§ (1) Any person occupying woodlands who proves to the satisfaction of the Special Commissioners that those wood-lands are managed by him on a commercial basis, and with a view to the realisation of profits, shall have the same right under Subsection (4) of Section 22 of the Finance (No. 2) Act, 1915, to elect to be charged under Schedule D as a person who proves those facts to the satisfaction of the General Commissioners, but an application to prove those facts in any year in respect of the same woodlands must be made either to the General or Special Commissioners, and not to both.
§ (2) Paragraph (a) of Subsection (4) of Section 22 of the Finance (No. 2) Act, 1915, which provides that the election shall extend to all woodlands managed on the same estate, shall not apply to woodlands which are planted or replanted after the passing of this Act, if the person occupying those woodlands gives notice to the General or Special Commissioners within a year after the time when they are so planted or replanted, that they are to be treated for the purpose of that paragraph as being woodlands on a separate estate.
§ (3) Section 23 of the Customs and Inland Revenue Act, 1890 (which gives relief to trading persons in case of loss), shall, where a person occupying woodlands has elected to be charged to Income Tax in respect of those woodlands under Schedule D, apply to losses on those woodlands as it applies to losses in any trade.
Mr. DUNDAS WHITE
I beg to move to leave out Clause 38 for formal reasons in order to ask the Chancellor of the Exchequer if he would be good 706 enough to explain, in as untechnical language as possible, what would be the effect of this Clause. I have no hostile feeling towards the Clause—indeed, I appreciate very fully the object for which the Clause has been introduced. I understand that the general plan is that it is designed to relieve future planting and replanting from the economic penalties that would otherwise fall upon these woodlands under the ordinary operation of the Income Tax as it stands at present or as it stood before last year. I have tried to find out what the precise effects of this Clause would be, but the whole question is rather complicated to one who does not give a considerable amount of study to it. In these circumstances, and in view of the importance of encouraging planting in this country, I would ask the right hon. Gentleman if he could tell us how matters will stand under this Clause. If these woodlands that are planted are used for sporting purposes or let for sporting purposes, what would the position be then, because there might be certain economic advantages from sporting as well as from the planting of timber?
§ Mr. McKENNA
The hon. Member was good enough to write to me and to say that he desired to get a clear statement as to the effect of Clause 38. As I admit that it is somewhat difficult to construe in its actual words, I have had prepared a statement which, if the House will allow me, I would like to read, as it sets out in a very clear form what is the actual effect of Clause 38. I propose to take a concrete case of a man, whom I will call X, who has lands which he proposes to plant or replant with timber. Within a year of the planting X satisfies either the General Commissioners or the Special Commissioners that he is managing the newly planted woodlands on a commercial basis; he elects for Schedule D assessment and intimates that these woodlands are to be treated as a separate area—a distinct unit—for Income Tax purposes. That is to say, these woodlands, which are to be managed purely on a commercial basis, are cut out for Income Tax purposes from the rest of the estates, and are to be assessed on Schedule D basis. On the conclusion of the first year's operations X's accounts will show a loss, obviously. There will be an excess of expenditure over receipts because he does 707 not cut his timber in the first year—indeed, for some years there will be little or nothing to show in the way of receipts. X will have paid Income Tax under Schedule A upon the rental value of the woodlands, and he will now come forward to invoke the aid of Sub-section (3) of Clause 38. Suppose the net Schedule A assessment to be £500, and the losses shown on the year's account to be £300, without charging anything for rent. The loss for Income Tax purposes will be £800, and X will be repaid the whole of the Schedule A tax—that is on £500, and further tax on £300 of his other taxed income. That is to say, where he has no profit, but a loss, he is repaid Schedule A tax, and he is repaid out of his other Income Tax the tax which he has paid in respect of a sum equal to his loss. This process will go on until the tide turns, and when profits begin to be realised X will be assessed for them under Schedule D on a three years' average, deducting, of course, Schedule A assessed value of £500 as an annual working expense. In this way, over the whole period, from the first planting until the final cutting, X will have borne Income Tax upon the actual profits realised from the woodlands, neither more nor less. I think that if we are to prevent discouragement of the planting of woodlands we ought to see to it that whoever plants woodlands is charged neither more nor less than any trader who is carrying on business. I have some further points here in the statement which has been prepared, but I think I have covered the whole ground and given a sufficient answer to my hon. Friend.
§ Sir G. YOUNGER
I am sure those who have taken an interest in this question are very grateful to the Chancellor of the Exchequer for the manner in which he has met the demand that some consideration ought to be given to those who are going to replant woods that have been cut down for the purposes of the War. Shortly put it means this: that you cut out of your estate and make a separate return altogether for the new woods, although you may continue to pay Income Tax on the older woods under Schedule D at present, and you can set off against your ordinary income the losses that may be incurred. I am sure we are all very much obliged to the right hon. Gentleman.
In withdrawing the Motion, I should like to thank the Chancellor of the Exchequer for his clear explanation.
§ Amendment, by leave, withdrawn.
§ Motion made, and Question proposed, "That the Bill be now read the third time."
