§ Sir William ClarkI beg to move amendment No. 71, in page 168, line 29, leave out paragraph 1.
This is a simple amendment. The schedule relates to the purchase of shares by unquoted companies. The amendment would remove the requirement that the vendor of shares in the company must be ordinarily resident in the United Kingdom.
Clause 48 and the schedule contain extensive anti-avoidance provisions and I cannot, therefore, see why the 930 sale of shares should be restricted to those who are ordinarily resident in this country. It could be in a company's interests to buy out a non-resident shareholder. For example, he may intend to set up an overseas rival to the organisation in this country.
I cannot understand why the Treasury should insist that vendors of shares in unquoted companies must be ordinarily resident in the United Kingdom. The tax concessions in this part of the Bill could be an inducement to an overseas shareholder to sell his shares back to the company.
§ Mr. RidleyWhile I cannot accept my hon. Friend's amendment, the next two amendments are concessions in the area of purchase of own shares. I tried hard to accept his amendment and had long discussions to see if it was possible, culminating in a letter to my hon. Friend in which I explained the two reasons why the Government do not feel able to meet his amendment.
The first reason is not one that I would stress or dwell on because it is only a partial reason. If an overseas resident sells his shares back to a United Kingdom company he would, according to the clause, escape the tax on a distribution and could claim that it would be a capital gain only if, indeed, there was a capital gain. As he would be an overseas resident he would be exempt from capital gains tax and there would be no tax to pay. That could be wrong as the gain is the result of enterprise and work in a British company. That is not uniform because it will vary according to whether we have a double tax agreement with the country, and the circumstances of the overseas resident.
The second and real reason why we cannot accept the amendment is that it makes it almost impossible to police the clause because the Revenue is not in a position, and never can or will be, to find out who is the beneficial owner of a share that is sold by an overseas resident. It would be possible for those who wanted to manipulate the new scheme of purchase of own shares to set up overseas nominees or front men who could carry out the transaction and refuse to divulge to the Revenue who was the beneficial owner or what were the circumstances to ensure that the transaction takes place within the rules. We have extended the privileged tax treatment for purchasing own shares both to corporate and to trustee shareholders, and it would be difficult to ensure that it was not being manipulated.
I looked again for a satisfactory way in which to distinguish genuine sales by non-residents which would not prejudice the two purposes for which we need the rule, but I failed to find it. It is one of those unfortunate examples where the bona fide operator does not realise that certain restrictions are necessary upon him because there are some who are not so bona fide and will take advantage of what is being done. It is difficult to justify to the bona fide operator, but, on the other hand, we would not be able to extend the privilege at all unless we were able to police it.
Sadly, and after much deep examination, I must tell my hon. Friend that we have not found a way around the difficulties, although we will continue to see whether they can be overcome in the light of experience with the scheme.
§ Sir William ClarkWe said in Committee on many occasions that the Revenue seem to be paranoid about 931 loopholes and about the person who tries to escape taxation. My hon. Friend rightly suggests that a nonresident might try to manipulate the tax system to avoid capital gains tax, but he can do that now if he is so minded. It is illegal, and he takes the chance of being caught. I do not accept my hon. Friend's argument about manipulation, because the anti-avoidance provisions are extremely stringent. However, I do not want to labour the point, because my hon. Friend has said that he will have another look at it and also because the Government have made a number of concessions. One can see from the Government amendments to follow that Ministers have met many of the points raised in Committee. I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
9.30 pm§ Mr. RidleyI beg to move amendment No. 72, in page 169, line 2, at end insert—
'(1A) If at any time during that period the shares were transferred to the vendor by a person who was then his spouse living with him then, unless that person is alive at the date of the purchase but is no longer the vendor's spouse living with him, any period during which the shares were owned by that person shall be treated for the purposes of sub-paragraph (1) above as a period of ownership by the vendor.'.One of the conditions of clause 48 is that the shares in question must have been owned by the vendor for at least five years. Schedule 9(2) provides for this. The purpose of this small amendment is to allow the ownership by a husband or a wife to count for this purpose as ownership by whichever spouse is selling the shares. I commend the amendment as a slight improvement.
§ Amendment agreed to.
§ Mr. RidleyI beg to move amendment No. 73, in page 169, line 4, after 'owner', insert '(a)'.
§ Mr. Deputy Speaker (Mr. Paul Dean)With this it will be convenient to take Government amendments Nos. 74, 75 and 76.
§ Mr. RidleyThe purpose of the amendment is to reduce from five years to three years the period of ownership required where the sale to the company follows a death. This is a point that several of my hon. Friends have raised with me. It seems reasonable that, where an owner intended to hold shares for five years but unfortunately died, his heirs or widow should not be circumscribed by the five-year rule, particularly as they might need to raise cash for one purpose or another. I hope that the House will feel that this small amendment slightly improves the scheme.
§ Amendment agreed to.
§
Amendments made:No. 74, in page 169, line 7, at end insert
'and
(b) that sub-paragraph shall have effect as if it referred to three years instead of five'.
§ No. 75, in page 169, line 9, after 'owner', insert '(a)'.
§
No. 76, in page 169, line 11, at end insert
'and
(b) that sub-paragraph shall have effect as if it referred to three years instead of five'.
