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Clause 29—(Meaning Of "Gross Relevant Distribution To Proprietors")

Volume 440: debated on Wednesday 16 July 1947

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I beg to move, in page 25, line 31, after "distributions," to insert:

"other than in respect of arrears of fixed preference dividends."
The House will recall that during the Committee stage when we discussed the Chancellor's new tax on distributed profits, it was pointed out on a number of occasions that the burden of the new tax fell entirely upon the ordinary shareholders. At that stage we sought to move Amendments to exclude from the computation of distributed profits amounts paid out by way of fixed preference dividends, that is, the dividends upon preference shares. We moved the Amendments for the reason that the object of the Chancellor's tax is declared to be to induce the ploughing back of money into the business and that if money were paid out by way of dividends, that object could not be achieved. However, we were unfortunate in our Amendments dealing with the elimination of the preference share dividends from the computation of tax liability, and here we are putting forward what is a very much smaller point but a case where real hardship will arise unless the Amendment is accepted.

There are a number of cases of concerns which have preference capital, and the dividends due upon that preference capital are in arrears. The share capital is what is known as cumulative preference capital, and arrears of dividend will have to be paid when the companies are in a position to pay them. Examples of such companies may be found in considerable numbers among the rubber producing concerns of Malaya and other parts of the Far East. Those companies have been prevented by circumstances quite beyond their control from making profits during the war years and distributing them to the shareholders. A time will, however, come when they will again be making profits, and very considerable sums may be due to preference shareholders. If there was a 5 per cent. preference share and the dividends for six years were in arrears, it might easily occur that a 30 per cent. distribution had to be made at a single moment to the preference shareholders in order to make up for the lack of dividends from which they had suffered during the war As the matter stands, any distribution of that character by way of discharge of preference dividends will fall to be taxed under the Chancellor's proposal at the new rate of 12½ per cent. We think this is a distinct hardship and that the Chancellor ought to meet this very limited point.

7.45 p.m.

I am sorry but I must again disappoint hon. Gentlemen opposite. I will endeavour to give the reason which, I think, will commend itself to them. It is true that during the war a number of companies were unable to earn profits and that substantial arrears of preference dividends must have accumulated in that case, but looking at the matter by and large, what is the position in the case where there is a distribution of arrears of preference dividends during the Profits Tax period? It is that it will be post-1946 profits. Profits earned after the end of 1946 will have made it possible for those arrears to be paid. That is a reasonably accurate description of the situation in general. If such companies are now paying arrears of preference dividends which have accrued during the war period or during the period up to the end of 1946, it is only because they have been able in 1947 and thereafter—in other words, during the Profits Tax period—to earn the profits with which to pay those arrears. I hope the House will think that that is reasonably accurate.

That being so, we feel that no real case can be made for differentiating the arrears of preference dividends from other distributions of income. The distribution is a distribution of profits earned during the Profits Tax period. This is a short answer but in our view it is an answer which should be regarded as conclusive We cannot see that in equity a sufficient case has been made for saying that any exclusion should be imported into the Bill in the case of arrears on preference dividends. I am sorry to disappoint hon. Gentlemen opposite but for those reasons we feel we must invite the House to reject the Amendment.

The Solicitor-General has gone nowhere near the root of what hon. Members on this side of the House try to do in this Amendment. He appreciates as well as I do the position of ordinary shareholders when preference dividends are in arrears. He said that many companies could not make sufficient money during the war to pay preference dividends. That is true, but I wish he had gone on to say that any company in that state is bound to be penalised in the postwar period and that before they can satisfy any obligations to their ordinary shareholders, they have, in the general run, to pay off those arrears of preference dividends. The Solicitor-General would be the first to admit that in nine out of 10 of the cases which we are now considering, it was no fault of the company concerned that they could not make money during the war. There were a thousand and one circumstances in which such companies could have been. They now want to get back on to a proper basis. They have the objections of all companies to this tax, but it is quite unfair to saddle them with this extra burden when they try to become—to use a phrase which has become so common—viable again, and to make up their arrears. They then find that this will be added to the burden they already have to bear. That seems to be quite unreasonable.

The Solicitor-General said that this could be paid only out of the profits made after 1946. That is quite true, but surely the continuity of policy in industry must mean that any Government, in framing legislation of this kind, must take into account the general over-all situation of industry. The only result of the stand the Government are taking is to make it more impossible for private enterprise to play its proper part in the reconversion from war to peace in this country. We are constantly told that effort is required and that private enterprise is the only barrier between this country and economic disaster. If that is so, surely the Government can help in a small matter like this? They could at least see the justice of the claim that where arrears have been incurred by companies through no fault of their own, those losses might at least be offset without this additional penalisation. I can see no justice or equity in it. I cannot understand the argument of the Solicitor-General. It seemed simply to be that just because the profits are being made after a certain date, they must, therefore, be subject to this tax. If, as he said, he is thinking of equity, then surely he should be the first to make allowance for the company placed in this position whose one object is to get back on to a viable basis and to play its proper part in the industrial life of this country. I hope that the Government will think again about this matter.

