NEW CLAUSE.—(Super-tax on undistributed income of certain companies.)

HC Deb 27 June 1922 vol 155 cc1867-951

(1) Where it appears to the Special Commissioners that any company to which this Section applies has not, within a reasonable time after the end of any year or other period ending on any date subsequent to the fifth day of April, nineteen hundred and twenty-one, for which accounts have been made up, distributed to its members in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of Super-tax, a reasonable part of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that for purposes of assessment to Super-tax, the said income of the company shall, for the year or other period specified in the notice, be deemed to be the income of the members, and the amount thereof shall be apportioned among the members:

Provided that, in determining whether any company has or has not distributed a reasonable part of its income as aforesaid, the Commissioners shall have regard not only to the current requirements of the company's business but also to such other requirements as may be necessary for the maintenance and development of that business.

(2) Any Super-tax chargeable under this Section in respect of the amount of the income of the company apportioned to any member of the company shall be assessed upon that member in the name of the company, and, subject as hereinafter provided, shall he payable by the Company, and all the provisions of the Income Tax Acts and any Regulations made thereunder relating to Super-tax assessments and the collection and recovery of Super-tax shall, with any necessary modification, apply to Super-tax assessments and to the collection and recovery of Super-tax charged under this Section.

(3) A notice of charge to Super-tax under this Section shall in the first instance be served on the member of the company on whom the tax is assessed, and if that member does not within twenty-eight days from the date of the notice elect to pay the tax a notice of charge shall be served on the company and the tax shall thereupon become payable by the company:

Provided that nothing in this Sub-section shall prejudice the right to recover from the company the Super-tax charged in respect of any member who has elected as aforesaid but who fails to pay the tax by the first day of January in the year of assessment or within twenty-eight days of the date on which he so elected, whichever is later.

(4) Any undistributed income which has been assessed and charged to Super-tax under this Section shall when subsequently distributed be deemed not to form part of the total income from all sources for the purposes of Super-tax of any individual entitled thereto.

Where a member of a company has been assessed to and has paid Super-tax otherwise than under this Section in respect of any income which has also been assessed and upon which Super-tax has been paid under this Section, he shall, on proof to the satisfaction of the Special Commissioners of the double assessment, be entitled to repayment of so much of the Super-tax so paid by him as was attributable to the inclusion in his total income from all sources of the first-mentioned income.

(5) This Section shall apply to any company—

1. (a) which has since the fifth day of April, nineteen hundred and nine, been registered under the Companies Acts, 1908 to 1917; and
2. (b) in which the number of shareholders computed as hereinafter provided is not more than 50; and
3. (c) which has not issued any of its shares as a result of a public invitation to subscribe for shares; and
4. (d) which is under the control of not more than five persons,

For the purposes of this Sub-section— In computing the number of shareholders of a company there shall be excluded any shareholder who is not a beneficial owner of shares or who is an employé of the company, or is the wife or the unmarried infant child of a beneficial owner of shares in the company; A company shall be deemed to he under the control of any persons where the majority of the voting power or shares is in the hands of those persons or relatives or nominees of those persons, or where the control is by any other means whatever in the hands of those persons; The expression "relative" means a husband or wife, ancestor, or lineal descendant, brother, or sister; The expression "nominee" means a person who exercises his voting power or holds shares directly or indirectly on behalf of another person; Persons in partnership and persons interested in the estate of a deceased person or in property held on a trust shall, respectively, be deemed to be a single person.

(6) In this Section the expression "member" shall include any person having a share or interest in the capital or profits or income of a company, and the expression "employé" shall not include any governing director, managing director, or director.

(7) The provisions contained in the First Schedule to this Act shall have effect as to the computation of the actual income from all sources of the company, the apportionment thereof amongst members of the company, and otherwise for the purpose of carrying into effect, and in connection with, this Section.

(8) The provisions of this Section shall apply for the purposes of assessment to Super-tax for the year 1922–23 and any succeeding year of assessment.—[Sir R. Horne.]

Brought up, and read the First time.

The CHANCELLOR of the EXCHEQUER (Sir Robert Horne)

I beg to Move, "That the Clause be read a Second time."

4.0 P.M.

During previous discussion I promised the Committee to put down an amended form of the proposals which were put forward in Clause 14. The Committee will remember that that Clause dealt with the case of what I may describe, not very accurately but sufficiently accurately to indicate to the Committee the idea which lies behind it, as the case of the one-man company. It was perfectly obvious that every Member of the Committee was in agreement with the general principle which I was seeking to establish. It is a fact that there have been started and are increasingly promulgated, companies whose chief result is to evade the payment of Super-tax by enabling small numbers of people to put to reserve, sums which should be Super-taxed, but which by reason of our present Company Law can thus evade the ambit of the Super-tax net. That was the foundation of the Clause. Many objections were taken in the course of the discussion, and I recognised the cogency and force of some of the apprehensions which undoubtedly were agitating the mind of Members of the Committee. Accordingly, I asked leave of the Committee to put down a new form of the Clause which might have the effect of meeting some of the difficulties. This new Clause is now on the Paper, and I should like to tell the Committee very briefly the results of the modification. In the first place, the phraseology of the first Clause was objected to on the ground that what we there described as "normal requirements of the business" might lead a company not to apply to reserve sums which might quite properly be used for that purpose. I recognised, of course, the force of that criticism, and I have struck out the words "normal requirements" altogether, and I now provide that a company shall only become subject to the provisions of this Clause if it fails to distribute a reason able part of its actual income from all sources for the year or period, after having regard to all the requirements of the business from whatever point of view you look at it. The Committee will find the words: That, in determining whether any company has or has not distributed a reasonable part of its income as aforesaid, the Commissioners shall have regard not only to the current requirements of the company's business but also to such other requirements as may be necessary for the maintenance and development of that business. I have put in no adjectives at all describing the requirements, and I think probably that will alleviate the difficulty felt by some hon. Members. Accordingly, it would be open to those who have to come to a judgment upon the matter to look at all the requirements which the business may have—not merely to current requirements, but everything that is necessary for the maintenance and development of the business. These words are wide enough to cover everything that a business may require. I notice that in some of the Amendments which have been put down to this Clause an attempt has been made to enumerate the kind of things for which companies might ordinarily require to set aside reserves. In the interests of the companies themselves. I would venture to deprecate any such enumeration. As a lawyer, I am very well aware that as soon as you begin to enumerate things, you exclude everything else that you do not enumerate. It is very much better to leave your provisions in wide terms if you wish to aid the companies rather than to set forth a schedule of things to which you are having special regard. If you make your enumeration, the maxim of the law immediately applies that the statement of one thing excludes the other. Therefore, I have put this Clause in as wide terms as I possibly can in order to allay apprehensions which anyone may feel that they will not be allowed consideration in the widest form of all the circumstances against which a company may have to provide in its discretion.

It was said in the course of the Debate that there are something like 66,000 private companies in this country operating under our Company Law, and apprehension was felt that there would be an attempt at scrutiny of all these companies. I may say, quite candidly, that no such intention ever occurred to our minds. Of course, the only intention was to get at the companies which were operating so as to defeat our Super-tax Law, and the kind of idea in our heads was that the number of companies, which at the moment one would desire to investigate, was confined to a very few hundreds out of the 66,000 companies which are registered under the Company Law. The Super-tax only began in this country in 1909, and though there may have been some inducement, at any rate, there was no such great inducement prior to 1909, as was created by the Super-tax Law of that year. Accordingly, I propose that this Clause shall apply to any company which has been registered since 5th April, 1909, under the Companies Acts, 1908 to 1917. I am told that takes out of the provisions of the Clause at least 25,000 companies, which were registered prior to that day. My information is that, of the remainder, at least 30 per cent. are small companies, with a total income of not more than £1,000 per year and which, accordingly, do not come within the ambit of these provisions. Therefore, the number of companies which could become by any possibility the subject of investigation would be very greatly restricted and limited by the proposal which I now make. There is a further restriction, which is designed to meet one of the Amendments, which was proposed, I think, by two hon. Members from Glasgow. It is that the Clause can only apply to companies which are under the control of not more than five persons. The proposal made by the hon. Members for Glasgow was, I think, four persons. I suggest the number of five as being more suitable.

I hope the Committee will see that I have been endeavouring to the utmost of my ability to meet the points which have been put and to design a Clause which will at least show that we are desirous of excluding from any troublesome investigations the great mass of the companies in this country and to strike at only those which are engaged in devices to escape the operation of the Super-tax. I have only one more remark to make, and it is in connection with an Amendment suggested by the hon. Member for North-East Derbyshire (Mr. Holmes). His Amendment was designed to put upon the auditor of the company the duty of saving investigation in cases where he could give a certificate that in his opinion the company's method of distribution of its proceeds was entirely justified and provided an appeal on the part of the Inland Revenue to the Board of Referees. The Committee will remember that I indicated some willingness to introduce some such principle into the Clause. There was, however, quite evident opposition on the part of various Members sitting on both sides, and I have since discussed the matter with several people very intimately acquainted with company business and also with the auditing of company accounts. For the moment' I have arrived at the conclusion that it may be quite possible to work this matter satisfactorily without any such provision, but, of course, in the event of the Committee holding the opinion that some such precaution would be an added advantage, I am perfectly willing to reconsider the matter.

Mr. DENNIS HERBERT

I should like, first of all, to thank the Chancellor of the Exchequer for the very kind and courteous attention which he has given to the representations made to him with regard to the original Clause. The original Clause met with rather devastating cross fire from two totally different points of view. It was objected to because it was calculated to be unfair to a number of trading companies which it was not the right hon. Gentleman's intention to hamper or to unduly interfere with. He has met those criticisms to a considerable extent. Then the Clause was met on the other side with the objection that it was not likely to effect its purpose to any considerable extent because there were two perfectly easy ways in which the particular person sought to be caught by the Clause could evade it. He could either reconstruct his company abroad, or he could make such arrangements as would make it a company not of a private character, and by either of those means he could entirely escape from the Clause. The Chancellor of the Exchequer has not met that objection in the least. Indeed, he has been unable to do so because he is bound by his Ways and Means Resolution, which confines the Clause entirely to com- panies registered in England and companies which being registered in England are of a private character. The right hon. Gentleman no doubt will say that, if he goes on with what I should describe as this ineffective Clause, he will capture a certain number of these people who, either through ignorance or carelessness, will not take the trouble or go to the expense necessary in order to get out of this Clause. That may be perfectly true, and that might be a good argument for going on with the Clause provided that it was not calculated to do harm otherwise. But, much as the right hon. Gentleman has tried to meet the other points raised against this Clause, he has not met some which will undoubtedly hamper a great many concerns which ought not to be hampered and which ought not to have this tax imposed upon them.

In all legislation of this kind there may be hard cases, and, if the Chancellor of the Exchequer were going to catch a large number of those people whom we want to catch, then there would be justification for his Clause, notwithstanding the fact that it might create two or three hard cases, but if you are going to do very little indeed to stop the hole in the net, I seriously suggest that it is not right to proceed with the Clause when there is the danger of doing harm. I go further than that, and I say that it is my very carefully considered opinion that this Clause, if passed, will do more harm to the Chancellor as tax collector than if he lets it alone, and my chief reason for saying that is that a very large number of people at any rate will take advantage of the opportunity which is open to them of getting out of this Clause by reconstructing their companies abroad. The effect of that would not merely be to get out of the Super-tax which this Clause is intended to fix upon them, but by doing so they will also, in nine cases out of ten, get out of paying Income Tax on their profits, which they do pay at the present time. I ask the Chancellor of the Exchequer to pay very serious attention to that indeed. He knows that a foreign company naturally does not pay British Income Tax. It is true that the shareholder in the foreign company, if he is a British subject and liable to tax, pays Income Tax on the dividends which he receives, but the whole essence of these companies is that they are not paying dividends, but keeping their profits and accumulating them in order to avoid Super-tax, and to the extent to which they do that and refrain from distributing among their members the profits which they earn, those profits which they refrain from distributing will not bear Income Tax. That is such a very big question indeed that, in my opinion, the Income Tax which the Chancellor will lose from the companies which are reconstructed abroad will probably be far more than the Super-tax which he will recover from those comparatively few people who will not take the advantage of evading this Clause by registering their companies abroad.

I do not want at this stage to go into criticisms of the Chancellor's new Clause in so far as he has endeavoured to meet the cases of the companies whom he does not want to hit; I shall have something to say about that on later Amendments to this Clause, if the right hon. Gentleman persists with it, but it seems to me that all I have got to prove for the purposes of my case now is that there is some chance of some companies being ill-treated under this Clause. If that be so, that takes away the justification for this Clause, unless the Clause is going to be thoroughly effective. When you add to the fact that the Clause is not going to be very effective the fact that it is probably going to lose a very large amount of Income Tax, I suggest that there is a very strong case indeed for asking the Chancellor to abandon this Clause altogether.

In conclusion, I would like to say that I have every sympathy with the right hon. Gentleman's attempts to tax those people who are improperly trying to avoid Super-tax. I do not want anyone to attach too much importance to my use of the word "improperly," because it is admitted by everybody, I think, that a man is entitled to get out of paying tax if he can do so without fraud or dishonesty, and it is the Chancellor's duty to try and stop his getting out of it, but I want to say that where you are going to try to stop those people from improperly getting out of Super-tax, we feel that an attempt which is likely to do more harm than good by loss of Income Tax should be abandoned until such time as legislation can be introduced which will be effective. In my opinion, for what it is worth, it is possible to legislate in such a way as to recover this Super-tax from these men, notwithstanding the fact that they register their companies abroad. That is a subject for discussion at the proper time. I know there are certain difficulties in the way, but I believe, myself, that it can be done, and I put down a roughly drafted Amendment originally to this Clause in order to indicate very shortly the way in which I thought it could be done. The objection to that, as I have already stated, is that the right hon. Gentleman and the Committee are precluded by the Ways and Means Resolution from moving a Clause which will hit foreign companies. I am not very well up in the Rules of this Committee or this House, but I believe I am right in saying that the right hon. Gentleman can recommit this Bill for this particular Clause and get a new Ways and Means Resolution, which would not confine him to dealing only with English companies, and only with companies of a private character. If he would do that, I can assure him that I, for one, and a great many who think with me, would do our best to support him in a Clause which would be effective against those whom he does want to reach, and which would be calculated to do as little damage as possible to the honest trading concerns. I should like to move that this Clause be read a Second time on this day six months.

The CHAIRMAN

That is not the custom with new Clauses.

Mr. A. M. SAMUEL

I do not think there is much chance of people registering their companies abroad, and, if they do, they will be taxed by foreign countries very seriously; besides, their doing so will be perfectly good evidence that they wish to avoid paying their proper share of the taxation of the country, and I should support the Chancellor of the Exchequer if he brought in legislation to withdraw the protection of the British flag from companies trying to do that sort of thing. I am able to say that I and those who think with me agree to accept this Clause, as we could not get the Chancellor to agree to the words put down in my Amendment last week. We think it is a great advance upon the other Clause. The other Clause was unworkable, but we support this Clause in detail, subject to such verbiage as we shall put forward to make it clearer.

Major Sir GEORGE HAMILTON

The hon. Member says, "I and those who agree with me." Does he mean the Chambers of Commerce?

Mr. SAMUEL

I have the honour of identifying myself in this matter with the Association of British Chambers of Commerce. We have had many consultations about this, as I said last week. We admit the principle involved in the Clause, and we now agree to accept it, subject to certain modifications, but there is something in the Clause which I do not think the Chancellor of the Exchequer has quite realised. I may be wrong; technicalities of the scheme puzzle my poor brain very much, and it is difficult to put my thoughts into words, but there is an element in this Clause which may make it a penalty against a man who has not at the original declaration brought out his profits at such a sum as will satisfy the Super-tax Commissioners. Whereupon the Super-tax Commissioners will say that the amount that he ought to call distributable is so much. They must do this, however, under the Income Tax Acts, and if they assess the amount distributable according to the Income Tax Acts, and not under this Clause, he will find they will have to apply rules of the Income Tax Acts which will not allow certain benefits which this Clause does allow. The consequence is, to apply the old tag, The little more, and how much it is; The little less, and what worlds away. The Super-tax Commissioners may say, "We will not take your figure; we will rip your figure up, although the difference may be small, and we will apply the only test to your accounts which we can apply, namely, the Income Tax Acts," and they will not allow the benefits which this Clause otherwise will allow. Yet the shortage in the original declaration may be a relatively small sum. The consequence is that, by having the amount assessed under the Income Tax Acts and according to the views of the Super-tax Commissioners, Super-tax will be payable on reserves, whereas another company operating and declaring its distributable profits under this Clause, having declared a figure which is just within what the Super-tax people think proper, will be put in a better position than the company which has had its accounts contested by the Commissioners and settled by them under the Income Tax Acts. I am not a lawyer, and not even an accountant, so with an intricate point like this I have great difficulty in putting what I mean into clear language. I have therefore drawn up a minute of what I want to express, and I will hand it to the Chancellor when I sit down. There is another point in the Clause, and that is this, that if a company is to be charged Super-tax, for reasons which we agree, why should it pay Corporation Profits Tax as well? There must be a hiatus in the Clause in not providing for a suitable rebate for Corporation Tax. I think the Chancellor of the Exchequer will say, when he comes to explain the Clause in detail, "Yes, I think if a company under Clause 14 pays Super-tax and is called upon to pay Corporation Profits Tax, which it must do already, I will give it credit in account for the amount of Corporation Profits Tax off the amount of Super-tax."

Sir R. HORNE

I am quite prepared to meet that.

Mr. SAMUEL

I am very much obliged. That does away with a great objection, and that will allay fears of what we otherwise would regard as unjustifiable treatment.

Sir R. HORNE

I am quite prepared to exempt companies under this Clause from the payment of Corporation Profits Tax.

Mr. SAMUEL

I am very much obliged. The word "members" is used very often in this Clause, and I do not know what the Chancellor of the Exchequer means by the word. I have nothing to do with these private limited liability companies in my own private capacity, but it has recently come to my knowledge that a private limited liability company issuing shares has issued the bulk of its shares to another private limited liability company, a holding company. Suppose the first-named company issues shares only to one or two, or three members, and one of them is a limited liability company, how are you going to get the Super-tax out of the limited liability company which holds shares in the original company? Therefore, there is a flaw in this Clause which the Chancellor of the Exchequer will have to look into. Let me construct a case to show what I mean. Suppose a limited liability company pays its dividends, large or small, to another limited liability company, which may be owned by one, two, or three people only, and suppose then the Super-tax people assess the second company under this Clause, they cannot get the money out of the second company because it is against the law of this country to put Super-tax on limited liability companies. I think the right hon. Gentleman will have to look into this matter pretty closely, otherwise the whole Clause can be defeated quite easily. Then suppose a member of one of these companies under this Clause is a man who has never been liable to Super-tax, and you assess an amount to him. How are you going to get from the man his proportion of the company's Super-tax for which he is liable, and at what rate are you going to assess him? And, if you get it, by what means if his total income is below the super-tax limit can he reclaim it from the Revenue?

