§ (1) Subject to the provisions of subsection (2) of this section, where the functions of a body corporate consist wholly or mainly in the holding of investments, the provisions of this Act relating to the excess profits levy shall have effect in relation to it as if each of the following amounts, that is to say—
- (a) the excess of its profits for a chargeable accounting period over its standard profits,
- (b) the deficiency of its profits for a chargeable accounting period,
- (c) its profits for the whole period mentioned in subsection (1) of section forty-one of this Act,
§ (2) This section does not apply to a body corporate which is a member of a group within the meaning of the Twelfth Schedule to this Act unless the functions of each of the other members of the group also consist wholly or mainly in the holding of investments.
§ (3) For the avoidance of doubt it is hereby declared that the references in this section to the holding of investments do not include a reference to the holding of land.—[Mr. Boyd-Carpenter.]
§ Brought up, and read the First time.1010
§ The Financial Secretary to the Treasury (Mr. John Boyd-Carpenter)
I beg to move, "That the Clause be read a Second time."
This is the first of the new Clauses in the name of my right hon. Friend, and this one is put down to implement the undertaking which, on behalf of my right hon. Friend, I gave during the debate in Committee. As I then indicated, this Amendment applies only in the case of investment trusts. I did venture to put to the Committee during the debate in Committee the difficulties which would arise if it were attempted to apply the same principles in the case of trading companies. I do not want to weary the House with a repetition of those arguments, but I pointed out that those difficulties arose in a much less degree in the case of investment trusts, and I indicated that this new Clause, which is confined to investment trusts, would be put down on the Report stage.
The effect of the new Clause, in brief, is this. It provides in subsection (1) that in the case of investment trusts the excess profits for E.P.L. purposes for each chargeable accounting period shall be reduced in the ratio which the amount of profits attributable to dividends and other distributions of profits received from other bodies ordinarily resident in the United Kingdom bears to total profits for the relevant period. Debenture interest or dividend income from overseas bodies will not be taken into the calculation.
Similarly, the amount of profits attributable to dividends from United Kingdom resident companies will, in the same proportions, reduce any deficiency of profits for E.P.L. purposes and be taken out of the calculation of total profits for purposes of computing the limitation under the over-riding maximum provisions. This will, in general, secure that money which has already borne E.P.L. taxation when distributed by a trading company does not have to bear it again when distributed by an investment trust.
The House will see that this does not apply where the body corporate is one of a group, some of which are trading companies. This limitation is imposed so as to secure that trading companies do not come into this concession by the back door. It is sometimes the case that 1011 a group of what are really trading companies vests for convenience its investments in a holding company. That holding company is really part of, in general, a trading group, and there seems no particular reason to exempt it as opposed to other trading companies.
I appreciate that this Amendment does not go as far as some of my hon. Friends would have liked, but, as I said during the Committee stage, this was as far as we could go in this direction. As I then indicated, the cost will be of the order of £1 million. If we went further and covered all companies, the cost would be of the order of £5 million.
§ Mr. J. Grimond (Orkney and Shetland)
As this Bill was originally drafted, it would have meant that some trust companies would have found themselves paying E.P.L. for the second or third time on their income. Not only would that have been unfair to the company concerned but, as these companies may again be a substantial source for the raising of risk capital—an activity in which they only play a limited part at the present time—it could have been a serious matter for the country. Those of us who put down Amendments earlier seeking to exclude such companies from E.P.L. altogether must nevertheless be grateful for small mercies, indeed for the reasonably substantial mercy offered by this Clause. I have no doubt it will be welcomed by the companies themselves as far as it goes.
I have only one question to ask. Subsection (3) is clearly designed to refer to companies which are themselves engaged in the holding of land. There are certain companies, however, which benefit indirectly from land or its products—most of which draw their incomes from land abroad and to that extent would not in any event be affected—but where a company holds shares in another company which is managing land in this country, I assume this Clause will apply?