§ Mr. J. MASON
I should like to take this opportunity of making some remarks on certain subjects which are dealt with in this Bill. The first is in regard to the question of the high rate of Income Tax which is imposed in this Bill, not as it affects private incomes, but as it affects, and must necessarily affect, industries carried on in this country, and especially those industries which come into competition with foreign nations in the neutral markets of the world. This is not a question to be considered as affecting these firms at the present moment so much as it is likely to affect them on the completion of the War. No one will imagine that we must continue an Income Tax of 5s. in the £ after the War, but we must admit, and we must be prepared to admit, that the Income Tax for several years after the War must necessarily be at a high rate in order to meet the very large burden which is imposed by the War. The object I have in mentioning this matter to-day, assuming that I am right and that for some years after the War is over the Income Tax has to be maintained at a high rate, is to suggest to the right hon. Gentleman that it will be necessary to go into the whole question of the system under which the Income Tax is now collected. It is admitted that the Income Tax Commissioners in collecting the tax are very severe in the matter of depreciation in industry. I think if we have to face a long period of high Income Tax it will be necessary, on account of foreign competition, that we shall have to meet in neutral markets, and in order to give our industries a fair chance, that the Commissioners should be more generous in the question of depreciation in the industries of this country.
The other subject I wish to speak about is the future of the controlled firms about which we had very considerable discussion the other day. There is no doubt that the controlled firms as a whole felt that they were being unjustly or harshly treated as compared with the uncontrolled firms. The fact that they were brought 709 under a double tax on the same profits and that that tax was in each case based on a different standard gave them a feeling that they were being treated more harshly than the uncontrolled firms, who were only subject to one tax. There is undoubtedly considerable justification for that contention, and I am sure that the Government is anxious, and has shown itself anxious, to remove as much of that feeling as possible. It has been suggested, so I am informed, that the controlled firms have tried to get out of a bargain, and it has also been suggested that they have, to some extent, threatened passive resistance. I think that both of these statements are very unjust to a large number of firms in this country, who really have been doing a great deal to carry us through a very difficult period. I will go further, and say that I am perfectly satisfied that if the controlled firms of this country as a whole did fail to get a single thing given to them or to get relief from what they believed to be an injustice, they would continue to do their best to win the War in spite of any injustice put upon them.
§ Sir J. D. REES
I wish to refer to a subject which I raised in Committee, because the Financial Secretary to the Treasury, in answering me, did not quite meet my point. He very handsomely said that he had recently take up his new duties, and he confessed to not being fully aware of the details. As the subject is one of very great importance and affects very large business concerns, I wish to refer to it again, in the hope that the Chancellor of the Exchequer will not pass it over in silence as he did another subject a few moments ago. The point is this, and I want an assurance from the Chancellor of the Exchequer in regard to it, which I think he should be able to give. It is the case of a firm which made £50,000 profit in one accounting period and £50,000 loss in another accounting period. Under the principal Act it appeared to be perfectly clear that the one period would be set off against the other, and that there would be no Excess Profits Duty to be paid. Words have been introduced into the Bill which say that the amount to be repaid or set off on account of a deficiency or loss arising in any period in respect of which duty would be payable at the rate of 50 per cent. of the excess, shall be calculated by reference to that rate of duty. As I understand these 710 words, the meaning is—I am not sure that it is not so, and I certainly think it would be argued by the tax gatherer—that whereas the concern would have to pay 60 per cent, on the £50,000 excess—that is to say, £30,000, it would only get a set off of 50 per cent. in respect of the loss of £50,000, and that between the £30,000 paid and the £25,000 set off, there would be £5,000 which would have to be paid as Excess Profits Duty, although as a fact no extra profit would have been made during the war period. I cannot think for a moment that that is really meant, but I do delieve that a tax gatherer, in fact, any ingenious person, would argue that that is the intention, of the words now imported into the principal Act by the present Bill. My hon. Friend the Member for Liverpool (Sir J. Harmood—Banner), than whom there is no more distinguished commercial Member of this House, and no one who has a better knowledge of this subject, supported me in the matter, and said he did not quite understand what would be the effect of the words now imported into the principal Act, and that when he asked the Chancellor of the Exchequer, even the Chancellor of the Exchequer indicated some doubt-it must have been in camera—as to what was the actual effect of this Clause. The Financial Secretary to the Treasury, in reply to me, said that this was a case of taking the rough with the smooth, and he gave me a case of two different men, whereas the whole point of the instance I have given is that it is one man or one firm that is affected, and that the loss in one case is to be set off against profit of an equal amount in the other case. I hope the Chancellor of the Exchequer will think proper on this occasion to give an answer on this matter, because if I err in interpreting the words now imported into the principal Act there are others who also err though they are more familiar than I can claim to be-though I have some knowledge of the subject-with the operation of the Excess Profits Tax in such cases.
