§ DIVIDENDS PAID OUT OF PRE-1966–67 PROFITS
- (1)This section has effect as respects the calculation of the three year surplus under section 85 of the Finance Act, 1965.
- (2)If the company's dividends paid in the years 1966–67, 1967–68 and 1968–69 are related to periods of account exceeding three years in total, the amount at which those dividends are brought into the calculation shall not exceed the amount of the company's dividends which are related to the first three years of that total period, and which were paid in the years 1966–67, 1967–68 and 1968–69, or earlier:
- Provided that if any of the dividends paid in 1966–67, 1967–68 and 1968–69 are related to any period of account ending before 6th April, 1965, this subsection shall apply with the substitution, for the first three years of that total period, of a period of three years beginning with the period of account in which that date falls.
- (a) this section shall not affect the proportion applicable under paragraph 1 of the said Schedule 7 in reducing a three year surplus as so adjusted,
- (b) in paragraph 2 (increase of three year surplus of principal company where three year surplus of a subsidiary is reduced) subparagraph (2) (which refers to the reductions under paragraph 1) shall have effect as if the preceding provisions of this section had not been enacted,
- (c) in applying sub-paragraph (3) of the said paragraph 2 (which attributes to the principal company its share of the excess of dividends over distributable profits of
1327 subsidiaries) the principal company's dividends shall be brought in at the adjusted amount, but a subsidiary's dividends shall be brought in at the unadjusted amount.
- (a)' dividend' does not include a capital dividend,
- (b) a dividend is related to the period ofaccount for which it is expressed to be payable and, if not expressed to be payable for any period of account, is related to the period of account in which it is paid,
- (c)where under this section it is necessary to ascertain the dividends related to a period of three years which includes part only of a period of account, the two parts of that period of account shall be treated as separate periods of account, and the amount of the dividends related to the entire period of account shall be apportioned to the respective parts on a time basis according to the respective lengths of the parts,
- and in the provisions about paragraph 2 of Schedule 7 to the Finance Act, 1966 ' the principal company' means the company whose three year surplus is being computed and ' subsidiary' means any other member of the group mentioned in that paragraph.—[Mr. Diamond.]
§ Brought up, and read the First time.
§ The Chief Secretary to the Treasury (Mr. John Diamond)
I beg to move, That the Clause be read a Second time.
This Clause modifies the rules governing the three-year surplus relief proposed in Section 85 of the Finance Act, 1965. That relief is a transitional relief available for a company where the total dividend in the first three years of the Corporation Tax system exceeds the distributable profits for that period. The argument was that, if it was in excess, the excess may have come out of the profits made in the pre-Corporation Tax system and must, therefore, have borne the proper weight of Income Tax and Profits Tax.
In arriving at the surplus, a comparison is made between the three years' dividends and the three years' profits, but it is possible for a company to pay more than three years' dividends during the three years, and, where it has paid more than three years' dividends, obviously one is obviously no longer comparing like with like. So that that shall be so, the dividends to be taken into account are now to be those which are declared in respect of profits on accounting periods totalling three years, and these accounting periods' will start with the first one to which the first dividend in the post-Corporation Tax system relates.
1328 I give an example of the difficulty we have in mind and which could clearly lead to abuse. It is the obvious case of a company which pays interim and final dividends to a year. Let us assume that it pays its interim in May. In the last of the three years, the company could decide to bring its interim forward from the beginning of May to the beginning of April. It could also increase its interim dividend and even so not fall foul of the dividend restraint scheme. It might both bring it forward and increase it, so that, in effect, we should be having something like nearly four years' dividends paid out of three years' profits.
Therefore, it is necessary to restrict, in order to compare like with like, the dividends and the profits both to three years. The Clause therefore provides a new rule: that the dividends to be taken into account shall not exceed in amount those attributable to the profits of a period of 36 months. That 36 months is to commence with the period of accounts to which the first of the dividends paid in this post-Corporation Tax period relates.
The justification for bringing the Clause forward now is threefold: first, to save the money that would otherwise be lost to the Treasury if advantage were taken of this method of increasing unfairly the relief; secondly, because there are certain companies which could take advantage of this, but many companies which could not, and, therefore, there would undoubtedly be lack of equity in taking opportunities of doing this; and thirdly, that it is right that at this early stage those who are considering or are likely to consider in due course what dividends they ought to declare at the end of this period—that is to say, broadly in the early part of 1969—would have the advantage of knowing the views of the Chancellor on this aspect.
Mr. Speaker, I recognise that we are on Report. I would seek to answer questions which are put to me on the details of this, if I have your permission of the House to address it again at a later stage.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
I do not think that we need 1329 delay the House for long on these technical matters. The Chief Secretary has explained briefly the effect of what appears to be a long and complicated new Clause. The point I wish to make is a quite general criticism which arises directly out of this amendment of the three-year surplus relief—the pre-Corporation Tax profits relief to which the Clause is related. This is a point which has been made to me by those who deal with these matters outside. They draw an unfavourable contrast between the swiftness with which the Government seek to block even limited loopholes, which this may well do, when the loophole is in the interest of the taxpayer, and the evident reluctance with which they are prepared to consider even well-founded cases where the provision appears to operate to the detriment of the taxpayer.
This is particularly so in relation to Section 65 of the 1965 Act, which, as the Chief Secretary will remember, was introduced during the passage of the Bill through Parliament to meet an objection which apparently the Government's advisers had not thought it necessary to meet before the Bill was published—the need to give relief in the case of pre-Corporation Tax profits. Those who discussed these matters with the right hon. Gentleman's advisers gained the general impression that they were not to worry too much about the precise details of how this relief was to work; the main thing at this stage was to get the relief on the Statute Book and the difficulties would be ironed out later.