If there are various members of a company, and each in his individual capacity is to be charged Super-tax, is each to go to the secretary of the company, disclose his various actual income and say, "You must charge Super-tax at that rate"? Does the Chancellor of the Exchequer mean that? I do not think he does, at least it is wrong if he does so intend. He has, therefore, to explain to us at what rate the Super-tax is to be taken from the company or from the various members of a limited liability company who may hold shares in such private company; otherwise we shall, when tax is collectable, be in a maddening state of confusion, the very thing which infuriates the trading community about revenue legislation. Then the right hon. Gentleman uses the word "income" instead of "profits." There is a great difference between the word "income" and the word "profits." If he means income to mean net profits, I am with him; but, unless he is willing to admit that interpretation, what will be the result? Let me take the first instance that comes to my mind. There is a trust company, for example, called the British Investment Trust and another called the International Investment Trust. They do not come under this Bill, but they hold large volumes of capital invested which brings in income. They have accountants, lawyers, directors, secretaries, offices and other necessary things to pay for out of that income before it becomes net profit. They have to take these working expenses out of income before getting at the net profit, but, under this Clause, you are defining such income as net profits, and we cannot allow that to stand. Why has the change been made in respect to these words in the new Clause? What is behind it?

Then, again, I notice there are elements in this Clause which are of a retrospective nature. My right hon. Friend the Member for the City of London (Sir F. Banbury) will back me up in saying that the Government ought to make every sacrifice to prevent every element of retrospective legislation being brought in. The Clause refers to 1921, instead of 1922. No doubt the Chancellor of the Exchequer will say that the reason for this is that he wants to get next year the revenue of the last year, because Super-tax is the revenue for the back year. This Clause, I submit, is not constructed for the purpose of revenue, but for the purpose of deterring people from trying to get through a gap in the Income Tax law. The right hon. Gentleman is not out for revenue in this particular Clause, but to deter people from doing things he does not want them to do. I think he ought to insert 1922 in place of 1921, although he might lose revenue thereby.

Look at the difficulty to a private company in having to re-open its accounts of a year or 18 months ago. When it closed its accounts, it made certain allocations and certain disbursements. Is it to go back to all those? It would he a bewildering and almost an impossible task. It must be made, too, perfectly clear that none of the undivided profits prior to 1921 or 1922, if 1922 is to be the date, should be brought under the purview of this Bill for this reason. If you bring up undivided balances in the past years, you make a differentiation between two sorts of companies. This Clause, therefore, should not apply to any reserves or brought forward balances in the accounts prior to 1921 or 1922, if you accept 1922. If the right hon. Gentleman does not accept that, what happens? Some companies who have been prudent, and kept money in their balance sheets, or at the bank, and have not made over-generous allo- cations to their shareholders in the form of bonus shares, will be penalised, as compared with the companies who dispersed their funds prior to 1921 or 1922 in the form of bonus shares. Therefore, you have given a preference to those companies who have been imprudent and not reserved money for the purposes of development, and you have penalised those who have not issued bonus shares, but have kept their money for development and have been conservative in their finance and profit distributions—the secret of stability in business. There is another side of the question. I think the revenue authorities generally on broad principle are wrong in trying in any way to throw cold water on the setting up of private companies throughout the country, and for two reasons. When you have firms turned into companies, the value of the goodwill and future prospects of the company are often reflected in the value of the shares when a man dies and his estate becomes taxable. The Revenue then benefits. That is not so often the case when a business is a private firm. In the case of a company with a balance sheet, you can go moreover very much closer into the amount of income for Income Tax. Certain books have to be kept, and it is to the advantage of the Revenue to get into closer contact with a company for the purpose of getting revenue.

There is another small point. I see that the Chancellor of the Exchequer has put the date at 1909. It would have been better to have put it at 1914. Still this 1909 does rule out a large number of innocent companies who might otherwise have a grievance against the Government for introducing this Clause. There is a risk of companies registered in and after 1909 labouring under restrictions imposed under this Bill as regards reserve policy which are not imposed on pre-1909 companies. There is a risk that they may suffer unfair competition at the hands of pre-1909 companies. I would rather have seen 1914 in the Bill. I do not think many companies were formed before 1914, for the purpose of escaping super-taxation, and if the Chancellor of the Exchequer were to put that limit up to 1914, very likely he would be able to relieve many of the earlier companies from what will otherwise be an unfair form of competition against them. But there is always the chance that a decaying pre-1909 company may be brought up and converted for purposes of escaping Super-tax in 1922 by other persons. The right hon. Gentleman must not lose sight of the fact that this Clause has not been constructed by him for the purpose of raking in revenue from the past. I think what he has in mind is that it should be a deterrent, or, rather, should stop a gap in the revenue by preventing people from being placed in a position in which they would be immune from taxation. Subject to certain verbal alterations, which I may have the opportunity of moving later, I am glad to say that I support the principle of this Clause, and that I shall do all I can to work it, but so as not to injure the innocent trader. I am much obliged to the Chancellor of the Exchequer for having met us on the question of the rebate for Corporation Profits Tax as a set off under the Clause when Super-tax is payable.

Sir W. JOYNSON-HICKS

I do not propose to discuss the details of the Clause, but I do want to put one or two Second Reading points to the Chancellor of the Exchequer. I am not at all sure, that in trying to catch the tax-dodger, in which we are all considerably with him, he is not going to do a lot of harm to the trading and banking world of the City of London. The object appears to be that where a one-man company—and we all know that such cases have been reported in the Law Courts—rolls up all the profits, and then borrows the reserve fund profits, and never pays them back, he ought, I agree, to be made to pay Super-tax on those profits. It is a clear fraud. There is also the case where a one-man company rolls up all reserve profits, dissolves the company, and takes those reserve profits out as capital and pays no Super-tax. Those are the only two cases that really need to be dealt with under this Clause.

Sir F. BANBURY

There are others.

Sir W. JOYNSON-HICKS

My right hon. Friend has greater experience of the iniquities of the City than I have.

Sir F. BANBURY

It is nothing whatever to do with the City. They were cases which came before me when I was on the Select Committee for New Issues at the beginning of the War.

Sir W. JOYNSON-HICKS

I was only chaffing my right hon. Friend, as he knows perfectly well. If there are cases in the nature of fraud, we all want to provide the Chancellor of the Exchequer with the means of dealing with them, but in this Clause I want to be sure that he is not hitting a great many public as well as private companies. There is nothing in the Clause limiting it to companies registered as private companies, but it is restricted to companies in which the number of shareholders is not more than 50, and which are under the control of not more than five persons. There will be hundreds, if not thousands, of companies registered as public companies which really are in effect private companies. I wilt give two instances. My right hon. Friend knows that during the War there was an enormous reinsurance business done between England and Germany. Those German insurance companies were put out of action during the War, and what happened? A very large number of re-insurance companies were founded in England with English capital, by English people, by English insurance companies, with very great benefit to the insurance market of the City of London. Most of those were registered as public companies, but certainly a great many had less than 50 shareholders. Two or three large insurance companies get together and say, "It is desirable to found a new insurance company. We will each put down a few thousand pounds, and a few directors a few thousands pounds more." By that means there will be formed a re-insurance company of very great advantage, enabling London to remain the re-insurance market of the world. There are several companies of that kind, every one of which would come under the effect of this Clause.

Sir R. HORNE

Is my hon. Friend referring to public companies?

Sir W. JOYNSON-HICKS

Public and private companies.

Sir R. HORNE

My hon. Friend did not specifically indicate whether it was a public or private company. The fact is that a private company has usually less than 50 members. [HON. MEMBERS: "No!"] On the other hand, you might have a public company with less than 50 members, but it is governed by special rules. It must publish a balance sheet, which a private company need not do. My hon. Friend has said nothing to indicate that it was really a public company to which he was referring.

Sir W. JOYNSON-HICKS

The right hon. Gentleman will forgive me for saying he is wrong. A private company need not issue shares to the public. That is perfectly true. A public company is one—I have registered scores and scores—which is registered with seven shareholders, and a private company is one which is registered with not less than two shareholders. There is no need for a public company to publish any prospectus or to issue any shares to the public at large. I think the hon. and learned Gentleman the Solicitor-General will agree with that. These re-assurance companies, whether registered as public or private companies, equally come under the operation of the right hon. Gentleman's new Clause. That is perfectly clear. Let me say what is an absolutely essential thing for the re-insurance companies to do—whether a public or a private company does not matter—and that is to build up its reserve. That is the thing it must do first. These re-insurance companies, which have been advantageous to the City of London, have none of them paid any large dividends, but generally very small dividends. They have had, necessarily, in order to carry out the big insurance operations of the world, been compelled to make large reserve funds. These reserve funds will never be distributed to the members, for re-insurance companies do not distribute their reserve funds to their members. They will, of course, increase as the years go on, their value by the investment of these funds and the dividends which are paid to the members will be so far increased, and on these dividends both Income Tax and Super-tax will be paid. But, as I say, it is perfectly clear that these companies will come within the purview of this Clause.

The SOLICITOR - GENERAL (Sir Leslie Scott)

Would the setting aside of profits for the purpose of reserve funds by the re-insurance companies to which the right hon. Baronet is referring come within the purview of the words Such other requirements as may be necessary for the maintenance and development of that business.

Sir W. JOYNSON-HICKS

In my opinion, yes, but the Super-tax Commissioners might not take that view. I am referring, of course, to companies managed by the most astute and upright business men in the City of London. I am not referring to rubbishy companies, but to perfectly bonâ fide companies, who say: "We think it is necessary for the prosperity and stability of our company to build up this reserve fund." The Special Commissioners come along and, under this Clause, they have the right to hold this Star Chamber inquiry—there is no doubt about it. The point is that you have no control of this new inquisition into these bonâ fide companies. Let me give one instance of a company which is well known. Just before or during the War many of our banks instituted foreign banking establishments—Lloyds, I think, and the London and Westminster Bank, among others—with a view to doing foreign banking business. I think it will be found that these foreign banking companies will also come under the provisions of this Clause. These foreign branches were formed with very few shareholders and some of the managers, it might be, from the parent bank, not only to increase banking facilities and for the benefit of our banking institutions, but for the benefit of the commerce of the country. They are now to come under the provisions of this Clause. I quite agree that the tax dodger should come under this Clause, but I submit that in this inquisition the Special Commissioners will have a right to say, "We do not think that you "—it might be Lloyds Bank or it might he the London and Westminster Bank—" are allocating your net profits properly. You are putting too much to reserve. We think you ought to have distributed something more by way of dividend to your shareholders"—chiefly, it might be, that they might get Super-tax. I apologise to my right hon. Friend for putting these points now. I had not the opportunity before. But I should suggest that between now and Report he should consider whether he cannot remodel the Clause so as to catch the defaulter—for we all agree with that—while, at the same time, dealing properly with the great financial institutions of the City.

Mr. HOLMES

I support the particular point at which the Chancellor is aiming, namely, getting the man who has deliberately formed a private limited company—and we all agree with this, for we all want the Chancellor to get hold of that man—for the purpose of endeavouring to escape Super-tax, and also evading Income Tax. At the same time it is most desirable that trading companies should not be particularly hampered in their operations by having a tax beyond their fair share as Super-tax. I tried to put down an Amendment last week to meet the case by inserting words to the effect that the Clause should not apply to a company carried on for bonâ fide trading purposes. The Chancellor in reply to me said: Take the next suggestion which has been made as an alternative, that we should insert words to apply it only to companies, a company formed or carried on for bonâ fide trade purposes. That can be evaded in the easiest fashion possible. Take the case of a man carrying on business by private limited company. He carries on the business that he previously carried on, but he would evade it entirely because ho would say, 'I am carrying on a bonâ fide trading business,' and, of course, it would be so"—[OFFICIAL REPORT, 20th June, 1922; col. 1233, Vol. 155.] This is what I take the Chancellor of the Exchequer to mean—that the man carrying on business would retain his investments in the business and not distribute them, and so he would evade the Super-tax on any yield from the investment, which in the ordinary way would be transferred to his own name outside his company. I want to point out one thing. The concessions which the right hon. Gentleman has made is going to be a further opportunity for the tax dodgers to evade Super-tax. An hon. Member referred to two ways in which the tax dodger could do this: The first was by registering his company abroad, and the second by forming a public company. The Chancellor of the Exchequer to-day by his new Clause is providing a new way. He has told them he has exempted all companies registered before 5th April, 1909. By the new Clause the companies registered before 1909 are outside the operations of this Clause.

Mr. G. BALFOUR

No.

Mr. HOLMES

I believe the Chancellor of the Exchequer told us there were about 25,000 companies registered before 5th April, 1909, which tax-dodgers can endeavour to buy, and a man of this description has only to place his invest- ment in such a company and carry on as before.

Mr. BALFOUR

Is it not a fact that the hon. Member is confusing registration with incorporation? I think he will find if he looks at the Companies Acts, 1908 to 1917, that companies registered prior to 1909 are automatically re-registered. I refer to companies in existence prior to that date and, therefore, companies registered up to 1919.

Mr. HOLMES

If that be so, the Chancellor of the Exchequer has put down something in which he is really very much misleading the Committee.

Sir R. HORNE

I am told that what was said by the hon. Member for Hampstead (Mr. G. Balfour) is correct, and that such companies would not be regarded as registered under the Acts of 1908–17.

Mr. HOLMES

Is it not the case they may be registered as private companies?

Mr. D. HERBERT

Registered as a private company, but that does not alter the date of the first registration, there is no re-registration.

Mr. HOLMES

The next point I want to make with regard to the Clause is this—but perhaps the Solicitor-General would like to explain the point I have just put.

Sir L. SCOTT

After the hon. Member has spoken.

Mr. HOLMES

While the Solicitor-General is thinking this point over, perhaps I might ask the Committee's attention to another point. Where companies come under the provisions of this Clause it means that every individual shareholder has to disclose his total income to the Special Commissioners, and this will also be known to the directors and the officials. That must be so. The Special Commissioners are going to say to a certain company, "You have put to reserve, let us say, £2,000 more than you need. We are going to allocate that £2,000 as additional income for last year over all your members." They take the list of members and divide that £2,000 out according to the holding of each member. Then they go to a shareholder of the company and they say: "There is £100 of this reserve allocated to you; what is your total income from all sources?" And if the man has less than £2,000 he will not be liable to Super-tax.

Mr. A. M. SAMUEL

On his share?

5.0 P.M.

Mr. HOLMES

No. If a portion of this reserve goes to a man who is not liable for Super-tax he cannot be assessed for Super-tax on this portion. But they allocate another portion to a man with a larger income, say £20,000 a year, and he pays at the rate of whatever the Super-tax may he, and on the amount of the reserve allocated to him he would pay, say, tax of 5s. in the £. I hope the Committee realises the amount of work all this involves. The principal shareholders will receive demand notes for Super-tax. There is no need for them to pay it at all under this Clause. I will try to show why in a moment. The company pays it. When the demand notes are received they say: "On A's share of the reserve there is no tax payable; consequently the directors and officials say, "This shareholder has less than £2,000 a year." They discover that D's rate is 5s., say, and they consequently deduce that he has £20,000 a year, and so they can work out exactly from the Super-tax assessments the income which each shareholder of the company is getting. That is something quite new up to the present time, for the total income from all sources has been the secret of the Inland Revenue officials alone. Now every shareholder in a private company is liable to have his total income from all sources known to the directors and officials. I said just now that no share-holder in a company will himself pay the tax, and for this reason: He may sell the shares, and when the money is actually distributed—it may he two or three years hence—it will go to the man who then has the shares. The first man will escape the tax. If he is a share-holder he will wait and then he will allow the company to pay. That is going to bring another complication into the shares of the company, and the value of the shares will depend to a certain extent as to whether or not the undivided profits have been taxed as Super-tax. When those profits are eventually distributed they will be worth more than the ordinary dividend because they are not subject to Super-tax. The more one thinks about this Clause the more difficult it becomes as to how a genuine trading concern as going to avoid serious complication which it ought to be spared. The Amendment which I have put down was designed to enable the genuine trading concern to escape from this inquisition. This Amendment would enable the genuine trading concern to avoid all these difficulties, and it would not prevent the Chancellor of the Exchequer from taxing those who are deliberately avoiding the tax.

Mr. MACQUISTEN

When this Clause was under discussion on a previous occasion, I then stated that the Chancellor of the Exchequer had set himself an impossible task. I am all the more confirmed in that opinion when I read the Clause. This Clause, we are told, was framed in order to prevent private companies from dodging the Super-tax. The Chancellor of the Exchequer has put in the forefront of this Clause its purpose which is said to be to prevent tax dodging. Unless it achieves that object, and that alone, far more injustice will be done to innocent people than to those who are dodging the tax. We are told that this Clause will affect over 60,000 companies who conduct a large part, of the entire business of this country. I am appalled when I think of the immense labour which is involved in the investigation of the business of those companies. In one way and another we have had an enormous increase of the number of officials in this country in various Government Departments and all this has added to the burden of the producing classes. When you come to decide the number of people who will have to investigate the business of over 60,000 companies, and when you have to decide what is a reasonable sum to be set aside for this purpose, no Department of State will be able to stand such an enormous increase of officials.

If this proposal be intended only to get at the Super-tax dodgers, I do not think there is a quarter of a million of money to be recovered, I was shocked when I heard an hon. Member state last time this Clause was debated that he would like to be able to point out to his constituents the names of the Members who wish to assist in tax dodging. How would the hon. Member like it to he pointed out that he wanted to have penalties inflicted on perfectly innocent people? This is almost like the farmer who finding a wolf among his flock of sheep adopted the process of machine gunning the flock, which not only killed the wolf but the sheep as well. The right hon. Gentleman can only recover a comparatively small sum if this proposal is administered in the spirit in which it is said to be conceived. If, however, money in any serious amount is to be got, some revenue may be recovered for a year or two, but the effect will be that you will destroy industry. People will not go on with industrial concerns if they are to be told by a Special Commissioner what is considered to be a reasonable part of their actual income. I would like to ask, what is considered to be a reasonable time? Personally I do not think the word "reasonable" should ever be allowed to appear in an Act of Parliament. We must not forget that every business is different. One of the reasons why the immense number of ships which were sunk round this island were not salved was because it was considered that the burden would be so colossal that it was not worth any companies' while to raise those ships with a chance of a large profit, because a large proportion of that profit would be taken by taxation, while all the loss would fall upon the salvers.