§ Sir Patrick Spens (Kensington, South)
I want to add my word of thanks for this new Clause. As the hon. Member for Orkney and Shetland (Mr. Grimond) has said, it goes a substantial way to meeting what we felt was not only a grievance but a matter of principle. I am sure the 1012 Financial Secretary will not complain when I say that where a principle is admitted that this is right and everything else is wrong, it is difficult to realise why it is confined only to a proportion of what comes in under the principle.
I appreciate that it is done really for financial reasons, and that to ask that the Clause should cover all income which these companies receive from companies that have already borne the tax would cost more than the Treasury feel they are able to give to investment trust companies. I hate looking a gift horse in the mouth and I am grateful for this concession so far as it goes. At the same time, the principle of double taxation is one that ought to be avoided even to the last halfpenny.
§ Mr. Mulley
I want briefly to fortify the Financial Secretary in resisting the demands of his hon. Friends behind him to extend this concession to holding companies of a trading group. We all agree that double taxation is a bad principle, and that where a trust company is concerned whose income is solely derived from investment there is an unanswerable case for exempting it, as this new Clause does.
However, it would not be in the interests of the Exchequer to extend the provision to give another £4 million back by relief from Excess Profits Levy. It is not as if the Excess Profits Levy were a new tax on companies. The additional impost of Excess Profits Levy has been offset by a reduction in the rates of Profit Tax. Therefore, the Financial Secretary should resist the demands of his hon. Friends to extend the concession to the holding companies of trading groups.
§ 4.15 p.m.
§ Mr. Ian Horobin (Oldham, East)
We must all agree that this new Clause is an improvement, but this tax has repeatedly been called, not a revenue tax, but one of moral principle. As a matter of moral principle, double taxation is wrong and cannot be justified by saying that we want £4 million. I much regret that insurance companies and other similar bodies will still be subjected to double taxation under these provisions. If it were not that this tax is a temporary one, I do not think this House could accept such a situation, but in all the circumstances we appreciate 1013 that the Chancellor has gone some way, and since this injustice will not last more than two or three years, we must grin and bear it.
§ Mr. Douglas Johnston (Paisley)
May I ask the Financial Secretary two questions? The first is whether he is quite accurate in describing this as an investment trust provision. As I understand it, an investment trust company is one which was formed wholly for the purpose of holding shares in other companies. This Clause applies not only to such companies which wholly own shares, but also to companies whose business is mainly holding shares. Would it not apply to such companies as those who were formerly engaged in the coal mining industry, whose assets have been taken over and who now hold stocks and shares but, at the same time, carry on a subsidiary business?
My second question applies to the use of the word "ordinarily" which occurs before the words "resident in the United Kingdom." As the Financial Secretary and the Solicitor-General know, there have been frequent comments by the courts on the use of any adjective or qualification of the word "resident" in so far as that applies to companies. Is the word "ordinarily" meant to be a qualification of "resident"? Is it something less than resident? If so, what is it? If it is no qualification, then why not leave the word "resident"? As the Solicitor-General knows, the question of where the residence of a company is depends entirely upon where the control of the company rests. Is the use of the word "ordinarily" meant to be a qualification or a departure from that?
§ Mr. Boyd-Carpenter
My hon. and learned Friend the Solicitor-General will endeavour to deal with the point raised by the hon. and learned Member for Paisley (Mr. D. Johnston), which is clearly a matter of legal construction. On the first point, I used the term "investment trusts" collectively. So far as I know, it is not a term of art and is an illustration of the class of bodies which would receive the benefit of this provision.
As the hon. and learned Gentleman will appreciate from his reading of the terms of the new Clause, it covers bodies corporate whose functions consist wholly 1014 or mainly in the holding of investments. He asked me whether it would cover the case of the former colliery companies. It must be a question of fact in each case whether they have so converted themselves largely into bodies that hold investments or whether they have not. I should not like to give a dogmatic answer, because it would probably cover some but not others. Generally speaking, however, it covers bodies which are clearly described in the opening words of the Clause. I fully appreciate that that goes a little way, perhaps not far, beyond what are colloquially described as investment trusts.
