§ 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.
§ Mr. A. M. SAMUEL
I beg to move, "That the Clause be read a Second time."
I put down this Clause as an Amendment to the twenty-first Section of the Finance Act, 1922. I was one of those who supported the insertion of the original Clause in the Act of 1922, because we thought—though I am not affected by it personally—that there should be no shirking of a proper payment of Supertax by those who ought to pay it. We, therefore, armed the Revenue with the weapon contained in this Section, but we fear that the Section may operate in a way which we did not foresee, and that it 315 may operate so harshly as to do a great deal of damage. For that reason I have put down this Clause, which introduces the word "reasonable," so as to make the first portion harmonise with the wording of the second portion of the Section, as it will then stand in the Statute Book.
Perhaps I had best explain, by giving an example, what we mean this New Clause to do. If a company makes, say, £100,000 in the year, out of that sum it may set aside a reasonable proportion for the purpose of extending its operations, or creating a reserve, or providing for depreciations of a reasonable kind. The rest has to be declared as profit, and becomes part of the sum upon which the members of the company have to pay Super-tax. If the company makes £100,000, and in the opinion of the directors £50,000 should be put aside for future use and not declared as dividends, then the company says that £50,000 is divisible and Super tax is to be paid by members of that company on that £50,000. The Special Commissioners may say "No, £50,000 is too little. You ought to have declared at least £60,000." The company might say then, "Very well, that is reasonable. We will pay upon £60,000." It is very much a question of opinion. But in that case the Special Commissioners have no power to assess the company for Super-tax at £60,000. They must assess it for the whole £100,000. That is not a reasonable figure. We ask that the word "reasonable" may be put in.
The right hon. Gentleman opposite may say that there have been no reported cases of hardship. I will concede that that may be true, but the Revenue ought not to put the honest company in peril of its existence by preventing the Special Commissioners from assessing the company at a reasonable amount, if there is an honest difference of opinion as to what the amount divisible ought to be. For example, suppose that this company made £100,000 profit, and the directors only divide £50,000 and its members pay Super-tax on £50,000, as the law now stands the Special Commissioners come along and say, "We assess you at £100,000, although we think £60,000 reasonable. We are bound to assess you at £100,000 because we have no power to vary the figure outside the total amount 316 of profits made." The result would be a thing which neither the Chancellor of the Exchequer nor the Financial Secretary to the Treasury would desire. The result would be to smash the business. Businesses do not keep money liquid. They use all their money; they put it into work.
When these Special Commissioners come along and assess the business at £100,000 because the directors have made an error of judgment, when there may be a difference of opinion only to the extent of £10,000, and call upon that company to pay on £40,000 extra, the penalty inflicted is greater than if these people had been convicted of fraud. That is really an offence against the commonwealth. It is something which would injure trade, and injure the company, anti is likely to throw men out of work. The penalty is so heavy under the Clause as it now stands that, if the directors had been brought into Court and branded as thieves or dishonest persons trying to cheat the revenue, I doubt very much whether so large a penalty would have been put upon them. I concede at once to the right hon. Gentleman who represents the Treasury that we have no recorded case of hardship, so far as I myself know, arising out of the Clause as it stands, but we who are connected with commerce and industry ought not to remain quiet, and allow to continue in existence a Clause which subjects an honestly managed business to the penalty which I have just described.
§ Mr. D. HERBERT
I beg to second the Motion.
The House will remember that in the Committee stage. I put down an Amendment aiming at the same object as that which my hon. Friend is seeking to secure, and I am certain that we should agree on this side to accept any alternative form of words which the Government might desire to carry out this object. In a few words I may give my reasons why I think the Government should accept this Amendment, and. I may also give a definite case illustrative of the hardships which may be inflicted by the section as it now stands. The case in which we are trying to effect a change is that in which there is a difference el opinion as to what should be distributed, and, as a result of an error of judgment on the part of the directors, there is a difference of opinion between them and the Commissioners as 317 to how much—always less than the whole—should be distributed. Then if a company is taxed on what the Commissioners think fair, they have to be taxed on a larger amount. It seems almost a Gilbertian proposition unless there is some very special reason for it. I have had the interest to refresh my memory of the Debate which took place with reference to this Section at the time when it was first passed. Running through the whole of that Debate, not only on the part of the then Chancellor of the Exchequer but on the part of Members on every side of the House, there was recognition that you wanted only to get at that money which was being unfairly withheld from distribution. The words spoken by the right hon. Member for Hillhead (Sir R. Horne), who was then Chancellor of the Exchequer, gave the keynote of the Debate. He said:It is only the extreme cases that are struck at, and we do not wish to strike at any case where there may be varying opinions as to how much should be put to reserve.With regard to the question of hardship, first of all I am entitled to say that this House ought not to wait for a case of hardship to arise before it remedies an error in its own legislation which is calculated to cause hardship. Owing to the member of a very large firm of solicitors, to whom I was referred, being ill, I am not able to quote a case as an example where this money has been actually unfairly recovered. But I am able to quote a case where there might have been a most extraordinary instance of hardship, if the Commissioners had taken a slightly different view of the case from that which they did take. I will put the case shortly. The particular company concerned was formed a year or two before this legislation was contemplated.
