§ 3.31 p.m.
§ Mr. Eric Fletcher (Islington, East)
I beg to move, in page 11, to leave out line 35 and to insert:the thirteenth day of December, nineteen hundred and fifty-five".
§ The Chairman
We can take with this Amendment the Amendment in the name of the right hon. Gentleman the Member for Huyton (Mr. H. Wilson), to Clause 17, in page 12, line 28.
§ Mr. Fletcher
The purpose of the Amendment is to make 13th December, 1955, the effective date for putting an end to dividend stripping. The 13th December, 1955, is very nearly, though not quite, the date which the Chancellor of the Exchequer himself suggested in his Budget speech. He chose 26th October, 1955, in his Budget speech. He then intended to make the provisions against dividend stripping retrospective to that date. We have selected a slightly later date, because we have given the Chancellor the benefit of the doubt, and we prefer that the retrospective aspect of these provisions should date back not to the first warning which was given by the then Financial Secretary but to the final warning on Third Reading of the Finance Bill in 1955, when, with the then Chancellor's express approval, the original warning was repeated and categorically reaffirmed.
It is not necessary for me, on this Amendment, to argue the case for stopping dividend stripping. The case for provisions in this Bill to that effect was effectively made by the Chancellor himself, and later by the Financial Secretary, when he moved the Second Reading of the Bill. On this Amendment we are concerned merely with the question whether or not these provisions should have retrospective operation so that effect may be given to the clear and explicit warning given three years ago, that if the practice of dividend stripping continued then new 1116 legislation would be introduced with retrospective operation. That, indeed, was the Chancellor's first intention. He has subsequently recanted, and we now urge him to reflect that his original thoughts were best and that, on third thoughts, he should adhere to his original intention.
In view of the complexity of this whole subject and of the fact that, as I understand, the only defence open to the Chancellor's present conduct is that the warning given in 1955 was not as full and explicit as it might have been, it will be necessary for me to trouble the Committee with a few preliminary observations about the subject of dividend stripping. I cannot do better than commend to the Committee the very lucid description of dividend stripping that was given by the Financial Secretary to the Treasury in moving the Second Reading of the Bill on 12th May.
The hon. and learned Gentleman pointed out in justification of this Clause the mischief which the Clause was designed to meet. He made it quite clear that although the device of dividend stripping has a number of variants it has always one essential feature. There is one essential feature common to all forms of dividend stripping. There are numerous variations of the device, but the feature which is common to all forms of dividend stripping, as the Chancellor will know, is that the device is used to extract from a company cash which has been accumulating out of profits and out of profits on which tax has been paid to the Exchequer, paid at a time when the shareholders in the company which had earned the profits were liable to have suffered Income Tax, so that the profits made by the company would have been diminished by tax at the standard rate—
§ Mr. Leslie Hale (Oldham, West)
Does my hon. Friend not think he might now explain the Clause, because I was hoping to speak on it?
§ Mr. Fletcher
Nothing would deter me from encouraging my hon. Friend to speak on any Clause in the Bill. I very much hope we shall have the benefit of my hon. Friend's guidance as to the meaning of the Clause, but at the moment we are not concerned with that. I was trying to explain and paraphrasing the 1117 explanation given on 12th May by the Financial Secretary.
I was saying that there are certain essentials common to all forms of dividend stripping. The first is that a large amount of tax has been paid by a company. The next feature which is common to all is that a device has to be found to extract the cash reserves of that company into the hands of some other company which, because of its privileged position, either, for example, because it is a charity, or because it is a company which has accumulated tax losses, is in a preferential position in taxation compared with the company which earned the profits and paid the tax. If a device is devised whereby those accumulated profits can be extracted and passed into some other hands, either directly or indirectly, the privileged company taxpayer is able to recoup from the Revenue tax which has been properly paid.
There are, as I say, various forms of it, and the hon. and learned Gentleman gave three examples of how the avoidance trick starts. He said:The avoidance trick consists of getting shares in company A into the hands of company B and using the liquid reserves of company A to pay a dividend to company B. That…is treated by the law as a gross dividend from which Income Tax…has been deducted to leave the net dividend actually paid."—[OFFICIAL REPORT, 12th May, 1958; Vol. 588, c. 41.]Company B, the hon. and learned Gentleman explained, being in a position to claim repayment of tax, is able to go to the Revenue and recover from the Exchequer the tax which has been legitimately paid.
The hon. and learned Gentleman went on to give examples of three methods of dividend stripping. He described the first device as a sheer technicality and he explained that Clause 16 (3) was intended to close that gap. The second form which he cited was a method designed to get round the requirements of the 1955 legislation. He went on to say that the most common form in recent months has been the switch between the company with large taxed reserves and another company with large trading losses. It is the easiest thing in the world for a big finance house to buy a company with taxed reserves and another company with large trading losses and switch the one to the other and by that device recover from the Revenue tax that has already been paid.
1118 That has been the situation which has existed since at least the year 1954. It was well-known to the Treasury in 1954. It was the subject of comment by the minority Report of the Royal Commission published in June, 1955. It was a subject which, quite obviously, ought to have been dealt with by the present Lord Privy Seal, then Chancellor of the Exchequer, in his spring budget of 1955, but at that time he was too preoccupied with having an early General Election to take the trouble to introduce a proper Finance Bill to check this and other notorious tax avoidance devices.
I must give the present Chancellor credit for the fact that when he came to prepare his Budget, which was introduced on 15th April, 1958, he then realised that this shocking loss to the Revenue had been going on long enough. He realised that whereas a certain number of people had very sensibly heeded the warning given by his predecessor in 1955, a number of others had thought that they would gamble on the warning not being carried out. Therefore, in his Budget speech of 15th April, the Chancellor said:The Committee may remember that this is a device for extracting the liquid taxed reserves of one company with considerable, and unjustified Income Tax advantage, to another company which gets those reserves as taxed dividends, and at a considerable cost to the RevenueAlthough my right hon. Friend the Lord Privy Seal dealt with this in his autumn Budget of 1955, and despite stern warnings given them, I am sorry to say that apparently the fascination of dividend stripping is such that it is still being practised by some. Although the form of the device has somewhat altered—it is now largely practised by companies with trading losses—it remains quite unacceptable and I must put a stop to it.My right hon. Friend the Minister of Housing and Local Government gave clear warning in 1955, in another capacity, that the Government would not hesitate to legislate against subsequent attempts at dividend stripping, and to make such legislation retrospective. Accordingly, the provisions I now propose will be retrospective to 26th October, 1955, which was the governing date of the earlier legislation."—[OFFICIAL REPORT, 15th April, 1958; Vol. 586, c. 61.]That statement was generally applauded in the Committee when it was made.
It was well received in the Press, initially, at any rate. There was no adverse comment in responsible financial papers on the Chancellor's decision to make this anti-dividend stripping provision retrospective. For example, the Economist of 19th April, commenting on 1119 the Chancellor's Budget statement, said this, and it was typical of other comments:Retrospective legislation is always poorly regarded, but applied to dividend stripping it can hardly warrant too much excitement. This is professional stuff, in which the rules are always rough. This obvious avoidance trick was the subject of a warning of retrospective action in 1955….The Economist made it quite clear that it approved the Chancellor's decision.
But what happened then? The Chancellor was quite obviously subject to representations from interested quarters in the City. There was a deluge of correspondence, not always well-informed, in The Times. There were squeals from those who, despite the 1955 warning, had continued to indulge in dividend stripping—the people with whom the Minister of Housing and Local Government was concerned in 1955 and the Chancellor was concerned in his Budget speech, the people who had been robbing the Revenue at the expense of the general taxpayer.
I have been unable to find any precedent for what happened next. Within a fortnight of his Budget speech, and before there had been any discussion in the House of Commons, the Chancellor capitulated. On 29th April, on the eve of the publication of the Finance Bill, the Chancellor came to the House to say that he had changed his mind and had changed it for the worst. It is important to observe precisely what he said. It was as follows:I said last week that I would give further thought, before the Finance Bill, to the proposal that the legislation to deal with dividend stripping should be made retrospective to 26th October, 1955. I have done so, taking into account the views which have been expressed in this House"—I interject there the observation that, apart from some comments by hon. Members opposite, there had been nothing but approval from this side of the Committee of the Chancellor's original announcement, and there had certainly been no opportunity for the House to discuss it. Therefore, I do not think that it was very flattering or complimentary to the House of Commons that the Chancellor changed his mind without having heard expressions of view from all quarters.
1120 The Chancellor added:and all other relevant considerations, including the need to be sure that the warning given in 1955 was wide enough to cover the sort of cases now in question."—[OFFICIAL REPORT, 29th April, 1958; Vol. 587, c. 196.]Because I regard this Amendment as involving a principle of considerable importance in connection with the conduct of both this Budget and future Budgets, it is necessary to analyse and deal with the reasons which the Chancellor has given for his sudden, precipitate capitulation.
The right hon. Gentleman's second decision really rests on three broad propositions. I do not think that I do him an injustice when I say that they are: first, that all retrospective legislation is prima facie bad and should be avoided; secondly, that retrospective legislation can be justified when a definite warning is given; and I suppose that he would add that in this case, in 1955, the warning actually given was not sufficiently wide and precise.
It will be necessary to say a few words about each of these propositions. First, as to the basic assumption that there is something abhorrent in all retrospective legislation. That is a sentiment which I think the Chancellor has accepted without criticism and without understanding it, and as a result he has been deluded. It never has been the law of England that all retrospective legislation is something to be avoided. This catch phrase has been repeated in recent years by interested parties anxious to prevent tax avoidance payments of this kind being stopped, with retrospective effect.
§ Mr. Geoffrey Wilson (Truro)
Will the hon. Gentleman allow me to interrupt? I gather that his argument is that the agitation against retrospective legislation is of recent date. Is he aware that the founders of the American Constitution wrote into their law as long ago as 1788 that ex post facto law could not be passed, and that this was based on experience of English law?
§ Mr. Fletcher
I was listening to the interjection about American law. I shall 1121 be interested to hear what he hon. Gentleman the Member for Carlton (Mr. Pickthorn) said.
§ Mr. Pickthorn
The hon. Gentleman said that it had never been English law that all retrospective legislation was to be avoided. Plainly, that must have been throughout the period of the English law when there was no recognised legislature, because it was the law, at least until late in the sixteenth century.
§ Mr. Hale
Before my hon. Friend replies, would he permit me to remind him that if the British written Constitution, which does not exist, had contained provisions that have just been quoted relating to the American Constitution, we would have been deprived of the services of a large number of Conservative Members who were disqualified through their own laches and who, by ex post facto legislation, have been permitted to sit here?
§ Mr. Fletcher
As you know, Sir Charles, I do not object to giving way to interventions, although I ought to say for my own protection that it sometimes disturbs the fluency of one's argument. Therefore, I hope that my interruptors will not object if I try to deal with their respective interventions in my own way.
The truth is that there has always been a great deal of retrospective legislation in this country, some of it good and some of it bad. To appreciate the significance of it one has to remember that legislation can take three forms. We can be talking about criminal legislation, we can be talking about civil legislation—Acts of Parliament which give rights to various parties, to individuals as between each other—or we can be talking about fiscal legislation. Different considerations—different philosophic, different juristic considerations—apply in each of those three different realms of law.
With regard to the criminal law, modern society, of course, regards it as repugnant and abhorrent that anything which was not a crime at the time it was committed should be made a crime by any ex post facto legislation.
§ Mr. Fletcher
I would tell the hon. Gentleman that there was a time when there was a great deal of ex post facto legislation in the criminal sphere. There were a great many Acts of attainder 1122 which were unjust and which were passed by this House to punish people by ex post facto criminal legislation. That would not be tolerated today. Recently, we have had the Nuremburg trials, which were of very doubtful validity. Indeed, it is a pertinent criticism of them that they came very near to—my hon. and learned Friend the Member for Northampton (Mr. Paget) would say that they exceeded—the bounds of permissible ex post facto legislation, and they operated in the criminal sphere. I mention this merely to show that it is not true to say that there has never been any retrospective legislation.
With regard to civil actions, it has always been recognised that rights as between one litigant and another which existed at a given date could be changed with retrospective operation by ex post facto legislation. I am not now thinking merely of Acts of indemnity which have taken away, for example, the rights of common informers and others to bring actions and to recover damages for some technical offence. There are a series of those Acts of indemnity which are inherently retroactive, and deliberately so, in their operation.
The classic passage on this subject, as the Minister will know, and which is sometimes used, but used incorrectly, to justify the proposition that all retrospective legislation is bad is the celebrated judgment of Mr. Justice Willes in the case of Phillips v. Eyre, the action against the Government of Jamaica. I do not propose to quote all he said, but those who are interested can find it in my Second Reading speech on 12th May, 1958, at col. 85 of the OFFICIAL REPORT. In that judgment, which is regarded as the high water mark by those who hold up their hands in horror at any thought of retrospective legislation, they will find that Mr. Justice Willes said this—perhaps the hon. Member for Carlton will bear it in mind:To affirm that it is naturally or necessarily unjust to take away a vested right of action by Acts subsequent, is inconsistent both with the common law of England and with the constant practice of legislation.I commend that to the hon. Gentleman.
We are not today primarily concerned with criminal law or civil law but with fiscal law, and different considerations again apply in this realm. In so far as 1123 there may in certain cases be some philosophic objections to some retrospective legislation in other respects, that doctrine has as a result of many years' experience become considerably modified when one is dealing with fiscal legislation.
There are two reasons for it. The first reason is that there is an element of retrospection in all fiscal legislation. Fiscal legislation does not deal with what is right and what is wrong. It is not a question of making something criminal that was justifiable when it was done. It is not a question of taking away the rights of one individual as against another. Amongst other things, fiscal legislation regulates the amount of a person's income which he is entitled to keep after the State has taken what it decides to take by way of taxation.
Inherently, much fiscal legislation contains some retrospective element. For example, the Income Tax one will pay next year will be based on this year's income. We do not know what the standard rate of Income Tax will be next year, except, of course, in the case of P.A.Y.E. payers. Nobody earning an income today can safely base his arrangements for the future on the assumption that the Income Tax which he has to pay a year ahead, or the Surtax which he may have to pay two years ahead, will be at the present rates.
If I may give another illustration, let us take Estate Duty. One is still entitled to try to build up a capital fortune and a certain number of people succeed in doing so, since we do not yet have a capital gains tax in this country. Yet no one is entitled to build a fortune on the assumption that the rates of Estate Duty now operative will remain constant. In so far as they may be changed in years to come, they will have a retrospective operation on fortunes that are now being acquired.
I do not, however, rely on this argument. What I think is far more important to recognise is that for the last thirty years or so the doctrine has become established in our fiscal legislation that if, in one Budget speech, a Chancellor of the Exchequer gives a clear warning that a particular tax avoidance dodge is being exploited at the expense of the Revenue, that device will be blocked by 1124 a subsquent Finance Bill with retrospective operation. This is so important that I must trouble the Committee by reminding them of the very distinguished precedents which have been laid down in justifying that doctrine. It is the Chancellor's deliberate, and I think misinformed—I hope that it is only misinformed—departure from that doctrine which I find so regrettable.
I will not go back more than twenty years. Mr. Neville Chamberlain, about whom hon. Members opposite can hardly complain, said on 20th April, 1937:…if people persisted in devising these ingenious contrivances for defeating the intentions of the Legislature, they must not expect that they would escape retrospective legislation."—[OFFICIAL REPORT, 20th April, 1937; Vol 322, c. 1610.]He proceeded to recommend remedies to defeat tax avoidance.
Two years later, Sir John Simon, than whom, I suppose, no one ever pretended to be a more potent champion of the rights of the individual and the liberties of the subject in any issue with the State, when introducing his Budget in April, 1939, said:These schemes of tax avoidance are so flagrant and are so deliberately devised to get round the legislation of 1936 and 1937 that I shall have no hesitation in recommending that retrospective effect shall be given to them as far as necessary, in accordance with the very clear warning I gave last year."—[OFFICIAL REPORT, 25th April, 1939; Vol. 346, c. 993.]In support of my general proposition may I just pray in aid two further quotations from Conservative statesmen? I do so because I am sure that they will appeal to hon. Members opposite, who appear to feel so strongly about retrospective legislation. The present Lord Chancellor, then Sir David Maxwell Fyfe, speaking in the House on 28th April, 1949, said:…I put this principle forward as quite unchallengeable; that the justification for retrospective legislation is that a reasonable and definite warning has been given to people likely to practise the matter to be struck at, and they have been given the opportunity to avoid that course."—[OFFICIAL REPORT, 28th April, 1949: Vol. 464, c. 499–500.]Finally, I quote that fount of all Conservative wisdom at the moment, the present Lord Hailsham, speaking in this House as Quintin Hogg as recently as 15th June, 1950, when he said:I do not see anything in principle objectionable if people seek to pick a hole in an 1125 Act of Parliament deliberately to defy its purposes and deliberately to get round its provisions, to repair the hole retrospectively. I think they must expect Parliament to protect its own policy in that way.That is what the Chancellor ought to have done, and he knows that he ought to have done it.
§ Sir Toby Low (Blackpool, North)
The hon. Member must quote accurately, especially as he has quoted it on a previous occasion. He has used exactly the same quotation before. He ought to finish it. The quotation by the Lord President of the Council finished with the words "at any rate, up to a point".
§ Mr. Fletcher
The right hon. Member is right. I made this quotation on Second Reading. If the right hon. Member looks at column 87 of the OFFICIAL REPORT he will see that I quoted the whole of it, which I will read again:I do not see anything in principle objectionable, if people seek to pick a hole in an Act of Parliament deliberately to defy its purposes and deliberately to get round its provisions, to repair the hole retrospectively. I think they must expect Parliament to protect its own policy in that way, at any rate, up to a point."—[OFFICIAL REPORT, 15th June, 1950; Vol. 476, c. 708–9.]They are the very distinguished precedents for this general doctrine that, once a clear warning has been given, taxpayers must expect subsequent legislation to have retrospective operation. The reason is quite clear. As the Chancellor knows, there is a constant struggle, a battle of manœuvre, going on between the Exchequer and the taxpayer. Methods of tax avoidance are continually being devised. In the nature of things it, is impossible for the Exchequer to catch up on every new form of tax avoidance.
That is why Parliament and the law of England have deliberately armed the Exchequer with this weapon of being able retrospectively to legislate, once a clear warning has been given. The more complex modern society becomes the more necessary it is that this weapon should be used, and therefore the more regrettable it is that the Chancellor should depart from the precedent laid down by his predecessors.
I do not want to be misunderstood. I am neither excusing nor condemning those who practise tax avoidance; that is not part of my argument at the moment. Tax avoidance is nothing new. 1126 It has been going on since the Middle Ages. I suppose that it could be fairly said that a great many of our loveliest abbeys and cathedrals would never have been built had it not been for the desire of a great many wealthy people in the Middle Ages to make endowments to the Church in order to avoid feudal dues and Royal exactions.
It may well be said that Henry VIII got his own back in the end with the dissolution of monasteries, when a great deal of the wealth of the Church was transferred back to the State, but I very much doubt whether anyone would say that any of the finance companies who benefit by dividend stripping and tax avoidance devices are particularly conspicuous for their endowments to charity or learning or other worthy objects. The Chancellor has a duty to follow the precedents which have been laid down for him.
This brings me to the crucial point, which is whether a clear warning was given. That means seeing precisely what was said in 1955. When dividend stripping first engaged the attention of the House, in the autumn Budget of 1955, the matter was debated on three separate occasions: first, on Second Reading, then in Committee, and, finally, on Third Reading. The first warning was given by the Financial Secretary, the present Minister of Housing and Local Government, who, in commending to the House Clause 4 of the Finance Bill, said:Clause 4 is designed to exterminate the small but ingenious tribe of dividend strippers.It is quite clear that what was in his mind at the time was to put an end to all sorts of dividend stripping. He said:These are people who have discovered a device for extracting from companies their cash reserves, without creating any liability to Surtax."—[OFFICIAL REPORT, 8th November, 1955; Vol. 545, c. 1664.]To convince the Chancellor that this warning was effective it is necessary to remind him of exactly what was said in the 1955 debate. My right hon. Friend the Member for Huyton (Mr. H. Wilson) interrupted the Minister of Housing and pointed out that this was not a new problem and that other Chancellors had had to consider how to stop similar devices. Alternative suggestions were put forward for making the 1955 legislation more watertight. My right hon. 1127 Friend asked why that Bill, now the 1955 Act, was framed in such a way and whether it would not have been more effective to have put the tax on the vendor.
I quote this to show that the present Minister of Housing and Local Government had no doubt whatever that he was intending his warning to cover the whole field of dividend stripping:No, Sir. The only reason is that we want to make sure that it is absolutely effective in our object of killing dividend stripping. Whether this is precisely the right, or the best way of doing it, might certainly be discussed in Committee, but our purpose in so drafting it is to ensure that the Statute will be effective."—[OFFICIAL REPORT, 8th November, 1955; Vol. 545, c. 1666.]Now we come to the Committee stage where you, Sir Charles, as you are now doing, presided over our deliberations. On 29th November, 1955, my right hon. and hon. Friends, acting as always like a vigilant and diligent Opposition; had the intelligence to see that the Government's Clause was ineffective. So we put down a number of Amendments to make it watertight. We explained the reasons why we had the same objective as the then Treasury spokesmen—they change almost every year and it is very difficult to keep up with them. We tried to explain how much wiser they would have been had they adopted our Amendments.
Then this most remarkable thing happened, which I do not think has been quoted before in this Committee. Amendments were moved by the present Leader of the Opposition and supported by my hon. Friend the Member for Sowerby (Mr. Houghton) and others. Strange though it may seem, it is easy to be wise after the event—it was not very difficult to be wise at that time—these Amendments were resisted by the then Treasury spokesman, the present Parliamentary Secretary to the Ministry of Education. It is important to note what was said by the hon. Baronet in resisting the Amendments:I can assure the right hon. Gentleman that a great deal of thought has been given to the drafting of this Clause, and if the final version is not satisfactory to hon. Members opposite it is not due to any lack of considering the possibilities. We thought, on the one hand, that it would be contrary to normal precedent to make this Clause retrospective"—1128 so that even then, in 1955, the Government were considering whether they should make it retrospective. The hon. Baronet said that they wondered whether they should make it retrospective. I had better quote the exact words:We thought, on the one hand, that it would be contrary to normal precedent to make this Clause retrospective without as it were, giving warning that we intended to deal with this whole abuse of dividend stripping…Later, the hon. Baronet said:Here, I should like to give a very definite warning. Dividend stripping has proved a profitable game to those who play it, and although we have tried to draw the present legislations tightly all experience in dealing with tax avoidance experts warns us that clever people may find devious and complicated ways around the legislation. Therefore, I should like to make it absolutely clear, and my right hon. Friend"—that is, the. Chancellor—specifically asked me if I would say this tonight, that the position will be watched. If, later, abuses are found to develop outside the six years, the question of tightening up the law may then have to be considered notwithstanding any administrative problem that would result."—[OFFICIAL REPORT, 29th November, 1955; Vol. 546, c. 2227–8.]Then this extraordinary thing happened. My right hon. Friend the Leader of the Opposition, very dissatisfied with what the hon. Baronet had been saying, and still having the wisdom and foresight to see that our Amendments would have avoided the situation which has arisen today, said this, and I commend him for his prescience:I was glad to hear what the Economic Secretary had to say about what he called the second point in the Amendment, that is, the point about the time limit. In particular, I welcome his warning to anybody who intends to defeat the object of this Clause.I wish the Committee to mark these words. My right hon. Friend continued:I can only hope that should the object be defeated"—that is, the object of the 1955 legislation—in any way, and at some future Committee stage of a Finance Bill it is discussed,"—that is what we are doing today; this is the Committee stage of a Finance Bill—we shall not then have the argument put forward that an Amendment from the Opposition is retrospective.My right hon. Friend said he hoped that when this precise situation—which he then envisaged—occurred it would not be argued by the Government against an 1129 Amendment such as this that it is retrospective. The hon. Baronet said:I can give that assurance unconditionally."—[OFFICIAL REPORT, 29th November, 1955; Vol. 546, c. 2229.]Does the Chancellor of the Exchequer repudiate that?
§ 4.15 p.m.
§ Mr. Graham Page (Crosby)
. All these quotations which the hon. Gentleman has given were in the context of a Clause relating to finance companies. Indeed, he has mentioned that throughout his speech. Would he say that these undertakings, as he has called them, apply to ordinary trading companies as well?
§ Mr. Fletcher
I do not think that there is the slightest doubt about that. The quotations which I have given in the context of the Bill, and in the context of the speech of my right hon. Friend the Member for Huyton and others all dealt with the whole sphere of dividend stripping. Although at the time one particular kind of device might be more prevalent, there were, obviously, a whole gamut of ways in which the tax reserves of companies could be extracted. It was obvious by the language used by the Chancellor, by the Financial Secretary and by the Economic Secretary that they were trying to deal with the whole question of dividend stripping. Our complaint is that they did not do it effectively.
