NEW CLAUSE.—(Relief from Income Tax in Respect of Interest on Bankers' Loans.) (Hansard, 29 June 1915)

§ Mr. PETO
I beg to move, "That the Clause be read a second time."
In moving this Clause I am dealing with only one of the many inconsistencies in the administration of the Income Tax Acts. I think I shall be able to show that in this matter the administration is so unjust and so contrary to public policy, particularly in view of the issue of the new War Loan, that it is most desirable that at any rate this particular anomaly and injustice should be removed. Until quite recently the form of certificate relating to a claim in respect of bankers' interest had on the face of it certain questions, the third of which was:— Has the loan been in existence continuously for at least twelve months? Although that question was answered in the negative, as it would be in the case of most people who have advances on general securities from their bankers, the claim for Income Tax paid was allowed. Last year this was disallowed. The effect of that is somewhat peculiar, because on this form the banker who gives the certificate is required to state formally that— This interest bus been accounted for by Mr.—in full, without deduction for Income Tax, and has been or will be included by the bank as part of their profits in respect of which an assessment has been or will be made, and duly paid under Schedule D of the Income Tax. In effect, that means that the banker is paying the Income Tax. In spite of that the Treasury refuses—except on the rare occasion when the loan is in force for the whole of the twelve months—to allow this as a reduction from the income of the individual. In other words, they claim to have this Income Tax twice over from two people. That is entirely contrary to the practice of the Treasury in respect of certain other matters. In the case of the occupation of tenements, the occupier deducts the Income Tax which he has to pay from the landlord, because the rent forms part of the income of the landlord. That, of course, is the usual practice. The same thing obtains in the payment of interest on a mortgage. It is only in the case of bank interest that, owing to the banker being in a somewhat different position to the mortgagor, or landlord, namely, that he is actually in possession of his client's money, that the banker deducts in the ordinary way the interest which is due to him, and the unfortunate person who pays that interest is unable 1686 to get a return of the Income Tax on it, unless he can state that the loan has been in force for the whole twelve months.
That seems an extraordinary illogical position. Take two people, one of whom gets an advance of £2,000 from his banker for six months, say, 4 per cent. His claim would be disallowed. Another person asks for a loan of £1,000, and supposing it is current for the whole of the twelve months, his claim would be allowed, although the amount of deduction from the income of the two individuals is absolutely identical, that is £40. In one case the Income Tax is allowed, and in the other it is not. It seems to me curious that it should be an arbitrary rule, that unless a loan has been in force and current for the whole of the twelve months no allowance is to be made. It is entirely contrary to equitable business principles. Where there is an ordinary debit and credit account running, it is always usual to allow any counterclaim, or set-off. In this case, if a man has an income of £1,000 derived from dividends from securities, a part of which he has bought by means of a loan from his bankers, he is not allowed to pay Income Tax on the real amount of his income—that is, the amount of income, less the amount of interest he has to pay to his bankers—unless in a certain arbitrary and unusual conditions of affairs, which is not good business, of having an advance from his banker for the whole of the twelve months.
It is also perfectly clear that, in relation to the present War Loan—and this is a point of special interest to the Chancellor of the Exchequer—this particular injustice is a very unfortunate one. Let me, if I may, give my own case. For many months past I have not thought of making any investments. Anything I had paid to me, or saved, has been put upon deposit at my bankers, waiting for the Chancellor of the Exchequer, who I knew sooner or later would come for all the money that anybody could find for his War Loan. Mine is not a round sum. In the ordinary way I should ask my banker for a loan for whatever I should think it likely I should be able to repay in at least six months. What will be the effect? Income Tax will have to be paid on every halfpenny of the money that has been on deposit, perhaps at the rate of 2 per cent. or 3 per cent., or whatever the banker may be pleased to allow. Income Tax will have to be paid 1687 on the dividends received on 1st December, and although a man may make an investment for £5,000, £2,000 of which he has to take on loan from his banker for the six months, he will not be allowed to set against the income he will be paid on his investment the interest he will have to pay, probably 5 per cent., to his banker for the six months on money borrowed to assist in the finances of the country.
I think, therefore, the Clause is not open to the criticism which was made by the hon. Member for Pontefract. I am inclined to think that under the existing circumstances, when parties in this House have disappeared, that we might have one advantage in a simple matter of this kind. The Clause I put is non-controversial altogether. We might have the opportunity of showing, whether or not we agree with the Clause in principle, whether we think it desirable that this particular anomaly and injustice of Income Tax administration should go on under present circumstances or whether it should be terminated. I hope the Chancellor of the Exchequer will see his way to agree to this very simple proposal that I put forward, but in the event of his not having some very strong argument against it—which I cannot conceive!—to show me that I am wrong in thinking that any injustice is at present done, I certainly propose to divide the House upon this Clause.

