(1) Paragraph 4 of the Fourteenth Schedule to the Income Tax Act, 1952 (which provides that where a sale of any property is one to which paragraph (a) of subsection (1) of section three hundred and twenty-seven of the same Act applies, and paragraph (b) of that subsection does not apply and the parties to the sale by notice in writing to the surveyor so elect, the provisions of paragraphs 2 and 3 of the Fourteenth Schedule shall not apply) shall, in the case of a sale to which this section applies, have effect subject to the modification hereinafter specified.
(2) If the purchaser or purchasers are outside United Kingdom jurisdiction but within the British Commonwealth and Empire and a sale is effected by a vendor within the jurisdiction of any property in circumstances in respect of which the Commissioners are satisfied that paragraph (b) of subsection (1) of section three hundred and twenty-seven does not apply, then if the Commissioners are satisfied that the sale arises from political or other similar circumstances in the country in which the purchaser is ordinarily resident and the vendor by notice in writing to the surveyor so elects the provisions set out in paragraph 4 of the Fourteenth Schedule shall have effect.
(3) Provided that this section shall not apply to a sale of any property which in the opinion of the Commissioners is one of a series of transactions of which the sole or main benefit which might have been expected to accrue to the seller was the obtaining of such an allowance or deduction as is specified in paragraph (b) of subsection (1) of section three hundred and twenty-seven of the Income Tax Act, 1952. —[Mr. Stevens.]
I beg to move, "That the Clause be read a Second time."
I very much regret that I have to bring the House from the libretto of Gilbert and Sullivan to the more prosaic Act of 1952 and, in particular, Section 327 and the Fourteenth Schedule of that Act. That Section and Schedule deal with the transfer of capital assets, notably of plant and machinery, from a seller to a purchaser and, in particular, to cases where the buyer has a controlling interest over the seller, or the seller over the buyer, or a third organisation has a controlling interest over both.
The Section and the Schedule envisaged a position whereby an attempt is made to obtain capital allowances by way of balancing allowances in excess of those to which a seller or a buyer could be entitled, whereby the seller transfers the property to the buyer at an artificially low price and thus gets a balancing allowance and the purchase by means of skilful book entries advised by an expert accountant writes up the price at which he takes over the capital assets and thus obtains larger capital allowances than those to which he should be properly entitled.
Paragraph 4 of the Fourteenth Schedule provides that where the transaction is quite obviously an honest and open transaction, one in which the obtaining of improper capital allowances is quite obviously not the object of the exercise and the buyer and the seller both apply to the surveyor—who is a gentleman whose identity I have never been able to discover, as the surveyor disappeared 40 years ago—to the effect that the price to be used in the case of taxation calculations of both parties, both seller and buyer, shall be the written down Income Tax value, that value shall be used in calculating the capital allowance not only of the seller but also of the buyer.
So far it seems to me that the law is sound, for there is a back door, an escape clause, whereby in transactions, legitimate and proper ones, both buyer and seller can appeal to the surveyor. So far, so good. But there is, it seems to me, one anomaly which is bad because of the hardship which may be inflicted. There is a severe penalty on persons whose transactions are perfectly legitimate and which indeed are forced upon them by the necessity of circumstances.
I have in mind that for many years past it has been the practice of commercial undertakings to be formed in this country, the companies registered in the United Kingdom but which are none the less operating factories, plant and machinery overseas, notably in the Dominions and in the Colonies. It is obvious that where national feeling has arisen in those territories it may be that it is desirable for political rather than for economic or commercial reasons to transfer the registration of that company from the United Kingdom to the country overseas. Should such a thing happen, obviously a sale would take place within the legal meaning of the word "sale."
It is not a sale such as I would have thought was contemplated by the Section or the Schedule to the Act. It is a transfer of property forced upon the persons who started the enterprise overseas by political circumstances in another country. It seems to me improbable that a purchaser in a country outwith the jurisdiction of the United Kingdom can jointly with the seller of the property write to the Surveyor of Taxes in this country and elect that the written-down Income Tax value should be used for the purposes both of the buyer and the seller. The consequence is that other provisions of Section 327 become operative and the Inland Revenue in this country require the seller, for the purposes of the transaction, to treat that sale as a genuine sale.
Supposing the plant and machinery was bought before the war and therefore stands at a relatively low price in the books of the seller, the Inland Revenue require that the open market value price at the date of the transfer should be used and the consequence is that the seller of the property finds himself liable to a very substantial balancing charge. I cannot believe that was contemplated when this particular Section of the Act was formed and I have put in a Clause filled, as it seems to me, with ample safeguards.
The seller, being in the jurisdiction of the United Kingdom, is required to satisfy the Commissioners that the transaction is bona fide. The seller is furthermore required to say that the transaction has taken place, not for commercial or economic reasons, but because of political circumstances in the country in which the plant and machinery is situated. I think that those safeguards would prevent any question of a wrongful application of the Section.
I believe that this Clause, or something of the kind, is absolutely essential. All transactions of that kind require the consent of the Treasury. The transfer of the registration of a company from this country to the country overseas normally requires Treasury consent. It seems wrong and incongruous and hard that the Treasury can give its consent to this transaction on the one hand, for the reasons given, and that the Inland Revenue should step in and impose a very harsh taxation penalty by way of balancing charges on the other. I believe therefore that this Clause will not open any gateway to spivvery or fraud, but will do something to remove what seems to me very clearly to be an anomaly and a hardship.