Whether they did or not does not now matter. The warnings were explicit. They were aiming at exterminating the evil of dividend stripping. The important feature of this evil is that a company which has legitimately and properly paid its tax can, as a result of some device, manipulate its affairs so that a different set of people can go to the Revenue and get that tax back. We do not know whether the amount that the Revenue has lost to date is £4 million, £6 million, £10 million or £12 million. Even the Treasury does not know.
If it is necessary to pursue this matter, let us note the language used during the Third Reading debate on 13th December, when the Financial Secretary, speaking with the authority of the Chancellor, said:Finally, the dividend strippers have been given notice to quit. With the authority of my right hon. Friend the Chancellor of the Exchequer, my hon. Friend the Economic Secretary has also put it on record that if 1130 clever people should discover ways and means of getting round this legislation, which is squarely directed against dividend stripping, the Government will not hesitate to stop any such loophole by further legislation, and to make such legislation retrospective."—[OFFICIAL REPORT, 13th December, 1955; Vol. 547, c. 1022.]I cannot believe that anything could be clearer.
I apologise for having detained the Committee for so long. In conclusion, I say—I wish to be moderate in the language I use—that I accuse the Chancellor of two things. First, I accuse the right hon. Gentleman of not having understood this matter properly when he introduced his Budget speech and then made that unfortunate pronouncement a fortnight later. I think it excusable if the right hon. Gentleman did not understand because, after all, he is relatively new to the Treasury.
My second accusation is more serious. I accuse the Chancellor of having betrayed his better judgment; of having flinched from his duty; of having preferred the interest of completely unmeritorious finance companies and others to the interest of the Exchequer and the taxpayer. I accuse him of having manifested the common failure of Conservative Chancellors and Ministers of always being more sensitive to the interests of wealthy taxpayers, even when they are engaged in the most notorious form of tax avoidance, than to those of the Exchequer, the protection of whose interests should be his primary and paramount concern. I accuse the Chancellor of knowing what was the path of righteousness and duty, but of having chosen the opposite and committing the sin of apostasy.
The Chancellor of the Exchequer (Mr. Derick Heathcoat Amory)
The purpose of the Amendment before the Committee is to reverse, to some extent, at any rate, the decision which I announced to the House on 29th April to remove retrospection from Clauses 16 and 17.
I listened with attention to the case which the hon. Member for Islington, East (Mr. E. Fletcher) made. If I may say so, there was only one thing in what he said about myself which I resented at all, and that was his suggestion that I had been influenced in this decision by the views of the kind of people who indulge in these practices. 1131 I will go on to say what did influence me, but I should like to say now, with the greatest emphasis I can, that nothing said by anyone in those sort of quarters influenced my decision in the slightest degree.
The effect of the Amendment as drafted would be very limited indeed. It would apply in cases where shares in a company were acquired after 13th December, 1955, but only, I believe, where tax liability for the current year, 1958–59, was affected. Since it is the practice of dividend strippers generally, I believe, to take their dividend as quickly as they can after acquisition of the shares, only a very few cases would be likely to be caught by the Amendment which would not be caught by the Clause as it now stands. However, I do not want to dwell on that particularly, because it is clear from what the hon. Gentleman has said, I think, that right hon. and hon. Gentlemen opposite want me to go a good deal further than the Amendment would go and that they are really challenging the decision I took at the end of April.
There is very little I can add to what I have already said about the reasons for my decision. I have already put on record that, in my view, retrospective legislation in fiscal matters and, even more, I think, in other legislative matters, needs very unusual circumstances indeed to justify it. The more infrequently it is used the better. I would not myself go as far as to say that it was never justified. Indeed, when I was preparing my Budget, I formed the view, looking at the precedents, that here was a situation in which retrospective legislation would be appropriate. I then listened to the arguments adduced in the House and in many quarters outside the House, also. I do not say that I have been wholly convinced by all the arguments against retrospection. While, as I said, I am strongly against retrospection as a principle in legislation, I do not go as far as some hon. Members go in regarding it as entirely illegitimate in all circumstances, or in the views which have been expressed in many quarters that warnings are entirely irrelevant.
I should like to mention two aspects of the matter of warnings. First, was the then Financial Secretary's warning, 1132 in 1955, for example, specific enough to cover the new forms of dividend stripping since devised? Secondly, are such warnings anyway an effective justification for subsequent retrospective legislation? Different opinions can, no doubt be held, and are passionately held, I think, on both those points. Retrospective legislation is something which must be judged according to the circumstances of each case, with, as I have said, a strong bias against the use of retrospective action.
In my opinion, one essential prerequisite, if retrospective legislation is to be used, is that those concerned should have every reason to be aware of the taxation consequences of their specific actions and, therefore, have a chance of avoiding it if they wish. In this case, the warning took the form of a statement by Ministers in the House and recorded in HANSARD. Different views are held about whether such a warning constitutes a valid warning which can be assumed to be available to, and in the mind of, anyone contemplating this kind of action at any time in the future.
Nothing that I have said is intended to lay down the proposition, as far as I am concerned, that in no circumstances whatever would retrospective legislation, after warning, be justified. I should be reluctant myself to countenance quite so extreme a view as that. All Governments must be vigilant against deliberate tax avoidance. If the weapon were to be entirely removed from our armoury, future legislation against avoidance might have to be much more lengthy, complicated and meticulous even than it is today, and the best brains of parliamentary counsel and Somerset House might have to be continuously applied, perhaps to a ludicrous degree, to the task of thinking out, to counter them specifically and in advance, every conceivable modification and refinement of any device which the wit and ingenuity of the human mind is able to contrive.
§ Mr. Harold Wilson (Huyton)
Is the Chancellor further aware—this is a point which we have stressed many times from 1955 onwards—that that legislation would be not only meticulous, lengthy and involved, but it would involve some very unfair burdens on legitimate traders and legitimate financiers merely for the sake of avoiding the use of retrospective legislation or other means to deal with people who are thoroughly unscrupulous?
I was going on to say, before the right hon. Gentleman interrupted, that I do not think that most taxpayers, who find our present legislation quite complicated enough, would welcome that kind of development. I believe that they would feel that it interfered with their legitimate activities, perhaps to a quite unnecessary and regrettable degree.
There are, of course, those who would like to see in the tax code some general provision which would enable action to be taken by the Commissioners of Inland Revenue to nullify for tax purposes any transaction whatever if it resulted in the avoidance of taxation. I shrink from that with even greater repugnance, for it might mean bringing under review ordinary transactions such as a transfer from gilt-edged, we will say, to National Savings Certificates in order to secure tax exemption, or the making of a life covenant for an aged mother.
§ 4.30 p.m.
It seems to me that that, in general, would be far too wide a power to give, and very undesirable. I am certain that it would be intolerable if any transaction in the whole world of business were to be open to challenge on tax avoidance grounds. I do not think that that proposal would be at all good.
What I want to reaffirm to the Committee is that my decision, after listening to the arguments advanced, not to apply retrospection in these cases where shares have been acquired before the date of the Budget this year, was based just on this fact, that different opinions were passionately held about the fairness of retrospection in this case, in view of the nature of the warnings given and in view of the principle of the objections to retrospection in general, and I concluded rightly or wrongly—I think rightly—that in those circumstances the balance of right seems to lie in giving the benefit of the doubt to the subject rather than to the Crown. I believe that that decision was right, and I invite the Committee, for that reason, not to accept the Amendment.
§ Mr. Frank Bowles (Nuneaton)
The right hon. Gentleman said twice that he does not think that the House of Commons is a sufficiently important place 1134 to utter warnings to "sharks". Where does he propose to go—to their annual dinner, or something?
I did not express an opinion beyond saying that two views were held about the nature of that kind of warning.
§ Mr. H. Wilson
I do not intend to make a speech, but I think that one comment should be made on what the right hon. Gentleman has said. It is clear that we have not got a Chancellor of the Exchequer. All we have got is a well-intentioned weathercock. At the time of the Budget he was obviously under strong pressure from the Board of Inland Revenue and he reflected that pressure in his Budget speech. As soon as pressure began from right hon. and hon. Gentlemen behind him, he got pushed in the opposite direction. He has clearly been under further pressure and the Board of Inland Revenue has protested to him that the kind of conclusion he reached will lead to the conclusion generally that tax dodgers can get away with it without the fear of retrospective legislation. Therefore, the right hon. Gentleman has swung in another direction and has told us that he is not afraid of retrospective legislation.
I want to ask the Chancellor this question. He has said to us that where there is a clear warning there is a case for retrospective legislation, although we should have a bias against it. He spoke in almost the same words as were used by my hon. Friend the Member for Islington, East (Mr. E. Fletcher) in quoting two Conservative Chancellors before the war. Where there was a warning this would be justified. Would the right hon. Gentleman tell the Committee now whether there was not a warning in 1955, or whether he is criticising the inadequacy and bad drafting of the warning given after very full consideration by the then Financial Secretary and the then Economic Secretary? If the right hon. Gentleman thinks that one is justified in acting on a warning, was it the warning that was inadequate and carelessly drafted, or is he running away from the conclusions and the consequences of that warning?
What I have said today is completely in line with my utterance on the last two occasions, on 21st April and 29th April.
1135 As to the right hon. Gentleman's question about the warning, I have said already that a warning was given. I called attention to it. What I am saying is that different views are held as to the adequacy of the nature of that warning in a matter like this. I want to repeat what I said earlier, that whether a warning has been given or not is one of the elements to be weighed up; but there are other factors which have to be weighed up and each case must be taken on its merits. A decision has to be reached, in those circumstances, on where the balance of fairness lies.
I said in my previous statement that I found it difficult to make up my mind on this matter. I owned to the Committee that after listening to arguments I had changed my mind and decided that the balance of advantage which I thought leant just in one direction now leans in the other. That is the explanation of my decision.
§ Mr. Wilson
A weathercock always finds it difficult to make up its mind. It is always right in reflecting the direction and pressure of the winds that blow upon it.
It is quite clear that the Chancellor has not told us whether he was prepared to stand up for the interests of the Revenue and the general taxpayer against these pressures. Taking even the Chancellor's words at their face value, he said that there was some doubt about the extent of the warnings of those Ministers. It is a very serious reflection on those Ministers that they could not choose their words more carefully at that time.
Even if we accept the Chancellor's words, which, frankly, I do not, even if we accept his argument, he will agree that we are now trying to deal with three different kinds of dividend stripping. Accepting the Chancellor's argument on one of those, there is some doubt as to whether the warning really covered it. On the other two, which are related to the 1955 Act, there can be no doubt that the warning covered them. Why will the Chancellor not say that he was prepared to have retrospective legislation for those parts of the practices which were clearly dealt with by that warning?
That still leaves the nature of the warning, apart from the specific content of the warning, undealt with.
§ Mr. G. R. Mitchison (Kettering)
May I ask a question? The Chancellor appreciates that this is a very serious matter, not merely in relation to this case. I suggest to him that the Committee is entitled to a clear answer to one question. Is it his considered opinion that the warnings given in 1955 were inadequate either because their terms were obscure or insufficient, or because they were only given in the House of Commons?
In answer to the first part of the hon. and learned Gentleman's question, I have on an earlier occasion said that there were some doubts as to whether the terms of the warnings were wide enough to cover all the new forms of dividend stripping which have arisen since then.
As to the second part of the question, as I have said earlier, it is a matter on which different views are held as to whether a statement in the House by the responsible Minister on a particular case shall constitute a sufficiently valid warning to all those who may be concerned in decisions in relation to commercial activities for all time.
§ Mr. Mitchison
If I may say so, that is not an answer to the question that I asked. It seems to me that in a matter of this sort, where the right hon. Gentleman's political honesty and his ability to maintain his own opinions against pressure from other people are at stake, he ought to tell the Committee what is his opinion—his considered opinion—on the two points I put to him. I will repeat them. Were those warnings inadequate in terms, or were they inadequate because they were only delivered in this House? It is the right hon. Gentleman's opinion we want, not whether there is any doubt about it.
I have given my opinion that at the time of the Budget I considered that the warnings given were adequate, but after listening to the arguments I came to the other conclusion. I have said that for the third time.
§ Mr. Wilson
The right hon. Gentleman has failed to answer the question for the third time. It is important to put this question. This is an entirely new point about the inadequacy of a ministerial 1137 warning in the House. In his considered statement which he gave at the beginning of the debate—and it was very helpful of him to intervene so early in the debate—the Chancellor made it very clear that it was perfectly appropriate to introduce retrospective legislation where there had been a Ministerial warning.
Then the right hon. Gentleman used mysterious words about the inadequacy, not of the words of the warning, but of the nature of the warning. My hon. Friend the Member for Nuneaton (Mr. Bowles) asked him what kind of nature of Ministerial warning is necessary if a considered Ministerial statement, in Answer to a Question, as it was in 1955, is not adequate.
Does the right hon. Gentleman say that there must be another warning, for instance, one circulated in the London Gazette? Must there be something which counts for more than a statement in the House of Commons? If the Chancellor thinks that there is any doubt about the nature of the warning—I am not concerned with its coverage or its definition—will he say what kind of warning would satisfy his requirements?
This is one of the elements to which I referred. My decision was reached here in the light of a number of different factors. That was one of the factors on which I have still some doubt, namely, whether it is reasonable to expect everyone concerned in future decisions on commercial matters like this to be conscious—by itself and without anything else—about what a Minister said in the House of Commons on a particular day.
§ Mr. John Diamond (Gloucester)
I am sure that hon. Members on this side of the Committee consider the answer given by the Chancellor most unsatisfactory. The whole Committee ought to consider the whole answer most unsatisfactory in relation to the last and the newest doubt of the Chancellor whether the House of Commons is the place in which to give a warning to tax tricksters, to use the Financial Secretary's term. Is the House of Commons the proper place in which to give notice to people whose sole concern is to make a business out of tax avoidance—reading HANSARD page by page, line by line, and comma by comma—and devoting their whole lives and a considerable fortune to doing it?
§ Mr. Diamond
That the right hon. Gentleman should be driven to rely even on the smallest measure on those considerations has taken something off the stature of the Chancellor. That is the last thing that I wanted to happen. I want the Chancellor to realise that this is a difficult matter. In his complete honesty, he has confessed to us—he is a man of the utmost integrity—his difficulty in making a decision when the arguments seemed to be equally balanced.
Surely the House of Commons is the appropriate place for us to discuss arguments of that kind and to help the right hon. Gentleman to make up his mind. He should have listened to us here; I hope that he will still listen to us. He has confessed that the arguments were equally balanced. I hope that he will allow us the opportunity of swaying his mind in what we think is the right direction.
It is difficult to conceive of a more important function for the House of Commons than that of raising taxation which affects the liberties of practically every subject, and it is difficult to think of any Amendment which could go more to the root of the fairness and justice of the methods by which we raise taxation than that which is before the Committee. We are concerned with seeing that the burden of taxation is shared fairly among taxpayers, that every taxpayer realises that he is called upon to pay his fair share—in simpler terms his fair whack—and that he has not to shoulder an additional burden because one particular class of taxpayer is notoriously getting away with less. I should have thought that that was absolutely fundamental to our responsibility.
I think the Chancellor would agree that it is essential that there should be a close relationship between the Revenue and the taxpayer in the collection of these millions of pounds of revenue, so that the machinery should work as smoothly as possible. The only reason why we are able, by and large, to collect such a high rate of taxation—higher than almost anywhere else in the world—is because we place a high value upon that relationship.
1139 4.45 p.m.
That relationship is utterly destroyed as soon as it is seen that there is a category of taxpayer completely avoiding its share of the burden and if, on top of that, it is seen, as it is now regrettably seen unless the Chancellor will change his mind once more, that the representative of the Revenue and of the community comes down in favour of the richest taxpayer and not in favour of the community, when he has a doubt in his own mind. The Chancellor is here to represent the whole of the community of taxpayers and not the richest taxpayers.
That is exactly what the right hon. Gentleman has done on this occasion. At an earlier stage he came down in favour of the taxpayers as a whole and of the principle that we should all pay our fair share of taxation. He has withdrawn, temporarily I hope, from that position, because of pressure put upon him by hon. Gentlemen who have the weakest possible case.
In Finance Acts we shall always be concerned with tax avoidance. There will always be some persons attempting to find a way through the provisions of a Finance Act, and will always be provisions to close loopholes. The very fact that we must have a Finance Act once a year which includes provisions for closing loopholes shows how continually we are faced with this problem. What is the best method of closing loopholes? I am delighted that the Chancellor of the Exchequer dealt with this point. He considered our Amendments, other than the one about the warning, and rejected them. I am in agreement with him and not necessarily with all hon. Members on this side of the Committee, in rejecting those other Amendments. They are bad.
One is left with only this method of dealing with the fact that no human being, including every draftsman in the country employed by the Inland Revenue, can foresee every possible complexity of our economic life, or can turn the wishes of the House of Commons into effective provisions legally drafted to deal with every economic possibility. The nature of our economic life is far too complex for any number of lawyers to provide for it. One cannot foresee the unforeseeable, or what events will later on put into individual minds the possibility of 1140 deriving beneficial results from taxation. Because of that complexity, it is impossible for any human being to provide for all the different transactions among tens of thousands of people over the years.
Knowledge of these transactions comes far too late to the Government Front Bench. It comes very late to the Inland Revenue, as I shall illustrate. At present, the Government Front Bench have no other method of dealing with this problem of loopholes than a Ministerial warning given under proper safeguards. There is no other method of dealing with the problem.
In 1955, for reasons I need not repeat, there happened to be two Finance Acts. I was not here then. We had a General Election, at which I was unsuccessful, and it immediately preceded the second Finance Act. The then Chancellor, the present Home Secretary, took advantage of the fact that there was an interim Finance Act to introduce legislation devised against dividend stripping. He said he knew about it then although he had not known about it at the time of the earlier Finance Act, in April of that year. These methods of dividend stripping had been common talk in the City of London for two years before that. For two years it had been a matter of common talk, not quietly discussed between experts on a particular problem, but coffee house talk.
I accept, as I must accept in this House, the statement that the Home Secretary then made that he was not aware, as Chancellor of the Exchequer, of the wide existence of this method of tax avoidance until October, 1955. I accept it and it is in support of the argument I am making that until a whole host of things have taken place and this original tax avoidance device has been perpetrated, no one knows on the Front Bench. One does not know until it reaches the Inland Revenue when a repayment claim for tax evasion is being made. It may be made years after the event.
One of the reasons taken into account in deciding the timing of the repayment claim is whether, if it is made very early, the dodge will be stopped in the next Finance Act. Therefore, if one lets it run a bit one is secure and is accumulating more and more years of tax benefit to the dodger and disadvantage to the rest of the community by letting it run. 1141 It is inevitable, therefore, for these two reasons—the complexity of our economic and business life and the fact that the information, on the word of the Home Secretary, reaches the Chancellor too late—that there will always be the problem of closing loopholes and we shall not deal with it satisfactorily other than by the method of Ministerial warning.
That warning was given with authority and in the most precise terms. It was repeated on three occasions and it was a warning which struck at dividend stripping and everything to do with dividend stripping. It was not a warning directed against a method of dividend stripping, but directed against a result, the tax benefit derived from dividend stripping.
The essential thing was two companies, a company rich in resources and a second company married to it in one form or another, as the Financial Secretary told us so clearly on Second Reading. There would be benefit to the dividend stripper and loss to the rest of the community. The rest of the community would have to bear an additional burden over and above that which it would have been called upon to bear had the dividend stripper, in common with the rest of the community, borne his fair share of tax.
The warning given was utterly precise in relation to this Amendment. If this is not the very thing which is 100 per cent. within the terms of that warning, when is a warning to be used and for what was that warning used? I cannot imagine any case in which the position was more precise and more exact. I can imagine no case where a warning has dealt more specifically with what was in the mind of Parliament. Everyone knew what was involved and the very thing against which the warning was made came off. Today, the Chancellor said he did not dismiss from his mind the giving of Ministerial warning in proper circumstances. I must ask what occasion he can conceive of, if not the one we are considering, to give effect to the Ministerial warning.
If the Chancellor takes the view of the right hon. Member for Blackpool, North (Sir T. Low) he takes the view that a Ministerial warning is not an appropriate measure in any event. I think that that was the view expressed by the right hon. Member in a speech some time ago. If 1142 the Chancellor took that view one could understand that he would dismiss the Ministerial warning altogether, but for the purpose of the tax collecting machine he dare not jeopardise the use of the one weapon which is of such vital importance. He dare not throw it away. It is the one thing which is of the greatest possible help in stopping tax avoidance. Because he dare not throw it away, he says that he has not completely rejected it from his mind.
I must, therefore, ask someone on the Front Bench to say what circumstances would justify a Ministerial warning. What circumstances could be more appropriate than the occasion when the warning was given three times with authority, directed specifically against dividend stripping; and we are dealing with the very thing which was warned against? I will not repeat the words of the warning. They have been dealt with by my hon. Friend the Member for Islington, East (Mr. E. Fletcher). Nor is it necessary to go into the general principle of retrospective taxation, because my hon. Friend has dealt with that so effectively, but I will add a further reason which I find very potent.
One notices that the first argument put forward by all those who speak against retrospective taxation of any kind is that one must not be made a criminal in the eyes of the law for doing something which was not criminal at the time it was done. There is no question of criminality at all. All we are considering in this Amendment is whether the wishes of Parliament, which were expressed at the time, shall be given effect. There is nothing retrospective about that. We are only deciding whether or not in this case, where Parliament omitted to dot the i's and cross the t's with sufficient precision, those who avoided tax are to be called upon to share in the burden of taxation which, having read the warning, they feared they would have to share.
All the dividend strippers must be laughing up their sleeves at the moment. They knew full well of this warning. They knew full well they were taking a chance on it. They realised that this is a case where one nets a profit fast. It is not a scheme which would be worth while having a five or ten years' run. On a dividend strip the profit is netted immediately, it can be done in 48 hours. 1143 They knew this was the case and that unless the Chancellor supported the warning he would not catch them. A man who does a deal like this cannot be caught by a subsequent Finance Act, brought in six to twelve months later, which is not retrospective in this sense.
It is extremely regrettable that by this action the Chancellor has not only given cause for laughter among all the dividend strippers who will now make a profit which they did not expect—they feared they would make a much smaller one—but he has dealt a blow against all those who have done everything they could to put tax avoidance upon the good ground that Parliament has said that there would be retrospection if this thing happened, and it has happened.
It is regrettable in the extreme that the Chancellor, by his change of mind in this way, is prejudicing enormously the ability of the Inland Revenue to function on our behalf and prejudicing enormously that other section of the community without whom the Inland Revenue could not work—the accountancy profession.
§ 5.0 p.m.
§ Mr. Pickthorn
If I heard the hon. Member aright, he said that Parliament had said that in such and such circumstances there would be retrospection. If I did not hear him correctly, I hope that he will tell me so now. If I did, does he think that a Ministerial assurance amounts to Parliament saying something with legislative effect?
§ Mr. Diamond
The hon. Member is quite right; I used the words "Parliament has said". I did so deliberately.
Although it was only a Minister saying it, with the authority of the Chancellor of the Exchequer, when that happens and when it goes completely unchallenged, I think that it is right in terms of the average public outside to say that "Parliament has said it". [HON. MEMBERS: "No".] This is an extraordinary state of affairs. Apparently some back benchers are disowning their own Government. I thought that I was being extremely courteous to every back bencher by including them all in support of the Chancellor.
I thought that the Committee would be pleased that I had included both sides of it in support of the Chancellor against 1144 tax dodging. I thought that that was the general sentiment of the Committee and I am surprised to find anybody objecting to it. I was on a very narrow point when I used the word "Parliament" instead of "Chancellor of the Exchequer".
§ Mr. John Arbuthnot (Dover)
The hon. Member seems to have suggested that if a Minister makes a statement, and nobody on either side of the House objects, that is the equivalent of Parliament saying it. That seems to me to be entirely wrong.
§ Mr. Diamond
I am suggesting that in the circumstances of this case, in which the Committee was debating the Finance Bill (No. 2), 1955, in which provisions against tax avoidance and dividend stripping were being considered, in which the right hon. Gentleman speaking for the Opposition at the time asked questions of the right hon. Gentleman speaking for the Government at that stage, in which questions and answers were asked and given in that way and in which the approval of the Opposition was obviously given as well as the tacit approval of the Committee, I am correct in what I said. It is no good hon. Members opposite trying to wriggle out of it now. They did not wriggle out of it then. The said not one word then.
Anyone should realise that a fair way of stating the position is that hon. Members supporting the Government at that time gave support to this principle. Do they not give support to it now? They say that they are in favour of dividend stripping, because the Clause is against dividend stripping and the only point involved is the date on which the provisions shall take effect.
