§ In estimating the profits or gains of any trade, manufacture, adventure, or concern in the nature of trade chargeable under Schedule D, there shall be allowed to be deducted as expenses incurred in any year so much of any amount expended in that year in replacing any plant or machinery which has been scrapped in that or any previous year, as is equivalent to the cost of the plant or machinery replaced after deducting from that cost the total amount of any allowances which have at any time been made in estimating profits or gains as aforesaid on account of the wear and tear of that plant or machinery and any sum realised by the sale of that machinery or plant.
§ Plant or machinery shall be deemed to have been scrapped within the meaning of this section when it has been destroyed or broken up or disposed of for a purpose other than that for which it was acquired. —[Sir B. Horne.]
§ Brought up, and read the First time.
§ Sir R. HORNEI beg to move, "That the Clause be read a Second time."
The question raised in this new Clause is one of vital importance to industry at the present time and, in particular, to the shipping industry of this country. It concerns the allowances to be made against the profits or earnings in any particular year by reason of the fact that new plant has been purchased to replace old plant. In the ordinary way the allowances which are granted by the Inland Revenue Department, are based upon the view which may be taken as to when plant is obsolete. The ordinary rule which the Inland Revenue seeks to apply is that if an industrialist or shipowner, finding his plant or his ship obsolete, replaces it, allowances should be made against the profits of the year for the expenses incurred by the replacement. The difficulty, however, which is particularly felt in these adverse times, occurs in this way: The question arises as to when you may regard a particular plant or ship as obsolete, and it is 697 obvious that there may be great variations of opinion upon that question. For example, suppose that although a manufacturer has purchased quite recently an entirely new plant, but in the course of a few months or a relatively short period some new invention has been discovered which makes that particular type no longer effective in competition. Can that plant be regarded as obsolete or not? Or, again, if a shipowner thinks a new form of ship, let us say, propelled by a Diesel engine, is the only one which he can employ for a particular traffic, and decides to scrap the old ship, can the old ship, though still perfectly efficient, be regarded as obsolete? The Committee will understand the great difficulty of questions that may be raised in that particular category.
Again, with regard to the question of replacement, can an old ship or an old plant be regarded as replaced if a considerable interval of time elapses between the buying of the new plant or the new ship and the scrapping of the old plant or the old ship? Is it replacement if it takes place one year, two years, three, four, or five years after? Can that be regarded in truth as a replacement of the old plant so that the allowance which ought to be given should be given as against the profits of the year? The Committee will readily see how important that question is at the present time, when there are many people, for example, with ships which have been lying up for some time and which have become obsolete, but may not be replaced, because of the conditions of the time, for several years. When the shipowner comes to buy the new ship in place of the old with which to conduct his business when better times come, can that be regarded as a replacement so as to allow the shipowner to get the deductions for the profits of the particular year to which he would ordinarily be entitled? It is with a view to clearing up that very difficult matter that I move this Clause, and what I venture to put before the Committee is that it should now become part of the rule by which the Inland Revenue shall be guided in dealing with these important matters that—
In estimating the profits or gains of any trade, manufacture, adventure, or concern in the nature of trade chargeable under Schedule D, there shall be allowed to be deducted as expenses incurred in any year BO much of any amount expended in that 698 year in replacing any plant or machinery which has been scrapped in that or any previous year, as is equivalent to the cost of the plant or machinery replaced after deducting from that cost the total amount of any allowances which have at any time been made in estimating profits or gains as aforesaid on account of the wear and tear of that plant or machinery and any sum realised by the sale of that machinery or plant.The difference which this Clause makes from the law as it at present exists is in using the word "scrapped" in place of the word "obsolete," so that there may be no discussion as to whether a plant or a ship has become obsolete or not in any technical sense, and again in providing that the replacement upon which allowance shall be made may take place not merely in the year in which the scrapping of the old plant or ship takes place, but in any subsequent year as well, provided, of course, that the replacement is a genuine replacement. The Committee will readily understand how important this is, because in the conditions of the present time it would be absurd and folly in very many instances for any shipowner or owner of industrial plant to replace all the plant that has been scrapped if he has not any opportunity of using it in industry for some time to come. When he starts industry again he should have the opportunity of replacing the old plant which he has scrapped. It is in order that the sale should be made to suit the facts that I venture to propose this new Clause which provides that replacements may take place not merely in the year in which the scrapping occurs, but in any subsequent year so long as it is a genuine replacement of new plant for old. I understand that the Inland Revenue contends that it has to a considerable degree mitigated the old and harsh interpretation given in previous Statutes, and that it is possible that my right hon. and gallant Friend the Financial Secretary may be able to give an assurance with regard to the interpretation which will greatly mitigate the fears and anxieties of the people who are attempting to carry on industrial and shipping business. If that be so, it may be possible for me to accept such assurances as he gives. In the meantime and for the purpose which I have described, I venture to move the proposed new Clause.
