HC Deb 07 June 1967 vol 747 cc1196-212
Mr. Patrick Jenkin

I beg to move Amendment No. 57, in page 61, line 31, at the end to insert: (4) To the extent that a company's income arises from sources outside the United Kingdom, the company may elect that the income shall be disregarded in computing the amount by which the expenses of management exceed the company's profits for the purposes of sub-paragraph (1) above: Provided that where such election is made no deduction for expenses of management shall be made under the said section 57 against that income from sources outside the United Kingdom. The introductory words of Clause 19 refer to Relief for trading losses and other amounts eligible for relief from corporation tax … In this Schedule these other amounts are specified and the exact treatment of each is set out. This appears from paragraphs 1 to 4 of the Schedule. Paragraph 1 deals with losses, which are the main subject matter of the schedule. Paragraph 2 concerns capital allowances. In the consortia case it is primarily the capital allowances which the companies have wished in past years to take advantage of. Paragraph 3 concerns management expenses. Paragraph 4 relates to charges on income.

The Amendment deals with a special point which arises in relation to management expenses. Where an investment company is receiving dividend income but incurring management expenses in the course of so doing, it is able to set off its management expenses against the dividend income for tax purposes. The position is different however, when it receives income from overseas. This is what is involved here, and I am intrigued to see that it is the Financial Secretary who has landed himself on the Front Bench to answer this case, perhaps because it is concerned with overseas income, with which he has come to be connected. Where it is overseas income, which is received after deduction of the foreign tax, as a result of double tax relief there is very often no foreign income chargeable to Corporation Tax, or, at least, it may be only partially chargeable to Corporation Tax, and this may have the effect of reducing the value of the relief in respect of management expenses.

When this happens in a single company, it is, of course, an inevitable feature. If, as a result of double tax relief, no Corporation Tax is payable, there is nothing against which the management expenses can be set off. But in the case of a group of companies, there is no reason why the same should apply. A parent company incurs management expenses. Subsidiary A makes profits in the United Kingdom. Subsidiary B has overseas income after foreign tax. In such a case, there seems to be no reason why set-off of management expenses in respect of subsidiary B should be limited as it would be in the case of a single company. Yet this is the effect of the Bill as drafted. The management expenses are available for set-off only to the extent that they exceed the total income, thus allowing no relief in respect of double taxation relief, even though it would be available in the case of a single company.

The Amendment would allow a company to opt to have its overseas income disregarded in these circumstances for the purpose of computing its total income. There must, therefore, be a corresponding limitation on the right to make set-off for management expenses. This seems a reasonable provision. It would allow a group to continue to be treated as a group and to pay tax on the net result of the profits and losses of its operating parts.

This seems to be fully within the spirit and intention of the Clause and Schedule, and it is a reasonable Amendment. A group ought to be treated as a single entity, and an individual member of the group does not necessarily need to be treated as a separate entity for this purpose as though it were a single company unattached and trading on its own. It is a fair Amendment to make, and it should not lead to undue avoidance. I hope that the Government will accept it.

10.15 p.m.

Mr. MacDermot

I cannot advise the Committee to accept the Amendment. The provisions in the Schedule as they stand are based on the simple principle that group relief in all cases, in the case of both trading companies and investment companies, will give to a company in a group the option of set-off, against another company's profits, losses or expenses which it could otherwise carry forward. There is a distinction between the position of a trading company and of an investment company, but this arises not from any new distinction drawn in the Schedule but from the existing difference that a trading company has an option allowing it to carry forward a trading loss without setting it off against investment income. By the nature of things, that distinction cannot be drawn for an investment company.

In arguing for his Amendment, the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) urges that, to the extent that an investment company has to set some of its management expenses off against its overseas income, it has so much the less relief. To some extent this is true. It has the advantage of being able to set its management expenses in whole against its United Kingdom income and get full relief against full rates of Corporation Tax, although the assumption is that those expenses have been incurred in relation to the overseas income. But the distinction here is a reflection of the fact that the income for overseas tax purposes is the gross income, but for United Kingdom tax is only the amount after management expenses.