The right hon. Member for Blackpool, North, for whom we have great respect, said on a previous occasion that he was wholly against retrospective fiscal legislation. He was in the Chamber last night. Last night, while I was out of the Chamber for those few minutes, the Chancellor announced a measure of retrospective fiscal legislation; he said that the initial allowances would be increased from the 25 per cent. laid down in the Finance Bill and in the Budget to 30 per cent. He said that the date from which this would become effective would be the date of the Budget. That would be at least two months before anybody had the slightest idea that these allowances would be raised.
1145 The right hon. Member for Blackpool made a speech last night which I read in HANSARD. Assuming it to be correctly reported, he did not say one word objecting to this benefit to the taxpayer on the ground that it was retrospective. This happened only last night. I do not know the amount involved; I think it was £23 million or something of that order, but I shall be corrected if I am wrong. This amount was given to a body of taxpayers restrospectively, with a minimum of two months and probably three months. The right hon. Member for Blackpool, North did not object in the slightest. Does he object now? Or is it his view that retrospective fiscal legislation should work one way only?
§ Mr. William Shepherd (Cheadle)
Is the hon. Member seriously suggesting to the Committee that he would put a benefit to the taxpayer in the same category as a penalty? If he is, then he is pronouncing something which I think is unacceptable to those who try to take a reasonable view of the matter.
§ Mr. Diamond
I am grateful for the intervention. The hon. Member has stated what I suspected was the view held—honestly and sincerely—by many hon. Members opposite. It is that we can have retrospective legislation only if it is retrospective in favour of a category of taxpayers and not if it is to the prejudice of a category of taxpayers. In that case, I do not know why hon. Members opposite object to the general principle of retrospective legislation. If that general principle is now accepted, I can turn immediately to the detail of this case.
The Chancellor said that he doubts whether the warning was wide enough to deal with the new methods of dividend stripping which have since come to his notice. I want to underline the fact that they may be new to the Chancellor and may have been new to the House in the autumn of 1955, but in fact they were not new because they had been in existence and had been practised. There was nothing new about them then. The marriage of the rich company with the poor company is as old as the hills, as is the dividend stripping which results from it.
By curious chance, I found it detailed in a book of nursery rhymes which I 1146 happened to find in my nursery only this morning. In order to avoid getting the words wrong, I noted them down. They concern the usual case where the boy seeks the girl—that is, the loss company seeks the company with rich reserves. Having put an advertisement in a column of the Financial Times, or a similar paper, seeking an interview with such a loss company, the following wooing goes on, in which he says to her:Where are you going to, my pretty maid?Where are you going to, my pretty maid?A'milking the Revenue, sir, she says,A'milking the Revenue, sir, she says.What is your fortune, my pretty maid?What is your fortune my pretty maid?My loss is my fortune, sir, she says,My loss is my fortune, sir, she says.Then I'll go with you my pretty maid,And I'll strip off my dividend, my pretty maid.But not till you've married me, sir, she says,Not till you've married me, sir, she says.They were duly married and invited all their nursery rhyme friends to the wedding. Along came Simple Simon—I am referring to the nursery rhyme characters—and gave them a cheque in repayment of tax for a cool half-million pounds, and they lived on the fat of the land ever after.
There is nothing new about the marriage of two companies in order to achieve the circumstances in which dividend stripping can take place. May I read the title of this Clause and then the title of the Section in the Finance Act, 1955, which this Clause seeks to amend? This Clause is headed,Purchases of shares by financial concerns and persons exempted from tax".That is the general purpose of the Clause. The relevant Section in the 1955 Act reads,Purchase of shares by financial concerns and persons exempted from tax".Word for word, it is exactly the same. As the right hon. Gentleman knows, and as he virtually admitted in his speech, we are dealing with exactly the same things as that with which we were dealing in the 1955 Act.
Certain provisions, as the Financial Secretary made clear in his opening speech on this Finance Bill, have been overcome by methods which the hon. and learned Gentleman called a "mere artificiality," or words of that kind. On 1147 12th May, the hon. and learned Gentleman said:The first device is a sheer technicality…This is a sort of dividend stripping by proxy and Clause 16 (3) is intended to close that gap. The second form tries to get round the requirements of the 1955 legislation…The House will see that in Clause 16 (2) a formula has been devised to deal with that case."—[OFFICIAL REPORT, 12th May, 1958; Vol 588, c, 42.]What we are doing in this Clause is exactly what was warned against and what it was intended to achieve when that first Clause was passed by the House. What we are doing is giving effect to the warning that if those provisions were circumvented retrospective legislation would be introduced. We are being extremely diffident. We are not leaning as far in the direction of financial rectitude as the Chancellor did in his Budget speech. In that speech the right hon. Gentleman agreed to make these provisions retrospective to October. We are only seeking to make them retrospective to September, which was the date when the final and most cogent warning was given.
We hold the view that where the warning has been given and where it is clearly understood what it is against, it is perfectly proper to introduce legislation to give effect to it, but not beyond the date of the warning. Then every taxpayer knows precisely where he is and no one is put in any difficulty of any kind. I think we have dealt completely with the question of anything new being involved in the Clause. There is no such thing.
Apparently, all the Government back benchers have withdrawn from the view that retrospective fiscal legislation is bad in all circumstances. The Chancellor no longer supports the view. He says that he holds open the possibility that, in appropriate circumstances, we would have retrospective fiscal legislation. I hope, therefore, that before we finish this debate the right hon. Gentleman is going to say that he will give the matter further consideration and change his mind.
I am in a great difficulty. What of the existing methods of dividend stripping which avoid the 1958 Finance Bill provisions? What is the Chancellor going to do about those? There are in existence at the moment methods of avoiding the provisions in this Finance Bill. What is 1148 the right hon. Gentleman going to do about those, because he does not know about them as they have not yet reached his Department?
§ Mr. Diamond
Because I am one member of the public and know a millionth at most of what other members of the public know. Whatever information I could give the Treasury I would most willingly give, but not in public. The hon. Member for Carlton (Mr. Pickthorn) pays me a great compliment which I do not deserve in believing that I know everything that everyone else knows. That is not so. It would still leave the problem of a host of other things which all my hon. Friends know on these matters.
§ Mr. Hale
Surely the duty of a Member of Parliament, if he knows of some method of tax avoidance, is to wait for a Finance Bill and to put down an Amendment to deal with it. That is what we have done, not only as regards the Amendment which we are now discussing, but also as regards the Amendment which stands in my name on page 2,950 of the Notice Paper.
§ Mr. Diamond
I say most earnestly to the Chancellor, what are we going to do for the future? There will be more avoidance of the current dividend stripping provisions. However much we alter these provisions, they will still be avoided. Is the Chancellor satisfied to wait for two or three years until evidence of this reaches his attention and then to take action to deal with the matter—
§ 5.15 p.m.
§ Mr. Diamond
—or is he prepared to say that this is the sort of thing concerning which a Ministerial warning should be given and prepared to give a warning now as Chancellor of the Exchequer against this practice in what are the words he thinks appropriate in this place—if he thinks this place is good enough in which to give that warning—together with whatever further advertisement in The Times and wherever else he wants the warning to be published—
§ Mr. Diamond
—and to include it in the list of concessions which the Inland Revenue circulate to interested parties? Is the Chancellor prepared to give a warning now, of whatever kind he likes, to apply to the future? Is he prepared to give us some reason to think that he is on the side of the taxpayer and not of the tax dodger? If the right hon. Gentleman is not prepared to do that, how are we to deal with these matters in the future? If the Chancellor is not prepared to do this, then he should rest the issue for all time.
The Chancellor has given the greatest stimulus to tax avoidance by introducing retrospection and then running away from it and changing his mind. I assure the right hon. Gentleman that to have loved financial rectitude once for a short time and to have lost is much worse than never to have loved it at all. It will give a stimulus in all the wrong sorts of quarters which we have been discussing for some time.
I should have thought that in the general atmosphere of the country today the Chancellor would not wish every civil servant, bus driver and factory worker to feel that he is paying more than his fair share of tax with the full knowledge and support of the Chancellor of the time. I should be utterly surprised if he, the Minister for the Inland Revenue, is going to let his own Department down and is going to be known as the Chancellor who supports the artful dodger.
§ Sir Alexander Spearman (Scarborough and Whitby)
I do not wish to enter into the arguments for and against retrospective legislation, however strong my view may be on the matter. I only want to speak very briefly indeed about the comments which have been made on the Chancellor's decision. It seems to me that hon. Gentlemen opposite are being very difficult to please. I can well understand their entirely disagreeing with the Chancellor's decision and criticising it as hard as they can. But I cannot quite understand why the right hon. Member for Huyton (Mr. H. Wilson) can describe my right hon. Friend as a weathercock when he listens to arguments and is influenced by them and as being rigid 1150 and unhelpful and as prolonging proceedings unnecessarily in listening to arguments which do not change his mind. That is what we were frequently told last week.
§ Mr. E. Fernyhough (Jarrow)
Will the hon. Gentleman tell us when the Chancellor listened to anything in the House which caused him to change his mind on the matter?
§ Sir A. Spearman
I am not conscious of any speeches being made there which were directed to my right hon. Friend the Chancellor. I only remember the speeches made in the House.
§ Sir A. Spearman
That is a matter of opinion. He may have listened to the hon. and learned Gentleman and not been convinced by his arguments in the very prolific speech which he made the other day.
My right hon. Friend said that the arguments were very nearly divided and that he found it particularly difficult to make a decision. I understand it was not the case that he thought the matter was either merely black or merely white. He found it particularly difficult on this occasion, and it seems to me the occasion when a man with that opinion should be open to hearing arguments and being influenced by them. Indeed, I have always thought that obstinacy and refusal to listen is not the sign of strength but of weakness and that willingness to change one's mind is a sign of strength and wisdom. I am very glad that my right hon. Friend has once again shown that he holds these two qualities in such a very high degree.
§ Mr. J. Grimond (Orkney and Shetland)
I, too, do not want to delay the Committee long. I sympathise with what the hon. Member for Scarborough and Whitby (Sir A. Spearman) said about the Chancellor's dilemma. He is always apt to be called obstinate, rigid and stiff-necked one day and weak-kneed the next day. That is a hazard that Chancellors 1151 face. I am glad that on this occasion the right hon. Gentleman has changed his mind.
On principle, I am against retrospection which operates against the taxpayer. Our law is sufficiently uncertain already without introducing a new hazard that it may be changed retrospectively. In addition, there is always a danger in these cases that if the taxpayer is unpopular though rich it is considered right to do things to him to which, in the case of a more popular member of the community, we might object. I am glad the Chancellor said that it could be justified only in very unusual circumstances. I agree with him.
I quite understand the argument that our taxation system is now so complicated that it is becoming extremely difficult to legislate about it. That is a devastating criticism, not of our economic but of our taxation system. It badly needs revision and reduction.
The point on which I want to say a word or two is the question of warning. I have said that I am against retrospection on principle, whether a warning is given or not. It seems, however, that there is some consensus of opinion in the Committee that a warning is important. The Chancellor himself led us to suppose that had he been convinced that a precise warning had been given on this point it would have influenced his mind strongly and he might have carried through the retrospective legislation which he originally suggested. I also appreciate that these tax matters are not criminal matters but they are, of course, matters which may have serious consequences for certain people. We should, therefore, investigate the whole principle of the warning.
The Chancellor's argument is that the warning was imprecise. Surely, the whole point of giving a warning is that the legislation involved would have to be so tortuous, detailed and lengthy that it was almost impossible to enact it and that it might harm a whole lot of innocent people whom one does not want to catch in that particular taxation net. Therefore, if there is any value in a warning, I should have thought that it was just that a rather imprecise warning could be given in general terms without going into details of exactly what is 1152 liable to taxation and what is not. Having looked at the warnings which have been given, I am bound to agree with the hon. Member for Gloucester (Mr. Diamond) that they were specifically aimed at the effect of dividend stripping and that, if any warning is fair, this was a reasonably fair warning.
I take the view that no warning is fair. If, however, we are to have the principle of warning at all, I do not see how it is of any value if it must be as precise as legislation. If we can be totally precise about this, why not legislate?
§ Mr. Grimond
If we cannot legislate, those who are in favour of warnings say that the warning is given about one's intention. It is directed at the end of the process one wants to stop; that is, some gain through evasion of a tax. As far as I can see, this warning was reasonably intelligible and accurate if one is in favour of warnings at all.
There are all sorts of objections to warnings. They make our position still more uncertain. They mean that we have a new form of direction which is not the law but which may ultimately affect law. It surely is extremely important that we should have some principles at least upon which warnings are to be given. Is the Chancellor saying that he will give a warning against dividend stripping in its new forms? He has been asked this question by the hon. Member for Gloucester. He says that there are methods of doing this which are still being practised. Is he saying that it is right if he says that he is against this method of minimising taxation, whether done in a trading company or a finance company, or is he saying that a warning must be absolutely precise? If a warning must be precise, he should introduce legislation, because I see no difficulty, if he is enabled to give a precise warning, why he should not bring precise legislation before us.
I do not join with the hon. Member for Gloucester in saying that if the Chancellor makes a statement in the House and we do not get up and disagree with him we are all taken to agree with him. This is a dangerous principle and, if 1153 extended, it would involve us in sitting here day and night, because one can never tell what Ministers will say.
§ Mr. Grimond
I usually disagree not only with most of what the Government say, but with practically everything that the Opposition says too.
§ Mr. Mitchison
The hon. Member has mentioned the serious consequences of retrospective legislation. May I take it that what he has in mind is the repayment by certain dividend strippers of sums that they have received from the revenue?
§ Mr. Grimond
No; the hon. and learned Member may not take that. I was making a general point that taxation at its present level may have extremely serious consequences for people of whom we may approve or disapprove. Morals do not enter into this. It is better to keep morals out of these taxation method arguments. What I am saying is that, as a general rule nowadays, with taxation at its present height, the introduction of retrospective taxation legislation may have extremely serious consequences.
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)
I should like for a moment to echo the concluding thoughts of the hon. Member for Orkney and Shetland (Mr. Grimond). Some of us from time to time complain of all-night sittings, tedious debates and one thing and another. I can imagine that those who are at present the Government Whips and those who, in the future, hope to be Government Whips—[Interruption.]—they may come from this side of the Committee as well as from the other side—listened with the greatest possible interest to the speech of the hon. Member for Gloucester (Mr. Diamond) and less so to the speech of the hon. Member for Islington, East (Mr. E. Fletcher), who, it seemed to me, was more objective in his approach to the problem.
The picture which emerges very clearly from the speech of the hon. Member for Islington, East is of a Ministerial warning at 3.30 p.m. and that then Parliament has spoken. There is no question of debate in the House, no question of Second Reading, Committee stage or any 1154 other place, but just a Ministerial warning and Parliament has spoken. That is what the hon. Member said.
Has the hon. Member followed that through to its logical conclusion? Let us imagine that a Ministerial warning in precise and specific terms is given. The years roll by and no legislation reflecting that warning goes through the proper constitutional stages. What is the position then? Has the law of the land been changed or has it not? Can another Chancellor or Minister come along in five, ten or twenty years' time and make his legislation retrospective to the date of the Ministerial warning? This is a moonbeam from the lesser lunacy.
§ Mr. Diamond
The hon. Member is, of course, exaggerating one point which I made. I hope he will bear in mind that he has already voted in favour of retrospective legislation. If I am not wrong, one of the Budget Resolutions which was submitted to the House and was voted upon by all Government supporters—I assume that the hon. Member was present for the Budget speech—was a Resolution dealing with the ability to exact taxation retrospectively. Indeed, Mr. Hynd, you would not have permitted discussion of the Amendment had it not been so.
§ Mr. Stevens
I shall certainly come to that point. It is, however, within the recollection of the Committee whether the hon. Member did or did not indicate the effect of Ministerial warnings. One of my hon. Friends challenged him when he said that a Ministerial warning had the effect that "Parliament has said". "Parliament has said" can mean only one thing: that is, that the proposal concerned has gone through all the stages of Parliament, which includes not only this place but another place also. The hon. Member has been a Member of the Committee and of the House long enough to know that.
I return straight away to retrospective legislation. I am very glad that my right hon. Friend did not yield to the most interesting and persuasive arguments deployed by the hon. Member for Islington, East, who introduced the Amendment. He was, as I thought, reasonably objective in his approach to this problem, and he deployed amongst his arguments the difference between various forms of retrospective legislation.
1155 5.30 p.m.
To say that we on these benches object to retrospective legislation as a whole is quite untrue. We have never said so, or meant to do so. The hon. Gentleman looks surprised. It is true that he is not one of us, but there are a number of hon. Members of the Committee who would not be here at all if it were not for retrospective legislation—those who sat here for many years under a disqualification, thereby running the risk of incurring very substantial damages—and one piece of retrospective legislation was a Bill of idemnity to prevent them from becoming bankrupt and thus ineligible to sit in this House.
Of course, we do not object in principle to all forms of retrospective legislation, and the hon. Member for Islington, East made that perfectly plain. What we do object to is retrospective penal legislation and retrospective legislation inflicting additional taxation, but certainly not, as in the case of the initial allowances, for a month or two, where the position is entirely different.
I am sorry that the hon. Member for Islington, East is not in his place at the moment, because in citing precedents for retrospective legislation he was guilty of a very sad error. It is of importance, because he quoted it to us as an everyday example for most of us, and, indeed, one very much in our minds at the present moment. He said that those of us who pay Income Tax will pay Income Tax at a different rate next year on our current year's income, and that this is therefore retrospective legislation. Of course, it is nothing of the kind, and I am quite sure that the hon. Member far Gloucester, with his great experience in these things, knows that perfectly well.
It is perfectly true that the Schedule D assessments for Income Tax are based upon the income of the preceding year, but the demand for tax is made in respect of the current year, and that that is so is shown by the cessation provisions, where the assessments for the last two years of a business, the profits of which are assessed under Schedule D, are adjusted to the actual and there is similar compensation at the beginning of a business. That was a bad precedent. It was quite faulty, and, perhaps for that reason, having taken a faulty precedent, 1156 the hon. Gentleman in his objective argument came to the wrong conclusion.
§ Mr. Hale
I have been listening with the greatest attention to the hon. Member. Will he permit me to ask him to assume that we reject the argument of the Leader of the Liberal Party that we should take all morals out of financial policy and should have a financial policy to balance the claims of the extremely poor against those of the rich and so on? The hon. Gentleman says he does not mind retrospection in financial legislation so long as it gives something to somebody, but, surely, if we are making a concession to a limited class, we impose a burden on all other taxpayers, and we are, therefore, effecting retrospectively an additional burden on the great mass of taxpayers, and very often on the poorest of them?
§ Mr. Stevens
I am bound to say that there is something in that argument, and I would not like to try to contradict it off-hand. I think we could have a most interesting debate upon it. I do not quite side with the hon. Member for Orkney and Shetland in all he said. I said, not quite the opposite, but that I object in principle to retrospective penal legislation or retrospective taxation. That is not going the whole way with the hon. Gentleman, but some little way.
The hon. Member for Islington, East took us on a very interesting historical journey, in the course of which the picture came clearly before us of the manner in which retrospective penal legislation or retrospective taxation is gradually disappearing from the British political picture. There is no question about that at all. He quoted instances from the sixteenth century, and came more up-to-date with Sir John Simon. I think that we have moved still further in the direction which I want to travel in the last twenty years.
There is, however, a most serious difficulty in connection with suggesting that ministerial warnings must have legislative effect. The difficulty is that of the precise interpretation of the ministerial warning. Hon. and right hon. Gentlemen opposite cast some doubt on that. They say that the warning of 11th December, 1955, by the then Financial Secretary, was in clear and precise terms, and that there was no difficulty about that at all. I turn to this Finance Bill, which has 38 1157 Clauses in it, and I know that one of the main objections of the Opposition is not that there was too much in the Bill, but that there was so little in it.
To many of us, these Clauses are almost unintelligible and one needs an interpreter to understand them, but yet they are necessary to give legislative effect to a warning. I think it is quite impossible to contemplate for a moment that we can put Ministerial warnings on the same plane as legislation. Unless what I have said is true, we should not have all these long Bills and very extensive debates on them. In this particular instance, I am abundantly satisfied that my right hon. Friend the Chancellor is right in giving practical effect to his doubt and to mine, and I hope the Committee will reject the Amendment.
§ Mr. Paget
I have listened with very great interest to two most informative speeches by my hon. Friends, but I cannot for the life of me discover what we on this side of the Committee have to grumble about. I really cannot follow it.
As I understand it, as a result of undertakings which took place between 1955 and 1958 large ascertained sums have been paid by the Treasury to dividend strippers. That money is there; it is known and it is ascertained. Now, there is a difference between the two sides of the Committee. In this respect, the Chancellor says that he is against retrospective legislation. We are in favour of retrospective legislation. When we come to our first Budget, since we are in favour of retrospective legislation, what on earth is there to prevent us getting this money back? Here is the Chancellor leaving this delightful plum ripening at his rate of interest of 7 per cent. on the tree for us to pluck, and we are grumbling about it. It seems to me so ungrateful.
§ Sir T. Low
The hon. and learned Member is making a great statement of policy on behalf of his party, which is directly contrary to the statement of policy made by his right hon. Friend the Member for Huyton (Mr. H. Wilson) during the debate on the Second Reading of the Bill. Am I to understand from him that he now rules the financial and constitutional policies of the Labour Party, and that he regards as naught all statements from his own Front Bench?
§ Mr. Paget
The hon. Baronet knows me well enough to know that I speak for myself. On the other hand, it sometimes happens that there are suggestions which come from my simple mind which find favour with my party. We shall have a good look at this plum when the time comes—[HON. MEMBERS: "The Royal 'We'."]—and no doubt consider it a suitable one to pluck, but do not let us grumble at the Chancellor for leaving it Now, I want to say something with regard to the general principle of retrospective legislation. When we impose taxation, we say that out of the money which John Smith, or whoever it is, has he shall provide some money for the use of the community to which he belongs. I do not know whether or not that is retrospective legislation, but it is the principle of all taxation.
As for retrospective legislation in the criminal field, I stand firmly behind the great words which were used upon the occasion of the impeachment of Stafford:First let a mark be put upon the door, and only then let he who enters die.There was a time, when the War Crimes trials were being held, when the late Dick Stokes and I were almost the only people in the House to insist upon that principle—but to apply it to the question of revenue collection is complete nonsense. It has nothing to do with it. I am unreservedly in favour of retrospective legislation against tax dodging, and I am quite certain that that is the only way to stop it.
Hon. Members opposite do not realise how this really works.
§ Mr. Paget
My hon. Friend the Member for Gloucester (Mr. Diamond), like the hon. Member for Langstone (Mr. Stevens) is an accountant and has some experience of the seamy side. So do lawyers. But the picture of the cunning financier, searching for ways of avoiding taxation, is in general a false one. What really happens is that a set of industrious and ingenious chaps think out methods of dodging taxation and then go round trying to persuade people who have got the money to adopt their ingenious methods in order that they may get a fee or commission for it. Very often they find the greatest difficulty in persuading 1159 boards and individuals who are too lazy-minded and stupid—not necessarily too good—to think of a bright idea of this sort to do so. We have only to put into their minds the idea of retrospective legislation and the eloquence of the chaps who have thought up a good dodge will cut practically no ice.
In other words, if we build up the thought of retrospection in the background we will break the practice of the ingenious people who really do think out these tax dodges. That is why we should be quite clear about it and should say quite straightforwardly that we stand for retrospection against tax dodges, whether or not a warning has been given. Let the warning be general. People who work out these schemes know very well what they are doing—they are tax dodging; they are avoiding taxes.
We should say quite clearly, "As far as tax dodging is concerned, whether or not we have thought of a possible group in advance and given a warning about it, or whether tax dodgers have thought of something more ingenious, in a new group that we have not thought of, it will not make the slightest difference; when we find it we will legislate retrospectively." Do that, and our respectable rather stick-in-the-mud boards of directors will not be led away by the bright young chaps who invent these dodges. It will not be done, and we shall not have to legislate retrospectively in practice. The mere threat will be an adequate deterrent.
§ 5.45 p.m.
§ Sir T. Low
I have already expressed my views on the undesirability of retrospective taxation legislation. I do not want to weary the Committee at length again, but I want to take up one or two of the arguments which have been put this afternoon.
The hon. and learned Member for Northampton (Mr. Paget), who spoke after me on the previous occasion, has declared, once again, his belief in wholesale retrospective legislation in taxation. That is a very odd belief, coming from one of Her Majesty's counsel. I do not want to interfere in any way with his practice, but I do not think that anybody would ever consult him on taxation law, because he would clearly not be advising them on the law but on what he thought a 1160 Government might do in the future in the way of altering the law. It makes the conduct of our affairs extremely difficult if the poor, rich, or medium rich company or individual has to take that kind of advice before deciding what to do about the manifold transactions which require to be dealt with.
