HC Deb 16 July 1914 vol 64 cc2249-57

If it shall be proved to the satisfaction of the Commissioners that the holder of any debentures, stocks, shares, securities, or obligations of any company, corporation, municipality, State, or Government which stipulate for the payment of interest or dividends free of Income Tax is a person entitled to exemption or abatement from Income Tax, he shall have repaid to him the amount which has been paid as Income Tax by the company, corporation, municipality, State, or Government, liable to pay such interest or dividends in respect of the debentures, stocks, shares, securities, or obligations which he holds."

Clause brought up, and read the first time.


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

There is just time enough before the guillotine falls to enable the right hon. Gentleman to remedy what is really a curious anomaly in the Income Tax law, which affects small investors, and which will cost him hardly any revenue. Under the law as it stands, if interest on debentures is paid free of Income Tax, that is to say, if the company pays the Income Tax before the interest is paid to the debenture holder, though he is a man with a total income under £160, he cannot get the abatement. I may give an illustration. Take Income Tax at Is. in the £. If a company pays 5¼ per cent, and deducts the Income Tax from it, the debenture holder in that case gets 5 per cent. net. He does get his abatement paid back if he has under £160. But if, on the other hand, the company pays him 5 per cent, free of tax, that is to say, if the company itself pays the ¼ per cent., he does not get the exemption. The revenue gets precisely the same amount of Income Tax in both cases. The debenture holder gets precisely the same amount of interest in both cases, and yet, for some reason that I cannot understand, in one case he gets repayment of his Income Tax and in the other case he does not. The hon. Member for Kingwinsford asked a question on the 2nd July, 1913:— Whether it is the practice of the Board of Inland Revenue to refuse repayment of Income Tax to the holders of debentures which stipulate for the payment of interest free of Income Tax, although the holder is entitled to exemption from Income Tax? The right hon. Gentleman in reply said:— The answer to the question is in the affirmative. The Income Tax Acts only authorise the repayment to an exempt person of tax which he has paid or has actually suffered by deduction from rent or interest. In substance he suffers a deduction if the company has paid it before it pays him. He is in precisely the same position whether the company pays 5¼ per cent, subject to Income Tax or deducts it before it pays him, and pays him 5 per cent, free of Income Tax. In those companies the small investor is really without any justification placed in a worse position. I cannot see the slightest ground for any differentiation. The company's position is this, that the Inland Revenue adopt this practice in the case of interest on debentures, but they do not adopt the same practice in the case of dividends on preference shares. If it is a case of dividends on preference shares, they do allow the small investor to have the rebate. What can be the grounds of the distinction I cannot imagine. They put forward the ground that no Income Tax has been actually deducted from the interest to which the debenture holder is entitled. Nominally that is so, but in fact it is not so. If they logically carry out their theory to its proper conclusion, the debenture holder who receives the interest on those debentures ought to pay Income Tax. If you treat it as interest which has not yet been paid on those debentures, then the debenture holder, when he receives his interest, ought to pay the tax. The Inland Revenue authorities do not carry it out logically; they do not ask him to pay. When he is a small man, they do not allow him the deduction. I cannot see what possible grounds of justification there can be for it. There are a number of companies which have contracted to pay their interest free of taxes. They cannot get out of their obligation. I have a list of companies here. There is a large number of very small investors in those companies who are quite unjustly placed at a disadvantage in comparison with investors in other companies. Really there is no justification for this, and I hope that the right hon. Gentleman will see his way to remedy this grievance, which, though it is small, is felt to be very real by those who hold debentures in those companies, and as to which I really think there can be no logical answer whatever.


I wish to say a word in support of the hon. and learned Gentleman. I have never been able to understand the distinction between loans and debentures at a fixed rate of interest and interest on shares on which the company have already paid Income Tax. This is not exactly the same case as the Lancashire case which the right hon. Gentleman had before him a year or so ago, because in that case it was loaned money, and really the interest might not have been paid. It seems to me that there is no difference between income from shares and income from debentures, and if the beneficiary receives an allowance in the one case it should be given in the other.