Immediately this Bill is passed the people who want to avoid this inquisition will have no difficulty in adding another 50 shareholders, and then, no doubt, the Chancellor of the Exchequer will want to make the number 100. A business to which I have before alluded was built up by very thrifty people, and the majority of mankind dissipate their resources and do not save. It was said by Lord Bacon that anyone who wished to succeed in business ought to put aside two-thirds of his income, but I would like to ask, how many people are now putting aside two-thirds of their income? Those who have done this and who make that attempt are the people who provide the capital for developing industry, and those are the people who give us the chance of building up the great enterprises of this country both at home and abroad. How can the Special Commissioner say whether any company is putting aside more than is reasonable? Surely that is essentially a jury point. Do not confound in this matter the innocent with the guilty. In order to get at the black sheep who are evading Super-tax, the Chancellor of the Exchequer is proposing to draw in the thrifty and industrious citizens who are endeavouring to build up business enterprises.

One of the reasons for the growth of these private companies is the necessity for more banking facilities. Many people have been driven into forming private companies because the bankers have insisted upon having the debentures guaranteed by shareholders of the company. That is why so many companies have sprung into being. This proposal will be a very great hardship upon those companies which were registered subsequently to 1909. A man in boom times has been described as an octopus. It was said by a firm eminent in commerce that the man who could not make money between the 14th July and the conclusion of the War must be a very silly person. The difficulty would be to keep any money for six years after the War. There is not a day passes but that a man who grew to great affluence during the period of the War, and carried his optimism into the times of slump depression after the War, goes into the Bankruptcy Court. This applies to many men who made enormous fortunes during the War. There may be one or two who had the prevision to cash out and to put their gains into liquid assets, but the vast majority failed to do that. The administration of this Clause will produce mental paralysis on the part of business men. Their business affairs will be rooted out by unsympathetic men earning salaries, not business men, and if the Clause is endeavoured to be administered as a revenue-producing Clause, I prophesy that the damage it will do will be immeasurably greater than any revenue that can accrue from it. If the Chancellor of the Exchequer wants to do justice—and presumably taxation is introduced for the purpose of doing justice—then I suggest to him he should put in the forefront of the Clause the purposes of the Clause, with the object of getting at the people at whom it is really aimed.

Mr. GEORGE TERRELL

I want to support the very strong request made to the Chancellor of the Exchequer to withdraw this Clause. I am perfectly certain that, as now framed, it is going to cost more to administer than it will produce. It is a thoroughly bad Clause for the reasons which have been stated, and which I need not go over again. There are one or two points, however, which have not been touched upon. First, there is the case of two firms in the same line, competitors in business, one being registered as a company before 1909, and the other being registered after 1909. How unequal will be the incidence of this taxation in their cases? The one registered since 1909 will have nothing like the financial capacity to put by reserves and to prepare for a rainy day which the company registered before that date will possess. There is another point. As everyone knows, Super-tax is levied on the same principle as Income Tax. A trading company may not get the full allowance for depreciation, and very often there are losses which are not allowed at all in the deduction for Super-tax. Does my right hon. Friend propose to make the full allowances before he presses this further claim against the company? I think he ought to.

After all, he is out simply to get at certain classes who have been described as tax-dodgers, and in that we all want to help him. In doing it, however, he ought to see that he does not put a burden on the companies which is going to cost far more than it will produce in revenue. May I make this suggestion, if the right hon. Gentleman is still wedded to his scheme, let him drop 1909 and go to the War period when these tax-dodging companies were registered. He probably has the fullest information as to them; they were the creatures of the War. Let him take the date when the first one which he has reason to suspect was registered for tax-dodging purposes and use that as the date for the commencement of the operations of this Clause. A great number of companies would then escape the annoyance and inconvenience that the Clause in its present form will inflict. The Clause in its amended form is better than the Clause in its original form, but it seems to me it is a thoroughly bad Clause. It is not really going to get at the men whom the Chancellor wants to get at, and I suggest he should devise much simpler machinery for his purpose without causing unnecessary annoyance and loss to the whole trading community.

Sir F. BANBURY

I am glad to hear that the Chancellor of the Exchequer is prepared to exempt those companies which the Special Commission exempted from the Corporation Profits Tax. I had an Amendment down to that effect. I think his action in this respect will go a very fair way to remove the objection of certain people who have hitherto opposed this Clause. I will also venture to express the hope that he will make the date 1922 instead of 1921. It is possible that taking the date at 1921 it may be deemed to be retrospective and to that principle a large number of Members of this House have always been opposed. I do not like the idea of special people being able to investigate one's affairs; but when I have said that I cannot conceal from myself that the Chancellor of the Exchequer is in a strong position. Undoubtedly a considerable number of people have avoided paying the Super-tax. I was one of the Treasury Committee on New Issues which was appointed in 1914. There were five members of it. A large number of private people sent applications to us and stated that they desired for family reasons to convert their property into limited companies. It took some time to ascertain what their real reasons were, but eventually we refused all these applications. There can be no doubt there has been a considerable number of people who have avoided payment of this Super-tax.

My own idea is that the only real way to meet this difficulty is to make the Super-tax and the Income Tax one tax. I have said that over and over again. Indeed I have moved an Amendment in byegone days in order to ensure that. I think very likely if this Clause becomes law it will have the effect of ensuring that the Super-tax and the Income Tax are made one tax, and then this Clause will be unnecessary. But as long as the Super-tax and the Income Tax are collected as separate taxes, it will be necessary to have some Clause of this sort. I think the Chancellor of the Exchequer has gone a very long way to meet the objections of those Members who were opposed to his original proposal. There must be some cases of hardship. When you are going to impose a tax you cannot avoid hardships. But I do not believe myself there is very much probability of persons turning their companies into foreign companies and registering them abroad in order to avoid this taxation. The hon. Member for Watford (Mr. D. Herbert) has pointed out the difficulties which will attend any person who turns his business into a limited company for the purpose of avoiding the Super-tax, and I would suggest that those difficulties would be equally inherent if he attempted to make it a foreign company. If he does so, what is he going to do with his assets? Supposing those assets are securities like War Loan or Debentures, or shares in railway companies or banks. On all those securities the Income Tax is deducted at the source, and even if he had converted his affairs into a foreign company, the tax on those securities will have been deducted before the income reaches him. In the same way if he held real property here, the Income Tax is assessed on the property and is levied on it, and it would be quite impossible for anyone to avoid payment of it merely by transferring his company abroad.

I am, of course, talking of the people who, I understand, the Chancellor of the Exchequer wishes to get at, namely, private individuals who endeavour to avoid the payment of Super-tax. The only way it could be done would be for the person registering his company abroad to hold nothing but securities payable to bearer, the dividends on which are payable in foreign countries. If he did that, then I think he might avoid Income Tax and Super-tax. But I am not at all sure there are many people who would be prepared to sell their home assets in order to invest in foreign securities payable abroad, for the purpose of avoiding the Super-tax. If the result of this Clause is that a large number of companies which were formerly registered in England are registered abroad, then the question would at once arise whether the Chancellor of the Exchequer could meet it. I do not know whether he could or not. The Clause applies to all companies registered after 1909, and I should like to ask why it is 1909. Was that the year in which Super-tax was first imposed?

Sir R. HORNE

Yes. That was the year when Super-tax was first imposed, and when the inducement to adopt such devices came into prominence.

Sir F. BANBURY

That does seem to me to be a more or less sound reason. In a case of this sort there must be a line of demarcation, and the result always is that some unfortunate people are on the wrong side of the line. I do not quite see, however, how that can be avoided. If my small vote is of any value, I should certainly support this Clause on the understanding that the Government would alter the date from 1921 to 1922, and would exempt any company, in the case of which the Special Commissioners ordered a certain amount to be paid, from the operation of the Corporation Profits Tax, so that it should not be liable to both taxes. I do not know that it would make much difference if the commencing date were altered to 1914, as has been suggested by the hon. Member for Farnham (Mr. A. M. Samuel).

Mr. A. M. SAMUEL

May I explain why I took that date? I do not think that many companies were formed for the purpose of escaping Super-tax until the Super-tax became heavy, and it only became heavy after 1914. Why worry a whole lot of companies that were formed between 1909 and 1914, when it is more likely that these companies were perfectly straightforward trading companies, with no intention in the world of evading the tax?

Sir F. BANBURY

Undoubtedly it is the fact that when a tax becomes very heavy—and these two taxes are really nothing short of confiscation—it leads to evasion. Between 1909 and 1914 the tax was very much lighter, and there was not the same inducement to evade it. That is really the point, and I think it is one that is well worthy of consideration, because, surely, the Chancellor of the Exchequer does not wish to bring people into this net who really did form their businesses, or their own private affairs, into companies without any intention of evading Super-tax or Income Tax.

Mr. HAYWARD

This Clause is designed for a purpose which will have the sympathy of every Member of the Committee, but there seems to be no doubt that it will have results which have not been anticipated and are not intended. The Chancellor of the Exchequer has made several Amendments to his original Clause to meet points which have arisen since it was drawn, and already, in the discussion this afternoon, many fresh points of objection have been raised which appear to be well founded and which ought to be met. I think it will be found that, the more the Clause is examined, the more points of objection will be found. I desire to ask one or two questions on points which do not appear to me to be at all clear as the Clause now stands. For instance, it states, with reference to the income of the company, subject to the Clause that the amount thereof shall be apportioned among the members. I should like to ask, and I think it is very desirable that we should know, whether the amount when so apportioned is to be paid to the members, or whether it will remain in the coffers of the company, and whether each member will be charged with the Super-tax, or whether the company will be asked to pay the member's proportion. If the member himself is asked to pay the tax and he has not been paid the dividends out of which to pay it, then he will be asked to pay Super-tax upon income which never comes into his pocket, and he may be quite unable to find it.

Sir R. HORNE

The company will pay ultimately; the member does not pay.

Mr. HAYWARD

Then that point is cleared up. One of the Amendments which the Chancellor has already incorporated, or is prepared to incorporate, in the Clause, is to the effect that it shall not apply to companies registered before 1909, the reason given being that it was in the year 1909 that Super-tax was first imposed, and that, therefore, it is obvious that no company formed before 1909 was formed for the purpose of evasion. It may be quite possible, however, for persons who wish to evade the payment of Super-tax in this way to acquire the shell of some company registered before 1909, and it would still be possible in that way to evade the tax. I am not at all sure that the best way in which to deal with this matter would not be by some such simple Clause as has been suggested by an hon. and learned Member opposite, namely, a statutory provision that, where reserves are put aside for the purpose of evading this tax, then these provisions shall apply. In that case each party would have recourse to the Courts. It would only apply to people who put by reserves for this specific purpose, and there would be a simple issue to place before the Courts in the last event. I believe that in that way many of the difficult points which arise on this Clause, and many of the objections to it, might be obviated.

Sir HALFORD MACKINDER

I spoke at some length when the previous Clause was withdrawn last week, and I do not propose to repeat what I then said. At present I would merely say that this new Clause has been examined by a committee in Glasgow representative of a number of very important Scottish private companies, and I have had, together with my hon. Friend the Member for Kelvingrove (Mr. McLeod), the opportunity of consulting with them. In the first place, let me thank the Chancellor of the Exchequer for having incorporated in his new Clause provisions to meet the two main objections which, on the advice of that Committee, I took last week. I think it is quite obvious, after the discussion that has taken place, that there will be many evasions of the provisions of this Clause, and I think also that there may be some hard cases. Personally, I should have very much preferred a Clause drawn in the form suggested by the hon. Member for Watford (Mr. D. Herbert), which passed in review persons in the first instance, and then went for any companies which they controlled, if those persons had rightly exposed themselves to any operation of the authorities under this Clause. I realise, however, that in order to do that it would be necessary to have a fresh Resolution in Ways and Means, and I can quite understand that the Chancellor of the Exchequer is anxious to avoid that if it can possibly be avoided. After all, there will be another Finance Bill a year hence, and I shall be very surprised if supplementary provisions have not to be made in that Finance Bill to stop some of the bolt-holes which will be discovered in the provision which the Chancellor of the Exchequer is now making.

The hon. Member for North East Derbyshire (Mr. Holmes) asked just now why it was that some of us called out "No!" when the Chancellor of the Exchequer seemed disposed to accept an Amendment which would have made the Clause operative on the certificate of auditors of companies. The Committee to which I have referred has been very closely into that matter, and certainly those who have been considering the matter in Scotland were unanimously of opinion that that would be a very unfair burden to put upon auditors in many cases. Young auditors would find themselves exposed to very considerable pressure from their employers, and very soon there would be suspicion as to some of the certificates given, which would lead to a series of appeals and all the evils which we fear under this Clause. It was on that consideration that we opposed that solution of the question. There may be words which one might like to see redrafted, hut, after deliberation with the very experienced and interested people to whom I have referred, I wish to say that my hon. Friend and I who put down Amendments, to which the Chancellor of the Exchequer acceded, do not propose to oppose, but to support the Second Reading of this Clause.

Major HILLS

I read this Clause with a great deal of sympathy, and with a desire to help the Chancellor of the Exchequer, but I was also anxious about a point which I have previously raised and which has been referred to, to-day. It is not only that I want to secure that reserves are not, subject to Super-tax, but I want to avoid the subsequent effect of making them subject to Super-tax, which would be to make people spend up to the hilt, and would lead to very bad finance. I may say in passing that a great many of the law s which have been passed lately did have that effect, and did encourage the belief, and the action, that the more money you spend the less the Government will get. I am very much afraid that the effect of some of that legislation is much greater than the Government realise. Anyone reading this Clause will not find in it one word of what the Clause really means. It is meant to catch Super-tax, of which the tax-evaders are now avoiding payment, and it would be a very great advantage if that were stated in the Clause. The advantage would be this: You now make the test as to whether or not you charge Super-tax, not the intention to evade, but the propriety of the reserve. By so doing you throw a perfectly impossible task on the Special Commissioners, and you throw on them the wrong task, because it is not their duty to say, and they cannot say, what is the proper reserve for a particular company to make; but they can say, and it is their business to say, whether juggling with the finance of the company does or does not amount to evasion. Many cases might be quoted. I will just give two. You may have an estate in the country—and many estates are now being formed into private companies—which has been very badly run in the past, and in the case of which, for many years to come, the reserve must he, and ought to be, a large part of the income. Then you may have a company formed, as many are formed, to exploit a patent or new invention. Who can possibly say what the reserve should be for +he first few years? You may have a series of actions for infringement, and your whole profits ought to go to reserve. You cannot say what the reserves should be, and no Special Commissioners can say that.

Is it impossible to add a second Subsection making the test not the propriety of the amount put away to reserve, but the fact of evasion? I have not put it down as an Amendment, because it is a very difficult provision to frame. But I think the proposal of the hon. Member for North East Derbyshire (Mr. Holmes) goes rather too far. You cannot leave it to the Board and the auditors entirely if you are meeting cases of absolute evasion. I think you will have to have some outside body, and I believe the Special Commissioners are the best body. I think it is a real point, and I believe you will strengthen your Clause by that and you will not hit the companies whom the Chancellor has no intention of injuring. My second point is a very small one. Is not the number—five—who are to have a controlling interest in the company, too high? Could you not safely confine the operation of your Clause to companies which are controlled by three people or fewer? When you come to five, you include a great many old-established businesses and firms which have been turned into companies and where the control is held by four or five people. After all, what you want to get at is not the five person controlled company, but the one-man company, and the man who controls this company will not dare to allow the control to be shared by four other people, for he would part with the majority of the shares and allow the control to go out of his own hands. I hope on both these points, cm the small point of the number of persons and the much larger point of putting into your Clause exactly what you mean, and giving that as the test to be enforced by the Special Commissioners, the Chancellor will meet me.

Lieut.-Colonel NALL

My hon. Friend the Member for Farnham (Mr. A. M. Samuel) said the Chamber of Commerce with which he is associated regard this as a satisfactory solution of the question.

Mr. A. M. SAMUEL

I did not say so. I said we agreed to accept the Clause as we cannot obtain from the Chancellor the words in my original Amendment.

Lieut.-Colonel NALL

I am sorry if I misinterpreted my hon. Friend, but the Manchester Chamber does not take that attitude, nor does the Cardiff one, because they believe, on advice, that it will be absolutely unworkable in practice. I want to follow the argument of the hon. Member for North-East Derbyshire (Mr. Holmes). What would happen in the case of a company, shall we say, of three shareholders? One holds 60 per cent. of the shares, and is liable to Super-tax, and the other two hold 20 per cent. each and are not liable to Super-tax. Only that part of the undistributed profits properly belonging to the man liable to the tax will be chargeable under this Clause. He may say, indeed he may be obliged to say, that if he does not actually draw this undistributed profit he may not have the cash to pay the tax due on that undistributed profit. He may refer the tax collector to the company. If the company has to pay the tax due on that part of its undistributed profits which properly belongs to the large shareholder will that payment be a charge on the general funds of the company, thereby prejudicing the holding of the smaller shareholders, or, if not, will it simply be deducted from the funds standing to the credit of the large shareholder in the books of the company? If that is the case, what happens? Funds have been placed to reserve out of profits according to the respective holdings of the different shareholders, but if one shareholder only has a deduction made from it to pay the tax on his share of the undistributed profit the net amount placed to reserve will not be strictly in proportion to the original holding of the three shareholders. So that where a business has for years been organised on a carefully balanced proportion of shares, one as against another or more shareholders, that balance will be constantly upset, frequent readjustments in the shares will have to be made to meet the annual charge due on the profits of the one shareholder, and it seems to me that all that, in addition to being most aggravating to the companies concerned, is going to involve the Income Tax Department in a tremendous amount of work which they will never he able to cope with.

