§ Now, Corporation Tax.
§ I said last year that I was not introducing Corporation Tax as a device for increasing the total burden of company taxation, but rather as a means of redistributing that burden. On that basis it looked as though the equivalent rate would be 35 per cent.; but since then three things have affected the calculation. First, during the passage of last year's Finance Bill, a number of substantial concessions were made as the 1450 result of representations by the interests affected and by the Opposition. These have naturally had the result of increasing the equivalent rate.—[Interruption.] We cannot have our cake and eat it. Second, the investment grant system had not then been brought forward and there is a substantial transitional cost in the next few years after this year. Third, as I have already said, there has been a considerable increase in the dividends paid in 1965–66, which may mean a reduction in dividends and consequently in receipts from Schedule F tax in the present year. All these factors affect the rate.
§ There is one further important issue that would lessen the yield by many millions of pounds. One of last year's concessions was that a company which paid dividends out of pre-1966–67 income could in certain circumstances get relief for the Schedule F tax which it would otherwise be required to pay over to the Revenue. There are two forms of relief, known as the "one-year surplus" and the "three-year surplus". It has become apparent that in relation to groups of companies these concessions were drawn too generously, and that relief might be due in circumstances for which it was never meant.
§ When the Act was dealing with the question of forestalling, it proceeded on the basis that dividends paid from subsidiary companies to parent companies represented merely the transfer of income from one pocket to another, and should therefore be excluded from the forestalling provisions. But this conception was not fully applied to the provisions which deal with the computation of the one-year and three-year surplus. If nothing were done, groups would get relief to an extent far greater than their circumstances would justify. For example, under the existing law, a parent company may be entitled to relief under the one-year surplus provisions on the assumption that most of its 1965–66 income, since it consisted of dividends, came from sources which had already borne Income Tax and Profits Tax; the real position being that the subsidiaries which paid the dividends had paid only Corporation Tax on their 1965–66 profits.
§ I shall introduce provisions to put this matter right. To avoid any charge of retrospection I shall allow the existing 1451 law about the one-year surplus to continue to apply to dividends declared between 6th April, 1966, and today. I shall also introduce certain amendments of the three-year surplus provisions in relation to groups of companies.
§ The amount of money which is at stake here is very substantial: it is impossible to make precise estimates, but for the one-year surplus alone I put the possible loss at about £85 million, of which £60 million falls into the current year. I am sure the Committee will agree that it is necessary to put this matter right. If we did not do this we should have to raise the equivalent amount of money elsewhere; for example, by having a higher rate of Corporation Tax over the whole of the company sector. I believe it is preferable to recover this money from those who would otherwise gain, rather than impose extra taxes on all the remaining companies.
§ Taking all these considerations into account, I have decided to fix the Corporation Tax rate at 40 per cent.
§ Sir Gerald Nabarro (Worcestershire, South)I had conjectured that it would be 42½ per cent. Corporation Tax.
§ Mr. CallaghanI believe that if the hon. Gentleman were asked to list the seven deadly virtues he would put modesty at the top of the list.
As from 6th April, 1966, Corporation Tax at 40 per cent. will replace the special 35 per cent. Capital Gains Tax which was charged under last year's Finance Act on the capital gains of companies which had not come within the charge to Corporation Tax in respect of any other source of income.