Schedule 11. — (Amendments of Corporation Tax Acts.)

Orders of the Day — FINANCE (No. 2) BILL – in the House of Commons at 12:00 am on 7th June 1967.

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Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley 12:00 am, 7th June 1967

I beg to move Amendment No. 89, in page 66, line 33, to leave out from the beginning to the end of line 48 on page 67.

This Amendment concerns life assurance business, and as I understand that the Chief Secretary will reply may I make it quite clear to him that, although we have tabled the Amendment to delete the paragraph, what we are really asking him to do at the moment is to reconsider it in the light of what I shall say, with a view, perhaps, to bringing forward something different on Report.

The paragraph deals with the amount of franked investment income which can be set off against Schedule F liability on dividends to shareholders. It will take a moment or two to explain, because it is a rather complicated matter. There are three positions with regard to this. There is the one that exists now, there is the one which the Government suggest, and there is the third possible one which would be a compromise, rather different, perhaps, than either.

The Chief Secretary will know that at present the taxation of life assurance companies is based on the recommendations of the Royal Commission of 1920. It is based on very clear principles, and the whole thing represents a coherent system which hangs together and makes the whole of that part of the Act intelligible. The Chief Secretary will also know, if he looks up that part of the Act and of the Royal Commission's recommendations and evidence, that very considerable evidence was given on the taxation of life assurance companies by Mr. Furtado, whose name the right hon. Gentleman will know well, as I do.

Mr. Furtado was with the Inland Revenue, and later became a Special Commissioner. He perhaps knew more than anyone else about life assurance work and the taxation of life assurance companies. Having seen his evidence several times, I am quite convinced that the principles there enunciated were correct, and, indeed, they have been held to be correct for a very long time.

I stress this point, because I believe that the present paragraph casts doubt on those principles and introduces a completely different set of principles by a side wind. I do not believe that it is right to undermine a system which has stood the test for a very long time by a kind of minor paragraph in a Schedule to a Finance Bill. I am sure that the right hon. Gentleman will agree that the evidence presented by Mr. Furtado could not have been presented by a better person, and that the system is still as it was then. It was imported into the 1965 Finance Act when the calculations were changed to the Corporation Tax system, but the principles are still the same.

11.15 p.m.

Under that particular system, which is the one we still have, we have in relation to investment income a system known as top slicing which has made them similar to commercial companies. An ordinary trading company which has investment income can set off the franked investment income against dividend tax on dividends distributed to shareholders. As of now life assurance companies can also do that. Even under the Chief Secretary's recommendations certain of them would continue to do that.

There are two ways of taxing a life assurance company. One is on its investment income minus management expenses and the other is on an ordinary Case I assessment under Schedule D. At the moment, and even under the right hon. Gentleman's recommendations, if the second basis of assessment were adopted, the Case I, Schedule D, we could still get top slicing in respect of franked investment income. It would seem very ironic that under the right hon. Gentleman's recommendations the moment that a company chose the alternative basis of taxing for life assurance companies the power to top slice would apparently go.

There is also the case of life companies which would consist partly of non-participating funds when all the profits would by definition belong to the shareholders and not to the policy holders. There again there would be top slicing which would mean that the company could set off franked investment income against Schedule F liability on dividends and it could take as much franked investment income as was necessary to do that. This conclusion is entirely consistent with the system of taxing which has reigned for a very long time.

The actual reference to the Royal Commission relevant in this case is paragraph 524, which said: In the case of a company transacting 'ordinary' business only, the profit that accrues to the proprietary body may be regarded as being part of the income which is taxed in the form of interest. That makes quite clear that top slicing was not merely permitted, but was essential to the system of tax on life assurance companies inherent in that set of principles there laid down.

The position at the moment is that we have top slicing in life assurance companies as in ordinary commercial companies. It seems that the Chief Secretary does not like that system and has, therefore, put down a completely different one in paragraph 2. The trouble about the new system is that it imparts a completely new set of principles into the taxation of life assurance companies and casts doubt on the system which has been there for a very long time and will introduce anomalies and inconsistencies into that system. The Chief Secretary is proposing that top slicing should cease and something else should take its place.

From his knowledge of taxation of life assurance companies, the right hon. Gentleman will know that usually there is a division of profits between shareholders and policy holders from time to time, a division which goes as to 10 per cent. to the shareholders and 90 per cent. to the policy holders. The shareholders have the right to say how much will go to the policy holders because it is an arm's length transaction and this is a way of increasing the benefits to the policy holders.

I believe that what the Chief Secretary has done is to say that because there is that normal division of profits, 10 percent, to shareholders and 90 per cent. to policy holders, there must be a division of franked investment component of that profit in exactly the same proportion and go on to say that because the profits are divided in that proportion he will divide the franked investment income in that proportion. I know of no principle which says that because one divides profits one has to divide the components of profits in exactly the same proportion. If that is his thesis, he is saying that 10 per cent. should be deemed to belong to the shareholders and to be available for set off against the liability.

I do not wholly go along with the right hon. Gentleman, but, if that is his thesis, he then contradicts it in a later part of this paragraph. He has divided on the basis of profits, but what he did in last year's Finance Act and what he has done in this paragraph is parallel with that division on the basis of profits. He has imported another division which goes, not on the basis of profits, but on the basis of the size of funds. Size of funds bears no relation to profits. There can be a general annuity fund which gives practically no profit.

These two different systems of apportionment cannot run side by side in any rational system. If the right hon. Gentleman is to go on his thesis of 10 per cent. belonging to the shareholders, there must be amendments to last year's Finance Act: Schedule 5, paragraph 9, of last year's Act must be changed and the apportionment on size of funds must go.

At the moment, there are two systems —the old system, which has stood the test of time for a long period, and this new one, which I believe has the seeds of inherent contradiction even within itself and of which the least possible compromise would be to amend last year's Finance Act. There would be a third possible compromise, which I understand that the life offices have already put to the Chief Secretary and which would be entirely consistent with the general principle of the taxation of life assurance companies. This would be much too complicated for me to try to explain. I would not dream of doing so at this time of night.

