§ GROUP RELIEF
After sub-paragraph (c) of subsection (2) of section 20 of the Finance Act, 1967, there shall be inserted the following sub-paragraphs:
'(d) where the surrendering company is a member of a consortium and the claimant company is a trading company which is owned by the consortium and which is not a subsidiary of any company, or
(e) where the surrendering company is a member of a consortium and the claimant company is a trading company—
(f) where the surrendering company is a member of a consortium and the claimant company is a holding company which is owned by the consortium and which is not a subsidiary of any company'.—[Mr. Patrick Jenkin.]
§ Brought up, and read the First time.
§ Mr. Speaker
I have suggested that with this new Clause we take new Clause 66, "Definitions for the purpose of group relief".
§ Mr. Jenkin
Mr. Speaker, I begin by expressing my gratitude and that of my right hon. and hon. Friends that you have accepted the suggestion that these proposed new Clauses might conveniently be discussed together.
1444 We are dealing with the complicated grouping provisions which were embodied in last year's Finance Act. This is an aspect of Corporation Tax law where I think the Chief Secretary will agree we have made progress in the last three years, but little by little. In the 1965 Act there was no provision for grouping for Corporation Tax. I moved an Amendment, but it was rejected as being impossible. In 1966, I moved a similar Amendment, and on that occasion the Chief Secretary, though unable to accept it, cast a benign eye on it.
In 1967, the Bill contained a Clause, which is now Section 20 of the 1967 Act, which went part of the way to providing a system of grouping for Corporation Tax. In Committee I moved an Amendment to say that this should apply to consortia of companies as well as to parents and subsidiaries. Again the Chief Secretary cast a benign eye on the proposal and on Report a consortia Amendment duly appeared, but it went only one way. It applied only where a trading company which was owned by five or fewer companies was the loser, and enabled it to share its losses with its parents.
I moved an Amendment to suggest that the provision should operate both ways, that where the consortium company was making a profit, that should be allowed to be shared with any losses made by any of the parent companies. 1445 Replying to the debate the Chief Secretary was again benign. He said:I hope that the hon. Gentleman will agree with me that we have gone a long way. I am not saving that we close our minds to going any further. At the moment, we have gone as far as we can. I wanted to listen to his arguments, and I have heard them, some matters require more careful consideration, and I do not rule out the possibility of coming some way to meet him in due course, which inevitably will be in a year's time."—[OFFICIAL REPORT, 27th June, 1967; Vol. 749, c. 352.]Here we are, and as a result I am not entirely without hope that the Chief Secretary's benign eye might lead him to accept the Clause.
This is a case where the joint offspring of a consortium is profitable, but its parents are making losses. I think one can add to the argument I adduced last year, and which I shall not repeat, that if this extension of the grouping relief is not allowed, one will see a growth in the pattern which is already operating of companies engaging in partnership operations because by doing so we are able to set off their losses against their profits. But this is bound to be an artificial business arrangement, and one which I should have thought was undesirable. If, however, the Clause is accepted, the case is met, and I hope, therefore, that the Chief Secretary will be able to indicate his acceptance of it this evening.
New Clause 66 is also concerned with this grouping provision for Corporation Tax. It aims to widen the relief slightly in three separate ways. First, as the 1957 Act is drawn a consortium qualifies for relief only if it is 100 per cent. owned by the parent companies. The Chief Secretary will remember that where one is dealing with the grouping of dividends the test is 75 per cent. New Clause 66 suggests that 75 per cent. is fair and will not lead to any undesirable tax avoidance. If some minor loophole is left, I suggest that that will be a small price to pay for the added flexibility which a 75 per cent. test will bring.
The second extension would apply to group relief in the case of a consortium in which the parent company did not necessarily hold shares in the joint offspring but in which some other company in the group had made a loss which was set 1446 off against the profits of the joint offspring. This is a small extension, and in the case of a group of companies it seems quite reasonable, because if the pattern is intended to operate both for consortia of companies and subsidiaries and a subsidiary of a parent company makes a loss and a consortium company—of which the parent company is a member— makes a profit, it is not unreasonable that the loss and the profit should be set off against each other.
The third change is a small one, which may at first sight appear to be dangerous but which I believe is not so. That is the case in which a consortium of parent companies owns shares in a holding company which itself owns shares in subsidiaries. If those subsidiaries are all United Kingdom companies, the case is covered by existing law, but if any companies are resident overseas the relief does not apply under the provisions of Section 20(7) of the 1967 Act which defines companies to which the Clause refers as United Kingdom-resident companies.
