The next Amendment selected is No. 341, and we can discuss with it the following three Amendments: Amendment No. 342, Clause 78, in page 55, line 22, at the end to insert:Provided that where an insurance company exercises its option under the proviso to subsection (3) above, the standard dividends shall be the average annual dividends paid in the valuation period referred to in such proviso.151 Amendment No. 343, Clause 78, in page 155, line 28, at the end to insert:Provided that where an insurance company exercises its option under the proviso to subsection (3) above the standard profits in subsection (6)(d) shall be the profits of such proportion of the valuation period preceding that referred to in the proviso to subsection (3) above as corresponds in length to the said valuation period.Amendment No. 304, Clause 80, in page 162, line 19, at the end to insert:(3) In the case of a company which carries on, whether alone or in conjunction with some other trade or business, a life assurance business or other long-term business as defined in section 33 of the Insurance Companies Act 1958 but including sinking fund and capital redemption insurance business (hereinafter collectively referred to as "long-term business") and has made or makes a valuation of its liabilities in respect of such business or businesses on or before the 31st day of December 1965, for the purpose of making a distribution, the next preceding valuation having been made two years or more before the date of such valuation, the notional surplus shall be the aggregate of the following—
- (i) so much of the surplus resulting from such valuation as has been or shall be allocated to the company's shareholders less any distributions that have been made out of such surplus to the shareholders prior to the 6th day of April 1966, and
- (ii) the notional surplus, determined according to the provisions of subsection (2) hereof, which that company would have had had it not carried on long-term business.
§ Mr. William Clark
I beg to move Amendment No. 341, Clause 78, in page 154, line 34, at the end to insert:Provided also that where an insurance company which carries on life assurance business and carries out a valuation of its assets and liabilities for the purposes of distribution of profits as at 31st December 1963 or 1965, or any intermediate date, the profits of the last valuation period before 1st January 1966 shall at the option of the company be substituted for profits in the taxable year 1965.The object of this Amendment is precisely the same as the object of the Amendment which we put down in Committee and relates to life assurance businesses in which the valuation is carried out on a three-year or five-year basis. The Chief Secretary will understand this rather technical point. I shall not weary the House at this hour by rehearsing the argument. Perhaps the right hon. Gentleman will now say what he could not say in Committee, that he recognises the validity of our proposal and is prepared to accept the Amendment.
§ Mr. Diamond
I am always glad to respond to the hon. Member for Nottingham, South (Mr. William Clark), but I am afraid that I cannot go so far as to use the words which he endeavoured, very charmingly, to put into my mouth. In fact, this is an unnecessary Amendment. Therefore, I am not able to say anything like he would have wished me to say.
Shortly, this deals with the problem of the life offices, which have argued that a dividend increase in 1965–66 which is merely the result of the normal working of the customary arrangements for measuring and disposing of the surplus thrown up by a periodical valuation should not be regarded as forestalling. This argument is accepted. My hon. Friend the Minister without Portfolio expressed general sympathy, and the Board of Inland Revenue has given an oral assurance to representatives of the Life Offices Association that an increased dividend resulting from the normal application of the customary rules following a periodical valuation would be exempted under the Chancellor's new motive test.
So, in a sense, it is unnecessary for the Opposition to bring forward the Amendment brought forward previously. If, on the other hand, they wish me to give from this Box the same assurance as was given orally by the Board of Inland Revenue to the life offices, I gladly do so now.
§ Mr. William Clark
In view of the categorical assurance which the Chief Secretary has given, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Sir John Barlow (Middleton and Prestwich)
I beg to move Amendment No. 249, Clause 78, in page 155, line 20, after "1964", to insert:Provided that any dividend paid after the beginning of December, 1964 shall be regarded as having been paid before that date if—
- (i) it was declared by the company in general meeting before that date; or
- (ii) it was declared in general meeting after that date but in accordance with a recommendation of the directors and the directors' decision to make that recommendation was, with the authority of the directors, publicly announced before that date; or
- (iii) it was paid in accordance with a decision of the directors, and that decision was, with their authority, publicly announced before that date.
