§ Mr. DENNIS HERBERT
I beg to move, in page 15, line 38, to leave out Sub-section (1).
If you will allow it, Sir, I think it would be for the general convenience of the Committee that we should take a short preliminary general discussion on this Amendment. It might lead to a saving of time on other Amendments.
§ Mr. HERBERT
Yes. I am moving this Amendment formally for the purpose of raising a general discussion. I would like to indicate those Amendments which some of us are particularly anxious to see accepted, and which we hope the Chancellor of the Exchequer will see his way to accept. It may be useful to consider how the Clause will stand if those Amendments are carried. I take no responsibility for any one else in what I say here, and no one else is in any way pledged to the views which I may express. I desire to say at the outset that the Chancellor has met some of us with the greatest sympathy and consideration, and obviously with the most genuine endeavour to try to meet the alarm which was caused in business circles by this particular Clause. For my part, if the Clause is amended as proposed by the Chancellor of the Exchequer, with certain further Amendments which I hope I have rightly understood from him he will be prepared to accept, then I shall be prepared to support the passing of this Clause; but, in saying that, I want to make it quite clear why I do so.
The Committee should remember that we already have had in operation, ever since 1922, Clause 21 of the Finance Act of that year, which establishes the scheme for, if I may say so, catching the man who tries unfairly to avoid Super-tax by means of limited companies. The scheme 880 of the Act of 1922, I said at the time, and I say now, is to my mind objectionable. It has turned out to be ineffective, and I think it will be made very little more effective by the present Clause—and the present Clause is intended to extend the operations of that Clause. But the Committee must also remember that, under Clause 34 of this Bill, this particular Clause 29 is not to come into operation until after next year's Finance Act has been passed. Therefore, it is the hope of some of us, who have already given considerable attention to the subject, that within that time we shall be able to place before the Government suggestions for a scheme that is totally different from that of Clause 21 of the Act of 1922; and, from my conversations with the Chancellor of the Exchequer, I understand that he will be prepared to accept the suggestion, and I hope he will make a statement on some such lines as this: that if, before next year's Finance Bill s brought in, proposals are submitted which, in the opinion of the Government and its advisers, are not less effective than Section 21 of the Act of 1922 and Clause 29 of this year's Finance Bill for the purpose of stopping the avoidance of Super-tax through the medium of limited companies, and which are more acceptable to the business community, then the Government, if the present Government is still in office, will incorporate those proposals in the Finance Bill of next year in place of Section 21 of the Act of 1922 and Clause 29 of this year's Finance Bill.
I understand that something of that sort is at any rate assented to by the Chancellor of the Exchequer, and I specially invite him, in the course of this Debate, to make a statement to that effect, because it will do a very great deal to allay the alarm which has been felt in business circles, and which must inevitably have an evil effect upon the business of this country. That is a point on which, perhaps, we may be able to say a little more when we come to the question that Clause 29 stand part of the Bill, and, therefore, I will not say anything at the moment about it, except this, that it is quite clear, from facts which are within my own knowledge, that a certain amount of harm to business, a certain stoppage or withdrawal of business, has already taken place by reason of the fear which has resulted from this 881 proposal. As I have already said, my own view is that, with the Amendments which stand on the Paper in the name of the Chancellor of the Exchequer, and with other Amendments which I hope he will accept, the position will be, at any rate, no worse than it was under the Act of 1922, and will in one respect be definitely better than it was under that Act; because every company which comes within this legislation will have the benefit of the Chancellor of the Exchequer's second Amendment, which gives a kind of preliminary reference to the Board of Referees, and will enable the Board of Referees at once to stop all further proceedings if they come to the conclusion that there is no prima facie case of tax-dodging, if I may use that expression—it is an expression which has been used very much in this connection, and, perhaps, it will be useful to use it here.
We realise that the Chancellor of the Exchequer has a very strong case indeed for endeavouring to stop that tax-dodging by very rich men which, although it is within the law, and is, therefore, quite permissible as long as they can do it, is not quite according to the rules of cricket, and has the effect of casting an additional burden upon the other taxpayers of this country. If we recognise that, it stands to reason that we must have some sympathy with the Chancellor's efforts, and, provided that his proposals are not calculated to do more damage to industry than is already the result of the Act of 1922, then I think we should support them, for I consider that no other choice is open to us. It may, perhaps, be convenient at this stage to see what Amendments are likely to be accepted, and what will be the general effect of the Clause if those Amendments are accepted; then Members can begin to make up their minds whether they will support the Clause in that amended form, which I propose to do, or whether they will still think it is necessary for them to vote against it.
Of course, the most important Amendments are those, three in number, put down by the Chancellor of the Exchequer—[HON. MEMBERS: "No!"]—I speak with all respect to hon. Members, and I am sorry I put it in a manner which was not agreeable to them. I will put it in a different way. There are two extremely important Amendments in the 882 name of the Chancellor of the Exchequer—three, in fact, but two of them must be taken together as one. Those Amendments undoubtedly contain very great concessions. The first of them is the one which excludes from the purview of this legislation subsidiary companies or companies in which the public is substantially interested. It proceeds, of course, to define what is meant by subsidiary companies and companies in which the public is substantially interested, but that is not a matter for discussion now; we shall come to it when we come to that Amendment. The Chancellor's second Amendment is the one to which I referred a little earlier as giving a certain advantage to the honest company which it has not got at present under the Act of 1922. That is the Amendment to add at the end of the Clause a new Sub-section providing, in substitution for paragraph (5) of the First Schedule to the Act of 1922, that directly any step is taken under the Act of 1922—a step indicating that the company is suspect—then the directors of that company may make a statutory declaration on the lines set out in the Amendment; that that, with the reply by the Inland Revenue Department, may be referred to the Board of Referees, and that, if they consider that no prima facie case is established, the whole proceedings shall stop at once. Again, I do not, of course, want to discuss that Amendment now, but merely to indicate what the effect of it generally is.
There are also other Amendments on the Paper, many of which are, if I may say so, rather on points of detail, and deal, perhaps, with slight points which have been overlooked in the drafting of the Clause or of the Government's Amendments. One of those at the beginning of the Clause is of very considerable importance. It was only put down very late. It proposes to leave out the words "not as" and to insert the words "may be regarded as not." I hope the Chancellor will indicate whether he is prepared to accept that Amendment or one like it because if he does, we shall understand what the Clause means, but as it reads at present, it is quite impossible for anyone to arrive at what was the real intention of the draftsman in that part of the Clause. There are two Amendments down to the Chancellor's first Amendment 883 in the name of myself and another hon. Member which I understand the right hon. Gentleman is prepared to accept; and then I want to refer to one which deals with this question: A large number of companies distribute either under profit sharing schemes or otherwise, a large part of their annual profits among their employés. It is obvious that it would never be the intention of the Government to interfere with arrangements of that sort and to say that profits used in that way were unfairly withheld from distribution among the shareholders.
§ Mr. HERBERT
It does not matter in the least what part it is. If the hon. Member takes an interest in it, let him listen: the amount distributed among the employés should not be regarded as being improperly withheld for tax dodging purposes. There are certain other Amendments with which I gather the Chancellor is in sympathy, and I hope he will accept them in principle. They provide that the Board of Referees which deals with these cases shall be so constituted that in every case that comes before it there shall be a member or members of the tribunal who are experienced in and familiar with the business carried on by the particular company. These are very reasonable, and I hope they will be accepted.
There is another group of Amendments which may be described as intended to do away with what has been described as the penal effect of this Clause and of the Section of the Act of 1922. What happens where a company is, if I may use the expression, convicted of tax dodging, where it is decided that it has unreasonably withheld profits from distribution? Then, according to the scheme of this legislation, the man or men, or women, who control the company and use it for purposes of tax dodging are put in the same position as if the company had never been formed. If the Chancellor refuses, as I understand he will, to accept those Amendments, he has a very good case for doing so subject to this, that under the Clause as it may turn out to be in its final shape, there is no appreciable danger of any honest trading concern, which has no idea of tax dodging, being brought within the operation of the Section.
§ Mr. HERBERT
The Chancellor of the Exchequer is only justified in tearing off the cloak of the company from the particular taxpayer provided this legislation does not affect in practice the honest trading company. That will be discussed later on. It depends what Amendments are carried and what are not. But this raises the question of the objectionable nature of the whole of this scheme under the Act of 1922. There again it is obviously the duty of the Government—it is the duty of Parliament, as well as the duty of business men who are affected by it—to set their brains to work at once, and not to wait until the next Finance Bill, to find a way of legislating against the offending taxpayer in such a way as not to interfere with the honest trading company, and I have every reason to believe—I hope I am not too optimistic—that that is not impracticable. Certain schemes to that end have already been roughly thought out and will, I hope, be further developed very soon. Here in this Finance Bill we are troubled with the fact that we have already got Section 21 of the Finance Act, 1922, on the Statute Book, and presumably we cannot expect to repeal that now; and unless and until we can repeal it, it is our duty to try to stop the loopholes under that Section, provided we can do it without making things worse for the honest trading company than they are at present. Whether we are doing that or not may be a matter on which there will be difference of opinion. It is undoubted that if this Clause passes it will bring companies under the operation of the Act of 1922 which do not come under it at present. But those companies, and also those already under the Act of 1922, now get what I consider to be a very strong and useful defence in the Chancellor's second Amendment, which enables the preliminary reference to be made to the Board of Referees.
I do not think at this stage it would be proper to go more into detail into any of the Amendments on the Paper, which will be dealt with in due course; but, if the right hon. Gentleman will indicate those Amendments he is ready to accept, and perhaps some others that he is prepared to accept in principle, it will obviously tend to simplify and 885 shorten our discussion on the Clause as a whole, and I hope, besides doing that, he will make a declaration as to what the Government will do between now and the next Finance Bill in order to allay anxiety. In regard to that, business people themselves are not altogether free from blame for the position that has arisen. The time when they ought to have taken up this question was when the 1922 Act was before the House as the Finance Bill of that year; but some of them did not think it necessary to interfere in the matter or to assist their less important friends. Even this year, after the Finance Bill was printed, it took a very long time to get any of them to realise what was the effect of this Clause. When the effect was realised, they were alarmed and undoubtedly harm has been done. Cases have actually occurred, and have been brought to my notice, where orders for shipbuilding have been cancelled. The Chancellor of the Exchequer knows, of course, that there are large numbers of private companies which would come within this legislation which own steamships or ships of some kind or other, and that it is the invariable and the only reasonable business practice that the whole of the profits resulting from the building of those ships should be set aside until the greater part of the cost of them has been provided for. I hope that these companies will be properly protected when this Clause is carried through.
I take another case where I was personally approached only a few days ago by a man concerned in the intended registration in this country of a company with a capital of several millions, intending to do all their finance in this country, build most of their factories in this country, and thus do a very great deal for employment and for the revenue. When they heard of this Clause, they practically decided to go to another country. [Interruption.] Perhaps hon. Members will listen till the end of the story. I was able to persuade that gentleman that without a shadow of doubt that great company would be safe from this particular legislation, and the result is. I hope, that that company will be registered here after all. But this does show the very great importance that, when taxation proposals of this kind are made, they should be made with care. 886 I have no hesitation whatever in saying that the Clause, as it was originally drawn, was nothing short of being amazingly ridiculous. I think it is unfortunate that more care is not taken by somebody when Finance Bills are drawn to consider what is likely to be the effect of them upon business, instead of waiting, as is, apparently, the practice of the Inland Revenue at the present time, for criticisms and then saying what should be done to meet them. In the meantime an immense amount of harm is done by the destruction of confidence in business. Let there be no doubt about my dislike of this Clause and of the Section of the old Act, but, considering all things, I believe that we ought to support the Clause if we can get such Amendments as I hope we shall do. I do so, because I honestly believe that the chances will be something like 999 to one against any honest company ever knowing in practice of the existence of this legislation.
The whole thing depends on whether the Clause makes it reasonably certain that no company will come under the operations of this Clause and be taxed for Super-tax, unless and until it is established beyond doubt that those who control that particular company have been trying to avoid taxation. If this be the case, then I am sure the Chancellor of the Exchequer will have the sympathy of the Committee behind him, but, on the other hand, it is our duty, in protecting the business of the country generally, to see that there is practically no risk of any company being assessed for Super-tax under these Clauses unless they have been definitely convicted of attempting to dodge the tax. On that basis, I hope we may have a reply from the Chancellor of the Exchequer which will satisfy some of us that the Clause will be as little unsatisfactory as can be hoped for; and, under those circumstances, I shall then ask leave to withdraw this particular Amendment, which is to leave out Subsection (1). Then we shall follow on, of course, with Amendments which are calculated, I hope, to be of a constructive and not of a destructive character.
§ The CHANCELLOR of the EXCHEQUER (Mr. Churchill)
I think the speech of the Member for Watford (Mr. D. Herbert) who is so exceptionally well-informed on these subjects, has been a helpful one and has been intended 887 to facilitate the task of the Committee this afternoon. Nevertheless, I intervene in this early stage of the discussion, because I propose to take advantage of this occasion to clear away some of the misapprehensions and the misrepresentations which have played such a large part in upsetting public opinion, quite groundlessly, during the last few weeks. The first of these misconceptions that I should like to deal with is a rather unfair attack upon the officials of the Board of Inland Revenue, which has found its way into a great many newspapers and even figures in a leading article of the "Times." It is suggested that Somerset House is at the bottom of these Clauses; that they have allowed themselves to be carried away by a desire to add to their inquisitorial powers, and that, reaching out further each year and, this year, finding a simple and ingenuous Chancellor of the Exchequer not able to penetrate into these deep matters, they have very readily made him the dupe of their purposes, and his connivance or default has involved the whole Government in this blunder. I think I have stated the case fairly.
Now let us have the truth. These Clauses did not originate at Somerset House. The need for dealing with this matter was not brought forward by the officials of the Board of Inland Revenue. The cause for action arose here, in the House of Commons. It arose on the Debate which we had last year. Speeches were made on both sides of the House alleging a growing abuse. My right hon. Friend the Financial Secretary to the Treasury first, and afterwards, on another occasion, I myself promised the House that we would look into this matter during the autumn and that if we found it had attained serious dimensions we would not hesitate to make proposals upon it. In consequence of these pledges, I made inquiries of the officials of the Board of Inland Revenue, who said that the allegations, as to the serious character of the abuse, were fully sustained, and that the remedy was comparatively easy, but they did not recommend that action should be taken, on account of the prejudice that would be aroused and the Parliamentary difficulties which had manifested themselves in 1922 when my right hon. Friend the Member for Hillhead (Sir R. Horne) first 888 dealt with this matter. He was our pioneer on the subject. Therefore, so far from the officials of the Board of Inland Revenue having been the motive power in this, in so far as they advised as to what ought to be done, the advice they gave was that it might perhaps be advisable not to press the matter.
The responsibility rests with His Majesty's Government, where it should rest, with the responsible Ministers of the day. The Cabinet set up a Committee to consider the matter, of which my right hon. and learned Friend the Attorney-General was a prominent Member. We examined the matter in great detail for a great many weeks, and we put the issues and the result of our deliberations to the Cabinet and asked them to consider whether, on the whole the needs of the occasion justified the legislation despite the difficulties which it would encounter. Their decision was that action was necessary and that it was our duty to take that action. Thereupon, we went forward, and having gone forward I need scarcely say that we must carry our policy through to its conclusion. I hope I have completely removed the misconception that the officials of Somerset House were responsible. Ministers and Ministers alone were responsible, and no Minister has any responsibility in this matter comparable with my own.
What is the second misconception; a widespread misconception? It is that these proposals are of a novel and exceptional character. Even the "Times" newspaper writes in its leading article that they are revolutionary proposals, and at length in other quarters, whether in letters or articles, we are told that these proposals will give the Inland Revenue power to interfere in the internal management of every company, will strike at the foundations by which the reserves of companies are built up, just at a time when we all know how important it is to add to the growth of those reserves; that this will spread want of confidence; that it will impose a hobble upon initiative and enterprise, and that the business of our country may receive a most serious and formidable blow. What are the facts? In principle and in method the measures which we propose in Clause 29 have been the law of the land for the last five years. The same powers of investigation, the same powers for fixing the liability to 889 Super-tax, have ruled for the last five years, ever since the Budget of 1922. All that Clause 29 in the present Bill does is to extend the range of those powers to a somewhat larger number of companies and, in addition, as my hon. Friend has just said, it affords certain safeguards to the companies who have been previously involved and those that will now be involved in the scope of our legislation, which were not present in the legislation of 1922.
Let us look at some of the figures. I am advised that there are, approximately, 80,000 non-derelict private companies in the United Kingdom at the present time. Does anybody know how many of those were brought into the ambit of the legislation of 1922? I think the figure will surprise the Committee. I think it may even surprise my right hon. Friend the Member for Hillhead. Forty thousand private companies were brought into the scope of the legislation of 1922. One-half of the whole of the private non-derelict companies in this country. That is to say, half the private company businesses of this country have for the last five years been living under this very revolutionary system, under this cruel inquisitorial investigation, under this absolutely fatal bar to business of every kind, and they have not even known it. They have not even been conscious of the fact that they were involved in it. That is a remarkable and significant fact. Let me impress this point upon the Committee and upon those who are outside who are particularly concerned. Forty-thousand, or one-half of the private company businesses of this country have been during the last five years under exactly the same administration in regard to this particular point as we now propose to apply to a somewhat larger number.
Of those 40,000 companies which have been in this terrible zone of potential inquiry 550 have in the last four years—the Clause has been on the Statute Book five years but has been working only four years—been called upon to make returns by this tyrannical, inquisitorial, oppressive Board of Inland Revenue which, once having got the power to do these things will, we are told, always use it in a very unfair manner. Of the 80,000 companies, on an average 135 per annum have been invited to make returns. I would like to point out that in those four years we have had 890 four Governments, including one Socialist Government, in which the Financial Secretary to the Treasury was specially interested in this question of evasion. The administration has worked in a perfectly harmonius manner during the whole of those four years.
A little later I will analyse what has happened to the 550 companies, that is, an average of 130 or so per annum, who have been called upon to make returns. For the moment, I will content myself by saying that the evil with which we are trying to grapple is the same as that which existed in 1922. The remedies we are applying are the same, but the evils having moved on to a somewhat wider field the remedy must be made to move on into that field. What were the evils which required the legislation of my right hon. Friend in 1922? Let me explain them. It is now possible for anyone who chooses to avoid taxation to do so by turning himself into a company; by selling his own business to a company. He retains the whole control of that company. Sometimes it is done in the form of a vote which the founder or proprietor has: a very peculiar vote: a vote which I have seen in some prospectuses described as giving him a voting power, in virtue of this vote, equal to all the votes cast against him, plus one. I think that is the sort of vote which some of us would be very glad to have in this House While retaining, under various devices, the full responsible control, the proprietor is able to draw out, in the form of a loan, or in payment for debentures, whatever money he requires for his personal expenses, and these moneys are drawn out free of all charge to Super-tax. These cases are quite well known to the Inland Revenue. The law renders them completely immune, but what is going on is absolutely apparent. I am going to give some instances, but I should like to make it perfectly clear that I have no personal knowledge to whom these instances refer. The Inland Revenue officials are governed by secrecy, very wholesomely and very necessarily, and, in consequence, the instances I give are in every way chosen so as to respect and safeguard the principles of that code. All I know is that they are actual and authentic cases.
891 Let me show a few cases of the kind with which we think it our duty to deal. The first case is that of a firm of manufacturers. In one year this company made a profit of £75,000 and paid dividends to the extent of £3,300. The two people in control of the company drew in that year £33,000 in so-called loans, on which no interest was payable. The second case is that of a textile company. The profits were £66,000. The dividends amounted to £6,900. The controlling shareholder drew out by way of loan £19,000, free of Super-tax. In the previous year he drew out £54,000 by way of loan, free of Super-tax. The third case was one of food supply, the profit being £9,000, the dividends paid £700, and a loan of £6,000 being made to the controlling shareholder. In another case, the profits were £13,000, the dividends £1,000 and the loan £10,000. In the previous year, the controlling shareholder had drawn by way of loan £33,000 out of the accumulated profits. All these cases are selected, not from the whole range, but simply from the pre-1914 classes which were specially exempted from the legislation of my right hon. Friend. Even in that small class, these are some typical cases.
I think I am right in saying that it is common ground with all of us that we are bound to do our duty to arrest an evil of that kind, and that the Government must do it before it has reached serious dimensions. A swift, sure, easy means of avoiding taxation exists. The knowledge of it is increasing every day. The advertisement it has received from Debates in this House last year, from articles in the newspapers, and from Debates we are having now, undoubtedly will bring it home to vast numbers of people who were unaware of the fact before, and if the Government, having introduced these Clauses which they have regarded as their duty to pass into law, were to withdraw from this task, it would give a warrant, a charter from Parliament for the widespread adoption of those practices. [An HON. MEMBER: "No!"]. I say if we were to avow ourselves incapable of dealing with the matter, it would give a charter to the widespread adoption of these practices, which, if they were to attain any general vogue, would unquestionably result in dividing the 892 taxpayers of this country into two classes—those who pay their taxes and those who do not, it being perfectly and clearly understood that those who were willing to pay their taxes would have to pay the share of those who would rather not, with the result that, undoubtedly, there would have to be an increase in the standard rate of Income Tax.
I am bound to point this out, because the Government have no choice whatever, having raised this matter, but to see that they deal with it in an effective way. I have accepted, and am willing to accept, many Amendments which reassure the general mass of the taxpayers and of business firms. I will accept no Amendment which in the slightest degree blunts the efficiency of the Clause. My hon. Friend who spoke suggested that the Amendments we had accepted, or had put down ourselves to our Clause, showed how carelessly the Clause was drafted. I repulse that suggestion. I believe the Clause, as drafted, would have done no harm to bona fide businesses. I believe the reassurance I have given in the form of Amendments which I have put down, or will accept, will in no way prevent our achieving the perfectly clear and definite object we have in view. When, in the year 1922, the first provisions on this subject were introduced by my right hon. Friend, there were, of course, the most extravagant predictions of the misfortunes that would follow. All the language which we have heard on this occasion—and some people who are good judges tell me even more—was poured upon his head and upon his proposals.
But how have the powers of 1922 been used in practice by the Inland Revenue authorities? I have said already that the business world has been hardly conscious of the fact that one-half of the private companies were already in this sphere. They have only just heard about it. Let us see what has been the actual procedure under the Section. The Inland Revenue acts in cases where they have reason to think there is tax evasion. The Special Commissioners then hear the taxpayer, and they adjudicate. The taxpayer may then, if he chooses, appeal to the Board of Referees and so may the Inland Revenue if dissatisfied with the decision of the Special Commissioners. What is the Board of Referees? People have discussed this matter as if the 893 Board of Referees were a body of gentlemen under the control of the Government, or an appanage of Somerset House. They are a body of independent, unpaid, impartial people, chosen and set up for the express purpose of standing as a bulwark between the taxpayer and the Inland Revenue.
§ Mr. CHURCHILL
In the first instance by the Government. Does the right hon. Gentleman suggest that he did not exercise his choice with impartiality?
§ Mr. CHURCHILL
If by his interruption my right hon. Friend meant anything, he meant that he doubted their impartiality.
§ Mr. CHURCHILL
If my right hon. Friend does not doubt that impartiality, I need not pursue the point. They are appointed in exactly the same way as His Majesty's Judges are appointed, and I have no doubt they discharge their functions with the same absence of fear, favour or affection. There is no power on the part of anyone to interfere in the management of companies, but the decision whether any particular company within the scope of the legislation is immune from Super-tax can only be taken by an impartial, non-official body, and I am going to show how that impartial, non-official body has exercised its powers. In 1922, there was a very careful definition for the guidance of the Special Commissioners and the Board of Referees of what was a reasonable sum to carry to reserve, and I think in the framing of this the Committee of those days had a great deal of assistance from my hon. Friend who opened the discussion this afternoon. Although perhaps the words are not exactly his, they are words which, I think, he had a great deal to do with framing, and words with which he was satisfied in the end. It is laid down for the guidance of the Special Commissioners and the Board of Referees thatIn 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 894 but also to such other requirements as may be necessary or advisable for the maintenance and development of that business.
§ Mr. CHURCHILL
That is in Subsection (1) of Section 21 of the Finance Act, 1922. So that the answer is in every way satisfactory to my hon. Friend. I said a, little while ago that, under this legislation, in four years of its working, on an area of 40,000 companies, or half the private companies in the country, 550 cases had been selected as cases in which the directors of the company had been asked to furnish returns. Let us see what happened to those 550 cases. After the returns had been furnished, the Inland Revenue claimed Super-tax in 250 cases, or rather less than half. There were 128 out of those 250 cases in which there was an appeal to the Special Commissioners. The Special Commissioners decided in favour of the taxpayer in 60 cases, and against the taxpayer, in whole or in part, in 68 cases. Only 11 cases were carried to the Board of Referees, the parties concerned on either side having recognised the justice of the decision of the Special Commissioners in all other cases. But 11 cases in four years, on a scale of business comprising 40,000 companies, went to the Board of Referees. Of those 11 cases—I said they were an impartial body, and I think the actual results ought to confirm that statement—in five cases the Board of Referees decided in favour of the taxpayer and in six cases against the taxpayer. Therefore in six cases only that were appealed against in four years has a decision been given against the taxpayer.
§ Mr. CHURCHILL
I shall be very glad to do so. There are 128 appeals made to the Special Commissioners, and in 60 of those cases the Special Commissioners decided in favour of the taxpayer and in 68 cases, in whole or in part, against the taxpayer. Of those 68 cases, 11 were carried to the purely impartial body, the Board of Referees, and of those 11 cases, five were decided in favour of the taxpayer and six against the taxpayer.
§ Mr. CHURCHILL
Of course, the Crown can appeal, if it think fit. These figures, of course, apply not to the 68 cases but to the 128 cases. That is perfectly true. I am much obliged to my hon. and learned Friend for pointing that out, but, whether 68 or 128, it is exactly the same for the purpose of the very serious argument I am employing. I was going to give to the Committee some examples of the decisions which have been given in favour of the companies by the Special Commissioners and the Board of Referees. We are told that business is going to be hampered. Let us see the kind of practice which has been adopted. Here is the case of a company of manufacturers. In the first year it made a profit of £27,000, and in the second year £36,000, and declared dividends of £3,000 and £5,000. The Inland Revenue drew attention to this, and there was an appeal to the Special Commissioners, who were satisfied that the retention of the undistributed profits was necessary for the development of the business and the extension of the company's premises.
In the second case the actual income was £13,000, and the dividend distributed was nil. The company satisfied the Special Commissioners that the retention of the income of the company was necessary in order to provide for depreciation of the property. The third case, a manufacturing company, the actual income was £15,000, and the dividend declared £5,000. The company satisfied the Special Commissioners that the retention of the undivided profits was necessary for the purpose of extending the company's buildings and plant. The fourth case, a manufacturing company, the actual income was £13,000, and the dividend declared £700. The company satisfied the Special Commissioners that the undistributed income was needed in order to meet the current requirements of a growing business. The fifth case, a textile company, the profits were £54,000, and the dividend declared £5,000. The company satisfied the Special Commissioners that it was necessary for them to retain the undivided income in order to provide re-serves 896 to meet trade competition. The sixth case, a multiple shop company, the income was £44,000 in the first year and £48,000 in the second year. The dividend declared was £13,000 for the first year and £14,000 for the second. The company satisfied the Special Commissioners that the retention of income was necessary for the maintenance of the existing business and the acquisition of further shops.
I now come to the decisions given by the Board of Referees. The first case is that of a company engaged in stock and share dealing. Its income was £7,000 for the first year, and £8,000 for the second year. No dividend was paid in either year. On appeal to the Board of Referees, the company showed that its issued capital was inadequate, and that it was necessary to retain the profits in order to provide the normal means of development. In this case, the Board of Referees reversed the decision of the Special Commissioners. In the second case, hotel proprietors, in the first year the income was £13,000 and in the second year, £21,000. No dividends were paid in either year. Upon appeal the Special Commissioners decided in favour of the company. The Board of Inland Revenue were not satisfied and considered that the case should go to the Board of Referees, and the Board of Referees after full investigation were satisfied that the withholding of the profits was reasonable in view of the requirements of the company's business. The fourth case, timber merchants, the income was £28,000 for the first year and £18,000 in the second year. No dividends were paid in either year. The Special Commissioners decided in favour of the company. The Board of Inland Revenue considered that the case should go before the Board of Referees, and the Board of Referees upheld the decision of the Special Commissioners on the ground that the company had reasonably withheld a distribution of profits. This is typical of the manner in which the provisions of my right hon. Friend have been working during the last four years under four separate Governments, and the way in which the powers have been used shows that the ordinary course of business has not been interfered with in the slightest degree.
§ Sir BASIL PETO
All the cases which the right hon. Gentleman has given are 897 of decisions one way; that is in favour of the trader. Has he any decisions in favour of the Government?
§ Mr. CHURCHILL
I have chosen these decisions in order to show how very wide is the latitude of the Special Commissioners and the Board of Referees. There are a number of decisions which have been given the other way, and in my figures I have stated that 68 decisions were given by the Special Commissioners against the taxpayer, as compared with 60 decisions in his favour, and that six decisions were given against the taxpayer by the Board of Referees as against five decisions in his favour. All I want to show is how broad-minded has been the interpretation placed by the Special Commissioners and the Board of Referees on the words of the Statute of 1922. That is the process which will rule when Clause 29 is passed into law.
§ Mr. MACQUISTEN
Can the right hon. Gentleman give us one or two of the most flagrant cases which obviously show the need for this legislation?
§ Mr. CHURCHILL
I have already read out a number of cases in which, in the opinion of the Board of Inland Revenue, there should be an examination, and those are the cases which under the present legislation we shall be able to put through this very carefully considered and safeguarded process.
§ Mr. CHURCHILL
I have not furnished myself with examples of those cases. It would be quite possible to give such, and they would be cases where the distributed profits fell so far below the average of the trade that it was perfectly clear that the object was not one of trading but a deliberate evasion of their fair dues to the State. My contention is that there has been no harm done to any business in the past, large or small, which has been conducted for bona fide commercial purposes, and I submit that the future does not differ from the past, and cannot be made to differ from the past, because these impartial authorities with their judicial functions are interposed between the taxpayer and the tax collector. All we are trying to do is to extend the zone of potential inquiry and 898 adapt new safeguards which are appropriate to the larger number of companies brought within the scope of the legislation. One of these safeguards will be to attach to the panel of referees a business man connected with the trade in regard to which cases may be discussed, or, conceivably, to give power to the Board of Referees to co-opt a representative of the trade in a particular case. This is under discussion and the actual words will be inserted on Report when they are in a completely satisfactory form.
Let us see what are the actual proposals of Clause 29. I am sorry to detain the Committee so long but I feel bound to do so. The first step in extending the powers of the Act of 1922 was to try and reassure as many people as possible that they would not be included within its extended scope, and therefore, we have attached four conditions of an exclusive character. It does not mean that everybody within this is going to be interfered with. It means exactly the opposite. All it means is that those outside the scope may immediately regard themselves as not affected in any way by the legislation. There is the old provision of not more than five persons. We have added to that, as a reassuring amendment, any company which is quoted in the Stock Exchange List official or supplementary of the United Kingdom and on which 25 per cents. of the voting power is held by the public. We have also arranged a provision dealing with subsidiary companies of ordinary companies. By that a turnstile is set up so narrow that while it includes by far the greater part of the private companies, nevertheless it excludes 90 per cent., by volume, of British business. Ninety per cent., by volume, of British business and 85 per cent., by volume, of company business is absolutely outside the scope of Clause 29, subject to the Amendments I have put down.
