HC Deb 11 August 1913 vol 56 cc2150-9

"For the purpose of enabling deductions from revenue receipts of expired capital outlay on inherently wasting assets existing outside the United Kingdom to be allowed by the additional Commissioners, claims in respect of those deductions shall be included in the annual statement required to be delivered under the Income Tax Acts of the profits and gains of any trade, manufacture, adventure, or concern, and where such a deduction from revenue receipts is made, and has been made, from the commencement of the actual employment of the said inherently wasting assets in seeking profits, or during a period of not less than three years to the end of the usual financial year of the particular trade, manufacture, adventure, or concern last prior to the year of assessment, and provided such deduction is so made as to prevent the same being available as profits, the additional Commissioners in assessing those profits and gains shall make such allowances in respect of those claims as they think just and reasonable. For the purpose of this Section the term 'inherently wasting assets' means assets which necessarily waste in the process of seeking profits, provided always that such wasting assets are not the value of transferred rights to future profits or increase which would have been chargeable with Income Tax if no transfer of such rights had been made."

Clause brought up, and read the first time.


I beg to move, "That the Clause be read a second time."

This Clause refers to an allowance for deduction in respect of inherently wasting assets. As time has gone on, I think those responsible for the finances of the country have gradually come to realise that there is a very serious grievance raised by this question. I remember the Chancellor of the Duchy of Lancaster saying that he really agreed that some exemption in respect of wasting assets ought to be granted, and last year the Chancellor of the Exchequer said, in answer to a Clause slightly different from this, that there really was no answer at all in justice to the Clause, and that the only answer that could be made was the one he made, namely, that by keeping the law as it stands at present, he was enabled to gather a very large sum of revenue, and that if the alteration suggested were made, he would lose a sum for which he was advised he would have to make no less provision than £2,000,000 per year. In fact, without meaning any offence, I may say his answer was the tyrant's plea, the plea of necessity. I may say I am grateful to the Chancellor for having given me the opportunity of placing before him some of the material and facts which lead me once more to move this Clause, and which has given me and those concerned with me in the interests of this Clause, the opportunity of discussing the matter with him and for that I desire to thank him. The point I want to bring forward now is this. It is not merely injustice to the subject that presses this Clause, but it is also in the interests of the Chancellor himself, because in the particular case which would be covered by this Clause he is at present, upon the information which I have got, losing revenue, and serious revenue annually. The Clause is drawn in accordance with Clauses which are to be found in the Finance Act of 1907, which enabled the Assistant Commissioners to allow exemptions in certain cases where a settled policy is adopted by those who seek to bring themselves within the Clause. It is only where a settled policy is adopted that any exemption can be paid, and it is only in very special circumstances that the particular exemption that this Clause would provide for could be granted.

8.0 P.M.

Let me give an illustration. We all know that there are a number of so-called wasting assets. If a coalfield is bought, and so much of the coal is extracted from the ground and sold, then by that amount the actual value of the asset belonging to the company or individual is diminished. So it is also in the simple case of the nitrate beds at Chili, which used to be worked very largely by English companies. Nitrates are minerals and easily measured, so that you can ascertain how long it would take to work a nitrate bed. Let me assume a nitrate bed is bought for £100,000, and that it is determined that you work it out in a period of ten years, using one-tenth each year, then in ten years the whole thing is exhausted. If the company adopt what would be considered the only sensible, and I might almost say the only honourable, course of providing that a certain sum should be written off their profit to meet the actual loss in the working of the year off the nitrate, that sum is still charged to Income Tax, and they have to pay 1cm. the gross receipts in the year. They do not pay on the actual estimated net profits. I have got here a simple case provided in recent years in which the company made a gross profit of £19,000. In the course of the working during the year it consumed a portion of the nitrate bed which necessitated placing no less than £10,000 to the depreciation account. The result was that after having provided for this depreciation the net profit for the year was only £3,800. One would have supposed that in the ordinary course the company would have paid Income Tax on £3,800. Not at all. Income Tax is a statutory charge on gross trading profits, and Income Tax was charged upon, not £3,800, but £19,000. Any shareholders who had to consider their interests would have said that if the directors had sought to treat the gross profit as profit and had made no allowance for depreciation, they were not conducting the company on honourable lines. Any company which had proper regard for real finance would make provisions for depreciation. The Income Tax Acts as they stand provide otherwise. They charge Income Tax on the gross trading profit, and do not allow for depreciation account in the case of inherently wasting assets. The effect is that companies which have hitherto registered in England, with English capital, and subject to other revenue laws, such as Stamp Duties and so on, find it too expensive now to register in England. They find that the Income Tax, which is nominally 1s. 2d., is in effect sometimes between 4s. and 5s. in the £. The result is that they are ceasing to be registered here, and the Chancellor of the Exchequer loses the revenue which he would otherwise obtain from the Stamp Duties on their registered capital, on the ordinary transfer of shares, and so forth, which undoubtedly in companies of large capital amount to no small figure.

