HC Deb 21 June 1966 vol 730 cc441-71
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- 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 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 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 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: 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 (Yeovil)

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 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 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 (Worcestershire, South)

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
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 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 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 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 (Oswestry)

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 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 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 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, 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 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 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 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 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 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 (Portsmouth, Langstone)

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 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 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 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.