§ Mr. CHURCHILL
How can I possibly on the spur of the moment answer that, and I should be paying less consideration to the question than it deserves if I were to try to answer it. Although 90 per cent. of the general business and 85 per cent. of the company business is excluded by these provisions, 35,000 more private companies 899 are added to the 40,000 companies which were included within the scope of the legislation of my right hon. Friend. To the vast majority of these nothing will happen. They will be asked no questions, and they will be no more conscious that anything is taking place than the 40,000 companies have been during the last four years. But where the Board of Inland Revenue thinks there is evasion, and there is no difficulty in selecting really extravagant cases, the directors will at the outset have the opportunity of making a statutory declaration that there is in fact no evasion and state their reasons. The Special Commissioners will in many cases accept this declaration, and in some cases they will, after hearing the counter-statement of the Board of Inland Revenue, refer the matter to the Board of Referees. The new provisions protect the taxpayer, that is the 40,000 companies as well as the 35,000 additional companies, which are now being included. The Crown cannot undertake to prove motive in law, as my right hon. Friend said very well five years ago. All the Crown can do is to deal with the facts as they are disclosed.
§ Mr. CHURCHILL
Let us deal with one Bill at a time. The Crown can undertake to submit a prima facie case to the Board of Referees. That is comparable to the kind of duty which my right hon. and learned Friend the Attorney-General discharges when he is asked to sanction a prosecution. He does not go into the actual case, he does not try the case; he considers whether there is a sufficiently strong case to justify an inquiry. It is also rather analogous to the position of a grand jury which refers cases to the Assizes. The differences are all in favour of the taxpayer, for whereas the Attorney-General and the grand jury decide on ex-parte evidence, in this case a written statement from both sides will be before the Board of Referees. They will hear both sides, and unless they say that in their opinion there is a prima facie case of evasion, nobody would be interfered with in the slightest degree. It will protect the 40,000 companies already in its sphere as well as the 35,000 which it is 900 proposed to bring in. The Board of Referees may, in giving its preliminary decision, decide in favour of the taxpayer, in which case that is an end to it. They may decide in favour of the Crown. If they decide in favour of the Crown, then and then only the provisions of Clause 29 begin to apply, and the turnstile, which I have indicated in Clause 29 is an exclusive turnstile, has been reinforced by a human gate-keeper in the shape of the Board of Referees, with a view to placing a larger number of companies immediately at their ease so that they may not feel the slightest alarm that they are going to be mauled, handled, or interfered with in any respect. What happens when a company actually enters the area of Clause 29? It has all the protection of the Clause, the words which I have read out and those which figure in the legislation of my right hon. Friend. It has all the protection of the Special Commissioners, and in about half the cases they have decided against the Board of Inland Revenue. It has, in addition, the protection of the Board of Referees, who in practically half the cases have decided in favour of the taxpayer.
Finally, there is an appeal, not on points of fact but on points of law, to the Courts of the land. But if the taxpayer is not covered by these protections and safeguards and finally the Board of Referees includes him among those, or he admits that he should be included among those who have evaded their due share of the taxation of the country, if in the last resort that position should be reached in regard to any particular company, what happens? Then, we are told, the penal clauses come into effect, the penal provision. What is the penal provision? All that happens is that the taxpayer, judged after all these precautions, loses his status as a public company and loses the privileges given to public companies, and drops down to the ordinary position of a private individual or private firm. There is not the slightest difficulty in his adjusting and rearranging his affairs in such a way as to place himself entirely inside the law before the next year comes along. That is the worst of the penal provision, of which we have beard so much.
I think it is impossible to set up a more considerate and careful procedure. All these precautions are not taken for the 901 sake of the tax-evaders; they are taken for the sake of giving reassurance to the vast mass of business by which this country gets its daily livelihood, and to remove the apprehensions that are felt there. I see in some of the newspapers statements made that these Clauses are retrospective to the extent of six years. I should be quite willing to rectify this if the case were made out. There is not the slightest shadow or shade of a shred of vestige of any such thing. In the ordinary working of the Income Tax errors and mistakes may be rectified six years back on either side. This Clause 29, so far from being retrospective, is to come into operation next year, and that means it will start fair from next year. It has no existence before next year. It will refer to what takes place this year, as all Super-tax does: it is calculated on the preceding year. Nothing will be taken into consideration that is not being done this year; nothing previous can ever be taken into consideration under this Bill; and if there were the slightest doubt as to the accuracy of what I say, about the words of the legislation, we would accept any words that were necessary to improve it. But I understand there is absolutely none, and that the legislation in fact begins for all alike next year and refers only to events which are taking place in the currency of the present financial year.
My hon. Friend has asked me whether I hope to reconsider these Clauses. I must admit that in one respect I am certainly not entirely satisfied that they are perfect. I must admit that the methods of evasion are not entirely dealt with in this provision. It may well be that at a later stage some of those who moved out of the sphere of my right hon. Friend in 1922 will be able to move out of the new sphere, the extended zone which we occupy in 1927. But they will have to move to a less comfortable position which alone will be open to them.
Of course Parliament retains control of this legislation until next year, when a general Financial Resolution covering the Income Tax and Super-tax proposals of the year will have to be passed by the House. Therefore, the House is not dealing with this matter once for all. I must not use any language which would give the slightest countenance to keeping alive the sort of campaign of apprehension and alarm and despondency 902 which has been noticeable in certain quarters during the last few weeks; but at any rate the House is in control of the matter until this time next year, and if, in the interval, a better way of achieving the purpose of the Government than that which we have devised can be devised by business men or by the Members of the House, a way which secures the proper protection which the revenue requires and at the same time is more satisfactory to the business men of the country, I am personally ready to consider it. Indeed I should be grateful for any assistance that can be offered on that score.
Meanwhile, I say that the Government have gone to their limit in trying to reassure honest doubts. It is quite impossible to postpone or to withdraw the proposals which we have put forward, still less to accept any Amendments which would render them nugatory. Therefore, I invite the Committee, without distinction of party, to sustain the Chancellor of the Exchequer against a dangerous and growing abuse which, as it develops, cannot fail to be seriously injurious to the revenue, and is in any case, from the very outset, grossly unfair to the general taxpayer.
§ Sir J. MARRIOTT
Before my right hon. Friend sits down will be make clear one point about the figures he has given, and so remove some misapprehension. He told us that there were 80,000 private companies and of those 40,000 had come within the ambit of the Act of 1922?
§ Sir J. MARRIOTT
Then the Chancellor said, later in his speech, that 35,000 additional companies would be brought within the ambit of the present proposal?
§ Sir J. MARRIOTT
Does that mean that only 5,000 of the 80,000 private companies will remain outside?
§ The CHAIRMAN
On another Bill I have protested against any hon. Member the moment a speaker sits down, firing a great number of questions at him. There is the less reason for doing so in Committee because both Ministers and others 903 can speak twice. Does the hon. Member for York (Sir J. Marriott) want to put another question on the same subject?
§ Sir J. MARRIOTT
It is on the same subject. My question was put entirely to enable the right hon. Gentleman to make clear to some of the more stupid Members of the Committee a point which he was endeavouring to make. I was asking him, and ask again, whether his statement means that the 35,000 additional companies brought within the ambit of the present proposal will bring up the total to within 5,000 of the 80,000 whom he had previously mentioned?
§ Mr. WILLIAM GRAHAM
The subject which has been raised in the speech of the hon. Member for Watford (Mr. D. Herbert) and explained at length by the Chancellor of the Exchequer is one of undeniable importance and also of very great intricacy in debate. In what will be said from this side of the Committee, I do not suggest for a moment that it may be possible altogether to escape minor inaccuracies in the statement of the case. May I, first of all, call attention to this rather interesting situation? During the past two or three days scores of millions of taxation have been piled on the taxpayers of this country. They are taxes which have often been debated in what was a practically empty House, and it is rather odd that the first time we have got a crowded House and genuine interest is when we deal with the question of Super-tax. A fact of that kind cannot be lost on the House of Commons, and still less can it be lost on the country outside. Our chief duty this afternoon is to direct our minds as clearly and as plainly as we can to what after all is the central consideration before this Chamber. That central consideration is the prevention of evasion of the payment of Super-tax by companies and individuals, in circumstances described by the Chancellor of the Exchequer.
May I associate myself at once with the right hon. Gentleman in the defence which he has offered of the officials of Somerset House, and the reply that he has made to some of the mischievous and 904 misleading newspaper criticism in this case? Over and over again it has been asserted in the discussion that we are wholly at the mercy, as we read only this morning, of a small company of bureaucrats, who can do practically what they like with an important section of taxpayers in this country. A statement of that kind is manifestly ridiculous. Civil servants cannot reply in this House for themselves, and they have no opportunity of stating their case in public debate. After all, it is our our duty to remember that they are operating under Acts of Parliament which we ourselves have passed in the House of Commons, and they are very largely, along with the Chancellor of the Exchequer, in the position of trustees acting for the public and making perfectly certain that the revenue is obtained under the law as it stands. I feel sure that if that consideration had been kept in mind a great deal of the criticism which has been true of the past four or five weeks would never have been offered.
Let us keep clearly in mind also the nature and scale of Income Tax and Super-tax evasion. The Chancellor of the Exchequer argued that the proposals of Clause 29 did not originate in Somerset House, and he went on to indicate that they originated in circumstances round about 1922, when Section 21 of the Finance Bill of that year was passed into law. But, of Course, the problem had a much earlier origin. In point of fact it was considered at very considerable length, and after a great deal of detailed evidence, by the Royal Commission on the Income Tax in 1919, and certain recommendations on this specific problem were embodied in the Report of that Commission published in 1920. Let the Committee remember that certain witnesses, by no means unreliable, suggested to the Royal Commission that there was large-scale evasion of Income Tax and Super-tax. Of course, hon. Members recognise that, with the increase of the burden of taxation in recent years, there must be a certain encouragement to a tendency in that direction, apart altogether from the demoralisation which overtook some departments of our business practice during the War, which familiarized 905 individuals with devices for evasion, which methods a number of them—I do not put it higher than that—have sought to carry into post-War conditions.
Witnesses argued that large sums of money were lost to the Exchequer. But, excluding the admittedly extravagant suggestions—I rule them out altogether this afternoon, because we want to be on the strongest possible ground in this Debate—it was conceded that £5,000,000 to £10,000,000 per annum, at a very low estimate, was lost by evasion, and that if certain administrative and other changes were introduced, at least £7,000,000 to £8,000,000 of additional revenue would be obtained, as I understand it, under the law as it then was. While that was not all attributable to this evasion of Super-tax, a fair proportion of it, no doubt, could be associated with this problem. The Royal Commission recommended substantially what was embodied in Section 21 of the Finance Act of 1922, that is that where there was not a proper, sufficient or fair distribution of the profits of the companies year by year, and where it was perfectly plain that that distribution was being restricted for the purpose of evading Super-tax, that those steps should be taken.
The hon. Member for Watford with whom I have had numerous discussions on this matter, both while we were in office in 1924, and on other occasions, has suggested that there are certain hardships in that Section of the Act of 1922. I have, in particular, very often heard him use the phrase about the penal effect of that particular Section. The real reply to that was given this afternoon, in a passage in the speech of the Chancellor of the Exchequer, when the right hon. Gentleman suggested that all you did when you put an individual into that apparently extreme position, was simply to reduce him to the position he should have occupied if this particular evasion had never been attempted. Let us remember here that it is evasion which is before the House. In the Debates of recent weeks, an attempt has been made to draw a distinction between ordinary arrangements of business such as those which put these profits beyond the reach of taxation on the one side, and what is manifestly evasion on the other. A good deal of attention has been directed to a remark made by Lord Sumner to the effect that the taxpayer was entitled to 906 arrange his business in such a way as not to expose himself to, or to attract the attention of the tax collector, if that could legitimately be done, or what would be called ordinary practice within the law, to reduce the burden on the individual. I make no particular comment on that this afternoon, because so long as this system of commerce and industry lasts, and we have private enterprise, individuals will be entitled, where they can, within the law, in a perfectly honest and bona fide manner—I emphasise that—to arrange their affairs in such a way as not to carry undue burdens.
When, however, we have made the fullest recognition of practice of that kind, it remains true that very often, in industrial and commercial practice in this country, it tends to shade into a form of evasion which, in my judgment, and in that of many of my hon. Friends on this side of the Committee, is an evasion that ought to be stopped at the earliest possible moment, and to which rigorous penalties should be applied. Of course, it is extremely difficult to say when you cross that border-line from the legitimate within the law into this sphere where you are unfairly taking steps to the disadvantage of the mass of other taxpayers at a time when you are raising between £833,000,000 and £850,000,000 of revenue, year by year. It is a very nice point; for our part, we are determined, so far as we have any voice at all, to stop the evasion wherever we can. This evasion, to-day, is worth to the Chancellor of the Exchequer, as I have tried to tell him personally, in the aggregate—not on this item alone, but with others—at least from £5,000,000 to £10,000,000 per annum and, I imagine, probably more. The House of Commons, since 1920, when the Royal Commission's Report was published, has never embarked on a proper scheme or programme for the prevention of evasion. Odds and ends have been taken from the recommendations of the Royal Commission, but a programme, as such, has never been undertaken. In point of fact, a very large part of the recommendations of the Royal Commission have remained a dead letter, the adoption of many of which would have prevented so far the emergence of this difficulty to-day and, of course, the embarrassment which has so far overtaken the Chancellor of the 907 Exchequer, although that does not unduly worry us on this side of the House.
I come now, after that preliminary survey, to Section 21 of the Act of 1922. When we were in office in 1924—a memorable period of legislative history in this country—a great deal of pressure was brought to bear on us, directly and indirectly, on this very issue. Of course, at that time, it was plain that the Section of the Act of 1922 had not had anything like a fair trial, and I was perfectly satisfied, from my experience on the Royal Commission three or four years before, that probably very much more drastic provisions would be necessary. This campaign has continued and developed, until we are in the minor crisis of to-day. The Chancellor of the Exchequer has very largely disposed of the case from the point of view of the ordinary business world in this matter, because, I imagine, until he spoke this afternoon, very few Members of the Committee were aware of the Very large part of the field which has already been covered by Section 21 of the Act of 1922. If that be the state of affairs, and if you cover all that in the circumstances described by the right hon. Gentleman as regards the forms of protection which the taxpayer gets, I am obliged to say, that there is a very artificial, if not dishonest element, in the agitation of the past three or four weeks. Many of those men who lent their names to those letters in the Press, and who made attacks on Somerset House, and the rest, must have known of the widespread operation of this Section of the Act of 1922, and must have been perfectly well aware of the judgments or decisions of the Court of Referees, and others, which, as the right hon. Gentleman pointed out, very amply protected their interests.
I come now to the present proposals of the Chancellor of the Exchequer. This Clause in the present Bill does not appear to be in any way too drastic for the purpose, because, with all the evasion, in that Clause there are many safeguards as originally introduced. The broad proposition of 1922 remains; there is all this arrangement for sufficient allowance for the current needs of the business, and attention is specially directed in the Statute to what is necessary for extension and development, together with the further safeguards to which reference has 908 been made. All these things remain, but in the Clause as originally introduced undoubtedly the Chancellor of the Exchequer proposed very widely to extend the field. He made the arrangement regarding not more than five people, and certain other additional provisions, for perfectly good reasons, such as were illustrated in those almost violent cases of downright evasion which he cited to the Committee and which, I have not the least hesitation in describing here, are most valuable material from our point of view, because he has now put on record in the OFFICIAL REPORT what many of us knew was going on in business, but which remained very largely a matter of debate or a confidential thing between the Inland Revenue and the taxpayer.
My criticism of the right hon. Gentleman is that, even if there is only a handful of cases of the extreme character which he cited to the Committee, what you require is not a modification of this Clause in the Bill but the original Clause. Accordingly, I am very sorry that he has modified his proposals, and all the more so because there was another year of investigation before us before this would come into strict and practical application. That is a phase of his speech which I specially regret. The right hon. Gentleman went on to intimate that, of course, his own two Amendments on the Paper would be applied and that probably, also, certain other Amendments, which we shall reach later on, will be accepted. At this stage, we are only in the realm of general debate. The right Gentleman comes along with proposals regarding these subsidiary companies and the public holding in a company—these two grouped together—and in the second place, a Clause regarding machinery and other devices giving the taxpayers the right of declaration, with all the other safeguards thrown in. The two Amendments, taken together, undoubtedly modify, at all events in my judgment, to an appreciable extent, the rigour of the Clause as originally introduced. Later in the discussion we shall find out what is the scope of the intention, but all I am going to say at the present stage is that it is regrettable that, bending to some extent under the agitation, the right hon. Gentleman has yielded. Probably it will be our duty to try to assist him in standing to the document which he has already 909 offered to the Committee and saying that, subject to minor Amendments here and there, the Clause as now modified represents the limit of his concession.
§ 5.0 p.m.
§ Mr. GRAHAM
My hon. Friend reminds me that it does not by any means go to the limit which we ourselves would desire. May I say one or two words in conclusion? It has been suggested in some quarters that a Clause of this kind is a veritable gift to the Labour Socialist movement. That has certainly been argued very strongly in connection with the later Clause which, presumably, we shall discuss some time to-day. I can imagine no argument which is more thoroughly misleading, if not dishonest. Our sole concern is to see that taxation imposed by law in this country is paid; that is, that the revenue is thoroughly safeguarded. To those who suggest that there will be an interference with legitimate business I would say that you have got the safeguard under Section 21 of the Act of 1922 still open to you, and that now you have the advantage of the two suggestions of the right hon. Gentleman which, apparently, have so far satisfied the hon. Member for Watford, and have left only what I may call the diehards in business to continue the fight. Against any attempt further to weaken the Clause we shall offer strenuous resistance. There is still in this country substantial evasion, and we are very far indeed from having overtaken the whole field of the evasion of taxation on profits. The right hon. Gentleman reminded his supporters this afternoon that there was a year of grace, and if during that time they could suggest anything better than that which we have devised—I presume the right hon. Gentleman includes the Clause in the Act of 1922—he was open to consider suggestions. I have a suggestion to offer to the Chancellor of the Exchequer. The way to deal with evasion is not to deal with it in this piecemeal fashion. If I had my way, I would ask a small body of men to collect all the relevant passages in the Report of the Royal Commission of 1920 dealing with evasion into a very clear and, it might well be, a very simple programme. I would also draw attention to the suggestion which 910 was made by the Financial Secretary to the Treasury in a Debate in this House that in this general problem the phraseology might be greatly simplified, because there is no human being whom I have ever met, outside a very select circle, who understands in the least what these Clauses mean, and it is left to what we call Income Tax experts, a most misleading term, to explain these Clauses to them. I fail to see, in the light of our experience in 1919, why this should not be stated in perfectly simple terms, but a very large part of the difficulty in this matter arises from the great Consolidation Act of 1918 and legislation by reference which has resulted. Accordingly, if the Chancellor of the Exchequer is going to deal with the evasion of Super-tax, Income Tax and all the rest of it, let him embark upon a bigger and a more comprehensive programme. With such a programme it can be confidently suggested that in a period of twelve months the Chancellor of the Exchequer could collect from £10,000,000 to £15,000,000 of additional revenue, under the law as it stands, from individuals who are at present evading the whole or a part of their duty to the State.
§ Mr. RUNCIMAN
The right hon. Gentleman who has just sat down has made quite clear what, I am sure, is in the minds of all Members of the Committee, and that is that evasion is not the issue before the Committee this afternoon, for the truth is that there is no Member of the Committee who would get up and defend the evaders. I doubt if there is any Member of the Committee who would not do his utmost to catch them if he could. Therefore, there is no question, while we are criticising the Clause and the Amendments, of our being in favour of a further evasion of Super-tax. I can only speak for myself in this matter, but I am quite ready, if the Chancellor of the Exchequer requires any information upon the industry with which I am connected, to advise my friends to give him the fullest possible information in the frankest possible way. We have endeavoured to do that already, and during the next 12 months we shall carry our inquiries further, to the utmost of our ability. We have nothing to hide and nothing to retract, and we certainly are extremely anxious that in this matter full justice shall be done to all tax-payers 911 alike. But when I heard the Chancellor of the Exchequer say that it was difficult to find any fault with the drafting of this Clause, I must say that I opened my eyes in astonishment. It is suggested that the drafting should not be blamed, and that it is so perfect that we need not criticise it. Our trouble is that the drafting is so obscure that we do not know where we are.
Let me take a very important instance. I am not dealing with a small and obscure concern, but with a very large one that has come under my notice in the last few days. A very important company in this country has two or three foreign branches abroad. Under the law of the foreign country they are bound to be registered companies in the foreign country, but they are most anxious to know whether or not they come within the purview of this Clause or of the Amendment put down. They have taken the best legal advice they can find and what is the result? The eminent lawyer who advises them tells them that there are two possible constructions which may be put on the Amendment of the Chancellor of the Exchequer.A.—(i) the Section shall apply to a company which is not a subsidiary company.(ii) The foreign company is a subsidiary company.Therefore, the Clause does not apply to the foreign company.or B.—(i) The Clause shall apply to a company which is not controlled by a company to which the provisions of Clause 29 do not apply.(ii) The foreign company is a company controlled by a company to which the provisions of Clause 29 do not apply.Therefore, the Clause applies to the foreign company.
It is when we receive advice of that kind that I think all those of us who are not lawyers consider that this kind of drafting renders the Clause, to say the least of it, extremely difficult to understand. The suggestion which I understand the Chancellor of the Exchequer to make, that he is going to accept the proposal that we should have a wider representation of individual industries on the Board of Referees, is a matter of great importance. I am not now arguing against the proposals as a whole. I am doing my best in the circumstances 912 to see if they can be improved. One of the directions in which undoubtedly improvement is necessary is in the constitution of the Board of Referees. Let me point out through the industry with which I am personally connected, the necessity for this. There is full provision made in the Income Tax Act and in the Act of 1922 without having it in the present Bill, for allowing a company to accumulate reserves which will now come under survey, but what does the survey mean? What about the question of maintenance? It is a different problem in every industry. The maintenance of cotton mills is very different from the maintenance of a shipping company, and in the case of shipping maintenance might mean that you would have to keep your funds together in order that from time to time if you desired to build new ships in place of others that have become obsolete. My hon. Friend who represents one of the Divisions of Newcastle if he had been present now would have agreed with me, for he is one of the best representatives of the shipbuilding industry in this country, in stating the fact that in the last 20 years we have seen great changes in the types of ships.
Again, there has been every year a chart in one of the technical papers circulating in this country showing the variations in the prices, in the market value, of a vessel of about 7,500 tons. There are no more remarkable curves to be seen in the history of commerce than the zigzag up to enormous heights and down to surprising depths. At times when there is great demand for these vessels and when steel and labour are dear, those are the times when prices are enormously high, but at other times, during periods of depression when shipbuilders will take orders at a loss in order to keep their works going, prices are much lower. Of course if a ship-owner were clever enough only to buy in times of depression instead of at the top of the market, he would be able to carry on shipping at a profit, but all progressive firms actually go on buying constantly year after year, and they keep a part of the profits for this purpose, and the first thing they have to do out of the profits of their vessels is to set aside a portion to meet changes in value for which provision must be made if the company is to remain sound. That comes under the 913 heading of "maintenance" but it would not be maintenance in a great number of other industries. It ought to be the practice of all the shipping companies to retain sufficiently large sums to provide for long-dated obligations. If you give an order for shipping this year, you may not get delivery of it for five or six years hence; consequently, you have to provide for obligations long before the vessels are delivered, and those obligations have to be provided for out of current revenue. They cannot be provided for in any other way, and if that were not done it would mean that a great many shipping companies would be in deep water and their misfortune would reflect upon people in other industries which depend upon shipping. There might also be a prolonged depression and if a shipping company is to survive at all it must have big reserves and be prepared to look forward to the time when trading is more profitable.
One of the reasons American shipping companies have failed so largely in the past is that they have not provided for continuity, which is the very essence of the shipping business. If that provision is to be made it can only be justified, I would suggest, before a tribunal that has some knowledge of the industry itself. If it goes before the ordinary Board of Referees, it will go before a board of admirable gentlemen who know nothing at all about shipping, and they may easily do very great harm to a most important branch of British industry. It would be quite possible for them to apply rules which might well apply in other circumstances and to make a very great blunder in regard to shipping companies. I understand the Chancellor of the Exchequer sees the possibility of that, and that he will do what he can to carry into the Board of Referees representatives of the industry who understand the question.
§ Mr. CHURCHILL
I did not say that. I said it would be done by Treasury Minutes, and not on the basis of Statutes.
§ Mr. RUNCIMAN
I was going to ask the right hon. Gentleman how he would provide for that. If it is done by Treasury Minute it is not as permanent as though it were done by Statute, but, at all events, it is better than nothing. I thank the right hon. Gentleman for 914 having made that concession in the constitution of this tribunal.
But what is to be the effect of this upon business as a whole? The right hon. Gentleman said that the Act of 1922 applies to about 40,000 private companies; that there are 35,000 roped in under this and that 5,000 are left in doubt. Inquiries are made about them, to which we got no specific reply. The question raised by my hon. Friend the Member for York (Sir J. Marriott) was the question of the 5,000 who are or are not outside. I do not know whether the answer to that is that they are to be left entirely outside. Perhaps the right hon. Gentleman the Member for Central Edinburgh (Mr. W. Graham) has better information on that subject. I did not gather from his speech what his view was on the matter, but if we are to have anything like 35,000 more companies brought within the purview of this legislation, I can see no justification for leaving any out. If they are to be in, let them all be in. It would certainly be unfair to some of the concerns which are not depending upon the Stock Exchange to provide them with quotations for their shares, or on public subscriptions for providing them with their capital, if they are to be treated on a different basis from other concerns. Let me point out in passing that a very large number of business men in this country, particularly in the North, do not care to float their concerns in the ordinary way by advertisements in the Press and the circulation of prospectuses. They are not at all anxious to see their shares quoted on the Stock Exchange for the very good reason that they know that gambling on the Stock Exchange has been one of the most pernicious influences in modern industrial life.
The case made out for bringing in the remaining number of the companies appears to be firing your artillery over a very wide area in order to catch a very small number of evaders. It is remarkable that according to the statement of the Chancellor of the Exchequer to-day, as far as I can make out the calculation, under the 1922 Act, the Inland Revenue bagged only 180 evaders out of 40,000 companies. I expect a good many of these were of a very small type, and the fact is that the apprehensions which have been aroused among all the remainder, 915 for the sake of these 180, have been scarcely worth while. Yet I feel certain that if the Chancellor of the Exchequer were to spend the next twelve months conferring with business people in all the various types of industry which have been mentioned here this afternoon, he would be able to do all that is required without disturbing industry at all. One of the safeguards for which we are asking now—it is a comparatively small one in point of drafting, but it would have a considerable effect in easing the minds of business men—is that when the Inland Revenue come across any of these questionable cases, the fact to set them moving should be that reserves have been made with a view to the avoidance of payment. To use the words of the 1922 Act, they should move "with a view to preventing the avoidance of payment." I understand the Chancellor of the Exchequer prefers having those words inserted later on, but if they are inserted later on, it means that a prima facie case is not that there has been anything done with a view to the avoidance of Super-tax, but that there has actually been an avoidance of Super-tax. We are advised that an avoidance of Super-tax would take place if half-a-dozen extra chairs were bought for the office, if there were any addition to the amenities of the staff or any one of a great many other things of that kind. That would be money actually used out of the revenue of the year and not, therefore, available for the calculation as to the Super-tax assessment. What we wish to have made clear is that we are not to have cases started against private or public companies which come within the purview of this Bill unless there is a prima facie case that they are doing something with a view to avoiding the payment of Income Tax.
My right hon. and learned Friend the Member for the Exchange Division of Liverpool (Sir L. Scott) and I have put down an Amendment on that subject—in line 39, after the word "effect," to insert the words:as if after the words 'assessment to Super-tax there were inserted the words 'a reasonable part of' and"—which would define more clearly what I believe to have been the intention of the 916 Chancellor of the Exchequer. I hope he will see his way to accept it. One thing that weighs with us, and must of necessity weigh with business men who have to go through their accounts very carefully in these difficult times and make wise provision for future liabilities, is that we do not know exactly what are the boundaries. Either owing to ingenious drafting or bad drafting—I do not know which it is—we cannot tell, even now, what the Bill means. The right hon. Gentleman the Member for Central Edinburgh said the boundaries were very vague, and I entirely agree with him. They are so vague that some of the companies do not know whether they are in or out. I quoted one very important instance. I can quote another of very great importance. There are a good many of the private banking houses in the City of London who are not at all certain that they will not be drawn into the purview of this proposal, and, as it stands, they cannot tell whether they are to be in or out. They have alliances in this country and outside this country, and they do not know how far this is to be carried. If the boundaries are so vague, if it is impossible for a man to know whether he is in or out, is it not unreasonable that you should subject him, if he happens to make a mistake in judgment in deciding whether he is in or out, to the penalty not only of having Super-tax charged on the amount which has been improperly withheld in the judgment of the Court, but also on the whole of the gross profits of that year? That is, I understand, how the law stands at present. I can scarcely believe that was the intention of Parliament in 1922. At all events, it is a very severe penalty when the boundaries are so vague, and I suggest that the right hon. Gentleman, in improving the law, ought to improve it on that side as well as on the other. If he is now going to be more severe to the evader than he or his predecessors have been in the past, he ought to make it clear when it comes to penalties that he is not going to impose heavy penalties on those whose position is doubtful and who cannot ascertain their position until they have passed two or three tribunals.
I make a plea to the Committee not to do anything which would endanger one of the first-class qualities of British 917 commercial concerns. It is a prime element of British commercial policy that good concerns build up solid reserves. Shipping companies, of which I have had some knowledge, have been almost entirely built up out of small capital and very large provisions out of revenue.
I could give instance after instance of tramp companies which started with one or two ships and, perhaps, £10,000 or £12,000 to £20,000 capital, and which had accumulated huge fleets up to the time of the War out of their surplus revenue. They were thrifty in the way they used their profits. Some went so far as to limit themselves to a distribution of profits of 6 per cent., and devoted all the rest of the money to increasing their fleets. They did a first-rate service to the British mercantile marine. Their policy was of great service also to the shipyards and ironworks of this country. It enabled us before the War to build up a huge fleet. I could give from my own experience the cases of three tramp fleets with which I have been connected in one way or another. The first is that of Messrs. Hain's, of St. Ives. They started with a very small number of sailing ships and they transferred to steamers in the course of the change over in the seventies, and at the outbreak of the War they had no less than 50 of the best cargo ships in the country. Lord Maclay, who was the very well-known Minister of Shipping, and was very highly respected throughout the shipping community, started with a small capital and the whole of his great fleet before the War was built up out of surplus revenue.