§ Mr. Paget
I shall certainly give them that advice. My advice will be, quite simply, "It is very ingenious, but you know what they have said about retrospection. I should not do it, because it is not worth while." That is, in fact, the advice which will be given everywhere, so long as it is made clear that the Government will never hesitate to use retrospective legislation.
§ Sir T. Low
The hon. and learned Member's words are seemingly rather attractive. If only it were clear to everybody exactly what tax-dodging was there might be something in his argument. If only it were clear that there was some natural law about this matter it might be possible to proceed in that way, but that is not the fact. The fact is that the taxation code of this country—and of any country—is most complicated, and we can find out what is and what is not subject to tax only by examining the Income Tax Acts, the Finance Acts and all the other codifications of taxation legislation and trying to interpret them.
The hon. Member for Gloucester (Mr. Diamond), was absolutely right to remind us that no question of criminality is involved. We keep talking about tax dodgers. I believe that it was the hon. Member for Nuneaton (Mr. Bowles) who talked about sharks, earlier, implying, perhaps, that some hon. Members were representatives of sharks.
§ Mr. Bowles
The Chancellor of the Exchequer said that ministerial warnings in the House were not of sufficient importance to reach the ear, and I therefore suggested that he might go to the annual dinner of these sharks and make his warnings there.
§ Sir T. Low
These terms of endearment which are bandied about proceed from the assumption that there is something most immoral and criminal in trying to order one's affairs so as not to pay tax, or, at any rate, to pay the lowest rate of tax. I know that that view is held 1161 by some hon. Members, and some people outside, but it is not the law; nor is it a sensible way of trying to conduct our rather complicated affairs in our rather complicated society.
The hon. Member for Gloucester, who has a considerable knowledge of these problems—I do not know whether his knowledge covers what his hon. and learned Friend calls the seamy side—did us a service when he reminded us that there is not any taint of criminality here. Although there is no taint of criminality, it is, nevertheless, very important that the law should be certain and that people, in conducting their transactions, sometimes of a complicated character, should know whether those transactions are or are not subject to tax.
It is for that reason, the reason of certainly, that I have declared myself definitely against retrospective legislation in principle in this sphere. It is not because I am in favour of tax dodging or sharks; and that applies to my hon. Friends. The right hon. Member for Huyton (Mr. H. Wilson), who, I think, differs with some of his hon. Friends, even his hon. Friend the Member for Islington, East (Mr. E. Fletcher), on this matter, did me the kindness of saying on Second Reading:Frankly, I respect right hon. and hon. Gentlemen opposite, like the right hon. Member for Blackpool, North (Sir T. Low), who base their arguments on the rule of law as opposed to the rule of ministerial warning. There is a great deal in the argument, with which the whole House feels a good deal of sympathy".He went on to say:…but I think that their argument would have been much more impressive if they had produced it in 1955, when the warning was given."—[OFFICIAL REPORT, 12th May, 1958; Vol. 588, c. 63.]However, let us give him that point; it is a fair one to make. This is where he is at variance with what has been said on the benches behind him.
I think I have shown that my hon. Friends and I dislike retrospective legislation as much as hon. Members opposite do. I take it that the right hon. Gentleman and myself at least do start with being in agreement in principle in our dislike for retrospective legislation.
§ Mr. H. Wilson
At least, I agree that these forms of tax dodging must be dealt with at all costs. If the right hon. 1162 Gentleman had time to continue to quote from my speech he would then find the conditions which I suggested would make retrospective legislation unnecessary. In the absence of those conditions there seems to be no other way of dealing with this problem.
§ Sir T. Low
That is a quite valid point. This is a case—and it is important—in which we are dealing, on the one hand, with the administrative needs of the Revenue in favour not only of efficiency in the Revenue, but in favour of the general body of taxpayers to have an efficient law. On the other hand, we are dealing with the interests of the individual, for whom this House has always stood in its long history. It is in balancing those two requirements that there is such great difficulty.
In principle, I come down in favour of the interests of the individual. It is not only the Liberal Party that does that. Most, if not all, of my hon. Friends do it and I know that some hon. Members opposite do it. One of them wrote in a newspaper to that effect. Although I come down in favour of the individual, I should like to make certain that the Revenue is not hamstrung in its duty by the procedure that I would enforce upon it.
The right hon. Member for Huyton suggested that it might be necessary to introduce new procedure to ensure that more immediate action could be taken by the Revenue. That is not necessary, not because I do not want new procedure—although I should be careful about introducing it on these lines—but because I think that the existing procedure is good enough if there is a case which the Chancellor thinks ought to be brought to the attention of the House. All that has to be done is to move a Ways and Means Resolution, and if there is a glaring loophole in a Finance Bill the Chancellor can propose a Ways and Means Resolution and a one-Clause Finance Bill. From what the right hon. Gentleman has said, I think that the Chancellor would get the co-operation of the right hon. Gentlemen opposite.
§ Mr. Wilson
Had the Chancellor done this at any time last year he would have received our co-operation. None of the last four Chancellors in the last two and a half years has shown any ability to act 1163 in that way, because the dividend stripping problem was brought to the attention of the Lord Privy Seal in 1954, and he did not act even in the 1955 Budget. It was not until the autumn Budget of 1955 that he did anything at all. These things have been going on for some time and none of his successors has dealt with the problem until the present Chancellor attempted to deal with it in the April Budget this year.
§ Sir T. Low
I have no doubt that if the right hon. Gentleman examined the history of past Chancellors on his side he could make the same point. The point I was making was that the power does exist. Whether it is used is another matter, but the right hon. Gentleman was declaring himself in principle against retrospective legislation and was saying that we could get rid of retrospective legislation if we took certain new powers. My point—I ask him to consider it with the amount of care that he always applies to these things—was that the existing procedure meets his point.
§ Sir T. Low
The hon. and learned Member knows that that is the way in which law-making develops. I was dealing with the proposal put forward by his right hon. Friend the Member for Huyton. If he wants to argue it would be better to argue with his right hon. Friend about it outside the Chamber.
I have not attempted to cover the whole ground. I think that the principle of whether retrospective legislation in taxation is good or bad is a principle to which the Committee and the House of Commons should pay more attention. I believe that the right hon. Gentleman and his hon. Friends know me well enough to know that I am not raising this point to back tax dodgers. It is a principle of constitutional importance and I hope that right hon. and hon. Gentlemen on both sides will agree to consider the matter once again, and, if my hon. Friends table a Motion, perhaps agree to discuss the general question of 1164 retrospective legislation in the sphere of taxation apart from the question of dividend stripping. It is too important to deal with now, and I hope that none of the principles laid down by both sides of the Committee will be accepted as Gospel until time immemorial.
I have strong arguments against what I call the warning doctrine, but we need not go into them. This matter requires serious thought and discussion at another time, when we shall be able to consider the constitutional aspects of it as well as its relationship in the sphere of taxation.
§ Mr. Fernyhough
I do not think that any hon. Member would disagree with the concluding sentences of the right hon. Member for Blackpool, North (Sir T. Low). He said that none of these people against whom the Chancellor originally intended to act has done anything criminal or immoral. But if nobody has done anything criminal or immoral, what was the right hon. Member for Saffron Walden (Mr. R. A. Butler), who is now Leader of the House, warning them about in 1955? Why do we have to warn people about their conduct if it is not either illegal or immoral? I should have thought that the citizen who leads a quite legal and quite moral life is the type of citizen that the Chancellor ought to please. According to the right hon. Member for Blackpool, North these citizens, who are neither immoral nor criminal, and who have not changed their ways, did not need the warning which was given in 1955.
§ 6.0 p.m.
§ Sir Godfrey Nicholson (Farnham)
The President of the Board of Trade or the Minister of Agriculture may say, "I give warning that if imports of early potatoes continue at this rate I will introduce a tariff against them." That does not necessarily mean that it is immoral or criminal to import early potatoes.
§ Mr. Fernyhough
I have never heard a Minister of Agriculture say anything like that. If I did, perhaps I could agree with the hon. Member.
§ Mr. Fernyhough
The point is that the former Chancellor but two decided in October, 1955, that certain gentlemen were evading the spirit of the law and were getting away with something to which they were not entitled. That Chancellor said that unless that practice ceased and unless those gentlemen mended their ways, retrospective legislation would be introduced to deal with them. Two and a half years later, the present Chancellor has admitted that those gentlemen have continued to evade the spirit of the law and have continued to pay less than their moral share of contributions towards the running of the State. He said that he would deal with that practice and implement the warning, and then he suddenly backed down. It is obvious that that was the result of representations made to him.
Who were the people who spoke to the Chancellor about his proposals? Was it the London busmen? I wonder whether it was Mr. Frank Cousins who said that it was wrong to introduce retrospective legislation. Could it have been the Miners' Federation, or representatives of old-age pensioners? As a matter of fact, 999 out of 1,000 people would agree with this form of retrospective legislation, because they would say that these people were given a warning in 1955 when they were evading the spirit of the law and they must not now grumble if, having ignored the warning, they have to accept the consequences.
The Chancellor was merely doing what many mothers do when they say to their children, "Unless you behave, unless you stop this, I shall cane you". If the child does not stop, it is invariably caned, and that was what the Chancellor intended to do. However, because of certain advice, he decided not to do it. Who are the gentlemen of whom the Chancellor takes most notice? In framing his Budget they will be the gentlemen at the Treasury. It is obvious that the present Lord Privy Seal when he was Chancellor was paying attention to the advice of the Treasury officials. He was taking the advice of the experts who 1166 knew what was happening and he gave his warning as a result of that advice. Presumably, those same officials were consulted about the framing of the present Budget by the present Chancellor. They must have told him that the warning of the Leader of the House had been ignored and that these gentlemen had continued to pursue their bad ways, ways which the Leader of the House had said he would penalise if they were not stopped.
The Chancellor expected to collect £4 million this year from this source. Now he will not collect it from that source, which presumably means that it will be collected from somebody else. Either the services for which the Budget was framed will be maintained or they will be reduced by £4 million, and none of us hopes that any service will be curtailed. We all hope that those services will be maintained at the levels indicated in the various Estimates. Therefore, the £4 million involved will have to be collected from somebody else.
I agree that, generally speaking, retrospective legislation may not be desirable, and that principle has been followed in this country over the centuries. However, in this case there was every justification for it. Those who indulged in the practice of dividend stripping were acting contrary to the spirit of the law and ignoring the warning given by a former Chancellor and they could have no grumble if the present Chancellor now decided to cane them.
§ Mr. Shepherd
I appreciate the course that my right hon. Friend the Chancellor is taking. It is not an easy course to take, as is apparent from the comments of hon. Members opposite. The tendency of all of us, against which we have to guard, is, because we do not like these practices and possibly the individuals who habitually make use of them, to accord those individuals and their practices a lower measure of regard than we would give to ordinary citizens, thus departing from our accepted safeguards for the individual.
I share the dislike of these practices which is common to most hon. Members, but however much one may dislike a practice, it is very proper that the rights of the individual should be safeguarded. When these individuals indulged in these practices they thought that they were 1167 acting in accordance with the law, and it is utterly wrong at a later date to impose a penalty on individuals who, at the time an act was committed, believed that they were acting in accordance with the law.
§ Mr. Diamond
They thought that they were acting in accordance with the law since they took great pains to avoid acting against the law and took great pains to circumvent it.
§ Mr. Shepherd
I fully accept that and I dislike what they were doing, but it is still a sound principle that we should not penalise people who, when they entered upon a transaction, were acting in accordance with the law—whether we like it or not. There is no doubt about this being a penalty if they have to repay the amounts involved. If at a later date they have to pay back some £50,000 or £100,000, that is a penalty retrospectively enacted.
I say to hon. Gentlemen opposite that, much as we dislike the actions of these individuals in adopting these practices, we ought not to sacrifice a principle because of that dislike. I believe that it would be a very bad thing indeed in our community to attempt to run the country on a basis of Ministerial warnings, even for as good a purpose as this.
I agree with hon. Gentlemen opposite that a Ministerial warning in this connection probably has as much justification as an act of the Government as any other action. I think that there is probably more case for saying that a Ministerial warning ought to have the value of a sanction in this case than in any other. Even though I admit that these are circumstances in which Ministerial warning has justifiably more force behind it than in some other cases and that there is probably more right to subsequently enact retrospective legislation, I still think that the idea of giving a warning or controlling citizens by means of Ministerial warnings is utterly repugnant. I would not do it for the sake of gaining £4 million, £5 million or £10 million.
I think that one must stand for principles in this matter. [HON. MEMBERS: "Oh."] I know that hon. Gentlemen get derisory about this, but I say that these principles of not running the country on the basis of Ministerial warnings and not penalising people retrospectively are 1168 important principles. If we give these principles away, merely because we dislike a certain form of action by individuals in our community, we shall not, in the long run, advantage ourselves. We shall erode our principles. I appeal to hon. Gentlemen opposite to take this view. I dislike dividend stripping as much as they do. It is a bad policy altogether. It is still indefensible, but I think that the principles which govern the conduct of the country should not be sacrificed because of our dislike of this policy.
§ Mr. Diamond
I follow the hon. Member's argument completely, I understand it and I accept the logic of it far more than the logic of the Chancellor's argument, but what he is saying surely leads to the conclusion that in no circumstances, as opposed to the Chancellor, would he support fiscal retrospective legislation given under an appropriate warning which was given in an appropriate place and circumstances.
§ Mr. Shepherd
I would not support legislation which meant a penalty retrospectively. I am perfectly prepared to accept retrospective legislation if an advantage is given to the citizen, but I reject the idea of imposing a penalty retrospectively.
§ 6.15 p.m.
§ Mr. Ede
I am quite sure that we all recognise the sincerity with which the hon. Member for Cheadle (Mr. Shepherd) has spoken. I am not being sarcastic when I say that his speech ought to have been delivered in 1955, when the warning was given, to make it quite clear that so far as hon. Members opposite were concerned, if it ever came to putting the warning into practice, they would oppose the Chancellor who tried to do it.
The Chancellor himself, whenever he alluded to the impropriety of the proceedings, by this warning and by applying it to this particular case, always added at the end that it should not run for ever—the warning could not last for ever.
We are not dealing with what Mr. Gladstone said in 1868. We are dealing with something which was said in 1955. Prior to then, as I understand it, dividend stripping was a normal process, and, so far as I know, it had never been objected to in the House of Commons and no Ministerial statement had ever been made 1169 condemning it. But in 1955 it was stated in the House, in the various warnings which were read out this afternoon by my hon. Friend the Member for Islington, East (Mr. E. Fletcher), that this was something worse than an undesirable practice. It was apparently a practice of somewhat wide range and of varying characteristics. A Clause was invented, which was put before the Committee, in which certain of the varieties of this practice were undoubtedly stopped.
My right hon. Friend the Member for Huyton (Mr. H. Wilson), and others speaking from this side of the Committee, pointed out that there were similar devices not easily distinguishable from those to which objection is now taken, and which also should have been stopped, if possible, in the Clause which was then before the Committee. Some of the quotations were read by my hon. Friend the Member for Islington, East this afternoon.
In answer to that, two Ministers, the present Minister of Housing and Local Government, who was then Financial Secretary, and the present Parliamentary Secretary to the Ministry of Education, who was then the Economic Secretary, gave a warning in clear terms—and on one occasion the Financial Secretary said that he gave it on behalf of the Chancellor—that if these parallel practices, these varieties of the same practice, were tried in the future, legislation would be brought in to widen the scope of the Clause then being passed. As my hon. Friend the Member for Gloucester (Mr. Diamond) pointed out, this Clause has exactly the same rubric as the Section in the 1955 Act, so as to make such practices illegal and so that, so far as any which had occurred up to that time were concerned, the law would be retrospective.
I am prepared to accept the doctrine that Ministerial statements are not law, but in this case they were rather a promise of law than a threat of law. We come tonight to the point where the promise has to be kept. Either hon. Members opposite did not think that the matter was worth raising, or at that time they were in favour of making it retrospective if it was thought that anyone would dare to do anything after being warned by the Financial Secretary and the Economic Secretary.
§ Mr. Shepherd
The right hon. Gentleman is doing less than justice to hon. Members on this side of the Committee. If my right hon. Friend had issued this warning it would not have been in the public interest for us to detract from its value today.
§ Mr. Ede
I always try to do less than justice to hon. Members opposite. In the words of Shakespeare,…consider this,That in the course of justice none of us Should see salvation;Therefore, I accept the rebuke of the hon. Gentleman. But what my right hon. Friend has said is quite correct. That was supposed to be a statement not merely by the Government but by those who support the Government, unless they repudiated it. In the circumstances, it is now clear—and every person in this line of business in the City knows it—that, no matter what is said about such practices in the House of Commons, when it comes to enforcing any promise of the kind made in 1955 the Government will not be allowed to do it because of the revolt of their back benchers at any time when we try to interfere with any practice that is very prevalent in the City.
After all, are we to understand that the people who invent these practices are the innocent sort of people who do not follow what is said? Does anyone mean to say that between 1955 and now these schemes have gone on being prepared by people who never knew what the former Financial Secretary and Economic Secretary said? These are not the widows and orphans who are generally introduced by the party opposite as the people who suffer under any Budget or legislation brought in by us on this side of the Committee. These are among the smartest people in following the details of the efforts made to prevent their practices one can find anywhere in the world.
The Chancellor of the Exchequer has yielded to the pressure which has been brought to bear upon him by people every one of whom has repudiated any sympathy with these dividend strippers. Even the Leader of the Liberal Party Went out of his way to assure the City of London that they will be quite safe from anything of this kind when he holds the balancing power—which in future will enable the rump to lead the Parliament.
§ Mr. Mitchison
We on this side of the Committee regard this as a very important matter. I should like to associate myself at once with what my right hon. Friend the Member for Huyton (Mr. H. Wilson) said about it earlier. We do not like, any more than the party opposite likes, retrospective legislation. I heard the Chancellor say today that he regarded retrospective legislation with repugnance—or some such word—and that it should be introduced only rarely, but he did admit, and I agree with him, that there are occasions when retrospective legislation is necessary.
I start from that. I then come to consider the character of the problem we have to deal with on this Amendment. What we are discussing is, first, a series of warnings, which I will not repeat, for they were perfectly clear. Everybody in this Committee, including the Chancellor, knows quite well that they were intended, in general words, to cover the case provided for in this Clause, and that there really can be no question that they were exact enough to include it. They may have included other things, but about that there can be no reasonable doubt.
Why is it that a warning of this sort becomes necessary? It becomes necessary because of a practice of a type which everyone in this Committee has said he disapproves of—evading tax liabilities or making tax gains in some ingenious form; and that practice, in one form or another, is carried on by a sufficient number of expert people for them to be always one step ahead of the Revenue. The Revenue stops one loophole, and the tax evaders then see if there is a way round; and the more ingenious and difficult the matter which is being dealt with at the moment the more likely are they to find a method of evasion. As has been said in this discussion, the Revenue will not know about it until the case arises.
That is of the nature of these fiscal questions. We can stop quite easily the plain man who tries to make a little extra. That is easy and simple. Those loopholes are stopped; they hardly exist in life. It is not the plain man who thinks up this sort of thing. It is people who have now become experts not at tax dodging, but at tax avoidance. When this Clause is passed today a number of them will think, "Is there any other way of getting from the Revenue a benefit of 1172 the type known as dividend stripping?" It so happens that what is dealt with in this Clause is so very close to the thing about which the warning was given in 1955 that there really can be very little question about it, but, of course, they may always get just round the margin.
The next thing we have to consider is the necessary character of the ministerial warning. As the hon. Gentleman the Member for Orkney and Shetland (Mr. J. Grimond), the Leader of the Liberal Party pointed out, a warning, of course, cannot be as precise as legislation, for if it were then one would simply introduce the legislation. It is bound to be in somewhat more general terms. It is, perhaps, a happy accident for the good government of this country that the warning which was given in 1955 so very clearly covered this case. It does not always follow that the warning does cover the case.
The next question is this. We get a warning given in these terms. I am not going to quote it again. It was so clearly, fully and ably put by my hon. Friend the Member for Islington, East (Mr. E. Fletcher), who moved the Amendment, and my hon. Friend the Member for Gloucester (Mr. Diamond). However, I would remind the Committee of something said in the final warning, which was one of a whole series of warnings, and which was given on 13th December, 1955, just the date we have taken in the Amendment because it was the date of the last of the warnings. All the others preceded it. This only added to what I should have thought was clear already.
The right hon. Gentleman who is now the Minister of Housing and Local Government, after saying thatthe dividend strippers have been given notice to quitsaid:With the authority of my right hon. Friend the Chancellor of the Exchequer, my hon. Friend the Economic Secretary has also put it on record that if clever people should discover ways and means of getting round this legislation"—and that is what they have done—which is squarely directed against dividend stripping"—and that was the word used by the right hon. Gentleman in describing these provisions—the Government will not hesitate to stop any such loophole by further legislation, and to 1173 make such legislation retrospective."—[OFFICIAL REPORT, 13th December, 1955; Vol. 547, c. 1022.]Really, there is no possible ambiguity about that. Right hon. and hon. Members opposite who seek to find it must be very short of good reason for what they have done or failed to do. It is perfectly clear that that is the character of the warning in this case.
First, is it necessary that there should be such Ministerial warning? If we are prepared to let not only this gang of ingenious people, but similar gangs, get away with it, Ministerial warnings become unnecessary. All one does is that when it becomes too frightful, one stops it. [An HON. MEMBER: "Hear, hear."] I hear somebody say, "Hear, hear." If that is the right course, what do we do? It is not entirely an abstract question between these people and the Treasury.
One way of looking at a Budget or a Finance Bill is as a calling-up of the Treasury's requirements from various people and groups of people; and if one group pays less than it ought, or succeeds in increasing Revenue demands by the type of practice that we are considering, other people have to pay for it. Those who talk about the rights of the individual in this connection should consider what individual they want to support—the individual dividend stripper or the individual taxpayer who has to pay rather more taxes because dividend stripping has not been stopped. That is the question which we have to consider.
Next, I notice that hon. Members opposite were driven to draw a distinction, no doubt technically a correct one, between what they call Parliament speaking and a Ministerial statement. I do not know quite how Parliament speaks, but one hon. Member assured us that Parliament can speak only by legislation. We get back to the same old point that we can never have a Ministerial warning because it cannot be as precise and exact as is required for a particular case. In effect, that means that we must never do anything but that which is sufficiently exact and precise to be embodied in legislation. Therefore, as far as that goes, there is nothing in it.
But let us consider the position of a Ministerial statement in a matter of this sort, in a country governed by a party 1174 system such as ours. Hon. Members opposite say, in effect, that they are not bound by a statement made by a Tory Chancellor, which was not objected to by any of them at the time. They might not have been in the Chamber, which is more than possible as a rule in debates on the Finance Bill. They say that they are not bound because they did get up to say, "Hear, hear". That is not the way a country is run. If a Tory Chancellor makes a promise, or a threat, it is political dishonesty for members of the party opposite to say that it does not bind them.
What happens when hon. Members opposite go through the Division Lobby in support of their party and they have not said anything about the matter under discusssion? We do not take it that on every minute detail what the Government do always represents their own personal views, but a Tory Chancellor making a promise or a threat of this sort is certainly committing his party to it. He is committing not only the Government of the day, but his successor in office and, for a reasonable period, those who follow him in the same succession.
That promise or that threat was quite clearly given on behalf of the Tory Party at the time. I repeat that I regard it as plain political dishonesty for hon. Members opposite to say, "We read it in HANSARD. We sat and listened. We did nothing about it. It was our Chancellor of the Exchequer or our Financial Secretary or Economic Secretary who said it, but we are not bound by it". Why do they say that? Is it because they have adopted a new principle? We know that both Mr. Neville Chamberlain and Sir John Simon said the exact opposite.
We have heard the Chancellor say today something which was quite inconsistent with what was said by the right hon. Member for Blackpool (Sir T. Low). They take quite different views. I do not regard this as a principle at all. I regard this as opinion, one of which can be wrong and the other right. There is no principle that I can see in it, and certainly nothing which justifies some of the arguments produced today.
It comes to this—that a definite warning, which included this particular case, was given on behalf of the Government of the day, if one looks at it one way, 1175 and on behalf of the Tory Party, if one looks at it another way. The Chancellor brought forward in his Budget and in his Ways and Means Resolution a proposal in exact line with the warning and promise then given, but he has now been compelled to drop it, or he has come to drop it.
What exactly has happened? We have to speak a little bluntly about these matters. I asked the Chancellor whether he really thought that the warning did not cover this case. I did not receive an answer, except that some people thought it did and some thought it did not. Then we had a similar question about warnings given in the House of Commons. It is nonsense to say in a case of this sort that any warning given in the House is not read by those who are concerned in evading its consequence. I do not know what came over the Chancellor when he came to that point.
