§ (1) This section has effect where, in pursuance of any enactment to which this subsection applies, gilt-edged securities are exchanged for shares in a company and, immediately before the exchange, those shares are owned by another company—
- (a) which is a member of the same group of companies as the first-mentioned company; or
- (b) which is a member of a consortium by which the first-mentioned company is owned.
§ (2) Subsection (1) above applies to any enactment providing for the compulsory acquisition of shares in companies engaged in manufacturing aircraft or guided weapons or in shipbuilding or allied industries.
§ (3) In any case in which this section has effect the company owning the shares immediately before the exchange may by notice in writing given to the inspector within four years after the exchange, elect—
- (a) that section 49(3) above shall not apply to the exchange; and
- (b) that section 33 of the Finance Act 1965 (replacement of business assets) shall have effect in relation to the disposal on the occasion of the exchange as if the shares were assets falling within the classes listed in that section and had, throughout the period of ownership been used and used only for the purposes of a trade carried on by that company.
§ (4) For the purposes of this section—
- (a) two companies shall be deemed to be members of a group of companies if one is the 75 per cent. subsidiary of the other or both are 75 per cent. subsidiaries of a third company;
- (b) a company is owned by a consortium if all of the ordinary share capital of that company is directly and beneficially owned between them by five or fewer companies, and those companies are called the members of the consortium.
§ (5) Subsections (6) and (7) of section 49 above shall apply in relation to this section as they apply in relation to that section.'.—[Mr. Joel Barnett.]
§ Brought up, and read the First time.466
Mr. Deputy Speaker
With this, we may take the following amendments:
- (a) in subsection (1), after first "by", insert "anindividual or".
- (b), in subsection (3), after first "effect", insert "the individual or".
- (c), in subsection (3), leave out first "exchange" and insert "issue of the gilt edged securities".
- (d), in subsection (3)(a), after "to", insert the whole or part of ".
- (e), in subsection (3)(a) at end insert:'that the exchange shall be treated as not involving any disposal of shares by that company, and where such an election is made, to the extent that a subsequent disposal of the whole or part of the gilt-edged securities is made by that company for the purpose of the acquisition of a qualifying asset and the acquisition takes place or an unconditional contract for acquisition is entered into in the period beginning on the date referred to in subsection 6 of section 49 and ending three years after the date of the subsequent disposal, the disposal of the qualifying asset and not the disposal of the gilt-edged securities shall be treated as a disposal and for this purpose "qualifying asset" means an asset (including goodwill and shares or securities acquired as investments) which is, or is an interest in, an asset to be used or held either for the purposes of a trade or business carried on or to be carried on by the company from whom the shares referred to in subsection (1) above were compulsorily acquired or by a member of the same group of companies as that company, or for any other purpose for which the shares were held prior to their compulsory acquisition'.(f) leave out subsection (3)(b).(g), in subsection (3)(b), at end insert:'or,(c) paragraph 6 of the Seventh Schedule to the Finance Act 1965 shall apply to the transaction as though the gilt edged securities had been issued by a company acquiring control of the first mentioned company'.No. 45, in page 30, line 24, leave out Clause 49.
No. 46, in Clause 49, page 31, line 13, at end insert:'but, to the extent that the disposal is made for the purpose of the acquisition of a qualifying asset and the proceeds thereof are applied in such acquisition within three years thereafter, the disposal of the qualifying asset and not the disposal of the gilt-edged securities shall be treated as a subsequent disposal for the purposes of this paragraph, and for this purpose "qualifying asset" means an asset (including good will and shares or securities acquired as investments) which is, or is an interest in, 467 an asset to be used or held either for the purposes of a trade or business carried on or to be carried on by the person from whom the shares referred to in subsection (1) above were compulsorily acquired (or if that person is a body corporate, a trade or business carried on or to be carried on either by that body or its wholly-owned subsidiary) or for any other purpose for which the shares were held by such person prior to their compulsory acquisition.'No. 47, in page 31, line 13, at end insert:'Provided that neither this paragraph nor subsection (2) above shall apply where any gilt-edged securities are within three years after their issue disposed of by a body corporate by way of distribution thereof to its members.'
The new clause gives relief to certain companies in the aircraft and shipbuilding industries by deferring the charge to tax on capital gains arising by virtue of Clause 49, which brings into charge gains on any nationalisation where the Government issue gilt-edged securities in exchange for shares compulsorily acquired. The relief is given by treating such gains as though they arose from the disposal of qualifying assets for the purposes of Section 33 of the Finance Act 1965. Shares are not otherwise qualifying assets. Section 33 of the Act lists the qualifying assets.
Where the company so elects within four years of the compulsory acquisition of the shares, the gain which would otherwise arise on the disposal of the gilt-edged securities issued for those shares can be rolled over into any qualifying replacement assets, subject to the normal rules of Section 33.
That, broadly, is the nature of the new clause. I shall be happy to deal with the amendments when we come to them.
§ Mr. Nigel Lawson (Blaby)
I hope that the Chief Secretary will address himself to this matter at considerably greater length, as a number of important issues are involved in the new clause, the amendments to it and also the amendments to Clause 49, which are being grouped with this new clause.
We had a debate in Standing Committee on Clause 46, as it then was, dealing with the treatment for tax purposes of the compensation to be paid by the Government to the companies owning the shipbuilding and aircraft subsidiaries that are to be nationalised, which started at about 3.20 in the morning and con- 468 tinued for about one hour. We have here a new clause produced as a result of that discussion, but it is far from satisfactory both in equity and in certain particular considerations which I shall outline as briefly as possible.
It might be helpful if I deal first with the specific amendments. The purpose of Amendment (c) is to give more time for the companies to decide what they have to do. Under the new clause, they are given four years after the date of the notional exchange. I suggest that it should be four years after they actually receive the gilt-edged securities. That is necessary because the companies have a very difficult choice as to how they use the profits and, as the Chief Secretary has indicated, there may be a considerable further delay before they received the securities. This is a minor amendment but it should not he disregarded.
