§ Mr. Patrick Jenkin
I beg to move Amendment No. 205, in page 71, line 33, at the end to insert:8. At the end of the first paragraph of paragraph 20(1) of Schedule 15 to the Finance Act 1965 there shall be added:Provided that the said section 20 of the Finance Act 1954 shall apply in relation to claims by a company for losses sustained in 1965–66 if the company is assessable for that year in respect of trading profits under the provisions of section 128 of the Income Tax Act 1952.This Amendment is moved in a spirit of inquiry and clarification. I have no doubt that if the Chief Secretary can give a reasonable explanation, either to the effect that it is not necessary, or that it is necessary and that the Government will introduce something else on Report, we will be happy not to press it.
The Amendment deals with paragraph 20 of Schedule 15 to the Finance Act, 1965, which contained a large number of provisions and details about the Corporation Tax, and particularly about the changeover to the new system of taxation. The paragraph dealt with the continuity of loss relief claims. Subparagraph 1 provided that Section 341 claims—that is claims which are trading 344 losses and can be set off against other income in the same year—may be made for losses incurred by the company in 1964–65 and set against income arising in 1965–66.
The purpose of the paragraph was to ensure that one would not be able to set loss relief claims against income later than 1964–65. Therefore, Section 15(3) of the Finance Act, 1953, had to be excluded, because it provided for the setting off of losses against other income a year ahead. A remedy in most cases is that the losses are carried forward under what is now Section 58(1) of the 1965 Act to be set against future profits. Paragraph 20 also provides that what one might compendiously call unrelieved capital allowances may be added to the loss, and 1964–65 unrelieved capital allowances may be added to the loss and are also available for Section 341 relief.
That is appropriate where the company is working, as under the old system, on a preceding year basis. The question which the Amendment poses by referring to Seotion 128 of the 1952 Act is, "What happens if the company is on an actual basis because it was starting for the first time in 1965–66?" If there is a trading loss, there is no doubt that that loss can be set off under paragraph 20 of Schedule 15, but if the loss is attributable to the existence of unrelieved capital 345 allowances, then, on one interpretation of the Schedule, as it exists, that loss cannot be relieved.
I understand from one professional association that some inspectors appear to have been given instructions that in those circumstances those unrelieved capital allowances shall not be relieved against:he other income, and shall be available only for carry forward. It may well be that in a great many cases carry forward is an adequate relief, but there are undoubtedly cases where a company does not anticipate making anything like sufficient profits to absorb these unrelieved capital allowances in the year ahead, whereas it has adequate income from other sources to set them off in the year in question under Section 341 relief.
I believe that this is a relief which should be available and which is intended to be available. But I understand that it is not always being available in all circumstances. It is in that spirit, more of inquiry than anything else, that I move the Amendment, and I hope that the Chief Secretary will be able to give us a reply on this quite narrow point.
Another related point arises in the case of companies which are not starting. There is a proposed new Clause No. 32, "Corporation Tax loss relief," put down by my hon. Friend the Member for Shipley (Mr. Hirst), relating to capital allowances and a slightly different point, in which he proposes to put in a new sub-paragraph (2). No doubt we shall discuss that if the new Clause is selected.
§ Mr. Diamond
I thought that both the manner and the content of the speech of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), in moving the Amendment, were amicable. I am only too glad to meet both. The hon. Gentleman has described the position with such clarity that there is no need for me to go over it. It is true that this section of the law as it stands provides for relief in the way which he has described and denies it in the way in which he says that it is in practice being denied.
We take the view that that is the correct interpretation of the Act, and the relief is in those circumstances being denied at present. I agree with him 346 that it should not necessarily be denied and that, therefore, this is a matter which must be looked at.
I cannot accept the Amendment as it stands, for the best possible reason. There is only one reason that a Minister can use which ever satisfies the whole Committee, and that is that the Amendment does not go far enough. In this case it does not deal with Section 129, the following Section, where there may be a current year assessment even though in the third year of trading. But that is a refinement. The principle is that which the hon. Gentleman has elucidated so clearly.
The matter must be looked at, and I hope that he will be good enough to withdraw the Amendment on my undertaking to bring forward an appropriate one for the Report stage.
§ Mr. Patrick Jenkin
I am very much obliged to the Chief Secretary, and hope that we may be able to proceed with the business before the Committee hereafter in as amicable and hopeful a manner. Before withdrawing the Amendment, I ask him whether he will undertake to consider—and I ask no more than that at this stage—new Clause No. 32 in the name of my hon. Friend the Member for Shipley (Mr. Hirst), which deals with a similar point. I hope that he might be able to consider that at the same time as the Amendment.
§ Mr. Diamond
I only regret that the hon. Member for Shipley (Mr. Hirst), to whom I gave a very broad hint only a short time ago, is not in his place, because one needs such soft words for that hon. Gentleman as one can muster. The answer is that we shall certainly consider that, and with sympathy.
§ Mr. Patrick Jenkin
I am much obliged to the Chief Secretary. In those circumstances, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mrs. Margaret Thatcher (Finchley)
I beg to move Amendment No. 64, in page 71, line 36, to leave out sub-paragraph (1) and to insert:(1) The limit on the rate of corporation tax imposed by section 69(6) of the Finance Act 1965 as it applies to chargeable gains shall be 37½ per cent, or such percentage as is represented by a rate equivalent to one-half of the 347 standard rate of income tax for the time being chargeable whichever is the lower.Now that we have embarked on the period of concessions which the Chief Secretary indicated were ahead, I have great hope that his soft words will not only be saved for my hon. Friend the Member for Shipley (Mr. Hirst), but that he might just have a few left for me on this Amendment.
The Amendment concerns the rate of Capital Gains Tax charged on the funds of life assurance companies. By the Bill the Government have agreed to bring down the present rate to the maximum individual rate of 30 per cent. I understand that this is to bring life assurance funds into line with the rate charged on investment trusts, and it arises from a famous victory which we had on last year's Finance Bill.
My point is that the rate has not been brought down far enough, because the funds due to policy holders are a case which warrants special consideration. I shall try briefly to make out that special case which rests on the principle of looking through the funds to the policy holders beyond.
The looking-through principle is already very familiar in Revenue law. It is on this basis that charities are exempt from Income Tax and it is also on this basis that companies could be directed to Surtax. Therefore, the principle of looking through the company or organisation to those beyond is already applied either to relieve the beneficiaries from tax or to impose a greater tax upon them. We know the principle well.
If one starts to look through the life funds which are due to policy holders—I emphasise that it is only that part of the life fund which is due to policy holders that we are considering—one comes to the following conclusion. Many people are policy holders today who would not pay the maximum individual rate of Capital Gains Tax if they put their savings into ordinary shares themselves. This is because their gains would be below the £5,000 a year limit and, therefore, they would opt to have the alternative basis of assessment and the chances are that they would pay Capital Gains Tax at a very much lower rate than the maximum of 30 per cent.
348 6.30 p.m.
This applies to the majority of policy holders. It is true that there will be one or two who will make gains of as much as £5,000 a year, though I doubt it yet. In due time, of course, there will be. The vast majority, on the other hand, are quite ordinary folk who have taken out policies and who would pay at a low rate.
I cannot say what is the average rate which would be payable by policy holders. No one could possibly do that. But some statistics about the number of policies held at present might be useful. At the end of 1964, there were in force about 10½ million ordinary policies with an average sum assured, including declared bonuses, of about £1,200 each. These are comparatively small policies, therefore. For new policies effected in 1964, the average sum was about £2,200. At the same date, the end of December, 1964, there were about 110 million industrial assurance policies, with an average sum assured for existing business of £45 and for new business of £90.
Clearly, there is some duplication here, and the life offices have some indication of it. They believe that 70 per cent, of the population have some form of life assurance and, therefore, that, on average, a policy holder is likely to have three policies. But the sums assured are, comparatively, so small that this would not mean that policy holders were anything like wealthy people.
I hope that I have said enough about the great number of policies in existence to show that the majority of people holding them must be quite ordinary folk. It is on this ground that one makes the case for reducing the rate of Capital Gains Tax on the funds which belong to those people. If one accepts that, one must agree that the rates should come down.
The rate we propose is a rate equal to one-half of the standard rate of Income Tax for the time being chargeable. This rate, of course, has a historic reason behind it. It was the rate which the Inland Revenue itself proposed should be chargeable on life funds in a memorandum it submitted to the Royal Commission in 1925. I hope, therefore, that I should have some support from the Inland Revenue even if I do not get much from the Chief Secretary. However, 349 having made the broad assertion that the tax should be less on these people, I hope that the right hon. Gentleman will give us hope that the level of tax will be reduced.
In reply to a slightly different Amendment last year, the right hon. Gentleman said that it could not be alleged that savings through life offices should be preferred to other forms of saving. I cannot wholly agree with him there. It seems to me that this is one of the most beneficial forms of saving. It is the only form which enables a man both to save and to provide at the same time against sudden tragedy.
I believe that every married man should provide a good deal of life cover in the event of sudden death so that his wife and family are not bereft of husband and father and livelihood at one and the same time. On these grounds, therefore, there are strong reasons, quite apart from the looking-through reasons, for giving some tax incentive to this form of saving by way of reduction in the Capital Gains Tax charge.
I hope that I have made the point clear to the Chief Secretary and that he is in one of his more benign and generous moods. I look forward to hearing him make a hopeful reply.
§ Mr. Diamond
The function of the Chief Secretary is to help the Committee. I am not sure that he is paid to be generous, benign and all the other things that the hon. Lady the Member for Finchley (Mrs. Thatcher) suggested I should be.
The hon. Lady described the purpose of the Amendment with complete clarity. She suggests that fife policies, under the general principle of life assurance, should be encouraged. Life assurance is, of course, encouraged. There is considerable relief given to everyone who pays life assurance premiums. But the question here is quite simple. The hon. Lady referred to the true situation at the beginning of her speech, when she reminded us of the occasion on which the
Committee decided that 30 per cent, should be the appropriate rate of tax for unit and investment trusts. In his Budget speech this year, my right hon. Friend referred to this and said:
I have decided to bring life assurance companies into line with unit trusts and investment trusts."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 728, c. 1433.]
§ That is the simple reason why we are bringing them in. We think that they are analogous. We think that they are in competition. We are sure that there would be a considerable scream and quite proper objection from the unit and investment trust managers if funds were encouraged away from them into life assurance companies. Because they are competitors, because their situation is analogous, and because the Government favour saving of all kinds, as we keep on saying, we are anxious to treat them equally and to give them the beneficial rate which, as the hon. Lady knows, we have not sought to remove. The rate was decided in what one might, perhaps, without heat, call unusual circumstances.
§ The Government have not sought to alter it. They are merely bringing life assurance into line. There is, therefore, every justification for the 30 per cent, rate. I can see no argument for treating this particular category with exceptional and unfair generosity as compared with other equivalent forms of saving.
§ Mrs. Thatcher
I am very disappointed with the right hon. Gentleman's reply, but I am not surpised at it. He has rejected the whole basis of the case and the looking-through principle which I put to him. I disagree that unit or investment trust managers would be dismayed if he were to accept the Amendment.
The quickest and the most impressive way by which we can make our opinion felt is in the Division Lobby. I hope that my right hon. and hon. Friends will join me in supporting the Amendment.
§ Question put, That the words proposed to be left out stand part of the Clause: —
§ The Committee divided: Ayes 232, Noes 159.353
|Division No. 37.]||AYES||[6.37 p.m.|
|Abse, Leo||Atkins, Ronald (Preston, N.)||Bellenger, Rt. Hn. F. J.|
|Allaun, Frank (Salford, E.)||Atkinson, Norman (Tottenham)||Benn, Rt. Hn. Anthony Wedgwood|
|Alldritt, Walter||Bagier, Gordon A. T.||Bennett, James (G'gow, Bridgeton)|
|Archer, Peter||Barnes, Michael||Bidwell, Sydney|
|Armstrong, Ernest||Barnett, Joel||Blackburn, F.|
|Ashley, Jack||Beaney, Alan||Blenkinsop, Arthur|
|Boardman, H.||Hale, Leslie (Oldham, W.)||Ogden, Eric|
|Booth, Albert||Hamilton, James (Bothwell)||O'Malley, Brian|
|Boston, Terence||Hannan, William||Orme, Stanley|
|Bowden, Rt. Hn. Herbert||Harper, Joseph||Oswald, Thomas|
|Braddock, Mrs. E. M.||Hattersley, Roy||Owen, Dr. David (Plymouth, S'tn)|
|Bradley, Tom||Hazell, Bert||Owen, Will (Morpeth)|
|Bray, Dr. Jeremy||Heffer, Eric S.||Padley, Walter|
|Brooks, Edwin||Herbison, Rt. Hn. Margaret||Page, Derek (King's Lynn)|
|Brown, Rt. Hn. George (Belper)||Hooley, Frank||Paget, R. T.|
|Brown, Hugh D. (G'gow, Provan)||Horner, John||Palmer, Arthur|
|Brown, Bob(N'c'tle-upon-Tyne,W.)||Houghton, Rt. Hn. Douglas||Pannell, Rt. Hn. Charles|
|Brown, R. W. (Shorctlitch & F'bury)||Howarth, Robert (Bolton, E.)||Parker, John (Dagenham)|
|Buchan, Norman||Howie, W.||Parkyn, Brian (Bedford)|
|Buchanan, Richard (G'gow, Sp'burn)||Hoy, James||Pentland, Norman|
|Callaghan, Rt. Hn. James||Hughes, Emrys (Ayrshire, S.)||Perry, Ernest G. (Battersea, S.)|
|Cant, R. B.||Hughes, Roy (Newport)||Perry, George H. (Nottingham, S.)|
|Carmichael, Neil||Hunter, Adam||Price, Christopher (Perry Barr)|
|Carter-Jones, Lewis||Hynd, John||Price, Thomas (Westhoughton)|
|Chapman, Donald||Jackson, Colin (B'h'se & Spenb'gh)||Price, William (Rugby)|
|Concannon, J. D.||Jackson, Peter M. (High Peak)||Probert, Arthur|
|Conlan, Bernard||Jeger, George (Goole)||Pursey, Cmdr. Harry|
|Craddock, George (Bradford, S.)||Jeger,Mrs.Lena'H'b'n&St.P'cras,S.)||Rankin, John|
|Crawshaw, Richard||Jenkins, Hugh (Putney)||Reynolds, G. W.|
|Crosland, Rt. Hn. Anthony||Jones, Dan (Burnley)||Rhodes, Geoffrey|
|Crossman, Rt. Hn. Richard||Jones, J. Idwal (Wrexham)||Roberts, Albert (Normanton)|
|Cullen, Mrs. Alice||Judd, Frank||Robinson, W. O. J. (Walth'stow, E.)|
|Dalyell, Tam||Kenyon, Clifford||Rodgers, William (Stockton)|
|Davidson, Arthur (Accrington)||Kerr, Dr. David (W'worth, Central)||Roebuck, Roy|
|Davies, G. Elfed (Rhondda, E.)||Leadbitter, Ted||Rose, Paul|
|Davies, Harold (Leek)||Ledger, Ron||Ross, Rt. Hn. William|
|Davies, Ifor (Gower)||Lee, Rt. Hn. Frederick (Newton)||Rowlands, E. (Cardiff, N.)|
|Davies, Robert (Cambridge)||Lever, L. M. (Ardwick)||Shinwell, Rt. Hn. E.|
|Dempsey, James||Lewis, Arthur (W. Ham, N.)||Short,Rt.Hn.Edward(N'c'tle-u-Tyne)|
|Dewar, Donald||Lewis, Ron (Carlisle)||Silverman, Julius (Aston)|
|Diamond, Rt. Hn. John||Lomas, Kenneth||Silverman, Sydney (Nelson)|
|Dickens, James||Loughlin, Charles||Skeffington, Arthur|
|Dobson, Ray||Luard, Evan||Slater, Joseph|
|Doig, Peter||Lyons, Edward (Bradford, E.)||Small, William|
|Dunn, James A.||Mabon, Dr. J. Dickson||Snow, Julian|
|Dunwoody, Mrs. Gwyneth (Exeter)||McBride, Neil||Spriggs, Leslie|
|Dunwoody, Dr. John (F'th & C'b'e)||McCann, John||Steele, Thomas (Dunbartonshire, W.)|
|Eadie, Alex||MacColl, James||Stonehouse, John|
|Edelman, Maurice||MacDermot, Niall||Swingler, Stephen|
|Edwards, Rt. Hn. Ness (Caerphilly)||Macdonald, A. H.||Symonds, J. B.|
|Edwards, Robert (Bilston)||McKay, Mrs. Margaret||Taverne, Dick|
|Edwards, William (Merioneth)||Mackenzie, Gregor (Rutherglen)||Thornton, Ernest|
|Ellis, John||McMillan, Tom (Glasgow, C.)||Tinn, James|
|English, Michael||McNamara, J. Kevin||Tomney, Frank|
|Ensor, David||MacPherson, Malcolm||Varley, Eric G.|
|Evans, Albert (Islington, S.W.)||Mahon, Peter (Preston, S.)||Wainwright, Edwin (Dearne Valley)|
|Evans, loan L. (Birm'h'm, Yardley)||Mahon, Simon (Bootle)||Walden, Brian (All Saints)|
|Faulds, Andrew||Mallalieu, E. L. (Brigg)||Walker, Harold (Doncaster)|
|Fernyhough, E.||Mallaiieu,J.P.W.(Huddersfield,E.)||Wallace, George|
|Finch, Harold||Manuel, Archie||Watkins, David (Consett)|
|Fitch, Alan (Wigan)||Mapp, Charles||Weitzman, David|
|Fletcher, Raymond (Ilkeston)||Marquand, David||Wellbeloved, James|
|Fletcher, Ted (Darlington)||Marsh, Rt. Hn. Richard||Whitaker, Ben|
|Floud, Bernard||Mason, Roy||Whitlock, William|
|Foot, Michael (Ebbw Vale)||Mayhew, Christopher||Williams, Alan Lee (Hornchurch)|
|Forrester, John||Mendelson, J. J.||Williams, Clifford (Abertillery)|
|Fowler, Gerry||Mikardo, Ian||Williams, W. T. (Warrington)|
|Fraser, John (Norwood)||Millan, Bruce||Willis, George (Edinburgh, E.)|
|Fraser, Rt. Hn. Tom (Hamilton)||Miller, Dr. M. S.||Wilson, William (Coventry, S.)|
|Gardner, A J.||Mitchell, R. C. (S'th'pton, Test)||Winnick, David|
|Garrett, W. E.||Molloy, William||Winterbottom, R. E.|
|Garrow, Alex||Morgan, Elystan (Cardiganshire)||Woodburn, Rt. Hn. A.|
|Cordon Walker, Rt Hn. P. C.||Morris, Alfred (Wythenshawe)||Woof, Robert|
|Gourlay, Harry||Morris, Charles R. (Openshaw)||Yates, Victor|
|Grey, Charles||Moyle, Roland||Zilliacus, K.|
|Griffiths, David (Rother Valley)||Murray, Albert|
|Griffiths, Rt. Hn. James (Lianelly)||Neal, Harold||TELLERS FOR THE AYES:|
|Griffiths, Will (Exchange)||Noel-Baker, Rt. Hn.Philip(Derby,S.)||Mr. Lawson and Mr. Bishop.|
|Alison, Michael (Barkston Ash)||Bennett, Sir Frederic (Torquay)||Bruce-Gardyne, J.|
|Allason, James (Hemel Hempstead)||Bessell, Peter||Buchanan-Smith, Alick(Angus,N&M)|
|Astor, John||Biffen, John||Bullus, Sir Eric|
|Atkins, Humphrey (M't'n & M'd'n)||Biggs-Davison, John||Campbell, Gordon|
|Awdry, Daniel||Black, Sir Cyril||Cary, Sir Robert|
|Baker, W. H. K.||Blaker, Peter||Chichester-Clark, R.|
|Balniel, Lord||Brewis, John||Clegg, Walter|
|Batsford, Brian||Brinton, Sir Tatton||Cooke, Robert|
|Beamish, Col. Sir Tufton||Brown, Sir Edward (Bath)||Cooper-Key, Sir Neill|
|Costain, A. P.||Hunt, John||Pardoe, J.|
|Crawley, Aidan||Hutchison, Michael Clark||Pearson, Sir Frank (Clitheroe)|
|Crosthwaite-Eyre, Sir Oliver||Irvine, Bryant Godman (Rye)||Peel, John|
|Crouch, David||Jenkin, Patrick (Woodford)||Percival, Ian|
|Cunningham, Sir Knox||Johnson Smith, G. (E. Grinstead)||Peyton, John|
|Curie, G. B. H.||Johnston, Russell (Inverness)||Pike, Miss Mervyn|
|Dalkeith, Earl of||Jopling, Michael||Pink, R. Bonner|
|Dance, James||Kaberry, Sir Donald||Pounder, Rafton|
|Davidson, James (Aberdeenshire, W.)||Kerby, Capt. Henry||Powell, Rt. Hn. J. Enoch|
|Dean, Paul (Somerset, N.)||Kershaw, Anthony||Pym, Francis|
|Deedes, Rt, Hn. W, F. (Ashford)||Kitson, Timothy||Ridley, Hn. Nicholas|
|Dodds-Parker, Douglas||Lancaster, Col. C. G.||Ridsdale, Julian|
|Eden, Sir John||Legge-Bourke, Sir Harry||Roots, William|
|Elliot, Capt. Walter (Carshalton)||Lewis, Kenneth (Rutland)||Rossi, Hugh (Hornsey)|
|Errington, Sir Eric||Loveys, W. H.||St. John-Stevas, Norman|
|Farr, John||Lubbock, Eric||Scott, Nicholas|
|Fisher, Nigel||MacArthur, Ian||Shaw, Michael (S'b'gh & Whitby)|
|Fletcher-Cooke, Charles||Mackenzie, Alasdair(Ross&Crom'ty)||Sinclair, Sir George|
|Fortescue, Tim||Macleod, Rt. Hn. Iain||Smith, John|
|Fraser,Rt.Hn.Hugh(Stafford & Stone)||Macmillan, Maurice (Farnham)||Steel, David (Roxburgh)|
|Giles, Rear-Adm. Morgan||Maddan, Martin||Stoddart-Scott, Col. Sir M. (Ripon)|
|Glover, Sir Douglas||Maginnis, John E.||Talbot, John E.|
|Glyn, Sir Richard||Mathew, Robert||Tapsell, Peter|
|Goodhart, Philip||Maude, Angus||Taylor, Sir Charles (Eastbourne)|
|Goodhew, Victor||Maudling, Rt. Hn. Reginald||Taylor, Frank (Moss Side)|
|Gower, Raymond||Maxwell-Hyslop R. J.||Temple, John M.|
|Grant, Anthony||Maydon, Lt.-Cmdr. S. L. C.||Thatcher, Mrs. Margaret|
|Grieve, Percy||Mills, Peter (Torrington)||Turton, Rt. Hn. R. H.|
|Griffiths, Eldon (Bury St. Edmunds)||Mills, Stratton (Belfast, N.)||Van Straubenzee, W. R.|
|Gulden, Harold||Miscampbell, Norman||Wainwright, Richard (Colne Valley)|
|Hall, John (Wycombe)||Mitchell, David (Basingstoke)||Walker, Peter (Worcester)|
|Hall-Davis, A. C. F.||Monro, Hector||Wall, Patrick|
|Harris, Frederic (Croydon, N.W.)||More, Jasper||Ward, Dame Irene|
|Harvey, Sir Arthur Vere||Morrison, Charles (Devizes)||Weatherill, Bernard|
|Harvie Anderson, Miss||Mott-Radclyffe, Sir Charles||Webster, David|
|Hawkins, Paul||Munro-Lucas-Tooth, Sir Hugh||Wells, John (Maidstone)|
|Hay, John||Murton, Oscar||Whitelaw, William|
|Heald, Rt. Hn. Sir Lionel||Nabarro, Sir Gerald||Wilson, Geoffrey (Truro)|
|Higgins, Terence L.||Noble Rt. Hn. Michael||Winstanley, Dr. M. P.|
|Hiley, Joseph||Nott, John||Wolrige-Gordon, Patrick|
|Hill, J. E. B.||Onslow, Cranley||Woodnutt, Mark|
|Hirst, Geoffrey||Orr, Capt. L. P. S.||Worsley, Marcus|
|Hogg, Rt. Hn. Quintin||Orr-Ewing, Sir Ian||Younger, Hn. George|
|Holland, Philip||Osborne, Sir Cyril (Louth)|
|Page, Graham (Crosby)||TELLERS FOR THE NOES:|
|Mr. R. W. Elliott and Mr. Eyre|
§ Transitional relief for companies paying dividends out of pre-1966–67 profits
§ (2) (A) In the case of a company which carries on, whether alone or in conjunction with some other trade or business, a life assurance business or other long-term business as defined in section 33 of the Insurance Companies Act 1958 but including sinking fund and capital redemption insurance business (hereinafter collectively referred to as "long-term business") and has made or makes a valuation of its liabilities in respect of such business or businesses for the purpose of making a distribution of profits, and the company was liable to income tax and profits tax and not to corporation tax upon some or all of the profits allocated to its shareholders out of the surplus resulting from such valuation, then the amount ("the valuation period surplus") shall be calculated in respect of each year prior to the year 1966–67 in which such profits arose so that income tax on it at the standard rates for the said years may represent according to the rules prescribed by this section the proportion referable to the com- 354 pany's income arising in each such year which is subject to income tax and profits tax of the extra charge to those taxes as compared with a charge to corporation tax but so that the valuation period surplus shall not exceed the amount on which repayments of income tax under this section would equal the income tax paid by the company on distributions made by it in the period up to the next normal valuation date out of profits which were liable to income tax and profits tax as aforesaid less any distributions that have been made thereout to the shareholders prior to the 6th day of April 1966.
