STOCK DIVIDENDS (Hansard, 17 July 1975)

§ Mr. Joel Barnett
I beg to move Amendment No. 58, in page 20, line 39 leave out "subsection (9)" and insert "subsections (9) to (11)"

§ Mr. Deputy Speaker (Mr. George Thomas)
With this amendment, we can take Amendment No. 61.

§ Mr. Barnett
These amendments remove what could amount to a retrospective or double charge to tax under Clause 33 as drafted. We had a debate on this matter during the Standing Committee proceedings and I hope that the hon. Member for Horsham and Crawley (Mr. Hordern), who asked me to deal with this 1878 point, will be satisfied with the amendments.

§ Mr. Joel Barnett
I beg to move Amendment No. 59, in page 23, line 17 after "to", insert (a)".

§ Mr. Deputy Speaker
With this we can take Government Amendments Nos, 60, 62, 63 and 64 and Amendment No. 113, in page 23, line 19 at end insert or (b) any share capital issued by a company in respect of shares in the company which confer on the holder a right to convert or exchange them into or for shares in the company of a class which is not a relevant class for the purposes of sub-section (1)(b) above, where the due date of issue of the share capital so issued precedes—

(i) the earlier of the day next after the earliest date after 5th August 1975 on which conversion or exchange of the shares could be effected by an exercise of that right; and 6th April 1976, or

(ii) in the case of share capital issued by an investment trust (within the meaning of Chapter VI of Part XII of the Taxes Act) 6th April 1977".

§ Mr. Barnett
These amendments provide a measure of transitional relief for shareholders until they are able to convert their shares of a special class into ordinary shares.
In cases involving a special class of shares which give a continuing right wholly or mainly to stock dividends, the shares are sooner or later convertible into ordinary shares. Where commercial or industrial companies have this type of stock dividend arrangement, the special shares are normally convertible into ordinary shares annually at the same time each year. The "locked-in" difficulty should therefore arise only in the current year and on one occasion. The amendment meets the problem by providing that a bonus issue on special shares of this kind shall not be caught by Clause 33 until the first occasion after August 1975 on which the special shares can be converted into ordinary shares or 5th April 1976 whichever date is the earlier.
The same problem arises on the "B" shares of approved investment trusts but with the added difficulty that large-scale conversion of "B" shares into ordinary shares will have a significant impact on the level of dividends paid to ordinary shareholders. This special situation is 1879 recognised in the amendment by extending the period of transitional exemption to 5th April 1977, instead of 5th April 1976 as for other companies. I shall be happy to deal with Amendment No. 113 after the hon. Member for Horsham and Crawley has spoken to it.