In any event, I know that the Chief Secretary has had details of it. He and I, quite apart from the fact that we may differ on some of the political aspects of taxation, have a respect for certain taxation principles. Whatever system one moves to, there must be a set of principles which can be recognised. The right hon. Gentleman is confounding the old set of principles quite casually in a way which is unforgivable and which will throw the whole taxation and life assurance business into confusion.

I hope that I have said enough to persuade the right hon. Gentleman to take it back and reconsider it in conjunction with the life offices to see if we can get some kind of compromise, if he will not accept top slicing, which will be consistent with the principles on which the taxation of life assurance business is based.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I am grateful to the hon. Lady the Member for Finchley (Mrs. Thatcher) for explaining with great clarity the purpose of the Amendment and particularly for prefacing her explanation by saying that the form of the Amendment, which leaves out any alternative proposal, deliberately leaves it out so as to give an opportunity for discussion rather than with the intention deliberately to leave the matter permanently open, which would cause difficulties. I am grateful to her. I understand her purpose completely.

The hon. Lady, similarly, will understand that this is a matter on which considerable care and time have been spent. I should be most happy to listen direct to the representations, because it is a most important field of our activities and it is essential that those conducting these important operations should feel that they have access to Treasury Ministers, who are most happy to consider their point of view and their proposals. The hon. Lady has explained that the provision which she seeks to raise in discussion moves on the principle of sharing this valuable commodity —the franked investment income—on the basis of the distribution of profits made by the company itself. That seems to me a commonsense way of making an apportionment on which there cannot be a precise rule and guidance given by any Body —with a capital "B"—which considered the matter in advance of this aspect of franked investment income. That seems a very sensible way of dealing with the matter.

The alternative method proposed by the companies does not seem equally appropriate. The hon. Lady has said, I think, that she sees the point in this and is pleading for consistency. I share her desire that we should be completely consistent. She has referred to certain paragraphs which she says are inconsistent with the paragraph in the Schedule which we are now discussing. I certainly give her my ready and immediate undertaking to look at the other provisions which she says are inconsistent. Obviously, I could not have a view on that at the moment. I am grateful to the hon. Lady for drawing my attention to them.

I shall readily consider them but, as she said, the purpose of raising this matter was for discussion. We must have something in the Bill and I hope that the Opposition will be good enough to give us this provision.

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

I am most grateful to the Chief Secretary. It is a most unusual case in which I have the experienced Inland Revenue witness on my side, and I hope that his evidence will speak to the Chief Secretary.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

I beg to move Amendment No. 124, in page 70, line 8, at the end to insert: Provided that nothing in this or subparagraphs (3) or (4) below shall be construed in such a manner as to make a company a close company which but for those provisions would not have been such a company. This is a short, probing Amendment affecting, in particular, paragraphs 5(2) and (3) of the Schedule. I believe that they are meant to be relieving sub-paragraphs in that they are intended to make the definition of shares beneficially held by the public in relation to close companies slightly wider in certain specific cases than it is at the moment.

One point has been put to me upon which I seek the Chief Secretary's assurance. Paragraph 5(2) says: Shares shall be deemed to be beneficially held by the public if, and only if, subparagraph (3) below so provides, … When one looks at sub-paragraph (3) to see what are the conditions which "if, and only if," will make the shares beneficially held by the public, one sees that there are three. The first is that they shall be deemed to be beneficially held by the public if held by a resident company which is not a close company.

The problem that has been put to me in view of the words "if, and only if," is, "What happens if the shares are held by a company which happens to be a close company?" There are times when companies can move in and out of the close company provisions. One company may not know if a shareholder is a close company or not. The provisions say that the shares shall be deemed to be beneficially held by the public if they are held by a company which is not a close company, and the point put to me is, "Does the converse apply?" Are they not beneficially held by the public if the company which holds the shares happens to be a close company?

I do not think that that is the case, because it looks to me as though those provisions under sub-paragraph (3) are alternative, and that only one of them need be satisfied. Therefore, it may be that the shares could be held by a close company and still be beneficially held by the public, provided, for example, they are not comprised in a principal member's shareholding.

11.30 p.m.

There is one final point which perhaps the right hon. Gentleman will look into. It would be possible for a principal member to hold shares privately in a close company which happened to invest in the original company which we are considering. Would that then make that company a close company when it is not a close company now?

In order to cover this position, I attempted to raise a protective Amendment, believing this to be a relieving provision, which would make it certain that nothing in the Schedule should be held to construe a company as a close company which is not a close company at the moment.

I should be grateful if the right hon. Gentleman would look into this. If he cannot answer now, perhaps he can look into the matter and later I can make it clear to the Committee, possibly by Question and Answer because sometimes it is complained that we raise matters which are answered in letters which the rest of the Committee does not see.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

It goes without saying that the hon. Lady was quite right in her construction of this paragraph. Subparagraph (b) is there for the purpose of reclarification. Then she asked whether, on that assumption, it was certain that other things followed having regard to the drafting. When an issue of this kind comes up, I do not think it appropriate for anyone to attempt an immediate answer. It requires the most careful consideration.

I understand what the hon. Lady has in mind and the premise on which she asked the question. It is a good premise. I understand that she would obviously want another opportunity for considering what we have to say about it. In these circumstances, I ask her if she would be good enough not to press the Amendment. I undertake to consider, with the help of the written word, what she has said and provide appropriate means—either by way of Question and Answer or a mention at a later stage—to satisfy her that we have given the matter careful consideration.