§ The notional surplus in respect of such a company shall be the aggregate of the following—
- (i) whichever is the greater of the one year surplus, the three year surplus or the valuation period surplus in respect of its long-term business; and
- (ii) the notional surplus, determined according to the provisions of subsection (2) hereof, which that company would have had had it not carried on long-term business.
§ In respect of a company to which this subsection applies the limitations to distributions provided for in subsection 1 hereof shall not apply and the words "but not after the year 1970–71" shall be substituted for the words which appear in parentheses in lines 2 and 3 of that subsection.355
§ This Amendment, also, pleads a special case for the profits of the life assurance companies. If I am to plead for special conditions, I obviously must attempt to make a case for them. I believe that there is a good case, which stems from the constitution of all these companies.
§ In the constitution of every company which carries on life assurance business there will be somewhere a provision that none of the profits can be paid out to their shareholders until the policyholders have had their share. This goes right to the root of the constitution of the company, whether it was created under the Companies Act, by Charter or by Act of Parliament. In each of those three cases there will be a condition in the constitution providing that nothing shall be paid to the shareholders until the policyholders have had their share of profits.
§ In going back to the beginning of these companies, one finds that it took a certain time to decide what the profits were. Clearly, in doing life asurance business the number of risks to be faced in the first year may be quite different from the number of risks giving rise to claims in the second year. Merely because in the first year of business one had, perhaps, rather few claims and, therefore, rather good results, does not mean that all those results could be allocated to profits. It was necessary to have quite a period of time to decide what the profits were.
§ For that reason, companies did not decide upon their profits for a period of one year or two, three or five years. These periods became known as the valuation periods. At the end of whatever was the valuation period the company made a valuation of the funds to determine what profits were available. In fact, no profits were paid to shareholders for the duration of the first valuation period and therefore there was a gap from the start of the company to the end of its first valuation period in which nothing was paid to shareholders.
§ At the end of the valuation period the funds are valued and then allocated. They are first allocated, usually to the tune of about 90 per cent., to policyholders. Those funds are added by way of bonus to the policies straight away. What is left goes to a special fund for the shareholders and the moneys in that fund are paid out during the next valuation period. This 356 is the crucial point. The funds which go out during the next valuation period are the profits of the last valuation period. They are not merely deemed to be the profits, or described as the profits, of the last valuation period. They are the profits of the last valuation period because of the constitution and process which I have described.
§ It follows that if the position is left as it is some of the profits which will be paid during the next valuation period will have already borne their full whack of Income Tax and Profits Tax, but are not necessarily covered by Section 85. To the extent that they are not covered by Section 85, they will, in addition to the tax they have already borne, have to bear another slice of Income Tax at the rate of 41¼ per cent. That means that in so far as the dividends are not covered they would bear a total rate of tax of 72 per cent.
§ When we discussed Section 85 last year, I understood that the principle was that in so far as dividends are paid out of funds which have borne their full share of Income Tax and Profits Tax they should be relieved from a further slice of Income Tax. That is the principle for which we are pleading today.
§ The crucial difference between this type of company and others is first the period of valuation, and secondly, the fact that no profits were paid in the first valuation period of the history of the company. We are therefore still five, three or two years, behind whatever is the appropriate valuation period. Unless some relief is given in accordance with the terms of the Amendment, certain of the funds paid to shareholders will bear an extra slice of Income Tax which they should not bear. The special case could not be pleaded by any other company because the constitutions of the companies are different and the valuation is different.
There was an attempt to debate an Amendment similar to this last year, but it was never fully debated. I understand that the Chancellor of the Exchequer wrote to Mr. William Clark, who, I am sad to say, is not here this year, in the following terms:
I do not think I could depart from the basic ideas of these reliefs in favour of a particular class of company and in particular I could not afford to allow companies to have relief on the basis that their 1966–67 and later
dividends ought to be attributed to past profits for this purpose because the company described them or regards them as having been paid out of past profits.
§ That shows that the right hon. Gentleman never got hold of the point. These are not dividends which are merely attributed to past profits or described or regarded as having been pair out of past profits. Because of the process which I have described, they will be dividends which are, and must, because of the constitution of the company, be paid out of past profits.
§ I hope that the point is clear and that the Chief Secretary will either agree to consider it or give some measure of relief.
§ Mr. Diamond
I cannot meet the Amendment at all. We shall finish with the same disagreement. I regret to say, as the one with which we start, because the hon. Lady the Member for Finchley (Mrs. Thatcher) bases her case on an allegation which I cannot accept, that these are not the methods of calculating the profits, but are the profits. This is a difficult matter, but perhaps I could help the hon. Lady and the Committee by going over very shortly the circumstances in which the one-year and three-year surplus reliefs are given.
As the hon. Lady rightly said, most companies carrying on this kind of business value their liabilities at intervals of more than a year. That is not true in very case. One of the biggest companies values them annually. Some value them every two years, some every three years and some every five years.
The hon. Lady will realise that she is asking for a great deal. The essence of the difference between what she is asking for on behalf of life assurance companies and the generality of cases is that we are starting a new tax system. When we do that, we have to have what I can only call a clear-cut start. If every company were to be allowed to say that dividends should be labelled, or described, or calculated by reference to a year in which the old system applied and that therefore, for as long as there were any profits or reserve under the old system which could be used for dividends paid in the future, those dividends should not be called on to pay Schedule F Income Tax, then there would 358 be very little revenue coming in for a very long time.
The Committee has agreed that there shall be a clear and clean start, but that in two exceptional cases relief of a transitional nature shall be given to cover the period of change from the old to the new system. One is the one-year surplus and the other the three-year surplus. Neither case fits the circumstances of the life assurance companies' claim, which I understand very well. The hon. Lady has put the case very clearly, and I have listened to it at first hand.
However, I cannot recommend the Committee to accept the Amendment, mainly because the life companies would, be claiming for themselves exceptional treatment on a basis which has no relevance to the reasons which led to the treatment of all other companies, and, secondly because I do not accept what the hon. Lady says, namely, that these are the profits of those earlier periods. All that she has done is to describe a method by which profits are arrived at and a practice which holds good. But I still say that all that is happening is that the life assurance companies are, for these purposes, labelling their profits as being applicable to a previous period because when directors declare dividends they do so each year. When they pay it to their shareholders, they refer to it as a dividend of the year, which indeed it is.
Of course it is. It is an almost impossible task to say that a particular dividend comes from a particular profit or a particular reserve. As we know, the whole thing is a pool of money which is fed by a number of different streams and rivers. It cannot be said that a particular distribution represents only certain pound notes which came in from a particular source. I am sorry to say. therefore, that I cannot hold out any hope of meeting the hon. Lady's case.
The Chancellor described the matter very clearly in his letter. We have heard the case on many occasions, and we have listened to it with great sympathy. The hon. Lady has put it with force and clarity again. We know the whole argument and what is in the minds of insurance companies. We cannot distinguish, 359 for a different reason, life assurance companies from the generality of companies. Secondarily, we cannot accept the notion that, because there is this method of calculating liabilities from time to time, that necessarily puts such a stamp on the character of the dividends that they can be held to be the dividends in a previous period.
I regret to say that I cannot recommend the Committee to accept the Amendment."
§ 7.0 p.m.
§ Mrs. Thatcher
That is one of the most disappointing replies and one of the weakest that we have had from the Government. It is not merely a method of calculating the profits. If the Chief Secretary has not grasped that it is not, he has not grasped the argument at all. I described not only the valuation, but the procedure which takes place at the end of that valuation period and the way in which the funds are then allocated both to policy holders and translated into a special fund for shareholders.
With all due respect, he was not listening very carefully, because he was chattering nineteen to the dozen to the Financial Secretary. I did not stop him, because I understand that consultation has to take place from time to time. But he is still answering me on the basis of a case which I did not make.
These are not merely dividends which are described as having been paid out of past profits. They are dividends which are paid out of past profits. The proof of the matter is that, in the first five years, if that was the valuation period of the company, no dividends were paid out at all, and that during the next period, five to 10 years, the profits of the first five years were then paid up.
That is the complete answer to the Chief Secretary's case. He is wrong. There is nothing unusual in that, but perhaps I can have the opportunity on another occasion of putting the case to him more effectively.
§ Amendment negatived.360
§ Mr. Patrick Jenkin
I beg to move Amendment No. 206, in page 73, line 35, at the end to insert:(3) Section 55(1) of the Finance Act 1965 shall apply as if after the words "within the charge to Corporation Tax" in the first paragraph there were added "and so far as in any accounting period there still exist allowable losses, they shall be allowed as a deduction from the company's total profits in that accounting period".With this Amendment we leave for a moment some of the hideous complexities which surrounded the Amendment which my hon. Friend the Member for Finchley (Mrs. Thatcher) has just moved and to which we shall have to return when we come to the next Clause.
We come now to something which I am sure that the whole Committee will recognise as an entirely intelligible and readily graspable point, which we attempted to make last year and got no change and which we are seeking to return to this year. It attempts to rectify what is a manifest injustice in the combination of the Capital Gains Tax and the Corporation Tax as it affects companies. It was raised during the Committee stage on last year's Bill on 15th June.
The short point is: should a company be entitled to set off any capital losses that it may incur against any revenue profits that it may make so as to charge Corporation Tax only on the balance? The arguments which I put in the debate last year were at some length, and I do not think that it is necessary to rehearse them all again. I shall start simply by quoting what the Chancellor said in his Budget statement last year, where he referred to the rate of tax which a company was going to pay on its capital gains.
The right hon. Gentleman said:I propose that capital gains realised by companies—and this applies to both short-term and long-term gains—shall be subject to corporation tax at the corporation tax rate. A company is a continuing association which has as its main purpose making profits; whether those profits arise as trading income or as capital gains is immaterial, and I think that it is right that they should be taxed at the same rate."—[OFFICIAL REPORT. 6th April 1965; Vol. 710, cols. 250–251.]They should both be charged to Corporation Tax. It is immaterial that they arise in a different way, and they should be taxed at the same rate.
As we know, Corporation Tax is charged on profits, and "profits" are 361 defined in Section 46 of the 1965 Act as "income and chargeable gains". It goes further. Section 46(4) of the Act of last year says:A company shall not be chargeable to capital gains tax in respect of gains accruing to it so that it is chargeable in respect of them to corporation tax or would be so chargeable but for an exemption from corporation tax.The Act goes out of its way to say that it is Corporation Tax which is charged on the capital gains and not the Capital Gains Tax. In logic, they ought to be treated exactly pari passu. Computation is bound to be different, because, naturally, for something which is in the nature of a capital gain, special rules will have to apply, and I am sure that the Financial Secretary, who argued this ad nauseam last year, will accept that point. But the treatment when the gain has been arrived at after the special rules have been applied should be exactly the same; otherwise one gets what is really a ridiculous position, and it does a manifest injustice to the people concerned.
Take the case of a trading company which makes a trading loss in any year and, in its effort to cut down its unremunerative activities, disposes of part of its assets in the shape of some land. If it happens to realise a capital gain because of the increase in the value of that land over the period that it has held it, it is not entitled to set off that gain against its trading loss. It is taxed on the gain and is only entitled to carry forward the loss to future years if it has no other income to set it against.
One can imagine a company getting itself in serious difficulties, having suffered a series of heavy losses, and carrying out a series of realisations in order to get its business straight. Because of the length of time for which it has held its assets or because of the impact of inflation, there is a paper profit on the realisation of those capital assets, and it pays tax on that paper profit. As the legislation stands at present, it has no right to set off those gains against the trading losses that it is making. Yet the gains are realised in exactly the same state, namely, the business being carried on. It is the same enterprise, and no relief is given. Of course, I exclude dealing companies, because capital gains does not come into that sphere at all.
Our taxing statutes sometimes go to great lengths to try and do justice to 362 particular taxpayers. Some of the highly complex transitional provisions which I fully concede the Government introduced last year were introduced as relieving measures, sometimes at the third or fourth attempt to give adequate relieving measures, and they have caused considerable headaches to companies and their professional advisers, all in the interests of equity.
It is recognised that taxation should broadly be calculated on the basis of what people are able to bear. The taxable capacity of the taxpayer is what counts. If one looks at the history of Income Tax, one finds that for years it has been recognised that it is unfair to tax profits without giving relief for losses, and that successively over the years new provisions have been introduced to the Income Tax Acts effectively to give relief for losses.
If a person has two taxable trades, and one makes a profit and one makes a loss, he strikes a balance and pays tax on that. If a person has other income arising in the same year, he can set losses on trade off against that other income. He can carry forward losses. He can carry back losses. Any number of provisions are made to recognise the truth that a company should pay tax on the net income left in its hands after it has had relief for any losses incurred.
The only one which is at present outstanding, and it stands out like a sore thumb and gives rise to the injustice of which I complain, is that a company can still pay Capital Gains Tax, and still pay Corporation Tax on its capital gains, while it is making trading losses. I do not necessarily say that we have the drafting right, but the simple adjustment which is proposed will remove a manifest unfairness. Companies which find themselves in this position regard it as unfair, and I am certain that this is an Amendment which the Government ought to accept.
§ Mr. Diamond
I am sure that the Committee is grateful to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) for moving the Amendment, because it shows that there is still a misunderstanding about the nature of the Capital Gains Tax. I hope that I 363 shall succeed in removing this misunderstanding, although many previous attempts have been made to do so.
Let me go straight to the strongest part of the hon. Gentleman's argument. He says that where there are trading losses they are set off against other kinds of income—that is correct—and that where other kinds of income were added to by the new Capital Gains Tax it followed from the previous treatment that any trade losses should be set off against all other forms of taxable income, including realised capital gains. Thus, we have the situation which the hon. Gentleman rightly described, that a person can set off all trade losses against other forms of income, no matter of what kind. That is a wholly logical way of dealing with the tax position.
I now invite the hon. Gentleman to consider non-trading losses. We have established the logical treatment of trading losses. There are now non-trading losses to be considered. There are three categories of non-trading losses, and the hon. Gentleman has mentioned only one. The first is Case VI of Schedule D, where there is a deficiency, but this cannot be called a non-trading loss.
The second one is Case VIII of Schedule D, which refers to income from real property, where a person can have a minus quantity, a deficiency. The third one is capital gains where a person can have a capital loss, not a trading loss but a deficiency.
In all these three cases we follow the same rule. The well-established rule which existed for Case VI was followed for Case VIII, and it is now being adopted for Capital Gains Tax, namely, that as these are not trading losses, but are of a separate category, we treat them justly by allowing losses to be set against surpluses, deficits to be set against surpluses, but we keep each one of them in its own compartment, which is the only sensible way of calculating and assessing.
Case VI is kept in its own compartment. Case VIII is kept in its own compartment, and we keep capital gains less deficits in their own compartment by setting them against future realised 364 capital gains. I hope, therefore, that I have explained to the hon. Gentleman and to the Committee why it is logical that we should give trading losses the benefit of the tax relief in respect of income of all kinds including capital gains, and why it is logical that non-trade losses should, in the case of capital gains, be treated in the same way as the other two categories of Case VI and Case VIII, and be dealt with in their own compartments.
In those circumstances, I am sorry that I cannot recommend the Amendment to the Committee.
§ Amendment negatived.
§ 7.15 p.m.
§ Mr. Patrick Jenkin
I beg to move Amendment No. 308, in page 74, line 43. to leave out "II" and to insert "I".
This is a very short point. Indeed, I venture to suggest that it is the shortest point on the Bill, but it appears that something has gone wrong with the draftsmanship. There is a reference to Part II of the Eleventh Schedule to the 1965 Act. It appears that it really ought to be Part I. I believe that this is a correct Amendment, and I am certain that the Government will accept it.
§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) is quite right, and the Committee is indebted to him. If it is not out of order, I should like to move that he go to the top of the class. With his eagle eye he has spotted a printing error which was not noticed by the various proof readers and others. The hon. Gentleman has thereby helped us to put right something which would otherwise have been omitted. The only time that I was in the happy position of being able to suggest a drafting error to the Government the Amendment was not selected. The Government moved it themselves, on Report.
§ Mr. Patrick Jenkin
I am grateful to the hon. and learned Gentleman for his remarks. I did a similar thing last year. I was able to pull the Minister without Portfolio's leg, but last year we had a different sort of Finance Bill.
§ Amendment agreed to.365
§ Mrs. Thatcher
I beg to move Amendment No. 204, in page 75, line 9, after "but" to insert "created by charter or".
This is a short point. At present, chartered companies such as the London Assurance Company, or the British South-Africa Company, seem to be excluded from the relief given by paragraph 2 of Schedule 13 to the Finance Act, 1965. This sub-paragraph which we are considering makes some amendments to that Act, but the question is whether the amendments it makes will bring chartered companies within the relief provided by that Act.
This sub-paragraph says:In Part I of Schedule 13 to the Finance Act 1965 references to a company shall include references to any company resident in the United Kingdom but formed under the law of a country or territory outside the United Kingdom.The Financial Secretary may tell me that a company created by charter is a company formed under the law of a country, but the opposite case is arguable. I know that, in certain Other cases on the same Schedule, he himself has differentiated between the companies formed under the law of this country and companies created by charter. In a part of Schedule 5, both are expressly mentioned.