There is another point which is also exceedingly important, because of existing financial relations between Great Britain and the United States, and because we are now a debtor country to the United States and because the Chancellor of the Exchequer is exceedingly anxious that those debts should be as far as possible extinguished, and that all private persons 711 should contribute so far as within them lies to their extinction. This arises out of the Budget of 1914, which made Income Tax payable for income arising abroad. Take the case of a man whose income accrues in America. He pays upon that on a three years' average. The contention is that he should pay upon the actualities of the year before, in the same way as the Super-tax is assessed. When I put down an Amendment on this, Mr. Speaker ruled it out. I am sorry that I did not catch his words or I should have ventured to suggest that it was capable of another construction. It was ruled out on the ground that it imposed a charge upon the subject. Had I heard that, I should have shown that the intention, at any rate, was to reduce a charge upon the subject. Suppose that a person whose income arises in America, in answer to the appeal of the Chancellor of the Exchequer brings home, say, £100,000. The income upon that money which he brings home, say, £5,000, is assessed here to Income Tax, while he continues to be assessed upon his three years' average. If such a person sells securities his income in America would be £5,000 less. But for the first year he would still be charged Income Tax upon £10,000, and at the same time he would be paying Income Tax on the £5,000 which he is getting by the reinvestment of the £100,000 that he brought home to invest in Treasury Bills or Exchequer Bonds. Therefore I contend that this patriotic individual would be paying Income Tax on £15,000 per year instead of £10,000 a year, and that this injustice would continue for three years in lesser degree. While accepting this principle in regard to profits arising from trade, where I admit that three years' assessment is the only proper method, my contention is that in other cases the Income Tax should be levied upon the last year's actual receipts, and not upon the three years' average. I have got the figures showing how it would work out for the three years, but I am sure that the Chancellor of the Exchequer takes my point and that it is, therefore, unnecessary to take, up further time with this matter.
Another matter to which I wish to refer is the Cocoa Tax. I must express regret that the Chancellor of the Exchequer, after a long period, having hardened his heart and put a proper tax of 6d. upon cocoa should subsequently have been persuaded to depart from his better judgment and 712 reduce it to 4½d. I do not think that those who are interested in tea will accept the Chancellor's statement that 4½d. on cocoa is a tax proportionate to the present tax upon tea. Though I am aware of the arguments that have been put forward, I think that 6d. would have been far more correct. I only hope that when the tea interest—this long suffering and loyal interest—is moved to make representations as to the amount of tax imposed upon it the right hon. Gentleman will be as amenable td the objections of the tea industry as he has been on this occasion to the arguments of those who are interested in the manufacture of cocoa. I think a great deal about this, but I hesitate to say more. I regret that the Chancellor of the Exchequer has not been able to impose Income Tax upon the profits of cooperative societies. I am not going to argue that. It has been repeatedly argued, but——
§ Mr. SPEAKER
On the Third Beading only the contents of the Bill are a subject for discussion. The hon. Gentleman must not proceed to deal with subjects that are not in the Bill.
§ Mr. J. SAMUEL
There was one point to which I called attention when the Bill was in Committee. It is in Clause 24. It is with regard to the reduction of Income Tax at the source. Under this Clause the Government is taking power to deduct 5s. from every payer of Income Tax, whether he is liable to pay the 5s. or not. I raised the point with the view of trying to get some relief for those who will be penalised under this Clause, and we suggested that the Chancellor of the Exchequer should take their case into consideration and endeavour to provide some redress, and he said that he would consider the matter. People whose Income Tax is deducted at the source, and whose incomes go up to £500, would have about £28 deducted from their income beyond what they are liable to pay. They are liable to pay in that case 3s. in the £, and 5s. is deducted. I do not trouble about the men who are earning large incomes, and are at the present time exploiting the nation in every direction. My sympathies go to the people who have stationary salaries and are not able to take advantage of the present situation to increase their income. I made the suggestion 713 that the Chancellor in these cases should give the person, who is so charged excess of Income Tax, the right to approach the surveyor of taxes in the locality, who is acquainted with the income of every person in the locality, and say, "I have been taxed at the rate of 5s. in the £. I am only liable to pay 3s. in the £, and I claim my rebate of 2s. in the £." I think that that is a very simple way of dealing with this question.
Since I raised the matter I have had several letters. One is from a man who is holding at the present time a judicial position, and he admits that he has come across a very large number of cases of very great hardship, especially in the case of women, of people who have no knowledge how to proceed to recover the excess tax. The suggestion which was made is a workable one. What it means is that the Chancellor should undertake to allow the over-tax to any person who is liable to pay only 3s. Income Tax, so that he shall not be obliged to pay practically a charge of 60 per cent. beyond what that person is liable to pay. There is no indication whatever in the Act as to how this person is to recover this money, and no business man in this country would undertake to overcharge any of his customers 60 per cent. beyond the actual price. I certainly protest against the Government taking the power to charge an Income Tax of 5s. in the £ where the person is only liable to pay 3s. in the £, and that it should have taken this money for a given period, even for three months or six months, and practically give them no indication whatever how they are to reclaim it, is a thing which no Government should do. I, therefore, plead with the Chancellor that he should meet the case of these people who are compelled, through their Income Tax being deducted at the source, either by banks or railway companies or other businesses, to the extent of 5s. in the £, and that he should give instructions that the people in their own locality should be able to approach the surveyor of taxes and say, " They have charged me at the rate of 5s. My income is only £300, £400, or £500, as the case may be. I am liable to pay only 3s. in the £, and I claim now to obtain a reduction of 2s. in the £." In these cases the Government have no right to retain the money. Upon these grounds I plead with the Chancellor of the Exchequer to make this concession, and to consent to issue these instructions to the different surveyors of 714 taxes, and I believe that if he does this it will give very great satisfaction throughout the country.