I have had an opportunity of calling the attention of the Chancellor of the Exchequer to the circumstances of this particular industry. I may say that it is an industry with which I have no possible interest myself, direct or indirect. I have brought the matter up merely because it is one of those injustices which I consider ought to be ventilated in this House and upon which I hope both sides are approximating to something like agreement. Under the present system of working nitrate beds it would be fair to say that the average life of a company is little more than fifteen years. Years ago when the machinery was not so complete or so effective the companies worked their beds more slowly; now, with improved machinery, they work them at a greater rate. They also have an incentive to greater industry in the fear lest other chemical resources should be provided to compete with them. If fifteen years be the life of a nitrate company, if they make provision for the depreciation of their capital, and if it is found that they cease now to register themselves in England because of the operation of the Income Tax, am I not right in pressing this matter once more on the Chancellor of the Exchequer? It is sometimes said that if any relief were given it would be taken advantage of by a great many other industries than those which I have in mind. I have endeavoured to make myself acquainted with the system of finance pursued in the gold mines of South Africa, not many of which I believe are now registered in England, and in some other companies. My researches rather lead to the conclusion that, whether you turn to South Africa, to Chili, or to Canada, the number of companies which would previously have registered here, but now cease to do so, is largely increasing, the fear of the heavy Income Tax having proved a real and effective deterrent. In order to guard against the danger to which I have referred, I have drawn the Clause in the form in which it stands on the Paper.

I have provided that no exemptions shall be allowed in respect of a deduction for inherently wasting assets unless it is the original policy adopted by the company or has been adhered to during a period of three years. The Clause also provides that in no case shall any company be entitled to an exemption unless and until it has placed a sum to depreciation account beyond any possibility of recall for the purpose of dividends in after years which may be less satisfactory from the trading point of view. The real difficulty arises from the fact that the Income Tax Acts were passed long before Joint Stock enterprise had reached its present dimensions. They have never been much modified or altered, and the present system of collecting Income Tax upon the gross trading profits is really an anomaly which ought to have passed away in these cases. A certain number of exemptions have been allowed. There is now an allowance of 5 per cent. in respect of plant and machinery. That was obtained under the Act of 1878. Under the Act of 1894 there is an allowance of one-sixth in respect of repairs to buildings. The Act of 1907 established that the life of ships should be taken at twenty-five years and granted an allowance of 4 per cent. on their prime cost. I am putting forward the case that this particular industry is also entitled to an exemption. It will be said that there are many other inherently wasting assets. One which is commonly put forward, but which in my opinion is not a wasting asset, is that of a leasehold. When a man buys a lease for a number of years what he buys for a lump sum is the right to enjoy something which the seller has, and on which the seller has to pay year by year his quota to the Exchequer. The fact that the purchaser pays down a lump sum does not prevent the subject matter of the purchase from being something which originally was liable year by year to pay its quota to the Exchequer, and it seems to me that no true exemption can be claimed in respect to depreciation.