The SOLICITOR-GENERAL (Sir Stanley Buckmaster)

I think a very little consideration will show that this Amendment is not a very reasonable one. It is directed to the case where a man holds debentures or some loan security in the company, and the company has contracted to pay him a fixed rate of interest irrespective of Income Tax. Let me assume that it is a payment of 4 per cent, or 5 per cent, free of Income Tax. The lender, then, gets every year his fixed 4 per cent, or 5 per cent., and the company undertake to pay the tax. How far it is a lawful bargain may well be doubted, having regard to Section 103 of the Act of 1842, which on the face of it certainly suggests that any such bargain should be utterly void. The words are:—

"All contracts, covenants, and agreements made or entered into for the payment of interest, rent, or other annual payment in full, without allowing deduction, shall be utterly void."

Let us assume it is not void, and that it is a perfectly lawful bargain, the result of this Amendment, if it were carried, would be to produce this astounding result, that the higher the rate of Income Tax the larger the sum the man would receive, because if he gets 4 or 5 per cent, free of tax when the tax is a shilling, and is entitled to recover that shilling in addition to the 4 or 5 per cent., it follows that if the Income Tax becomes 1s. 2d. or 1s. 3d. he recovers, in addition to the 4 or 5 per cent., 1s. 2d. or 1s. 3d.; and he would represent one of the only fortunate class in this country who would be able to rejoice as the Income Tax proceeded to rise. Really there is no ground whatever, I submit to the Committee, for accepting this Amendment, and I ask the Committee to reject it.


I hope my hon. and learned Friend will not feel aggrieved if on this occasion I say that I think the arguments of the Solicitor-General are unanswerable. Suppose a certain person holds, say, 5,000 Three Per Cent. Debenture Stock producing £150 per year, free of Income Tax, and that that is all the income he has, then he is entitled to the deduction of Income Tax upon that income. He gets the £150, and he is not aggrieved in any kind of way. He does not pay Income Tax. I cannot see why, because the company has chosen to make that kind of bargain he should, in addition to the £150, also receive a bonus of 1s. 2d. or 1s. 3d. to which he is in no way entitled. Take the case of a company which declares its dividend on its ordinary stock free of Income Tax, there a man receives £150 free of Income Tax. In that case it is quite true if the company did not pay the Income Tax upon the £150 there would be a certain amount over which the company really ought not to have paid—that is to say, the Exchequer has got something which it would not have got if the company did not pay the Income Tax, because it would not have got that on the £150. But that has got to be divided amongst the whole shareholders. It is not the property of this particular person, and the result would be so infinitesimal that I really do not think it would be worth while troubling about it. In the latter case it is within the power of the shareholders to pass a resolution at any annual general meeting that they should in future not deduct the Income Tax, but that the individual shareholders should pay it. That was done in the case of a company of which I am a director. Therefore, though as a rule I sit, with great advantage to myself, at the feet of my hon. and learned Friend, in this particular case I think he has made a mistake, and if he goes to a Division I am afraid I shall have to find myself in the same Lobby as the hon. Gentlemen opposite.


(who was indistinctly heard): If this matter goes to a Division, I am sorry I shall not have the unusual privilege of voting in the same Lobby as the hon. Baronet. This grievance is felt by a large number of people. There are in Lancashire mills alone 27,000 small loan holders who usually receive their interest free of Income Tax. Until a short time ago the money was paid to the Inland Revenue, and it was then repaid to these people, so that they have a definite grievance now that the Inland Revenue are awake to the position. On the merits of the case, it seems to me that it is really Income Tax deducted on incomes below £160. It is no good saying that the individuals have no particular right to it. At any rate, the State has no right to it. The money is paid on behalf of Income Tax payers, and it is received by the State in respect of people who are not liable to Income Tax. For that reason I think the State ought not to try to drive too hard a bargain. The hon. Baronet opposite says it is quite easy for the company to change its system, and instead of paying 4 per cent, free of Income Tax to pay 4¼ per cent. The two things are practically the same, but the State says, "Although the two things are the same, in one case we collar the money to which we are not entitled, and in the other case we do not." It is not always easy to make the change. It is not good for the credit of a mill, where they have been able to borrow at 4 per cent., to raise the rate to 4¼ per cent. On the merits I think these people have a very good claim, and I hope the Government will allow the Clause to be passed.