Then there is the instance—I hope I may allude to it with due modesty—of the firm which my father built up. It began in the smallest possible way, and at the time of the outbreak of the War it had 42 first-rate cargo vessels. Those vessels were not produced by constant flotations on the Stock Exchange, but were built up out of surplus revenue. These men one after another were so prudent and so careful that they did not divide their profits up to the hilt; they were satisfied with smaller incomes in order that they might increase their concerns. That was ultimately not only a matter of great profit to them, but of great advantage to the country. But for 918 these services and but for those great fleets, of which the three I have mentioned are only samples, we should have been in a sorry plight at the outbreak of the War.
§ Sir R. HORNE
The right hon. Gentleman the Member for West Swansea. (Mr. Runciman) has made a most important speech, the weight of which I hope will be realised by the Committee. It goes directly to the Amendment in the name of my hon. Friend the Member for Watford (Mr. D. Herbert), an Amendment which I regretted to hear my hon. Friend say he was prepared to withdraw. It is an Amendment of the utmost importance, because the feature of this Bill which is struck at by his Amendment, is that it makes impossible the building up of those fleets to which my right hon. Friend the Member for West Swansea has referred. My right hon. Friend the Chancellor of the Exchequer appears to look with some derision upon that suggestion, but I would beg him to observe that what he proposes as a change in the Act of 1922 in this regard, falls outside of any ameliorating Amendment which he proposes to make to the Clause. By the Statute of 1922 it was provided that, in taking into account what was a reasonable distribution, regard was to be had to necessary current needs, to business maintenance and to development in the future. I paraphrase the words, but I think I convey more or less accurately what they imply. My right hon. Friend the Chancellor of the Exchequer proposes to alter that provision of the Act of 1922 by providing in the present Finance Bill that no longer shall you be entitled to take those things into account; that, in fact, in estimating what is a reasonable distribution you shall not be entitled to take into consideration anything that is being paid for the acquisition of property by the company or anything that is being paid for the purpose of repaying the borrowings upon which you have built up the property of the company.
These are the very things about which my right hon. Friend the Member for West Swansea has been speaking, and the Chancellor of the Exchequer cheered his remarks. The right hon. Gentleman pointed out that these shipping fleets have been built up by men starting with very small capital. Probably they only had a portion of the capital required for the 919 first ship, and they borrowed the rest. According to this provision, anybody who does that, in future will not be allowed to regard the repayment as part of reasonable distribution, as they were allowed to do under the Act of 1922. Under the three separate sub-heads of my right hon. Friend's proposal with regard to his new Clause everything is struck at which enabled the shipowner, in the position which the right hon. Gentleman the Member for West Swansea described, to build up fleets such as he mentioned. Apparently, my right hon. Friend the Chancellor of the Exchequer does not understand the process. Here is a practical method which to my certain knowledge was applied in the building up of one of the big fleets to which reference has been made. An individual shipowner with a small amount of capital—about 40 per cent. of what he required—borrowed the remainder, and he did so under an arrangement by which he was steadily and as rapidly as possible to pay off what he had borrowed. Surely that was good business? But according to these provisions the use of his revenue to pay off what he had borrowed would not be allowed. He would be regarded as evading Super-tax.
Let me give him a further example of what occurred only the other day. This is a case which has come to my knowledge. Last year a shipowner ordered four ships from the shipbuilder. He was to pay 50 per cent. in cash and the remainder over a period of six years. As the right hon. Gentleman the Member for West Swansea knows, that is a very common kind of transaction. An arrangement had to be made with the banks. The banks discounted bills in connection with this transaction, with the stipulation that there was to be no division of profits over a certain figure, and that all else that was made was to be devoted to paying for the ships which were being built. That kind of transaction can no longer occur under these provisions as I read them. Another transaction of the same kind was being initiated this year and has been abandoned owing to this Clause in the Finance Bill. I can give my right hon. Friend the Chancellor of the Exchequer another example which was brought to me personally to see if I could help. It is the case of a very important shipbuilding firm in this country which 920 requires large sums of money at the present time, unfortunately, owing to the depression in trade. One of their customers was prepared to advance them £350,000 in order to help them through this time of difficulty and trial, but when the Finance Bill appeared with this particular Clause which provides that you cannot pay off borrowed money as part of your reasonable distribution of what you have earned, they said, "This is no longer of any use; we cannot complete the transaction."
I do beg my right hon. Friend to appreciate what is involved in these Clauses, because I am perfectly certain that those who drew them have never understood or appreciated what the business results of what they have drawn will be. I, for one, do not at all assent to my hon. Friend withdrawing this particular Amendment, and I would go into the Lobby against the Government if I were forced to do so. I hope my right hon. Friend will really take into serious consideration what involved in these provisions. I must observe that they lie outside any Amendment that he makes. It is apparently proposed that money borrowed and property acquired are not to be regarded as a proper charge against the earnings of a company, and if that is to be the policy of the British Government in an industrial country, I am very sorry for our industries.
§ Mr. HERBERT
If the right hon. Gentleman's interpretation of this Clause is correct, then I am entirely with him and should not wish to withdraw my Amendment, but it is only fair to say that my impression is that the construction he puts on this Clause is quite incorrect. It is very difficult to understand.
§ Sir R. HORNE
I cannot find anybody else who differs from the view I have of ei, either in legal opinion or lay opinion, and unless our minds can be very clearly satisfied upon this matter, and we can have such a statement from the right hon. Gentleman as will reassure us, we cannot, as a serious body of business men dealing with this problem, vote for it. At least, as far as I am concerned, my mind is clear. I pass from that to the speech of the right hon. Member for Central Edinburgh (Mr. W. Graham). There were two matters which he raised which, I think, deserve to be noted by 921 the Committee. In the first place, he makes it perfectly clear that in the view of his side of the House these provisions are not strong enough. Therefore, we get an idea of the way in which this Clause will be operated if we have a Labour Government, not merely in office, but in power. All my right hon. Friend's references to what the Labour Government did when it was in office, fall far short of what would happen if we once get a Labour Government in power.
He gave us a variety of instances showing how very little the Clauses had been operated by the representatives of the Treasury, and with regard to these gentlemen, I should like entirely to endorse what he says on the subject of their competence and faithfulness. I know of no body of men that more completely deserves the support of the country than do the representatives of the Treasury and the bodies of Special Commissioners who carry on their business throughout the country. Of that I am assured from a very close and intimate experience of their work. But my right hon. Friend is making a mistake if he supposes that the Treasury officials have had time to do all that they might have done under the Clause. It is true that only a certain number of cases have been dealt with, but that has not been because they represented all the cases with which they might have dealt, and I am afraid we should be living in a fools' paradise if we were to imagine that the operations of the future were going to be confined to the comparatively small proportion which have been dealt with during the last four years. This is a new enactment, and it has not been taken advantage of to anything like the extent—I speak on a subject of which I know—to which a very much larger staff might have operated it.
§ Sir R. HORNE
But other Governments might think it well to do so, and we have some indication of the way in which they will look upon the powers conferred on the Government by this Clause. But there was another matter to which the right hon. Member for Central Edinburgh referred, and that was the evasion of taxation in this country. I agree that it is very considerable. I am also entirely 922 with him in his suggestion that the Report of the Commission, which sat to discuss the Income Tax, should be carefully gone through and all the various classes of evasion should be put together or, at least, in some document to show what is the real problem with which we have to deal. I am sure that every Member of this House, no matter where he sits, is eager to root out this kind of evasion that is going on in this country, because it is obvious that the innocent taxpayer has a very much heavier burden imposed upon him, I will not say by the frauds, but at least by the neglects of duty, which, as taxpayers, we see on the part of the evaders. That leads me to say that, although I was the author of the particular plan with which we are now dealing, or the initial stage of it at least, I am of opinion that we shall never really seriously achieve our object of stopping tax evasion along this particular line. My own impression is now that we are proceeding on a wrong assumption. All this legislation is on the assumption that somehow or other the putting of money to reserve is wrong and that we ought to watch the man who is putting money to reserve. But that is not where the wrong starts. It is by the use that is made of the reserve afterwards, and that is where we ought to tackle the evil. I heartily endorse the suggestion made by my right hon. Friend the Member for Central Edinburgh
With regard to what the Chancellor of the Exchequer has said this afternoon, he was good enough to refer to me in several instances, and I quite recognise that if there is an evil, to a large degree I am the author of it. I do not seek to disguise it. I supported this plan in 1922, and perhaps I ought to stand in a white sheet, but I very early came to the conclusion, during the Debates of that year, that there was every probability of grave injury being done to trade if the matter was carried too far, and as my right hon. Friend, who has evidently gone into the old Debates, would realise when he read them, I ultimately came to a position in which the original plan was greatly whittled down and the whole arrangement was confined within the narrowest limits. For example, it was provided that the scheme should not apply to companies with more than 50 members, that it should not apply to any company that had ever issued a 923 public prospectus, and that it should not apply to any company which was registered before 1914. The reason why that year was taken was this, that it was not until Super-tax became heavy in 1914 that the temptation to make this evasion really began, and it was thought that we should stop this tax dodging if we started the operation of this scheme in 1914.
I am still of the belief that that was a wise and proper method to adopt. But my right hon. Friend in the present Measure proposes or at least he originally proposed to extend it very much further because as his Bill was originally drawn it would have applied to many very large public companies. I could name a few if he liked, but he can think of some of them himself. It would have applied to some of the large public companies in this country whose control happens to be in the hands of five families or even less, and accordingly my right hon. Friend shifted his ground and put in a provision that it should not apply to companies in which the public have a substantial interest. I hold no brief for the "Times" in this matter but the "Times" was right in describing his original Clause as a revolutionary proposal. It certainly was. It was a great interference with the life and method of management of some of the biggest companies in this country or it could have been if the Treasury officials chose to take action, and there was nothing to indicate that they were only to take action in the case of the real tax dodger. My right hon. Friend will remember that I put into the Bill for which I was responsible a preamble to the Clause to make it clear that it was designed to catch the tax dodger—I am not using the language of the Statute I need scarcely assure the Committee—but the Courts disregarded that preamble, and they said, the rest of the Clause was clear and that they had nothing to do with what the motive of the taxpayer was. I gather that my right hon. Friend opposite is anxious that there should be put in the body of my right hon. Friend's provision the fact that it should only be operative if the intention is to avoid Super-tax. As my right hon. Friend's new Clause stands at present the Special Commissioners would be entitled to take action and the Board of Referees to decide against the 924 taxpayer if—whatever his intention was—there was avoidance of taxation provided only that they thought a reasonable proportion of the revenue had not been distributed. I hope accordingly my right hon. Friend will take that into his serious consideration and try to put that aspect of the matter right. Obviously it would be intolerable to the business of this country if people who are managing large concerns were to have their policy dictated by any outside body no matter how competent. Imagine men who are applying all their times and devoting all their energies to these problems being told by somebody outside no matter how clever that they need not provide against the contingencies they feared and in fact that they ought to divide much more of the money than they are doing. I ask my right hon. Friend to imagine how great the power would be in the hands of people who take a different view from that which we take of the merits of the conduct of industry by individual enterprise. There are people whose doctrine it is that the more the State interferes the better. Imagine them in the control of a power like this.
§ Mr. CHURCHILL
Even if it were true that the Special Commissioners could be superseded, how can the Government of the day influence the action of the Board of Referees.
§ Sir R. HORNE
These appointments fall to be filled up from time to time and one knows that all parties tend to put people in positions of that kind whom they know.
§ Mr. CHURCHILL
Whom they know and in whom they have confidence that they will do their duty, not that they will pervert it.
§ Sir R. HORNE
We must remember that this is a matter not of law but of individual opinion and discretion, and I venture to think that it would be a day of disaster for this country if ever we were to get to the stage at which the man whose duty it is to manage a business has that operation taken out of his hands by somebody else. I hope we are all going to stand firm on that principle and to say that whatever is done in this Bill this duty must not be taken away from the people who are primarily responsible. My right hon. Friend has departed from his attempt to include large 925 public companies or some of them and he has now provided that the Clause is not to apply to those companies in which the public are substantially interested but there still remain some very large private companies which will be subject to the operation of this Clause. I can think of one which has lasted now in this country for at least 80 years. I think there are four generations of families which have been associated with it and because of the family tradition and their pride in their business it has been as well managed as any company of which I know. It is one of the most important companies in Great Britain, but this company under my right hon. Friend's provision would become suddenly subject to this kind of inquisition if the Special Commissioners asked how they distributed their profits. I venture to say with regard to this company that it started with little capital and that the whole of its success and all of the employment which it has given and all the wealth which it has brought to this country have been built up through laying far more to reserve than under modern circumstances some members of the Treasury—and many of us perhaps—might think necessary. It is because they have denied themselves the use of these profits for their private ends that they are in their present position. Now this company may be subjected to this inquisition.
May I put this point to my right hon. Friend? He has used as a strong argument the statement that on the whole very few people have been caught, very few business people have engaged in the evasion of taxation. I think a statement was made that 128 had been brought before the tribunals and that 60 had been caught. I wish the Committee to observe that the trouble in connection with this matter does not lie entirely in being found out. The trouble lies also in the uncertainty which attends one of these inquiries. What is the position in which people stand during all the time this inquisition is being held? Think of the process which has to be gone through. First of all the Special Commissioners have to inquire as to the details of what the firm have been doing. Then the firm have to make a declaration if they think they have not done anything which would avoid the payment of Super-tax. There-after 926 the affair comes before the Special Commissioners again. The Special Commissioners are to consider the matter within 28 days, and thereafter, if they are not satisfied, they pass it on to the Board of Referees without any limitation at all as to the time within which the Board of Referees shall deal with the matter. While this process is going on, the firm do not know where they stand. Suppose the firm have a certain amount of revenue and have determined to use three-quarters of it in embarking upon some new equipment or some new machinery. All the time this inquisition is going on they do not know whether that sum will be at their disposal or whether it will not be, and all their operations during that period, whatever the period may be, are stopped, in reality, by the fact that they do not know whether the sum is going to be available.
§ Sir R. HORNE
Certainly, but the Super-tax upon the sum may in certain instances amount to a considerable sum of money; and during the whole of this period there is that uncertainty. These are the things which are troublesome. I am one of those who desire to make every effort to stop evasion, but I would warn the Chancellor of the Exchequer that if we are on the wrong plan, as we may be, if we push this thing to extremes, the result to the revenue will be unfortunate. The proposals which the Chancellor of the Exchequer makes in his further Amendments are really not yet sufficient to meet the difficulties of the people who have to carry on the trade and industry of this country. I revert to the suggestion that the Chancellor should make it clear that the preliminary upon which any action shall be taken shall be that there is evidence of an intention to avoid the Super-tax.
My right hon. Friend referred to a remark of mine in a previous Debate in 1922, when I said that you cannot get inside the head of a taxpayer to discover his motive, but what you can do is to see by his previous practice whether, before this kind of question was raised, he did this kind of thing or not. That would be very good evidence of his intentions. Let us take the case of one of the shipping firms to which 927 reference has been made. If it were found that in the course of that company's history they had always put large sums to reserve, in order to build up their fleets, then one could readily come to the conclusion with complete certainty that they were not now attempting the business of tax evasion. I would beg my right hon. Friend to give way to this suggestion, and to meet many of us who are very much troubled about this matter. Another thing I would venture to put to him is that he should stand where we previously stood in 1922. I say that because I believe he is not going to get much in the way of revenue from any further extension of the period of time within which the Clause is to operate, and I say it also because I believe that during the next year we shall find it to be our duty and a necessity to stop evasion in some totally different way, rather, perhaps, according to the suggestion of my right hon. Friend the Member for Central Edinburgh than according to the plan upon which we are at present engaged. I believe there are many ways of avoiding even what my right hon. Friend is designing now. I can think of many already; and the Chancellor will find himself at the end of another few years in a position in which he has again to review the procedure. I do not believe that in this matter we are proceeding on the best lines, and I think we ought to start not at the point where money is put to reserve, but at the point at which the reserves are being nefariously used. With these reflections I venture to appeal to my right hon. Friend to give consideration to some of the suggestions which I have made.
§ Mr. GILLETT
I was surprised, in listening to the speech of the right hon. Gentleman, to note, after he had seemed to advise the Chancellor of the Exchequer not to proceed with the proposal because there was very little money in it, that a minute later he told the Committee that so much evasion went on that it would be necessary to attempt something on bigger lines in order to check this evasion, as was suggested by my right hon. Friend the Member for Central Edinburgh (Mr. W. Graham). It seems to me the right hon. Gentleman has been trying to prove too much this afternoon. In the first place, he has 928 been anxious to make us all exceedingly nervous about what is going to happen to various companies, and then there was his point about the real meaning of this Bill. I am not in the legal profession, and I do not want to enter into the dispute which the right hon. Gentleman had with the hon. Member for Watford (Mr. D. Herbert) as to the actual meaning of the Clause now before us. I prefer to draw the attention of the Committee to the real object of this Clause. When this question was mentioned in the House last year, and the year previously, by an hon. Member sitting opposite, no word of objection was raised to any action being taken, in fact, the Government were strongly urged by certain hon. Members sitting opposite to take action on those lines. I wish the Committee would recall the instances that were brought before us at that time by the hon. Member for South Salford (Mr. Radford). I think it is a most unfortunate thing that he and his friends have not come forward in reply to the newspaper campaign which has been carried on against the proposals made a year ago, which then had the support of large numbers of Members in the Committee. I very much hope he will not allow us to be turned away from the main point he has in view, and that is the question of preventing the evasion of taxation.
It has been my experience and I expect it has been the experience of other business men in the Committee, that taxation in connection with the companies has worked quite satisfactorily until there has come on the scene some of the very clever gentlemen who think they are going to score. A man appears who is trying to evade taxation if he can, running as near to the wind as possible; he wants to do the thing legally, and so he gets the very best advice he can. The Board of Inland Revenue get information like that which the hon. Member reported to us a year ago. Then what happens? In the action taken to prevent this astute gentleman from continuing his systematic evasion, a large number of other people are very much inconvenienced. Over and over again we have found that certain privileges which were granted have been withdrawn because of the abuse of them by men of this class; and it is because of what such men have done that in this case the 929 Government are introducing legislation which is going to impose certain hindrances and hardships upon other classes, and that people who are in no way attempting to evade tax are going to be made to suffer. If we listen to the right hon. Gentleman the Member for Hillhead (Sir R. Horne) we are to abandon, seemingly, the attempt to prevent these gentlemen from doing what they want. I agree entirely with the Chancellor of the Exchequer that the thing has gone too far already, and it is quite impossible for the Government to recede from the position they have taken up. Nothing is to be gained by giving way to this campaign, though I agree that there are certain dangers connected with the question before us, and also certain difficulties.
With regard to the wording of these proposals the right hon. Gentleman has taken it that this is an instruction to those who are going to administer the Bill when it becomes an Act, that in considering the income of any business all these things mentioned are to be considered as part of the profits of the business. I gather from the way in which the right hon. Gentleman spoke, that he wishes us to think that any money spent in these ways by any company would virtually become liable to Super-tax. But it seems to me that the words are not necessarily interpreted in this way, because in one of the Amendments which the Chancellor of the Exchequer has put down he speaks of a company paying "a reasonable part of its income for that year or period." I take it that really all this Clause is intended to do is to make it quite plain, when you are considering what that reasonable figure is, that this kind of expenditure will be taken into account. These various points have been included on account of these rather clever gentlemen, because of some of the one-man companies which are being formed. There have been a number of instances in the newspapers of people turning their private estates into companies, and then part of the income which they receive is used for these very definite purposes which are here detailed.
That is why the Committee have this question before them to-day, and are being asked to solve the difficulty of frustrating these gentlemen. The argument 930 is that in frustrating these gentlemen the whole question of the amount of money which a business can put to reserve is to be put in the hands of certain officials. I confess I was very surprised at the right hon. Gentleman's reference to the appointment by the Government of officials of this kind. It almost seemed to imply that such appointments were a kind of political jobs, and I venture to suggest that Ministers, to whatever party they might belong, would not readily agree with the description of the way in which these appointments are made. Personally, I should feel more confidence in Ministers, even of parties other than my own, than to imagine that they would make appointments on quite the lines that the right hon. Gentleman has suggested. I quite agree that this will bring before the Super-tax Commissioners the question of what amount of money should be put to sinking fund, and, if that is going to be done, it does open up a very big subject for the various concerns affected. The Chancellor of the Exchequer has already told us that 40,000 firms came under this provision, but it is perfectly well known that many of them have suffered no inconvenience from it whatever in the past. If this Clause is put into the Finance Bill, are we really going to have any greater difficulty in the future than we have had in the past in the case of those who obviously came in under the Act?
I should like to ask the Attorney-General in how many of the 40,000 cases to which the Chancellor of the Exchequer referred as coming within the previous Act, these companies escaped the net of the Super-tax Commissioners. I do not think that the Chancellor ever explained that point. He told us that 40,000 came in, but I gathered that the reason for making this change was the way in which certain companies could get out of it if they chose to issue a few shares publicly, or to increase the number of their shareholders, or in other ways. I should like to ask, also, whether some period of time could be put in whereby the companies concerned would know how soon they were likely to become liable to anything of this kind. A company makes up its accounts and pays its dividends, and it may be that a long time afterwards this question will be raised. I am not 931 now discussing how long the negotiations may go on, but I think it would be useful if the Attorney-General would consider whether any limitation could be placed on the period of time within which, after the company has declared its dividend, the question might be raised, so that at any rate there might be some security in that regard.
When the hon. Member for South Salford raised this matter last year, I entirely supported the case that he was making out, and I wish to support it this year. I do not wish to run away from the position I then occupied simply because of the difficulties that there may be in connection with administration. I think that any of us who have had anything to do with the general administration of the Income Tax will agree that, if you are prepared to treat the Commissioners fairly, you will find that on the whole they will treat you fairly. The people who have most difficulty with the Income Tax Commissioners or the Super-tax Commissioners are those people who are trying all the time to play a game with them, and in whom they have no confidence. Looking at the whole question, and realising the position in which we are now placed, I think it is quite impossible for the Government to retreat. As the Chancellor of the Exchequer has said, it would only leave the way open to many people to evade taxation entirely, and it seems to me that it is only fair to those who are reasonably paying their taxation that we should do everything we can to see that those who are trying to get out of their fair taxation should be prevented from doing so. At the same time, I think it is evident that the Government have fully recognised the difficulties. I myself am inclined to hesitate a little as to the wisdom of the Chancellor's suggestion as to appointing certain business men to the Committee in answer to the request of the right hon. Gentleman the Member for West Swansea (Mr. Runciman). There is going to be a representative of the shipbuilding industry, a representative of the Stock Exchange, and so forth, but, after all, you cannot have all business interests represented on a committee of this kind, and, therefore, certain definite interests must he left out.
§ Mr. GILLETT
If the company with which I am concerned were going before certain Commissioners, I would rather that they should not be appointed in that way. I would rather not have my competitors in my private business sitting on the board before whom I should have to explain all the private affairs of my company. If the hon. Member had had as long an experience of business as I have, he might see my point. I do not think there is at all necessarily a sound argument in what the right hon. Gentleman said about the difficulty of understanding what these different terms mean as applied to different businesses. We shall have to depend upon the wisdom of the Minister in making the selection, so as to try and cover all the various aspects of business life, without saying that one man is representing one interest, another another, and so on. I hope the Government will stand firm on this matter, and will not give way before a newspaper campaign which does not fully recognise certain difficulties in the administration of a Measure of this kind. I think we should be satisfied that the Commissioners and the officials will administer this Bill in the very able way in which they have for so long administered these matters, and I hope that the Committee will be satisfied to support the Government.
§ Sir HENRY BUCKINGHAM
The last speaker, twice in the course of his remarks, referred in a somewhat deprecating way to the newspaper campaign through which this agitation has been carried on. Of course, it is only through a newspaper campaign that the public are able to bring their grievances to the notice of the powers that be, but, if the hon. Member's suggestion is that the campaign was organised by the newspapers, and is simply a newspaper "stunt," I can assure him that he is very much mistaken. I myself have had a very large amount of correspondence in connection with this matter, which has had nothing to do with newspapers at all, but which has come from chambers of commerce, great firms and companies, and so on, and I can assure the hon. Member that the agitation is not a news-paper "stunt," but a very genuine agitation indeed. So far, this Debate has been of a topsy-turvy character. The only people who have supported the proposals of the Chancellor of the Exchequer 933 have been members of the Socialist party. It was extremely interesting, when one was listening to the Chancellor's speech, to hear his analysis of the criticisms of the Clause cheered by members of his own party, while his defence of the Clause was cheered by the Socialist party.
§ Sir H. BUCKINGHAM
I was expecting to hear from the Chancellor of the Exchequer a more conciliatory speech. He certainly promised certain Amendments, but he made a very vague statement as to what he proposed to do to alleviate the public feeling of insecurity. He told us that he would be prepared to consider some other plan which might be put before him which would have the same effect in stopping the evasions that we all want to stop, and would at the same time be more acceptable to the commercial and business community. That, in plain language, is nothing more than the expression of a pious hope, and is not in the least helpful. I certainly understood that the Chancellor of the Exchequer was going to promise that this inquiry should not be conducted by some amateur body such as a Committee of this House or any other body outside who might consider the situation and make certain proposals to the Chancellor of the Exchequer, but that the inquiry should be an official inquiry, backed up by the help of the Treasury and with every assistance from the commercial and financial community, so that it would have some really definite and official result, and might possibly help to allay the feeling of insecurity which now exists. The Chancellor's suggestion was purely an expression of a pious hope that something or other would turn up which would be better than the proposals in this Clause.
§ Mr. CHURCHILL
No, Sir, it was much more than an expression of a pious hope. I pointed out that I should welcome any suggestions that might be made for dealing with this matter in a manner which would he more satisfactory to the business community, and which did not fail to achieve the purpose 934 we have in view. That necessarily implies that I should put no obstacle in the way of my hon. Friend or others working with him who might wish to study this matter, and that I would see that they got any assistance that they reasonably required in formulating their case in a proper manner. The statement which I made conforms to what I have indicated to my hon. Friend as the line that I should take.
§ Sir H. BUCKINGHAM
I do not think the Chancellor of the Exchequer was here when I made by earlier remarks. I was saying, before the Chancellor came into the Chamber, that the only sort of inquiry that would have any possible effect would be an official inquiry backed by the resources of the Treasury, so that, if any result came of it, and if any recommendation were made to the Chancellor of the Exchequer, it would be of an official nature, and would, therefore, help to alleviate the feeling of uncertainty which exists to-day.
§ Mr. CHURCHILL
I am sorry to interrupt my hon. Friend, but that is not what he said to me when he did me the courtesy of coming to see me on the subject. He did not mention an official inquiry at all, but asked that any inquiry that might be made by Members should not be denied a measure of assistance from the officials. That is quite a different thing from asking for an official inquiry, which would legalise the campaign of disturbance which has been going on throughout the year to the great detriment of the business of the country. Therefore, my hon. Friend is not really justified in suggesting that I have promised him an official inquiry. I have promised official assistance in so far as it may be necessary for any inquiry which he and any of his friends instigate.
§ Sir H. BUCKINGHAM
I asked for an inquiry of an official nature. That is clearly within my recollection. But, in the meantime—
§ Sir H. BUCKINGHAM
In the meantime, as the Chancellor of the Exchequer remarks, there would be a great deal of uncertainty throughout the whole commercial 935 community. This Clause would be on the Statute Book and it would be exceedingly difficult to remove it, but, at the same time, if the Chancellor could promise to institute an inquiry of an official nature—I will not say an official inquiry, if he objects to that term, but an inquiry assisted by the Treasury, and with the assistance of representatives of the commercial and financial world—I believe it would be possible somewhat to relieve the anxieties of the commercial and business community. But it would be better still, of course, as the right hon. Gentleman the Member for Central Edinburgh (Mr. W. Graham) suggested, to treat the whole matter as one and, instead of taking it piece by piece, institute a general inquiry to see if it is possible to arrive at a method of preventing evasion. If in the meantime he would postpone the action of these Clauses, he would satisfy public opinion and relieve his political followers very considerably.
§ Mr. W. GRAHAM
The hon. Member has attributed a statement to us which is very misleading. I did not suggest any further inquiry. In point of fact, all the material is now at our disposal. What I suggested was a simple collection of that material.
§ Sir H. BUCKINGHAM
We have all the material and, therefore, we are in a position to have a general inquiry. I think the Chancellor of the Exchequer knows perfectly well that if he gets these Clauses, he will get them for political reasons and not upon their merits. I have not the least doubt that this and another Clause we shall be discussing presently are detested by the industrial community and by a large number of his political supporters, and if they do not vote against them the reason will be that some of us believe it would be a still greater disaster that the Government should be defeated on this Clause, with all the constitutional results which would follow, than that the Clause should be put into force, with the possibility of something better being evolved before it comes into actual operation.
Why is the Clause so detested? Several remarks have been made to-day about the Civil Service. The Chancellor himself, the right hon. Gentleman the 936 Member for Central Edinburgh, and my right hon. Friend all spoke of the Civil Service in the highest terms, but there is not the least doubt that there is a general feeling that the increased powers that are given year by year to the bureaucracy are a matter of danger to the community. I have pointed out ever since I have been in the House the gradual increase of powers given year by year to the Civil Service in the matter of the Inland Revenue. Under this and other Clauses very largely increased powers are being given, and I think it only my duty to point out once more that these increased powers will become a real menace, and it is the duty of the representatives of the people to oppose it. That, I believe, is at the bottom of the whole of this agitation, the detestation of the idea that either members of the Civil Service or any other outside body should have the right to interfere with what, after all, is the primary duty of directorship of companies, the wise allocation of profits. Under this Clause that power is considerably enlarged and extended to a much larger section of the community than before, and until the public is satisfied that the powers of the bureaucracy are not to be further extended I believe this agitation will continue.
The second objection which the commercial community have to the Clause is that it is vicious in its very essence. It encourages principles of finance which are entirely opposed to the sound principles of thrift and wise management which have built up our British industry and enabled many firms to survive the difficult period they have gone through. It not only discourages them, but penalises those who practise them. Can there be any more vicious principle than to encourage this spendthrift manner of disposing of profits and discouraging the principles on which the whole foundation of British prosperity rests? There are many of us—I am one of them—who, if they or their fathers had not practised these principles, if they had adopted the spendthrift policy which this Clause forces upon directors of companies, would not be here to-day. I seriously invite hon. Members on the Socialist and Liberal benches, many of whom take a 937 real interest in the prosperity of British trade, to say whether they are in favour of this policy of practically forcing directors of companies to divide up to the hilt the profits they have made or to pay heavy taxation upon them. I consider it quite unsound and entirely vicious in principle. The third reason is that the Clause is so utterly ill-considered. The Amendments the Chancellor himself has put upon the Paper are quite sufficient evidence of that. I believe the general opinion of hon. Members also proves it. If the right hon. Gentleman had instructed his officials to produce a Clause which could be easily evaded and would cause irritation, he could not have been better served.