What we have had have been almost exclusively difficulties ironed out in the Revenue's interest, including, as the Chief Secretary will remember, the very first difficulty, if it may be described as such, which was ironed out in the Finance Act, 1966 to close what was a glaring loophole for the benefit of groups of companies.
Those who have to administer these highly complex branches of Corporation Tax law continue to look back with anger at the gilbe of the Prime Minister when he accused Parliament of engaging in tomfoolery when we sought to debate these things through the watches of the night on the Finance Bill, 1965. Here we are in 1968, still finding flaws with this 1330 provision. These are being put right only so far as they favour the Revenue.
We had on the Notice Paper in Committee, on Recommittal, and now on Report, three Clauses—I merely mentioned them, making no criticism whatever of your selection, Mr. Speaker—34, 78 and 79, all of which seek to make minor adjustments to the operation of this provision in the interests of greater fairness to the taxpayer. We have not had the opportunity to debate them, but no doubt we could have had had the Government given any indication that they were prepared to offer a little quid pro quo.
There it is. This Clause and the following one, which I do not think need detain us for long, either, are solely in the interests of the Revenue. All that I want to urge here—I hope that the Chief Secretary will feel able to give this undertaking—is that there is still time, because this is a three-year relief, to look at this again for next year with a view to making adjustments which are called for by the justice of the case in the interests of the taxpayer.
It may be said against us: why are not these matters being debated this time? It may be said that the Opposition did not indicate that these are matters of sufficient importance—
§ Mr. Speaker
Order. The hon. Gentleman has mentioned the Clauses which have not been selected. He must leave them alone now.
§ Mr. Jenkin
The only point I wish to make then is that, because of the way the Bill was drawn up, all Corporation Tax Amendments had to take the form of new Clauses. The result is that there are 116 new Clauses on the Notice Paper. In previous years the Government have given the opportunity, by the way the Bill has been drawn, for such matters as these to be discussed as Amendments to the Bill; then there may have been a greater possibility of discussing them.
The way in which the Government have leaped to the defence of the Revenue and have apparently ignored cases which have been advanced on the basis of justice for the taxpayer leaves a nasty taste in the mouth. It is the duty of Ministers to hold the balance fairly between the taxpayer and the Revenue✶ or, as the Chief Secretary is 1331 so fond of saying, between different classes of taxpayer. He identifies the Revenue as a class which will be disadvantaged by any relief given to any particular body of taxpapers. I emphasise that it is the duty of Ministers to hold this balance. I hope that the Chief Secretary will be able to give an undertaking, if he catches your eye again, Mr. Speaker, that he will view with sympathy the cases for relief which have been made on this very complex and technical transitional relief to the Corporation Tax.
§ Mr. Barnett
I have a great deal of sympathy with what the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said about the Inland Revenue being prepared to act quickly to deal with a loophole or an avoidance scheme which adversely affects the Revenue, but not the other way round. I also have sympathy with the hon. Gentleman's point about our not being able to discuss close company Amendments this year, because of the way the Bill has been drafted. This is a shame, although I have read somewhere that the Government have set up a committee to examine the whole question of close companies. 1 am rather sorry that some hon. Members are not also to be invited to take part in those deliberations.
I would like to see some of the anomalies that exist to the detriment of taxpayers put right even before next year. There is a particular point, which I should have thought that the Government might well have taken, on something which affects the way a particular part of the close company provisions works. I think, for example, of directors' remuneration. It is generally thought that four directors can have up to £13,000 of remuneration between them. This is not so. There is an example, details of which I have given to the Government, in which, even where there is as little as £13,000 remuneration between four directors, £500 of that is treated as excess.
This is clearly the type of anomaly in respect of which I should have thought that the Government would take action to bring in an Amendment this year, instead of which there is to be yet a further year during which companies and their advisers will be compelled to set up further companies and partnerships to 1332 deal with something with which they should not have to deal at all, simply because the Act is working in a way in which Parliament did not intend it to work.
For that reason, I have a good deal of sympathy with what the hon. Gentleman said. I hope that the Government will be able to inform us not only that they are to have comprehensive discussions about the anomalies which arise and which have arisen in close company legislation, but that we shall not have to wait until 1969–70. I hope that, if necessary, when serious anomalies are thrown up in the way that close company legislation is working, a small Bill will be introduced before April, 1969, just to deal with those anomalies.
§ 4.30 p.m.
§ Mr. Diamond
I have listened carefully to what has been said. I am in a little difficulty in replying in full detail to the comments on directors' allowances in close companies, and so on, but I recognise my hon. Friend's close interest in this matter, and I can only ask him to leave them with me. I will be glad of his help, which may be forthcoming in a number of ways. I can give no undertaking whatsoever that a new Bill will be introduced during the course of the year to deal with certain matters. Nor do I accept that there are any glaring anomalies of the kind he mentioned, but perhaps this is not the appropriate time to go into that matter in detail.
I recognise what the hon. Gentleman opposite said. I am surprised that he thought that we were due for criticism for having brought this matter forward at the earliest possible opportunity. As a result of the tentative inquiries that have been made during the last few weeks it has recently come to our attention that consideration was now being given to the possible amount of dividends to be declared next year, in 1969. Even though it meant taking advantage of bringing in a provision on Report, which I agree is not a convenient stage at which to bring in new provisions, I should have thought that it would be right at the earliest opportunity to let directors and others concerned know the way in which the Government's mind was working with regard to this relief.
As the hon. Gentleman said, our task is to hold the scales fairly, and that is 1333 what this provision does. I hope that the Clause can be added to the Bill.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.