HC Deb 16 July 1969 vol 787 cc836-42
Mr. Diamond

I beg to move Amendment No. 47, in page 25, line 1, at beginning insert 'Subsection (1) of'.

Mr. Deputy Speaker (Mr. Harry Gourlay)

It would be convenient if we also discussed Amendment No. 264, in page 25, line 5, at end insert: 'or

  1. (d) if it is a property investment company or investment company and owns directly or indirectly fifty-one per cent. or more of the ordinary share capital of other property investment or trading companies which are or will be in receipt of estate or trading and/or investment income'.
and Amendment No. 265, in line 6, at end insert: (2)A. (a) The expression 'substantially the whole' as referred to in subsection (2)(c) of this section shall mean fifty-one per cent. or more.
  1. (b) The expression 'property investment company' as referred to in subsection (2)(d) of this section shall mean a company that holds land or an interest in land which is in receipt or will be in receipt of estate income.
and Government Amendments Nos. 48, 49, 50, 51.

Mr. Diamond

This Amendment excludes the parent companies of property holding groups from the scope of the Clause. This was an undertaking given in Committee and I hope that the proposals meet with the wishes of the Committee.

Clause 21 provides, in the circumstances about which we know, that interest paid by companies has to be apportioned to shareholders and charged to surtax so as to prevent the avoidance of surtax by the other simple device of setting up a close investment company and borrowing money with which to buy securities. The Clause does not apply to close trading or property companies. Parent companies of close trading groups are also excluded, but there is no equivalent exclusion for the parent companies of close property groups. This series of Amendments deals with that. I will leave it at that and listen to what hon. and right hon. Gentlemen have to say.

3.0 a.m.

Sir J. Foster

Does the Chief Secretary think that the mischief aimed at in Amendments Nos. 264 and 265 is cured? It is difficult to follow how the Amendments work. The object of Amendment No. 264 is to take a property investment company which is defined in Amendment No. 265 and notice that it holds land or an interest in land in receipt of estate income. Therefore, it does not come within the definition of subsection 2(c) of the Clause. One started with a property investment company in which the estate income is not substantially the whole, but the justification for doing that is that the property investment company which the Amendments have in mind owns 51 per cent. of one or more property investment companies and will be in receipt of the estate or trading or investment income from companies lying underneath.

in drafting the Amendments it seemed to us that if the estate income in the subsidiaries was pushed up in the form of dividends the property investment company which should be included in the relief would not be included because its income would not be estate income but dividend income. Does the Chief Secretary think that the problem is solved by the Amendments? If not, is it not right that this kind of company should be included? If, ex hypothesi, property investment companies lying below the limit do not benefit from the exemption because they come up in the form of dividends or come forward in the form of subventions, that would not satisfy the criteria.

The Amendment is not perfect because when we push it up perhaps there should be "substantially the whole". The Amendment might be interpreted as meaning that if all the property investment companies below did not add up to "substantially the whole" in the top company it might be said that it was contrary to the spirit of the Clause. I would be prepared to agree that one should ensure that when dividends are pushed up which represent estate income the top company should be "substantially the whole" of estate income as expressed in the Amendments.

Mr. Graham Page

We argued about "substantially the whole" when dealing with an earlier new Clause. What I said then applies in this case. It will be extremely difficult to interpret the meaning of "substantially the whole", but the point is that a different rule should apply to the property holding company, the parent company. When the dividends are passed up from the subsidiaries, surely it is sufficient to cover those or substantially the whole of the income of the subsidiaries without applying that rule to the parent company. There would be no mischief in fixing a percentage for the parent company such as is seen in Amendment No. 264.

Mr. Diamond

I gather—but I should not like to stake my life, on it—what is being put to me. I gather that we are in broad agreement about our proposal, but that there is difficulty in feeling certain that the character of the dividends coming up from the subsidiary companies can be defined.

The hon. Gentleman the Member for Crosby (Mr. Graham Page) is anxious about the phrase "substantially the whole," as he was on an earlier occasion. On that earlier occasion I acceded to his pressure that I should define the phrase a little more precisely, and referred to something well in excess of 75 per cent. But that sort of definition would be inadequate on this occasion, in my view, because what one is giving here is a blanket exclusion, and if one is giving a blanket exclusion one wants much more than a 51 per cent. character or nature of the dividends coming up. One would therefore want something that was substantially the whole, or practically the whole, in order to justify the blanket exclusion to which I have referred.

Mr. Graham Page

I am not quite sure whether the right hon. Gentleman is talking about substantially the whole of the income of the subsidiaries or of the parent company. He is tempting me to ask him again what percentage he has in mind. He said earlier in dealing with a new Clause that it would have to be substantially more than 60 per cent., and now he says substantially more than 75 per cent. Where is he going—up to 99 per cent.?

Mr. Diamond

I do not think that 99 per cent. is a very bad figure here. It would qualify as being substantially the whole.

I think that we are in broad agreement. I have taken the point. I understand what the hon. and learned Member for Northwich (Sir J. Foster) suggests. I think that the sensible thing to do in the circumstances would be for him to be good enough to allow me to read very carefully what he has said, and to write to him if necessary—the point does not call for any Amendment in the Bill now —to make sure that I was acting reasonably.

