§ '(1)For the purposes of section 18 of this Act the exempt income level of an intermediary of a company for any year is—
- (a) where no other person is linked with the intermediary, £5,000; and
- (b) in any other case, that proportion of £5,000 which is equal to the proportion which the intermediary's income from the company in respect of relevant services for the year in question bears to the total amount of the group's income from the company in respect of such services for that year.
§ In paragraph (b) above "the group" means the intermediary together with the person or (where there are more than one) all of the persons linked with the intermediary.
§ (2) Where in a case falling within subsection (1)(b) above the income from the company in respect of relevant services for any year—
- (a) of the intermediary; and
- (b) of each person linked with the intermediary;
§ (3) The following are persons linked with an intermediary for the purposes of this section, whether the intermediary is a company or a person other than a company—
- (a) any partner of the intarmediary and any partnership of which the intermediary is a member;
- (b) any company of which the intermediary is a director; and
- (c) any director of any company which is linked with the intermediary.
§ (4) Where the intermediary in question is a company the following are also persons linked with the intermediary for the purposes of this section—
- (a) any person other than a company who has a controlling interest in the intermediary, and any company other than the intermediary in which any such person also has a controlling interest;
- (b) any company of which the intermediary is a subsidiary and any other subsidiary of any such company;
- (c) any subsidiary of the intermediary; and
- (d) any director of the intermediary.
§ (5) Where the intermediary in question is a person other than a company the following are also persons linked with the intermediary for the purposes of this section—
- (a) any company in which the intermediary has a controlling interest;
- (b) any company of which a company linked with the intermediary by virtue of subsection (3)(b) or paragraph (a) above is a
1794 subsidiary and any other subsidiary of any such company;
- (c) any subsidiary of any company linked with the intermediary by virtue of subsection (3)(b) or paragraph (a) above; and
- (d) where the intermediary is a partnership, each of its members.
§ (6) A person other than a company shall be treated as having a controlling interest in a company for the purposes of subsections (4)(a) and (5)(a) above if, but only if, that company would be a subsidiary of the person in question if that person were a company.
§ (7) In determining for the purposes of subsection (6) above whether a company would be a subsidiary of any person other than a company, any shares held or power exercisable by either of two spouses or by both spouses jointly shall be treated as held or exercisable by each spouse.
§ Brought up, and read the First time.
§ Mr. Deputy Speaker (Mr. George Thomas)
With this new clause we shall take Government Amendments Nos. 1, 13, 33 to 37, 47 to 49, and Amendment No. 26, in page 18, line 29, leave out Clause 18.
§ Mr. Clinton Davis
I beg to move, That the clause be read a Second time.
The clause and the amendments are interlinked and relate to the levy on intermediaries, which is the subject of Clause 18 and Schedule 2. This provision as to the levy did not appear in the original Government proposals but was inserted against the Government's advice in another place.
We continued to have reservations about the practicality of the new provision, but it clearly had wide support on both sides of the Committee and in another place. We accepted the principle of the new levy, and we have tried to resolve the practical difficulties and to improve the draftsmanship of the clause and the schedule as they reached us from the other place. This subject was discussed at length in Standing Committee, and the present Clause 18 and Schedule 2 were finally accepted as welcome improvements to the original wording. In assenting to Clause 18 and Schedule 2, members of the Committee asked the Government to reconsider one or two points of detail before Report. In those circumstances, I am putting forward these 1795 provisions and I shall deal with them under three headings.
Let me first deal with aggregation of earnings of linked intermediaries. I turn first to new Clause 2 and related amendments dealing with the aggregation for purposes of the levy of the income of linked intermediaries. It was suggested in Committee that so that the clause should apply equitably to intermediaries who happen to be organised in different ways and also to minimise opportunities for evasion, the earnings of linked intermediaries should be aggregated when the levy is assessed.
A problem arises because the clause exempts from the levy the first £5,000 of any income which an intermediary has received from a failed company in any one year. Accordingly, an intermediary who organises himself as a group of legally separate units, albeit under common ownership, will be less liable to the levy than an intermediary of comparable size who chooses to run his business as a single unit.
Under subsection (1), where intermediaries are linked the exempt income level of £5,000 is to be divided between them in the same ratio as the earnings of each have to the earnings of the group as a whole. To avoid excessive work for the Board in chasing up a large number of small claims subsection (2) provides for a further exemption from the levy where the income of no member of a group of linked intermediaries exceeds £1,000.
