§ Where any lands, tenements, hereditaments or other premises of whatsoever description used for the purpose of any trade, manufacture, ad venture, concern, profession, employment or vocation, are situated outside the United Kingdom, no deduction or set-off shall, in estimating the amount of annual profits or gains arising or accruing from that trade, manufacture, adventure, concern, profession, employment or vocation, in any manner be allowed on account or in respect of the annual value of those premises.
§ Mr. J. HENDERSON
I beg to move, after the word "vocation" ["vocation, are situated"], to insert the words "are the property of the trader or manufacturer and."
This Amendment is designed to meet the decision of the House of Lords in the Bowstead case that the owners of lands, tenements, hereditaments, or other premises were entitled to charge the annual value of these as against their working expenses. It cannot be contended if a man rents a property in Cape Town or anywhere that he is not going to have the rent which he actually pays allowed off his Income Tax. That was a case where the people did not own the property, and it was held by one Court, that because they did not pay on it under Schedule A that it ought to be allowed. The House of Lords said they were entitled to deduct it.
§ Mr. HENDERSON
I admit I made a mistake. The case has not been taken to the House of Lords, because there is no chance of success. Am I right in supposing that it is only where people are the owners of the property that no allowance is to be made for the value of the premises out there, or is no allowance to be made even 1366 if they pay rent?. If the Chancellor of the Exchequer will explain to me what he means, I will withdraw the Amendment.
§ Mr. BONAR LAW
My legal advisers inform me that the effect of this Clause would produce precisely the result my hon. Friend desires. It is obviously a point upon which I cannot express an opinion on the wording of a legal document. It is very difficult to deal with it by way of a manuscript Amendment. Perhaps my hon. Friend will be satisfied now with the statement I have made, and if he wishes to raise the point later he can do so on the Report stage.
§ Mr. HENDERSON
Will the right hon. Gentleman put the point to his legal advisers? The word "value" might mean rental value. I do not see that it can mean anything else. If a man pays rent, he ought to be allowed to deduct it, and it is only if he is the owner that he should pay.
§ Sir C. HENRY
This is a rather important point. Until I heard the Chancellor of the Exchequer's explanation I was under the impression that any firm which carries on a branch business, say, in France or anywhere else, and which has to pay rent for those premises, could not deduct the rent in making up their accounts for Income Tax purposes. That ought to be made perfectly clear, because I feel sure that as the Clause is drafted now the view of the hon. Member for West Aberdeen (Mr. J. Henderson) is the one that is generally held.
§ Mr. BONAR LAW
If that be so, I will give the Committee the undertaking that we will examine the words carefully, and if any change is necessary in order to make the meaning quite clear, we will bring it up on the Report stage.
§ Sir J. D. REES
May I ask you, Mr. Whitley, whether you are going to allow a discussion on the proposal to leave out the Clause now, or should that be raised later?
§ The CHAIRMAN
It is always open to an hon. Member to speak on the question, "That the Clause stand part of the Bill," when we have disposed of the Amendments.
§ Sir F. BANBURY
I am not at all sure that I agree with the Amendment of the hon. Member for West Aberdeen (Mr. Henderson), but perhaps the best course to pursue would be to raise a discussion on the question that the Clause stand part of the Bill, so as not to have two discussions. I think I could bring it in.
§ Sir C. HOBHOUSE
The right hon. Baronet thinks he can bring it in. We all know what a past master he is in the art of introducing into a discussion anything he wishes to introduce, but the real decision would rest with you, Mr. Whitley. May I ask whether it would be possible for the right hon. Baronet to introduce this subject into the discussion on the question, "That the Clause stand part of the Bill"? I should like your ruling on that point, otherwise I should like to say something on the Amendment.
§ Sir F. BANBURY
Nothing has been agreed. The Chancellor of the Exchequer has merely given an undertaking that on the Report stage he will do certain things. Therefore there is nothing agreed. There has been nothing before the Committee. When the question is put that the Clause stand part, we can discuss whether or not it should be passed, with Amendments which may be put into it or without.
§ Amendment, by leave, withdrawn.
§ Motion made and Question proposed, "That the Clause stand part of the Bill."
