HC Deb 28 June 1967 vol 749 cc535-45
The Chief Secretary to the Treasury (Mr. John Diamond)

I beg to move Amendment No. 38, in page 65, line 4, at the end to insert: (3) In the case of a claim made by a company as a member of a consortium only a fraction of the amount of the loss may be set off under sub-paragraph (1) above, and that fraction shall be equal to that member's share in the consortium, subject to any further reduction under paragraph 6(2) of this Schedule.

Mr. Speaker

It has been suggested to me from the Government benches that we might take, with this Amendment, Amendments No. 39, 40 and 42.

Mr. Patrick Jenkin (Wanstead and Woodford)

That is entirely acceptable.

Mr. Diamond

I am grateful to you, Mr. Speaker, for what you have said.

The four Amendments which we are discussing together ensure that the maximum that each consortium member can claim by way of relief for a jointly owned company's loss or other amount eligible for relief is its proper share based on its shareholding. That is to say, if five companies each own 20 per cent. of the shares, they can claim for up to 20 per cent. each of the loss. The Amendments deal in like terms with trade losses, excess capital allowances, excess management expenses, and excess charges on income, but the principle is the same in each case.

Amendment agreed to.

Further Amendments made: No. 39, in page 65, line 16, at end insert: (2) In the case of a claim made by a company as a member of a consortium only a fraction of the excess referred to in subparagraph (1) above may be so set off, and that fraction shall be equal to that member's share in the consortium, subject to any further reduction under paragraph 6(2) of this Schedule. No. 40, in line 35, at end insert: (4) In the case of a claim made by a company as a member of a consortium only a fraction of the amount of the excess referred to in sub-paragraph (1) above may be set off under that sub-paragraph, and that fraction shall be equal to that member's share in the consortium, subject to any further reduction under paragraph 6(2) of this Schedule.—[Mr. Diamond.]

4.30 p.m.

Mr. Patrick Jenkin

I beg to move Amendment No. 41, in page 65, line 35, 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. In Committee we attempted to persuade the Government that there was a point of substance here. The Financial Secretary dealt with the matter. It was one of great complexity. I indicated that I would read his arguments in HANSARD in the cold light of morning and see whether there appeared to be more substance in them in the written word than there had appeared to be as he delivered them across the Table.

The point is simply that there are a number of different reliefs which can operate for Corporation Tax purposes. Two with which we are concerned in the Amendment are relief against double taxation and the relief which is available by way of management expenses against investment income. The purpose of the Amendment is to allow Clause 20 group relief to be so operated that a group of companies which is entitled both to relief against double taxation and relief for management expenses shall, where this is possible, obtain both reliefs in full and not have the one set off against the other.

The Financial Secretary argued that the Government could not allow both management expenses relief and double taxation relief. I have read the hon. and learned Gentleman's comparatively short speech several times, and I still remain entirely unconvinced. Why should not a group of companies in effect be entitled to both reliefs if there is enough income within the charge to Corporation Tax to exhaust both reliefs? These reliefs are in no sense mutually exclusive. Both reliefs have the same purpose, namely, to ensure that Corporation Tax is charged on what income is left after the statutory reliefs have been deducted.

The effect of Clause 20 and Schedule 10 as at present drawn is that, if part of the income of one of the companies in a group which has applied for group relief comes from overseas, and if it gets relief from double taxation so as to exhaust, or substantially to reduce, the amount of Corporation Tax which is charged, there is no provision for allowing the management expenses attributable to that company to be set off against the income of other companies in the group.

For the life of me, I cannot understand why this should be so. The nub of the Financial Secretary's argument seems to prove my case. He said this: 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 incomes and outgoings."—[OFFICIAL REPORT, 7th June, 1967; Vol. 747, c. 1199.] I entirely agree. Therefore, to suggest that the fact that one subsidiary company's income has had set off against it the double taxation relief, so that there is no Corporation Tax charged on that income, precludes the due share of the management expenses being apportioned to another company in the group is quite unreasonable. I do not want to repeat the argument which I had with the Chief Secretary last night. The whole purpose of the Clause 20 position is to find out the profits and losses within a group of companies or within a consortium of companies. A group of companies should be entitled to do exactly what a single company could do if it had both classes of income in its own hands. This must be assumed to be the purpose of the legislation. To limit it as it is limited by the Bill as at present drafted is a quite unreasonable restriction.

