Schedule 11.—(Amendments of Corporation Tax Acts.)
I beg to move Amendment No. 89, in page 66, line 33, to leave out from the beginning to the end of line 48 on page 67.
This Amendment concerns life assurance business, and as I understand that J. Diamondthe Chief Secretary will reply may I make it quite clear to him that, although we have tabled the Amendment to delete the paragraph, what we are really asking him to do at the moment is to reconsider it in the light of what I shall say, with a view, perhaps, to bringing forward something different on Report.
The paragraph deals with the amount of franked investment income which can be set off against Schedule F liability on dividends to shareholders. It will take a moment or two to explain, because it is a rather complicated matter. There are three positions with regard to this. There is the one that exists now, there is the one which the Government suggest, and there is the third possible one which would be a compromise, rather different, perhaps, than either.
The Chief Secretary will know that at present the taxation of life assurance companies is based on the recommendations of the Royal Commission of 1920. It is based on very clear principles, and the whole thing represents a coherent system which hangs together and makes the whole of that part of the Act intelligible. The Chief Secretary will also know, if he looks up that part of the Act and of the Royal Commission's recommendations and evidence, that very considerable evidence was given on the taxation of life assurance companies by Mr. Furtado, whose name the right hon. Gentleman will know well, as I do.
Mr. Furtado was with the Inland Revenue, and later became a Special Commissioner. He perhaps knew more than anyone else about life assurance work and the taxation of life assurance companies. Having seen his evidence several times, I am quite convinced that the principles there enunciated were correct, and, indeed, they have been held to be correct for a very long time.
I stress this point, because I believe that the present paragraph casts doubt on those principles and introduces a completely different set of principles by a [column 1221]side wind. I do not believe that it is right to undermine a system which has stood the test for a very long time by a kind of minor paragraph in a Schedule to a Finance Bill. I am sure that the right hon. Gentleman will agree that the evidence presented by Mr. Furtado could not have been presented by a better person, and that the system is still as it was then. It was imported into the 1965 Finance Act when the calculations were changed to the Corporation Tax system, but the principles are still the same.
Under that particular system, which is the one we still have, we have in relation to investment income a system known as top slicing which has made them similar to commercial companies. An ordinary trading company which has investment income can set off the franked investment income against dividend tax on dividends distributed to shareholders. As of now life assurance companies can also do that. Even under the Chief Secretary's recommendations certain of them would continue to do that.
There are two ways of taxing a life assurance company. One is on its investment income minus management expenses and the other is on an ordinary Case I assessment under Schedule D. At the moment, and even under the right hon. Gentleman's recommendations, if the second basis of assessment were adopted, the Case I, Schedule D, we could still get top slicing in respect of franked investment income. It would seem very ironic that under the right hon. Gentleman's recommendations the moment that a company chose the alternative basis of taxing for life assurance companies the power to top slice would apparently go.
There is also the case of life companies which would consist partly of non-participating funds when all the profits would by definition belong to the shareholders and not to the policy holders. There again there would be top slicing which would mean that the company could set off franked investment income against Schedule F liability on dividends and it could take as much franked investment income as was necessary to do that. This conclusion is entirely consistent with the system of taxing which has reigned for a very long time. [column 1222]
The actual reference to the Royal Commission relevant in this case is paragraph 524, which said:
“In the case of a company transacting ‘ordinary’ business only, the profit that accrues to the proprietary body may be regarded as being part of the income which is taxed in the form of interest.”
That makes quite clear that top slicing was not merely permitted, but was essential to the system of tax on life assurance companies inherent in that set of principles there laid down.
The position at the moment is that we have top slicing in life assurance companies as in ordinary commercial companies. It seems that the Chief Secretary does not like that system and has, therefore, put down a completely different one in paragraph 2. The trouble about the new system is that it imparts a completely new set of principles into the taxation of life assurance companies and casts doubt on the system which has been there for a very long time and will introduce anomalies and inconsistencies into that system. The Chief Secretary is proposing that top slicing should cease and something else should take its place.
