Clause 26. — (Cancellation of Tax Advantages from Certain Trans- Actions in Securities.)

Part of Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 25 May 1960.

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Photo of Mr Douglas Houghton Mr Douglas Houghton , Sowerby 12:00, 25 May 1960

The hon. Member for Kidderminster (Mr. Nabarro) must take comfort in the fact that the subsection (2, c) which the Financial Times said should be thrown out was the old subsection (2, c). So far as I know, that newspaper has not commented on the new wording, but since neither the Attorney-General nor the Financial Times appeared to understand the other, we must await their further verdict on the revised version.

We are all very grateful to the right hon. and learned Gentleman for the care he has taken in explaining the Amendment. While he was speaking, I thought, "Now we know more about the kind of transactions that this Clause seeks to check, and we also know more about the sort of people who take part in those transactions." When I listened earlier to the references of the hon. Member for Wolverhampton, South-West (Mr. Powell) to the need to avoid cynicism in relation to our tax law, the sort of cynicism he thought that we should avoid was that which I discerned, I think, in the heading of an article in The Accountant for 16th April, "Heads we win; tails you lose."

I suggest to the Committee, however, that it is not that cynicism we have to fear most, but the cynicism of the great mass of taxpayers who say that the whole thing is riddled with fiddles; the attitude of the ordinary taxpayer who believes that those who are better off and better advised can swindle the Revenue left, right and centre.

I wonder what sort of companies these are that are treated in this way, that are stripped of their stocks and stripped of their accumulated reserves in order to make a Roman holiday for those who are seeking to get tax advantages? Who are the workers in these companies? What do they think—if they know what is going on? What contribution is all this making to increased productivity and the wealth of the nation? I think that that is the background to this amended subsection that we must have in mind.

Had we heard of this before we dealt earlier with the proposed Amendment to subsection (1) I think that we should have had rather less sympathy with the plea to avoid punishing the innocent in the pursuit of the guilty. It seems to me that all transactions covered by this proposed subsection are, prima facie, suspicous. I wonder whether there are any innocent parties in all this. If they are innocent, they are outside the Clause, and if they come within the Clause I think that the chances are that they are guilty.

There are two ways of dealing with this problem. One is precise definition—prohibition in specific terms. We have tried that. We prefer it. The whole Committee would prefer it, because in that way we would know what we were doing and everybody else would know as well. When we have decided that certain transactions are, on the whole—though there may be some innocent cases—taxation-avoidance devices, we prohibit them specifically and expressly in the law, and thereafter there is no need to worry about motives. What we do is to rule them out by the very nature of the transactions that fall under the prohibition.

The fact that we are today discussing this subsection, and the Clause as a whole is an acknowledgement on both sides of the Committee that we have reached the limit of precise definition against this type of tax avoidance. We would not be discussing Clause 26 or subsection (2) if we could deal with the matter by alternative means. I think that we must acknowledge that previous attempts over five years have lamentably failed, and that the Committee is now justified in trying another remedy, however reluctant we may be to embark on it.

The other alternative is the Australian method, adopted in 1959. The Australian Act of that year included a sweeping prohibition against almost anything and everything that would result in reduction of tax liability by contrivances of one kind or another. That Australian law is only a year old and how it is working I do not pretend to know, but it might be worth watching to see whether there is anything there that we might one day adopt here.

For the present, we are adopting this middle course by defining as closely as we can the nature of the transactions that may be called into question though realising that the motives of those taking part in them may be called to judgment. I fail to see how one can operate a Clause of this kind unless the motives of those who take part in those transactions are called into question and are subject to judgment.

Motives are an important part in deciding whether a transaction is tax avoidance or normal commercial practice. A Clause like this is the only alternative to more, specific definition. I wonder whether any of this falls within the scope of the Jenkins Committee? I think that some aspects of this manipulation probably go beyond the scope of our tax law. I cannot feel that a lot of this does any good to the country, to the businesses concerned or to the people who work with them.

It is merely a field of activity into which people have moved in order to satisfy their acquisitiveness, rapacity and greed, and that is to be condemned. If I may say so, I do not think that we can really be too fastidious about catching a few innocent transactions when the overwhelming number of the transactions will undoubtedly have the object of tax avoidance.

7.0 p.m.

The Attorney-General says that the revised Clause is not fundamentally different from the original one and that the main change is in paragraph (c) which is a little more specific and a little easier to understand than the original version. But I emphasise that the Attorney-General is absolutely right in this respect, that if we can define the nature of the transactions that we are out to catch and if they are defined not only clearly but as narrowly as possible consistent with stopping the devices that we are out to check, everything else in the Clause will fall into place.

We can then consider what the taxpayer has or has not to prove. We can consider what remedy the taxpayer may have—his right of appeal and that sort of thing—in better perspective when we are satisfied that the transactions that we are out to stop are clearly identifiable as mainly anti-avoidance devices. If we provide an opportunity for the taxpayer to show in the odd case, or in any case, that that was not the purpose of this transaction—if that right of appeal is there—there is a complete safeguard for the taxpayer, and the major purpose of the Clause will not be frustrated by too cumbersome a provision for either proof or appeal. If the Clause is clear and if our purpose is clear, then there is no need to clutter up the Clause with excessive provisos relating to onus of proof or appeal.