I doubt whether it was the intention of the Committee last year to exclude companies created by charter from relief. I should be grateful if the Financial Secretary will tell me whether they are excluded or included in the term "formed under the law of a country". If it is necessary, I hope that he will accept the Amendment.
§ Mr. MacDermot
The answer to the hon. Lady's questions is that chartered companies are not excluded at the moment and there is no reason why they should not be. We therefore look favourably on the point raised by the Amendment. Last year, this relief was originally given in the case of groups of companies, but was limited to groups of companies resident in the United Kingdom and companies within the meaning of the Companies Act. That excluded companies which, though resident here, were registered abroad. In that case, they did not come within the Companies Act and paragraph 15 of this Schedule removes that deficiency. There is no reason why 366 a company resident here should not be regarded as satisfying the test for the purpose of this relief.
Oddly enough, the question of chartered companies has never been brought to our attention before. If it had occurred to us, we should have covered it. With all the many representations which we received last year—no doubt the interests of chartered companies were affected—none made representations to us. Otherwise, we should certainly have included it in the paragraph. As I said, we are favourably disposed towards the Amendment, but I would ask the hon. Lady to give us time to look further at it. At first sight, it appears to us that it may not go far enough. There are other companies which are incorporated, for example by special Act of Parliament or by letters patent, which do not come yet within the provisions.
We are not yet certain of the right formula which would cover all the interested companies and we want to test the validity of the formula before bringing it before the Committee. If the hon. Lady would be good enough to withdraw her Amendment, I will gladly give an undertaking to bring forward a suitable Amendment on Report. We are grateful to her.
§ Mrs. Thatcher
I am grateful to the Financial Secretary. I hope that this time he will manage to include all companies which he intends to include. I therefore beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. R. J. Maxwell-Hyslop (Tiverton)
I beg to move Amendment No. 229, in page 76, line 3, at the end to insert:(c) if the trust is a charitable trust for the benefit of the employees or a trust which is established for charitable purposes:Provided also such trust or trusts shall be registered under the Charities Act, 1960.
I think that it is the intention of the Government, in paragraph 17(1) of Schedule 4, to undo some of the side effects, probably quite unintentional, of last year's Finance Act. I want to draw the Committee's attention to a situation which I think the Government would not wish to be caught within the previous net and not released, although it does not exist very often.
367 The sections which are let out of the net from the point of view of the definition of an "associate" of close companies, covered by sub-paragraph (1, a and b), do not need arguing, but the case which does need to be put is that of a charitable trust for the benefit of the employees. This, surely, is at least as worthy an entity to facilitate in this way as is a trust fund, entirely concerned with superannuation or one exclusively for the benefit of the employees or their dependants—in other words, a trust fund established in order to deal with hardship in the first case, sometimes of unpredictable kinds, which overtakes employees of the company, or, secondly, charitable purposes within the meaning of the Act of 1960, which go even more wide than that. I hope that the Financial Secretary will feel disposed to accept the Amendment.
It is only fair to say that this is not entirely a hypothetical argument. A case in point is John Heathcoat and Company in my constituency, which, as the hon. and learned Gentleman may be aware, pioneered, for instance, profit-sharing and superannuation schemes for its employees. It has a charitable trust which is not confined to superannuation, not entirely to employees. At the moment, however, it could be in difficulties, because of the definition of "associate" contained in last year's Act, of the burden of which they would not be entirely relieved by paragraph 17(1,a and b) in the Bill this year.
That is not to say that it would be impossible so to arrange its affairs that, by restricting the scope of the trust, it could be brought within the provisions of sub-paragraph (1,a and b), but were it to do so, it would lose some of its beneficent nature, which would be a loss rather than a gain to the community.
I am sure that the Financial Secretary will be aware that this question is not entirely dissociated either from the question of assessment of the shortfall, as it appears in Section 77 of last year's Finance Act. In order to achieve a great degree of uniformity throughout the country in the way in which these assessments are made, it is desirable that they should be undertaken by special inspectors rather than by local inspectors. This would result, one hopes, in far fewer 368 appeals and in a degree of consistency which would not otherwise be achieved. It is fair to say that the special inspectors are more familiar with the type of problem involved and that this would not be a type of business which the local inspector would in any way mind losing.
I do not want to adumbrate this point at greater length. I hope that the Government, to use an expression which borders on a pun, feel charitably disposed towards it. The Amendment covers the objectives which I have tried to describe to the Committee. On the other hand, if the Government find that the actual drafting of the Amendment is faulty, but would undertake to introduce an Amendment to achieve a similar purpose themselves, that would in many ways be an equally happy solution. I should be grateful, however, for the practical sympathy of the Financial Secretary in this respect.
§ 7.30 p.m.
§ Mr. MacDermot
The hon. Member for Tiverton (Mr. Maxwell-Hyslop) suggested that we had introduced paragraph 17 to try to undo some side effects of our legislation last year. That is not correct. What we have done in paragraph 17 is to try to bring forward proposals to meet some points which were raised in debates initiated by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) and the hon. Member for Wokingham (Mr. van Straubenzee).
In response to those my right hon. Friend the Chief Secretary invited hon. Gentlemen opposite to give specific instances of cases of the sort about which they had been speaking which might produce the kind of hardship which, they had argued, could arise. No response was made to that invitation. Nevertheless, as the question had been raised, we sought to put into this paragraph provisions which would meet the theoretical point —and I emphasise that to us it is still a theoretical one—which had been raised.
I should make it clear when the hon. Member for Tiverton is referring to charitable trusts, that it is not that we are seeking to draw any distinction between the validity or worthwhile nature of a charitable trust and that of the bodies referred to in paragraph 17 (a) and (b). We are not concerned here with the question of inflicting hardship or penalty or 369 of giving a tax advantage either to the superannuation schemes or employees' trusts as defined in the paragraph or to the charitable trusts to which the hon. Gentleman has referred. We are concerned with what is the right way to determine what companies are close companies and what are not, and which are controlled sufficiently narrowly to come within the definition of close companies.
As is well known, for that purpose the holdings of associates are aggregated with the holdings of participators with whom they are associated. The argument put forward last year was that, in the application of these close company rules, one had cases where some of the shares were held on trust for employees, and that under those rules two or more persons interested in the shares of a company held on trust could be treated as associates of one another as regards that company.
One effect of this would be that all the personal shareholdings in the company, together with the shares of the trust of which they were beneficiaries, would be aggregated and treated as held by a single person in determining whether the company was controlled by five or fewer persons. It was recognised that this could give rise to hardship in some cases. That is why my right hon. Friend the Chancellor brought forward this year in this paragraph these two specific cases; namely, broadly speaking, under subparagraph (a) that if the trust is either a bona fide tax approved superannuation scheme or, under sub-paragraph (b), is an employees' trust and the individual concerned does not hold more than 5 per cent, of the ordinary shares or receive remuneration of more than £4,000, then the person shall not be treated as an associate merely by being a fellow beneficiary of the trust.
Since the hon. Member for Tiverton tabled the Amendment we have considered this problem in relation to charitable trusts, but we find it difficult to see the circumstances in which the kind of difficulty he described is likely to arise.
The hon. Gentleman referred to a company which had instituted charitable trusts—and I assure him that I know of the pioneering work which this company has done in this sphere—but I did not gather from what he said that the effect 370 of the omission of charitable trusts from the categories of trusts in paragraph 17 would be to turn that company, it otherwise not being a close company, into a close company.
If, however, this is the case, and it there is a practical example of this kind, then I can only repeat the invitation which my right hon. Friend made last year; that if we can be supplied with particulars of any instance we will gladly look at the matter sympathetically. But I must advise the Committee that, unless and until we have the argument supported by an actual case, we do not feel disposed at this stage to accept the Amendment.
§ Mr. Maxwell-Hyslop
I understand that the case I gave, of John Heathcoat and Co., is not a hypothetical case but a real one. One of the trustees of that trust fund wrote to me suggesting the case I have adduced, and that resulted in my tabling the Amendment. Thus, it is not a hypothetical case but an actual example for which the hon. and learned Gentleman asked.
Does what the Financial Secretary said mean that this will have to wait another year—another year from when he receives correspondence on the subject? Or did his words mean that if he receives the information within the next week or so an appropriate Amendment will be tabled on Report?
§ Mr. MacDermot
The sooner we receive the information the sooner we can study it. If we are able to reach a conclusion on the matter by Report, and if we then thought it right to bring forward an Amendment, certainly one would be brought forward.
§ Mr. Patrick Jenkin
The whole Committee is indebted to my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) for having raised what is obviously a point of great importance which, while it may not affect many companies, undoubtedly affects one and will almost certainly affect more. It is right, therefore, that these matters should be aired.
I thought it rather disingenuous of the Financial Secretary to argue that what we now read in paragraph 17(1) is not in the provision to meet the real arguments which I and my hon. Friends 371 adduced last year. Indeed, it is not valid to suggest that the present provision was introduced otherwise than because of that pressure exerted by my hon. Friends and myself.
If one considers the language used by the Chief Secretary in Committee on the 1965 Measure in replying to some points made by me, one sees that the right hon. Gentleman said that everything that I had said confirmed the wisdom and draftsmanship of the provision—in other words, that my arguments, so far from making any impression on him, had merely confirmed his view that the provision was properly drawn and that the difficulties and anomalies to which I had drawn attention were unreal. Indeed, when my hon. Friend the Member for Wokingham (Mr. van Straubenzee) raised the point again on Report last year the Chief Secretary said that, having considered the position very carefully, he still thought that there was no real hardship involved.
I concede two points. The first is that the Chief Secretary did invite my hon. Friend the Member for Wokingham to submit any cases which might come to his notice. Being a solicitor, my hon. Friend is obviously more likely to come across such cases than I am. The right hon. Gentleman also said that if a case was brought to his attention he would consider it this year. He can, therefore, understand that we were delighted to see that the Government had gone part of the way to meet the difficulty to which we drew attention last year.
§ Mr. Jenkin
No, part of the way. It would be out of order for me to attempt to discuss another Amendment which appears on the Notice Paper, Amendment No. 309, which has not been selected. However that was intended to deal with the case of a participator or an ancestor of his who was a trustee under a settlement, and considerable difficulty could be caused in that matter. However, I will not pursue that issue further, although we may be able to return to it at a later stage in our proceedings.
On the paragraph we are considering, where the participator is interested in any shares or obligations of the company subject to any trust, in response to the 372 points the Government refused us last year, the Government have brought forward an Amendment this year. I believe the clue to the point which appears to be puzzling the Financial Secretary rests in the word "exclusively" in paragraph 17(1,b). A charitable trust is not exclusively for the benefit of the employees, if it contains a residuary clause containing a general charitable intention going far wider than the employees of the company. In that case the trust would not be one which could be excluded from the paragraph of the Schedule asexclusively for the benefit of the employees.This would be a case on which it would be important that the Government should legislate.
I strongly urge my hon. Friend the Member for Tiverton to allow the Government to have the precise example be has quoted to show that this is a point of some substance affecting one company, and it may be more. I found the Financial Secretary very forthcoming and accommodating. He is prepared to look at the case brought by my hon. Friend and others which may be put before him to see whether an Amendment is necessary and he will consider the matter most sympathetically. In those circumstances, my hon. Friend may feel it right to withdraw the Amendment. If we do not get satisfaction, we can return to the matter on Report.
§ Mr. Maxwell-Hyslop
The advice which has been given to the Committee by my hon. Friend the Member for Wan-stead and Woodford (Mr. Patrick Jenkin) is very good advice. It was my inclination, having heard the Financial Secretary, to do precisely what he has suggested. I shall certainly let the Financial Secretary have a clear statement of the position as soon as possible. Quite apart from general provisions of law, it is always worth while having a specific example in mind when drafting legislation of any kind.
The point my hon. Friend emphasised is very material indeed because this is an extremely tightly drafted paragraph and the words "exclusively" and "employees" are not elaborated as much as they might have been without going so far as I have suggested. For instance. 373 there is the case of ex-employees and those who have not yet become employees because they are undergoing full-time studies at a technical college. I shall send the information to the Financial Secretary as quickly as possible.
I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. Patrick Jenkin
I beg to move Amendment No. 114, in page 76, line 3, at the end to insert:(2) Sub-paragraph (1)(c) of paragraph 9 of Schedule 11 to the Finance Act 1965 shall only apply to so much of any royalty or other consideration paid or given by the company to a participator for the use of a patent, trade mark, or registered design as represents more than a reasonable commercial consideration.
§ The Deputy Chairman
With this Amendment can be discussed Amendment No. 115, in page 76, line 17, at end insert:(3) Sub-paragraph (1)(a) of paragraph 9 of Schedule 11 to the Finance Act 1965 shall apply only to so much of such interest or oilier consideration as is therein mentioned, as represents more than a reasonable commercial rate of interest;and Amendment No. 100, in page 35, line 9, at end insert "as amended by this Act".
§ Mr. Jenkin
It will be for the convenience of the Committee, I believe, if we can consider Amendment No. 115 with the Amendment I have moved as it obviously deals with a closely related point, and then if we wish we may have separate Divisions.
Amendment No. 114 is directed to a very important point indeed, which has given rise to considerable disquiet since the Finance Act passed last year. Few provisions have given rise to more criticism than the treatment of royalties for the purposes of close company legislation by last year's Finance Act.
§ The Deputy Chairman
Order. I ought not to allow the hon. Member to proceed on the assumption that there can be Divisions on Amendments Nos. 115 and 100. The Chairman has not selected those Amendments for Divisions.
§ Mr. Jenkin
I appreciate the position and, of course, we accept your Ruling, Mr. Irving.
374 With close companies there are certain payments which, in the hands of an ordinary company, would be entitled to be treated as deductions for Corporation Tax purposes, in the hands of a close company must be treated as distributions. The Committee does not need to be reminded that that represents a swingeing tax penalty. Instead of being allowed to deduct profits before Corporation Tax, one is not allowed to do so and one must account for tax under Schedule F.
Last year, I gave figures to show to what extent this represents a penalty. In the hands of an ordinary company £100 of interest gross costs the company £100, but in the hands of a close company loan interest of the sort I have mentioned costs the company no less than £166 13s. 4d. The reference is the OFFICIAL REPORT for 22nd June, column 1631. This was justified by the Chief Secretary, who replied to the debate on this point last year and said that it was necessary to protect the Revenue and to prevent tax avoidance. Of course we on this side of the Committee accept that a great deal of the close company legislation is necessary to protect the Revenue.
The Chief Secretary will remember that I moved an Amendment at the beginning of the debates on the close company legislation intending to make clear that it was for the prevention of avoidance of tax. For a reason which I am still at a complete loss to understand, that Amendment was refused by the Government. Of course this is necessary to prevent tax avoidance. Otherwise, people who conduct their business through these companies could avoid substantial amounts of tax, but the point we have always to bear in mind is that we have to hold a balance and it is to this major point that this Amendment is directed.
We moved a number of Amendments last year to try to bring into the framework of the legislation that although the particular payments concerned were made to participators and, therefore, ought to be regarded as distributions of profits, nevertheless where they took the form of deductions they should be allowed to be treated as deductions up to a reasonable commercial rate. We tried to move this for loan interest so that a close company 375 which borrows money from a participator —a relative of a shareholder or a director—and pays a reasonable commercial rate should be no worse off than if it had borrowed the money from the bank. If it pays more than a reasonable commercial rate, to the extent that it was a reasonable commercial rate the interest should be allowed as a charge and only the excess should be charged as a distribution.
One form of payment embraced by Part II of Schedule 11 in last year's Act was patent royalties. It includes not only patent royalties, but royalties on trade marks and registered designs. There is no doubt that this has given rise to a great deal of resentment. Why, it is asked, should royalties paid to an inventor or designer who takes a stake in a company exploiting the invention or design be disallowed as a charge for Corporation Tax? Why should the whole royalty, although in the form of an annual payment always allowed under previous legislation, be treated as a distribution with the extra penalty of Schedule F tax which that implies?
This is a very common transaction. An inventor hits upon a novel idea and the first thing he thinks of is to try to form a company with a view to raising some outside money to exploit the invention. If he himself remains a participator in the company and has shares in it —after all, nothing can be more natural or desirable than that—the whole of the royalty which the company pays him must be treated as a distribution and is not allowed as a charge against the profits for Corporation Tax purposes but is treated as though it were, in effect, a dividend paid to himself.
Close companies are in a very anomalous position. If a company were not a close company, exactly the same transaction would have entirely different results. The Chief Secretary gave his answer at column 1641 on 22nd June. He was pressed by my hon. Friend the Member for Belfast, North (Mr. Stratton Mills) as to why the paragraph of the Schedule drew a distinction between tangible and intangible property, because, as anyone who has studied the Schedule will realise, if the interest is paid in respect of tangible property such as rent a reasonable com- 376 mercial rate is allowed. If it is intangible property—patents or copyright—it is not allowed. The Chief Secretary's answer was the impossibility of valuation. He said that it is impossible to value intangible property so as to arrive at a reasonable commercial rate.
Then we had the curious sequence of events between the Committee stage and Report when somebody drew the attention of the public, through a letter in the Financial Times, to the fact that copyrights were caught if the author to whom they were paid happened to be a participator in a publishing company which was also a close company. Much to everybody's astonishment, the Government promptly tabled an Amendment to take copyright out of the mischief of the provision and to say that, as far as it was copyright, a reasonable commercial rate would be regarded as a reduction for Corporation Tax purposes and only the excess would be treated as a distribution.
The Government continued to refuse patent royalties, trade mark royalties and royalties for registered designs. The Chief Secretary sought to justify this in these words:I am not saying that the difference between copyright and patents is one between black and white. I am saying, however, that there is a difference, and that one falls on one side of the line as far as which we are prepared to go and the other falls on the other side of the line".—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 208.]The Chief Secretary refused to accept the Amendment. Most people who have anything to do with patents regard that argument as completely unconvincing.
Recently, there was a letter in The Times from Mr. Nicholas J. Flower under the heading "Taxing Our Brains". Mr. Flower took up the statement of the Chief Secretary that there were no penal provisions whatever in the Corporation Tax for close companies. Mr. Flower wrote in this way:Is this really so? When the profits of a close company are computed for Corporation Tax purposes no deduction can be made in respect of any patent royalties paid to a participator in the close company, or to any associate of such a participator …This strikes a particularly serious blow at the small company which wishes to get on its feet by developing and marketing a new invention with the aid of the inventor, the patent owner. Either the tax must be paid, or the company must forgo the services of the inventor 377 not only as a director but even as a shareholder. So an equally hard blow is struck at the small inventor himself.Mr. Flower goes on to talk of what he regards as "the absurdity of this situation". Mr. Flower is a chartered patent agent, so he knows what he is talking about. How can anybody seek to draw that sort of distinction between an inventor participator and an author-publisher? The distinction between copyright and patent is absurd.
§ Mr. Barnett
I am interested in the hon. Gentleman's argument and I am following it very closely. Would he go on to tell us how he would arrive at a reasonable commercial value?
§ Mr. Jenkin
This is a matter which must be left to those who have a very much greater knowledge of this subject than I have. I do not profess to be an expert in patents. [Interruption.] The Chief Secretary enjoins me to leave it to him. I have an unfortunate impression that I should still get the wrong answer. I am perfectly happy to leave it to my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), who, after all, must know more about this subject than anybody else in the country. I know that the subject will be very fully and expertly dealt with by my right hon. and learned Friend.
Mr. Flower's letter to The Times was followed by a letter from the Secretary of the Institute of Patentees and Inventors, Mr. Cotterell, who pointed out that it was not just a question of hardship on the inventor. He points out that it is an actual positive discouragement to the exploitation of inventions. Mr. Cotterell, whose letter was published on 9th June of this year, wrote in this way:By taxing the patent royalties and other payments made by companies employing an inventor as a director or shareholder, but having no such liabilities in respect of reasonable royalties paid for copyright, suggests that the Bill was drafted by those unaware of the resultant discouragement to these companies to introduce inventions and new products for the benefit of trade and export.In fact, the proceedings of the Report Stage of the Finance Act, 1965, indicate clearly that this differentiation between invention and copyright was adopted deliberately, although no less an authority than Sir Lionel Heald pleaded against it.It all adds to the difficulties experienced today by the inventor, whose chances of get- 378 ting assistance in the development and adoption of a commercially viable idea are becoming negligible in this country.
§ Mr. Jenkin
I have little doubt that that is true. I have no doubt that if one were to make inquiries one could find cases where just that had happened. Mr. Flower challenged Labour back benchers to attempt to justify the discrimination between copyright and patent. No doubt the hon. Member for Heywood and Royton (Mr. Barnett), if his intervention is any guide to go by, will attempt to take up Mr. Flower's challenge. He will be the first to have done so.
I believe that representations on this matter have been made to the Chancellor of the Exchequer by the Chartered Institute of Patent Agents. Coming from that source, these are representations to which great weight should be attached. There is no doubt that this legislation in its present form tends to discourage inventors from offering inventions to close companies. It must tend to reduce the royalty rate and, therefore, the return from close companies. It must tend to discourage inventor participation in close companies. Above all, it must tend to discourage the formation of companies to exploit inventions.
I do not want to exaggerate this case, because I do not believe that the case needs exaggeration in order to be made. In my previous sentences I used my words advisedly. I believe that the legislation tends to have these effects. In so far as it has an effect—I believe that it is an appreciable one—it is an effect in the wrong direction. It will tend to militate against the exploitation of inventions rather than in favour of it. I believe that it stems from the Government's shortsighted and prejudiced preoccupation with tax avoidance.
