§ Where in pursuance of any enactment passed after the fifth day of April, nineteen hundred and forty-six, any securities are issued to any body corporate as or as part of the consideration for the acquisition of any property under that enactment and where that body corporate is wound up, or the capital thereof is reduced or any bonds debentures or debenture stock are redeemed, or by virtue of a scheme of re-organisation to adapt the capital employed by the corporate body to the conditions created by the compulsory acquisition of its property a special distribution of reserves is made to the shareholders with or without a reduction of capital and in connection with the winding up, reduction of capital, redemption or special distribution all or any of the securities issued as aforesaid to the body corporate are distributed to holders of the securities of the body corporate or in a case where the distribution would involve a sum less than the value of one security a distribution of cash in lieu thereof, the distribution of securities or cash shall be deemed not to be a distribution to which subsection (1) of section thirty-six of the Finance Act, 1947, would but for this section apply.—[Lieut.-Commander Braithwaite.]
§ Brought up, and read the First time.
§ Lieut.-Commander Braithwaite
I beg to move, "That the Clause be read a Second time."
This Clause raises a new point and one which is gradually emerging in respect of concerns which have paid Profits Tax and whose businesses are nationalised, wholly or in part. As the Committee are well aware, a company pays Profits Tax at 25 per cent., but if some part thereof is not distributed, it is possible to claim what is known as non-distribution relief at a rate of 15 per cent. This has the effect of making profits which are "ploughed back"—to use the popular phrase—bear a rate of 10 per cent. If in some future year distribution exceeds this profit, then, in effect, such an excess is regarded as having been paid out of the reserve, and the relief is withdrawn by means of a 1120 surcharge upon such a distribution at 15 per cent. That is the machinery and the administration which the House approved.
Here is the point to which I call attention. When a company's business is nationalised, either wholly or in part, it receives as compensation the Government stock which may be issued at the time. A decision may be taken that it is not desired to hold this stock in the business, and it may be distributed to the shareholders; in those circumstances, I submit that what is distributed is not so much a reserve of profits made in the recent past as actual real capital originally subscribed for, built up and accumulated, before the Profits Tax was passed by this House and became operative. I submit that it is not right in cases of that sort that any surcharge should be levied by the Revenue authorities on any part of the distribution.
One has also to remember cases where the nationalisation scheme takes the form of acquiring shares in an existing company, where no such question arises. But in some cases there has been an issue of Government stock, and more recently the Government themselves have acquired shares in the business taken over. Therefore, I am sure the Committee will see that it is not equitable that the accident of the method of official take-over adopted in the nationalisation scheme should be the arbiter as to whether there is to be further Profits Tax or not.
The example I have in mind is a Bill which has not yet become an Act—the Iron and Steel Bill, which is now under consideration in another place—in which that method has been adopted. The right hon. Gentleman may recall, because I think he was concerned with the Standing Committee which considered the Bill, that discussion was not then possible. This matter is therefore being raised now, this being the first opportunity of doing so.
I should like to add a few words in support of what has been said by my hon. and gallant Friend. A number of anomalies are disclosing themselves in connection with nationalisation. There is the anomaly, for example, of concerns which are partly nationalised being forced to pay tax on profits which are no longer theirs. There is the anomaly, which has just been indicated by my hon. and gallant Friend, of concerns being forced to accept compensation. They never wanted to be nationalised, they did not want the compensation they are getting, but it has been forced upon them; and then they have been discouraged, particularly in the coal industry, from carrying on any form of activity at all. Holding companies were things that were discouraged. When they distribute to their old shareholders the compensation stock they have received, it is treated as though it were income and not as what it really is, capital. The law, as it stands, creates great injustices. It regards capital as income which is subjected to taxation. The Clause, which I commend to the Committee, puts right that quite obvious injustice. It is something that was not foreseen at the time of nationalisation, and it must now be put right.
