HL Deb 08 December 1964 vol 262 cc27-31

3.46 p.m.

LORD SHEPHERD

My Lords, I am most grateful to my noble friend. With your Lordships' permission, I should like to repeat a short Statement which my right honourable friend the Chancellor of the Exchequer has just made in another place. I think it would be convenient if I were to use his own words.

"The House will recall I promised that as soon as I was able to do so I would provide further details of my proposals for a corporation tax and a capital gains tax. I am accordingly circulating in the Official Report, in reply to Questions on the Order Paper to-day"— that is, in another place— "information about certain features of the proposals which, as at present advised, I have it in mind to put before Parliament."

My Lords, I am arranging for this information to be circulated in the House of Lords Hansard, but your Lordships might like to know that 50 copies are

being made available and will be in the Printed Paper Office after 4 o'clock.

Following is a copy of the Chancellor of the Exchequer's reply referred to in the above Statement:

"The task of working out all the provisions of these major schemes of tax reform will be long and complicated. But I am anxious that there should be no unnecessary doubts and I set out below certain features of the proposals which, as at present advised, I have it in mind to put before Parliament. It must be understood that these outline proposals are concerned with ordinary transactions and the ordinary conduct of business affairs. Special provisions may be necessary for special types of corporations such as, for example, life assurance companies: and the full details of the schemes I shall present next April will, of course, have to take account of, and guard against, any dangers of action that might be taken to avoid or artificially to reduce the normal liability to tax. I am, of course, ready to consider any ideas arising out of my outline proposals which representative bodies may wish to put forward and representations should be addressed to the Board of Inland Revenue at Somerset House. Meantime, the House will not expect me to give any further details, pending the examination of representations and the formulation of my detailed proposals.

Proposals as to Corporation Tax General

The essence of my proposals is that the income of all companies and of other bodies within the scope of the profits tax shall become liable to a new corporation tax and shall cease to be liable to income tax and profits tax. Income arising to individuals and partnerships will be liable to income tax and, where appropriate, to surtax also.

A corporation tax will be charged at a flat rate on the total income of companies for each accounting period. A deduction will be given for normal interest (including normal debenture interest) and other charges paid in the accounting period. No deduction will be given for dividends on either ordinary or preference shares Such dividends will be liable to income tax and surtax when received by individuals and partners. Capital allowances will be given for corporation tax purposes on the same lines as for income tax. It is a natural corollary of the separation of company taxation from personal taxation that a company which enjoys overseas income that has suffered overseas tax should receive credit for overseas tax only against the corporation tax to which it is liable. I realise that this will create special problems for certain companies and I am considering whether, whilst adhering to the principle set out above, these problems could be eased by some transitional arrangements.

Basis of Charge

In general, the first charge of corporation tax will be on the income of the accounting period following that which was the basis of income tax liability for 1965-66. The rate of tax appropriate to income up to April 1966 will be fixed in the Budget of April 1966. For new companies corporation tax will be payable in one sum nine months after the end of the accounting period, but for existing companies which keep the same accounting date the tax will be payable in one sum on the 1st January in the financial year following that in which the accounting period ended.

The last charge to income tax on trading profits will be for 1965-66. As regards other sources of income, the last income tax charge will also be on income charged for 1965-66. The last charge to profits tax will, in relation to a particular source of income, correspond to the last charge for income tax; thus, in the case of trading profits, the last charge will be on the profits of the period that formed the basis for the 1965-66 income tax assessment.

Dividends

Companies will be required to deduct income tax at the standard rate from dividends and other distributions of profits, and also from interest and other charges, and to account to the Revenue for the tax as and when it is deducted. These provisions will apply to dividends and other payments after 5th April, 1966. Special provisions will be introduced to deal with possible attempts at forestalling as regards dividends.