It will be convenient to discuss, at the same time, Amendment No. 250, in Clause 78, page 155, line 22, at end insert:Provided that where the dividend paid by a company in respect of any accounting period ending in the standard period was less than such sum as after deduction of income tax at the standard rate then in force was equivalent to three-fourths of the amount shown by the accounts of the company for such accounting period to have been available for payment of a dividend the company may elect to substitute for the purpose of subparagraph (c)(i) of this subsection the gross sum so ascertained in place of the dividend actually paid in respect of such accounting period and for this purpose a dividend shall be treated as paid in respect of an accounting period when expressed to be so paid or if not expressed to be paid in respect of any period when paid within an accounting period.
§ Sir J. Barlow
My Amendments relate to dividends paid after 1st December, 1964, bit declared and announced before that date. A company having profits available for dividend as shown by its audited accounts may during the three years up to the beginning of December, 1964, either pay no dividend in respect of an Accounting period or pay a low dividend in relation to available profits. Such a company is penalised in the calculation of its standard dividends under Clause 78(6,b) although it has retained the profits in the business rather than distributed them to the shareholders. My Amendments would provide for the company in this difficulty, and I hope that the Chief Secretary will be able to accept them.
§ Mr. Diamond
I think that I can meet the point of the hon. Member for Middleton and Prestwich (Sir J. Barlow) but not in precisely the way in which he invited me to do so. I recognise that there is some point in the argument, but what I want to demonstrate to him is that the Amendment is unnecessary.
The hon. Gentleman will be aware of the Chancellor's Amendment No. 178 in Clause 78, page 14, line 4, which excludes from the operation of the Clause cases where it is shown that the main purpose was no': avoidance. I think that that will take account of a whole host of exceptional cases where there might otherwise have been hardship and for which it is impossible to provide by separate provision for each individual case. I hope, 154 therefore, that the hon. Member will feel that this has met the point. Although I am grateful to him and recognise the validity of his argument, I think that the solution which my right hon. Friend proposes in his Amendment is perhaps the better one.
§ Sir J. Barlow
In view of the Amendment in the name of the Chancellor, which largely meets my point, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ 9.15 p.m.
§ Mr. Diamond
I beg to move Amendment No. 166, Clause 78, to leave out "fifteen" and to insert "ten".
Lest I should be accused of ungraciousness, let me say on this exclusive occasion how grateful we are to the Liberal bench for having moved this Amendment at an earlier stage. The hon. Member for Bodmin (Mr. Bessell) is keenly aware of the details of the Amendment and is in his place to receive this bouquet which I am happy to accord to the Liberal Party.
The Amendment restores to the original figure the minimum amount to be treated as the measure of the profits of the standard period. The minimum was originally 10 per cent. of the company's share capital. The increase from 10 to 15 per cent. was made in Committee in line with an increase from 5 per cent. to 7½ per cent. of share capital as minimum standard dividends to be assumed under the Clause.
The hon. Member for Orpington (Mr. Lubbock) drew our attention to the effect that this might have in a particular case, and we are very glad therefore to bring forward this Amendment to restore the original position because otherwise it might, in that case, not have been as helpful as it was the Government's intention to be. [HON. MEMBERS: "Oh."]I am sure that that did not come from the Liberal bench, although I do not know where it came from. However, some minimum is necessary and it should be more than 7½ per cent. As 15 per cent. is perhaps too high in terms of statutory assumptions, the best course, and one which goes as far as is reasonably possible in the company's favour, is to revert to the figure of 10 per cent. originally proposed.
§ Mr. Peter Bessell (Bodmin)
I feel that it would be ungracious to allow this occasion to pass without expressing the thanks of the Liberal bench, particularly of my hon. Friend the Member for Orpington (Mr. Lubbock), for the very good common sense that the Treasury has shown in this matter. On behalf of my party, I express my thanks to the Chief Secretary.
§ Mr. Patrick Jenkin
Here again we are to have 10 instead of 15 which was put in instead of 10 in Committee. What seemed right to the Treasury at the outset seems wrong now. If we went on for another few weeks would there be more? How do we know that we have the Bill right now according to the Government? This points the unwisdom of trying to rush through legislation of this sort.
§ Amendment agreed to.
