HC Deb 14 July 1976 vol 915 cc824-32
The Minister of State, Treasury (Mr. Denzil Davies)

I beg to move Amendment No. 22, in page 107, line 36, leave out 'the amount of which shall be' and insert 'on whichever is'.

Mr. Deputy Speaker

With this we shall take Government Amendments Nos. 23, 25, 26, 28, 30, 32, 33, 35 and 36.

Mr. Davies

These amendments introduce provisions to ease final recovery of stock relief when a business run by an individual or a partnership ceases. The device used to do this is one known as "top slicing".

In Committee, the hon. Member for Norfolk, South (Mr. MacGregor) proposed an amendment to deal with the problem of "bunching" of income caused by the problem of recovery of accumulated stock relief when a business ceases. Under the Bill as it stands the full amount of any previously unrecovered stock relief would be added to income in the year in which the business ceased. This could push the taxpayer into higher marginal rates for that year. I accepted the spirit of the amendment in Committee and I said I would consider the matter further and put down a Government amendment on Report. This fulfils that undertaking.

The amendment achieves what the hon. Member sought in Committee. He sought to spread the recovery charge over the last three years of the business so that it would not all fall in one year. This would have thrown up substantial difficulties. It would have imposed extra tax charges in certain circumstances on partners who had already left the business and who had no part in the decision to close it down. They would have every justification for complaint. Then, again it would have imposed administrative costs on the Revenue and on taxpayers because of the need to reopen assessments for previous years. Therefore, we have decided that it is much better to use the device of top slicing.

12.15 a.m.

Without going into the technicalities, the effect is that the whole of the recovery charge is normally to be taxed at the rate appropriate to the first third of it, and it does not attract the higher rates which would otherwise fall on the top two-thirds. So it allows to be achieved in one year—the year of cessation—what the spreading arrangement would achieve over three. It will be a substantial help to those who could otherwise be liable at the top rates of tax. It is merely another way of achieving what the hon. Gentleman sought to achieve in Committee.

Mr. Deputy Speaker

I wonder whether the Minister can assist me. Government Amendment No. 25 is not included in this group. Does he wish to include it in this group or deal with it separately?

Mr. Peter Hordern (Horsham and Crawley)

May I seek clarification? The Minister of State said that the principal amendment was Amendment No. 22. From what I can see, Amendment No. 22 is simply a paving amendment and the substantive amendment appears to be Amendment No. 25, which I do not think we are discussing in this group. Is the Minister of State, therefore, going to explain Amendment No. 25 later, or has he dealt with it already in this group?

Mr. Davies

I apologise to the House. The principal amendment is No. 25. The other amendments are consequential on that. I have spoken to Amendment No. 25.

Mr. Deputy Speaker

They are not grouped together. However, it appears that the House does not object to Amendment No. 25 being included in this group. I heard the Minister refer to "top slicing", which is what Amendment No. 25 refers to. We have agreed that we are including Amendment No. 25 in this group.

Mr. MacGregor

I thank the Minister of State for honouring the commitment he gave in Committee when, as he rightly said, I moved an amendment on this subject. I suppose it is usual that the amendment which the Minister eventually brings forward is several times longer and several times more complicated than the amendment I introduced originally. However, I take the hon. Gentleman's point that there were difficulties about the original amendment, particularly in relation to business partners who have since left the partnership. I record my gratitude to the Minister for meeting this very real point and bringing the amendment forward.

Amendment agreed to.

Amendments made: No. 23, in page 108, line 6, leave out third 'of' and insert 'on'.

No. 25, in page 108, line 37, at end insert—

'Top-slicing

3A.—(1) Where a trade has been carried on by a person for more than one year before the discontinuance or other event on which a charge under paragraph 2(2) above falls to be made on him, then, his liability to tax for the year of assessment for which the charge is made shall, on a claim made by him within two years of the end of that year of assessment, he reduced in accordance with the following provisions of this paragraph.

(2) The reduction is the amount of the difference between—

  1. (a) the tax on the whole amount on which the charge is made (the "chargeable amount"), calculated on the basis set out in sub-paragraph (4) below; and
  2. (b) the tax (if any) on the appropriate fraction of the chargeable amount, calculated 827 on the same basis, and multiplied by the reciprocal of the appropriate fraction.

(3) The "appropriate fraction" depends on the period for which the trade has been carried on before the discontinuance or other event and is—

  1. (a) one-half if the trade has been so carried on for more than one but less than two years;
  2. (b) one-third if it has been so carried on for two years or more.

