§ Mr. Graham PageI beg to move Amendment No. 56, in page 31, line 24, leave out 'materially reduced' and insert:
'reduced by more than 30 per cent.'.This amendment is designed to counter specific capital gains tax avoidance schemes, but it goes very wide in doing that. I imagine that the clause was devised to counteract the case of Floor v. Davis. It was an extraordinary case which finished up with the shares in a company called Donmarco in the Cayman Islands.But the clause goes very much further than that and is couched in broad terms so that it might effectively operate as a general counter to a very wide variety of capital gains.
Any disposal after 29th March 1977 is caught if, as a result of any arrangement made, the value of the asset disposed of has been materially reduced and a tax benefit has been received by someone else. It is those words "materially reduced" which I seek to alter in the amendment. There is a tendency in taxation legislation to use nebulous words such as "material", and only last year the taxpayer was put in an impossible position by the use of the similarly nebulous word "insubstantial". On that occasion the Financial Secretary informed the Committee that the use of a car for one or two journeys a year would be regarded as insubstantial. He then said:
This is a straightforward amendment that seeks to point out that in legislaton terms such as 'insubstantal' should where possible be quantified. If the figure were to be put as high as some of these amendments suggest, perhaps 5 or 10 per cent., it would be wholly disadvantageous to the taxpayer."—Official Report, Standing Committee E; 22nd June 1976, c. 1070.]204 Therefore, from June 1976 one thought that 'insubstantial' could not mean as much as 10 per cent. or even as much as 5 per cent., judging by what the Financial Secretary had said. But then, on 11th November 1976, the Inland Revenue Press release on this matter said:The word 'insubstantial' is not defined. The Inland Revenue wishes it to be known that the business use of a car will not be regarded as insubstantial for the purposes of Section 62(1) if that use exceeds 10 per cent. of its total use to the tax year.According to the Inland Revenue in its release, four or five months after Financial Secretary's statement that 5 or 10 per cent. would be disadvantageous, the word "insubstantial" related to as much as 10 per cent. of total use.If we are to use phrases such as "materially reduced", or similar terms in the present Bill, is the taxpayer to be put in an impossible position again? Surely Ministers and the Inland Revenue should agree what they mean when they use such nebulous words. My amendment seeks to qualify the phrase "materially reduced" by altering it to
reduced to more than 30 per cent.
§ Mr. Denzil DaviesThis amendment relates to Clause 38. The case of Floor v. Davis was countered by Clause 35. Clause 38 is aimed at a different kind of transaction. In the case of Clause 35 many transactions would be commercial transactions. In Clause 38 we are concerned with a wholly artificial transaction designed for no other purpose except to avoid tax.
I am told by the Inland Revenue that 185 cases have come to light which would be covered by Clause 38 and that the tax loss amounts to £23 million. Furthermore, there are many other cases which have not yet come to light. Therefore, in dealing with Clause 38 we are looking at tax avoidance schemes entered into for no other reason than tax avoidance. We must bear that factor very much in mind.
The right hon. Gentleman asked why we did not define "material" or change it to meet his understanding of the word. I am told that if the amendment were accepted it would provide the avoider with a clearly defined escape route. Since the avoidance schemes at which the clause is aimed are usually wholly artificial, with no cash changing hands, apart from the payment of commissions, it would simply 205 be a matter of choosing the desired figures in terms of capital loan without exceeding the 30 per cent. tolerance which the right hon. Gentleman wishes to include in the provision. The figures could be as large as necessary, as they involve little or no real expenditure.
"Materially" is a matter to be determined according to the facts of the particular case. The clause is aimed at artificial tax avoidance devices. If the tax avoider does not like the Inland Revenue's interpretation of "materially", he can appeal to the Special Commissioners, and from them to the House of Lords. The word can be determined by the courts in the normal way, taking account of the facts of the particular scheme.
For those reasons, I cannot commend the amendment to the House.
§ Amendment negatived.
§ Mr. Graham PageI beg to move Amendment No. 57, in page 31, line 42, at end insert—
'(4) This section shall not apply where the value of shares in one member of a group of companies has been reduced and the shares of another member of that group of companies has been increased by virtue of a transaction falling within section 273(1) of the Taxes Act (disposals within a group of companies).'.
§ Mr. PageThe clause is a very wide-ranging provision to catch the artificial schemes that the Minister has mentioned. Where a disposal is caught under these provisions, the inspector can make adjustments under subsection (4), but then we come to subsection (5), to which the amendment relates, and there again the transaction must be considered.
As it stands, if one member of a group of companies disposes of an asset to another and 10 or 20 years later the shares in the first company are sold, the Inland Revenue can pick up any under-value placed on the asset, transferred and add it to the sale proceeds of the shares in the transferor company. Section 273 of the Taxes Act specifically allows intra-group transfers to take place without having to worry about the establishing of market values, on the basis that any under- or over-value will be picked up ultimately on the disposal of the asset. It is difficult to see why Clause 38 should 206 be drawn so widely as to negate that practical approach to transactions within a group. It may well be that the matter is remedied by paragraph (b) of Government Amendment No. 59. I hope that it is, and I await with great expectations the explanation of the Government amendment.
§ Mr. Denzil DaviesThe right hon Member for Crosby (Mr. Page) is right, as he often is. The point in his amendment is met by the Government amendment. The right hon. Gentleman rightly said that there was no reason why the clause should apply to transfers within groups in particular. I am told that Government Amendment No. 59 is considerably more generous than the right hon. Gentleman's amendment. I am sure that on that basis he will be delighted to withdraw Amendment No. 57. Our amendment goes slightly further, because it protects all transfers of assets within groups of companies.