§ Mr. WARDLAW-MILNEI want to impress upon the Committee the immense 699 importance at the present time of giving every possible advantage to those who are prepared to scrap old plant and to bring new plant into operation, which is a matter to which the House in various Debates in the past has paid great attention. This new Clause is to me, at any rate, a new interpretation of what has been the practice in the past. My right hon. Friend has indicated that from information which he has received it appears that the point is to some extent met by the practice of the authorities. All I can say from my own experience is that I do not think that view is generally held throughout the country. I do not think that it is generally known that an allowance will be given to the extent suggested in this Clause if the plant is in fact replaced in a year other than that in which it is scrapped. I suggest, therefore, that if the Financial Secretary can meet us in this matter he will do something which will have more effect in bringing manufacturers into a position in which they can compete with the best plants abroad than almost any suggestion that could have been put forward. I do, however, see a difficulty in the Clause as it stands in the inclusion of the words:
or in the previous year.I do not want to put objections to the Clause into the mind of the Financial Secretary to the Treasury, but it is worth saying that if it is the view of the Treasury that there should be some limit, there is no reason why the situation should not be cleared up and a limited period given—that one should make it perfectly certain that the new plant put in is in fact replacement and that it was scrapped within the year, two years, or it may be five years preceding. The Committee should know clearly what is intended. If a manufacturer has a piece of plant or a shipowner a ship which is scrapped and replaced within a reasonable time by a new ship or a new piece of machinery he will then have the opportunity of adding, as it were, the un-recovered value of the old machinery to the new for the purpose of getting depreciation allowance in the expenses of the year. If the Treasury can accept this new Clause, even if they find it necessary, at this or a later time, to put some limit to the number of years, it would be an 700 immense advantage to manufacturers in all parts of the country.
Lieut.-Colonel SANDEMAN ALLENMay I add my earnest plea to that of my hon. Friend's because I think that not only by the direct effect upon shipowners but by the indirect effect upon shipbuilding this change would enormously assist industries which are vitally affected in the constituency which I represent. There is no need for me to point out to the Government the tremendous asset that shipping is to this country. Our invisible exports are estimated by the Board of Trade returns for 1931 to amount to £80,000,000, while the exports of cotton textiles amount to £57,000.000. There are other figures which I could quote but I do not want to take up the time of the Committee.
§ Mr. D. G. SOMERVILLEI support this new Clause, which I regard as a very important one indeed. Any plant to-day which is not the latest plant is obsolete. In the face of world competition we require the most up-to-date and modern plant we can purchase. Many firms, owing to the depression, are not in a position to purchase that plant; if they were to do so they would have to overdraw or reduce their resources for carrying on their works; but when the depression lifts, as we all hope it will, they may then be in a position to purchase the plant. An allowance would be made on that plant, not necessarily in the year in which it was purchased, but later. I hope the Financial Secretary will consider this matter and so assist the great engineering industry to equip their works with the latest possible plant.