In general this restriction is right, but it can operate much too restrictively in the circumstances that I have described, in which a holding company is interposed between the consortium parent companies and the subsidiaries. It is quite appropriate that the relief should operate even if some subsidiaries are resident overseas.
These are all useful extensions of Section 20. They all reflect the basic philosophy which that Section intended to embody, namely, that we tax a group of companies broadly on the balance of its profits and losses and do not tax the profits and merely leave the group to carry its losses forward to another year. I have moved the new Clause in a spirit which I hope the Chief Secretary will find sympathetic and I hope that he, in turn, will be sympathetic to the amendments which the new Clauses embody.
§ Mr. Diamond
The hon. Member was correct in saying that we have made considerable progress in this matter year by year and little by little. The form of the progress is as he has indicated. He puts forward a proposal; I think about it; I make some sympathetic noises, and I am later—on Report, or during the following year—in a position to bring forward a proposal to meet the point. This process serves two purposes. First, it meets the point made and, secondly, it 1447 provides a suitable platform upon which a second request can be built.
I realise this and I am grateful for what the hon. Member said, because he painted a picture of me as I would want to be seen, namely, as being sympathetic to this general approach and as trying to move with the times—and, to the extent that consortia are adopted as a suitable method of organising business, to provide that nothing in the Income Tax Acts prevents their proper businesslike spread.
The hon. Member has now proceeded to erect on the considerable structure of Amendments which have been made hitherto a number of proposals, which we are now discussing. I will deal with them together rather than go into detail on each one as the broad case is the same on each. None of the proposals, as far as I am aware and as far as the Inland Revenue is aware, presents actual cases of difficulty at this time. The first proposal was one which the hon. Gentleman referred to on an earlier occasion last year as one of artificial hypothesis. It is of considerable artificiality. It is the case where the parents get together and set up a consortium; the consortium makes profits out of business ideas contributed by the parents, and the parents make losses.
This is theoretically possible, but highly unlikely. I am dwelling on the point of possibility because I and my officials have said that we are not aware of any individual cases. When discussions have taken place with, for example, the C.B.I., we have invited those discussing these matters with us to give examples and to produce real cases, but this has not been done. I am strengthened in my view that, although this is theoretically possible, there are no individual cases afoot which call for consideration.
It would be wholly illogical for me to use that argument unless I were to say that, if there were such cases, we would want to look at them with a degree of sympathy. One cannot rely on the argument that it does not arise unless one deals with the position of what happens if it does arise. If it does arise, I would be happy to look at the Clause Amendment with sympathy, and the same remarks apply to the other Clauses which we are discussing.
1448 The hon. Gentleman would not suggest that the only method of avoiding difficulty is the method of the relief which he proposes. If, for example, a holding company is embarrassed by containing both resident and non-resident companies, there is nothing easier than to split it up into two holding companies so that one would be of the kind to qualify for the relief. One does not want to put this trouble on to people unnecessarily, but it is an easy way of organising the matter so that the difficulty does not arise.
My reply to the three points contained in the second Clause and the main point made in the first Clause is, first, that we are not aware of actual cases. Secondly, these proposals added together amount to a considerable rewriting of the provisions which we have so far agreed for relief where consortia are involved. Thirdly, the arrangements that we have provided have not had a long run. We have altered them every year and the latest ones have had hardly any satisfactory time to run. Fourthly, and importantly, if during the course of the coming year we are made aware of actual cases of difficulty, I will continue to look at the matter with considerable sympathy and, if necessary, bring forward proposals to the House next year.
The difficulty has not, in practice, arisen. I do not think that we ought to anticipate it. We ought to see how the present proposals are running. I am grateful to the hon. Gentleman for what he has said, and I hope he feels that 1 have responded in the spirit in which he put forward his request.
§ Mr. Patrick Jenkin
I do not wish unduly to prolong the debate. I would only assure the Chief Secretary that I find it difficult to believe that busy businessmen and their advisers would have taken the trouble last year and this year to seek parliamentary support for Amendments which clearly they regard as important to the existing structure of the Corporation Tax if they were wholly without foundation. It may be that, for example, the C.B.I. has not produced the concrete cases to the Treasury which have moved it to seek the Parliamentary support from this side of the House which it has.
However, I have no doubt that those responsible for these matters will read what the Chief Secretary has said and 1449 will see that he and his officials are appraised of any cases where the existing law is operating unduly restrictively and where my Amendments might ameliorate the position. Then next year, I hope that we shall take a further step, when one would hope that the Chancellor would produce in the Finance Bill the proposals that I have moved this year so that we could move on to further concessions, taking us well into the next Government.
Having said that, I beg to ask leave to withdrawn the Motion.
§ Motion and Clause, by leave, with drawn.