§ 5.0 P.M.
§ Mr. LOUGH
There is one point raised in the Debate on which I would like to make a single remark which is due to my right hon. Friend the Chancellor of the Exchequer. He has been accused of having dealt unfairly in the matter of the Cocoa Duty in reducing the tax and not maintaining its proper relationship with the tax on tea. I am surprised that my hon. Friend the Member for Nottingham (Sir J. D. Rees), who is, to some extent, an expert in these matters, should have raised the argument. He will find, if he looks at the Bill, that the thing is perfectly simple. The Chancellor of the Exchequer has made a change which has put cocoa into the same relationship with tea as had been previously established in the case of coffee. Just as coffee is taxed on the raw coffee, which afterwards has to be roasted and loses about 20 per cent., so cocoa comes in in a green state and has to be roasted, so that this tax of 6d. on the pound bears exactly the same relationship to the drink of cocoa as a 1s. on the pound does to tea. I will not elaborate the point further, but I think it fair to my right hon. Friend, who corrected a mistake in the earlier draft of the Bill, that he should receive a word of criticism on this point in the House. From the little I know of the trade, in which I am not" interested, I think that the change which the Chancellor has made is highly appreciated. My hon. Friend now says that the change is appreciated. I feel great hope that he will take a more reasonable view hereafter. With regard to the point mentioned by my hon. Friend opposite, I do think, though it is the Third Reading of the Bill, that the Chancellor of the Exchequer should bear in mind this question of abatement in the case of those with small incomes whose Income Tax is deducted at the source. These are cases of great hard-ship, and if the right hon. Gentleman can in any way facilitate repayment to these taxpayers he will be doing a great service. I do not know whether my hon. Friend has a proposal, but I trust the Chancellor of the Exchequer will be able to make arrangements for hastening these payments of these abatements.
§ Mr. J. SAMUEL
I suggested that there should be a local notice published indicating how people could reclaim payment 715 of the money. I could not say that people should have these repayments made unless they do claim.
§ Mr. LOUGH
There are facilities for those who are justly entitled to make claims. The point I want to make to the Treasury and the Chancellor of the Exchequer is that though this year the Government are in need of the money, yet the deduction of the tax at the source will be a great trial to people with small incomes derived from investments, more especially at this time, when their expenditure is greatly increased. Therefore I hope that the right hon. Gentleman will hurry up the Inland Revenue Department in order that these abatements may be made quickly, and if he does that he will be rendering a great service to many people throughout the country. I will only make one general observation with regard to the Bill itself: I think the Chancellor of the Exchequer deserves to be congratulated upon the fact that a Bill which throws such immense burdens upon the country has been accepted by the House.
§ Mr. BROUGHTON
I differ from the statement of the hon. Member for East Nottingham (Sir J. D. Rees) in regard to income arising in the United States, that the income is averaged on the three preceding years. My experience is that unearned income arising in the United States, for any one year, is for the current year, and that only part of the three preceding years is included in the average.
§ Mr. WARDLE
I would like to join in the appeal to the Chancellor of the Exchequer in regard to the deduction which is made at the source, and what is made at a very high rate. Surely there should be some machinery by which this deduction can be made in respect to these fixed incomes, and whereby the money to be returned may be repaid more quickly than is now proposed. I was almost going to say that it should be given back before it is taken away, but certainly it could be allowed when the Income Tax Returns are made up, and the proper amount could then be paid. I feel sure that the case is one of grave hardship, and that we have a right to urge in these extraordinary times that something should be done by the Chancellor of the Exchequer and his Department to relieve this class of people with small and fixed incomes, upon whom this burden falls very heavily indeed.
§ Mr. PENNEFATHER
My hon. Friend the Member for East Nottingham referred a few moments ago to an apprehension which exists in his mind, and in the mind of others, in regard to what might happen if the new words introduced into this Bill in regard to the Excess Profits Duty-the difference between 50 per cent. and 60 per cent.—were allowed to remain. I quite think that these words must remain in the Bill, and that we could not ask the Chancellor of the Exchequer to take them out, because I can imagine many circumstances in which it is essential that those words should be in. I think there was some misunderstanding, a bonâ-fidemisunderstanding between my hon. Friend the Member for East Nottingham and the right hon. Gentleman the Financial Secretary. They certainly did seem to be talking a little bit at cross purposes. I should like to ask the Chancellor of the Exchequer, in order to make the point clear, whether that misunderstanding did not arise from the assumption that if a man made a loss of £50,000 in the first year, and made £50,000 in the second year, there would be a set-off in respect of duty. My point is—I think I am right-that there will be a set-off of the loss as against the profit. No duty having been paid in the first period when there was a loss, no such duty could be set off in respect of the duty payable in the second period. What I submit is this, that the man says, " I have lost £50,000 in the first period and made £50,000 in the second period, and that there is no profit for the whole period, and there being no profit you cannot possibly charge me with Excess Profits Duty." I think that is according to the Principle Act, the words of which areand will make the total amount of Excess Profits Duty paid by him during the whole period accord with his profits or losses during that period.I think the right hon. Gentleman had not these words in mind when the discussion arose. I am quite sure my hon. Friend and others interested with him will be perfectly satisfied with an assurance from the Chancellor of the Exchequer that wherever, for the whole period, there is actually no profit, then no Excess Profits Duty will be charged. I think that assuranced would entirely meet the case.