For the reasons I have indicated, the Chancellor may get the Clause, but I hope before the Debate finishes he will see the wisdom of accepting certain Amendments which will make it less offensive than it is at present. I appeal to him to accept one Amendment which will remove the penal aspect of the Clause. Anything more vicious than to penalise a man for effecting savings I cannot understand. The result of this penal Clause is extraordinarily quaint, to say the least of it. A company is found guilty, we will say, of having put £100 or £1,000 more to reserve than the Commissioners or the Board of Referees approve, with this extraordinary result, that the Board of Referees will have no option except to say the company must pay the extra tax on the whole of its profits, including actually that part which they themselves say ought to have been put to reserve. It is so ridiculous that I believe the right hon. Gentleman, if he considers that aspect of it, will accept the Amendment. I have made these remarks because I felt it my duty to do so. I think there are many of us who would like to vote against the Clause. I dare say there will be a great many who will, but I am hopeful that after the right hon. Gentleman has heard all that has been said he will either withdraw the Clause altogether or postpone its action for at least another year or make some statement which will justify those of us who would like to vote against it in not doing so. The matter is entirely in his hands. If he forces it through Committee, it will be done with the help, not of Government supporters but of the Socialist party.
§ Mr. RADFORD
I have no doubt all hon. Members have noticed the statements that have appeared in the Press in the last few months with regard to the provisions in this Bill, and the ludicrous nature of some of the statements. After listening to the speeches to-day even at the risk of appearing to show undue disrespect to the opinions of some other hon. Members, I am bound to say the misapprehension with regard to these provisions seems to extend even to the Committee itself. The right hon. Gentleman the Member for Hillhead (Sir R. Horne) spoke as if, with these provisions passed, it would be impossible for any company to accumulate reserves. The right hon. Gentleman the Member for West Swansea (Mr. Runciman)—I am speaking of two of the best informed Members of the House—explained how not only shipping companies in which his own family are interested, but other shipping companies, made very small beginnings, but, by setting aside their profits to reserve, have managed to grow into huge concerns and the individuals interested from small men into men of great wealth—absolutely most valuable work for the country and the commercial community, but their annual savings have escaped Super-tax. May I remind the Committee of the position of the different Super-tax payers? Highly salaried officials pay Super-tax on every penny piece, in excess of £2,000, of their remuneration. Professional men pay Super-tax on every penny piece of their incomes in excess of £2,000, and so do the proprietors of or partners in private firms. Shipbuilding firms have been mentioned. When Harland and Wolff started in Belfast as a private firm, I have no doubt that they did not draw out their profits and live in a big style. They built up, and if they had continued as a private firm after 1909, when Super-tax was first imposed, they would have been charged Super-tax on the whole of the earnings of their business. They would not have been allowed any deductions whatever.
In Clause 29 there are to be limitations on the items that may be claimed as an excuse, or reason, for the non-distribution of profits, and we have this outcry. I have had cases brought to me in perfect good faith calling for an answer. One is the case of a man who started in a manufacturing 939 business a few years ago, a small limited company of which he is the sole proprietor. He is making £5,000 a year but he had to borrow the whole of the capital required to enable him to start. He has rigidly limited his drawings to a few hundreds per annum, and has applied the rest of his £5,000 a year profit to the payment off of these liabilities. "Now," they said, "here is a case. He may become liable under these provisions and be called upon to pay Super-tax, and thus be prevented from carrying out his obligations of paying the debts he owes." This is no doubt a reasonable and plausible case. But what are the facts? Assuming that the Special Commissioners choose that man as one who is improperly failing to distribute a reasonable proportion of his profits by way of dividends, that they establish their case against him, and that he appeals to the Board of Referees, and they give their judgment against him, and he has to pay, the serious amount he will have to pay will be £231 5s. That man with £5,000 a year profit will be mulcted to the extent of £231 for Super-tax. Is that going to prevent him from carrying out his obligations?
I have had another case put to me of a private company owned by five men making £24,000 a Year. It has been arranged between them that they shall only distribute a dividend of 6 per cent., which comes to less than £2,000 a year. Let us assume that their case is brought up by the Special Commissioners and that judgment goes against them. Assuming that these five men are equal partners or equal proprietors of the shares, how much of this £24,000 a year is going to be taken from them by way of Super-tax? In the neighbourhood of £1,100. It is absolutely ludicrous for hon. Members to rise here and say that these proposals are going to paralyse industry. Supposing a young professional man buys a practice, and he borrows money from his bankers or from others to enable him to purchase the practice or a share in a practice. He borrows £10,000 and he makes £3,000 a year out of the practice. But as he wants to pay off his indebtedness, he lives on £500 and places £2,500 a year, or wishes to do so, in redemption of his indebtedness. Is there any question as to whether the Special Commissioners will 940 pick his case out for notice? Is there any question that he may possibly succeed in winning his case if they take his case before the Board of Referees? No. It does not arise at all. Such a man is assessed for Super-tax on £3,000 without regard to his indebtedness.
§ Mr. MACQUISTEN
May I ask my hon. Friend if he will not be allowed to charge the interest he has paid on his loans?
§ Mr. RADFORD
My hon. and learned Friend has asked me that question. I do not wish to weary the Committee with details, but it must be borne in mind that such companies equally have to pay interest on their loans and that fact has to be taken into account as a charge against their profits. There are improvements in this Clause which might possibly be effected, but, for my own part, I welcome these provisions most wholeheartedly, and I should like my right hon. Friend the Chancellor of the Exchequer to know that at any rate on this side of the Committee there are some of us who welcome them wholeheartedly. I think that the direction in which some improvements are desirable is with regard to appeal. The provisions of the Finance Act, 1922, are rather peculiar. Sub-section (I) of Section 21 of that Act saysWhere it appears to the Special Commissioners that any company to which this Section applieshas failed to distribute a reasonable proportion of its profits by way of dividend, they shall have this power to bring the matter into question. Schedule 1 of that Act provides for certain details with regard to management of the matters arising in the Section, and it provides at the beginning thatA company which is aggrieved by any direction given under Section 21 of this Act may appeal to the Special Commissioners against the direction.That seems to me to be rather a peculiar position. The Special Commissioners of Income Tax are those who take the initial steps against the taxpayer, and if he is aggrieved he has to appeal to the same Commissioners. He appeals back to them, and asks them to reconsider the decision to which they have previously came, but, failing any satisfaction, then there is the Board of Referees who are appointed by the Treasury. I would suggest 941 to my right hon. Friend that to allay all possible, reasonable fears on the part of the commercial community, it would be advisable that the Board of Referees should not be some nebulous body the composition of which is unknown to the commercial community, but that the composition of the Board should be made public and that they should be a body of men whose impartiality and ability to adapt themselves to the varying circumstances of the different cases should be absolutely beyond question.
I must admit that when my right hon. Friend made his speech, which he said he hoped would be reassuring to the Committee, it was reassuring to me in that he said he was not going to see this Clause vitiated. He would agree to various reasonable Amendments, but he would not agree to the life and strength being taken out of it. I must admit that I did not find it reassuring when I heard him give the example of companies who are making anywhere in the neighbouhood of £25,000, £30,000, or £40,000 a year, and who are applying the whole of their profits to the extension of their businesses, and that they were held, when the Commissioners brought forward their cases, not to be liable to Super-tax because their profits were being used for extensions. One of the cases given was that of wholesale clothiers' shops that made profits somewhere in the region of £40,000 which were being utilised for extensions. There is no end to that principle. It is possible to start with nothing, and as long as your income can be used for extensions gradually building up until you become a millionaire, and be free from Super-tax throughout the period.
I must admit that my right hon. Friend, while reassuring a great number of Members on these benches, did not reassure me in that respect. It has been stated that this is a raid upon industry, and that it is a further means that is being given to the Inland Revenue officials to screw more money out of industry. It is nothing of the kind. The same amount of money will be raised by way of Super-tax when this Bill becomes law as was raised before, but the burden of it will be more equitably spread over those who ought to pay it. I trust that my right hon. Friend will stand firm, and will not give way on this 942 Clause in any respect that will prevent it from achieving the purpose for which it was designed.
Sir HILTON YOUNG
The hon. Member who has just sat down made a very interesting and courageous speech, although, at times, he caused me to wonder whether he quite realised the width of the area which might be affected by this legislation or the gravity of the apprehension of those who were affected. Indeed, in contending that all those who ought to be liable for Super-tax should be brought in, it appeared to me that he was somewhat begging the question at issue to-day. Let me, in the first place, range myself with those who show no disposition whatever on this matter to attack the officials of the Inland Revenue. On the contrary, it appears to me that the duty of the officials of Inland Revenue is most admirably discharged. It is their duty to suggest to the Government, and the House of Commons, as severe legislation as they possibly can suggest to fortify the revenue system of the country. That is their duty. It is the duty of the Government to say whether the proposed legislation is in accordance with the general interest, and it is our duty to criticise and, if possible, to amend that legislation. But, if anything goes wrong with the revenue legislation of the country or the revenue administration, the responsibility and fault are entirely those of the Government and of the House of Commons, and not at all those of the officials of Inland Revenue, who simply administer the legislation given, to them to administer.
It has appeared to me in the course of this Debate that a great deal of argument has been due to a profound doubt and uncertainty in all our minds as to what really is "evasion" of the tax. It is very difficult indeed to give any precise meaning of that word, and I view with a good deal of doubt the particular Amendment proposed by the Chancellor of the Exchequer which will throw upon those affected in this matter the burden of making out a case as to whether they have been avoiding taxation or not. That, it appears to me, is a very difficult task to discharge. It avoids taxation when one fails to earn as much as he might, but that is a perfectly legitimate form of avoidance. 943 It seems to me that the logical outcome of some of the provisions in this year's Bill would be that the Special Commissioners should be able to say to the taxpayer: "You are not earning as much as you might. You are idle; your earning capacity is greater than your earnings and we will assess you on that." That is, of course, a reductio ad absurdum.
The importance of this Debate is that we are engaged in constructing legislation which is in course of evolution. No one hopes for one moment that this will be the last that we shall hear of this matter in Finance Bills. We shall have more Clauses on this matter in future years. It is, therefore, of extraordinary importance that we should get legislation on to the right lines, and that we should not trust, as some hon. Members opposite argue that we should trust, to Ministerial statements in the House or to the hopes of reasonable administration. When one is actually in the course of evolving legislation year by year in the House of Commons, it is important that we should direct the evolution on to the right lines. It appears to me that in this matter our legislation has taken a turn in the wrong direction. I may, perhaps, say that with some sense of responsibility, because behind the broad shoulders of my right hon. Friend the Member for Hillhead (Sir R. Horne) I had a minor Ministerial responsibility in this legislation in 1922. But one does not always make correct deductions from first beginnings. My right hon. Friend the Chancellor of the Exchequer has proposed to us that we should leave this matter for a year and see whether it is possible to arrive at some better scheme of legislation.
§ Mr. CHURCHILL
No, Sir. I have not proposed anything of the kind. I propose that the proposals put forward and the Amendments accepted shall be the decision of Parliament. There the matter shall remain for a year, and if in the interval a better scheme can be provided I shall be glad to adopt it.
Sir HILTON YOUNG
If you please. My phrase was a loose one. We should leave the matter as it stands in the Bill as amended, and see whether, in the course of a year, we can arrive at some better scheme. In view of this possibility for the future I want to make a suggestion 944 as to the lines it will be necessary to follow to turn legislation back into the right direction. It is this. It is, in the first place, recognised as an admitted principle, that saving money and putting it to capital purposes is a good thing and a public service and ought to be encouraged. If one accepts that principle, and, I think, we are all prepared to accept it, we should not look upon a person as evading taxation who honestly and in a beneficial manner applies his money to capital purposes. I would go further and say, that even though the motive of the parties concerned may be not to pay so much Super-tax as they otherwise might, if they save money and put it to capital purposes, one ought not to consider the motive but ought to consider the result.
The practical consequences that would follow from that are, first, that one ought to abandon this attempt to define the sort of company that comes within the purview of the Act. It is leading us to artificial and impracticable formulæ of legislation. You cannot find a clear and workable basis in attempting to define the sort of company which should come within the purview of the Act. We ought, further, to abandon the attempt to impose an authority which can dictate to a business undertaking what shall or shall not be put to reserve for capital purposes. That is what excites the protests of the business community. We recognise that in the agitation which has taken place over this matter. If that be so, and if we are to abandon those attempts, what principle are we to substitute? I believe that the principle has emerged perfectly clearly in our Debate to-day, and most clearly in the instances which have been given to the Committee by the Chancellor of the Exchequer. What we should do is to say not that one is evading Super-tax who honestly saves his money and puts it to capital purposes, but that one is evading Super-tax who, by a subterfuge, is getting his money back into his pocket and not putting it to capital purposes at all. The Chancellor of the Exchequer will recognise that all the instances which he gave to the Committee of the sort of tax-dodger we all want to "round up," were instances in which the party concerned was actually getting the money back into his own pocket. He was getting it back by repayment of loan, or some 945 subterfuge of that sort. He was getting it back under his own control and not putting it to capital purposes.
Let me follow this matter up by steps, because it has a very wide and very deep application to our Income Tax system. As regards ordinary Income Tax, as the Committee well knows, all funds of a company are subject to ordinary Income Tax which are put to reserve, if they are beyond what is necessary for depreciation and maintenance of the business. That is a weak point in our Income Tax system. I have sometimes argued that we ought to have a differential rate of Income Tax as regards sums put to reserve. The ideal might be to exempt them altogether, but that is a very distant and remote ideal. If that be a weak point in out Income Tax law, although we cannot for revenue reasons exempt these funds put to reserve from ordinary Income Tax, we ought to be most reluctant to take a step forward and place upon money which is saved and put back into industry the fresh burdens implied in subjecting it to Super-tax. I believe that what is at the bottom of the very lively apprehensions expressed on this occasion is an apprehension lest we are marching steadily forward in the direction of subjecting this particular form of good social deed, the saving of money universally over the whole of its area, to the burden of Super-tax as well as that of Income Tax. That the common sense of the country is reluctant to do. One ought so to act on this principle, in evolving a more satisfactory scheme, as to refuse to consider the form of the company or the amount of funds that are put to reserve and to say that we will accept as our test of what is evasion, not how much money is saved and put to capital purposes, but whether the money is actually received back by the party concerned. They should make it liable to taxation.
There is a difference of opinion between the hon. Member who moved the Amendment and the Chancellor of the Exchequer as to the nature of the further inquiry into this matter which should take place in the following year. My hon. Friend said that in the Committee which he desired he wished to have the assistance of the great volume of official knowledge, without which very little can be done. The Chancellor of the Exchequer, 946 as I understood him, does not desire to promote doubt by making it an inquiry by the Government or by officials. Might not these two ends be met by making the inquiry an inquiry by a Select Committee of this House?
§ The ATTORNEY - GENERAL (Sir Douglas Hogg)
Perhaps it will be for the convenience of the Committee if I endeavour at this stage to deal with some of the points which have been raised in various quarters of the House. I think I can clearly start from this standpoint, that all Members of the House, to which ever political party they may belong, are agreed in their desire to put a stop to what is conveniently called the evasion of taxes. As has been pointed out by the right hon. Member for Central Edinburg (Mr. W. Graham), there is, legally speaking, no such thing as the evasion of taxes. Either you are within the purview of the Act of Parliament, in which case you must pay, or you are outside it, in which case Parliament has not decreed that you are liable to pay. Therefore, you are not evading a tax, legally speaking, if you so arrange your affairs that you are not hit by the words which the Taxing Statute uses. Whatever may be the legal view, a good many of us, at any rate, have pretty strong opinions as to the morality of so arranging your affairs as deliberately to avoid bearing the share of that burden of taxation which Parliament intends should be borne equally by all the citizens in the State. Therefore, it is not an inconvenient phrase to speak of the "evasion" of taxation.
The dispute which has been argued about this evening is not with regard to the desirability of stopping evasion, but with regard to the question, the very important question, whether this Clause effectively stops evasion, and whether it interferes unduly with legitimate business enterprise. These are the matters to which I wish to address myself The right hon. Member for West Swansea (Mr. Runciman) said that having regard to the small number of companies which had been brought within the purview of the Act of 1922, he doubted whether it was worth while to attempt to make the extension of Section 21. My right hon. Friend the Member for Hillhead (Sir R. Horne) gave the answer when he pointed out that, although comparatively few companies have been brought within the Act of 1922, there are a number of others 947 —the precise number I cannot give, although I have been asked for it, because we cannot get the information until this Act becomes law—which are doing the same sort of thing as is aimed at by the Act of 1922, and which have so far succeeded in doing it in such a way as to keep themselves just outside its provisions.
I do not want to weary the Committee with instances, but there are two which came within my personal knowledge because they were eases in which the Crown unsuccessfully attempted to stop the fraud. I was the advocate who failed in that endeavour. There was one case in which two brothers, directors of a large company, and controlling that company, had borrowed sums which, I think, aggregated to something over £100,000, from the company for two or three years, thereby avoiding the necessity for declaring dividends and, of course, the monies they so borrowed were not income. [HON. MEMBERS: "Were they Scotsmen?"] I do not wish unnecessarily to identify them. Then, as directors, they released themselves from the debt. We said, "This is really too obvious a fraud." The successful answer was, "The release is not valid, because we cannot legally release by resolution of the directors. The only way we can get out of our liability is by winding-up the company, and it has been decided that in the winding-up of a company the distribution is not income and, therefore, not liable to tax."
There was another case in which a gentleman who controlled a company, in the month of March of one year capitalised £100,000 of profits, paying practically no dividend, and applied that sum in paying up in full debentures to that amount. The debentures were then issued as a bonus to the shareholders, which was himself, in the month of March, and in the following month of May, so as to get into another Income Tax year, the debentures were redeemed at par. It was said that this gentleman had received no income; that he had in the first year received merely a capitalised sum which the company had validly capitalised, and that he had in the second year merely received payment of a capital debt owing by the company to him. That is the sort of case which is not covered by the Act 948 of 1922 and which I think every hon. Member will say ought certainly to be stopped. Therefore, we start with this assumption that there is a case which has to be met. If it is a case which needed to be met a year ago, it needs far more urgently to be met to-day in view of the cases to which I have referred, cases which have appeared in the Press, instances which were given last year and instances which have been given to-day by the Chancellor of the Exchequer. Those instances have called the attention of everybody who desires to avoid payment of Super-tax to the possibility, the easy possibility of doing it, and if Parliament having had its attention directed to this form of evasion takes no step to put a stop to it, then indeed we can expect a very large increase in the number of persons who will take advantage or devices of this character.
We all desire to stop tax-dodging—evasions of Super-tax; and we are agreed that something has to be done, and done urgently, to put a stop to it. That does not cover all the ground, because one still has to see how far the proposals which we have brought forward are adequate to remedy the evil, and also we have to see that they do not unduly interfere with business. I would like to call attention to the main alterations effected by Clause 29 in the existing law. There is an alteration, first of all, in regard to the class of company which is included within the purview of Section 22, and the substantial alteration, when we have taken into account the Amendments which stand in the name of my right hon. Friend, is that we include companies which were formed before April, 1914, whereas previously any company formed before April, 1914, was automatically excluded from the Section. The right hon. Member for Hillhead has urged that we ought to maintain that exclusion, on the ground that before 1914, when taxation was less heavy, it is probable that there were no cases of companies formed for the purposes of evading taxation. I agree with him in that, but I do not quite agree with him in his conclusion, because the question is not whether the company was originally formed with a view to evading Super-tax. The question 949 is whether the company is now being used with the object of evading Super-tax. In fact, hon. Members may know that companies which were formed before the year 1914 and formally registered and incorporated, and which have never done any effective business in their lives, are actually hawked about and sold for a considerable sum to various ingenious people who Wish to use them for the purpose of evading Super-tax—and there can be no other Object in buying these companies—and who know that by buying a company incorporated before April, 1914, they put themselves safely outside the Act of 1922.
§ The ATTORNEY-GENERAL
No. He cannot effectually prevent it. My right hon. Friend says that the President of the Board of Trade can control it. I do not know how he can stop a company which had been legitimately formed and incorporated under the Companies Act being acquired by any person who chooses to buy its shares, whatever they are—and there are probably only one or two pounds issued. The new purchaser being in control of the company, can use the company for any purpose within its memorandum and articles of Association. As my right hon. Friend the Chancellor reminds me, all these instances which he gave and which I think must have very much impressed Members of the Committee, are instances of companies formed before April, 1914, so that I do not think there can be any doubt that there is the need for the extension to which I have alluded, nor can there be any logical objection to these companies being put in the same position as companies incorporated at a later date.
The other direction in which we have made an alteration is in the provision which stops that kind of tax dodging to which my right hon. Friend called attention and to which I have referred, namely, the provision under which it is no longer possible to escape liability to Super-tax by the device of either making loans or purporting to sell your business to a new company on terms of being paid so much a year, either in instalments of the purchase price or in redemption of the capital debt. It is 950 quite a common device to sell your assets, say, for £100,000, to a company, to be payable in 20 instalments of £5,000 each. Your assets which are worth £100,000 bring in £5,000 a year. You continue to get your £5,000 a year, but you get it as instalment of the purchase price, and so it is not income and no Super-tax is paid on it. That is the sort of thing which is to be stopped and which I submit fully wants stopping. But then, it is said, quite sincerely I think, that the real effect of this Clause goes a good deal further, and it is suggested that it will stop, for instance, the sort of case given by the right hon. Gentleman the Member for West Swansea of the ship-owning company which necessarily and rightly builds up reserves in order to meet the fluctuations of business and in order to increase its fleet as the old ships get worn out. The Government feel confident that the Clause, with the Amendment which we are putting down, will not in any way interfere with a business of that kind. We agree entirely with the right hon. Gentleman that it ought not to be possible, and we believe it will not be possible under this Clause, to prevent the devotion of any sum of money for the proper development or maintenance of the business which the company is carrying on.
My right hon. Friend the Member for Hillhead differed from my hon. Friend the Member for Watford (Mr. D. Herbert), because the right hon. Gentleman said that, as he read the Clause, with the earlier Act, any payment on account of property acquired by the company would be treated as income, whereas my hon. Friend said he read the Clause as excluding the payment of such sums, i.e., as including only the purchase price agreed to be fixed for the acquisition of the property or undertaking of the company. The Government view is that the hon. Member for Watford is right about this matter. Certainly, I say, unequivocally, our intention is only to deal with such a position as my hon. Friend alluded to, and certainly we do not intend to interfere with the sort of case given by my right hon. Friend the Member for West Swansea. The right hon. Gentleman was reinforced by the right hon. Gentleman the Member for Hillhead and since he assures me that he, as a very learned 951 Member of this House, and friends of his really think that the words are capable of the construction which he puts upon them, we will do our very best, by some appropriate language on Report, to make it perfectly clear that only the case which we have in mind, and which I think is covered by this Clause, shall be, in fact, affected by it. I think the fallacy of my right hon. Friend was in not noticing that the words were:payment for the business, undertaking or property:acquired by the company. That does not mean payment for any ship or property acquired by a company. It is only the purchase of the business which is acquired by the company. I do not wish to thrash the matter out now.
§ Sir R. HORNE
I shall be very much obliged if the right hon. and learned Gentleman will say what is the language in this Section which will restrict this matter, as he wishes, to deal with the acquisition of the business acquired. The business might be a single ship, which is paid for partly in money and which would be distinctly struck at by the Clause, as I read it, and all similar undertakings are in exactly the same position under the Sub-section. I wish he would be content with the last paragraph (b) which says:Any sum expended or applied, or intended to be extended or applied, in pursuance or in consequence of any fictitious or artificial transaction.That would cover the whole category of things he is referring to and would prevent him laying down what we think is one of the worst principles any Government could lay down, namely, as to the way in which you are to deal with your profits.
§ The ATTORNEY-GENERAL
I think the right hon. Gentleman will remember that that very phrase, "artificial transaction" was attempted to be used in the 1915 Act, or in an earlier Finance Act, and in practice it proved almost wholly ineffective, because it was almost impossible to prove that the transaction was not legally a genuine one, although the motives which inspired it might be anything but lawful, and, therefore, that phrase by itself I am afraid would not do.
§ The ATTORNEY-GENERAL
I hope we shall do it. I think the right hon. Member will remember that the proviso of Sub-section (1) of the Act of 1922 is still operative. It is the proviso: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.
§ Mr. D. HERBERT
If the Attorney-General will forgive me, he did not entirely meet or correctly state my view. He has hit on the exact point now. He says those words are in operation now. If he will look at the top of page 16 in the Bill, he will see that Clause now provides that such sums shall be regarded not as having been applied or being applicable to the current requirements of the company's business, but he knows that on that I raised a question and put down an Amendment, because although I quite agreed with what I supposed to be the intention of the Government, I think these particular words "and not as" are liable to misinterpretation.
§ The ATTORNEY-GENERAL
I think the object which the Government certainly had in view is met by the fact that you only exclude such payments as are payments for the business, undertaking, or property acquired. At any rate, the intention is that we shall cover only the case of the man who is selling the business of the company on terms of being paid either by instalments or by redemption of debentures and who says what he has received is repayment on account of the purchase price and therefore not income. If necessary, we will see that these words are framed so as to meet the objection, and I hope that will ease the mind of my right hon. Friend. Then there was the point made by my right hon. Friend the Member for Hillhead in which he said he was very anxious to have words inserted so that before the Commissioners can apply they must have grounds for believing that what is being done is being done with a view to the avoidance of Super-tax. My right hon. Friend has forgotten what he himself 953 said when a similar Amendment was moved in 1922. He said this:The intention to evade is the important thing, but you never can discover intentions except by overt acts. You cannot get inside a man's head, as has often been said on the Law Courts, and discover what his motive is. You can only interpret his motives from what he does."—[OFFICIAL REPORT, 27th June, 1922; col. 1909, Vol. 155].That view was very powerfully reinforced in the Law Courts in the case which I think my right hon. Friend had in mind when Lord Sands said:Human motives are obscure and difficult of ascertainment and sometimes conjectural, and their ascertainment cannot appropriately be allowed to enter into the matter of the collection of the public revenue.So there is a view judicial which reinforces my right hon. Friend's Parliamentary assertion. I think we are going a good way towards meeting my right hon. Friend's difficulties, because he pointed out, and correctly so, that in the 1922 Act the reference to the evading of Super-tax appeared only in the Preamble, and it had been said that on that account it was not part of the operative language of the Act. My right hon. Friend will remember that in the Amendment which the Chancellor of the Exchequer is moving the reference to avoidance of the payment of Super-tax is inserted as part of the operative Clause and, therefore, although the Government cannot accept an Amendment which makes it necessary for the Commissioners to be able to say that they know before they have made an inquiry into the facts—and that is the stage at which they are called upon to act—that what has been done has been done with a view to the evading of Super-tax, it is possible, as soon as the Commissioners make an inquiry, for the directors of the company to make a statement that there has not been, and will not be, any avoidance of the payment of Super-tax through the failure to distribute a reasonable part of the income. The matter then goes to the Board of Referees, and, unless the commissioners show a prima facie case is made out there is no further inquiry. Therefore, I think a great deal has been done to meet my right hon. Friend's case, for, although we cannot interpolate motives into the Act of Parliament for the reasons he himself gave and which Lord Sands has reinforced, 954 we do bring in the question of the avoidance of Super-tax at the earliest moment at which it is possible to bring it in, namely, before ever the case reaches the Board of Referees.
Another suggestion which I have to meet is that the penalty is unduly severe. It is said that, if a company has failed to distribute a reasonable part of its income as dividends, it is not right that its whole profits should be treated as subject to Super-tax, but only the surplus beyond what might reasonably have been distributed. I think hon. Members lose sight of the object and effect of the Clause. We are not legislating in order to deal with people who do not distribute as much of their income as some other person may think reasonable. That is not the object of the Clause. We are dealing with people who are using the machinery of companies in order to evade Super-tax, and I submit, it is not unfair, when you get a company used for that purpose, that the persons using it, and who are really controlling the company, should be put for that one year in the same position as if they were a private firm. They are not penalised in any sense; they are merely treated for that year as if they were private individuals and as if they had earned this money themselves instead of through the machinery of companies.
It is said that the Income Tax law is complicated and it would be much better to simplify it and, by simplification, to stop evasion altogether. I am not quite so sanguine as to believe that by simplifying the language you will stop all the ingenious devices for getting round Income Tax. As long as we are unhappily burdened with taxation on the scale under which we suffer at present, so long, I am sure, there will be people ready to evade payment of that tax, if they can legally do so, and plenty of people who will be able to show them the way of achieving it. I agree that simplification is eminently desirable. It is a matter which I have advocated ever since I have been in office, and only recently my right hon. Friend was able to announce in this House that he was setting up a committee of those best qualified to judge and assist, including those who act normally for the Revenue and those who act normally for the taxpayer, in order that they may set to work and frame a form of Statute which will render the language simple and 955 intelligible, so far as it is possible. But a task like that is necessarily a lengthy one. If it is done with extreme care it will involve careful study and consideration, and research.
What is to be done with the tax evader meanwhile? Are we to allow these holes, whose existence has been widely advertised, to remain unstopped whilst we are waiting four or five years for the result of the labours which are about to be initiated? That is an impossible position. We are not stopping every possible gap. We are stopping gaps which have become large enough to threaten the whole structure of the Income Tax law if they are allowed to continue to expand, and we are stopping them in a way which will not cause any injustice or any unfair treatment to those who are not attempting to avoid their legitimate obligations. The Chancellor of the Exchequer has stated that if during the year which elapses before these provisions become operative any suggestion can be put forward for a better scheme which will achieve the same results, he will be only too glad to welcome it; he will consider any suggestions if they are practicable. Meanwhile this is a suggestion which is the best we are able to put before the Committee, to which no satisfactory alternative has at present been offered, and I think the Committee would hardly be doing its duty to the public, with all these facts laid before it and with this scheme before it, if it rejected the scheme and left these gaps unchecked in the hope that in some future years someone will be able to devise a better way of achieving the same result. For these reasons, although we are anxious to accept the Amendments which have been indicated, and are anxious and ready to meet any legitimate criticism which may be made as to the undue apprehensions which this Clause may arouse, yet we feel bound in duty to ask and press that the Committee shall accept the essential features of our scheme and shall indicate that tax dodging of the character we have indicated in the illustrations we have given, and which we seek to stop by this legislation, shall be not only condemned by the opinion of this House but rendered impossible when this Bill becomes law.
§ Mr. D. HERBERT
In view of the Attorney-General's very specific statement 956 as to what is intended, and his indication that the Government will introduce words to make that intention perfectly clear, I ask leave to withdraw the Amendment.
§ Mr. LLOYD GEORGE
I understand that the Committee refuses leave to withdraw, and I therefore propose to make a few observations on the subject. It is a sore temptation to the Opposition, when the Government is embarrassed by the criticism of their own supporters, to take advantage of it, but I cannot on this occasion honestly take advantage of the difficulties of the Government. In the main the course taken by the Chancellor of the Exchequer is right and, if I may say so, courageous. Unless some step of this kind is taken, I agree with the Attorney-General, there is a real danger of the State losing a very important branch of revenue. I was responsible for imposing the Super-tax in the first instance, and I am very concerned to see Chancellors of the Exchequer protecting the income and equally concerned to see that they do not develop the bad habit of pocket-picking. On this occasion, I think the Chancellor of the Exchequer has afforded a reasonable protection to the Super-tax. What is the principle of the Income Tax and Super-tax? The principle is that each man should contribute to the revenue according to the income he earns. Certain allowances are made for depreciation, reserves, for insurance and other items. Whether these allowances are adequate, or whether they are fair, is a matter for general consideration and investigation, but if any additional allowances are to be made they must be made all round. They must not be made merely to persons who are ingenious enough to be able to frame schemes by which they evade the general law of the land and cast upon others a heavier burden by doing so.
