Ministry has issued instructions to all its professional officers in charge of contracts to try to ensure that precautions are taken and that work carries on in inclement weather unless it is so severe as to make this unreasonable.
    This has been taken up in Circular 43/65 by the Ministry of Housing and Local Government which recommends similar action by local authorities, and in the same way the Department of Education and Science, the Ministry of Health and the Scottish Development Department have all taken the matter

    543
    very seriously and pressed on the bodies with whom they work the need for good contract arrangements to cover work throughout bad weather and the winter. On painting work, the Ministry does, as far as it possibly can, engage painters to do indoor painting work in the winter season, and it encourages other bodies to do the same.
    My hon. Friend referred to films. The Department has produced an excellent film, which I think he has seen. This drives home the moral of working through bad weather very well, and I am pleased to say that the B.B.C. has produced a television film which was shown called "Carry on Building". This was shown on B.B.C 2 last summer, and it is to be rescreened on B.B.C. 1 at 9.45 p.m. on 27th, 28th and 30th June. I hope that hon. Members as well as a large number of people connected with the building industry will take the opportunity of seeing this film. We are most grateful for the collaboration which there was between the Ministry's winter building adviser and the B.B.C. in preparing this film. It is a little unfortunate that it has to be screened in the summer. Although summer is a good time for considering this subject, it is not perhaps a good time for televising this kind of material. Anyway, the B.B.C. has been most co-operative, and for this we are most grateful.
    As my hon. Friend knows, the Ministry all the time, but particularly in the winter season, goes in for a big programme of conferences, lectures, and film shows. Last winter I attended a conference in Glasgow. It was exceptionally well organised, and people came from all over Scotland to discuss winter and bad weather building. The whole thing was most effective.
    My hon. Friend raised a point about tax incentives. He will be interested to know that in May last O.E.C.D. had a working party on the best way of continuing work in bad weather and through the winter. The consensus was that tax incentives are open to abuse, and that the British method of nagging, worrying, using propaganda and pushing, as my hon. Friend has been doing tonight, is as effective as, and considerably cheaper than, using tax incentives. On this score I think we can sum it up by saying that
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    we should try all the methods that we know before we think of piling further burdens on the taxpayer. But I am grateful to my hon. Friend for his suggestion.
    On the question of publicity, my hon. Friend raised a point about the pamphlets which have been issued from time to time. We have issued a questionnaire on the effect of winter lighting. Results are not yet available, but a good deal of information has come in, and I shall consider the point raised by my hon. Friend. We have also a vast amount of other information, which we need to publicise more widely, on all sorts of matters like air houses, coverings for buildings in course of erection, protective clothing, heating, and chemical additives to cement, and I shall continue to look carefully at the kind of publications that we need.
    My hon. Friend said that he could not understand how any builder could afford not to take these precautions. I have said several times that winter building pays. I wish that every builder would grasp that. The Ministry issues a pamphlet which sets out the economics of winter building. We have a rough, rule of thumb guide which puts it this way, that in a normal winter a contractor can spend up to 10 per cent, of his fixed weekly overheads and profits for use during the winter period and recover that expenditure by keeping up his output. From a national point of view this is even more important, because of the general effect which working through the winter will have on the men, on the image of the builder, and so on.
    I take the point made by my hon. Friend about small builders grouping to hire and share equipment, or perhaps even to buy it. I also take the point, which I am pursuing, of the best way of encouraging mobile welfare facilities.
    One of the cheapest things which can be done, and something which is certain to be required in a winter, is to provide site lighting. I have said that winter building pays, and I have suggested a rule of thumb by which a builder can calculate what it will cost him to take precautions. There is no doubt that darkness comes in winter. There may be an argument that it might not snow in a good winter, and therefore that a builder need not bother, but darkness certainly comes, and it is disappointing