§ Mr. Birch
I should like to say a few words of support of this new Clause. My hon. and gallant Friend the Member for Holderness (Lieut.-Commander Braithwaite) said that hon. Gentlemen opposite always required a precedent before they would do justice. There is a very good precedent for this Clause, and it is to be found in the Finance Act, 1946. In that Act it was argued that nationalisation was a matter of force majeure. What we had in mind then was the nationalisation of the Bank of England. At that time stocks were held by many insurance companies. They clearly did not intend to sell Bank of England stock, and we managed to get a provision into the 1946 Act to make it clear that no profit had been made because the Bank of England stock had been changed into Government stock.
That is on all fours with this position. What we are trying to avoid is someone being charged tax when he is not really liable to tax at all. The tax arises through nationalisation which was not willed by the company and is no fault of 1122 theirs. As to the question of justice, one first has a business taken away—a thing which one does not want to happen—inadequate compensation is paid in stocks which are going at a discount, and then one is taxed on a profit one has not made. That combination should, I think, be too much even for hon. Gentlemen opposite.
§ The Solicitor-General
I confess that I think the arguments advanced in support of this new Clause are really based on a misunderstanding of the effect, or intended effect, of Sections 35 and 36 of the Finance Act, 1947, which are the Sections that define what is a distribution for the purposes of assessment of Profits Tax. Broadly speaking, whatever a company distributes must be taken into account as a distribution in respect of which either 25 per cent. or 15 per cent. has to be charged. That includes distributions in kind.
This, however, is always subject to this limit: First, anything which is a repayment of loans or a repayment of the subscribed capital of the company cannot be treated as a distribution under either of those Sections; secondly, the limit at which a company can be charged in respect of any distribution of reserved profits under either of those Sections is the amount in respect of which it has received non-distribution relief.
The hon. and gallant Member for Holderness (Lieut.-Commander Braithwaite) explained how that operates. Briefly, if I may recapitulate what he said, if a company makes £1,000, distributes £500, and keeps £500, it is, in the first place, regarded as liable to pay 25 per cent. on the whole of the £1,000, but then it is given what has quite rightly been described as non-distribution relief at 15 per cent. on the amount it does not distribute. Therefore, in the example I am giving, it gets a credit of 15 per cent. on the £500. That is the over-riding limit beyond which no company, whether it goes into liquidation or not, can be charged. It can only be charged subject to that limit in respect of profits which it has not distributed since 1st January, 1947.
It amounts to this. Any company in 1949, whatever it distributes, either in liquidation or if it distributes its profits in specie, cannot be charged more than 1123 25 per cent. on the amount of profits made since 1st Jan, 1947. One looks at the profit since 1947, one deducts anything which represents a repayment of subscribed capital and anything which represents a repayment on loans, and on the balance one says that the maximum that the company can be charged in respect of any such distribution as the hon. and gallant Gentleman described, would be 15 per cent.
How does that apply to nationalised companies? One has to consider two entirely different sets of circumstances. In the one case, compensation is paid direct to the company. The other class of case is where the Government stock is paid to the shareholders of the nationalised concern. The case of the electricity concern is an example. Their shares are taken over and the shareholder is given compensation in Government stock to the extent of the market value of the shares.
Let me deal with the latter case first. There can be no possible reason, I suggest, for giving any relief of the kind asked for to an ex-shareholder in a nationalised electricity concern who is simply in the position that he has exchanged an investment in stock in an electricity company and has received Government stock instead. There is no possible reason in equity, or any other reason, why he should be given any relief of the sort asked for. If it is a company which receives that stock, and if it goes into liquidation, there is no reason why it should not pay Profits Tax upon the amount it distributes in liquidation just as any other company which goes into liquidation and distributes its assets.
Now take the case of a company whose undertaking has been taken over—such as a colliery company—and which itself has received compensation in the form of Government stock. In the case of colliery companies, the way in which it works is that they get their compensation as at 1st January, 1947, and therefore receive interim income. The only amount in respect of which they could be charged Profits Tax in the event of liquidation—and that is the case contemplated primarily in this Clause—[HON. MEMBERS: "No."]—on distribution of the stock, would be 15 per cent. in respect of what they received since 1st January, 1947—that is to say, interim income. 1124 I do not think it can be said that any exception should be made in the case of colliery companies, and that that interim income should be exempt from Profits Tax.