The Chancellor has met another point by saying companies brought under this Clause will be exempt from the Corporation Profits Tax. Whether he will lose much on the Corporation Profits Tax under that heading, I do not know. It may be it will be worth the while of some companies to come under the Clause in order to avoid the Corporation Profits Tax. A further objection, and a very important one, is that the income of individual shareholders in a company is now going to be disclosed to the officials of every small concern in which that man may have a holding, and of course in a small concern, where the few shareholders are also directors, all those people will get this information, so that the secrecy of the Income Tax system will vanish. Why such particular objection to this Clause must arise in a place like Manchester is that the vast majority of business houses concerned in the general trade of Manchester may become liable to the operation of this Clause, and it is grossly unfair that companies coming under this arbitrary limit of 50 shareholders should be treated in this way, whilst others in the same line of business, with 53 or 54 shareholders, would escape. Everyone is agreed that the original object should be achieved, and I beg the Chancellor to reconsider the proposal made by the hon. Member (Mr. Herbert) in order that these objections may be met and that we may not have still another millstone round the neck of small companies who are struggling to regain their prosperity. How the Chancellor is going to meet the other objections raised by firms engaged in wildly fluctuating trades, in which it is absolutely necessary to set off the losses of one year out of the profits of another year, I really do not know. It seems to me there again that houses engaged in the export trade, who made big profits in a boom which enabled them to cover losses in the succeeding slump, would under the operation of this Clause be obliged to wind up during periods of slackness for the simple reason that any profits which they have in the past put aside in good years to cover the losses in a bad year, will be absorbed in Super-tax or else, under the operation of this Clause, will have been distributed to their shareholders. So that in the future, if this is made a permanent part of the Income Tax law, it will operate with great disadvantage in commercial quarters and inevitably clamour will arise for its abolition, and I only hope the Chancellor at the eleventh hour will be induced to reconsider this very involved question.

Mr. REID

I have listened to a great part of the Debate, and I think the Chancellor of the Exchequer must agree that the Clause as it stands is practically unworkable. I am afraid I am inclined to look at it from the point of view of my own profession, and I can scarcely conceive how anyone could possibly advise a client whether he was acting rightly or wrongly if he came under the provisions of this Clause. It really amounts to putting the management of businesses into the hands of the Special Commissioners. An hon. Member has called attention to the fact that there are a number of moribund companies on the companies' register. That same point struck me, and I have made inquiries about it, and I am told that there are any amount of them, and occasionally there are cases where a promoter wanting to float a particularly undesirable company has bought the interest in an old company, and after some transmogrification the shares go on to the public as the shares of a company which was floated 30 years ago. The number of people who want to do this kind of thing is comparatively small, and there are quite enough moribund companies to supply them with all they want.

6.0 P.M.

But apart from that, I think this Clause starts the wrong way altogether. Several hon. Members have suggested that it ought to begin by saying what it is intended to do. We are all discussing this matter on the assumption that it is intended to prevent people making use of the machinery of the Act for the purpose of evading Super-tax. It is difficult to say what it is reasonable to put to reserve, but it is easier to say whether or not a company is being used for the purposes of evasion. I do not think in this case the Income Tax official approaches the matter from the point of view of the company at all. He sees an individual who obviously ought to be paying Super-tax. Then he finds he is not making a return, or is making one which shows he is not liable to Super-tax. Then he finds the company. I suggest that the proper course to adopt is to go direct to the matter, to substitute for this Clause another giving the Court power to revoke the incorporation of a company where it is shown to the satisfaction of the Court that the company has been formed, or is carried on for the purpose of evading Super-tax. If that were done, it would really effect the object. It would have a further advantage. The Special Commissioners are not a suitable tribunal for dealing with this matter. They sit in a room. The whole thing is conducted in private. On ordinary Income Tax matters that is quite proper, but in a case of this kind, where a man is evading taxation, there is no reason why the hearing should be secret. It ought to be an open Court. Probably in many cases it would prevent men from forming these companies if they knew that the matter would be discussed in open Court. We may take an example of what happened during the War, when we had cases of food hoarding. Many people talked in a casual way about food hoarding, but when cases came into Court people who were convicted found that it really did bring unpopularity upon them. A man who has formed a company of the sort now under discussion would, if he were brought- before the Court by the Attorney-General, consider that he was in an awkward position, unless he had a very good defence. I think we can trust the High Court. This is essentially a matter for the High Court. We can trust a judge and jury to say whether, in fact, a company is being formed, or is being carried on for the purpose of evading taxation. If the Court revokes the incorporation from the date that the man had begun to evade Income Tax, then he becomes a private person again, and is liable for Super-tax. Some provision would have to be made for the creditors. On the lines I have suggested, a practical scheme could be worked out, but I do not believe that the present Clause is administratively possible.

Sir WILLIAM PEARCE

What is wrong about the Clause is that its intention is not clear. The Government are out to stop evasion, but the Clause as drafted really makes the 60,000 or 70,000 smaller companies open to inspection or review by the Special Commissioner. If the Chancellor of the Exchequer is able to say that it is not the intention of the Government that the Special Commissioner should examine and review every one of those 60,000 or 70,000 accounts—if they are going to do it they will want a very large increase of staff in the office of the Special Commissioner—it will get rid of a good deal of disquiet which the public are feeling. Whatever may be the intention of the Government, the public think that this is a dodge to increase the revenue, and that the accounts of the 60,000 or 70,000 companies will be open to review, with the object of the Government getting some extra revenue out of them.

Mr. HOLMES

Does the hon. Member consider that it is sufficient to get a declaration from the Chancellor of the Exchequer? I have had a good deal of experience in the last five years in the interpretation of Excess Profits Duty, from the 1915 Act onwards, and I have quoted to the Inspectors of Taxes and the higher officials at Somerset House the speeches of Mr. McKenna, then Chancellor of the Exchequer, and the hon. Member for Cambridge (Mr. Montagu), then the Financial Secretary to the Treasury, in interpreting the Bills when they were before this House, and they have always said, "We cannot take what is said in the House. We must go by the Act."

Sir W. PEARCE

That is quite true. The wording of the Act is what rules the position, and not any statement by the Chancellor of the Exchequer. However, the smaller commercial community would like a declaration from the Chancellor of the Exchequer as to the intention of the Government. It would, to some extent, quieten the commercial mind. There is one objection to the Clause which is inherent in it, and very unfortunate, and that is that this Clause is to the detriment of the smaller companies and allows the very large ones to escape. In these days, the difficulty is to the smaller companies. It is difficult in any industry for a small company to hold up its head against the big corporation, and if this Government, or any Government, tries to rake in revenue by this Clause, it will fall upon the smaller man, who is in a bad position and not so well able to take care of himself. The particular reason for the public disquietude is that the intention of the Clause is not absolutely clear in the wording. It does not appear that the Government are out to stop evasion, but, rather, that they are out to raise revenue.

Sir J. HARMOOD-BANNER

I was a member of the Income Tax Commission, and I should like to say that in so far as the Government seeks to meet a point which we considered of great importance, namely, getting rid of evasion, I shall give them full and hearty support. If something could be done to differentiate between the real, bonâ fide trading companies, and companies which are out for evasion, we should not have anything to complain about. It was abundantly clear in the evidence we had before the Income Tax Commission that when Super-tax was created there was at once, amongst very clever people, an effort made to create companies, private family companies, so as to avoid the tax. For four or five years after the Super-tax was introduced there was not very much evasion, but when the Super-tax got higher, during the War, there was an enormous amount of it. I have no doubt that the hon. Member for East Derbyshire (Mr. Holmes), who is a chartered accountant as well as myself, has prepared statistics for many family companies which were to be created, and by which they arrange their funds so as not to pay Super-tax. Solicitors who are Members of this House would also admit that they had advised clients in regard to creating companies of that description This really only started after Super-tax became oppressive; after the Super-tax had become rather penal, the penalty amounting in some cases to 12s. in the pound.

So far as the prevention of evasion is concerned, the Chancellor of the Exchequer can make the provision as strong as he likes, and I shall fully approve of it; but I should like him to make some differentiation between companies formed to evade tax and the bonâ fide trading companies which are helping the community by providing labour, and adding to the prosperity of the country. After the War, a great many companies, such as Coates', the Imperial Tobacco Company, and others, capitalised their reserves. They said that it made a very bad show to the world if they paid very high dividends, so they decided to capitalise their reserves, and their shareholders received a bonus share, for which they paid nothing. In that way they made the capital larger, and the dividend smaller on the increased capital, so as to satisfy the labour men by declaring a 5 per cent. dividend instead of a 10 per cent. dividend. That was done to a very large extent, and the Income Tax Commissioners tried to make these bonus shares subject to Super-tax. They carried the case to the House of Lords, but the decision was against them. It was decided that these shares were conversion of income into capital, and having been converted into capital they were not subject to Income Tax.

The Chancellor of the Exchequer is now making attempts to get behind that decision and to get hold of the reserves, so that they will have to pay Super-tax. He is going to do a most unfair thing. If Coates' and the Imperial Tobacco Company do this sort of thing they will pay no Super-tax, but if it happens to be a company of 10 or 30 cotton spinners in Oldham, or a flour mill company, who create a company and create reserves, they will have to pay Super-tax upon their reserves, because they are private companies, while the very big companies, which may still go on converting their income into capital, will not pay anything at all. That is going to be a most unfair tax upon the private companies. There are many colliery companies in which there are only 20 or 30 shareholders. In future they will be subject to the condition I have stated, and will have to pay Super-tax because they happen to be private companies; but if the company is a huge limited company they can do this thing and they will not have to pay the tax. The Chancellor of the Exchequer ought to consider whether he could put into his Clause some words to show that it is to touch evasion but not to touch; the bonâ fide trading companies which, for years, have conducted their business in a regular, industrious way and have enlarged their business. Now they are to be treated differently from those who are in big companies, and are going to be penalised because they are small companies. I do not know exactly how the Chancellor of the Exchequer could do what I suggest. So far as paragraph (a) is concerned, there is no necessity to go back as far as 1909, when the Super-tax started. I think that it would be quite reasonable if instead of 1909 we had 1912 or 1913. That would give a, little more time for those companies which were conducting their business in the ordinary course. The Commission on Income Tax were ready, if they could, to have got at some of these distributions in the shape of income which was made bonus shares. But the law decided against them. There should be no differentiation between the honest company and the other company. On a point of procedure, I would, like to know how, when the company are to be forced to pay the Super-tax, they are ever going to get their money back. They have to make a schedule. One man pays nothing, another man 9d., another 2s., another 3s., and so on. Undoubtedly, as it stands, there is no power from the company to recover from the man. I would plead on behalf of these small companies that they should not be penalised.

Mr. PENRY WILLIAMS

I am not pleading for the one man company or the company which deliberately sets itself out to avoid its fair share of taxation. I agree that capitalised reserves, distributed as shares, should be liable to Income Tax and Super-tax, and also that any man's money borrowed from a company by a man who has control of the company, should be treated as the income for Super-tax purposes. While saying that I do want to ask the right hon. Gentleman if he is treating the private trading company fairly—the bonâ fide trading company? In the North of England that company is the backbone of the commerce of the country, whether it be a small ironworks firm, a shipbuilding firm, a chemical firm or any other. And those companies have been built up by father and son, or by two or three brothers working hard, and living hard, allowing their money to accumulate to develop their property. Now you are superseding their functions as directors, in deciding the amount of dividend to be paid, and this Clause says that unless, in the opinion of the Special Commissioners, a reasonable proportion of the profit or the income is distributed the firm shall be liable for Super-tax. The Chancellor of the Exchequer must have considered what was a reasonable proportion of the profits to distribute before he came to the conclusion to insist on reasonable proportion. He must have ascertained what proportion of gross profit is distributed by a well-managed company. Can he give us any information as to what proportion of gross profit is distributed by a well-managed company?

If Members of the Committee will go into the figures they will be surprised to see how small a proportion of the gross profit—[HON. MEMBERS: "Net profit!"]—or the net profit ever reaches the shareholder's pocket. I have had some figures taken out. I got the balance sheet the other day of a big company which has been mentioned in this House. It showed that it distributed last year to its shareholders 44.2 per cent. of its profits. I have here the case of another well-managed company in the North of England. If the right hon. Gentleman wants the name I will give it, but I do not care to pass it across the Floor of the Committee. I asked this company what proportion of its profits it distributed to its shareholders during the three pre-War years, and the three post-War years, taking the gross profit on the balance sheet. The figures for 1922, 1923 and 1924 were: 40.3 per cent.; 41.5 per cent. and 39.3 per cent. For 1919, 1920 and 1921 the figures were: 23.6 per cent., 38.8 per cent. and 31.7 per cent. That was practically 40 per cent. before the War and 30 per cent. after the War. I have had some opportunity of studying the profits of private companies. In some of them I have an interest and particulars as to others have been given to me by friends, and the percentage of the gross or the net profits is very much less than that. The remainder was passed back into the business to help to create commerce, trade, and employment for the people in the industry.

We are suffering to-day from the fact that the Government and the local authorities and everybody else are extracting too much of the profit of industry. You cannot allow the Government to take 50 per cent. of your profits in Super-tax and Income Tax, and rates to take 20 shillings or 30 shillings in the £ of your rateable value to pay increased charges for public service, and pay a dividend to your shareholders and then have enough money to put into your business. That percentage has gone up year by year until it has reached a point when it is having a very serious effect on our industry and is doing a great amount of harm. The provision that there shall be five controlling shareholders, is of no value because if those five—it may be six or seven—are brothers and sisters or father and sons, then they are considered as one holding under this Clause, and and that hits the bonâ fide family trading company. That is a very disastrous thing to happen to our commercial life. I object strongly to the Commissioner of Income Tax or any other body superseding the function of the directors, and telling them what dividends they ought to declare and ought not to declare, but at the same time I am willing to give the Chancellor of the Exchequer and the Government every power to prevent deliberately planned fraud on the Revenue by way of evasion of Super-tax.

Sir R. HORNE

I listened with great care to the speeches which have been made on this very important matter, and one reason why I did so was that I was anxious to hear about any failure on my part to arrive at a solution of a question which, although it is difficult, ought to be capable of adjustment. The evil is admitted, and one reason why I feel compelled to take action now, and one strong reason why I should feel reluctant to abandon this Clause at the present moment with a view of bringing it up again some time next, year, is that I have had very accurate information that advice is being given at the present time to clients, both by legal firms and bankers, as to the particular methods which may be taken to evade Super-tax, both by the creation of trusts and by the creation of this type of company. I agree with what has been said by the hon. and gallant Member for East Middlesbrough (Colonel P. Williams) that the burden of taxation upon this country at the present time is very heavy, and that the taking away of so much money from business tends to destroy the prosperity which everybody wants to see in this country. But if we let this tax-dodging, as somebody has described it, continue, obviously the burden must be heavier upon those who are doing their duty by the State, and the very people whom you want to encourage to create industry are having their opportunities destroyed.

Accordingly, I hope that the Committee will understand my anxiety at present that we should not get over this matter by abandoning the proposal. I would much rather, if I might, appeal to the Committee to see whether I cannot find a solution which will be satisfactory to the great body of Members of the Committee. I feel the force of the argument put forward by the hon. and gallant Member for Durham (Major Hills). This is, indeed, a Clause to detect evasion and, perhaps, it ought to be prominently stated. The intention to evade, as the hon. and gallant Member said, is the important thing. But you can never discover intentions except by overt acts. You cannot get inside a man's head, as has often been said in the Law Courts, and discover what his motive is. You can only interpret his motive from what he does. What is the overt act which leads you to suspect an intention to evade? It is the fact that he does pile up reserves, which are unnecessary for the purpose for his business, and which he has the opportunity afterwards of putting in his pocket, meantime evading the Super-tax, which decent business people pay. The stoppage of distribution is the only overt act which you can find. But I am prepared, if that will meet the difficulty, to put down words or to accept words which may be suggested, and which commend themselves to me, to make it perfectly plain that the failure to distribute must lead to the conclusion in the minds of the Special Commissioners that it was due to an intention to evade the Super-tax.

It has been suggested that there is a great deal of apprehension that the bonâ fide company is by some means or another going to be seriously inconvenienced. I hope that that is not so. There is certainly no intention of embarrassing any bonâ fide company. Let me remind the Member for North-East Derbyshire (Mr. Holmes) that you do not get rid of the difficulty by saying that no company carrying on a bonâ fide trading business shall be subject to investigation. Obviously a man who is going to evade may be carrying on quite a bonâ fide trading business. The point is as to what he does with the proceeds of the bonâ fide business. That point is not met, by saying that the Clause shall not apply to a company carrying on a bonâ fide business. Indeed, so far as words can be suggested, or I can find them, which will prevent the investigation of any business which is being carried on, no doubt for the benefit of the trader, but whose proceeds are being applied legitimately—all that class of company I am anxious to keep out of the scrutiny.

The hon. Member who opened the discussion made a point which, for the moment, I do not see how I can get over. He referred to a company composed of individual members who were themselves limited companies.

Sir W. JOYNSON-HICKS

No company, as far as I know, is made up solely of a limited company. There are many companies in which the great bulk of the shares are held by a limited company, but they must all have at least two shareholders, and there is nearly always a general manager or two or three of the staff put in as shareholders; and that would authorise the Special Commissioners to come in and examine into the banking companies and reinsurance companies which I have mentioned.

Sir R. HORNE

It would not be worth their while. I am certain that the administration of this matter will be confined strictly to the prime object of the Clause, and that is to detect the person who is evading. The hon. Member for North East Derbyshire raised a difficulty about the way in which the Super-tax would be exacted. He pointed out that the process would involve a disclosure of the whole income of individuals, which had never previously been required by Income Tax or Super-tax law. I agree that there is a difficulty there, but it is avoided if the person who is called upon to pay Super-tax himself pays it and does not leave it to the company to pay. It is only if he himself refuses or fails to pay that the company is called upon, and disclosure takes place. On the other hand, the point that the company has no way of getting back from the individual the tax which the company paid on his behalf is entirely fallacious, because the terms of the Clause are that the company shall pay on behalf of the individual, and in law the company would have the means of exacting from the individual taxes properly paid on his behalf. The hon. and learned Member for the Hulme Division of Manchester (Lieut.-Colonel Nall) drew a very gloomy picture of what was going to happen to various small companies that had gained a profit one year and lost money another year. I am not sure that the Committee thoroughly understand that these private companies would not be put in any worse position than a private firm whose whole income is to-day subject to the payment of Super-tax. Accordingly, I cannot imagine more improvidence on the part of private companies than one would expect on the part of private firms. I cannot see how the mere exaction of Super-tax from a private company is going to drag them to ruin, when in point of fact that is the process which the private firm faces every day in the year.

Lieut.-Colonel NALL

The private firms turn themselves into companies.

Sir R. HORNE

A great deal of business is carried on by small private companies, and there is an enormous number of firms which have never turned themselves into private companies, whose partners regularly pay Super-tax on their share of the income of the year.

Colonel P. WILLIAMS

They have not a limited capital. They have the full capital in their pocket, whereas the limited company has only a limited capital.

Sir R. HORNE

That is a detriment rather than a benefit. It really means that all they have may become the subject of their obligations. In the private company the individual knows he may never be worse off than the amount of capital he puts into it. Therefore, he is in a more advantageous position.

