HC Deb 08 July 1924 vol 175 cc2059-68

Section twenty-one, Sub-section (1), of the Finance Act. 1922, shall be amended so that the words "The said reasonable part of such income" shall be substituted for the words "The said income." in line fourteen of the Sub-section.—[Mr. A. M. Samuel.]

Brought up, and read the First time.


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

This is merely a drafting Amendment of the Act as it now stands. We wish to insert the words "reasonable part of such." We propose this new Clause in order to bring the first part of the first Sub-section of Section 21 of the Act of 1922 into complete harmony with the concluding words of the same Sub-section. We are trying to make the first part of the first part of the Sub-section harmonise with the words of the last part of the Sub-section, which read: 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 or advisable for the maintenance and development of that business. Under Section 21 of the Act of 1922 the Company to which this Section applies must distribute a, reasonable part of its profits so that the recipients will include that proportionate amount in their Super-tax returns. If the company does not distribute a reasonable part of its profits the Commissioners may direct that, for the purposes of assessment of its members for Super-tax, the said income of the company from all sources shall for the year or other period be deemed to be the income of the members. What is the "said" income? Why not "reasonable part"? I took a considerable part in getting this Clause substituted and put into the Act of 1922, and after remarks I made in the Debate upon the original Clause the late Chancellor of the Exchequer got up and said he would withdraw his original Clause. We had a consultation with him behind the Chair, and he then undertook to draw up this present Clause which we now seek to amend. We had no idea when we agreed to the Clause that it would be interpreted in the way it has been. We had no idea of the ambiguities that would arise out of it. May I give an instance to illustrate what I mean? If a company has made £20,000 in the year and it has decided to distribute £12,000 to its members and to hold back £8,000 for the development of the company, that may be thought to be a reasonable amount to hold back, and the Commissioners may consider it reasonable and accept £12,000 for Super-tax purposes; but if, by chance, the company has distributed only £11,000 and has reserved £9,000 the Commissioners may come along and say, "You have not distributed a reasonable amount," and then they have power under this Act to fix the assessment, not at the admittedly reasonable£12,000, but at£20,000, the whole amount of the profits for the year; and not the reasonable part of the profits. That is, I submit, a great hardship for the company, and it really defeats the intention of the Act, which provides for regard to be had for the maintenance and development of the concern. I suggest we ought to give the Commissioners discretion, and we can do that by importing into the Clause the words "reasonable part of the income," thereby making the earlier part of the Clause harmonise with the closing words of the Sub-section. For that reason, I beg to move that this new Clause be read a second time.

The FINANCIAL SECRETARY to the TREASURY (Mr. William Graham)

I am going to ask the hon. Member not to press this new Clause, because its effect will go very far beyond what he himself thinks. The Amendment in the Act of 1922 to which he has referred was designed to impose a check upon attempts to evade the payment of Super-tax. Where the amount distributed was regarded as a reasonable part of the income the Special Commissioners were given power to assess the income accordingly. I believe the difficulty suggested by the hon. Member has been more than met by the proviso which was inserted in the Act of 1922 to the effect that the Commissioners, in fixing the amount of the income, should have regard not only to the current requirements of the company but also to the needs of the business from the point of view of future development. I am advised that the effect of the hon. Member's new Clause would be to weaken the protective value of this Clause from the point of view of the evasion of Super-tax, and it would tend to put these people in a position to evade that Super-tax. If there is any doubt or ambiguity about the effect of the proviso in the Act of 1922 the Government would agree with the hon. Member in trying to remove it, provided also that we do not in any way weaken the safeguard which the Clause is intended to provide. If therefore the hon. Member will withdraw the Clause I am quite willing to look into the matter to see if there is any ambiguity as he has stated, and to try and remedy it between now and the Report stage. But we cannot possibly do anything which would weaken the Clause as regards the protection it affords against the evasion of the payment of Super-tax.


I am obliged to the hon. Gentleman, and I think if he will look at this matter from our point of view he will agree with our argument Let me say here and now we do not desire for a moment to weaken the safeguards of the Clause against Super-tax evasion. We will assist the hon. Gentleman in every possible way to get his proper and fair Super-tax, but I want to point out again that if a company has earned £20,000, and it can be deemed reasonable that it should distribute only £12,000 and reserve £8,000 for future requirements, we desire to have it made clear that the Commissioners have the power, if they think£12,000 is the right amount to distribute, and that they should assess the distributable income at £12,000, and not at £20,000, as they do now. They must be free to make allowance for the maintenance and development of the business. If the hon. Gentleman will meet us on these lines we will withdraw the Clause, as we have no wish to do anything to defeat the original intentions of the Clause as to Super-tax. I am certain that the way in which the Treasury or Revenue has interpreted the Clause is very penalising and unfair. If the hon. Gentleman is willing to come to some arrangement with us as to an amending Clause, I will withdraw my Clause on the understanding that he will not allow the Clause in the Act in future to be interpreted without discretion allowed to the Commissioners, as it is at the present moment.