It is no more difficult—here I take up the point made by the hon. Member for Heywood and Royton—to try to arrive at a reasonable rate of royalty for an invention than it is for a copyright. Last 379 year the Chief Secretary tried to prove that there was something special about books, papers, coupons and that sort of thing which made it much easier to arrive at a market rate. The fixing of market rates for inventions is an activity which is going on between companies all over the world. There is a rising tide of innovation resulting in intangible inventions for which companies all over the world are granting licences. The proprietors of such inventions rarely have any difficulty in arriving at a reasonable rate of remuneration between themselves. If there were a serious dispute between the Inland Revenue and the taxpayer, it could be determined by the expert evidence of people accustomed to handle these things on appeal in the ordinary course of events.
§ 8.0 p.m.
§ Mr. Barnett
There is, in experience and practice over the years, a definite basis for the valuing of copyright. It is easier to value a copyright than a patent.
§ Mr. Jenkin
I do not accept that. Because hon. Members happen to be more familiar with marketing books and articles they should not assume that copyright is much more amenable to valuation than things like patents. I do not want to pursue this point, because my right hon. and learned Friend the Member for Chertsey, who is extremely knowledgeable on the subject, can dispel any remaining doubts that the Chief Secretary may have.
It cannot be right to maintain this distinction. The whole set-up tends to discourage the exploitation of royalties. We are concerned, quite rightly, about the progress of our economy, the difficulties that the country has in paying its way and earning sufficient money overseas, and with getting the sort of buoyant industry that we need for economic salvation. A country preoccupied with anti-avoidance, that is so deeply concerned to prevent any form of tax avoidance that it imposes provisions of this nature upon its taxpayers, does not deserve to work out its economic salvation.
Of course, this is a question of degree. I am not saying that there is a mighty principle on which one is taking a stand. But on the question of degree, and backed by the authority of those learned gentlemen who felt so strongly that they wrote 380 to the newspapers and by the representation made by learned associations to the Chancellor, I submit that it is not right that the Government should adhere to this provision and continue to treat patent royalties as charges and make no allowance for a reasonable commercial rate.
I hope that the Government will accept the Amendment or at least cover the same point on Report. As part of our economic effort, the activities of inventors and designers are crucial and anything which tends to hinder their work and the effectiveness of their contribution unnecessarily is not something that the country can afford to maintain.
§ Sir Lionel Heald (Chertsey)
I am pleased to have the opportunity of supporting my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and very glad that he has stressed the importance of this general subject of the encouragement of inventions. We in the House and the Government are too apt to dismiss it as a rather minor matter. But the subject is one in which a great deal more interest should be taken by the Board of Trade and the Ministry of Technology.
We mentioned this point last year and when the matter was discussed then I had the impression that we might hope, for the first time apparently, that the Minister of Technology and those advising him would realise that patents were important and would do something about them. Unfortunately, up to now it appears that this is not the case and therefore we need not apologise for pressing this Amendment strongly and encouraging a thorough discussion upon it.
I want to deal both with the principle and the merits. On the principle, we are asked to approve this provision by the Government as a guard against the paying of excessive royalties as a method of tax evasion. But I decline to believe that there is any evidence that such a thing is being done or that anyone is concerned to pay excessive royalties. I will deal with what I regard as the completely fallacious intervention by the Chief Secretary last year when, finding himself in difficulty—not having had much notice nor having done much homework on the subject—he said that it was impossible to value patents and licences. This was absurd.
381 The reason given by the right hon. Gentleman last year for not giving patent royalties the same treatment as copyright was, he said:As between persons who are not at arm's length, it is too easy to fix a figure which, in effect, could scoop the pool. That is not the case with copyright."—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 208.]That would almost suggest that nobody ever did settle a patent royalty. That is a fallacy. Thousands of licences are dealt with each year.
The difficulty of settling the precise figure has been grossly exaggerated. I heard a judgment in court today in which reference was made to the evidence that had been given from the experience of examining hundreds of licences. The evidence was given by an officer of the Ministry of Aviation who is responsible for the Government's dealings with patents. Tt was to the effect that there are, roughly speaking three classes of royalty.
The first is the figure of 5 per cent., or thereabouts, which is the most frequent figure for ordinary straightforward commercial licences; the second is 7½ per cent., which applies when know-how or particular technical considerations can be advanced to justify a higher figure; thirdly, there are the few cases where one might get up to 10 per cent, or even more, particularly when dealing with a thing like a machine tool which is, as it were, once and for all, or with such matters as drugs, where it is justifiable to add a substantial figure for research.
There have been a number of such cases during the last two or three years, particularly when the drugs are being used in the hospital service. There has been a great deal of discussion in this House and the matter has been the subject of decision by the Patents Appeal Tribunal and the divisional court of the High Court. Today, I came across a report of a case in which it was said that it had been suggested that there was great difficulty about evaluating licences. The Controller of Patents has considerable experience in these matters because a large number of compulsory licences have had to be dealt with. An account was given in the judgment of the sort of considerations the Controller had to have in mind. The figure of about 15 or 16 per cent, has become established for 382 drug patents and is being paid by a larger number of companies.
I am very sorry to have to say that what was said by the Chief Secretary last year was just bunkum. I do not blame him, for he had not had much preparation. Apparently, the authors had got to work on the Government, who had decided that they must surrender to them, so that something had to be done in a hurry. The Chief Secretary was told that he must look after the authors, but not give away anything else, and as he had to say something, he said that it was almost impossible to say what should be the figure for patent royalties. That is not true.
If that has gone, nothing is left. I hope to be moderate about this, but I am bound to say that everyone concerned was disappointed and that last year a number of people were angry about the way in which we were brushed off by the Chief Secretary on this matter. The HANSARD report of that debate shows that three hon. Members from this side of the Committee spoke, of whom I was one. We then had a very short statement from the Chief Secretary, which was a complete brush off, on the basis that there was a contrast between copyright and other kinds of royalty and the difference was that copyright could be valued, but that the other could not be. My right hon. Friend the Member for Altrincham and Sale (Mr. Barber), with his usual gentleness and strength in gentleness, then very moderately pressed the Chief Secretary to give us a little more of an explanation, but he got no reply. The Chief Secretary sat there and made no answer.
§ Mr. Barnett
I have listened to the right hon. and learned Gentleman's argument with great interest. He quoted royalties of 5 per cent., 7½ per cent., and, in some cases, 10 per cent. In those judgments which in his great experience he has known, was the grant for the whole life of the patent, or in certain instances was it granted for a short period? For example, was it granted for up to a certain level of turnover? Was there any variation, or was it exactly the same in each case?
§ Sir L. Heald
Almost invariably it was for the life of the patent, but, particularly in the case of the Crown user, there was 383 sometimes a sliding scale which was applied to large quantities. As I have been asked about this, perhaps I should enlarge on the matter a little by saying that the case in which the judgment was delivered today was concerned with important patents in connection with machine guns or, rather, with a gun called the Patchett gun. A very large claim was made with the Crown user, and a very substantial award was made.
For the purpose of assisting the court, a very experienced official, who is one of the chief patent advisors of the Government and a Government servant, gave evidence that, in the course of his business in connection with exchange control and various other things, he had examined hundreds of licences, as a result of which he was in a position to produce a kind of graph with a series of towers, as it were, so that one could see the three big humps of 5 per cent., 7½ per cent, and 10 per cent. We were not talking in the air but about practical experience.
After all, the Chief Secretary has better access than I have to that gentleman whose evidence was accepted by the court and he should consult him about this. I venture to think that no one who knows anything about patents has been consulted and I ask the Chief Secretary to tell the Committee whether anyone other than himself has been consulted.
At the end of his speech, my right hon. Friend the Member for Altrincham and Sale said something which I want to quote, because the Chief Secretary must be asked to take this matter seriously. Last year he treated it almost as a joke. I can assure him that what my hon. Friend said was quite right and no exaggeration and that there is great indignation about this. My right hon. Friend said:… I feel that this is a matter which should be looked into in the course of the coming year, and I hope that the Chief Secretary, with that fairness which he has shown on these matters which have no party political significance, will look into it in the coming year in the light of what my right hon. and learned Friend said."—[OFFICIAL REPORT, 12th July, 1965; Vol. 716, c. 210.]I understand that it is admitted, as it must be, that there has been, not pressure, but a request from several organisations and societies and people who know 384 about this subject for the matter to be carefully considered. I do not know what meetings or discussions there have been, but I have the impression that again those people have been virtually brushed off. That is not good enough and on this occasion we must ask the Chief Secretary to treat the matter a little more seriously.
§ 8.15 p.m.
§ Mr. Barnett
I have a great deal of sympathy with the arguments of the right hon. and learned Member for Chertsey (Sir L. Heald) and I entirely accept that he would have a very strong case if one could arrive at a valuation. The right hon. and learned Gentleman is an expert in these matters and I listened with great care to his arguments, but they did not altogether persuade me. He used some very harsh words about my right hon. Friend the Chief Secretary.
§ Mr. Barnett
He used "absurd", "bunkum" and so on, but much of what he said amounted to not a great deal more than assertion. Much worse, he attempted to prove his argument by telling us that there were cases of payments of 5 per cent., 7½ per cent, and sometimes 10 per cent. As hon. Members will be aware, I am sure, 10 per cent, is precisely double a 5 per cent, royalty. That is a considerable difference. The right hon. and learned Gentleman went on to say that there were additional complications of differing scales, so that it was not quite so simple to arrive at these valuations as he seemed to suggest.
I entirely agree that at times we seem to be obsessed—I do not think that that is too strong a word—with tax avoidance. Perhaps I should declare an interest as a practising accountant, but we do not wish to encourage tax avoidance. Certainly we should not have legislation which would encourage it and if we accepted the Amendment, unless there are some better arguments than those which I have yet heard, there would be a great loophole which it would be difficult for any Government to accept.
Although the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said that he did not wish to overstate his case, after being in this place for some 18 months, I am beginning 385 to believe that it is normally the function of Oppositions to tend to overstate their case.
In most cases, rather than receive substantial sums on which he would be liable to tax and Surtax, the inventor would very much prefer to take a rather heavier slice of the equity when a company is first formed, when he would then be subject only to 30 per cent. Capital Gains Tax on any substantial gain if his invention were highly successful.
§ Mr. St. John-Stevas
Does not the hon. Gentleman agree that the vice of overstating a case applies to politicians in general and is not confined to Her Majesty's Opposition?
§ Mr. Barnett
This can be done as the hon. Gentleman should know by giving the inventor a large share in a small share capital at the outset, which would give him a very large stake in the equity, with the moneys required being lent over a period when the company becomes larger, in which case the loan interest would then be a charge. We can discuss this on another occasion.
I should have thought that the inventor of the type that the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin) quoted would very much prefer to have his wealth staked on the invention, which he is certain is going to be so successful. Then he would have a very much bigger net return than he would have had if he took it in royalties. It is for these reasons that I feel that this Amendment cannot be accepted.
§ Mr. Gower
If hon. Members of the Opposition are sometimes given to exaggeration, I would reply to the hon. Member for Heywood and Royton (Mr. Barnett) that the Government and their supporters are sometimes addicted to over-simplification, particularly with 386 reference to the last point about an inventor taking a larger proportion of the equity, which is not so easy in practice as it would seem from his explanation.
I would have thought that the Chief Secretary, having heard the arguments, would now be straining at the leash to stand up and declare his acceptance of this Amendment. The arguments which have been adduced by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) are powerful.
Whatever one may say about the course of the post-war economic history of this country, I would have thought that the Government, engaged in a stem battle, as any Government must be with our economic conditions, to sustain and improve the economy, would have been most anxious to encourage anything which would contribute to the strength and dynamic growth of our economy. I put it to the Chief Secretary that whatever else may be said, there exists a certain amount of disquiet at our apparent inability to capitalise many of our inventions.
It is a fact that we are still a fairly inventive people, but far too often inventions which should be capitalised here are capitalised elsewhere. To this extent anything that can be devised in the context of a Finance Act to encourage the exploitation of our inventions by the British inventors should be deserving of ready acceptance by the Government.
I agree that payments made as royalties for the use of patents, to shareholders and directors should not be a means for widespread evasion of tax. We all accept that, but I do not think that anyone on this side of the Committee would contend that what we have in mind is that kind of avoidance. What is important is that there has been a kind of acceptance of this principle, when the Government readily accepted an analagous principle in relation to copyright. I wonder how that was done so swiftly?
It was amazing how quickly that was accepted. I applaud that decision, as I am sure do my hon and right hon. Friends. It was a proper decision and it should not be difficult for the Government with all their resources of draftsmen and advisers, to frame a formula in 387 the content of what was said by my right hon. and learned Friend. I concede that it may not be an easy task, but we have evidence, given by my right hon. and learned Friend, that this is not impossible. I hope that the Chief Secretary will be more forthcoming in this respect this year than he was able to be last year.
§ Mr. St. John-Stevas
I have nothing to add on Amendment No. 114 and, having listened to my right hon. Friend the Member for Chertsey (Sir L. Heald), and the other speeches which have been made from this side of the Committee, it would be presumptuous of me to attempt to add anything to their arguments. I would merely like to associate myself with everything that they said.
I want to confine myself to Amendment No. 115. This is a minor but important Amendment, and I am delighted that the Chancellor has arrived in time to listen to my argument upon it. I only regret that there are so few Members opposite taking part, even passively, in this extremely important debate. Family companies have contributed and are contributing very greatly to our industrial prosperity. They have been most unfairly treated by the Chancellor in the matter of Corporation Tax in general, and, in particular, on the subject with which Amendment No. 115 is concerned.
Under existing law a family company which wishes to borrow from one of its participators can only do so by paying a penal rate of interest which, in practice, may well amount to 10 per cent, or more. This discrimination in relation to borrowing money is particularly unfair. It is not only unfair, but it is quite absurd. Why should not a director of a family company, if he has some surplus capital, be able to lend it to that company without the company's incurring this penal rate of interest?
Yet that is the effect of not allowing the company to deduct the interest charges before being assessed for Corporation Tax. I should have thought it self-evident that this was the first and natural source of borrowing for such a company. It is perfectly natural for a director to put his own money usefully to work in his own company.
388 8.30 p.m.
The next group of persons to look to for extra capital, again in the natural order of things, is other members of the family who have some spare capital available. Why should the company be penalised for using the most obvious source of capital? In some cases it may be the only source of capital available. There may be no choice open to the company, in which case the discrimination is even more unjust and arbitrary.
Why should a man who wishes to keep some liquid resources, perhaps for death duties, also be encumbered in letting his capital out temporarily to work? If an individual in those circumstances deposits money with a bank, and the bank then lends the required sum to the company, bank interest charges are allowable as a tax deduction, but the director of the family company has to pay bank charges to facilitate this device.
There is a further anomaly. If he borrows from the company, then the interest charges may be charged against both his personal Income Tax and Surtax. This is an extremely anomalous situation. What is the reason for persisting in this anomaly? I think that the hon. Member for Heywood and Royton (Mr. Barnett), if I may repay the gracious tribute which he, doubtless inadvertently paid me earlier, put his finger on the point, as he so often does, when he said that his right hon. Friend the Chief Secretary was obsessed with the question of tax avoidance.
§ Mr. Barnett
Whether one likes the Corporation Tax is another matter, but I am sure that the hon. Gentleman will agree that in the case which he is putting with Corporation Tax in its present form, if one allowed directors and their families to lend money to the company, at will as it were, and allowed the interest charged, the loophole for avoidance would be enormous.
§ Mr. St. John-Stevas
The loophole for avoidance could be enormous, but I think that there are other ways of closing the loophole rather than by establishing this arbitrary rule. The loophole could be closed quite easily by giving a discretion to the officers of the Inland Revenue and allowing them to use it intelligently. [HON. MEMBERS: "Oh."]
389 That seems to be controversial. Nevertheless, I think that it is a possible alternative.
§ Mr. St. John-Stevas
I agree with the hon. Member for Heywood and Royton that the Chief Secretary seems to be obsessed with the question of tax avoidance. This has communicated itself to his colleagues, or perhaps they had this obsession already. After all, the Chief Secretary himself is an accountant and the Chancellor of the Exchequer made his career in the Inland Revenue. This has proved a particularly lethal combination, because again and again one gets this totally negative attitude to fiscal policy.
They do not seem to care if 99 just people are penalised, provided that one sinner is brought to suffer condign punishment. Nowhere is this better illustrated than in the treatment, or ill-treatment, of family companies. Instead of their being encouraged in the invaluable work which they are doing, every obstacle is set in their path.
The present law as it affects interest rates constitutes a very serious clog on the development and work of family companies. The Amendment would remove that artificial obstacle and in my view it therefore deserves the support of the Committee.
§ Sir Eric Errington (Aldershot)
I support what has been said already from this side of the Committee. These are reasonable and proper Amendments which would not create anything in the nature of a loophole. The suggestion with regard to a patent is that the amount should not represent more than a commercial consideration, and, as regards interest, there is nothing easier than to arrive at a reasonable commercial rate of interest.
I regard this as a question of balance. I am much disturbed by the way some business of a constituent of mine turned out. I am fortunate in having in my constituency many inventors. The Royal Aircraft Establishment, at Farnborough, employs a good many people who subsequently make quite important inventions. The man I refer to was seriously contemplating forming a company with a view to exploiting the business which followed from his invention.
390 In spite of what the hon. Member for Heywood and Royton (Mr. Barnett) said, we all know that it is very difficult to find money at an early stage in the process of developing an invention. My constituent was forced to go to a member of his family who was better off than he, but, on taking advice, he was informed that, if the member of his family advanced money, he would be a participator. In these circumstances, the end of the story was that the invention went overseas.
This is a serious matter and not one which can easily be laughed off. To catch the minnow of lost revenue we are losing the whale of inventive genius in some of our people. It is extremely difficult to borrow money, and in such cases as I have mentioned, under the arrangements made for participators, the financial consequences are quite intolerable.
I do not understand, and I have not had an answer from the Government, why a reasonable commercial consideration or a reasonable commercial rate of interest would not offer a suitable method. I have noted what was said by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), and that helps, but I cannot believe that it is beyond the wit of man or the wit of the tax collector to say what is a reasonable rate of interest.
With one hand the Government are exhorting and encouraging the inventor, the man who really produces the goods, and with the other they are slapping him down in a quite unforgivable way.
§ Mr. Diamond
I hope it will be for the convenience of the Committee if I direct my remarks, first, to Amendment No. 115, which seemed to attract less discussion, though I do not know whether it would be regarded as less important, and then deal with the many points raised on Amendment No. 114.
On Amendment No. 115, I hope that I can make our case clear in a few sentences. What we have to do is not to be obsessed with preventing tax avoidance, but to hold the scales fairly between all categories of taxpayer so that no taxpayer is called upon to pay an unfair share and no taxpayer is allowed to get away with not paying his fair share. That is all we are trying to do, to hold the scales fairly.
391 With regard to close corporations, everybody appreciates the reason why the ability to avoid tax under the new system could be much greater than it was before. One has, therefore, to look at the position with care but with a perfectly open mind. Everybody understands the distinction between interest on money borrowed and dividends on capital invested; but in the case of a close corporation we are not so much considering the rate of interest charged by a lender of money as considering the much more simple and fundamental point, to which my hon. Friend the Member for Heywood and Royton (Mr. Barnett) referred, that there is nothing whatever to prevent a person who is putting up share capital describing it as loan capital. Therefore, the whole or the greater part of what would go as dividend on shares goes as interest on loan. Even if the rate of loan was 1 per cent, below the market price, the point would still be the same.
Everybody understands that in the normal course of events a dividend can be expected to be, at all events, at a minimum of X per cent. There is nothing to prevent a close corporation so arranging its affairs that the X per cent. part of the dividend is labelled "loan interest" and is of a rate which is well below any figure which could be challenged as being reasonable. In this most simple procedure, however, the majority of the dividend is transmuted theoretically into loan interest and what would be a distribution of profits and would attract the appropriate tax becomes—or it is hoped that it will become—a charge against profits and, therefore, avoids being taxed to the proper extent. It is just as simple as that.
Until we can find a method of dealing with that situation, the door is so wide open to a taxpayer taking unfair advantage over the general body of taxpayers that it is the duty of the Revenue to protect the general body of taxpayers.
§ Mr. Stratton Mills
If that is the point that is worrying the right hon. Gentleman, it is perfectly possible for people in a close company to have a very small equity capital and to borrow all the working capital from one of the joint stock banks on a personal guarantee 392 which is exactly the kind of circumstance about which the right hon. Gentleman is so worried.
§ Mr. Diamond
If money is borrowed from a person who is not a participator— that is a wide description and I will not go into it in greater detail at the moment —that is borrowed money in the ordinary sense and the interest, whatever rate is charged, would be a deduction from profits. That is the answer on that Amendment.
In spite of what has been said about the other Amendment, it received very careful consideration last year and has received consideration since then. I am open to suggestions and we should be glad to find a way of removing any cause for complaint, if there is any cause— we do not know of any cases yet. But I cannot recommend to the Committee that the Amendment should be accepted, for a variety of reasons, including the powerful one given by my hon. Friend the Member for Heywood and Royton.
