(1) The following paragraphs shall be substituted for paragraph (3) of Rule 8 of No. V in Schedule A (which grants relief in certain cases in respect of the cost of maintenance, repairs, etc.):—
"(3) This Rule shall apply to any land (inclusive of farmhouses and other buildings, if any) or house, the assessment on which is reduced for the purpose of collection:
Provided that no repayment of tax shall be made under this Rule in respect of the cost of maintenance repairs, insurance or management, if or to such extent as that cost has been otherwise allowed as a deduction in computing income for the purposes of Income Tax."
(2) This Section shall not have effect as respects Income Tax for the year 1922–23.
Sir J. HOPE
I beg to move in Subsection (1) to leave out the words "paragraph (3)," and to insert instead thereof the words "paragraphs (2) and (3)."
§ The CHAIRMAN
I take it that the hon. and gallant Member is moving this Amendment, in order to get his second Amendment discussed. They hang together.
Sir J. HOPE
Yes. My second Amendment reads as follows:For the purpose of this Rule the term 'maintenance' shall include the replacement of farmhouses, farm buildings, cottages, 1342 fences, and other works, if and to the extent to which the replacement is necessary to maintain the existing rent; and the term 'replacement' shall include replacement according to an improved standard necessary to meet modern requirements, or to comply with any Act of Parliament or any regulations or bye-laws of a local authority.
Sir J. HOPE
I am moving the Amendment mainly in order to give assistance in the improvement of agricultural housing, especially in Scotland. It is a well-known fact, especially in Scotland, that agricultural housing conditions are far from good. That has been confirmed by the Royal Commission on Housing, and is an acknowledged fact amongst Members of this House. It is also agreed that though a good deal has been done for housing in urban areas, little or nothing has been done since the Armistice to give public assistance in the improvement of housing in agricultural areas. In agricultural areas owners are doing their best to improve the conditions, which are far from satisfactory. A certain minimum standard is laid down by this House in regard to housing, such, for instance, as the condition that there should be a water closet or an earth closet in every house, that there should be a decent water supply to the houses occupied by agricultural labourers or other labourers, and that there should be a coal place, a larder, and a scullery. Owners, where opportunities arise, are anxious to put those houses which do not comply with these conditions into the required condition, and in some cases the inspectors of Income Tax have allowed the money expended with this object as a legitimate charge in the maintenance claim for repairs. But this is not always allowed. Some inspectors question the putting in, for instance, of a decent water supply into an agricultural labourer's house as being an improvement, a capital expenditure, which cannot be charged in the maintenance claim.
My Amendment would ensure that such sums expended could only be charged in the maintenance claim where there is no increase of rent. This seems to me to be an absolute safeguard. Further, the Amendment would provide that the charge could not be made in the maintenance claim if the improvement of the 1343 house goes above the standard laid down by Parliament—the minimum standard of decency and comfort. On these grounds there is no danger of any illegitimate charges being put into the maintenance claim. I hope the Chancellor of the Exchequer can see his way to accept the Amendment. If he thinks, or if his advisers are afraid, that my Amendment might open too wide a door, I trust he will give us an assurance that he will instruct the collectors of Income Tax throughout the country that where money has been expended on the improvement of houses in order to bring them up to, but not above the minimum standard laid down by this House, for decency and comfort, and where there has been no increase of rent, that expenditure shall be allowed as a charge in the maintenance claim. This is a reasonable proposition. I only ask that where the money is spent on bringing the house up to the present-day statutory standard of decency and comfort, the money so expended shall not be taxed by the Central Government.