In our view, the Amendment, which is designed to let the company throw some of its management expenses against another group member's United Kingdom income, would enable it to secure both relief within the group at the full Corporation Tax rate for the management expenses and the double taxation relief for overseas tax on the like amount of overseas income. This could not be justified, for the simple reason that an investment company's incomings and outgoings are all elements in a single business and cannot be properly split up in this way. Its total investment income is its business income, and the net result of its year is the balance of total incomings and outgoings.

With the trading company, one has a different concept, a different position, in that its trading income and investment income are separate concepts and are dealt with separately. The group relief in this case enables it to be set off against another company's profits what it could otherwise carry forward, and we do not think that it is right to grant the relief any further than that.

Mr. Patrick Jenkin

I find it very difficult to follow the Financial Secretary's somewhat tortuous explanation. At one point I thought that he was making my case, saying that an investment company must be treated as a single entity. In a sense, that was what I was asking for.

The Financial Secretary has obviously made a complex case and we shall want to study it and possibly return to this matter on Report. It is sometimes difficult to follow an argument of this sort as it is first put down. In the circumstances, it would be right that, rather than press the Amendment to a Division at this stage, we study what the Financial Secretary has said and return to it later.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Patrick Jenkin

I beg to move Amendment No. 58, in page 61, line 48, at the end to insert: Provided that in computing the profits of the claimant company no regard shall be had to any deduction falling to be made in respect of losses, allowances or expenses of management of any other period, except any deduction falling to be made against chargeable gains in respect of losses incurred before the accounting period. The Amendment exposes another flaw in the system, where the group of companies will be considerably worse off than it was under the system of subvention payments. Where a group has made an overall loss, the losses are carried forward in the individual companies. Paragraph 5(1) of the Schedule has the effect of requiring the company to utilise the losses which it is carrying forward before it arrives at a profit which is available for set-off against losses made elsewhere in the group, losses which are available for transfer under Clause 19.

There was no such restriction in the case of subvention payments and I am advised that the situation arises from time to time where the group may wish to operate a loss-sharing provision— whether by way of subvention or whatever it may be under Clause 19—in respect of the profits and losses made in the particular year, and does not necessarily wish to be obliged to absorb past losses against profits of the year in question before it can use the balance of these profits to absorb losses made in the year in question. That is to say, the old system had in this regard greater flexibility than the new.

The Amendment would have the effect of restoring the flexibility which these companies enjoyed under the subvention system. I hope that the right hon. Gentleman will regard this as reasonable. He has indicated that we would have to deploy most powerful and overweening arguments to budge him an inch from the view that he has provisionally taken up, but here is a case where a reasonable provision has operated in the past and one which we hope might continue to operate in future.

Mr. Diamond

I am listening carefully to all the arguments the hon. Gentleman is putting. As I have indicated, I am most anxious to try to meet circumstances in which, under the new grouping, there might possibly be some additional flexibility which was available, and sensibly available, before. This is not one of those cases.

The flexibility available before derived purely from an oddity, resulting from the difficulties attached to the subvention payments system. This is a somewhat different system. What we ought to meet is the relief that a company ought to get in terms of not being required to pay tax which it would otherwise be required to pay in a given year. The relief that we should try to provide is immediate relief—that is, instead of one company having to wait until a future year for relief, a second company should set off against profits of the second company the loss of the first company, so that tax would not be payable in that year. Otherwise, it would pay tax for one year after there was amalgamation or grouping.

It is reasonable to have to meet that situation, but that is quite a different proposal from what the hon. Gentleman is putting, which is not merely that we should bring a loss to the necessary extent into the profitable company so as to extinguish the possibility of what I am saying, and extinguish tax which would otherwise be paid—but should go further. We have no ground for going further and transferring from Company A to Company B such an amount of loss that Company B would have its profits extinguished and would carry the loss forward. That is not part of the philosophy I have propounded.