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

I am obliged to the right hon. Gentleman.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

I beg to move Amendment No. 30, in page 72, line 18, at the end to insert: 9. In section 74(2) of the Finance Act 1965. leave out '£4,000' and insert '£6,000". In section 74(3)(a) of the Finance Act 1965 leave out '£13,000' and insert '£19,500'. Leave out '£10,000' and insert '£15,000'. Leave out' £7,000' and insert' £10,500'. In section 74(3)(b) leave out '£4,000' and insert '£6,000' and leave out '£3,000' and insert '£4,500'. The hon. Member for Heywood and Royton (Mr. Barnett) will have observed that this Amendment is not entirely dissimilar from one he moved with such eloquence last year. We were surprised then to find that he was unable to persuade himself of the force of his argument and voted against his own Amendment. We trust that this year we find him in a more rational frame of mind. We make no apology for introducing a similar Amendment again.

The Amendment seeks to alleviate what at present is an intolerable burden on small family close companies. We feel on this side of the Committee that there is plenty of evidence that the Government have no sympathy for such companies. They are not the sort of companies and the directors are not the sort of people for whom the Government have much sympathy. They tend to escape standard categories of classification and a number of them conduct business in what I suppose the Prime Minister would endearingly describe as "candy floss", although many export a good deal of their production.

Our concern here is to make it possible for the small family type businesses to grow and flourish. The Amendment seeks to increase the maximum remuneration allowed to the first director from £4,000 to £6,000 per annum and to allow the other three directors a maximum of £4,500 each.

The figure of £6,000 is what we would regard as a much more realistic figure to allow a director of this kind of company in current conditions. It is a reasonable though not perhaps over-generous figure for a full-time director, which is what we are considering. If the services of a useful part-time director are to be gained, that too is not an unreasonable figure.

We stress, as the hon. Member for Heywood and Royton did last year, the need to encourage the young executive whom a lively board would wish to encourage, not merely by rewarding him a higher salary, but by allowing him to subscribe for more than 5 per cent. of the equity. This is the best possible kind of incentive. It not only has the virtue of retaining his services, but gives him a real stake in the future prosperity of the company. Yet, to that kind of person, £4,000 is not wholly an appropriate level and £6,000 is much nearer the mark.

I turn now to the arguments which I think the Chief Secretary will raise. He will say, I am sure, that the amounts allowed under Profits Tax was only £3,000 and that, since then, the Government have made it £4,000, having originally offered only £500. Indeed, with that impeccable logic of his, he once referred to this as a 100 per cent. improvement on the original figure. There is no comparison in reality to be made with Profits Tax.

I want to quote from HANSARD of 3rd June, 1965, when you, Sir Eric, so clearly drew to the attention of the Committee the following circumstances: As I have said on other occasions, we do not want to draw any analogy with what was appropriate in the case of Profits Tax and argue that the same thing should apply to Corporation Tax. It is pact of the basic philosophy of this part of the Bill that we are getting rid of both Profits Tax and Income Tax for corporations, and introducing a new separate Corporation Tax to which different principles shall apply.'—[OFFICIAL REPORT, 3rd June, 1965; Vol. 713, c. 2097.] No one could put the case more plainly than you did, Sir Eric, on that occasion. It would be difficult for the Chief Secretary to dispute that extremely clear account of the situation.

But under Profits Tax and Income Tax —the old basis—there was an allowance of 41 per cent. on companies on the directors' remuneration. This was an allowance of only 15 per cent. for Profits Tax. If the right hon. Gentleman tries now to compare that 15 per cent. with the Corporation Tax rate of 40 per cent. he is talking arrant nonsense. Profits Tax itself had an exemption limit of £2,000 which does not exist under Corporation Tax.

Again, in comparing the director controlled companies under Profits Tax and the full range of companies now considered to be close, the right hon. Gentleman cannot compare like with like. There must be thousands of companies now caught in the new category of close companies which would not have been caught under the old description of director-controlled companies.

No doubt the right hon. Gentleman will have some remarks to make about the cost of the Amendment. Last year, the hon. Member for Heywood and Royton, in speaking to his Amendment, said that the cost of implementation of his proposal to increase the maximum remuneration allowed from £4,000 to £5,000 would be about £5 million. We are proposing an increase from £4,000 to £6,000 for one category and the total under this Amendment would be £19,500 as compared with the cost under his Amendment of £20,000. There cannot be much difference in cost. If the figure of £5 million was accurate, much the same would apply to this Amendment.

We would like to know what allowance has been made against that figure for the extra Income Tax and Surtax which the Revenue would otherwise gain. If, as I suspect, there would be little loss to the Treasury, it is impossible to see how the right hon. Gentleman can employ the final argument which I am sure he will use—that this is not the right time to do it.

The Committee will remember the old argument that Chief Secretaries always give us, that it is never the right time to introduce any relief from tax, least of all on close companies. Judging by the right hon. Gentleman's remarks earlier today, his idea of a vista for the country is one of a bed of nails. He always looks as if he is only too delighted to occupy that position, but it is not one about which the rest of the country need have very much enthusiasm.

Therefore, I hope that the right hon. Gentleman will address himself to the points in the Amendment and let us have an answer particularly about cost, which he did not do last year when addressing himself to his hon. Friend's Amendment.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I agree with a good deal of what the hon. Member for Horsham (Mr. Hordern) has said, but not with everything. When he referred to the bed of nails I thought that I would agree with him completely. I agree with the thought of going to bed, if not with the idea of a bed of nails. I am sure that we shall meet each other's point of view on this.

Therefore, I say shortly, without raising the temperature, that the hon. Gentleman misjudges my right hon. Friend, my colleagues and myself if he thinks that we are not interested in the welfare of companies be they closed or open. We are interested in their enterprise, their welfare, and, as Treasury Ministers, their results, and, in our responsible position at the receiving end, we hope that they flourish.

The first question is whether this is the appropriate time to make the increase proposed. The second question is: what is the cost?, and perhaps I may answer that immediately. The cost would be approximately—it is not possible to be other than approximate—£20 million in a full year.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

Does that include the Income Tax and the Surtax which would necessarily flow to the Exchequer?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

It would be wrong for me to give an answer when I am not sure. I imagine not, but I cannot give a positive answer. I hope that the hon. Gentleman will allow me to look into it. It is safer to say not, and by the look of the thing I would say not. I was dealing with the question of cost; the hon. Gentleman asked me a question, and it is my privilege to answer his question.