§ The SOLICITOR-GENERAL (Sir Leslie Scott)
So far as I can follow the purpose of the Amendment, it falls under two heads, a part which is not necessary, because it is already the law, and a part which cannot be acceded to because it proposes to allow deductions for Income Tax purposes in respect of expenditure that is essentially capital expenditure in character. This maintenance deduction, historically, was introduced as an additional allowance in regard to houses of low rental in the year 1909. At different dates since then it has been raised by various Acts to houses of higher rental, differing in different districts. The object of the Clause is to remove the money limit in regard to the rental of houses. The broad effect of the Amendment would seem to be to ask for the recognition to some extent of the Rule as it is to-day under Schedule A of the Income Tax, but to go beyond that and to make a loophole in the Rule for allowing deductions for what is really capital expenditure. The phraseology of the Amendment in so far as it differs from the phraseology of the Rule is this. The Rule says:(2) For the purposes of this Rule the term 'maintenance' shall include the replacement of farmhouses, farm buildings, cottages, fences, and other works where the 1344 replacement is necessary to maintain the existing rent.The Amendment says:For the purpose of this Rule the term 'maintenance' shall include the replacement of farmhouses, farm buildings, cottages, fences, and other works, if and to the extent to which the replacement is necessary to maintain the existing rent; and the term 'replacement' shall include replacement according to an improved standard necessary to meet modern requirements, or to comply with any Act of Parliament or any regulations or bye-laws of a local authority.In so far as the Mover of the Amendment has in mind expenditure which the landlord is bound to incur in order to meet the minimum requirement of the health authorities, or in order to maintain the existing rent, the Amendment is not needed, because he can get that allowance under the law as it stands to-day. In so far as he contemplates expenditure made by the landlord on improvements on his estate, the Amendment cannot be accepted. The one fundamental principle in Income Tax law is that expenditure in the nature of capital expenditure can never be deducted. The comment on the Amendment is that partly it is unnecessary and partly it is objectionable for the, reasons I have given. For these reasons, I regret that we are not in a position to accept the Amendment.
§ Lord R. CECIL
I am anxious to understand this matter. I may have misunderstood the Solicitor-General, but I can only go by the Amendment as I read it. As I read the Amendment, the first part is a repetition of the existing Rule, and the second part deals with a case where you are replacing an existing farmhouse or an existing building, and where you primâ facie come under the Rule with regard to charges for capital improvements not being allowed in the maintenance claim, but where, owing to various building laws or other statutory requirements, you have to provide certain things, and you cannot replace that building exactly in the same way as it existed before. You have to put back something better. You cannot replace it at all unless you replace it according to the building laws, and the Mover of the Amendment suggests that in that case, you ought to be entitled to deduct the cost of doing that as part of the cost of replacement. I understood the Solicitor-General to say that in consequence of the building laws where you make an improvement, which 1345 might well be, you are not to be entitled to deduct, the cost of so much of the replacement as is in fact an improvement. That seems to me to be rather hard.
A landlord or an owner finds it necessary to replace a building. So far as he is concerned he would be quite ready to replace it exactly as it was before. Then comes in the statutory requirements which say, "You must not do that, You must put back an improved building." The standard of building has been raised since the original building was erected. That happens in the vast majority of cases where an old building has to be replaced, and you have to put in something better. It seems hard that a man is not entitled to charge in the maintenance claim so much of that expenditure as is to be attributed to the demand for improvement, although the improvement is not necessarily attributable to what he wishes, but to what he is compelled to do. I understand from the Mover of the Amendment that some Income Tax officials allow the whole of that replacement cost as maintenance, but others take a narrower and stricter view and say that in so far as it is a replacement of what was existing you can charge it as a maintenance, but if there is an improvement you are not so entitled.
Sir J. HOPE
I thank the Noble Lord for the way in which he has put the case. The question largely turns on what is an improvement. I do not move this Amendment with any idea of suggesting that Income Tax should not be paid on real improvements. What is an improvement? Take an agricultural cottage in which there is no water laid on, and the cottagers have to fetch the water a distance of 100 yards or so. There may be an indifferent earth closet, and no water closet. There may be no building of any sort in which to store coal. In replacing the house you put in a proper water supply, so that the housewife has not to go out in the snow to fetch the water, or you provide decent sanitary arrangements, and a proper place in which to store coal. All these things are demanded in regard to the building of new houses. Some inspectors say that because the house has been improved in the course of being replaced by the introduction of modern sanitary and necessary conditions, the charges for putting in a water 1346 closet, or water supply, or a coal house constitute an improvement which is not a legitimate charge as maintenance.
