§ Amendment made: No. 50, in page 26, line 15, leave out 'income tax'.[Mr. Joel Barnett.]
§ Mr. Peter ReesI beg to move Amendment No. 51, in page 26, line 15, at end insert
'but for the purposes of this section avoidance of liability shall not be deemed to include the deferral of liability'.The amendment relates to Clause 35 which is designed initially at any rate to enlarge the relief for company reconstructions. But if one reads a little more closely one sees that it also narrows it. In characteristic fashion the Government have decided that if one is to take advantage of the relief, which was initially introduced by the Labour Government of 1964 in the Finance Bill of 1965 one has to demonstrate that the avoidance of tax was not one's main or sole purpose.I have always felt a slight difficulty about that in that it is very rare to find a reconstruction which is within the relieving provisions of Schedule 7 of the Finance Act 1965 which does not have, at any rate in the minds of those who engineer it, the possibility that capital gains tax will if not be avoided at least be deferred.
201 Perhaps in an unguarded reply, the Chief Secretary in our debates upstairs seemed to suggest that the deferral of tax could also be regarded as the avoidance. If that is so, it will, I suspect, follow that the relief provisions of the Schedule 7 will be entirely valueless.
Cases have already been drawn to my attention which I would have regarded as perfectly necessary reconstructions, admittedly hoping to take advantage of those relieving provisions and hoping to defer capital gains tax. There is therefore considerable concern in financial circles which, I should emphasise to the Minister of State, is not allayed by the bland statement that the Inland Revenue will deal sympathetically and expeditiously with all applications.
The clause as drawn makes it virtually impossible for any company reconstruction to slip through the net. For that reason I and my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) have put down Amendment No. 51 which states:
'but for the purposes of this section avoidance of liability shall not be deemed to include the deferral of liability'.I believe that it is a reasonable, sensible and self-evident amendment. I hope that it will commend itself to the House.
§ Mr. Denzil DaviesThe amendment seeks to ensure that Clause 35 does not apply where the scheme involves a deferral of the payment of tax. The hon. and learned Member for Dover and Deal (Mr. Rees) will appreciate that the clause is aimed in the main at that kind of situation. I am sure that the hon. and learned Gentleman is well aware of the ways in which tax can be deferred by artificial schemes. In fact, in most cases the deferral becomes effectively a permanent non-payment of tax.
§ Mr. Peter Reesrose—
§ Mr. DaviesI shall not give way at the moment. The difficulty is that the most common form of avoidance, in a case of this kind, where there is a real disposal of shares for cash, is dressed up as a share exchange. The capital gain is rolled over indefinitely, but the cash goes into a money-box company controlled by the avoider. He inserts this company between his own company and the shares that he wants to sell. He has 202 no need to sell the share of this intermediary because he can enjoy the benefit of the cash in other ways—for example, by loans from the money-box company. The result is that deferral effectively becomes a permanent exemption. The clause is aimed at the avoidance of capital gains tax by artificially creating a company which ends up as a money-box company merely holding cash, and then the cash can be extracted, very often by way of loan, from that company.
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The clause contains provisions for seeking a clearance. But if clearance is refused, we have inserted into the clause a provision for a kind of appeal to the Special Commissioners. That safeguards genuine transactions. If the hon. and learned Gentleman's amendment were accepted, one of the main reasons for the clause would be lost, because it is at that kind of transaction at which the clause is aimed.
§ Mr. Peter ReesSurely the hon. Gentleman will appreciate, although perhaps he has not made it clear, that the original scheme of relief, which was devised by the present Prime Minister, then Chancellor of the Exchequer, in the Finance Bill 1965, was designed to defer tax, so he can hardly complain that someone takes advantage of that provision to defer capital gains tax. He goes on to amplify that position by saying that the deferral may be permanent. But surely the right way to tackle that is to ensure that the deferral does not become permanent or to ensure that loans are caught by some other provision, and not to render the whole basis of relief nugatory. It is idle to say that there is a clearance procedure. If the Special Commissioners are bound to operate the provisions of this clause, it will make it virtually impossible for anyone to take advantage of the provisions of Schedule 7 of the Bill.
§ Mr. DaviesThe kind of transaction aimed at is clear. It is not aimed at the share exchange transaction. It is aimed at the case where a person wishes to sell his shares for cash, decides not to sell the shares for cash but instead to go through this artificial transaction where at the end of the day the cash ends up in a company specially designed for that purpose, and then the cash is transferred to the individual. Instead of his actually 203 selling the shares for cash, he gets the cash out of the money-box company by means of a loan. The intention all along is to get cash and not to carry out the ordinary kind of merger share exchange to which the original schedule was directed.
§ Amendment negatived.