TRANSFER OF BUSINESS TO A COMPANY (Hansard, 22 June 1976)

§ Mr. Ian Stewart (Hitchin)
I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker
It would be for the convenience of the House to discuss at the same time New Clause 10 [Transfer of business to a Company.] and Government Amendment No. 222.

§ Mr. Stewart
In Committee we tabled two new clauses relating to the transfer of a business to a company. After the wide ranging debate that we have just had on the broader issues raised by the Bill, we come back firmly to the nuts and bolts.
I should explain briefly the reason for tabling these new clauses and why it has rightly been suggested that Government Amendment No. 222 should be considered at the same time.
One of the points that we made in Committee was that there was no provision in the Bill, as it stood, to protect the position where a business was transferred from personal ownership to a company. There are good precedents—notably capital gains tax—for enabling an unincorporated business to be transferred into company form without it acting as a trigger for capital taxation such 1540 as capital gains tax. We felt at that time that it would be right for the Bill to include a similar provision for development land tax.
Therefore, we tabled two new clauses in Committee—New Clauses Nos. 4 and 5. New Clauses 5 and 10 substantially reproduce those new clauses, although with some alterations in response to criticisms which had been made about the drafting and technicalities of the new clauses.
I think that the general argument is accepted on both sides of the House, that the incorporation of businesses is to be encouraged when that point in their development is reached. That happens every day of the week, in all kinds of businesses and trades. It is helpful not only to the Revenue but to the taxpayer, because it enables him to formalise his affairs within the structure of a company. At the same time it creates a body that is more readily accountable to the Revenue and perhaps more regular in its returns, and so on, because of the statutory requirements that apply to companies.
We also pointed out that no funds would be available if a business were transferred to a company in exchange for shares. Therefore, there would be no receipt of moneys out of which the development land tax could at that time be paid.
Furthermore, in such a transaction the same basic ownership of the property persists in the original partnership or ownership in personal hands both before and after the incorporation takes place, provided that the shares are held by the original owner of the business.
We tabled these new clauses in the hope that they would encourage the Government to come forward with their own proposals, if they were unable to accept ours in detail, which would allow such a provision to be incorporated within the Bill. We had to table the new clauses at this stage because, until a very late date, we were not given sight of the amendment which is now Government Amendment No. 222.
I do not wish to say much more at this stage, beyond welcoming the fact that the Government have now tabled an amendment that goes a good way to meeting the points that we made in Committee. It does not go quite as far as 1541 we suggested or, indeed, would like or think appropriate in these circumstances. We think that some questions need to be asked about it. However, before going further, and in the hope that I may have permission to come back to the Minister with some questions after what he may say on Amendment No. 222, I think it would be better for the hon. Gentleman to introduce and speak to that amendment.

§ Mr. Denzil Davies
Similar clauses to New Clauses Nos. 5 and 10 were moved in Committee, as the hon. Member for Hitchin (Mr. Stewart) recognised. The intention behind the clauses is to provide relief where an individual or a partnership transfers to a company a business which includes an interest in land for which the individual or the partnership receives shares. This is an attempt to defer the charge to development land tax which would arise under the Bill as presented to the House on Second Reading and in Committee.
We recognised in Committee that there was a problem. Unfortunately, it is not possible to meet either New Clause 5 or New Clause 10. The hon. Gentleman said that there were good precedents for capital gains tax. There are. But unfortunately they are not good precedents for development land tax. I should have been delighted to accept New Clause 10. The draftsmen have wrestled with this problem for some time. I explained in Committee why it was not possible to follow a capital gains tax provision for development land tax. The development land tax is a tax on the disposal of land, not shares. If land is transferred or transmuted into shares there would—in the absence of special provisions—be no tax charge on development land tax if the shares were disposed of. That is the problem.
The Government have brought forward Amendment No. 222, which I concede does not go the whole way, as hon. Gentlemen and the Government would have wished. However, it proved impossible to find any other way in which to solve this problem other than that provided in Amendment No. 222.
The amendment gives relief where, as part of the transfer of the business to a company, a person disposes of an interest in land to the company and receives shares as part of the consideration. The 1542 payment of some or all of the DLT accruing from the disposal of shares, is deferred until either the shares comprised in the consideration or the interest in the land itself are sold, or until the expiration of eight years from the date of incorporation if later. Therefore that is a deferral of tax, and not a complete exemption. It is the deferral until the shares are sold that triggers off the tax charge, or until the expiry of the period of eight years if that is a shorter period. If there has not been a disposal within eight years the tax charge is triggered off. That is the only way in which it can be done. Otherwise, we should have to trace the interests in the shares. That would present considerable complications.
However, I give this assurance—as indeed was the case with the 1965 capital gains tax legislation: the matter was again considered in the light of the way in which the tax operated, and no doubt we shall have to keep this under review. At the moment this is the best effort that we may make. It goes 75 per cent. of the way to meeting the wishes of the Opposition. We shall keep the matter under review and see whether we may improve on it. If there are problems, we shall solve them.
There is one other problem. We have no wish to charge tax where there is a mere transfer from an individual to a company. But this is the best that we can do for the moment. I hope that hon. Gentlemen will accept that there has been an effort to meet at least 75 per cent. of the points they have raised.

§ Mr. Ian Stewart
With the leave of the House. I shall make a few comments.
I welcome the statement of the Minister of State. The amendment that he introduced goes a considerable way to meeting the essence of the points which we raised.
I imagine that the clause will apply equally to a partnership or an individual.

§ Mr. Denzil Davies
indicated assent.

§ Mr. Stewart
Guidance sub-paragraphs are included for the assistance of the board in deciding what is just and reasonable. I imagine it is intended that these notes of guidance on apportionment should be pretty strictly followed in every case and that although it is not 1543 possible to impose technically the exact provisions within the paragraph the board would normally make judgments only about the matters which are mentioned.
Will the provisions for the eight-year deferment interact with the deferral provisions under Clauses 19 and 27? I refer to Clause 19. I suppose that technically I should refer to New Clause 1. I have no doubt that it will be renumbered Clause 19 when the Bill is reprinted. Does the eight-year limit override or interrupt deferral under Clauses 19 and 27? What exactly is the technical position?
12.30 a.m.
An immediate reaction is that it would have been better if, at the expiry of the eight years, the chargeable person had been able to pay by instalments. That would have been an extension of the arrangement, which would have been greatly to the benefit of companies that did not have the money to pay the tax at the time.
However, a period of eight years is a long time. The Minister has fairly said that further consideration can be given to these provisions. Therefore, I beg to ask leave to withdraw the motion.

§ Mr. Denzil Davies
We have had a long and interesting debate on a number of fundamental points in this legislation. We have discussed charities and various other matters that go to the root of the legislation. Therefore, I beg to move, That further consideration of the Bill, as amended, be now adjourned.

§ Mr. Graham Page
I am a little surprised that the Minister should imply that we have made enough progress on the Bill, after we have dealt with five clauses, only two of which the Government have withdrawn. I am not surprised at the Minister asking that we should adjourn further consideration of the Bill at this stage, when the Government have succeeded in taxing charities by a majority of only five votes. If that is the best vote they can muster, perhaps it would be better if we were to continue these debates tomorrow.