Amendment (d) seeks to give companies flexibility in what they propose to do with the proceeds. As I understand the clause, companies are able to elect what they do with the total compensation. It is right that they should elect to get the roll-over relief either for all or for only part of the compensation if they decide that that is sensible in the interests of the company and its shareholders.
I also seek clarification on another matter. It seems to many experts—I hope that the Chief Secretary will give guidance on this matter and will undertake, if necessary to do something about the situation—that roll-over relief is applicable only if the gilt-edged securities which companies receive are directly applied for the purchase of qualifying assets whereas what will normally happen is that gilt-edged securities will be sold and cash proceeds will be used for the purchase of qualifying assets. It cannot be the Chief Secretary's intention to insist that bits of gilt-edged paper are used to purchase qualifying assets. He clearly intends that where gilt-edged are sold, the money raised should be used for the acquisition of qualifying assets. It is important that we should be told whether the clause means that because there seems to be some doubt.
We come to the more substantial point dealt with in Amendment (e), a long and somewhat complicated amendment for 469 which fact I apologise. It seeks to ensure that the roll-over relief should be extended not merely to acquisition of physical assets, plant, machinery, and so on, but to the acquisition of the share capital of a company which a parent company receiving compensation would wish to acquire to replace a subsidiary which, through no initiative of its own, it has had taken away from it by nationalisation. Thus it is no use the Chief Secretary relying, as he did in Committee, on the argument that Section 33 relief is concerned with physical assets. We are now talking about something different. We are not talking about a company that is selling a machine tool and using the proceeds to buy another machine tool, but about something wholly different.
We are talking about a company which has had the entire share capital of one of its subsidiaries taken away from it and which wishes to use the proceeds to purchase the share capital of another company. I mention the share capital in both cases for a particular reason. The Government in the context of the Aircraft and Shipbuilding Industries Bill in its long Committee stage upstairs—I am glad to see many of the veterans, the scarred heroes of that battle, around me now, and I hope that they will take part in this debate—stressed that what they were doing was acquiring shares, not assets.
The whole basis of compensation according to that measure was that of acquiring shares rather than physical assets. The way in which the shares were valued were totally phoney, but I emphasise that the whole concept involved the acquisition and valuation of shares. It is wrong for the Government to try, as it were, to have it both ways and to say that everything was done on a valuation basis of acquiring shares, and then to combine it with a roll-over relief that would come into operation only if the compensation were used to acquire physical assets rather than other shares.
There is another reason why I believe that the Government need to think again on this point and should extend rollover relief to the acquisition of shares. I am not talking about shares for investment trust purposes, let alone speculation, which so upsets Labour Members, but about a trade investment to acquire a new subsidiary company for the group 470 in place of one of its subsidiaries that has been taken away by nationalisation.
I am sorry to see that the Minister of State, Department of Industry, hay not taken the trouble to be here for this debate. In his confused and muddled steerage of the Bill in Standing Committee he said a number of things that bear on this matter. For example, he said that a parent company would be able to use its compensationto re-establish itself at the same level of activity as existed before its subsidiaries were vested.—[Official Report, Standing Committee D, 2nd March 1976; c. 1440.]This is a crucial point and indeed was the litmus test of the Government's ideas on whether compensation was fair. That undertaking, which was repeated on many occasions, can be honoured only if companies are indeed able to establish them, selves at the same level of activity, that is to say, to purchase new companies to replace the old without capital gains tax being imposed on them.
In regard to capital gains tax the Government have not merely resiled on the undertaking they gave in Committee on the Aircraft and Shipbuilding Industries Bill, but they have indulged in an underhand way of discriminating still further in terms of the compensation payable to companies which suffer the fate of nationalisation or whose subsidiaries are nationalised. One of the ways in which they have defrauded the companies concerned is to say that this will be on the basis of share values of two and a half to three years ago. This is being done at a time of rapid inflation. This is monstrous, because no account has been taken of the fall in the value of money.
This point bears on the clause and indeed on other provisions now before us in a number of pertinent ways. First, the only way in which the Government can justify their action is to say "The share index is much as it was two and a half to three years ago". But, again, that argument can have force only if the whole matter is being discussed in terms of shares rather than in terms of the valuation of the underlying assets. If that is so, roll-over relief should be given on the acquisition of shares. The whole question of capital gains tax becomes very different when looked at in a period of rapid inflation and when the gains that are being taxed are not real gains but 471 simply a reflection of the falling value of the pound.
This matter goes wider than this clause. It raises the question of whether capital gains tax is right in its present form. It is interesting to note that the Chancellor of the Exchequer in his 1975 Budget made clear that he was unhappy about this point. However, he has done nothing about it. The result is that it is not a tax on real capital gains at all: it a capital levy. The inadequacy of the compensation, particularly at a time of rapid inflation, is plain and is the backcloth to all our discussions of this clause.
Amendment (f) is self-explanatory inasmuch as it questions the whole application of section 33 of the Finance Act 1965 to this matter. The amount of rollover relief confined to qualifying assets, as defined in Section 33, is wholly inappropriate.
Other amendments have been selected in respect of Clause 49. Amendment No. 45 is perhaps the best. I would recommend the Chief Secretary to accept it. It speaks for itself.
Amendment No. 46 brings in, in the context of Clause 49, the important point to which I referred earlier, in the context of New Clause 24, namely, the extension of roll-over relief to the acquisition of goodwill and shares acquired as trade investments. The amendment inserts this important point into Clause 49.
Finally there is Clause 47, which is almost as important, and which deals with the position of the individual shareholder. It is sometimes easy to get confused when we talk about shareholders in this context. Two kinds of shareholders are involved. There is the parent company, which is the shareholder which holds the shares of the operating subsidiary which has been nationalised, and there are the ordinary shareholders in the sense in which we normally use the term—the public, the pension funds, the life insurance companies, and so on, who hold shares in the parent company. The position of this latter group of shareholders is extremely unfair and unacceptable.
Because, say, it has its sole operating subsidiary nationalised and there is nothing left, a company may decide that 472 the right thing to do is to distribute the gilt-edged stock to its own shareholders so that they may invest it in the best way and let market forces operate. I am sure that Labour Members would rather this were done than to have it spent on boardroom fripperies.
