It may be convenient to consider with this Amendment No. 55, in page 21, line 42, at end insert:
Provided that this subsection shall not apply where the claimant company and the surrendering company jointly elect and further providing that where relief is granted under the said section 20 relief shall not be granted under this section:
and Amendment No. 108, in Schedule 10, page 62, line 34, at end insert:
6. In subsection (10) of section 20 of the Finance Act 1953, the following proviso shall be added at the end: —
'Provided that where all the shares of a company are owned by no more than five corporate shareholders, all of whom are resident in the United Kingdom, any one of such shareholders may, notwithstanding that it is not an associate company within the meaning of this section, make a subvention payment to that company which shall be treated for tax purposes, in accordance with the provisions of this section up to an amount equivalent in value to that proportion of the company's issued share capital which is owned by the paying company '.
Before the Chancellor leaves the Chamber, I hope that he will recognise the debt which he owes to this side of the Committee for allowing Clause 18 to stand part of the Bill. Otherwise, the Government would have had no Corporation Tax for the ensuing year, and I fancy that that would have knocked the Budget judgment for six.
Clause 19 deals with a technical matter and I hope the Committee will allow us to hurry through the Amendments at a reasonable pace. The night is not so young and we do not want to waste a lot of time.
Both in 1965 and in 1966, I moved Amendments, first from the back bench and last year on Report from the Dispatch Box, urging on the Government the need to adopt the grouping system for Corporation Tax on groups of companies. The system which I was urging would have resulted in one assessment to Corporation Tax as it used to operate with Profits Tax. On both occasions the Chief Secretary refused the Amendments, but last year he was a little more forthcoming, because he said that the Government were examining some system which might go part of the way towards achieving what I was aiming at. Clause 19 is the fruits of that examination and we have a brand new system, different from anything which has preceded it, so far as I can ascertain, a system whereby in a group of companies, if one makes a loss and another makes a profit, the loss-making company can surrender its loss to the profit-making company and their taxation can be based on the resulting position.
I am bound to say straight away that this falls considerably short of the full grouping Amendments which we were aiming for in the last two years and, in particular, still leaves the situation where the companies would each have separate assessments. It suffers from a number of grave disadvantages which we shall see as we go through the Clause, but, in spite of the disadvantages, those who are concerned with the taxation of groups of companies will realise that the Government have gone part of the way and will no doubt be grateful for that.
But that is very far from going the whole way, and most of the Amendments, including this, are designed to improve the situation still further. The position is still left that there will be separate assessments on the companies in the group. The grouping is inadequate because it applies only where the accounting periods of the companies coincide as well as those where they overlap. There are serious limitations for close companies, particularly in relation to the operation of the shortfall provisions, and there are other disadvantages.
Most of these could be overcome if subsection (2) were omitted. Subsection (2) is that which removes the procedure for subvention payments which was first introduced by Section 20 of the Finance Act, 1953. The origin of that was the Millard Tucker Report on the computation of profits for Income and Profits Tax purposes. The Committee had pressed on it a proposal that there should be grouping for Income Tax. It saw the difficulties —difficulties which last year I argued did not apply to Corporation Tax—and adopted instead a suggestion by the Inland Revenue for subvention payments whereby a company which had made a profit could make a subvention payment to another company in the group and thus the taxation could be evened out. The Committee pointed out that it was simple, and that there need be no special safeguards for minorities, because the responsibility would rest firmly with the company whether it was right in all the circumstances to make the payment.
There is no doubt on either side of the Committee that the subvention payment system on the whole has operated very well. There have been difficulties. Certainly it does not meet all cases. Curiously, in the end—it went to the House of Lords—it met the case to which I referred last year, the case of Davies v. Davies Jenkins. However, it is right to remind the Committee of the strictures passed on the Revenue by Lord Upjohn in his judgment in the House of Lords when he complained that in operating the subvention payments system the Revenue had sought to change the construction which had hitherto operated for many years and had sought to limit the application of the Section which, although upheld by the Court of Appeal, had been turned down by the House of Lords.