Up to the present it has been the principle of the Income Tax that you tax upon the basis of what a man earns without any reference to the use he makes of it. What is the principle laid down by the right hon. Member for Norwich (Sir Hilton Voting)? It is that money so saved and put to capital purposes ought to be taken into account in 957 your assessment of the Income Tax. Surely, if you begin to say that the purposes for which you use money you have earned is to be taken into account by the Revenue, you will find half your income will escape Income Tax altogether. Are you going to apply that principle to a man whose income is £1,000 or £2,000 a year? One man may be earning £2,000 and spending it all. You tax him. Another man may be more frugal and thrifty and he may save money, and although he does not apply the savings to his own business, but applies them to somebody else's business, although part of his savings go to the development of capital investments, he does not escape Income Tax. Why should you apply a different principle to the man who is using his money and putting it into reserve and the development fund of his own business than to the man whose general savings are put into the fund of savings which is utilised for capital investment and development? You cannot apply the principle in the case of the Super-tax payer unless you are prepared to apply it to the case of the ordinary man who saves.
There is only one principle on which you can base your taxation; and that is, you tax a man according to his earnings. The moment you begin to say that you are going to allow him to deduct savings it will knock the whole Income Tax machinery endways. It will be impossible for any Exchequer to depend upon receiving its revenue year by year. If you put forward this as an inducement it must be an inducement all round to the small man as well as to the man who earns a large income. You cannot say that purely because a man is saving for the purpose of developing his own business you exempt him, but that if he saves for the purpose of increasing the general fund for investment of the country, you do not protect him.
§ Mr. LLOYD GEORGE
The hon. Member says that in Holland they exempt savings. That is a principle which is worth considering, but it must be considered all round and not in reference to one particular favoured class.
§ Mr. MACQUISTEN
Only in limited companies. They are taxed on their dividends, not on their reserves.
§ Mr. LLOYD GEORGE
That may be a subject for consideration; but it must be considered all round, and as to the effect on the revenue. I remember when I first proposed the Super-tax a very rich friend of mine came to me and said, "It is no use your making this proposal. We shall find a way out of it, and I give you fair warning. I can give you half a dozen different ways in which I can get out of it." I am not sure whether he succeeded or not, but I am absolutely certain that there have been endless devices for the purpose of escaping liability for the payment on large incomes. It is thoroughly well known that it has been done. And they are multiplying; and every additional Is. put on has been a stimulus to this purpose. There is no doubt about it. The right hon. Member for Norwich says that it will interfere with enterprise. All taxation interferes with enterprise, and the real answer is not to grant special opportunities for one class to evade taxation but to reduce taxation altogether by means of economy. That is the way to do it.
If you permit one class of taxpayers, who have at their hands the most ingenious brains in the country, including lawyers, who can employ the best minds and who have themselves the most ingenious resources for the purpose of manipulating finance, to evade their legitimate responsibilities, what is the result? You are simply casting a heavier burden on other people who cannot evade it. There are people whose incomes are simple anal uncomplicated. There is the professional man, for instance. He cannot escape; he cannot form himself into a limited liability company; whereas those who are in business can do it and have succeeded in doing it. There is no doubt that a great deal of this kind of thing is going on now. What is the result? The professional man, whose income is clear, straightforward and simple and who cannot indulge in these evasions, will have to pay more because others are able to evade. He cannot say. "While I saved last year, I invested my savings in the most admirable scheme for the development of British industry" Why should another man who is engaged in a different method of conducting business be able to say it?
959 There is a good deal to be said for reconsideration of the whole question of the allowances made for depreciation, for reserve and for development. Take the case put by my right hon. Friend the Member for West Swansea (Mr. Runciman). Whether sufficient allowance is made in that case for substituting new ships for old, and for the great fluctuations in the shipping industry, I cannot say. But what applies to one industry applies to all other industries. Many a time when I was Chancellor of the Exchequer I felt it was very difficult to resist the claim put forward by business men for a greater allowance for depreciation, not merely in shipping, but in other trades as well. It would be very desirable that the taxation of this country should be so arranged as to be an encouragement for people to put their money into re-equipment, into new machinery and improvement. I remember well that when I put some sort of Excess Profits Duty on munition works, I made allowances of that kind. But there was very little that I got in the way of Excess Profits. A Chancellor of the Exchequer has to be very careful as to the kind of allowances that he makes. If the right hon. Gentleman were to undertake to reconsider the whole question of depreciation and reserve, there is something to be said for it, but that must be done all round, and must be done equitably, not by way of favour to those who are in a special position by means of this kind of company to escape the liability. What is done for one must be done for everyone. That is not the case now. I do not know what the Chancellor of the Exchequer thinks he is going to get out of this proposal. I am not sure whether he has given the figures to the Committee.
§ Mr. CHURCHILL
It will not affect this year at all, but next year for all the Clauses we have credited an addition of £500,000. As I explained, it is not so much an addition to revenue that we expect to make as the warding off of what would otherwise be a very serious loss.
§ Mr. LLOYD GEORGE
There is no doubt that it is now going on at a very accelerated rate, and every case in the Courts that goes against the Crown encourages others to follow the example. 960 I cannot see what any Chancellor of the Exchequer in the position of the right hon. Gentleman could do differently, when his advisers came to him and say, "Unless you stop this gap you may lose millions of revenue." I think it might very well happen. What would any Member opposite say in the position of the Chancellor? That advice is received from very able men who are as anxious as anyone not to embarrass trade and industry. If they say, "If this goes on you will lose not only £500,000, but £5,000,000, and it will go on probably until you lose £10,000,000," what could any Chancellor do? He may have to impose fresh taxation on others. That is not fair to the rest of the people. One favoured section escapes the £10,000,000 and the rest will have to pay. I forget what the Income Tax is at the moment—I do not mean the rate, but the total amount which is paid. I understand it is £230,000,000. £10,000,000 will escape. The other £230,000,000 will have to be found by others. That is not fair. As long as the Chancellor of the Exchequer thinks it necessary to raise these huge sums in taxation—whether he ought to do so is another matter—if the money has to be raised it ought to be raised equitably, and I am very glad the right hon. Gentleman is bringing in this provision to make it impossible for people to escape their fair contribution to the Income Tax of the country.
§ Mr. H. WILLIAMS
I have listened, as have all of us, with great interest to the right hon. Gentleman who has just spoken, but with profound respect I would say that I do not think he has read very carefully the Clause we are discussing or studied very exhaustively the proposed Amendments to the Clause. Half of the right hon. Gentleman's speech seemed to be devoted to Income Tax and the other half to an assumption that certain people were in fact evading Super-tax on the reserves, or were not—I was not quite cleat what the right hon. Gentleman was driving at, and I do not think the right hon. Gentleman was very clear himself. I am sorry to have to say that, but I feel it is my duty to say it. When the Chancellor of the Exchequer was speaking this afternoon I asked him a question which he did not answer. I was not surprised that he did not answer, because he would not have 961 the information in his head at the moment. As he was not in a position to answer I thought he rode off a little lightly. I asked him whether a company like Lever Brothers Limited would be brought into the scheme, because a little earlier he told us that the various Amendments would cut 85 per cent. of the trade out of the scheme. I rather doubted the accuracy of that statement, and that was why I asked whether, for example, Lever Brothers were brought in.
There is a business with £60,000,000 of capital, and at one time the whole of the ordinary shares were held by the late Lord Leverhulme and his son. Therefore, the whole of the real voting power was held by those two people, and though now the company is a public company, it is under the control of fewer than five persons, or was, and therefore would be brought into this scheme. That company, I believe, did not pay any dividends last year on its ordinary shares; the whole was placed to reserve. Therefore the Chancellor of the Exchequer would have the right to investigate that big business and it might be decided that the company had improperly placed to reserve the whole of their profits available for distribution to the ordinary shareholders. The ordinary shareholders might not be in a position to meet a charge imposed upon them, in which case it would fall on the general body of the shareholders who had no vote in the matter. It may be that I am wrong in my assumption that the company would be brought in. I think it would be brought in, and, if so, the burden would not necessarily fall upon those who had taken the decision but might fall upon the general body of the shareholders who had no control whatever.
I think that all these devices for tax avoidance ought to be stopped. I am certain that there is no person criticising this Clause who desires that there should be any continuation of tax avoidance of an improper kind. But the difficulty apparently is how to do it. I am inclined to think that if the whole of this Subsection except the last three lines were left out, the case would be met. What we are out to deal with is improper transactions whereby money which was income suddenly becomes entitled to call itself capital and to avoid taxation. The Chancellor of the Exchequer, instead of 962 dealing with the improper use of reserves, is proposing to authorise the Inland Revenue to investigate, if they choose, every case. It is no defence to say, "Oh, in fact we are not going to do that.'' Every company knows it may be done, and the future policy of the companies with regard to dividends and reserves is going to be influenced by the fact that they fear it may be done.
§ Mr. CHURCHILL
Will my hon. Friend say whether the 2 per cent. of 40,000 companies in the last four years under this regime have in fact been influenced.
§ Mr. WILLIAMS
I am asked whether the 2 per cent. of the 40,000 companies which have been affected in the past have had their policy influenced. I cannot say off-hand. The right hon. Gentleman is now going to influence other aspects of the matter by these various Clauses of the Bill, and, therefore, the policy of companies in the future will be influenced. Stringent Regulations are to be introduced, and, therefore the future policy of companies might be entirely different from their past policy. I am connected with a small industry which is a very hard-up industry and has not been in a position to put much to reserve in recent years; but it happens to be an industry where nearly all the companies are small family companies, where none of them have ever indulged in any of these improper devices for tax avoidance. Yet they are all perturbed about their future, judging by communications I have received. All fear that there is a risk that they may be interfered with in future.
With regard to taxation, a tax may be bad because it is too high or it may he bad on psychological grounds. I can think of three cases. In 1909 certain taxes were proposed on land values in certain circumstances. I believe the amount of these taxes was not large, but psychologically they were bad and they produced most deplorable results. In 1920 the present Secretary of State for Foreign Affairs was Chancellor of the Exchequer. He raised the rate of Excess Profits Duty from 40 per cent. to 60 per cent. It had the most deplorable effect on business of any Act passed in this House in modern times. One met people who were carrying out great extensions of enterprises. The fact that this 963 increase of the duty had been made checked numerous enterprises just at a time when our trade situation was critical. The tax was psychologically wrong, and I am certain that for the same reason the proposal in the present Finance Bill is psychologically wrong. It creates a fear at a time when we want to avoid it. This scheme potentially treats every honest trader as a possible rogue. It is what people resent, and I hope that the Chancellor of the Exchequer will go a little further in the way of amendment and do something more to remove the legitimate fear which exists. I am able to speak on this subject freely and dispassionately, because one way or another it will not affect me at all; I am looking at the matter from the broad point of view of its possible effect on business.
There has been some reference to an Amendment, which will be discussed later, on the penal Clause. I think that every crime ought to have a penalty in proportion. We make it a crime of sorts if a firm places an inadequate sum, or uses an inadequate sum, for the payment of divdends. They do not know what an adequate sum is in advance; they have no knowledge. They do not know when they have committed the crime whether they have committed it or not. There is an air of absolute uncertainty. Later they discover that they have committed a crime. They are thus punished, not to the extent of the crime they have committed, but to a very much greater extent. Let us take a hypothetical case. Suppose a business made a profit of £100,000, and suppose it retains £90,000, and distributes £10,000. Then the Inland Revenue looks into it, goes through their books, and ultimately it is decided that they ought to have placed £20,000 to reserve. The measure of their crime is £10,000, but the measure of their penalty is £90,000, because they are taxed on £90,000 although their crime is only £10,000. That is perfectly unjust and absurd, and against all the principles of taxation. I think that the taxpayer ought to know in advance whether he is entitled to do a thing or not. If this Clause becomes law it will extend the area of uncertainty and I urge upon the Chancellor of the Exchequer that he should do something with regard to the penal Clause, and 964 that he should be rather more willing to accept Amendments of the whole scheme than he has shown himself up to now.
§ Mr. PETHICK-LAWRENCE
The hon. Member for Reading (Mr. H. Williams) has said that a large number of firms are perturbed at this legislation which the Government are introducing. I want to ask the Committee who it is who is responsible for those firms being perturbed? The Government have brought in measures to stop up certain loopholes. These measures, as the Chancellor of the Exchequer has pointed out, will not interfere with an honest business carried on by a private company and dealing with their affairs as honest businesses do to-day. But a large number of Members on the other side of the Committee have thought fit, backed up by the more unscrupulous parts of the Press, to pretend that this very sound legislation is designed to interfere with the legitimate business of private companies, and because hon. Members on that side of the House have taken that course, and have boosted their exploits in that direction, the companies to which the hon. Member for Reading has referred are perturbed. There is no doubt that the people who are responsible for perturbing those companies are the hon. Member for Reading and his friends who have taken that action.
§ Mr. H. WILLIAMS
Many of these communications reached me before there was any general discussion in the Press, or before I myself had drawn the attention of those people to the situation. Perturbation existed before there was public agitation.
§ Mr. PETHICK-LAWRENCE
The hon. Member can attempt to ride off on that line, but we all know perfectly well that the really serious perturbation has been due to the misrepresentation of this reasonable Clause in the Press, and to the attitude taken up by hon. Members opposite. [HON. MEMBERS: "Nonsense!"] In reference to that, the right hon. Gentleman the Member for West Swansea. (Mr. Runciman) seemed to me to argue this way. He said. "After all, this legislation of 1922 has not been very much of a success, because the right hon. Gentleman the Chancellor of the Exchequer has admitted that out of 40,000 companies 965 only 180 a year have come within the meshes of the Clause." But I would remind the right hon. Gentleman the Member for Swansea that it is not the companies who are found out, and dealt with, that are the important consideration. The important thing is the number of companies which have not practised this method of evasion because this law has been brought into effect. I entirely agree with what the Chancellor of the Exchequer has said with regard to the extension of this law. It is not an answer to give the number of companies that will be dealt with when the new law comes into operation; it is the number of companies that will avoid the transgression which otherwise they would be permitted to do.
The hon. Member for Reading in one of those self-glorifying attitudes which he so often adopts in this House, referred to the right hon. Gentleman the Member for Carnarvon Boroughs (Mr. Lloyd George) and pretended that his speech about income reserves was obscure. It may have been obscure to the hon. Member for Reading, but I think it was perfectly clear to the bulk of this House. He referred to the speech of the right hon. Gentleman the Member for Norwich (Sir Hilton Young), who sketched out an entirely new theory. He suggested that the Revenue ought not to collect taxation from money that was put to reserve, whether it was put to reserve by people as individuals or as private companies or public companies. There was a very good answer to that: that if you once began to take the view that money which is put into saving is to be exempt from Super-tax—and possibly the right hon. Gentleman the Member for Norwich even suggested from Income Tax—you will go a very long way indeed, and you will lose an enormous sum to the Revenue.
But the real fact is, as it seems to me, that this Committee has somewhat lost sight of the fact that we are essentially in an anomalous position with regard to the whole of this matter. We have had on the one hand private individuals who have their money invested in a firm. Whatever they do with profits they make in the year they are subject to Super-tax on the full amount of their profits for the year. They may use their profits to reinvest them in the firm; they may use 966 their profits to put in other firms, or to swell the capital of the country by starting new companies, or by investing in new companies; whatever action they adopt, their money is entirely subject to Super-tax right through. Now, at the other end of the scale, we have a man who has shares in a public company. The profits which the company divide are subject to Super-tax in the hands of the shareholders. The profits that the company does not divide, but puts to reserve, are subject to Income Tax, but not to Super-tax. There is a fundamental anomaly, and I think the great bulk of the Members of this House would wish to see that anomaly removed, but the difficulty of course is to do it. So far as the company is concerned, it would be exceedingly difficult to trace the undivided profits of the company to the individual shareholders, and attempt to charge them each up with Super-tax for these undivided profits which they had not received in cash. Now the private company comes in between the individual and the public company, and the question is what are we going to do with regard to the private company?
The hon. Member for South Salford (Mr. Radford), who has been largely responsible for bringing this matter before the House in times past, compares the position of a private company entirely with that of the single individual. It seems to me the hon. Members opposite might consider his defence of the Clause incomplete on the ground that they might prefer to correlate the private company not with the individual, but with the public company, and that is to a certain extent true. The fact is however that so far as the public company is concerned, there is a safeguard against unlimited abuse. The public company with large numbers of shareholders and whose shares are being sold openly in the market is not very likely to put an undue amount of its profits to reserve from the very fact that it is a public company, and that it is bound to distribute a very considerable amount in income, and further, it cannot play hokey-pokey games such as the Chancellor of the Exchequer has explained, because the number of persons engaged is too large. But when you come to the private company you have a totally different state of affairs. There you have a company which is able to put a totally undue amount of its profits to reserve 967 for the express purpose of enabling its shareholders to escape Super-tax; and it is for that reason that it is necessary to have a Clause of the kind which the Chancellor of the Exchequer is putting forward. The hon. Member for Reading championed the evader by saying that he would like to see the whole of this legislation swept away.
§ Mr. PETHICK-LAWRENCE
The hon. Member has probably no recollection of what he said, but he will find that he did say something of that kind.
§ Sir BASIL PETO
What the hon. Member said was that he thought the whole of this Sub-section might very well disappear except the last three lines. There was no question of all the legislation.
§ Mr. PETHICK-LAWRENCE
If the hon. Member says he did not say so, I do not wish to press a point against him on which I may be misinformed; but I think he gave the impression that the less there was of this legislation the better. Am I right in understanding that the hon. Member wishes to catch the evader by every means, but there is one small part of the Clause which he thinks will do that?
§ Mr. PETHICK-LAWRENCE
It is not a question of withdrawing. If I have misrepresented the hon. Member I will withdraw my statement, but at the same time I will not withdraw the statement that he gave the impression that it was a mistake to be too hard in following up these men who are trying to evade the proper payment of Super-tax. I venture to take entirely the opposite line. It is perfectly clear from the speech of the Chancellor of the Exchequer and the speech of the Attorney-General that there is a very great deal of evasion going on. That evasion will clearly increase unless steps are taken to stop it, and so far from thinking that the proposals 968 which the Government have put forward are too severe, I think that they are still very lenient in letting a large number of evasions through the meshes of the law.
§ 8.0 p.m.
§ Mr. GATES
The speech of the Attorney-General has had a somewhat reassuring effect upon me. I have on the Paper an Amendment which will carry out the views of the right hon. Gentleman the Member for Hillhead (Sir R. Horne). The Amendment is to omit the greater part of Clause 29—Sub-section 1, Sub-section (a), leaving in the words "Any sum expended or applied or intended to be expended or applied in pursuance or in consequence of any ficticious or artificial transaction." I should have though that as the right hon. Gentleman the Member for Hillhead said that that Clause would have been quite sufficient to secure the Exchequer against any tax dodging or fraud by the taxpayers. But I confess that I was somewhat relieved to hear what the Attorney-General has said about the words that are in the Act of 1922, which enable the Commissioners, if they are satisfied that a reasonable part of the income of the company has been distributed to have regard to the current requirements of the company's finance and such requirements which might be necessary for the maintenance and development of the business. These are the words in the Act of 1922, though I confess that I thought they were taken out of that Act by Section 29 of the Finance Bill of this year. In any case if they are not taken out it is now proposed to enact that there shall not fall within that category certain sums spent in payment for the business in reduction of loan capital and in meeting any obligation of the company in respect of the acquisition of the business. All these things, in the general constitution of the company, are matters which every director is bound to look to for the maintenance of his business. He is bound to put aside out of income certain reserves, so that, if the opportunity comes along, he may acquire other businesses or use it for the redemption of any loans. It is a matter of ordinary business, in private life or in company life, to set apart a portion of income to repay any loans that have been made for the benefit of the business. If they were not paid 969 in cash out of the income for the year, they would be, in most prudently managed companies, repayable by yearly premiums in respect of a policy of mortgage redemption.
I do not know whether the right hon. Gentleman the Financial Secretary to the Treasury would consider any suggestion. Very great difficulties are going to be put in the way of directors of companies by these provisions. Would it not be possible to say that it shall be lawful to apply, say, 25 per cent. of your income in payment to a reserve fund, and that the remainder be subject to Super-tax? That is a round figure which, I believe, the Treasury would find would be a fair sum to the shareholders and to the Treasury. It was a figure put to me this morning by a very big commercial man in the City. It will have the advantage that directors of companies, who come within the provisions of this Bill, would know where they are; at the present time, they cannot have any idea of what they will be subjected to. In spite of the Amendments which the right hon. Gentleman the Chancellor of the Exchequer has put down, giving certain exemptions from the provisions of this Section to some companies, it does not apply to a very large number of companies. The companies to be exempted by the Amendment must, I think he said, satisfy four conditions: first, they must be shares of a class in respect of which a public offer of subscription must be made; second, not being shares entitled to a fixed rate of dividend; third, carrying not less than 25 per cent. of the voting power; and, fourth, must be quoted on the Stock Exchange. There are an enormous number of companies who could not satisfy those conditions. The hon. Member for Reading (Mr. H. Williams) referred to one company; I could give a very great number where the ordinary shares have not been issued to the public although the preference shares may have been. They may be, and probably are, under the control of five persons, and the ordinary shares, at any rate, may not be quoted. This would apply to practically every shipping company and to a great number of colliery companies and textile companies, and, I believe, also to newspaper companies. I have heard that, if these provisions had been applicable at the present time, in all probability the "Daily Mail" would not have been able 970 to build the magnificent premises from which it fulminates against the Government. Whether that would be the case or not I do not know, but, at any rate, it was paid for out of reserves accumulated, I am told, out of the profits of the business which, possibly, they would not have been able to accumulate if the provisions of this Section had been enforced and were seriously carried out.
I need hardly say that I have every sympathy with the Government in their object, which is to catch the tax-dodger, and I hope they will succeed. But I am fearful of the difficulties that privately-owned companies, carrying on and developing the necessary business of this country, may experience at the hands of the officials of the Board of Inland Revenue. Colliery companies are absolutely bound to use a very large portion of their income to replace seams and to open up new mines. Textile companies and many other trading concerns have to do the same thing. The right hon. and learned Gentleman the Attorney-General has given us some words of reassurance that he will, on the Report stage, put some words into the Clause that will ensure that all reasonably-managed companies will have the opportunity of carrying on their business without undue disturbance from the officials. I may point out how important it is, from the employment point of view, that these companies should be able to accumulate their reserves and develop their business by acquiring new properties, putting out tenders for new ships to the shipyards, opening up new collieries and new textile factories, and so on. If they are unable to do so, there will be an immense increase in the volume of unemployment all over the country. Private companies, I submit, should be on an equality with public companies in determining the amounts available for distribution among their shareholders, always providing, in accordance with the Finance Act of 1922, that such distribution is a reasonabe one. Super-tax was always considered to be an entirely personal matter. The recipient had the use of the money which was taxed; he had the advantage of spending it and doing what he wished with it, hut under this Clause, the shareholders are subjected to a tax on an arbitrarily-assumed income which they have never received, and which perhaps they are never likely to receive. 971 That seems to me to be entirely indefensible. I do hope the right hon. Gentlemen the Chancellor of the Exchequer and the Financial Secretary to the Treasury will be prepared to consider a reasonable Amendment with a view to making this Clause less hard upon the many business concerns in the country. The right hon. Gentleman the Chancellor of the Exchequer said in his Budget speech that he had no desire to disturb or damage the broad structure of company law and the practice of limited companies in this country, and that his object was only to prevent the avoidance of the tax by the tax-dodger and secure legitimate revenue for the Crown. With these objects I am heartily in sympathy, but I have ventured to express what I know is a very real difficulty, which is felt by a great many well-managed commercial concerns in the country.
§ Mr. MACQUISTEN
This is not the only country where tax evasion is practised. It is a very common thing when taxation reaches very high figures. When I was travelling recently in the East, I met an American accountant who told me that when taxation was high in America he had been set away to the East by some very wealthy men and there he cached under holding companies very large sums, and he was sent out from time to time to see how they were getting on. Not only will we have evasion here, but we will have evasion by flight of capital. There is nothing more timid than capital. When it is liable to be taxed, it can take the wings of the morning; it goes on strike; it folds up its tent like the Arab and silently steals away. That is where I see a certain danger in this Clause. I admit that the speeches of the right hon. Gentlemen the Chancellor of the Exchequer and the Attorney-General, and the instances they gave us, may have some effect in quelling a great deal of the alarm that has been raised, but one always has the feeling, especially when one hears the Chancellor of the Exchequer, that his capacities for debate are so great and so ingenious that he could have made probably a far stronger case for the other side. He almost persuades one in spite of oneself, and I believe he almost persuades himself, which is perhaps one of the most difficult things that a man could do. The cases that those two right hon. Gentlemen gave were all hard and 972 extreme cases; they had nothing to do with the 40,000 companies or the 35,000 companies. To tell us, as the Attorney-General did, about two brothers who lent money to themselves without interest and so on—that is quite a different case. To tell us, as the Chancellor of the Exchequer did about a limited number of cases, I think he mentioned two or three, where men lent money to themselves out of the funds of the company which they themselves controlled and paid small dividends—I must say that these things are suspiciously like illegal devices. He tells us that the cases were lost; I suppose they were brought before the Special Commission. But to deal with all companies because of such cases is like machine-gunning a large crowd, because there are one of two pickpockets in it, and to say that if you shoot the whole crowd you are bound to shoot the pickpockets.
Would it not have been possible to frame a Section that would have said that no man in control of a company should be entitled to draw money out of the funds of a company, whether by way of loan, directly or otherwise, beyond the amount of his dividend? That would have shut the door on this practice of loaning money from the company to the manager and so forth. If it were provided that all a person could get out of the company would be the dividend, that would meet the cases mentioned by the Chancellor of the Exchequer. The damage which this particular legislation does, is that it creates fear and apprehension. Every limited company has the knowledge that this sword is hanging over its head. We have been told to think of the number of cases in which it will prevent the undue holding up of profits—but think of the number of cases in which directors will say, "If we keep up a large surplus and endeavour to develop the business, the Chancellor of the Exchequer and his minions may come down upon us and we will be branded as people who have been endeavouring to defeat the revenue. Therefore, let us eat, drink and be merry and divide our profits up to the hilt." It is not the tax evader who is affected. The tax evader has a thick skin and he does not care. It is the man of sensitive conscience who dislikes even to be called in question by an 973 Inland Revenue official, who will suffer and he is the man who will be liable to damage a company of which he has some control by an undue distribution of profits.
It is all very well to say that we must not select one section of the earning part of the community for preferential treatment. I think we ought to encourage thrift in every section and let us begin with the private limited company man, the man who saves on his own income for the general benefit. The man who leaves his money in the bank, even on current account without interest, is helping the whole community. The private limited company is the creation of recent legislation. There used to be nothing but public companies and the private limited company is a comparatively new juridical structure. If it has been the means of encouraging men to save and to develop business and to give employment, it should be encouraged. If men in the control of such a company leave the money in the business and use it for the development of the business, that is for the benefit of the whole community and they ought not to be frightened from doing so.
The cases which the Attorney-General gave us were really cases for the abolition of the Limited Liability Acts altogether. As long as you have the Limited Liability Acts which enable a man to make himself into two personalities, one the limited liability company of which he has control and the other himself, so long will you have opportunities for evasion. But that is far too big a task to be tackled in our modern civilisation, and if we have created these companies then we ought to give them every encouragement where to do so is for the general benefit of the community. I was speaking not long ago to one of our chief industrialists, a man who gave employment to a leading shipbuilding centre for over a couple of years. He told me that as a young man he had no money but he could always borrow money and he did borrow enormous sums because the lenders and the banks believed in his business capacity. That was because he had what is called credit. Credit is capital and credit is character. That is why all suggestions of extreme taxation on capital are out of the question, because that means taxation of 974 character. That is what the Bard meant when he wrote:Who steals my purse steals trash.But he that filches from me my good nameRobs me of that which not enriches himAnd makes me poor indeed.This man to whom I refer had character, and starting with practically nothing, at one single little slip, he is now one of the greatest men in the shipping world. Do hon. Members think it would be possible for him to do so under these provisions? At all events it would not be easy for him under these particular provisions. He would not have had the same inducement,to scorn delights and live laborious days.—to work and toil while others enjoyed themselves and to live on a minimum income in order to put everything into the business. It would not be possible for him under these provisions to get the accommodation with which he was provided in order to develop those great and beneficent enterprises. I have known cases of men whose sons are now millionaires and whose fathers were making incomes of £20,000 to £30,000 a year, living in a room and a kitchen. Their business was the object of all their keenness. They tried to develop and increase it and such men have been great benefactors. One of the greatest motor firms in this country has sprung up within the last half dozen years, all under the control of one man, who is now employing thousands of men. It has never paid a dividend on the ordinary shares. This one man owns the ordinary shares and his anxiety for the future of the business is so great that he has foregone all luxury in personal expenditure. It is men like him who keep the business community going—men who are devoted to their business and are not looking out for an easy time.
I think these proposals may have a serious effect upon industry. The hon. Member for Salford (Mr. Radford) gave us an instance of professional men and talked about a man buying a practice for £10,000 and making £3,000 a year out of it. A medical man who paid £10,000 for a practice paid far too much. I do not think a professional man, if he were wise, would pay a capital sum for any practice. His practice resides in his head—in his capacity to make it for himself. These, however, 975 are not comparable cases because they are not cases of men giving employment, like the man in the industrial company, who is using his capital not only for his own advantage but for the development of a business which employs others. What is wrong with the industrial affairs of this country at present is that we have far too few captains of industry—too few men who will go into the market and create fresh industries. One of the reasons is that they are discouraged by taxation. Nothing could discourage them more than this type of legislation
I was glad to hear the right hon. Gentleman the Member foe Hillhead (Sir R. Horne) and the right hon. Gentleman who was his Financial Secretary to the Treasury expressing a belated repentance, because this Clause was introduced in the Budget of 1922, and it was pointed out to these gentlemen, who did not then know as much about limited liability companies as they know now, the dire effects which it would probably have. I am glad to hear that they are now of that opinion and that they have come to the conclusion that that would be injurious. I, therefore, sincerely trust that the Chancellor of the Exchequer will, in the Amendments which he is going to introduce, remove some of the difficulties and some of the apprehensions. It is true that the number of cases he gave show that the Inland Revenue have not been making a very full use of the Act of 1922. It may be because they have not the staff, or I think it is more probably because few companies make a practice of hoarding reserves. But it is possible the Inland Revenue may go on making much further use of the new Act, and new views may prevail on the part of the gentlemen at Somerset House. I am not so sure that they always act with profound wisdom, and I am not so sure whether they always realise that the effect of the undue exercise of their powers may result in losses. Only the other day there was a case where a man carried through a huge transaction with the Government after the War. He made a million pounds profit, when he only anticipated making a quarter of that sum. He offered to go 50–50 with the tax collectors. But Somerset House said: "No, 976 we will have Excess Profits Duty, Income Tax and Super-tax on the whole profit, and so collar the lot." This particular gentleman said: "Very good, I will fight you for it." And he fought them in the Law Courts, but in the meantime he went to the United States of America and made representations to the American Government, became naturalised, and took his million pounds profit with him, so that our Goevrnment got nothing at all. That is the result of unreasonable dealing on the part of Somerset House. Anybody could have told they were taking far too drastic action with a man who risked his entire capital on this particular transaction, and no one but the tax collectors blamed him for the extreme step he took.