§ Mr. Ron Thomas
The hon. Gentleman's comments amuse me in the light of his attitude to the Price Code, which is that new capital investment should be paid for by increased prices by the consumer rather than by the market mechanism of distributing investable funds.
§ Mr. Lawson
I fail to see the inconsistency. I should have thought that the consumer was the essence of the market and the Price Code, to which I object is undesirable and serves only to distort market forces. On this occasion we are talking about the capital market, which enables the shareholder to invest his capital where he think he can get the best long-term return.
However, the shareholder in this case is penalised because what happens is that the company will be liable to pay capital gains tax on the receipt of the compensation and then, when it distributes this to its shareholders, what has been taxed as capital in the hands of the company will then be taxed as income in the hands of the shareholder.
The Chief Secretary has had the courtesy to write to me about this. It was a matter which I raised in Committee and to which he was unable to reply at the time. He wrote to me on 30th June:The same result follows where there has been a voluntary sale of shares by the holding company and the company distributes the proceeds. I am afraid that I cannot accept that there is a case for altering the normal tax rules on this point where the disposal takes place as a result of the nationalisation arrangements.I would have thought there was a world of difference between a wholly voluntary distribution of capital and a distribution which has arisen simply and solely because a company has had, in some cases, all its operating subsidiaries taken away from it forcibly by nationalisation.
The Minister, when steering the Bill through Committee, took very great care to distinguish between acquisition by 473 takeover and acquisition by Act of Parliament. He argued that the Government did not need to pay any premium for control of those companies because this was something which was done in the case of commercial takeover, but it was not something which was done in the case of acquisition by Act of Parliament.
The Minister in Committee maintained that acquisition by Act of Parliament was something totally different; and yet now, because the Chief Secretary refuses to accept that difference, we have the penalisation of the individual shareholder as a result of an acquisition by Act of Parliament. That means, at the end of the day, that shareholders will have practically nothing left after the capital gains tax has been levied on the inadequate compensation in the first place and then shareholders themselves, when it is distributed to them, have to pay income tax rates on it. Amendment No. 47 seeks in a rather neat way to put the matter right.
There are one or two general points which I think it would be helpful if the Chief Secretary were to discuss and about which he could enlighten us. He did not promise that he would. He said that he would deal with the matter of the individual amendments, but his method of dealing with the new clause itself was wholly inadequate. For example, the new clause is headed:Capital gains: compulsory acquisition of aircraft and shipbuilding sharesIndeed, subsection (2) makes it absolutely clear that it is confined to the shipbuilding and aircraft industries. Yet it is linked with Clause 49, which is a general clause dealing with capital gains liability on compensation stock for acts of nationalisation of all kinds.
We discussed this clause in committee under its maiden name of Clause 46. At that time the Chief Secretary hotly denied that this part of the Bill was specifically concerned with the nationalisation of the shipbuilding and aircraft industries. Yet now we have the new clause, originally intended as an amendment to the old, which is explicitly confined in this way. Why is there this discrepancy? Why does Clause 49 cover all nationalisation whereas the new clause covers only nationalisation of the aircraft and shipbuilding firms?
§ Mr. Lawson
My hon. Friend asks about nationalisation of the banks. One knows that there are many hon. Members opposite who have all sorts of nationalisation plans in mind. Yet this kind of limited relief, inadequate though it is, will be confined only to the act of nationalisation of the aircraft and shipbuilding industries. Why is that? Why is there this discrepancy? It seems to me that this is something of a hybrid Finance Bill, and we know the dangers attendant on matters of that kind.
I hope that the Chief Secretary will try some reconciliation and be consistent. Surely either Clause 49, too, should be applied simply and solely to the aircraft and shipbuilding industries, which would be a logical thing to do, or Clause 24 should be extended so that it applies to all industries which have the misfortune to be nationalised by this Government. I hope that the Chief Secretary will explain the inconsistency and explain what he proposes to do about it.
I would revert to the point which the Chief Secretary failed to explain in Committee and, that is, if he is to make any pretence that the companies should be compensated fairly for what they have lost, it is imperative that, at the very least, those companies should be compensated in such a way that they do not incur capital gains tax liability. If the Chief Secretary's method is followed, that can be done only by eliminating Clause 49, as one of the amendments suggests. However, if the Chief Secretary will not accept that, he must extend the roll-over relief to the acquisition of the share capital of other manufacturing companies which will form part of a group which has lost one of its subsidiaries.
We should also be told the cost of these nationalisation proposals and the cost of New Clause 24. We know that the Treasury works everything out so that the House can decide these matters sensibly. We must be told the cost of New Clause 24 and of acquiring these shares, net of capital gains tax or gross, whichever he prefers—preferably both.
§ Mr. Tom King
To be fair to the Chief Secretary, he has already given the infor- 475 mation about the cost, although it was refused by the previous Secretary of State for Industry. He said on television that it would be £300 million.
§ Mr. Lawson
That is a very pertinent point. Although the Chief Secretary gave the total cost on television, it is characteristic of this Government that they have never been given to the House. Indeed, when we asked for that figure in Committee only a few weeks ago, it was denied us. Yet it is given on television, where the right hon. Gentleman cannot be held accountable.
But what I was also asking for and what I do not believe has been given is the cost of the new clause. The Chief Secretary will find that the cost of extending the roll-over relief as I have suggested would not be great—certainly nothing compared with the vast cost of the nationalisation proposals in themselves.
I know the Chief Secretary's dedication to the cause of cutting public expenditure and getting the borrowing requirement down; I know his anxiety about the size of the National Debt and problems of debt management. Let us not delude ourselves: the issue of large quantities of gilt-edged stock in these nationalisation proposals will make the problem of managing the National Debt substantially greater and will almost inevitably raise interest rates, because much of this stock will be sold.
That the Chief Secretary, with those real preoccupations, should be introducing clauses of this kind at this time is beyond comprehension. It is also beyond comprehension that we should hear of all this heartache over some of the cuts that are coming when here is a cut that the right hon. Gentleman can make that would cause no heartache to anybody.