§ Mr. Graham PageOn that assurance, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ 12.15 a.m.
§ Mr. Graham PageI beg to move Amendment No. 58, in page 32, line 15, leave out from 'by' to end of line 19 and insert
'the amount by which the consideration for the disposal of the asset mentioned in paragraph (a) above had been increased by virtue of subsection (4) above'.This, again, is an amendment to Clause 38. In those cases where there has been a reduction in the value of one asset and a corresponding increase in the value of another, I am not sure why both these amounts—the reduction and the increase —should need to be looked at separately by the Commissioners.The way I read the clause one amount is to be determined under subsection (4) on the disposal of the first asset. It seems both fair and sensible to use that amount on the disposal of the second asset, rather than ask the Commissioners to reconsider the matter and perhaps arrive at a different conclusion.
This puts the taxpayers in considerable difficulty and doubt, and gives the Commissioners the bother of making a second valuation. The amendment intends to 207 avoid that, by seeing that the first valuation is used on the disposal of the second asset.
§ Mr. Denzil DaviesAt first sight, the right hon. Member's amendment seems to be reasonable enough. It could be argued that an automatic reduction of the consideration received on the disposal of the second asset is equal to the increase made in the consideration of the disposal of the first asset. That seems to be a reasonable way of dealing with the matter.
However, I am told that the amendment could pave the way for more avoidance in this situation. It does not follow that the amount by which the value of the first asset is reduced is exactly matched by the amount of the increase in the value of the second asset. For example, part of the value inherent in a controlling holding of shares may not reappear if it is broken up into smaller holdings. It would be difficult to match one asset with another because the valuation could change if the holding were split up.
Nor need there necessarily be an exact equilibrium between tax bills on the two disposals, and it is not difficult to see how this amendment could be used to avoid tax liability. For this reason subsection (5) provides for a just and reasonable reduction of the consideration, taking account of the scheme or arrangements and the increase made to the consideration of the first asset.
The words "just and reasonable" appear in relation to Section 280 of the Income and Corporation Taxes Acts, and of course this could be adjudicated upon again in the courts if the taxpayer did not agree with the Inland Revenue's interpretation. That is why "just and reasonable" has been used rather than the matching of the two sums, which at first sight appears to be the best way of dealing with this. We have considered the matter and we believe that our way is better.
§ Mr. Graham PageI am sorry that the Minister should throw us back on a decision by the courts, with all the expensive litigation that this would entail for the taxpayer. However, in the light of his explantation, 208 I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§
Amendment made: No. 59, in page 32, line 27, at end insert—
'(6A) In relation to the disposal by a company of an asset consisting of shares in another company the reference in subsection (l)(a) above to a reduction in the value of the asset does not include a reference to any reduction attributable to—
§ Mr. Denzil DaviesI beg to move Amendment No. 60, in page 32, line 32, leave out
'mentioned in subsection (1) above is' and insert 'and reduction in value mentioned in subsection (1) above (or, in a case within subsection (7) above, the disposal and reduction or increase in value) are:
§ Mr. SpeakerWith this we may take Amendment No. 61, in page 32, line 33 at end insert
'but shall not apply where an arrangement for or affecting the disposal had been made before 29th March 1977 and there is evidence in writing of such an arrangement'.
§ Mr. DaviesThis amendment confines the operation of Clause 38 to cases where the reduction in value, as well as the disposal, occurs after Budget day.
Opposition Amendment No. 360 moved in Committee had this precise purpose, but for drafting reasons it could not be accepted. The Government amendment meets an undertaking given in Committee to meet the Opposition's point and confines the clause to reductions in value, as well as the disposal, that occur after Budget day.
§ Mr. Graham PageI should like to refer to Amendment No. 61. I understand that Clause 38 comes into operation where an arrangement has been made before a disposal as well as where there is an actual disposal. The exclusion for pre-27th March 1977 disposals should therefore also include pre-29th March 1977 arrangements.
That was the purpose of the amendment. It seems unfair that one should 209 be included and the other excluded. 1 hoped that my Amendment No. 61 was in some way included in Amendment No. 60, but, from what the Minister said, I do not think that it is. I hope, therefore, that he will accept Amendment No. 61.
§ Mr. Denzil DaviesAs I understand Amendment No. 61, the right hon. Member for Crosby (Mr. Page) seeks to exclude cases where there is written evidence of an arrangement before Budget day "for or affecting" the disposal of an asset.
I do not follow why he wishes to cover the kind of case where there is merely a written arrangement and no disposal. I can see great difficulties in determining what transactions are intended to be covered by the phrase "affecting the disposal". I understand that there was a House of Lords case—Greenberg v. Commissioners of Inland Revenue—where great difficulty was found in interpreting the phrase. The introduction of the concept of an arrangement "affecting" a disposal would greatly add to the uncertainty of legislation. The clause is aimed at highly artificial schemes for the avoidance of tax. I do not see why we should allow an escape because an arrangement was planned before Budget day but where there was no actual disposal.
§ Mr. Graham PageThe Minister said "planned before Budget day". That was why I went rather further in the amendment and said
evidence in writing of such an arrangement".If there were evidence in writing, it would be specific as to what the arrangement was. In that way I have tried to exclude the doubt that might arise from referring only to an arrangement.
§ Mr. DaviesEvidence in writing can be fairly wide. It could be a letter on a file. It could be minute evidence. I suggest that that kind of imprecision is not the best way of dealing with cases of tax avoidance. I do not see why we should go any further and allow mere evidence of that kind in writing to exclude liability. I cannot recommend the House to accept Amendment No. 61, but I hope that the House will accept Amendment No. 60.
§ Amendment agreed to.