Subsections (3), (4), (5) and (6) set out the various categories of intermediaries that are to be regarded as linked for the purpose of this clause. The definition is inevitably complicated since intermediaries may be individuals, partnerships or companies. Subsection (7) provides for the counting together of husbands and wives when determining who has the controlling interest in a corporate intermediary. Subsection (8) applies to the new clause the definition of a subsidiary company in Section 154 of the Companies Act 1948.
I do not claim that the new clause covers all conceivable linkages between intermediaries—there is really no limit to the refinements one could make—but it 1796 deals with the most obvious ones and goes, I believe, as far as it is reasonable to go in the context of the present Bill.
Amendments Nos. 33, 34, 35, 36 and 37 are simply consequential in regard to the new Clause and Clause 18. Amendments Nos. 47, 48 and 49 to Schedule 2 provide for implementation and enforcement of the provisions of the new clause.
New paragraph 2A of the schedule in Amendment No. 47 enables the Board to obtain from intermediaries the information they need to determine whether intermediaries are linked within the meaning of the new clause. The new paragraph 2B provides for offences and penalties where intermediaries fail to respond to a notice from the Board requiring information or knowingly supply false information. This point also was dealt with in Committee and I undertook to deal with the matter. The offences and penalties are parallel to those laid down in Schedule 3 for insurance companies which fail to supply correct statements of income liable to Clause 19 levies. The remaining amendments to Schedule 2 are consequential and relate to delivery of the notices for which the schedule provides.
§ Mr. Tim Renton (Mid-Sussex)
I believe that the Minister referred to Amendments Nos. 47 and 43. May I point out that we are not now debating those provisions but that they come later?
§ Mr. Davis
That is correct, but I am not prohibited from mentioning them, and that is all I have done. I am in no way seeking to prevent any debate on those matters at some future stage.
Finally, there are paving amendments to Clause 18 and the new clause. I refer to Amendments Nos. 1 and 13. The first inserts a reference to the levy on intermediaries in the statement of the Board's functions in Clause 1(2). The other includes a reference to the levy on intermediaries in Clause 13(3), which relieves the Board of the need to incur expenditure in fulfilment of its duties in any period when the funds available to it from levies or otherwise are insufficient.
This is a complicated series of amendments, but I hope that we have accomplished what we set out to do. I commend the new clause and the amendments to the House.
§ 4.30 p.m.
§ Mr. Tim Renton
As the Undersecretary has said, the question of the principle of the levy on intermediaries or brokers in the insurance business was raised and substantially discussed in Committee. We shall have an opportunity to discuss this principle again later when we debate Amendment No. 28 in the name of my hon. Friends and myself.
In this debate we are considering only the attempt in new Clause 2 to define which companies should be aggregated or consolidated together for the purpose of arriving at the exempt income level of £5,000. As the Minister said, in Committee the point was raised that the principle of the exempt income level of £5,000 could be abused by a number of subsidiary companies being set up, each of which could write or broke an appropriate amount of business in order to receive approximately £5,000 each and thus not be subject to the clawback—in the event of the clawback from intermediaries ever being enforced.
However, in trying to define the principle of aggregation or consolidation in new Clause 2 the Government have, in large degree, made confusion worse confounded. This new clause is extremely hard to understand. I believe that (he clause could be an extremely good candidate for the Renton Report on the preparation of legislation, which this House will consider on Monday evening, because although I have read the clause a number of times I still find various paragraphs extraordinarily hard to understand.
When the Minister was speaking I noted a good deal of hesitancy in his voice. That hesitancy was well justified. I want to set forth in simple arithmetical terms how new Clause 2 might operate. Perhaps the Minister will tell me later—I am sure other hon. Members will wish to speak on this—whether I have the sums right. I start with subsection (1)(a). I assume from this paragraph that if the business transacted leads to income of less than £5,000 and the company or person concerned is not linked with anyone else, there is no clawback.
We then come to subsection (1)(b). The wording of this paragraph leads us into great trouble. The wording appears to mean that if the insurance company concerned were to have paid income of 1798 £25,000 for relevant services to a group of companies and the particular intermediary has received an income of £5,000 for his relevant services, his exempt income level would be only £1,000. That is arithmetical proposition No. 1. Perhaps the Minister will correct or confirm it later.
I turn to subsection (3)(b) and (3)(c). In arriving at this definition of which companies should be consolidated together, the Government are, in effect, saying that if one of my hon. Friends is a member of the board of a firm of insurance brokers and is also a member of the board of, perhaps, five other firms of insurance brokers, by virtue of those interlocking directorships all these companies should be consolidated together. Therefore, although there is no linking shareholding, we could have a situation in which a great number of insurance brokers or intermediaries were consolidated together purely because they had one common director, and for no other reason.