In his judgment, Lord Upjohn said:
… I am disturbed, as I have been disturbed in another case very recently, at the conduct of the Board of Inland Revenue in respect of these matters. Until 1958 they very rightly accepted the interpretation which I have placed upon this section without question … This led, so your Lordships were informed, to a reappraisal of the section and the board then adopted a construction which, in my opinion, is quite untenable and incidentally produced anomalies. If the board want to change the basis of taxation from the clear words which Parliament has used and to alter a clearly settled practice understood by Crown and subject alike, surely they should seek statutory powers to do so and not, by an internal change of practice, try to alter well-settled law.
It may well be that the Inland Revenue, despite Section 20 of the 1953 Act, which was its own proposal, and in spite of the fact that it has worked well over the years, may have acquired an increasing dislike of it. Be that as it may, Clause 19(2) sweeps it away, and one is bound to ask why? What are the reasons that have led the Inland Revenue to abolish this relief merely because it is introducing another less valuable and somewhat different relief? What is the connection between the relief which is being introduced by Clause 19, the new limited relief for a transfer of losses, and the former
well-tried relief by way of subvention payments?
As will be seen as the debate on this Amendment progresses, there are a number of cases where one will work and the other will not, and correspondingly there are a number of cases where the other one works and the former is inappropriate. It is clear from the representations made to me and a number of my hon. and right hon. Friends that those who are concerned with the operation of the taxation of groups of companies are puzzled and not a little hurt that the Government, though going part of the way to meet their claim for some form of grouping for Corporation Tax purposes, should have accompanied this by a withdrawal of a provision which they consider has been useful and has operated well.
The Government giveth and the Government taketh away, but I am bound to say that there are few to be found to bless the name of the Government.
My hon. Friend will recognise that we shall come to an Amendment later which seeks to modify the obstacles which the Clause faces in the way of groups of companies where their years do not overlap. There is an apportionment for time purposes, but it is not only a question of overlapping accounting years; it is also a question of the period during which they are in the same group. There are other difficulties which do not arise in the case of subvention payments, but which undoubtedly do arise in this case, and my hon. Friend is absolutely right when he points out, by implication, that the abolition of the subvention payments in these cases will add considerably to the difficulty of groups of companies which have different accounting periods.
Amendment No. 54, which is the Amendment that has been selected, would retain unvarnished the subvention procedures, and Amendment No. 55 would make it clear that the group could not seek to operate both subvention and this new system of transfer of losses. It would have a choice, and I would respectfully suggest that it would be right that it should have an option. This would be reasonable and entirely fair.
I have no doubt that possibly the only argument that we should get from the Treasury Bench is that there are risks that this would lead to avoidance. It would be incumbent upon anyone seeking to put that forward to explain how this could arise. How could there be avoidance because there are two alternative systems of granting relief, when neither of them, singly, can give rise to avoidance, and when the taxpayer has to opt for one or the other?
I cannot see how that can seriously give rise to danger of loss to the Revenue or to avoidance of tax by companies, and I very much hope that the Government will, in the face of almost universal demand by the commercial community that the subventions should be allowed to remain, have second thoughts and, even if they cannot accept this Amendment, will at any rate give an undertaking to introduce something that would achieve the same end on Report.
I wish to be very brief in supporting what my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) has said. When the Chief Secretary and his colleagues are on the right lines, as they are on this occasion, why should they be so grudging? Why should they not be generous, having recognised that this is the right line? They have recognised that, otherwise they would not have made these improvements. Why remove the subvention facility which has proved to be right?
This is the second occasion during the last three hours on which the Government seem to be on the right lines. They have learned from experience and are taking advantage of the knowledge which they have gained in the previous year. Yet they spoil it by going in a grudging way along the right lines. I see the Chief Secretary smiling. I have not seen him do much smiling recently. He is usually very jolly. I hope that while he is in that mood he will give the sort of answer which my hon. Friend and I would like him to give.
I am always delighted to see the hon. Member for Peterborough (Sir Harmar Nicholls). I am always in high spirits when I see him and all my Governmental colleagues. However, it makes not the slightest difference to the answer, I regret to say.
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) was good enough to say that, to a certain degree, the proposed grouping was welcome. It follows from discussions which have taken place and the examination given to the matter over the past year. I promised a year ago that it would be given that examination. It is right that when it is profitable and useful to carry on a business in a different number of enterprises and structures the tax system should not be so organised as to prevent good business from being done. That is the approach, and one tries to meet it reasonably.