In his Budget speech the Chancellor said:I now turn to a small group of proposals which I have felt bound to include for the protection of the RevenueThat is, without doubt, on advice, and on facts known to his Department, including the Board of Inland Revenue. He went on:The first has to do with an activity known as dividend stripping.He said a few words about it and then added:Although my right hon. Friend the Lord Privy Seal dealt with this in his autumn Budget of 1955, and despite stern warnings given them, I am sorry to say that apparently the fascination of dividend stripping is such that it is still being practised by some.There can be no doubt that at that time the right hon. Gentleman had no doubt whatever that the warnings covered this case, and that they were stern warnings.
A little later, the right hon. Gentleman referred to the passage which I have just read and said:My right hon. Friend the Minister of Housing and Local Government gave clear warnings in 1955, in another capacity, that the Government would not hesitate to legislate against subsequent attempts at dividend stripping, and to make such legislation retrospective.—[OFFICIAL REPORT, 15th April, 1958; Vol. 586, c. 61.]There is not the faintest doubt that the right hon. Gentleman, at that time, knew of the necessity for this legislation, knew 1176 of the necessity for retrospective legislation, and knew that the case with which he proposed to deal was fully and exactly covered by the warning given on behalf of the Government and the Tory Party in 1955, and intended to carry out the threat that was then made against the practice of dividend stripping.
What has happened? The next stage is that the right hon. Gentleman comes along on 29th April, 1958, and we get this:There were very difficult considerations which had to be taken into account in this case"—at what stage, before or after he made his Budget speech?—and I did not find this an easy matter on which to reach a decision.But what about the decision made in the Budget? He continued:The representions which I took into account came by no means from one direction but from many different directions.A remarkably gusty day, if I may say so. He then said:I mention among them the doubt as to whether the warning was sufficiently wide to cover the new methods which have been discovered in the meantime. I am not sure.With the greatest possible respect to the right hon. Gentleman I find that difficult to follow. That was a very clear warning indeed. The right hon. Gentleman was absolutely clear about it in his Budget speech. He said it was a clear warning. He said it was a stern warning. If he has not enough common sense to stand up to the representations to the contrary that were made to him, I feel the gravest doubt whether he is the right person to fulfil his present high office. The right hon. Gentleman continued:It was my view to start with that it was wide enough, but there is a doubt about that."—[OFFICIAL REPORT, 29th April, 1958; Vol 422, c. 198.]Whose doubt? The two Clauses are labelled in the same way, they are about the same thing, the warning has been described as a clear one, nobody can have any real doubt about it, and the people who made those representations must have made them for other reasons. We have not heard it suggested today that it was not really clear enough, that it did not cover the case or anything of that kind. We have got back to a principle. It is a principle that we must not do these things now. There was not a word 1177 about it in the statement of the right hon. Gentleman, or in the speech he made today, because he admitted that there were proper cases for retrospective legislation.
§ Mr. Diamond
If I may interrupt my hon. and learned Friend, I was hoping that he would try to elucidate from the Front Bench opposite what these cases might be, when it would be right, and when we could get a better case than the case we are dealing with now.
§ Mr. Mitchison
I entirely agree with that interjection and I would add this comment, that we, too, dislike retrospective legislation.
§ Mr. Mitchison
I was speaking for my party and my right hon. Friend the Member for Huyton also spoke for my party when he said exactly the same thing. Really, the hon. Member for Carlton (Mr. Pickthorn) must accept that from me. That is our view. I do not ask complete unanimity of any political party on every point. I merely ask right hon. and hon. Gentlemen to do what the Tory Party is at the moment declining to do, to carry out collective pledges and collective promises. It is already incurring the reputation of being a party of broken promises. I hope that it will not add to that the reputation of being a party of empty threats, because that is what appears to be the likely result of these proceedings.
Now I turn again to the right hon. Gentleman. I am not making a personal attack on him. He knows that, and I hope that he accepts that I would not dream of doing it. I am attacking his political conduct in this matter. I regard it as most unsatisfactory that we should not get a better excuse or reason for this complete change of attitude—which, of course, means only £2 million in this case, but which also means a charter for dividend strippers and similar folk in future—than what was said on 29th April, or anything that can be added to it today.
We have a responsibility in this Committee that sometimes rises above individual cases and that calls on us to do what we consider to be the right thing. Those members of the party opposite 1178 who made representations to the right hon. Gentleman the Chancellor, and any other people interested in this matter who made similar representations, seem to me to have done something which it is difficult to justify, having regard to what had been said in the past, and difficult to justify in the interests of good government.
Whatever may be said about the rightness or wrongness of Government warnings of this kind, that warning was given in no uncertain terms. Some people no doubt followed it. They believed that it would be carried into effect and they refrained from doing things which they might otherwise have done or did things differently. Others, on the other hand, looked at it and said, I suppose, "Well, this party cannot be relied upon to carry out the threats it makes and we will deliberately seek a way round this. We know that we shall not suffer by it, or at least we have not sufficient confidence in the party to refrain from taking that chance." Now it is those last people whom we are benefiting at the expense of those who believed in the warning when it was made. As I see it, that is the inevitable consequence of failing to implement any Ministerial warning.
It is easy to draw fine distinctions. It is easy to invent new principles or to misapply old ones, but at the end of the day it comes down to this: right hon. and hon. Gentlemen opposite know perfectly well, as the Chancellor did when making his Budget speech, that a threat was made in November, 1955, which exactly covers this case, and which, in political honour, binds them today. Is he, and are they, prepared to disregard an honourable obligation?
§ The Paymaster-General (Mr. Reginald Maudling)
As my right hon. Friend the Chancellor of the Exchequer has made clear, this is a matter in which he admits and accepts that there are arguments on both sides. There was a clash of principle here between the maintenance of the Revenue—and, of course, we accept that if taxation is not gathered from one group of people and the same amount of money is needed, it must be gathered from other groups of people—and, on the other hand, there was the principle which we on this side of the Committee, and, I gather, the majority of hon. and right hon. Gentlemen opposite, accept, 1179 that retrospective legislation is a bad thing.
So this is a clash of principle, or balance, to which my right hon. Friend had to have regard, and he has come to the conclusion that the argument against retrospective legislation is in this case an overwhelming one.
§ Mr. Maudling
My right hon. Friend has been accused of changing his mind, but, as my hon. Friend the Member for Scarborough and Whitby (Sir A. Spearman) pointed out, the ability to change one's mind is not a sign of a lack of strength. It is a sign of, a lack of stupidity. I think that the ability to change one's mind in the face of argument is a good quality in a Minister. I often think that an expression of opinion, if one agrees with it, is called an expression of opinion and, if one does not agree with it, is called a pressure group. The fact remains that it is the same thing. It is the right of a Minister to listen to representations on matters which affect the public good.
§ Mr. H. Wilson
Will the right hon. Gentleman deny that representations were made to the Chancellor by an important and substantial group of back bench Government supporters, without the matter having been discussed in the House, stating that they would not support him in the Lobby if he went on with the proposal?
§ Mr. Maudling
My right hon. Friend listens, as it is his duty to do, to both what is said in this House and what is said by people outside on matters of public interest. No Chancellor could do anything else. [HON. MEMBERS: "Answer the question."] I have answered the question.
A certain amount of prejudice has been introduced into the argument on both sides. In the first place, I have seen articles in newspapers suggesting that what the Chancellor did in his Budget was to make illegal ex post facto what was legal at the time. That is nonsense. Equally, on the other side prejudice is introduced into the argument by confusing what is tax evasion and what is 1180 tax avoidance and coupling the two together in the phrase "tax dodging."
We must be careful to distinguish between the two. Tax evasion is the illegal non-payment of tax, which is a criminal offence. Tax avoidance is the legal non-payment of tax. There has always been a maxim of the law in this respect. I think it was Lord Sumner—I am not sure—who said that it was the right of any citizen so to organise his affairs as to pay the minimum of tax. That is a fundamental principle of our law, and always has been.
To give a simple, well-known example, I am told by the leading photographer in my constituency that he gets a flow of business in March every year when people get married in order to obtain the benefit of the marriage allowance for the full year. They thus arrange their affairs within the law so as to avoid the payment of tax. There is a fundamental difference between avoidance of tax, which is a legal operation, and evasion of tax, which is illegal, and to confuse the two does not help the Committee.
§ Mr. Mitchison
Surely the right hon. Gentleman will recognise that this case is neither the one nor the other. What happens here is the recovery of a sum of money from the Revenue to which we all think that the gentlemen or companies in question are not morally entitled.
§ Mr. Maudling
By his intervention the hon. and learned Gentleman has substantiated the point that I was making. We are not dealing with the evasion of tax or with an illegal process. Yet the word "evasion" has been used on too many occasions by hon. Members who have taken part in the debate.
A point which has been raised by several hon. Members is that of the warning. There appears to be a considerable difference of opinion here. It has been suggested by some hon. Members opposite that there is no real distinction, whatever the formal position may be, between a ministerial warning and something recorded and voted on by the House. That is a doctrine which the Committee and the House as a whole cannot possibly accept. If the hon. and learned Member for Kettering (Mr. Mitchison) and the hon. Member for Gloucester (Mr. Diamond) will study the speeches which 1181 have been made they will find it suggested that the distinction between a Ministerial statement and a decision of the House recorded by a vote is only a formal one.
§ Mr. Mitchison
So far from saying that, I said the opposite. I said that a Ministerial statement must necessarily be of a character quite different from legislation, because if it was a matter sufficiently precise upon which to legislate, the House would legislate. They are quite different things, but they are equally binding on the Government and on the parties on whose behalf they were made.
§ Mr. Maudling
That is exactly the point. They are of a different character; therefore, they have a different effect. In view of what the hon. and learned Gentleman has just said, how can he possibly say that they are equally binding? It is nonsense.
We are concerned here with the tax liabilities of individuals, and what I am saying from the point of view of the tax liabilities of individuals is that there must be a difference between Ministerial statements, challenged or unchallenged, and things laid down in the House by statute.
§ Mr. E. Fletcher
Does not the right hon. Gentleman realise that a decision was arrived at in the House pursuant to a Ministerial warning? The Amendment moved by the Opposition in 1955 was rejected by the House in its reliance upon a Ministerial warning.
§ Mr. Maudling
I am speaking about the point of view of the individual taxpayer. To my mind, it is not a reasonable argument that the individual taxpayer should be bound by a Ministerial statement, even if unchallenged, as he is bound by statute law.
§ Mr. Mitchison
The right hon. Gentleman must consider the points which have been put to him. What has been said is that a Ministerial statement is binding in honour on the Government and on the party on whose behalf it is made, and if that Ministerial statement includes a promise to bring in retrospective legislation, it is right that retrospective legislation should be introduced in the case contemplated.
§ Mr. Maudling
I am saying that from the point of view of the individual a 1182 Ministerial statement is not the equivalent of anything passed by Parliament. That is the point. In considering what legislation should now be introduced, my right hon. Friend has to balance, on the one hand, the warning given in the House and, on the other hand, the objection to retrospective legislation, and he has to balance one against the other on the basis of what is right for the individual taxpayer.
As for the nature of the warning, I think that if right hon. and hon. Gentlemen opposite will study the statements by my right hon. Friend who is now the Minister of Housing and Local Government and my hon. Friend who is now the Parliamentary Secretary to the Ministry of Education they will find that, as the Chancellor has said, there is room for doubt as to the exact scope of the warnings given at that time.
What we are really arguing about this afternoon is the nature of the retrospection. It has been said by some hon. Members opposite that the Government are in favour of retrospection when it benefits the taxpayer but not when it is against the taxpayer. That is true. That is our point of view, and it seems an entirely reasonable point of view. For example, where there is something illegal, it would be reasonable to make it legal after the event, but where we have something legal, it would be wrong to make it illegal after the event. There is nothing illogical or wrong in saying that one can act retrospectively to benefit the individual taxpayer but should not act retrospectively to the disadvantage of the individual taxpayer.
§ Mr. Diamond
Can the right hon. Gentleman explain how he ties that statement up with the statement he made a few moments ago that if one gives a benefit to a certain group of taxpayers one has to collect the money from other groups?
§ Mr. Maudling
If the hon. Gentleman carried that argument too far, it would be wrong to accept any Amendment to any Finance Bill which benefited any class of taxpayers. Clearly that is wrong. The considerations which affect reductions of tax liability are different from those which affect impositions of tax liability. I should have thought that that would be obvious even to right hon. and hon. Gentlemen opposite.
1183 The question here is the principle of retrospection. As my right hon. Friend has made quite clear, we feel that the objections on principle to retrospection in tax impositions on this occasion, after weighing all the arguments, are so strong that we cannot accept the Amendment.
§ 7.0 p.m.
§ Mr. H. Wilson
I had not intended to speak on the Amendment as I hoped to offer a few words on the Question, "That the Clause stand part of the Bill", but I feel that I must rise to draw attention to the fact that the Chancellor has not replied to the debate. I hope that before the Question is put he will reply, because we must tell him that his own position is very much involved in this matter. He spoke for a few moments at the very beginning of the debate from a carefully prepared script which said absolutely nothing, but proved that he was responsive to almost any wind that blew upon him.
Since that time, the debate has continued for another two and a half hours and some serious statements have been made, but the Chancellor has not attempted to answer them. With the greatest respect to the agility of the Paymaster-General, he has not set out to answer those points. Many questions have been put to the Chancellor to which we have not had an answer. Whether that was avoidance or evasion, I do not know, but, certainly, we have not had an answer to the questions which have been put. We did not have an answer from the Paymaster-General and I now want to put one or two questions to which I hope the Chancellor will reply before we divide the Committee.
We have heard a lot about the representations which were made between the Budget debate and the Chancellor's surrender. Who made the representations? From where did they come? We know that there was a small but highly organised campaign of correspondence in The Times. Surely the Chancellor is not pushed away from a principle in which he believes by reading one or two not very coherent letters in The Times. Who made the representations? Did they come from the legal profession, or from the accountants? Did they come from the tax dodgers themselves?
1184 Will the Chancellor answer what the Paymaster-General has just refused to answer? Was there, as was reported in the Press at the time—I cannot say whether it is true—a threat to desert him in the Division Lobby today if he did not give way on this issue? We read in the Press at the time that a powerful group, or, at any rate, an influential group, of Conservative back benchers, headed by one or two Privy Councillors, had made it clear that they would not vote with the Government on this question unless the Chancellor gave way on the issue of retrospective legislation. Is that the case or not. Was that decision made? It was reported at the time, and as far as I know it has not been denied.
I can sympathise with the right hon. Gentleman. That would have been a serious state of affairs for him. On past occasions, however strongly they have felt, right hon. and hon. Gentlemen opposite would not vote against the Government. For instance, at the time of Suez they would not vote against the Government, yet on this issue about the tax dodgers they cared so much about the matter that, if the Press is right, they were prepared to vote against and, if necessary, bring down their own Government. Will the Chancellor tell us whether that is the case and whether that was the pressure to which he surrendered on this occasion? He was very obscurantist in the short statement he made this afternoon about the considerations which led him to change his mind.
Does the Chancellor accept that there was a series of Ministerial warnings in October, November and December, 1955? He said today that there was a case for retrospective legislation when there had been a warning. He was repeating the words of the late Neville Chamberlain and the late Sir John Simon. He admitted that there was a case, and he implied that the only case for retrospective legislation was where there had been a Ministerial warning.
Will he admit that Ministerial warnings in the clearest possible terms—they have been read a number of times and I do not want to weary the Committee further by repeating them—were given? Was it right for Ministers to issue warnings at that time, or was it wrong? Will the Chancellor show some straight-forwardness and purpose and repudiate 1185 them, and say that the warnings should not have been given—since that is the inference of his action or inaction? He implied that the warning was wrong both in its form and wording and, for a reason which we have not understood, in its nature or place or timing.
What was wrong with the wording? We have made it absolutely plain, and no one on either side of the Committee has attempted to deal with this matter, that of the three issues being covered and which were described by the Financial Secretary on Second Reading, only one is in any doubt at all. The other two are clearly related to Section 4 of the Finance Act, 1955, and to the warnings given by Ministers on that occasion. At any rate, on that argument the Chancellor ought to have stuck to his guns in respect of those issues which were clearly within the warning. The mere fact that there may have been doubt about the third may be an argument for giving way on that third issue. Personally, I disagree, but even if the Chancellor came forward with that proposal, he could not justify his decision on the issues where there is no question about the coverage of the warning.
This may have an important bearing on the future attack on tax dodging. What were the meanings of the obscure words suggesting that a Ministerial warning in the House of Commons does not have the authority necessary to justify retrospective legislation, which, on his own statement today, the Chancellor feels is sometimes justified? If it is ever justified, what kind of Ministerial warning is needed? The Chancellor ought to answer that question. Is not this the right House in which to make the warning? It could not be made in another place—the whole House would revolt at the suggestion. Does there have to be some official publication—I suggested in the London Gazette—before the warning carries the authority to which the Chancellor referred? When he has answered that, let us note this: in the light of the arguments he has used this afternoon, what was the point of making the warning in 1955?
Reference has been made to an apparent loss of revenue of £2 million—which is nonsense. The figure is nothing like £2 million. It is at least £10 million. 1186 I will not weary the Committee with the calculations. I do not know where the Chancellor got the figure of £2 million, but if he wants to check the figure of £10 million he can look at the arguments and statistics which we deployed when debating Section 4 of the Finance Act, 1955. He will find that the Treasury's then estimate of the amount involved in dividend stripping was proved to be far too small, because it was only the Treasury's estimate of the amount of tax refund claimed and, as we all know, in the dividend stripping operation there is far more at stake than the amount of tax refund involved. We found the figure to be nearer £15 million than £4 million and I am certain that this figure of £2 million must be based on only a very partial estimate. It is too small, because it does not cover the whole operation and because it has been kept to artificially low levels because of the threat of retrospective legislation.
Whether the figure is £2 million, £5 million, or £10 million, does not the Chancellor think that it has a relevance either to justice as between taxpayers, or to the inflationary position which he is always telling us the country is facing? I should be out of order if I were to say anything about recent industrial disputes and the disturbance and chaos involved in that case for the sake of a few thousand pounds. We were told that a principle was at stake because of the issue and the inflation about which the right hon. Gentleman the Member for Monmouth (Mr. P. Thorneycroft) had so much to say last autumn. Apparently, there is something highly inflationary in a few thousand pounds for the busmen and nothing inflationary in £10 million for the dividend strippers.
Will the Chancellor, or any of his hon. Friends, explain to us how he can possibly argue in that way, because £10 million given away in this manner, given back to the tax dodgers, to that extent reduces the size of the Budget surplus, and for many years we have deliberately created a Budget surplus for the purpose of fighting inflation? If that surplus is reduced by £2 million, £5 million or £10 million, the action is exactly the same as that which the Government claim would result from an inflationary wage increase. We have not had an answer from the Government on that issue.
1187 Finally, I said in 1955—and it is very clearly on record—that the method proposed by the Lord Privy Seal in 1955 would not deal with the problem. I said that on Second Reading, in Committee, and on Report, and so did my right hon. and hon. Friends. It was only because we thought that the Government meant business—and they talked in a most ominous manner, as though they did mean business; we had assurances many times from the then Financial Secretary— —
§ Mr. Wilson
We were misled into thinking that the Government did mean to deal with this evil. That was why we did not press our Amendments further in regard to the alternative means we proposed to deal with this matter.
The Chancellor must admit that we were right and that the then Chancellor was wrong, and that this method did fail to deal with the problem of dividend stripping, and that it did not honour the Financial Secretary's statement that the Government were going to exterminate it. Our method would have done, and it is because of that that we are soon to debate the Question, "That the Clause stand part of the Bill."
We said that the Government's method was not the way to proceed, and since then all these new methods have been devised. It is precisely because the Government are so weak in this matter that we have little faith that they will carry on this fight in the future. They have stopped up one or two loopholes with Clause 16 but, as I said in the Second Reading debate, I am certain that, for every loophole they have stopped up in this legislation on tax avoidance, the Chancellor will find that before we have passed this legislation into law another ten methods will have been devised of getting round this Clause.
That is why we feel that strong and extreme measures are needed to deal with these people. I am sure that that is the advice that the Chancellor is getting from the Board of Inland Revenue, and that it is the only basis upon which he can act fairly in relation to other taxpayers who do not have the same opportunities for dodging taxation or, in this case, more than dodging taxation— 1188 because this is not merely disposing of one's affairs in such a way as to pay the least amount of tax; this is claiming back from the Board of Inland Revenue taxation which has never been paid.
That is the essence of dividend stripping. It is a method of getting a hand-out from the Board of Inland Revenue. It is a form of subsidy. These people are going along cap in hand—or top hat in hand, or whatever they wear—and the Board of Inland Revenue is doling out money which has never been paid in taxation. That goes much further than the kind of practice to which the Paymaster-General referred, when he quite fairly said that it is up to the average taxpayer to dispose of his affairs in such a way as seems most reasonable to him under the tax law.
I said earlier, after the Chancellor had spoken, that it was quite clear that he was capable of being moved by any pressures put upon him—first, by the Board of Inland Revenue, in the Budget; secondly, by the Tory back benchers, and those unnamed and mysterious persons who have made representations to him, and, thirdly, today, because the weakness of his attitude had caused doubt in the financial community about the Government's policy or willingness to fight tax dodging, he had obviously succumbed to a certain amount of pressure from the Board of Inland Revenue to utter some tough-sounding phrases this afternoon which, on probing, clearly represent nothing.
When we debated the Budget I described it as a mouse of a Budget. After the way the Chancellor has carried on, in surrendering to pressures on the issue that we are now debating, it is clear that we have a mouse of a Chancellor.
I have already concisely stated the reasons that led me to change my mind in this matter of retrospection, and I have very little that I can usefully add now. The right hon. Member for Huyton (Mr. H. Wilson) asked me to what opinions I attached weight and what opinions were factors in leading to my change of opinion on this point. He referred to something like an organised rebellion. We do not have organised rebellions. [Laughter.] With the right hon. Gentleman's experience of the way things are settled in his party I quite understand how that thought came easily to his mind.
§ Mr. H. Wilson rose—
§ 7.15 p.m.
§ Mr. Wilson
Unfortunately, I did not say that it was an organised rebellion. I said that there had been an organised correspondence in The Times—although I would not call that a rebellion. I did, however, refer to the statement made in the Press that certain hon. and right hon. Members opposite were going to vote against the Government.
This is not the first time that I have said that I first listened to the speeches made during the course of the Budget debate—and I do not think that the right hon. Gentleman could quarrel with me for doing that—and then, outside the House, I listened to the opinions of friends and acquaintances whose opinions I value; then I read the newspapers, and the opinions expressed in the Press for and against retrospection, and I also received a number of letters, as one always does on these subjects, both for and against retrospection. Those were all the opinions I took into consideration, and I am not going to apologise for having changed my mind in the light of weighing up such opinions. I am quite prepared, to change my mind in this way, and I think it would be a very stupid man who would take pride in not changing his opinion when he was convinced that the balance of advantage lay in a direction different from what he first thought.
The right hon. Gentleman seemed to imply that because a substantial amount of money is involved that was a factor to which I should have attached exclusive importance. I do not agree with that view. A substantial amount of money is involved. I am not quite sure why the figure of £2 million was mentioned, because I have not specifically mentioned £2 million as the total estimate covering this loss. I do not know what the figure would be, but I would judge that, in total, it would be substantially higher than £2 million, but considerably lower than the £10 million quoted by the right hon. Gentleman.
If I mentioned a figure of £2 million it might have been to say that that was the amount that would have arisen from one year only, but it could not 1190 possibly be for the period going back to 1955.
§ Mr. Diamond
The figures are here in the Financial Statement. The estimate for a full year arising out of the right hon. Gentleman's then proposal, which was to tax retrospectively, was £2 million. The estimate for 1958–59, which included a lag for one or two years, was £4 million.
§ Mr. Mitchison
It was perfectly clear. The right hon. Gentleman himself, when introducing his Budget on 15th April, said in reference to his present proposals:This should make good a loss of revenue of £2 million a year. But the gain this year will be about £4 million because of the retrospection."—[OFFICIAL REPORT, 15th April, 1958; Vol. 586, c. 61–2]I have always understood that even in the Tory Party two and two sometimes make four.
That is the figure. [Laughter.] This is a perfectly serious point. I understood the right hon. Member to imply that I had said that £2 million was the total loss involved in this retrospection. I would say that the best estimate we could make at that time was a total loss of £4 million for that period, but I qualified that today by saying that it is a very approximate estimate, and I have said that I think the figure would be substantially more than £2 million but very substantially less than £10 million. If I had to be more precise I would say that it is about £4 million, £5 million or perhaps £5½ million. It is absolutely impossible to say, but the point I am making today is that whether it had been £5 million, £10 million or even £15 million, I should still have reached my decisions on the same grounds—upon what I thought, on balance, was fair.
