New Clause No. 7.—(Definition of ‘investment trust’ for purposes of capital gains tax.)
Section 37(2)(c) of the Finance Act, 1965 (Unit Trusts and investment trusts), shall be amended by the insertion after the words ‘United Kingdom’ of the words ‘or that the company is not under the control of less than 50 persons’.—[Mr. John Smith.]
Brought up, and read the First time.
Mr. John Smith (Cities of London and Westminster)
I beg to move, That the Clause be read a Second time.
The Clause should, I think, prove acceptable to the Government because the words which it seeks to insert in the Bill were first put forward by the present Chancellor of the Exchequer and supported in principle, as I shall show, by the present Chief Secretary to the Treasury, the Financial Secretary to the Treasury, and the hon. Member for Manchester, Cheetham (Mr. Harold Lever). Indeed, in those days before he assumed the chains of office, the hon. Member for Cheetham went a great deal further than anyone else on this subject.
However, in the general confusion surrounding the Finance Bill of 1965 these wise words were removed from it by a Government Amendment put forward as [column 310]a result of Opposition pressure and designed to do something quite different, namely, to avoid making a number of large quoted investment trusts liable to double taxation. The Clause seeks to put back into the 1965 Finance Act these good Government words which were ill-advisedly removed, and by so doing to relieve certain members of the public from double taxation which the Government never intended they should bear.
The Government have said many times, and they said it in 1965, that they wish to encourage savings in all forms. I do not have to quote Hansard on that. One of the most useful forms of saving is through the medium of investment trusts. Indeed, except perhaps for the invention of limited liability, which is now under attack, and possibly life insurance, the investment trust movement has been the most powerful of all the forces which have expanded the economy in the past 100 years, and in particular has generated those dollar resources which have seen us through two world wars and which may yet see us through balance of payment troubles in the future. I think that no one in this House should be in any doubt about the value of the investment trust movement.
Recognising this, the Government, when they introduced the Capital Gains Tax, sought to relieve shareholders in bona fide investment trusts of some of the effects of double taxation. The Finance Act, 1965, laid down, wrongly, in my view, that capital gains realised by investment trusts should be taxed, but that the shareholders, when they finally sell their shares, should, by an extremely complicated and time-consuming procedure, not be taxed again, providing the investment trust was a bona fide affair.
But, of course, the Government were soon involved in the inevitable complications that spring from this ill-thought-out Capital Gains Tax and which still clog the economy. They had to define a bona fide investment trust. Their objective was plain and acceptable. On 8th July, 1965, the Chief Secretary said:
“The objective is to distinguish the genuinely public investment trust from an investment trust company under private control.” —[Official Report, 8th July, 1965; Vol. 715, c. 1842.]
[column 311]On 31st May, the Financial Secretary said:
“I should like briefly to explain our objective in laying down the criteria in the Bill. It is to distinguish the genuinely public investment trust, in respect of which the relief under the Clause is intended, from the investment trust company which is under private control and which is, in substance, no more than a company designed to hold the private fortune of a family group; for example, the shares of a family company in which a large number of members of the family are interested.” —[Official Report, 31st May, 1966; Vol. 713, c. 1314.]
When the Bill—as it then was—was first drafted the words used by the Government to describe a genuine investment trust were as follows:
“that it is a company in which the public are as shareholders substantially interested and that it is not under the control of less than 50 person” .
But, by the time the Bill became law this definition had been revised—if I may paraphrase—to provide “that the shares of the company are quoted on a Stock Exchange” . This excludes those companies which are unquoted yet which met the original conditions.
Mr. Robert Sheldon (Ashton-under-Lyne)
Was not the purpose of this provision not so much to exclude those organisations which were already in existence, but rather to prevent the creation of a number of spurious organisations of this kind seeking to obtain the advantages of this tax? One can think of many commercial types of organisation which could have provided an outlet for this type of promotion.
I am coming to that point. It is clear from everything that was said in those debates that the distinction intended to be drawn—this is the most important point—was not between quoted and unquoted trusts but between public and private trusts. All the words are quite clear.
Now, there are several bona fide public investment trusts which are unquoted, for good reasons, and the shareholders of those have been left liable to double Capital Gains Tax. It is, of course, quite possible for an investment trust to obtain a quotation on the day it is born, but mainly to protect the public and to give the company time to establish a record by which the public can judge it soberly, it is more usual not to apply for [column 312]a quotation for some years. Indeed, it is in the public interest that this should be so. The Act as it stands, in respect of that part which I seek to amend, actually encourages investment trusts to take a course, that of obtaining an immediate quotation, which can be against the public interest.