§ Mr. Ron Thomas
I start from a totally different point of view from that of the hon. Member for Blaby (Mr. Lawson). He mentioned the sterling contributions of the Tory Party in the Committee on the Aircraft and Shipbuilding Industries Bill. The Official Report of that Committee shows that his colleagues spent the bulk of the time, probably 80 to 85 per cent. of it, doing all they could to extract the last penny from the taxpayer for the shareholders of the com- 476 panies. Not for them any concern about jobs, industrial democracy or the real matters which affect the workers in those industries. Their main and absolute concern week after week was in extracting the highest compensation for the shareholders.
I believe that the compensation already worked out is far too generous. Without the kind of public support that it has had over decades, the aircraft industry at any rate would no longer exist and we should not be arguing what kind of compensation to pay shareholders of Vickers, GEC and other companies. It has been estimated that the so-called private aircraft industry has been kept going on about £5 million a week of public money.
§ Miss Harvie Anderson (Renfrewshire, East)
I know that the hon. Gentleman and I are most unlikely to start from the same premise, but my concern happens to be to retain jobs on the Clyde. There is nowhere in this country where jobs are more necessary. Therefore, if the compensation is unfair, as I believe it to be, the result will be fewer jobs. That is why I served on the Committee considering the Aircraft and Shipbuilding Industries Bill and was glad to be there. It is unrealistic of the hon. Gentleman to say that the Opposition were concerned only for the shareholders. Certainly we are concerned for the shareholders, but it is because we know that it is from that source that jobs are supplied and held.
§ Mr. Thomas
With all due respect, if the right hon. Lady is mainly concerned with jobs, I do not understand her attitude and that of her colleagues in their antics over the last few weeks, prevaricating and preventing the shipbuilding industry from being brought into public ownership while jobs were going in that industry because it was not taken into public ownership. I am afraid, therefore, that I do not go along with the kind of crocodile tears that the right hon. Lady was shedding just now.
I repeat, the compensation is already far too generous. We made it clear in the consultative document that, when we worked out the compensation, we would take account of the fact that the aircraft industry had already benefited from the injection of hundreds of millions of pounds of public funds.
477 I should like more information about the new clause, but it seems that we are once again giving special treatment by means of these provisions for rolling over and deferring capital gains tax liability. We all know that in the end deferment of that liability means that the companies pay nothing. I can understand the hon. Member for Blaby wanting an extension and saying that there ought not to be any capital gains tax liability at all in respect of what people do with the compensation money. Essentially, that is what the hon. Member is saying.
I ask my right hon. Friend to convince me that no special treatment is being given to those who receive compensation—in Vickers, GEC and other concerns—as far as public ownership of the aircraft industry is concerned, because in my judgment they have already had enough public money and that industry would no longer be in existence had it not received almost £5 million a week, as it has been receiving over the last decade or so.
§ 8.30 p.m.
§ Mr. John Cope (Gloucestershire, South)
The hon. Member for Bristol, North-West (Mr. Thomas), like myself, served on the Committee on the Aircraft and Shipbuilding Industries Bill, but the hon. Member does not do justice to our debates. In particular, he exaggerates the length of time we spent on the compensation clauses. We were half-way through the Committee in both time and in the clauses of the Bill before we reached any of those clauses. At the same time, my hon. Friend the Member for Blaby (Mr. Lawson) seemed to me to do less than justice to the part played by the hon. Member for Bristol, North-West in debate because he was one of those who helped us to spend such a long time on the Committee stage, so that in the end it became a record.
The selection of Amendment No. 45 with the new clause opens up the whole of the principles of Clause 49 of the Finance Bill, as well as the points raised in the new clause. I consider that New Clause 24 is a fully justified, though only partial, retreat from the position taken up by the Government in relation to compensation under the Aircraft and Shipbuilding Industries Bill last year. It is right that we should remind ourselves 478 at this stage of the history of this compensation. I hope that the Chief Secretary is fully aware of the history and what has happened concerning it.
The original terms of compensation were announced in outline in February 1975. When they were originally announced, compensation was not liable for capital gains tax under any Tory Act or under the Labour Government's own Act of 1965 or any other Finance Act which had been passed. Even though the compensation was not liable for capital gains tax, the terms were disgraceful. As we demonstrated in Committee, if they had been offered by a foreign Government in payment for the assets of British companies being nationalised overseas, they would have been regarded by the Export Credits Guarantee Department, the Government's own agency, as confiscatory, and payment would have been made under insurance cover. We demonstrated this in Committee and I believe it to be incontrovertible The next thing was that in July 1975, in response to a Written Question by the hon. Lady for Bolton, West (Mrs. Taylor), the Chief Secretary announced that he proposed retrospectively to alter the tax regime as far as this compensation and all future compensation under similar Bills was concerned. He did so in two respects, first by providing that the gains on shares were to be taxed when the gilt-edged shares given in exchange for the shares were sold. This is incorporated in Clause 49(3) of the Bill.
Secondly, the right hon. Gentleman announced that the gilt-edged shares themselves were to be taxed if they were sold within 12 months of their issue instead of within 12 months of the original shares for which they were given in exchange being acquired. This is incorporated in Section 49(2) of the Bill and it is not affected by New Clause 24 or the amendments thereto. He applied this retrospectively to the Industry Bill and to the Aircraft and Shipbuilding Industries Bill, the terms of which had already been announced. We were subjected, however, to a pompous speech on the latter Bill about how important it was that the compensation terms, on which the market had been relying should be 479 adhered to absolutely, but the Government themselves failed to stick to them.
Following a considerable amount of protest, with meetings and other action, the Government decided to introduce at this Report stage what is now New Clause 24, which implements the undertaking given in the Budget debate by the Chief Secretary. As my hon. Friend the Member for Blaby said, however, it applies to aircraft and shipbuilding only.
There is a small point of detail with which I should like the Chief Secretary to deal. The new clause says that it is to apply to the acquisition of shares in companies engaged in the manufacturing of aircraft or guided weapons, or in shipbuilding or allied industries. We had a good deal of discussion in Standing Committee about allied industries and what they were, whether they included ship repair, the manufacture of slow-speed diesel engines and so on. I should like the Chief Secretary's confirmation that it is his intention and belief that the new clause will apply equally to compensation for the acquisition of shares in ship repair and slow-speed diesel engine manufacturing companies as well as shipbuilding companies themselves, and for all companies which it is intended should be taken over under the Aircraft and Shipbuilding Industries Bill.
