Orders of the Day — Finance Bill – in the House of Commons am 12:00 am ar 16 Mehefin 1947.
Paragraph (a) of Subsection (2) of Section fifty-two of the Finance (No. 2) Act, 1945 (which limits the rate at which relief or repayment may be allowed in respect of tax deducted from certain dividends) shall be amended by the insertion, immediately after the words, "such dividends," of the words "other than a preference dividend," and by the addition at the end of the said paragraph (a) of the following words:
In this Subsection the expression "Preference dividend" means a dividend receivable at a fixed gross rate per cent. payable in priority to all dividends on some other class of share but shall not include so much of any such dividend as represents some further participation in profits over and above the said fixed gross rate per cent. —[Mr. Birch.]
I beg to move, "That the Clause be read a Second time."
This Clause seeks to amend Section 52 of the Finance (No. 2) Act, 1945. That Section laid down two things which are material to this new Clause. It laid down first that taxation should be deducted at the full standard rate from dividends notwithstanding any allowance to which a company might be entitled for double taxation relief. That Section made an alteration to the existing practice, which was laid down by Section 27 of the Finance Act, 1920, which had the effect of passing on directly to the shareholder any relief there might be in respect of Dominion Income Tax relief. The second effect was that a repayment which anyone, who was entitled to a dividend, could get, was limited to what was described as the net United Kingdom rate payable by the company, that is, the tax payable by the company after taking into account double taxation relief.
The effect of that is that the whole of the benefit from any Dominion Income Tax relief there might be goes to the equity shareholder, not, as it previously did, both to the preference shareholder and the equity shareholder. It may be said that there is nothing wrong in principle in its going to the equity shareholder. But it has an effect about which there has been a good deal of correspondence. I have carried on an acrimonious correspondence with the Financial Secretary to the Treasury on the matter. It has an effect which is very unfair. Supposing there is a person who holds preference shares in a company which is entitled to double taxation or Dominion Income Tax relief. From his dividend he has deducted, Income Tax at the full standard rate of 9s. Supposing that company is liable to taxation only at 7s. 6d. in the £, arid supposing the holder of the preference shares is not liable to taxation at all, owing to the fact that his income does not amount to the requisite figure, what happens is that instead of being able to reclaim the full tax which has been charged at 9s. in the £, he can only reclaim tax at 7s. 6d. Therefore, it means that somebody who is not liable to Income Tax at all is paying tax at 1s. 6d. in the pound. That seems to be inequitable and wrong. Probably it was not intended when the Finance (No. 2) Act, 1945, was passed. I hope that it may be put right.
As the hon. Gentleman said, in effect a person who holds shares in a company and who is entitled to foreign Income Tax relief and to repayment of the tax on these shares, because his income is below the tax level, has to pay the amount of the foreign tax. I will explain in terms of figures what I mean by that. Indeed, I am really repeating what has been said. Suppose there is a company which pays 2s. foreign tax and, therefore, by virtue of the Section in the 1945 Act to which the hon. Gentleman referred, has to pay only an additional 7s. British tax—that is to say, that 2s. and the 7s. make up the 9s. tax—it is the case that a shareholder in that company who is entitled to tax relief because his income is a low one, only gets back 7s. He has 9s. deducted from his dividend, but he only gets back 7s.
If hon. Gentlemen will consider the matter further, I think they are bound to recognise that it is quite inevitable. If the Revenue pay not 7s. but 9s., the Revenue will pay the shareholder 2s. which it never receives. What happens is that the company pays the 2s. foreign tax. It then deducts 9s. from the dividend, so that the company pays nothing. It reimburses 2S. foreign tax and the 7s. British tax, so that the company is reimbursed by deducting the 9s. from the dividend. If the Revenue then pay back to the shareholder the full 9s., it means that the Revenue will be paying to the shareholder 2s. which it has never received, namely, the 2S. which the company has paid to the foreign Government, and which has never gone into the coffers of the Inland Revenue. That is a position which cannot be accepted. Obviously, the British Revenue cannot be expected to pay back anything beyond what it has received out of the shareholder's dividend.
The hon. Gentleman made reference to Section 27 of the Finance Act, 1920. As he said, that was the Act which dealt with Dominion tax relief. When that Act was in force, there was no other form of relief for double taxation in respect of tax paid to a Dominion or foreign government except the relief which was afforded under that Section. What happened under that section was that the company deducted only am assuming that the rate of tax is constant at 9s.—from the shareholder's dividend. The effect of that was that the equity shareholder was unfairly treated. It meant not that the shareholder was paying the 2s. foreign tax, but that the company was paying. If hon. Members will picture the state of affairs, it is that the company paid 2s. abroad. It then paid 7s. at home, and it deducted only 7s. from the dividend. The net result of that was that the 2s. was borne by the company, that is by the ordinary shareholders, and it was lifted off the shoulders of the preference shareholders That was a position which could not be allowed to obtain, and therefore we adopted the present system for the purposes of the 1945 Act.