§ Major ELLIOTThe request made by my right hon. Friend the Member for the Hillhead Division (Sir R. Horne) and those associated with him is one, I understand, for classification as much as a request that the Clause should be accepted. If the principle which they desire to see accepted can be shown to be accepted by the Treasury, they would be willing, I understand, to consider holding the matter over for a further stage. I think I shall be able to satisfy them upon that point. It is true that the rule as regards obsolescence has been closely interpreted, perhaps, in the past. "Replacing" was regarded originally as implying that there should 701 be a close similarity in function between the new machinery and the old, and it was originally held that the word "obsolete" meant that the discarded machinery should be out of date to be superseded by a new type. For a considerable time past the view has prevailed that, where a trader thinks proper in the interests of his business to discard one machine and replace it by another, the Revenue is not concerned to inquire too closely whether the machine is to be regarded as of a new and improved type as compared with the old. A replacement is a replacement, and it is for the trader to judge whether his machinery needs replacement or not. We of the Inland Revenue are interpreting the rule accordingly. Again, if it is desirable to replace plant, if a trader, with a view to greater efficiency, discards plant in use and instals new plant, a claim for the obsolescence allowance is not to be opposed by reason of differences in the character and functions of the new plant so long as the facts of the case do not lead to the conclusion that the changes which have taken place really amount to the discontinuance of one trade and the setting up of another.
So much for the general conditions of obsolescence. But the right hon. Member for Hillhead was more particularly concerned with the conditions as regards shipping, although his new Clause was of a general character. As regards shipping, it is clear that replacement must not be held too closely to be replacement within one year or even within a given period of years. The term "replacement" is to be taken as the essential act of replacing and not of replacing within a given time. "Replacing" is a reasonable matter which cannot be settled by reference to a term of years. It is almost impossible to put a definition to it, although we must exercise common sense as to when it is replacement and when it is reconstruction. The authorities in Germany, for instance, might consider that the building up of a new Imperial Navy similar to that of 1914 was replacement, whereas other authorities might hold it to be the reconstruction of an Imperial Navy. There are obviously points where it passes over from what is clearly replacement to a debatable stage and from that to what is obviously not replacement at all. If, 702 for instance, a shipowner during the present period of depression orders a new ship and takes his old ship out of commission right away, we should hold it no obstacle to a claim under Rule 7 that the shipbuilders did not deliver the replacing ship and that he did not pay for it until the year 1934 instead of in the year 1932. Nor would a claim be opposed because he thought it expedient to wait a considerable time before giving the order for a new ship. That deals with the question raised by the hon. Member for West Birkenhead (Lieut.-Colonel Sandeman Allen). But suppose a shipbuilder had a fleet of ten old ships in 1919, and found after a few years that they were nearly worn out. He decided to reduce his activities, and he ordered only four new ships and carried on his business with the four new ships. If in 1939, he ordered four more new ships to extend his activities and then made a claim for an allowance, it would be held that there was no real relation between the old ships and the new such as would reasonably be implied by the word "replacing".
We hold that, under a reasonable interpretation of Rule 7 such as is being carried out now, we can do all that the right hon. Member for Hillhead requires. We feel that the terms of the proposed Clause do not go any further than Rule 7 and that, if they were stretched further than the wide interpretation of Rule 7 which I have given, namely, that replacement might take place even several years after the scrapping of the previous piece of plant or previous ship to which the claim related, then replacement might be stretched beyond its proper limits. Now that it is realised that the shipowner can get his obsolescence allowance notwithstanding that the replacement of the discarded ship may be deferred for two or three years, or even longer, and that the only condition in interpreting Rule 7 is the essential condition that the acquisition of the new ship may reasonably be regarded as a replacement of the old one, I hope it may be found possible not further to press for this Clause.
§ Mr. D. G. SOMERVILLEWill that condition apply to engineering plant as well as to ships?
§ Major ELLIOTYes. I am using the ship as an illustration, as that was the 703 case which was more particularly raised by my right hon. Friend.
§ Mr. DUNCAN GRAHAMWill it apply to mines? There are mines which have been suspended for two or three years, and in such cases the owners would be put to considerable expense to put their mines into a condition in which they could produce otherwise than at a loss. Will they be entitled to relief under the proposals of this Clause?