From his knowledge of taxation of life assurance companies, the right hon. Gentleman will know that usually there is a division of profits between shareholders and policy holders from time to time, a division which goes as to 10 per cent. to the shareholders and 90 per cent. to the policy holders. The shareholders have the right to say how much will go to the policy holders because it is an arm's length transaction and this is a way of increasing the benefits to the policy holders.
I believe that what the Chief Secretary has done is to say that because there is that normal division of profits, 10 per cent. to shareholders and 90 per cent. to policy holders, there must be a division of franked investment component of that profit in exactly the same proportion and go on to say that because the profits are divided in that proportion he will divide the franked investment income in that proportion. I know of no principle which says that because one divides profits one has to divide the components of profits in exactly the same proportion. If that is his thesis, he is saying that 10 per cent. should be deemed to belong to the shareholders and to be available for set off against the liability. [column 1223]
I do not wholly go along with the right hon. Gentleman, but, if that is his thesis, he then contradicts it in a later part of this paragraph. He has divided on the basis of profits, but what he did in last year's Finance Act and what he has done in this paragraph is parallel with that division on the basis of profits. He has imported another division which goes, not on the basis of profits, but on the basis of the size of funds. Size of funds bears no relation to profits. There can be a general annuity fund which gives practically no profit.
These two different systems of apportionment cannot run side by side in any rational system. If the right hon. Gentleman is to go on his thesis of 10 per cent. belonging to the shareholders, there must be amendments to last year's Finance Act: Schedule 5, paragraph 9, of last year's Act must be changed and the apportionment on size of funds must go.
At the moment, there are two systems—the old system, which has stood the test of time for a long period, and this new one, which I believe has the seeds of inherent contradiction even within itself and of which the least possible compromise would be to amend last year's Finance Act. There would be a third possible compromise, which I understand that the life offices have already put to the Chief Secretary and which would be entirely consistent with the general principle of the taxation of life assurance companies. This would be much too complicated for me to try to explain. I would not dream of doing so at this time of night.
In any event, I know that the Chief Secretary has had details of it. He and I, quite apart from the fact that we may differ on some of the political aspects of taxation, have a respect for certain taxation principles. Whatever system one moves to, there must be a set of principles which can be recognised. The right hon. Gentleman is confounding the old set of principles quite casually in a way which is unforgivable and which will throw the whole taxation and life assurance business into confusion.
I hope that I have said enough to persuade the right hon. Gentleman to take it back and reconsider it in conjunction with the life offices to see if we can get some kind of compromise, if [column 1224]he will not accept top slicing, which will be consistent with the principles on which the taxation of life assurance business is based.
I am grateful to the hon. Lady the Member for Finchley (Mrs. Thatcher) for explaining with great clarity the purpose of the Amendment and particularly for prefacing her explanation by saying that the form of the Amendment, which leaves out any alternative proposal, deliberately leaves it out so as to give an opportunity for discussion rather than with the intention deliberately to leave the matter permanently open, which would cause difficulties. I am grateful to her. I understand her purpose completely.
The hon. Lady, similarly, will understand that this is a matter on which considerable care and time have been spent. I should be most happy to listen direct to the representations, because it is a most important field of our activities and it is essential that those conducting these important operations should feel that they have access to Treasury Ministers, who are most happy to consider their point of view and their proposals. The hon. Lady has explained that the provision which she seeks to raise in discussion moves on the principle of sharing this valuable commodity—the franked investment income—on the basis of the distribution of profits made by the company itself. That seems to me a commonsense way of making an apportionment on which there cannot be a precise rule and guidance given by any Body—with a capital “B” —which considered the matter in advance of this aspect of franked investment income. That seems a very sensible way of dealing with the matter.