We have studied from that point of view only the methods which previously existed for grouping—the full grouping method and the subvention payments method—to see which is the most applicable to the new circumstances and most helpful in doing what we set out to do. The hon. Member for Wanstead and Woodford did not refer to the full grouping method, and I take it from his silence that he is not proposing that method, which has certain defects. A decision had to be made irrevocably, and that did not always suit. The hon. Gentleman says that the proposed method is good up to a point, but would like to see two systems running side by side, although he was good enough to go on to say that an individual company would have to make the choice.
The hon. Gentleman wishes to know why we do not propose to have two systems running side by side. T shall be glad to listen to any arguments to the effect that the achievement of the broad philosophy which I have indicated is being prevented. It will be extremely difficult, however, to persuade me that it would be right to continue two systems, one of them being the subvention payment system. That system has serious defects. The major defect is that a payment has to be made which frequently causes difficulties regarding minority interests. It was always a major defect in that system that, to achieve something which had nothing to do with paying, but to get the grouping, one had to resort literally to a cheque passing.
If we were at this moment considering only the subvention payment system and not any other kind of grouping system, there would be several serious defects in the subvention payment system which we would seek to persuade the Committee to correct. First, the subvention payments system has a major defect in itself, and, secondly, it could not be continued in that form. The hon. Member is not right in saying that we are grudging. That is not the spirit in which we are approaching the matter. We have a responsibility to protect the revenue and also the taxpayer. The main consideration is not to prevent, through the structure of the tax system, good business being done in different form of organisation by people who have the responsibility for doing business in this way for good reasons—not tax avoidance reasons, I understand this, and have lived with it all my life.
But, I repeat, this system is not a good system. In my view, the system that we are proposing is infinitely better. It is much more flexible. We can pick out a certain" company to associate with another company, provided that they are members of a group. We can do that for one year only. We do not have to do so irrevocably. We do not have to make a payment. We do not have any problems of minority interests. That has enormous advantages.
I want to help and not to hinder, so I go straight on to say—and I shall find it extremely difficult to be persuaded to the contrary—that if the Committee accepts it as unwise to have two systems running side by side, adding complexity upon complexity of a kind which the Inland Revenue can Gee no way of coping with—and it is good at coping with complexities involved in a series of companies—if the Committee accepts that as the Bill is drawn it would be unwise and, on the ground of complexity, virtually impossible to have two systems running side by side, I am left with the question, which I freely give to the hon. Member: what about those circumstances in which it may be alleged that the grouping system turns out in good, bona fide cases, not to be as helpful and satisfactory in achieving what it sets out to achieve—the proposed new group- ing system—as the old subvention payment system?
Several Amendments relate to this point and in respect of all of them I shall be most interested to hear what hon. Members have to say. I shall gladly think about the matter to see whether, in certain cases—I am not giving a blanket undertaking at the moment—it would be possible to adjust the proposed method of grouping so as reasonably to meet the difficulties which would then remain— not all the difficulties, because some are intrinsically incapable of being overcome for certain good reasons about which I hope to persuade the Committee.
To put it shortly, I am grateful for the way in which the proposal has been received. I hope that I have demonstrated that it is a serious attempt to help business do its job. We believe that the proposed system is considerably better than either of the other two systems which existed. We cannot see how we can have the two running side by side. If, in the circumstances described by the hon. Member, with an alternative choice, there are good, bona fide reasons why, in a particular series of cases, problems which were met by the subvention payments system will not be met by the system which the Bill provides, I shall be glad to look at them, after listening carefully to the arguments.
I hope that I have made the position clear and that the hon. Member will not feel compelled to press the Amendment.
Sir Eric, you indicated that, with this Amendment, we were taking Amendment No. 108. I wonder if you would care to reconsider that, because it would appear that Amendment No. 108 would be more appropriately taken with Amendment No. 106. I mention that in case any of my hon. Friends wish later to make remarks relative to Amendment No. 108, which otherwise will be out of order.
I am grateful for that indication, Sir Eric.
