DEMERGERS (Hansard, 17 July 1980)

§ Mr. Denzil Davies (Llanelli)
I beg to move amendment No. 102, in page 147, line 38, after 'must', insert: 'for a period of five years'.

§ Mr. Deputy Speaker
With this it will be convenient to take the following amendments:

§ Mr. Davies
You have indicated, Mr. Deputy Speaker, that with amendment No. 102 we may debate amendments Nos. 103 and 105. Amendments Nos. 103 and 105 are different. I do not make any criticism of the grouping, but I shall deal with them separately, because they are not entirely on the same point as amendment No. 102.
Amendment No. 102 is an amendment to what is now known as the demerger schedule, which was debated fully in Committee. When I raised the points in Committee the Minister of State said that he would bear them in mind, although he did not make any commitment. The amendment seeks to insert the words for a period of five years during which, after a distribution, a company must still be a trading company.
1843 As I understand the schedule, it applies to trading companies, and we ascertained in Committee that immediately after a distribution a company can cease to be a trading company. It can be a trading company for a day, and after that it can become something else, or become dormant. It is our contention that that might open up a loophole in the legislation, and we do not want to see that. For that reason, we have put in the amendment the words for a period of five years during which time a company must continue to be a trading company. That is a reasonable safeguard. There might still be certain circumstances in which people would try to avoid tax, but five years would be a reasonable safeguard.
Amendment No. 103 is different. It relates to paragraph 7(2), and it seeks to strengthen the sub-paragraph by saying that not only must a scheme of arrangement not have as its main purpose the avoidance of tax but that it must not be made otherwise than for bona fide commercial reasons". The amendment picks up the drafting later on in the schedule, in paragraph 12, which is entirely satisfactory. No doubt the Minister of State will tell me why the drafting in paragraph 12 of the schedule is different from that in paragraph 7(2). My intention is to make the two similar and to provide a belt and braces in relation to the possibility of tax avoidance, because there will be the possibility of tax avoidance under the schedule. Although we do not oppose the schedule, no doubt attempts will be made to use it for tax avoidance purposes. The amendments seek to prevent certain loopholes from appearing.
I turn now to amendment No. 105. As I understand the schedule, if distributions are made within five years there is a tax charge, but if they are made after five years there is no tax charge. It is our contention that five years is too short a time. It is very difficult to place any particular time limit and I accept entirely that this is a matter of judgment, but I should have thought that five years was too short a period. It is perfectly possible to tie up assets for five years in the hope of getting a tax benefit at the end of the day. That is why we have tabled the amendment to increase the period 1844 from five years to 10 years as an added safeguard.
The three amendments are designed to strengthen the tax avoidance provisions of the schedule.

§ Mr. Peter Rees
We had a wide-ranging debate in Committee on the conceptions underlying the demerger provisions. As I explained to the Committee, and as I hope I may explain again to the House, it is crucial to strike a right balance here to ensure, as the right hon. Member for Llanelli (Mr. Davies) stated, that these provisions do not become a charter for tax avoidance. But equally we must ensure that they have some practical effect and that they are drawn sufficiently liberally to encourage people to demerge. The criticism that I venture to raise against the right hon. Gentleman's amendments is that it goes a little too far on the tax avoidance side.
I understand the right hon. Gentleman's point on amendment No. 102, but I am not quite certain what vice he wishes to prevent. The right hon. Gentleman, with his Calvanist approach to problems, detects sin where I, being more relaxed, do not. If he could persuade me that there was sin or vice here, I should be the first to accede to his amendment. However, I do not think that he can. I do not find it objectionable that a company may become dormant. That, I think, is about the only option open to it under these fairly tightly drawn provisions. The right hon. Gentleman said that it was objectionable that a company should become dormant, but he did not develop the argument why that should be so.
I do not claim that these demerger provisions will be the last word by this or any other Administration is this area of considerable technicality and complexity. We shall certainly watch this area as it develops over the years to ensure that we have struck the right balance and that people, for legitimate reasons, are enabled to demerge and are encouraged to take advantage of these provisions. Equally, we shall watch to ensure that these provisions do not encourage tax avoidance in this area.
I advise the House not to accept the amendment. I hope that the right hon. Gentleman will accept that if we find a measure of tax avoidance in this area 1845 we shall bring in a measure to prevent it, if not precisely on these lines, at least on comparable lines.
The right hon. Gentleman then spoke to amendment No. 103, which seeks to build in a further test in the context of paragraph 7. Again, I think that he would be the first to accept—indeed, he asked me to reconcile some rather fine drafting provisions—that the demerger provisions are studded with conditions and tests designed to ensure that the distributions and transactions that take place are undertaken for bona fide commercial reasons, and not for the avoidance of tax. I am hesitant to build in too many provisions of that kind. Otherwise, as I said earlier, they will stultify the provisions and discourage bona fide operators from taking real advantage of them.
The right hon. Gentleman, referring to amendment No. 105, suggested that the asset should remain locked inside the corporate structure which emerged as a result of demerging transactions for 10 years rather than for five years. As I said in Committee upstairs, it is a matter of fine judgment as to what is the right period to impose in this instance. We considered these provisions very carefully not only before we tabled them in Committee, but before Report. We felt, and still feel, that five years is adequate. The right hon. Gentleman, who, as I said, has a Calvanist approach to these matters, suggests 10 years. I am reluctant to recommend 10 years. Again, I feel that that would build in undue rigidity. However, I undertake that if we find that we have been too liberal and flexible in these provisions and they become a charter for tax avoidance we shall not be slow to bring in corrective measures at the appropriate time.
I hope that the right hon. Gentleman, having ventilated these important points, will accept that we have done our best to strike the right balance. On the basis that this will probably not be the last word by this or any other Administration on this slightly archaic area, I hope that the right hon. Gentleman will ask leave to withdraw the amendment.

§ Mr. Denzil Davies
I appreciate that valiant attempts have been made in drafting the schedule to prevent tax avoidance and I understand that it is not possible in legislation to stop it entirely. However, 1846 I am not convinced by what the Minister of State said. If the operations are bona fide and commercial and not for the purpose of tax avoidance, these amendments would not inhibit them.
It is a matter of balance. We shall also keep an eye on these matters, as no doubt will the Government and the Inland Revenue. There will be another Finance Bill next year, and we shall have another shot at it then. I see the Financial Secretary smiling with pleasure at the thought of another Finance Bill. We shall keep these matters under scrutiny and we may come back to them next year.
I beg to ask leave to withdraw the amendment.

§ Mr. Peter Rees
I beg to move amendment No. 143, in page 149, line 37, at end insert: