(1) Where it appears to the Special Commissioners that any company to which this Section applies has not, within a reasonable time after the end of any year or other period ending on any date subsequent to the fifth day of April, nineteen hundred and twenty-two, for which accounts have been made up, distributed to its members in such manner as to render the amount distributed liable to be included in the statements to he made by the members of the company of their total income for the purposes of Super-tax, a reasonable part of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that for purposes of assessment to Super-tax, the said income of the company shall, for the year or other period specified in the notice, be deemed to be the income of the members, and the amount thereof shall be apportioned among the members:
Provided that, in determining whether any company has or has not distributed a reasonable part of its income as aforesaid, the Commissioners shall have regard not only to the current requirements of the company's business, but also to such other requirements as may be necessary or advisable for the maintenance and development of that business.
(3) A notice of charge to Super-tax under this Section shall in the first instance be served on the member of the company on whom the tax is assessed, and if that member does not within twenty-eight days from the date of the notice elect to pay the tax a notice of charge shall be served on the company and the tax shall thereupon become payable by the company:
Provided that nothing in this Sub-section shall prejudice the right to recover from the company the Super-tax charged in respect of any member who has elected as aforesaid but who fails to pay the tax by the first day of January in the year of assessment or within twenty-eight days of the date on which he so elected, whichever is later.
Where a member of a company has been assessed to and has paid super-tax otherwise than under this Section in respect of any income which has also been assessed and upon which Super-tax has been paid under this Section, he shall, on proof to the satisfaction of the Special Commissioners of the double assessment, be entitled to repayment of so much of the Super-tax so paid by him as was attributable to the inclusion in his total income from all sources of the first-mentioned income.
(5) This Section shall apply to any company—
For the purposes of the Sub-section—
(6) In this Section the expression "member" shall include any person having a share or interest in the capital or profits or income of a company, and the expression "employee" shall not include any governing director, managing director, or director.
I beg to move, at the beginning of the Clause, to insert the words
With a view to preventing the avoidance of the payment of Super-tax through the withholding from distribution of income of a company which would otherwise be distributed, it is hereby enacted as follows.
This is designed to carry out a promise to insert words, which I indicated that the Government would be willing to insert when the Bill was in Committee, in order to make clear what was the general purview of the Clause, namely, that it was not to interfere with bond fide companies carrying on business in the ordinary way, without having an eye on escaping taxation.
I am very much obliged to the Solicitor-General for putting in these words. I think they do what I, and those who think with me, had sought to have laid down during the discussion of the old Clause 14 and now of this new Clause 17. That is to say, we have upheld with him the principle that legal tax-evasion by a loophole in legislation should be stopped, but that we wish to protect innocent people from being hurt by the operation of this Clause. The Clause, as it is now to be remodelled, will help us in that respect. We shall protect the innocent by this Clause, but the Chancellor of the Exchequer will not catch all the wicked with it. There are three certain ways by which the wicked, if the sum involved were large enough to make it worth while, could get out of the paying of Super-tax by means of limited liability methods.
I beg to move in Sub-section (1), after the word "company"["the said income of the company shall for the year"], to insert the words
after deducting such amounts as may be required for the maintenance and development of the business.
This is a technical accounting point. I daresay the Solicitor-General remembers the point I made on the Second Heading. It was, roughly, this: If a party or company or person returns an amount as profit or income, which the authorities think is not a sufficiently large or proper amount, they will proceed to rip up the figures. But if they rip up the figures, they are then able to reconstitute the balance sheet only in accordance with the terms of the Income Tax Act, and if they do so, they will not be able to allow the person or company which they are assessing the advantages or reliefs which this Clause provides. I therefore suggest that the Commissioners, when they review figures which they have challenged, in putting the net profit at a figure which will satisfy themselves, must allow the company or person whom they are reassessing under this Bill the same advantages as could be claimed by the company or him under this Clause if he had at the outset returned an amount which satisfied them—that is to say, an amount which would not have made it necessary for the authorities to re-open the balance sheet for the purpose of preventing the avoidance of Super-tax by withholding income from distribution.
If you adopt that view, do you not penalise the man by depriving him of the right to have the exemptions or abatements which he would have had, had he made returns which in the first instance suited the Commissioners? Sup- pose the difference challenged turns out to be small?