§ Mr. PRETYMAN
I hope that the Chancellor of Exchequer and the Solicitor-General will consider this matter before the Report stage, and see if something cannot be devised to meet what is the wish of everybody concerned and-grant this allowance where the replacement is really a replacement under modern conditions and there is no increase of rent. Trouble arises through the difficulty of interpreting the words which the Solicitor-General read out from the Rule. What exactly does a replacement amount to? It seems to be quite obvious to the Committee that you cannot in replacing a house replace something that is worn out by something that is also worn out. The fact is, that in some districts the inspectors of taxes interpret the Rule fairly liberally, and no difficulty arises. In another district an inspector of taxes interprets the Clause very strictly. Several cases have come under notice in which an allowance has been refused because some simple fitting in a house or some part of a house has been replaced with something a little different or better than before. Surely, that kind of interpretation is not desired.
It was recognised when this Rule was made, when it was discussed in Debate—and I believe that. if the Solicitor-General refers to the Debate he will find that it was understood—that there would be some little difficulty about interpreting this, and that there was a distinct understanding that it should be liberally interpreted so as to give an encouragement to replacement on better lines than before. I would suggest that the Chancellor of the Exchequer should give an assurance that inspectors of taxes will be instructed to interpret liberally. The existing words themselves must be rather stricter than it is necessary to interpret them, because a large capital expenditure on something entirely new could not be treated as expenditure of income with a deduction for Income Tax purposes. We do not want so much to get an extension of language, which might give rise to litigation, as to get a re-assurance that if this Clause cannot be amended—that is a matter of terminology on which the Inland Revenue Department would have to be consulted—a liberal interpretation shall be given and that these replace- 1347 ments by something a little better in the matter of housing shall not be penalised. If a man who replaces something by an, expenditure of £20 is going to get off the whole of that, while if he expends £25 he is not going to get anything at all, that is putting a premium on replacement with something worse, which I am sure there is no desire to do.
§ Sir L. SCOTT
The position has been accurately stated and is well recognised by the Government, and there is no difference of view whatever between the Inland Revenue Authorities and hon. Members who have addressed the Committee. The truth is that we all want to see replacement done not of the old identical thing that was there serving its purpose for 100 years, but of something that serves the same purpose, and no mere than the same purpose, but of a standard suitable to modern progress. In practice the question is a question of fact as to whether the thing you see there is replacement of the thing that was there before, though of a better quality, or whether in point of quantity it is something larger and more expensive.
§ Sir L. SCOTT
I am afraid that I could not conceive that that is the real measure. It is a limiting condition in the sense that, if as a result of what is called replacement, there is a substantial rise in rent it is a fair inference that it is something more than replacement, but I do not think that the converse applies. One may conceive the case of a substantial addition being made in the way of replacement which was, though possibly economically, there might be a justification for the alteration, replacement from capital expenditure. For instance, there might be a farmhouse with four or five rooms replaced with a farmhouse of eight or ten rooms. Obviously there is capital expenditure in addition to replacement. Probably a higher rent would be demanded, but it might not be. You cannot take the actual rent as the criterion of the particular replacement, because there are all sorts of other conditions affecting the rent of the whole farm which may intervene and upset the criterion. The truth is that the only way to give effect to what is the intention of the rule, 1348 and of the Committee, and of the Government, is that those officers of the Inland Revenue who have to interpret the rules should have administrative instructions as to the way in which to approach the question, and on behalf of the Government I am authorised by the Chancellor of the Exchequer to say that instructions of that character will be given, the rule remaining as it is, if the Amendment be withdrawn.
§ Amendment, by leave, withdrawn.
§ Clause ordered to stand part of the Bill.
§ Clause 19 (Relief from Income Tax in respect of National Savings Certificates and Ulster Savings Certificates) ordered to stand part of the Bill.