Replacement of Business Assets: Exemption to Companies Carrying on Mutual Business with Its Members

Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 6th July 1971.

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Section 33 of the Finance Act 1965 shall be amended by adding, after paragraph (c) of subsection 10, the words '(d) in relation to a company carrying on any mutual business with its members'.—[Mr. Ogden.]

Brought up, and read the First time.

Photo of Mr Eric Ogden Mr Eric Ogden , Liverpool, West Derby

I beg to move, That the Clause be read a Second time.

First, Mr. Deputy Speaker, I thank you and Mr. Speaker for making it possible for us to discuss this matter in the House tonight. There are rather exceptional circumstances, and we appreciate what has been done to make this discussion possible. I declare my interest, as I have the honour to be parliamentary adviser to the Council of the Pharmaceutical Society of Great Britain, and the Society also has a direct financial interest in the Clause.

There are some hon. Members here tonight who were not present in 1965, or who, if they were here, may have forgotten—as I had—that Section 33 of the Finance Act, 1965 is concerned with capital gains tax and exemptions from payment thereof. The purpose of the new Clause is to ensure that professional bodies shall in certain circumstances be able to claim exemption from payment of capital gains tax, as sections of industry and individuals are able to do.

I begin by explaining how the matter was brought to our attention. When I say "our attention", I include the hon. Member for Nottingham, South (Mr. Fowler), in whose name also the new Clause was put down. Last week, we received a copy of a letter which the Pharmaceutical Society had written to the Chancellor of the Exchequer. In that letter, the president of the Society, Mr. Darling, explained a series of circumstances which, for the convenience of the House, I shall telescope in time.

Hon. Members will know that the British Museum is to extend its premises. The home of the Society, No. 17, Bloomsbury Square, is required to provide a site for the extension of the British Museum Library scheme. The Society's headquarters has been in Bloomsbury Square for a number of years and it is, naturally, reluctant to leave its present home, but, as the site is required for what it has regarded as a greater purpose than its own convenience, the Society has agreed to the sale of the site, a purchase price has been agreed, and the negotiations for sale have continued on that basis. The purchaser is the Department of the Environment, which will use the site, when acquired, for the extension of the British Museum Library.

Last week, the Society was informed that, contrary to what had previously been understood, any sum of money accruing to it from the sale of the site to a Government Department would be subject to capital gains tax. It had not understood this at any previous time—perhaps this was the Society's fault—and in the negotiations about purchase price, whether done through the district valuer or by normal commercial agreement, the Society had assumed that it would not be liable to capital gains tax. The Society had thought that it was in a similar position to an industrialist. If he wishes to sell one factory and move into new premises, the money accruing from the sale can be used in full towards the purchase of the new factory, provided he is carrying on his business. Similarly, a householder who sells his or her home and uses the money towards the purchase of another does not have to pay capital gains tax.

The Society is now informed that under Section 33, even though it is a statutory, professional, non-profit-making body in the sense of profit as we understand it, and even though it has had exemptions over many years from the Inland Revenue Department for internal surpluses on the services it provides for its members, it will have to pay capital gains tax on any profit from the sale. Obviously, if it has been at the premises for 20, 30 or 40 years it will receive more than was paid for them. The whole proceeds from the sale to a Government Department are to be used to provide another home and headquarters to carry on not only its ethical and professional duties but its statutory duties.

The purpose of the Clause is to say that a professional organisation carrying on professional and statutory duties shall have the same exemptions as an industrialist ox a home owner when it wishes to continue those duties—and in fact is forced by law to do so—when it has cooperated with the Government to give up its present site, and when it did not seek to make any profit but the profit was forced upon it by Government action.

We informed the Treasury that these questions were being raised, so the matter is not completely new to the Financial Secretary. We apologise to him for having had to telescope the facts. We tried in the circumstances that were made known to us to bring the matter to the attention of his Department. He was not able to give any answers, and so we have been compelled to bring the matter forward in this way. I say that with no disrespect for the hon. Gentleman and the House.

We ask quite simply that a non-profit-making organisation which has co-operated with Government Departments and is doing its public duty should not be liable to capital gains tax where a profit is forced upon it, partcularly when, as in the case that I have instanced, the tax would be paid to one Government Department, the Treasury, but the Society would have to reconsider the price of the property to another Department. In finally agreeing the price with the Department for the Environment, the Society would have to take note of the new situation.

The Minister may be able to say that under existing legislation there is a provision of which I am not aware by which the Society is already exempted. We hope that he will give the matter favourable consideration.