I think there is a misapprehension. The question involved here is really the question that was debated yesterday, as to whether or not, in the case of a private firm, money put to reserve for capital purposes out of the income after it has been earaed, should be allowed as a deduction from the income as costs of earning the income. That principle was contrary to the whole scheme of Income Tax legislation, and was negatived. The scheme of this Clause is that where a company is, in effect, similar in character to a private firm, and the company cloak is assumed only for the purpose of avoiding the taxation to which the income of those persons controlling it would be liable if that were a firm and not a company—the object of this Amendment is to allow just the same kind of deductions as were negatived yesterday in the case of the private firm. If that were done and it were applied to a private firm the cost would be very large.
The Solicitor-General said one thing which rather surprised me. He has just inserted at the beginning of this Clause the words "with a view to preventing the avoidance of the payment of Super-tax," etc. That Amendment will shut out from the operation of this Clause any number of bond fide trading companies. Several alterations were made in the Committee stage. The date has been brought forward from 1909 to 1914. Are we to understand that after all these exceptions have been made the insertion of these words will cost the Exchequer £5,000,000 a year?
No. I fear that what I said may have given that impression. If the principle, which was negatived yesterday, in the case of firms were adopted and applied to firms as well as companies, that figure would be involved. I did not say that £5,000,000 would be involved in this Amendment.
In point of fact, the figure can only be guessed at. Taking the Clause in its revised form and assuming a normal year, my anticipation is something like £500.000 altogether for the first year. Perhaps the House will allow me to say a word on the particular modification suggested in the Amendment. The intention is, or at least the effect of this Amendment would be, that you would be asking the Special Commissioners of Income Tax to determine how much should be put to reserve. We should not pretend for a moment to do that. We would not say to any company that it should put a particular sum to reserve. The whole idea of this Clause, as I have said, is to take hold of the egregious cases, the cases where every reasonable person ran see that the amount put to reserve is entirely unreasonable. We do not presume to say what is the amount which actually should be put to reserve. It is only the extreme leases that are being struck at, and We do not wish to strike at any case where~ there may be varying opinions as to how much should be put to reserve. It is only the cases which are perfectly apparent on the face of it, the class of case that leaps to the eye, which will be inquired into. We should not presume to sit as authorities on the precise amount which any company shall put to reserve, but what we propose to do is. in the egregious cases to say, "You really have acted in bad faith in this matter, and, accordingly, your penalty shall be that you shall be taxed as if you were a private firm." The Amendment goes rather contrary to that, in seeking to say that certain deductions shall first be made and that then we shall arrive at a sum. That is not the intention at all, and for that reason I cannot accept the Amendment.
I beg to move, at the end of Sub section (1), to insert the words
and without limiting the foregoing words any income used, or reasonably intended to be used, for the purpose of the business of the company shall be deemed to be reasonably withheld from distribution.
With all respect, Sir, I submit that is not so. This is quite different from the previous Amendment, and I was certainly under the impression that I should be met with an acceptance of this Amendment, because, as the Chancellor may remember, in the Committee stage the principle was accepted, and I was given a very definite assurance in regard to it. The only difference between the present Amendment and the one which I moved in Committee is that on the suggestion of the Solicitor-General, so that there should be no narrowing of the. general words, I have put in the additional words "without limiting the foregoing words."
I quite well remember the discussion in Committee with regard to this particular suggestion of my hon. Friend. The words which he proposes now seem to be entirely covered by the proviso to the Clause itself. I cannot imagine, if that proviso is interpreted in terms as it stands, any new words such as he proposes will be found necessary.
I beg to move, in Sub-section (3), after the word "pay" ["elect to pay the tax"], to insert the words "his proportion of."
I think this Clause should be made more lucid, because as it stands it may mean that a person who is really not liable to pay Super-tax in the normal way has now to pay Super-tax, even though his total income is below the Super-tax zone. Such a person should not be penalised and his liability should be more closely denned by the addition of the words which I have suggested. I propose in a subsequent Amendment to also insert the words "calculated on the basis of his share or interest in the capital or profits or income of the company" I only mention those words in order to show what my meaning is.
I assure my hon. Friend that these words are absolutely covered by the Clause as it stands. I would ask him to keep his eye on his own Amendment while listening to the terms of Subsection (1) of this Clause:
The Commissioners may, by notice in writing to the company, direct that for purposes of assessment to Super-tax, the said income of the company shall for the years specified in the notice be deemed to be the income of the members, and the amount thereof shall be apportioned among the members.
I beg to move, at the end of Sub-section (3), to add the words
Provided that nothing in this Subsection shall prejudice the right of the company to recover from such of its members whose total income renders them liable for Super-tax any sums which have been paid on their behalf by members whose total income is within the limit of exemption for Super-tax.