§ Mr. Diamond
I beg to move Amendment No. 167, Clause 78, in page 156, line 39, after "districts)", to insertor under section (Annual allowances for new ships) of this Act".This Amendment is consequential on the Chancellor's new Clause 28, allowing free depreciation for new ships.
§ Amendment agreed to.
§ Mr. Diamond
I beg to move Amendment No. 178, Clause 78, in page 157, line 4, at the end to insert:(10A) Where a company has in the year 1965–66 paid a gross amount in dividends greater than the standard amount, it may, not later than two years after the end of that year, apply to the Board to be exempted from the foregoing provisions of this section, and if the company shows that it was not the company's main purpose or one of its main purposes in paying that excess to avoid or reduce a liability under section 43(3) of this Act in respect of dividends paid after that year, the Board shall certify that the company is entitled to exemption under this subsection, and subsection (1) above shall then not apply to the company.If on an application duly made by a company the Board refuse a certificate under this subsection, the company shall have the like right of appeal to the Special Commissioners against the refusal as if it were an assessment made on the company under Schedule D, and the enactments relating to an appeal against such an assessment (including any enactment relating to the statement of a case for the opinion of the High Court) shall apply accordingly.This Amendment excludes from the operation of Clause 78 cases where a company shows that tax avoidance was not 156 the main purpose or one of the main purposes in paying a dividend. The object of Clause 78 is to define forestalling. It provides that companies must account for the Income Tax deducted from dividend both in 1965 and 1966, if those dividends are excessive. The tests originally laid down in Clause 78 were purely objective and arithmetical.
It became apparent from representations received, and from points raised in the House, that there could be a variety of circumstances in which this objective approach could operate harshly. The Chancellor has therefore decided to adopt the principle of the official Opposition Committee stage Amendment, for which we are duly grateful, and particularly grateful to the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin). If he will forgive me, I will start every future Amendment by saying how grateful we are to the hon. Member for Wanstead and Woodford, or occasionally the hon. Member for Woodford and Wanstead.
It will now be unnecessary to deal with a number of specific hardship cases which have been brought to notice. A motive test is not normally a satisfactory criteria to apply in matters of taxation, because motives are notoriously difficult to establish. In this case it is less open to objection, because the provision is a purely transitional one and it would come into play only if certain, clearly defined objective tests, are clearly satisfied. It does not apply to capital dividends. I should like to make that perfectly clear. I am happy to adopt the essence and some of the wording, of the Opposition Amendment put down earlier.
§ Mr. William Clark
I beg to move, as an Amendment to the proposed Amendment, Clause 78, in line 14, at the end to insert:(10B) The following provisions shall have effect where in pursuance of this subsection a company furnishes to the Board particulars of a dividend or dividends to be paid by it in the year 1965–66 which will cause the gross amount of all such dividends to exceed the standard amount, that is to say—
and if the Board notifies the company that they are so satisfied, the said subsection (1) shall not apply to it in respect of that excess:
- (a) if the Board is of opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this subsection, it shall within thirty days of the receipt thereof notify to the said company what further information it requires for
157 those purposes, and unless that further information is furnished to the Board within thirty days from the notification or such further time as the Board may allow it shall not be required to proceed further under this subsection;
- (b) subject to the foregoing paragraph, the Board shall within thirty days of the receipt of the particulars, or where that paragraph has effect of all further information required thereunder, notify the said company whether or not it is satisfied that the dividend or dividends described in the particulars were or will be such that subsection (1) above ought not to apply to the company on the grounds that it was not the company's main purpose or one of its main purposes in paying that excess to avoid or reduce a liability under section 43(3) of this Act in respect of dividends paid after the said year 1965–66;Provided that if the particulars, and any further information given under this subsection with respect to any dividend or dividends are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the Board any notification given by the Board under the subsection shall be void.(10C) A company aggrieved by a decision of the Board under the last preceding subsection may appeal to the Special Commissioners and all the provisions of the enactments relating to appeals against assessments to the corporation tax shall have effect with respect to any appeal to the Special Commissioners under this subsection.The Chief Secretary has said, quite rightly, that this is the result of opposition criticism to the original Bill. We on this side of the House are grateful that he has been gracious enough to say how much he owes to the Opposition for having improved the Bill. The main purpose of his Clause is to deal with tax avoidance. This may occur where a company, in general meeting before the printing of the Finance Bill, has said that it will pay a dividend of £x. It could also apply to a company which became public before the Corporation Tax provisions were known and in its prospectus asking for capital from the public said that dividends for the future would be 15 per cent., 10 per cent. or whatever percentage it may be.