Having got that clear, may I say that I regard the Chief Secretary's reply as disappointing. The arguments which have been put to us on behalf of those who will have to administer these provisions do not bear out the case which the Chief Secretary has put to the Committee. He rested his case primarily on what he regarded as the considerable defects in the subvention payment procedure. That is rather surprising, because that procedure has lasted for 14 years almost without amendment. There has been no effort to remedy those defects, except in one case where the Inland Revenue unilaterally sought to alter the construction in a way which, in the end, the House of Lords refused to accept. His second argument was as to some unnamed and hideous complexity the details of which were so terrible that he could not bear to unveil them before the Committee lest we should be shocked.
I remain unconvinced. I cannot see why the Government's new system, which presumably they have introduced as one which will work and not lead to avoidance, and the system which has been operated for 14 years, though modifications could have been made, should not exist side by side with a clear option to choose between the two. It is not a novel proposition in taxation. Dairy farmers, for example, are entitled to be taxed in two different ways. The first is what is known as the "herd basis", and the name of the second one I cannot remember. However, dairy farmers may
Although the Chief Secretary's reply was disappointing, there was some hope in his words, and that hope confirms the strength of my hon. Friend's case. The subvention payments system has worked, and that is as good a test as one could wish for. The fact that the Chief Secretary indicated that he will think about it next year or before is an admission that he sees the force of my hon. Friend's argument. On those grounds, why wait? The right hon. Gentleman is wavering. He has indicated that my hon. Friend is partly right, and I think that he would be well advised to accept the Amendment now. If he does not, we must test the Committee's strength. We shall lose, of course, but we shall go down knowing that we have argued for the right thing.
|Division No. 352.]||AYES||[9.45 p.m.|
|Allaun, Frank (Salford, E.)||Callaghan, Rt. Hn. James||Dunn, James A.|
|Alldritt, Walter||Cant, R. B.||Dunwoody, Mrs. Gwyneth (Exeter)|
|Allen, Scholefield||Carmichael, Neil||Dunwoody, Dr. John (F'th & C'b'e)|
|Anderson, Donald||Chapman, Donald||Eadie, Alex|
|Archer, Peter||Coe, Denis||Edwards, Rt. Hn. Ness (Caerphilly)|
|Armstrong, Ernest||Coleman, Donald||Edwards, William (Merioneth)|
|Atkins, Ronald (Preston, N.)||Concannon, J. D.||Ennals, David|
|Atkinson, Norman (Tottenham)||Corbet, Mrs. Freda||Ensor, David|
|Bagier, Gordon A. T.||Craddock, George (Bradford, S.)||Evans, Albert (Islington, S.W.)|
|Barnett, Joel||Crawshaw, Richard||Evans, Ioan L. (Birm'h'm, Yardley)|
|Baxter, William||Cronin, John||Faulds, Andrew|
|Bence, Cyril||Cullen, Mrs. Alice||Fernyhough, E.|
|Benn, Rt. Hn. Anthony Wedgwood||Davidson, Arthur (Accrington)||Finch, Harold|
|Binns, John||Davies, G. Elfed (Rhondda, E.)||Fletcher, Raymond (Ilkeston)|
|Blackburn, F.||Davies, Ednyfed Hudson (Conway)||Fletcher, Ted (Darlington)|
|Blenkinsop, Arthur||Davies, Harold (Leek)||Foley, Maurice|