The remedy, I would say, is this. I quite agree that the preference shareholder is entitled to repayment, because he suffers a loss of 2s., but there is nothing to prevent him changing his preference shares into ordinary shares. Hon. Members might say that that is not fair to him because he suffers a loss, in that preference shares are worth less and he suffers a loss in their capital value, and that if he does change his shares, because of this difference he is bound to suffer a loss. I think, however, that that is not quite correct, because the shareholder who is entitled to relief in respect of his dividends is always a very small shareholder, and I think the experience of the Stock Exchange—or so I am informed—is that, ordinarily, the value of his share is not governed by the very small shareholder—the one whose holding is very small and whose total income is very small, and who is entitled to relief on the dividends on his shares. The value is governed by the large shareholders, and, therefore, my answer is that the small shareholder who changes his shares will not necessarily suffer a loss, because the capital value of his shares is ordinarily determined by the larger shareholders.
This, however, is true—that the shareholder who was paying tax under the old system, that is, the system in force under Section 27 of the 1940 Act, and who now comes, in consequence of the new Act, under the new system, does suffer a loss on preference share dividends. The answer to that really is that when his preference share was taxed upon the basis of Section 27 of the 1940 Act, he was getting, as part of the dividend on his preference share, an uncovenanted benefit, and his preference share was then standing at a slightly enhanced value. Therefore, I say that the preference shareholder is not being dealt with unfairly. I agree that this matter is difficult to follow, but I hope hon. Members have been able to follow me. We feel that the preference shareholder is not unfairly dealt with, as he can change his share. If he got back the full amount of 9s., he would be getting it back at the expense of the ordinary shareholder to the extent of the 2s. paid by way of foreign tax. Therefore, I ask the Committee to reject the new Clause.
I would like to make one or two comments on what the learned Solicitor-General has said. The hon. and learned Gentleman started by saying that the effect of accepting the new Clause would be that the Revenue would be paying the tax, or I should say that it would be receiving less, and that, if we accept any form of double taxation relief, the Revenue does automatically receive less than it would otherwise have done. I do not see that there is really any point there at all. Then, the Solicitor-General said how unfair it would be—
I am sorry to interrupt the hon. Gentleman, but not only does the Revenue receive less in the case of the 7s. instead of 9s., but, if the preference shareholder received the 9s., the Revenue would, in addition, be paying an extra 2s. which it would never have received, and would, therefore, suffer a double loss.
That is a very subtle point. Surely, what the Revenue is now doing is to extract from somebody taxation which he is not bound to pay because, to take the Solicitor-General's example, somebody is being made to pay tax at 2s. in the pound when, in fact, he is not bound to pay tax at all. The Revenue is collecting extra revenue. We were told how unfair this new Clause would be to the equity shareholders. I am glad the Solicitor-General is now a convert to our case on the Profits Tax, and I hope that on the Report stage he will argue that at greater length. We were then told that there was no hardship on these people—and we are talking about very small people—because, although the hon. and learned Gentleman said he did not know much about the Stock Exchange, he stated there was no reason why a holder of these shares should not exchange them for ordinary shares.
Two arguments present themselves. First of all—and this Budget makes the position much worse—the expense of changing a small holding is heavy. The Stamp Duty is doubled and that means an increase from one per cent. to two per cent., to start with. The commissions on small holdings are large. Therefore, it is expensive to change small holdings of preference shares into ordinary shares. Secondly, many of these investments are held under trust deeds, and, although a preference share is not strictly a trustee security, there are many trust deeds which stipulate that one may invest in preference shares and not in ordinary shares. Therefore, it may not be possible to make this' exchange at all. One of the big arguments for the small savings campaign is that the small person cannot afford the risk of an ordinary share. It is all very well for the Solicitor-General to say that a small shareholder can contract out by taking an ordinary share, but many of these people cannot afford to take the risk. Therefore, that course is not open to them. I thought the Solicitor-General's case was not a good one. This tax has caused considerable resentment among many people with small incomes, and I think it is grossly unfair.