A further point to which I would call attention on this new clause is the four-year limit, extended, as my hon. Friend the Member for Blaby has said, to four years from the exchange of the shares; that is the language used in the new clause. In Clause 49 (6) of the Bill, "exchange" is specifically defined as being the date on which right to the shares is granted.
I hope that the Chief Secretary will tell us whether the definition of "exchange" of shares in Clause 49 (6) applies as the starting date of the four years. It is not clear to me that it does. It appears to apply only to Clause 49. There is no definition that I can see that applies to New Clause 24 to start the four years except "exchange", which need not necessarily be vesting day. Obviously there will be considerable delays between vesting day and some of the compensation being paid. There is an elaborate arbitration procedure to be gone through. There is the most farcical 480 method of valuing the shares with a whole list of guesses to be assembled and argued about before arriving at the notional value of a parcel of shares which are not quoted but might be on the Stock Exchange.
Worst of all, as my hon. Friend the Member for Blaby pointed out, the new clause does not extend the roll-over from the purchase of assets to the purchase of shares, and it should do so. My hon. Friend made that point very strongly. Therefore, I shall not elaborate it.
I return to the point of the compensation generally. The original statement by the then Secretary of State for Industry was that he wanted to achieve fairness in the compensation. The Government have clearly ratted on that. It is not fair in general or, for that matter, as between the individual companies or subsidiaries which are being taken over. There are obvious unfairnesses between some of them.
In Committee, Ministers were more specific. My hon. Friend the Member for Blaby quoted from the Committee proceedings on the Aircraft and Shipbuilding Industries Bill. Unfortunately, he attributed his quotation to the Minister of State. I must tell him that the quotation should have been attributed to the Under-Secretary of State, since replaced. However, the statement was in no way repudiated.
The rule of the Committee appeared to be that if the Government thought that there was a good argument the Minister of State should deal with it. If, on the other hand, there was a feeble argument, they put up the Under-Secretary of State instead. Indeed, this was the Under-Secretary of State.
I should like to give the House another quotation from the Under-Secretary of State. At column 2080 the hon. Gentleman said:The Government have proposed in the Bill compensation which seeks to make good to a shareholder the loss caused by the acquisition of his shares."—[Official Report, Standing Committee D, 25th March 1976; c.2080.]I do not believe that that is true of compensation as it stands in the Aircraft and Shipbuilding Industries Bill, and it is certainly not true if Clause 49 of this Bill goes through and waters down the 481 compensation from what is offered in the Bill.
The shares are to be valued below their value as a controlling parcel. The Chief Secretary will recall that in the past we have argued about the difference between the cost of control and individual shares. This proposal seeks to value the compensation as individual, not as control, shares.
I believe that the compensation generally is a fraud and that Clause 49 makes it worse. It is retrospective. By introducing the new clause, the Government have gone a little of the way to admitting that it is a fraud, but they have not gone very far in correcting it. They have exposed the flaws in their logic, but they have not put them right.
I hope that we shall vote not only on Amendment (e) to the new clause but in due course on Amendment No. 45, which seeks to take Clause 49 out of the Bill altogether and to go back at least to the compensation as it was first announced.
§ Miss Harvie Anderson
I have been roused by the hon. Member for Bristol, North-West (Mr. Thomas) to make plain that there is one small point which should not be overlooked. If the compensation will be, as we all believe, much less than the fair compensation that was promised at the outset, we shall do damage in two ways. The successful firms cannot carry on their enterprises with the limited money. At the same time there is an equally important point. In many cases we expect that the individuals who are at present running successful companies will continue to do so under nationalisation. That is common sense.
I feel sure that the Chief Secretary will have sympathy with those who, having run a successful industry, then have it virtually confiscated but at the same time are asked to continue to run it under nationalisation. If the expertise and good will of these people are wanted by the Government—as I believe they are—to continue to make a contribution, especially to shipbuilding, these people, who have the best knowledge and expertise in the country, must be given some assurance that the compensation will be fair. They must be shown some good will to encourage them to continue in the industry. I hope that the Chief Secretary will not overlook that aspect, which runs 482 through many levels of expertise in these important exporting industries.
§ Mr. Joel Barnett
Before dealing with the large number of amendments to which the hon. Member for Blaby (Mr. Lawson) spoke, I shall deal with the question of compensation, which one of my hon. Friends considered to be too generous but which the right hon. Lady the Member for Renfrewshire, East (Miss Harvie Anderson) and the hon. Member for Gloucestershire, South (Mr. Cope) thought was confiscatory. The matter is not relevant to these amendments or to the clause. We are not speaking about the size of the compensation. We are speaking about the capital gains tax treatment on the compensation. I believe that the compensation is fair and reasonable. I am sure that that is how it will be seen in due course.
I assure my hon. Friend the Member for Bristol, North-West (Mr. Thomas)— although I may not be able to convince him, as he requested—that we seek to achieve a fair balance. My hon. Friend asked me whether we were giving special treatment under the new clause. The simple answer, in the narrow sense, is "Yes". In one sense we are being generous. We are allowing roll-over relief, in a way that is not normally applied on the sale of shares, to qualifying assets under Clause 33. We thought it right to do so in the ineerests of an industrial strategy that wants to see the proceeds of this compensation going into industry. Therefore, to the extent that the proceeds go into industry, it will be beneficial to the nation. I am sure my hon. Friend accepts that that would be right for the Government and for the country.
§ Mr. Lawsonrose—
§ Mr. Barnett
I know that the hon. Member for Blaby can never resist interrupting me, even before I have been on my feet for one minute. However, I should like to finish replying to the remarks of my hon. Friend.
My hon. Friend asked me whether deferment meant that the persons concerned would never pay. Deferment of roll-over relief means that the relief is rolled over into qualifying assets. If those qualifying assets are never realised there is no capital gains tax liability. But neither would there have been capital gains tax liability if the original assets had not been sold. A deferment 483 simply means the time when the assets into which they have been rolled, are sold. At that time there would be a capital gains tax liability.