At any one time there are always several absolutely bona fide investment trusts—indeed, trusts in which the public have got not merely a substantial interest—which the Government wanted—but a total interest; that is to say, only members of the public are shareholders. These trusts are on their way to a public quotation, but they are disqualified by the unfortunate change in the original definition put forward by the Government.
I cannot do better, to summarise this anomoly, than to read what the hon. Member for Cheetham said in 1965, on 8th July, 1965:
“If I invest in an investment trust company which is not quoted on the Stock Exchange but which fulfils every single one of the Chancellor's requirements except that, why should I pay double tax; whereas, say, the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd) who invests in a company which is indentical with regard to its investments, size, number of shareholders, nature of its investments, and the amount of its capital profit, is exempt from double taxation merely because the company is quoted on the Stock Exchange?” .—[Official Report, 8th July, 1966 Vol. 715, c. 1845.]
Indeed, the present definition shuts out some investment trusts which are a great deal more public than some which it lets through.
There remains the problem of excluding the family investment trust—the problem of making sure that these wicked people who have gone forth and multiplied should pay double tax. To achieve this the new Clause has been drafted to apply only to trusts controlled by not less than 50 persons, which was the Government's original wording. I know that in moments of stress I have the feeling that it would take a great deal more than 50 persons to control my family, but for ordinary, common or garden families, which are not called Smith, the definition of 50 persons should be tight enough to exclude them.
By choosing 50 persons as a criterion, private companies are automatically excluded, as the Government wish, and for the same reason subsidiary companies are automatically excluded, as the Inland [column 313]Revenue wishes. This exclusion also meets the wishes of the Association of Investment Trusts. This latter body is so capable, and enjoys such good relations with the Inland Revenue, that the House may sometimes forget that it represents only quoted investment trusts; whereas the new Clause is concerned only with unquoted investment trusts. Indeed it is possibly because this powerful and effective Association of Investment Trusts does not embrace them that the unquoted trusts have been overlooked in a way which the Clause seeks to put right.
The new Clause opens no doors. It creates no precedents. It creates no thin ends of wedges. It simply puts right a wrong inadvertently done to a few thousand members of the public—a wrong which Treasury Ministers have all, by their own words—and to their credit—shown to be inadvertent. It would be extraordinary if, in the Finance Act, 1965, certain mistakes had not been made and, I earnestly commend the new Clause to the House.
I will not go over in detail the ground which my hon. Friend the Member for Cities of London and Westminster (Mr. John Smith) has covered adequately. I want to press the Chief Secretary in respect of only one matter. I hope that he will acknowledge the force of my hon. Friend's argument that what is asked for is a moderate change and one which appears to be consistent with the first intention of the Government when Capital Gains Tax was introduced not long ago.
As my hon. Friend said, investment trusts in general have served a splendid purpose in our financial and industrial build-up. It would be most undesirable if the Government allowed the exclusion of all unquoted investment trusts to continue. In some ways the position can be summarised by saying that we look for some, at any rate, of the successful quoted public investment trusts of tomorrow among the unquoted investment trusts of today. In the same way, we look for the successful public companies of the future among some of the small private companies of today.
I believe that this has been an inadvertent exclusion. For that reason I hope that the Chief Secretary will assure us that the Government do not intend it [column 314]to continue. I have, however, one slight difference with my hon. Friend. Even in respect of the small family trust, I see no justification for double taxation. I wonder whether my hon. Friend is prepared to consider that. But I agree with him on the main issue. As he said, we have here a clear definition—
“not under the control of less than 50 persons” .
The words were included in the first draft of the Bill.
I therefore hope that the Chief Secretary will at least accept the principle of the new Clause.
The Chief Secretary to the Treasury (Mr. John Diamond)
The hon. Member for the Cities of London and Westminster (Mr. John Smith) is right in saying that the words were originally in the Bill. But I am not sure that he retained his ground firmly in considering the purpose of those words. They were to ensure that there was a genuine public interest. He and I do not move on the same basis as to the argument of double taxation. We do not accept for one moment that there is any question of double taxation. Corporation Tax is a proper tax which has its effect. But we recognise that where individuals were investing in large numbers in this way there might be a special provision so as to enable them to have this advantage. That was the situation when the Bill was printed.
We then received representations that the principal objective which we were setting out to achieve—and, as far as I am aware, there is common ground between us about it—namely, a demonstration of a genuine public interest which would satisfy the conditions of the relevant Clause, was being vitiated by the restrictive terms of the Clause. I cannot do better than read the memorandum which was submitted to the Chancellor of the Exchequer after the publication of the Bill with the Clause containing words which are in the proposed new Clause.
The memorandum was received from the Association of Investment Trusts. I recognise that the hon. Member does not speak on behalf of the association, but what it said is relevant to the new Clause.