I do not quite understand whether this question of granting a rebate in this case goes as far as the hon. Baronet thought. As I understand, there is a rule in the case of debentures where a specific contract has been made by the company to pay the interest free of Income Tax. But I did not gather from the Solicitor-General whether the same practice exists in regard to ordinary or preference shares.


It is a different thing altogether.


Very few companies which in the past have been in the habit of paying their dividends free of Income Tax are likely to do so much longer. There are two reasons why they should not. The first is that Income Tax is now so high that it is most desirable that taxpayers should know exactly what they are paying. The second is that it is likely to go higher still. As we know from a recent speech of the Attorney-General, we are going to have not only a Super-tax but a super-Super-tax. Heaven only knows where it is going to end! No company with any sense at all will continue to pay its dividends free of Income Tax. Scottish banks which were in the habit of paying interest free of Income Tax have recently, largely at my suggestion, changed their practice, and they have been extremely glad since that they did so. I do not suppose that there will be very many cases of this kind. The Chancellor of the Exchequer is very careful when he charges his Super-tax to take care that those who get their dividends free of Income Tax should have the tax added and be Super-taxed upon it. He is very careful to look after his own interests in this respect, but I am not so sure whether he will be equally careful to see to this particular concession. What is sauce for the goose is also sauce for the gander, and there is a good deal to be said from what my hon. Friend has put forward.


Although I very much regret that the hon. Baronet does not support me on this occasion, and in face of his threat of being against me in the Lobby I shall not be prevented going to a Division if I can get anybody to tell with me. I feel that this is so monstrously unjust upon small people. Why should any man whose income is less than £160 pay Income Tax—and he does pay Income Tax. As for the differentiation which the Solicitor-General attempted to draw between the case of ordinary shares and debentures, that does not apply in the case of preference shares. I have got here a letter from the Inland Revenue to say that in the case of preference shares a man may be entitled to 5 per cent, without being allowed an exemption. I can understand him attempting to draw a distinction between taxing shares where there is no limit, but in the case of preference shares, which are limited just the same as debentures, it is made perfectly clear that really the subject ought to be entitled to that exemption. As for the other argument of the Solicitor-General that the higher the Income Tax the more benefit the man gets if he is not liable to Income tax, that is so in every case where he is relieved. In every case where the Income is under £160 the higher the Income Tax the more the man benefits, because the more he gets let off. It is a mere question of which way you put it; whether, say it is 4¼ per cent, subject to Income Tax, or 4 per cent, free of Income Tax. There is no reason for refusing to repay to the man, who by law is free of Income Tax, that to which he is entitled. I feel myself so much on the subject that notwithstanding the opposition of the hon. Baronet, I shall press this matter to a Division.

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

The Committee divided: Ayes, 119; Noes, 219.