§ Mr. Lawson
The Chief Secretary said that the Government were giving this roll-over relief to the aircraft, shipbuilding and ship-repairing companies as they were anxious that they should invest their compensation in productive assets in industry rather than keep the assets in gilt-edeed stocks or place them on the market. Is he saying that in any future nationalisation that the Government might be foolish enough to undertake they will not be anxious that the compensation should be invested in industry? If not, why not?
§ 8.45 p.m.
§ Mr. Barnett
It is absolutely marvellous. The hon. Gentleman asked me a whole series of questions and has an amendment amongst many on precisely that point. I should like to reply to every point the hon. Gentleman has raised and I shall come to that one, especially as he has raised it twice.
The hon. Gentleman asked me first whether the roll-over relief would apply even though the gilts were not used for buying all the new assets. I can give him that assurance. In general, the rollover relief practice is that, where the proceeds of the first assets are temporarily reinvested before being rolled over into the qualifying assets under Section 33, they will still be eligible for the Section 33 relief.
Amendment (c) to New Clause 24 concerns timing. It would allow a four-year period for making an election for roll-over relief to he extended. If we extended it in the way in which the hon. Gentleman suggested, once we got over the period of six years we should be in the limitation period for the purposes of assessment. I know that the hon. Gentleman's concern is that the issue of gilts could be delayed pending negotiations on the compensation price. My right hon. Friend the Secretary of State for Industry has made it clear that he hopes to make substantial payments on account very soon after vesting day, so most companies should be in that position well within the four-year period. If it is found that any difficulty arises, we shall certainly look into the matter 484 again. There is plenty of time, because there are four years in which to claim.
Amendments (d), (e) and (f), which include the large amendment to which the hon. Gentleman spoke, seek to substitute new rules for rolling over a gain, eliminating the reference in New Clause 24 to the existing rules in Section 33. The amendments provide that a company may elect that the exchange of shares for gilts on nationalisation is not to be treated as a disposal of shares. I hope he will agree that this is going much too far. We certainly cannot accept that.
The hon. Gentleman quoted what I said upstairs and said that I would say it again, so I had better do just that. He said that I would say that the Section 33 intention was to allow roll-over relief only where there was a roll-over into qualifying assets. That is absolutely true. That was the position under Section 33, and to go beyond that would be to extend what is a pretty generous relief which has not normally been applied to the sale of shares. This would be to go much wider than was ever intended under Section 33 of the Finance Act 1965 and much wider than I would want to do or would recommend the House to do.
§ Mr. Barnett
As the hon. Gentleman quoted me as having said precisely that upstairs, I am not sure that I am going back on my word. I am repeating what was said up stairs and sticking to that.
§ Mr. Lawson
I should not wish it to be thought that I was saying that the Chief Secretary personally was going back on his word. The Government are going back on their word, because they said that companies would be able to re-establish themselves at the same level of activity as they had before.
§ Mr. Barnett
I am saying that what I promised when I met delegates from the industry I have done in the clause, in granting roll-over relief in the way I have suggested. I hope that that will be found helpful, as am sure it will, to the industries concerned.
Amendments (a), (b) and (g) seek to give an alternative option to a claim for roll-over relief by allowing the shareholder, which is to include individuals as well as companies—but not, I understand, trustees—to elect that paragraph 485 6 of Schedule 7 to the Finance Act 1965 should apply. Paragraph 6 contains the special capital gains rules for company amalgamations. The effect is that where a person gives up shares in company A in exchange for shares in company B the new shares are treated as the same assets as the old shares, acquired on the same date and for the same cost. The effect would therefore be to treat the gilt-edged issued by the Government on the aircraft and shipbuilding nationalisation as the same asset as the compulsorily-acquired shares. In other words, the hon. Gentleman is seeking to restore the position to what it was before Clause 49 was introduced. I cannot accept that. There is also an amendment to delete Clause 49, which is the central clause to which all this relates.
Amendment No. 46 is intended as another version of the roll-over relief concession. I am not sure whether the amendment works, since it opens with the odd proposition that the relevant disposal of gilt-edged must befor the purpose of the acquisition of a qualifying asset".It is difficult to see how it would be possible to satisfy that requirement. The matter is better dealt with by the relief I am providing. I hope that on consideration the hon. Gentleman will recognise that. Indeed, in some respects that amendment could be more restrictive than we intended.
The purpose of Amendment No. 47 is to ensure that where a company receiving gilt-edged securities in exchange for shares compulsorily acquired on any nationalisation passes that compensation stock on to its shareholders within three years—it therefore ranking as a distribution, taxed as income of the shareholders, and taxable as part of their capital gains if distributed in a liquidation—that disposal of the gilt-edged securities will not trigger the accrued gain or loss on the shares arising at the date of exchange. If I accepted that, I should incur the wrath of my hon. Friends because I should be much more generous than it is reasonable to be.
§ Mr. Tom King
The right hon. Gentleman has rightly made the point that in assessing the treatment of capital gains tax problems the general standard of compensation is very germane. He spoke of 486 being generous. Has he realised that compensation will be based on a company's results in 1972–73, on which the share price for 1973–74 was probably based, on which assets may be taken away from it in 1976 and on which it will receive the compensation funds in 1978 if it is lucky? How can he describe as fair a situation in which a company with net assets of £10 million, making a pre-tax profit last year of £7 million, will receive £4 million compensation? Does not all the right hon. Gentleman's professional training tell him that that is an outrage?
§ Mr. Barnett
I went a little wide of the clause in even referring to the compensation as fair and reasonable. Whatever the compensation, we are talking about what should be the capital gains tax treatment. It is no use the hon. Member for Bridgwater (Mr. King) shaking his head. That is what we are talking about. If compensation were 10 times as high as the Government are prepared to go, one would still need to deal, as we are dealing here, with the question of capital gains tax liability.