(4) The amounts of tax referred to in subparagraph (2) are to be calculated on the following assumptions—

  1. (a) that the person's total income does not include any amount in respect of which he is chargeable to tax under section 81, 81 or 82 of the Taxes Act (premiums, etc. treated as rent), section 187 of that Act (payments on retirement or removal from office) or section 399(1)(a) of that Act (gains from life policies, etc.);
  2. (b) that deductions to be made in computing the tax are so far as possible set against sums other than the chargeable amount (or the fraction of it);
  3. (c) that the chargeable amount (or fraction), after any deductions remaining to be made after applying paragraph (b), is the highest part of the person's total income (notwithstanding any other provisions of the Income Tax Acts directing any other income to be so treated).

(5) Where a claim under this paragraph for any year of assessment is made in respect of more than one trade, the paragraph applies to each chargeable amount individually as if there were only one charge in that year.

(6) For the purposes of section 400, paragraphs 3 and 4 of Schedule 3 and paragraph 8 of Schedule 8 of the Taxes Act (other top-slicing provisions) a person's total income shall not be treated as including any amount as a result of a charge under paragraph 2(2)'.

No. 26, in page 109, line 48, leave out "of that charge" and insert: 'on which the charge falls to be made'.—[Mr. Denzil Davies.]

Mr. Denzil Davies

I beg to move Amendment No. 27, in page 110, line 42, leave out from 'then' to end of line 52 and insert: 'effect shall be given to this paragraph in relation to that claim only with the consent in writing of every other person engaged in carrying on the trade between the end of that year and the making of the claim, except that where the claim is for a loss sustained before an event treated as the permanent discontinuance of the trade, the consent is not required of a person so engaged only since the discontinuance. (8) If a person whose consent is required under sub-paragraph (7) has died, the consent in writing of his personal representatives is required instead.'. This is a small drafting amendment designed to correct an error in connection with claims by the members of a partnership to set unused stock relief against other income.

Paragraph 5 of Schedule 5 provides that for individuals and partnerships, where profits in a period of account are insufficient to cover the available stock relief, or where there are no profits, the surplus relief goes to create or augment a loss, which can then be set off against income for the year of assessment in which the period of account ends or for the following year.

Where a person carries on a trade in partnership, however, effect cannot be given to a claim to set his share of a loss, as augmented by stock relief, against other income unless there is the written consent of the other partners. The amendment clarifies the rules which apply in these circumstances. Where one of the partners has died and the partnership trade is treated as having ceased for tax purposes, the written consent of that partner's personal representatives is acceptable. Where a partner has been involved in the business only since the period for which the claim is made, his consent is not required. It is a drafting amendment to ensure that the consents can be given. Consent is necessary in the case of a partnership to give the taxpayers the necessary relief.

Amendment agreed to.

Amendment made: No 28, in page 112, line 7, leave out 'the amount of which shall be' and insert 'on whichever is'.—[Mr. Denzil Davies.]

Mr. Hordern

I beg to move Amendment No. 29, in page 112, line 11, at end insert— 'Provided that where the charge is made on the company ceasing to carry on a trade, paragraph 13 of Schedule 6 to the Finance Act 1972 shall not apply to the said amount'. The Minister of State will know that this is an amendment which we discussed in Committee. It seems to me to rank in importance exactly with the amendment which we have just discussed, which dealt with the position of a sole trader and the clawback for stock appreciation relief.

The present amendment deals with the position of participators in a close company, and I see no reason in principle why those participators should not be treated on the same basis as sole traders. Happily, the Minister of State has gone to some trouble in giving them relief under Amendment No. 25, and I know that he has proposals to make concerning the position of participators who are in precisely the same position.

I shall not weary the House by giving a full description of the position of participators, but, briefly, they are expected to pay tax on the accumulation of the clawback on stock appreciation relief when the business is being closed, and the situation is made far worse in the event of death because then the tax position can be extremely onerous, even to the point of wiping the company out altogether, making the position of the executors very difficult.

This case deserves every bit as much considerate treatment as the sole trader has been given by Amendment No. 25, and I hope that the Minister of State will give a sympathetic reply.

Mr. Denzil Davies

I undertook, without commitment, to look at this matter when the hon. Member for Horsham and Crawley (Mr. Hordern) moved his amendment in Committee. I have looked at it, but I had to write to the hon. Gentleman to say that, unfortunately, I could not accept that the position was on all fours with that of the sole trader or partnership.

I cannot accept the amendment. The main reason is that for a sole trader or partnership there is no way of disposing of the business apart from disposing of the business, if I may so put it, whereas with a company, if the shares are disposed of, there is no problem in relation to stock appreciation relief. That is the basic difference. We are here concerned with only a small area of disposal of the business of a close company, whereas in the case of an individual or partnership there is no other way to dispose of the assets.