§ Sir J. D. REES
This arose out of the Bowstead case, which has not got beyond the Appeal Court. In that ease a firm of merchants having branches in different places in the East, in arriving at the Income Tax chargeable, claimed a set-off against the average profits of the annual value of the premises they occupied abroad. Those profits accrued before 1914, in the Budget of which year income which accrues abroad and is not remitted home becomes subject to Income Tax. Under the judgment in the case between the surveyor of taxes and Messrs Bowstead the Court of first in stance and the Court of Appeal found in 1368 favour of Messrs. Bowstead. But I do not pretend to argue that the matter should be left exactly where it now is, because under the judgment the firm would be entitled, in arriving at its profits, to deduct the annual value of their whole estates and buildings. I do not think the Chancellor of the Exchequer could well leave the matter in that position, but at the same time there is this to be considered. This was a flaw in Income Tax law in favour of the subject, but as the Income Tax law contains many anomalies and inequalities against the subject and as it is all awaiting revision it does not seem quite fair, because a gap has been discovered in favour of the taxpayer, to proceed to alter that, leaving all the other inequalities which are against him in full force and effect. For that reason it is hardly fair to enforce this Clause as it finds a place in the Bill at present. I do not know whether the Chancellor of the Exchequer would be disposed to consider if the Clause might stand as regards buildings, leaving out the question of land. Of course, the Clause very frequently becomes enforce able in respect of plantations in India and Ceylon, for instance. Therefore you would hardly expect the annual value of those lands and premises to be deducted, and very difficult questions would arise whether the basis of calculation should be 5 per cent. of the capital at the time they were acquired or what it should be. That would be a very difficult question. I am prepared to base my argument upon this, that though a flaw has been discovered in favour of the taxpayer it is not altogether right and equitable to stop that gap as against the taxpayer, leaving unadjusted all the many inequalities in Income Tax which tell against him.
§ Sir C. HOBHOUSE
I understand that the object of this Clause, as contained in the side note, is that hereafter no deduction shall be allowed on account of annual value of premises abroad in estimating the annual profits or gains arising from trade. The Chancellor of the Exchequer has expressed his readiness to consider an Amendment which, while stopping this deduction in the case of freehold premises abroad, would continue it in the case of leasehold premises.
§ Sir C. HOBHOUSE
The right hon. Gentleman grants the deduction in the 1369 case of leasehold, but stops it in the case of freehold property. Surely that is not a wise thing either from the point of view of justice or revenue. Consider what would happen? I get a deduction off leasehold premises, but no deduction off a freehold. What would be my action? I should convert the freehold into a leasehold. I should at once sell the premises abroad, and I might have £ 10,000 in free cash. Then I should pay a rent to some person to whom I had sold the premises and at once proceed to claim deduction in respect to the premises. It is rather an unwise piece of business on the part of the Treasury, and I would seriously ask the Chancellor of the Exchequer whether when he comes to consider the proposed Amendment he will not see both the inequity and stupidity of accepting it, and that he will either allow the Clause to stand as it is or delete the Clause altogether from the Bill. If I recollect aright, the trades which are carried on at a profit abroad have to be brought into account for the purpose of taxation in this country by any person who is a subject of this country or a resident in this country. If that trade is carried on abroad and the profits of it are subject to Income Tax in this country then surely the premises kept abroad for the purposes of that trade ought to get the same reduction as if they were premises here. I should have thought that was equity as well as common sense. Whether the Chancellor of the Exchequer agrees with that or not, I hope he will agree with the other view, and either make the deduction common to both lease hold and freehold premises or get rid of it altogether.
Sir F. BAN BURY
I object to this Clause. As I understand it, the Clause is put in to meet a decision which was given in one of the Courts of law. It seems to me that very often when we desire to defeat a decision given in a Court of law we make mistakes in this House. What does this Clause actually do? I am not a lawyer and I may be wrong, but if English words have any meaning the Clause as it now stands says that if you have premises, tenements, or hereditaments used for trade or manufacture in England you may deduct the annual value when you are arriving at the method of assessing your property for Income Tax, but if they are held 1370 abroad you cannot do so. That seems to me to be absolutely absurd. There can be no reason whatever why if you can deduct the annual value of premises in England that you cannot deduct it when they are abroad. There is more reason why you should deduct it abroad, because the original reason of imposing taxation was that the person who enjoys the benefit and protection of the laws of the land which requires money to carry them out should contribute to the maintenance of law and order in the country. There fore, it seems to me absurd to say that you may not deduct the same sum if you happen to have property abroad that you may deduct if you happen to have property in England.