There is no need for me to go into the basis or the general principle. The general principle is accepted. The hon. Gentleman is merely suggesting not a cancellation or a variation of the principle but an increase in amount. There is a good deal of common ground between us. My right hon. Friend has never said—my hon. Friends are aware of this—that these figures should remain for all time. We made that clear a year ago. There has been a considerable improvement in the figures, of course. Whether Profits Tax is an exact parallel or not, it is an interesting one at all events. The minimum figure was £3,000, as the hon. Gentleman remarked, and it is now £4,000. The hon. Gentleman proposes to put it up to £6,000. If there were three, for example, he proposes £15,000. The figure was £7,000, now it is £10,000, and the hon. Gentleman is proposing £15,000.

The first point that I want to make is that we are not inflexible about it. There have been considerable improvements. We are not relying on the argument of cost. We are relying very heavily—I might almost say exclusively—on the argument, which I stress, that this is certainly not the time to pick out, and to be seen to be picking out, in a way which would be completely misunderstood a group of individuals for special treatment by increasing

the allowable remuneration. There is nothing to prevent them from having their remuneration at the moment. The only thing provided in the Act is that the remuneration beyond a certain figure is not allowable for tax purposes. It does not prevent it from being treated as what it would be in the same way as dividend income. So there is no question of preventing remuneration from being given.

However, there would be an act taken by the Government of deliberately picking out individual directors who are earning up to allowable limits on these figures and increasing their limits by 50 per cent., and doing it at a time when there is severe restraint and restriction, asked for by, and to an extent imposed on, other members who are working, I am sure, as hard as they can and as productively as they can and who must be considered at the same time.

I want to make it quite clear against that background that I could not possibly recommend the Committee to accept the Amendment.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

We have no confidence that the Government will ever feel that it is the right time to make this change, and I can, therefore, only invite my hon. Friends to join me in the Division Lobby.

Question put, That those words be there inserted: —

The Committee divided: Ayes 105. Noes 166.