In the case of assets outside the United Kingdom there is no liability to make any contribution to the Exchequer on the part of the foreigner who sells to an Englishman. The only right of the Chancellor of the Exchequer arises when the Englishman or the English company has purchased some foreign asset, and there is a real distinction between the case of a purchase held and worked entirely by citizens of this country, whether it be a coalfield or a leasehold, and cases where foreigners sell wasting assets. It is only when the Englishman has paid his money and begun to work his assets that the Chancellor of the Exchequer has any right to make any demand for Income Tax. I have drawn the Clause in a form in which the relief given would be confined within narrow limits, and only granted to those who had seriously made out a good case for exemption. It applies only to assets existing outside the United Kingdom, thereby preventing the possibility of its being said that I am releasing so large an amount as was indicated by the Chancellor of the Exchequer last year. I have drawn the Clause in a manner in which the exemption can only be claimed by those who have made this policy of providing for wasting assets part of their regular system, and have placed to depreciation account a sum which cannot thereafter be possibly used for distribution amongst the shareholders. That limits the scope of the Clause. I have asked the Chancellor of the Exchequer to go a bit further than he did last year. He said last year—and I think I fairly remember what he did say—that practically justice was on my side, but that the system of the present time worked sufficiently well from his point of view, and that of the large revenue that was collected. If justice is on my side the injustice is worse on a number of persons. If injustice is to be continued, the injustice ought to be narrowed as much as possible. I claim that at the present time, in the interests of the business of the Chancellor of the Exchequer himself, in the interest of his own collection of revenue, that it is advisable to accept this Clause. If no exemption is given to wasting assets as I suggest, so long will companies fail to come.

I have been told, on information which I can safely pass on to the Chancellor of the Exchequer, that a very large company with a capital of £800,000 ultimately registered itself in Chili because they were unable to face the English difficulties. Another case in which the circumstances were of much the same character with a capital of much the same amount was that of a company which will not come to this country because of the severity of the Income Tax. If this exemption could be granted, and if the penalties of the Income Tax could be mitigated, we should once more have the companies ready to come to London—which, after all, is the most satisfactory place from many points of view for their purposes—where they would be liable, and rightly liable, to contribute to other forms of taxation, the Stamp Duties and others. I apologise to the Committee for having explained this matter at some length, but the Clause is not one which explains itself at first sight. I press the Chancellor of the Exchequer to deal with this matter. I have ventured to make a somewhat long draught upon the patience of the Committee. Let me add this one word in closing. If we insist, as we do, both by practice and in the Courts, that men shall conduct their business on the methods of sound finance, it is very unfortunate that the present system of Income Tax should be such as to give an incentive to unsound finance and to prevent the proper provision being made for wasting assets. We should so far as we possibly can bring the system of Income Tax into conformity with sound, genuine, honest finance. If the Chancellor of the Exchequer will accept this Clause he will have made a contribution to that end. At the same time, having regard to the limited scope of the Amendment, and the present difficulties of the companies coming over here, he will find that his revenue, instead of being diminished, will in fact be increased.


Every Chancellor of the Exchequer is confronted with Amendments similar to this when he gets into Committee on the Finance Bill. Ever since I have been in the House, I think, there has been a Motion of this kind pressed upon the Government. The hon. and learned Gentleman has put his case with lucidity and as cogently as it possibly could be put. He has also this advantage over previous Amendments of the same character; he has limited this one in its scope. If it were possible to accept it in this form, without any serious consequences, I agree that it would not be very easy to resist, because, for instance, he put a strong case in respect to the nitrate company. Once, however, you begin to embark upon this course—once the Treasury accept this distinction and import it into the Finance Bill of the year in reference to companies outside, no one in this House believes it possible to stop short in its application to companies inside the United Kingdom. The hon. Member stated that last year I acknowledged the justice of the case he was making. He suggested that was an admission on my part of the injustice of the present law. But it is not so much a question of justice or injustice as of the utter impossibility or impracticability of establishing a rule which will enable you to draw a distinction between what are wasting assets and what are not. If you say a wasting asset is something which is bound to come to a termination as a profit-bearing enterprise within a certain term of years, more or less defined, then the only asset in this country which is not a wasting asset is land. Any business or industrial enterprise is bound to be a wasting asset. Take, for instance, a business which depends upon goodwill, and which really very often is the case of either depending upon the locality being one which is going to remain, say, fashionable for that business, or which depends upon the life of some person who has made or developed the business. The moment he vanishes you can never be certain that you will get an equally good man to follow.