We will try to meet the situation but it is unnecessary, in order to do that, artificially to transfer a loss from one company to another so as to give a new company the right to carry forward a loss which did not belong to it but to a different company. We are not required to do that in order to help business properly to get on with its job. It is something which happened oddly—not deliberately—under the subvention payments system. It was unfortunate and unwelcome and was an oddity which we should not bring into our present system.

I have explained the situation briefly. This is a small point but I am grateful to the hon. Gentleman for bringing it forward. I have listened carefully but I am sorry to say that I do not think that this is a case where we should even undertake to consider the matter further. Plainly, therefore, I must advise the Committee to reject the Amendment.

Mr. Patrick Jenkin

It may well be that there could be common ground between us when we come to look at this again. I was not envisaging a situation where a transferred loss could be carried forward and if the Amendment would have that effect I recognise that perhaps it has been too widely drawn. All I was looking for is that the loss should be transferred to the extent to which it would then be extinguished by the profits in the claimant company in terms of the Bill. This would lead the claimant company, if it passed losses in this way, free to carry those losses forward. It is not a question of carrying forward the losses which have been its own. It may be that we can come back to that.

Mr. Diamond

The hon. Gentleman has made his point clear and I rise to say that in that respect we are not on common ground. The old losses must be extinguished before the surrendering company's losses are deducted from the claimant company's remaining profits.

Mr, Jenkin

It seems that, however many claimant companies there may be, I always bear the loss on this one. I recognise that the Chief Secretary is not prepared to yield on this. As he said, it is not a very important point, but it has been put to me and I have felt it right to put it before the Committee.

In the circumstances, I think it right that I should beg to ask leave to withdraw this Amendment.

Amendment, by leave, withdrawn.

Mr. Diamond

I beg to move Amendment No. 100, in page 63, line 1, after 'by' to insert 'applying'.

This is a simple drafting Amendment to insert a word which inadvertently was omitted from the Bill as introduced.

Amendment agreed to.

Mr. Patrick Jenkin

I beg to move Amendment No. 59, in Schedule 10, page 63, to leave out lines 11 to 17 and insert: (7) Group relief shall be given for such periods throughout the whole of which the surrendering company and the claimant company are members of the same group but so that where a company joins or leaves a group during an accounting period relief may be given for that part of the period during which it is a member of the group and for this purpose any apportionments shall be made in accordance with the rules in sub-paragraph (2) of paragraph 6 above. We come to what is a major difficulty with the new system and I cannot help feeling that it is one with which the Government must have some sympathy. It was a point adverted to by my hon. Friend the Member for Peterborough (Sir Harmar Nicholls) on the first Amendment moved to Clause 19. This is the question of apportionment where the accounting periods of the companies within the group are not coterminus.

Paragraph (6) provides for apportionment on a time basis. This would appear to be reasonable. Amendments were tabled by the hon. Member for Ashton-under-Lyne (Mr. Sheldon) and the hon. Member for Hey wood and Roy ton (Mr. Barnett), but we would accept that this is reasonable.

Paragraph (7), which Amendment No. 59 seeks to replace with another paragraph (7), as drafted in the Bill provides that even where there are two accounting periods which partially overlap, nevertheless, the two companies in the group must be in the group for the whole of their accounting periods, subject to the minor exception of a new company which has been set up. This appears to be unreasonable. Provided that the two companies are members of the group for the period which their accounting periods overlap, it would seem that the purposes of the legislation are satisfied and that there cannot be any objection. Provided the accounting periods of both companies do not overlap and they are not members of the same group, there can be no objection to granting relief. However, we find it impossible to amend paragraph (7) to achieve this purpose and we have therefore replaced it with a new paragraph (7) to achieve that purpose.

The Chief Secretary may say that the problem under paragraph (7) can be dealt with by a broken period by having a short period for one company so that its accounting period overlaps for the whole of the period when the companies are members of the same group.

My answer would be that it seems an unnecessary complication to achieve the objective which the companies wish to achieve. Everybody knows that a company makes up its annual accounts on a 12-month basis. One purpose is to compare results year by year over a series of years. It is always a complication which lasts for a number of years that wherever a company has a broken accounting period one has to have a note on the accounts or figures produced for management stating, "This was only a 7½ month period", or whatever it may be.