If the Amendment were accepted, this would reflect the position as outlined by the Financial Secretary in the passage I have read, namely, that the incomings and outgoings in an investment company's business are all to be regarded as elements in a single business. There seems to be no reason why the management expenses relief should be limited merely because some part of the income has already exhausted its liability to Corporation Tax by reason of double taxation relief.

On reflection, I believe that the Amendment has more substance that the Government were prepared to allow in Committee. This is why we have tabled it again and why we have thought it right to press the matter. I hope that on reflection the Government will be able to accept it.

Mr. MacDermot

I fear that there is a real difference of principle between us. I cannot meet the Amendment. The difference emerges most clearly in one sentence used by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) in Committee: A group ought to be treated as a single entity …". That carries the principle of group relief too far. A group of companies is not a single entity. It is a group of separate companies.

We believe that the right way to deal with the matter is, first, to work out what, under the existing tax law, is the tax position of each company individually within the group; and if, having settled that liability, there is then an item for which, under the existing code, there exists a relief by way of carry forward, be it for a trade loss or for excess of management expenses or excess of charges, each computed under the rules as for a single company, group relief can be given for that amount and for no other. We believe that that is the right approach and the right extent to grant group relief.

That is exactly what we are doing here. We are allowing an investment company the option to set off against the profits of other companies within the group only those items which it would, under existing law, be able to carry forward if it was not a member of the group. When in Committee I used the words which the hon. Gentleman has quoted, that … an investment company's ingoings and outgoings are all elements in a single business."—[OFFICIAL REPORT, 7th June, 1967; Vol. 747, c. 1198–9.] I was referring to the company within the group. I was using those words to distinguish the position of an investment company from a trading company, which may have two separate incomes, namely, a trading income and an investment income, both of which fall to be treated in a different way from the point of view of relief.

I hope that I have succeeded in explaining clearly what the difference is between us, even if I do not succeed in convincing the hon. Gentleman that this is right.

I will make one final point on the way to test this. If under the existing law an investment company could pick and choose what current profits it could set its management expenses against and then carry the rest forward, I agree that there would be no answer to what is proposed in the Amendment. But that is not the position. Let us suppose that a single company had United Kingdom profits which were less than its management expenses and, in addition, had some foreign profits.

Let us suppose that it had an expectation of having greater U.K. profits in the following year. If the present law let it ignore the current foreign profits and carry forward the excess of management expenses over United Kingdom profits, it would be quite logical to do what we are being asked to do. That is not the position. Such a company is obliged to set its management expenses against the whole of its income, foreign as well as United Kingdom, before seeing whether there is any excess which it should be allowed to carry forward. We are, therefore, being perfectly logical in what we are doing, carrying out the right principle.

If companies want to have the full benefit of tax treatment as though they are a single entity, the remedy lies with them, namely, to convert themselves into a single entity.

Mr. Patrick Jenkin

With the leave of the House, may I make two comments on the Financial Secretary's disappointing reply. In part, the Government's reluctance to meet the point of the Amendment stems from the defect in Clause 20 and Schedule 10 to which I have already drawn attention, that they go only part of the way to meet the wishes of industry for group treatment. But in part it is a reflection of the Government's rooted dislike of overseas investment.

Mr. Diamond

Really!

Mr. Jenkin

The Chief Secretary may exclaim, but it stems from their decision substantially to reduce, simply by the change-over to Corporation Tax, the facility for giving double tax relief in respect of tax paid overseas. This situation did not arise before the Corporation Tax. But here is a direct example where it appears that the relief is limited and, as a result, merely because companies are organised in groups, they are likely to be worse off, and the general relieving provisions of Clause 20 do not operate to help them.

However, even in my short time as a Member, I have listened to too many protestations of the impossibility of accepting an Amendment in one year, only to find an Amendment in exactly the same form tabled the following year, to be entirely without hope that the Government may have a second or even third look at this matter, together with the other matters on Clause 20 which the Chief Secretary undertook to look at between now and next year. I hope, therefore, that the Treasury will see that there is force in the case which we have put and that something more favourable will emerge next year.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave withdrawn.