Sir J. Foster

There are two aspects which the right hon. Gentleman must consider. First of all, there is the percentage shareholding which the parent company must have to make the subsidiary company a subsidiary. That is not necessarily substantially the whole, which is another point. Having got the subsidiaries, one pushes up the dividends. Then there comes the question of how much of the total income of the superior, top holding company should constitute estate income, and then, somehow—perhaps by extra- statutory concession, of which I disapprove, because there are so many such concessions—to say that the dividends pushed up will constitute estate income.

Mr. Diamond

I was not necessarily leaning towards an extrastatutory concession: it would be wrong for the hon. and learned Gentleman to read that into my remarks. I was saying that I hoped that he would allow me to read very carefully what he had said, in order to make sure that I was fully seized of the points he had made.

Amendment agreed to.

Futher Amendments made: No. 48, in page 25, line 5, after 'is', insert 'of one or more of the following descriptions, that is— (i)'.

No. 49, in line 5, at end insert: '(ii) interest, and dividends or other distributions, received from a subsidiary which is itself within paragraphs (a), (b) or (c) of this subsection'.

No. 50, in line 6, at beginning insert 'Subsection (1) of'.

No. 219, in line 8, after 'above', insert 'or section ("loans made on or before 15th April 1969") of this Act'.—[Mr. Diamond.]

Mr. Graham Page

I beg to move Amendment No. 243, in page 25, line 11, at end insert: 'or (c) to interest, the payment of which is enforceable against the company under the terms of a mortgage, a debenture or other similar charge entered into prior to 15th April 1969 and containing provision that the principal money secured thereby will not be repayable until the expiration of twenty years from the date of the making of the loan in respect of which the interest is payable'. As a major concession from this side of the House I suggest that this Amendment may be discussed with Amendment No. 244, in line 11, at end insert: (4) This section shall not apply to a company if twenty-five per cent. or more of such of its issued share capital as carries voting power has been allotted to or acquired by the public unconditionally and is so held at the relevant time and if such share capital has within twelve months preceding 15th April 1969 and subsequently been the subject of dealings on a recognised Stock Exchange in the United Kingdom. The Amendments deal with different points but they are in the same context. They refer to the end of subsection (3) but to put them into context, I refer to subsection (1), which explains what the Clause is about. The subsection says: all interest paid by a close company in any accounting period shall be apportioned under section 78 of the Finance Act 1965 (apportionment for surtax) as if the interest were income of the close company". We are not dealing here just with relief in payment of interest—that is, making a deduction from taxable income—but with the apportionment of income among participators for the purposes of surtax. To put it fully on the record, I take the first three lines of Section 78 of the 1965 Act, which says: Subject to the provisions of this subsection, the income of a close company for any accounting period may for the purposes of surtax be apportioned by the Board among the participators,… That is what we are talking about in Clause 21 and it is not quite the same as the contents of Clause 19.

Amendment No. 243 is intended to remove from the interest to be apportioned for surtax purposes where there is a pre-Budget obligation to pay. This is very much the same as new Clause 28 which, speaking from memory, I think went on to the Notice Paper before this Amendment. The new Clause deals with relief in respect of payment of any interest and seems by those words to refer to Clause 19 rather than Clause 21. It does not seem to deal with apportionment for surtax. It may be that the point is covered by Clause 21(3)(a), which says: This section shall not apply— (a) to interest which would be eligible for relief under section 19 above if paid by an individual, I hope that once again the Chief Secretary will be able to tell us that it is all quite all right in the Bill and what I am seeking to do is there already now that we have new Clause 28 and if there is a pre-Budget obligation under a loan to pay interest that is taken out of Clause 21.

Amendment No. 244 seeks to exclude from the effect of Clause 21 and the apportionment for surtax purposes a certain type of close company. Subsection (2) already excludes certain companies as they are defined but there will be a number of close companies which will not fit in with any of those exclusions. Some will not fit in with the phrase "substantially the whole", with overseas subsidiaries and so on. By Amendment No. 244 I am seeking to exclude what I call the public close company. I need not go into all the definition set out in the Amendment, but it is to exclude a further type of public close company which it defines.

3.15 a.m.

Mr. Diamond

I can help the hon. Member for Crosby (Mr. Graham Page) by saying that in general terms—I would not be too specific about it—Amendment No. 243 is unnecessary. What the hon. Gentleman was asking was whether the six-year period applies to the Clause. The answer is that it does by virtue of Amendment No. 219, to which the House has just agreed. That covers the essential point which was in the hon. Gentleman's mind on Amendment No. 243.

I think what the hon. Gentleman is suggesting by Amendment No. 244 is a reversion to the pre-1966 percentage for the purposes of the exemption from the Clause. Under the ordinary close company rules the percentage would otherwise remain at 35. This is an Amendment which I could not accept. I do not think there is any real justification for the hon. Gentleman's anxieties. I will carefully consider what he has said, but I do not think I can advise the House to accept the Amendment, as things stand at the moment.

Mr. Graham Page

I am grateful to the Chief Secretary for saying that what I sought to do by Amendment No. 243 appears to be covered, except that I included the longer period of 20 years obligation. If the six years covers it, that seems to be satisfactory.

Amendment negatived.

Amendment made: No. 51, in page 25, line 33, at end insert: 'and for the purposes of this section—

  1. (a) "distribution" has the same meaning as in Part IV of the Finance Act 1965,
  2. (b) the question whether a company is a subsidiary of another company shall be determined in accordance with paragraph 9 of Schedule 12 to the Finance Act 1965.—[Mr. Diamond.]

Further consideration of the Bill, as amended, adjourned.—[Mr. Roy Jenkins.]

Bill, as amended, to be further considered this day.