I beg to move Amendment 55, in page 72, line 46, at the end to insert:
(5) The said Schedule 11 shall have effect subject to the following amendments —
(a) after paragraph 3(1) of that Schedule there shall be inserted the following new paragraph:—
‘(1A) In the case of any share capital issued before 6th April 1965 which on that date had attached to it a term providing that, if the share capital was redeemed or repaid, a premium shall be payable the amount of the premium shall on redemption or repayment be treated as repayment of capital.’
(b) In paragraph 3(2) of that Schedule for the words ‘sub-paragraph (1)’, there shall be substituted the words ‘sub-paragraphs (1) and (1A)’.
This Amendment concerns the treatment for tax purposes of a premium paid on the redemption or repayment of shares which were issued before 6th April, 1965.
J. DiamondThe Chief Secretary will be aware that it was frequently the practice to issue shares such as preference shares on terms that a premium would be paid when those shares were redeemed. For example, a particular class of preference shares may have an issue price of 20s. but a redemption price of 22s. namely, a premium of 2s. per share, when the shares were redeemed.
Before the 1965 Act that premium would have been treated both in fiscal law and in company law as a repayment of capital. The entire payment had the quality of capital both for taxation purposes and for company purposes.
When the 1965 Act came in, the treatment of that premium was altered. It would have been open to the Government at that time still to retain the nature of the premium as capital, in which event it would have been liable to the new Capital Gains Tax. Under the suggested Amendment the premium would still be liable to Capital Gains Tax, but it would retain its quality as a capital payment. However, in the 1965 Act the Government treat the premium on these shares as a distribution by the company. That changed the quality of the payment and it became an income payment liable to have Income Tax deducted from it when it was paid to the shareholder. [column 555]
This has raised a number of problems for investment trusts which have to keep their capital and income separate. We are suggesting that on the strictly limited number of shares that were issued before 6th April, 1965 the premium should be treated as a capital payment.
There can be no question of my having to meet the argument that a company chose this method of issuing shares in order to avoid a particular tax, because the tax which gave rise to the difficulty was not in existence until 1965. Pre-1965 issues cannot have been made to avoid the Act, which did not come into existence until after that date of issue, and so there can be no question of tax avoidance here.
The 1965 Act has led to very great practical difficulties. Making the premium distribution has meant that one has to decide the precise amount which is liable as income to have Income Tax deducted from it. As the Chief Secretary probably knows, shares are not always issued at the same price. The same share can be issued at different times at different prices, and frequently this is so. Therefore, when it comes to calculating the precise amount of the premium from which tax is to be deducted, it is not possible to identify the issue price with certainty. Indeed, it is not possible to identify it at all.
The company is therefore left with a certain difficulty. If it takes the lowest issue price, in which case one would get the maximum premium and the maximum deduction of tax from the Exchequer's point of view, the person owning the shares can go against the company if he happens to have paid rather more than that for his shares in the first place. If the highest issue price is taken to be that which should be deducted from the repayment price, it would then be an admission by the Revenue that the terms of the Act were virtually unworkable.
That is the simple case where there is an issue at a number of different prices, but there are various other complications which can occur. There may be an amalgamation of two issues of preference shares which were originally issued at different prices. There may be an original issue at a premium followed by a scrip issue at par, or vice versa. There [column 556]may be an original issue at a premium followed by an issue of the same class in exchange for shares in another company, and such an issue is presumably deemed to be made at part. It is therefore extremely difficult, if not impossible, for a company to work the rules as they are at present.
A number of the arguments which I have adduced would attach in any case to all shares, but after an Act has been passed companies are deemed to know about it and to alter their plans in accordance with the new law. It is also possible to argue whether they know what the new law is. However, the Amendment refers only to shares issued before the crucial day in April, 1965, and issued with a contract on the part of the company that a premium would be paid on redemption. By these shares, a company becomes contractually liable to pay a premium and there can be no question of its altering its arrangements in accordance with the Act.
I ask the Chief Secretary to consider the Amendment very carefully and for this limited group of shares to treat the premium as a repayment of capital. Last year he was fairly sympathetic to a similar Amendment which related to the interest on bonus issues of debentures made before 6th April, 1965, and the grounds upon which he acceded to our request then was that there could have been no avoidance motive when the security was issued before last year's Budget. The same reasoning applies to this Amendment and we hope that the right hon. Gentleman will consider it very sympathetically.
I consider everything the hon. Lady says very sympathetically. That is my privilege. Apparently, last year I went to the extremes of sympathy and accepted an Amendment—which, I regret to say, I have not reread—relating to debentures. The hon. Lady has been good enough to refresh my memory on that and to say that it was accepted then that there was no question of tax avoidance. Nobody suggests that tax avoidance enters the present argument.
There are two aspects to what the hon. Lady said, first the argument of substance and then the practical difficulties. This is not a question of tax avoidance, but simply a matter of whether a premium [column 557]on share redemption is capital because it was regarded by the shareholder as an expectation of an addition to his capital. Everybody knows that a company provides for a premium on redemption of a share out of profits, except where it is provided out of a premium raised at the time of issue of the share, in which case that is put to a premium redemption account. That does not enter into this argument, because what is here being taxed is not the premium at redemption, but the difference between the premium at issue and the premium at redemption. Either that whole amount or part of it is provided out of profits.
When an original issue price share is repaid out of profits as it can be, does that change the nature of the repayment from capital to income?
I would not go the whole way with the hon. Lady about that. She has asked whether a different set of circumstances is analogous. That set of circumstances would require very careful consideration and I would probably not agree that it was in any way analogous, but that does not affect my perfectly accurate statement that the difference in the premium which is relevant for these purposes is provided out of profits.
Secondly, the way in which Corporation Tax moves is to say that anything which a shareholder gets out of the company, so long as the subscribed capital remains intact, is not a repayment of capital, but is a distribution—and the word “distribution” rather than “dividend” , is used—and is a distribution of something other than capital. If it is not repayment of capital, it is distribution and it is therefore taxable in the ordinary way. I am bound to say that, for those solid reasons, I could not possibly recommend the House to accept the Amendment.
The hon. Lady went on to say that this would land me in certain practical difficulties and she regaled us with a long list of ways in which companies could make life complicated. The Revenue has not yet in practice had one of these [column 558]difficult practical cases. That does not mean that we shall not have one, for we may. When we do, I think that no undue difficulty will be found in reaching agreement between Revenue and taxpayer about the way in which to deal with the matter sensibly and to apply the law sensibly to these rather difficult practical cases.
However, if in the administration of the law it is found that there are practical difficulties which cannot be resolved in the way which I have indicated, and which necessitate legislation, we shall produce legislation next year. In the meantime, we have no reason to believe that that will be necessary. Certainly, it is not necessary at the moment and certainly, for the good and solid reasons which I have given, I could not possibly recommend the House to accept the Amendment.
By leave of the House, I cannot accept the right hon. Gentleman's argument that because a premium is sometimes paid out of profit, that necessarily changes the nature of the payment from capital to income payment. The premium may be repaid out of capital, in which case, on his argument, it should still have the quality of capital. There is, therefore, clearly a good deal of muddled thinking.
The Chief Secretary has not perhaps had as many practical problems yet because the Revenue is in any event very behind in some of its computations. I have no doubt that even more difficulties will arise in future than have arisen in the past. It will be better if we show our displeasure with the Chief Secretary's reply in the Division Lobby, and I would therefore advise my hon. and right hon. Friends, who seem to have been flooding into the Chamber in the last few moments, to divide the House.
Question put, That those words be there inserted in the Bill:—
The House divided: Ayes 152, Noes 213.