The effect that this has on the exempt income level is startling. I have already given an example of where the exempt income level would fall to £1,000. However in the case I have mentioned and if my understanding of the clause is right, if there is a common director between four intermediaries and between them they have received income for relevant services of £100,000 from the insurance company in question and one of those intermediaries has received only £5,000 or 5 per cent. of that £100,000, its exempt income level would fall to 5 per cent. of the £5,000, that is, £250. That is arithmetical proposition No. 2.
I appreciate the Government's difficulties in trying to draft a suitable consolidation clause, but if my mathematical understanding is correct and if, under the terms I have suggested, we could find that an exempt income level of one intermediary were to fall because he was consolidated with others who had written a total of £100,000 and he had written only £5,000, his exempt income level could fall to 5 per cent. of £5,000, that is £250. There is no logic in it. If £5,000 is thought to be an appropriate level for exempt income levels, consolidation simply by virtue of an interconnecting individual directorship has gone too far.
On that basis the Government should think again about how the clause has 1799 been drafted. Perhaps later in the debate the Minister will tell me that my understanding and interpretation of the arithmetical figures is not totally correct but as of now that is my understanding of this extremely complicated clause. For unnecessary reasons the exempt income level for an individual member of this remote group could fall too far below the £5,000 level that the Government think appropriate. I trust that the Minister will answer that point later.
§ Mr. A. P. Costain (Folkestone and Hythe)
Has my hon. Friend the Member for Mid-Sussex (Mr. Renton) come across the same problem as I have; namely, at what stage an interlocking director is appointed and when these calculations start to be calculated?
§ Mr. Renton
My hon. Friend has raised another relevant point of definition. It is not clear from the clause the time at which an appointment of a director would be effective for purposes of consolidation. This point has not been raised in this new clause. It could be relevant because a new director could join a board virtually within the last days of the year and, therefore, the relevant income level of the intermediary whose board he joined could fall substantially. That is another point for the Government to consider.
§ Mr. Ted Graham (Edmonton)
I welcome the new clause because it is the result of amendments that were tabled in Committee but which were withdrawn after certain assurances had been given to us by the Under-Secretary. The clause was introduced, with Government opposition, in another place by Lord Peddie who, together with my hon. Friend the Member for Farnworth (Mr. Roper) and myself, has very strong co-operative connections.
We are satisfied that the review which took place in Committee and the scrutiny which has taken place since have improved the intentions of the clause that appeared in the Bill in another place. We are grateful indeed to the Undersecretary for fulfilling the commitments he gave to the Committee. Therefore, my hon. Friend the Member for Farnworth and myself very much welcome these improvements.
§ Mr. Roger Moate (Faversham)
I rise equally briefly to cover one very small 1800 point. Before doing that perhaps I may congratulate my hon. Friend the Member for Mid-Sussex (Mr. Renton) on the amazing way in which he managed to see through the fog of this new clause. If I had understood him correctly, I am sure that I should have been able to say that he had a very strong point, but as I did not understand him correctly I shall have to read what he said very carefully later.
It all sounds very alarming and complicated. I only hope that the Board never has the need to apply this levy in practice. My hon. Friend's skill in seeing through the fog would qualify him as a referee in international football matches in Czechoslovakia, even though the spectators might not see what was going on.
This is a complicated clause. I have no wish to complicate it further. The Minister said that it would be a mind-boggling exercise to try to define all possible relationships. In our discussions on the Insurance Companies Act 1974 we had similar problems in trying to define who was and who was not a controller of an insurance company. When we came to the question of parental relationships, we produced in the end a satisfactory set of proposals that covered a much wider range of relationships than simply both spouses, as referred to in subsection (7). I suggest to the Minister that it may be easier—perhaps he will consider the matter in any event—to take the definition from the 1974 Act, which would offer an already tested and accepted definition of relationships in an insurance context.
§ Mr. Robert McCrindle (Brentwood and Ongar)
I am glad that everyone else is glad that there has been this great improvement in the clause. I feel a little like the odd man out, because although everyone else understands it, I, with the small benefit of having spent a few years in the insurance business, do not. Nevertheless, I am prepared to accept the Minister's assurance that this is an improvement on the original form. Anyone who has read the original form must wonder how we ever got as far as this clarification which is an improvement.
As a simple, direct person, I want to put to the Minister one simple and direct point. Let us suppose that there are 50 people who pay their national insurance contributions at the self-employed rate. 1801 Let us suppose that they all sell life assurance policies and that their income from one company which subsequently gets into difficulties is £999. Assuming that they are linked only by the provision of administrative and technical services and that, therefore, they remain, first, self-employed and, second, independent agents, they all escape the net of the intermediaries levy. If that is so, why should they be so different from 50 people who pay national insurance at the employed rate and are having the services provided by a company? In other words, will not there be the greatest incentive to people to become pseudo-self-employed so as to avoid the imposition of the levy, whereas those companies which continue to employ representatives as they do at present are likely to be penalised?