The right hon. Gentleman raised the question of a warning, and asked what I meant in referring to the nature of the warning given by Ministers in 1955. My right hon. Friend the Paymaster-General referred to that when he said that a warning by Ministers clearly did not necessarily carry with it the same authority as a statutory decision passed by Parliament.
§ Mr. Douglas Jay (Battersea, North)
In that case can the Chancellor tell us what was the purpose of giving the warning?
I am just coming to that, because I did say earlier this afternoon that the Ministers concerned had given a warning which I thought was relevant and was one of the factors to be taken into consideration. I did take that warning into consideration in reaching the decision I announced at the time of the Budget. What I want to say today is that many other people have taken a view different from mine. I held the view at that time that the warning given by Ministers was sufficiently comprehensive to cover these cases, but many views have been expressed to the contrary.
What I said was that those doubts expressed were among the factors I took into consideration when I reached the decision which I announced on 29th April. I want to say this once more. I still take the view that the statements made by Ministers were relevant to this. I say there is a possibility, at any rate in respect of one of the newer forms taken, that it may not be covered. That is why
§ I have been willing to give the benefit of the doubt to the subject, and I am certain that that decision is right.
§ Mr. H. Wilson
The Chancellor has given away what little bit of a case he had left by the remarks he made as he sat down. He has admitted what I thought he would admit—of the three cases covered, the three types of tax avoidance covered, there is doubt about one of the three. Why, then, does he not introduce retrospective legislation in respect of those issues where there was no doubt whatsoever?
Because, as I have explained, on balance, in the light of the opinions I have taken into consideration, I am of opinion that it is far better in this case to give the benefit of the doubt to the subject and to have no retrospective element in it at all.
§ Question put That the words proposed to be left out stand part of the Clause:—
§ The Committee divided: Ayes 233, Noes 196.1195
|Division No. 160.]||AYES||[7.23 p.m.|
|Aitken, W. T.||Cole, Norman||Goodhart, Philip|
|Amery, Julian (Preston, N.)||Conant, Maj. Sir Roger||Gough, C. F. H.|
|Amory, Rt. Hn. Heathcoat (Tiverton)||Cooke, Robert||Gower, H. R.|
|Anstruther-Gray, Major Sir William||Cooper, A. E.||Graham, Sir Fergus|
|Arbuthnot, John||Cooper-Key, E. M.||Grant-Ferris, Wg Cdr. R. (Nantwich)|
|Armstrong, C. W.||Cordeaux, Lt.-Col. J. K.||Green, A.|
|Ashton, H.||Craddock, Beresford (Spelthorne)||Gresham Cooke, R.|
|Atkins, H. E.||Crosthwaite-Eyre, Col. O. E.||Grimond, J.|
|Baldwin, A. E.||Cunningham, Knox||Grimston, Hon. John (St. Albans)|
|Barlow, Sir John||Currie, G. B. H.||Grimston, Sir Robert (Westbury)|
|Barter, John||Davidson, Viscountess||Grosvenor, Lt.-Col. R. G.|
|Batsford, B. C. C.||Davies, Rt. Hon. Clement (Montgomery)||Gurden, Harold|
|Baxter, Sir Beverley||D'Avigdor-Goldsmid, Sir Henry||Harris, Frederic (Croydon, N. W.)|
|Beamish, Col. Tufton||Deedes, W. F.||Harris, Reader (Heston)|
|Bell, Ronald (Bucks, S.)||Digby, Simon Wingfield||Harrison, A. B. C. (Maldon)|
|Bennett, F. M. (Torquay)||Dodds-Parker, A. D.||Harrison, Col. J. H. (Eye)|
|Bennett, Dr. Reginald||Donaldson, Cmdr. C. E. McA.||Harvey, John (Walthamstow, E.)|
|Bevins, J. R. (Toxteth)||Doughty, C. J. A.||Head, Rt. Hon. A. H.|
|Bidgood, J. C.||du Cann, E. D. L.||Heald, Rt. Hon. Sir Lionel|
|Biggs-Davison, J. A.||Dugdale, Rt. Hn. Sir T. (Richmond)||Heath, Rt. Hon. E. R. G.|
|Bingham, R. M.||Duncan, Sir James||Henderson-Stewart, Sir James|
|Birch, Rt. Hon. Nigel||Duthie, W. S.||Hesketh, R. F.|
|Bishop, F. P.||Elliott, R. W. (Ne'castle upon Tyne, N.)||Hill, Rt. Hon. Charles (Luton)|
|Body, R. F.||Emmet, Hon. Mrs. Evelyn||Hill, Mrs. E. (Wythenshawe)|
|Bonham Carter, Mark||Errington, Sir Eric||Hirst, Geoffrey|
|Bowen, E. R. (Cardigan)||Erroll, F. J.||Hobson, john (Warwick & Leam'gt'n)|
|Boyd-Carpenter, Rt. Hon. J. A.||Finlay, Graeme||Holland-Martin, C. J.|
|Braine, B. R.||Fisher, Nigel||Holt, A. F.|
|Browne, J. Nixon (Craigton)||Fletcher-Cooke, C.||Hornby, R. P.|
|Bryan, P.||Foster, John||Howard, Gerald (Cambridgeshire)|
|Bullus, Wing Commander E. E.||Fraser, Sir Ian (M'cmbe & Lonsdale)||Howard, Hon. Greville (St. Ives)|
|Burden, F. F. A.||Freeth, Denzil||Howard, John (Test)|
|Butcher, Sir Herbert||Gammans, Lady||Hudson, W. R. A. (Hull, N.)|
|Butler, Rt. Hn. R. A. (Saffron Waiden)||Garner-Evans, E. H.||Hulbert, Sir Norman|
|Campbell, Sir David||George, J. C. (Pollok)||Hurd, A. R.|
|Carr, Robert||Gibson-Watt, D.||Hutchison, Michael Clark (E'b'gh, S.)|
|Cary, Sir Robert||Glover, D.||Hyde, Montgomery|
|Channon, Sir Henry||Glyn, Col. Richard H.||Hylton-Foster, Rt. Hon. Sir Harry|
|Chichester-Clark, R.||Godber, J. B.||Iremonger, T. L.|
|Irvine, Bryant Godman (Rye)||Marshall, Douglas||Sharples, R. C.|
|Jenkins, Robert (Dulwich)||Maudling, Rt. Hon. R.||Shepherd, William|
|Jennings, Sir Roland (Hallam)||Maydon, Lt.-Comdr, S. L. C.||Simon, J. E. S. (Middlesbrough, W.)|
|Johnson, Dr. Donald (Carlisle)||Molson, Rt. Hon. Hugh||Smithers, Peter (Winchester)|
|Johnson, Eric (Blackley)||Mott-Radclyffe, Sir Charles||Smyth, Brig. Sir John (Norwood)|
|Jones, Rt. Hon. Aubrey (Hall Green)||Nabarro, G. D. N.||Spearman, Sir Alexander|
|Joynson-Hicks, Hon. Sir Lancelot||Nairn, D. L. S.||Speir, R. M.|
|Kaberry, D.||Neave, Airey||Stevens, Geoffrey|
|Keegan, D.||Nicholson, Sir Godfrey (Farnham)||Steward, Sir William (Woolwich, W.)|
|Kerr, Sir Hamilton||Nicolson, N. (B'n'm'th, E. & Chr'ch)||Stuart, Rt. Hon. James (Moray)|
|Kershaw, J. A.||Noble, Comdr. Rt. Hon. Allan||Studholme, Sir Henry|
|Kimball, M.||Nugent, G. R. H.||Summers, Sir Spencer|
|Lagden, G. W.||Oakshott, H. D.|
|Lambton, Viscount||O'Neill, Hn. Phelim (Co. Antrim, N.)||Sumner, W. D. M. (Orpington)|
|Langford-Holt, J. A.||Orr, Capt. L. P. S.||Taylor, Sir Charles (Eastbourne)|
|Leavey, J. A.||Orr-Ewing, Charles Ian (Hendon, N.)||Taylor, William (Bradford, N.)|
|Leburn, W. G.||Oswald, T.||Temple, John M.|
|Legge-Bourke, Maj. E. A. H.||Page, R. G.||Thompson, R. (Croydon, S.)|
|Legh, Hon. Peter (Petersfield)||Pannell, N. A. (Kirkdale)||Thornton-Kemsley, Sir Colin|
|Lindsay, Hon. James (Devon, N.)||Partridge, E.||Tiley, A. (Bradford, W.)|
|Lindsay, Martin (Solihull)||Peel, W. J.||Turton, Rt. Hon. R. H.|
|Lloyd, Maj. Sir Guy (Renfrew, E.)||Peyton, J. W. W.||Tweedsmuir, Lady|
|Lloyd, Rt. Hon. Selwyn (Wirral)||Pickthorn, K. W. M.||Vane, W. M. F.|
|Longden, Gilbert||Pitman, I. J.||Vickers, Miss Joan|
|Low, Rt. Hon. Sir Toby||Pitt, Miss E. M.||Vosper, Rt. Hon. D. F.|
|Powell, J. Enoch||Wade, D. W.|
|Lucas, P. B. (Brentford & Chiswick)||Price, David (Eastleigh)||Wakefield, Edward (Derbyshire, W.)|
|Lucas-Tooth, Sir Hugh||Price, Henry (Lewisham, W.)||Wakefield, Sir Wavell, (St. M'lebone)|
|Macdonald, Sir Peter||Prior-Palmer, Brig. O. L.||Wall, Patrick|
|Mackeson, Brig. Sir Harry||Profumo, J. D.||Ward, Rt. Hon. G. R. (Worcester)|
|McKibbin, Alan||Ramsden, J. E.||Ward, Dame Irene (Tynemouth)|
|Mackie, J. H. (Galloway)||Rawlinson, Peter||Webster, David|
|McLaughlin, Mrs. P.||Redmayne, M.||Williams, Paul (Sunderland, S.)|
|Maclean, Sir Fitzroy (Lancaster)||Renton, D. L. M.||Wills, Sir Gerald (Bridgwater)|
|McLean, Neil (Inverness)||Ridsdale, J. E.||Wilson, Geoffrey (Truro)|
|MacLeod, John (Ross & Cromarty)||Rippon, A. G. F.||Wood, Hon. R.|
|Maddan, Martin||Robertson, Sir David||Woollam, John Victor|
|Maitland, Cdr. J. F. W. (Horncastle)||Robinson, Sir Roland (Blackpool, S.)|
|Maitland, Hon. Patrick (Lanark)||Roper, Sir Harold||TELLERS FOR THE AYES|
|Manningham-Buller, Rt. Hn. Sir R.||Ropner, Col. Sir Leonard||Mr. Brooman-White and|
|Markham, Major Sir Frank||Russell, R. S.||Mr. Hughes-Young.|
|Ainsley, J. W.||Dodds, N. N.||Janner, B.|
|Allen, Scholefield (Crewe)||Donnelly, D. L.||Jay, Rt. Hon. D. P. T.|
|Bacon, Miss Alice||Dugdale, Rt. Hn. John (W. Brmwch)||Jeger, George (Goole)|
|Baird, J.||Ede, Rt. Hon. J. C.||Jenkins, Roy (Stechford)|
|Balfour, A.||Edelman, M.||Johnson, James (Rugby)|
|Bence, C. R. (Dunbartonshire, E.)||Edwards, Robert (Bilston)||Jones, Rt. Hon. A. Creech (Wakefield)|
|Benn, Hn. Wedgwood (Bristol, E.)||Edwards, W. J. (Stepney)||Jones, David (The Hartlepools)|
|Benson, Sir George||Evans, Albert (Islington, S. W.)||Jones, Jack (Rotherham)|
|Beswick, Frank||Evans, Edward (Lowestoft)||Jones, J. Idwal (Wrexham)|
|Bevan, Rt. Hon. A. (Ebbw Vale)||Fernyhough, E.||Kenyon, C.|
|Blackburn, F.||Finch, H. J.||Key, Rt. Hon. C. W.|
|Blenkinsop, A.||Fitch, E. A.||King, Dr. H. M.|
|Blyton, W. R.||Fletcher, Eric||Lawson, G. M.|
|Boardman, H.||Fraser, Thomas (Hamilton)||Ledger, R. J.|
|Bottomley, Rt. Hon. A. G.||Gaitskell, Rt. Hon. H. T. N.||Lee, Frederick (Newton)|
|Bowden, H. W. (Leicester, S. W.)||George, Lady Megan Lloyd (Car'then)||Lee, Miss Jennie (Cannock)|
|Bowles, F. G.||Gibson, C. W.|
|Brockway, A. F.||Gordon Walker, Rt. Hon. P. C.||Lever, Leslie (Ardwick)|
|Broughton, Dr. A. D. D.||Greenwood, Anthony||Lewis, Arthur|
|Brown, Thomas (Ince)||Grenfell, Rt. Hon. D. R.||Logan, D. G.|
|Burke, W. A.||Gray, C. F.||Mabon, Dr. J. Dickson|
|Burton, Miss F. E.||Griffiths, David (Rother Valley)||McCann, J.|
|Butler, Herbert (Hackney, C.)||Griffiths, Rt. Hon. James (Llartelly)||MacColl, J. E.|
|Butler, Mrs. Joyce (Wood Green)||Griffiths, William (Exchange)||MacDermot, Niall|
|Callaghan, L. J.||Hale, Leslie||McGhee, H. G.|
|Carmichael, J.||Hall, Rt. Hn. Glenvil (Colne Valley)||McGovern, J.|
|Castle, Mrs. B. A.||Hamilton, W. W.||McInnes, J.|
|Champion, A. J.||Harrison, J. (Nottingham, N.)||McLeavy, Frank|
|Chapman, W. D.||Hastings, S.||MacMillan, M. K. (Western Isles)|
|Chetwynd, G. R.||Hayman, F. H.||Mahon, Simon|
|Clunie, J.||Harbison, Miss M.||Mainwaring, W. H.|
|Coldrick, W.||Holman, P.||Mallalieu, E. L. (Brigg)|
|Collins, V. J. (Shoreditch & Finsbury)||Houghton, Douglas||Mann, Mrs. Jean|
|Craddock, George (Bradford, S.)||Howell, Charles (Perry Barr)||Mason, Roy|
|Cronin, J. D.||Howell, Denis (All Saints)||Mayhew, C. P.|
|Crossman, R. H. S.||Hoy, J. H.||Mellish, R. J.|
|Dalton, Rt. Hon. H.||Hubbard, T. F.||Messer, Sir F.|
|Darling, George (Hillsborough)||Hughes, Emrys (S. Ayrshire)||Mitchlson, G. R.|
|Davies, Ernest (Enfield, E.)||Hughes, Hector (Aberdeen, N.)||Moody, A. S.|
|Davies, Stephen (Merthyr)||Hunter, A. E.||Morrison, Rt. Hn. Herbert (Lewis'm, S.)|
|Diamond, John||Isaacs, Rt. Hon. G. A.||Mort, D. L.|
|Moss, R.||Reynolds, G. W.||Thomas, George (Cardiff)|
|Moyle, A.||Robens, Rt. Hon. A.||Thomson, George (Dundee, E.)|
|Mulley, F. W.||Roberts, Goronwy (Caernarvon)||Thornton, E.|
|Noel-Baker, Francis (Swindon)||Robinson, Kenneth (St. Pancras, N.)||Tomney, F.|
|Noel-Baker, Rt. Hon. P. (Derby, S.)||Rogers, George (Kensington, N.)||Usborne, H. C.|
|Oliver, G. H.||Ross, William||Warbey, W. N.|
|Oram, A. E.||Royle, C.||Watkins, T. E.|
|Oswald, T.||Shinwell, Rt. Hon. E.||Weitzman, D.|
|Padley, W. E.||Short, E. W.||Wells, Percy (Faversham)|
|Paget, R. T.||Silverman, Julius (Aston)||Wells, William (Walsall, N.)|
|Paling, Rt. Hn. W. (Dearne Valley)||Silverman, Sydney (Nelson)||West, D. G.|
|Pannell, Charles (Leeds, W.)||Simmons, C. J. (Brierley Hill)||Wheeldon, W. E.|
|Parker, J.||Skeffington, A. M.||White, Mrs. Eirene (E. Flint)|
|Paton, John||Slater, Mrs. H. (Stoke, N.)||Wilkins, W. A.|
|Pearson, A.||Slater, J. (Sedgefield)||Willey, Frederick|
|Peart, T. F.||Smith, Ellis (Stoke, S.)||Williams, David (Neath)|
|Plummer, Sir Leslie||Sorensen, R. W.||Williams, Rev. Llywelyn (Ab'tillery)|
|Popplewell, E.||Soskice, Rt. Hon. Sir Frank||Williams, Rt. Hon. T. (Don Valley)|
|Price, Philips (Gloucestershire, W.)||Sparks, J. A.||Willis, Eustace (Edinburgh, E.)|
|Probert, A. R.||Spriggs, L.||Wilson, Rt. Hon. Harold (Huyton)|
|Proctor, W. T.||Stewart, Michael (Fulham)||Woodburn, Rt. Hon. A.|
|Pursey, Cmdr. H.||Stones, w. (Consett)||Woof, R. E.|
|Rankin, John||Sylvester, G. O.||Yates, V. (Ladywood)|
|Redhead, E. C.||Taylor, Bernard (Mansfield)|
|Reid, William||Taylor, John (West Lothian)||TELLERS FOR THE NOES|
|Mr. J. T. Price and Mr. Deer|
§ Motion made, and Question proposed, That the Clause stand part of the Bill.
§ Mr. H. Wilson
I beg to move, That the Chairman do report Progress and ask leave to sit again.
In the atmosphere of the Committee following the debate, I am sure that we would make far more progress if the Chancellor of the Exchequer were to think again about what has been said. There is clearly great anxiety in the Committee about the Chancellor's action, about his awn personal position in regard to what has happened, and in regard to the unspecified pressure that has been put upon him. It would be better for him and for the progress of the Bill if he would agree to leave the matter here for the evening and to consider the whole matter further and decide whether he could not come forward between now and Report with effective measures to deal with the problem that has been so clearly illuminated in the debate.
§ The Chairman
I could not accept the Motion which the right hon. Gentleman has moved. We have already been sitting for four hours and only one Amendment has been moved. It would be better to make some progress before I am asked to accept a Motion to report Progress.
§ Mr. Wilson
I think it was on the morning of 17th November, 1955, that this question was first raised. I do not think it has ever been finally resolved whether the acceptance of this Motion, which is entirely within your jurisdiction, should or should not depend upon the 1196 amount of progress made. It could easily be argued that we should have made a good deal more progress if the Chancellor had answered some of the questions put to him. If that is your Ruling, Sir Charles, I suggest that if we had altered the timing of this debate, as we could have done, and had left Clauses 13, 14 and 15 until today, we could have made progress upon them; and then, in the light of what I have brought to your attention, you might have been prepared to accept the Motion I have moved.
§ The Chairman
It might have been different, but the point still remains that it is difficult to report Progress without having made any progress at all. There is so much of the Finance Bill still to do that I cannot accept the Motion.
§ Mr. Hale
On the Question, "That the Clause stand part of the Bill," new considerations arise. I was agreeably surprised on my first visit to this Committee for some days at what took place. I was not surprised at the brilliance of the speeches made by my hon. Friend the Member for Islington, East (Mr. E. Fletcher), but I have been rather shocked at what has happened in the last four hours. You referred, Sir Charles, to the fact that four hours had gone by and we had considered only a single Amendment; but there were some three Government Front Bench speeches. We started with an appeal from the Leader of the Liberal Party to cut morals out of the Budget. When I joined the Liberal Party my leader was David Lloyd George, and he was conducting a campaign to bring 1197 morals into the Budget. I was only eight years old then, but I gave as much support as I could.
Then we had an appeal by the Chancellor of the Exchequer to keep figures out of the Budget. When one of my right hon. Friend's mentioned £6 million, the right hon. Gentleman said that that was the right figure. When my hon. and learned Friend the Member for Kettering (Mr. Mitchison) said £4 million, the right hon. Gentleman said that was an accurate figure. He finally said, "Anyhow, I do not know what the figure is." One appreciates that when one has gone into the various varieties of this particular swindle in which the right hon. Gentleman is acting as an accessory after the fact.
Let us be plain about the Clause. We can call dividend stripping "a romantic development of British industry," but it is a method by which wide boys are endeavouring to mulct the Exchequer of money to which they are only entitled because the regulations have been made with such lack of care as not to cover the particular point. Everyone knows that in the making of financial regulations we are bound to make mistakes. Everybody also knows that the tax-avoidance organisation is the most remunerative of British industries. The position is rather like the old battle between naval guns and steel. As we lengthened the range of the guns and widened the bore thicker steel was produced, and so on.
Today we had a financial statement from the Chancellor of the Exchequer which was perhaps the most remarkable ever made in history. He said, "I had arrived at certitude but then I arrived at doubt, and on balance I took the view that doubt should prevail." If the right hon. Gentleman feels that I am being unfair I will give way, but I must say that that is how I understood him when I listened to him. At one point in our discussion he was clear in his mind. "Then," he said, "I saw my friends outside." He did not tell us who they were, but I am sure they were not a deputation of Quakers. I have no doubt that the right hon. Gentleman's friends are all very reputable and excellent people, but this is not a matter on which he would take the view of a maiden aunt. It is a matter of considerable complexity. Indeed, I doubt whether a more complex Clause has ever appeared in any Budget. That is a fairly strong statement.
1198 When I read the Clause for the first time I had in mind the fact that I had long planned to write a book on unsolved mysteries of history. I hope to start some time, and anyone who offers an advance payment will accelerate the procedure. There would be Chapter I, Who Was Junius? Chapter II, the Mystery of the Man in the Iron Mask. Chapter III, What does Clause 4 of the Finance (No. 2) Act, 1955, as amended by Clause 16 of the Finance Act,—if it becomes an Act—1958, varying a whole series of Sections of other Finance Acts, really mean? Nobody knows. The curious thing is that we know the evil with which it is sought to deal and we could all point to reasons why it fails, but no one is able to say precisely what the Clause does. The very purpose of the amendment proposed in this Bill is an amendment designed to remedy the mistakes made in the Act of 1955.
§ Mr. Hale
How far that little candle throws its beamsHere is lucus a non lucendo. The Clause says:Section four of and the Third Schedule to the Finance (No. 2) Act, 1955 (which make provision as to the treatment of certain dividends paid to any extent out of accumulated profits), shall have effect subject to the amendments specified in subsections (2) to (4) of this section.It is to the amendments specified to which I am applying my mind.
§ Mr. Hale
Yes, but only the first sentence of that subject. If the hon. Member had waited a few minutes longer, it is possible that he would even have understood what I had to say. Possibly, but it is not a matter of certitude at all.
There is a new Clause on the Paper in the names of myself and the hon. Members for Salford, West (Mr. Royle) and Jarrow (Mr. Fernyhough): Computation of profits of business. I have no doubt that the Chancellor was reading that with very pleased interest over his oats this morning. In the first speech he made today he 1199 rather tended to reply to that new Clause and rather intimated that he is not going to accept it. That actually would be an amendment to Clause 16, and the only reason why it was not tabled as an Amendment was that it is so long and complex that the procedure is rather like driving nails in the Hindenburg statue, one has to have them all over the place and a lot of them, and we thought it would be better to table it as a new Clause.
I want to refer to that new Clause because the Chancellor did reply to it. He said he could not think of having any sort of procedure by which the Inland Revenue should be entitled, subject, of course, to the jurisdiction of the courts and full legal protection of the citizen, to say that because this device was for the collection of tax it would ignore it. He says that procedure is quite impossible, but such a device existed in the late years of the last war and the early years of the last peace, and it worked very well. It worked well, and it may be that no provisions in detail could have produced the effect which it produced.
I want to cover a little history on this form of tax evasion. Years ago my wife and I used to spend our vacations on a tiny island off the coast of Donegall, the Island of Inishcoo, out in the Atlantic. It was an historic island because General Napper Tandy made his most famous landing there and, two and a half hours later, made his embarkation from the island. It is a fascinating thought that it was from there that St. Columba came to teach the savage tribes of Britain and, but for the work of St. Columba, we might not have tax dodgers now. In a sense, the process of commerce has gone on and, on the Island of Inishcoo, we come across the Boyles and Macdonalds who used to have a prosperous time there in the sea salmon fishing season. The salmon used to come from near the Gulf of Mexico round the coast of Scotland and these fishermen, with their gallant seafaring endeavour, were able to get a measure of revenue for the island.