|Booth, Albert||Davies, Ifor (Gower)||Foot, Sir Dingle (Ipswich)|
|Bowden, Rt. n. Herbert||Davies, S. 0. (Merthyr)||Ford, Ben|
|Braddock, Mrs. E. M.||Delargy, Hugh||Forrester, John|
|Bradley, Tom||Dell, Edmund||Fowler, Gerry|
|Bray, Dr. Jeremy||Dewar, Donald||Fraser, John (Norwood)|
|Brooks, Edwin||Diamond, Rt. Hn. John||Galpern, Sir Myer|
|Broughton, Dr. A. D. D.||Dickens, James||Gardner, Tony|
|Brown, Hugh D. (G'gow, Provan)||Dobson, Ray||Garrett, W. E.|
|Buchan, Norman||Doig, Peter||Ginsburg, David|
|Buchanan, Richard (G'gow, Sp'burn)||Driberg, Tom||Gordon Walker, Rt. Hn. P. C.|
|Gourlay, Harry||MacColl, James||Price, Thomas (Westhoughton)|
|Gray, Dr. Hugh (Yarmouth)||MacDermot, Niall||Price, William (Rugby)|
|Greenwood, Rt. Hn. Anthony||Macdonald, A. H.||Probert, Arthur|
|Griffiths, David (Rother Valley)||McGuire, Michael||Pursey, Cmdr. Harry|
|Griffiths, Will (Exchange)||Mackenzie, Gregor (Rutherglen)||Rees, Merlyn|
|Hamilton, James (Bothwell)||Mackie, John||Rhodes, Geoffrey|
|Hamilton, William (Fife, W.)||Mackintosh, John p.||Robineon,Rt.Hn.Kenneth(St.P'c'as)|
|Hannan, William||Maclennan, Robert||Robinson, W. 0. J. (Walth'stow, E.)|
|Harper, Joseph||MacMillan, Malcolm (Western Isles)||Rodgers, William (Stockton)|
|Harrison, Walter (Wakefield)||McMillan, Tom (Glasgow, C.)||Rose, Paul|
|Hart, Mrs. Judith||MacPherson, Malcolm||Ross, Rt. Hn. William|
|Haseldine, Norman||Mallalieu,J.P.W.(Huddersfield,E.)||Sheldon, Robert|
|Maxell, Bert||Manuel, Archie||Shore, Peter (Stepney)|
|Heffer, Eric S.||Mapp, Charles||Short, Mrs. Renee(W'hampton,N.E.)|
|Henig, Stanley||Marquand, David||Silkin, Hn. S. C.(Dulwich)|
|Herbison, Rt. Hn. Margaret||Mason, Roy||Silverman, Julius (Aston)|
|Hobden, Dennis (Brighton, K'town)||Millan, Bruce||Snow, Julian|
|Hooley, Frank||Miller, Dr. M. S.||Spriggs, Leslie|
|Horner, John||Milne, Edward (Blyth)||Steele, Thomas (Dunbartonshire, W.)|
|Houghton, Rt. Hn. Douglas||Mitchell, R. C. (S'th'pton. Test)||Taverne, Dick|
|Howie, W.||Molloy, William||Tuck, Raphael|
|Huckfield, L.||Morgan, Elystan (Cardiganshire)||Varley, Erie G.|
|Hughes, Emrys (Ayrshire, S.)||Morris, Alfred (Wythenehawe)||Wainwright, Edwin (Dearne Valley)|
|Hughes, Roy (Newport)||Morris, Charles R. (Openshaw)||Walden, Brian (All Saints)|
|Hunter, Adam||Moyle, Roland||Walker, Harold (Doncaster)|
|Irvine, A. J. (Edge Hill)||Newens, Stan||Watkins, David (Consett)|
|Jackson, Colin (B'h'se & Spenb'gh)||Noel-Baker, Francis (Swindon)||Whitlock, William|
|Jackson,Peter M. (High Peak)||Noel-Baker, Rt.Hn.Philip(Derby,S.)||Williams, Alan (Swansea, W.)|
|Jones, Dan (Burnley)||Ogden, Eric||Williams, Clifford (Abertillery)|
|Jones, J. Idwal (Wrexham)||O'Malley, Brian||Williams, Mrs. Shirley (Hitchin)|
|Jones, T. Alec (Rhondda, West)||Oram, Albert E.||Willis, George (Edinburgh, E.)|
|Kelley, Richard||Orbach, Maurice||Wilson, William (Coventry, S.)|
|Lawson, George||Orme, Stanley||Winnick, David|
|Leadbitter, Ted||Padley, Walter||Winterbottom, R. E.|
|Lestor, Miss Joan||Page, Derek (King's Lynn)||Woof, Robert|
|Lewis, Arthur (W. Ham, N.)||Paget, R. T,||Wyatt, Woodrow|
|Lewis, Ron (Carlisle)||Park, Trevor||Yates, Victor|
|Loughlin, Charles||Pearson, Arthur (Pontypridd)|
|Lyon, Alexander W. (York)||Peart, Rt. Hn. Fred||TELLERS FOR THE AYES:|
|Lyons, Edward (Bradford, E.)||Perry, George H. (Nottingham, S.)||Mr. Alan Fitch and|