§ Mr. MONTAGU
The present law on this subject is a little difficult, because if a man borrows from his banker for business purposes, whether he borrows for a part of a year or for the whole of the year, he is allowed to deduct as part of his expenses the interest upon his banker's loan; so that in the form in which the hon. Member's Clause was originally upon the Paper he did not propose any amendment at all of the law. In the form in which he now moves it, he does propose an alteration of the law, because if the loan from the banker is not for business purposes, but is annual in its duration, or, if I may use a horrible expression familiar to those who know this subject, a quasi-loan, which runs for more than a year, and on which interest, as I understand it, is not chargeable at the end of the year, but at periods analogous to the end of the year, then, although he cannot deduct in making his return, 1688 the banker is bound by law to give a certificate of receipt to the Commissioners of Inland Revenue, and when the taxpayer claims repayment of Income Tax on this receipt the State is bound to repay it. The hon. Member wants to go further than that and allow a man either to deduct from his income, or to have repaid to him, the tax which he pays, for, I think, partly private loans for broken parts of the year from his banker. As at present advised, it does seem to me very difficult to distinguish that form of casual loan, or overdraft, from any of the many other expenses which the Income Tax payer has to meet with in the course of the year. That is the conclusion which we had formed before we had the advantage of hearing the speech of the hon. Gentleman. If he will desist from his bloodthirsty threat, and not press this Clause to-day, I will consider it and the speech he has made between now and the Report stage, and see whether a Clause to meet his views cannot be framed.

§ Sir JOHN SPEAR
In supporting the Amendment, may I say that I hope the Chancellor of the Exchequer will be able to accede to the request of the hon. Member for Devizes, as he met the hon. Gentleman a while ago in defending the interests of the Post Office depositors—that is on the ground of convenience. Surely from that point of view, as well as from that of my hon. Friend, the concession might be made. Everyone connected with business knows that some of our most able business men have occasionally to have an overdraft from their bankers in order to successfully carry on their business. They should be able, I cannot help thinking, in making up their accounts, to deduct the interest so paid, so as to get the correct balance of their net profits. May I point out that at the present moment it is more than ever important that something should be done in this direction. The great liberality of the interest of the new Loan will make it very difficult for traders to have that accommodation at the banks on the same terms as they have hitherto done. There will be great danger of that seriously embarrassing our trading community. We know that a good deal of the money in the banks, lent at a low rate of interest by bankers to their customers, will be invested in the new Loan, and the banker, in order to meet the requirements of those who wish for an overdraft, must charge a higher rate. The time, therefore, is opportune for the Chancellor of the 1689 Exchequer to meet the case put forward by my hon. Friend. We want the trading community to maintain that position it has hitherto had. Since some of them will be handicapped by any action of the new Loan, I certainly think they ought to be met in this particular instance, so that this grievance can be removed by the acceptance of the Amendment.

§ Mr. ANNAN BRYCE
The hon. Member who spoke last is not quite right in what he said. I thought the hon. Member who moved this Amendment pointed out that anyone who is in business does get the allowance on the interest, whether the loan is for twelve months or shorter. The Secretary to the Treasury stated—and of course it is the fact—though I have never been able myself to understand—

§ Sir J. SPEAR
Certainly it is not the case with the farmers.

§ Mr. ANNAN BRYCE
Whoever does not claim it does not know the law. Everyone in business who borrows from his bankers, and has it as a charge on his business, is not merely allowed to claim for repayment, but may count it a charge before his accounts are made up. There is one point to which the Secretary to the Treasury did not allude, and which I should recommend to his notice, that is the fact that the banker's interest pays Income Tax twice over. That has always seemed to me an absolutely preposterous position. In the case of interest, so much of it goes to the banker as profit, and part is diminished by the banker's expenses, and therefore is taken by the State as Income Tax twice over. I hope that the Secretary to the Treasury, when he comes to consider the case made by the hon. Member, will endeavour to make the thing as easy as possible. Personally, I do not think there is any reason why it should not be allowed to be deducted exactly as in the case of the Super-tax and as in the case of the business firm.

§ Mr. PETO
I am sorry not to agree to the proposal of the Financial Secretary. It seems to me that the principle of withdrawing everything in the hope that something will be added on some future day can be carried too far. This is an arbitrary distinction between people who are and who are not in business, and really is quite indefensible. The hon. Member for Tavistock pointed out, for instance, that farmers are regarded as private individuals. The reason for that is that they 1690 do not, as a rule, pay their Income Tax under Schedule D. They are therefore penalised, although they are the very people who ought not to be. They ought to be allowed to deduct the interest on banker's loans, whether these are for a short or a long period. I am sorry the Financial Secretary will not accept this Amendment. But in view of the fact that he did not challenge the justice of the arguments I put forward or give any reason of national importance why it is undesirable to make this trifling but very necessary change, I regret I cannot withdraw the Amendment, and if the hon. Member for Tavistock (Sir J. Spear) will tell with me, I propose to challenge a Division.

§ Mr. MONTAGU
May I make another appeal to the hon. Member? I do not challenge his arguments, because I want to meet them. I have not the slightest desire to oppose what he wants to do, but I merely ask that we should have time to consider before the Report stage the exact terms of the amendment of the law. Income Tax is not a thing on which one can legislate at a moment's notice. I am not sure, and my advisers are not sure, that the drafting which the hon. Member proposes will effect any change in the existing state of the law. I do, therefore, most earnestly appeal to him not to divide the House. If the hon. Member proposes the Amendment in the present form I shall be bound to ask the House to resist it.

§ Sir GEORGE YOUNGER
I hope the hon. Member will accept the promise of the Secretary to the Treasury.

§ Mr. PETO
As I now understand that it is a question of drafting, and possibly my wording may not be watertight, of course, on the understanding that the right hon. Gentleman will accept the principle and carry it into effect, I will withdraw the Amendment.