It is an interesting point, as indicating the prescience, knowledge and judgment possessed by these charming and eminently edible fish, that we observed they were nearly always seen off the coast at a time which indicated that they 1200 had left American waters immediately following a speech on peace by Mr. Foster Dulles. These hardy islanders, keeping observation on the weather from the cliff and watching the current, would be listening to the wireless and hearing Mr. Foster Dulles, and they were able to make a passably good income, but the real trouble is that Inishcoo is a long way from Dublin, which is the ordinary centre of Irish trade and commerce. It is so far away that it takes nearly as long to travel from Burtonport to Dublin as for the Minister of Labour to prepare an impromptu outburst of honest indignation against the Leader of the Opposition, and that is a very long time.
The result was that that very prosperous fishing industry was whittled away by a limited company, which could use lorries to convey the fish to Dublin and sell it there at high prices. I hope I am making myself clear and showing that what I am saying is relevant to this Clause. I am talking of course—[An HON. MEMBER: "A lot of nonsense."] On the contrary, Clause 4 of the 1955 Act is very long. Subsection (8) says:'Company' includes anybody corporate, but does not extend to a company not resident in the United Kingdom.So we have finished with Ireland now and gota company not resident in the United Kingdom.which has made a very large profit on salmon for a great many years. In the words of previous Chancellors, it ploughs back those profits. In other words, it acquires a very high capital value by not distributing profits. The simple view of the islanders of Inishcoo was that they were being swindled, because the climate there is such that businessmen are subject to all kinds of temptations. If they had not ploughed back profits, we might have had a balance of payments crisis with Monaco, and perhaps it was as well that the money remained in Dublin.
Everyone but Chancellors of the Exchequer has known what was going on for the last 40 years. This sort of thing is commonplace and every citizen except the Chancellor of the Exchequer knows about it. In the ordinary economic development of our institutions, businessmen used to deal in goods, but that involved a considerable amount of risk and capital. That is a Jack of Newbury, and there was the possibility of losing 1201 money. They got over that by the invention of the limited liability company.
It was then pointed out that even through a limited liability company one might lose capital, and they proceeded to the deferred share method whereby Consols could be held by people who put up the smallest amount of money. In that way they could insulate themselves. They got over the difficulty of losing money on goods by selling goods which did not exist to people who did not want them but who thought that on the whole they might make money by buying them in the future. The whole romantic story of modern adventurous industry began to expand and develop, and we reached the stage when the great genius came down and expounded the next step.
I do not know whether the Assistant Postmaster-General was here in 1945. Perhaps if he was he will recall the story told by a Tory Member in the course of the Budget debate about three businessmen who were arguing who should pay for a meal. One said that he would pay because he was paying such a high rate of Surtax that it would cost him only 2s. in the £. The second man said, "I am paying the maximum excess profit taxation and I can get it for nothing." The third said, "Give me the bill. I am working for the Government at 10 per cent. cost-plus and I can make money out of it."
The great genius said, however, that the thing to do was not to buy goods at all but to buy losses; if one made any money in any legitimate enterprise, one saved the whole of the taxation on it by buying a loss. Indeed, losses were advertised at such a rate that buying them became almost prohibitive. It was not so much because of legislation as because of competition to buy losses that their prices went up.
Next came the great genius who, working in a small way, said, "We have got it all wrong. We should buy profits." They asked how that was done and he said, "If you buy cum-div you are all right. You know that the dividend has been declared and that it has not been distributed, and you save the tax on the dividend as an item of capital, because it will not rank for your tax as income. In the value of the shares you buy capital plus dividend minus tax, and you do not 1202 have to pay any tax on that dividend." Then there was a search all over Britain for companies which had accumulated reserves of dividend on which tax had been paid, and one found companies on which one paid 100 per cent. of purchase price but only 20 per cent. of it represented capital and 80 per cent. was tax-free.
Surely the Chancellor knows about it. I do not want to be discourteous to the Chancellor, whom we hold in considerable regard and who has had rather a rough passage today, but surely he knows about this. We have had a lot of experience of Tory Chancellors in the last two-and-a-half years, and this is our experience of the sort of mental atrophy which starts from the moment they go into the Treasury. There is something in the Treasury which has the petrifying effect which is seen at Matlock; the steady application of moist atmosphere produces cranial degeneration and mental atrophy which come out in the presentation of these schemes. I am not trying to be discourteous for a moment. Indeed, I am trying to hold back a wealth of criticism.
Suddenly the City of London found that they had this great method of producing money virtually without much industry. There were more belly laughs in the City of London that day than since the day somebody invented the joke, "She was somebody's daughter, but—". A new cheerfulness came about.
I want to deal with what has happened since. First we were told by the Government, "There is no question about it; we will deal with it. We will start by passing some limited legislation but we will give a firm and formal warning that if there is any more of this, we shall deal with it." What has happened? The Clauses of the Bill do not touch it and the Amendments do not touch it. To start with, we have excluded all the companies outside the United Kingdom. All a man has to do now is to look for a company in Dublin. He finds the product of the labour of my fishermen in Inishcoo, capitalises it over about eight years, buys it up and gets his money back from the Government here. It is true the tax has not been paid, but he gets a capital asset not liable to taxation and a substantial financial benefit by that process.
1203 Secondly, we have excluded debentures; these provisions apply only to normal profit-participating shares and debentures are excluded. The naive theory in the Chancellor's mind is, "Debenture interest is paid regularly and it will not apply to debentures." The wise guys then stop paying interest on debentures. They proceed to accumulate them, and one can now buy debentures with six or seven years' accumulated profit. So it goes on.
I do not want to detain the Committee on this, but I would say that in listening to the Chancellor's argument this afternoon I was once again reminded of the most lucid and clear dictum of the late Sergeant Arabin, which appears in a legal collection called "Arabiniana," which is perhaps almost unknown in these days. He said that if ever there was a case in which it was made clearer than in this case that this case was not that case, that case was this case. Listening to the explanations of the working of the Chancellors mind, I came to the conclusion that Sergeant Arabin had come to life again and that we were about to be regaled with some of those dubious propositions.
It is true—and everyone knows it—that tax dodging is a great industry. It is true—and everyone knows it. Let us be fair; Lord Chief Justice Hewart's dictum still stands that if you can get out of paying tax you are a fool if you do not.
§ Mr. Hale
He may have said it, too, but I am certain that Lord Chief Justice Hewart said it. Indeed, from what I remember of him, it is precisely the sort of thing which he would say.
I do not object to that. The most reputable company will call in its solicitor and its accountant on any deal and will say, "Advise us of the taxation implications of this." Why should not it? The solicitor and the accountant will say, "If you do it the other way you can get out of tax." Why not? If I am being paid to advise a company, then the question of my political views is not in issue at all; I am being paid for my advice. But it is the job of the Chancellor of the Exchequer to stop it. There is only one 1204 way to do it, and that is the way which he has rejected this afternoon, for once without listening to the arguments. I hope that when he has heard the arguments, he may change his mind again, because there are occasions when it is a virtue to change one's mind.
On this occasion he has said that he is not prepared to have any method by which the tax authorities can say that here is a transaction which in their view is blatantly devised solely for the purpose of avoidance of legitimate taxation. We say that we reject that doctrine, and we shall proceed as if it had not been made. If one can appeal to the High Court, one can say that it is a perfectly fair transaction and one can explain to the High Court the reasons why one was compelled to enter into that transaction as an ancillary part of some other business. Unless they can do that, there is no reason for saying that the people who set out to engage in a transaction carefully and coolly calculated primarily for the avoidance of tax should have any help from this House. Certainly they should have no help from the Chancellor.
I say to the Chancellor that although this is legitimate, it is a swindle. Of course, there are many forms of swindle which are not liable to prosecution. In the old days we did not prosecute for false pretences, and I am personally inclined to agree with that. I do not think the criminal law should be used in cases where it can be avoided. I do not believe in making criminals if it can be avoided. I believe that to be an eminently liberal principle. Of course there are swindles. Time after time we hear a judge say to the accused in the dock, "You have not actually transgressed the criminal law in this transaction but you have behaved like a crook and I hope that you leave this court with a very unpleasant conscience." "These are the people", the Chancellor said, "who on balance of doubt, having discussed the matter with my aunt and a couple of cousins and friends outside, I have come to the conclusion should not be interfered with."
It is a monstrous proposition, and it is made more monstrous by speech after speech today which says, "If you are dishing out the boodle retrospectively our hands will be retrospectively held out, 1205 but if you suggest that someone should pay an amount which he owes and which he is endeavouring to contend he does not owe because he was provided a whole façade of ingenious devices to avoid payment, I say that, having thought over the matter, on a slight balance of doubt I shall let them get away with it. I shall not deal with this. I shall instead adversely affect the financial situation of the average citizen. I am going to weaken the Budget." Heaven knows how many times in the last few days we have been told that we cannot have a concession costing £100,000 because it would be inflationary or it cannot be done. Now, we are asked to shovel out £4 million of public money to a set of crooks merely because they have managed to find a legal way of avoiding the tax laws of the country.
§ Mr. Douglas Houghton (Sowerby)
My hon. Friend the Member for Oldham, West (Mr. Hale) has posed with wit and skill the classic dilemma of all taxation systems. That is, how to check devices for avoidance of tax. This is what we are talking about on Clause 16.
The Paymaster-General suggested a few moments ago that we were, perhaps, confused in our minds between tax evasion and tax avoidance. There is no confusion in our minds at all about it. The term "tax dodger" can be applied to the tax avoider. The tax evader is a crook. When we talk about tax dodgers, we are talking about tax avoiders.
The right hon. Gentleman said that those who get married just before the end of the Income Tax year to get the advantage of the married man's personal allowance, and, probably, other benefits also, for the whole of the tax year, are indulging in a form of tax avoidance. If it is, it is a very mild form of it. What we mean by tax avoidance, at least in condemning it, are those artificial devices the purpose of which is wholly or mainly tax avoidance. People usually do not get married mainly or wholly for the purpose of tax avoidance. If they do, it is a heavy price to pay. The people who get married just before 5th April are getting married anyhow, but the tax dodgers indulge in activities which they would not undertake anyhow, apart from their purpose of tax relief or tax avoidance.
1206 I know all the difficulties about this problem. They have been discussed comprehensively and thoroughly by one Royal Commission after another and the more recent Radcliffe Commission wrote a whole chapter on the subject of tax avoidance, defined it, posed the possible remedies for it and came rather weakly to the conclusion that as the Inland Revenue apparently did not want it any other way, we should carry on as we are.
This kind of debate on the activities of the sophisticated taxpayers enrages the great mass of the ordinary taxpayers. They feel that these fiddles and dodges are not only a reflection upon the honour of those who indulge in them, but are having their effect upon the amount of tax that other people pay and the spirit in which they pay it, which is very important in any taxation system.
Clause 16 is rendered necessary as a check on tax avoidance because the efforts made in 1955 to close the loopholes were defective in some respects and ineffectual in others. The Clause deals with the respects in which the 1955 legislation was defective. Clause 17 deals with those respects in which it was ineffectual.
There has been no dispute on either side of the Committee that what Clause 16 seeks to check is a trick. The then Financial Secretary to the Treasury, now the Minister of Housing and Local Government, described dividend stripping as a trick; and those who perpetrate a trick are tricksters. This Clause is a further attempt to check the activities of tricksters.
Indeed, I go further and say that the enlargement of the check upon "acting in concert" is another attempt to stop conspiracy. That really is what "acting in concert" means. When a safeguard was put in Section 4 of the 1955 Act to prevent evasion of the provision that the acquisition of more than 10 per cent. of the shareholding would bring a person within the conditions of the Section, provision was made to guard against the possibility that by acquiring 5 per cent. each, two persons acting in concert could remove themselves from the scope of the Clause.
I believe—not all people will share this view and apparently not the Leader of the Liberal Party—that there is some 1207 morality in one's sense of duty towards the taxation system. We pride ourselves on having an efficient tax system fully supported by the co-operation of the great majority of taxpayers. We proclaim to the world our astonishing willingness to bear such heavy burdens with such a high sense of duty. The need for a Clause of this kind is a sign of our failure to live up to the standards of integrity that we claim to observe in our tax affairs.
The great mass of ordinary people may not be able to judge on the refinements of the avoidance techniques but, on the whole, they know what is right and what is underhand. They can recognise in many of these tax avoidance devices something underhand—a put-up job, something which is being done for private and personal gain to evade the proper obligations under our tax system. For my part, I regard the need for this Clause and the Clause which follows it as an affront to honourable taxpayers throughout the country. If we have much more of this, it may well impair the social fabric of the nation and diminish its confidence in our taxation system.
One of the things that is cardinal in tax administration is secrecy. The Chancellor of the Exchequer will never answer Questions in the House on the personal affairs of individual taxpayers or companies. When the public want to know how it is that some people get away with things, if they ask whether certain people are getting away with things, the Chancellor says, "I cannot discuss the affairs of individual taxpayers." So the general mass of the public have to rely on the tax machine's doing its job in secret without their inspection or their right to intrude upon the affairs of taxpayers and to make discoveries for themselves. In those circumstances, it is of fundamental importance that public confidence in the taxation system should be fostered and strengthened.
Yesterday, we were asking for some modest concessions for various types of taxpayers, personal reliefs for those living on small incomes, for those who employ housekeepers, those who maintain dependent relatives. The Financial Secretary rejected all our pleas for concessions, yet I would assert that through the depredations 1208 of the tax avoiders to be affected by this Clause, before 1955 began the check, and now before this Clause completes the check, if indeed, it does complete it, more money has been lost to the Revenue than would have been needed to pay for a very large part of the concessions we were asking for yesterday and were refused.
On the morality of tax paying, I came across a speech by a one time Member of the House of Commons who was greatly honoured by both sides, Mr. Lees-Smith. On 1st July, 1936, he made a speech following declarations by the then Chancellor of the Exchequer of determination to check tax avoidance, and threatening, if necessary, to introduce retrospective legislation to deal with it. Referring to the Chancellor's speech, Mr. Lees-Smith said that he took it to mean thatto devise by skilful methods highly artificial arrangements by which you find a loophole in the law, which amounts to some dodge or trick by which you can avoid Income Tax, and yet because of that loophole not get caught in the meshes of the law, may be legal, is not good citizenship, and is not proper and decent, and ought not to be encouraged in this country."—[OFFICIAL REPORT 1st July, 1936; Vol. 314, c. 443.]Those are sentiments which all right-minded people throughout the country would endorse.
I know that the Royal Commission said that there would be difficulty in laying down any kind of moral code in this connection, but right hon. and hon. Gentlemen opposite represent those who claim to play the game; they represent those who declare that some things are not done. They are those who claim that laws and restrictions are not necessary to govern the behaviour of those who have had the right sort of bringing up. So it is not from these benches on this side of the Committee that this kind of protest should be coming and reiterated time and again.
It is right hon. and hon. Gentlemen opposite, by the traditional superiority of their breeding, and having long enjoyed all the privileges of the governing class, who should be denouncing these nefarious activities. But no. They join the Leader of the Liberal Party and say, "Let us keep morals out of this tax business. Is it within the law? If so, it is all right, and until the Chancellor takes steps to check it, we shall continue our practice."
1209 The question which this Clause poses afresh is: how are we to deal with these activities? What is the most satisfactory and the most acceptable way of applying proper checks to abuses? Because there is no doubt that there are abuses, and they have been denounced in very strong terms by successive Chancellors over the years.
§ 8.15 p.m.
§ Mr. Nabarro
I am intrigued by the hon. Gentleman's argument, as always, with his copious knowledge of tax matters. Would he define what is his attitude and the attitude of his party towards the deliberate purchase by one company of a loss forward for Income Tax purposes in another company? Does he regard that as highly immoral? Does he regard that as tax avoidance? Does he regard it as tax evasion? Or does he regard it as a moral and proper recourse in appropriate circumstances?
§ Mr. Houghton
It would be difficult for me to answer a hypothetical question like that without knowing the facts and the circumstances of the case concerned.
§ Mr. Nabarro
There are often widely differing facts and circumstances. It may be a transaction involving a very proper and legitimate vertical combination between businesses habitually associated with one another. It may be purely a financial transaction to take advantage of the Income Tax loss forward. Who is to decide? Who is to be the arbiter as to the fundamental reason for the transaction? Would the hon. Gentleman answer that question?
§ Mr. Houghton
Had the hon. Gentleman given me time I would have replied to his first question. I would say this, that if that or any other transaction has as its purpose wholly or mainly tax avoidance then it is wrong.
Next, the hon. Gentleman asked me who should be the arbiter. That is the question that I am coming to now, because one can take differing views. The course we are following in this Clause and in Clause 17, in accordance with the traditional practice, is specific legislation to deal with a specific abuse. That is one 1210 way. The law is altered. Those who claim that they will act within the law, but only within the law, can say, "We will change the law, and we will check abuses that way."
Whether that alteration of the law shall be retrospective is another aspect of the problem. One can follow the course of specific legislation to deal with abuses and at the same time lay down the principle that in no circumstances should the law be changed retrospectively. Or one can lay down, without being absolutely emphatic about retrospective legislation, that it should be utilised only when the circumstances fully justify it.
We will leave that. This is the method we are following now, that is to say, a specific abuse is to be dealt with by legislation with or without retrospective effect.
There are other ways, and the Royal Commission examined some of them, in other countries. This difficult question whether a tax avoidance device has as its purpose wholly or mainly tax avoidance is a matter which is referred to an independent tribunal by the tax authorities for it to decide whether the transaction is a legitimate one, and whether the tax avoidance is only incidental to some other purpose or whether it is the main purpose.
In our own case of the Excess Profits Duty and later with the Excess Profits Levy we had an umbrella Clause. In the final Report of the Royal Commission dealing with those duties, it was quoted:A person shall not for the purpose of avoiding payment of Excess Profits Duty enter into any fictitious or artificial transaction or carry out any fictitious or artificial operation…That Clause has never been written into the general taxation law either for Income Tax or Surtax, but it was continued in the Excess Profits Levy legislation, if my memory serves me rightly. That is another way. This could be written into the whole code of Income Tax and Surtax, leaving the Commissioners of Inland Revenue to be the first judges on this issue, and providing opportunities to go to an independent tribunal in the event of dissent from the judgment of the Commissioners.
There is the course, as suggested by my hon. Friend the Member for Oldham, West and several of my hon. Friends.
1211 which is embodied in a proposed new Clause entitled "Computation of Profits of Business" on the Notice Paper. It provides that where there may be a mixture of genuine commercial transaction with the purpose of tax avoidance the Commissioners of Inland Revenue shall have power to decide fairly the actual commercial consequences of the transaction. That is an attempt to adjudicate between the tax avoidance element and the genuine business transaction in any operation.
The Inland Revenue, in evidence to the Royal Commission as reported in paragraph 1027 of its Report, apparently seemed to be content with the methods we now employ. In the last sentence of that paragraph, the Inland Revenue says that it did not think that the introduction of some general anti-avoidance provision was desirable or necessary. But I see that on the Notice Paper there is an Amendment in the name of a number of hon. Members opposite which seeks to distinguish between the genuine transaction, which might be caught in the tax avoidance Clause, and the artificial transaction. They wish to provide for the Commissioners to determine that a certain transaction is a genuine one and should not suffer the penalties otherwise imposed upon it by the Bill.
§ Mr. Houghton
It is the Amendment in Clause 17, page 12, line 41, to add new subsections (3) and (4). The name of the hon. Member for Kidderminster (Mr. Nabarro) is among those appended to that Amendment.
§ Mr. Nabarro
In fairness, there are two other Amendments to that Clause to which my name is not appended. I wanted to be certain that the hon. Member was referring to the Amendment to which I have put my name.
§ Mr. Houghton
I beg the hon. Member's pardon. I am sure that he wants to be quite sure to which Amendment his name has been attached.
This Amendment requires the Commissioners to decide which is the artificial device and which is not. That is the same thing the other way round, which suggests that hon. Members opposite are coming to the view that a method of 1212 checking avoidance, other than specific legislation, is desirable in certain circumstances.
Finally, there is the suggestion of my right hon. Friend the Member for Huyton (Mr. H. Wilson) that where the Chancellor finds that an abuse is gathering momentum and he thinks it desirable to stop it, he should have power to ask the House of Commons for an Order to check the abuse pending legislation in the Finance Bill later. That is an alternative which would apply the check when the abuse becomes plainly visible. Here, I endorse something which my hon. Friend the Member for Gloucester (Mr. Diamond) said about the 1955 Section, because the second Finance Bill in 1955 was quite fortuitous. The October, 1955. Budget was absolutely fortuitous from the point of view of checking dividend stripping.
The major purpose of the Budget then was not to stop tax avoidance, but to stop the rot caused by the run on our reserves. Indeed, in April, 1956, the Chancellor said so, and the then Financial Secretary to the Treasury said, on 8th November, 1955, that:This trick is at present perfectly lawful and it has just begun to be exploited on a really big scale. If we waited until the next Finance Bill the loss of revenue in the interval would exceed six figures. I am not prepared to stand by and see the Revenue milked like that."—[OFFICIAL REPORT, 8th November, 1955; Vol. 545, c. 1665.]What would the Chancellor have done had he not been able to utilise the agency of an autumn Finance Bill in 1955 to check an abuse which was then said to be exploited on a big scale and which, if he waited until the next Finance Bill, would involve the Revenue in heavy loss? This last suggestion is an attempt to meet the loss of revenue which would be incurred on account of delay in taking measures to check tax evasion devices.
We leave the Clause with a load still on our minds. We have not yet found the answer to this recurring problem, which excites passions, which leads to lack of confidence in our taxation system, which impairs the morale of the taxpaying public, and which is thoroughly bad from a social as well as a fiscal point of view.
An opportunity might be taken at a more convenient season than debates on the Finance Bill to discuss the fundamental question of how we are to administer 1213 our taxation system and ensure a reasonable observance not only of the law but the spirit which should underline legislation which lays burdens on the people in order to sustain the country in its defence, in its social services, in its education and in all the other services which go to make up the life of a civilised community.
§ Viscount Hinchingbrooke (Dorset, South)
This debate has been going on all day and I do not usually like to intervene in a debate when I have not heard the whole of the preceding speech and all that went before on this Question, "That the Clause stand part of the Bill," but I heard a great deal of the arguments earlier in the day, and it is clear that we are now continuing what was said upon certain Amendments to the Clause.
I have crossed swords before with the hon. Member for Sowerby (Mr. Houghton) and no doubt I shall do so now. I see the situation from a completely opposite point of view from that of the hon. Gentleman and his hon. Friends. I think that taxation today is at such a high level that, whether people are justified or not, they will go on taking every possible means to escape its consequences. It is no use the House of Commons continuing to pursue a vendetta against those people. We shall only become increasingly a laughing stock not only in their eyes, but also in the eyes of all those who think that the weight of taxation today is such that they are justified in taking every possible means of avoiding the consequences of the law.
I am specific in my words. I think that tax evasion, which I understand is an illegal device, is to be deplored and always should be deplored by every hon. and right hon. Member of this Committee. But there is a sharp distinction between tax evasion which, if it is spotted by the Commissioners of Inland Revenue, may be the subject of a case before the courts as a criminal charge, and tax avoidance. For tax evasion the law can take its course. We are not concerned with that in this Committee. The House of Commons passes laws and then it is up to the other authorities to take people in charge if they evade them.
Tax avoidance is an entirely different matter. I hold the view that many people who are indulging in many of these activities are wholly justified 1214 because of the intolerable weight of taxation forced upon the country by the Governments since the war, and not least by the Government of the present day.
§ 8.30 p.m.
§ Mr. Mitchison
I am much obliged to the noble Lord for giving way and I hope I have not interrupted his eloquence. This Clause is not concerned either with tax avoidance or with tax evasion. It is concerned with collecting from the Revenue a sum of money to which morally they were by no means entitled.
§ Viscount Hinchingbrooke
The moral question is the question at issue. This Committee is incapable of defining that when it comes to financial matters. We are capable of making a law which has to be observed, and if people do not observe it they must come before the courts and take the consequences, but this wholesale moralising by the Labour Party is a thing which will increasingly bring Parliament into contempt if it is continued.
In the speeches today we have heard all kinds of phrases. The right hon. Member for South Shields (Mr. Ede) talked about warnings contained in Government statements. The hon. Member for Jarrow (Mr. Fernyhough) talked about the spirit of the law. What on earth is the spirit of the law unless it is the spirit of his own thinking when he is in some inner Socialist conclave planning what to do to bring a reign of financial terror to the country in five years' time. What is the spirit of the law? I should like to have a definition of it.
I deplore the whole business of Government exhortation ever since it became a current political device. I think we have only suffered indignities from it, and I hope to see it soon brought to an end. I hope that the present Chancellor of the Exchequer is eschewing these methods not only in his public speeches but in his legislation.
§ Viscount Hinchingbrooke
It is on the basis of these exhortations, which have been delivered at various times by Chancellors of the Exchequer, that the Socialist Party is now erecting the theory that it is correct, honourable, just and wise to introduce retrospective legislation to catch up with the public non-obedience 1215 to these dictates issued by right hon. Gentlemen, on whatever side of the House of Commons it may be.