It is the apprehension of unreasonable treatment in time to come that is worrying the business community at this moment. It is not the past, it is not what they have done since 1922, but it is that they have the power to do what the commercial community think they ought not have the power to do. We have the Income Tax Commissioners and the Board of Referees, whom I am glad to hear described as they have been described. It is not quite correct to compare them with His Majesty's Judges, who, after all, administer the common law and the Statutes of the land and are guided by an infinite number of decisions. On the other hand, what these people have to decide is purely a question of business policy, and it may vary with every business that comes before them. Theoretically, it involves this, that if the Inland Revenue are to decide what sums should be put to reserve and what should not, they ought to have sitting in the office of every company a representative who knows better than the managing director, the board of directors and the secretary how the business of the company ought to be carried on. If the Inland Revenue could provide the limited liability companies of this country with supermen of that description, it would be welcomed by the shareholders, I am sure, because many companies are grossly mismanaged at the present time.
It is said that these powers will be reasonably used, but the trouble is that the powers are there and that they have this extravagant penalty at the back of them. It is what an hon. Member 977 has called the psychological effect of these proposals that does the harm. The power to do ill deeds makes ill deeds done is at the root of this alarm. The Government having taken the wrong turning in 1922, it is difficult for the Chancellor of the Exchequer to turn round, and I suppose they will have to go ahead for this year, but I trust he will give effect to his promise to consider better Clauses with all the assistance he can get from the business community for next year, before the Bill really comes into operation. I hope he will give real effect to that promise and get the business community to believe that he and Somerset House really mean it. If he does that, I do not think the actual commercial damage is going to be anything like so severe as some of the opponents of these Clauses in this House and in the Press campaign have anticipated.
§ Sir HENRY CAUTLEY
After four and a half hours' discussion, I feel still in a state of bewilderment as to this Clause. I am concerned only with one thing, and that is that every bona fide trading company should have power to decide as to what reserves it shall set aside. I am the more interested in that, because I have received a number of letters and communications from people in my constituency who are engaged largely in trade, and trade of a biggish character. I am well aware that both the Chancellor of the Exchequer and the Attorney-General have suggested that companies in the past—the 40,000 bona fide trading companies—have not suffered but I cannot, from what I have heard from them, see that there is any guarantee that they will not be interfered with in the future, and I will give the Committee one illustration, showing how far-reaching this interference may be.
I am acquainted with a company, in which I have not the slightest interest, with a capital of somewhere between £500,000 and £1,000,000. It has been in existence for something approaching 40 years, and the control of the whole of the ordinary shares rests with one family. It is a manufacturing company, employing none but people in our own country. It has raised capital from time to time from the public by preference shares, but it comes within the terms of a company that will be subject to 978 this provision. It has been extremely prudently managed. It has gradually extended itself, by means of the money raised from the public and by means of its own reserves, reserves which, in the course of so many years, it has established to a very large extent. Among its other enterprises was to extend to foreign countries, and, though it may have been a foolish decision, it decided to extend to Russia. Its business became very prosperous and grew immensely, but, in common with all foreign businesses in Russia, it found its, prosperity stolen away, and this company, by a stroke of the pen of the Soviet Government, found itself suffering a loss of over £400,000. Of that loss it has never got a penny back, and never will, as far as I can see. If it had not been for their reserves this company must have perished, but owing to prudent management and the establishment of those reserves in the past they were able to weather the storm, and are on the road to prosperity again. What I would like the Minister in charge of the Bill to explain is how it would be possible in the future for a company to sustain such an enormous loss and yet survive? The directors of that company know how great were the risks of going to Russia and to other foreign countries, and their prudence has been rewarded, but how could the Inland Revenue officials have that knowledge, or estimate those particular risks with any accuracy?
I can imagine numbers of other businesses trading with Eastern countries which are of an even more speculative character than the one I have in mind; indeed, this was not regarded as a very speculative business. One can imagine hundreds of different businesses, of an extremely speculative character, where, when large profits are made in one year, large sums must be placed to reserve, because of possible losses or very small profits in succeeding years. If only we could have had some assurance on this point I should agree entirely with the Government's proposals.
I am glad to see that the Attorney-General has just come in. I understood from his speech that he was prepared to make some modification to help bona fide trading companies to keep control over their reserves if only he could be assured of hitting the tax dodgers, and I suggest that he should consider whether, instead 979 of treating paragraphs (a) and (b) in the Clause as entirely distinct it would not be possible to couple with (a) something in the nature of (b) as well. It may be a question of the form of words, and on the Trade Disputes Bill my right hon. and learned Friend handled a similar difficulty extremely well, and I suggest that we should make (a) and (b) coexist before the Inland Revenue officials interfered. That is to say, the transaction, in addition to coming within the definition in (a), would also have to be of a fictitious or artificial character. I think the word "artificial" would probably cover the case. I feel very strongly indeed that trading companies ought not to be interfered with, and I see no guarantee that they will not be, in spite of what the Attorney-General has said, and I do sincerely hope that modifications may be introduced.
§ Sir ALFRED BUTT
Everyone who has spoken in this Debate has emphasised the desire that the Chancellor of the Exchequer should do everything possible to close up all avenues by which taxation can be evaded, and any machinery which he may submit to the House to achieve that end is bound to have the whole-hearted support of all Members. At the same time he must realise that there is, rightly or wrongly, great anxiety amongst the business community over the far-reaching powers which, for the first time, and notwithstanding statements which have been made to the contrary, certain public authorities are to have over the reserves of companies carrying on business in the interests of the community. Hitherto it has been a principle of British taxation that the taxpayer should know definitely what he had to pay. Under Clause 29 the taxpayer is left in uncertainty as to how much he has to provide for the purposes of taxation. Quite innocently he may put too much to reserve, and thereby be penalised by having to pay Super-tax on 100 per cent. of his profit. There can be no possible justice in saying to a company that is controlled by five persons, "You have to put money to reserve in accordance with the wishes of a Board of Referees," and leaving a company controlled by six persons with entire liberty as to what they shall put to reserve.
980 I happen to have an intimate knowledge of the entertainment industry, which is of a highly speculative nature. Many theatrical companies make very large profits in one year. If they pursue a conservative policy, they distribute a very small portion of those profits, and reserve the major portion in order that they may meet possible heavy, and quickly occurring, loses in a subsequent year. Those companies are conducted perfectly honestly, without the slightest idea of avoiding payment of Super-tax. It is inconceivable to me that any Board of Referees would appreciate the fact that a company making perhaps £50,000 or £60,000 thought it prudent to distribute only 5 per cent., and carry forward the balance in order to continue their business in successive years. I can only say that if these companies did not exercise that prudence a very large number of people would be put out of work and unemployment would be greatly increased. If the Chancellor of the Exchequer insists on Passing Clause 29, I urge upon him to give the Committee an assurance that in every case the Board of Referees shall include at least one member who is cognisant of the particular business upon which he is called on to adjudicate. There is one other matter to which I would like to call attention. The Chancellor of the Exchequer has put down an Amendment under which certain companies are to be excluded. He proposes to exclude companies whose shares are of a classin respect of which a public offer for subscription has been made by the company.There are a large number of companies which do not issue shares publicly but issue them through brokers or by other means. If my interpretation of that provision is correct, those companies would not be covered by that definition, and I invite the Attorney-General to say whether it would not be possible to leave out the words about shares that have been offered for public subscription. The Chancellor of the Exchequer gave us, I think, four instances of companies that were escaping Super-tax, and in almost every instance it was because they were making loans to their principal shareholder without interest. Surely, it is possible, and very simple, to close an avenue of abuse of that nature without inflicting what is likely to be a very 981 real hardship on a very large number of companies that are now carrying on business in a decent way, and without setting up a form of inquisition which, perhaps, in the future may act as a boomerang to the Conservative party.
Lieut.-Colonel Sir FREDERICK HALL
I listened most attentively to the discussion this afternoon, and to the statement of the Chancellor of the Exchequer, and I should like, if I may, to join with my hon. Friend the Member for Balham (Sir A. Butt) in saying that there is no single Member of the House who is not desirous of doing all that he can so to tighten up the administration as to do away as far as possible with evasion of any taxes which are justified; but, with all deference, I venture to think the Government have gone much too far in regard to Clause 29. The secret of all business success is, as has been said by my hon. and learned Friend the Member for East Grinstead (Sir H. Cautley), the building up of reserves. What is the position with regard to our big industrial undertakings, our banks, our insurance companies? It may be argued that they do not come under this Clause, and I quite agree, but the principle that they have laid down is the only correct and reasonable principle for any business man to adopt.
First of all, there are the Commissioners, then there is the Board of Inland Revenue, and now there will be the Referees. The Chancellor of the Exchequer intimated this afternoon that he is quite prepared to consider the suggestion that on the Board of Referees there should be someone with a knowledge of every specific business into which they will have to make inquiries. At first that seems perfectly simple, but anyone who has any business knowledge at all is perfectly well aware that, although people are carrying on their business in a straightforward manner, nevertheless the last thing that they want is a competitor—and it must be a competitor if it is to be someone who has a full knowledge of the business—coming as a member of the Board of Referees and looking through all their papers, finding out who are their clients, and otherwise making himself thoroughly conversant with the whole of the business that they have built up. It is all very well to talk of evading taxation, but at the same time, while we 982 want to save the Government from evasion of taxes, we do not want inquistors sent to inquire into the manner in which a man is carrying on his business. If there is any thought that a man, perhaps, is endeavouring to evade taxation, then, under the law at the present time, machinery can easily be set in motion, and it is possible to find out what that man is doing rightly or wrongly with regard to his business.
We heard this afternoon of the 80,000 cases, and we heard of 40,000 only being brought in under Clause 21 of the Finance Act, 1922. Now we hear that there are another 35,000. What I should like to ask the Attorney-General is this: If 5,000 are to be left out, on what ground are those people to have that benefit? There must be some specific reason. When the Chancellor of the Exchequer was speaking of 5,000, he must have had in his mind some idea with regard to some specific business, and I should be glad if the Attorney-General would enlighten us on that when he replies. He smiles. Apparently he is unaware of what is at the back of the Chancellor's head, but when we are told that there are 80,000, and that 75,000 can be brought in, it is only reasonable that we should ask the Government what is going to be done with regard to the remaining 5,000.
If we are all desirous of assisting business—and I cannot help thinking that the Government have that desire—surely we should not bring in a Measure that is going to break up the foundations of the business of this country. Surely it is the business of the directors of a company to know what are the ordinary requirements, to know what in the ordinary course of events should be a reasonable dividend paid to the shareholders. It would be all very well to say, "We have had a good year; we will pay 40 per cent. or 50 per cent." Just imagine the position then of the shareholders. They, not having, perhaps, such inner knowledge as the board itself, make their spending arrangements according to the increased dividend that they have received. Next year the company may have a bad year, and the directors may say to the shareholders. "We are most awfully sorry, but last year we had a good year, and we paid you a very handsome dividend; during the past year, however, we have met with a great 983 many difficulties, and, therefore, we regret to say that we have a deficit instead of a profit." Surely, that is not a reasonable way to go along, but, if this Clause be passed as it stands, it will be incumbent upon directors to act in that manner. That cannot be good for business. I sincerely trust that the Chancellor of the Exchequer, who has indicated that he is prepared to consider Amendments with regard to this Clause, will give it every consideration, because the commerce of this country has been built up by careful handling of the moneys that are made, and, if anything is going to be done to interfere with that, it will be one of the most retrograde steps that this or any Government has taken.
§ Sir CHARLES WILSON
I do not want in any way to help any taxpayer to evade his proper share of taxation, but I do not like this Clause as it at present stands. Reference has been made by the Chancellor of the Exchequer to a statutory declaration. If a statutory declaration made by a member of a small company, to the effect that all proper taxes have been paid in times gone by, would meet the case, that would dispel a large amount of alarm and misapprehension that exists. I have here a letter from one of my principal constituents, a man of great standing in the City, whose company has been in operation for 100 years, who has lived frugally, like his forefathers, whose company has put a good deal of money to reserve, and from time to time out of its resources has extended its business until it has now reached very large dimensions and employs a large number of workers. I should like the Chancellor of the Exchequer to make it clear that where, in times gone by, such companies have made proper returns, and have paid their taxes in accordance with previous requirements, they will not be interfered with. It is perfectly true that the Inland Revenue authorities have a remedy where they suspect evasion, but it is not right that a company which has carried on its business properly should be haled before anyone, and I hope it may not be necessary. A certain number in times gone by have been tackled where there has been any question of fraud, and by all means 984 let such be tackled, but in my opinion there should be a more careful sorting out of the sheep from the goats. I should like to read what this representative citizen says:Dear Wilson,—May I ask your co-operation in getting the proposed Clause 29 of the Finance Bill deleted or very drastically altered. As it stands, a private firm, and a private company with a small directorate, are very much prejudiced compared with a public company in that the latter will not be sur-taxed on reserve used or to be used for the purchase of property to enlarge their business or for reserves made against future contingencies, of which such purchase would be one. It is obvious that this will tell greatly against the development of the class of firms named above. It seems to me if under this Clause shareholders will be charged with this sur-tax, which is for Income Tax and Super-tax, things have now arrived at such a pitch that I cannot see how British firms can hope to compete with their opponents abroad.My main point with regard to the matter is that, as an accountant, all my business life I have recommended my customers to put sums to reserve and from time to time, from those reserves, to extend their business where it is safe to do so. That has led to the employment of a far larger number of people than could have been employed had the business merely been carried on as it was started, without any question of reserves being built up. If this is put into operation, of what use is it to anyone to put money to reserve? I hope the idea is not to force anyone to distribute all profits made in dividends. I do not want to make it out worse than it is. On the contrary, I want those concerned to be reassured and not interfered with where they have done their work properly. If people have acted improperly and attempted to evade payment of tax, by all means put them through the mill, but there are cases, such as that I have given, where to interfere in the slightest degree would be a very serious matter indeed to the parties concerned and it would work out in entirely the wrong direction.
§ 9.0 p.m.
§ Sir FRANK NELSON
I think the Attorney-General must know as well as anyone that apprehension, however ill-founded, has the most disastrous effect on all markets. It turns into what is known as market sentiment. I am wholeheartedly with the Chancellor in closing up loopholes. In fact I have several grievances in that I do not think all the loopholes have been closed up sufficiently. 985 I have no personal interest whatsoever as to the outcome of the Clause, so I can without any ulterior motive ask the right hon. Gentleman how he proposes to deal, for instance, with the following situation. Take the case of a company composed of five proprietors. We know from the Chancellor's speech that a very usual mode of evasion is to pay no dividend, or a very small one, out of the annual earnings, and each of these five proprietors or partners is provided for by means of a draft on the firm, which bears no interest. This Clause 29 is put on the Statute Book in a week or two. If I were a member of such a company I should immediately take steps to put it under the control of six people. I have always regarded myself, in so far as being able to understand the wording of an Income Tax Act is concerned, as mentally deficient, and it may be I have insufficiently studied or insufficiently digested it, but it seems to me the obvious mode of procedure for any company such as I have indicated is to turn itself from a five-man into a six-man company. That will mean, I presume, that next year we shall have an Amendment to the Clause making it seven, and then it will be eight and nine and so forth. No doubt the Attorney-General will inform me later on how he proposes to close that loophole up.
There is another aspect of this. Take the case of many small country businesses, mostly family concerns. Many of them in the last two years have seen tariffs going up against them all over the world. It is only natural that in anticipation of these tariffs they have for the Last two years, and will perhaps for the next two years, pay no dividend of any kind. To them applies more than to any other kind of business the apprehension I have alluded to, all through the next year and possibly the next two years until they know whether the Special Commissioners, and after them the Board of Referees, are going to call upon them to disclose all the ramifications of their business for the last two or three years and eventually to decide whether they will or will not be assessed to Super-tax on the profits they have not distributed. The Chancellor dwelt, with his usual richness of rhetoric, on apparently the simple procedure involved in the case of another bona fide company in the control of not more than five people who were to be 986 called upon to disclose whether or not they had distributed a sufficient amount of profits. I am informed that it is nothing like so simple. It is a very costly business, to say nothing of the anxiety of taking your case up to the Special Commissioners. It lasts possibly not for months but in many cases for years. All that time the amount in dispute is to be held in abeyance, and once again there will be this feeling of apprehension in the breasts of these companies, illfounded as the Chancellor may say. For an hour after he had spoken I felt frankly reassured until I went away and thought it over. Many of my business associates have said to me in the last week or 10 days: "It is no good the Chancellor reassuring us in one of his famous speeches because, however much he may reassure us, it is not going to help us when the Somerset House authorities get their clutches into us and demand £30,000, £40,000, or £50,000 in Super-tax. It means that we shall be years and years in abeyance in a state of anxiety, to say nothing of the cost." I shall vote for the Government, but with a very heavy heart. I admire the aim of the Chancellor and the Cabinet, but my admiration is tempered with misgiving.
§ Mr. EDWARD GRENFELL
After the Chancellor and the Attorney-General had spoken I felt convinced that, on the whole, I was prepared to vote for the Bill. They have removed several doubts that I had, and I think it is partly their fault that there have been any doubts in my mind and in that of many people in industry and in the City. Ever since the Budget was brought in I think there has been a feeling on the part of serious-minded people in business that the Chancellor, with his matchless gift of oratory, had to a certain extent mesmerised the House, and when they went away they sometimes change their minds after what they have heard. There have been two occasions since the Budget was brought in in which the Chancellor has appeared to treat these matters in a light-hearted spirit. I have particularly in mind that he said the details of the scheme would be set forth in the Clauses of the Bill in language that he could say with safety very few people would understand. Either that was meant to be funny or it was not. No later than last Thursday, when a Noble Lord made a speech in 987 which he referred to the simplification of the Income Tax, the Chancellor of the Exchequer referred to the fact that action in the Courts led to far greater difficulties when the recognised and highly respected jargon and rigmarole of a great profession is not employed. These lighthearted arguments disturb plain city men. When the Chancellor of the Exchequer said to-day that he could not understand why people have been so stupid and have failed to understand the arguments for this Bill, I think he had partly himself to blame. Undoubtedly, one of the difficulties of business men in this House is, that when they come up here as representatives of the coal industry or of the shipping industry—except in the case of the right hon. Gentleman the Member for West Swansea (Mr. Runciman)—they have not the gift of tongue, and they do not present their case very well. It is for the Chancellor of the Exchequer and other Ministers to explain their case quite clearly and without so surrounding themselves with words that we simple folk fail to understand them. There are several things in this Bill that I hope will be amended. The explanation that the Attorney-General gave to my right hon. Friend the Member for Hillhead (Sir R. Horne) satisfied me that there is no danger really in this Clause as it will be amended, and, I think, after the many hours we have spent on it, we might now let it pass and proceed to discuss the further Amendments
§ Mr. DAVID REID
I only want to intervene for a moment, and, like the hon. Gentleman who spoke last from the other side, I may say at once, that I am not in business, and I have no personal interest in this matter. I cannot be charged with any of the vices which hon. Gentlemen on the opposite side above the Gangway seem commonly to imply. I only rise because the right hon. Gentleman the Member for Central Edinburgh (Mr. W. Graham), whom I have always looked upon as an extremely eloquent person on this matter, took a point of view which I think was not altogether fair. He said he wished to call attention to the fact that it was only when the question of the evasion of Super-tax was raised there was anything like an audience in the House. I should like to say I shall personally 988 vote for this Clause, but I shall not vote for it for any of the reasons which have been given. I think this method of dealing with the matter is entirely misconceived. To my mind the Government is suffering from confusion of thought. Super-tax is a tax levied upon individuals; it is not levied upon companies. When a member of a company is liable for Super-tax he is liable as an individual. To try and bring in a company is to my mind making a mistake. I think they are making a mistake for the reason given by the right hon. Gentleman opposite. The effect of the company law of this country has been greatly to assist the development of business in this country. I think company law ought to be left out of the question. Business men ought to be left to make their own arrangements. They ought to be left to make use of company law for legitimate business purposes.
If some people make abuses of company law, they do so as individuals, and the way that the Government should approach this subject is to make those individuals who are guilty of what are considered fraudulent practices liable. No one on this side of the Committee, I am certain, desires for a moment to protect anyone who is guilty of fraudulent practice or any practice which is perhaps not legally fraudulent but is morally fraudulent in its evasion of Income Tax. No one wishes to protect a person who is guilty of that kind of thing, but what we do want to do is to prevent the Government in their endeavour to catch that person, putting a spoke in the wheel of ordinary commerce and industry. Having said that, I have said all that I want to say on this point, but I think it is only fair that it should be understood that what many of us on this side of the Committee object to is not that the Government are trying to catch the tax dodger but that they are trying to catch him in a way that we think is going to throw an entirely additional and unnecessary burden on numbers of people and going to interfere with the ordinary commerce of this country.
§ Mr. WALLHEAD
I will not detain the Committee more than two or three minutes. I, like other speakers, have no interest of a personal character so far as this Clause is concerned. I have been 989 rather astonished to hear the variety of arguments brought against the Clause. The Chancellor of the Exchequer has shown the position very clearly. It seems to me that his argument has never been met. I think the case has been completely over-stated on the other side. What we heard from the right hon. Gentleman the Member for Central Edinburgh (Mr. W. Graham) was this—and he speaks, I think, with a certain amount of authority—that there was evasion to the extent of probably anything between £12,000,000 and £15,000,000 per annum.
§ Mr. W. GRAHAM
What I said was, that according to the report of the Royal Commission there was evasion to the extent of between £5,000,000 and £10,000,000 per annum, but I ought to point out, as, I think, I did at the time, that that was a comprehensive figure in which this would be only one element.
§ Mr. WALLHEAD
It is a considerable sum at any rate, and it seems to me that Members on the other side who are constantly pressing for economy and for the lowering of the rate of taxation ought to jump at the prospect of putting more money into the Treasury without the raising of taxation. Are we to understand that the continued commercial success of business men in certain forms of companies depends upon whether they can cheat the Chancellor of the Exchequer or not? Does their continued success depend upon whether they can reserve money to which they are not entitled for certain purposes? If this is a condition on which their success is to be assured I do not think we should take the slightest notice of it. They must make up the necessary saving by personal savings as other people do. We have heard complaints about the penalties to be imposed upon the people who defraud the revenue of the country. It is the contention of the Government that there is actual, deliberate fraud taking place, and here are Members turning up in this Committee for the purpose of defending this by all the means in their power. The extent to which they have gone in the last few weeks in making attacks on the Chancellor of the Exchequer, both in private and in public, is a revelation. Surely this is a thing that ought to be put a stop to at the earliest moment. We have been told that an 990 awful penalty is to be imposed on people who act in this way. What is the penalty? According to the Chancellor of the Exchequer, it is that they shall cease to be a private company for 12 months, and at the end of that time they can return. What an awful penalty! If my wife smuggled a silk dress from France into Dover, she would have to pay twice or three times the amount of its value. In any case, such a penalty would be perfectly fair, but what does this thing amount to? This House was discussing a short time ago the penalty to be imposed upon men who objected to have their livelihood stolen from them by blacklegs, and what is the penalty—three months' imprisonment. Here we are told that it is a tremendous penalty that a man who has defrauded the Revenue for years shall cease to be a private company for 12 months. Members who argue like that ought to be ashamed of the line they took in regard to trade unions.
§ Mr. WALLHEAD
There has been a tremendous lot of lip service paid to the idea of curtailing the abuse, but what does it amount to? Hon. Members opposite have had a fair innings and have been able to speak smooth nothings about their desire to trap the defaulters. The chief spokesman of hon. Members opposite has told us that business men are engaged in defrauding the State. I am stating that point of view and comparing that with the penalty imposed on working men when they were protecting their livelihood with the penalty imposed on rich men when they have defrauded the State. They are now asked to disgorge part of it and to lose their status as private companies for 12 months. I am not going to vote for the Chancellor of thy Exchequer, because I do not think the penalty goes far enough. If he would punish these people by imprisonment, or punish more effectively those who are guilty of this offence, I will support him with pleasure, but I see no penalty in this Bill that would win my admiration, after the line which this House took with regard to trade unions a few weeks ago. I am not an expert and do not pretend 991 to be. I stand for reasonable treatment all round, and after the orgy of fraud which has gone on for years—[Laughter] Hon. Members may laugh, but, admittedly, it has gone on for years. According to the reports of the committee in 1920, this evasion has gone on for years, and rich people have put millions of pounds into their pockets.
§ Sir COOPER RAWSON
When there are Super-tax payers on his own side of the House, why does the hon. Member address all his remarks to us?
§ Mr. WALLHEAD
If I knew any Super-tax payers on this side who had evaded payment of tax, I would say that what is sauce for the goose is sauce for the gander. I would defend them no more than I would defend defaulters on the other side. I have not two codes, but only one code. I have not a code for myself and my friends and another code for others. What I condemn in others I would condemn in my own people, if I knew of it. I am not defending any particular class. I am backing up the Chancellor of the Exchequer as far as I can go with him. I go with him to the full length in his desire and in his attempt to get back a little of the State's rights as far as taxation is concerned from the gentlemen who have been engaged in a most unholy conflict between the Treasury and themselves as to who should keep or get the loot.
§ Mr. CHURCHILL
I hope that I may now appeal to the Committee to come to a decision. The hon. Member who has just sat down was speaking, no doubt, with the desire to cast oil on the troubled waters; I hope that none of my hon. Friends will allow themselves to be ruffled and cast into tumult by his extremely peaceful endeavours. We have been discussing this matter since a quarter past three, and we have a very long way to go to-night. Indeed, I can see the light breaking and gilding the various buildings on the Thames Embankment, long before we get to the end of our proceedings. I would appeal to the Committee to terminate this general discussion, which the Chair has allowed to range over the whole field, and let us get on to the specific Amendments. It may help if I indicate the Amendments 992 which we can accept. I am afraid we can do no more. I hope hon. Members will understand, when I have made my statement, that we have given away all that we have to give, and that it is not a matter of bargaining, but fully and freely accepting what we offer. If that which it is in our power to give does not achieve its purpose, then the only thing we can do is to vote, and we must do our duty according to our lights. It is no use our attempting to spend the whole night discussing this or that Amendment to this particular Clause. I shall move the Amendment which stands in my name on page 1613 of the Amendment Paper. I am prepared to excuse from the possibility of review subsidiaries of public companies and companies where shares carrying 25 per cent. of the voting power are held by the public and quoted. I cannot accept an Amendment dealing with preference shares which only carry voting strength at the time when the dividend is passed by the company. We consider that, on the whole, the influence exercised by the preference shareholders will not be influenced in the direction of protecting the revenue. They are interested in securing a dividend and after their dividend is paid of building up the largest possible reserves. I cannot, accept an Amendment in the name of my hon. Friend the Member for Watford (Mr. D. Herbert) regarding shares mentioned in Stock Exchange supplementary lists. I made a mistake this afternoon when I referred to official and supplementary lists. Supplementary lists have special considerations which apply to them. With regard to the Amendments standing in the name of the hon. Member for Watford—to leave out lines. 11 and 12 of the Government Amendment and to insert some consequential words, Amendments which eliminate the condition that the shares in question must be shares which have been the subject of a public subscription—I am prepared to accept those Amendments. Whether the shares have come into the market by public offer or whether they have merely drifted on the market and have, in fact, been dealt with, is a matter irrelevant to the nature of the issue which we have to decide to-night.
§ Mr. D. HERBERT
Does that cover both my Amendments to the right hon. 993 Gentleman's Amendment—to leave out lines 11 and 12, and in line 16, after the word "to," to insert the words "or acquired unconditionally by."
§ Mr. CHURCHILL
Yes. I shall move my own Amendment on the Order paper which deals with the procedure on the submission of a prima facie case to the Board of Referees. I am certain that in practice that will leave untouched and untrammeled, and undisturbed every company which is carrying on a thrifty, far-sighted, straightforward business. Now with regard to the Amendment of my hon. Friend the Member for Reading (Mr. H. Williams)—in page 16, line 17, after the word "business" to insert the wordsbut such sum shall not be apportioned among the members for the purpose of assessment to Super-tax if the total amount distributed is deemed to be reasonable.I cannot take it in exactly those words, but I promise to introduce on Report words making the object of that Subsection clear. This also covers the immediately preceding Amendment on the Paper in the name of my hon. Friend the Member for Watford—in page 16, line 2, to leave out the words "not as," and to insert instead thereof the words "may be regarded as not." In short, the principle which we accept is that the fact that money is applied for the purchase of a business from the original owner does not of itself involve the fact that the distribution of the profits is necessarily unreasonably small. It does not prejudge the position which the Special Commissioners or the Board of Referees will take. I am willing to insert words on Report which will meet that criticism effectually and thoroughly.
As to the Amendment of the hon. Member for Watford, which we are at present discussing, I am prepared, as he is going to withdraw his Amendment, to introduce words on Report making it clear that this Sub-section only applies to a business which a company was formed to acquire or which was the first substantial business which in fact it did acquire, but does not at all apply to later transactions or the later development of the business. It does not at all apply to the slow extension of a fishing fleet out of the carefully hoarded profits. That is not even in the slightest degree affected by this Clause. What we are aiming at is the gentleman who has sold 994 his business to himself and is going to take his income for the next 10 or 15 years in the form of debentures free of Super-tax.
§ Mr. H. WILLIAMS
Will the Amendment in the names of myself and other hon. Members—in page 16, line 14, to leave out the words "acquired by the company," and to insert instead thereof the words "which the company was formed to acquire"—meet that?
§ Mr. CHURCHILL
I was speaking in connection with the Amendment of the hon. Member for Watford, to leave out Sub-section (1), and in connection with the Amendment of the hon. Member for Reading I can promise to introduce words on Report to make it clear that the Sub-section only applies to a business which a company was formed to acquire or which was the first substantial business it did acquire. It covers both Amendments. I cannot say I will accept the exact words of the hon. Member for Reading, but I am prepared to deal substantially and effectually with that matter on report. The hon. Member for Reading has also an Amendment—in page 16, line 31, at the end, to insert the words,Provided that paragraph (a) in this Sub-section shall only apply in the case of obligations entered into after the twenty-eighth day of April, nineteen hundred and twenty-eight.On that, I can undertake to insert words on Report which will limit the operation of the Sub-section to cases where the business was bought after the declaration of war. I would like to point out that this is not a question of exempting for all time old companies. All the acceptance of this principle does is to respect old pre-War contracts. Where the contract was made to pay a certain sum for a purchase price pre-War, we are ready to recognise that as a binding obligation and will accept words to that effect. I am not able to exempt a particular class of companies for all time and to earmark them specially as being immune from the ordinary taxation of the country. We will respect these contracts, however, and I will give effect to this upon Report.
§ Mr. W. GRAHAM
It is extremely difficult to follow that in the form in which the right hon. Gentleman has now put it. Does that mean that the Clause, 995 as he proposes to amend it, will run with the Section of the 1922 Act, dealing with post-1914 companies?