§ Major ELLIOTNot, I hope, under this Clause, but under the existing law, under Rule 7. They will be in the same position as shipbuilding plant; I was using that as an illustration, and not as an exception. Under the wear-and-tear provision there is an allowance in respect of the annual wear and tear of machinery; under the obsolescence provision there is an allowance for the replacement of machinery or plant which has become obsolete to an extent measured by the cost of the old machinery or plant less the total of any allowances already granted for wear and tear. Roughly, the effect of Rule 7 is that, where new machinery or plant is acquired to replace discarded machinery or plant before the end of its physical life by reference to which the wear-and-tear allowance is computed, a further allowance is given to complete the writing off of the cost of the old machinery or plant for tax purposes.
§ Mr. D. GRAHAMWould a pit shaft be regarded as plant?
§ Major ELLIOTThat is a highly technical point on which I should like to consult my advisers. On these matters there are well recognised formulae agreed upon after many generations of industrial experience. We are not bringing in a new definition of plant. If plant has been defined in the past as including a pit shaft, it will be so defined in the future. Naturally, my hon. Friend would not expect me to give a ruling on such a point across the Floor of the Committee in answer to a question.
§ Mr. GRAHAMI should like to be assured that, when the question is dealt with further, the mining industry will not be put in a worse position than any other industry. It is just as much entitled to put forward such a claim as any 704 other industry, though it would, perhaps, be more difficult to make it as clear to the ordinary mind as in the case of a ship or machine that has become more or less obsolete.
Mr. WARD LAW-MILNEThe right hon. Gentleman's reply is extremely satisfactory as to the procedure that is followed at present. Unless my right hon. Friend, the Member for Hillhead, desires to go further. I do not wish to press the Government unduly but I hope he will consider this point: that the procedure as followed in the way he has described is certainly not generally known and I would ask him to consider whether it is not necessary that the point should be made clear by some alteration as suggested in the words of the new Clause. I would ask him to consider whether the whole situation should not be made clear to shipowners and manufacturers throughout the country so that they may take advantage to the fullest extent of the possibilities under the procedure that he has outlined.
§ Major ELLIOTStatements have been made to British Chambers of Commerce to that effect by the officials.
§ Mr. MAXTONI do not wish to take up time as I understand, in accordance with the agreements, which have worked so well to-day, this is rather a little family party in which members of the Conservative party discuss their little hobbies across the Floor rather than an important part of the Committee stage. But I have been watching this discussion with very great interest. I understand the right hon. Gentleman the Member for Hillhead (Sir R. Home) and the hon. Member for Kidderminster (Mr. Wardlaw-Milne) are urging the Financial Secretary to make an easier interpretation of the allowances that may be made to big concerns in calculating what they are liable to in the matter of their Income Tax, and that certain allowances are to be granted on a more generous and easy scale than previously under Schedule D and the right hon. Gentleman replies that, while he is not prepared to make the concession that they are urging, he is prepared to interpret the existing Rule 7 in an easier way than it has been actually operated in practice in the past. That seems to me to be granting a relief of taxation to what are presumably the 705 most prosperous section of the community just now. Shipowners were only used as a type. I am sure the right hon. Gentleman the Member for Billhead did not know of any large scale proposals for scrapping obsolete machinery inside ships on the Clyde at present.
This Clause, if it operates, will be in favour of concerns that are prosperous and are doing well and making profits. We are told that concerns that are making profits at present are few in number. I do not know whether that is talk for the benefit of the oi polloi—the ignorant mob—but that is what we are told. Concerns that are making no profits, and those interested in them, are to continue paying Income Tax at the ordinary rates, but special reliefs are being permitted to those whose businesses are so prosperous that they can see the advantage of making replacements, and scrappings of plant that they consider obsolete. This is an economy Government. It is always telling us that we who are on the Opposition benches do not realise the serious nature of the crisis ahead. It has told us that no concessions can be made in any direction, that we must maintain taxation at its present level, and that we must still diminish expenditure in many directions. And yet, if I understand the Financial Secretary to the Treasury correctly, not by decision of the House, but by administrative processes in the Treasury, the reliefs for which the right hon. Gentleman and his friends are pressing are to be granted.