There is also the other point of the imprecision of these warnings, which has been referred to on this side of the Committee this afternoon. How on earth can we expect to catch up with financial transactions and reclaim the tax from those people who have carried out transactions on some Government statement which was imprecise? It leaves every kind of device unprovided for and, under the cover of this, people will do what they will do, and good luck to them I say.
The hon. and learned Member for Northampton (Mr. Paget) talked about a requirement for blanket legislation. He said there must be a general statement issued, or some legislation of a comprehensive nature introduced and passed by Parliament to deal with anybody who adopted any kind of device for escaping from the consequences of taxation—doing, in fact, what learned judges in the courts have said was permissible and legal, and if they used the phrase "honourable" I am in no doubt that they were correct in using it. They have said on many occasions that a man is entitled to arrange his affairs so as to escape the consequences of taxation, but not according to the hon. and learned Gentleman, who wants blanket legislation which will cover all so-called past misdeeds. However, there he stops. He comes to a point when he reaches the criminal law, the branch in which he is involved, and he quotes the great occasion when Stafford was brought to trial. He says that if a man is apparently about to commit a crime, it must be quite clear what the law is; he must not suffer death before it has been made clear that death is a penalty for the crime which is about to be committed. But when it comes to financial legislation and fines, which are one form of penalty applied in the courts, and applied by the Chancellor of the Exchequer and the Inland Revenue now, the hon. and learned Gentleman says, "No, a different principle must prevail".
§ Mr. Hale
I did not want to interrupt the noble Lord in the full spate of his oratory, perhaps for fear of being submerged, but when he asks, "What is 1216 the spirit of the law?", I would remind him that Montesquieu wrote under precisely that title, "L'Esprit des lois", on the spirit of law in general; Rousseau wrote on the spirit of political law, and Grotius wrote about the spirit of international law, and all of them are held in very high esteem internationally as writers, and the first and the third in almost universal esteem.
§ Viscount Hinchingbrooke
They may all have written about the spirit of the law, but my complaint is that if the spirit of the law is interfered with people will begin to conceive of other spirits of the law in an opposite sense to that meant by partisan Members of the House of Commons and will begin to break it more than they have previously been doing. Do not let us make the mistake of going out too far on this limb in the House of Commons because we draw increasing contempt upon the House in the process on the part of ever-increasing and ever-widening sections of the community.
My right hon. Friend the Member for Blackpool, North (Sir T. Low) suggested a means by which swift action could be taken when it was found that forms of taxation avoidance were developing on a wide scale which Parliament, as it proceeded to look at them and increasingly took them into account, began to think were undesirable. I agree with my right hon. Friend. I do not think he will object to my saying that I gave him the idea which he produced this afternoon.
It is, perhaps, in these days very wrong to have to wait a whole year for another Budget and another Finance Bill before some of these processes are followed up. I join with my right hon. Friend in hoping that the Government will look at the idea of introducing as soon as it becomes manifest that a practice is becoming undesirable—that is the basis of all legislation in this House and in every other civilised country in the world—a short, sharp Ways and Means Resolution, to be followed swiftly by a one-Clause Finance Bill, the Second Reading of which could obviously be taken formally because the debate would have taken place on the Ways and Means Resolution a day or two previously, and we could then get the legislation through the House quickly.
1217 I think that is the only possible corrective that we can apply to this situation other than reduction of taxation. It is clear that many people today believe that the State is unduly weighing upon their opportunities, hopes and enterprises and so they resort to this kind of thing. Do we suppose that people engaged in business and commerce really want to spend half or three-quarters of the day with secretaries, accountants and taxation barristers looking into the possibility of avoiding the effect of this State activity? Of course they do not. They would much rather pursue their normal avocations. Until we can bring the weight and scale of taxation down we shall not achieve any remedy for the issue now before us.
§ Mr. Nabarro
I have found it very difficult in the course of the tortuous debates in Committee today to distinguish between the provisions of Clauses 16 and 17. If I err slightly in my remarks to the Committee by straying into the provisions of Clause 17, Mr. Hynd, I think it might well be understandable, because they are extremely complex provisions and can be read only with one in conjunction with the other.
§ Mr. Nabarro
I recognise that, and I hope, Mr. Hynd, that you will be in a position so to interpret these Clauses as to tell me when I err.
My hon. and learned Friend the Financial Secretary dealt with Clauses 16 and 17 together in his Second Reading speech. I do not think he could have been capable of precisely separating the requirements of the one Clause from the other. My hon. and learned Friend said:I now pass to a very different sort of matter, to Clauses 16 and 17, which are designed to protect the Revenue against avoidance through the device known as dividend stripping.There followed a lengthy explanation, including hypothetical cases which all of us have now read with great interest, but which some of us, myself included, have found extremely difficult to understand.
My hon. and learned Friend concluded his reference to Clauses 16 and 17 with these words—and this is the point to 1218 which I want to address myself this evening—The House will see that these are not ordinary commercial transactions. This is a serious matter for the Exchequer. The Income Tax code is generous in its treatment of trading losses, but it assumes genuine losses to set off against genuine income."—[OFFICIAL REPORT, 12th May, 1958; Vol. 588, c. 41–3.]It was those last few words which caused me to intervene in the speech of the hon. Member for Sowerby (Mr. Houghton), and I do not blame him for side-stepping and adroitly neglecting to answer the specific point put to him. It falls partly in Clause 16 and partly in Clause 17, but I shall try to address my comments to that part which comes within Clause 16.
I ask the Chancellor of the Exchequer this over-simplified question. Is there anything in Clause 16 which inhibits or precludes and makes illegal the purchase of an Income Tax loss forward by one company from another company? This is a legitimate recourse widely practised. The hon. Member for Oldham, West (Mr. Hale)—and I wrote down his words—referred to "saving taxation by buying losses." Those were his exact words. He went on to use the phrase, "competition to buy a loss."
That is a legitimate business recourse. It is widely practised in industry and commerce. It is desirable that that should be so, and I rise this evening to protect that arrangement, for I believe that in certain circumstances it may fall within the purview of the provisions in Clause 16, if not within Clause 17.
Let us take a case, which is not hypothetical by any means, that of a general engineering company—of which there are hundreds if not thousands throughout the country—using large quantities of castings or forgings in its manufacturing processes. Supposing that it does not possess the manufacturing facilities by itself to produce those castings or forgings and it decides, as a perfectly normal process of vertical combination within the industry, to buy as a subsidiary company a concern which manufactures only castings or forgings; this is a perfectly legitimate recourse, a process of vertical combination, which may well lead to increased efficiency and possibly lower costs in that industry.
However, it may well be—and I address this to the hon. Member for 1219 Sowerby—that the company which is being bought, the producer of forgings or castings, may have a large loss forward for Income Tax purposes. Is that to be declared illegal in the eyes of the hon. Member for Sowerby or the hon. Member for Oldham, West, who talked of saving tax by buying losses and of competition to buy losses, and the hon. Member for Oldham, West did so in rather derogatory terms?
Surely the hon. Member was viewing the matter from narrow fiscal aspects by themselves, whereas in fact there are often practical reasons for a major company with a general engineering product, for example, buying a smaller but specialised concern. Should it be prohibited from so doing simply because the smaller concern may have a large loss forward for Income Tax purposes? I answer, certainly not.
§ 8.45 p.m.
§ Mr. Hale
But it is an unusual example. I will quote him a normal one. Let us suppose that there is a tool manufacturing company, which is a highly reputable organisation making about £100,000 a year on taxable profits. It does not like paying taxes—nobody does. In the North of England there is a company in liquidation, called the Oswaldtwistle and Middle Wallop Mah Jong and Fish and Chip Co. Limited, United, which lost £50,000 last year. The liquidator says, "Look here boys: buy us up, form your own little company. You take over the shares and put them in two names; hold a meeting in a little back room, amend the articles of association, and say, 'We are now in favour of making machine tools.' You can do all that for roughly half-a-crown." Fish and chips go out, with all their beautiful aroma, and machine tools come in. [Interruption.] There is lots of time. I do not want to go home tonight.
That is precisely what happens. The liquidator is looking not only for machine tool companies but for motor vehicle repair companies, garage companies, 1220 and so on, and finding who will pay the most for the losses.
§ Mr. Nabarro
I readily concede that cases of that kind may occasionally occur, but everybody with the slightest knowledge of industrial matters knows that there are genuine combinations and amalgamations for the purposes which I have described, and that the primary purpose of such amalgamations and combinations is not the avoidance of tax. But I claim that it is nearly impossible to distinguish the motive for a particular amalgamation or combination. Should we damn them all out of hand, on the grounds that they are recourses to tax avoidance, when so many of them are quite legitimate devices to improve productivity and lower costs? There are surely countless cases of that kind.
I cannot avoid mentioning Clause 17, because in this respect the Clauses overlap, but I want to ask my right hon. Friend whether there is anything in either Clause which prohibits, inhibits or makes more difficult in any way the purchase of a loss forward, which is an absolutely legitimate recourse and ought to be encouraged? If the answer of my right hon. Friend is that there is no such prohibition or inhibition it immediately demolishes the case put to the Committee by the hon. Member for Oldham, West who seemed to suggest throughout his speech that "saving taxation by buying losses", to quote one of his phrases, and "competition to buy losses", were highly immoral. They are nothing of the kind. They are very moral, and they are desirable recourses of business. They were thought so last year by Odhams Press and the Daily Herald.
I am aware that the hon. Member for Sowerby was a member of the negotiating committee of the Trades Union Congress in connection with the transactions which caused the controlling interest in the Daily Herald to be taken over by Odhams Press. During the Second Reading debate, I referred to the transaction in these words:As to the ethics of dividend stripping, let us consider here and now matters affecting the Daily Herald's finances, which may be very instructive to hon. Gentlemen opposite. Last year, the trade unions transferred control of the Daily Herald to Odhams Press Limited. The object of this transaction was to enable Odhams Press to set off the accumulated losses 1221 of the Daily Herald against the large profits which Odhams Press Ltd. were earning on their other publications. This means that a very considerable proportion of the continuing losses of the Daily Herald are now paid by the Exchequer in the form of loss of taxation receipts arising from the profits of Odhams Press, Ltd."—[OFFICIAL REPORT. 12th May, 1958; 588, c. 91–2.]That was a deliberate purchase of a loss forward. I will give the Committee the amount of the loss forward. It was £2 million. The Daily Herald was losing money at the rate of £9,000 a week, on a circulation of 1,650,000 copies on each of six weekdays. It was a deliberate effort to bolster the finances of the Daily Herald, to prevent it succumbing altogether, and going into Carey Street.
§ Mr. Houghton
I am obliged to the hon. Gentleman for giving way, because I heard the statement about the Daily Herald when he made it earlier and I had no opportunity to intervene. Now he directly associates me with this transaction, and I acknowledge that I was a member of the committee of the General Council of the Trades Union Congress which concluded this arrangement about the future of the Daily Herald. I am obliged to the hon. Gentleman for giving me the opportunity of declaring that that transaction had not as its purpose wholly, mainly or at all tax avoidance.
I do not want, and it would not be in order for me, to go into details of the transaction. But it is important to observe that Odhams Press had lent all the money concerned to the Daily Herald to cover its operating costs in earlier times; so that the money had originally come by loan from Odhams Press to the Daily Herald. This transaction did no more than allow Odhams Press to recoup its losses from future profits of the Daily Herald.
§ Mr. Stevens
Before my hon. Friend replies, would he be good enough to answer a question which arises at once in my mind? If it were not one of the main purposes of this transaction to set off previous losses against future profits, was it not one of the main results of this transaction, and equally beneficial?
§ Mr. Nabarro
I am grateful to my hon. Friend who is, of course, a chartered accountant and, therefore, professionally qualified to judge a matter of this kind.
1222 Whatever may have been the purpose of the transaction, the result of the transaction was a substantial loss to the Treasury—
§ Mr. Nabarro
I did not interrupt the hon. Gentleman's speech. I listened to a lengthy speech from him, and this is a complicated matter.
I did not say that the Daily Herald was making a profit. In case the hon. Gentleman failed to gather the purport of the words I used, I will repeat them to him:The object of this transaction was to enable Odhams Press to set off the accumulated losses of the Daily Herald against the large profits which Odhams Press, Ltd. were earning on their other publications. This means that a very considerable portion of the financial losses of the Daily Herald are now paid by the Exchequer in the form of boss of taxation receipts arising from the profits of Odhams Press"—
§ Mr. Houghton rose—
§ Mr. Houghton
I am obliged to the hon. Gentleman, but in bringing my name into this connection I think, with respect to him, that he is endeavouring to import a little prejudice against some of the things I have said earlier and I am very anxious to clear myself and to clear those others concerned in this matter—
§ Mr. Houghton
Let me say that the losses of the Daily Herald were made good by loans from Odhams Press which it could not charge against its taxable profits; and therefore Odhams Press were suffering losses upon which it paid tax and the transaction will not result in a loss to the Exchequer.
§ Mr. Nabarro
If the hon. Gentleman thinks that my reference to him as a member of the negotiating committee in any way impugns his character or professional reputation, I unreservedly withdraw. The fact is that he was a member of that committee and there were a number of other prominent trade 1223 unionists who were members. I do not in any way deprecate the transaction which was arranged. It was a perfectly legitimate transaction. Had I been the managing director of Odhams Press, or of the Daily Herald, I should have applauded a transaction of that kind. The purchase of losses forward in business is highly desirable in certain circumstances. It is not illicit, nor is it immoral, and it is nothing which should be deprecated, either by the hon. Member for Sowerby or by the hon. Member for Oldham, West. It is a perfectly moral thing to do—
§ Mr. Hale rose—
§ Mr. Nabarro
I quoted the words of the hon. Gentleman. He referred to saving taxation by buying losses and to competition to buy losses—
§ Mr. Hale rose—
§ Mr. Nabarro
I have not given way yet. The hon. Gentleman was highly derogatory in his comments. I want to finish what I have to say.
I am not alone in these comments. They are not in any way original. I do not claim that special distinction in this field. On the contrary, they are warmly supported by many important persons and journals, not of a Tory Party political or partisan character.
Let me quote the Economist of 29th June, 1957. Let the hon. Member listen to these words. I commend them to the hon. Member for Sowerby. I am sure that he could not have seen them when he made his speech today. It refers to the Daily Herald transaction and says:The first part of the new arrangements for the Daily Herald announced this week—with the T.U.C. 'granting a licence' to Odhams to publish the paper—is merely a sensible tax dodge: Odhams' accountants will now be able to set off the losses on the Daily Herald against its group profits on other ventures It is surprising that this has not been done before.I repeat for the benefit of the hon. Member for Sowerby, "a sensible tax dodge."
The hon. Member was very derogatory in his comments during his speech on the question, "That the Clause stand part 1224 of the Bill," as to what was a tax dodge and what steps we should take in this Committee to prevent tax dodges. Here is a prominent journal, and I put it no higher than that, calling the Daily Herald-Odhams transaction a "sensible tax dodge".
May I also call attention to what The Times of 25th July, 1957, had to say? It said:It appears that the main effect of the arrangement will be on the finances of Odhams Press, who will now be in a position to set off any losses on the Daily Herald against profits made by their enterprises for taxation purposes.There is no doubt about the result of the transaction, though it might not have been the purpose of it. In their innocence, it appears the Daily Herald people did not know what the implications would be. They were running the newspaper in such a way that it piled up a loss of £2 million, so I would not expect them to possess any outstanding financial perspicacity.
Whatever the result to the Daily Herald may be, the result to the Exchequer and to the Chancellor of the Exchequer was the loss of large sums of money in revenue. It ill behoves Socialists in this Committee to denigrate a system from which their principal party Press organ obtained such a magnificent advantage in its financial arrangements. [Interruption.] The hon. Member for Stoke-on-Trent, South (Mr. Ellis Smith) is irritated with me. He has reason to be irritated, because the biggest tax dodger in recent times has been the Daily Herald. Even the Economist calls it a "sensible tax dodge".
§ Mr. Ellis Smith (Stoke-on-Trent, South)
My indignation was reflecting the fact that the hon. Member called Odhams Press "Socialist". It is not the case. Odhams are not Socialist. They are part of the system which the hon. Member supports.
§ Mr. Nabarro
I did not refer to Odhams as Socialist, and I have no knowledge of that organisation, but I am sure that the Daily Herald is Socialist and it was a party to this transaction. I hope, therefore, that in future we shall have a little less hypocrisy and humbug from hon. Members such as the hon. Member for Sowerby. When he talks about—
§ Mr. Hale
On a point of order. We have now had, Mr. Hynd, an allegation of hypocrisy and humbug directed against an individual Member of the Committee. That has been ruled out of order time after time. I would not raise this point at all but for the contemptible conduct of the hon. Member for Kidderminster (Mr. Nabarro). Although criticising what I have said, he has four times refused to give way to me. I therefore do a thing which I do not normally do, and I call your attention by means of this point of order to a manifest breach, which is made more disgraceful by the fact that we have had a hypocritical apology from the hon. Member for Kidderminster to my hon. Friend the Member for Sowerby (Mr. Houghton), in which the hon. Member said that he did not mean to say something, whereas three minutes later he said it.
§ 9.0 p.m.
§ Mr. Nabarro
I apologise profusely to the hon. Member for Sowerby if he felt that he was in any way impugned. I did not impugn his professional reputation or character, but mentioned in an aside that he was a member of the negotiating committee dealing with this transaction. He admitted it himself, and the Economist has called it "a sensible tax dodge". Presumably the Economist considers that the hon. Member was a party to that "tax dodge", but I merely add that the hon. Member—
§ The Temporary Chairman
I do not remember the word "humbug" being 1226 used, but if the hon. Member used it in the heat of the moment I am sure he will withdraw it.
§ Mr. Nabarro
No, Mr. Hynd, I did not suggest that the hon. Member for Sowerby was either a hypocrite or a humbug. What I said was that the case he presented to the Committee was hypocrisy and humbug, and that I reiterate, unless it is considered out of order to make an imputation of that kind.
§ Mr. Houghton
My final word is that it was not a tax dodge, sensible or otherwise. It was a commercial transaction, and I am prepared to justify it, but this has nothing whatever to do with dividend stripping. Clause 16 has nothing to do with buying losses forward. What it deals with is unloading of dividends from assets collected. That is what it is doing—not buying losses, it is buying dividends.
§ Mr. Nabarro
I have no doubt that the hon. Member for Sowerby is very touchy and sore that the Daily Herald was never in a position to pay any dividends, but, be that as it may—
§ Mr. Mitchison
On a point of order, Mr. Hynd. I am not in the least sore or touchy, but I heard the hon. Member for Kidderminster (Mr. Nabarro) refer to my hon. Friend the Member for Sowerby (Mr. Houghton) as a hypocrite and a humbug. "Hypocrite" is, of course, out of order and, I imagine, "humbug" is too. I have not yet heard the hon. Member for Kidderminster withdraw the expression, which he ought not to have used. I do not know whether I shall hear him or not, but I suggest to you, Mr. Hynd, that if he does not withdraw, he ought to be asked to do so.
§ The Temporary Chairman
I have heard the hon. Member for Kidderminster (Mr. Nabarro) say he was not applying those expressions to the hon. Member for Sowerby (Mr. Houghton) personally but to the trend of his remarks, and he apologised for any personal reference he may have made, but perhaps he may care to confirm that.
§ Mr. Mitchison
Further to that point of order. I do not think the hon. Member did, but if he intended to do so perhaps he will tell us.
§ Mr. Nabarro
I am grateful, Mr. Hynd, as always, for your protection in a moment of crisis. To make my position perfectly clear, I did not call the hon. Member either a hypocrite or a humbug. What I said was that the case he presented to the Committee in regard to tax avoidance amounted to hypocrisy and humbug and I repeat it, having regard to the transactions of Odhams Press and the Daily Herald.
§ Mr. Mitchison
Is that in order, Mr. Hynd, "the case he presented to the Committee…amounted to hypocrisy and humbug"? I suggest that that is going beyond the rules of order.
§ Mr. James Griffiths (Llanelly)
Further to that point of order, Mr. Hynd. Is it brought within the rule of Parliament when the hon. Member for Kidderminster (Mr. Nabarro) identifies those words with my hon. Friend the Member for Sowerby (Mr. Houghton)?
§ The Temporary Chairman
I understand the hon. Member has made it clear that he did not identify them personally with the hon. Member for Sowerby. It is undesirable that these epithets should be thrown across the Chamber, but we get a little excited at times, especially in Committee. It is undesirable that these expressions should be used, and I hope that the hon. Member for Kidderminster will make it quite clear that he does not apply those adjectives to the hon. Member for Sowerby.
§ Mr. Nabarro
For the third time, Mr. Hynd, I did not apply those comments to the hon. Member for Sowerby. I repeat, for the third time, that I did not impugn his character or his professional reputation in any way. I said that the case which he presented to the Committee was hypocritical and humbug, and I repeat that.
Finally, I ask my right hon. Friend whether, having regard to the importance of this Odhams and Daily Herald case, it would not be desirable to establish how much money has been lost to Her Majesty's Revenue by this "sensible tax dodge", as the Economist called it. I suggest that it would be a very good idea, before very much longer has passed, if 1228 we could have a judicial inquiry into the transaction so that the facts may be established beyond peradventure.
§ Mr. Nabarro
I am sorry that the hon. and learned Member for Kettering has found originality deserting him on this question.
§ Mr. Scholefield Allen (Crewe)
The hon. Member for Kidderminster (Mr. Nabarro) should lend my hon. and learned Friend the Member for Kettering (Mr. Mitchison) his thick skin.
§ Mr. Nabarro
I have a very thick hide when discussing such matters with Socialists. It will not be possible for any of these statements which I have made to the Committee this evening to be confuted in any way. They are all on record.
I want my right hon. Friend to tell the Committee quite clearly that the purchase of a loss forward for Income Tax purposes is in no way prohibited by the provisions of the Clause. I shall ask him the same question on Clause 17, because that type of transaction is often highly desirable in industry and commerce in many contexts and over a wide field, and I should not like a Conservative Administration to do anything to prejudice such a course of events in the future.
§ Mr. Hale
Over the many years since the hon. Member for Kidderminster (Mr. Nabarro) came to the House I have wished to express a frank view on his speeches, because I have always thought that there was a good deal of hypocrisy and humbug in many of the things he said, but I have restrained myself not only because of my innate sense of decency but because I thought that this would be a breach of the rules and laws of the House. Now that you have been good enough, Mr. Hynd, to rule that such an observation can be made, I desire to make it about the hon. Member's remarks tonight, and I desire to say that his conduct is peculiarly contemptible because in the course of his speech he made four separate references to me and refused to give way when I attempted to reply to them. Not only did he refuse to give way to me, but at least five times afterwards he gave way to other hon. Members. That seemed to be an act of personal discourtesy on which I was entitled to comment.
1229 Let me therefore say that in my speech I made clear what my views were. I said that, personally, if I saw a way of avoiding tax, I should do so and that if I were called upon to give advice on tax avoidance, I should give it. I said that a Lord Chief Justice of England of the past had said that this could be done. But I also said that unless the Treasury took the view that this was essentially a swindle, and that the people who were doing it ought to be treated by the Treasury as crooks, we should not be able to stop tax avoidance.
There is a great deal in what the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) said. It is a perfectly logical and reasonable point of view to say that in the contacts between people who think they are being brutally over-taxed and the Treasury they are entitled to use all the guns at their command. But I go further and say that it is the duty of the Treasury to try to stop those guns from becoming effective. My speech was along those lines.
I want to say only one other word, and I want to say it coolly, without heat and without any antagonism at all. I hold no brief for the Daily Herald in particular or for Whams Press. I know nothing of this transaction. But it has been a rule up to now in the House, and it was a rule long before the hon. Member for Kidderminster was elected, that one did not mention personal and individual transactions about tax, or ask Questions about them, because it would lead to mutual recriminations of the most undesirable kind.
There have, of course, been exceptions. There was a special case when the Labour Party indulged in retrospective legislation about a case which appeared to be a rather special example of personal tax avoidance and which was of a nature which obviously could not have very widespread applications. This is an old story, but I admit at once, in case there is some interruption, that there have been exceptions, although, generally speaking, we have respected that rule.
There are many forms of tax avoidance and I do not personally reprobate anyone who takes advantage of them. There is the method by which if you have written a great book which is selling all over the world you do a capital transaction with your publisher and your 1230 remuneration for it becomes capital. We have never raised this point. We have never discussed names in the House. I hope that we shall not do so. Nobody profits by it.
I hope, however, that some of those Members who value the traditions of the House, and who realise that in discussing these things frankly and freely we have, in the past, tried to abstain from personalities, will have a quiet word with the hon. Member for Kidderminster, for whom I have a considerable personal regard, who talks often a great deal of good sense and with considerable courage, but who occasionally makes observations which appear to have come from a slightly mentally retarded political juvenile delinquent.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.