§ Mr. CHURCHILL
There are companies which are in a special immunity because they are pre-1914. We sweep away that immunity. But there are pre-1914 contracts which oblige a company to pay to the original vendor certain sums of money. Those contracts we respect because they are definite obligations entered into before the War. We give the immunity not to any particular organisation but for the execution of a definite contract. That is the position there. It is a fine distinction, but one which I think it is quite legitimate to draw. Then there is the Amendment of my right hon. Friend the Member for West Swansea (Mr. Runciman), which asks that the Board of Referees should be fortified by persons of the particular industry in each case. There are, of course, immense varieties of industries in this country, numbering perhaps hundreds and perhaps thousands, and, though I would not go as far as to say that every variant of trade would find one of its own representatives there, we will add to the panel of referees adquate represenation of the principal groups of trades and arrange that any body of referees convened from the panel to deal with a particular case shall have a representative of the industry concerned upon it as long as the industry is a recognised and substantial industry. That would go a long way to meeting the views which my right hon. Friend has expressed.
There is an Amendment on the Paper which suggests that it should be an instruction to the Board of Referees to make sure that the practice of the parties under review did not fall below the general level of the trade in which they are engaged. This would be much too severe for the parties concerned. We are contemplating action only in cases which are flagrant, and extravagant, and which have no relation whatever to the ordinary course of business. That is what I have been trying to make clear to the Committee all the afternoon. Merely to say that the practice did not conform to the ordinary practice of the trade would be giving no protection to the individuals concerned. The individual 996 or company might be building up reserves over a lengthy period of years, paying no divdends, strengthening their position, and yet would be able to make a case which the Board of Referees would unhesitatingly accept and support.
Sir F. HALL
Does he recognise that this is a double-edged sword? If you are going to put somebody on the Board of Referees who understands the particular business, he may be a competitor, and may make himself thoroughly cognisant of all your business.
§ Mr. CHURCHILL
I am quite ready to see that the specially informed member shall only sit upon the panel of referees in any particular case at the demand of the taxpayer. If the taxpayer says: "Let me have somebody who knows my trade," it shall be done.
§ Mr. WALLHEAD
Will the right hon. Gentleman accept the latter part of the Amendment of the right hon. Gentleman the Member for West Swansea—"And another member shall be an accountant acquainted with the industry."
§ Mr. CHURCHILL
No. I have said all that I have to say. There shall be at least one member, if the taxpayer demands it, who is acquainted with the trade. There remains only the Amendment standing in the name of the hon. Member for Reading (Mr. H. Williams) on Clause 30. The hon. Member proposes to leave out the words "that date" and to insert the wordssuch date as the Special Commissioners shall consider just having regard to the dates on which distributions have been or might reasonably he made.This Amendment can be accepted in principle, and words will be introduced on Report stage to cover it. It is rather a technical point. It is a question of the date at which this operation shall come into force, and it is proposed that the date shall be struck from a reasonable date having regard to the dates at which the dividends were distributed in the past instead of from the automatic end of the accounting period. I think I have now stated the position which the Government take up and the Amendments they are prepared to accept.
§ Mr. HERBERT
Will the right hon. Gentleman refer to the Amendment in my name to Clause 29, which is to add the following new Sub-section: 997( ) For the purposes of the said Section twenty-one of the Finance Act, 1922, any part of a company's actual income from all sources for the year or other period in the said Section referred to which has been distributed among or paid to or for the benefit of any employés or former employés or widows or dependents of any employés or former employés of the company shall be deemed to have been distributed among the members of the company.It deals with the question of profits distributed amongst employés. I understand that the Revenue authorities think these words are not necessary, but if I can show him that they are I hope he will be prepared to accept them.
§ Mr. CHURCHILL
We are advised that these words are not necessary. Money distributed among employés is deducted as if it were a proper expense for Income Tax purposes. I am advised that the words are unnecessary because they add nothing to the existing law. If it is found in the interval that the hon. Member is right, words will be introduced to cover the point, but we take our stand on the fact that it would be a work of supererogation to put them in.
§ Mr. RUNCIMAN
What is the attitude of the right hon. Gentleman in regard to the Amendment standing in the name of the right hon. Member for the Exchange Division of Liverpool (Sir L. Scott) and myself, to leave out in paragraph (ii) of his Amendment the word "any" and to insert instead thereof the wordswith a view to the.The object is that when a prima facie case is brought, the condition of bringing it should be that there is a suspicion that it has been done with the intention of avoiding payment of Income Tax, rather than that the intention to evade Income Tax should arise after the prima facie case.
§ Mr. CHURCHILL
I am afraid I cannot accept that Amendment, because it would lead to a statutory obligation to prove motive. After all, the stating of a prima facie case is not a legal proceeding, and will not have to be fought out with the supreme logic of a Court of Law. These cases will have to be dealt with from the point of view of what a reasonable and fair tribunal consider is a prima facie case, and a prima facie case will be established when tax is being evaded in a flagrant 998 manner by unreasonable and exceptional means, and only such cases will be brought to the notice of the tribunal. I do not think I can undertake to make it necessary for the Board of Referees, in its preliminary examination, to pronounce upon the motives of the party concerned. They would have to pronounce that the facts were such that a much closer examination was required.
§ Sir J. MARRIOTT
The Chancellor of the Exchequer has not said anything in reference to the Amendment which stands in the name of the right hon. and learned Member for the Exchange Division of Liverpool, and the hon. Member for Barnstaple (Sir B. Peto).
§ Sir B. PETO
There is also the Amendment, to add at the end of Clause 29 the following new Sub-section:(6) The provisions of this Section and of Section twenty-one of the Finance Act of 1922 shall not apply to any sums paid to reserve for the extension, development, or maintenance of the business of any company engaged in commerce, trade, or industry.Earlier in the Debate the right hon. Gentleman told the Committee that he is prepared to accept any Amendments which would not vitiate the purpose of this Clause, and which were acceptable to the trades and industries of the country. Many hon. Members are interested in this Amendment, and we would like to have some expression of opinion from the Chancellor of the Exchequer as to whether legitimate transactions in placing to reserve sums of money for the extension, development and maintenance of the business of any company engaged in commerce, trade or industry, should not be left entirely out of the purview of this Clause.
§ Mr. CHURCHILL
Here we are dealing not so much with motive as with a declaration of motive. This Amendment cannot be accepted, because it would be open to the company to say that they had paid these sums for the extension and development of the business. That may not be true. If it is true, it is already covered by the words in the Clause, "necessary or advisable for the development of the business." To insert this Amendment would be to render the whole Clause useless.
§ Mr. STORRY DEANS
May I ask whether the Chancellor of the Exchequer 999 will consult with the Attorney-General as to the substantial legal difference between "motive" and "intention," and whether he will not further consider the Amendment standing in the name of the right hon. Gentleman the Member for West Swansea (Mr. Runciman). If the right hon. Gentleman will consider this for a moment from the point of view of the lawyer who has to interpret the Statutes, he will find that there is a great difference between "intention" and "motive," and without going into any question of motive it would be perfectly safe for him to accept the Amendment of the right hon. Gentleman.
§ Sir R. HORNE
I should like to express my gratitude to the Chancellor of the Exchequer, and the Attorney-General for the way in which they have met me on the argument I advanced on the Amendment of the hon. Member for Watford (Mr. D. Herbert). Of course, I do not propose to insist, as far as I am concerned, upon the Amendments being discussed in view of the assurance given that the Government have no intention of catching any such company as I described, and that they are prepared to put words in the Bill before the Report stage which will meet that point of view. Before parting with this matter I should like to bring to the notice of the Chancellor of the Exchequer a class of company for which the Government apparently do not realise that they have to provide. It is a kind of business which is perfectly legitimate, and which should be safeguarded. It is this. When you provide that a company is not to take into consideration the price of the business which they originally acquired, you effect a kind of transaction which is familiar to my right hon. Friend, and I hope that he will take acouunt of it when he is designing the Clause afresh. It is this: I myself was engaged in a case which was connected with three young men who purchased a ship. It was the very first transaction they had ever had. They had only a very small amount of money, and they borrowed all the rest to form what is known as a one-ship company. These people could never have done that transaction if they had not been allowed to put a great part of the revenue that they obtained from the use of the ship to the purchase. That is just one of the 1000 things that my right hon. Friends do not seem to realise would be struck at by the first part of the Clause.
§ Sir R. HORNE
I beg them to consider that not merely the development of the business but the original acquisition of the business should be taken into account. That kind of transaction takes place. There is no reason why a legitimate transaction like that should be struck at in an Act of Parliament. These transactions are very well known.
§ Mr. CHURCHILL
Long before it got to the stage where that particular transaction would be struck at, a great many other precautionary arrangements would come into play. In the first place, assuming that the Inland Revenue Commissioners asked these young men to make their statutory declaration that in buying the ship in this way there had been no tax-avoidance, the young men would just file their explanation. They would say, "Here are we three young men. We have bought this ship and hope to build up a company which will trade and make trade as well." If it is conceivable that the investigation would go any further, that by any chance the malignancy of the Inland Revenue would be such that the investigation would go further, on the facts disclosed no one can assume for a moment that these people, who are trying to create a business like that by buying a ship, would be held to be engaged in tax avoidance. If the Special Commissioners had a hand in the matter, and if they were unconvinced by the three young men, the matter would go to the Board of Referees. [Laughter.] Let no hon. Gentleman laugh at the enterprise of this country. A great many weak brethren are kept going by those who undertake such enterprises. The matter would go to the Board of Referees, and on the issue of whether there had been tax avoidance. You must trust an impartial body like that. I am certain that 10 minutes of the eloquence of my right hon. Friend, employed before the Board of Referees, would decide the matter in favour of those who had taken such a course. It is only after all these transactions have been gone through that Clause 29, with all its safeguards, comes into play.
§ Sir R. HORNE
Really, the right hon. Gentleman has not read his own Bill or has not appreciated what it provides. This Clause provides that, when a matter comes before the Special Commissioners, they shall not be entitled to regard sums paid for the acquisition of a ship, as sums which should be written off against the ordinary business of the company. The right hon. Gentleman absolutely puts an embargo on the Special Commissioners and the Board of Referees taking that into consideration. So long as the Clause stands as it is, the Special Commissioners and the Board of Referees would not be entitled to takes these very matters into consideration. As I understand that we have the assurance of my right hon. Friend that he is going to deal with the matter, I hope the Attorney-General will take this matter up with the others and see whether words can be found which will save just such a case.
My right hon. Friend the Chancellor of the Exchequer uses words of beneficence in this matter. He talks as if these clauses are to come into operation only when the example is flagrant, when unusual means are being used. But none of that phraseology gets into the Bill and, unfortunately these Clauses will be interpreted, not by the beneficent sentiments of my right hon. Friend, but according to the strict language of the Clauses of the Bill. I would remind him that when the Attorney-General replied upon the point about putting in something indicating motive or intention, the words he used—I took them down at the time—were that he was only attempting to get at the man who was using the machinery of the Companies Acts in order to avoid Super-tax. If that is what it is intended to do, why does not the Attorney-General put in this Clause language which will say that the Clause strikes only at a man who does it in order to avoid Super-tax or who uses the machinery of the Companies Acts with a view to avoid Super-tax? Surely that is a perfectly simple consideration.
I must really beg my right hon. Friends to go a little further in this matter. If they intend to strike at those who are doing things in order to 1002 defeat the ordinary principles of taxation, I submit that they should use phraseology that clearly attains their end. As my right hon. Friend's Amendment stands now, the effect of it is this: Wherever the avoidance of Super-tax occurs this question is raised. There is always an avoidance of Super-tax in result if you do not distribute all your revenue. It is simply a question of result, as my right hon. Friend said. The only point, accordingly, which it is competent for the Commissioners to consider is whether, in fact, there has been a reasonable distribution or not, apart altogether from intent or motive, because if there has not been, in the view of the Special Commissioners, a reasonable distribution there is necessarily an avoidance of Super-tax. Then you are submitting to the discretion of someone outside the business what is a reasonable contribution, and if he does not think it reasonable, apart altogether from any intention, the matter must go further. That is entirely against everything that my right hon. Friends have protested in these Debates. I beg them to consider whether the English language is not capable of expressions which will put into this Bill those beneficent intentions which they have expressed in their speeches.
§ Mr. CHURCHILL
I really must recall the Committee from these hypothetical hard cases, in which it is assumed that the administration will be the most unreasonable and the wickedest that there has ever been, under provisions which, so far as I am responsible for them at all, I have founded upon the words that fell from the lips of the original creator of these Clauses. I have simply endeavoured to fulfil his original intention. I have not come up to his original intention. I have gone only a short way towards repairing some of the damage which was done to the revenue by those Amendments which he accepted under the kind of pressure that I am subject to to-night. I say that I am not going to have this matter decided, and it ought not to be decided, by the Committee on the basis of what is the worst thing that can be done to the most simple and honest and ingenuous person by the cruellest 1003 and wickedest and most unreasonable Income Tax official. It is absurd. We have a right to appeal to practice and to facts. Out of 40,000 companies which, for four Years, have been in active administration within the area of this legislation, only 550 have been questioned in any way; and of that latter number only one-half have been judged to have been liable to a surcharge of any kind. It is ridiculous that the Committee should be asked to deal with these most extreme and extravagant points of difficulty when, as a matter of fact, under the practical working of the matter, the whole affair has been proceeding smoothly, and 99 out of every 100 companies involved within the ambit of my right hon. Friend's legislation have never been aware of the slightest difficulty or oppression.
So far as this particular matter is concerned, we believe that no difficulty will arise; but we cannot, in any event, undertake to commit ourselves to attribute motives. The Crown has never undertaken to do that. No one has used stronger language, and, if I may say so, better-chosen language, than my right hon. Friend in regard to that, but nothing will induce me to commit the Crown in this legislation to imputing motives at any stage. The moment you do that, you render it nugatory. I have given my closest attention to this matter; I have examined most carefully what has taken place in the past; and I say that there is not the slightest foundation for the apprehensions which the right hon. Gentleman has put forward. We know perfectly well that the champions of these three young men and their ship take a very unsympathetic view of any method of taxation; but, in the interval between the Committee stage and the Report stage, if it can be brought home to me that there are dangers which we have not foreseen, and if there are words by which these dangers can be avoided, which do not commit the Crown to imputing motives, I shall be perfectly ready to give most careful attention to them.
§ 10.0 p.m.
§ Mr. W. GRAHAM
The Chancellor of the Exchequer must not so airily throw away the only support which he appears to have in the Committee. A number of my hon. Friends and I have done our 1004 best to elucidate very difficult Clauses in this Bill. I rise at this moment to find out what is the position of our business because, at this stage, the Amendment of the hon. Member for Watford (Mr. Herbert) is still before the Committee, and the Chancellor has intervened to make a statement regarding the Amendments on the Paper which he was prepared to accept. As I understood it, the object of that intervention was to shorten the Debate. It may be, from some points of view, that the Debate has been shortened by the statement which has been made, but it is perfectly plain that on the Amendments that are to be accepted further explanation is required. Strictly speaking, at this stage, what has happened has been that the right hon. Member for Hillhead (Sir R. Horne) and others have started to debate the merits of the proposals which, on the Chancellor of the Exchequer's acceptance, are still to come before the Committee. Then, apart altogether from those Amendments to be accepted, there are many Amendments on the Paper which, I presume, will be called, and which probably Members in different parts of the Committee will desire to support. In these conditions, it is plain that we are in for a very long sitting of the Committee. Accordingly, I rise to ask the right hon. Gentleman whether, in these circumstances and with all the technicalities of the night and the dawn before him, he still intend to try to reach Clause 46, on the Road Fund, which again will be the subject of considerable debate. I want to appeal to the right hon. Gentleman to abandon at least that Clause for to-night, and to let us understand that at this point we are to bend our energies, if that is his intention, solely to Clauses 26 and 31, with the Amendments which will be selected by the Chair.
§ The CHAIRMAN
I think it would he more convenient if the right hon. Gentleman would move that the Chairman do report Progress. We cannot have this sort of discussion on this Amendment.
§ Mr. CHURCHILL
I am sorry to trespass so much on the time of the Committee, but I must ask the Committee 1005 to persevere. We have a very long way to go. It seemed that a very large measure of agreement had been reached. The right hon. Gentleman for Hillhead (Sir R. Horne) has raised an extremely ingenious point, to which I presume he has given careful attention, and somehow political partisanship seemed to spring up, which might possibly delay our proceedings. We have an enormous number of Amendments on this particular Clause 29; then we have another Clause, not of very great importance; and then we have Clause 31, on which there must be considerable debate. There are one or two minor points in the other Clauses in this particular section of the Finance Bill. Then we come to the Road Fund. It is my view that we ought to get the Road Fund before we separate. [HON. MEMBERS: "Oh!"] How are we going to deal with our business otherwise? If we do not get the Road Fund before we separate, we shall not be able to begin with the Betting Tax to-morrow, nor take it as the principal piece of resistance. Of course, I am in the hands of the Committee, and if the Committee will give us our Bill at a reasonable hour tomorrow, I can perfectly well postpone the Road Fund. Then we can do the Road Fund and the Betting Duty debates tomorrow. If, however, it is intended to carry this Debate on over to-morrow, and if more than the four days to which we have been working for the Committee stage of the Finance Bill are taken, we shall have to sit late to-night, and endeavour to make the necessary progress to-night, so as to finish the Committee stage to-morrow. After all, we have had to give a day for the Vote of Censure and the inconvenience which will be caused without any good purpose if Members have to come back on August Bank Holiday or after it will be very great indeed. I know that everyone always says "Oh, nobody minds," but in practice, everyone minds very much indeed. I do not believe it would be useful or convenient to the House to break the time-table, to which we are always endeavouring, subject to our duty thoroughly to discuss things, to work. Therefore, I urge the Committee either to let us have the Road Fund Clause tonight or, in the event of it being decided that we shall reach the close of the Committee 1006 stage at a reasonable hour tomorrow, I am quite ready that the Road Fund should go over until to-morrow.
§ Mr. WALLHEAD
You should recognise that your own supporters have kept you going; we have not done so.
§ Mr. GRAHAM
I am afraid it is altogether impossible, so far as we are concerned, to accede to the appeal which the right hon. Gentleman has made. After all, four days were set aside for the Committee stage of the Finance Bill, and the right hon. Gentleman indicates that it is his desire to wind up the Session at the earliest possible moment. He offers, as one of his reasons, that the Vote of Censure will take up the time of the House. It is perfectly fair to remind him and the Committee that practically the whole of the proceedings to-day have been due to the attack on his policy from his own side of the House. The position is that we are asked to finish this Clause to-night, in addition to the Road Fund, and there are a large number of other Clauses which we shall have to consider to-morrow afternoon and far into the following morning. I suggest that that is altogether unfair, when we have got £850,000,000 of expenditure to debate under these proposals, and that it is a very moderate and very reasonable request to ask the Government for extra time for the Committee stage of this Bill.
§ Mr. BALFOUR
I am sure all members of the Committee were interested to see the efforts made by the right hon. Gentleman the Member for Central Edinburgh (Mr. W. Graham) to render assistance to enable the Government to make progress to-night. I always rather interpreted the functions of the official Opposition in the contrary sense. But I think it is possible to make progress and at the same time possible also to defeat the object which the right hon. Gentleman has in view. If the Chancellor of the Exchequer can state in definite language to his supporters on this side of the House that he is prepared between now and the Report stage—or if we fail to get that concession before now and the Report stage that he will make the concession before this is operative in the next Finance Bill—to state that his only object is that which 1007 he has declared to this House and to the country as the one sole object which His Majesty's Government has in view and nothing more, he will receive the whole-hearted support of all his supporters on these benches, and I suppose of every Member in the House, to whatever party he belongs. If the right hon. Gentleman will make it clear between now and Report stage that this Clause is intended to catch and to punish and to penalise one class and one class only, he will have the support of every one of the Members on these benches and I am sure of hon. and right hon. Gentlemen opposite. The right hon. Gentleman informed the House that through the operations of the one-man companies it had been possible to evade and avoid the just and proper due of Super-tax taxable against an individual. We all agree that in every case wherever it can be shown that such action has taken place that these people should be brought within the scope of the law of the land. Hon. Members may try to get out of it and state that we are trying to get special concessions for what they call our class of people. We are doing nothing of the kind. We are as anxious as hon. Members opposite to see those people whom I have mentioned caught, but we say to the Chancellor of the Exchequer: "We will not have the Clause put into operation by means of throwing a dragnet over a wide field of industry and incidentally scooping in these people who are to be punished." This Clause must be framed to capture and punish the people who are out to evade the law. It must be a Clause which in its language is only intended to capture those people who are at present endeavouring to evade their just and lawful dues to the revenue of the country. If the right hon. Gentleman is in a position to say now that he will, between now and Report accept Amendments, designed to remodel Clauses 29 and 31, and make it clear that there can be no evasion and no loophole to protect these people whom we all wish to see caught and brought within the mesh of the law, but that he will not seek to achieve that by throwing a net over a wide field of industry in order to catch them—if he will reverse this Clause and make it operative particularly against those people and not make 1008 it incidentally operative over a wide field of industry; if he is able to give us an assurance that he will fairly accept any Amendment which will achieve that object and which will assist his Department in achieving their object—then, I think, indeed, that we can make progress.
§ Mr. CHURCHILL
I have already described in full detail the treatment which the Government can afford to the various Amendments which I have read out and I gather that that has been found to give satisfaction to a very large extent to some of those who are friends and supporters of His Majesty's Government. In some cases Amendments have been accepted; in other cases I shall move Amendments and in other cases again I have undertaken to consider matters between now and Report. So far as this Finance Bill is concerned that is the end. No more Amendments can be accepted and no more Amendments made and everybody must do their duty as they think fit in the circumstances. So far as next year is concerned, I should like to point out that the whole of this matter lies under the control of the House until the Financial Resolution is passed next year. Therefore, in the interval it is open to my hon. Friend who has just spoken and who made an offer in the spirit which I am sure was designed to expedite proceedings—[Interruption]. I know it was—if he or anybody has any better suggestion for dealing with these difficulties, if such a suggestion can be made, I shall consider it with the greatest attention. I am prepared to see that there is full assistance available for any inquiry into the matter and I do not for a moment suggest that what we are proposing now is the end. I am sure it is not; I am sure that it can be improved upon in the interval. We have a whole year before us and I shall give the most careful and attentive consideration to any recommendations that may be made. Having said that, I have definitely said all that is within our power.
§ Mr. BALFOUR
Does not the right hon. Gentleman understand the disturbance that has been created in industry and the effects that these Clauses have on the whole of industry. Is he not prepared to go further and say he will repeal this 1009 Clause next year and introduce a new Clause to achieve the object which he desires?
§ Mr. BUCHANAN
I would ask hon. Members in this Committee to realise that what we are discussing is not the Clause that the hon. Member for Hampstead (Mr. Balfour) set out to discuss, but we are discussing a Motion to report Progress, and we are not discussing the merits or the rights or wrongs of this Clause. I want to say to the Chancellor of the Exchequer that I have never seen a Member of this House stand in such a humiliating position as he has been placed in during the latter stages of this discussion. I have listened to this Debate practically all day. I heard the right hon. Gentleman's first speech in which he stated without the slightest trace of ambiguity the exact position of the Government. I heard the speech reinforced by the speech of the right hon. and learned Attorney-General and yet, despite that statement, the Chancellor of the Exchequer—this great strong Chancellor of the Exchequer who recently addressed a Primrose League meeting in the Albert Hall and told them how he could govern the world—when one Member, and not a very outstanding Member, of his party gets up and with a speech that in every sentence of it—if any person watched his facial expression he could see nothing but bitter hatred from one Member to another—[Interruption.] I say quite frankly that no Member who sat here and watched the hon. Gentleman making his speech could see anything but hatred, and those who watched the right hon. Gentleman the Member for Hillhead (Sir R. Horne) must also have been interested. I do not want to create any diversion. It may be that I am doing an injustice to the right hon. Gentleman and I do not want to do that, seeing that he is a colleague from Glasgow. It may be that there was a conflict, of opinion.
The Chancellor of the Exchequer having explained and re-explained at least four times to his own supporters the position which he has taken up, was called upon for still another explanation, and that seems to me to be humiliation in its worst possible form. The Opposition are entitled to some consideration. We are the right hon. Gentleman's supporters to-day, and it is to the credit of the Opposition that we should support 1010 even this Government when we think they are right. The Members on the Opposition Front Bench have proved themselves to be the only real Government in this country by showing that they are prepared to look higher than mere narrow party or business considerations in a matter which concerns the general good of the community. We now come to the position of considering how far we are to go on with this business to-night. The right hon. Gentleman's own supporters have made many speeches. The right hon. Gentleman the Member for Hillhead has made the same speech twice, I have heard the hon. Member for Watford (Mr. D. Herbert) explain his views once or twice and I see that the hon. Member for York (Sir J. Marriott) has not yet finished. I know that the Parliamentary Secretary to the Treasury strives to handle the business of this House and to make due allowance, within reasonable limits, for occasional loss of temper, but he must be aware that we have to meet again to-morrow, and if the Chancellor of the Exchequer is to be in a position to discuss the further Clauses of the Bill and if he is to treat the Committee with proper respect he must get a decent sleep between to-night's adjournment and to-morrow's meeting. It is not treating the Committee with respect if the Chancellor of the Exchequer is to stay here until 9 o'clock or 10 o'clock to-morrow morning, and is then to be expected to bring a fresh mind on the important business which lies before us.
I suggest that the right hon. Gentleman should state that he is not going on with the Road Fund proposals, at any rate not in the small hours of the morning. Of course, if it is to be a case of trying to force the matter through then the Opposition can enter into the game and if speeches are to be made, we shall make our due contribution. I have no wish to obstruct the business which has been proceeding fairly harmoniously but, with reference to the argument used about sitting on Bank Holiday, I may remark that I have been in this House on at least three August Bank Holidays and I cannot see any objection to meeting on a Bank Holiday this year if it is in the interests of giving proper discussion to this Road Fund proposal. We should remember that the Finance Bill is the most important Bill of the year. It decides Government policy in regard to 1011 every other matter for the forthcoming Session. The Government supporters have had the best part of the time to-day and the right hon. Gentleman is now offering to the Opposition the leavings of the Parliamentary day. If the right hon. Gentleman has no respect for his own supporters, he must have some respect for the Opposition and I hope the Opposition Front Bench will insist that, if we cannot have the Road Fund proposals discussed at a reasonable hour, we shall endeavour to make it as difficult as possible for the Government.
§ Mr. STEPHEN
I am sure many of us on these benches have a good deal of sympathy with the Chancellor of the Exchequer in the humiliating position into which he has been put by his own supporters. He is willing to take the Road Fund to-morrow if we are also willing to take it and the Betting Tax to-morrow, if the business of the country is to be done with due regard to Members of Parliament being out of doors on Bank Holiday. I think the Chancellor of the Exchequer is rather unfortunate in taking up that position, and I am going to suggest to him a way in which we may make progress to-night. It is that the right hon. Gentleman should stand up to the people who are supposed to be his supporters. I wonder whether he is in such a hurry in regard to this thing because he is afraid that by to-morrow the right hon. Member for Hillhead (Sir R. Horne) and those who are with him on this matter will be presenting their ultimatum to the Cabinet and demanding the Chancellor's head on a charger.
I have seen the right hon. Member for Hillhead (Sir R. Horne) trying to make trouble for the present Chancellor in this present Parliament on other occasions, and I have always noticed that when the present Chancellor has stood up to the ex-Chancellor, the ex-Chancellor in a very short time has been only too anxious to congratulate the present Chancellor on the brilliance with which he has carried on the business. I suggest to the Chancellor of the Exchequer that while he is still in this job he should go on the lines on which he has gone to-day. I do not believe that the people who have been taking part in this discussion to-day, with all due respect to them, will do anything at all 1012 against the Government. I have no real aversion to the hon. Member for Hampstead (Mr. Balfour), or the hon. Member for York (Sir J. Marriott), or the hon. Member for Watford (Mr. D. Herbert). They are all very pleasant gentlemen in their own way, but I believe that the Chancellor would find that he would make ever so much better progress if he would give them his answer and be done with it, and tell them that that is all that he has to say to them. They know perfectly well that their salvation is bound up with the Chancellor of the Exchequer's retaining his office in this Government. They know as well as anybody else that there is practically no member of this Government, apart from the Chancellor of the Exchequer, who gives it any measure of confidence in the country. I am quite serious when I say that, because while we on these benches remember the record of the present Chancellor, and know that his ecclesiastical figure is the Vicar of Bray, that he may change his party, at the same time—
§ Mr. STEPHEN
I am sorry, but perhaps you will excuse me being a little bit carried away, Captain FitzRoy, because of a sense of grievance that we have, for we have been waiting here all day to get on with this Bill. There are many Amendments on the Paper, but it is perfectly well within the knowledge of everybody in this Committee that there is practically not one of those whose names are dawn to those Amendments who would have the courage to go into the Lobby against their own Government. The Chancellor of the Exchequer has been footling away the time of the Committee in listening to their attempts to try to make evasion possible. If the Chancellor would only show a little more courage against his own supporters and impose a little discipline on them, and show a little more consideration for the Opposition, we should make more progress with this Finance Bill. He ought not be frightened of the right hon. Gentleman the Member for Hillhead, because it is quite certain the country would never stand him as the successor of the present Chancellor.
§ Mr. CLYNES
It is never desirable to have a long Debate on a Motion of this kind. I have only heard at second-hand something of what the Chancellor said since this Motion was submitted, but I recall to his mind the question he was asked by my right hon. Friend the Member for Colne Valley (Mr. Snowden), because the answer he gave then was an indication that it was not desirable to begin at any late hour any very important section of the Finance Bill. I seriously put it to him that he would best be consulting the interests of the Bill itself and the general convenience and desires of the Members of the Committee on both sides if he would express himself as being content with concluding to-night those Clauses in the Bill which deal with this question of Super-tax and not touch the Road Fund until we resume the Bill later.
§ Mr. LLOYD GEORGE
I should like to support the appeal of the right hon. Gentleman the Member for Platting (Mr. Clynes). I earnestly trust that the Chancellor of the Exchequer will not compel the House to undertake to-night the discussion of a topic which excites so much general interest in the country as the Road Fund. His method of dealing with the Road Fund is a novel one and has caused a good deal of discussion and animadversion, and it ought to be discussed at a time when there will be a full opportunity of presenting the case. All the great local authorities in the country are supremely interested in it. They are moving in the matter. There is some sort of rumour that there is a statement to be made on this subject. If there is a proposal to be submitted to the judgment of this Committee by the Chancellor of the Exchequer or by the Prime Minister, it surely ought to be done at a time when there is a fair opportunity for discussing it. I understand that there are still several pages of Amendments to be gone through on the Income Tax Clauses. The Chancellor of the Exchequer is a sufficiently old Parliamentary hand to know that it would, perhaps, facilitate matters very much if he were to give the intimation suggested by the right hon. Gentleman the Member for Platting, that is, that he does not propose to go beyond the disposal of these eight and a-half pages 1014 of Amendments. That would be a very reasonable concession and a very liberal concession.