I think that the Chancellor of the Exchequer's Amendment covers that. The Amendment we propose deals with the question of clearance on the subject of tax avoidance. As the Chancellor's Amendment stands, it means that for a dividend paid in the year 1965–66 it could 158 be claimed there was no tax avoidance and the Revenue would then decide whether there was such avoidance.
This means one could have a period of uncertainty up to the 5th April, 1968. What we are suggesting—there is no question of us wanting to create a loophole for persons wishing to avoid the payment of tax—is a streamlining of the clearance procedure. Briefly, we are saying that where a dividend is paid in 1965–66, then within 30 days the Board of Inland Revenue can ask for information as to why the increase has been from 5 to 10 per cent., or whatever figure it may be. Then we go on to say that information must be given within 30 days. If it is not given, tax avoidance is lost to the company. But if it is given, then the Board of Inland Revenue must decide within 30 days.
The Chief Secretary will accept from his great personal experience that one of the main criticisms of our tax system is that when one appeals there is often a great delay between notification of the appeal and the time that it is decided. This matter applies only to the one year, 1965–66, on forestalling.
I should have thought that the Chief Secretary could accept the Amendment. I hope that its wording is right. We paid particular care to its drafting. I assure the right hon. Gentleman that all we attempt to do is to streamline the clearance procedure. There is no question that any taxpayer, a company or otherwise, will get any additional advantage. We merely suggest that in this time limit the matter should be decided one way or the other. I hope that the right hon. Gentleman will accept that this is a point of great validity, and that our Amendment would help not only companies but the profession of which he is such a distinguished member.
§ Mr. Diamond
Although I thought that part of the argument of the hon. Member for Nottingham, South (Mr. William Clark) was very persuasive, I regret that I cannot advise the House, for reasons which I hope will appear satisfactory, to accept the Amendment to the Amendment, which, as the hon. Gentleman clearly explained, is based on a clearance procedure already in use in perhaps two cases. But there is this very substantial difference, that in connection 159 with the position which we are discussing the motive test is not the only test. The motive test has been put in to clear up a host of individual detailed cases for which provision might not otherwise be made. There are full provisions as to whether an excessive dividend has been paid without relying on the motive test. The motive test is residual. In the other cases where the motive test is applied and there is clearance, the motive test is part of the permanent legislation and there is no other way of arriving at the answer.
The first reply which I have to give is that there is no real parallel or need to introduce this procedure because in the vast majority of cases there will be objective arithmetical tests against which the company will know whether the dividend which it proposes is acceptable. Furthermore, the directors know what is in their minds—or should do, and indeed must do. They know full well whether the dividend which they propose is proposed for good sound commercial reasons or for tax avoidance reasons. They must be prepared to rely on their own knowledge and judgment, and they know full well that if it is not proposed for avoidance reasons they need not expect any trouble.
When there are objective arithmetical tests and the motive test is added only to clear up the odd case, and if we were then to introduce the clearance procedure, we should be inviting people to say, "Let us make an application. Let us try a higher dividend. We cannot possibly lose in the sense that the objective arithmetical tests are satisfied. That is our floor. We could not go below that. Let us try for a higher dividend. If we get our application cleared, well and good. If we cannot get it cleared, we are no worse off because these objective arithmetical tests are satisfied in any event". Those are three good reasons why I do not regard this as appropriate in the circumstances.
A further and compelling reason is that in the vast majority of cases it would not be possible to know until the end of the period what the facts were to enable the Inland Revenue to give a clearance certificate. Therefore, on grounds of 160 impracticability, on the ground that it is not really relevant to this kind of situation and as it might invite certain companies to take advantage of the situation, the procedure is not one which I could recommend to the House.
§ Mr. Barber
I am not wholly convinced that the balance of argument lies with the Chief Secretary. On the other hand, as the Amendment is not of profound importance to the Corporation Tax and in view of the great services of the Chief Secretary to the accountancy profession, I do not on this occasion advise my hon. Friends to divide the House.