§ Sir W. PEARCE
I think in all parts of the House it would afford pleasure if the Chancellor of the Exchequer found himself able to meet the real hardship of 717 those people with small incomes whose Income Tax is deducted at the source. To take away 5s. in the £ from people who have a comparatively small sum of money at their disposal is a real hardship, even if the money which is to be repaid is retained only for three or four months. I trust that, if possible, the procedure may be simplified in order to meet the case of people who may, from want of knowledge, find it difficult to make any claim, and if that can be done I am sure the House will be glad. The Excess Profits Taxes are very heavy indeed, but I suppose nobody can object, because the country needs the money. At the same time, however, there is this danger, that this heavy taxation may take "away money which is really necessary for the development of industries, if this country is to maintain its position and to capture trade after the War. The money required by the Chancellor of the Exchequer and by the Ministry of Munitions could go to maintain and extend our industries after the War, and, unless we can do that, we shall have Germany coming back with her dyes, her chemicals and other products. I do hope that the right hon. Gentleman and the Minister of Munitions will bear in mind this aspect of the case, and that they will allow not only for depreciation, but make allowances, if they are able to do so, under both the Finance Act and the Munitions Act, so that there may be in hand capital that is really required for the development of the industries of the country. I hope that there will be borne in mind not only the necessity for adjustment of prices, but adjustments of capital that is wisely expended in the real interests of the nation.
§ Mr. BRYCE
I want to emphasise the point raised by my hon. Friend (Sir W. Pearce) with regard to the danger of the action of the Excess Profits Tax. Under existing circumstances there is not much good, seeing the needs of the Chancellor, in urging the point, because he has to get the money some how or other. But I doubt very much whether it is a particularly wise way of getting it. As the last speaker observed, you may be preventing the retention of capital which would be used in the capture of German trade after the War, owing to the action taken under the Munitions Act and under the Finance Act. The Government have set up a very large number of Committees, many of them composed of able men, who 718 have devoted a great deal of time and study to the question of the means to be adopted for meeting trade competition, and the increase of our trade after the War. The effect of these Committees will be rendered entirely nugatory by the operation of these taxes. The money which would have been available from the profits would have been used for the purpose of creating facilities for attempting to capture trade. But the money will not be available. These resources are all being eaten up by the operation of the Excess Profits Tax, and it will be quite impossible to get any money even if the Treasury or the Chancellor of the Exchequer are allowed to get in extra subscriptions of capital, because nobody would put their money in for the sake of getting 6 per cent. When we come to the Germans, we find that they have very wisely—though they must be far more in need of money than we are—avoided imposing this tax, and they have done this simply for the purpose of allowing their industries to accumulate funds in readiness for the business which they hope to do after the War, and in order to do which they must be in the very best possible position if they are to get their way at all. That is a point which I hope the Chancellor of the Exchequer will consider with a view to next year's legislation. I hope that he will see his way to remove the Excess Profits Tax instead of increasing it as he has done this year. I join in the appeal of the hon. Member for Limehouse and the Member of the Labour party to the Chancellor of the Exchequer to try, by some tentative legislation, to make a more rapid return to persons with small incomes whose Income Tax is deducted at the source. Take the case of a poor lady with £200 a year who has to pay this tax, and who is entitled to reclaim a very large part of it. The want of the sum of £50 during six, or eight, or nine months means a very great hardship. There was another point, that of allowances for the purpose of Excess Profits Duty, which has been referred to. I do not think the hon. Member for Liverpool (Mr. Pennefather) noticed that Clause 40 makes a difference in the operation as compared with what it was in last year's Act. I hope the Chancellor will be able to show that that will not act unfairly.
