HC Deb 26 April 1938 vol 335 cc52-5

On the Third Reading of the Finance Bill last year I referred to one form of avoidance, namely, the misuse of revocable or accumulating trusts, and I gave warning that in this year's Finance Bill legislation would be introduced with retrospective effect to deal with it. This particular device makes use of the legal machinery of trusts and settlements in order to take income out of charge to Surtax, while the individual still preserves such a control or call over it as enables him to retain its ultimate enjoyment. If the individual can get back the benefit for himself merely by revoking the arrangement without the consent of anybody else, then the arrangement under the existing law is ineffective for the purpose of reducing his tax liability. So he is careful in these cases to provide that the revocation can take place only with the consent of some other person. But by nominating some accommodating friend who will be prepared to give his consent whenever he is asked, he can evade the tax while getting back the benefit. This must be stopped.

I propose, therefore, that in the case of all trusts and settlements the income arising should be treated as the income of the settlor for Income Tax purposes—and this includes Surtax—if the terms of the settlement provide any power of revocation whatever by the exercise of which the settlor might become entitled to the beneficial enjoyment of the income. I propose, secondly, that, if the terms of any settlement—there must be an exception in the case of settlements of the nature of a marriage settlement—are such that the funds of the settlement may revert to the settlor in the future on any contingency, the income of the settlement, in so far as it is accumulated by the trustees, shall be treated as the income of the settlor. These two proposals will apply to all settlements, existing and future, and as regards existing settlements they will take effect for Surtax purposes for the year 1937–38, thus having the retrospective effect of which I gave due warning last year. They are founded on the principle, which, I think, the whole Committee will agree is just and reasonable, that income which may be within the power of an individual to enjoy should be treated as his income for the purposes of Income Tax and Surtax as if he were actually in receipt of it.

There are two more proposals on this topic to which I attach importance. One deals with the device under which the settlor is enabled to enjoy the income of a settlement, without paying tax upon it, by way of loans made to him by tile trustees. A loan is not income. It is, first, a debt, but if it is a debt that you never have to repay then it is more convenient than income, because it does not pay Income Tax. I propose to treat loans from the undistributed income of the settlement as the income of the settlor for tax purposes. This proposal will apply with respect to past and future settlements, but only with respect to loans after the beginning of the current year. Another proposal which will apply to future settlements is that in computing the individual's total income for Surtax purposes, no deduction shall be allowed in respect of any annual payment which he may make under the terms of the settlement, if the income represented by that annual payment is not paid out by the trustees, but is accumulated in their hands.

My next proposal in regard to the avoidance of tax is to strengthen the provisions of Section 18 of the Finance Act, 1936. That Section deals with the avoidance of tax by way of the formation abroad of one-man companies, and so forth. It provides that where an individual ordinarily resident in this country has transferred assets abroad, with the result that income is receivable by some person abroad, but the individual, that is, the man here, retains the power to enjoy that income, the income of the person abroad shall be treated for Income Tax purposes as the income of the individual at home. That is simple and clear, but there is a proviso in the Section. The Section does not apply if the individual can show that the transfer abroad was effected mainly for some purpose other than the purpose of avoiding liability to taxation. I am very much struck with some of the excuses that have been offered to prove that the avoidance of taxation is not the main purpose of such transfers. For example, there was a case not so long ago where a taxpayer escaped Surtax by forming a one-man American company, transferring a large sum to it and receiving from it shares which never paid any dividend. When he was challenged he explained that he had formed the company because he was afraid of what a Labour Government in this country might do with his property.

Mr. Gallacher

One of your own supporters.

Sir J. Simon

His main motive, so he explained, was not to avoid tax. I hope the Committee will agree with me that if that is the way the law works it needs strengthening. Where the circumstances are such that avoidance of taxation is the purpose of the arrangement, I do not consider that the transfer should be allowed to effect that purpose and reduce liability to taxation. These proposals, which are the result of much close examination by my expert advisers, will, I believe, contribute a great deal towards the stopping of tax avoidance. I regard the whole subject as a very important one, not only because there may be substantial amounts involved, but because the benefit which one man may get from escaping tax which his income would normally have to pay, necessarily involves putting an additional burden on others.

I must put in a word for the vast majority of those who come under direct taxation. It is not true that they resort to any such devices. These devices are resorted to by the few. The great majority accept the full and natural burden and discharge it without any effort to avoid it. We as a nation are entitled to take pride in the general standard of ethical performance of the taxpayer's duty which prevails in this country. The House of Commons should do its utmost to secure that the actual burden as between two individuals in the same position should be equally spread. I intend to continue to keep a close watch on this subject and I have taken measures to ensure that any developments will be kept closely under review, so that if methods of avoidance emerge which are not already sufficiently or effectively dealt with, further measures for their suppression may be promptly devised and put into execution. In view of the warning which I am now giving, the would-be avoider must reckon with the possibility that these measures may be so arranged as to operate with retrospective effect.