HC Deb 21 June 1926 vol 197 cc133-6

Notwithstanding anything contained in Rule 3 to the Rules applicable to Cases 1 and II of Schedule D, where any royalty or other suns is paid to a person not resident in the United Kingdom in respect of the user of a patent outside the United Kingdom, the amount of such royalty or other sum shall be allowed as a deduction in computing the balance of profits or gains of the trade of the person paying the said royalty or other sum in respect of such user of the patent, and the provisions of Rule 21 (1) and (2) of the General Rides applicable to Schedules A, B, C, D, and E, shall not apply to the payment of any such royalty or other sum so paid in respect of such user of the patent.—[Mr. Forrest.]

Brought up, and read the First time.

Mr. FORREST

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

I do so feeling with confidence that it is one which the Chancellor of the Excise- quer will accept. It is devised to rectify what under the existing law is a great hardship. The present position of the law is that a person who pays a royalty under a patent cannot put it down as an expense. He cannot include it in any of his returns for Income Tax purposes, but that is remedied so far as the royalty owner resident in this country is concerned by his being able to deduct the tax in paying his royalties. That is the compensation which the present law intends to give, and the reasons for this Amendment is that it is non-effective against a foreign royalty owner. It may be that he can deduct it from the foreign royalty owner, hut the foreign royalty owner has a remedy in his own country and Law Courts whereby he can claim the full royalty charge from the user in this country. The result is that the British taxpayer has to pay the royalty charge here. He can deduct it if the owner is a British subject, but he is unable to reclaim if the owner is a foreigner.

May I give the Committee an example as to how this works. Assume that the receipts from the manufacture of a royalty article come out at £12,000, and that the cost of manufacturing the article, including materials, labour costs and all the other charges which he is able to put against Income Tax in his return, amount to £10,000. That leaves a balance of £2,000. Assuming the royalty payable is £2,000, it means that his actual profits are nil. As a matter of fact he has to pay Income Tax on £2,000, and if the royalty owner is not subject to the laws of this country he has no remedy. He has to pay Income Tax on £2,000 whereas he has made no profit whatever. I do not want to emphasise this point further because I think it will appeal to the good sense of the Committee as fair and equitable to put the royalty user in exactly the same position whether he happens to be resident and subject to the laws of this country or whether he happens to be a subject of the laws of a foreign country.

The ATTORNEY - GENERAL (Sir Douglas Hogg)

The Government are not able to accept this new Clause, and I should at once make it clear why. So far from this being a hardship which has inadvertently crept into the law and is, therefore, to be corrected, the present system was deliberately introduced into the law as long ago as 1907, pursuant to the express recommendation of a Departmental Committee which sat in 1905. The law as it stands seeks, as far as possible, that royalties and other profits shall be taxed at the source. That is desirable, because it ensures that the taxpayer shall pay out of his profits and, secondly, and most important from the Revenue point of view, it ensures that the tax shall be collected. The hon. Member has said that this creates a hardship because, if a person owning a royalty lives abroad, it may not be possible to recover from him; and he gave an instance of a business which made £12,000 receipts, with £10,000 expenses, leaving a profit of £2,000, the whole of which was paid to the owner of the royalty, leaving nothing for the unfortunate manufacturer. I do not suppose he would carry on the business very long on those terms. But, in fact, if a business is carried on in this country, and is controlled in this country, the fact that the profits are paid to someone abroad does not exempt it in the Inland Revenue view from taxation.What the hon. Member proposes is that where the profits go to somebody resident abroad, no tax should be payable at all. That obviously is not a proposition which we can accept on behalf of the Government. The hon. Member said that he desired to put the royalty owner in the same position, whether he was resident in England or abroad, but the Amendment, so far from effecting that, destroys the present position. At present whether a royalty owner lives at home or abroad, any royalty on any business controlled in this country has to pay tax.

The Amendment proposes that whereas the royalty owner resident in this country shall pay the tax, the royalty owner resident abroad shall get off scot free. That is putting a premium on our inventors leaving the country for the other side of the Channel, and it is not a proposal which the Government would desire to foster or encourage. We take the view that all royalties ought to pay the tax, wherever the owner may happen to reside, as long as the business is carried on and controlled in this country, and the only effective way of ensuring that the tax shall be paid is by deducting it at the source. Although the royalty cannot be deducted from the profits the payer of the royalty is entitled under the Income Tax Rules to deduct from the royalty the amount of the taxes and account for that amount to the revenue. In making bargains the user of a royalty should have regard to the residence of the particular person and take account of the taxation which he will necessarily incur by using a patent in this country. The Government adhere to the view reached in 1905, embodied in our legislation as long ago as 1907, and we are not able to differentiate in favour of the foreigner as against the British resident in the way proposed.

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