Photo of Mr Norman Fowler Mr Norman Fowler , Nottingham South

I have little to add to what the hon. Member for Liverpool, West Derby (Mr. Ogden) has said.

The curious rule to which the hon. Gentleman has referred affects not only the Pharmaceutical Society, of which I also have the honour to be one of the parliamentary advisers, but other professional bodies. I think that the Monopolies Commission said that there were 300 professional non-profit-making bodies in this country. It is curious that the law allows a trading company to carry over profits on the sale of, say, its headquarters and to devote the entire proceeds to the purchase of new headquarters, but that this form of exemption is not open to a professional body. That means that, for example, as I understand the position, if the Law Society wanted to move from Chancery Lane, or the British Medical Association wanted to move from Tavistock Square, or the Institute of Chartered Accountants wanted to move from Moorgate Place, they would also be caught by the rule and have to pay capital gains tax on the proceeds of the sale. The amounts involved in possible payment of the tax may run into several hundreds of thousands of pounds, and this may very much affect the planning of many professional societies.

It seems peculiarly unjust that the Pharmaceutical Society, which is moving out of the building entirely to facilitate the extension of the British Museum and to fit in with the Government's plans, should be penalised in that way. The rule has a very serious potential effect upon other professional societies. I very much hope that my hon. Friend will be able to give us some encouragement on this point.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I am grateful for the moderate way in which the hon. Member for Liverpool, West Derby (Mr. Ogden) and my hon. Friend the Member for Nottingham, South (Mr. Fowler) have raised the matter. It has come to the attention of Treasury Ministers only in the past few days, as the hon. Member for Liverpool, West Derby, acknowledged, which has made it a little difficult to give it the attention which clearly we should have liked to give it, in view of the case they have put before the House.

The legal position seems pretty clear. The professional body in question, the Pharmaceutical Society, and the other bodies mentioned by my hon. Friend are not charitable bodies. If they were charities, there would be no question of liability to capital gains tax.

The Pharmaceutical Society was incorporated by royal charter. Like the other bodies, it is non-profit-making and, therefore, in respect of the activities between its members there is no taxable profit. But these bodies, for the purposes of the corporation tax, are treated as companies, and as such are liable to tax on their investments like any other body. Equally, they are liable to the capital gains tax. The hon. Member for West Derby referred several times to exemption from capital gains tax——

Photo of Mr Eric Ogden Mr Eric Ogden , Liverpool, West Derby

I quoted two examples. I understand that if an industrialist carrying on normal industrial activities disposed of one factory to obtain a larger factory, the whole of the proceeds of the sale of the first factory could be used to pay for the new one, and he would be exempt. Similarly, a householder selling one house and using the whole of the proceeds to buy another for himself would also be exempt.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

With respect, it is not an exemption. In the case of the industrialist, the capital gains liability is rolled over into the new assets. I apologise for the jargon, but one talks rather glibly of roll-over relief. That was what my hon. Friend was asking for—it was suggested that professional bodies which are not charities and are, therefore, liable to tax should nevertheless be entitled to the same treatment as though they were businesses fully liable to tax on all their profits.

The householder exemption is different. A householder is not liable; he is genuinely exempt from capital gains tax in respect of a house where he lives. The business roll-over is much more analogous to what the hon. Gentleman and my hon. Friend are seeking, where a firm sells one asset and invests the proceeds in another, and we have eased the rules in this very Finance Bill for businesses. Thus, they are not now confined to getting roll-over relief when the assets are assets of the same class—that is to say, buildings, plant and machinery, ships, aircraft, hovercraft and so on.

8.0 p.m.

Nevertheless, the roll-over relief applies under the law as it stands only to traders, and the rationale behind that is simply that a business should be entitled to preserve its capital intact when it merely changes an investment from one asset to another. But a professional society really represents, although it has statutory duties and is incorporated by Royal Charter, the sum of its members, and if the members were owners of the asset in question there would be no doubt that they would be charged to capital gains tax on the appreciation in value of the asset from April, 1965, to the date of the sale. It therefore does not make any difference if the members, as it were, are incorporated by charter and form a professional body of this sort. A professional body is still a society and is not carrying on business. It is not a trader in the accepted sense. It is a body which owns property and, like any other body, is subject to the normal law of the land in relation to capital gains tax liability.

