HC Deb 25 October 1966 vol 734 cc817-8
29. Mr. Turton

asked the Chancellor of the Exchequer whether he is aware that uncertainty exists over the effect of Section 77 of the Finance Act, 1965, on the liability for Corporation Tax of close companies; and whether he will publish an explanation of the tests that are being applied by the Inland Revenue to determine the required standard under Subsection (3)(a) of that Section.

Mr. Diamond

I am not aware of any reason for uncertainty. The tests referred to are the same as those which have applied for many years under the company Surtax legislation.

Mr. Turton

Is the right hon. Gentleman aware that some close companies are interpreting the Section as an encouragement to pay the greater part of their profits out as dividends instead of using them for re-equipment and expansion? This would appear to be contrary to Government policy. Will the right hon. Gentleman clarify the position?

Mr. Diamond

There is no reason for that kind of interpretation. It has been made clear time and again that a company which has good business reasons, as laid down in the Section, for retaining profits is entitled to do so irrespective of how small the resulting dividend might be.

33. Mr. Stratton Mills

asked the Chancellor of the Exchequer if, for the period of the voluntary dividend standstill, he will suspend for publicly-quoted close companies the provision in the Finance Act, 1965, requiring them to increase their dividend where they increase their profits.

Mr. Diamond

No. Sir.

Mr. Mills

Is not this quite a Gilbertian situation? Would the right hon. Gentleman confirm mat publicly quoted close companies, of which there are a number, are forced to pay out increased dividends on the Stock Exchange if they increase their profits, while publicly-quoted non-close companies are encouraged not to increase their dividends? What possible logic is there in this situation?

Mr. Diamond

The logic of that situation has been explained many times from this Box. There is no differentiation to be drawn between publicly quoted and not publicly quoted close companies. Close companies exist; and for the purposes which we all know—in order to comply with the tax rules and to prevent the avoidance of Surtax—dividends to correspond with the provisions of the Act have to be declared.