§
No. 77, in page 172, line 30, at end insert—
'(3) This paragraph has effect subject to paragraph 9 below.'.—[Mr. Ridley.]
§ Mr. RidleyI beg to move amendment No. 78, in page 173, line 13, at end insert—
'(1A) A payment made by a company on the redemption, repayment or purchase of its own shares shall be deemed to be one to which section 48 of this Act does not apply if, before it is made, the Board have on the application of the company notified the company that they are satisfied that the section will not apply.'.
§ Mr. Deputy SpeakerWith this it will be convenient to take Government amendment No. 79.
§ Mr. RidleyThis is a more substantial amendment. Clause 48 treats the transaction where a company buys back or redeems its shares as one of purchase and sale and not as one involving a distribution of profits. Generally, this will give more favourable tax treatment to all concerned. This is, however, not always the case. It has come to our notice that there could be circumstances in which those concerned may want to be sure that the new tax treatment will not apply because it gives a less favourable tax result for them.
We have already set out in Committee a clearance procedure in schedule 9(10) under which the company may seek advance confirmation that the Revenue is satisfied that clause 48 will apply. If it notifies the company that it is so satisfied, that clause is statutorily deemed to apply. The amendment now gives the same opportunity to seek certainty about the application of the law, where the desired result is the opposite—that clause 48 should not apply.
§ Mr. Robert SheldonI am not sure of the circumstances in which it will be favourable to the taxpayer for the new tax treatment not to apply. I understand about purchase and repayment, but if the Minister has an example, I should be grateful to him if he would give it, because I could not think of one.
§ Mr. RidleyIt came to our notice after the debates in Committee that the Industrial and Commercial Finance Corporation and possibly other companies are in the business of subscribing to shares, particularly in unquoted companies, and in doing so they negotiate terms that take account of the tax consequences for them. If they agree terms on the basis of a sale to the company invested in, clause 48 will not apply, and if it were subsequently to turn out that it applies, they might be able to get a better price because the redeeming company would be relieved of having to pay advance corporation tax. For some companies, investment in other companies is treated as a trade, so the returns from the sale of shares are treated as franked investment income. Therefore, that is more valuable to those companies than to treat the returns as a capital gain. I hope that that helps the right hon. Gentleman.
§ Amendment agreed to.
§ Amendment made: No. 79, in page 173, line 29, leave out from 'notification' to 'shall' in line 30 and insert 'by the Board'.—[Mr. Ridley.]
§ Mr. RidleyI beg to move Amendment No. 80, in page 175, line 18, leave out from 'sub-paragraph' to end of line 19 and insert—
'or of companies in a group to which that company belongs, or their dependants (and are not wholly or mainly for the benefit of directors or their relatives);and for the purposes of this sub-paragraph "group" means a company which has one or more 51 per cent. subsidiaries, together with those subsidiaries.'.933 This amendment corrects, in favour of the taxpayer, two defects in the provisions relating to employee trusts. Paragraph 14(9) (b) of schedule 9 excludes certain trusts from the rules that make trustees and beneficiaries associates. As drafted, it does so broadly only where the trust is exclusively for the benefit of employees of the company concerned. The amendment extends the definition in two ways. First, trusts will now also be excluded where they are for the benefit of employees or their dependants. Those last three words are vital. Secondly, they will be excluded where they are set up to benefit employees of part or all of the group of which the company is a member. In other words, there is a loosening of the definition of "associate" in favour of trusts and employees.
§ Amendment agreed to.
§ Mr. RidleyI beg to move amendment No. 81, in page 175, line 35, leave out from beginning to end of line 45 and insert—
'(3) Where a person—his interest in that loan capital shall be disregarded for the purposes of sub-paragraph (2) above.'.
- (a) acquired or became entitled to acquire loan capital of a company in the ordinary course of a business carried on by him, being a business which includes the lending of money, and
- (b) takes no part in the management or conduct of the company,
§ Mr. Deputy SpeakerWith this it will be convenient to take Government amendment No. 82.
§ Mr. RidleyClause 48 provides new tax treatment when a company buys back or redeems its share capital and certain conditions are met. One of the conditions is that after the transaction the vendor must not be connected with—that is, must not have a dominant interest in—the company. Schedule 9, paragraph 7, so provides and paragraph 15 spells out the circumstances in which the person is treated as being connected with the company. One of the matters taken into account is possession of or entitlement to loan capital. That is necessary because a person who is a significant loan creditor can in practice exercise a dominant influence over a company.
It has been suggested to us, however, that that rule could inhibit institutions from providing finance in a mix of shares and loan capital. They sometimes subscribe for preference shares redeemable before the loan is repayable, and the loan which is essential to the financing of the company may constitute more than 30 per cent. of the combined loan and share capital. In these circumstances, as the schedule is at present drafted, clause 48 would not apply when the shares were redeemed because the vendor would continue by virtue of its lending to be connected with the company. I am assured that this combination of circumstances does arise. Therefore, we think that it is right to make an exception to cover those cases. The amendments do just that.
§ Amendment agreed to.
§
Amendment made: No. 82, in page 176, line 17 at end insert—
'(5A) References in this paragraph to the loan capital of a company are references to any debt incurred by the company—