|McCann, John||Price, Christopher (Perry Barr)||Mr. Neil McBride.|
|Alison, Michael (Barkston Ash)||Cower, Raymond||Mott-Radclyffe, Sir Charles|
|Allason, James (Hemel Hempstead)||Grant, Anthony||Munro-Lucas-Tooth, Sir Hugh|
|Awdry, Daniel||Gresham Cooke, R.||Murton, Oscar|
|Bell, Ronald||Grimond, Rt. Hn. R.||Nabarro, Sir Gerald|
|Bennett, Sir Frederic (Torquay)||Gurden, Harold||Nicholls, Sir Harmar|
|Berry, Hn. Anthony||Hall, John (Wycombe)||Nott, John|
|Bessell, Peter||Hall-Davis, A. G. F.||Onslow, Cranley|
|Biffed, John||Harrison, Col. Sir Harwood (Eye)||Osborn, John (Hallam)|
|Birch, Rt. Hn. Nigel||Harvey, Sir Arthur Vere||Osborne, Sir Cyril (Louth)|
|Bossom, Sir Clive||Hawkins, Paul||Page, Graham (Crosby)|
|Boyd-Carpenter, Rt. Hn. John||Heseltine, Michael||Page, John (Harrow, W.)|
|Braine, Bernard||Higgins, Terence L.||Peroival, Ian|
|Brewis, John||Hiley, Joseph||Pounder, Rafton|
|Brinton, Sir Tatton||Hill, J. E. B.||Ramsden, Rt. Hn. James|
|Brown, Sir Edward (Bath)||Hirst, Geoffrey||Renton, Rt. Hn. Sir David|
|Bruce-Gardyne, J.||Holland, Philip||Rossi, Hugh (Hornsey)|
|Buchanan-Smith, Alick(Angus,N&M)||Hordem, Peter||Royle, Anthony|
|Buck, Antony (Colchester)||Hornby, Richard||Russell, Sir Ronald|
|Bullus, Sir Eric||Hunt, John||Scott, Nicholas|
|Campbell, Gordon||Irvine, Bryant Godman (Rye)||Sinclair, Sir George|
|Carr, Rt. Hn. Robert||Jenkin, Patrick (Woodford)||Smith, John|
|Chichester-Clark, R.||Jopling, Michael||Stainton, Keith|
|Cooke, Robert||King, Evelyn (Dorset, S.)||Stodart, Anthony|
|Costain, A. P.||Kirk, Peter||Stoddart-Scott, Col. Sir M. (Ripon)|
|Crosthwaite-Eyre, Sir Oliver||Lambton, Viscount||Summers, Sir Spencer|
|Dance, James||Lewis, Kenneth (Rutland)||Taylor, Sir Charles (Eastbourne)|
|Davidson,James(Aberdeenshire, W.)||Macleod, Rt. Hn. lain||Taylor, Frank (Moss Side)|
|Dean, Paul (Somerset, N.)||McMaster, Stanley||Temple, John M.|
|Deedes, Rt. Hn. W. F. (Ashford)||Maddan, Martin||Thatcher, Mrs. Margaret|
|Dodds-Parker, Douglas||Maginnis, John E.||Thorpe, Rt. Hn. Jeremy|
|Doughty, Charles||Maude, Angus||Tllney, John|
|Eden, Sir John||Mawby, Ray||Van Straubenzee, W. R.|
|Elliott,R.W.(N'c'tle-upon-Tyne,N.)||Maydon, Lt.-Cmdr. S. L. C.||Vaughan-Morgan, Rt. Hn. Sir John|
|Errington, Sir Eric||Mills, Peter (Torrington)||Wainwright, Richard (Colne Valley)|
|Eyre, Reginald||Mills, Stratton (Belfast, N.)||Ward, Dame Irene|
|Fortescue, Tim||Miscampbell, Norman||Webster, David|
|Galbraith, Hon. T. G.||Monro, Hector||Whitelaw, Rt. Hn. William|
|Gilmour, Ian (Norfolk, C.)||More, Jasper||Wills, Sir Gerald (Bridgwater)|
|Gilmour, Sir John (Fife, E.)||Morgan, Geraint (Denbigh)||Wilson, Geoffrey (Truro)|
|Clover, Sir Douglas||Morrison, Charles (Devizes)||Winstanley, Dr. M. P.|
|Wolrige—Gordon, Patrick||Wright, Esmond||TELLERS FOR THE NOES:|
|Wood, Rt. Hu. Richard||Wylie, N. R,||Mr. Bernard Weatherill and|
|Worsley, Marus||Younger, Hu. George||Mr. Timothy Kitson,|
I beg to move Amendment No. 106, in page 22, line 13, at the end to insert:
Provided that where all the shares of a company are owned by no more than five corporate shareholders group relief shall be available as between that company and any one of those shareholders up to an amount equivalent in value to that proportion of the company's issued share capital which is owned by that shareholder.