§ Mr. J. M. HENDERSON
I add my appeal to that of the hon. Member who has just spoken. On the question of Income Tax, the Chancellor and the 719 Treasury know that they have no right to retain a good deal of the Income Tax they deduct. People cannot be expected to go through all the paraphernalia to get a return of small sums of £2 or £3, and they will not go to that trouble, and in many cases do not know the modus operandi. The consequence is that large sums are retained as Income Tax, which the Exchequer are not entitled to retain. The only way I can see to cure that is to speed up the method for making these returns and not to have such an elaborate process as hitherto. I should think that a simple declaration that the income is so much and the charge so much, with the production of the receipt and handing it in at one end of a room to be passed along, should be sufficient, and that that day, or the next day, the amount should be refunded. I see no reason why that should not be done if they would only speed up the matter as people do in ordinary affairs. I wish to refer to Clause 52, which deals with the question of accumulated or accumulating capital. I spoke on this matter on the Committee stage, and the then Financial Secretary suggested to me that between the Committee and Report stages he would consider whether he would fix a date for accumulated as distinct from accumulating capital; but like many other pledges given in Committee to consider between that and Report, nothing has been done. I would point out that there must be very great difficulty and confusion in differentiating between what is accumulated capital and what is accumulating. My right hon. Friend saw that, and he said that as regards profits which are used for plant, since they are employed on plant, they become accumulated, and the percentage is being given in all such cases. Take a firm starting in January which makes a balance sheet in December, and that during the first three months they make a profit and increase their book debts or their stock, and having regard to the high price of stock it is very likely they would do so; they are allowed no interest on those items, whereas if they put it into new machinery they are allowed interest from the date on which they do so. That is how I read the statement of the Minister of Munitions. Book debts or stock are just as much assets as plant. Suppose a firm takes a three-monthly balance and 720 another firm takes the yearly balance, and on the balance sheet of three months, if there is an accumulated sum, they will be entitled to interest for six or nine months, but in the case of the company which does not balance until the end of the year they get no allowance of interest on the profits which have been accumulated and have gone to increase the assets.
What is going to happen? People will face this and get rid of it in this way. If I were a firm what I should do would be this. I should draw out the profits and borrow money for plant or book debts and then I would be allowed interest. If I was a company I would issue debentures, pay the dividends up to the hilt during the year, then borrow on the debentures and be allowed interest at the end of the year. I assure you there is a way of getting over it, but I think a good deal depends on administration, and with sufficient elasticity of treatment there may not turn out to be very great hardship. Take another case, where a great difficulty will arise. Suppose that A makes during the first three months £3,000, and has been trading on overdraft and that he reduces the overdraft by that sum. My right hon. Friend must be aware a great many firms carry on business through overdraft, and the profits will go to reduce them. In such a case A gets the benefit of less interest being charged at the end of the year, whereas the man who has no overdraft and leaves the money in the business for the twelve months gets no consideration. It is too late, I suppose, to ask the right hon. Gentleman to strike this out now, but I hope that he will see that it is construed in a reasonable way. If a man can clearly show, or a firm, that the stock has been increased from what it was before, or the book debts in relation to bills payable, they ought to get consideration for the sums concerned as if they had borrowed to do so. If they had borrowed from the bank to do so, they would be entitled to deduct interest under the terms of this provision. I hope the right hon. Gentleman will see that justice is done as to this point in administration, which is sometimes not so bad as people make out.
I have just said a word about controlled establishments, and at this stage I do not want to weary the House further with the matter. I think it was a very grave mistake in the first instance to have allowed another Department to put on what, after all, say what you like, is a grant of money to the Crown. The proper and straight- 721 forward course was to treat all companies and firms subject to excess profits in the same way and under the same regulations as each other. That apparently we cannot get away from. I quite acknowledge that to some extent the right hon. Gentleman has mitigated the hardship to controlled firms, but he may take it from me that there is great heartburning amongst those men. They feel, and I think they are entitled to feel, that they deserved not to be worse off than others uncontrolled, and if anything, although they did not ask it, that they should have had better consideration, because a great many of them have dropped their businesses and have come forward to help the country out at a time of great trouble and emergency. They were not the men that you should have left with this heartburning, which, believe me, exists and which, I think, they are justified in feeling. It may be thought that I have been trying to reduce the income which my right hon. Friend seeks, but I am now going to tell him how he can recover from two and a half to three millions of money. I refer to Treasury Bills. When the old Treasury Bills were issued for five, or ten, or fifteen, or twenty millions, sometimes there were none of them on the market at all, and they were taken up mostly by banks and discount houses. The discount was treated as part of their ordinary profit, and therefore they paid the tax on it. What is the position now? The last time I looked I saw that we had some seven hundred millions of Treasury Bills. I do not suppose that banks and discount houses could take more than a third of those, and the rest are in the hands of foreign banks and private individuals. It is quite true, as the right hon. Gentleman has said, that everybody who buys a Treasury Bill ought to return the discount as part of his income and pay the tax on it. Some do so, but the majority do not, and I will tell you why. A man may buy at 95, and as these Bills get a little nearer maturity he may sell at 96 or 97. He treats that as increment of capital, and I do not know how you are to distinguish in any rise that the Treasury Bills have in the market between what is increment of capital upon which he pays no tax, and what is interest upon which he ought to pay tax. The consequence is that my right hon. Friend will not receive from £2,500,000 to £3,000,000 Income Tax, which he ought to receive upon these Treasury Bills, if he dealt with them in what I sug- 722 gest is the proper method. I suggest that the Income Tax ought to be deducted on the interest at the time of the issue of the Bills. That may be difficult, but I do not know why it should not be done. There is so much discount less tax on the discount. There he gets his money. He will find it is true if he inquires of his brokers and friends in the market that the great bulk of their Treasury Bills are treated as the increment of capital. He buys at one price, and realises at another, and treats it as capital investment from the first. He ought not to do that, but I dare say it is difficult once an idea or system has grown up in the market to eradicate it. I hope my right hon. Friend will do something, because I want to see him get as much money as possible as long as he gets it fairly and without injustice. I desire that he should get whatever is right, but at the same time I think he has gone a bit out of his way to do what will be felt to be a great injustice, and I do not suppose these firms will abate one single iota of their enthusiasm. All the same it is a very great pity that there should be this rankling feeling.