May I just remind the hon. Gentleman of an Amendment which stands in my name further down on the Paper to the effect that The amount of income of any company which under Section 21 of the Finance Act, 1922, the Special Commissioners may direct shall for the purpose of assessment to Super-tax in any year or other period, be deemed to be the income of the Members, shall notwithstanding anything in that Section contained not exceed such part of the income of the company as for the purpose of that Section shall be a reasonable part thereof for the company to distribute. This Amendment is intended to meet the case quoted by my hon. Friend, and it does so in somewhat different words. I suggest there should be no difficulty in the Government accepting my Amendment. I would remind the Financial Secretary that I sent him a draft of that Amendment two or three weeks ago when the question had been raised in the City of London, and it had been assumed by some financial papers and authorities that there was an error in the drafting of the Finance Bill. For my part I have not the slightest doubt whatever that that is so. The hon. Member for Farnham (Mr. Samuel) will remember that it was due to an Amendment moved by me that the first draft of the Clause was withdrawn altogether, and the right hon. Member for Hillhead (Sir R. Horne) subsequently put in the present Clause. Never for one moment was it suggested that the person who honestly made a mistake or had a difference of opinion with the Income Tax Commissioners as to what was a reasonable amount to be distributed should be penalised simply because of an error of judgment. That seems to me to be grossly unfair. In view of the fact that the Government, until this afternoon, have given us no hope whatever of what they intend to do—on the contrary, the Financial Secretary wrote definitely to me that he feared there was no chance of the Government accepting my Amendment—and after what has passed now, I ask to have something a little more definite than the statement of the Financial Secretary, before this Amendment is withdrawn. I hope my hon. Friends will press with me for an assurance that, in any case, we shall receive the support of the Government in some Amendment which shall rectify the particular unfair penalty in the Clause as it now stands.


This Amendment was put down on behalf of the Association of Chambers of Commerce. I appreciate the assurance that the Financial Secretary has given the Committee, but I think we might ask for some rather more definite assurance. I feel certainly that the Financial Secretary will agree with me in this. It is not an attempt in any way to enable the one-man company to dodge its Super-tax. I think the whole House agrees that the formation of a small company for the express purpose of not dividing the profits to dodge Super-tax is a thing we want to stop. But there are many companies which, for various purposes, do not wish to divide a great proportion of their profits. It may be that a company is in a bad financial position. There are hundreds of companies to-day, after the 1920 slump, who are only carrying on because their banks are allowing them to do so on the proviso that the profits shall go to reduce the assistance that the banks have given to them. If the members of that company do better, we do not ask for a moment that they shall be relieved from paying their Super-tax, but we do ask that if, for one reason or another, they decide not to distribute their profits, a reasonable arrangement shall be made between the Inland Revenue and the members of that company as to what a reasonable distribution is. At the present time the Commissioners of Income Tax have no power to make a reasonable arrangement. If they disagree as to the amount that should be divided, they are compelled to charge Super-tax on 100 per cent. of the profits. If the Financial Secretary will say that he will put in words which will meet that great hardship—and we do not want to assist anybody to dodge their fair Super-tax—I shall be only too glad, as my name is on the Amendment and as I am speaking as the secretary of the Associated Chambers of Commerce, to join my hon. Friend in withdrawing this Amendment. The Financial Secretary should bring in words to give a reasonable relief to the people who are unable, very often because of the financial pressure from their banks, to distribute their profits.


I think we have now a pretty clear idea of what it is we want to do, and what it is we do not want to do, in making any alteration in the law as it at present stands. I examined the Amendment with some care, and whilst I agree with the object of my hon. Friend the Member for Farnham, I do not think the Amendment is drafted in a way which the Financial Secretary could accept as it stands. In the Act itself the Special Commissioners are not directed to say what is a reasonable amount to be distributed by the company; they are only directed to say what is not a reasonable amount. I do not think the words, therefore, could stand as they are, because there is no reasonable amount mentioned in the Act. That objection, as the hon. Member for Watford (Mr. D. Herbert) has pointed out, does not appply to the Amendment which stands in his name. This Clause says that the amount to be charged is not to exceed such part of the income of the company as, for the purpose of that Section, shall be a reasonable part thereof for the company to distribute. That does not seem clearly to indicate who is to decide what is a reasonable part, but I want to suggest to the Financial Secretary that, if he amended the last line, so as to make it clear by whose authority the reasonable part ought to be decided, he might then quite well give an undertaking that he will accept the Clause of my hon. Friend in the words in which it is put down.