§ Major ELLIOTHave been, and are being granted.
§ Mr. MAXTONI should be loth to believe that our right hon. Friend the Member for Hillhead (Sir R. Horne), whom we both know as a colleague in the representation of Glasgow, is ill-informed about the operation of the Income Tax processes as far as the business interests of our City are concerned. He has brought forward this Clause because he feels that the present procedure has operated harshly and that it will make it operate more reasonably. The right hon. and gallant Gentleman, in reply, says that there is no need for any change, because the spirit of this Clause will be carried out by Rule 7. I leave my two colleagues in the representation of the City of Glas- 706 gow to make up their minds as to who is "having the other on," because if "Hill-head" is correct in believing that it is necessary to ease the operation of Rule 7, then "Kelvingrove" is not right in his interpretation that there is no hardship. "Hillhead" says there is a hardship, and "Kelvingrove" says there is no need for this Clause because we are making all the concessions for which he asks, and have been doing so in the past. I cannot believe that the right hon. Gentleman, a former Chancellor of the Exchequer not so many years ago, and a director of a great many very important companies, is so ill-informed. I think that I am correct in believing that the Financial Secretary promised the Committee that in the future these companies, which are making big extensions of plant and are prosperous, are to be treated with a consideration which has not been meted out to them in the past. I will not put it higher than that. I do not think that it is right and proper that concessions in taxation should be made by administrative action at a time when we are told that every half-penny which can be gathered in from any source is needed in the National Exchequer.
§ Sir R. HORNEMy hon. Friend the Member for Bridgeton (Mr. Maxton) very seldom misunderstands an argument, and accordingly I think that I must have put my propositions very badly since he has formed so complete a misapprehension of what I have suggested. He talks as though it was a proposal in favour of those who are prosperous. The contrary is the case. My hon. Friend and I may have different fundamental views, but we are seldom at arms in argument. I submit that prosperous firms have no difficulty in meeting the very strict interpretation of the old rules, for the reason that they are in a position to replace as soon as they scrap. I am not asking anything for the benefit of prosperous firms who have resources to replace that which has become obsolete. The people for whom I am appealing are those who are scrapping now or who scrapped last year and who are unable to replace now or next year or perhaps the following year or the year after that, but who are saying that when they make replacements these will really be as against the ships which they have scrapped now or even a year or two years 707 ago. They cannot replace now because they have not the resources to do it. When the new ships are built or the new plant is obtained it will be a true replacement of that which has gone by the board this year or last year or the year before. It is for the man who is down and out and whose resources are gone that I am appealing—not for the man who has got the resources to make immediate replacements. I hope my hon. Friend the Member for Bridgeton understands the fundamental basis of the appeal made to the Committee.
§ Mr. MAXTONBut this Finance Bill only operates for this year.
§ Sir R. HORNEThat is perfectly true, but, as the hon. Member very well knows, this Clause, once embedded in the Finance Bill, goes on from year to year unless altered. What does one do with regard to the Finance Bill? In any particular year one seeks to have a Clause put in with the hope that it will continue to operate as long as the same conditions exist. There are very few Clauses which get altered, and accordingly the proposition I am putting forward is one which I believe to be sound and which should operate as long as any of the conditions which we know to exist continue.
I now turn to the other point the hon. Member made. He has sought to put me on the horns of a dilemma, but the horns of a dilemma are sometimes very easy to sit upon. He says, in effect, that either you ought to have this new Clause or you are legislating by administration without putting it in the proper form in which it should operate. As I understand my right hon. and gallant Friend's explanation, it is this: As far as the interpretation of "obsolete" is concerned, he said that they had for a considerable time been interpreting it in the Statute in a more generous way than they did some years ago. I do not think that is legislating by administration, because, in fact, the Inland Revenue Department have to deal with things as they find them, and in the question of the interpretation of the Statute in times like these it is perfectly obvious that if they interpret the word "obsolete" in too narrow a sense they may very easily be defeating justice and defeating their own 708 revenue. They do not so interpret the Statute as to get less revenue than they would if they interpretated it in a more generous form. What the right hon. Gentleman said was not that he was conceding a new interpretation of the word "obsolete," but that the new Clause was unnecessary because of the interpretation which the Inland Revenue Department has been putting on that word for some considerable time. That is no new thing.