Provisions will be required as to the treatment of dividends paid by one United Kingdom company to another, and these require further consideration. But I can give an assurance now to investment trust companies and unit trusts that such dividends will not be charged to corporation tax in their hands if they are passed on to their shareholders in the form of dividends. I can also give an assurance that dividends received by parent companies from their United Kingdom subsidiaries will be treated as "franked" income for corporation tax purposes.

Special Cases

Because the new scheme will tax undistributed profits at a lower rate than the present scheme, there will be special provisions to ensure that certain types of companies, including the so-called 'one-man' companies, do not retain profits for the purpose of enabling shareholders to avoid personal taxation.

Charities and approved superannuation funds which are at present entitled to exemption from income tax will not themselves be chargeable to corporation tax and will continue to be entitled to exemption from income tax, and will therefore be able to claim repayment of income tax suffered by deduction.

Proposals as to Capital Gains Tax Occasion of Charge

The new tax will be imposed only on gains which are realised after next Budget day. Such gains will be chargeable whenever the underlying assets were acquired. There will, however, be no retrospection; the gain to be charged on disposal will not exceed the difference between the value of the particular asset on the 1965 Budget day and the amount realised when it is disposed of subsequently. Moreover, the charge to tax on a gain realised after next Budget day will not be on an amount greater than any gain that is realised. As I have already indicated, provisions will be included to prevent avoidance by creating artificial values on Budget day.

For the purpose of the tax, realisation will include disposal by sale, long lease, exchange, forfeiture and the transfer of ownership by gift or on death. In the last two cases the asset will be treated as realised at its market value. However, the first £5, 000 of gains realised on death will be exempt; and any capital gains tax paid will be deductible from the amount of the estate for estate duty purposes.

Where stocks, shares or securities are treated as realised involuntarily, in such circumstances that new stocks etc. are received in place of those formerly held, as a result of a conversion operation or a scheme of company reorganisation no tax will immediately be chargeable: for cases of this kind I propose that there should be rules broadly comparable to paragraphs 10 to 14 of the Ninth Schedule to the Finance Act, 1962.

Assets Chargeable

The tax will extend to all gains realised on the disposal of assets of whatever kind, whether tangible or intangible, with the following exceptions. Gains realised from the disposal of the taxpayer's only or principal residence will be exempt. Capital gains realised in respect of Savings Certificates or National Development Bonds will also be exempt, as will sums received on the maturity or surrender or normal policies of life assurance. Premium Bond prizes, football pool dividends and betting winnings, where there is no disposal of an asset, are outside the scope of the tax. Gains arising out of the sale of chattels will not be within the charge to tax except where the price realised from a single transaction standing alone is £1, 000 or more. There will be restrictions on relief for losses on chattels.

Persons Liable

Persons, including companies, who are resident in the United Kingdom will be liable to tax on all realised gains wherever the underlying assets are situated. Non-residents, whether individuals or companies, will not be liable on gains realised from assets situated in the United Kingdom unless those assets are used for the purposes of a trade or business carried on in this country by a permanent establishment which they maintain here. Thus, gains realised by non-residents from portfolio investments in the United Kingdom will be exempt. Gains realised by charities and approved superannuation funds which enjoy exemption from income tax will also be exempt.

Basis of Charge

The tax will be charged on net gains realised in the year to the extent that those gains are not already chargeable to income tax. Relief for realised losses will be given primarily against any gains realised in the same year, any excess of losses being allowed to be carried forward without time-limit and set against future gains. For assets acquired before next Budget day relief will be given only for the due proportion of the loss which accrued after that day.

The relationship of the new tax to the existing short-term gains tax is under examination."

THE EARL OF DUNDEE

My Lords, we are very grateful to the Government for this extraordinarily prompt and most welcome reaction to the requests which your Lordships made on Wednesday and Thursday of last week. We shall look with great interest in the Printed Paper Office or in Hansard tomorrow in the hope of discovering that the Government really do understand what they are trying to do.

LORD SHEPHERD

My Lords, I am most grateful to the noble Earl. I hope that Her Majesty's Government will always be prompt and that, in time to come, the noble Earl will not think it is extraordinary.