§ DIVIDENDS PAID OUT OF PRE-1966–67 PROFITS: GROUPS OF COMPANIES
- (1) In applying paragraph 2(3)(a) of Schedule 7 to the Finance Act 1966 (which attributes to the principal company its share of the excess of dividends over distributable profits of subsidiaries) where any subsidiary is itself a company having a notional surplus which is a three year surplus which falls to be increased under the said paragraph 2, that subsidiary's excess of dividends over distributable profits shall be the amount produced by the said paragraph 2(3)(a) in calculating that increase, so that there is attributed to the principal company the appropriate share of the excess of dividends over distributable profits not only of the subsidiary, but also of some one or more other members of the group paying dividends to the subsidiary.
- This subsection applies even if the subsidiary's three year surplus as so increased is then reduced or extinguished under paragraph 1 of the said Schedule 7.
§ Brought up, and read the First time.
§ Mr. Diamond
I beg to move, That the Clause be read a Second time.
I am happy to say that this is a relieving Clause. The answer to the criticism made by the hon. Member for Wansted and Woodford (Mr. Patrick Jenkin) is that the first Clause we introduced protects the tax-paying public generally, and the second Clause is a relieving Clause. We have taken the first opportunity to give relief where relief is due. There is a gap in the provisions of the existing law for enabling three years' surplus relief to be given to what I can perhaps call a multi-tier company, and the provision is intended to remedy that gap.
In speaking of a multi-tier company, I have in mind a company with a subsidiary, which, in turn, has a subsidiary, and so on✶ what is generally referred to as a 1334 subsidiary company, a parent company, a grandparent company; and, indeed, it can apply to a great grandparent company and a great great grandparent company. The present situation is that there is a gap in providing relief for groups of companies. The relief is a relief that we discussed on the earlier Clause and I have no need to repeat it.
The attempt was made to apply the relief to groups of companies. To take the simplest case, where a dividend is declared by a subsidiary company to a parent company, and the subsidiary is a wholly-owned subsidiary, so that every penny of the dividend goes to the parent company, that is not a dividend to the outside world, it is a dividend to the parent company. A parent company can generally require whatever kind of dividend it wants, having regard to the relationship between parent and subsidiary, and that is therefore not the kind of case to which the relief should apply.
Therefore, when that dividend is paid, no relief entitlement arises. Let us assume for the sake of simplicity that the dividend is wholly paid out to the public by the parent company; then, whatever relief was due is restored. The result is the situation which would have applied had there not been a group of companies, but merely one combined company distributing some of its profits to the public.
A subsidiary company may pay to its parent, which, in turn, may pay to the public, and the appropriate machinery works. But there is a gap in the present legislation, inasmuch as a subsidiary company may pay to the parent, and, indeed, to the grandparent and out to the public. The link between the subsidiary and the grandparent does not at present exist. It should exist, it was intended to exist, and, therefore, the Clause provides for the insertion of that link so that the full relief which it was intended to give will be given.
The detail is not entirely free from complexity. I have given perhaps an oversimplified but reasonably accurate account of the general impact of this relieving proposal.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.