I started by saying that this would be a clear point. I had better leave it there, because it becomes murkier the longer I address myself to the problem. However, the Minister should be clear whether there is a real way out of this imposition in the way I have suggested. Perhaps I have been not only partly misreading the clause but totally misreading it.
§ 4.45 p.m.
§ Mr. Clinton Davis
I assure the House that there are some mysterious people in and around this place who do understand the entirety of this clause. I shall try to deal with the points raised by the hon. Member for Mid-Sussex (Mr. Renton) in the order in which he raised them.
As regards the hon. Gentleman's first point, the answer is that there would be no clawback in those circumstances. As regards his second point, which he described as his first proposition, in so far as I was able to follow his argument—no doubt he found it extremely difficult to follow mine—I think that the answer is "Yes", but I shall read in the Official Report what he said. However, I think that what he was aiming at was the principle of the matter rather than these abstruse mathematical calculations which I had some difficulty in following. I am glad to know that I was not alone in that regard.
Interlocking directorships will have the effect of linking not the intermediaries but only the director himself. If he has relevant income on his own account, this is linked, but not his company.
1802 Having said that, I think that the hon. Gentleman will see his way very clearly through what is intended here, and that therefore his other calculation, equally abstruse, does not arise.
§ Mr. Tim Renton
I am very interested in the Minister's comment. If this is so, it helps me a long way through the problem I had envisaged. If I understand him correctly, he is saying that the link flows only through an individual director if he has income for relevant services, and that company A is not linked with company B for the purpose of the new clause simply because Mr. X is a director of both. It is indeed helpful, but I wonder whether to a layman this would be clearly understood from subsection (3)(b) and (c). In my judgment it is not totally clear from those paragraphs.
§ Mr. Davis
Indeed they are.
My hon. Friend the Member for Edmonton (Mr. Graham) clearly understands it all. I am delighted about that. He is perfectly satisfied that I have implemented the undertaking which I gave.
The hon. Member for Faversham (Mr. Moate) hoped that the Board would never have to apply these very difficult rules. I hope that that is so as well. I am sure that the whole House hopes that that would be the position. But we have to deal with possibilities and we cannot be sure what will arise in the future. The hon. Gentleman is quite right, and he reflects what I said earlier. It is extremely difficult to define the links with any real degree of satisfaction.
He asked why we did not apply the same definition as was provided for in the 1974 legislation. The answer is that we are dealing with a different problem, in a sense. Having regard to the nature of the people we would be levying here it is a much smaller problem than that of controllers of insurance companies. It was thought—and I accept responsibility for this—that it would be better in all circumstances not to be caught up in the 1803 maze of difficulties which apply—I think properly apply—when it comes to questions affecting controllers of insurance companies.
The hon. Member for Brentwood and Ongar (Mr. McCrindle)—always on the ball on these matters, and not going on for too long so that he got off the ball—asked whether self-employed people would devise methods of escaping the levy. It would be wrong of me to discount that possibility altogether, but I suspect that they will not go to all the trouble that would clearly be necessary to do that. The hon. Gentleman may be right, however, and we shall have to see how the situation develops.
§ Mr. Higgins
We have always had some trouble with the Under-Secretary, in that he assumes that what he says will become the law. A number of my hon. Friends have some concern about whether the wording of the clause is adequate to bear the interpretation the hon. Gentleman has placed upon it as regards the position of individual directors.
We do not wish to press the matter to a Division, but I think that the Undersecretary will accept that this point is worth studying before the Bill goes to another place. It is a complex matter. The Under-Secretary may well be right, but many of my hon. Friends think that the wording could be improved to make what the Under-Secretary says clear beyond a peradventure.
§ Mr. Clinton Davis
I am disappointed that the hon. Member for Worthing (Mr. Higgins), with whom I have sat on a number of Standing Committees, should have thought that I am so arrogant as to believe that every word I utter will become law. That is an attractive but unreal proposition.
I do not dissent in principle from what the hon. Gentleman said. It is very difficult to deal with these complex matters in the House and to take them all in when I have had relatively short notice of an amendment. I recognise that this matter may require further investigation. I hope that what I said was reasonably accurate and that it will not require any further amendment. I do not object to hon. Members looking at the matter 1804 afresh. No doubt their Lordships will do that as well.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.