NEW CLAUSE.—(Amendment of Rule 8 applicable to Cases 1 and 2 of Schedule D, Income Tax Act, 1918.) (Hansard, 21 June 1926)

§ Sir VANSITTART BOWATER
I beg to move, "That the Clause be read a Second time."
I hope this may have a better result than the last Clause, with which I was in heartfelt sympathy. This is to remove what at present is a very great injustice to some taxpayers. Everyone sympathises with the Chancellor of the Exchequer. He is anxious, and we are anxious that he should get all the grist to his mill that he can, but I am sure he would wish to get it in a thoroughly constitutional way and without causing any injustice. This Clause simply protects the new trader. I will give a concrete instance, which I know to be a fact, where a man started business in the boom yeas, 1920, and was fortunate to make a net profit of £5,000, and not having been in business before, he was charged Income Tax on that £5,000. The next year he made £3,000, and had to pay the full rate of Income Tax on that amount. The next year he made only 21,000 and still paid the full amount, but, unfortunately for him, in the fourth year he 119 made a loss of some £200 or £300. He received an assessment based on his trading for the three years and was debited with a third of the proceeds of the, three years' trading. It may be argued that in the next few years he will get that back again, but it is not easy. In the next year and the following year he may make a hundred or two, but he can never be reimbursed for the tax he had to pay in the year during which he actually made a loss. If the right hon. Gentleman will only look at it from that point of view I think he will see the fairness of the Clause. I understand there are not many of these cases. I am told if this man had gone out of business in the fourth he would not have had to pay Income Tax, but goodness knows we do not want to send people out of business. We want to encourage them to go in business and earn money to help the Chancellor of the Exchequer.
I understand even the Revenue officials realise the hardship and think, in their own minds, that it should be remedied. I understand it can be done very easily, and it will cost the Treasury very little. If the right hon. Gentleman can only see his way to accept this, he will be taking away what he must realise is a great injustice to the new trader. The Clause speaks for itself. I am sure the Chancellor would not like anyone to have to pay an unjust tax on a business which has absolutely made a loss and be charged on the three years' average when he has only been in business three years. This is to help the new trader and we ought to give him all the encouragement we can.

§ Mr. CHURCHILL
It is quite beyond my power to meet my hon. Friend. There are a great many reasons, from which I will only select a few, which make it impossible and undesirable to accept this new Clause. First of all, it runs counter in several respects to the procedure and machinery for the transition from the basis of the three years' average to the basis of the previous year, and it runs counter to these in such a way as to impose on the Exchequer a loss which I am creditably informed will not be less than £500,000. When I proposed to make this transference from the three years average to the previous year basis, it was by no means 120 certain that the coal stoppage would occur, and there were good hopes that it would be averted. Therefore I might have looked forward to making the change next year without having to bear any exceptionally heavy strain or burden through loss of Revenue. But owing to the fact that we have already had a stoppage of a large portion of the industry of the country for eight weeks, which may go on for several weeks more, I must look forward next year to a heavy shrinkage in the income earned by businesses during the present year. Whereas on the three years' system it would have been averaged with two good years, and I should only have had one-third of the short-fall next year, I shall now get the whole of that short-fall concentrated upon that year under the transition to the previous year basis.
I have quite clearly to consider the position. It is true that the relief the Income Tax payer will get is relief which will only go to that very class of taxpayers who will be suffering most by this stoppage and the losses which have resulted from it. It will be giving a measure of relief in the very direction where that measure of relief is most needed. They will not have to pay on the high profits of the earlier years shortly after a year when they have had bad trade. But the very fact that we are making this change and that the taxpayer will get an easement and the Revenue a loss—the fact that it is working out in this way—makes it all the more essential that we should strictly adhere to the safeguards that are provided and not go beyond the recommendations which the Royal Commission approved in regard to the allowances to be made for hard cases in the transition period. My hon. Friend asks us to go beyond the arrangements proposed for their relief by the Royal Commission, and he has asked us to go beyond them in an entirely one-sided way. An option is to be given to the taxpayer to reopen his liability if it suits him, but no corresponding option is given to the Revenue to reopen the liability if it suits them. A one-sided option of this kind is always exercised to the detriment of the State, whereas no countervailing reclaim is obtained by the State in cases which are extremely fortunate for the taxpayer and detrimental to it.
121 Then my hon. Friend's proposal is based entirely upon Rule 8. In that case it only operates during the current year 1926–7. Rule 8 is repealed by the present Bill, and its repeal is a definite part of the process of transferring the tax from the three years to the previous year basis. So he is hanging his proposal on a peg which it is the object and the effect of the Bill to cut away. If my hon. Friend only intends it as a temporary measure to meet cases of harship which may arise owing to the proposed change of basis I must say I cannot accept any proposal which goes beyond the definite suggestion of the Royal Commission. They considered this very carefully and they make provisions which are incorporated in the Bill to meet hard cases, and an option is given in certain circumstances to enable the taxpayer who is very hard hit, and feels himself invidiously affected by the change, to continue being assessed upon the three years' average for 1927–8 and 1928–9 provided he likes to accept that for the two years put together. The circumstances of our national life at the present time have made this transition much more favourable to the taxpayer than I had any reason to expect at the time when I introduced it, and I cannot go beyond the provision approved by the Royal Commission in that respect. If the hon. Member intends to make it a permanent provision to cover future years and to substitute this system for the proposed system, it is a method which will not answer, because Rule 8 will have passed away. Whether he proposes it as a permanency or merely to meet the transition period of this single year I cannot, for the reasons which I have stated, entertain it, nor can I face the loss of revenue of £500,000 which would be incurred, in addition to the undoubted disadvantage which the revenue will suffer, to the benefit of the taxpayer, in the next year, consequent upon the change we are making.