I listened very carefully to the argument put forward by the hon. and learned Gentleman, but I was not convinced that he has taken full account of one factor. It is that in the case of a distribution of this kind the directors of the company have no option but to pay the accumulated dividend on the preference shares which is in arrear. In a sense, therefore, it is particularly hard that they should be subject to tax on that account. That is an argument which I think has some basis, and it was not one which the hon. and learned Gentleman went any way to meet. I wonder whether he would perhaps be good enough to consider it and to say what he thinks of it?

I had considered it and was aware of the point which the right hon. Gentleman makes. It is really a question of weighing up considerations and balancing one against the other. Taking account of the circumstances in which arrears of preference dividends are paid, we feel that the major factor which should influence our judgment in this case is that they are paid, albeit perforce, but for the greater part, out of post-1946 profits. Rightly or wrongly, we consider that that should be the prevailing consideration, and if that is right we feel we have no alternative but to say that those distributions should rank on exactly the same footing as any other distributions. For that reason, I am very sorry that after listening to the further arguments which have been adduced, I still do not feel in a position to alter my mind.

Amendment negatived.

I beg to move, in page 26, line 7, after "exceed," to insert "an amount equal to."

This is a slightly technical Amendment which I will endeavour to explain in this way. Clause 29 (1, c) provides that in the case of the last chargeable accounting period in which a business or trade is carried on, the distributions to be taken into account for the purposes of Profits Tax are to include distributions made after the end of the period, which distributions are not distributions of capital. If one looks at the succeeding words in the Subsection, one sees what is to be taken as a distribution of capital for that purpose. Those words provide that for the purposes of (c):
"distributions which are to be treated as distributions of capital shall not, in the case of distributions made by a body corporate with a share capital, exceed the total nominal amount of the paid-up share capital thereof."
That is as the Clause stands at present. During the Committee stage of our discussions the hon. Member for Chippenham (Mr. Eccles) made a suggestion with regard to that. I should like to take this opportunity of saying how exceedingly sorry I and all my hon. Friends are that he is not in his place so that I can address him personally. We hope that he will very soon be back. The suggestion he made was that the amount of the issue capital should be increased by the aggregate of the amount of the premiums paid in respect of shares issued in the case of a company which has issued shares at a premium for cash.

What we have done has been to say that the nominal amount of the capital is to be increased by that amount. In other words, that will reduce the amount pro tanto which is treated as a distribution for the last chargeable accounting period for the purpose of Profits Tax. We have sought to meet the point that was then advanced by the hon. Member for Chippenham, and supported by other hon. Gentlemen, including one of my hon. Friends, and we hope that the Amendment will be accepted as adequate for that purpose. There is another Amendment on the Order Paper. I cannot tell whether it will be called, but we feel that, having gone as far as we have done, and having met what we understand the suggestion to have been, we have adequately dealt with the position. I accordingly commend the Amendment to the House.

I am very much obliged to the hon. and learned Gentleman for the attention he has paid to the point made by my hon. Friend the Member for Chippenham (Mr. Eccles) and also for the kind remarks he made about the hon. Gentleman, whom we all hope to see back before long. I am not quite sure why the limitation has been made, as it is made here, to the case of shares issued at a premium for cash, because there must be occasions, at any rate, when shares have been issued at a premium for considerations other than cash. For example, let us take the case of arrears of preference dividends in a reconstruction scheme or something of that kind. If the hon. and learned Gentleman looks at it he will find that he will be unable to justify the words just as he has them here, including "for cash," if such a case is to be taken into account. It may be that the Amendment put down in the name of some of my hon. Friends is not quite perfect and could be improved upon, but I am sure that the idea is right, and that the hon. and learned Gentleman would be unwise to insist on the words "for cash" remaining in his Amendment. I am sure that there should be some other limitation.

Very briefly, the answer to what has been said is that we have selected cash payments because we regard them as on a par with capital originally subscribed, as distinct from profits which have been capitalised, or arrears of preference dividends mentioned by the right hon. Gentleman, and so on. If they had not been distributed they would have qualified for the non-distribution relief and, therefore, if they are again aggregated to the capital so as to diminish the amount distributable in the last period for the purpose of Profits Tax, it will mean that they will get relief twice over.

May I ask the Solicitor-General what happens if one goes a stage further and considers shares issued as a premium in exchange for giving up certain rights? That very often occurs and I should like to know what would happen in that case. That seems to me to be a very important point and one which we are trying to meet by our Amendment. If it means, in fact, that this Clause will not cover this kind of case in which rights are surrendered as against the issue of premium, then there seems to me to he quite a large issue involved.

Amendment agreed to.