I hope the Chancellor of the Exchequer will give his mind to this matter and say whether he entirely concurs in the case which the learned Solicitor-General adduced. I thought my hon. Friend the Member for Flint (Mr. Birch) put forward a strong case. It is certainly not one in which there is any party interest. It is purely a matter of trying to make up our minds on what is the fair thing to do. I think I understood, but I would not be certain, the first of the arguments Which the hon. and learned Gentleman used. I am not so certain that I appreciated his second argument, and I think my hon. Friend's criticism of that second argument contained a good deal of substance.
It is no remedy to a class of share holders who are called upon to bear a tax which they regard as unjustifiable to be told that they can exchange one class of share for another class. It would mean that some other shareholder would be left with the preference shares which the first man sold. We must look at the matter from the point of view of the whole class of shareholders concerned. It is not right to say, "If you are dissatisfied with the system of taxation which is imposed on preference shareholders, you should cease to be a preference shareholder." That is a weak argument. In addition, my hon. Friend exposed the practical difficulties of exchanging from preference to ordinary shares by pointing out the expense in which it would involve the shareholder, and by pointing out that it might be that the shareholder might not by himself be entitled on account of circumstances, or because of the trust deed by which the investment was governed, to make such an exchange. I suggest that, in addition to those arguments, one can very reasonably say that the ordinary shares which would be purchased in exchange for preference shares are now standing relatively higher in relation to preference shares than they were before this law was made.
9.0 p.m.
The hon. and learned Gentleman said that these preference shareholders in the past got uncovenanted benefit. Even on the assumption that the hon. and learned Gentleman is right and they got the uncovenanted benefit, the holders who bought the shares when they were getting that uncovenanted benefit, of course, paid a higher price than they would have done if that benefit had not attached to those shares. Similarly, if they exchanged them for ordinary shares now, they would pay a higher price than the shares stood at, because the ordinary shares are getting the benefit of whatever disadvantages the preference share§ are suffering. Therefore, I find it difficult to accept the conclusion that these arrangements are fair to the preference shareholders in companies which enjoy the benefits of these double taxation arrangements. For these reasons, I support the arguments put forward by my hon. Friend.
Division No. 256.] | AYES | [9.2 p.m. |
Amory, D. Heathcoat | Harvey, Air-Cmdre. A. V | Raikes, H. V. |
Assheton, Rt. Hon. R. | Herbert, Sir A. P. | Ramsay, Maj. S. |
Baldwin, A. E. | Hinchingbrooke, Viscount | Rayner, Brig, R. |
Barlow, Sir J | Hogg, Hon. Q. | Reed, Sir S. (Aylesbury) |
Baxter, A. B. | Holmes, Sir J. Stanley (Harwich) | Robinson, Wing-Comdr Roland |
Bennett, Sir P | Hope, Lord J. | Ropner, Col. L. |
Birch, Nigel | Howard, Hon. A. | Ross, Sir R. D. (Londonderry) |
Bower, N. | Hurd, A | Sanderson, Sir F. |
Braithwaite, Lt.-Comdr. J. G. | Hutchison, Lt.-Com. Clark (E'b'gh, W) | Shepherd, W. S. (Bucklow) |