§ Sir FRANK MEYER
In spite of the refusal of the Chancellor of the Exchequer to accept the Amendment, I should like to say a few words in its favour, because the Amendment has been very carefully thought out by people of experience in these matters. In spite of the hilarity with which it was received by hon. and right hon. Members opposite, I would impress upon the Committee the 122 fact that this is a very serious question and one which involves great hardship on certain individuals. Whatever may be the principle of taxation in this country—there are very different views on that subject—the Committee will, I think, agree that there is one definite principle that should be established in all eases of Income Tax, and that is, that a man shall not over a period of years pay taxation on a greater amount than the total profits he has made over that period of years. Whatever may be the system under which Income Tax is administered, whether on the three years' average or on individual years, I do not think any hon. Member will dispute that no one should pay taxation on a greater amount than the profits he has earned over a period of years.
May I give a few figures to show clearly why this Amendment has been moved and what is the hardship that is involved in the present system At the present time when a new business is started the owner of the business has the option for the first three years of paying on the profits of the individual year or on the average of the preceding years. He pays at the end of the first year on the first year's profits, and at the end of the second year he can pay on the profits of the second year or on the average of the first and second years. At the end of the third year he can pay on the profits of the third year or on the average of the first, second and third years. After that, his option ceases, and at the end of the fourth year he has to pay on the average of the first, second and third years. I will give the figures supplied from an actual ease. I will give round figures, because they are simpler to deal with. A new business is started. In the first year it earns £1,000. The owner of the business pays tax on the £1,000 at the end of the first year. In the second year, the business made £800, and, naturally, the owner exercised the option of paying the tax on the £800 and not on the average of the first and second years, which would have been on the average of £1,800. In the third year the profits were £500, and he paid on £500; but in the fourth year he only earned £300 and he had to pay on the average of the first three years, which meant that he had to pay on £766. In the fifth year he only earned £200, and 123 he had to pay on the average of the previous three years, which meant that he had to pay taxation on £533. In the sixth year he earned £100 and he paid, on the three years' average taxation, on a sum of £333. In the aggregate, in six years his profits had been £2,900 and he is paying taxation on £3,900. Is that equitable? All we are asking for, and the whole pith of this Amendment is in one sentence, is that in such cases the taxpayer shall be entitled to be charged on the actual amount of profits.
The Chancellor of the Exchequer tells us that he is altering the law during the current year, that in future the average is to be done away with and people are to pay on individual years. My answer is that in future this hardship will not arise, but that does not alter the fact that the hardship has arisen during the last three or four years, and especially during the last period. New businesses made large profits in 1919–20 and possibly up to 1921, but a great many of them have been on a continually diminishing scale since then, and as a result there are many cases—a big case has been referred to by the hon. Member for the City of London (Sir Vansittart Bowater) with which case I am familiar, and there are many small cases—of small businesses set up by ex-service men and ex-officers with a capital of £500 or £600 which have been very hardly hit. All we ask is that they shall not pay more taxation than on the total profits which they have earned. We ask that this Amendment shall be accepted by the Government in order that that state of affairs shall be remedied, pending the coming into force of the new system, on which they will pay on the profits of each individual year. The new system will not help the people who during the last three or four years have had these diminishing profits.
Where there has been a diminishing scale, if there comes a sharp rise in the scale of profits, they would pay less if the three-years' average continued, than they will have to do in future by paying on the profits of an individual year. Therefore, from that point of view the doing away with the three-years' average will be no remedy for them at all. It will mean that they have been kicked in the past and that they will be kicked in the future. All we ask is that they should 124 have what seems to me very elementary justice, and I am sorry that the Chancellor of the Exchequer has not seen fit to accept the proposal. I am not very convinced by the arguments he has put forward. Of course, it is only a temporary measure and is not intended to interfere in any way with the change over from the old system of average to the new system. I am not an expert on the legal side of this question, but the Amendment seems to me to be one which might have been accepted and fitted in with the change proposed to take place this year. For these reasons, I am a strong supporter of the Amendment and I very much regret that the Chancellor of the Exchequer has not seen his way to consider it favourably