My next point is the Amendment of the hon. Member below the Gangway. I very often agree with him, but in this case I think he is absolutely wrong. There is the very astute reason brought forward by my right hon. Friend (Sir C. Hob-house) that an ordinary person, knowing that his property was freehold and that he could not deduct the annual value, would immediately sell to somebody else, pay rent, and then deduct the annual value. Why is their rent to be more sacred than the interest of money arising from an investment? There is no difference that I can see between them. In those circumstances I cannot agree with that particular Amendment. As I understand it, the argument put forward is this, that if you are in England and own a certain manufactory you are allowed to deduct the annual value of that because the Income Tax is charged in other shape upon the annual value. But if you own the property abroad you do not pay Income Tax on the annual value of the property. I do not think that that has anything to do with it, be cause what we have got to consider is the proper and just method of arriving at the profits on which you are to be assessed, but under the Act which was passed by the present Prime Minister, I think in 1914, which said that all incomes that was received from property abroad, whether it was brought to this country or not, had to be declared for the purpose of Income Tax. That argument falls to the ground. Therefore, I see no necessity for the insertion of this Clause un less it is because of the wish to defeat the decision of the Court, which is a growing practice of this House. It may be that 1371 this Clause may not have been fully understood by members of the Committee. Probably that is so. I should not have noticed it if it had not been brought specially to my attention, but I think that it is a matter which really requires attention, and I hope either that we shall have some very good reason given for its inclusion or that the Government will allow the Clause to be negatived.
§ Sir G. YOUNGER
I do not think that this Clause wants much elucidation. My right hon. Friend has taken the case both for and against it. Obviously the reason for the Clause is this. In Great Britain every person who owns property and returns his Income Tax under Schedule D, has already been assessed for the rental of his buildings under Schedule A. In those circumstances I suppose he deducts Schedule A valuation, because he has paid already, and it would be ridiculous to ask him to pay twice. If you pay rental for premises that you use in connection with your business that is deducted in the profit and loss account, but the Schedule A is paid by the man who receives the rent. In the case of the Colonies obviously there should be no deduction in respect of the value of freehold property. You are entitled to deduct it here because you pay tax on it, but you have no right to deduct it abroad because you do not pay tax on it.
§ Sir F. BANBURY
The original law, as I understand it— I may be wrong, though I do not think I am— was that if a man had property abroad, and if he brought the proceeds to this country he was not liable to Income Tax; but the present Prime Minister altered that.
§ Sir G. YOUNGER
This is only to really put a man abroad in the same position as a man here. When he pays under Schedule A he is entitled to deduct that; where he does not pay under Schedule A he is not entitled to a deduction. There is no reason why he should be.
§ Mr. J. HENDERSON
My right hon. Friend opposite has not quite grasped the position. In this country no allowance is deducted in respect of the value of the premises. All that is allowed is part of the Schedule A tax which is paid. You have the rental of the premises under Schedule A. You may have that. But the balance of profits is under Schedule D. Suppose you had a place in Cape Town, and your own premises in London, and you charged the Cape Town premises with a thousand a year; that thousand ought to come to London, and be credited in the books here. But under this provision the Government get nothing from that, neither under Schedule A or Schedule B. That is the point, which my right hon. Friend has confused with the Act of 1914. Under that Act, a London firm carrying on business at the Cape did not pay the tax whether he brought the profits here or not. That was decided under the De Beers case. It would be most unfair, if I had a place in Cape Town, and I charged my business there with £ 500 a year and was allowed a deduction out there, that then, on bringing my accounts here under Schedule D I should be charged on that, and not credit myself with the £ 500. You cannot credit yourself in London unless you have paid under Schedule A. Where a bond fide rent is paid to a third party, that should be allowed in the expense of carrying on the business.