My Amendment seeks to achieve the objective of the existing paragraph (7); it is not enough to give greater relief except to the extent that it will give relief where, under the existing paragraph (7), it would not be available. Nevertheless, it would be reasonable that relief should be available in those circumstances without the companies having to engage in the tiresome nonsense of broken accounting periods, which would achieve the same objective. I believe this to be a very reasonable Amendment, and I hope that the Chief Secretary will be able to accept it.

10.30 p.m.

Mr. Diamond

The hon. Gentleman, on behalf of the Opposition—I hope that I do him no harm by saying this—is behaving in a most co-operative and sensible way, and I want to reciprocate.

I would interject that the hon. Gentleman has nothing but my admiration for the way in which he manages to cope, without the assistance that I have, with these fantastically complicated areas of taxation. I should have found it impossible when doing a similar job on a much less prominent bench.

The hon. Gentleman has understood the position absolutely accurately. He is asking whether we are going to put companies to the somewhat tedious trouble of preparing broken period accounts to achieve what they want to achieve, of having accounts covering overlapping periods. We are here talking about grouping and groups, and, therefore, about companies which by and large finish their accounting periods on the same date, and if a company enters such a group it will tend to adjust its accounting period to fit.

The hon. Gentleman said that there are difficulties about broken periods. This is inherent in the problem of being a member of a group for company law purposes rather than a problem of being grouped for Corporation Tax purposes. So although there would be a broken period at one part of the period, it would have to arise in any case. Therefore, I have to suggest that the hon. Gentleman's argument is not as strong as he thought at first.

There is the problem that a simple time apportionment is perhaps a little too simple. It is open to a company which has made a loss in a part of a year to join a group and then to be fed automatically with profits, and, therefore, for the overall result of that company to be such that if one apportioned it on a time basis one would get a wholly inaccurate spread of the profit or overall loss in the period. So those are the two problems.

I do not want to put companies to the difficulties of getting out separate accounts if one does not have to do this. It seems to me that on balance the proposal in the Bill is the right one.

I have listened to the hon. Gentleman. I should be grateful if he would give me time to consider this further. I will not go further than that. I have given him the arguments; he has given me the arguments. We owe it to each other to give further consideration to the point.

Mr. Patrick Jenkin

I am extremely grateful to the Chief Secretary not only for his forthcomingness but for the very kind words with which he opened his speech. I seem to have managed to conceal my lack of understanding, of these matters remarkably successfully. He is right; they are complicated. I am most grateful for his undertaking to look at this again.

I did not place stress so much on the company law aspect of preparing accounts perhaps because I have never been concerned with that aspect of a company's management. I was more concerned with the problems of management accounting, the problem of comparing company and management performance, where I have had difficulties in preparing papers for management on broken accounting periods. It adds considerable complication over a period of years and should be avoided if possible. If the right hon. Gentleman can find a way round which meets his objectives and my objectives, those concerned with this sort of legislation will be very grateful.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Patrick Jenkin

I beg to move, Amendment No. 109, in page 64, line 9, at the end to insert: 10.—(1) If the claimant company and the surrendering company so agree the former may pay to the latter an amount equal to the amount surrendered by the latter to the former. (2) Any amount paid under sub-paragraph (1) above shall be treated as an expense of the claimant company and as income of the surrendering company for the accounting period in respect of which it is paid, for the following purposes—

  1. (a) in any computation under paragraph 7 of Schedule 18 to the Finance Act 1965;
  2. (b) the computation of profits under paragraph 6 of Schedule 17 to the Finance Act 1965;
  3. (c) in any calculation relevant to the calculation of the three-year surplus under section 85(6) of the Finance Act 1965 as amended by Schedule 7 to the Finance Act 1966;
  4. (d) in calculating income from all sources for the purpose of section 84(3) of the Finance Act 1965, and where and insofar as the payment has been used by the claimant to reduce the corporation tax on income with unused credit, in calculating the amount of that income
but for no other purposes of the Corporation Tax Acts.