§ Mr. Peter Hordern (Horsham and Crawley)
I am grateful to the Chief Secretary for bringing forward the amendments and carrying out the undertaking he gave in Committee. Amendment No. 63 covers the question of investment trusts when scrip dividend shares are issued. The present position is that they are taken as worth a cash dividend, whereas scrip dividends are made in the case of an investment trust, on the asset value. What is required is to change it into a market value.
The Chief Secretary has sought to meet the point by inserting the words: "substantially greater or". It would be helpful if, in replying to this group of amendments, he could say what sort of figure he has in mind in the term "substantially greater or". Does he mean 5 per cent. of 10 per cent.? In these cases there is frequently a discount of some 20 per cent. or so, and one wants to make quite certain that the discount would be counted as "substantially greater or", as in the terms of Amendment No. 62.
I hope that the Chief Secretary will also make clear that ordinary scrip issues are outside the ambit of these provisions. I do not know whether it is necessary—I think that the Chief Secretary said it was not—to provide that ordinary bonus shares, technically known as scrip issues, are outside the scope of the Bill.
Having paid tribute to the fact that the Government have brought forward some helpful amendments on cumulative shares and convertible ordinary shares—that is to say, the shares which are "locked in" —I should like to turn to Amendment No. 113. I refer particularly to the especial position of investment trusts. As I understand it, the effect of Government Amendment No. 60, which attempts to deal with this, does so in this way.
We are talking about a transitional arrangement for investment trusts. It refers to the situation where the due date of issue of the share capital so issued precedes the earlier of the following dates…the day next after the 1880 earliest date after 5th August 1975…or, in the case of…an investment trust…6th April 1977". It is the earlier of the two dates, so effectively it appears that investment trusts are not being given any effective transitional period. That is the reason for Amendment No. 113, which is termed in almost precisely the same words as the Government amendment, which allows a clear transitional period of two years from now.
The Chief Secretary will recall the tenor of our debate in Standing Committee in which we were discussing the amendment which gave a transitional period of about three years to investment trusts. In dealing with Amendment No. 377 in Standing Committee the Chief Secretary said: I am not sure that I would necessarily go all the way with the amendment for a transitional period of three years, but I am happy to tell the hon. Gentleman"— that was me— that I will look at this point sympathetically with a view to bringing back a suitable amendment on Report."—[Official Report, Standing Committee H, 1st July 1975; c. 608.] I am sure that the right hon. Gentleman meant that seriously. But the Government amendment which seeks to deal with this matter, by employing the word "earlier" does not cover the particular point of investment trusts, which is different from that of ordinary investment companies.
Ordinary commercial companies' dividends are very well covered, and of fairly recent origin, whereas in the case of investment trusts some schemes have existed for 10 years and the "B" shares in some cases represent a very significant proportion of the total capital. I am told that sometimes it is nearly 50 per cent. In addition, investment trusts are bound by statute to pay out almost all their dividends. In that case they are penalised in every way, and there is no question that if the provision goes through without transitional relief investment trusts in certain categories and in certain cases will have to reduce their dividends to existing ordinary shareholders. I am certain that the House would not wish this state of affairs to occur because it has been a well-known practice of Governments of both political parties that the small shareholder should be encouraged. The investment trust 1881 movement is designed particularly to help the small shareholder to achieve a very wide spread of investment, far more than if he had to invest his own small sum on his own.
This is, therefore, a very desirable form of investment which needs to be encouraged. I think that Amendment No. 113 covers the point by giving a two-year transitional period.
11.30 p.m.
Replying to the original debate, the Chief Secretary said that he accepted the spirit of the amendment, although he thought that it might be rather long.
I hope that I have the attention of the Chief Secretary. I have almost finished. I hope that he will bear with me amongst all the comings and goings. This may not be an important point to the Patronage Secretary, but it is important to people outside the House.
The Chief Secretary gave a serious undertaking in Committee. He mentioned the transitional period of three years, although he was doubtful whether it was the right period. Consequently, our amendment allows a two-year period. That will make a substantial difference for investment trusts. I hope that the Chief Secretary will accept the terms of Amendment No. 113 to allow for a proper transitional period for investment trusts. We know what the consequences to the shareholders of the trusts will be if this is not allowed.
I should be grateful if the Chief Secretary would make clear the position of scrip issues.

§ Mr. Joel Barnett
I dealt with normal bonus issues or scrip issues in Committee, when I made it clear that the clause did not catch that type of share. I am happy to confirm that. We have taken further legal advice, which confirms that the wording of the subsection will not bring a normal bonus issue within the scope of the legislation.
The Revenue will interpret the words "substantially greater or substantially less" as meaning a difference of about 15 per cent. or more, either way. I hope that that satisfies the hon. Gentleman.

§ Mr. Hordern
The figure of 15 per cent. is high. I hope that a smaller figure, say 5 per cent., may be accepted. Perhaps that figure could be negotiated between the Treasury and interested 1882 parties. I am sure that the figure is not binding. Perhaps something could be arranged later.

§ Mr. Barnett
The hon. Gentleman knows that there is give and take on the odd 1 per cent. or 2 per cent. I am always prepared to look at these figures and discuss them, but that is my understanding of the situation.
There is a genuine misunderstanding by the hon. Gentleman on the main point of Amendment No. 113. I undertook to look at the figures. Amendment No. 60 deals with the special situation of the locked-in problem which the hon. Gentleman raised in Committee. It does so by extending the period of transitional exemption to 5th April 1977 instead of 5th April 1976 as for other companies. But—this is the important point—it is still subject to any earlier conversion right. The hon. Gentleman's Amendment No. 113 disregards the possibility of earlier conversion and excludes bonus issues on the 'B' shares from the operation of the clause until 5th April 1977. The extension of time provided by Amendment No. 60 does not give any special help to those investment trusts where conversion may take place between 5th August 1975 and 5th April 1976. We have decided that a further concession on the lines of this amendment would be much too generous. Where there is an earlier conversion, the taxation of the bonus issues should be subject to that earlier conversion. That is not unreasonable. I hope that the hon. Gentleman agrees.

§ Mr. Hordern
I am not altogether happy with that reply by the Chief Secretary. As I understand it, the position will still be that investment trust shareholders who convert between the earlier date and 6th April 1977 will be caught by these provisions. That simply means that the ordinary shareholders will be put under greater strain, and in some cases investment trusts may well find themselves forced to reduce dividends. This is something I shall want to look at again.
The Chief Secretary says that the position is not as onerous as I made out. I shall certainly want to look at the position again—I am not altogether happy about it—and I am sure that the right hon. Gentleman will wish to look again at what he has said.