The distinction which we draw between the licence for use of tangible property and the licence for use of intangible property is very real. The advice that I have received—I will not particularise it; I am responsible for accepting it and therefore I do not put the blame for it on anybody's shoulders other than my own—and my own experience coincide completely. It is just not possible, without having argument upon argument and going to the courts, to arrive at a regularly accepted market price for patent royalties. Copyright is entirely different because what one is doing in most cases is writing a book which is printed time and again. As one would expect, the commercial consequence of that is that it is a regular transaction and produces a regular contract for royalties. One could almost guess beforehand what the remuneration would be and what the terms of the contract would be.
The essence of a patent is that it is unique—[Interruption.] That is what I said last time. There is nothing like being consistent. I propose to repeat some of the things which I said last time because I have been accused of brushing people off. I was not aware of that. I thought that I had given the matter 393 careful consideration and very full thought. The situation has not changed as a result of all the advice we have received and the thought which we have given to the matter during the intervening period.
The professional experience of my hon. Friend the Member for Haywood and Royton is exactly the same as mine. In the case of inventors and inventions, the variety of the terms of the contract and the ways in which the inventor could exploit the invention commercially are enormous. The greatest argument to the contrary which we have heard is that only today there was great argument on this matter in the courts and that the best evidence which could be produced to demonstrate that this matter was simple to a degree was that the rates could be 5, 7½, 10, 14 or 15 per cent.; that the rates would vary with the amount of turnover; that there would be variation and that the Crown, as a consumer, would expect a reduction after a certain period. This is also my experience.
My professional experience also is that there could be enormous variety in the terms on which the inventor and his backer got together. There could be a whole host of terms as to whether there should be a minimum turnover on behalf of the exploiter who was paying the patent royalty, a very important consideration which would affect the rate. In my experience as an accountant, and the experience of my hon. Friend the Member for Heywood and Royton, and according to the advice given to me, it is just not possible to say in respect of any category of patent that there is a clearly defined rate which one could say is reasonable having regard to all the other terms, including the terms of exploitation and backing, and that any rate over and above it is wholly unreasonable.
§ Mr. Gower
May I put two concrete examples to the right hon. Gentleman? When the late Somerset Maugham wrote the book "The Moon and Sixpence", it was subsequently published and the books were printed from time to time and the original copyright led to the publication of numerous editions of the book. Similarly, when the inventor of the safety razor had a form of patent on his invention, the razor blades were produced by the com- 394 pany which capitalised that in the same way as the books were printed. Can he really say that there is a complete dichotomy between the two things and that they cannot be reconciled in any way?
§ Mr. Diamond
There is this difference between the hon. Gentleman and myself. I am relating my own professional experience, gained over a third of a century as a practising accountant. The hon. Gentleman is not drawing from his personal experience, but from reports. One does not know the details of the cases which he has mentioned.
Yes, I aver that there is a total difference between the two kinds of cases. The book is something which is produced, and it matters little what the title is or what the length of it is. There is a regular market price for books. As one would expect, for inventions which are so varied and unique—otherwise they are not inventions—the patent royalties and the terms for them are of immense variety.
I want it to be understood that we should welcome any way of getting over the difficulty, but it is a very real difficulty. The Government are most anxious to do everything that they can to help in the exploitation of good inventions. They are demonstrating that in every way through the Ministry of Technology, through the way that they treat inventions, and the way that they treat research for tax purposes. Research has equal top treatment for tax purposes; there is no expenditure which is treated more favourably than research expenditure. The Government do everything that they can to encourage it, and there has long been Government machinery for exploiting and developing inventions which have failed to be exploited because there has been no commercial support for them.
§ Mr. Barnett
As my right hon. Friend has touched on the point of Government assistance which is given to research, may I point out that there is one sphere of activity in which they do not show a great interest? I refer to an inventor who carries out research prior to going into business. He may spend quite a large amount of money on research prior to starting up a business, and that expenditure is not allowed for tax purposes. Would my right hon. Friend look at that?
§ Mr. Diamond
That is an allied point which I should be glad to look into. I have been caught on my flank, and though I am not sure whether my hon. Friend's point is in order, I shall be glad to look into it.
§ Sir E. Errington
As I understand it, the objection by the Government is that there is a variation in percentages up to 14 or 15 per cent. I imagine that what is happening is that, in order to secure themselves, the Government are securing 100 per cent. It would seem reasonable to consider perhaps some half-way point between the 5 per cent, and the 15 per cent. It does not seem right that the whole thing should go by the board because it is impossible to get a figure which meets all situations.
§ Mr. Diamond
I am grateful to the hon. Gentleman. He is coming with me, and I am anxious to follow his argument and go with him. He is saying, "Would it not be possible to fix a figure?" and, instead of saying "a reasonable figure", which is impossible to define, and would lead to enormous trouble and conflict in the courts, as we have heard, he suggests fixing a given figure and saying that that amount shall be treated as a deduction from profits and only the balance shall be regarded as a distribution. But I know of many cases where 2½ per cent. is a very full figure. It is a regular figure for a licence to use a not particularly large or unusual invention, especially where a large turnover is likely to result. The basic figure could not be a figure of more than 2 or 2½ per cent. I know of cases of 25 per cent. The right hon. and learned Gentleman the Member for Chertsey (Sir L. Heald) told us of a number of cases of 15 per cent, in connection with drugs. None of these people, the 5 per centers, the 7½ per centers, the 10 per centers, the 15 per centers, or the 25 per centers will be happy about an arrangement under which 2 per cent, is allowed.
I do not think that we can solve our problem in that way. It is far better to say that there are arrangements which, at the maximum, would cost a small amount of tax, and under which inventions can be exploited without any of the inconvenience which hon. Gentlemen opposite would regard as unfortunate. The problem can be easily avoided in that way.
396 It would be contrary to the public interest to adopt the other alternative and say that whatever is paid for patent fees —and indeed we would have to allow whatever is paid as the licence fee for intangible property—should be a deduction for tax purposes. It would be unfair to the general body of taxpayers, and for these reasons I hope that the Committee will understand that, anxious as we are to help inventors, and to deal with this problem, I cannot recommend the acceptance of the Amendment.
§ Mr. Ian Percival (Southport)
The right hon. Gentleman says that he would be only too pleased if some one could offer a way out of the difficulty. At the same time he brushes aside the obvious answer by airily talking about avoiding further contests in the courts. This is what the courts are for. This is what special commissioners are for. I hope that the right hon. Gentleman will listen to the argument.
Does the right hon. Gentleman really think that special commissioners are not able to decide in any particular case whether it is a reasonable commercial arrangement, or whether it is a fiddle? This is what they have had to do in many other contexts. Is there any reason why they should not do the same in this case?
§ Mr. Diamond
If the hon. and learned Gentleman's suggestion were adopted, there would be incessant references to the Commissioners.
§ Mr. Diamond
No, and the reason is that the structure of the tax is such that it is not likely to give rise to interminable arguments about one small section of the tax code. Of course we have thought about this. We have thought about the difficulties which the Commissioners would have, and the limitations on the Commissioners' powers to arrive at what would be reasonable in a very difficult context, and of treating the matter in some other way and putting it before the Commissioners and letting them have a discretion.
We have not thought very much about the suggestions made by the hon. Member for Chelmsford (Mr. St. John-Stevas) that 397 every inspector of taxes should have a complete discretion and decide what the right amount of tax should be for each subject, the proposal would give rise to interminable difficulties and delays in the procedure and collection of taxes.
§ Mr. Lubbock
Can the right hon. Gentleman answer the question put to him by the right hon. and learned Gentleman the Member for Chertsey (Sir L. Heald) about whether he had undertaken any consultation with bodies representing inventors during the past year since the debate on the same subject in last year's Finance Bill?
§ Mr. Diamond
I do not know whether that was the form of the right hon. and learned Gentleman's request. I thought that he asked me a different question, which I specifically answered. The answer to this further question is that we have been at the receiving end of representations, and that we have taken them into account.
§ Mr. Stration Mills
I am disappointed with the right hon. Gentleman's reply to the argument which has been put forward during this debate. The right hon. Gentleman's argument appeared to be that the danger was that in a close company participators would compile their working capital not in the form of equity capital, but essentially on the basis of loan capital. That seemed to be the burden of his argument and the main worry of the Inland Revenue. I can understand this being a matter of some concern, although I think that he possibly gave it undue emphasis.
As I pointed out in my intervention in his speech, there is a danger as he sees it at the moment, that companies can have a very small existing equity capital, with the
§ bulk of their working capital coming from the bank at a fixed rate of interest. This, of course, gives them a substantial gearing for their ordinary share capital. This is the other method of dealing with the point with which the right hon. Gentleman was concerned.
§ The method by which families put into the family business loan capital is a normal, sensible, commercial practice. The reasons why equity shares are not issued are varied. Sometimes it is because the money is being kept only for a year or two. On other occasions there are problems which give rise to the question of what is the right price for issuing new ordinary shares. There are also problems about the watering of the equity capital, the balances between various members of the family and questions of control. Therefore, it is nothing other than a normal commercial practice.
§ I understand, of course, that the real reason why the right hon. Gentleman might have objected to the Amendment was the danger that people would pay inflated rates of interest, for example, 24 per cent, per annum on loan capital. This could have been dealt with by some form of Amendment which would provide for a reasonable rate of interest on the basis of, say, 1 or 2 per cent, over Bank Rate and that that would be fixed in the Statute as the agreed maximum rate.
§ I suggest to the right hon. Gentleman that this is a problem which will give a great deal of trouble both to the Revenue and to private close companies over the years ahead and that he might look at it again.
§ Question put, That those words be there inserted: —
§ The Committee divided: Ayes 141 Noes 208.401
|Division No. 38.]||AYES||[9.3 p.m.|
|Alison, Michael (Barkston Ash)||Bruce-Gardyne, J.||Currie, G. B. H.|
|Allason, James (Hemel Hempstead)||Buchanan-smith, Alick(Angus, N&M)||Dalkeith, Earl of|
|Atkins, Humphrey (M't'n & M'd'n)||Bullus, Sir Eric||Dance, James|
|Baker, W. H. K.||Campbell, Cordon||Davidson, James(Aberdeenshire, W.)|
|Balniel, Lord||Cary, Sir Robert||Dean, Paul (Somerset, N.)|
|Batsford, Brian||Chichester-Clark, R.||Deedes, Rt. Hn. W. F. (Ashford)|
|Bessell, Peter||Clegg, Walter||Dodds-Parker, Douglas|
|Biffen, John||Cooke, Robert||Eden, Sir John|
|Biggs-Davison, John||Cooper-Key, Sir Neill||Elliot, Capt. Walter (Carshalton)|
|Birch, Rt. Hn. Nigel||Costain, A. P.||Elliott, R.W.(N'c'tle-upon-Tyne,N.)|
|Black, Sir Cyril||Crawley, Aidan||Errington, Sir Eric|
|Blaker, Peter||Crosthwaite-Eyre, Sir Oliver||Eyre, Reginald|
|Brewis, John||Crouch, David||Farr, John|
|Brinton, Sir Tatton||Crowder, F. P.||Fisher, Nigel|
|Brown, Sir Edward (Bath)||Cunningham, Sir Knox||Fletcher-Cooke, Charles|
|Fortescue, Tim||Legge-Bourke, Sir Harry||Peyton, John|
|Fraser,Rt.Hn.Hugh(St'fford & Stone)||Lewis, Kenneth (Rutland)||Pike, Miss Mervyn|
|Giles, Rear-Adm. Morgan||Loveys, W. H.||Pink, R. Bonner|
|Clover, Sir Douglas||Lubbock, Eric||Pounder, Rafton|
|Glyn, Sir Richard||MacArthur, Ian||Ridley, Hn. Nicholas|
|Cower, Raymond||Mackenzie, Alasdair(Ross&Crom'ty)||Rossi, Hugh (Hornsey)|
|Grieve, Percy||Macleod, Rt. Hn. lain||St. John-Stevas, Norman|
|Griffiths, Eldon (Bury St. Edmunds)||Maddan, Martin||Shaw, Michael (Sc'b'gh & Whitby)|
|Grimond, Rt. Hn. J.||Maginnis, John E.||Sinclair, Sir George|
|Gurden, Harold||Mathew, Robert||Smith, John|
|Hall, John (Wycombe)||Maude, Angus||Steel, David (Roxburgh)|
|Hall-Davis, A. G. F.||Maxwell-Hyslop, R. J.||Stoddart-Scott, Col. Sir M. (Ripon)|
|Harris, Frederic (Croydon, N.W.)||Maydon, Lt.-Cmdr. S. L. C.||Talbot, John E.|
|Harvie Anderson, Miss||Mills, Peter (Torrington)||Taylor, Frank (Moss Side)|
|Hawkins, Paul||Mills, Stratton (Belfast, N.)||Temple, John M.|
|Hay, John||Miscampbell, Norman||Thatcher, Mrs, Margaret|
|Heald, Rt. Hn. Sir Lionel||Monro, Hector||Thorpe, Jeremy|
|Higgins, Terence L.||More, Jasper||Turton, Rt. Hn. R. H.|
|Hiley, Joseph||Morrison, Charles (Devizes)||Van Straubenzee, W. R.|
|Hill, J. E. B.||Mott-Radclyffe, Sir Charles||Walker, Peter (Worcester)|
|Hirst, Geoffrey||Munro-Lucas-Tooth, Sir Hugh||Wall, Patrick|
|Holland, Philip||Murton, Oscar||Ward, Dame Irene|
|Hunt, John||Nabarro, Sir Gerald||Weatherill, Bernard|
|Irvine, Bryant Godman (Rye)||Noble, Rt. Hn. Michael||Webster, David|
|Jenkin, Patrick (Woodford)||Nott, John||Wells, John (Maidstone)|
|Jennings, J. C. (Burton)||Onslow, Cranley||Whitelaw, William|
|Johnson Smith, G. (E. Crinstead)||Orr, Capt. L. P. S.||Wilson, Geoffrey (Truro)|
|Johnston, Russell (Inverness)||Osborne, Sir Cyril (Louth)||Winstanley, Dr. M, P.|
|Jopling, Michael||Page, Graham (Crosby)||Wolrige-Gordon, Patrick|
|Kaberry, Sir Donald||Pardoe, J.||Younger, Hn. George|
|Kershaw, Anthony||Pearson, Sir Frank (Clitheroe)|
|Kitson, Timothy||Peel, John||TELLERS FOR THE AYES:|
|Lancaster, Col. C. C.||Percival, Ian||Mr. Pym and Mr. Grant.|
|Abse, Leo||Dickens, James||Hoy, James|
|Allaun, Frank (Salford, E.)||Dobson, Ray||Hughes, Emrys (Ayrshire, S.)|
|Alldritt, Walter||Doig, Peter||Hughes, Roy (Newport)|
|Archer, Peter||Donnelly, Desmond||Hunter, Adam|
|Armstrong, Ernest||Dunn, James A.||Hynd, John|
|Ashley, Jack||Dunwoody, Mrs. Gwyneth (Exeter)||Jackson, Colin (B'h'se & Spenb'gh)|
|Atkins, Ronald (Preston, N.)||Edelman, Maurice||Jeger, George (Goole)|
|Atkinson, Norman (Tottenham)||Edwards, Rt. Hn. Ness (Caerphilly)||Jones, Dan (Burnley)|
|Bagier, Gordon A. T.||Edwards, Robert (Bilston)||Jones, J. Idwal (Wrexham)|
|Barnes, Michael||Edwards, William (Merioneth)||Judd, Frank|
|Barnett, Joel||Ellis, John||Kelley, Richard|
|Baxter, William||Ensor, David||Kenyon, Clifford|
|Bence, Cyril||Evans, Albert (Islington, S.W.)||Kerr, Dr. David (W'worth, Central)|
|Bennett, James (G'gow, Bridgeton)||Evans, loan L. (Birm'h'm, Yardley)||Leadbitter, Ted|
|Bidwell, Sydney||Faulds, Andrew||Ledger, Ron|
|Bishop, E. S.||Fernyhough, E.||Lee, Rt. Hn. Frederick (Newton)|
|Blackburn, F.||Finch, Harold||Lever, L. M. (Ardwick)|
|Blenkinsop, Arthur||Fitch, Alan (Wigan)||Lewis, Arthur (W. Ham, N.)|
|Boardman, H.||Fletcher, Ted (Darlington)||Lewis, Ron (Carlisle)|
|Booth, Albert||Floud, Bernard||Lomas, Kenneth|
|Boston, Terence||Foot, Michael (Ebbw Vale)||Loughlin, Charles|
|Bowden, Rt. Hn. Herbert||Forrester, John||Luard, Evan|
|Braddock, Mrs. E. M,||Fowler, Gerry||Lyons, Edward (Bradford, E.)|
|Bradley, Tom||Fraser, John (Norwood)||Mahon, Dr. J. Dickson|
|Brooks, Edwin||Fraser, Rt. Hn. Tom (Hamilton)||McBride, Neil|
|Brown, Hugh D. (G'gow, Provan)||Cardner, A. J.||McCann, John|
|Brown,Bob(N'c'tle-upon-Tyne,W.)||Garrett, W. E.||MacColl, James|
|Buchan, Norman||Garrow, Alex||MacDermot, Niall|
|Buchanan, Richard (G'gow, Sp'burn)||Gourlay, Harry||Macdonald, A. H.|
|Callaghan, Rt. Hn. James||Grey, Charles||Mackenzie, Gregor (Rutherglen)|
|Cant, R. B.||Griffiths, David (Rother Valley)||McMillan, Tom (Glasgow, C.)|
|Carter-Jones, Lewis||Griffiths, Rt. Hn. James (Llanelly)||McNamara, J. Kevin|
|Castle, Rt. Hn. Barbara||Griffiths, Will (Exchange)||Mahon, Peter (Preston, S.)|
|Concannon, J. D.||Hale, Leslie (Oldham, W.)||Mahon, Simon (Bootle)|
|Conlan, Bernard||Hamilton, James (Bothwell)||Mallalieu, E. L. (Brigg)|
|Cousins, Rt. Hn. Frank||Hannan, William||Mallalieu, J.P.W.(Huddersfield,E.)|
|Craddock, George (Bradford, S.)||Harper, Joseph||Manuel, Archie|
|Crawshaw, Richard||Hattersley, Roy||Mapp, Charles|
|Cronin, John||Hazell, Bert||Marquand, David|
|Crosland, Rt. Hn. Anthony||Heffer, Eric S.||Mason, Roy|
|Cullen, Mrs. Alice||Herbison, Rt. Hn. Margaret||Mayhew, Christopher|
|Dalyell, Tarn||Hooley, Frank||Mendelson, J. J.|
|Davidson, Arthur (Accrington)||Homer, John||Mikardo, Ian|
|Davies, G. Elfed (Rhondda, E.)||Houghton, Rt. Hn. Douglas||Millan, Bruce|
|Davies, Robert (Cambridge)||Howarth, Robert (Bolton, E.)||Miller, Dr. M. S.|
|Dempsey, James||Howie. W.||Mitchell, R. C. (S'th'pton, Test)|
|Dewar, Donald||Dunwoody, Dr. John (F'th & C'b'e)||Molloy, William|
|Diamond, Rt. Hn. John||Eadie, Alex||Morgan, Elystan (Cardiganshire)|
|Moyle, Roland||Rankin, John||Tinn, James|
|Murray, Albert||Reynolds, G. W.||Tomney, Frank|
|Neal, Harold||Richard, Ivor||Varley, Eric G.|
|Oakes, Gordon||Robinson, W. O. J. (Walth'stow, E.)||Wainwright, Edwin (Dearne Valley)|
|Ogden, Eric||Rodgers, William (Stockton)||Walden, Brian (All Saints)|
|Orme, Stanley||Roebuck, Roy||Walker, Harold (Doncaster)|
|Oswald, Thomas||Rose, Paul||Watkins, David (Consett)|
|Owen, Dr. David (Plymouth, S'tn)||Ross, Rt. Hn. William||Weitzman, David|
|Owen, Will (Morpeth||Rowlands, E. (Cardiff, N.)||Wellbeloved, James|
|Palmer, Arthur||Sheldon, Robert||Whitlock, William|
|Pannell, Rt. Hn. Charles||Shinwell, Rt. Hn. E.||Williams Alan Lee (Hornchurch)|
|Park, Trevor||Short, Rt.Hn.Edward(N'c'tle-u-Tyne)||Williams, Clifford (Abertillery)|
|Parker, John (Dagenham)||Silverman, Julius (Aston)||Willis, George (Edinburgh, E.)|
|Parkyn, Brian (Bedford)||Skeffington, Arthur||Wilson, William (Coventry, s.)|
|Pentland, Norman||Slater, Joseph||Winnick, David|
|Perry, Ernest G. (Battersea, S.)||Snow, Julian||Winterbottom, R. E.|
|Perry, George H. (Nottingham, S.)||Spriggs, Leslie||Woodburn, Rt. Hn. A.|
|Price, Christopher (Perry Barr)||Steele, Thomas (Dunbartonshire, W.)||Yates, Victor|
|Price, Thomas (Westhoughton)||Swingler, Stephen||Zilliacus, K.|
|Price, William (Rugby)||Symonds, J. B.|
|Probert, Arthur||Taverne, Dick||TELLERS FOR THE NOES:|
|Pursey, Cmdr. Harry||Thornton, Ernest||Mr. Lawson and|
|Mr. Charles R. Morris.|
§ Mr. Patrick Jenkin
I beg to move Amendment No. 116, in page 76, line 17, at the end to insert:18. The proviso to subsection (2) of section 77 of the Finance Act 1965 (which makes provision for abatement of the required standard of distributable income of certain small close companies) shall apply as if the words "not having any associated company" were omitted, and there were added, at the end of the proviso, the words "but if the company has one or more associated companies, the relief under this proviso shall be computed as if the estate or trading income of those companies were aggregated; and if the aggregate of such income is less than £9,000, then the relief shall be shared between the company and its associated companies in proportion to their respective estate or trading incomes.I seem to remember that about this time on a similar occasion last year the Government were run very close until, in the small hours of the morning, we on this side of the Committee triumphed. We looked forward to achieving the same success this year. This Amendment is one on which I am sure even more hon. Members opposite will join us in the Lobby.