I beg to second the Motion.
I wish to point out that in many parts of the world our capital invested overseas is liable to be assailed from many quarters, especially for political reasons. An orderly retreat is occasionally necessary. When such a retreat has to take place it is important that the company or the persons concerned should not be subjected to a particularly unfortunate form of tax liability. The provisions of this new Clause are adequately safeguarded by subsection (3). I hope that the Chancellor will see his way to accept it.
My hon. Friends have spoken to this new Clause in most persuasive tones. I hope they will not think from anything I say that I minimise the importance which they have rightly stressed of enabling British enterprises operating overseas to comply with changing political conditions overseas. It is obviously of the greatest importance that we should assist our British enterprises to do that as much as possible, but I hope that I will be able to show to my hon. Friends that the method they proposed is not really acceptable.
When one company transfers assets to another company, normally speaking, for the purposes of a balancing charge or a balancing allowance, the price at which those assets is calculated is based on the price at which the assets are actually sold. But the Fourteenth Schedule to the Income Tax Act, 1952, prescribes that in certain circumstances for the purpose of computing balancing charges and allowances it shall not be that value but the market value. Those circumstances are two: first, where there is a transfer between two companies within common control and, secondly, where the purpose of the operation is to gain certain special allowances or deductions specified in Parts X and XI of the Act of 1952.
In those circumstances, the Fourteenth Schedule provides that the price at which the assets shall be deemed to have been transferred is the open market price and not the written down price. But paragraph 4 of the Schedule to which my hon. Friends referred provides that in the first instance —in other words, where there is a transfer between companies within common control and where there is no question of trying to get a special tax allowance or deduction—the two parties to the transaction can apply to the Surveyor and ask that the transaction shall be treated as having taken place at the written down value of the assets. Therefore, no balancing charge will arise for the company that disposes of the assets; but, on the other hand, the company acquiring the assets gets its depreciation allowance only on the written down basis.
There is a further condition that if the second company should subsequently dispose of the assets, then the balancing charge can be raised not merely to the extent of the written down value accepted by the second company, but to the total value of the original allowances made to the first company plus the allowances made to the second company when acquiring it. The question may arise of whether such an application can be made to the Surveyor for the written down value to be taken in circumstances where the acquiring company is outside jurisdiction.
Obviously, when both the selling and the purchasing company are within jurisdiction, the Schedule, operates and an application can be made. The question whether such an application can be made when the acquiring company is outside jurisdiction is very complicated. It has been before the Special Commissioners on more than one occasion. The position is obscure, and I understand that it is likely to be settled by the courts. Therefore, the matter, to that extent, remains sub judice.
So far as this Clause is concerned, it would, of course, give an option to the vendor company to claim under Paragraph 4 of the Fourteenth Schedule, without needing a simultaneous claim to be put forward by the purchasing company. I think it is open to two major objections, for which reason my right hon. Friend cannot accept it.
First of all, it would undoubtedly enable a company transferring or disposing of assets to another company outside the jurisdiction to avoid the balancing charge. My hon. Friend talked as if the balancing charge is a penalty. It is not a penalty, but a recoupment of what, in fact, has been an excessive allowance for depreciation in the past. The depreciation allowances are based on the fact that, in using the assets the company detracts from their value, in that they wear out. If it was shown that the assets had not worn out, but had been enhanced, there would be no case for the depreciation allowance, and the whole point of the balancing charge is that it recoups the Treasury for allowances which have been excessive, and, which, in point of fact, have been shown by experience to have been excessive.
Would my hon. Friend agree that it is only in countries where the transfer has been dictated by political circumstances, where the political circumstances did not allow the sale or transfer to the other company in this country, and, therefore, no possibility of a balancing charge would arise in this country, because there was no sale or transfer? Therefore, is it not the political circumstances of the other country which give rise to the possibility of the balancing charge?
That is perfectly true. If there was no sale or transfer of the assets, no question of a balancing charge would arise. The point I was making is that the balancing charge, when it is levied, cannot properly be described as a penalty.
The other objection to the Clause is that the safeguards to which my hon. Friend referred, are not really adequate, in that a loophole would still be open to transactions designed to avoid the balancing charge. It is perfectly clear that there is, written into the new Clause, provision from the Fourteenth Schedule dealing with transactions the purpose of which is to get an allowance or deduction under Parts X and XI of the Act of 1952. but the phrase about allowances would not cover the balancing charge. Therefore, the precautionary phrase in the new Clause would not be adequate to cover a transaction designed mainly to avoid the balancing charge.
My hon. Friend made the point that the Treasury have the power of control over the movement of companies, but whether that is to be a permanent or a transient feature of our economy is another matter. We must surely deal with this question as part of the Income Tax law, and the point I have been making is that there are two main disadvantages in this proposal. The first is that it would enable companies to transfer assets overseas to avoid the balancing charge, and, second, as drafted, it certainly would leave a loophole to transactions designed to avoid the balancing charge.
The question whether a joint application by parties, one of whom is outside the jurisdiction, can be made to the surveyor is before the court and still sub judice. I ask my hon. Friend to await the decision of the court, and, in the meantime, for the reasons I have tried to explain, my right hon. Friend regrets that he cannot accept the new Clause.
Having regard to the fact that the matter is sub judice, and having no desire to prejudice it one way or the other, I beg to ask leave to withdraw the Motion.