Amendment made: No. 42, in page 65, line 47, at end insert: (3) In the case of a claim made by a company as a member of a consortium only a fraction of the excess referred to in subparagraph (1) above may be set off under that sub-paragraph, and that fraction shall be equal to that member's share in the consortium, subject to any further reduction under paragraph 6(1) of this Schedule.—[Mr. MacDermot.]

Mr. Diamond

I beg to move Amendment No. 44, in page 67, line 12, to leave out paragraph 7 and to insert:

Companies joining or leaving group or consortium

7. Subject to paragraph 7A below, group relief shall be given if, and only if, the surrendering company and the claimant company are members of the same group, or fulfil the conditions for relief for a consortium, throughout the whole of the surrendering company's accounting period to which the claim relates, and throughout the whole of the corresponding accounting period of the claimant company.

7A.—(1) This paragraph has effect where on any occasion two companies become or cease to be members of the same group.

(2) For the purposes specified below it shall be assumed as respects each company that on that occasion (unless a true accounting period of the company begins or ends then) an accounting period of the company ends, and a new one begins, the new accounting period to end with the end of the true accounting period (unless before then there is a further break under this sub-paragraph), and—

  1. (a) that the losses or other amounts of the true accounting period are apportioned to the component accounting periods on a time basis according to their lengths, and
  2. (b) that the amount of total profits for the true accounting period of the company against which group relief may be allowed in accordance with paragraph 5(1) of this Schedule is also so apportioned to the component accounting periods.

(3) Where the one company is the surrendering company and the other company is the claimant company—

  1. (a) references to accounting periods, to profits, and to losses, allowances, expenses of management or charges on income of the surrendering company, in paragraphs 1 to 4 of this Schedule shall be construed in accordance with sub-paragraph (2) above,
  2. (b) references to accounting periods in paragraphs 6 and 7 of this Schedule shall be so construed (so that if the two companies are members of the same group in the surrendering company's accounting period, they must under paragraph 6 also be members of the same group in any corresponding accounting period of the claimant company),
  3. (c) references to profits, and amounts to be set off against the profits, in the said paragraph 6 shall be so construed (so that an amount apportioned under sub-paragraph (2) above to a component accounting period may fall to be reduced under the said paragraph 6(2)).

(4) This paragraph shall apply with the necessary modifications where a company begins or ceases to fulfil the conditions for relief for a consortium, either as a surrendering company or as a claimant company, as it applies where two companies become or cease to be members of the same group.

Mr. Deputy Speaker (Sir Eric Fletcher)

I think that it will be for the convenience of the House to discuss at the same time the Amendments No. 45 and No. 46.

Mr. Diamond

Yes, Mr. Deputy Speaker; I am much obliged.

These Amendments deal with the situation where companies join and leave a group or consortium and have to deal, therefore, with the problem of how to calculate their liability and any reliefs which may be due when all are not members of the jointly owned company for the whole of the relevant accounting period. Amendment No. 44 arises out of a promise which I gave in Committee to reconsider the matter. In view of what the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has just said, I hope that I did not on that occasion say that it was impossible to meet the views of the Opposition, because we are here meeting them.

Amendment No. 44 extends the right to claim group relief to cases where a company either joins or leaves a group in the course of its own Corporation Tax accounting period or in the course of the Corporation Tax accounting period of the other company concerned, and it provides for an appropriate fractional relief.

4.45 p.m.

The method of providing this relief is on a time basis. When we discussed the matter last time, I suggested that this would, perhaps, be unnecessary because all the joining company had to do was to take out accounts up to or as from the relevant period. But I recognise that this is putting a burden, not an excessive one but a burden none the less, on the company in question. In order to avoid doing that, although it would give a more accurate result than a pure time apportionment, we propose the Amendment in this form in the sure hope that it will meet the views of the Opposition and will lighten the burden on industry, which is what we are anxious to do the whole way through. We hope that it will be accepted as an indication that we wish to move somewhat more away from what the hon. Gentleman described last night as the antithesis between our responsibility to look after the Revenue and his responsibility rather more to look after the interests of business. We want business to prosper. We do not want business men to be unduly hampered. We have also to look after the interests of the Revenue, and we hope that there will be no need in future years to make adjustments to what we are now proposing.