The Temporary Chairman (Mr. J. C. Jennings)

With this Amendment we take also Amendment No. 110, in page 65, fine 10, at end insert: Provided that no payment for group relief shall be made in respect of an amount surrendered where and to the extent that a payment has been made in respect of that amount under paragraph 10 of this Schedule.

Mr. Jenkin

With this Amendment we come to what many people regard as a major difficulty of the new system compared with the old subvention payment system. The Chief Secretary, I think in the first debate we had on Clause 19, put as a difficulty, as an obstacle, as a disadvantage of the subvention system that a cheque had actually to pass, and that because of minority interests and so on it was necessary to proceed strictly in this matter. The point which arises on this Amendment is that it is not always a disadvantage that money should pass, and indeed, one of the advantages claimed for the subvention system was that any transfer under the new system of loss sharing which the Bill contains is that the cash, as it were, did follow the tax treatment; there was cash transfer to represent how the tax treatment ultimately was applied to the situation.

With the subvention payment there was actually a transfer of cash from company A to company B. This put company B in funds to offset its loss, and taxation consequences followed. With the new system there is no transfer of cash but merely transfers of accounting concept of the tax loss—the loss for tax purposes; and it is then transferred to claimant company A and is allowed to reduce the company's tax assessment. But it leaves company B—and this is really the point of the Amendment—still in its own accounts with the deficit which it has incurred.

All that has happened is that, although in the tax computation there has been a transfer of its loss, the actual statutory accounts which it prepares at the end of each year will show the loss there. One can imagine the situation where for a number of years in succession one company in a group is making losses and is therefore piling up a sizeable deficit on its profit and loss account, and this can give rise to difficulties which may certainly in certain circumstances give rise to embarrassments and it can give rise to considerable inconvenience.

It was perfectly possible before Section 20 of the 1953 Act was passed to make subvention payments. It was rather dangerous; one did not necessarily get it allowed as a deduction in the subventing company; it was not necessarily treated as a receipt of the subventing company; and if one did it for a number of years in succession it could give rise to an annual payment from which tax ought to be deducted.

The Chief Secretary may say, "You can go back, surely, to the 1953 position, if this is really your difficulty." My answer to that is that the Finance Act, 1965, has made that almost impossible. It is difficult to imagine circumstances where a subvention of that sort would not be regarded—or at any rate suffer from a grave risk of being regarded— as a distribution with all the liabilities to Schedule F and so on that would apply. I do not think anybody would now adopt that solution to the problem. Therefore we are left with the problem of the mounting deficit and no means of relieving that.

What these two Amendments provide is that there should be a limited right with only very limited tax consequences of a transfer of cash from the claimant company to the surrendering company, as it were, in return for the surrender of the loss, which would avoid the difficulty of the mounting deficit in the loss making company. This is, as it were, a sort of halfway house which accepts completely the framework of the new system the Government are proposing and yet allows companies to avoid the embarrassment and difficulties and inconveniences of the situation which I have described. It would be treated as an expense in the hands of the payer and as income in the hands of the recipient for the four purposes named in subparagraph (2)(a), (b), (c) and (d) of the new paragraph 10 which we are proposing.

Briefly, (a) covers the method of calculating distributable incomes for the purposes of shortfall prospects of close companies, (b) deals with dividend stripping, (c) deals with the three-year surplus provision, and (d) deals with the overspill relief from double taxation. Those would be the only purposes for which this payment would be regarded as, respectively, a deductible expense and a trading receipt. There would be no tax consequences, apart from those four.

They are necessary to achieve fairness and for the protection of the Revenue. We should leave both the Revenue and the taxpayer in the same position, but would avoid the embarrassment and difficulty which would arise if there were no provision for payment of this sort.

The problem is regarded as a very important one by those who have to deal with these complicated matters. One can imagine a situation where a public company is a member of a group, 75 per cent. of the shares are owned within the group and 25 per cent. or less are owned by the public. In such circumstances, it could be difficult if the mounting deficit were allowed to go unchecked. That is a situation which was dealt with easily in terms of the subvention payment procedure.

