Section 28 provides for a lower rate of corporation tax where the total profits do not exceed £5,000. There is marginal relief where the profits are over £5,000 but do not exceed £10,000. Where the company is a member of a group or where the accounting period is less than 12 months, appropriate adjustments are to be made in the limits of £5,000 and £10,000. This provides a more favourable form of tax than the existing one, where the limit is £2,500.
SECTION 28.
Question proposed: " That section 28 stand part of the Bill."
The principle is the same but the limits are different.
Yes.
What happens if there are five or six companies in a group—five or six small companies?
The genuineness of the company will naturally have to be investigated. There will have to be evidence that there has not been artificial fragmentation of the company.
Very often in a group of companies—it has nothing to do with taxation—there might be a division of a company not to avoid tax but to avoid a run-through of a trade dispute. Supposing you had six in a group—six shops, six pubs, anything you like—all under the one umbrella, and if there is a trade dispute in one, it runs through the lot. If you have them as separate entities, there cannot be a picket on every one of them, because if there was an injunction could be got. This very often happens. Are they considered the one or separate businesses in that case?
Subsection (3) provides that the amounts of £5,000 and £10,000 respectively apply where a company has no associated company. Where a company has one associated company the amounts are to be divided by two. If a company has two associated companies, the amounts will be divided by three and so on. The aim is to prevent the abuse of the relief by the establishment of a number of companies under the same ownership. Perhaps I should give some examples. A company has a profit of £4,000 and it has an associated company with a profit of £3,000. The limit of £10,000 divided by two means that they would be within the relief. But if the first company had a profit of, say, £20,000 and the second company a profit of £3,000 then the relief would not arise in the case of the first company.
Suppose they are natural entities.
They enjoy certain benefits because they are under common ownership.
They will not enjoy it unless they are under the umbrella of another company, a subsidiary of another company. They cannot use this where losses are concerned. At the moment, if there are ten companies with a profit of £2,500 on each one of them, there is relief. Under this Bill, that is to go.
That is true. It is anti-fragmentation.
At the moment, if there are ten associated companies there is an allowance of ten times £2,500. But under the provisions of this Bill, there will be a loss in such a situation. What will be the loss?
There is no group relief at the moment except that a concession will be given pending the introduction of this legislation. The anti-fragmentation clause and group relief will operate to the greater advantage of companies than the existing charge on a profit of £2,500 and no group relief.
I am a little concerned about this. If I understand Deputy Belton correctly, existing relief is now being taken away while I understood the Minister to say that existing relief was being increased under this section.
It is increased for one company. Take the licensing trade, where a person owns several premises, it is better to have each one kept separate. In the case of a strike, it can be confined to the one house directly concerned in the industrial dispute and the trade unions cannot extend it to all the premises in a group. I agree with this, because a dispute in one premises should be confined to that one premises. If a trade union withdraws its members from all the premises comprising a group, the owners can obtain a court injunction against them. At the moment each company is receiving an allowance on a profit of £2,500. But because there is a holding company, and all the subsidiaries are amalgamated under one umbrella, there will not be tax relief on each one. On the ten companies one will get only a £5,000 allowance. It was £2,500 on each company heretofore. You must arrange to have the companies separate if only for the purposes of trade disputes.
I can understand the Deputy's arguments, but, fundamentally those companies are in a group. They are in a group because they have common ownership. The corporation tax is looking at that group and in that group situation I think it obvious that you cannot have fragmentation. Paragraph 110 of the 1974 White Paper dealt with this matter and it is interesting to observe that no representations were received about it. I have this paragraph and I will read it out if I may:
To prevent the possibility of exploitation by fragmentation of companies an appropriate deduction would be made in the profit limits which determine the relief where there are groups of small companies operating under one control. Where a company has one or more associated companies the limits of £5,000 and £10,000 would be divided by one plus the number of those associated companies if one had control of the other or both were under the control of the same person or persons.
What does an appropriate reduction entail? Would the Minister define that for us?
You will add the number of companies together and divide. If a company has too associated companies the limits of £5,000 and £10,000 are divided by three, that is, one plus the number of associated companies and then the limits are £1,667 and £3,333 for each company.
Would the Minister take a simple example of three companies to which this provision would apply now? What would their present position be? Could he state what the existing provision would be if this Bill had not come and what it would be after the Bill applied.
At present they would have individually, profits not exceeding £2,500 chargeable at the low rate. Now, take those three companies after the passing of this Bill, if the profit of each individual company were only £1,667 they would continue to get relief because you get £5,000 divided by three.
Is there an improvement or disimprovement?
Is what the Minister said right in relation to the three companies?
That is right. If there were four companies, if there were five companies, it would be £1,500 per company.
It would be £7,500.
Question put and agreed to.