Moreover, in the case of a close company, if the business is disposed of as a going concern or if it runs down, it is quite possible for shareholders to spread their liability on any stock appreciation relief in the final year by declaring dividends which fall to be treated as income in two or three different years. With a little forward planning, all companies can arrange to pay dividends falling into two different years, and most can so arrange for three years. When the income is distributed in this way, apportionment under paragraph 13 is avoided, and a company can by its own actions go a long way towards solving the bunching problem. It is possible, therefore, for a company to declare dividends for two or even three different accounting periods when faced with this problem, provided that it plans ahead a little, and that avoids the difficulty of bunching. That opportunity is not open to sole traders or partnerships because, of course, they do not declare dividends.

I am sorry to have to tell the hon. Gentleman that, having looked into it, I cannot go along with his amendment, although on the surface it appears to be on all fours with the previous one. In fact, it is different, and I am not convinced that there is a problem.

Mr. Hordern

I see the point which the Minister makes and the distinction which he draws. None the less, there is real hardship here for close companies when the business is being wound down or in the event of death of the participators. I shall have to study what the Minister said in reply, but I am not sure that the alternative arrangements which he suggested the participators in a close company can make are satisfactory.

After consultation, we may have to return to this matter on next year's Finance Bill. Let us see how it goes. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 30, in page 112, line 17, leave out third 'of' and insert 'on'.—[Mr. Denzil Davies.]

Mr. Denzil Davies

I beg to move Amendment No. 31, in page 112, line 31, at end insert— '9A.—(1) Where there is a change of ownership of a company and section 483 of the Taxes Act applies so as to restrict the carrying forward of losses incurred before the change, then, relief to which those disallowed losses are attributable shall, although unrecovered in periods of account ending before the change of ownership nevertheless be disregarded in ascertaining the amount of unrecovered past relief in later periods of account. (2) Relief to which disallowed losses are attributable is that which was not given effect in the period of account or base period for which it was allowed or in a subsequent period of account. (3) For the purposes of sub-paragraph (2) relief is assumed to be given effect before capital allowances and profits or gains are assumed to be set against losses attributable to relief before other losses. Section 483(5) of the Taxes Act has effect subject to this sub-paragraph. (4) For the purpose of ascertaining the extent to which relief to which disallowed losses are attributable has been recovered in periods of account ending before the change of ownership, it shall be assumed—

  1. (a) that relief is recovered from earlier periods before later periods; and
  2. (b) that effect is given to relief from earlier periods before later periods.'
This relieving amendment ensures that where Section 483 of the Taxes Act prevents the carrying through of losses on a change in the ownership of a company, the later owners should not be liable for recovery in respect of stock relief which has been accumulated but not used by the earlier owners and which has gone to help to create these losses. Under Section 483 of the Taxes Act the normal carry-forward of losses is not allowed in certain circumstances, where there is a change in the ownership of a company followed by a modification of its trading patterns.

Section 483 of the Act is an anti-avoidance device to prevent loss buying. Representations have been made that the situation might arise when a company had had stock relief which created losses but because of Section 483 the losses could not be carried through on a change of ownership, although the accumulated past relief continued under the Bill to be recoverable from the new owners.

Section 843 of the Act already contains provision to deal with capital allowances. This amendment ensure that the taxpayer is not damaged. It ensures that the fact that he cannot carry forward the losses under Section 483 does not act to his detriment. This is a relieving provision designed to help the taxpayer. I recommend the amendment to the Committee.

Amendment agreed to.

Amendment made: No. 32, in page 112, line 39, leave out 'of the charge' and insert 'on which the charge is to be made'.

No. 33, in line 42, leave out 'relief or charge' insert 'amount.'—[Mr. Denzil Davies.]

Mr, Denzil Davies

I beg to move Amendment No. 34, in page 115, line 30 at end insert—

Time limit for claiming Schedule 10 relief

14A. A claim by a company for Schedule 10 relief may be made at any time before 1st January 1977 notwithstanding that the time limit imposed by paragraph 6(3) of that Schedule has expired.'

This amendment extends until the end of 1976 the time limit for companies to claim last year's stock relief where this is later than the existing time limit provided by Schedule 10 of the Finance (No. 2) Act 1975.

The amendment is proposed in response to a point made by the right hon. Member for Crosby (Mr. Page) in Committee. I undertook to bring forward the amendment on Report to deal with his point.

The amendment deals with companies. It does not deal with individuals or partnership, as the problem does not arise in relation to individuals and partnerships. They have a longer time limit, anyway. This is a relieving provision. I commend it to the Committee.

Mr. Graham Page

I thank the Minister for this amendment. I appreciate that the proposal does not extend to partnerships. The Minister is right. I am grateful for the fact that he has brought forward the proposal.

Amendment agreed to.

Amendments made: No. 35, in page 120, line 37, leave out from 'amount' to 'amount' in line 38 and insert: 'on which the charge to be made is the'.

No. 36, in page 121, line 16, leave out from second 'aggregate' to 'made' in line 17 and insert: 'of the amounts on which charges by way of recovery of relief have been'.—[Mr. Denzil Davies.]

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