Mr. D. HERBERT

The unfair competition is as between the company which comes within this Clause and the one which does not. There is on the one hand a public company, carrying on a particular business and able to pile up huge reserves. The smaller company coming within the Clause will not be able to pile up those reserves.

Sir R. HORNE

Again, I cannot imagine any circumstances in which it would be held that the private company will be in error in piling up reserves which the public company might legitimately accumulate. The theory upon which many Members of the Committee are working is that the Special Commissioners in every case will say that the Referees will support them in saying that everything must be distributed up to the hilt. Nobody will be as mad as that. It has been suggested that the Commissioners do not understand business. But the Board of Referees is a board of business men. Members of the Committee know very well how they are composed. There is no representative of any Government Department among them. They are a committee of business men in whom I am certain the public have every confidence.

Lieut.-Colonel Sir F. HALL

Suppose a company earns 7 per cent. on its capital and it pays 2 per cent. or 3 per cent. Would the shareholders or those who owned the balance be liable for Super-tax on the balance, or what would be considered a reasonable dividend?

Sir R. HORNE

Nobody is going to say what would be considered a. reasonable dividend. There are many cases of public companies and private companies which have piled up large reserves, in view of anticipations as to the future of their businesses. No one will quarrel with them. In point of fact, the cases which the Special Commissioners will take up will be comparatively few, but they want to get at the real cases where money is set aside for reserve with a view to evading payment of Super-tax. The right hon. Baronet the Member for the City (Sir F. Banbury) made two suggestions, and I am prepared to agree to both of them. I am willing to agree to a modification of the Clause by substituting 1922 for 1921. It was also suggested that we should begin from the point of view of the time when Super-tax really became heavy, rather than from the time when it was first imposed. I recognise the force of that argument, because I think it is true that this device was not practised to any extent prior to a period at which taxation became so heavy. I am quite prepared to meet the opinion expressed on that point. It has been said, on the other hand, that, no matter where you begin, advantage will be taken by companies previously registered, in which shares may be purchased in order to use them for carrying out the evasion of Super-tax. I see that that might be done, but between now and the Report stage I shall try to find words to avoid that possibility.

Mr. D. HERBERT

Has the right hon. Gentleman considered the question which I put to him as to loss of Income Tax in the case of companies registering abroad?

Sir R. HORNE

I must beg my hon. Friend's pardon for not having referred to that point, which for the moment I had forgotten. Quite frankly, my answer to it is that which was made from the other side of the House. I do not anticipate that many people will register abroad for this purpose. If they do it will indicate a direct intention of evading the obligations which, as citizens of this country, they owe to the State. I do not think many people are going to adopt that device. If they do, it can be dealt with at some subsequent period. The Resolution on which this Clause is based would not allow me to deal with the matter which the hon. Gentleman raised, and I am afraid it is not competent now to go back upon it. I do not think we shall lose much in the way of Income Tax under that head as circumstances are at present. Circumstances might subsequently arise which would develop some such situation as has been described, and then, of course, we should have to deal with it.

Sir WATSON RUTHERFORD

I make no apology for intervening in the Debate on this question, though it is quite true it has occupied all the time since the ordinary business commenced. It is an exceedingly important matter. If the business community are to understand, that between now and the Report stage, the whole of this Clause will be recast and will be put in an entirely different shape, then, of course, it is obvious we would be wasting our time in discussing these exact words. Further, I think the Chancellor of the Exchequer must be convinced that there are overwhelming objections to almost every Sub-section of this Clause as it now stands. It is capable of being ridden through, and of having its provisions evaded, just the same as was the original text. I could give him, even now, half a dozen ways in which, if this Clause were passed, the tax could be evaded just as easily as before. The Committee want it made perfectly clear that they are against the evasion of any tax. We want to get at the evaders of taxation to make them pay up and, if necessary, to punish them. The Chancellor asked if anybody could suggest a few words which might have the desired effect, instead of this Clause occupying a page and a half. I suggest a few lines which I think would carry out the real object explained by the Chancellor of the Exchequer—the object which we all want to achieve. I suggest something like this: In any case where, in the opinion of the High Court of Justice, a company has been formed or is being carried on, for the purpose of evading Super-tax the Court shall have power to revoke the registration of such company from such date as the Court shall think fit, and the company shall, as a penalty for evasion, be liable to pay double the quantity of Super-tax that would have been payable if the company had been properly formed. There in a few simple words, taking the place of this page and a half Clause, is a provision which could not be evaded, and would impose a proper penalty for this kind of evasion. The Chancellor before the Report stage should consider something of this kind.

Lieut.-Colonel WILLEY

This Clause has been discussed at considerable length and sufficient has been said to impress Members of the Committee with the many difficulties that may arise in connection with it. As has been said by the last speaker, it is of great importance and it is causing apprehension to the trading community as a whole. For this reason, I had hoped that the Chancellor would have promised some greater modifications than those which he has indicated. In the absence of that, I think a little further time might be taken up in pressing some of the points which will justifiably cause apprehension. We are now commencing legislation which necessarily must be extended. Anyone engaged in business knows that the wording of the Clause will need substantial modification as time goes on, as opportunities will readily present themselves to the astute minds of those who wish to evade the object of the Clause, an abject with which the trading community as a whole is in complete sympathy. One cause for apprehension is that it is felt that it is not possible for the Special Commissioners to readily distinguish as between the class of company which will not fall within the object aimed at here, and the other class which probably should come within it.

This provision extends the supervision of the accounts of small private companies. Those hon. Members who before the War were engaged in business in America are familiar with the substitution of incorporated companies for partnerships which went on much more rapidly in America before the War than it has in this country since the War and which was brought about entirely by the heavy burden of taxation. We realise that this is bound to take place. This proposal opens up a vista of further investigation on the one hand and an extension of bureaucracy on the other, followed by continuous fresh legislation. We might think that this was intended as a benefit to legal talent because, as the Chancellor has said, a tremendous amount of legal energy is being occupied at the present moment in the invention of means whereby taxation can be evaded. But in addition to that, we are going to put a bigger burden on to the Special Commissioners of Income Tax, already overloaded, and we are going to hinder the rapid passage of accounts.

Those Members of the Committee who, like myself, are members of the board of a joint stock bank can easily visualise the difficulties which will be added to the direction of the big financial institutions if unexpected calls can be made after the survey of a balance sheet. Necessarily we have institutions with branches running into 2,000 in some cases, where the personal element which existed in banking in the past no longer exists, but instead direction of their affairs is along the lines of close, cold-blooded examination of the balance sheet, and on that balance sheet advances are made to the continually increasing number of private companies. Now we are to find the presentation of that financial condition, quite proper and quite correct at the time, can be suddenly and entirely reversed by the introduction of a new decision which was never contemplated. That is going to strike disastrously at the security which banks have. The stability of our financial institutions is of great importance to the country. The ability of their management is something which the country has a right to be proud of, and I think it can be rightly said that the conduct of the joint stock banks in the period of staggering deflation which we have gone through in the past two years has been a subject of admiration. Now something is going to be started which will add greatly to their difficulties.

The Chancellor said it was not the intention of this legislation to penalise private companies in the way of putting them in a disadvantageous position as against partnerships. But these small companies are going to include a large number of subsidiaries of foreign corporations who contemplate starting in this country and developing and extending business. We are going to discourage the establishment of these foreign branches. Then there is the additional point of the difference between the manufacturing business and the merchanting business. In the first case it is obvious the reserves put aside are not necessarily as great as they would be in merchanting concerns. We have seen in the last few years some staggering losses sustained by big private companies in merchanting. I venture to say those losses have been in excess of what any body of Special Commissioners could have contemplated as regards the necessary provision for reserve of security. Some companies which would otherwise have been partnerships have recently been made private companies, having foreseen that they should put aside reserves which otherwise would have had to be distributed, and probably the activities of those concerns would have been reduced, to the general disadvantage of employment in this country.

It is the manufacturing concerns, however, to which I particularly wish to draw attention. Here, we come into the difficult field of the capitalisation of the producing unit. That is a matter of supreme importance. There is the difference which arises in the capitalisation of machinery. We may have, on the one hand, a plant, old and well managed, with its machinery written down almost to the minimum, perhaps to one-fifteenth of its value. If it was suggested to the Special Commissioner of the Inland Revenue that such machinery should be written up, for purposes of greater depreciation, it would not be permitted. On the other hand, we have a new concern, built on the inflated values which existed in 1919. It is obvious that the profits made by those two concerns, doing the same work, producing the same material, selling at the same price, must he essentially different. How is it possible in such cases to tell what is an equitable reserve and what is not? In my position I have had to scrutinise the cost sheets of a large number of concerns, and I found it almost incredible that there could be such a wide margin of difference between the cost of production of identically the same article, as between one factory and another. Is it suggested now, where a firm by ability of management, prudence and forethought, can put aside reserves, or is in a position to make big profits, and is continuously reinvesting them in the business to the extension of employment in this country, they are not to be exempt? They are not being squandered, they are not distributed in dividends, nor are they being put to the private uses of the individuals who may happen to own the capital.

7.0 P.M.

I think the Committee will realise that where inevitably such distinctions between cases of manufacturers exist it is going to be very difficult to establish what is a reasonable reserve. For that reason I think the time of the Committee might be occupied in pointing out how legislation of this kind—admitting that some kind of legislation is necessary—how the drafting before us necessarily causes some apprehension amongst the commercial community. It is with regret that we find that the Chancellor of the Exchequer has reluctantly to admit, I will not say a second failure, but a less success in producing a drafting which would meet all difficulties. On the grounds of financial prudence and of the danger of the extension of bureaucracy—which last we already have had too much of, during days of control under D.O.R.A.—I hope the Chancellor of the Exchequer will consider a further modification of this Clause.

Mr. MACQUISTEN

I would ask what is the good of passing this Clause, which can be evaded at once by the principals of any company? What is the use of passing it, as a company can emigrate? Why should not a company emigrate, as well as an individual? If an individual feels that his taxes are too high, he can emigrate. Only the other day I noticed that the right hon. Member for the City of London (Sir F. Banbury) pointed out that the reward for emigrating a huge business, and for getting away from taxation, was to become a member of another place. I saw that stated in the Press, and it was not contradicted. If that can be done so easily what is the use of passing this legislation which, as the hon. Gentleman who has just sat down has said, can only result in the crippling of industry and in the development of other difficulties?

Sir W. JOYNSON-HICKS

May I make a suggestion to the right hon. Gentleman? We are all agreed, as he says, that we want to catch the tax-dodger. The crime is not in accumulating a reserve fund, the crime is when the money is got out of the reserve fund. That can he done in one of three ways. The taxpayer can put his hand into the pocket of the company and get the money out either in the form of a loan or in the form of winding up a company, or in the form of distributing the reserve by paying the money out in bonus shares. Those are the three ways of evasion, and the right hon. Gentleman cannot usually catch these people. By his present plan he gets the man or the company who has not committed a crime but has built up a reserve fund. Lot him go forward and catch the man who is dipping into the reserve fund and make him liable to Super-tax. It is quite clear, as the right hon. Gentleman admits, that his own Clause will not do. He should withdraw it and ask half-a-dozen business men in this House—as has been done by other Chancellors of the Exchequer in the past—to meet and consult with him and frame a Clause which would have the effect which we all desire, namely, to catch the tax-dodger, and not to endanger the real business man.

Question, "That the Clause be read a Second time," put, and agreed to.

Sir W. JOYNSON-HICKS

I beg to move, in Sub-section (1), to leave out the words "it appears to the Special Commissioner that."

I am sorry the Chancellor of the Exchequer did not accept the proposals which were made to him. I do not think his Clause will carry out the object he desires. The object of my Amendment is to give a company that is attacked the right of appeal to the courts of law. Under the present provisions of this Clause the Special Commissioners of Income Tax may say, "It appears to us that this company or that company comes within the provisions of the Clause." There is no appeal from their decision, and they might come down and ransack the whole of the affairs of that company. To that the business community strongly object. I do not propose to make a long speech. We have had speech after speech this afternoon from various members of the, business community, objecting very strongly to the increase of bureaucracy and the giving of additional powers to bureaucracy. The business community does, at least, trust His Majesty's Courts of Law. The Chancellor of the Exchequer has promised that be will put words into the Clause that there is only to be an appeal if there is an attempt to evade. In view of that my Amendment becomes a much more serious question than before, because that is a matter for a jury. Under this Clause as it is going to be amended by the Chancellor of the Exchequer, a company cannot be attacked by the Special Commissioners unless they first find as a fact that it has been formed for the purposes of evasion. Surely my right hon. Friend must see, after giving way on that question and making it apply to cases where there is an evasion, that there must be a right to the subject before he is convicted of attempted evasion of the tax to go before a court and a jury. It becomes, therefore, a question of quite definite—I do not use the word "crime"—but of a criminal intention, of a distinct and definite intention to evade the tax, and unless that criminal intention is established the Clause will not apply. The Clause as it stands leaves the Special Commissioners completely masters of the situation. If my Amendment were carried, the Clause would read: Where any company to which this Section applies. etc. It would have to be established in a Court of Law that this Clause applies to a company, and that this is a company formed for evasion. My Amendment has become a much more serious question since the Chancellor of the Exchequer has agreed to incorporate in his Clause, as a condition precedent to the Clause acting, the words "when there is a proposed evasion of taxation." You must not leave the question whether a company is formed for the purposes of evasion to the Super-tax Commissioners. You must give anyone who is challenged with criminal evasion the opportunity of going before a Court of Law and of seeing whether it is a criminal evasion or not. The legal effect of the Amendment will be that the Commissioners must establish to the satisfaction of a court of justice that any company which they claim to be within the purview of this Clause must be a company formed for the purpose of a criminal evasion, and that therefore they have the right to deal with them.

Mr. MACQUISTEN

I beg to support the Amendment, which brings out perfectly clearly the whole purpose of this Clause. Its purpose, and the plea put forward as a justification for it, is what it will deal with, the creation of a company whose members are few—it is generally called a one-man company—which builds up reserves and then, as the Chancellor of the Exchequer says, borrows its own money and never puts it back again, and so evades the Super-tax. That type of company must be perfectly well identifiable when it is seen. You notice the stigmata of tax evasion about it when you see it, not in the mere registration, but in the conduct and carrying on of its business. I do not think this should be put in the way of making it a criminal offence, and I demur to that statement by the hon. Member for Twickenham (Sir W. Joynson-Hicks). It should be recognised simply as a device that has failed. The way in which it would be proved before a judge and jury—and it is purely a jury point, and should be tried by them and not by the Special Commissioners—would be to prove the fact that a man has formed himself into a company and has drawn out the money without paying Super-tax. It is a very different thing to put it into the hands of the Special Commissioners, who are not there to do justice, but simply to gather in the taxes. You ought to get over the difficulty in regard to evasion, which would attach a certain amount of stigma to the persons concerned, by giving them the right to go before a jury, and not leaving them to the tender mercies of the Super-tax Commissioners. Unless this Bill is to be an honest Bill, and is to achieve its object, which is to get at the wrongdoers, it has no justification whatever. The purpose of evasion must be clearly established in the Bill, and you must leave a question of that kind to the courts of justice.

Major HILLS

I quite agree with the last two speakers that somebody must decide either whether an undue amount of money has been reserved or whether there has been an intention to evade. It has been suggested by the mover of the Amendment that that question should be carried to the Courts. I hope, most sincerely, that the Chancellor of the Exchequer will not accept that. The Special Commissioners are the proper body to decide the cases, and, with all respect to the hon. and learned Member for Springburn (Mr. Macquisten), they are much more than tax-collectors. They have to decide various cases of business and, as he knows very well, there are certain ways of appealing against a decision of the Special Commissioners and of taking the opinion of the Courts upon that. In the suggestion that I made a short time ago, and of which the Chancellor of the Exchequer was kind enough to express a qualified approval, I had no intention of suggesting that the Special Commissioners should be deprived of their right to act in these cases. The only suggestion I made was, that the position on which they should base their decision should not be an act such as putting money to suspense, but should be the intention of evading the payment of taxes. My suggestion would sweep away a good deal of this Clause, and would go wider and farther in the right direction than does the Clause. I have merely risen to say that I think the suggestion of the Mover of the Amendment would entail great expense and trouble, and that I hope the Chancellor of the Exchequer will not agree to it.

Mr. PRETYMAN

The Chancellor of the Exchequer undertook to introduce words to the effect that the test would be whether or not there was an attempt at evasion, and I think that has a very important bearing on this Amendment, because it seems to me that the Special Commissioners are the right people to decide that question. I do not think the Special Commissioners are the right people to form an opinion as to how much reserve a company ought to accumulate, but as to whether people are trying to evade a tax, that seems to me to be a very proper thing for the Special Commissioners to decide. I want to ask the Chancellor of the Exchequer whether he proposes now to suggest what his words are going to be, or whether he intends to defer them until the Report stage. It is important to know, because this is a very large new departure which we are making, and it may be a very large burden on the trading community as a whole. It has been assumed throughout that evasion is in every case of a criminal nature, but may I suggest to the Committee that, as I have heard this matter put by people, either in commerce or owning property, who have considered the desirability of turning their business into a company, their object is this? Under the existing law of taxation a company pays Income Tax on a different basis from a private individual, and by merely turning your business into a company, without any evasion whatever, you pay less tax. A private individual who owns a business or an estate cannot accumulate any reserves at all, but has to pay on the whole of it. By turning his business into a company, he is allowed to accumulate reserves, and therefore it is rather dangerous to assume that he is doing this in order to evade the tax. It is perfectly legitimate.

Mr. A. M. SAMUEL

It was made clear earlier in the Debate that the word "evasion" should not be used as implying an unworthy act. The late Lord Macnaghten laid it down that there is nothing illegal or immoral for a man to do something which the law does not deal with. In the earlier part of the Debate those who spoke, including myself and the hon. and learned Member for Central Bristol (Mr. Inskip), took the point and made it clear that no one used the word "evasion" as meaning an unworthy act.

Mr. PRETYMAN

As long as that is understood, well and good, but the word has been used consistently by the last few speakers as if evasion in any form were a criminal act, and as far as I am concerned we ought to take every possible means to stop anything in the nature of an evasion of a legitimate tax, but I do not call it a criminal evasion where, by altering the character of your business, you can avoid a tax perfectly legitimately. If a company does not pay on its reserves reasonably accumulated, and if a private individual is not allowed to accumulate any reserves at all, then I say it is legitimate to turn his business into a company.

Sir W. J OYNSON-HICKS

That is not the point.