Amendment No. 45 arises out of Amendment No. 44, making certain consequential provisions of a detailed nature, which are self-explanatory, though I shall be glad to deal with them if the House wishes. There is one point on which I should dwell in discussing Amendment No. 45. Where there is a claim which might be a claim either for group relief or for relief as a member of a consortium, the normal practice—this is the rule we are developing—is that, if one is entitled to relief as a group, that must come first and there is no entitlement in those cases to relief as a member of a consortium. In this particular case, however, in the circumstances covered by the Amendment, we are providing for the option to be given to the taxpayer to decide which method he would prefer, it being clear that, in the early stages, he will not be able to say which suits his circumstances best.

Amendment No. 46 provides that a claim for group relief by any company under the new provisions for relief to members of a consortium must have the consent of the other members of the consortium. All the members are interested in what happens for tax purposes, so it is right that any one of them should be in a position either to agree or to refuse to agree, inasmuch as his share of the profit or loss will be affected. The only way to do it, therefore, is to have not a majority but a unanimous decision.

Mr. Patrick Jenkin

If I have from time to time criticised the Government for their handling of these matters, I would not like that criticism to mask the fact that there are occasions when we unreservedly welcome what they have done. This occasion is one such. The right hon. Gentelman explained the position very clearly, and the only point I make is that the proposal he has put to us was almost inevitable once the Government had decided to accept the consortium concept for group relief purposes, since it was impossible, or very unlikely, that the accounting periods of all the parents of a consortium would be the same, so as to bring the consortium into line with all of them. To split it up on a time basis, which the Government have done, without obliging them to have their separate accounting periods seems the most sensible way, and we are grateful that the Government have met the case we made in Committee.

Amendment agreed to.

Further Amendments made: No. 45, in page 67, line 30, at end insert: (3) If claims for group relief are made by more than one claimant company which relate to the same accounting period of the same surrendering company, and—

  1. (a) all the claims so made are admissible only by virtue of paragraph 7A above, and
  2. (b) there is a part of the surrending company's accounting period during which none of those claimant companies is a member of the same group as the surrendering company,
those claimant companies shall not obtain in all more relief than could be obtained by a single claimant company which was not a member of the same group as the surrendering company during that part of the surrendering company's accounting period (but was a member during the remainder of that accounting period).

(4) If claims for group relief are made by a claimant company as respects more than one surrendering company for group relief to be set off against its total profits for any one accounting period, and—

  1. (a) all the claims so made are admissible only by virtue of paragraph 7A above, and
  2. (b) there is a part of the claimant company's accounting period during which none of the surrendering companies by reference to which the claims are made is a member of the same group as the claimant company,
the claimant company shall not obtain in all more relief to be set off against its profits for the accounting period than it could obtain on a claim as respects a single surrendering company (with unlimited losses and other amounts eligible for relief) which was not a member of the same group as the claimant company during that part of the claimant company's accounting period (but was a member during the remainder of that accounting period).

(5) The provisions of this sub-paragraph have effect as respects a claim for group relief made by a company as a member of a consortium, in this sub-paragraph referred to as a consortium claim'—

  1. (a) a consortium claim, and a claim other than a consortium claim, shall not both have effect as respects the loss or other amount of the same accounting period of the same surrendering company, unless each of the two claims is as respects a loss or other amount apportioned under paragraph 7A(2)(a) above to a component of that accounting period, and the two components do not overlap,
  2. (b) in sub-paragraphs (3) and (4) above consortium claims shall be disregarded,
and paragraph (a) above shall take effect according to the order in which claims are made.

No. 46: in page 67, line 45, at end insert: (2) A claim for group relief by a company as a member of a consortium shall require the consent of each other member of the consortium, notified to the inspector in such form as the Board may require, in addition to the consent of the surrendering company.—[Mr. Diamond.]

Mr. Diamond

I beg to move Amendment No. 47, in page 68, line 11, to leave out paragraphs 10 and 11.

We considered the Amendment in our discussion yesterday.

Amendment agreed to.