NEW CLAUSE.—(Alteration of basis of assessment for Schedule E.) (Hansard, 15 July 1924)

§ Sir HENRY BUCKINGHAM
I beg to move, "That the Clause be read a Second time."
I have another Clause on the Paper dealing with an alteration of the basis of assessment for Schedule D, and, although I shall propose, with the permission of the House, later on to withdraw both my Clauses, I wish first to have an opportunity of saying a few words with regard to them. They cover a very large subject, and I am perfectly conscious of the fact that, as they appear on the Paper, they are not altogether practicable from the taxing authorities' point of view. But, owing to the danger of the Clauses being ruled out, acting on the best advice I could obtain, I included certain words to provide the taxpayer with an alternative choice of methods under which he should be taxed. With my experience of Income Tax administration, I am quite conscious that any such suggestion is quite impracticable. The meaning of the second Clause which stands in my name is that the three years' average should be abolished, and that the assessment of Income Tax under Schedule D should be made on the preceding year's profits.
I am quite aware that the few words in which I have described such a suggestion in the proposed Clause would not be at all sufficient to make that suggestion practicable. Still the Royal Commission in 1920 was very much in favour of the alteration, and they reported that the chief benefits 292 they saw in taking the preceding year's profits as the basis of liability under Schedule D were (a) that it would make the amount of profit assessed correspond more closely in point of time with the amount of profit actually earned, (b) that it would be a very important step in the direction of uniformity, and (c) that it seemed to be the universal desire. "Therefore," say the Commission, "we have no hesitation in recommending that the change be made." I do not think I can add very much to those suggestions of the Royal Commission, but I should like to say in regard to the first of the three—that the alteration would make the profits assessed correspond more closely in point of time to the amount of profit actually made—that we all know that the larger and better organised businesses are able to so arrange their assets that the demand for Income Tax based on the three years' average does not cause any hardship. But the great majority of smaller businesses in this country have to depend for payment of Income Tax on the profits they are actually making and handling at the time the Income Tax is due, and I venture to suggest that that may be one of the reasons why so much Income Tax is now in arrear. If a small trader has to pay on an average which may be larger than his actual amount of profit in the previous year he may be unable to raise the necessary money, and I venture to suggest there is very great hardship on these people and that the alteration of the basis of taxation from the three years' average to the profits of the year preceding the year of assessment would help them very much. It would also enable the Income Tax authorities to collect the money much more easily.
I know perfectly well there are many difficulties in the way of carrying out this suggestion, and I am not quite satisfied that the desire for the change is universal. There are many cases which fall under various rules in Schedule D which require very close examination in order to avoid the hardship that may arise, for example, from the possibility of a large loss being made in one year which at present is spread over the three years. There are various other things I could mention to 293 the House, but I suggest, with all due deference to the House, that it is not quite the proper assembly to deal with the details of such a far-reaching change. I am going to ask that both as regards Schedule D and Schedule E the Chancellor of the Exchequer will be good enough to appoint a Committee, consisting of Treasury officials and others versed in Income Tax administration, and also in mercantile pursuits, to go into this very large question which I am raising and only just slightly touching upon this after- noon. I also propose to ask that if such a Committee is appointed it shall inquire into the question of Schedule E assessments also. Although the Royal Commission formed a different opinion as to the correct method of assessment for Income Tax under Schedule E as compared with Schedule D they said that in their opinion the method of assessing Income Tax under the latter Schedule on the actual year of assessment was ideal. That is just exactly the opposite to what they said about Income Tax assessment under Schedule D.
The ideal does not carry us far, and I think I am right in saying that the Treasury officials have found it anything but ideal in practice, for it is obviously impossible to correctly assess in advance the amount of salaries and commissions of a varying character, as salaries may rise or fall and commissions are always variable. It is impossible for any man to return, at the beginning of the year, the amount of salary or commission he is going to be paid during that year. I think the Financial Secretary will agree that the practice has utterly failed, and I am inclined to think that the suggestion I am putting before the House will be welcomed by the Inland Revenue Authority, as the present method leads to an enormous amount of labour and expense in consequence of the necessity of making very large numbers of additional assessments or allowances. I do not wish to press the point on the House now, but, having made it, I hope the Chancellor of the Exchequer will see his way to agree that a Committee shall be formed to inquire into this very big question, not only from the taxpayers' point of view but from the Treasury point of view as well, because the continuity and equality of revenue derived from income tax is very necessary 294 from the Treasury point of view. Therefore, it is just possible that the change from the three years' average to one year's profits might, in the opinion of this Committee, be found to be of too unequal a character, and result in a revenue not sufficiently stable. I am inclined to think that will not he so, because seven-tenths of the Income Tax is derived from more or less stable sources. All those, however, are matters for debate. I think I have foreshadowed some of the difficulties which must arise, and all I ask is that I may be allowed to withdraw these Clauses, but, before doing so, I hope the Financial Secretary will he good enough to say whether my suggestion is acceptable to the Treasury.