We are still dealing with close companies, and very small close companies. We have had a number of shots at including an Amendment we moved earlier from this side of the Committee, which, I regret to say, was not accepted. This Amendment is designed to provide for groups of close companies the same sort of treatment which is at present available to a small close company on its own.
It will be remembered that one of the Clauses in last year's Finance Bill which caused very widespread dismay and disquiet among close companies and their 402 proprietors and advisers was what was then Clause 72 and is now in the Act as Section 77. It established the concept of a required standard of distributions which a close company had to make if it failed to persuade the inspector that a lower measure of distributions was appropriate in the circumstances. The Committee will recollect the long debates we had on the question of where the burden of proof should lie. It is true that during the course of the Bill through Parliament last year the Chancellor introduced a number of minor alleviations, but I am sure that the Chief Secretary agrees that the main structure of the Clause remained intact, and we have it today.
It is too early—I concede that, if, indeed, it is a concession—to see how the Clause will work in practice. There has not yet been time for inspectors to make the assessments of the shortfalls which will give an indication whether all the bland assurances which were poured on the Committee from the Government Dispatch Box will turn out to be justified. Certainly, those assurances were regarded with considerable scepticism, coming from right hon. and hon. Gentlemen opposite, so that when Professor Kaldor gave exactly the same assurances—I can tell the Committee that they were exactly the same, because I was at the meeting of the Economic Research Council which he addressed—about the way in which the Section would be applied, it was greeted as if it were an entirely new revelation which he had made on the operation of the Section.
Still, it is not necessarily too early to look at some of the provisions which we 403 might put into the Bill to alleviate the position for very small companies. The Clause contained—and right from the outset, as the Bill was originally drafted, it contained—a very minor relieving provision relating to the required standard of distribution of estate and trading income of companies whose income was below a certain level. The Committee will remember that the normal standard was to be all the investment income and 60 per cent, of the estate and trading income, but small companies with a trading income below £9,000 were entitled to have the figure of 60 per cent, reduced.
If the profits are below £1,500 it can be ignored completely and for those between £1,500 and £9,000 the figure is reduced by one-fifth of the difference between the actual income and £9,000. If the profit is £4,000, then one-fifth of the difference between £4,000 and £9,000 is £1,000, and the 60 per cent, is applied not to £4,000, but to £3,000.
There was one very curious restriction applying to this alleviating provision, namely, that the provision is to be applied only to a company not having any associated company, that is to say, a company which, as I explained earlier, stands entirely alone and with no other associated company in a group. This point was raised last year not by an Amendment, because the Amendment was not selected, but on the Question that the Clause stand part of the Bill. On 21st June—for the benefit of the hon. Member for Orpington (Mr. Lubbock) who is no longer in his place; my speech is reported at column 1309— the Chief Secretary replied to the point which I had made to him then, and it was evident from his reply that he had totally misunderstood the point which was being made.
I should like to make it clear that we are not seeking to claim in the Amendment—which, I hope, has been carefully drafted to make this quite clear —that the abatement should be applied to each member of a group of companies. This was the point to which the Chief Secretary devoted most of his speech last time. I then intervened and said that this was not the purpose.
It is that where there is a group of companies, two or more, then if the total income—estate and trading income—of 404 all the members of the group is below the level which qualifies for the abatement when aggregated, the abatement should be applied to them all and should be apportioned between them in the proportion in which their incomes exist to each other. This Amendment is intended to make that clear. It is drawn even more stringently than the Amendment tabled last year.
The abatement should not be lost merely because a number of businesses which are operated as a group are run in separate companies rather than under one hat. It is possible to imagine where, for reasons of management, organisation or even the accident of history, two businesses are operated together, perhaps even under a single management, but are treated as separate businesses and where the combined trading income is below £9,000, thus getting abatement. But where they happen to be limited companies and run by a parent company or a subsidiary, relief does not apply.
The Amendment would not open any threat of evasion or possible avoidance. All that would happen is that companies which are now denied it—companies with very small profits and a stated trading income of less than £9,000— would get the abatement. To that extent, there would be a minimal cost to the Inland Revenue. The cost would be small because we are dealing here only with very small companies. Nevertheless, this would give the help to very small companies that the present Act denies them. I hope that if the right hon. Gentleman cannot accept the Amendment because of the drafting, he will make forthcoming noises on its principle.
§ Mr. Diamond
I have, at all events, understood this time. I am sorry if I did not understand the last time, although I do not know whether that was a true description of events. As I have said, I fully understand what the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has said tonight. I am sorry that I cannot be persuaded by it.
I deal first with a minor point. The drafting is interesting and, if one follows it through its complicated length, one finds that every company controls every 405 other company and one gets into the most glorious tangle of inconsistency. I do not make a great deal of that, because one can always revise drafting, but I mention it to clear it out of the way at once.
The major point is the use of entitlement to abatement for a group. I want to correct one word that the hon. Gentleman used, for it is a key word. He talked about the "normal" 60 per cent. I invite him in future to use the term "maximum" 60 per cent. That is the maximum distribution which has to be declared in order to demonstrate that there is no need to go to the Revenue and put forward any reason as to why a higher distribution was not made.
The object of the abatement arrangement is merely to get rid of a lot of footling little cases where there might otherwise be argument as to whether an adequate amount had been distributed. I agree that we are dealing with very small companies and very small profits and that one has to have a figure proportionately larger than might otherwise be the case. The essence of the matter is that this is a method of clearing the ground for a number of small businesses. Once they are groups, they cease to be the kind of company for which the abatement procedure was devised. What the hon. Gentleman proposes deals with the kind of company for which it was not the intention of the legislature to give help at all.
The hon. Gentleman talked about minimal advantage but there would be a distinct advantage. This would encourage the splitting up of businesses into more than one company, thereby affecting the tax position. In any case, there is no need for all this complicated structure. At the moment there is a simple arrangement. The splitting and apportioning as suggested by the hon. Gentleman could be very complicated. It is a complicated matter to try and draw a subsection dealing with control and association. It is complicated to apportion tax and there is no need to have any sophisticated provision of this
§ kind when the matter is being dealt with perfectly satisfactorily and happily as it is at the moment.
§ I agree that neither side has gone far enough to be able to say that there is no problem at all. The hon. Gentleman has spoken about our attitudes and I hope that he will forgive me if I talk about the unnecessary anxieties which were displayed by hon. Members opposite. Hitherto, there has been no justification for any of those anxieties. Certainly, if, in the years ahead, one found that there was justification, one would consider whether anything needed to be done; but the present position is that the system is working perfectly satisfactorily, as we thought that it would. There is no need to complicate a simple system, the essence of it being that we want to keep it simple.
§ Mr. Patrick Jenkin
That was a very disappointing reply. The case which we were making was not that this provision would encourage the splitting up of companies. With the greatest respect to the right hon. Gentleman, I would have thought that that was a lot of nonsense. One is here dealing ex hypothesi with very small companies trading individually and independently and whose profits are less than £9,000 and, if there happen to be two or more in a group, whose aggregate profits are less than £9,000. I cannot imagine in those circumstances that these petty tycoons—I suppose that they may be called that—will start manipulating companies for tax avoidance purposes as some of the big ones might be tempted to do.
The fact of the matter, as the right hon. Gentleman has said quite plainly, is that it is not the intention of the legislation introduced by his Government to help the cases aimed at in the Amendment. All I can say is that it is our intention to help those cases and I ask my hon. Friends to express their intentions by joining me in the Division Lobby.
§ Question put, That those words be there inserted:—
§ The Committee divided: Ayes 131, Noes 217.409
|Division No. 39.]||AYES||[9.27 p.m.|
|Alison, Michael (Barkston Ash)||Balniel, Lord||Birch, Rt. Hn. Nigel|
|Allason, James (Hemel Hempstead)||Batsford, Brian||Black, Sir Cyril|
|Atkins, Humphrey (M't'n & M'd'n)||Biffen John||Brewis, John|
|Baker, W. H. K.||Biggs-Davison, John||Brinton, Sir Tatton|
|Brown, Sir Edward (Bath)||Hall-Davis, A. G. F.||Nabarro, Sir Gerald|
|Bruce-Gardyne, J.||Harris, Frederic (Croydon, N.W.)||Noble, Rt. Hn. Michael|
|Buchanan-Smith, Alick(Angus, N&M)||Harvie Anderson, Miss||Nott, John|
|Bullus, Sir Eric||Hawkins, Paul||Onslow, Cranley|
|Campbell, Cordon||Hay, John||Orr, Capt. L. P. S.|
|Cary, Sir Robert||Heald, Rt. Hn. Sir Lionel||Osborn, John (Hallam)|
|Chichester-Clark, R.||Higgins, Terence L,||Page, Graham (Crosby)|
|Clegg, Walter||Hiley, Joseph||Pearson, Sir Frank (Clitheroe)|
|Cooke, Robert||Hill, J. E. B,||Peel, John|
|Cooper-Key, Sir Neill||Hirst, Geoffrey||Percival, Ian|
|Costain, A. P.||Holland, Philip||Peyton, John|
|Crawley, Aldan||Hunt, John||Pike, Miss Mervyn|
|Crosthwaite-Eyre, Sir Oliver||Irvine, Bryant Godman (Rye)||Pink, R. Bonner|
|Crouch, David||Jenkin, Patrick (Woodford)||Pounder, Rafton|
|Crowder, F. P.||Jennings, J. C. (Burton)||Ridley, Hn. Nicholas|
|Cunningham, Sir Knox||Johnson, Smith, G. (E. Grinstead)||Rossi, Hugh (Hornsey)|
|Currie, G. B. H.||Jopling, Michael||St. John-Stevas, Norman|
|Dalkeith, Earl of||Kershaw, Anthony||Shaw, Michael (Sc'b'gh & Whitby)|
|Dance, James||Kitson, Timothy||Sinclair, Sir George|
|Dean, Paul (Somerset, N.)||Lancaster, Col. C. G.||Smith, John|
|Deedes, Rt. Hn. W. F. (Ashford)||Legge-Bourke, Sir Harry||Stoddart-Scott, Col. Sir M. (Ripon)|
|Dodds-Parker, Douglas||Lewis, Kenneth (Rutland)||Talbot, John E.|
|Eden, Sir John||Lloyd, Ian (P'tsm'th, Langstone)||Taylor, Frank (Moss Side)|
|Elliot, Capt. Walter (Carshalton)||Loveys, W. H.||Temple, John M.|
|Elliott, R.W. N'c'tle-upon-Tyne,N.)||MacArthur, Ian||Thatcher, Mrs. Margaret|
|Errington, Sir Eric||Macleod, Rt. Hn. Iain||Turton, Rt. Hn. R. H.|
|Eyre, Reginald||Maddan, Martin||Van Straubenzee, W. R.|
|Farr, John||Maginnis, John E.||Walker, Peter (Worcester)|
|Fisher, Nigel||Mathew, Robert||Wall, Patrick|
|Fletcher-Cooke, Charles||Maude, Angus||Ward, Dame Irene|
|Fortescue, Tim||Maxwell-Hyslop, R. J.||Weatherill, Bernard|
|Fraser,Rt.Hn.Hugh(St'fford & Stone)||Maydon, Lt.-Cmdr. S. L. C.||Webster, David|
|Giles, Rear-Adm. Morgan||Mills, Peter (Torrington)||Wells, John (Maidstone)|
|Glover, Sir Douglas||Mills, Stratton (Belfast, N.)||Whitelaw, William|
|Glyn, Sir Richard||Miscampbell, Norman||Wilson, Geoffrey (Truro)|
|Gower, Raymond||Monro, Hector||Wolrige-Gordon, Patrick|
|Grant, Anthony||More, Jasper||Younger, Hn. George|
|Grieve, Percy||Morrison, Charles (Devizes)|
|Griffiths, Eldon (Bury St. Edmunds)||Mott-Radclyffe, Sir Charles||TELLERS FOR THE AYES:|
|Gurden, Harold||Munro-Lucas-Tooth, Sir Hugh||Mr. Pym and Mr. Blaker.|
|Hall, John (Wycombe)||Murton, Oscar|
|Abse, Leo||Cronin, John||Garrow, Alex|
|Allaun, Frank (Salford, E.)||Crosland, Rt. Hn. Anthony||Gourlay, Harry|
|Alldritt, Walter||Cullen, Mrs. Alice||Grey, Charles|
|Archer, Peter||Dalyell, Tarn||Griffiths, David (Rother Valley)|
|Armstrong, Ernest||Davidson, Arthur (Accrington)||Griffiths, Rt. Hn. James (Llanelly)|
|Ashley, Jack||Davidson, James (Aberdeenshire, W.)||Griffiths, Will (Exchange)|
|Atkins, Ronald (Preston, N.)||Davies, G. Elfed (Rhondda, E.)||Grimond, Rt. Hn. J.|
|Atkinson, Norman (Tottenham)||Davies, Robert (Cambridge)||Hale, Leslie (Oldham, W.)|
|Bagier, Gordon A. T.||Dempsey, James||Hamilton, James (Bothwell)|
|Barnes, Michael||Dewar, Donald||Hannan, William|
|Barnett, Joel||Diamond, Rt. Hn. John||Harper, Joseph|
|Baxter, William||Dickens, James||Hattersley, Roy|
|Bence, Cyril||Dobson, Ray||Hazell, Bert|
|Bennett, James (G'gow, Bridgeton)||Doig, Peter||Heffer, Eric S.|
|Bessell, Peter||Donnelly, Desmond||Herbison, Rt. Hn. Margaret|
|Bidwell, Sydney||Dunn, James A.||Hooley, Frank|
|Binns, John||Dunwoody, Mrs. Gwyneth (Exeter)||Homer, John|
|Bishop, E. S.||Dunwoody, Dr. John (F'th & C'b'e)||Houghton, Rt. Hn. Douglas|
|Blackburn, F.||Eadie, Alex||Howarth, Robert (Bolton, E.)|
|Blenkinsop, Arthur||Edelman, Maurice||Howie, W.|
|Boardman, H.||Edwards, Rt. Hn. Ness (Caerphilly)||Hoy, James|
|Booth, Albert||Edwards, Robert (Bilston)||Hughes, Emrys (Ayrshire, S.)|
|Boston Terence||Edwards, William (Merioneth)||Hughes, Roy (Newport)|
|Bowden Rt. Hn. Herbert||Ellis, John||Hunter, Adam|
|Braddock, Mrs. E. M.||Ensor, David||Hynd, John|
|Bradley, Tom||Evans, Albert (Islington, S.W.)||Jackson, Colin (B'h'se & Spenb'gh)|
|Brooks, Edwin||Evans, Ioan L. (Birm'h'm, Yardley)||Jeger, George (Goole)|
|Brown, Hugh D. (G'gow, Provan)||Faulds, Andrew||Johnston, Russell (Inverness)|
|Brown,Bob(N'c'tle-upon-Tyne,W.)||Fernyhough, E.||Jones, Dan (Burnley)|
|Buchan, Norman||Finch, Harold||Jones, J. Idwal (Wrexham)|
|Buchanan, Richard (G'gow, Sp'burn)||Fitch, Alan (Wigan)||Judd, Frank|
|Callaghan, Rt. Hn. James||Fletcher, Ted (Darlington)||Kelley, Richard|
|Cant, R. B.||Floud, Bernard||Kenyon, Clifford|
|Carter-Jones, Lewis||Foot, Michael (Ebbw Vale)||Kerr, Dr. David (W'worth, Central)|
|Castle, Rt. Hn. Barbara||Forrester, John||Leadbitter, Ted|
|Concannon, J. D.||Fowler, Gerry||Ledger, Ron|
|Conlan, Bernard||Fraser, John (Norwood)||Lee, Rt. Hn. Frederick (Newton)|
|Cousins, Rt. Hn. Frank||Fraser, Rt. Hn. Tom (Hamilton)||Lever, L. M. (Ardwick)|
|Craddock, George (Bradford, S.)||Gardner, A. J.||Lewis, Arthur (W. Ham, N.)|
|Crawshaw, Richard||Garrett, W. E.||Lewis, Ron (Carlisle)|
|Lomas, Kenneth||Oakes, Gordon||Spriggs, Leslie|
|Loughlin, Charles||Ogden, Eric||Steel, David (Roxburgh)|
|Luard, Evan||O'Malley, Brian||Steele, Thomas (Dunbartonshire, W.)|
|Lubbock, Eric||Orme, Stanley||Swingler, Stephen|
|Lyons, Edward (Bradford, E.)||Oswald, Thomas||Symonds, J. B.|
|Mabon, Dr, J. Dickson||Owen, Dr. David (Plymouth, S'tn)||Taverne, Dick|
|Mr.Bride, Neil||Owen, Will (Morpeth)||Thornton, Ernest|
|McCann, John||Palmer, Arthur||Thorpe, Jeremy|
|MacColl, James||Pannell, Rt. Hn. Charles||Tinn, James|
|MacDermot, Niall||Pardoe, J.||Tomney, Frank|
|Macdonald, A. H.||Park, Trevor||Varley, Eric G.|
|Mackenzie, Alasdair (Ross&Crom' ty)||Parker, John (Dagenham)||Wainwright, Edwin (Dearne Valley)|
|Mackenzie, Gregor (Rutherglen)||Parkyn, Brian (Bedford)||Wainwright, Richard (Colne Valley)|
|McMillan, Tom (Glasgow, C.)||Pentland, Norman||Walden, Brian (All Saints)|
|McNamara, J. Kevin||Perry, Ernest G. (Battersea, S.)||Walker, Harold (Doncaster)|
|Mahon, Peter (Preston, S.)||Perry, George H. (Nottingham, S.)||Watkins, David (Consett)|
|Mahon, Simon (Bootle)||Price, Christopher (Perry Barr)||Weitzman, David|
|Mallalieu, E. L. (Brigg)||Price, Thomas (Westhoughton)||Wellbeloved, James|
|Mallalieu,J.P.W.(Huddersfield,E.)||Price, William (Rugby)||Whitlock, William|
|Manuel, Archie||Probert, Arthur||Williams, Alan Lee (Hornchurch)|
|Mapp, Charles||Pursey, Cmdr. Harry||Williams, Clifford (Abertillery)|
|Marquand, David||Rankin, John||Willis, George (Edinburgh, E.)|
|Mason, Roy||Reynolds, G. W.||Wilson, William (Coventry, S.)|
|Mayhew, Christopher||Richard, Ivor||Winnick, David|
|Mendelson, J. J.||Robinson, W. O. J. (Walth'stow, E.)||Winstanley, Dr. M. P.|
|Mikardo, Ian||Rodgers, William (Stockton)||Winterbottom, R. E.|
|Millan, Bruce||Roebuck, Roy||Woodburn, Rt. Hn. A.|
|Miller, Dr. M. S.||Rose, Paul||Yates, Victor|
|Mitchell, R. C. (S'th'pton, Test)||Ross, Rt. Hn. William||Zilliacus, K.|
|Molloy, William||Rowlands, E. (Cardiff, N.)|
|Morgan, Elystan (Cardiganshire)||Sheldon, Robert||TELLERS FOR THE NOES:|
|Moyle, Roland||Short, Rt.Hn. Edward (N'c'tlc-u-Tyne)||Mr. Lawson and|
|Murray, Albert||Skeffington, Arthur||Mr. Charles R. Morris.|
|Neal, Harold||Slater, Joseph|
§ Mr. Barnett
I beg to move Amendment No. 67, in page 76, line 31, at the end to insert:19. In section 74(2) of the Finance Act 1965, leave out "£4,000" and insert "£5,000".In section 74(3)(a) of the Finance Act 1965, leave out "£13,000" and insert "£20,000."; leave out "£10,000" and insert "£15,000"; leave out "£7,000" and insert "£10,000".In section 74(3) of the Finance Act 1965, leave out paragraph (b) and the definition of "the highest paid such director" and insert paragraph (b) as follows—a limit of £5,000 on the remuneration of any one such director".
§ The Chairman
I suggest that it would be convenient if, with Amendment No. 67, we discussed the following two Amendments: Amendment No. 66, in line 17, at the end to insert:18. In section 74 of the Finance Act 1965 there shall be added a further subsection as follows—(7) Notwithstanding anything to the contrary in the foregoing provisions of this section, a close company may elect that, in computing its profits for corporation tax for any accounting period, the deduction to be made for the remuneration of any director shall be so much of any remuneration paid to that director as is commensurate with the services he performs for the company.Amendment No. 68, in line 35, at the end to add:Provided that paragraph 19 of this Schedule shall have effect from 6th April 1966.
§ Mr. Barnett
Amendment No. 67 stands in the names of my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), myself, and the hon. Member for Gosport and Fareham (Dr. Bennett) whom I do not see in his place, but who, I have no doubt, will agree with all that I say as well as with the Amendment which we have tabled.
The Amendment is of an exploratory nature because I am not well versed in the art of Parliamentary draftsmanship. No doubt, for technical or other reasons, the Chief Secretary may find some other method at a later stage of altering it to fit in with what I have in mind.