Mr. PRETYMAN

What I want to ask the Chancellor of the Exchequer is whether he proposes to introduce his words now or to recommit the Bill in order to introduce them, or whether he proposes to do it on the Report stage.

Sir L. SCOTT

The hon. Baronet the Member for Twickenham (Sir W. Joynson-Hicks), who moved this Amendment, did use the expression that evasion of a tax was a criminal act. I agree completely with the right hon. Member for Chelmsford (Mr. Pretyman) that that is an entirely inappropriate use of the word "criminal." Where a taxing Act provides that a tax is to be paid under certain conditions, a man who avoids those conditions is not committing a criminal act, but the Committee felt that there is a sort of sense of decency in regard to the amount of general burden that each person ought to bear, and that if he shifts an undue amount of his share on to other people's shoulders, it is not playing the game. That is the point of view from which we have been approaching this question all the way through, and it is the point of view from which Clause 14 is intended to be framed. Clause 14 proceeds broadly on this footing, that a firm has certain definite obligations of Super-tax if the incomes of the members of the firm exceed a certain limit. It is very easy to clothe that firm in the legal clothing of a company, and up to now that legal clothing has been an armour against Super-tax. It is in order to get round that clothing that the Clause is drawn. What is the ordinary procedure for the purpose of ascertaining the facts upon which an obligation to pay tax follows? The ordinary procedure that has been adopted for centuries past in this country is that it shall not be referred in the first instance to the courts of law, and for two reasons: First, that it is very desirable, in the interests of the individual citizens, that their income affairs should be kept secret and private, and if a matter goes to court everything becomes public; secondly, it is desirable that the process of collecting a tax should be as little expensive as possible, both to the Exchequer and to the taxpayer. If the case is to be referred to court, to a judge or to a judge and jury, as some hon. Members have suggested, who is to pay the costs? Is the Exchequer to pay the costs in every case, and, if not in every case, in what case is it for the individual to pay the costs? It is not a practicable procedure, I venture to submit. It would mean a totally unnecessary employment of lawyers, a great deal of waste of money, great delay, with appeals possibly to the House of Lords, and, secondly, it would involve the disclosure of information that many people desire to keep private.

The Clause is framed in order strictly to follow the procedure which Parliament has for centuries past approved in regard to the assessment of taxation, namely, the system of leaving it to the Commissioners. If the Special Commissioners, in this case, think that on the facts within their knowledge there is a primâ facie case, they are to take certain steps. They are to send what is in effect a notice in writing, containing a direction that, for purposes of assessment to Super-tax, the income of a company is to be treated in a particular way. What follows? Hon. Members will find in the first Schedule of the Bill that when such a direction is given by the Special Commissioners, it is only a preliminary step, to initiate the proceedings, and that then a member of a company affected may appeal to the Special Commissioners and ask for them to investigate the case judicially. They are a judicial body, a body which, I believe, the great mass of the taxpayers of this country who have had to deal with them have found a very impartial body, and in their judicial capacity they make this investigation. The whole of the investigation is subject to all the careful machinery and precautions laid down in the Income Tax Act, 1918, which regulate the procedure. A further provision is that if either party, either the company or the Commissioners of Inland Revenue, are dissatisfied with the judicial decision of the Special Commissioners, either party may appeal to the Board of Referees, and then the same procedure will apply, with a power to state a case on any question of law. At each of those hearings the persons affected by the taxation will be heard—they will be able to present their case, they can appear by counsel, and there is nothing whatever to differentiate the hearings which are directed under this Clause from the hearings that take place for other general Income Tax purposes.

The Special Commissioners are made the body to decide these questions of fact, and there is no better tribunal to which, in my submission, those questions could be referred. The Board of Referees is composed of business men who have nothing whatever to do with taxing generally, presided over hitherto, as the Committee knows, by Sir Duncan Kerly, a lawyer of the greatest distinction and the greatest ability, and when on some future day he ceases to preside or does not preside over this Board, then some other competent and impartial person will take his place. The precautions laid down by way of machinery, for preventing any injustice being done or for preventing a decision which goes outside the spirit of the Clause and brings under tax companies that are not in the least intended by he Clause to be brought under tax, are so carefully framed that I venture to submit to the Committee—and I speak with some knowledge of these matters from my own personal experience—that the practical protection extended is far greater than hon. Members have seemed to assume.

Sir W. JOYNSON-HICKS

I think the explanation given by the learned Solicitor-General removes a very great many of the difficulties which were in my mind, but I should like to be clear on one particular point. Assuming, as I do assume, from what the Chancellor of the Exchequer has said, that the initial fact will have to be found that there is an attempt being made to evade the tax by forming a company, can a member of such company put his case before the Special Commissioners and the Board of Referees to have that question decided before the Special Commissioners come down and investigate the whole of the accounts?

Sir L. SCOTT

That is a very relevant question. The first thing to realise is that we must frame the words relating to evasion with care, and let me say at once, if I may, the sort of words which would commend themselves to me, without tying the Government to the precise words, of course. The sort of words I should like to put into the Clause are something like these: Where it appears to the Special Commissioners that any company to which this Section applies has, for the purpose of avoiding the payment of tax by the persons who control the company. What we want is, first, a neutral word like "avoiding," importing no moral obliquity, and, secondly, that the avoidance is avoidance by the persons who control the company. It is a question of Super-tax, but it is not a. Super-tax to be paid by the company but by those who control the company. That is the kind of Section we want to work in. What is it which, to an ordinary sensible man, such as any Member of this Committee, would appear to be evidence of an intention to avoid payment of tax? He would like to see where the company was formed, where it was started on its career, what proportion of money was being used in the trade, if it were a trade, whether the company was a trading company or not, the general management of it, the relation of it to the persons who control it, whether it was really being used for the purpose of running an independent business, and, if so, whether it was wholly used for that purpose, or only partly used for that purpose, whether the reserves that were being put aside would be the kind of reserves that anyone in control would be likely to put aside for a rainy year, or for purposes of extension or development—all those questions would be considered by any sensible Member of this Committee if he were asked this question, "Is that man trying to evade payment of his Super-tax or not?" That being so, it follows that the question whether there is an attempt to evade the payment of taxation or not is the last question you would put to yourself as the judge, and not the first. And you cannot answer that question until you have considered all the details of the case.

Sir W. JOYNSON-HICKS

I think, under the circumstances, my hon. and learned Friend has answered my point, and I ask leave to withdraw my Amendment.

Amendment, by leave, withdrawn.

Mr. HOLMES

I beg to move, in Subsection (1) to leave out the word "twenty-one," and to insert instead thereof the word "twenty-two."

The Chancellor of the Exchequer has already intimated that he will accept this, but, in view of certain opposition to my Amendment, I will explain what it means. The Clause we have been discussing as it now stands is to come into force for any accounting period ending after the 5th April, 1921. This is retrospective taxation. It means that a company which has closed its accounts in the year ending 30th June, 1921, will now be subject to Super-tax for the amount in that year, although the auditors have given their certificate a year ago, and all outstanding taxation, which has to be dealt with nowadays by all auditors of such accounts, has been provided for. It is one of an auditor's greatest difficulties at the present time to calculate the amount to be kept in reserve for Income Tax, having regard to the fact that in the next two years the three years' average, or, in the case of colliery companies, the five years' average, is causing the amount which will come to be assessed for Income Tax to be far greater than the profits actually being made at the present time. That is, however, by the way. The proposal in the Clause as it stands is that we have to go back for the 12 months ending 30th June and 30th September, 1921, to tax companies under this Clause in a way which was not expected when the accounts were made up and the dividends allocated. The proposal I make is that we should make the first date of the accounting period end after the 5th April, 1922. Very few companies have made up their accounts for such an accounting period, and the auditors will be able to make proper reserve for the tax under this Clause. I hope the Committee will not be guilty of imposing retrospective taxation, which, I believe, is as distasteful to Members of the House, as it is to people outside.

Mr. MOSLEY

The effect of this Amendment, as I understand it, is to delay the operation of this Clause for the space of one year. My hon. Friend bases his case on the ground that the Clause as at present constituted imposes retrospective taxation. I do not think that is so. As the Committee is well aware, the Super-tax return is based upon the income of the preceding year. This Clause as it stands, as I read it, merely lays down that certain actions taken by companies during the year 1921–22 for the purpose of evading Super-tax during the current year 1922–23 shall not be allowed to stand. It is not retrospective taxation in that the Super-tax payable upon income of last year is paid in the present year. We are merely preventing the effect of action taken last year by these companies depriving the Chancellor of the Exchequer of revenue which he should derive during the present year. It cannot be argued in any way that that is retrospective taxation, but, in any case, even if it were, there are many cases of-retrospective taxation in this very Bill which we are considering, and surely, if it be right to introduce this Clause in order to prevent a considerable loss to the revenue, it is proper that it should he immediately operative, and not be delayed for the period of the whole year during which the Chancellor of the Exchequer will lose this appreciable revenue which he has anticipated. The fact that the Chancellor of the Exchequer has introduced this Clause evidently means that a considerable amount of money is at stake. The proposal of my hon. Friend is to deprive the Exchequer of that sum of money for the period of a year. I submit that he has not substantiated his case that this Clause as it stands imposes retrospective taxation, and the loss of a whole year is a loss of revenue which at the present time we can ill afford.

Sir G. COLLINS

I was hoping the Chancellor of the Exchequer would inform the Committee of the amount of revenue which he would lose if this Amendment were accepted. If I understood him correctly during his speech on the Second Reading of this Clause, he said that he had a perfectly good defence for the insertion of 1921 in this Clause. My object in rising is to ask the Chancellor of the Exchequer whether he can give the Committee some figure as to the amount which the revenue will suffer if this Amendment be accepted. If I understand the Super-tax law correctly, it is this, that the income of an individual in 1921 is assessed for Super-tax in 1922, but it is not payable until the first two months of the coming year. Therefore, if this Amendment be carried, the Revenue will suffer some loss, and we hope the right hon. Gentleman will give us some figures on that point.

Sir R. HORNE

I think I indicated in my previous speech that there were considerations on both sides, and the question is just on which side you come down. I was originally moved by the views of the hon. Member for Harrow (Mr. Mosley) and his friends that Super-tax undoubtedly is based upon the previous year and not on the current year, but, on the other hand, as the hon. Member for North East Derbyshire (Mr. Holmes) has said, all the books of companies have been made up and certified on the basis of the law as it then existed.

Mr. A. M. SAMUEL

And the money has been spent.

Sir R. HORNE

Yes. You may say that all forms of legislation may possibly have the effect of impinging upon past transactions, but I have been very much impressed in presenting this new legislation to the House by the great apprehension of Members as to the effect on business. I do not want to do anything at all to make business people more nervous than they otherwise would be, and, accordingly, I have expressed my intention to accept the Amendment of my hon. Friend the Member for North East Derbyshire. It is very difficult to tell what amount of money will be derived under this new legislation, especially at the start off. Once you have experience for a year you may be able to state something about the next year. At the present time we are proceeding very much in the dark, although we know there are a considerable number of companies which would appear to be entirely designed to avoid the Super-tax. We do not know the amount of money involved in these cases, but we would assume, so far as the present year is concerned, that we should get practically nothing, and that in the next year we should get £400,000. That, however, is only, as I say, a guess, but to that extent we should not get that £400,000 next year if we delayed this for a year. In one sense you do lose it.

Mr. RENDALL

In every sense.

Sir R. HORNE

I will admit in every sense, if you like. That is the position, and I have agreed to accept the Amendment which has been proposed.

Sir D. MACLEAN

I quite see the force of the position taken up by my hon. Friend the Member for North East Derbyshire (Mr. Holmes) in his Amendment, since it is based upon this, that the subject is entitled, especially in taxing questions, to take any legal means of, what he would call, protecting himself. He has done that, and he has done it legally. But the, Chancellor of the Exchequer says that that is not what this House intended by its measures for raising money from the subject in this way, and that he, therefore, proposes to put a stop to it. I do not think—while I quite understand the position taken by the hon. Gentleman behind me—there is any objection at all in the State going to a subject and saying, "That is not what we intended legally, you are legally within your rights, but we proposed to protect a certain thing and we propose now to do that." The companies retort: "That is very unfair to us, we have distributed our dividends and there is a very considerable sum of money involved." I, therefore, think the right hon. Gentleman has not been well advised in throwing away a sum of between £200,000 and £400,000—it is quite impossible to estimate it accurately. At any rate it was a very substantial sum. I think what the Chancellor of the Exchequer ought to have done, and I have listened to what he had to say, was to stick to his guns.

Colonel Sir JAMES GREIG

May I ask the Chancellor of the Exchequer whether he will consider leaving this matter to the Committee and not putting on the Government Whips—leave the House to decide it as last year?

Lord R. CECIL

In respect to that appeal of the hon. and Gallant Gentleman, I think it would be rather hard to put on the Government Whips to force an alteration in a Government Bill. My own feeling is rather one of surprise that the Chancellor should give away £400,000 in a manner which does not appear to have any very great merit behind it.

Sir R. HORNE

I only gave it on condition that I got my Clause.

Lord R. CECIL

Is it really true that the supporters of the Government will not support this Clause unless this concession be made? Let me understand this aright. This Clause is only designed to touch companies formed for the purpose of doing what I think the Solicitor-General said was not quite fair, was not playing the game, or something to that effect. It is to deal with those companies and those alone. The question is whether the original proposal of the Chancellor to make this applicable from 5th April last year to 5th April this year is to be adopted. But surely the hard cases of which we have heard, and of which I myself have heard, and the need for relieving those who are in great distress or difficulty being rejected by the Chancellor on the ground that he could not afford the money, is a contrast to giving over £400,000 in order to protect those who have not been playing the game!

Sir J. BUTCHER

I regret very much that the Chancellor of the Exchequer has been so generous, that he has given away £400,000 which he would have got in January or thereabouts, and which will not now be available until January, 1924, or thereabouts. Unless there are very urgent reasons, administrative or otherwise, I hope that the Chancellor will stick to the original proposal or, at any rate, as my hon. and gallant Friend has suggested, that be will leave it to the House to decide. I am much more inclined to speak as I do because we have heard the Chancellor from time to time, when we have put forward a request for certain relief and benefits for people in this country who are in the greatest straits and difficulties, old age pensioners and otherwise, and especially old Royal Irish Constabulary pensioners in Ireland, whose claims are not unreasonable, say that he has not the money to spend. These claims would not have required a great deal of money, but we have been told it was not there. Now the Chancellor is giving away £400,000 which he might have used more profitably if he had got it out of the pockets of these gentlemen who are said to be evading the tax, used it more profitably in the way I am suggesting. I do not go into the morals of the question. A man is entitled to evade a tax in any way that is legally possible. There is nothing immoral on the part of these people trying to evade taxation, but inasmuch as the House has come to the conclusion that that ought not to be allowed to go on, they are getting an unfair advantage over other taxpayers, and I hope the beneficial provisions of this Clause will be kept in the Clause.

Mr. A. M. SAMUEL

I endeavoured to express my views on this subject on the Second Reading of this Bill, but I am sorry to note the opposition of those hon. Members around me who have just spoken, the hon. Member for Harrow (Mr. Mosley), the Noble Lord the Member for Hitchin (Lord R. Cecil), and the hon. Member for York (Sir J. Butcher), who have never in their lives spent a single day in trade, and know nothing whatever about it. You cannot rip open the year's accounts which are closed and get the money which has been spent. The thing suggested by the Government cannot be done. When I spoke upon the Clause, I pointed out such things as I thought were wrong, but we also gave considerable support to the Clause, thinking that the Chancellor of the Exchequer would meet us on various points. He met us on this point. He said he was going to put this date forward from 1921 to 1922. He knows as well as we do that for him to put into operation the Clause as it stands—notwithstanding all that has been said by certain hon. Members—so far as raising the £300,000 or £400,000, would be quite easy. But you can only do what you can do. Much of this money has been spent, and much of the outcry and opposition has been on the part of honest companies who have no intention whatever in the world of evading taxation. The opposition to this taxation will not be entirely removed when they feel that this hampering and troublesome Clause of 1921 has passed away, and that it has only been set aside till 1922. I hope those who are not engaged in business will give business men credit for being honest and decent men. We approve of the principle underlying this Clause, but we say it is utterly foolish to rip up balance-sheets which were settled 18 months ago. For that reason I hope the Chancellor will go to a Division. I shall certainly support him, on the score that he is doing the right thing.

Mr. RENDALL

I am not prepared to go to a Division without expressing my views. The defence of the Chancellor of the Exchequer—with great respect to him—struck me as the manner of an apologist ashamed of what he is doing. [HON. MEMBERS: "No!"]—and extremely alarmed at the criticism which fell upon him, for the House is wideawake, and I am glad it is. In the course of his speech he said that in one sense we are losing £400,000. I asked him what sense he meant, and he replied, "in every sense, if you like." What on earth did the right hon. Gentleman mean by saying losing in one sense? He might not have been trying, but he was successful in deceiving the Committee. [HON. MEMBERS: "Oh!"] I say, not trying to do so, but succeeding in deceiving the Committee. He certainly deceived me—not intentionally.

We are having Amendments introduced, and we on this side of the House have a number down with case after case, and good cases, for relief from Income Tax. We have put them forward, but we have failed so far to convince the Chancellor that these Amendments ought to be made. The Clauses which are going to be presented, in my opinion, deal with harder cases than the one now put forward. I have a new Clause, for which, I believe, I have a large measure of support. The object of that Clause is to free widows from the taxation of certain small sums spent on the education of their children.

The DEPUTY-CHAIRMAN (Sir Edwin Cornwall)

I am afraid that is a point beyond the scope of the present discussion.

Mr. RENDALL

With all submission, I was desirous of giving an instance of retrospective taxation, for the point is being made that this is not a fair proposal, because it is retrospective taxation. I was saying what I was by way of illustration. I was wishful to show that for the last three or four years war widows—for whose dependants, young children, there had been given special sums for education—have not paid Income Tax upon those sums, but by a mistake or something of the kind—a certain Royal Warrant coming into force, I think—these small sums are now taxed. I have a Clause down, which I hope will be accepted, freeing these from taxation, and I wanted to show that the Chancellor is in that case giving retrospective sanction. Certainly, we have here a different case altogether. My hon. Friend the Member for Farnham (Mr. A. M. Samuel) does not like to see the clerks and accountants making up their balance sheets afresh, nor does he wish to see the balance sheets ripped open. As a matter of fact, the hon. Gentleman knows as well as I do that Super-tax is paid out of next year's income. We all pay our Super-tax out of the income we earn in the year when we pay it. [HON. MEMBERS: "No!"] The ordinary individual is going to pay Super-tax next year, and out of the income he earns next year. The private individual does that, and I think it will probably be the case with these private companies. These are not companies in the real sense of the term. They ought to be called "evasion companies." Why we should protect them after we have decided that they should not be allowed to do what they have done I do not know. Here is £400,000 to be given away simply because the Chancellor of the Exchequer makes some private arrangement—[HON. MEMBERS: "No, no!"]—I call it that—with certain Members of the House, to whom he says: "If you will accept certain Amendments I will give you other Amendments." It may be a legitimate arrangement, but it is made in a way which I think is not creditable to the House or the Committee. I personally detest this sort of arrangement, and I think we ought to have had the matter more fairly dealt with, for there is no reason for giving this £400,000 away. It could have been got. There are plenty of cases where relief ought to be given, but it ought not to be given here. For these reasons I trust that my hon. Friend will go to a Division.