Division No. 179.] AYES. [10.38 P.m.
Agg-Gardner, James Tynte Goldsmith, Frank Randles, Sir John S.
Ashley, Wilfrid W. Guinness, Hon. Rupert (Essex, S.E.) Ratcliff, R. F.
Astor, Waldorf Gwynne, R. S. (Sussex, Eastbourne) Rawlinson, John Frederick Peel
Baird, John Lawrence Hamilton, C. G. C. (Ches., Altrincham) Rees, Sir J. D.
Baldwin, Stanley Hardy, Rt. Hon. Laurence Ronaldshay, Earl of
Barlow, Montague (Salford, South) Harris, Henry Percy Royds, Edmund
Barnston, Harry Harvey. T. E. (Leeds, West) Rutherford, Watson (L'pool, W. Derby)
Bathurst, Hon. A. B. (Glouc., E.) Henderson, Major H. (Berks, Abingdon) Salter, Arthur Clavell
Benn, Ion Hamilton (Grenwich) Henderson, Sir A. (St. Geo., Han. Sq.) Sanders, Robert Arthur
Bird, Alfred Hewins, William Albert Samuel Sanderson, Lancelot
Brassey, H. Leonard Campbell Hoare, S. J. G. Sandys, G. J.
Bridgeman, William Clive Hohler, Gerald Fitzroy Spear, Sir John Ward
Burn, Colonel C. R. Hope, Major J. A. (Midlothian) Stanier, Beville
Campion, W. R. Horne E. Stanley, Hon. Arthur (Ormskirk)
Carlile, Sir Edward Hildred Horner, Andrew Long Starkey, John Ralph
Cator, John Hunter, Sir Charles Rodk. Saveley-Hill, Henry
Cawley, Sir Frederick (Prestwich) Ingleby, Holcombe Stewart, Gershom
Cecil, Evelyn (Aston Manor) Jessel, Captain H. M. Strauss, Arthur (Paddington, North)
Cecil, Lord Hugh (Oxford University) Joynson-Hicks, William Swift, Rigby
Cecil, Lord R. (Herts, Hitchin) Kinloch-Cooke, Sir Clement Talbot, Lord Edmund
Clyde, J. Avon Lane-Fox, G. R. Terrell, Henry (Gloucester)
Coates, Major Sir Edward Feetham Lawson, Hon. H. (T. H'mts., Mile End) Thomas-Stanford, Charles
Courthope, George Loyd Lewisham, Viscount Thomson, W. Mitchell- (Down, North)
Craig, Norman (Kent, Thanet) Locker-Lampson, O. (Ramsey) Thynne, Lord Alexander
Craik, Sir Henry Lockwood, Rt. Hon. Lt.-Colonel A. R. Touche, George Alexander
Croft, H. P. Lowe, Sir F. W. (Birm., Edgbaston) Ward, A. S. (Herts, Watford)
Currie, George W. Lyttelton, Hon. J. C. Watson, Hon. W.
Denison-Pender, J. C. Mackinder, Halford J. Weigall, Captain A. G.
Dixon, C. H. Macmaster, Donald Weston, Colonel J. W.
Duke, Henry Edward Mallaby-Deeley, Harry Wheler, Granville C. H.
Du Pre, W. Baring Mildmay, Francis Bingham Wilson, Captain Leslie O. (Reading)
Eyres-Monsell, Bo'ton M. Mount, William Arthur Wolmer, Viscount
Faber, Captain W. V. (Hants, W.) Newton, Harry Kottingham Wood, Hon. E. F. L. (Yorks, Ripon)
Falle, Bertram Godfray Nicholson, William G. (Petersfield) Wood, John (Stalybridge)
Fell, Arthur Nield, Herbert Worthington Evans, L.
Flannery, Sir J. Fortescue Orde-Powlett, Hon. W. G. A. Yate, Colonel C. E.
Fletcher, John Samuel Pease, Herbert Pike (Darlington) Younger, Sir George
Ganzoni, Francis John C. Perkins, Walter Frank
Gardner, Ernest Peto, Basil Edward TELLERS FOR THE AYES.—
Gastrell, Major W. Houghton Pollock, Ernest Murray Mr. Cassel and Mr. Cawley.