Then, with regard to "replacements," I do not think that that is legislation by administration in any unfair sense because the circumstances now are entirely different. The whole question is whether in interpreting the word "replacements" you allow replacements to be regarded in a reasonable sense in the circumstances of the present time, when they cannot occur owing to the conditions with which we are likely to be confronted for some years to come. It would be folly for a man to replace at the present time a ship which he cannot use. He has accordingly to wait for two or three years, and the question I put to my right hon. Friend is; "Will you interpret the word 'replacement' reasonably so that it will cover replacements in a reasonable sense"?
§ Mr. BUCHANANThe point my hon. Friend made was this. Is not that being done now? The right hon. Gentleman is saying it is not being done now whereas the Financial Secretary says it is.
§ Sir R. HORNEIn regard to the question of replacement we are met to-day with an entirely new condition of things, which has prevailed for a long time. I do not suppose that anyone living remembers a period of such prolonged depression, when people are compelled to wait for such a length of time in order to manage their business in a way that is efficient. The prolonged gap that has occurred between former prosperity and the chance of regaining prosperity has raised an entirely new set of conditions, and what I am saying is that in these conditions if a man is compelled, say, to sell or to scrap a ship for old iron, if he cannot build his new ship perhaps for two or three years, he should be allowed by the Inland Revenue to count that as a replacement under the old rule?
709 My right. hon. Friend has said on behalf of the Inland Revenue that they will take that reasonable view, and I hope the Committee will support him in taking that reasonable view. Otherwise, the greatest possible injury and detriment is going to be done to trade and industry. I am indebted to my right hon. Friend for the interpretation that he has given of the action which the Treasury and Inland Revenue mean to take in regard to this matter. I thank him for his explanation of what has been their practice, although not very well known to everybody, for some time, and which required some illustration. I say "not known to everybody" because it does not come to one's knowledge unless you have to apply it in particular cases. I am thankful for what he has said, and in view of the assurance that he has given, and, bearing in mind that if any departure in practice is to be made in the course of the year, there will be an opportunity again to raise the matter, I beg to ask leave to withdraw the Clause.
§ Mr. BUCHANANNo man within living memory can recall so many ships being laid up in the Clyde and elsewhere. In this matter we are considering a situation that no one would have thought 10 years ago or five years ago would have been possible to-day, and I would ask the Financial Secretary when he is giving wide interpretations to the Clause he should try to remember other matters as well. It is not only a new situation that has arisen. There is the question of men maintaining relatives under the means test.
§ 12 m.
§ Mr. BUCHANANI am not discussing it. All that I am asking for is that in any wide extension of administrative power to deal with a situation that no one dreamt of a few years ago, a person who has to maintain relatives shall receive the same leniency and the same right that is granted to others. If he is showing this consideration to shipowners and manufacturers I hope he will show the same consideration to those people who are poorer than shipowners and shipbuilders. 710 I hope that this administrative consideration will be extended to those people who have to maintain relatives who are dealt with under the means test.
§ Major ELLIOTThe hon. Member knows that in the case of the maintenance of miners and their families during a trade dispute administrative consideration was given to cases which I discussed with him.
§ Dr. O'DONOVANThere is one small point which I think is worth consideration. It is a human point. The more we encourage the scrapping of obsolete machinery and plant the fewer will be the fatal and non-fatal accidents. There is nothing more lamentable than the number of fatal accidents due to the persistence of plant and machinery which should have been scrapped long ago. There was the tragic occurrence recently when a tug which should have been scrapped exploded. Any stretching of the regulations by the Treasury which enables the scrapping of machinery to take place quicker would be for the benefit of human life and employment.
§ Question, "That the Clause be read a Second time," put, and negatived.
§ FIRST SCHEDULE (Customs Duties on Colonial sugar and molasses etc.), and SECOND SCHEDULE (Excise Duties on Sugar, Molasses, etc.), agreed to.