Because I went a little wide of the new clause in talking about the compensation terms being fair and reasonable, the hon. Member for Bridgwater took a narrow aspect of that and sought to prove, by going much wider than the clause we are debating, that the compensation terms are not fair and reasonable. If I went into the detail sought by the hon. Gentleman, it would be nothing to do with the clause. We debated this subject upstairs, and if I went into it again tonight I would be upsetting the Opposition and Mr. Deputy Speaker. We are talking about capital gains liability on eventual compensation.
§ Mr. Tom King
The right hon. Gentleman is taking a long time to avoid answering the basic question. He claimed at the start of his speech that the compensation terms were fair and reasonable. Our contention is that the position under capital gains tax is relevant because the basic terms are so grossly unfair that it is outrageous further to penalise people with onerous capital gains tax.
§ Mr. Barnett
Even if the hon. Gentleman were right, which I do not accept, capital gains tax must be fair and reasonable, no matter what the compensation. 487 He is putting forward an interesting submission. He suggests that the compensation is unfair and that we should therefore have capital gains tax terms which are grossly unfair as compared with other taxpayers.
Clause 49, which Amendment No. 45 seeks to remove, simply and fairly ensures that accrued gains are taxed and accrued losses are allowable. Before that clause was put forward, the situation was hugely generous for special reasons relating to steel nationalisation. Gains were not taxed and losses were allowable. The hon. Member for Bridgwater is a fair and reasonable man and I am sure that he would not ask us, whatever he feels about compensation, to leave that situation unaltered.
I cannot accept Amendment No. 45. It seeks to re-create the situation which gave an unfair amount of tax relief to one section of shareholders. I hope that my hon. Friends will resist the amendments.
§ Mr. Nott
The Chief Secretary said that it was not his task or the task of the Committee to talk about the size of compensation for nationalisation, but he went on to say that, in his view, the compensation was fair and reasonable. He said that he was here only to talk about the capital gains tax aspects of the matter.
But he is a member of the Government and has a collective responsibility for the Government's actions. It cannot be for him to separate the capital gains tax question from the overall compensation, since my hon. Friends are rightly concerned about the compensation which shareholders will receive in a net form after they have paid tax.
It is intolerable to have a Minister from the Treasury coming here and telling us that compensation is unrelated to taxation, that he is merely here to debate the fiscal side of the issue, that he believes it is fair and reasonable to leave the matter there. That is not good enough.
488 My hon. Friends the Members for Blaby (Mr. Lawson), and Gloucestershire, South (Mr. Cope) and my right hon. Friend the Member for Renfrewshire, East (Miss Harvie Anderson) have all said that this measure is an underhand way of diminishing still further the compensation, which by any measure is anyhow quite unreasonable, in gross terms. As my hon. Friend the Member for Blaby said, it was fixed on the basis of share values of two and a half years ago and there has been no adjustment made for inflation in the intervening period.
Now the Chief Secretary comes to the House with something entirely new. He is changing the existing rules, and it is not good enough to say that this is a very generous relief. It is not generous at all. It is the Treasury which has changed the rules, and as a result shareholders receiving gilt-edged stock in return for nationalisation will be considerably worse off.
We wholly reject these arguments. What is the Chief Secretary's answer to the undertakings given by other Ministers? My hon. Friend the Member for Blaby quoted a statement made during the debate on the Aircraft and Shipbuilding Industries Bill on 2nd March in which the Under-Secretary stated clearly that the basis of compensation allowed the parent to re-establish itself at the same level of activity as existed before its subsidiaries were vested.
Every word that the Chief Secretary has said today makes it absolutely clear that companies will not be in the same position after they have paid capital gains tax as they were before. It is intolerable for the Minister to disclaim remarks made by his colleagues in other Departments and to come forward and diminish still further the compensation given by another Department.
Another complaint which I have goes back to the business motion that we debated earlier. As I understand it, this new clause for roll-over relief appeared on the Order Paper on Monday after being tabled on Friday. The Chief Secretary said that there was nothing unusual in the manner in which this matter had been handled. But on 2nd July 1975—more than a year ago—the Government indicated that they would pursue this course of action. Yet the 489 actual details of roll-over relief were put down only on Friday.
My hon. Friend the Member for Blaby quoted remarks made by the Chief Secretary on 8th April in the Budget debate. On that occasion he said:As foreshadowed in the Written Answer that I gave on 2nd July 1975, the Finance Bill will contain a provision for charging the accrued gains, and allowing losses, on shares given up on a nationalisation in exchange for gilt-edged securities, the gains to be assessed at the time that the compensation stock is sold.He added:A Government amendment will therefore be tabled in Committee on the Finance Bill to provide that tax on gains arising from the issue of compensation stock for shares in the aircraft and shipbuilding companies to be acquired under the Bill at present before the House shall be deferred where parents or consortium companies reinvest the compensation in qualifying assets."—[Official Report, 8th April 1976; Vol. 909, c. 766.]We debated the clause in Committee, but only at the last moment is the Chief Secretary now coming forward with a new clause on roll-over relief. Why has it taken all this time to produce it? Why did it appear on the Order Paper only on Monday when the Government have had more than a year to think about it?
In Committee the Chief Secretary also made it perfectly clear to my hon. Friend the Member for Blaby that Clause 49 would be of general application. Indeed, as we understand it, so it is. But if it is to be of general application, why is the roll-over relief not to be of general application too? This was a point made by my hon. Friend the Member for Gloucestershire, South.
It is all very well for the Chief Secretary to say that ship repairing is included, but the clause as drafted does not give us any confidence that the Chief Secretary's assurance, given a few moments ago, is valid.
§ Mr. Lawson
My hon. Friend may recall that I asked the Chief Secretary to explain this discrepancy between Clause 49 and the new clause, and he said that as I had asked it twice he would certainly answer my question. Despite that, he has still not answered it.
§ Mr. Nott
Quite contrary to what the Chief Secretary said in Committee, this roll-over relief applies apparently, only 490 to the aircraft and shipbuilding industries. This is not what we were told in Committee. We were told that it was a general relief. The roll-over is not a general relief. It is specific.