Gilmour, Captain John Pryce-Jones, Colonel E.
Abraham, William (Dublin, Harbour) Cowan, W. H. Goldstone, Frank
Adamson, William Craig, Herbert J. (Tynemouth) Griffith, Rt. Hon. Ellis Jones
Addison, Dr. Christopher Crooks, William Gwynn, Stephen Lucius (Galway)
Ainsworth, John Stirling Crumley, Patrick Hackett, John
Allen, Arthur A. (Dumbartonshire) Cullinan, John Hall, Frederick (Yorks, Normanton)
Allen, Rt. Hon. Charles P. (Stroud) Davies, Timothy (Lines., Louth) Hancock, John George
Arnold, Sydney Dawes, James Arthur Harcourt, Rt. Hon. H. L. (Rossendale)
Baker, Harold T. (Accrington) Delany, William Harcourt, Robert V. (Montrose)
Banbury, Sir Frederick George Denman, Hon. Richard Douglas Hardie, J. Keir
Barnes, George N. Dickinson, Rt. Hon. Willoughby H. Harmsworth, Cecil (Luton, Beds)
Barran, Sir John N. (Hawick Burghs) Dillon, John Harvey, A. G. C. (Rochdale)
Benn, W. W. (T. Hamlets, St. George) Donelan, Captain A. Haslam, Lewis (Monmouth)
Boland, John Pius Doris, William Hayden, John Patrick
Booth, Frederick Handel Duffy, William J. Hayward, Evan
Bowerman, Charles W. Duncan, C. (Barrow-in-Furness) Henderson, Arthur (Durham)
Boyle, Daniel (Mayo, North) Duncan, Sir J. Hastings (Yorks, Otley) Henderson, J. M. (Aberdeen, W.)
Boyton, James Edwards, John Hugh (Glamorgan, Mid) Henry, Sir Charles
Brady, Patrick Joseph Esmonde, Dr. John (Tipperary, N.) Herbert, General Sir Ivor (Mon., S.)
Brocklehurst, W. B. Esmonde, Sir Thomas (Wexford, N.) Higham, John Sharp
Bryce, J. Annan Esslemont, George Birnie Hobhouse, Rt. Hon. Charles E. H.
Buckmaster, Sir Stanley O. Falconer, James Hodge, John
Burns, Rt. Hon. John Farrell, James Patrick Hogge, James Myles
Burt, Rt. Hon. Thomas Fenwick, Rt. Hon. Charles Hope, John Deans (Haddington)
Byles, Sir William Pollard Ffrench, Peter Hudson, Walter
Carr-Gomm, H. W. Field, William Hughes, Spencer Leigh
Chancellor, Henry George Fitzgibbon, John Jardine, Sir J. (Roxburgh)
Chapple, Dr. William Allen Flavin, Michael Joseph John, Edward Thomas
Clancy, John Joseph Gelder, Sir W. A Johnson, W.
Clough, William George, Rt. Hon. D. Lloyd Jones, Rt. Hon. Sir D.Brynmor (Swansea)
Clynes, John R. Ginnell, Laurence Jones, Edgar (Merthyr Tydvil)
Collins, Sir Stephen (Lambeth) Gladstone, W. G. C. Jones, H. Haydn (Merioneth)
Compton-Rickett, Rt. Hon. Sir J. Glanville, Harold James Jones, J. Towyn (Carmarthen, East)
Cornwall, Sir Edwin A. Goddard, Sir Daniel Ford Jones, Leif (Notts, Rushcliffe)
Jones, William (Carnarvonshire) O'Brien, Patrick (Kilkenny) Scanlan, Thomas
Jones, William S. Glyn- (Stepney) O'Connor, T. P. (Liverpool) Scott, A. MacCallum (Glas., Bridgeton)
Joyce, Michael O'Doherty, Philip Sheehy, David
Kellaway, Frederick George O'Donnell, Thomas Sherwell, Arthur James
Kelly, Edward O'Dowd, John Simon, Rt. Hon. Sir John Allsebrook
Kennedy, Vincent Paul O'Kelly, Edward P. (Wicklow, W.) Smith, Albert (Lancs., Clitheroe)