The Committee will remember that two years ago the Government, in doing about the only good thing in the Finance Act, 1965, gave statutory recognition to a new concept for the purposes of taxation. It was the concept of the consortium—the situation in which five or fewer companies together owned most of the shares in another company, none of them owning less than 5 per cent.
As the Act was originally drafted, this was applied to inter-company dividends and contained a form of grouping for that purpose. It was later applied to interest-passing between companies in a consortium and last year it was extended, in the Finance Act, 1966, to cover the case of a holding company which was one of the five or fewer companies owning the consortium company. This has been widely welcomed as representing belated but valuable fiscal recognition of an increasingly frequent situation in reality. This Amendment seeks to extend the operation of the new groupings provision contained in Clause 19 to such a consortium.
Let me concede at once that it may be that the drafting is defective—that it does not entirely meet what the Revenue would regard as a reasonable requirement —but perhaps that need not concern us too much. I am sure that the Chief Secretary will understand the principle of the Amendment, and we may argue the merits of that principle.
Very briefly, the argument is that if it is right as between a parent company and a 75 per cent. subsidiary company that there should be this new provision for the transfer of losses for tax purposes, why should this similar provision not be operated in connection with consortium companies which would satisfy the test which applies to consortia for the purpose of the 1965 Finance Act? If it is right to give this special treatment to a consortium for inter-company dividends and for interest-passing between companies, why should it not equally well be right for the purpose of sharing the losses?
It is right to recognise the nature of a consortium of this sort. I say that five or fewer companies can own the shares of the consortium company, but very frequently there are only two who between them, own, perhaps, 50–50, the shares in the joint operating company. This is, in effect, a form of partnership, a joint enterprise, whereby the partners may pool their resources in patents know-how, management, raw materials and other things, in a joint venture for the common good, and in this way can create new enterprise where there was no enterprise before.
Many of our biggest and most prosperous companies that have grown up since the war have been the products of consortia of this sort. In electronics, one has to only think of I.C.T. and in chemicals there are a number—perhaps the best known is British Titan Products, owned jointly by three companies. This is a valuable form of enterprise. Not only does it allow resources to be pooled, but it allows the risks to be shared. It is clearly something that our fiscal system should, at least, not discourage even if it does not positively encourage it.
It is almost inevitable in those circumstances that in the early years the consortium company will make a loss. I say that it is almost inevitable, because this form of organisation tends to be adoped where the risks are higher and the capital investment is substantial, and where some years will elapse before there will be a return. This is a situation which none of the companies can bear themselves, but which in partnership, they are prepared to accept in the hope of profits in the future.
This is exactly the way in which one would want Clause 19 to operate—that the consortium company makes the loss —yet, as the law will stand if the Bill passes amended in this respect, the only thing that can happen is that the loss can be carried through for two, three, four or even five years before it can be set off against the future profits of the consortium companies. Meanwhile, the parent, the owner companies, will be making profits and paying full Corporation Tax on those profits with no relief for the loss made by their joint offspring.
That being so, what is happening—and if the Chief Secretary makes inquiries he will find that it is so—is that companies are operating real partnerships. They are not forming a joint company, but are constituting themselves into a partnership which is carrying on the joint operation, so that partnership profits and losses are available to be set against the profits and losses of each partner company. This is a very cumbersome and, indeed, somewhat difficult concept to grasp. Nevertheless, it is happening because of this defect in our fiscal system. This Amendment is intended to remedy the defect and remove an anomaly.