This Amendment proposes to deal with the case of a member of a company whose income is very small and whose total income would not be liable to Super-tax. Why should he be called upon to pay Super-tax, if the amount he receives from the company plus the amount he receives otherwise do not together amount to a total which would render him liable to Super-tax normally? If the two amounts together do not total that which would otherwise bring him up to the Super-tax level, he should be able by this Clause to recover that portion of Super-tax which should not have been charged to him from other members of the company who are liable to Super-tax. Under this Clause as it stands you make a man subject to Super-tax in a way which was not possible before—and indeed was, and perhaps is still, illegal.
I certainly appreciate the object of my hon. Friend and the basis upon which he seeks to have this Amendment made, but there are considerations on the other side. It is the company by which the Super-tax is to be paid, and it is difficult to alter that provision in the way in which my hon. Friend seeks to alter it. The words which he uses are not very apposite for the purpose. In point of fact the money is not paid by these other people. It is really paid by the company, in the sense that it is taken out of reserves which would otherwise have been apportioned among the others, but not being distributed, the company is the persona liable to pay. I entirely appreciate the point of view expressed in the Amendment, and as no assessment can be made undo this until 1923–24—the date at which the Act begins having been altered and Super-tax being always assessed upon the year after the year in question—I. will undertake in the Department to see what arrangements can be made in order to meet this point.
I beg to move, after Sub-section (4), to insert a new Subsection:
(5) Where Super-tax is charged under this Section in respect of the income of a company for any year or other period, the Commissioners of Inland Revenue shall, on a certificate from the Special Commissioners that the Super-tax has been accounted for, repay-to the company the amount of any Corporation Profits Tax paid by the company in respect of the corresponding accounting period or part thereof.
This is an Amendment which I undertook, in the Committee stage, to propose, providing that any company which was held liable, or whose members were held liable, for Super-tax on undistributed profits, should be exempted from the operation of the Corporation Profits Tax. The Amendment was originally moved by the right hon. Baronet the Member for the City of London (Sir F. Banbury), and the Amendment now on the Paper is designed to meet the point which he raised.
During the Committee stage of the Bill, if I remember correctly, this particular concession was announced at a late hour. I ask the Chancellor why he grants these further concessions to these particular companies? The Corporation Profits Tax was instituted because, in the opinion of the Government, limited liability companies had certain favours conferred on them by law, and the particular companies whom the Chancellor is anxious to rope in under this Super-tax law are the limited liability companies. They are not the public ultility societies; they are not like certain other companies which the Chancellor has exempted from the Corporation Profits Tax. They are, as certain hon. Members have described them during the Committee stage, tax-dodging companies, but the Chancellor exempted the fortunate owners and members of these companies from paying Super-tax this year on their profits last year. That appeared to many of us to be very unfair, especially as the Super-tax is at a very high rate, and there is to-day in the country a sense of unfairness that all these particularly clever people, whom hon. Members have described as tax-dodgers, are going to be exempt to the extent of £400,000 this year. This afternoon the Chancellor of the Exchequer grants another concession. inasmuch as the Corporation Profits Tax is to be refunded to them, and I ask the Chancellor or the Solicitor-General to inform the House why this further concession should be granted?
One of the grounds upon which the Corporation Profits Tax is justified is that these corporations do not pay Super-tax. If you, in effect, say that they are really private firms masquerading under the companies laws, and must pay Super-tax, it is perfectly obvious you cannot ask for the Corporation Profits Tax as well. If this Bill has stripped the clothes of a corporation off this body of persons who pretend to be a corporation for the purpose of evading Super-tax and says that these men shall be regarded as private persons under the provision by which private firms pay Super-tax, you cannot, after stripping off the cloak and saying: "You must pay Super-tax," turn round, with complete inconsistency, and say: "You must also pay Corporation Profits Tax."
I thank the right hon. Gentleman for what he has said. This disposes of what some of us business men considered a gross injustice and we are obliged to the Chancellor for what he has done now. It meets our case in its particular respect and so much so that although I have another Amendment down on the next page, I shall withdraw that Amendment because I think that the Chancellor's words meet our contention. I am obliged to him.