We have legislation changing the tax laws to deal with a specific case derived from the Government's doctrinaire policies to nationalise an industry that clearly does not seek it in any way at all. I quote from my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson) in Committee. I think he summed up our feelings extremely well. He said:A very large amount of gild-edged stock will be issued to people who have businesses which they are perfectly happy to keep. They will have to take stock which they do not want. The Chief Secretary has explained that he will do several favours to those lucky people. He will not be tough with them. He will take from them only what they do not want to sell, give them something which they do not want to take in exchange for it, and will make sure that any gains tax which may be deemed to exist will be built into that stock."—[Official Report, Standing Committee E, 8th June 1976; c. 625.]The whole manner in which this clause has been handled and now the roll-over relief, is as unsatisfactory as every other aspect of the Bill. I cannot see why it is not possible to meet the points made by my hon. Friend the Member for Blaby and my hon. Friend the Member for Gloucestershire, South.
If, for example, Hawker Siddeley is to be allowed to sell its gilt-edged stock and to use the proceeds through the roll-over relief concession and invest in qualifying assets, why is it to be prevented from actually using the proceeds of that gilt-edged stock to buy other stock? Hawker Siddeley might wish to go out and buy a company which has qualifying assets. Why should Hawker Siddeley, because it wishes to go out and purchase a company, have to bear capital gains tax on the way through, thereby greatly diminishing the compensation it receives? It makes no sense and is totally contrary to the undertakings given by the Government throughout the whole passage of the Aircraft and Shipbuilding Industries Bill.
I have quoted one undertaking given by the Under-Secretary during the passage of that measure. The reason that this is being done—I hope that my hon. Friends are all absolutely clear about what is happening—and the reason all the rules are being changed is that the 491 Government know, and the Treasury in particular knows, that it is becoming increasingly difficult for the Government to finance their borrowing requirement.
The Government are concerned that the shareholders who receive their gilt-edged stock will not hold it but will tip it on to the market. The Government will have to buy it up, and the money supply will rise. It is a measure dictated by the Treasury to ensure that the money supply does not get out of hand as a result of what is being done by another Government Department. The capital gains tax rules are being changed because the Treasury is concerned about the impact of this measure on the gilt-edged market. The shareholders of shipbuilding and aircraft companies will have their compensation diminished deliberately because the Government are worried about the management of the National Debt. If the Chief Secretary denies that, will he please stand up and say that that is not the reason?
§ Mr. Joel Barnett
The hon. Gentleman is seeking to go back to the old position, which Clause 49 changes. The old position was that capital gains tax was not charged but a loss was allowed. I find that remarkable.
§ Mr. Nott
If some of the shareholders affected by the Aircraft and Shipbuilding Industries Bill have capital gains tax inherent in their stock—as they do—on the old basis they would not have borne capital gains tax on the sale of their gilts. There would presumably have been greater sales of gilts which would have impacted on the gilt-edged market, contrary to the Treasury's wishes. A further discriminatory measure is being taken against shareholders who hold gilt-edged stock because the Government are worried about the management of the National Debt.
As my hon. Friend the Member for Blaby also said, some companies which receive compensation will pay capital gains tax, and the shareholders will be taxed again on their incomes when they receive a distribution. There will be double taxation.
The Government gave undertakings that there would be fair compensation. The Government are diminishing even further that compensation in after-tax 492 terms. They have gone back on their commitments and undertakings. They are incapable of putting down amendments until the last moment. They are treating the House of Commons with contempt by giving us only three days in which to consider the rollover relief proposal. It is right that we should divide the House.
§ Question put and agreed to.
§ Clause read a Second time.
Amendment (e) proposed to the proposed clause, in subsection (3) (a) at end insert:
'that the exchange shall be treated as not involving any disposal of shares by that company, and where such an election is made, to the extent that a subsequent disposal of the whole or part of the gilt-edged securities is made by that company for the purpose of the acquisition of a qualifying asset and the acquisition takes place or an unconditional contract for acquisition is entered into in the period beginning on the date referred to in subsection 6 of section 49 and ending three years after the date of the subsequent disposal, the disposal of the qualifying asset and not the disposal of the gilt-edged securities shall be treated as a disposal and for this purpose "qualifying asset" means an asset (including goodwill and shares or securities acquired as investments) which is, or is an interest in, an asset to be used or held either for the purposes of a trade or business carried on or to be carried on by the company from whom the compulsorily acquired or by a member of the shares referred to in subsection (1) above were same group of companies as that company, or for any other purpose for which the shares were held prior to their compulsory acquisition'.—[Mr. Nott.]
§ Question put, That the amendment be made to the proposed clause:
§ The House divided: Ayes 174, Noes 230.
§ [For Division List No. 241 see col. 611]
§ Question accordingly negatived.
§ Clause added to the Bill.
§ Dr. Glyn
On a point of order, Mr. Deputy Speaker. I wish to seek your guidance because a number of my hon. Friends and I are concerned about New Clause 1, entitled "Allowance for travel to work". We had hoped that the House would be able to debate that matter because I understand that it was not debated in Committee. I should be grateful for your guidance.
§ Mr. Deputy Speaker (Mr. Bryant Godman Irvine)
The only guidance I am able to give the hon. Gentleman is that Mr. Speaker has not selected the clause in which the hon. Gentleman is interested.
§ Mr. Julian Ridsdale (Harwich)
Further to that point of order, Mr. Deputy Speaker. I, too, wish to refer to New Clause 1, which I tabled. When the Bill was in Committee, I understood that we would have an opportunity on Report of debating the important subject of travel to work. It is very disappointing that so many hon. Members will not have a chance to debate that matter.
§ Mr. Deputy Speaker
As I have said, it is entirely a matter for Mr. Speaker's discretion, and is not a subject on which I can be of any assistance.
§ Mr. Paul Channon (Southend, West)
Further to that point of order, Mr. Deputy Speaker. May I point out that New Clause 1 cannot be out of order, because I moved a similar clause 15 years ago and it was then in order? It is most regrettable that the House is unable to debate this matter tonight.
§ Mr. Deputy Speaker
The proposal on which hon. Gentlemen are inquiring is moved fairly regularly, and Mr. Speaker has his own discretion as to the years in which it will be debated. He obviously decided "Not this year".