There is no need to go over all the arguments which we rehearsed at great length in the very early hours of the morning last year, round about 9 a.m. I should like to make my own view quite clear. I believe that the Opposition——
§ Mr. Barnett
Perhaps he will allow me to go on. I am sure that the hon. Gentleman will have his opportunity of getting in, it's nearing ten o'clock.
I believe that the Opposition has often grossly and mischievously overstated the case for this type of Amendment. In so doing, they do themselves and the case 411 great harm, because there is a case here. I am mainly concerned with the goodwill that the Government can have in the business world generally, and, in particular, among people in small close companies, by accepting an Amendment of this nature.
The major reason why there has been a good deal of confusion is that there are two different types of company affected. There is the investment and property type of close company, which my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) was concerned to defend today, and the close company which I like to feel is the genuine close family company. I am not greatly concerned with the property and investment type of company in the close company world. On the other hand, I am sure that my hon. Friend the Member for Cheetham will agree that the Amendment is not really affected by the argument he was making earlier today because, in the case of the property and investment close company, there is in any event difficulty in proving to inspectors of taxes that the remuneration is truly earned, earned, that is, in the Income Tax sense of the word, and, therefore, allowable as remuneration even up to the existing level.
My Amendment is not intended to help that type of company, and, indeed, if the spate of voluntary liquidations in that sector of the close company world continues, as was suggested from the benches opposite earlier today, I shall not be particularly concerned.
Last year, many examples were given of the difficulties of small close companies as a result of the level of remuneration allowed. I am sure that all hon. Members who were present will recall the debates which we had in the early hours that morning last year, or they will have read the report of them, so I shall not go over all the details again. A large percentage of those examples, however, were far from typical of the average small family close company, though this does not mean that there is not a strong case.
A good many companies are penalised by the levels fixed. I am concerned, for instance, not to discourage the executive who may be offered a directorship as well as more than 5 per cent. of shares in a 412 close company. I feel that it would be wrong to discourage this type of person from taking a greater stake in the company. One has to accept that the Amendment would not altogether remove that discouragement, but it would help. I am sure that it would help in the case of a genuine small close company. I said last year that there was need for young blood in and among the old boards in this country, and I consider this to be just as true today.
One of the worst features of the present legislation is that it is to a considerable extent becoming like the Estate Duty legislation. This is now something of a voluntary tax because it can be readily avoided. Because, for example, the formation of associated companies is not too difficult. I have no wish to encourage the already over-large industry of producing new companies. What with this and the Selective Employment Tax with its built-in incentive to create new employers even for only one employee—I hope that this will be amended in due course—we are, as it were, helping to manufacture new companies. I do not know what my right hon. Friend has in mind or whether he intends to increase our average rate of productivity by increasing the rate of productivity in forming new companies.
My final point—I wish to be as brief as I can—is on the cost argument. In answer to a recent Question, I was told that the estimated cost of an Amendment of this kind would be about £5 million. I hope that it will not be argued that this represents, as it were, a rise and that we cannot do it because of the prices and incomes policy. The major reason for that estimated cost must surely be—my right hon. Friend will correct me if I am wrong—that the companies would not be paying the tax on the present disallowed proportion. And if it is argued that more remuneration would be paid than is being paid now, the answer is that it would not bring in less revenue. Indeed, it is likely to bring in very much more because, with the payment of that extra slice, although there would not be the 40 per cent. Corporation Tax on it, there would be Income Tax at the standard rate plus Surtax on the individual director. No case, therefore, should be made on grounds of cost.
413 I hope that my right hon. Friend the Chief Secretary will look benignly upon the Amendment, as he has been doing at others, throughout the day. The concession for which I am asking is only a minor one. Although I feel sure that my right hon. Friend will accept the Amendment, I hope that he will at least make a considerable gesture towards it if he does not go all the way.
§ 9.45 p.m.
§ Sir D. Glover
I congratulate the hon. Member for Heywood and Royton (Mr. Barnett) on what I regard as one of his best speeches in the House of Commons. I agreed with every word of it, so much so that I was forced to intervene in the debate and convey my congratulations to the hon. Member.
I have spent the whole of my working life in what would be termed a close company which is covered by these provisions. The hon. Member's proposal in the Amendment would be of tremendous value to an enormous number of family businesses. I support the hon. Member very much when he talks about these family businesses bringing on to the board the younger executives, which at present they have difficulty in doing. That is how a family business remains virile and strong. There should not, therefore, be the difficulty which exists in providing decent remuneration for that sort of person to be brought on to the board, whatever amount of shares is given in a family business because of the service that a person has rendered to it in previous years.
I always thought that the old provisions about distributions in family businesses were grossly unfair. I am glad that as a result of what happened in last year's Finance Bill there is not now quite the same danger from the 100 per cent. Surtax direction. Sixty per cent. is an improvement. A heavy burden is still caused, however, by the small amount which is allowed for directors' remuneration before the full rate of tax is incurred.
I support the hon. Member when he says—and I think that he is right—that to bring in an Amendment that would give benefit to hundreds of companies and, at the same time, probably bring increased revenue to the Exchequer must be about the most extraordinary Amendment ever 414 moved in the House of Commons. If it has both those advantages in producing benefits where we want them and bringing a larger off-take for the Chancellor of the Exchequer, the hon. Member has performed a miracle. It must be about the only time that this has happened in a Finance Bill.
I do not, however, think that the Chief Secretary will accept that his hon. Friend is right. I regret this, because the right hon. Gentleman never seems able to accept reasonable Amendments. He always tells us afterwards that the case has not been made, whereas a great many hon. Members are convinced that the case has been overwhelmingly made. Many of the technical debates opened tonight from the Opposition Front Bench on previous Amendments have been persuasively and cogently put, but the Chief Secretary has not been able to grasp the point.
I am sure that even on this Amendment the right hon. Gentleman will not be able to grasp the point. However, if the hon. Member for Heywood and Royton wants any assistance in the Division Lobby, I assure him that I shall be only too happy to be a Teller with him and to support him in forcing what I believe to be one of the best Amendments on the Notice Paper to a Division.
§ Mr. Sheldon
The Amendment seeks to allow a maximum of four directors to draw up to £5,000 each. Section 74 of last year's Finance Act allowed £4,000 to be paid to the first director in director's remunerations and £3,000 to each of three subsequent directors. We are not trying to increase the level of distribution. Acceptance of the Amendment, moved so ably by my hon. Friend the Member for Heywood and Royton (Mr. Barnett), would not mean that each company had to pay these amounts of remuneration. We want to leave it more to the individual company to make its own decisions.
There are many circumstances in which a company may wish to increase its disbursements to suit changing circumstances. It may wish to give rewards to a director who has been trying out a new product in very adverse circumstances and putting in a great deal of effort. It may wish to reward, by means of an incentive, a director who has been having difficulty in opening up a new market.
415 We are trying to bridge the gap between the more favourable concessions given to the larger companies, which are allowed to give up to 15 per cent, of their profits in directors' remuneration, and the smaller companies. For a company earning very large profits, this is much more advantageous relatively than for the smaller company. The small company is very much more hedged in. We are leaving alone the bigger fish so as to catch, if not the tiddlers, some of the smaller fish. We are attempting to correct the balance.
When the company makes a distribution, it is not a free distribution. The directors who get the increased salary or bonus, or whatever it may be, have to pay Income Tax and, where applicable, Surtax. We must, therefore, look for the reason why a suggestion on the lines of the Amendment was not accepted last year. We know the real reason, namely, to prevent distributions to try to obviate the Section which separated Corporation Tax from Income Tax. The effect of this would be small. The figure quoted by my hon. Friend was £5 million. There is some doubt as to how this was worked out and whether it took account of the Income Tax and Surtax which might be paid by the director receiving the remuneration.
Some play has been made of encouragement to liquidate caused by Corporation Tax. I know of one case in which this happened. A company might be earning, per shareholder, £20,000 to £30,000 profit and, because of the incidence of Income Tax and Surtax when no distributions are made, depending on the state of the company, it may well elect to go into liquidation. I do not consider this as much a disaster as some hon. Members. In certain cases, this is a straightforward option which a company may choose to exercise. But I do not think that legislation should tend necessarily to come down on the side of the fence favouring such liquidation. It is difficult to say what should be the absolute level or remunerations. When we take account of the varying circumstances of companies, it becomes even harder.
We have tried to put down a reasonable Amendment to give a little more discretion to companies in this situation, 416 and I hope that my right hon. Friend will give it every consideration.
§ Mr. Michael Shaw (Scarborough and Whitby)
I support the Amendment wholeheartedly, though I would couch it in rather more restrained terms than those of my hon. Friend the Member for Ormskirk (Sir D. Glover), if only to try to avoid endangering the support of the hon. Member for Ashton-under-Lyne (Mr. Sheldon) or his right hon. Friend. It has not always passed unnoticed that too much support from this side may perhaps do a disservice to the cause to which we both aspire. Although I keep my terms more modest than those of my hon. Friend, I can sincerely say that I support him wholeheartedly.
In the Amendment, there are three types of directors to whom I should like to refer. First, there are the full-time directors earning more than 5 per cent, of the equity. Having had some practical experience of working out the various permutations and computations, we now know how the various members of a family, no matter what their positions in the firm, provided that there is some element of management in the jobs that they do, always seem to be caught under the directorship heading. It is very difficult for them to know how much they can pay themselves. In general terms, in view of present-day rates of remuneration to which top executives feel themselves entitled and which they can claim, the amounts laid down in the Bill last year are too low. On that score, I welcome the Amendment.
Secondly, there is the case of the part-time directors. I must not say a lot about them, because I cannot conveniently fit them into the Amendment. Nevertheless, in certain circumstances, they can benefit from the Amendment, in that it raises the minimum limit to £5,000.
§ Sir D. Glover
May I help my hon. Friend? With the Amendment, we are discussing Amendment No. 66. Under that, I think that he can talk about part-time directors.
§ Mr. Shaw
In that case, I may be encouraged to expand a little on that point.
Close companies, varied as they are both in size and in the types of tasks 417 that they have to undertake, have a real need in many cases to attract men and women who will not spend the whole of their time in the service of those companies but who have, through business experience of one kind and another, valuable contributions to make to those companies. I believe that such companies should have the benefit of their services by having them on their boards. At the moment, they are discouraged from having part-time men on their boards, because, in addition to paying them directors' remuneration, in most cases they have to pay the 40 per cent. Corporation Tax. Here again, any help that we can give to encourage part-time directors to serve on the boards of companies, in appropriate cases, the better it will be for those companies.
Finally, we come to the whole-time directors, and here I wholeheartedly agree with the hon. Gentleman, because we want to make sure that members of the staff of all companies in all businesses are encouraged to work their way right up to the top on to the board, and the Bill as it stands is a positive discouragement to this end. It is also a discouragement if they reach the board, because if they have less than 5 per cent, of the share capital they are denied the opportunity of acquiring a further equity interest in the company.
I believe that by taxation we are once again distorting the natural development of the pattern of companies. Where taxation distorts the development of companies, and distorts shareholdings in this way, it is bad for industry, and, therefore, unless there are very good reasons to the contrary, this is a bad principle of taxation.
For all those reasons, I wholeheartedly support the Amendment. I hope that at the end of this debate we shall all be able to agree that this is a good Amendment, and that, possibly with the assistance of the Chief Secretary, we shall be able to agree some amended form of Amendment, if amended form is necessary.
§ Mr. St. John-Stevas
I, too, should like to join in the paeans of praise from this side of the Committee, which are doubtless deafening and alarming the hon. Member for Heywood and Royton (Mr. Barnett). I am glad to see that his 418 Amendment is supported by an hon. Member who sits on this side of the Committee, and I trust that he will not think that I am in any way underestimating the importance of this political ecumenism if I leave his Amendment and concentrate my remarks on Amendment No. 66 because, whereas I think that the hon. Gentleman's Amendment is good, I think that Amendment No. 66 is better.
This Amendment seeks to remove an unfair restriction on family companies. I raised this matter with the Chancellor earlier this year, and no one will be surprised to hear that I received a highly unsatisfactory answer. The limit on directors' fees which are chargeable before the levy of Corporation Tax is fixed at the entirely arbitrary figure of £13,000 per year, or 15 per cent, of the profits before the levy of Corporation Tax, whichever is the larger.
The motivation behind this state of the law seems to be to catch the person who is abusing the procedure, or might abuse it, and take advantage of it for his own private gain. This is another example of the Chief Secretary's obsession, which quite rightly has been referred to today, with tax avoidance. The vast majority of directors of family companies are honest and straightforward men, willing to pay their fair share of taxes, and not seeking to subvert the Revenue.
These directors are being treated by the Chancellor and by the Chief Secretary as though they were potential criminals, when, in fact, they are the very people who are making one of the major contributions to our economic survival. Many of them have been decorated by the Queen on the advice of the Prime Minister for services rendered to the export drive, when it would be much more equitable——
§ The Chairman
It is contrary to all the rules of order to introduce the name of the Monarch into these debates.
§ Mr. St. John-Stevas
I was introducing the name of the Monarch only in so far as she was acting on the advice of the Prime Minister——
§ The Chairman
Order. It is out of order to introduce the name of the Monarch or references to honours.
§ Mr. St. John-Stevas
I should have thought that it would have been much 419 more equitable and more effective, instead of seeking to reward a family director in a roundabout way, if he were allowed to draw a fair remuneration from the company commensurate with the services which he was or is rendering it. That is precisely what the Amendment suggests should be done. It was Walter Bagehot who, when analysing the constitution, abandoned the theory of how it was said to operate and looked instead of what was actually happening, closely and for himself. As a result, he wrote a classic work.
We are suggesting that the Inland Revenue officials should be allowed to do something similar. That does not mean that they should be allowed to indulge their literary aspirations at the taxpayers' expense, but that they should be allowed to look at the actual situation of family companies as it is and pass a judgment accordingly. The inspector of taxes, in other words, instead of being bound by a rigid theoretical rule, should be able to look at the effects and see what, in reality, the individual director is doing for his own company.
This would involve the exercise of a discretion but it would be a discretion controlled by the words of the Amendment. Surely, therefore, the Amendment is based purely on common sense. One hopes that, for that reason, it would appeal to the Chief Secretary. However, in view of his attitude to other Amendments today, which were equally soundly based, I fear that this very common sense gives one grounds for belief that it is unlikely to be accepted by the Chief Secretary.
§ Mr. Gower
We have frequently heard Government spokesmen in these debates assert that they are most interested in the welfare of smaller companies, but far too often those excellent words have been associated with actions which to some of us seem positively injurious to the smaller companies. However, the hon. Member for Heywood and Royton (Mr. Barnett) and some of his hon. Friends have not only made these protestations but shown by their attitudes that they would go a good deal further perhaps than Government spokesmen towards sustaining the smaller close companies and family companies which mean so much in our economy.
420 However, I hope that the protestations and assertions of Government spokesmen mean what they seem to mean and that they are concerned that these companies should be lively and successful and should form the units from which the great public corporations of tomorrow will develop. That is in the interests not only of the companies themselves but of our economy in the forseeable future.
I agree with the hon. Member for Heywood and Royton that it is in the interests of those companies that the provisions for the remuneration of their directors should be altered as he suggested. I agree with my hon. Friend the Member for Chelmsford (Mr. St. John-Stevas) that there are one or two aspects of the other Amendment which might appear more attractive, and I think that he would agree that its acceptance would also confer a valuable benefit in this respect. I hope that my hon. Friend the Member for Ormskirk (Sir D. Glover) was being unduly pessimistic when he suggested that the Chief Secretary would not accept the Amendment. Let us give the hon. Gentleman the benefit of the doubt.
§ Mr. Gower
I hope that the right hon. Gentleman will be convinced, not only by the arguments of my hon. Friends and I but by the informed judgment of some of his colleagues, and will be prepared to take a new look at this whole matter. I trust that he will not be governed by statements made a year ago but that he will feel that an adequate case has been made out for the Amendment to be accepted.
§ Dame Irene Ward (Tynemouth)
A constituent of mine is a well known chartered accountant in the North of England. He has sent me a great many communications about the problems affecting close companies and while I will not enter into the arguments on this issue, I have, in the light of our democratic form of representation, sent a large number of these letters to the Government. I am bound to say that I have been surprised—because this correspondence from my constituent has been going on for some months—that although during this time I have asked for replies to these letters, I have not received any—[HON. 421 MEMBERS: "Disgraceful."]—It really is not good enough.
However busy the Chief Secretary or the officials of the Inland Revenue may be, I would appreciate a detailed answer being sent so that I might hand on to my constituent the views which the Chief Secretary holds on this subject. Having listened to a part of this discussion. I imagine that the comments and criticisms of my constituent have not been acceptable to the right hon. Gentleman. However, that does not allow him not to answer these letters.
I do not know whether my constituent supports my party. For all I know, he may support the Labour Party or even the Liberal Party. In any case, this is a democratic assembly and I require an assurance that, before long, all the complicated letters on this subject from my constituent will receive an answer, and I will, of course, draw my constituent's attention to this discussion.
§ Mr. Diamond
I will, first, deal with the complaint of the hon. Member for Tynemouth (Dame Irene Ward) about some letters which apparently she sent, I take it to me or to the Treasury, some time ago.
§ Mr. Diamond
The hon. Lady would surely not be challenging me here, in this Committee—having talked about the Chief Secretary—unless she means that the letters were sent to the Treasury.
§ Mr. Diamond
According to the hon. Lady, the letters went to the Treasury. She did not tell me before she spoke that she would raise this matter. Had she done so I would have been only too happy to look into the whole question and give her an answer here and now. However, although that is the normal procedure and one normally takes such action before raising a matter of this sort, I have been having the matter looked into. Since she mentioned it a 422 moment ago I have had inquiries made and I can only say to her, that, on recollection, and obviously I cannot be definite about this without notice, my office has no recollection of letters of the type to which she referred being long outstanding——
§ Dame Irene Ward rose ——
§ The Chairman
Order. Unless the letters to which the hon. Lady refers relate to this particular Amendment——
§ The Chairman
Order. Unless they refer to this particular Amendment it is quite out of order to continue this discussion.
§ Dame Irene Ward
On a point of order. Perhaps you were, Sir Eric, because you were asking if the letters were in connection with the Amendment. We have discussed close companies and the letters do refer to close companies. The First Secretary said that I had not sent any letters. That is a gross misstatement of fact.
§ 10.15 p.m.
§ The Chairman
The hon. Lady is under a misconception. We are not, on this Amendment, discussing close companies but directors' remuneration.
§ Mr. Diamond
Perhaps, Sir Eric, I could leave this with a short repetition. As I said before, we have no recollection of any such letters. Of course, the hon. Lady may have sent letters——
§ Mr. Diamond
We have no recollection of any such letters or reminders. I am not sure whether the hon. Lady is asking about letters sent to my colleagues. I shall certainly make a point of seeing tomorrow what letter the hon. Lady has sent which allegedly has been unanswered.
§ Mr. Diamond
Perhaps we could deal with the Amendment which has been put forward by my hon. Friend the Member for Heywood and Royton (Mr. Barnett) and the various speeches which have been made about it. The first point upon which we can all agree is that there is no difference of principle between any hon. Members in the Committee. Everybody is saying that there should be some limitation with regard to directors' remuneration in close corporations. One group of hon. Members suggests that the limitation should be defined. Others suggest that it should be left for definition by a different procedure. I am bound to say that the latter suggestion would lead to a great deal of confusion and delay and would be a very unsatisfactory way of attempting to define what is extremely difficult to define.
If we are to have a restriction, as everybody in the Committee agrees we should have, it is far better that it should be a definite restriction of the kind proposed and supported by my hon. Friends. Perhaps, therefore, I can now concentrate on the Amendment they have put forward suggesting an adjustment in the figures.
Everybody realises the need for a restriction and, therefore, I have no need to go over that. I am sure that hon. and right hon. Members recollect the three different categories to which these restrictions are related. There is, first, the minimum limit which my hon. Friend has suggested should be increased from the present figure of £4,000 to £5,000. I repeat that we are not talking about whether there should be a limit, but what the size of the limit should be, the size of the figure, and whether it should be proposed and adopted now. I repeat that now because I have never suggested 424 that these figures should remain unaltered for all time.
My hon. Friend will recollect that when I was speaking on this matter from this Box last year I said that it would be appropriate that these figures should be reviewed from time to time. All that we are debating is the timing and the scale and no principle at all. First, there is the proposal of £5,000, an increase of £1,000 on the £4,000, a 25 per cent, increase on a figure which was debated a year ago and agreed by the Committee a year ago.
The whole story is that two years ago this figure was £3,000 for Profits Tax purposes, a very similar definition. We proposed originally that it should be increased to £3,500. Amendments were put forward and we finally accepted a figure of £4,000. The increase would be either £1,000–25 per cent, in 12 months —or alternatively £2,000—two-thirds, or 66 per cent, in the course of two years. I would regard an increase of that order as inappropriate at present—too large, too soon.
The next limitation is that with regard to the percentage on the profits. My hon. Friend does not propose any change there. It only remains for me to remind the Committee that under that limitation directors can receive a total of 15 per cent, of the profits, no matter how large a figure that is. There used to be a ceiling, first of £15,000 and then of £25,000. There is no ceiling now. Therefore, directors can receive all told 15 per cent, of the profits, no matter how high a figure that may result in. Therefore, we agree that this element of bonus —the greater the profits made the more it can be assumed that directors are earning it and, therefore, the greater their remuneration should be—is a proposition which should be accepted.