Kilbride, Denis O'Malley, William Smith, H. B. Lees (Northampton)
King, Joseph O'Neill, Dr. Charles (Armagh, S.) Strauss, Edward A. (Southwark, West)
Lambert, Rt. Hon G. (Devon, S. Molton) O'Shaughnessy, P. J. Sutherland, John E.
Lambert, Richard (Wilts, Cricklade) O'Sullivan, Timothy Sutton, John E.
Law, Hugh A. (Donegal, West) Outhwaite, R. L. Taylor, Thomas (Bolton)
Leach, Charles Palmer, Godfrey Mark Thomas, J. H.
Lewis, Rt. Hon. John Herbert Parker, James (Halifax) Thorne, G. R. (Wolverhampton)
Low, Sir Frederick (Norwich) Parry, Thomas H. Thorne, William (West Ham)
Lundon, Thomas Pearce, Robert (Staffs, Leek) Toulmin, Sir George
Lynch, Arthur Alfred Phillips, John (Longford, S.) Trevelyan, Charles Philips
Macdonald, J. Ramsay (Leicester) Pirie, Duncan V. Verney, Sir Harry
Macdonald, J. M. (Falkirk Burghs) Ponsonby, Arthur A. W. H. Walsh, Stephen (Lancs., Ince)
McGhee, Richard Pratt, J. W. Ward, John (Stoke-upon-Trent)
MacNeill, J. G. Swift (Donegal, South) Price, C. E. (Edinburgh, Central) Wardle, George J.
MacVeagh, Jeremiah Pringle, William M. R. Wason, Rt. Hon. E. (Clackmannan)
M'Curdy, C. A. Raffan, Peter Wilson Wason, John Calhcart (Orkney)
McKenna, Rt. Hon. Reginald Rea, Rt. Hon. Russell (South Shields) White, J. Dundas (Glasgow, Tradeston)
M'Micking, Major Gilbert Reddy, Michael White, Patrick (Meath, North)
Manfield, Harry Redmond, John E. (Waterford) Whitehouse, John Howard
Marks, Sir George Croydon Redmond, William (Clare, E.) Whyte, Alexander F. (Perth)
Marshall, Arthur Harold Rendall, Athelstan Wiles, Thomas
Meagher, Michael Richardson, Albion (Peckham) Wilkie, Alexander
Meehan, Francis E. (Leitrim, N,) Richardson, Thomas (Whitehaven) Williams, Aneurin (Durham, N.W.)
Meehan, Patrick J. (Queen's Co., Leix) Roberts, Charles H. (Lincoln) Williams, Penry (Middlesbrough)
Millar, James Duncan Roberts, George H. (Norwich) Williamson, Sir Archibald
Molloy, Michael Roberts, Sir J. H. (Denbighs) Wilson, Rt. Hon. J. W. (Worcs., N.)
Montagu, Hon. E. S. Robertson, Sir G. Scott (Bradford) Wilson, W. T. (Westhoughton)
Morgan, George Hay Robertson, John M. (Tyneside) Winfrey, Sir Richard
Morison, Hector Robinson, Sidney Wing, Thomas Edward
Muldoon, John Roche, Walter F. (Pembroke) Yeo, Alfred William
Munro, Rt. Hon. Robert Roche, Augustine (Louth) Young, William (Perthshire, East)
Murray, Captain Hon. Arthur C. Rowlands, James Yoxall, Sir James Henry
Neilson, Francis Runciman, Rt. Hon. Walter
Nolan, Joseph Russell, Rt. Hon. Thomas W. TELLERS FOR THE NOES.—Mr.
Nugent, Sir Walter Richard Samuel, J. (Stockton-on-Tees) Gulland and Mr. Webb.

The new Clause standing in the name of the hon. Member for South Northampton (Mr. Fitzroy), is outside the scope of the Bill. The new Clauses standing in the name of the hon. Member for Enfield (Mr. Newman) and the hon. Member for Rutland (Mr. Gretton), are not in order.