§ Mr. FIELD
I merely rise in order to contradict a statement made by an hon. Member a few moments ago, speaking of what are called excess profits. I disagree with the hon. Member, and agree with the Chancellor of the Exchequer. I think that instead of reducing the tax on excess profits, a greater portion—and in fact all the excess profits—ought to be taken by the Chancellor of the Exchequer. Take, for instance, shipping freights. We find in to-day's and Saturday's papers reports of companies in Cardiff, Liverpool, and elsewhere making 187 per cent. profit; one. I think, made over 200 per cent, profit. Is it a reasonable proposition that a man who holds shares in a shipping company should be taxed less than a person with a moderate income? I am strongly of opinion that the Chancellor of the Exchequer, instead of being asked to reduce his excess profits ought really to take all of them that he possibly can. I coincide with what has been said by the majority of Members in the course of this Debate, that it is the man of small income who ought to be considered as far as possible, so as to inflict the least hardship in the collection of this tax. Looking at the enormous amount that has been levied under circumstances over which we have no control, and which are really unprecedented, I think the Chancellor of the Exchequer 723 ought to be sincerely congratulated upon having the consent of the House and the public to this enormous measure of finance. He has endeavoured as far as in him lay to enable everyone to contribute according to their means, but I would ask him to reconsider this question of the excess profits, particularly in regard to freights. These freights have to do with the increased cost of food and manufactures, and the result is that the whole question has become a burning one. Especially is there indignation at the freights. One of the most effective ways to prevent these high freights is for the Chancellor of the Exchequer to take all the profits. There would then be no object in shipowners charging such enormous freights.
§ Sir F. LOWE
I want to ask just one question before the Chancellor of the Exchequer replies. What is the position of a man whose income is wholly or mainly derived from quarterly rents? It is customary for the tenant who pays the rent to deduct the Income Tax from the first quarter, and I understand that under this Bill he deducts 5s. in the £. Therefore the man who receives quarterly rents will get no income for the first quarter, because 5s. in the £ will be deducted. I want to know whether it is possible for this person to be relieved in any way. This certainly places that man in a rather difficult position.
§ Mr. McKENNA
The hon. Member has stated the proposition in a way which will not bear examination. The tenant deducts from his rent the amount of the Income Tax which he has paid.
§ Mr. McKENNA
For the whole year. Therefore it is deducted for the preceding year. In the case brought forward by the hon. Member for Stockton (Mr. J. Samuel) it is paid in arrear, but all deductions from the landlord, after all, have to be paid by himself.
§ Sir F. LOWE
Yes; but, as a matter of fact, the amount for a whole year is deducted from a quarter's rent.
§ Mr. McKENNA
Certainly; but it is a quarter which is after the period at which the Income Tax is due. Therefore the landlord for the time being is at an advantage. He has to pay it some time, and it falls upon the landlord at a later quarter rather than at an earlier one. The Exchequer 724 is bound to be anxious to meet all complaints brought forward in this House, particularly such a reasonable complaint as that to which expression has been given by many of my hon. Friends on both sides of the House today with regard to the payment of Income Tax levied in excess of the amount due. My hon Friend the Member for Stockton raised the question first. Let me remind him what I think has escaped his memory for the moment. Already this year a part of the grievance has been met. He instanced the case of a taxpayer from whom 5s. in the £ was deducted, whereas he ought only to pay 3s. or 3s. 6d. He has got a direct assessment to make to the surveyor. He would know that his total income is only £400 or £500 a year. My hon. Friend says, "Why should not the surveyor deal with it?" Under the new Bill the surveyor can do so. We have already made that reform, and wherever a taxpayer makes a direct assessment and is directly assessed in respect of an earned income, he can get an allowance upon that direct assessment in respect of any overpayments of Income Tax by deduction at the source, so that part of the grievance is met.
As regards the other point, I would remind the House of a fact which has not been touched upon, that again in this Bill we do provide—or, rather, we have promised—that the repayment shall be made twice a year instead of once a year, which limits the period of time for which the tax-payer can be without his money—a comparatively short period. Again, I have promised, as soon as we are in a position to do so, that I will carry out the whole reform of my hon. Friend, and enable the surveyors to deal with the whole question locally. But we cannot do it at present. Indeed, we are so overburdened with labour that we could not possibly attempt to throw upon the surveyors this additional duty at the present time, nor should I say in the immediate future. The burden of Income Tax collection at present is, and for some time to come will be, enormous. We have the Excess Profits Duty thrown on by way of an addition to all the other duties, and the Inland Revenue officials, untiring as they are in their work, and very remarkable as they are in their abilities, could not undertake the additional work which my hon. Friend suggests might be imposed upon them now. However we have it in view, and I hope at no long distant date the reform will be carried out. There are one or two other points which I would like to deal with at 725 once. My hon. Friend the Member for West Aberdeenshire (Mr. Henderson) stated that Clause 52 of the Bill, he thought, contains a grievance. I understand that his definition of good administration of the Income Tax is lax administration.