I beg to move, in page 26, line 8, at the end, to insert:

"together, where the body corporate has issued shares at a premium for cash, with the aggregate of the amounts of the premiums."

8.0 p.m.

I beg to move, as an Amendment to the proposed Amendment in line 2 to leave out "for cash."

I shall now have to put my question to the Solicitor-General again. What will happen in a case where rights are surrendered as against the issue of premiums, as for example, in connection with an amalgamation? Would that case be covered under the Clause as it will stand?

The hon. Member has no doubt noticed that there is an Amendment on the Paper to deal with the case of bona fide amalgamations. In the case of shares issued at a premium in consideration of the foregoing of rights, and where that does not come within the meaning of the expression "cash," we feel that we have to draw the line somewhere. Therefore, we have sought to draw what we regard as an intelligible line of demarcation and of distinction. We have taken the original capital subscribed and added to it further cash subscribed. We regard that as being the appropriate measure for limiting distribution. If one goes beyond that, one gets into dangerous waters. We do not know where we might be led as a result. I justify the Clause by saying that we have sought to embrace that which we can easily demarcate. I hope that the House will think that is a satisfactory way, even if hon. Members do not think it is a perfect way, of dealing with it.

I do not want to appear ungrateful to the hon. and learned Gentleman for the concession he has made, which I think is valuable and reasonable. I understand his difficulty about drawing the line, but I think he is drawing it in the wrong place. I hope that at some time in the future he will take the opportunity of amending it.

Amendment to the proposed Amendment negatived.

Proposed words there inserted in the Bill.

I beg to move, in page 26, line 16, at the end, to insert:

"(3) Where the person carrying on the trade or business so elects by notice in writing given to the Commissioners within six months from the passing of this Act or such longer time as they may in any case allow, Subsections (1) and (2) of this section shall apply in relation to all chargeable accounting periods of that trade or business with the substitution for references therein to six months, of references to nine months, or, in the case of a company carrying on business or having interests abroad, twelve months."
This, again, is an Amendment to meet: arguments which were advanced by the hon. Member for Chippenham (Mr. Eccles). It deals with Subsection (2), which provides that dividends declared within six months are to be deemed to be distributions. It was felt that six months is not really long enough, even though there is power to extend the period. Therefore, in response to the argument advanced, we substitute nine months for six months, or, in the case of a company having interests abroad, 12 months, providing that the company so desires. It is given an option to elect. If it does so, then this longer period is substituted for the period of six months and then there is still a discretion.

Amendment agreed to.

I beg to move, in page 26, line 29, after "that," to insert:

"(i) where the amount of any class of paid up share capital on which dividends are expressed to be paid in respect of, or of any part of, the preceding chargeable accounting period is less than the amount of that class of paid. up share capital on which dividends are expressed to be paid in respect of, or of any part of, the succeeding chargeable accounting period, the dividends on that class of capital expressed to be paid in respect of, or of part of, the said preceding period shall, if the per. son carrying on the trade or business so elects, be treated for the purposes of this Subsection as correspondingly increased; and
(ii)"
This Subsection deals with the case in which increased dividends are paid in respect of a period which falls wholly or partly after 1st January, 1947, when the dividends are declared after 15th April, 1947. It provides that in a case like that, inasmuch as the assumption is that by that time the proposal to introduce the Profits Tax must have been known, the dividends shall be treated as dividends of the period in which they are declared rather than of the period for which they are expressed to be paid.

The Amendment provides that in the event of the capital which is being used in the latter period being greater than the amount of capital which was used in the preceding period, the profits of the preceding period shall be deemed to be proportionately increased, with the result that the excess which, under Subsection (3), has to be treated as subject to Profits Tax, is proportionately reduced. The Amendment is to meet the argument which was adduced by hon. Gentlemen opposite to the effect that where the profits of the succeeding period were earned by an increased capital, the profits of the preceding period should be deemed to be correspondingly increased. The Amendment does a measure of justice.

I am much obliged to the hon. and learned Gentleman for this Amendment, and for the previous Amendment to which we agreed.

Amendment agreed to.

I beg to move, in page 26, line 41, after "that," insert

"(i)".
This Amendment has to be taken with the Amendment which follows. It deals with another point which was raised by the hon. Member for Chippenham (Mr. Eccles) to the effect that Subsection (3) did not cover cases where the directors' decision had been publicly announced on behalf of the directors, but the dividend had not been declared in general meeting. It would cover the case of interim dividends, for example. The effect of the Amendment is that in that case the dividend shall not be treated as taxable in the year in which it is declared but in the year in which the decision is announced.

Amendment agreed to.

Further Amendment made: In page 26, line 46, at end, insert:

"and
(ii) Where a dividend not so declared is paid in accordance with a decision of the directors, and that decision was, with their authority, publicly announced at an earlier date, the dividend shall, if the body or society so elects, for the purposes of this section be treated as declared at that earlier date."—[The Solicitor-General.]