§ The Solicitor-General
The hon. and learned Member for Paisley (Mr. D. Johnston) will find that the phrase in the Income Tax Acts and earlier in the Bill —in Clause 35—is always, or nearly always, "ordinarily resident." The Clause is not meant to make any alteration in the usual definition of "resident" so far as a company is concerned.
The hon. and learned Gentleman has advanced an interesting argument that the word "ordinarily" is unnecessary, but, as he knows, if the word is left out of the Clause, that might have an effect upon the application of the Clause having regard to the phrase which is so generally used—"ordinarily resident."
§ Mr. D. Johnston
Am I not right in thinking that where the words "ordinarily resident" are used in the Income Tax Acts and in the Bill, they are used in relation to a natural, and not an artificial person; and that where the word "resident" is used in relation to an artificial person, what is used is the phrase "resident or ordinarily resident," which implies a difference between the two?
§ The Solicitor-General
The short answer to that is that the phrase "ordinarily resident" is also applied to artificial persons. It is so applied in Clause 35.
§ Question put, and agreed to.
§ Clause read a Second time.
§ Mr. G. P. Stevens (Portsmouth, Langstone)
I beg to move, as an Amendment to the proposed Clause, at the end of subsection (1), to insert:or unless in the opinion of the Commissioners the functions of the group as a whole consist mainly in the holding of investments in which case the proportions provided by subsection (1) of this section shall apply.1015 On behalf of my right hon. and hon. Friends and myself, I say "Thank you" to my right hon. Friend the Chancellor of the Exchequer for recognising to a very large extent the merits of the case that we tried to make during the Committee stage for avoiding as far as possible the evils of double taxation. We recognise the difficulties of going beyond investment trust companies, but I feel that the Financial Secretary to the Treasury is going a little far when he refers to the wording of the Amendment and suggests that it would open the back door to trading companies.
§ Mr. Stevens
I thought that that was what was suggested—certainly the hon. Member for Sheffield, Park (Mr. Mulley) suggested that—and that if the Amendment was put into effect, trading companies, masquerading in the shape of children of holding companies, would benefit. That is not so and it is not intended to be so.
I have in mind, not one case, but a number of cases, where a company which comes within the generic heading of an investment trust company operates none the less through a group of, perhaps, eight or ten different companies, where it holds both quoted and unquoted stocks and shares, and in addition, within the group, perhaps holds freehold and leasehold land, ground rents and things of that kind. For the purposes of efficient and economical management it sets aside one subsidiary company within the group to act as the company owning the freehold land and leasehold land interests.
Although the proportion of quoted and unquoted investments in a case of that sort may be 90 per cent. of the total wealth or assets of the group, nevertheless it seems to me that subsection (2) of the Chancellor's new Clause would exclude that company from the benefits of the operation of his Clause. In other words, although the business of that group would undoubtedly consist mainly —indeed, very nearly wholly—of the holding of investments, none the less because for the purposes of efficient administration the holding of the land had been set aside into one particular company, that group of companies would not benefit in any shape or form.
1016 I suggest that that is an anomaly. It is a blot upon an otherwise admirable attempt, and I hope that the Chancellor, having heard the case for the Amendment, will let us know why he cannot accept it or, alternatively, will tell us that he is going to accept it.
§ Mr. Boyd-Carpenter
The Amendment, which my hon. Friend the Member for Langstone (Mr. Stevens) has moved with such commendable brevity, illustrates very clearly the great and genuine difficulty in this matter in drawing a very clear line of demarcation. I have a great deal of sympathy with the class of case to which he refers, but, as he will appreciate, there is a very great risk in this sort of matter, if we were to abandon the line taken in the Government's new Clause, of opening up quite a wide area in which the concession would operate, probably a wider area than my hon. Friend has in mind in his Amendment.
