Orders of the Day — FINANCE (No. 2) BILL

Part of the debate – in the House of Commons at 12:00 am on 10th May 1965.

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Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee 12:00 am, 10th May 1965

I hope that the hon. Member will not say that my hon. Friend dodged the question. He gave way a number of times and did not give way to the hon. Member, and that was the reason I gave way to him. [HON. MEMBERS: "He did give way."] The hon. Member then tried to get up again and failed. I will come to close companies. Indeed I will come to that straightaway. Am I going on too long? [HON. MEMBERS: "No."] I have a lot of candid friends. I will deal with close companies and the question of overseas investment, and then, perhaps, we can move to a vote.

My hon. Friend the Member for Heywood and Royton (Mr. Barnett) made the classic case, to which, unfortunately, the hon. Member for Nottingham, South did not listen. I must therefore repeat it. There are provisions in the existing law to deal with avoidance of Surtax through the retention of the profits of very closely controlled companies. As explained in my Budget speech, the temptation there is to withhold profits from distribution unnecessarily will be far greater under the new system because Income Tax as well as Surtax would be avoided. Having paid Corporation Tax at a rate to be fixed, those in control of the company could accumulate their savings free of all personal tax until they needed them.

The need to prevent avoidance in this way leads to provisions that may seem at variance with the general objective of encouraging retentions. But the same problem existed when distributed profits were taxed at a rate higher than undistributed profits; and all parties have always accepted that whatever might be suitable for the public company had to be modified in its application to the private company. I am surprised, nevertheless, that we have not been given any credit for the substantial change we have made in the law about closely controlled companies.

Under the present law, if a company does not make a reasonable distribution, all of its profits can be made liable to Surtax. This provision was long criticised as too severe. Under my provision, only 60 per cent. of its net trading profits have to be distributed, and it is open to the company to show that it could not make a distribution up to that standard without prejudice to the requirements of its business. If hon. Members will look at paragraph 10 of Schedule 17 they will find that this requirement has been defined in a way that links it up with the existing law.

The position is that we are proposing to repeal the existing provision, and the new language is supposed to have, and, I trust, will have, exactly the same effect. I think that 60 per cent. of net trading profits to be distributed is not a severe test. It amounts to 39 per cent. of the gross profit under Corporation Tax at 35 per cent., and 36 per cent. under Corporation Tax at 40 per cent. This is below the general level of distributions for public companies. It is no use the hon. Member for Kidderminster (Sir T. Brinton) shaking his head—