The association said that the Clause in its original form, providing that the company must not be under the control [column 315]of fewer than 50 persons, would exclude most genuine public investment trusts with thousands of individual shareholders, which could have a few large holdings by insurance companies, pension funds or unit trusts. It therefore suggested that the definition should be altered to secure the purpose of the original words and not to vitiate that purpose. Accordingly, the words were altered and the purpose achieved in that way.
I recognise that the hon. Member is suggesting that there should be an additional or alternative definition so as to include investment trusts which are not under the control of as few as 50 persons and yet are not public. They would be very odd trusts not to be under the control of 50 persons or fewer. It takes very few shareholders to join together to have control of a company, and the units would have to be divided very evenly indeed. It would mean that the largest 49 shareholders would hold less than 50 per cent.
The fact that it is unusual is not an argument on which to rely. The hon. Member will ask: If it is so unusual, and if it is providing for virtually no cases, what am I worried about? I am worried only because I cannot imagine the type of case which he has in mind which would satisfy the essential criterion that there is a genuine public interest. A public interest is not only that which concerns a lot of private people. It is an interest in which the public freely come and go, in which there would be changes of shares and in which individual members of the public would have a right to use the services of the investment trust.
Mr. John Smith
That was most certainly not the intention of the words originally put in the Bill by the Government. I should not be wasting the time of the House by putting forward a new Clause at some length if there were not actual examples to be quoted. Far from being odd trusts, these investment trusts are exactly what the Labour Party would like to see—trusts in which the shareholdings are manifold and also very evenly divided. Of course they exist, as [column 316]all of us who are financially literate know.[column 316]
I will not be put off by that last bad-tempered comment. I was about to say that I had listened to the argument. It is a new argument. The fact that it is new does not detract from it. We have never had representations of this kind from any of the bodies which are continually making representations to us either in the House or outside it. I therefore could not see any particular reason for adding to the words. I find it difficult to think that the words which we have in the Bill are not satisfactory.
But if there is new information of which we are unaware, I am prepared to listen to it and to receive representations. All of us who are illiterate like to improve our literacy if we are sensible people. There are many fields in which I am very ignorant, and I am always delighted to learn. If, out of his vast knowledge of these matters, the hon. Member wishes to make representations to my right hon. Friend or myself, or if he wishes to bring a delegation, we shall be glad to listen to him, to receive the delegation and to consider the matter.
I cannot go further than that, because, even after listening carefully to the hon. Member, I have difficulty in understanding that there are cases which satisfy the original criterion which we had in mind in proposing the words which were in the Bill but which are not now covered.
Mrs. Margaret Thatcher (Finchley)
We are most grateful to J. Diamondthe Chief Secretary of the Treasury for what he said. If he looks through the records of the Inland Revenue he will find that letters have been sent to the Inland Revenue on this very point. I have in my hand a copy of a letter which was sent to the Inland Revenue shortly after the Finance Act, 1965, was passed. A reply to it was received from the Inland Revenue on this very point. These letters are dated November and December, 1965. I will let the Chief Secretary have copies of them.
However, as he seems genuinely fairly sympathetic to the point—indeed, he argued that the new alternative test did not appear to go far enough—I wonder whether my hon. Friend would pick up his offer during the coming months and [column 317]that we might get some decision, to be incorporated in another Finance Bill perhaps, or, who knows, in an autumn Budget.
Mr. John Smith
May I have your leave to speak again, Mr. Speaker?
The hon. Gentleman, who moved the Clause, does not need my leave or that of the House. He may speak again.
Mr. John Smith
Order. I am sorry. I stand corrected. The Bill has not been to Standing Committee, so the hon. Gentleman must have leave of the House to speak again.
Mr. John Smith
With the leave of the House. I do assure the Chief Secretary that my expression about financial literacy was not ad hominem. There are few Members in the House so literate in that way as the Chief Secretary: indeed, it is because we know that he knows the facts of many cases that we are shocked when he expresses certain opinions.
I agree that the purpose of the definition was that there should be a genuine public interest in investment trusts which are allowed to qualify. The right hon. Gentleman said that it was represented to him, correctly, by the Association of Investment Trusts that the Government's definition would exclude a large number of public quoted investment trusts; and the wording was altered. Because the wording is improved to remove an anomaly to allow certain trusts to qualify which it was intended should qualify, it seems unreasonable at the same time to exclude from relief other trusts which were also intended to qualify.
The right hon. Gentleman has been handsome and said that, if I can produce an example of this rare animal, he will reconsider the matter. In view of that assurance, I beg to ask leave to withdraw the Motion.
Motion and Clause, by leave, withdrawn.