8.0 P.M.

Sir W. JOYNSON-HICKS

The suggestion which has been made is that a private arrangement was made with the Government to give this concession, but it is nothing of the kind. This concession was asked for and discussed openly on the Second Reading when the Chancellor of the Exchequer announced that be would be prepared to make this concession, and there was nothing private about it. It was simply one of the ordinary Parliamentary bargains made across the Floor of the House, and I do not think we can now go behind that bargain. Many hon. Members accepted the Clause because of the concessions which were made, and for this reason they allowed the Clause to go through. If this bargain be not carried out, they will not have any opportunity now of voting against the Clause.

Lord R. CECIL

They can vote against the Motion, "That the Clause be added to the Bill."

Sir W. JOYNSON-HICKS

Many hon Members have gone away on the strength of the concessions made by the Chancellor of the Exchequer, and when they were made no one got up and said they were improper concessions to make. Now some hon. Members seem to think that on this point they have got a nice party cry. The truth is there is something rather more important than that, and it is adhering to a Parliamentary bargain made across the Floor of the House. I hope the Chancellor of the Exchequer ill stand by his concession, put on the Government Whips, and carry this proposal.

Mr. LAWSON

If the Chancellor of the Exchequer had given us any reason for believing that there was anything in the argument set forth that there was some difficulty with the books, then there would have been some reason for reconsidering our position. As a matter of fact, the right hon. Gentleman did not believe there was any difficulty about the matter at all, and he did not take up that line of argument. With him it was simply a question on which side he would come down, and he came down on the side of the hon. Member who has just spoken.

Mr. HOLMES

This question does not affect the books at all. If it is shown that £5,000 had been distributed in dividends, and the company used the rest for developing the business, under this Clause a year after you could come to them and say, "We are going to demand from you in taxation some of the money which you have spent."

Mr. LAWSON

The Chancellor of the Exchequer himself did not give the slightest heed to the argument on those grounds. Some of us on the Labour benches may not have been in trade, but

we come in contact with those who are engaged in industrial concerns. While we may not have been engaged in trade, we have been present when discussions have taken place on the Finance Bill. One of the things that has struck me is that the Chancellor of the Exchequer is giving colour to the argument freely used outside that this is a rich man's Budget. I remember when we were pleading for a certain concession which it was said would cost £180,000, the Chancellor of the Exchequer said he quite agreed with our object and had great sympathy with it, but he could not accept our proposal, because he must get his money somehow. Now he comes forward, and without any argument whatever in favour of it, he accepts an Amendment which means a loss of something like £400,000 to the Exchequer. That is only one of the many concessions which he has made to the same interests in this House. In face of the fact that he has not given way a single inch to representatives in this House who are putting forward economies which he says he, agrees with but cannot afford, I put it to him that it is about time that he began to keep a stiff back to some of these interests, and he should give some consideration to Amendments which have more substance in them. If we go to a Division, we on the Labour Benches as a body will oppose this Amendment, because we believe it is a flagrant illustration of the belief which is prevalent outside that this is a rich man's Budget.

Question put, "That the word 'twenty-one' stand part of the Clause."

The Committee divided: Ayes, 59; Noes, 244

Division No. 177.]	AYES.	[8.9 p.m
Adamson, Rt. Hon. William	Grundy, T, W.	Parkinson, John Allen (Wigan)
Banton, George	Guest, J. (York, W. R., Hemsworth)	Raffan, Peter Wilson
Barker, G. (Monmouth, Abertillery)	Hall, F. (York, W.R., Normanton)	Rendall, Athelstan
Barnes, Major H. (Newcastle, E.)	Hallas, Eldred	Richardson, R. (Houghton-le-Spring)
Barton, Sir William (Oldham)	Hartshorn, Vernon	Rose, Frank H.
Benn, Captain Wedgwood (Leith)	Hayday, Arthur	Sexton, James
Bowerman, Rt. Hon. Charles W.	Hayward, Evan	Short, Alfred (Wednesbury)
Bramsdon, Sir Thomas	Hirst, G. H.	Sitch, Charles H.
Briant, Frank	Hogge, James Myles	Swan, J. E.
Bromfield, William	Irving, Dan	Thomas, Brig.-Gen. Sir O. (Anglesey)
Cairns, John	John, William (Rhondda, West)	Thomson, T. (Middlesbrough, West)
Carter, W. (Nottingham, Mansfield)	Jones, Morgan (Caerphilly)	Walsh, Stephen (Lancaster, Ince)
Cecil, Rt. Hon. Lord R. (Hitchin)	Kenyon, Barnet	Watts-Morgan, Lieut.-Col. D.
Collins, Sir Godfrey (Greenock)	Lambert, Rt. Hon. George	White, Charles F. (Derby, Western)
Davies, A. (Lancaster, Clitheroe)	Lunn, William	Wignall, James
Edwards, C. (Monmouth, Bedwellty)	Maclean, Rt. Hn. Sir D. (Midlothian)	Wilson, Rt. Hon. J. W. (Stourbridge)
Finney, Samuel	McMicking, Major Gilbert	Wood, Major M. M. (Aberdeen, C.)
Foot, Isaac	Murray, Dr. D. (Inverness & Ross)
France, Gerald Ashburner	Myers, Thomas	TELLERS FOR THE AYES.—
Galbraith, Samuel	Newbould, Alfred Ernest	Mr. Lawson and Mr. Mosley.
Gillis, William	O'Grady, Captain James
NOES.
Adkins, Sir William Ryland Dent	Green, Joseph F. (Leicester, W.)	Norton-Griffiths, Lieut.-Col. Sir John
Ainsworth, Captain Charles	Greene, Lt.-Col. Sir W. (Hack'y, N.)	Parker, James
Armitage, Robert	Greenwood, Rt. Hon. Sir Hamar	Parry, Lieut.-Colonel Thomas Henry
Ashley, Colonel Wilfrid W.	Greer, Sir Harry	Pearce, Sir William
Astbury, Lieut.-Com. Frederick W.	Gregory, Holman	Pease, Rt. Hon. Herbert Pike
Astor, Viscountess	Gritten, W. G. Howard	Perring, William George
Atkey, A. R.	Guest, Capt. Rt. Hon. Frederick E.	Phillpps, Gen. Sir J. (Southampton)
Baird, Sir John Lawrence	Hall, Lieut.-Col. Sir F (Dulwich)	Phillpps, Sir Owen C. (Chester, City)
Baldwin, Rt. Hon. Stanley	Hamilton, Sir George C.	Pickering, Colonel Emil W.
Balfour, George (Hampstead)	Hannon, Patrick Joseph Henry	Pilditch, Sir Philip
Banner, Sir John S. Harmood-	Harmsworth, C. B. (Bedford, Luton)	Pinkham, Lieut.-Colonel Charles
Barlow, Sir Montague	Harmsworth, Hon. E. C. (Kent)	Pollock, Rt. Hon. Sir Ernest Murray
Barnes, Rt. Hon. G. (Glas., Gorbal[...])	Haslam, Lewis	Pownall, Lieut.-Colonel Assheton
Barnett, Major Richard W.	Henderson, Lt.-Col. V. L. (Tradeston)	Pratt, John William
Barnston, Major Harry	Herbert, Dennis (Hertford, Watford)	Pretyman, Rt. Hon. Ernest G.
Barrand, A. R.	Hills, Major John Waller	Purchase, H. G.
Barrie, Sir Charles Coupar (Banff)	Hinds, John	Rae, Sir Henry N.
Bartley-Denniss, Sir Edmund Robert	Holbrook, Sir Arthur Richard	Ratcliffe, Henry Butler
Beck, Sir Arthur Cecil	Holmes, J. Stanley	Remnant, Sir James
Bell, Lieut.-Col. W. C. H. (Devizes)	Hood, Sir Joseph	Renwick, Sir George
Benn, Sir A. S. (Plymouth, Drake)	Hope, Sir H. (Stirling &, Cl'ckm'nn, W.)	Richardson, Sir Alex, (Gravesend)
Betterton, Henry B.	Hope, Lt.-Col. Sir J. A. (Midlothlan)	Richardson, Lt.-Col. Sir P. (Chertsey)
Bigland, Alfred	Hopkins, John W. W.	Roberts, Rt. Hon. G. H. (Norwich)
Bird, Sir R. B. (Wolverhampton, W.)	Hopkinson, A. (Lancaster, Mossley)	Roberts, Samuel (Hereford, Hereford)
Blair, Sir Reginald	Horne, Edgar (Surrey, Guildford)	Robinson, S. (Brecon and Radnor)
Blake, Sir Francis Douglas	Horne, Sir R. S. (Glasgow, Hillhead)	Robinson, Sir T. (Lancs., Stretford)
Blane, T. A.	Howard, Major S. G.	Rutherford, Sir W. W. (Edge Hill)
Boscawen, Rt. Hon. Sir A. Griffith-	Hunter-Weston, Lt.-Gen. Sir Aylmer	Samuel, A. M. (Surrey, Farnham)
Bowyer, Captain G. W. E.	Hurd, Percy A.	Samuel, Samuel (W'dsworth, Putney)
Brassey, H. L. C.	Hurst, Lieut.-Colonel Gerald B.	Sanders, Colonel Sir Robert Arthur
Breese, Major Charles E.	Inskip, Thomas Walker H.	Sassoon, Sir Philip Albert Gustave D.
Bridgeman, Rt. Hon. William Clive	Jackson, Lieut.-Colonel Hon. F. S.	Scott, A. M. (Glasgow, Bridgeton)
Briggs, Harold	James, Lieut.-Colonel Hon. Cuthbert	Scott, Sir Leslie (Liverp'l, Exchange)
Britton, G. B.	Jodrell, Neville Paul	Seddon, J. A.
Broad, Thomas Tucker	Johnson, Sir Stanley	Shaw, Hon. Alex. (Kilmarnock)
Brotherton, Colonel Sir Edward A.	Jones, Sir Edgar R. (Merthyr Tydvil)	Shaw, William T. (Forfar)
Bruton, Sir James	Jones, G. W. H. (Stoke Newington)	Shortt, Rt. Hon, E. (N'castle-on-T.)
Buckley, Lieut.-Colonel A.	Jones, Henry Haydn (Merioneth)	Simm, M. T.
Campion, Lieut.-Colonel W. R.	Jones, J. T. (Carmarthen, Lianelly	Smith, Sir Harold (Warrington)
Carter, R. A. D. (Man., Withington)	Joynson-Hicks, Sir William	Stanley, Major Hon. G. (Preston)
Casey, T. W.	Kellaway, Rt. Hon. Fredk. George	Stanton, Charles Butt
Cautley, Henry Strother	Kelley, Major Fred (Rotherham)	Stephenson, Lieut.-Colonel H. K.
Child, Brigadier-General Sir Hill	Kidd, James	Stevens, Marshall
Churchman, Sir Arthur	King, Captain Henry Douglas	Strauss, Edward Anthony
Clough, Sir Robert	Larmor, Sir Joseph	Sturrock, J. Leng
Cockerill, Brigadler-General G. K.	Law, Alfred J. (Rochdale)	Sugden, W. H.
Cohen, Major J. Brunel	Law, Rt. Hon. A. B. (Glasgow, C.)	Surtees, Brigadier-General H. C.
Colfox, Major Wm. Phillips	Lewis, Rt. Hon. J. H. (Univ., Wales)	Sutherland, Sir William
Colvin, Brig.-General Richard Beale	Lewis, T. A. (Glam., Pontypridd)	Sykes, Sir Charles (Huddersfield)
Cope, Major William	Lloyd, George Butler	Taylor, J.
Cory, Sir C. J. (Cornwall, St. Ives)	Locker-Lampson, G. (Wood Green)	Thomas, Sir Robert J. (Wrexham)
Dalziel, Sir D. (Lambeth, Brixton)	Lorden, John William	Thomson, F. C. (Aberdeen, South)
Davies, Alfred Thomas (Lincoln)	Lort-Williams, J.	Thomson, Sir W. Mitchell- (Maryhill)
Davies, Thomas (Cirencester)	Lyle-Samuel, Alexander	Townley, Maximilian G
Davies, Sir William H. (Bristol, S.)	Mackinder, Sir H. J. (Camlachie)	Tryon, Major George Clement
Davison, Sir W. H. (Kensington, S.)	McLaren, Hon. H. D. (Leicester)	Wallace, J.
Dawson, Sir Philip	McLaren, Robert (Lanark, Northern)	Walters, Rt. Hon. Sir John Tudor
Dean, Commander P. T.	Macleod, J. Mackintosh	Walton, J. (York, W. R., Don Valley)
Dewhurst, Lieut.-Commander Harry	McNeill, Ronald (Kent, Canterbury)	Ward, Col. [...]. (Stoke-upon-Trent)
Dockrell, Sir Maurice	Macpherson, Rt. Hon. James I.	Ward, Col. L. (Kingston-upon-Hull)
Doyle, N. Grattan	Macquisten, F. A.	Ward, William Dudley (Southampton)
Du Pre, Colonel William Baring	Mallalieu, Frederick William	Waring, Major Walter
Edgar, Clifford B.	Manville, Edward	Watson, Captain John Bertrand
Edge, Captain Sir William	Martin, A. E.	Weston, Colonel John Wakefield
Edwards, Major J. (Aberavon)	Middlebrook, Sir William	Wheler, Col. Granvil[...], C. H.
Evans, Ernest	Mitchell, Sir William Lane	White, Col. G. D. (Southport)
Falls, Major Sir Bertram Godfray	Molson, Major John Elsdale	Williams, Aneurin (Durham, Consett)
Fell, Sir Arthur	Mond, Rt. Hon. Sir Alfred Moritz	Williams, C. (Tavistock)
Flannery, Sir James Fortescue	Morden, Col. W. Grant	Williams, Col. P. (Middlesbrough, E.)
Forestier-Walker, L.	Moreing, Captain Algernon H.	Windsor, Viscount
Forrest, Walter	Morrison-Bell, Major A. C.	Winterton, Earl
Fraser, Major Sir Keith	Munro, Rt. Hon. Robert	Wise, Frederick
Fremantle, Lieut.-Colonel Francis E.	Murchison, C. K.	Wood, Hon. Edward F. L. (Ripon)
Ganzoni, Sir John	Murray, John (Leeds, West)	Wood, Sir H. K. (Woolwich, West)
Gardner, Ernest	Nall, Major Joseph	Wood, Sir J. (Stalybridge & Hyde)
Gee, Captain Robert	Neal, Arthur	Worsfold, T. Cato
George, Rt. Hon. David Lloyd	Newman, Sir R. H. S. D. L. (Exeter)	Worthington-Evans, Rt. Hon. Sir L.
Gibbs, Colonel George Abraham	Newton, Sir Percy Wilson	Yeo, Sir Alfred William
Gilbert, James Daniel	Newton, Sir D. G. C. (Cambridge)	Younger, Sir George
Gilmour, Lieut.-Colonel Sir John	Nicholson, Brig.-Gen. J. (Westminster)
Goff, Sir R. Park	Nicholson, Reginald (Doncaster)	TELLERS FOR THE NOES.—
Gould, James C.	Nield, Sir Herbert	Colonel Leslie Wilson and Mr.
Gray, Major Ernest (Accrington)	Norris, Colonel Sir Henry G.	McCurdy.

Question put, and agreed to.

The CHAIRMAN

The next Amendment in the name of the hon. Member for Farnham (Mr. A. M. Samuel) is one of a series and—

Sir W. JOYNSON-HICKS

Before that be taken, may I move, in Sub-section (1), to leave out the words "actual income" ["part of its actual income from all sources"] and to insert instead thereof the words "net profits and gains"? This follows the wording of the Income Tax Act, 1918.

The CHAIRMAN

The first Amendment of the hon. Member for Farnham comes before that.

Mr. A. M. SAMUEL

I am quite willing to give way to the hon. Member for Twickenham. The Amendment which stands in my name is one of a series, and the first could be put in conjunction with the second.

Sir W. JOYNSON-HICKS

Mine is a purely verbal Amendment. The words "profits and gains" are the words always used in the Income Tax Acts where the taxation is on the income of a business. It is only in the case of the Super-tax that you get taxation on the total income of the individual which may consist of profits and gains from a business, of income from shares and of the value of landed property.

The CHAIRMAN

In order to make his Amendments read, the hon. Member for Farnham will have to move it as it appears on the Paper. I will take care in putting the question to save the Amendment of the hon. Member for Twickenham.

Mr. SAMUEL

I beg to move, in Subsection (1), to leave out the words in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of Super-tax. What I desired was that my two Amendments might be taken together, because they dovetail into each other, but as that is not in order, I move this first Amendment, the object of which is to clarify the Clause and not in any way to destroy its meaning. If we leave out these words, then a little later I want to paraphrase them so as to make the mean- ing more clear, and to put them in after the word "period" ["said year or other period"] in this form: in such manner as to render the amount withheld from distribution not hitherto liable to be included in the statements made by the members of the company of their total income for the purposes of Super-tax. As the words now stand in the Clause the term "distributed" is used, but they are not distributed. They are withheld from distribution. I therefore suggest we should recast these words and put them in in the form I will in due course propose. Then I want next to insert, after the word "said" ["the said income of the company"], the word "undistributed." Some of these are drafting Amendments and are not intended to upset the Clause.

The CHAIRMAN

It is not necessary to recite each Amendment, unless the hon. Member wishes to do so. What I suggest is that he develops his whole alternative plan on this first Amendment. Of course, if the first Amendment be rejected, the others would fall too. I should only put the first.

Mr. SAMUEL

As it is quite plain as it, stands on the Paper, I do not want to weary the Committee by dealing with it further. These words have been carefully thought out by those who have helped me in this matter, and their only object is to clarify the Clause, the drafting of which seems to be open to several alternative meanings.