§ Mr. McKENNA
And his definition of bad administration is administration in which the revenue officials recover all they are entitled to recover.
§ Mr. McKENNA
I was therefore rather alarmed at the compliment which my hon. Friend paid to the administration of the Act.
§ Mr. McKENNA
Let me assure my hon. Friend of this, that if any accumulating profits have actually been invested in fixed plant, of course that fixed plant will be allowed for; but where accumulating profits have not been so definitely allocated to capital, and may be divided at the end of the year by way of dividend, it would be very improvident to treat those accumulating profits as fixed capital. The accumulating profits must be definitely allocated to fixed capital, or else they must wait until the end of the year until the accounts are made up. I do not think that is an unreasonable provision in the Bill. Then my hon. Friend the Member for Nottingham (Sir J. D. Rees), who was supported by the hon. Member for Liverpool, raised another question. He took the case of two years of profits, in the first of which two years there was a deficiency of £50,000 compared with the datum line revenue, and in the second year there was an excess of £50,000 over the datum line. He argued that the proposal in the present Bill is defective in dealing equitably with a firm so situated. Last year we proposed that the total loss of any one year during the period of the operation of the Excess Profits Duty should be set off against the total datum during the same period, but that, of course, was in contemplation of an equal tax running through the whole period. Now, when the rate of the tax has been raised to 60 per cent., I quite admit that in the case put forward by my hon. Friend the result of the set-off would not be the same as it would have been if the whole loss had been set off 726 against the whole profit. Altering the rate of tax of course alters the charge for the year, but the change operates both ways. Suppose, instead of the case of my hon. Friend, there had been in the first year a gain, and a loss in the second year. Then the taxpayer gains, because he makes his loss when the tax is very high, 60 per cent. and makes his profit when it is comparatively low, 50 per cent. It is just the chance of business. One man may make a very big income at the very moment when the Income Tax is 5s. in the £, and may have had the misfortune to have had a series of years with no income, when the Income Tax was only 1s. in the £. That is the fortune of war. Another man may have had a high Income Tax when the tax was 1s. in the £, and may have had a low income when the tax was 5s. in the £. It is the fortune of war. One escapes very much less than the other. However, I admit that on the face of it the operation of the Clause does seem to raise a not unreasonable objection in the minds of certain people, and I will look into it again in view of the next Bill that we may have. Of course it is impossible to reconsider the question now, but I will look further into the matter. That must not be taken as a pledge that any change will be made, but only that I will reapproach the subject with an open mind.
I was asked in regard to the effect of the high rate of Income Tax prospectively over a long series of years upon the trade of the country. I would be the first to admit, after some study of the subject, that our Income Tax laws were never devised for a rate at the present level. Their entire incidence undoubtedly is not well adapted to our present trade, especially with a scale of 5s. in the £. Nobody could be better acquainted with that fact than the occupant of my present office. I have had case after case of undeniable hardship brought up before me, hardship that it is impossible to deal with under the present law, or even under an Amendment of the present law—and all cases which would entail a complete rearrangement of the Income Tax. That rearrangement had got to be made. I have more than once undertaken, on behalf of the Government, that we will have a complete review of the whole system of the Income Tax as soon as we are in a position to undertake it. For my part I should consider myself in a position to undertake it immediately the War is over. It must not be proposed 727 that this undertaking has anything to do with another undertaking which is entirely separate, that we shall get a simplification—a more simple statement of the law as it stands. That work we are already proceeding with. I hope very shortly we shall be able to issue a general codification of the existing Income Tax law. The sooner these laws are remodelled from top to bottom the better for the trade and business of this country. I am sure Income Tax would be accepted more readily by every member of the community if he felt certain, in the main, that the tax was one which would be equally imposed upon all persons able to bear it. I think that completes the reply to questions put to me, except those general observations about the Excess Profits Duty. In this matter I can only say that it would be wrong to take the tax as a permanent tax. We only ask the country to submit to it during the War, because the necessities of revenue are so overwhelming. Everybody has admitted that it is more in accordance with public sentiment that those who are enjoying specially high profits during the War should contribute specially for the purposes of the War. In conclusion, I would thank the House for the support that they have given to me throughout this Bill, a support which alone has enabled me to pass a measure entailing so gigantic a burden as £500,000,000 a year upon the State. Let me assure the House that everybody concerned in the Exchequer will do their very best to see the taxes are levied in as fair and reasonable a way as it is possible to do it.
§ Question, "That the Bill be now read the third time," put, and agreed to.
§ Bill read the third time, and passed.