It was formed with a very small capital for the purpose of buying the goodwill of a very big retail industrial business of a somewhat fluctuating and slightly speculative nature. It was formed to purchase that business for no less than £250,000. The people who wanted to buy the business had not the money, and they did not dare risk borrowing it on their own liability. They formed a limited company, and then, having put up as much money as they could provide, about £100,000, they borrowed the other £150,000. The terms on which they bor- 318 rowed that sum were that they should repay it by instalments within a period of, I think, 12 years—whether it was 11 years or 13 years does not matter. It was calculated that if the business continued fairly regular and satisfactory, with its natural fluctuation, during the 12 years, the profits which would he derived from it during those 12 years would enable them to repay the money which had been borrowed.
That case was taken before the Commissioners who proceeded under Section 21 of the Act. I was personally concerned in it myself. Fortunately for my clients, the Commissioners took the view that it was not reasonable for them to distribute any of their profit, because they had definitely bound themselves to apply that profit in the reduction of certain capital indebtedness. There was no hardship there, because they succeeded before the Commissioners, after a long hearing, and the revenue authorities did not think fit to proceed any further in the matter. But it is an example of a case where a very great hardship might have resulted. In order to pay the instalments and the interest at the rate of 6 per cent on that borrowed money, the profits had to be somewhere in the neighbourhood of £18,000 a year. That meant that in order to repay the whole they had to earn about, £18,000 a year for 12 years. They paid, by regular annual instalments, let us say., £12,000 a year, and about £8,000 or £9,000 a year as interest during the first year next year still the £12,000 with a little less for interest; and as the years went on a little less still for interest. Therefore, if the business still went or equally successfully, by the end of the fourth or the fifth year there would be a little income which was not absolutely required for payment of the instalment and interest.
Dealing with a fluctuating business the directors could say, "Yes, but we cannot make sure that we will make the same profit next year. Therefore, that comparatively trifling sum of £1,000 or so, which is the surplus for the year, we must put aside till next year and see whether we then want it to make up a diminution of profit." I submit that it would have been perfectly reasonable for the Commissioners to have said, "Yes, we quite agree that this year you can pay nothing; you have to apply it in repaying your debts." But they might have said, "In 319 so far as you have got a, trifle over, and you may in future years have a rather larger trifle over, we consider that there is no excuse for your not dividing it." You cannot debar the Commissioners from giving that decision if they think it right to give it; they would be bound in the performance of their duty to say that they thought the company ought to have distributed £2,000, and that to distribute nothing was, in their opinion, not reasonable. If that had been done what would have been the result? That company would have had to pay Super-tax on about £18,000 in that year, just because they had not distributed £1,000 which the Commissioners thought they ought to have distributed.
I put that case forward as showing the kind of case that must over and over again arise where real hardship will be inflicted upon people who have had not the slightest intention of evading or avoiding or otherwise keeping out of the tax; they have been perfectly bona fide in the decision they have come to, as to how much they should or should not distribute. It is no answer to us now to say that no actual cases can be quoted or that the case which I have quoted is the only one and an unusual one. The answer to that is another question to the Chancellor of the Exchequer: How many cases have been dealt with under this Section up to the present? The Section has, in effect, only just come into operation. I do not know how many cases have been dealt with, but I think they are very few.
The Chancellor of the Exchequer will remember that there is a special procedure under this Section under which a company can produce a certificate by a chartered accountant given upon a statutory declaration by the directors of a company. I have taken the best means I could to ascertain how many cases have come forward under this Section. I have inquired from most of the very biggest and most important firms of chartered accountants in the City of London, and, as it happens, the particular case to which I have referred is the only one I can find known to some half-dozen of the biggest firms of accountants in the City. Therefore I say that genuine cases, where difficulty will arise, have not yet come forward because the Section has not been in actual operation a sufficiently long time, 320 but it undoubtedly will create an immense hardship which I do not think the Revenue wish to have inflicted. They do not wish to take unfairly a tax which they never could receive unless in the form of a penalty and which is chargeable, as to amount, by chance and by nothing but chance. I hope, following the indication given by the Financial Secretary during the Committee stage, the Government will give this matter their careful consideration and at least allow this Clause to get a Second Reading, or, with the permission of Mr. Deputy-Speaker, if they prefer the other proposed new Clause which stands in my name, they might allow that a Second Reading if the Clause now under discussion is dropped. I hope, in any case, they will go as far as they can in order to deal with this point.
§ 9.0 P. M.