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    that almost every site is not lit through the winter. But the figures show a steady improvement. In 1963–64, it was estimated that site lighting was used on little more than 10 per cent, of the sites. As a result of publicity and general propaganda about lighting, this figure had risen by 1964–65 to 30 per cent. The questionnaire is being analysed and I hope shortly to be able to give an indication of progress. We are making progress, but not enough to satisfy me.
    The Government are working with the British Electrical Development Association working party to seek a solution to one of the difficulties, that of getting electricity on to a site early. This is important not only for site lighting but also for electrical apparatus and heating equipment. This is being carefully and sympathetically considered by the electricity authorities. The British Lighting Council is taking an active rôle in encouraging contractors to take an interest in this work.
    Perhaps the biggest factor is that the building industry has not perhaps as good an image as it deserves. It is a progressive industry and many firms have a great interest in their workmen and in the conditions they have to put up with. It has been put to me that workmen will understand if, because of difficulties, the management cannot provide them with everything they want, but that if the management does not show an interest, it has a bad effect. Bad weather building is one of those spheres in which precautions taken by management are bound to be reflected in better morale and efficiency among the men. From the national point of view, of course, stability of employment, good conditions on the site and a better image are all absolutely imperative.
    Although long hours and a big pay packet look all right during the summer and shorter hours in the winter are therefore no great hardship, many men, and certainly their wives, would prefer to have a steady income maintained throughout the year. There is no question that good site facilities can greatly improve productivity and the spirit of men working on the site.
    My hon. Friend raised the matters of protective clothing. The Ministry has prepared designs for better protective clothing to be tried out by our own
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    direct labour force and by selected contractors in the industry. It is hoped that in that way we shall evolve the best kind of clothing, though perhaps not along the lines which my hon. Friend suggested might be desirable for young apprentices.
    In the meantime, there is, of course, a good deal of protective clothing about. With very little effort, the employer can find clothing which can greatly help to make men comfortable during cold and wet weather. The question of clothing is brought out very well in the winter building film to which I have referred.
    Only today, the Minister held a conference with all those people who have been concerned with setting up a new organisation for research and information in the construction industry. The discussions went very well. Many sections of the industry are showing a keen interest in raising the necessary money. Something which will be an important part of both research and information aspects is the question of continuous working during bad weather and the winter.
    I am hopeful that the steps that the Ministry is taking will be taken up by this new body and that it will be a permanent feature of our information service and our attitude to the industry that builders and workmen will reckon to work a normal week except perhaps during cataclysmic weather. The need for research into the various things which we require is fairly well known and research will go on. As more application is added to research, so we shall make headway.
    My hon. Friend is perfectly right that the construction industry, as a whole, spends less on research than many manufacturing industries. We hope that this new organisation will give just the impetus needed, and not only that this national organisation will do work, but that many firms will continue with their own work and make great advances.
    The essence is that what is known about bad weather building should be known on a much wider front and that everybody concerned with the construction industry, builders, men, clients and professionals, should take every step to see that work is pushed on through the winter. This will be in the national interest, and to the advantage of builder

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    and client. It is to everybody's advantage and I am grateful to my hon. Friend for raising the matter because I am sure that notice will be taken of what he said.
    4.26 a.m.
    Mr. Robert Cooke: I do not want to disturb the mutual admiration society between the ex-P.P.S. and the Parliamentary Secretary, but this is a subject in which Her Majesty's Opposition have a continuing interest. I am glad that our booklet was referred to. The Parliamentary Secretary has said much about studies and propaganda and I hope we shall see some re-
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    sults now. He mentioned continuity and bricks. There was a surplus of between 500 million and 600 million in 1962–63. Now there is a surplus of 896 million. Heaven help us if there is a bad winter next year. I wish the Government well in their efforts to see better progress in winter building. We must have continuity and confidence in the industry and in the manufacture of building materials. Perhaps we can work together on that and get the brick stocks shifted.
    Question put and agreed to.
    Adjourned accordingly at twenty-seven minutes past Four o'clock a.m.