§ Mr. PETO
I had a Motion to omit this Clause, and I want to give my reasons for that Motion. I am going back to an Act before that of 1914, namely, the Act of 1842, and I wish to tell the right hon. Gentleman why I think this Clause is wholly misconceived. This comes under the original Act of 1842, under Schedule A, which says that tax shall be collected for all land, tenements, hereditaments, and heritages in Great Britain. The Treasury has never claimed Schedule A on land and premises held all over the world, but under the 1842 Act, on profits under Schedule D, the words are these:Upon the annual profits or gains arising or accruing to any person residing in Great Britain from any kind of property whatever, whether secured in Great Britain or elsewhere.'Therefore, the basis of assessment under Schedule D is entirely different from Schedule A, and I cannot see why now, in 1918, we should in effect say that the Chancellor of the Exchequer is entitled to charge Income Tax under Schedule D on 1373 the annual value of property that is held at Cape Town or somewhere else which ought to be or only could be assessed under Schedule A.
§ Mr. PETO
It is not a question of profits at all. By all means, if the right hon. Gentleman throws his net as wide as he does, tax the actual profit made in any part of the world by a British subject which is brought to this country, but do not say, in taxing that profit, you are going to include the annual value of premises which would have been, or ought to have been, taxed under Schedule A if they were situated in this country, no matter what part of the world those premises were situated in. It is only one step removed from the Chancellor of the Exchequer saying that a British subject has no right to purchase property in any part of the world without paying him Income Tax on the annual value of the property, whether they are profits from industry or trade, or it is merely a house in which he resides. I think in doing this, and in trying, as the right hon. Baronet said, to change, in an Act of Parliament, what is probably a perfectly correct judgment in the High Court, we shall probably be making a great mistake, and I am more than ever convinced that we have departed from the fundamental rule on which the whole of the Income Tax is based. I hope those who have put down the rejection of this Clause will press it to a Division.
§ Sir A. WILLIAMSON
I do not agree with all the critics of the Clause, and I am inclined to think the Government is right. There is one illustration, how ever, as to the matter of rent being paid to third parties. I will give a concrete case as to how this operates. I am chair man of a company which owns mills in South America. Until lately we have paid Income Tax on our whole profits, but some clever person discovered that we were entitled to deduct) an, imaginary rent from these profits. Consequently, during this current year we have deducted this rent from our profits, and, there fore, we are paying Income Tax on less than the profits we have made. I do not think that is quite reasonable, although I was in duty bound as chairman of the company to agree that we must take all the legal rights to which our share- 1374 holders are entitled under the law as it stands. That is called the Bowstead decision. This Clause is designed to put us back to the position we imagined we were in before this took place. Provided the Clause is cleared up, so as to make it clear that the Government do not intend to treat as an item which is not deductible from the profits rent paid to third parties, I think the Clause is perfectly right, and I support the Government.
§ Sir W. BEALE
The hon. Member for Ayr Burghs is quite right, on the showing of the hon. Member for Devizes. If a man carries on business on property which he owns abroad he is, in fact, bringing the annual value of that property over here on account of his profits. If a man were exempt because his income was derived from property abroad, it would be a different thing, but I think the hon. Member for Devizes rather con fused two things. This is a question whether a man should be allowed to deduct a rent which he has brought over to this country as profit owing to his con ducting business abroad. I think it is clear the Clause is right from that point of view.
§ Mr. BONAR LAW
The Committee will perhaps understand the difficulty which Ministers have in dealing with a variety of questions of this sort when we see the immense amount of difference in the views of the Committee with regard to a matter which is, I think, as simple as it could possibly be. It has been explained absolutely correctly, I think, by my hon. Friend behind me, and the only argument which has been addressed on this subject that has any point at all, to my mind, is that of the right hon. Baronet the Member for the City of London. His view is that, since the subject has got the better of the Government, it is very wrong of the Government to try to get back on the subject. That might be a very satisfactory thing: for the subject, but it would be very bad for the Chancellor of the Exchequer. All that this does is to bring back what has been the practice from the very beginning. I hope, therefore, the Committee will think we have had sufficient discussion on this subject, and will allow this Clause to go through. Perhaps they will be further influenced in coming to this decision, when I say that, as we have done so well to day with the Bill, I shall not ask them to proceed further to-night.
§ Question put, and agreed to.1375
§ Motion made, and Question, "That the Chairman do report Progress and ask leave to sit again," put, and agreed to.
§ Committee report Progress;to sit again To-morrow.