§ Mr. Stratton Mills rose ——
§ Mr. Diamond
I think that it would be more appropriate if I finished by dealing with the third one in the scale. Then I will gladly give way.
The other is the individual limitation if there is more than one full-time director. I am sure that there is no need for me to remind the Committee that a whole-time service director—that is, somebody with less than 5 per cent. of 425 the shares who works full time—can have whatever remuneration his colleagues on the board decide is appropriate, without a ceiling of any kind. However, with those who do have a stake in the company and who work full time the remuneration is £5,000 a director, to put it simply, according to the proposal put forward by my hon. Friend, going up to a maximum, if there are four or more, of £20,000. That £20,000 would compare with £13,000 a year ago, or with £9,000 two years ago. So the scale of the advance which is being suggested by my hon. Friend is from £9,000 two years ago, a figure adopted by the Tory Government, to £20,000 today, an increase of more than 100 per cent. It would more than double the figure in the course of two years.
Of course, we are prepared to look at the need for increases from time to time, but increases of this scale are quite out of tune with the needs of the times. It is too early to reconsider this matter, which was so fully, carefully and sympathetically debated only a year ago. We agreed on a minimum figure a year ago for one director of £4,000. I think that that is art appropriate figure today. We agreed on £7,000, £10,000 and £13,000, a further £3,000 per director. I think that is an appropriate figure today, as opposed to my hon. Friend's suggestion of £5,000 a director.
My hon. Friend said that this was an exploratory Amendment. I am not sure whether the third name added to the proposal is also of the view that it should be treated as an exploratory Amendment. His interest has not been so close as to command his presence here at any time during the discussion.
I hope that I have answered my hon. Friend's inquiries and given him the reason why, although we are, as I said a year ago, always ready to look at this from time to time, because obviously the figure cannot stay fixed for all time, the Government as a whole and my right hon. Friend the Chancellor of the Exchequer in particular are of the opinion that it is not the appropriate time to propose increases, certainly not in this case.
§ Mr. Stratton Mills
How long had the £3,000 figure for a single director under the Profits Tax system been in operation?
§ Mr. Diamond
Perhaps I may intervene and give that figure a little later. I think that it was fixed in 1959. It may have been 1957.
§ Mr. Shaw
The comparison between the Corporation Tax basis and the Profits Tax basis is false. The percentage tax allowed shows the difference. The Profits Tax was imposed as a tax on top of Income Tax. Therefore, under the old basis for directors' remuneration, no matter how much was paid, there was an allowance of 41 per cent, on directors' remuneration. There was a disallowance in certain cases to the extent of 15 per cent. In the case of Corporation Tax there is a full disallowance of 40 per cent.
So here we have the case of a disallowance of 40 per cent, whereas under the old system there was an allowance of 41 per cent, with a disallowance of 15 per cent. Under the old system there was far greater allowance. Under the new system there is a far greater burden on the company than under the old.
§ Mr. Diamond
I rise not to respond to the hon. Member for Scarborough and Whitbv (Mr. Michael Shaw), but to confirm the date 1959.
§ Mr. Patrick Jenkin
I do not rise to close the debate. I am sure many of my hon. Friends wish to express their view on this important Amendment. One of the nice aspects of our proceedings is that, from time to time, both sides are able to agree that a change should be made and to join in pressing it upon the Government, with all the more effect because of their collaboration.
The Chief Secretary's reply was depressing. He returned to the point he tried to make last year and which, as he said, arose at about 9 o'clock in the morning when we had some rather bad-tempered exchanges. I agree with my hon. Friend the Member for Scarborough and Whitby (Mr. Michael Shaw) that the analogy with Profits Tax is false. Not only was one dealing with 15 per cent. Profits Tax compared with 40 per cent. Corporation Tax but with a different category of companies, director-controlled companies. The whole scope of close company legislation has brought in thousands of companies which were never within the limits of director-controlled 427 companies for Profits Tax purposes. All these have had limitations imposed on them for directors' remuneration.
I agree with one point made by the right hon. Gentleman. When we dealt with this subject last year I made this point and I repeat it because I believe it is right. Where one is dealing with movement of income from a close company to a director or a participator, it is right that, for the protection of the Revenue, the tax legislation should make it clear that that which goes to him, if he is an employee, in the form of remuneration should be distinct from that which goes to him in his capacity as a proprietor. This applies also to the other forms of participation one might have in the profits of a close company. I therefore agree with the right hon. Gentleman that there should be this limitation. The question is, what should the limitation be? Have we the right figures?
Having refreshed my memory before the debate of the curious sequence of events which occurred during the passage of the 1965 Act, I would suggest to the right hon. Gentleman that he would be a brave Chief Secretary who would say, "This is the right limit and I am not prepared to change it". He said that twice last time and a change followed after each occasion.
First of all, a £25,000 limit was swept away after being fiercely criticised. Then the right hon. Gentleman said that £3,500 was an appropriate limit and that he could not change it. Subsequently, it was raised. He has just said again that he considers the £4,000 limit to be appropriate and that the increase proposed in the Amendment would be too large and too soon. As he pointed out, a 25 per cent, increase in 12 months.
It is important to realise exactly what these figures are, particularly the figures which are in the latter part of the hon. Gentleman's Amendments. They are really, in a sense, floors and not ceilings, in the sense that the 15 per cent, limit on the amount which can be spent on directors' remuneration is quite unrealistically low in the case of small companies. The figures are, therefore, put as levels below which the 15 per cent. does 428 not apply. It is a sort of cut-off figure which is to be the limit of remuneration to be paid for directors of those companies.
I agree completely with what the hon. Member for Heywood and Royton (Mr. Barnett) said, when he said one is dealing with a number of small family trading companies. I very much welcome his support for the case which has often been made from these benches about the value of these companies to the economy of the country. I am reminded of the celebrated remark which no Member of this Committee should ever forget, when it was pointed out during our debates last year that the close company legislation would mean the end of the small family company. The then Economic Secretary, now the Minister of State, Department of Economic Affairs, said, "And good riddance", or words to that effect—"about time, too".
This was the attitude of a number of hon. and right hon. Members opposite. They regard the small companies as thorns in the flesh, as sand in the machine, not amenable to Government pressure, not prepared to fall in with national plans and the rest of it. Some—not all—hon. and right hon. Members opposite would gladly see them out of the way.
One of the measures which can be brought to squeeze the small private company is to make it uneconomic for men of managerial and technical talent to serve it without incurring swingeing tax penalties. That is the case for raising these limits. The limits in the Bill and in the Act of last year are unrealistically low, bearing in mind the salaries which are daily being offered in the advertisements in the quality Press, particularly in the Sunday Press, for managers and technical men of all sorts. To suggest that they should be limited to these low figures or be subject to substantial tax penalties is a real disservice to this sector of our economy. It is the case for the increase in their remuneration.
So far as part-time directors are concerned there is a difficulty which the Chief Secretary ought to look at. If there is a part-time director who is a part-time director of a number of companies and cannot be expected to devote his attention all his time to any one of them the remuneration which is paid by all 429 those companies, as I understand it, is disallowed to the extent it exceeds £4,000. If there are several part-time directors none of that remuneration paid to them can be allowed. This is a situation which ought to be looked at, and I hope the Chief Secretary will be prepared to look at it again.
As to full-time service directors, there are two points. In the first place, is the 5 per cent, limit the right figure? Ought this not to be increased to 7½ per cent. or even 10 per cent, so that the issue to such persons of shares or a stake in the companies—a reasonable stake, not merely nominal—does not bring them into the category of full-time service directors to whom these limits apply?
The other point always to be remembered is that, however much the Chief Secretary says that the whole-time service director is outside the scope of Section 74 of last year's Finance Act if he is associated with somebody who is a participator—such a man may have worked up the business and may be a full-time professional technical manager—but if he happens to be a relation of somebody who is a participator, he is brought within the mischief of the provision.
Those are matters to be considered in the issue of the level of remuneration. A strong case for the Amendment has been made by hon. Members on both sides of the Committee and I am, therefore, happy to advise my hon. Friends to go into the Lobby to support the hon. Member for Heywood and Royton.
§ Mr. Martin Maddan (Hove)
I must echo the view that the Chief Secretary's reply was very disappointing. The fact that he built his case on the complete irrelevance of Profits Tax shows that he knows what an empty argument he has. Last year, the Government brought about substantial amendments of all the taxation provisions surrounding companies and especially close companies and they might now feel that, even with the help of the Committee, they would be extremely lucky if they had all the right answers. They should not take the view that it is beyond the pale even to start thinking about amendments a year later.
Not one voice has been raised against the Amendment except the right hon. Gentleman's own. I wonder whether that 430 causes him to feel that he is defending the line unjustifiably. If he had said that too much money was involved, and that the Government could not afford the Amendment, that would have been the sort of argument which we might have understood, but not even that well-worn defence was open to the right hon. Gentleman. His reply was disappointing not only to both sides of the Committee but outside, especially to the small companies which are so important to the economy, as has been said.
Should not the right hon. Gentleman take into account the fact that last year's Finance Act had the curious effect of encouraging the large public corporations to get larger and fatter while at the same time the smaller companies, about whom we are now talking and which are essential for growth and enterprise, have been deliberately discouraged and penalised? If the protestations of right hon. Gentlemen opposite about wishing to see these companies play their proper rôle in the economy mean anything, perhaps the Chief Secretary will be able to say, perhaps out of his discretion and wisdom and great personal experience of these things, or from something written on the back of his brief, that he can offer the encouragement of assuring us that, if not now, then at a later stage he will reconsider the matter.
I must say that I was surprised that an Amendment which has the support of both sides of the Committee, and has not found a single hon. Member to rise against it, except from the Treasury Bench, should be turned down so flatly, with arguments so hollow.
§ Mr. Gower
I want to make one point. I would certainly not accuse the Chief Secretary of deceiving, or seeking to receive the Committee, but it may be that inadvertently his argument would have that effect. He said that there was no conflict of principle in this; that it was merely a matter of degree—the right amount at the right time. Then he produced two, in my submission, completely fallacious comparisons.
One is the largely irrelevant comparison with profits tax and the second was the comparison with a figure in the Profits Tax legislation which he suggested was at a certain figure two years ago. The whole inference was that this figure had 431 been fixed two years ago but, as was pointed out, that figure was fixed in 1959. It was quite misleading for the Chief Secretary to produce a proportion of increase between now and two years ago. Surely it is as relevant to say that the figure was a much smaller increase between 1959 until now.
I was just frightened that the hon. Member for Heywood and Royton (Mr.
§ Barnett) might have been convinced by this argument, but I believe that he could not have been convinced by these quite irrelevant comparisons and for these reasons I feel sure that he will lead us into the Division Lobby.
§ Question put, That those words be there inserted: —
§ The Committee divided: Ayes 132, Noes 184.433
|Division No. 40.]||AYES||[10.43 p.m.|
|Alison, Michael (Barkston Ash)||Glover, Sir Douglas||Murton, Oscar|
|Allason, James (Hemel Hempstead)||Glyn, Sir Richard||Nabarro, Sir Gerald|
|Atkins, Humphrey (M't'n & M'd'n)||Cower, Raymond||Noble, Rt. Hn. Michael|
|Baker, W. H. K.||Grant, Anthony||Nott, John|
|Balniel, Lord||Grieve, Percy||Onslow, Cranley|
|Batstord, Brian||Griffiths, Eldon (Bury St. Edmunds)||Orr, Capt. L. P. S.|
|Bennett, Sir Frederic (Torquay)||Grimond, Rt. Hn. J.||Osborn, John (Hallam)|
|Bessell, Peter||Gurden, Harold||Page, Graham (Crosby)|
|Biffen, John||Hall, John (Wycombe)||Pardoe, J.|
|Biggs-Davison, John||Hall-Davis, A. G. F.||Pearson, Sir Frank (Citheroe)|
|Birch, Rt. Hn. Nigel||Harvie Anderson, Miss||Peel, John|
|Black, Sir Cyril||Hawkins, Paul||Percival, Ian|
|Brewis, John||Heald, Rt. Hn. Sir Lionel||Peyton, John|
|Brinton, Sir Tatton||Higgins, Terence L.||Pike, Miss Mervyn|
|Brown, Sir Edward (Bath)||Hiley, Joseph||Pink, R. Bonner|
|Bruce-Gardyne, J.||Hill, J. E. B.||Pounder, Rafton|
|Buchanan-Smith, Alick(Angus,N&M)||Hirst, Geoffrey||Pym, Francis|
|Campbell, Gordon||Holland, Philip||Ridley, Hn. Nicholas|
|Chichester-Clark, P..||Hunt, John||Rossi, Hugh (Hornsey)|
|Clegg, Walter||Irvine, Bryant Godman (Rye)||St. John-Stevas, Norman|
|Cooke, Robert||Jenkin, Patrick (Woodford)||Scott, Nicholas|
|Corfield, F. V.||Johnson Smith, G. (E. Grinstead)||Shaw, Michael (Sc'b'gh & Whitby)|
|Costain, A. P.||Johnston, Russell (Inverness)||Sinclair, Sir George|
|Crawley, Aidan||Jopling, Michael||Smith, John|
|Cresthwaite-Eyre, Sir Oliver||Kitson, Timothy||Steel, David (Roxburgh)|
|Crouch, David||Lancaster, Col. C. G.||Stoddart.Scott, Col. Sir M. (Ripon)|
|Crowder, F. P.||Legge-Bourke, Sir Harry||Talbot, John E.|
|Cunningham, Sir Knox||Lewis, Kenneth (Rutland)||Temple, John M.|
|Currie, G. B. H.||Lloyd, Ian (P'tsm'th, Langstone)||Thatcher, Mrs. Margaret|
|Dalkeith, Earl of||Loveys, W. H.||Thorpe, Jeremy|
|Dance, James||Lubbock, Eric||Turton, Rt. Hn. R. H.|
|Davidson,James(Aberdeenshire, W.)||Mackenzie, Alasdair(Ross&Crom'ty)||Van Straubenzee, W. R.|
|Dean, Paul (Somerset, N.)||Macleod, Rt. Hn. Iain||Walker, Peter (Worcester)|
|Deedes, Rt. Hn. W. F. (Ashford)||Maddan, Martin||Wall, Patrick|
|Dodds-Parker, Douglas||Maginnis, John E.||Ward, Dame Irene|
|Eden, Sir John||Maude, Angus||Weatherill, Bernard|
|Elliot, Capt. Walter (Carshalton)||Maxwell-Hyslop, R. J.||Webster, David|
|Elliott, R.W.(N'c'tle-upon-Tyne,N.)||Maydon, Lt.-Cmdr. S. L. C.||Wells, John (Maidstone)|
|Errington, Sir Eric||Mills, Peter (Torrlngton)||Whitelaw, William|
|Eyre, Reginald||Mills, Stratton (Belfast, N.)||Wilson, Geoffrey (Truro)|
|Farr, John||Miscampbell, Norman||Winstanley, Dr. M. P.|
|Fisher, Nigel||Monro, Hector||Wolrige-Gordon, Patrick|
|Fletcher-Cooke, Charles||More, Jasper|
|Fortescue, Tim||Morrison, Charles (Devizes)||TELLERS FOR THE AYES:|
|Fraser,Rt.Hn. Hugh(St'fford & Stone)||Munro-Lucas-Tooth, Sir Hugh||Mr. Younger and Mr. Blaker|
|Abse, Leo||Blackburn, F.||Cousins, Rt. Hn. Frank|
|Allaun, Frank (Salford, E.)||Blenkinsop, Arthur||Craddock, George (Bradford, S.)|
|Alldritt, Walter||Boardman, H.||Crawshaw, Richard|
|Archer, Peter||Bootn, Albert||Cronin, John|
|Armstrong, Ernest||Boston, Terence||Crostand.Rt. Hn. Anthony|
|Ashley, Jack||Braddock, Mrs. E. M.||Cullen, Mrs. Alice|
|Atkins, Ronald (Preston, N.)||Bradley, Tom||Ralyell, Tarn|
|Atkinson, Norman (Tottenham)||Brooks, Edwin||Davidson, Arthur (Accrington)|
|Bagier, Gordon A. T.||Brown, Hugh D. (C'gow, Provan)||Davies, G. Elfed (Rhondda, E.)|
|Barnes, Michael||Brown, Bob(N'c'tle-upon-Tyne,W.)||Davies, Robert (Cambridge)|
|Barnett, Joel||Buchan, Norman||Dempsey, James|
|Baxter, William||Buchanan, Richard (C'gow, Sp'burn)||Dewar, Donald|
|Bence, Cyril||Callaghan, Rt. Hn. James||Diamond, Rt. Hn. John|
|Bennett, James (C'gow, Bridgeton)||Cant, R. B.||Dickens, James|
|Bidwell, Sydney||Carter-Jones, Lewis||Dobson, Ray|
|Binns, John||Concannon, J. D.||Doig, Peter|
|Bishop, E. S.||Conlan, Bernard||Donnelly, Desmond|
|Dunn, James A.||Jackson, Colin (B'h'se & Spenb'gh)||Oswald, Thomas|
|Dunwoody, Mrs. Gwyneth (Exeter)||Jones, Dan (Burnley)||Owen, Dr. David (Plymouth, S'tn)|
|Dunwoody, Dr. John (F'th & C'b'e)||Jones, J. Idwal (Wrexham)||Owen, Will (Morpeth)|
|Eadie, Alex||Judd, Frank||Palmer, Arthur|
|Edelman, Maurice||Kelley, Richard||Park, Trevor|
|Edwards, Robert (Bilston)||Kenyon, Clifford||Pentland, Norman|
|Edwards, William (Merioneth)||Kerr, Dr. David (W'worth, Central)||Perry, Ernest G. (Battersea, S.)|
|Ellis, John||Leadbitter, Ted||Perry, George H. (Nottingham, S.)|
|Ensor, David||Ledger, Ron||Price, Christopher (Perry Barr)|
|Evans, Albert (Islington, S.W.)||Lee, Rt. Hn. Frederick (Newton)||Price, Thomas (Westhoughton)|
|Evans, loan L. (Birm'h'm, Yardley)||Lever, L. M. (Ardwick)||Price, William (Rugby)|
|Faulds, Andrew||Lewis, Arthur (W. Ham, N.)||Reynolds, G. W.|
|Fernyhough, E.||Lewie, Ron (Carlisle)||Richard, Ivor|
|Fitch, Alan (Wigan)||Lomas, Kenneth||Robinson, W. O. J. (Walth'stow, E.)|
|Fletcher, Ted (Darlington)||Luard, Evan||Rodgers, William (Stockton)|
|Floud, Bernard||Lyons, Edward (Bradford, E.)||Roebuck, Roy|
|Foot, Michael (Ebbw Vale)||Mabon, Dr. J. Dickson||Rose, Paul|
|Forrester, John||McBride, Neil||Ross, Rt. Hn. William|
|Fowler, Gerry||McCann, John||Rowlands, E. (Cardiff, N.)|
|Fraser, John (Norwood)||MacColl, James||Sheldon, Robert|
|Fraser, Rt. Hn. Tom (Hamilton)||MacDermot, Niall||Silkin, John (Deptford)|
|Gardner, A, J.||Macdonald, A. H.||Slater, Joseph|
|Garrett, WE.||McKay, Mrs. Margaret||Steele, Thomas (Dunbartonshire, W.)|
|Garrow, Alex||Mackenzie, Gregor (Rutherglen)||Summerskill, Hn. Dr. Shirley|
|Gourlay, Harry||McMillan, Tom (Glasgow, C.)||Swingler, Stephen|
|Grey, Charles||MCNamara, J. Kevin||Taverne, Dick|
|Griffiths, David (Rother Valley)||Mahon, Peter (Preston S.)||Tinn, James|
|Griffiths, Will (Exchange)||Mahon, Simon (Bootle)||Varley, Eric G.|
|Hale, Leslie (Oldham, W.)||Mallalieu,J.P.W.(Huddersfield,E.)||Wainwright, Edwin (Dearne Valley)|
|Hamilton, James (Bothwell)||Manuel, Archie||Walker, Harold (Doncaster)|
|Hannan, William||Mapp, Charles||Watkins, David (Consett)|
|Hattersley, Roy||Marquand, David||Weitzman, David|
|Hazell, Bert||Mayhew, Christopher||Wellbeloved, James|
|Heffer, Eric S.||Mendelson, J. J.||Whitlock, William|
|Herbison, Rt. Hn. Margaret||Miller, Dr. M. S.||Williams, Alan Lee (Hornchurch)|
|Hooley, Frank||Mitchell, R. C. (S'th'pton, Test)||Williams, Clifford (Abertillery)|
|Horner, John||Molloy, William||Willis, George (Edinburgh, E.)|
|Houghton, Rt. Hn. Douglas||Morgan, Elystan (Cardiganshire)||Wilson, William (Coventry, S.)|
|Howarth, Robert (Bolton, E.)||Morris, Charles R. (Openshaw)||Winnick, David|
|Howie, W.||Moyle, Roland||Winterbottom, R. E.|
|Hoy, James||Murray, Albert||Woodburm, Rt. Hn. A.|
|Hughes, Emrys (Ayrshire, S.)||Oakes, Gordon||Yates, Victor|
|Hughes, Roy (Newport)||Ogden, Eric||Zilliacus, K.|
|Hunter, Adam||O'Malley, Brian|
|Hynd, John||Orme, Stanley||TELLERS FOR THE NOES:|
|Mr. Lawson and Mr. Harper|
§ Schedule, as amended, agreed to.