New Clause (Hansard, 2 July 1968)

§ Mr. Michael Alison (Barkston Ash)
I beg to move, That the Clause be read a Second time.
The Clause is designed to relieve paperwork by corporate bodies who already have a great deal to undertake. I may be mistaken in the precise terms which have been adopted, but I hope that it introduces a simple remedy, the effect of which will be to straighten out some of the deviousness of the Finance Act, 1965, and introduce a shorter distance between the two points of the aggregate liability of a corporation to pay tax and its aggregate discharge of that obligation.
To fill in the background a little, perhaps I might remind the House of an existing complication which arises from the fact that there are two sorts of outgoings for which a corporation has to account to the Inland Revenue for Income Tax. The first is in respect of dividends or other distributions made to its shareholders in the technical sense of the word "distribution" and as we understand it in the terms of the Finance Act, 1965. The second is what are generally referred to as "other payments"—interest payments, and so on—not payable to shareholders necessarily. In respect of both sorts of outgoings, the corporation has to account to the Inland Revenue for Income Tax.
1450 The plot thickens slightly when one recalls that there are two categories of income that a corporation may receive which correspond to those two species of outgoings. If those two categories of income accrue to it, they will do so under deduction of Income Tax. The two categories of income are distributions or dividends received from another company resident in the United Kingdom— that is, franked investment income—and other annual payments like interest payments payable to the corporation. Both those categories of income will be received under deduction of Income Tax, and tax will be borne by the receiving company.
10.15 p.m.
These two outgoings and two incomes are precisely the same thing, depending on whether one is paying or receiving. I am sure that the Chief Secretary, with his desire always to reach the crucial point as quickly as possible and his experience as an accountant, will agree that the common sense procedure, when a company accounts for Income Tax when it is the maker of certain payments, dividends or interest, and when it has an entitlement to repayment, is that it should marry the obligations and entitlements and strike a net obligation. This is a straightforward short cut when conflicting claims and obligations arise.
This is where we plunge into the murky waters of Treasury deviousness in the machinery for discharging those obligations and entitlements and striking the net figure. The 1965 Finance Act provides for precisely this sort of rational off-setting in respect of the monthly accounting period, as distinct from the year-end rounding-up of the off-setting arrangements made during the monthly accounting periods. The feature which the Act introduced into the monthly accounting periods was that all these lines could be crossed; that is to say, tax which had been borne on franked investment income and to which there was an entitlement to repayment, or tax which had been borne by other payments received by the company, could be used indiscriminately in the monthly settlements to offset obligations in respect of distributions or other payments made.
The two categories did not have to be married into precisely the same family. They could all be jumbled together. All 1451 that had to be resolved at the end of the period was a residual figure of all these claims and obligations. Yet, at the end of the fiscal year, instead of just being allowed to settle with the residual net figure emerging from these conflicting transactions, the Act obliged corporations to pull up all these lines and unscramble all these settlements, and made it clear that entitlement to repayment of tax in respect of franked investment income could be used only to offset obligations to account for tax for dividends and distributions, and for nothing else, including interest payments. Correspondingly, entitlement to repayment of tax in respect of other payments received by a corporation, not being franked investment income, could be applied only to offset tax obligations in respect of these other payments, interest payments, for example, forming an outgoing.
Thus, a corporation which has conceivably gone through the year striking at the end of each month a sensible net balance for these four possible permutations of entitlement or obligation must tear up the whole complicated system, look up all the old documents and revise its whole payments procedure throughout the 12-monthly accounting period to resolve the different categories into their original family likenesses once again.
It seems to many corporations an irrelevant waste of manpower, paper, energy and patience to have to go to this trouble. We are, therefore, merely asking the Government to persist in the logic which has been introduced into the settlement of the monthly account, namely, that all the conflicting claims and counterclaims to and from the Revenue should be settled at the end of the fiscal year by a simple net residual figure, as it is for the monthly accounting period, without the necessity being laid on corporations to resolve these conflicting claims into their original family categories.
I concede that the words of the Clause may not precisely achieve the objective we have in mind. I hope, however, that in what is a technical and complicated sector of company finance the Financial Secretary will see the reasonable logic of our proposal, even if he must dispute the form in which we seek to achieve it.