The alternative method proposed by the companies does not seem equally appropriate. The hon. Lady has said, I think, that she sees the point in this and is pleading for consistency. I share her desire that we should be completely consistent. She has referred to certain paragraphs which she says are inconsistent with the paragraph in the Schedule which we are now discussing. I certainly give her my ready and immediate undertaking to look at the other provisions which she says are inconsistent. Obviously, I could not have a view on that at the moment. I am grateful to the [column 1225]hon. Lady for drawing my attention to them.
I shall readily consider them but, as she said, the purpose of raising this matter was for discussion. We must have something in the Bill and I hope that the Opposition will be good enough to give us this provision.
I am most grateful to the Chief Secretary. It is a most unusual case in which I have the experienced Inland Revenue witness on my side, and I hope that his evidence will speak to the Chief Secretary.
I beg to ask leave to withdraw the Amendment.
Amendment, by leave, withdrawn.
I beg to move Amendment No. 124, in page 70, line 8, at the end to insert:
Provided that nothing in this or sub-paragraphs (3) or (4) below shall be construed in such a manner as to make a company a close company which but for those provisions would not have been such a company.
This is a short, probing Amendment affecting, in particular, paragraphs 5(2) and (3) of the Schedule. I believe that they are meant to be relieving sub-paragraphs in that they are intended to make the definition of shares beneficially held by the public in relation to close companies slightly wider in certain specific cases than it is at the moment.
One point has been put to me upon which I seek J. Diamondthe Chief Secretary's assurance. Paragraph 5(2) says:
“Shares shall be deemed to be beneficially held by the public if, and only if, sub-paragraph (3) below so provides, …”
When one looks at sub-paragraph (3) to see what are the conditions which “if, and only if,” will make the shares beneficially held by the public, one sees that there are three. The first is that they shall be deemed to be beneficially held by the public if held by a resident company which is not a close company.
The problem that has been put to me in view of the words “if, and only if,” is, “What happens if the shares are held by a company which happens to be a close company?” There are times when companies can move in and out of the close company provisions. One company may not know if a shareholder is a close company or not. The provisions say that [column 1226]the shares shall be deemed to be beneficially held by the public if they are held by a company which is not a close company, and the point put to me is, “Does the converse apply?” Are they not beneficially held by the public if the company which holds the shares happens to be a close company?
I do not think that that is the case, because it looks to me as though those provisions under sub-paragraph (3) are alternative, and that only one of them need be satisfied. Therefore, it may be that the shares could be held by a close company and still be beneficially held by the public, provided, for example, they are not comprised in a principal member's shareholding.
There is one final point which perhaps the right hon. Gentleman will look into. It would be possible for a principal member to hold shares privately in a close company which happened to invest in the original company which we are considering. Would that then make that company a close company when it is not a close company now?
In order to cover this position, I attempted to raise a protective Amendment, believing this to be a relieving provision, which would make it certain that nothing in the Schedule should be held to construe a company as a close company which is not a close company at the moment.
I should be grateful if the right hon. Gentleman would look into this. If he cannot answer now, perhaps he can look into the matter and later I can make it clear to the Committee, possibly by Question and Answer because sometimes it is complained that we raise matters which are answered in letters which the rest of the Committee does not see.
It goes without saying that the hon. Lady was quite right in her construction of this paragraph. Sub-paragraph (b) is there for the purpose of reclarification. Then she asked whether, on that assumption, it was certain that other things followed having regard to the drafting. When an issue of this kind comes up, I do not think it appropriate for anyone to attempt an immediate answer. It requires the most careful consideration. [column 1227]
I understand what the hon. Lady has in mind and the premise on which she asked the question. It is a good premise. I understand that she would obviously want another opportunity for considering what we have to say about it. In these circumstances, I ask her if she would be good enough not to press the Amendment. I undertake to consider, with the help of the written word, what she has said and provide appropriate means—either by way of Question and Answer or a mention at a later stage—to satisfy her that we have given the matter careful consideration.
I am obliged to the right hon. Gentleman.
I beg to ask leave to withdraw the Amendment.
Amendment, by leave, withdrawn.