If a road haulage undertaking, for instance, having received compensation when the undertaking was taken over, goes into liquidation and distributes assets, somewhere in the assets it distributes is the amount of the post-1947 profits in respect of which it has received non-distributed relief. It can only be charged a sum not in excess of 15 per cent. on any post-1947 profits. When this consideration is taken into account, I cannot see that there is any reason why such companies should not be treated as any others which go into liquidation and distribute assets or reconstruct themselves under the existing conditions of Sections 35 and 36 of the Finance Act, 1947.
That is the kind of case which comes within the scope of these Sections, and there is no reason why any exception should be made of companies which are nationalised. The fact that a company is nationalised is no reason why it should be treated differently from one which goes into liquidation. It is charged Profits Tax in respect of non-distributed relief on post-1947 profits, and I should have thought that there was no reason why a company which goes into liquidation or reconstructs itself on being nationalised and distributes Government stock, in whole or in part, by way of compensation, should be taken out of the scope of these Sections. The matter is complicated and difficult to explain in detail. If hon. Gentlemen will consider the general principle underlying the Sections, they will agree that there is nothing to differentiate these companies.
§ Mr. R. A. Butler
If the Solicitor-General had given an explanation of this length on the previous new Clause, in which we took so much interest—that relating to education—we might have been better pleased. No one can complain that the right hon. and learned Gentleman has not given us the benefit of his advice, at such great length that we are wondering whether he is hoping to talk this Bill out. We are grateful for his description of the conditions of Sections 35 and 36 of the Finance Act, 1947, to which my hon. Friends have 1125 turned attention. One must never underestimate the value of giving a case clearly. The Solicitor-General devoted a considerable time to dealing with the case put by my hon. and gallant Friend who moved the new Clause, and who actually said that no such question arises where the scheme of nationalisation takes the form of acquiring the shares in an existing company. That was the Solicitor-General's second example, which he took some time in demolishing; but there was no need to raise that point or to demolish it, because my hon. and gallant Friend had already demolished it. Therefore, the Solicitor-General might well have saved himself the trouble.
§ Mr. Butler
My hon. and gallant Friend drew attention to the matter in his speech, which might have shortened the general discussion. What has struck us about the whole matter is that the accident of the method adopted in the nationalisation schemes seems to make a differentiation between one type of scheme and another, and what we have been particularly interested in is the question which has arisen in the passage of the Iron and Steel Bill and which it has not been possible to discuss on that Bill.
I do not think that my hon. and gallant Friend desires to press this matter to a Division, but we should like the Government carefully to examine any points that have been raised and any points that may subsequently be raised by hon. Members on this side of the Committee. What we are particularly anxious about is that what a company is distributing, not only in the event of liquidation but perhaps in other events, is not so much its reserve of profits made in the past, which has had the benefit of non-distributed relief, as its real capital originally subscribed or built up before Profits Tax existed. Although the Solicitor-General has referred to the extent of profits since 1947, I do not think that he has completely put the point I have made.
§ Mr. David Renton (Huntingdon)
This is not an easy matter to understand and I must say I was somewhat confused about the main principle underlying the 1126 Solicitor-General's remarks. As I understood him, he was asking us to say that there is no substantial difference in principle between a concern which is brought to an end on nationalisation and any other concern which goes into liquidation. But I suggest that there must be some distinction.
§ Mr. Renton
So far as Profits Tax is concerned. I understand that qualification, as naturally one would, discussing this Clause which deals with Profits Tax. But surely when a concern other than a nationalised concern goes into liquidation, it does so with assets in excess of capital to distribute or without assets in excess of capital. If there are no assets in excess of capital, presumably the Profits Tax does not apply. I am subject to correction if I am wrong, but if there are assets in excess of capital, obviously the Profits Tax must apply and it is there that we have to begin to apply the analogy with regard to compensation on nationalisation.
The compensation on nationalisation, the Solicitor-General says, must be distributed in all cases as though it were distributed profits. Surely that overlooks the fact which was being made by the right hon. Member for Saffron Walden (Mr. Butler) just now, that as often as not—and this applies particularly to the smaller transport concerns which were compulsorily acquired—the compensation represents merely the distribution among the members of a family business of the capital which they have raised, very frequently by borrowing at the bank or by raising debentures on the capital they have put into the business. If there is an element of profit about the matter, it will not as a rule be taken into consideration in assessing compensation.