Division No. 353.]AYES[11.45 p.m.
Allason, James (Hemel Hempstead)Eden, Sir JohnJopling, Michael
Awdry, DanielElliott, R. W.(N 'c' tle-upon-Tyne, N.)King, Evelyn (Dorset, S.)
Baker, W. H. K.Eyre, ReginaldKirk, Peter
Bell, RonaldFortescue, TimLambton, Viscount
Bennett, Sir Frederic (Torquay)Gilmour, Ian (Norfolk, C.)Lloyd, Ian (P'tsm'th, Langstone)
Berry, Hn. AnthonyGilmour, Sir John (Fife, E.)Macleod, Rt. Hn. Iain
Biffen, JohnGlover, Sir DouglasMaddan, Martin
Bossom, Sir CliveGower, RaymondMaude, Angus
Braine, BernardGrant-Ferris, R.Mawby, Ray
Brewis, JohnGresham Cooke, R.Maydon, Lt.-Cmdr. S. L. C.
Brinton, Sir TattonGurden, HaroldMills, Peter (Torrington)
Brown, Sir Edward (Bath)Hall, John (Wycombe)Mills, Stratton (Belfast, N.)
Bruce-Gardyne, J.Hall-Davis, A. G. F.Miscampbell, Norman
Buchanan-Smith,Alick(Angua,N&M)Harrison, Col. Sir Harwood (Eye)Monro, Hector
Buck, Antony (Colchester)Harvey, Sir Arthur VereMore, Jasper
Campbell, GordonHawkins, PaulMorgan, Geraint (Denbigh)
Channon, H. P. G.Heseltine, MichaelMorrison, Charles (Devizes)
Chichester-Clark, R.Higgins, Terence L.Munro-Lucas-Tooth, Sir Hugh
Cooke, RobertHiley, JosephMurton, Oscar
Costain, A. P.Hill, J. E. B.Nicholls, Sir Harmar
Crosthwaite-Eyre, Sir OliverHolland, PhilipNott, John
Dance, JamesHordern, PeterOnslow, Cranley
Davidson,James(Aberdeenshire, W.)Hornby, RichardOsborn, John (Hallam)
Dean, Paul (Somerset, N.)Hunt, JohnPage, Graham (Crosby)
Dodds-Parker, DouglasIrvine, Bryant Godman (Rye)Percival, Ian
Doughty, CharlesJenkin, Patrick (Woodford)Pounder, Rafton
Ramsden, Rt. Hn. JamesTemple, John M.Wilson, Geoffrey (Truro)
Rossi, Hugh (Hornsey)Thatcher, Mrs. MargaretWinstanley, Dr. M. P.
Royle, AnthonyTilney, JohnWolrige-Gordon, Patrick
Russell, Sir Ranaldvan Straubenzee, W. R.Worsley, Marcus
Scott, NicholasVaughan-Morgan, Rt. Hn. Sir JohnWright, Esmond
Sinclair, Sir GeorgeWainwright, Richard (Come Valley)Wylie, N. R.
Smith, JohnWard, Dame IreneYounger, Hn. George
Stainton, KeithWeatherill, Bernard
Stoddart-Scott, Col. Sir M. (Ripon)Webster, DavidTELLERS FOR THE AYES:
Summers, Sir SpencerWhitelaw, Rt. Hn. WilliamMr. David Mitchell and
Mr. Anthony Grant.
NOES
Abse, LeoFletcher, Ted (Darlington)Mason, Roy
Allaun, Frank (Salford, E.)Foley, MauriceMillan, Bruce
Alldritt, WalterFoot, Sir Dingle (Ipswich)Miller, Dr. M. S.
Allen, ScholefieldFord, BenMilne, Edward (Blyth)
Anderson, DonaldForrester, JohnMitchell, R. c. (S'th'pton. Test)
Archer, PeterFowler, GerryMorgan, Elystan (Cardiganshire)
Armstrong, ErnestFraser, John (Norwood)Morris, Alfred (Wythenshawe)
Atkins, Ronald (Preston, N.)Galpern, Sir MyerMorris, Charles R. (Openshaw)
Atkinson, Norman (Tottenham)Gardner, TonyMoyle, Roland
Barnett, JoelGarrett, W. E.Newens, Stan
Benn, Rt. Hn. Anthony WedgwoodGordon Walker, Rt. Hn. P. C.Noel-Baker, Francis (Swindon)
Blackburn, F.Gray, Dr. Hugh (Yarmouth)Noel-Baker,Rt.Hn.Philip(Derby,S.)
Blenkinsop, ArthurGreenwood, Rt. Hn. AnthonyOgden, Eric
Booth, AlbertGriffiths, David (Rother Valley)O'Malley, Brian
Braddock, Mrs. E. M.Griffiths, Will (Exchange)Oram, Albert E.
Bray, Or. JeremyHart, Mrs. JudithOrbach, Maurice
Brooks, EdwinHaseldine, NormanOrme, Stanley
Brown, Rt. Hn. George (Belper)Heffer, Eric S.Owen, Will (Morpeth)
Brown, Hugh D. (G'gow, Provan)Henig, StanleyPark, Trevor
Buchan, NormanHerbison, Rt. Hn. MargaretPeart, Rt. Hn. Fred
Buchanan, Richard (G'gow, Sp'burn)Hooley, FrankPerry, George H. (Nottingham, S.)
Callaghan, Rt. Hn. JamesHorner, JohnPrice, Christopher (Perry Barr)
Cant, R. B.Houghton, Rt. Hn. DouglasPrice, William (Rugby)
Carmichael, NeilHowie, W.Probert, Arthur
Coe, DenisHoy, JamesRees, Merlyn
Coleman, DonaldHuckfield, L.Roberts, Albert (Normanton)
Concannon, J. D.Hughes, Roy (Newport)Robinson, W. 0. J. (Walth'stow, E.)
Crawshaw, RichardHunter, AdamRodgers, William (Stockton)
Crossman, Rt. Hn. RichardJackson, Colin (B'h'se & Spenb'gh)Rose, Paul
Cullen, Mrs. AliceJackson,Peter M. (High Peak)Ross, Rt. Hn. William
Davidson, Arthur (Accrington)Jones, J. Idwal (Wrexham)Rowland, Christopher (Meriden)
Davies, G. Elfed (Rhondda, E.)Jones, T. Alec (Rhondda, West)Rowlands, E. (Cardiff, N.)
Davies, Ednyfed Hudson (Conway)Kelley, RichardSheldon, Robert
Davies, Harold (Leek)Lawson, GeorgeShore, Peter (Stepney)
Davies, Ifor (Gower)Leadbitter, TedSilkin, Rt. Hn. John (Deptford)
Delargy, HughLestor, Miss JoanSilkin, Hn. S. C.(Dulwich)
Dell, EdmundLewis, Ron (Carlisle)Silverman, Julius (Aston)
Dewar, DonaldLoughlin, CharlesSnow, Julian
Diamond, Rt. Hn. JohnLyon, Alexander W. (York)Taverne, Dick
Dickens, JamesLyons, Edward (Bradford, E.)Tuck, Raphael
Dobson, RayMcBride, NeilVartey, Eric G.
Doig, PeterMacColl, JamesWainwright, Edwin (Dearne Valley)
Donnelly, DesmondMacDermot, NiallWalden, Brian (All Saints)
Driberg, TomMacdonald, A. H.Walker, Harold (Doncaster)
Dunn, James A.McGuire, MichaelWatkins, David (Consett)
Dunwoody, Mrs. Gwyneth (Exeter)Mackenzie, Gregor (Rutherglen)Whitlock, William
Dunwoody, Dr. John (F'th & C'b'e)Mackle, JohnWilliams, Alan (Swansea, W.)
Edwards, William (Merioneth)Mackintosh, John P.Williams, Clifford (Abertillery)
Ellis, JohnMaclennan, RobertWilliams, Mrs. Shirley (Hitchin)
Ennals, DavidMacMillan, Malcolm (Western Isles)Willis, George (Edinburgh, E.)
Ensor, DavidMcMillan, Tom (Glasgow, C.)Wilson, William (Coventry, S.)
Faulds, AndrewMcNamara, J. KevinWoof, Robert
Fernyhough, E.Mallalieu,J.P.W.(Huddersfield,E.)Yates, Victor
Finch, HaroldManuel, ArchieTELLERS FOR THE NOES:
Fitch, Alan (Wigan)Mapp, CharlesMr. Walter Harrison and
Fletcher, Raymond (Ilkeston)Marquand, DavidMr. Joseph Harper.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

I beg to move Amendment No. 85, in page 72, line 18, at the end to insert: 9. Provided that the total loan capital of a company does not exceed 50 per cent. of its issued share capital and reserves, paragraph 9(1)(a) of Schedule 11 to the Finance Act 1965 shall not apply to so much of any interest or other consideration as represents a reasonable commercial consideration. This Amendment is designed to ease the extremely harsh provisions which at present obtain on loans by directors of close companies. We come, once again, to the essential difficulty the Government are in with regard to these close companies. If they are allowed to operate on normal commercial grounds then these grounds may be used as a means for reducing the burden of taxation, so as always attempts are made to block those who would take advantage of these grounds and in doing so the close company is prevented from operating in a normal commercial way.

This is particularly devastating and harmful to the small family company which may, in a time of credit squeeze or economic difficulty, have no other sources from which to derive its funds. At a time of rapid expansion, particularly of small growth companies, the only means by which these funds can be obtained, apart from raising funds from a bank if it is possible to do so, is for a director of the company to advance the loan.