§ Mr. HANNON
I beg to second the Motion.

Mr. GRAHAM
As the hon. Member has dealt with these two new Clauses together, I will reply to both at the same time, because the hon. Member has indicated to the House that he does not intend to press these Clauses, and, accordingly, hon. Members will not expect a detailed reply. As regards Schedule E, the first new Clause standing in the name of the hon. Member suggests that we should alter the present foundation of the year of assessment to the income of the year preceding the year of assessment. As regards Schedule D, which deals with ordinary business profits of commercial and other undertakings, it is suggested that we should alter the present practice on the application of the person assessed to the income of the year preceding the year of assessment. That is the hon. Member's proposal. I need not say that all these proposals were very carefully considered by the Royal Commission.
As regards the suggestion which is made under Schedule E, it would be wrong if I held out any prospect of the change being made from the year of assessment to the year preceding. There is not a great difference from an administrative point of view, but it is important to keep as near as possible to the year in which the profits are being made. I imagine that what the hon. Member has in mind is that there is something of a fluctuating character in the method of assessment, but in case of fluctuation we take the basis of the pre- 295 ceding year. I hope that goes a very long way to meet any case of hardship.
The problem as regards the hon. Member's second new Clause is more important, because it involves the substitution of the preceding year for the three years' average. I know there are differences of opinion on that point. As a member of the Royal Commission on Income Tax in 1919 I was very much impressed by the fact that practically no evidence was submitted in favour of the three years' average. When we have a three years' average, we get away from the time the profits are being actually made, and we land ourselves in certain administrative difficulties, and this contributes to the accumulation of arrears which we all want to see kept down. The case for the three years' average is on account of the fluctuations from year to year, and it also enables the Exchequer to estimate more closely what the revenue will be year by year.
My own opinion is entirely in favour of the year of assessment, but I know many hon. Members take another view. I do not need to argue the case further, because later on I hope there will be an opportunity of considering this question. I know that on a former occasion this point was raised by the right hon. Gentleman the Member for Hillhead (Sir R. Horne) who said that at a time of financial dislocation and industrial distress, it might be a little hard to make a change of this kind.
As regards the appointment of a Committee, I feel that this House has had a very liberal dose of Committees up to the present time. The matter was inquired into at great length by the Royal Commission. The facts are probably familiar to hon. Members, and I know they are very familiar to the Inland Revenue and Treasury authorities. I do not think an inquiry by a Committee is required, but I may say that I do not think that any change would be introduced without consultation with hon. Members who are interested, and I imagine that would meet the situation. I do not think the hon. Member who moved this new Clause will dispute what I have said in regard to the situation, and I should think this matter will came up for decision probably next year or the year after.

§ Sir H. BUCKINGHAM
I am much obliged for the reply which has been given by the Financial Secretary, and for the information which he has given me, and the promise that the consideration of this very important change will come before the authorities at the Treasury before this time next year. The hon. Member also said that the appointment of a Committee was unnecessary. In view of the evidence given before the Royal Commission and the decision they arrived at, this may be so, but I hope this matter will be considered very shortly, and that the Government will take into consultation such hon. Members of this House, and those outside, this House, as may be helpful in coming to a conclusion on this important matter. I wish to refer to one other point about Schedule E Assessments—

§ Mr. SPEAKER
I thought that the hon. Member got up to withdraw his Motion. He is not allowed to make a second speech.

§ Sir H. BUCKINGHAM
Then I ask leave to withdraw my Motion.