Sir R. HORNE

I gather from my hon. Friend that this is a pure question of drafting, and not one on which he takes exception to the principle which I am endeavouring to follow. I confess I do not entirely share his critical attitude towards the words which have been used, and which, indeed, have been discussed very carefully between the Inland Revenue Department and the Parliamentary draftsman. If, however, my hon. Friend will allow me, I will promise to go into these words again, and if any difficulty is found in regard to them, and it is considered that my hon. Friend's words would be better, I shall frankly confess it. At the moment I do not share his view. It seems to me that there is no difficulty in saying, as we say here, that Where it appears to the Special Commissioners that any company … has not … distributed … in such a manner as to render the amount distributed liable to be included in the statements made by the members of the company … It means that the amount is not distributed so as to render it liable to Super-tax. I think it is really quite clear. I do not, however, dismiss my hon. Friend's suggestion summarily, and if we come to the conclusion that his words are clearer, I shall be quite frank in saying so.

Mr. SAMUEL

I do not say that my way is better, but I do not understand the meaning of the words as they stand, nor do those who think with me. It is the amount withheld from distribution; it is not a fact that it is distributed. However, I am perfectly content on the assurance of my right hon. Friend that he will discuss the Clause with his draftsman in the light of what I have said, and, if he will try to put it right, I shall be quite content to leave it at that.

Amendment negatived.

Mr. HOLMES

I beg to move, in Subsection (1), after the word "Commissioners" ["the Commissioners shall have regard"], to insert the words shall not take into consideration any amount brought forward from any preceding year or other period, and". Perhaps I may give an example to show what I mean. If a company makes £10,000 and distributes £5,000, the Special Commissioners may say that it is reasonable that the other £5,000 shall be retained in reserve, and that it will not be taxed to Super-tax. But they may say, "You have distributed £5,000, but you have an accumulated fund of about £20,000, and the £5,000 that you have distributed was out of your accumulated reserve. You have actually this year made £10,000, and have not paid any dividend at all." The object of my Amendment is to ensure that every case shall be judged on its merits, having regard to the amount earned, the amount distributed, and the amount put to reserve, and that consideration shall not be given to any amount brought forward from previous years, which was really an accumulated reserve.

Sir R. HORNE

Personally, I agree with the general idea which the hon. Member has expressed, and I entirely assent to his view that you must take each year upon its merits. If this Amendment, as I understand it, be adopted, however, a company might find itself in an awkward position. The amount brought forward from any preceding year is a matter of importance in deciding what may reasonably he distributed, and how much may be put to reserve, and if you are going to rule out amounts brought forward from one year to another, you must also rule out losses which you have sustained in past years. I should really prefer that the matter be left as it stands in the Clause. I agree that the persons examining the case should take into account the factors to which my hon. Friend refers, but if this Amendment were passed as it stands it might lead to a very unfair situation. Accordingly, I would ask my hon. Friend to be so good as not to press it.

Mr. SAMUEL

I think we should take into consideration the fact that some people bring forward their reserves while others are not so prudent—and we want to encourage prudence as much as possible—and distribute these moneys in the form of bonus shares, and that, consequently, those people who have received bonus Shares are put in a much better position than when the money has been carried over and has become subject, to this taxation.

Sir R. HORNE

I should not have thought that. I should have thought that a person who had distributed bonus shares was better off than anyone who held reserves, but I should not regard as reserves money brought forward in the ordinary sense.

Mr. SAMUEL

I mean the carry-forward—the undivided profits carried forward in the accounts to make provision for a rainy day. Super-tax may be charged upon that, but it is not charged upon people with bonus shares. Of-course, the people who use that carry-forward by capitalising it in bonus shares will not then be subjected to Super-tax in respect of it, and will be in a much better, though an unfair, position vis-à-vis the people who have carried the money forward.

Mr. D. HERBERT

I do not know whether my hon. Friends opposite have considered the meaning of the words "a reasonable part of its actual income from all sources for the said year or other period." That seems to me to cover the point of the Amendment.

Mr. HOLMES

The point is whether the distribution made during the year is intended to be considered as having been made out of that year's income. I do not want to go any further, after what the Chancellor has said.

The CHAIRMAN

Does the hon. Member ask leave to withdraw the Amendment?

Mr. HOLMES

No, Sir, I do not wish to withdraw it.

Amendment negatived.

Mr. SAMUEL

I beg to move, in Subsection (1), after the word "may" ["such other requirements as may be necessary"], to insert the word "reasonably."

I do not think that this needs any explanation.

Sir R. HORNE

After what I have said, I hope my hon. Friend will agree that this Amendment is not necessary, and that he will not press it.

Mr. SAMUEL

I agree. I think I was wrong to move the Amendment, and that I had better ask leave to withdraw it.

Amendment, by leave, withdrawn.

Mr. D. HERBERT

I beg to move, in Sub-section (1), after the word "necessary" ["such other requirements as may be necessary"], to insert the words "or advisable."

My intention in moving this Amendment is the same as that of my hon. Friend in regard to the last Amendment, and I hope that the Chancellor of the Exchequer will see no objection to it.

Sir R. HORNE

I would ask my hon. Friend not to press it.

Mr. HERBERT

I do not wish to press the Chancellor, but I do not quite see the objection to it. It does seem to me that requirements which are advisable are very much wider than requirements which are necessary, and the whole trend of what the Chancellor has told us to-day has been that he does not want to interfere with what is reasonably necessary or advisable in the interest of the business.

Sir R. HORNE

If my hon. Friend thinks these words will improve the situation I shall be glad to accept them.

Amendment agreed to.

Mr. D. HERBERT

I beg to move, at the end of Sub-section (1), to insert the words, and any income used or reasonably intended to be used for the purpose of the business of the company shall be deemed to be reasonably withheld from distribution. The object is to provide that any income which is actually used for the purpose of the business shall not be held to be income which is unreasonably withheld.

Sir L. SCOTT

I ask the hon. Member to accept the assurance from me, of which I feel no doubt whatever, that the import of these words is already contained in the Clause as drafted and they really add nothing to it. I accept absolutely the criterion implied by the Amendment and merely say that that criterion is already contained in the Clause as drafted and the words are unnecessary.

Mr. HERBERT

I ask leave to withdraw the Amendment and I will further consider what the Solicitor-General has said before Report.

Amendment, by leave, withdrawn.

Mr. SAMUEL

I beg to move, in Sub-section (2), after the word "the" ["amount of the income"], to insert the word "undistributed."

I move this merely for the purpose of clarity. I want the Chancellor to do what he can to avoid any trouble later on as to ambiguity about this Clause.

Sir L. SCOTT

I do not think, even as a matter of grammar, the word "undistributed" can go in here. What the hon. Member means is that the tax shall apply only to such portion of the income as has in fact been distributed to shareholders. That, I think, is already provided for. The principle is obviously consistent with the Clause. Perhaps he will withdraw it now, and we will look into it as a matter of drafting.

Amendment, by leave, withdrawn.

Mr. SAMUEL

I beg to move, in Subsection (3), after the word "is" ["whichever is later"], to insert the word "the."

There again we find ambiguity. It is better to put in "whichever is the later date of the two."

Sir R. HORNE

It is a mere matter of drafting.

Amendment, by leave, withdrawn.

Mr. HOLMES

I beg to move, at the end of Sub-section (4), to insert the words An amount equal to five per cent. upon any sum which shall be assessed and in respect of which Super-tax has been paid under this Section shall be repaid to the company out of the amount of Corporation Profits Tax paid by such company. This is intended to carry out what the Chancellor has promised, that a company will not be liable to Super-tax and Corporation Profits Tax on the same sum.

Sir R. HORNE

If the hon. Member will withdraw his Amendment I will put down a Clause on the Report stage.

Sir G. COLLINS

Can the Chancellor of the Exchequer give some figure as to what loss of revenue will accrue to the State through the acceptance of this Amendment?

Sir R. HORNE

I cannot give any particular figure, but I should expect it to be comparatively small.

Amendment, by leave, withdrawn.

Mr. HOLMES

I beg to move, at the end of Sub-section (4), to add the words The directors of any company which is carrying on a bonâ fide trading business may, in respect of any year or other period, if they so elect, make a declaration under the Statutory Declaration Act, 1835, and submit the same to the auditor of the company, being a member of the Institute of Chartered Accountants or the Society of Incorporated Accountants and Auditors, or an accountant approved by the Board of Trade, as to the amount which they regard as necessary to be retained in the business out of the income of that year or other period, and as to the amount (if any) which they propose to recommend to the shareholders for distribution, setting out the reasons for such retention, and if such auditor is satisfied that a primâ facie case is made out by such declaration that such proposed distribution (if any) would he a reasonable proportion of the income for such year or other period for the purposes of this Section, he may so certify, and such certificate shall he conclusive, subject to an appeal by the Commissioners of Inland Revenue to the Board of Referees. Provided that no company whose directors shall not think fit to make such declaration shall in any manner he prejudiced by the absence of any such certificate as aforesaid. I have mentioned this matter before. I move it formally in order to get it on the records.

Sir R. HORNE

I have already said something upon the subject of this Amendment. I said I was willing to accept a Sub-section on these lines. I have since made investigations, and the result has been that it would be a somewhat invidious task, in fact, too much for an auditor, to give a certificate which should be regarded as conclusive as to whether a company was properly managing its business in so far as the distribution of its profits was concerned. That was strongly brought to my notice, and I was bound to give consideration to that fact. On the other hand, it is plain also that if the Commissioners of Inland Revenue were to be entitled to take an appeal, they must have some information on which to take it, otherwise they would be in really a somewhat false position. Accordingly, I came to the conclusion that it should not take the precise form in which the hon. Member has put it in his Amendment. I am prepared to bring up an Amendment on the Report, carrying out the main idea, which is to put an auditor in the position of giving a primâ facie certificate which will enable the Special Commissioners to leave the matter there and go no further. On the-other hand, if they have grounds for thinking that there was something more-behind the auditor's certificate and something behind the statutory declaration of the directors of the company, under those circumstances the Commissioners would be empowered to investigate the matter and go forward upon the same line as that upon which the Clause was previously constructed, and for which the Schedule provides. Accordingly, if my hon. Friend will withdraw the Amendment, I shall present to the House an Amendment on similar lines on the Report stage.

Amendment, by leave, withdrawn.

Mr. HOLMES

I beg to move, in Subsection (5, a), to leave out the word "nine," and to insert instead thereof the word "fourteen."

The Clause, as it now stands, applies to any company registered after 5th April, 1909, and I desire to make it applicable to any company registered after the 5th April, 1914. The object of the Clause is to catch the tax-dodgers, those individuals who have turned themselves into limited companies for the purpose of avoiding Super-tax. It was not until the high taxation, caused by the War, that this became a general practice. In order to prevent private companies, which have nothing whatever to do with this matter, from being subject to the inquisition of going before the Special Commissioners, I beg to move the insertion of "fourteen."

Sir L. SCOTT

As the Chancellor of the Exchequer said at an earlier stage this afternoon, he is prepared to accept this Amendment, with its corollary, which has been suggested from certain quarters, that we must deal with some companies registered earlier, where they are, so to speak, bought up for the purpose of doing the very thing which this Clause is intended to prevent. The words which are necessary, to carry out that promise given by my right hon. Friend, will be considered between now and the Report stage, and, subject to that Amendment being put as part of the acceptance of the Amendment now before the Committee, we shall be glad to accept the present Amendment.

Amendment agreed to.

Mr. D. HERBERT

I beg to move, in Sub-section (5, a) after "1917," to insert the words: and is not a reconstruction of a company registered before the fifth day of April, nineteen hundred and fourteen. This is a manuscript Amendment to clear up a point, and to bring in a company which may, for technical reasons, fail to come with paragraph (a), as a company registered before the 5th April 1914, as that paragraph has now been amended. This Amendment affects what is commonly known as a reconstructed company. If that reconstructed company is registered after the date provided in paragraph (a), it ought not to lose the benefit, seeing that it originally started its business at an earlier period, and has simply gone through the process of reconstruction, but is really the same business in all ways as the business which was registered prior to 1914.

Sir L. SCOTT

I am not quite sure that this is a convenient place in which to insert this Amendment, or that the Amendment can be accepted in this form. It is carrying out, in effect, the spirit of the undertaking already given by the Chancellor of Exchequer, and if the hon. Member will be good enough to ask the leave of the Committee to withdraw the Amendment, the purport of it shall be considered and incorporated in the Clause which the Chancellor of Exchequer has promised to bring up on the Report stage.

Mr. HERBERT

I am very pleased to beg the leave of the Committee to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. HERBERT

I beg to move at the end of Sub-section (5, d) to insert a new paragraph: (e) The net profit of which for the last completed year of its accounts was not over one thousand pounds. I have moved this manuscript Amendment as a result of what the Chancellor of Exchequer said in introducing this Clause on the Second Reading. He said that there was a considerable number of these companies whose total income was under £1,000, or not over £1,000, and I think he said that, obviously, it would not he necessary to go into these cases. If that is the feeling, I do think it would relieve these small companies of a good deal of anxiety, and would relieve them of the possibility of having the perhaps unwelcome attentions of the Commissioners, if it was expressly stated in this Clause that the Clause does not apply to companies whose net profits for the year in question was not more than £1,000

Sir L. SCOTT

There may be companies which would come within the net of this Clause who are evading payment of duty to a very small extent. There may be others who are evading it to a very great extent. So far as I understand it, the Mover of this Amendment proposes to limit the operations of the Clause to those who are evading payment to a small extent, and to allow those who are evading payment to a great extent to evade the Clause altogether. I do not think that is quite the intention of the Clause, or of the hon. Member; but the effect of the words which he has proposed would, I think, do what I have suggested. I have heard a sin excused from time to time on the ground that it is a very small sin, but I have never heard a sin excused on the ground that it is a very big sin, which, apparently, is what my hon. Friend desires to do by this Amendment. I would ask him to withdraw the Amendment in order that we may consider the words, and per- haps he will take the opportunity of discussing the matter with me before the Report stage. I think there must be some misapprehension.

Mr. HERBERT

I beg leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. HERBERT

I beg to move, in Subsection (5), to leave out the words "not a beneficial owner" and to insert instead thereof the words "trustee or nominee for or on behalf of any shareholder of the company."

The Clause says: In computing the number of shareholders of a company there shall be excluded any shareholder who is not a beneficial owner of shares. Obviously, that is intended to hit the man who, not being a beneficial owner of shares, is either a trustee or nominee for the person you want to get at, namely, one of the principal shareholders of the company. Surely it is a common case to have shareholders of a registered company who are not beneficially interested, because they are trustees, perfectly genuine trustees of a settlement or of a will, for the benefit of some person who is not himself a shareholder in the company, and is not otherwise interested in the company in any way. It seems to me obvious that if you are going to rope in, as the nominees, so to speak, of the man you want to get at, a person who is simply trustee for some widow or children, whom this man you want to get at has never heard of, there must be an error in the drafting. Therefore I propose this Amendment.

Sir L. SCOTT

I think that this Amendment is based on a failure to appreciate the whole of the drafting of the Clause from the beginning to the end of paragraph (d). The scheme of the Clause is to disregard people who are not beneficial owners, in the sense of people who have not a real interest in the earning of the company. We want to get at those persons in whose interest the company is being run, and who effectively control it as a mere cloak or machinery for their own operations, and we thought that the phrase "not a beneficial owner" was a good way of describing them. The objection to the words suggested in their place is that it may be that a man who is in control, and his estate devolves upon trustees of whom there may be more than one, and that therefore there are on the register shareholders who are, in the words of the Amendment, trustees. We do not want to say that they are not to be computed. We want to say that the trust as an entity shall be substituted for the man who has died, and counted as one, and we do that by the insertion towards the end of the words: Persons in partnership and persons interested in the estate of a deceased person or in property held on a trust shall respectively be deemed to be a single person. The trust, therefore, composed of the trustees, would in that case be treated as one person. I would ask my hon. Friend to consider whether, after that explanation, he will withdraw his proposal.

9.0 P.M.

Mr. HERBERT

The point which the Solicitor-General has raised makes me think that there is substantial objection to the words which I have proposed. At the same time, I do think that I have called attention to a weakness in the Clause which should be met in some way or other. I will ask the Solicitor-General to consider this case. You might get a company, say, with 150 shareholders. A hundred of them might be trustees, and the other 50 might be shareholders who would be either controllers of the company or nominees of the controller. Therefore I should be glad to ask leave to withdraw the Amendment if the Solicitor-General will be good enough to consider that point and see whether amendment is required in the drafting in order to prevent being roped in, under these words, the man who is trustee for some person entirely outside of, and apart from, the person who is controlling or assisting the control of the company.

Amendment, by leave, withdrawn.

Mr. A. M. SAMUEL

In view of what has taken place in the earlier part of the evening I do not move the Amendment which I have put on the Paper to leave out Sub-section (8).

Sir NORMAN RAE

I beg to move, in Sub-section (8), to leave out "1922–23," and to insert instead thereof "1923–24."

This is a consequential Amendment.

Mr. A. SHAW

I would like to hear what the Solicitor-General has to say about this, as I am not sure at the moment that, this Amendment is a necessary consequence of the Amendment which has been already made.

Sir L. SCOTT

Yes, I think that it is purely a drafting Amendment.

Amendment agreed to.

Motion made, and Question proposed, "That the Clause, as amended, be added to the Bill."

Mr. HERBERT

I may be forgiven for expressing again my deep appreciation of the way in which the Chancellor of the Exchequer and the Solicitor-General have tried to meet the objections to this Clause. I am still an unrepentant opponent of this Clause for the reason that I believe more than ever, now that the Chancellor has tried to meet us so much, he will have relieved those companies which we want to protect, and the only companies left that will be caught by this Clause will be those that we want to catch, and that will not have the slightest hesitation about going out of the country and therefore getting out of the Clause, or adding 50 members to whom they can give a £1 share apiece in order to put the company outside the Clause. Therefore, I still hope that the Chancellor of the Exchequer, before the Report stage, will consider seriously whether he is not likely to lose on the Income Tax which he will fail to receive owing to these companies going abroad more than he will get from the Super-tax to be recovered under this Clause.

Sir L. SCOTT

I want the Committee to look upon this Clause in this sense. We have taken a pair of compasses, and described a circle with a comparatively small radius. No doubt we shall find in the course of the application of the Clause certain companies here and there beyond the edge of the circle, and it may be necessary to come back to Parliament next year and ask Parliament to allow us to extend the radius slightly. But it is better not to attempt too much at first.