Yet by paragraph 9(1,a) of Schedule 11 to the Finance Act, 1965, loans to close companies made by a director who owns 5 per cent. or more of the equity in that company are treated as a distribution and taxed accordingly.

We are seeking, in this Amendment, to allow interest at normal commercial rates, but at no specially enhanced rate, to become an allowable deduction for Corporation Tax provided always that interest on such loans shall be disallowed if the total loan capital exceeds 50 per cent. of the issued share capital of the company.

We put forward this Amendment as a reasonable compromise between what the Government quite clearly seek to do to protect the Government's interest in so far as dividend stripping is concerned and the essential interest of such close companies in raising money by loans from directors. It is what we feel to be a useful compromise, and it is in that spirit that we advance the Amendment.

12 m.

Photo of Sir Eric Errington Sir Eric Errington , Aldershot

I would like, if it is not interfering too much with the sort of Irishmen's fight which has been going on between the Front Benches, to say a word or two in support of this Amendment because of the serious effect on small close companies which at the moment is inevitable.

Very often, as has been said, these companies are formed with a modest capital and they need loan money to be able to progress to a position where they can get development money on a much larger scale, either from merchant banks, insurance companies, or by other means.

I would like to quote an example which seems to me to put the position clearly and to indicate the lengths to which these things can go. The testator died and left benefit under his will to a relative who subsequently became a participant and this relative was also a person who, besides benefiting under the trust, was also a director of the company to whom the money was lent.

The effect of these facts seems to be that for the purposes of Corporation Tax the interest due on the money advanced by the trust is not allowed as a deduction before the amount of tax to be paid is arrived at. Even if it is the wish of the Government—which I hope it is not —to make things as difficult as possible for small companies, I cannot believe that there is any justification or fairness in not allowing a deduction in those circumstances.

Because of the way in which the 1965 Act is drafted it is difficult to deal with this situation, but the precaution provided in the Amendment— does not exceed 50 per cent. of its issued share capital"— will bring some relief to those who, to their amazement, and because of a continuous process of obscure legislation, find themselves in a situation in which they are made to suffer without gaining the benefits to which they are entitled, on any basis of fairness.

Photo of Mr Richard Wainwright Mr Richard Wainwright , Colne Valley

I would like briefly to associate myself with the Amendment in the spirit in which I happened to make representations from outside the House during the passage of the 1965 Bill, and at least as much on grounds of public interest as on grounds of hardship to individual proprietors and associates of companies.

As the Committee knows, the public interest is that large sums of accumulated private savings used to be held on loan account, sometimes almost on current banking account, with private companies, by their proprietors and associates. The headlong zeal with which the Government have tried to stop this as a means of avoidance has resulted in the shaking out of a large part of these savings, and we know that when savings are suddenly taken out, especially at a time of credit squeeze, by no means all are effectively reinvested. Some are spent, and some are diverted in other ways.

It may be that most of the damage has been done during the last two years. Close companies which have been at all reasonably advised have shed these loan accounts and wherever possible have called in other means of financial support, but it may be that some of this traditional form of saving has survived this process and to the extent that there is still a volume of private savings held by close companies I hope that the Government will accept the Amendment and prevent further damage to the overall savings position.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

There is no need for me to explain the principles behind this matter because the Committee is well aware of them and of the position. I am grateful to the hon. Member for Horsham (Mr. Hordern) for making it clear that the problem is to draw a sensible dividing line between complete freedom for the close company operator to operate at the expense of the Revenue and sensible provisions under which finance can be provided.

I have listened carefully to the proposals that have been made, remembering that this is not the first time that we have had this discussion, and I have had the most careful inquiries made. If, on these two scores, I had been convinced that there was a substantial measure of hardship, I would have been willing to see whether we could not, if necessary, go too far the other way to meet a need which, it was alleged in Committee, was not being met.

But that has not happened. The hon. Gentleman said that most of the damage may have been done in the past two years. He was, in fact, saying that any hardship would have been created and would have come to light in those two years. From the information I get in total form from the Revenue—and I wish to make it clear that nobody knows the precise details but only the overall position—I am sure that there is no real evidence of hardship being created by this provision.

We do not believe that there is a substantial case for the proposal. I recognise the weight of the argument, but it is not supported by facts. There seems to be no real difficulty in providing finance in a sensible way and, in these circumstances, I cannot recommend acceptance of the Amendment.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

My hon. Friends and I are disappointed with the right hon. Gentleman's reaction to the Amendment, particularly in view of the evidence that has been presented to the Committee about the way in which these companies suffer from the severe penalties put on directors who provide loans to close companies.

The Amendment seeks, in a reasonable way, to provide some midway position; between what are the essential and proper Government interests that must be protected and the requirement of these small family companies for director finance. On the assurance that we will do our best to revert to this subject on Report, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

I beg to move Amendment No. 118, in page 72, in line 18, at the end to insert: 9. In section 74 of the Finance Act 1965 the following new subsection shall be inserted: —'(4A) For the purposes of this section, any director of a close company who dies in office during an accounting period shall be regarded as having held office for half that period, unless he is replaced during that same period by a new director whose duration of service during that period, together with that of the deceased director, equals or exceeds half that period'. This subject was first introduced by my hon. Friend the Member for Belfast, North (Mr. Stratton Mills) when, last January, he asked the Chancellor of the Exchequer … whether he is aware that the Inland Revenue have been disallowing the remuneration of whole-time directors in close companies as an expense before Corporation Tax where the director dies within six months of the commencement of the financial year, on the grounds that the director was not a full-time employee for more than 50 per cent. of the company's trading year; and what action he will take. The Chief Secretary, in a Written Answer, replied: Representations on this point are being taken into account, along with the other representations my right hon. Friend is receiving in the Budget review".—[OFFICIAL REPORT, 31st January, 1967 Vol. 740, c. 55.] This question has still not been answered. If a director of a close company dies in the first half of the company's financial year, he is held to be a part-time director and hence the taxation of the remuneration of the other directors of the company is affected. It may not be desirable for a director to be appointed almost immediately after the death of another director, with the penalty that if he is not, the other directors are penalised.