The words used in the Amendment are:the functions of the group as a whole"—note the words, "a whole"—consist mainly in the holding of investments…That would cover the case of a large group of companies, some of which were carrying on trading activities on a very substantial scale. If the intention of the Amendment were effective in those words, the effect would be in certain cases, simply because trading companies were grouped with others, to give this concession to those trading companies and not to other trading companies so grouped. We should find that the line, difficult as it is adequately to define, even under the Government's new Clause, would be extremely irregular, anomalous and unfair
I appreciate that the intention is to deal simply with those anomalies, but we must deal with the Amendment, which is, after all, intended to be put into the Bill, on its actual draft and wording. I suppose that on a strict reading the Amendment would give the concession, or might be deemed to give the concession, in the case of a group which, taken as a whole, could be divided up as to 51 per cent. holding of investments and as to 49 per cent. trading activities, although I am quite certain that that is 1017 not my hon. Friend's intention; but that is how, I think, the line would be drawn under his Amendment, and very great practical difficulties in administering such a line would arise.
In the case of a group of companies such as the extreme case to which I have referred—the 51–49 per cent. case—it is more than likely that the balance of activity might shift from one side of the line to the other. The administrative difficulty in that sort of situation, for the company's accountants no less than for the Board of Inland Revenue, would make the whole matter impossibly difficult.
§ Mr. Stevens
I was actually quoting, of course, from the first subsection of the Chancellor's new Clause:where the functions of a body corporate consist wholly or mainly in the holding of investments…Would my hon. Friend's arguments not apply equally in that case?
§ Mr. Boyd-Carpenter
They would apply, but not equally, because what is just practicable in the case of one company becomes a wholly different matter when dealing with a group of companies. The variables are much greater in number and much more difficult to follow in the case of a group of companies.
I appreciate that my hon. Friend has done my right hon. Friend the courtesy of imitation in drafting his Amendment. That serves to underline that even the line that we have taken in our attempt to meet the genuine points that were raised during the Committee stage involves some difficulty. Those difficulties would be magnified if we sought to apply a rule which could operate, we believe, with reasonable success in the case of a single company, to a whole group of companies, with all the more complex factors that there arise.
We do none the less recognise that my hon. Friend and those associated with him have raised a very real point of difficulty. We do not believe that it can be solved quite as easily as the Amendment suggests. But my right hon. Friend, however, authorises me to say that he is far from shutting his mind to the difficulties which will arise on the Government's new Clause and that he intends to follow very closely the operation of this aspect of the tax.
1018 Indeed, he authorises me to go further and to say that if in the event, when the tax has actually operated, the sort of situation to which my hon. Friend referred, quite rightly, as an anomaly should develop, he would be prepared to consider the inclusion in next year's Finance Bill of amending legislation; and in his consideration of that possibility he certainly does not exclude the introduction of legislation with retroactive effect. But he feels that the best thing at this stage is to seek to operate this somewhat difficult concession along the lines of the Government's new Clause, and at the same time to watch the matter in the way he has authorised me to say he will do.
I hope that that will re-assure my hon. Friend that it is not our intention to allow anomalies of a gross character to spring up in this connection, and that in that aspect of the tax, as in all others, the intention of my right hon. Friend is to administer the provisions of the Bill as fairly between company and company and between individual and individual as it is administratively possible to do.
§ 4.30 p.m.
§ Mr. Assheton
I am sure that the House will be grateful to the Financial Secretary for the way in which he has met the point which my hon. Friend the Member for Langstone (Mr. Stevens) put so well in regard to the Amendment standing in my name and the names of two of my hon. Friends. My attention has been drawn to very serious anomalies which would arise under the Clause as at present drafted, anomalies which obviously any Chancellor and the Inland Revenue would wish to remedy. I appreciate that that is difficult, particularly at such a late stage, and I think that the suggestion of the Financial Secretary is a very fair and proper one. In view of that, I beg to ask leave to withdraw the Amendment.
§ The Chairman
Does the hon. Member for Langstone (Mr. Stevens) agree to the withdrawal of the Amendment?
§ Amendment to the proposed Clause, by leave, withdrawn.
§ Clause added to the Bill.