This is a modification of the new relief which I hope that the Government will feel able to accept. It would go part of the way to restoring one important advantage of the subvention system. If the Government are not prepared to accept it and we do not have some cogent reasons, it is right that I should warn the Chief Secretary that we feel so strongly about it that we shall be obliged to press the matter to a Division. However, I hope that the right hon. Gentleman will be forthcoming on this one.

Mr. Diamond

I am sure that the hon. Gentleman would wish me to pay more regard to the weight of his arguments than to the weight of numbers in the Division Lobby. I respond to his arguments rather than to what he said at the end of them, although I take that as an indication of the importance which he attaches to the Amendment.

There are certain elements in this overall approach on which we wanted to hear what the Opposition had to say and to which we should be glad to give consideration.

I should find it very difficult to be persuaded about the appropriateness of carrying on a subvention system side by side with a grouping system. What the hon. Gentleman is proposing for four kinds of case is something of a subvention payments nature. I say that to show that I understand what he is driving at and, to that extent, I shall find it difficult to be persuaded that the hon. Gentleman is on the right lines.

Nevertheless, with regard to the shortfall position and dividend stripping, which were his first two points, there are elements which I gladly undertake to look at, though not with a view to introducing something of a subvention payments system. That is a major hurdle which we should not be willing to accept. Rather, we shall look at it to see if the existing system can be adjusted to meet the points which he has made about those two. I am giving no precise undertaking in saying that, but I shall be glad to look at the position in relation to my other remarks. These matters tie up one with the other, and that is why I indicated at the beginning that there is a series which one would want to look at, because any review would be related to the whole approach.

10.45 p.m.

As far as the third item is concerned, that is, the three-year surplus, I think I had better put the hon. Gentleman out of his misery straight away. This is something we cannot meet. If we met what he is proposing in one form or another it would merely result in the choice being made as to which particular company would have either the transfer of the loss or the profit so as to get the maximum benefit from the three-year surplus relief provision, a benefit which would be wholly in excess of what would have happened if the whole of the activities had been carried on under one roof. So we cannot meet his point of view so far as the three-year surplus is concerned.

The transitional overspill relief again is something which I think is less strong than the hon. Gentleman's first two points, but it is something we would look at at the same time. I do not want to invite the hon. Gentleman too strongly to withdraw his amendment, lest he draw too much from what I have said, but I have indicated that I would look sympathetically at (a) and (b) though not (c) and (d).

Mr. Patrick Jenkin

I think the Chief Secretary's words will be welcomed by those who are concerned with these matters. It will not have escaped his attention that in agreeing to look sympathetically at (a) and (b) he has in fact picked out the two which have permanent importance. He has rejected (c,) which clearly has only transitional importance, and (d) which is important but which relates to a rather longer period. I think we are most grateful for that, and in the circumstances I certainly would not advise my hon. and right hon. Friends to vote in favour of this Amendment.

I hope we may see something on the Order Paper on Report which will show that the Chief Secretary's sympathy has resulted in action.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Patrick Jenkin

I beg to move, in page 65, line 30, at the end to insert: Provided that this paragraph shall not operate to prevent the reduction of the distributable profits of a company, as mentioned in section 85(6)(b) of the Finance Act 1965, by the amount of the losses of any other company incurred in the years 1967–68 and 1968–69. I was going to develop the problem of the three-year surplus at some considerable length, because this is a subject which the Chief Secretary knows is dear to his heart and to mine after we spent many happy hours on it last year, but in view of the expression of opinion he has already given vent to on the last Amendment, I believe I should be beating the air. However, I will formally move the Amendment in order to give the Chief Secretary the opportunity to explain why he cannot possibly accept it.

Mr. Diamond

I can only congratulate the hon. Gentleman on making his own mind absolutely clear and on describing my point of view with such perspicuity that I need not expand on it. I cannot recommend the Committee to accept the Amendment.

Mr. Jenkin

In view of the Chief Secretary's cogent speech—perhaps the most cogent he has made on this Finance Bill—I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Schedule 10, as amended, agreed to.