It is surely bad enough that directors' salaries are limited for fear of tax evasion in the way they are. But to reduce them because of a wholly unforeseen event outside their control seems to be carrying events too far. My hon. Friends and I, and my hon. Friend the Member for Belfast, North—who has asked me to apologise for his absence— expect a proper reply from the Government tonight.

Photo of Mr Niall MacDermot Mr Niall MacDermot , Derby North

One can judge the merits of the Amendment only against the background of the principle underlying the present rule governing the allowances. Obviously, it would be absurd to give the full allowance, for example, where a director worked full time only for one week or one month in an accounting period. Equally, at the other extreme, it would be unfair to deny the allowance if he worked for nine or ten months in the year.

Two alternative approaches are possible. One would be to try to apportion the allowance for the whole year according to the amount worked, in twelfths, allowing one-twelfth for each month, and the other would be that which was done under the legislation which we introduced to follow the precedent of the Profits Tax rule, giving the full allowance wherever the relevant director worked full time for more than half the accounting period. The effect is that if he dies or retires, say, after five months' full-time work in the year, no allowance is earned. Equally, if he dies or retires after seven months, a full year's allowance is given. This works on the swings and roundabouts basis, sometimes to the advantage of the Revenue and sometimes to its disadvantage, and it is simpler than having an application of a provision based on twelfths.

So much for the general rule. The Amendment suggests departing from that swings and roundabouts approach where a director does not retire voluntarily or due to illness but dies in harness after working for less than half the accounting period. By the way in which the rule operates and is phrased, there still can be a full year's allowance in those circumstances, provided that a successor is appointed within six months of the death. One is then allowed to aggregate the time of his service with the time of his successor, and provided that a total of six months' service is done by him and his successor, the full year's allowance is earned. We are considering the case where a director dies in harness and the company does not appoint a successor after a period of six months, which would surely be adequate for the company to find a successor. It is surely a case in which it is fair to say that the company deliberately decides not to appoint a successor.

Reverting to the swings and roundabouts approach as a general rule, I do not see why the position should be any different in that case from the position where a director retires, perhaps similarly after five months' service, and again the company decides not to appoint the successor. It seems to me that the merits of the case put forward in the Amendment are not sufficient to justify a change in the law which would be a definite departure from the general rule which applies.

Mr. Hordera:

If I may say so, with great respect, that is a thoroughly "wet" reply. The hon. and learned Member does not seem to realise that we are not interested in the roundabouts. We are interested only in the swings. Where directors of close companies find themselves in this position, we think that this would be a worth-while step to take. To say that a company must appoint another director within six months or suffer a penalty of higher taxation, is a ludicrous argument.

Once again, I shall ask leave to withdraw this Amendment, but on the clear understanding that we shall return to it on Report. I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

12.15 a.m.

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

I beg to move Amendment No. 136, in page 72, line 18, at the end to insert: 9. In paragraph 5(b) of Schedule 18 to the Finance Act 1965 after the words 'the trustee or trustees of any settlement' there shall be inserted the words 'other than the trustees of any settlement established for charitable purposes only and registered under the Charities Act 1960'. I hope that the Financial Secretary will consider this Amendment with a view to telling us something about it on Report if he cannot accept it now. The matter concerns debenture interest. As the hon. and learned Gentleman knows, the normal rule is that debenture interest is allowed in computing liability for Corporation Tax. The normal rule is altered with regard to close companies when a debenture interest would not be allowed as far as it was a distribution to a director or to an associate of a director.

I have a very special case concerning charitable trusts. It arises in this way. Two directors made very extensive charitable settlements for the benefit of the employees of a company, and other settlements for general charitable purposes. Those settlements were made for charitable purposes only, for registered charities. It so happens that when one considers paragraph 5 of the Eighteenth Schedule to the Finance Act in conjunction with paragraph 9 (1, a) of the Eleventh Schedule to the Finance Act, one finds that trustees of a charitable settlement set up by the director of a close company are to be regarded as associates of that director. Because those trustees are regarded as associates of that director, debenture interest would be treated as a distribution. This means that the charity suffers very considerably indeed. They are charities which are wholly for charitable purposes and are registered charities.

We therefore proposed an Amendment which would provide that debenture interest which goes to settlements made under those circumstances would not be a distribution for the purposes of this provision. This would be a tremendous help to the charity and I hope that the Financial Secretary will consider the point. Last year, he made certain relieving provisions with regard to pension funds, and so I hope that this year he will make certain relieving provisions for settlements which are set up for charitable purposes only.

Photo of Mr Niall MacDermot Mr Niall MacDermot , Derby North

The hon. Lady invited me to give a reply indicating a willingness to consider this matter further before Report. I would not wish to encourage her particularly in that form, but rather to say that I would be willing, as I was last year, to consider the circumstances of any case that the hon. Lady brought to my attention so that we could examine further whether we think any alteration of the law would be justified and would be possible in a way that could be contained.

I must say that the Amendment as it stands at the moment would be too wide, and we could not accept it. I understand that there could be what I may call perfectly genuine cases of the kind which she is describing, but equally I am afraid, unfortunately, it is the experience of the Revenue that attempts are from time to time made to use charitable status for purposes of tax avoidance.

One does not have to be of a peculiarly suspicious mind to envisage a case where a person could make a trust which was a charitable trust and then arrange for the funds to be provided back by way of loan finance to the company in a way in which one could take the realistic view that the settlor had not relinquished control, and that this was being used as machinery for avoiding the rules that we have just been discussing.

Without going into detail, the intention is that one cannot accept the Amendment as it is. Nevertheless, the hon. Lady said that she has a particular case in mind, and if she cares to let me have particulars, I will, without any kind of undertaking, willingly look into it.