The sort of situation in which this difficulty is placed in the way of the development of consortia is not calculated to encourage innovation, and it is innovation which these consortia companies are primarily aimed to create. We are a country which must increasingly rely on innovation and on the products of innovation if our economy is to thrive and prosper, and this is one perhaps relatively small measure which the Government should accept, and which would be a recognition on their part of the truth of this proposition. Innovation is essential. Consortia are one way of getting it. Our fiscal system should not actively discourage consortia as they are discouraged at the moment. I hope that the Government will accept the argument and that, if they are not able to accept the Amendment, they will give consideration to it with the possibility of introducing something on these lines on Report.
The hon. Gentleman has been good enough to recognise that the Government are anxious to encourage all forms of company structure and business structure and to adjust the tax system so that there will not be in any sense a discouragement or deterrent to these forms of activity. In that sense the consortia are becoming recognised. It had not been borne upon us that there was any need of the kind to which the hon. Member referred. As he pointed out, a consortium could consist of two members, one with 80 per cent. and one with 20 per cent., and the grouping rules would be such as to set off profit and loss against each other. There are complications, and this would add to the complications and complexities.
The Amendment is perfectly adequate to make the point clear, but it is inadequate on other grounds which we need not go into now. I would not be able to accept the Amendment. This is one of the cases where I have said that we wanted to listen to, and consider, what the Opposition had to say. I make no promise of any kind other than that I will give it consideration between now and Report. Under those circumstances, I hope that the hon. Member will not feel it necessary to press the Amendment.
We must recognise that the right hon. Gentleman has been extremely forthcoming. I hope that further consideration will lead him to accept that there is some substance in what I have put to the Committee. In these circumstances, I beg to as leave to withdraw the Amendment.
I beg to move, Amendment No. 60, in page 22, line 20, to leave out paragraphs (a) and (b).
This is a very short point. The effect of paragraphs (a) and (b) of subsection (4) is that the grouping provisions we are discussing in Clause 19 for loss sharing are not available between a finance or share dealing company and any subsidiary if the proceeds of sale of shares in that subsidiary would be a trading receipt in the hands of the trading company. This is a limitation which has never operated in the case of the subvention payment procedure under the 1953 Act and nor was it necessary to operate it under Section 42 of the Finance Act, 1958.
I should be most grateful if the right hon. Gentleman would explain why this grouping provision cannot be extended to finance companies and, as it were, their stock-in-trade. If it is right to share losses and profits, to even them out, in circumstances which the Clause envisages, why is it not equally right in the case of a finance or share dealing company?
The basic reason is that it does not fall within the philosophy of what I have already indicated. I made it perfectly clear that the approach was to help business, to help trading. This is not helping trading. This is providing that, whereby a matter of fluke or coincidence, a finance house or somebody happens, in the course of its ordinary holding of investments as stock in trade, to hold shares in a particular company which for the time being puts it in the position of being able to claim group treatment in this way, it should be entitled to do so. That was not the purpose at all. That is one answer.
The second answer is that it was certainly covered by the subvention payments system. It would certainly not have been covered by the subvention payments system if that system would have been continuing. We should have been introducing an Amendment this very year, because under this system of Corporation Tax there is relief twice over. Where it is an investment company, it gets the relief twice over because it gets the relief under the grouping system. That is quite clear. There would also be the relief which the investment company gets because its stock in trade would be reduced. Its stock in trade would have to be valued. Its stock in trade would be reduced as a result of the reduction in the profits of the company. It being a holding company or a dealing company, its stock in trade would be reduced. First, there would be the reduction from grouping. Secondly, there would be the reduction from the reduced value from the stock in trade. There would be the same thing twice over. As it does not coincide with the principle, because it would in effect mean a double relief, I hope that the hon. Gentleman will not seek to pursue the Amendment.
I do not altogether follow the Chief Secretary, though I recognise that in the case of finance companies and share dealing companies he has an almost unrivalled experience. Therefore, perhaps we ought to go part of the way at any rate in accepting his word that this could lead to tax avoidance.
However, I should have thought that it would be recognised that, if it is right as between a group of companies that they should be taxed, in effect, on the net balance after balancing out profits and losses, there is no difference merely because the companies happen to be the stock in trade rather than investments of the parent company. The taxing Statutes are full of measures to avoid the receipt of double relief. All the dividend stripping provisions as operated by finance companies contain measures to prevent that. I should have thought that there was some argument for suggesting that it could equally well be available here.