§ Mr. Patrick JenkinI 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—
320 Provided always that—
- (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:
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.
- (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
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 321 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 322 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 323 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 324 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 325 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 (Ashton-under-Lyne)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. JenkinI 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. BarnettWould 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. JenkinThis 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- 326 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. BarnettWould 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. JenkinThe 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 (Manchester, Cheetham)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. JenkinThe 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 rose ——
327§ Mr. JenkinI have already given way a number of times.
§ 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. LeverThe 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. JenkinPerhaps 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 weeksan 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 (Belfast, North)Perhaps my hon. Friend saw the Answer 328 of the President of the Board of Trade a few weeks ago in which he was unable to give details about close companies.
§ Mr. JenkinI 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 solutionbut 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. 329 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 LeverI 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.
330 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. BarnettI 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. LeverI 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 JenkinBefore 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. LeverThe 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. HirstThe 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 LeverI was not complaining.
§ Mr. HirstI 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 332 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.
333 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 (Darwen)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 334 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 LeverI 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-CookePeople 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. DiamondPerhaps 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. HirstBut 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. DiamondThe 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 MillsHon. 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 JenkinI 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 (Orpington)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. JenkinThe 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.
343Division 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 |
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.