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

I will willingly respond to the hon. and learned Gentleman's invitation, and now beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 147, in page 73, line 18, leave out 'repaid' and insert 'paid'.—[Mr. MacDermot.]

Photo of Mr Niall MacDermot Mr Niall MacDermot , Derby North

I beg to move Amendment No. 148, in page 73, line 39, to leave out sub-paragraph (3).

With this Amendment I suggest that it might be convenient to discuss Amendment No. 155. The two are related.

These Amendments remedy a flaw in the Schedule relating to the procedure for recovering Income Tax and interest on it in respect of dividends and interest paid by companies. I am in a position to describe the matter at rather more tedious length if any hon. Member wishes me to do so, but perhaps it is already clear to hon. Members.

Amendment agreed to.

Further Amendment made: No. 194, in page 74, line 3, at end insert:

Adjustments at end of year

12. Where the amount of any tax payable in accordance with sub-paragraph (2) of paragraph 1 of the said Schedule 12 (adjustment at end of year) is agreed between the company and the inspector—

  1. (a) the making of an assessment charging that tax, or an appeal against the assessment, shall not affect the date when the tax is due (that is to say, as provided by paragraph 5(1) of the said Schedule 12, fourteen days after the tax is so agreed), and
  2. (b) the power of making an assessment under sub-paragraph (3) of the said paragraph 1 shall include power to make an assessment of the tax on that company if that tax, or any part of it, is not paid within the said fourteen days after the tax is so agreed (whether or not it has been paid when the assessment is made).—[Mr. MacDermot.]

Photo of Mr Niall MacDermot Mr Niall MacDermot , Derby North

I beg to move Amendment No. 150, in page 75, line 7, after 'distraint' to insert 'or poinding'.

This Amendment, Sir Eric, remedies a drafting slip. When we referred to distraint, we committed the grave error of overlooking the Scottish equivalent which, I understand, is called poinding.

Amendment agreed to.

Photo of Dr Horace King Dr Horace King , Southampton, Itchen

I do not propose to call Amendment No. 167. I think that it would be more convenient if Amendment No. 134, which could have been discussed with it, should be called separately when we come to Clause 34.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

I am much obliged.

Question proposed, That this Schedule, as amended, be the Eleventh Schedule to the Bill.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

I have one point on which I have been asked to get clarification. I recently told the hon. and learned Gentleman that I would raise it. It relates to paragraph 5 of the Schedule. The question is whether an open company—a non-close company—can be a principal member for the purposes of sub-paragraph (6) of the paragraph.

On Second Reading, the Chief Secretary said: Paragraph 5 of Schedule 11 therefore provides broadly that 'the public' are all the shareholders other than the five largest. That by itself should bring greater certainty.In addition, there is a substantial concession, in that shares held by open companies are to be treated as being held by the public whether or not they form part of the five largest holdings."—[OFFICIAL REPORT, 2nd May, 1967; Vol. 746, c. 349.] That is a very clear statement of intention which we all understand.

In addition, we have paragraph 2, on page 70, which reads: Shares shall be deemed to be beneficially held by the public if, and only if, sub-paragraph (3) below so provides, and if they are not within the exceptions in paragraph (a), (b) or (c) of the said paragraph 1(3) (shares held by a director of the company or his associate or by certain other companies) or within the exception in sub-paragraph (4) below. My interpretation is that sub-paragraph (6) does not affect the interpretation of a company beneficially held by the public as an open company under (a). It seems that sub-paragraph (6), the 85 per cent. test account, applied to an open company.

I provide two simple examples to make the dilemma clear. Suppose we have a case where there are four private shareholders owning 51 per cent. of a company and LCI. holds 35 per cent. Together, the holding would be 86 per cent. Would such a company be treated as a closed company or not? We should like to know what the purpose of sub-paragraph (6) is.

The second example is slightly more difficult. If a single shareholder holds 64 per cent. of the shares and under the normal interpretation being an open company, and the rest is held within the meaning of sub-paragraph (3), supposing that four open companies which between them hold 22 per cent. of the companies' shares, thus putting it just over the 85 per cent. limit, does that make it a closed company, and if so, why should it?

Perhaps the Chief Secretary will explain the purpose of sub-paragraph (6). This is a point to which we would like to return, but as there has been particular dispute on the interpretation on these points the Committee would be glad to have his comments on them.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The hon. Member said that he wants an answer to his specific question and is returning to the matter later. I can help best by giving a specific answer to the question of which he was kind enough to give me notice. The answer is, yes. The answer is that an open company or an approved superannuation fund can be a principal member so that its holding is taken into account for the purposes of sub-paragraph (6). From that follows the answer to all the other questions which the hon. Member has asked me.

Question put and agreed to.

Schedule, as amended, agreed to.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

I beg to move, That the Chairman do report Progress and ask leave to sit again.

Clearly, the Chief Secretary must have got hold of the wrong brief. We cannot have a situation in which Treasury Ministers answer questions with such a simple word as "Yes". I do not know what would happen if we went on like that.

Seriously, we have made remarkable progress, particularly as for reasons outside our control we started an hour late. The next obvious chunk of the Bill is Clause 24, dealing with Selective Employment Tax. I think that we should start a day on that.

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I am so overcome with astonishment and shock by hearing the Chief Secretary saying "Yes" after all this time, that I must agree with the right hon. Member for Enfield, West (Mr. Iain Macleod). We must have time for this almost unprecedented practice that the Chief Secretary has adopted to be studied. He and I must have a private conversation before resuming progress.

I have been absent from the Committee, for which I apologise. I am sure that the Committee understands the reasons for that. I think that both sides of the Committee have done a remarkable job and that there has been great co-operation. I hope that the Opposition feel that the points made have been properly ventilated. The Committee has managed to get through a very great deal of work. We are grateful for the co-operation which has been shown. I know that my hon. colleagues who have carried the burden are most grateful for the co-operation.

Question put and agreed to.

Committee report Progress; to sit again this day.