Bromley-Davenport, Lt.-Col W | Hutchison, Col, J. R. (Glasgow, C) | Stanley, Rt. Hon. Q. |
Buchan-Hepburn, P. G. T. | Jeffreys, General Sir G. | Stoddart-Scott, Col M. |
Bullock, Capt. M | Joynson-Hicks, Hon L. W. | Stuart, Rt. Hon J (Moray) |
Carson, E | Keeling, E. H | Sutcliffe, H |
Clarke, Col R. S | Langford-Holt, J. | Taylor, C S. (Eastbourne) |
Clifton-Brown, Lt.-Col. G. | Lindsay, M. (Solihull) | Taylor, Vice-Adm, E. A. (P'dd't'n, S.) |
Conant, Maj. R. J. E. | Lucas-Tooth, Sir H. | Thorneycroft, G. E. P. (Monmouth) |
Corbett, Lieut-Col U (Ludlow) | Macdonald, Sir P. (I. of Wight) | Thornton-Kemsley, C N. |
Crookshank, Capt. Rt. Hon H F. C | Mackeson, Brig. H. R. | Touche, G. C. |
Crosthwaite-Eyre, Col O. E. | Maclay, Hon. J. S. | Vane, W M F. |
Cuthbert, W. N | Maitland, Comdr. J. W | Wakefield, Sir W W |
Digby, S. W. | Manningham-Buller, R. E | Walker-Smith, D |
Dower, Lt.-Col A. V. G. (Penrith) | Marples, A. E | Ward, Hon G. R |
Drewa, C. | Marshall, D. (Bodmin) | Wheatley, Colonel M. J |
Dugdale, Maj. Sir T. (Richmond) | Mellor, Sir J. | White, Sir D (Fareham) |
Eccles, D. M. | Morrison, Maj. J. G. (Salisbury) | White, J. B (Canterbury) |
Fletcher, W. (Bury) | Mott-Radclyffe, Maj. C E | Williams, C (Torquay) |
Fraser, Sir I (Lonsdale) | Nicholson, G. | Willoughby de Eresby, Lord |
Gage, C | Noble, Comdr A. H. P. | Winterton, Rt. Hon Earl |
Gammans, L. D. | Peake, Rt. Hon. O. | |
Glyn, Sir R. | Peto, Brig C. H. M. | TELLERS FOR THE AYES: |
Gridley, Sir A | Pitman, I. J. | Mr. Studholme and |
Grimslon, R. V | Poole, O B. S (Oswestry) | Lieut.-Colonel Thorp. |
Harmon. Sir P. (Moseley) | Prior-Palmer, Brig, D. | |
NOES | ||
Adams, Richard (Balham) | Gallaghan, James | Fernyhough, E, |
Adams, W T (Hammersmith, South) | Champion, A. J. | Fletcher, E G M. (Islington, E.) |
Allen, A. C. (Bosworth) | Chater, D. | Follick, M. |
Alpass, J. H. | Cobb, F. A. | Foot, M. M. |
Attewell, H. C. | Cocks, F. S. | Forman, J. C. |
Austin, H. Lewis | Coldrick, W. | Foster, J. G. (Northwich) |
Awbery, S. S. | Collins, V J | Fraser, T (Hamilton) |
Ayles, W H. | Colman, Miss G. M. | Gaitskell, H T N |
Ayrton Gould, Mrs. B. | Comyns, Dr. L. | Ganley, Mrs. C. S. |
Bacon, Miss A. | Cooper, Wing-Comdr. G | Gibbins, J. |
Baird, J. | Corlett, Dr J. | Glanville, J E. (Consett) |
Balfour, A | Corvedale, Viscount | Goodrich, H. E. |
Barstow, P G | Cove, W. G | Greenwood, A. W. J. (Heywood) |
Barton C | Crawley, A | Grenfell, D. R. |
Battley, J. R. | Crossman, R. H. S. | Grey, C F |
Bechervaise, A E | Daggar, G. | Grierson, E |
Benson, G | Daines, P | Griffiths, D. (Rother Valley) |
Berry, H | Dalton, Rt. Hon. H. | Griffiths, Rt Hon J. (Llanelly) |
Beswick, F. | Davies, Edward (Burslem) | Gunter, R. J |
Bing, G. H. C | Davies, Ernest (Enfield) | Guy, W. H. |
Binns, J. | Davies, Harold (Leek) | Haire, John E. (Wycombe) |
Blackburn, A. R | Deer, G. | Hale, Leslie |
Blenkinsop, A | Diamond, J. | Hall, W. G. |
Blyton, W R. | Dobbie, W. | Hamilton Lieut.-Col. R |
Bottomley, A. G | Dodds, N. N | Hannan, W (Maryhill) |
Bowden, Flg.-Offr. H. W | Donovan, T. | Hardy, E. A |
Bowles, F. G. (Nuneaton) | Driberg, T. E. N. | Harrison, J. |
Braddock, Mrs E M. (L'pl. Exch'ge) | Dugdale, J. (W. Bromwich) | Hastings, Dr Somerville |
Braddock, T (Mitcham) | Dumpleton, C W | Henderson, A. (Kingswinford) |
Brook, D (Halifax) | Dye S. | Henderson, Joseph (Ardwick) |
Brooks, T J (Rothwell) | Ede, Rt. Hon J C | Herbison, Miss M |