§ Amendment to the proposed Amendment negatived.
§ Proposed words there inserted in the Bill.
§ Mr. William Clark
I beg to move Amendment No. 248, Clause 78, in page 157, line 45, at the end to insert:(14) This section shall not apply to any dividends paid before the first day of April 1966 in respect of which the company paying such dividends shows to the satisfaction of the Commissioners that the main purpose, or one of the main purposes of paying such dividends was not the avoidance of the payment of any income tax in respect of such dividends which would, apart from this subsection, have otherwise been payable by the company.
§ Mr. Speaker
With this Amendment, I propose that we should discuss Amendment No. 309, in the name of the hon. Member for Walthamstow, East (Mr. John Harvey), in Clause 78, page 157, line 29, at end insert:(11A) Where a company has in the year 1965–66 paid a gross amount in dividends greater than the standard amount, it may, not later than two years after the end of that year, apply to the Board to be exempted from the foregoing provisions of this section, and if the company shows that it was not the company's main purpose or one of its main purposes in paying that excess to avoid or reduce a liability under section 43(3) of this Act in respect of dividends paid after that year, the Board shall certify that the company is entitled to exemption under this subsection and subsection (1) above shall then not apply to the company.If on an application duly made by a company the Board refuse a certificate under this subsection, the company shall have the like right of appeal to the Special Commissioners against the refusal as if it were an assessment made on the company under Schedule D, and the enactments relating to an appeal against such an assessment (including any enactment relating to the statement of a case for the opinion of the High Court) shall apply accordingly.
§ Mr. John Harvey
I sought to put down an Amendment which, I thought, might be helpful in clearing up any possible residual difficulties in capital dividends. I decided to use exactly the same words as the Chancellor of the Exchequer had used because it had occurred to me that the Chief Secretary could not argue about the drafting of his right hon. Friend, because, presumably, he would accept that he had the best possible drafting at his service.
It is perfectly possible, as the Chief Secretary will understand, for capital dividends to be paid in no less good faith than ordinary dividends without any intention of forestalling. I thought, therefore, that the Chancellor's Amendment No. 178, in Clause 78, page 157, line 4, would more logically follow subsection (11) than subsection (10). I accept, however, that subsection (11) was improved by the addition of a number of provisions proposed in Committee by my hon. Friend the Member for Yeovil (Mr. Peyton). Even so, there are some firms which are not entirely sure whether their case would be met by the wording of subsection (11) in its present form.
If the Chief Secretary accepted my Amendment or, as an alternative Amendment, No. 248 moved by my hon. Friend the Member for Nottingham, South (Mr. William Clark), either of these Amendments would make it possible for such companies to state a case and explain their motives to the Special Commissioners should the need arise. Failing this, capital dividends might be caught inequitably by comparison with ordinary dividends.
Since the Chief Secretary has insisted all along that, as we know, it is not part of the intention of the Clause to catch any company that is not seeking to forestall, it would be a tremendous help to many companies which still are not quite sure about their position if the right hon. Gentleman could accept an Amendment on these lines.
§ Mr. Diamond
I gathered from the hon. Member for Nottingham, South (Mr. William Clark) that he does not wish me to go into the arguments at length as to why his Amendment would not be acceptable.
The hon. Member for Walthamstow, East (Mr. John Harvey) is proposing to exempt from liability by reference to a motive test with regard to capital dividends. I cannot see that capital dividends come into the same category as ordinary dividends. Indeed, this matter has been authoritatively considered. As far back as 1955 it was considered by the Royal Commission on Taxation, which at paragraph 808 in its Report recommended that capital dividends should be taxable as ordinary income in the shareholder's hands. That recommendation could have been implemented at any time since the date of the Report. It has not been implemented, but it remains an authoritative statement on the subject and it remains the Government's view.
In those circumstances, it is not possible to have a motive test with regard to capital dividends. I am therefore not prepared to recommend to the House that any proposal of this sort about capital dividends should be approved. My right hon. Friend's Amendment meets any possible case in which a normal dividend is concerned. I therefore hope that the official Opposition will not think it necessary to pursue their Amendment No. 248.
§ Amendment negatived.