My Amendment was particularly drawn in such a way as to meet the point raised. It is not to exceed such part of the income of the company as, for the purpose of that Section, shall be a reasonable part, and what is to be a reasonable part for the purpose of that Section is the very point which, under the Section as it at present stands, the Commissioners have to decide.


I do not quite agree. If the hon. Member will read the Section he will see that the Commissioners are not directed to say what is a reasonable part, but only what is not a reasonable part.


There is one point in Section 21 of the Act of 1922 in which there is a refund of Corporations Profits Tax in respect of the amount that is charged for Super-tax, and it therefore follows that Section 21 is entirely disturbed, and it is necessary that the whole matter should be taken into consideration. In dealing with this matter it is desirable to have regard to the actual position as we find it. In the case of a company that has not distributed a reasonable part of its income, it is the practice to treat that limited company as though it were a partnership, and the assessment therefore made upon the company for Income Tax—which forms the basis of the assessment for Super-tax, which is levied upon the person in the name of the company, as mentioned in Section 21—is not the amount of the distributable profits, but the amount of statutory income, calculated according to the Income Tax Act. As the Corporation Profits Tax ceases to be levied for any accounting period after the 30th June, the whole balance of the, treatment under this Section is lost, and I suggest to the Financial Secretary that he should agree, if this Clause is withdrawn, that the parties interested should be called into consultation, so that a new Clause should be inserted which restores the balance under the Act of 1922. No one who has had experience in the working of this Section will agree that the decision of the Special Commissioners as to the way in which this operates is what was intended when the Finance Act, 1922, was passed. It, was clearly intended then that a reasonable amount should be distributed, and that the reasonable amount should be brought into charge, but now we have the view of the Special Commissioners, who have held that they have no discretion in the matter if they have the slightest difference as to what they find is a reasonable amount, and they have no alternative but to bring in the whole assessment and to make that liable for Super-tax. That was not intended by the Finance Act, 1922. What is a reasonable amount must always be a matter of opinion, as it frequently happens that this is a matter of keen controversy between the directors. It is especially unfair that on a decision of the Special Commissioners as to what is a reasonable amount, and that amount differs from the view of the directors, the whole amount must be brought into charge for Super-tax. It must be remembered that the Special Commissioners are adjudicating at a later date, when it may be experience has falsified the perfectly justifiable expectations of the directors. I appeal to the Financial Secretary to the Treasury to come to the arrangement suggested by the hon. Member for Farnham (Mr. A. M. Samuel), so that the parties interested may find what is the real position contemplated by the Act of 1922, affected by the position as we find it to-day.


From the practical experience of Members of the Committee, there is a difference of opinion, not confined to one part of the House, as to the way in which this Section in the Act of 1922 works out. My own impression of the distribution has always been that there is adequate safeguard in the proviso to the main part of the Act of 1922, that part which I quoted earlier in the Debate, which indicates that regard must be had not only to the current needs of the company's business, but also to such other requirements as may be necessary or advisable for the maintenance and development of that business. As I said earlier, if hon. Members will agree to withdraw their Clause, I will undertake to consult with them between now and the Deport stage, subject to the condition that there must be no weakening of this Section from the point of view of the safeguards against the one-man companies. On that basis, it is a matter which we might clearly discuss. Perhaps my hon. Friend will withdraw the Clause.


Might I be allowed to put one further question? The proviso which an hon. Member put in at the end of his words just now, I am sorry to say does not altogether please me, because I have had it indicated to me pretty strongly in this letter, to which I have referred, that there was, a short time ago, a definite difference of opinion between the Government and ourselves, and, therefore, with all respect, and I hope the hon. Member will not think I am saying it offensively, I do not think that I quite like the proviso. I would rather like the Financial Secretary, if he prefers my Amendment to my hon. Friend's, to accept my Amendment. Let that go in now and then we shall have an earnest that this matter will be dealt with on the Report stage.


Let us be clear on this, as it is of so much importance to us, and the revenue does not get very much out of it one way or the other. Will the Financial Secretary meet us and see if we can draw up an Amendment to be put in on the Report stage? We shall be perfectly satisfied if he will merely adopt the words already in the Act.

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