I am very much interested in the speech of my hon. Friend the Member for Farnham (Mr. A. M. Samuel). What the Chancellor of the Exchequer has now done by the insertion of these words is simply to make this Clause applicable to people who obviously and deliberately were indulging their fancy by turning themselves into limited companies. I think the hon. Member for Greenock (Sir G. Collins) does not quite grasp where we have arrived at in regard to this matter. This is a Clause designed to catch the tax-dodger who deliberately forms himself into a limited company in order to avoid the payment of Super-tax. He has had to pay Corporation Profits Tax, and that is far less than the Super-tax he would have to pay. The Chancellor, by the way in which he has redrafted the Amendment and subsequently altered this Clause, says that this particular man who has turned himself into a limited company is now to be regarded again as a private individual. He is going to pay Super-tax, which he will pay if he remains a private individual. Obviously it is going to bring in far more to the Exchequer if that man remained a company and paid Corporation Profits Tax. Some of my hon. Friends of the Labour party have asked for concessions in several ways for their workpeople, and have not got them, and they now find that these other people are getting concessions. I think it is a great mistake for the right hon. Gentleman to try to fan any feeling of that sort by a statement which I venture to think was very unfair.
I beg to move, in Subsection (5, a), to leave out the word "fifth"["fifth day of April"], and to insert instead thereof the word "fourth."
The reason for this Amendment is that people have deliberately formed companies in order to evade the payment of Super-tax, and those who do so claim that their action is chiefly concerned with the post-War period. It occurred to me on the Committee stage that there is no reason why we should have the date of 5th April, 1914, though it is not the company's years, and has nothing to do with the registration of companies.
Why the 5th April, 1914, was taken rather than the outbreak of the War was that it was the beginning of the financial year, and 4th August has no relation to the financial year. A second reason was this; that it was in the Finance Act, 1914, that the Super-tax was first graduated up to 1s. 4d., with Income Tax at 1s. 3d.
I beg to move, in Sub-section (5, a), after"1917,"to insert the words
and is not a reconstruction of a company registered under those Acts before the fifth day of April, nineteen hundred and fourteen.
The object of this Amendment is to give exemption to a company which for all practical purposes is a company registered before the date referred to, but owing to its having undergone a process which is perfectly well known to all lawyers and business men, the process of reconstruction, is technically a company which has been registered after that. The Solicitor-General in Committee thought those in charge of the Bill would see their way to accept the Amendment.
I beg to second the Amendment.
I think this proposition made by my hon. Friend is a fair one. If those concerned can prove that the reconstruction after 1914 of the company was legitimate, with no intention of tax-dodging, I think the Amendment ought to be allowed. You will, however, find a snake in the grass. A trade is likely to grow up in the purchase, in order to alter the Articles of Association, of derelict and moribund companies, and it would, therefore, be possible to bring, by amalgamation, a new company outside the clutches of this Clause. If so, there is danger of tax-dodging in the Amendment moved by my hon. Friend. If, however, the Solicitor-General can see his way to get out of that difficulty I think the Amendment is a very good one.
Perhaps I may explain to my hon. Friend that he has seconded the Amendment and has not entirely understood it. The person who wants to use one of these old derelict companies in the way suggested and in order to avoid registering his company does not reconstruct the company. He saves nothing whatever if he does. I quite agree that probably there may be a trade in the Articles of Association of derelict companies, but this does not affect this particular question of reconstruction in the very least degree.
This "snake in the grass" was the object of debate in Committee. The Chancellor of the Exchequer indicated the hope that he might be able to deal with the case which various Members have pointed out. Since then my right hon. Friend has considered the matter very carefully and has not found himself able this year to frame a useful Clause dealing with this particular mischief. As this Clause has, as will be seen, in deference to the recommendation of the Committee, been postponed in operation for a year, the urgency of the matter is not now as great as formerly. As the Chancellor of the Exchequer has decided, therefore, not to introduce any new Clause in this Bill dealing "with the snake in the grass," perhaps, under all the circumstances, the mover may see his way to leave the matter for the present.
The Amendment of the hon. Member for Govan is out of order, as it would impose a charge.
Further Amendments made: In Subsection (5), leave out the words,
not a beneficial owner of shares
and insert instead thereof the words,
a trustee or nominee for 6ome person otherwise owning or beneficially interested in shares in the company."—[Mr. D. Herbert.]
In Sub-section (5), leave out the words, "exercises his voting power," and insert instead thereof the words
may be required to exercise his voting power on the directions of."—[Sir R Horne.]
I want more information. I want to know whether this Act can impose taxation by Super-tax on a limited liability company, when the law says that no Super-tax can be imposed upon a limited liability company.
A limited liability company, included under Sub-section (6) by the interpretation and within the meaning of the word "person," will be thereby exposed to the liability of Super-tax, but there may be cases in which the members of the company include not only persons but also another company.