Under the terms of the Transport Act, with regard to the compulsory acquisition of the smaller businesses, the first duty of the authority which is assessing the compensation is to inquire into the capital value of the business, and it is on that capital value that compensation is paid. Compensation is not being paid on the basis of recently-earned profits. Therefore, I suggest that it is quite wrong to make a provision of law that compensation distributed, being com- 1127 pensation representing capital, should be treated as though it were distribution of profits and taxable as such.
This is a difficult matter, and probably I have not made myself clear, but if there is anything in the submissions which I have made, I suggest that the matter is worthy of further consideration, because it affects a very large number of people already and it will affect an increasingly larger number of people in the lamentable event of the nationalisation of the steel industry. This is a matter which the Government should not treat lightly. The Solicitor-General, to do him credit, has not treated it lightly. He has attempted to put forward arguments, which were to his mind convincing but which were at the same time complicated, and which affect the rights of a large number of people who have exceedingly little hope of understanding what all these arguments mean. For those reasons, I submit that this matter should not be allowed to fade away in obscurity, in the heat of this evening's temperature, but that we should hear much more about it on the Report stage.
§ Mr. Gallacher
I want to say a word which is quite outside my province. I gather that there is an anomaly in connection with the nationalised industries. I am of the opinion that such an anomaly should not exist. An hon. Member has said that when industries are taken over they are forced to take compensation which they do not want. That is a shame. I suggest that they stand on their sturdy independence and refuse the compensation, and then the anomaly will disappear.
§ Colonel Haughton
At the start of his speech, the Solicitor-General spoke of distribution in kind. We ought to know exactly what he meant by that. Throughout the length of a complicated speech, he postulated the suggestion that, as regards Profits Tax, taking over a business under a scheme of nationalisation was exactly the same thing as voluntary liquidation. I suggest that the similarity is as great as it is in the case of shaking somebody by the hand when he comes to one's house and kicking him out of the front door and saying "It is all the same thing as regards the weather." The Solicitor-General should explain what he 1128 meant when he spoke of distribution in kind. Also, does he really suggest that the taking over of a business under a scheme of nationalisation is exactly the same as a company going into voluntary liquidation?
§ Mr. Birch
The fog seems still to be rising in the Chamber as a result of the speech of the Solicitor-General. I want to bring the Committee back to the main point which my hon. and gallant Friend had in mind when he was moving the Clause. I believe that I can do it most simply by giving an example. Let us suppose the iron and steel industry is nationalised. Under that Bill, a subsidiary of Vickers is nationalised, that subsidiary is not a very large part of Vickers' business, but it will be nationalised and bring into Vickers a lot of Government stock which they may or may not want to take in cash. Suppose that in future years Vickers decide to make a special distribution of reserves because they do not need that money in the business; suppose that in the year that is done their total distribution does exceed the profits made in that particular year. Then, as I understand, under the existing law, the excess would be considered to have been paint out of reserves which had benefited from the non-distribution relief. As this is not a very large part of the business, the whole of this special distribution might very well fall to be mulcted in this additional Profits Tax. That we hold to be unfair.
§ The Solicitor-General
But it would be subject to the amount in respect of which they received non-distribution relief.
§ Mr. Birch
But the point is that the profits of the parent company are large in proportion to this particular business, and therefore the whole of this distribution might very well be less than the amount of relief they received previously, since 1947. That would be unfair because in fact what they would be distributing would not be recent profits subject to this particular tax, but capital which had been subcsribed in the past before this tax was thought of. That was the point of my hon. Friend, and it is a clear case of something being unjust. If I have got it right, there is a strong case here.
§ The Solicitor-General
This Clause does assume that what is distributed only 1129 comes out of pre-1947 accumulated profits, and that is just where it is misconceived.
§ Lieut.-Commander Braithwaite
As the mover of this Clause, while I am unable to describe myself as satisfied, I do realise that there are further matters which it is desirable to discuss before the atmosphere of the Committee becomes too soporific, and that I must deprive hon. Members of the chance of improving their batting average. I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.