§ Mr. Harold Lever
Nobody who took part in the debates on the 1965 Act, in which we instituted our system of Corporation Tax, will attribute to me unqualified enthusiasm for every particularity of the arrangements then made for the taxing of corporations. Even my right hon. Friend the Chief Secretary, who was present during those debates, will bear witness to the truth of that. It so happens, however, that the hon. Member for Barkston Ash (Mr. Alison) has picked on a particular system for dealing with company investment income, franked and unfranked, which I think he will, on reflection, regard as not unreasonable and not unfair.
The system of Corporation Tax involves a great number of payments in and out of the company and the Revenue to secure the tax and obligations of the company concerned as speedily as possible and as a monthly settlement, for it follows from the Corporation Tax system —I will not go into it in unnecessarily great detail—that it often involves a company holding the Revenue's money.
This means that if, for example, a company has a fiscal year ending in May and pays its dividend in May, so deducting tax on behalf of the Inland Revenue under Schedule F, it is then in possession of the Revenue's money. The tax deducted belongs to the Revenue, which has a pardonable anxiety to have it in its pocket at the earliest date. For this reason we established the system of monthly settlements, and that does not seem unreasonable.
It follows, however, that if the Revenue says, "We wish to have our money from the company in these circumstances at monthly intervals and as soon as possible," the company should be entitled to set off as quickly as possible against its obligations any obligations which the Revenue may have. The hon. Member for Barkston Ash will concede that we must have monthly settlements. The difficulty is that some of the tax deductions that are made in the payments through the company, notably dividends, are usable only in certain circumstances. One such circumstance which normally applies to a company is when it receives franked investment income; it can use the tax deducted only to offset it against the dividends it pays out. There are 1453 other circumstances, but normally the only real use that a company can make of franked investment income is to relieve itself of its obligations in this respect and so to set one off against the other.
In the monthly computations, the Revenue takes the most favourable view from the taxpayer's point of view. It allows a taxpayer company to set off against those franked investment dividend deductions anything of any kind for which the company would be accountable including, for example, tax that it had itself deducted from a debenture payment for which it would be accountable to the Revenue and which is not offsettable under the law against the franked investment income it has received. It is offset in the monthly settlement to the advantage of the taxpayer. It follows that at the end of the year, however tedious it is to ascertain what exactly is the tax due, we have to go through the computations and segregate the different types of income received by a company into their original form.
To put it shortly, in the monthly settlements, to make it simpler, the Revenue concedes that any tax deduction the company has suffered can be set off against any tax liability which the company has to the Revenue. This is to the advantage of the company, because in the example I have given, in the monthly settlement, instead of the company paying over at once the tax that is deducted from a debenture coupon, which it would have to do if we enforced the law month by month, the company is able to hold the money till the year ends.
It comes down to this. Since we want monthly settlements, the fairest thing is to take the monthly settlement in the. way that is most favourable to the taxpayer, but when we come to the final settlement, alas, the Revenue wants its correct amount of tax. This involves disentangling the payments, so that the temporary advantageous use by the company cannot be finally and ultimately acceptable. Without my going into too many minute aspects of Corporation Tax law, I hope that the hon. Gentleman will be satisfied that the not uncritical eye of a Treasury Minister having looked at it, he has come to the conclusion that this 1454 is to the advantage of the taxpayer, and that there is no real way, short of losing that advantage to a taxpayer and making him perform monthly calculations of accuracy, as we use for the final settlement. In principle, it is easier to do 11 simple statements which need no time at all, and one final, rather more complicated system, than to have 12 monthly settlements, each minutely correct in accordance with the somewhat complicated provisions of the 1965 Act. For those reasons, I hope that the hon. Gentleman will feel minded to withdraw his Clause.

§ Mr. Alison
The Financial Secretary, with his customary acumen and charm, has put the best possible light on a poor case. I appreciate his sense of obligation and his desire to help the taxpayer. He stressed that it was in the interests of the taxpayer that these monthly payments were tilted in the taxpayers' favour, but he left out one possible permutation of the alternatives which was at once apparent to hon. and right hon. Members on this side—that the principle of being of assistance to the taxpayer in 11 months out of 12 should be extended to the twelfth month.
This principle of helping the taxpayer in respect of his obligations and preeminently in respect of the paper work with which he is encumbered when he should be doing things more directly connected with the welfare of the company and the economy as a whole, should be the overriding concern of the Treasury.
Although, in the light of the hon. Gentleman's attempt to put the best possible construction on these provisions, I would not advise my hon. and right hon. Friends to press this issue to a Division, we would, nevertheless, like to put it on record that we think that the principle of fairness to the taxpayer in regard to the monthly payments should be extended to the full year, and that that principle should not be entirely negatived and taken away at the end of the normal accounting period. For that reason, we record our disappointment— a disappointment that will be echoed elsewhere.