When you are investing your money in a business of that sort, you are investing your money in a business which is a wasting business to that extent. The same thing applies to collieries. The hon. and learned Member has pointed out the case of the goldfields in Africa, India, and elsewhere. Those are wasting assets; but in none of those cases do the companies themselves, in their balance-sheet, arrange their affairs as if that business were coming to an end. The hon. and learned Gentleman knows very well they do not set aside any sum to reserve in order to provide against the possibility of the enterprise coining to an end. They distribute the whole of the dividend. The only sum of money they do set aside is for purposes which involve acknowledged depreciation. There rarely is anything set aside in contemplation of the possibility of the termination of the business for one reason or another. It is extremely difficult for that reason to draw a line between what is a wasting asset and what is not. If you draw a hard and fast line, the only thing that remains is land, which is the one thing that does not waste. I am not sure you could say the same with regard to Consols, because you will find, before the present Government came into power, there was a very considerable drop in Consols, and that drop has been going on owing to reasons which are not really applicable to this country alone, but affect Europe. As a matter of fact the balance is redressed and adjusted in the Death Duties. When you take the capital value of your assets and when you are coming to assess their capital value you take the possibility of wastage into account, and often in that way the balance is redressed. Take the amount of the shares. The value of these shares is fixed on the Stock Exchange. The contingency which the hon. and learned Gentleman put before the House now was that when you come to Death Duties the wasting character of the asset is an important element in arriving at the duties, and I heard the hon. and learned Gentleman many times treating the Death Duties as if they were only a kind of deferred Income Tax. If you do it on that basis in respect of a most substantial part of your Income Tax, the wasting character of the asset is taken into account.

The hon. and learned Gentleman made a very strong case in respect of this particular kind of security. He introduced a deputation to me the other day upon the subject, and a very strong factor was that the different speakers accentuated the view which the hon. and learned Member very clearly stated, that it would take twenty-five or thirty years to exhaust these mines, but that is now done in about fifteen years. The reason of that is that some other commodity may be invented or discovered which would prove a serious rival to the nitrate deposits of the West Coast of America, and, therefore, might bring their profitable character to an untimely end. That is an element of a totally new character that makes their profits exist for a shorter time than before. I think the answer to that is the answer which can be given in respect of a leasehold, that when you purchase a leasehold you take into account the number of years. The same thing applies to the nitrate fields. If the nitrate fields would last for forty or fifty years they would be three times as valuable as something that would come to an end and be exhausted in fifteen years.


If I am not inconveniencing the Chancellor of the Exchequer, I should like to say that, of course, the nitrates are based upon the value per quintal. You may work it at a slower or quicker rate; that is not so in the case of a lease.


It is only another way of putting it. If you could go down another 10 ft. or 20 ft. for more quintals, it would take more time to exhaust. It is the same thing. It takes a certain number of years to exhaust. You do not know how long it will take to exhaust, and, therefore, it is no use making a calculation as to the number of years in which you waste it. With regard to nitrate deposits you know the area but you do not know the quality or the depth of the deposits in the area. You find in certain places a very rich deposit and good depth. In another part of the same field, a few yards beyond, you may find a very good deposit but not of the same quality. I experienced in dealing with men who had a knowledge first hand they could not give a fair average of the life time of these nitrate deposits. My own idea is that once you introduced this element in this new Clause, you cannot draw the line. You may say some of the nitrates will come to an end in twenty years, but the West Coast of America cannot possibly accept that line. The hon. and learned Gentleman put a very strong case. I consulted with my advisers, and they were very alarmed, and they warned me very strongly against giving way upon this question. It seems only a small thing, but it would cost another 1d. on the Income Tax, and, therefore, I am afraid that I shall have to follow the example of my predecessors for the last forty or fifty years, because I am afraid the hon. and learned Gentleman's suggestion is a dangerous experiment, and one that I could not accept.

Question, "That the Clause be read a second time," put, and negatived.