When the Finance Bill was in Committee I made a promise on behalf of my right hon. Friend to see hon. Members who were interested in this matter. That promise was duly fulfilled, and I think it is a fair representation of the discussion which took place to say that we arrived substantially at agreement that the Section had only been a short time in operation, and that probably, in the absence of concrete cases of hardship, no case had been established at this, stage for its alteration. That was the position at the end of the informal discussion which took place, but it is my duty to the House to say a few words in reply to the points put by my two hon. Friends opposite. This Section was embodied in the Finance Act of 1922 after very careful consideration, and with the assistance of hon. Members opposite, for the express purpose of trying to provide a safeguard against the formation of one-man companies whose obvious object was to avoid the payment of Super-tax by holding up the distribution of a reasonable part of the profits. Under the first part of that Section there is a reference to "a reasonable part" of the profit, and that is subject to two considerations as far as the Commissioners are concerned, namely, that regard should be paid to the current needs of he business and also to the needs of the business from the point of view of development. Accordingly, we begin, as regards the early part of the Section, with that very definite consideration in our minds. When we get to the end of the 321 Section it is true, as hon. Members suggest, that the wording is to the effect that in the event of the Commissioners taking the view that there has not been a distribution of that reasonable part of the profit, then a company of the kind specially treated under this Act is to be liable for the whole profit, and, on the face of it, there appears to be some kind of hardship in that state of affairs.
§ Mr. A. M. SAMUEL
Is my hon. Friend correct in saying that the Section specifically mentions the "whole" profit?
I understood that the object of my hon. Friend's Amendment was to limit the second part of the Section to "such reasonable part of the profit." I am afraid he himself has fallen into error on that point.
§ Mr. SAMUEL
If the hon. Member will look into my Clause and look into the Act, I think he will find that no such words as "whole income" are used, and "whole" is the word which he used.
§ Mr. HERBERT
I have the Section here before me, and it is really open to two different interpretations, though I have no doubt that the one which the hon. Member for Farnham (Mr. Samuels) would put upon it is probably, in law, the wrong one. The Section states that where a companyhas not distributed a reasonable part of its actual income …. the Commissioners may direct that for purposes of assessment to Super-tax, the said income, etc.I think that the words "said income" mean the company's actual income. We say it is unfair, and that the words "said income" should mean and would probably be read by a layman to mean "the said reasonable part of such income."
I am obliged to my hon. Friend the Member for Watford (Mr. Herbert), for so fully confirming what I was endeavouring to say. I know this Section well, if I may say so, and I have never had the least doubt about its effects. On the face of it, is there a real hardship in that state of affairs? I think not, when we go back on the history of the Section and remember exactly what it is designed to effect. In other words, the object is to take away this kind of cloak from certain concerns and put them back in the position of a partnerships in which of course they would 322 be exposed to tax on the whole profits. If that be the idea behind the Section and it seems to me beyond all doubt that was the idea, then the latter part is explained and I think probably to a very large extent that is a justification of the phrase which is there introduced. Be that as it may, after the discussion that I had with my hon. Friend the Member for Farnham (Mr. Samuel) and others, it was admitted, as has been quite frankly stated in the discussion to-night, that so far we have not been able to produce any case of hardship under this Section.
It was put on the Statute Book in 1922 but did not come into operation until 1923 and prima facie there might be some kind of argument that there has not been much opportunity of getting individual cases. On the contrary, I are advised that already some hundreds of cases have been considered under this Section and no difficulty of a substantial character has emerged. That being so, I suggest to the House it would be very unwise to alter a provision the object of which commends itself to hon. Members generally, because, quite clearly we cannot open any door which will enable one-man companies to evade the payment Super-tax and get rid of a duty to the revenue involving what may be very large sums. Accordingly, I understand my hon. Friend the Mover does not desire to press this new Clause unduly to night, on the understanding which I gave him that we will have another year's experience of the working of the Section before we come, as my right hon. Friend the Chancellor indicated we would come, to this Box next year and if by that time cases have been provided, then quite clearly the House will take into consideration any modification which is required. I have no doubt in my own mind the matter will work out quite smoothly and possibly with that statement my hon. Friend the Mover will withdraw the new Clause
§ Mr. SAMUEL
I am content to accept the hon. Gentleman's assurance, but will he go further and say that, if next year it is found necessary to review this Clause, and if proceedings are now, or in the next few months, begun against any firm, that firm shall not be debarred from getting the benefit of any modifica- 323 tion that may be put into this Clause as the result of the coming year's experience?
§ Mr. HERBERT
May I ask whether that means that the hon. Gentleman is going to accept the invitation of my hon. Friend to promise to introduce retrospective legislation, and does he not see that his own objection to retrospective legislation ought to lead him to accept some Amendment of this kind this year?
I am quite satisfied that there can be no case of hardship, and I could not give a pledge to do what the hon. Member suggests. I think the House will agree to let this Clause go out for another year, and then we earl decide what to do.
§ Motion and Clause, by leave, with drawn.