CLAUSE 23.—(Interest paid on arrears of Excess Profits Duty not to be allowed as a deduction.) (Hansard, 13 July 1922)

§ Mr. HOLMES
I beg to move, at the end of the Clause, to add the words but in the computation of any profits or income for the purposes of assessment to Corporation Profits Tax or Super-tax a deduction shall be allowed in respect of the interest in question of the gross amount which, after deduction of Income Tax at the standard rate, would give a net amount equal to the amount of interest actually paid. By the Clause the Chancellor of the Exchequer seeks to enact that the interest which he is charging on arrears of Excess Profit Duty shall not be a deduction from the profits of a business in computing the sum at which they are assessed to Income Tax. On 20th February I asked this question: With reference to the interest at the net rate of 5 per cent. per annum without allowance for Income Tax to be charged on any arrears of Excess Profits Duty, whether the interest so paid will be allowed as a deduction from total income in calculating the amount of Super-tax payable by an individual, and whether if the answer is in the affirmative the amount to be deducted will be the interest at the net rate of 5 per cent. plus tax? 1538 The Financial Secretary to the Treasury said: My right hon. Friend the Chancellor of the Exchequer proposes that for the purposes of Corporation Profits Tax and Super-tax a deduction shall be allowed in respect of the interest in question of the gross amount which, after deduction of Income Tax at the standard rate, would give a net amount equal to the amount of interest actually paid."—[OFFICIAL REPORT, 20th February, 1922; col. 1529, Vol. 150.] I, therefore, expected that when the Finance Bill was introduced there would be a Clause inserted to the effect that while this interest would not be deducted for the assessment of Income Tax there would be a deduction for Corporation Profits Tax and Super-tax, but no Clause to that effect has appeared in the Bill. I have, therefore, put down this Amendment, which the House will see is in the exact words of the reply given on the 20th February by the Financial Secretary. I understand that the reply of the Chancellor of the Exchequer is that this is already covered by the existing law. So far as I can see, it is not dealt with in the present law. If he can show me that it is dealt with I shall be glad to withdraw the Amendment. In the first place, take the Corporation Profits Tax. Section 53 of the Finance Act, 1920, says: Subject to the provisions of this Act, profits shall be the profits and gains determined on the same principles as those on which the profits and gains of a trade would be determined for the purposes of Schedule D That is, for the purposes of Income Tax. Clause 23 says that this interest paid on arrears of Excess Profits Duty shall not be deducted for the purpose of Income Tax. Sub-section (2) of Section 53 of the Finance Act of 1920 says that in regard to Corporation Profits Tax you shall arrive at the profits in exactly the same way as you arrive at the profits in respect of Income Tax, subject to certain provisions. 'One provision says: ("b) deductions shall be allowed in respect of interest on money borrowed for the purposes of the company. I do not know whether the right hon. Gentleman is going to tell us that the arrears of Excess Profits Duty which a person has not paid, and which the State are allowing to stand over to be paid by instalments, become money borrowed by the company from the State. If, as a 1539 lawyer, he says that that is a proper interpretation, I should say that this point is covered. As a mere layman, I cannot see that interest on arrears of Excess Profits Duty which are payable by instalments can be called interest on money borrowed for the purposes of the company. As far as Corporation Profits Tax is concerned, I suggest that, as the law now stands, the profits have to be arrived at in accordance with the Income Tax method, and by this Clause you are shutting that out. Now let me come to Super-tax. This is even simpler than Corporation Profits Tax. Section 5 of the Income Tax Act, 1918, says: (1) For the purposes of Super-tax, the total income of any individual from all sources shall be taken to be the total income of that individual from all sources for the previous year, estimated in the same manner as the total income from all sources is estimated for the purposes of exemption or abatement under this Act. This means, as estimated for Income Tax purposes. Therefore, if for one year for the purposes of Income Tax a deduction of the interest on arrears of Excess Profits Duty is disallowed, then, in the following year, according to Section 5 of the Income Tax Act, 1918, it will similarly be disallowed for Super-tax. I leave the learned lawyers on the Government Bench to clear up this point. The Chancellor of the Exchequer says that what he says in the House does not become a matter of law, and I only want to be perfectly clear that the law carries out what is intended.

§ Mr. RAFFAN
I beg to second the Amendment.

§ Sir L. SCOTT
The point raised by the hon. Member is one of a very technical character, and of some legal difficulty, and I want to be quite frank with the House about it. I understand that the hon. Member has been in correspondence with the legal advisers of the Inland Revenue on the matter, and has had from them a letter containing an assurance that under the law as it stands the object of the Amendment is already obtained. and that the Amendment is superfluous. I was not anticipating that the Amendment would be moved, and I want to be perfectly frank with the House and to say that I have not given that thought to the point which, as a law officer, I always like to give, if I am going to make any statement to the House as to what I think is the law. I must candidly confess 1540 that I am only able to give the general impression that arises from my knowledge of the subject, without having given close attention to the particular point raised by the hon. Member.
I want to remind my hon. Friend and the House that in the case of Estate Duty there is no comparable Clause to the Amendment which he now desires to insert. That is an analogous case to the question of interest on arrears with which his Amendment is dealing. In Section 53 of the Finance Act, 1920, to which the hon. Member referred, which is part of the Finance Act of that year dealing with Corporation Profits Tax, he pointed out the provision that the profits shall be the profits and gains determined on the Income Tax principle. That Section also has this proviso: Provided that for the purpose of this Part of this Act … (b) deductions shall be allowed in respect of interest on money borrowed for the purposes of the company. The advisers of the Inland Revenue have always taken the view that that provision covers the deduction of arrears of Excess Profits Duty. The objection to adding the Amendment proposed by the hon. Member is not that there is any objection to what it does, because that: is common ground, for what it does is intended in the Bill as it is drafted. The objection is, that under the existing law what is proposed by the Amendment is already done. Having regard to the careful investigation that has been given to the matter by the legal advisers of the Chancellor of the Exchequer, I would ask the House to accept the statement which I make, after consultation with them, that the point is covered, and that the Amendment is not necessary.

§ Mr. HOLMES
I have moved a good many Amendments on the Finance Bill in the last three years, but have never had such an unsatisfactory reply. I put forward two points of law, and apparently there is no reply to them. Obviously, as a matter of good faith, the Inland Revenue will allow the deduction of this interest in the case both of Corporation Profits Tax and Super-tax. I did hope that one would have had a better reply.

§ Sir R. HORNE
I apologise to the hon. Member if we have not given him satisfactory information. We are advised, 1541 and we shall act upon the advice, that what my hon. Friend desires is really covered by the existing law, and in these circumstances he need not fear that there is going to be any injustice.

§ Mr. HOLMES
I beg leave to withdraw the Amendment.