Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 12th March 1973.

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Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford 12:00 am, 12th March 1973

I am anxious, in opening the debate this afternoon, to be reasonably brief as I know that a large number of right hon. and hon. Members are anxious to catch your eye, Mr. Speaker. I intend, therefore, to confine my remarks to those parts of the Budget judgment which are my concern at the Treasury. I shall touch on corporation tax, I shall try to answer various points raised in last week's debates, and I want to reply to the attack of the right hon. Member for Leeds, East (Mr. Healey), on unification; but the main part of my speech will be devoted to answering the charges levelled at our public spending plans, particularly the criticisms voiced in the recent Report of the Select Committee on Expenditure.

In his Budget statement the Chancellor touched very briefly on our proposals under the new corporation tax for dealing with groups of companies. This is not a subject with much political sex appeal, but I hope the House will bear with me for just a moment or two while I explain what we intend to do and why. I need not go into great detail because the Inland Revenue published a full statement on Budget day.

Those who took part in our debates last year will remember that one of the amendments moved in Committee was to allow more flexible arrangements for the surrender of advance corporation tax between members of a group of companies. As the law stands at present, a company may surrender only its surplus advance corporation tax, that is to say, ACT surplus to the amount that can be set against corporation tax on the income of the particular year. What we now propose is that the parent company should be able to surrender to its subsidiaries any amount of advance corporation tax in respect of dividends regardless of whether or not it is surplus.

As a corollary, we shall need some restriction on the use of the surrendered ACT. We intend to allow it to be set against the current tax of the company to which it is surrendered or carried forward, and the facility contained in last year's Finance Act for it to be carried back against the tax due for earlier years will be withdrawn. We believe that this measure will be of help to certain groups of companies for which the existing rules are needlessly restrictive.

At the same time, and perhaps of more importance to the House, we are acting to check the growing abuse of group relief provisions as they relate to losses and capital allowances. The House will remember that my right hon. Friend indicated that perhaps up to £100 million might be lost in the coming year if we did not act. It has become apparent that the rules as they now stand are open to serious abuse and must be changed. We have discussed the various possibilities with representatives of industry and the professions and we believe that the solution we propose, while dealing effectively with the main areas of abuse, will not impose penalties in genuine cases.

Hitherto, the group relationship under the Taxes Act is defined in terms of ordinary share capital. A company and a subsidiary in which it holds at least 75 per cent. of the ordinary share capital may be treated as a group. What is now happening is that a company which is a full member of a genuine trading group can at the same time, by manipulation of its share capital, become for tax purposes the subsidiary of a totally unconnected company. And it can thus, for tax purposes, effectively sell any unused capital allowances or losses to that other company at a discount. This is clearly wrong; and what we propose is a more realistic test of group relationship.

In future the parent company will need to hold not only 75 per cent. of the ordinary share capital but also be entitled to 75 per cent. of its profits and 75 per cent. of its assets. This will prevent, for instance, special classes of shares being created which entitle one parent to the profits and assets while another parent can be treated as grouped with the company. We also propose to introduce measures to counter arrangements which, from the outset, envisage the subsidiary company passing under the control of another company at the moment when its losses have been sucked dry. There will be similar provisions for consortia and partnerships of companies, and also for the conditions covering surrender of ACT within groups, the latter based, of course, on a 51 per cent., and not on a 75 per cent., test.

These arrangements will take effect from Budget day. However, we recognise that groups which do not qualify under the new tests might be in serious difficulties because it would take time for them to reorganise so as to qualify under the new more stringent rules. We propose therefore that there will be a period of grace for groups and consortia already in existence. Provided that they satisfy the new tests by April next year, they can continue to qualify for group relief during the coming financial year. We are also taking steps to ensure that there is no retrospection. There will be special arrangements for first-year allowances in respect of contracts entered into before Budget day.

Another matter left over from last year related to some anti-avoidance legislation consequential upon the change to the imputation system. With one exception the amendments which we propose will simply adapt the way the existing provisions apply to the new imputation system. The one exception relates to our old friend, the dividend stripper, where tighter provisions are required.

Like other hon. Members, I have from time to time voiced criticisms about much of our anti-avoidance legislation, and I know that certain aspects of it, notably what is now Section 460 of the Taxes Act, have been subjected to some criticism in the courts. While it is necessary this year to legislate in the way I have indicated, I must tell the House that we are having a radical look at the whole field of anti-avoidance legislation to see whether some new approach is possible which may perhaps avoid the complications and uncertainties of the present legislation. It is not an easy field and I certainly cannot guarantee that we shall succeed. It will certainly take time. But for my part I would hope that we might be able to finish this review in time for any consequential legislation to be brought forward next year.

I should now like to take up a few points raised in the debates last week. The hon. Member for West Lothian (Mr. Dalyell) asked about our new share savings scheme proposals, the right hon. Member for Birkenhead (Mr. Dell) raised a number of points about the taxation of North Sea oil; and my hon. Friend the Member for Horsham (Mr. Hordern) raised an important point about profit margin control.

The hon. Member for West Lothian expressed some reservations about the new share savings scheme proposals—in distinction to the warm welcome which those proposals received both in the Press and outside the House. He pointed out that although a participant will be protected against a fall in the value of shares during the savings period, he has no protection once he has become the full owner of his shares. This is of course quite right and proper. It would be very difficult in these circumstances to justify giving him any special protection from the normal risks attaching to share ownership.

Secondly, the hon. Member suggested that the scheme would be a drag on mobility and that provision should be made for transfer rights. I agree that we should aim to avoid any drag, and we have various means in mind to achieve this.

Thirdly, the hon. Member complained that there would be no dividends or voting rights during the savings period. This is surely right, for it is only by such restrictions that one can justify making shares available at up to a 30 per cent. discount. Finally he said that no provision was made for public sector employees. That is of course true—but then we on this side of the House have never taken the view that because a benefit cannot be open to all, it must not be open to any. These proposals have been widely welcomed, and I hope that a large number of firms will consider introducing share savings schemes for their employees at the earliest possible moment.