Brown, George (Belper) | Edelman, M. | Hobson, C. R. |
Brown, T J (Ince) | Edwards, N (Caerphilly) | Holman, P |
Brown, W. J. (Rugby) | Evans, E (Lowestoft) | Holmes, H. E. (Hemsworth) |
Bruce, Maj. D. W. T. | Evans, John (Ogmore) | House, G |
Burden, T. W. | Evans, S N (Wednesbury) | Hoy, J. |
Burke, W A | Ewart, R. | Hudson, J. H. (Ealing, W.) |
Butler, H W (Hackney, S.) | Fairhurst, F. | Hughes, Hector (Aberdeen, N.) |
Byers, Frank | Farthing, W. J. | Hutchinson, H. L. (Rusholme) |
Hynd, J. B. (Atteroliffe) | Neal, H. (Claycross) | Steele, T. |
Irving, W. J. | Nichol, Mrs. M. E. (Bradford, N.) | Stewart, Michael (Fulham, E.) |
Janner, B. | Noel-Baker, Capt. F. E. (Brentford) | Strachey, J. |
Jeger, G. (Winchester) | Noel-Buxton, Lady | Summerskill, Dr Edith |
Jeger, Dr. S. W. (St. Pancras, S.E.) | Oliver, G. H | Swingler, S. |
Jones, D T (Hartlepools) | Paget, R. T. | Sylvester, G O. |
Jones, Elwyn (Plaistow) | Paling, Rt. Hon. Wilfred (Wentworth) | Symonds, A. L. |
Jones, P. Asterley (Hitchin) | Paling, Will T. (Dewsbury) | Taylor, H. B. (Mansfield) |
Keenan, W. | Palmer, A. M. F | Taylor, R. J. (Morpeth) |
Kenyon. C | Pargiter, G. A | Taylor, Dr. S. (Barnet) |
Key, C. W | Parker, J. | Thomas, D. E. (Aberdare) |
Kinley, J. | Parkin, B. T. | Thomas, Ivor (Keighley) |
Kirby, B. V. | Paton, J. (Norwich) | Thomas, I. O. (Wrekin) |
Lang, G. | Pearson, A. | Thomas, George (Cardiff) |
Lee, F. (Hulme) | Peart, Thomas F. | Thorneycroft, Harry (Clayton) |
Leslie, J. R | Poole, Major Cecil (Lichfield) | Thurtle, Ernest |
Levy, B. W. | Porter, E. (Warrington) | Tolley, L. |
Lewis, A. W. J. (Upton) | Porter, G. (Leeds) | Tomlinson, Rt. Hon. G |
Lewis, J. (Bolton) | Price, M. Philips | Turner-Samuels, M. |
Lipson, D. L. | Pritt, D. N. | Ungoed-Thomas, L. |
Lipton, Lt.-Col. M. | Proctor, W. T. | Vernon, Maj. W. F |
Longden, F. | Pryde, D. J. | Viant, S. P. |
Lyne, A W | Pursey, Cmdr. H | Wadsworth, G |
McAdam, w. | Randall, H. E. | Walkden, E. |
McEntee, V. La T. | Ranger, J | Wallace, G. D. (Chislehurst) |
McGhee, H. G | Rees-Williams, D. R. | Wallace, H. W. (Walthamstow, E.) |
Mack, J. D. | Reeves, J. | Warbey, W. N. |
McKay, J. (Wallsend) | Reid, T. (Swindon) | Weitzman, D |
Mackay, R. W. G (Hull, N.W.) | Richards, R. | Wells, W. T. (Walsall) |
McLeavy, F. | Robens, A. | West, D. G. |
Macpherson, T. (Romford) | Roberts, Emrys (Merioneth) | White, H. (Derbyshire, N.E.) |
Mallalieu, J. P W. | Roberts, W. (Cumberland, N.) | Whiteley, Rt. Hon. W |
Manning, Mrs. L. (Epping) | Royle, C. | Wilkins, W. A. |
Marshall, F. (Brightside) | Sargood, R. | Willey, F. T. (Sunderland) |
Mathers, G. | Scollan, T. | Williams, D. J. (Neath) |
Mellish, R. J | Shackleton, E. A. A | Williams, J. (Ketvingrove) |
Messer, F | Sharp, Granville | Williams, Rt Hon. T. (Don Valley) |
Middleton, Mrs. L | Shawcross, C. N. (Widnss) | Williams, W R. (Heston) |
Mikardo, Ian | Shawcross, Rt. Hon. Sir H. (St. Helens) | Willis, E. |
Millington, Wing-Comdr. E. R | Simmons, C. J. | Wills, Mrs. E. A |
Mitchison, G. R | Skeffington, A. M. | Woodburn, A. |
Moody, A. S. | Skinnard, F. W. | Woods, G. S |
Morley, R. | Smith, C. (Colchester) | Wyatt, W. |
Morris, P. (Swansea, W.) | Smith, H. N. (Nottingham, S.) | Yates, V. F. |
Mort, D. L. | Sorensen, R. W. | Young, Sir R. (Newton) |
Moyle, A. | Soskice, Maj. Sir F. | Zilliacus, K. |
Murray, J. D | Sparks, J. A. | |
Naylor, T. E. | Stamford, W | TELLERS FOR THE NOES |
Mr. Collindridge and Mr. Snqw |