That being so, it would be difficult to start making exceptions. We have the basic exception for charitable bodies but there are a large number of different sorts of body and individual taxpayers who have sought to secure a roll-over relief from capital gains tax, and it would be extremely difficult to know where to draw the line if we started exempting professional bodies. For example, one may take the case of agricultural landowners and urban landlords. They might well claim the same sort of treatment in a case where a property company invests in a block of flats or where an agricultural landowner invests in one estate, sells that and tries another one. There seems no real line that could be drawn between one category and another.

The existing line is drawn between charges which are exempt and traders who are entitled to roll-over relief. Although I have sympathy with the situation in which the Pharmaceutical Society finds itself—I know the site very well and that it has been earmarked for the British Museum—and I appreciate the embarrassment in which the council of the Society must find itself, faced unexpectedly with a potential capital gains tax liability, I find it difficult to accept the new Clause both as it is worded and in its intention and spirit. I make no point about the wording. That would not be an apt argument to cover the question because this is not a mutual business in the normal sense of the word. But I find it difficult to accept the spirit and intention of the new Clause.

I do not think that this is a matter which should affect the negotiations with the Department for the Environment. Tax liability which attaches is independent of any question of valuation for purchase for British Museum purposes. I am somewhat surprised that my hon. Friend sug- gested that the liability could run into several hundreds of thousands of pounds We must remember that we are talking about a gains tax and not a tax on the total realisation, and that this, furthermore, is only the gain which has accrued since 6th April, 1965. There has been in those six years a gain on property which this body has occupied for many years.

Photo of Mrs Freda Corbet Mrs Freda Corbet , Camberwell Peckham

Has the hon. Gentleman given up all idea of what he used to say in opposition with regard to inflationary effect upon capital gains tax, which would have had a great deal to do with this case had the Government been able to rectify what I thought myself was an error on the part of the Labour Government?

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

This is an interesting observation and, indeed, were such a provision written into the Statute Book the liaibility might well be less, although we are dealing here with a site in London where perhaps land values have risen rather more than the value of money has depreciated since 1965. I doubt very much whether the amount of liability is likely to be of the order of magnitude which my hon. Friend suggested, and I have no doubt that the Society will wish to pursue this with its accountants in order to determine the amount. The Inland Revenue will be helpful in trying to quantify.

Photo of Mr Norman Fowler Mr Norman Fowler , Nottingham South

I think my hon. Friend has slightly misunderstood me. I said that some cases in London have run into this figure. Surely that is not an exaggeration.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

That may well be the case. I apologise if I have misunderstood. Be that as it may, the law is clear—that bodies which are not traders are not entitled to roll-over relief because they are not investing in assets successively for the purpose of a business, and a society of this kind seems to me to be outside the scone of what was the definite intention of Parliament when it legislated for the roll-over relief. It would be very difficult if we sought now to extend the scope of availability of roll-over relief because it would be impossible to know where to draw the line, right down to the urban landlord or the agricultural landowner. It is with great regret that I cannot accept the new Clause, which is supported on both sides of the House, but I hope that, in the light of my explanation, the hon. Member for West Derby will feel able to withdraw the Motion.

Photo of Mr Eric Ogden Mr Eric Ogden , Liverpool, West Derby

I am grateful to the Financial Secretary for the manner in which he has replied and for the trouble he has taken. This might be taken as an example of the inevitable law that once a Treasury Minister is installed, whatever party he comes from, he is reluctant to part with taxation at any particular time, although I accept the 6d. off the income tax and the rest. The hon. Gentleman congratulated and complimented the hon. Member for Nottingham, South (Mr. Fowler) and me on the moderate way we put our case. Perhaps we were a little too moderate. He offered us sympathy. But no one can spend sympathy. We were asking for cash—or at least the opportunity not to pay cash.

I omitted to say that this is the first time, to my knowledge, that the Pharmaceutical Society has asked us to make representations on a matter in which it has a financial interest. On every other occasion, its case has concerned the profession itself, standards, medicines and so on.

I do not usually trouble the Financial Secretary in debates on Finance Bills. To me, "roll over" is usually something said to a dog. I was lost. Perhaps I should have consulted my hon. Friend the Member for Heywood and Royton (Mr. Barnett), but I am always lost long before he begins.

I think that the Financial Secretary was saying, "Certainly not yet". I think that he was saying, "No". He was right in saying that the Department has had little time to consider this matter. On that basis, I hope that he will provide opportunity for further representations to be made to him and that he will give them the same degree of consideration that he has given the new Clause, but with a more hopeful verdict at the end of it. On the basis of the fact that I do not believe in fighting battles or dividing the House when I know I am going to lose, I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.