§ Mr. CHURCHILL
Of course, I am in the hands of the Committee. Not only have we had strong appeals from the Leader of the Opposition and from my right hon. Friend the Member for Carnarvon Boroughs (Mr. Lloyd George), but there is, of course, a very strong body of opinion on our side of the Committee which is very anxious to discuss the Road Fund. Having regard to the amount of business on the Order Paper, unless the programme is adhered to, the whole business of winding up the Session will be upset. However, in view of the opinions which have been expressed from all quarters in the strongest way, and which I have heard through other channels from the Conservative side of the Committee, I am prepared to meet the wishes of the Committee that the Road Fund shall be undertaken when we meet to-morrow, and not before. If the discussion on the Road Fund is to be undertaken when we begin to-morrow, we might finish the taxation provisions on which we now are, and the other Clauses of Part IV of the Bill, which are of a non-controversial and technical character. That will enable us to take Clause 46, which deals with the Road Fund, as the only Clause to be dealt with to-morrow, and, after that, we shall be able to get on with the new Clauses. That would mean that Clause 46, when we reach it, would be postponed, and that we should have run through the other provisions to the end of the Bill by to-morrow.
§ Mr. LLOYD GEORGE
Does the right hon. Gentleman insist on taking Clause 45, which, surely, has a bearing on Clause 46?
§ Mr. W. GRAHAM
The statement which has been made by the Chancellor of the Exchequer alters the situation, and I think I speak for all my colleagues when I say that, if the right hon. Gentleman agrees to postpone Clause 46, which covers the Road Fund, until to-morrow, then, Clause 45 having been already disposed of, there is very little, if anything, in the remaining Clauses of the Bill, and, accordingly, so far as we are concerned, 1015 we should be prepared to accept that offer. On that basis I beg leave leave to withdraw the Motion to report Progress.
§ Motion, by leave, withdrawn.
§ Original Question again proposed.
§ Mr. D. HERBERT
I should like to expedite matters, if I can, by asking the leave of the Committee to withdraw my Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. H. WILLIAMS
I beg to move, in page 15, line 39, after "1922," to insert the words:shall be amended by the addition of the words 'or such part thereof as they may require the Board of Referees to decide as being a reasonable distribution' after the words 'direct that for the purpose of Super-tax the said income,' and.I think that this issue was not dealt with in the summary of Amendments which the Chancellor of the Exchequer said he was prepared to accept, or in the general Debate that we have had on the question. I want to ask the Chancellor of the Exchequer to give consideration to one point. If the Amendment which I am now moving were incorporated in the Bill, it would lie in the power of the Commissioners to impose the full penalty in cases where the full penalty ought to be imposed, but, on the other hand, in the case of a nominal offence, the only penalty that would be imposed would be in respect of that part of the income which was not properly distributed.
§ Sir SAMUEL ROBERTS
I hope that this Amendment will not be accepted. Although I object to this Clause as it stands, I think that this Amendment would make matters worse from the point of view of business. As the Clause stands, a case would have to be fairly flagrant before it could be dealt with at all, but if, on the other hand, the Commissioners are able to draw a dividing line between what is reasonable and what is not reasonable, a great many more companies would be brought under review than would be the case under the original Clause. Therefore, in the interests of business, I hope the Chancellor will resist this Amendment.
§ Mr. CHURCHILL
I am not able to accept the Amendment for the reasons 1016 which have been given by my hon. Friend behind me. It would not be in the interest of the taxpayer for us to invite the Board of Referees to lay down a rule as to the kind of proportion which should be adopted as a standard. It is far better that the matter should be left as it is by the Bill and that only flagrant and extravagant cases which stand out will be dealt with. Secondly, I cannot agree, when a case of this flagrant character has been made out in the opinion of these impartial judges, that only a proportion of the profits should be taxed. The company in question should lose its status for a year and drop down to the position occupied.
§ Amendment, by leave, withdrawn.
§ The DEPUTY-CHAIRMAN
The right hon. Gentleman the Member for West Swansea (Mr. Runciman) has three Amendments very much of the same character. It is a question of which he would like to move. I am referring to the Amendment in page 15, line 40, after the word "added," to insert the wordsand to the current commercial practice followed by companies in which the public are substantially interested and which are engaged in the same class of trade or business as the company and.
§ Mr. RUNCIMAN
I understand that the Chancellor of the Exchequer not only does not accept this, but he regards it as rather belittling the rights of the taxpayer. If he is so advised I do not propose to differ from him, and I shall therefore not move.
§ Mr. DAVID REID
I beg to move, in page 15, line 43, after the word "shall," to insert the wordsin any case in which a business undertaking or property has bean acquired by the company from the person or persons who have control of the company.The object of myself and my Friends in moving this is to try to confine the operation of the first Sub-section to cases where a man sells his property to a company. Take the case of a man who wishes to retire. He forms his business into a company, gives the shares to a number of his employés and takes himself a series of debentures payable by instalments. The employés work the business, pay off the debentures and gradually become the owners. Take the ease of a single-ship company. I believe it is quite a common transaction to have a company formed 1017 who own a single ship. It is unable to put up all the money for the purchase. The builder leaves part of the money outstanding on mortgage and the mortgage is paid off by the earnings. That transaction would be impossible under the Clause. Take the further case of people who carry on a mining business. They do not pay the whole of the purchase money but only a part of it, and they raise the remainder by debentures. Those debentures they pay off out of earnings. Here again the transaction would be impossible under the Clause. Our suggestion is that the Clause should be confined to cases where a man sells his property to a company.
§ Mr. CHURCHILL
We cannot accept this Amendment in the form in which it is moved. It would limit the application of the provision to a case where, let us say, the firm of Smith sells, let us say, to the firm of Smith, Ltd., retaining control of that company. We cannot accept the Amendment, first of all, because, although the provision, thus limited, would, prima facie, cover most of the outrageous cases, it would not cover all the cases which ought to be dealt with. Suppose, for example, the said firm of Smith, Ltd., formerly owned by Smith is bought by Brown and Smith, Ltd., and paid for out of profit. Why should Brown and Smith, Ltd., escape Super-tax? No private firm acting in this way could do so, nor could any public company ever treat its original business in this way. We have indicated in regard to the Amendment that has been moved by my hon. Friend the Member for Reading that we will introduce on Report words to make it clear that the provisions of Clause 29 will only apply to payment for the business which a company was formed to acquire, or which was the first substantial business that the company did acquire. Further than that I cannot go. Having regard to the other safeguards which limit and restrict the operations of this Clause, I cannot see that we can go further.
§ Mr. D. REID
May I ask my right hon. Friend if the Clause as amended would apply to businesses which have already been made into companies? I know of many cases where they have been sold to third parties and been paid for by debentures. Will my right hon. Friend say whether the Clause will be limited to 1018 future transactions or whether these transactions will be included?
§ Sir S. ROBERTS
May I put a case to the Chancellor of the Exchequer? We will assume that a business was sold many years ago to a company, and that the purchase price was paid in debentures and shares, these debentures and shares having now got into the hands of persons entirely separate from the original vendors. So far as I read the Clause and the Amendments proposed it means that the debentures being part of the original purchase price cannot be paid off and will be a perpetual clog on this business.
§ Mr. BALFOUR
What happens in every day practical business life is that some enthusiastic man purchases a business, either in his own name or in the name of a company—it does not matter—and believes he can make a job of the business. He takes it over probably foolishly, and places himself under an obligation to pay a sum of money. He then secures a loan for the acquisition of the business. He continues for a series of years to devote practically the whole of his profits towards paying back that loan, and, as has frequently happened in the past before the loan is paid off, and in the ordinary movement and cycle of trade, the business falls on evil times. That man who has possibly been taking a mere pittance out of the business—£40 or £50 a month—to exist upon, has worked for years and produced a sum of money merely to pay off the loan which he himself incurred to acquire the business. It is possible that he has not completely repaid the loan, or if he has, he will find that the change of trade has left him with a business not worth the whole of the purchase price.
What happens to him under the proposal of the Chancellor of the Exchequer? Be is the individual who is to be answerable for the payment of Super-tax on the whole amount of his debt to a third party, who has collected from him the fruits of the goodwill of that business and who has done nothing whatever to make the goodwill. It is the man who has worked hard in the business and who has provided the money to pay for the sum which he has been charged for the goodwill of the business who, at the end of the time, is called upon to pay Super-tax on the 1019 amount of money received by the other man for the goodwill. If any question of payment of Super-tax arises, it should be the recipient of the proceeds of the loan who sold the business for cash on goodwill and left the other man with a business which has not proved profitable. I am not putting this forward as a case which is universal, but as a case which is very common. It is hard on working people who genuinely acquire a business and very often make nothing out of it, and I wish to protect them against having to pay the toll of Super-tax after they have done nothing more than get a fair income out of the business and provide employment.
§ Amendment negatived.
§ Mr. D. HERBERT
After the statement of the Chancellor of the Exchequer I do not propose to move my Amendment—in page 16, line 2, to leave out the words "not as," and to insert instead thereof the words "may be regarded as not."
§ Mr. GATES
I beg to move, in page 16, line 24, after the word "therefor," to insert the words:not being debentures or debenture stock issued pursuant to an offer contained in a public prospectus or offered for sale, being for an amount not more than one-third of the total purchase price paid by the company for the business undertaking or property acquired by the company, or any other business undertaking or property from time to time acquired by the company.I do not know whether the Chancellor of the Exchequer will regard this Amendment in a favourable way. I want to qualify the definition of debentures in Sub-section (2). The proviso which I seek to put in meets the case of debentures being openly issued in a public prospectus for an amount of not more than one-third of the total purchase price paid by the company. It is a common and usual thing in a company to buy a property and to issue debentures for one-third of the purchase price, and it is common and usual to repay these debentures out of the income of the company, either by instalments or by premiums on a debenture redemption policy. This is quite in the usual order of business, and I hope the Chancellor of the Exchequer will see his way to accept the Amendment.
§ Mr. CHURCHILL
I have tried very hard this afternoon to explain to the Committee a whole series of safeguards which protect again and again the taxpayer from being ill-treated by tins legislation, and I am not able to add to them by accepting an Amendment of this character. I do not feel that there is any danger of hardship arising. I do not consider that we ought to look upon this legislation from the point of view of a most unreasonable exercise of it, and the Board of Inland Revenue applying it unreasonably to the most virtuous taxpayers. The old maxim applies that "hard cases do not make good laws." I am not able to accept the Amendment which the hon. Member proposes. When I consider the necessity of expressing in simple form the taxation proposals and of shortening the Clauses which show the taxpayer what he has to pay, I cannot think that the acceptance of a number of provisions of this kind, however shrewdly they may meet some exceptional points, would be an advantage if they figured upon the Statute Book.
§ Amendment negatived.
§ Mr. CHURCHILL
I beg to move, in page 16, to leave out from the word "company" in line 36 to the word "which" in line 38.
§ Mr. CHURCHILL
This is one of the exclusive Amendments. I was asked to put as large a portion of the business community at rest as possible by the knowledge that they were not going to be affected, and we are putting 90 per cent. absolutely outside the scope of the Clause. This is one of the Amendments which excludes subsidiary companies of companies which have a holding in the company concerned.
§ Mr. W. GRAHAM
I will not detain the Committee at this late hour, but many of us regarded this Amendment together with the later Amendments on the Paper as representing the concessions which the Chancellor of the Exchequer is prepared to make. I can only repeat from our point of view that we should have preferred the Clause in its original form, but having gone through these Amendments I am bound to say, on the whole, they do not make too serious an inroad and, speaking for myself, and I 1021 think for others, I am not prepared to resist them. At the same time, the circumstances are such, in our judgment, that the original Clause might very well have been maintained.
§ Colonel GRETTON
The right hon. Gentleman who has just spoken has correctly gauged the real value of this particular concession. It is an improvement in the Clause, but only a little improvement, and it will not satisfy the business community that the Clause is not going to damage these small companies and partnership businesses which are going to be roped in. As far as it goes the Amendment is an improvement, but I hope and trust the Committee will not think that this Amendment—which we ought not to be so ungracious as not to thank the Chancellor for—will really mitigate the fundamental and vital objections which still exist to the Clause, the greatest objections to which still remain.
§ Amendment agreed to.
§ Mr. CHURCHILL
I beg to move, in page 16, to leave out line 40, and to insert instead thereof the words:and which is not a subsidiary company or a company in which the public are substantially interested. For the purpose of this Sub-section—A company shall be deemed to be a subsidiary company if, by reason of the beneficial ownership of shares therein, the control of the company is in the hands of a company not being a company to which the provisions of this Section apply, or of two or more companies none of which is a company to which those provisions apply.A company shall be deemed to be a company in which the public are substantially interested if shares of the company—
carrying not lees than twenty-five per cent. of the voting power have been allotted unconditionally to, and are at the end of the year or other period for which the accounts of the company have been made up as aforesaid beneficially held by, the public (not including a company to which the provisions of this Section apply) and any such shares have in the course of such year or other period been the subject of dealings on a stock exchange in the United Kingdom and the shares have 1022 been quoted in the official list of such a stock exchange.
- (a) being shares of a class or classes in respect of which a public offer for subscription has been made by the company; and
- (b) not being shares entitled to a fixed rate of dividend, whether with or without a further right to participatein profits;The expression 'company' means a company within the meaning of the Companies (Consolidation) Act, 1908.
§ Question, "That the words proposed to be left out stand part of the Clause," put, and negatived.
§ Motion made, and Question proposed, "That those words be there inserted."
§ Mr. RUNCIMAN
I beg to move, as an Amendment to the proposed Amendment, in line 10, after the word "if," to insert the words "twenty-five per cent. of the."
The object of the Amendment is to provide that 25 per cent. of the shares is to be the gauge to be used in this connection, and it is moved with the object of dealing with cases when the ordinary shares may be under the control of a comparatively small number of people and the preference shares held by the public as a whole. It has become usual in the issue of preference shares to provide that the preference shareholder shall only have a power of voting when the dividend is in default, and it therefore means that the 25 per cent., as it stands in the proposal of the Chancellor of the Exchequer, applies only to the ordinary shares and does not apply to the preference shares which may be held outside. The object of the Amendment is to make it 25 per cent. of the shares as a whole.
§ Mr. CHURCHILL
I have already explained in my general review of the Amendments that this is not one on which I can meet the right hon. Gentleman. The provision of 25 per cent. of voting power to be held by the general public is very moderate, and the preference shareholders are only interested when there is an accumulation of reserves which may affect their general position. The point is not a very serious one, but I am afraid I am unable to accept the Amendment.
§ Mr. RUNCIMAN
I agree that the point is not a serious one, but the right hon. Gentleman has not safeguarded himself in the least by the proposal he has made. It is easy for a company to give voting power to its preference shareholders, and so defeat it.
§ Amendment to proposed Amendment negatived.1023
§ Mr. D. HERBERT
I beg to move, as an Amendment to the proposed Amendment, to leave out lines 11 and 12.
My right hon. Friend has agreed to accept this and the next Amendment and, therefore, I need not do more than remind the Committee that the effect is that where the public are "substantially interested" it means that they are substantially interested by having bought shares and they need not necessarily obtain them by means of public subscription.
§ Amendment to proposed Amendment agreed to.
§ Mr. HERBERT
I beg to move, as an Amendment to the proposed Amendment, in line 16, after the word "to," to insert the words "or acquired unconditionally by."
§ Amendment to proposed Amendment agreed to.
§ Proposed words, as amended, there inserted.
§ Mr. CHURCHILL
I beg to move, in page 17, line 28, at the end, to insert the words:(6) The following shall be substituted for paragraph (5) of the First Schedule to the Finance Act, 1922:5. (a) Where the Special Commissioners have—
the directors of the company, if they are of opinion that there has not been and will not be any avoidance of the payment of Super-tax through failure to distribute to the members of the company a reasonable part of its income for that year or period, may make a statutory declaration to that effect stating the facts and circumstances upon which their opinion is based;
- (i) issued a notice requiring any company to furnish them with particulars under paragraph (4) of this Schedule as respects any year or other period; or
- (ii) given a direction under Sub-section (1) of Section twenty-one of this Act as respects any year or other period in relation to any company to which no such notice has been issued as respects that year or period;(b) In any case where such a statutory declaration as aforesaid is sent to the Special Commissioners within twenty-eight days of the issue of such a notice or the giving of such a direction as aforesaid the Special Commissioners shall not, unless they see reason to the contrary, take any further action in the matter;1024(c) I in any such case the Commissioners see reason to the contrary they shall send to the Board of Referees a certificate to that effect, together with the said statutory declaration, and shall at the same time transmit a copy of the certificate and of the statutory declaration to the Commissioners of Inland Revenue;(d) The Commissioners of Inland Revenue may at any time within twenty-eight days after receiving the copy of the certificate and the copy of the statutory declaration submit to the Board of Referees a counter-statement with reference to the matter;(e) The Board of Referees shall in any case take into consideration the declaration, and the certificate, and the counter statement, if any, and shall determine whether there is or is not a prima facie case for proceeding in the matter;(f) The determination of the Board of Referees under this paragraph shall be final and conclusive, and, where the Board of Referees determines that there is a prima facie case for proceeding, the notice or direction aforesaid shall have effect as if it had been issued or given on the date on which notice of the determination of the Board is given to the company.
§ Mr. RUNCIMAN
I beg to move, as an Amendment to the proposed Amendment, in line 11, to leave out the word "any" and to insert instead thereof the words "with a view to the."
The proposal of the Chancellor of the Exchequer provides that the directors of a company may make a statutory declaration, on certain clear set of facts and circumstances, that there has not been or will not be any avoidance of the payment of Super-tax. If they are to make a declaration to that effect it means that they will be debarred in that declaration from stating that they have not withheld from the return of their profits amounts which may have been spent on all sorts of legitimate objects. For instance, it might have been possible for them to have added to their stock, and so on. It surely cannot be with the object of drawing from the directors a declaration that there had not been avoidance of payment of tax; it surely must have been, as declared, "with a view to" avoidance. The Chancellor of the Exchequer, I think, was confusing motive with intention, and when the Attorney-General spoke on this subject in general he was inclined to argue with the Committee that it was impossible for the Government to embark on anything 1025 in the way of an interpolation of motive into this Clause. Of course, the Attorney-General knows that "intention" occurs again and again in Acts of Parliament of all kinds. We are constantly coming into contact with it in commercial legislation, and there is no reason why it should be regarded as unfitting for this Amendment of this Bill. My right hon. and learned Friend the Member for the Exchange Division of Liverpool (Sir L. Scott) is supporting this Amendment, and I am sure it is well within his recollection that there are scores of Statutes where intention is declared or the declaration of intention is an essential part of the operative portions of the Statute. In these circumstances, I beg to move the Amendment, so that the declaration made by the directors would be a declaration that they had not, with a view to the avoidance of payment of Super-tax, failed to distribute to the members of the company a reasonable part of its income for that year or period.
§ The ATTORNEY-GENERAL
My right hon Friend has already explained to the Committee that this is not an Amendment which it is possible for the Government to accept. The right hon. Gentleman in moving it said that it was a small Amendment in volume and that it was quite an easy thing to define "intention." But I would remind the Committee where it is that the words of the Amendment are to be inserted, and what the effect would be. We are assuming a case where the Special Commissioners have thought that there is something to look into. They have communicated with the directors of the company, giving them that information. The directors then are to have an opportunity of making a statutory declaration. The statutory declaration, with the Commissioners' statement, then has to go to the Board of Referees, whose decision as to whether the matter shall go on or not is final and conclusive. It is obvious, therefore, that there is no opportunity given to the Special Commissioners either to cross-examine the directors upon any affidavit, or to make any investigation of the books of the company to check any statement which appears in the affidavit. If the directors are prepared to state that there has been no avoidance of Super-tax there may be 1026 facts, and probably will be facts, which the Commissioners can put forward to show the Board of Referees that prima facie there has been avoidance of Super-tax. But if the question which is to be submitted to the Board of Referees is not whether there has been avoidance of Super-tax, but whether the particular thing was done with a view to avoidance, then you have the uncontradicted affidavit of the directors, and no opportunity of checking it, no opportunity for cross-examination, or testing in any way at all; and the result would be that the Board of Referees would be bound in almost every case to accept the statement of the directors, which could not be challenged, that they were not acting with a view to avoidance, and the whole machinery would be rendered nugatory. I would remind the Committee once more of what has been quoted more than once, both from judicial and from Parliamentary statements, that human motives are obscure, difficult of ascertainment, sometimes conjectural, and their ascertainment cannot be allowed to enter into the matter of the calculation of the revenue. The same view was expressed by my right hon. Friend the Member for Hill-head (Sir R. Horne) in the Debate on the corresponding Clause in the Act of 1922, and for these reasons, namely, that the result of the acceptance of this Amendment would really be to destroy the whole effect of the Clause and enable directors of a company who were prepared to swear that they did not act with a view of avoiding Super-tax, in effect, to stop any further proceedings, that it is impossible for the Government to accept this Amendment.
§ Sir LESLIE SCOTT
I really do not quite understand the answer of the Attorney-General. Earlier in the evening the Chancellor of the Exchequer or the Attorney-General—I think it was the Attorney-General himself—said that the whole object of this Clause was to provide that a man using the machinery of the Companies Acts in order to avoid payment of Super-tax should be hit. That is the very object of this Amendment. It is to bring to the test of that question this particular problem that we propose this Amendment. It is in order that we may differentiate between those companies in which what is done is done 1027 with the intention to avoid payment of Super-tax and not for a bona fide business purpose that we introduced these words. I believe the Committee wants to arrive at some test by which they can distinguish between acts of one kind and acts of another, We are all agreed that improper evasion of tax, which merely means that the man who does not pay his fair share of tax is putting it on to his fellows, should be prevented, but we do not want to interfere with bona fide business.
The Attorney-General has put before the Committee an argument in relation to the question of intention which I find it very difficult to follow. As I understand him he confused two totally different questions—the question of human motive with the question of the intention with which any act is done. I agree with him that to search into human motives is very difficult to bring to the arbitrament of any medical tribunal, but the question of the intention with which an act is done is habitually brought to the arbitrament of legal tribunals. It is brought before every tribunal which tries any criminal offence; every jury in this country deals with that issue and has no difficulty in dealing with it, for the simple reason that you judge a man's intentions by the whole surrounding circumstances and assume that he intends the natural consequence of his acts. It is also habitually brought before a legal tribunal in every single case of bankruptcy where it is alleged that any particular debtor has fraudulently preferred one creditor to another. The definition accorded to "preference" in bankruptcy is that a payment is made with the intention of preferring one creditor to another. In my view, that is extraordinarily similar in character to the question of a taxpayer taking certain steps in order to prefer himself, from the point of view of taxation, to the other taxpayers. All that this Amendment provides is that, if the directors make a declaration within the terms of this Clause that the allocation of any part of the annual profits to reserve is not done with the view or intention—I do not care which word you take—of avoiding payment of Super-tax, that shall constitute a prima facie case, and nothing more than a prima facie case, that it is an honest business transaction. I cannot understand why, if the 1028 Government, and I am perfectly convinced that is their desire, do no want to interfere with the conduct of ordinary business by a business man according to the requirements of business interest, they should not allow the directors of a company who, even in matters of taxation, are to be presumed to be innocent until they are proved to be guilty, to say on their conscience that what they have done was not with a view to avoiding payment of Super-tax. I cannot see any reason why that should not be done, and, as a lawyer, I see no difficulty in so providing. But if, in business, there is no reason against such a provision, and if, from the point of view of the general system of taxation, we do not want to tax companies or individuals, directly or indirectly, in these circumstances; and, if there is no legal objection to doing it, why should this Amendment not be accepted?
§ Mr. BALFOUR
Are we to have no explanation as to why the right hon. and learned Gentleman the Attorney-General should resist an Amendment of this kind? Let us see what the innocent director is supposed to do. He is supposed to certify that there has not been and will not be any an avoidance of Super-tax. He is supposed, where there is no point in question, to have his attention directed by the Special Commissioners to his accounts, and he is asked to certify that there has not been and will not be any avoidance of Super-tax. The Special Commissioners only imagine that there has been or will be an avoidance of Super-tax; they get a statement of the accounts, and send it on, and representations are made to the Referees. Even the Referees do not know, and the Special Commissioners do not know, but the director is supposed to certify that there has not been and will not be, any avoidance. He is not in a position to certify, even when he is appearing before the Referees. He believes that he has made up his accounts honestly, and he has not in mind any question of avoidance of Super-tax. How is he to know whether he is or is not avoiding Super-tax? If he sends in a certificate, and it is presented, and if a prima facie case is made out against him on a small question in which there is a difference of opinion, he is looked upon as a dishonest man in a matter that the Special Commissioners did not know anything about and the 1029 Referees did not know anything about. Is that not a presumption on the part of the Executive? Have we arrived at a stage when the people of this country have to plead in the House of Commons for their ordinary liberty?
Have we arrived at the stage where we have to plead with Ministers, not to protect the Executive against the people, but to protect the people against the Executive? Can the right hon. and learned Gentleman give a plain and simple answer to the question of how a director can certify that there will or will not be liability for Super-tax? There is nothing in the Schedule which gives a clear indication that in a business of type A you can do so-and-so, in a business of type B you can do so-and-so, or in a business of type C you can do so-and-so. The director is supposed to be primarily dishonest. He is supposed to be, in the first instance, a person who would wish to evade his lawful dues. The right hon. and learned Gentleman will have to go a long way to clear up points like this before he will satisfy many of us, if not the majority, on these benches that he is acting in the protectection of the proper rights and liberties of the people in this Bill.
I support the Amendment to the proposed Amendment. It seems to me the words which are proposed to be substituted state concisely the offence, with which the Clause is seeking to deal. If that be so, why cannot we have them instead of the equivocal form which appears in the proposed Amendment? Surely the offence is failure to distribute "with a view to the avoidance of the payment of Super-tax." There would appear to be no good reason why that should not be the only offence which people should be called on to swear they have not committed. Instead of that they are being called on to swear they have not committed something which is not pretended to be an offence under the Bill at all. It appears to me the Amendment to the Amendment would clarify the Clause. There is the further reason that, notwithstanding the fact that this affidavit has been sworn, the powers of the Commissioners are by no means terminated. Under paragraph (c) of the proposed Amendment, if the Commissioners "see reason to the contrary"— 1030 if they think the affidavit is not a good one—they can bring the matter before the Commissioners of Inland Revenue. On the ground of clarity and on the ground that they are left with ample means of redress, I support the Amendment to the Amendment.
§ Sir S. ROBERTS
I cannot help feeling that without the Amendment to the proposed Amendment the Clause as put down will be absolutely nugatory. I do not see how any directors can sign an affidavit that there has been no avoidance of Super-tax unless they have divided the profits up to the very hilt. If sixpence is put to the reserve and there is one shareholder who is a Super-tax payer, there has been avoidance of Super-tax to the extent of a fraction of sixpence. It seems to me no director can swear such an affidavit as is proposed, and that these words are a fraud and a delusion.
§ Mr. E. BROWN
I would point out to the Attorney-General that the suggested phrase is the phrase of the Act of 1922. Section 21 of that Act beginsWith a view to preventing the avoidance of the payment of Super-tax through the withholding from distribution, etc.If there was no difficulty in interpreting those words in 1922, I fail to follow the argument that there will be difficulty in doing so now.
§ Mr. MACQUISTEN
The drafting of the Government Amendment is lather peculiar. The directors of the companyif they are of opinion that there has not been and will not be any avoidance of the payment of Super-tax through failure to distribute… may make a statutory declaration to that effect.That seems to read that the directors may make a statutory declaration that they are of opinion that there has not been and will not be any avoidance of Super-tax. That is how the law seems to me to read, and that seems to be a very odd way of expressing the matter.
§ Mr. PETHICK-LAWRENCE
The hon. Member for Hereford (Sir S. Roberts) failed to read the word "reasonable" in line 12 of the Chancellor's Amendment. If he takes that word into account, I think he will find that his argument falls to the ground. Provided that a director is satisfied that a reasonable part of a company's income has been distributed, 1031 he can honestly make the declaration in question. I hope very much that the Attorney-General and the Government will stand firm by their Amendment. It seems to me that the directors have quite enough option by being entitled to
§ express it as their opinion that there is no avoidance of Super-tax.
§ Question put, "That the word 'any' stand part of the proposed Amendment."
§ The Committee divided: Ayes, 209; Noes, 55.1033
|Division No. 236.]||AYES.||[11.23p.m.|
|Acland-Troyte, Lieut.-Colonel||Grundy, T. W.||Oakley, T.|
|Agg-Gardner, Rt. Hon. Sir James T.||Guinness, Rt. Hon. Walter E.||Ormsby-Gore, Rt. Hon. William|
|Alexander, A. V. (Sheffield, Hillsbro')||Gunston, Captain D. W.||Paling, W.|
|Ammon, Charles George||Hall, F. (York, W. R., Normanton)||Parkinson, John Allen (Wigan)|
|Ashley, Lt.-Col. Rt. Hon. Wilfrid W.||Hall, G. H. (Merthyr Tydvll)||Penny, Frederick George|
|Atkinson, C.||Hall, Capt. W. D'A. (Brecon & Rad.)||Perkins, Colonel E. K.|
|Baker, Walter||Hammersley, S. S.||Pethick-Lawrence, F. W.|
|Banks, Reginald Mitchell||Hanbury, C.||Peto, Sir Basil E. (Devon, Barnstaple)|
|Beamish, Rear-Admiral T. P. H.||Hardie, George D.||Peto, G. (Somerset, Frome)|
|Benn, Sir A. S. (Plymouth, Drake)||Harland, A.||Potts, John S.|
|Bennett, A. J.||Harrison, G. J. C.||Pownall, Sir Assheton|
|Betterton, Henry B.||Harvey, Major S. E. (Devon, Totnes)||Radford, E. A.|
|Birchall, Major J. Dearman||Haslam, Henry C.||Raine, Sir Walter|
|Bird, E. R. (Yorks, W. R., Skipton)||Hayday, Arthur||Ramsden, E.|
|Bird, Sir R. B. (Wolverhampton, W.)||Hayes, John Henry||Rawson, Sir Cooper|
|Blundell, F. N.||Henderson, Capt. R. R. (Oxf'd, Henley)||Rentoul, G. S.|
|Boothby, R. J. G.||Henderson, T. (Glasgow)||Richardson, R. (Houghton-le-Spring)|
|Bourne, Captain Robert Croft||Henderson, Lt.-Col. Sir V. L. (Bootle)||Roberts, E. H. G. (Flint)|
|Bowerman, Rt. Hon. Charles W.||Heneage, Lieut.-Colonel Arthur P.||Rose, Frank H.|
|Bowyer, Captain G. E. W.||Hennessy, Major Sir G. R. J.||Salmon, Major I.|
|Briscoe, Richard George||Herbert, Dennis (Hertford, Watford)||Salter, Dr. Alfred|
|Brooke, Brigadier-General C. R. I.||Hills, Major John Waller||Sanders, Sir Robert A.|
|Brown, Brig.-Gen. H. C. (Berks, Newb'y)||Hilton, Cecil||Sanderson, Sir Frank|
|Buchan, John||Hirst, G. H.||Sandon, Lord|
|Burman, J. B.||Hogg, Rt. Hon. sir D. (St.Maryiebone)||Sassoon, Sir Philip Albert Gustave D.|
|Campbell, E. T.||Hopkins, J. W. W.||Savery, S. S.|
|Carver, Major W. H.||Hudson, J. H. (Huddersfield)||Shaw, R. G. (Yorks, W. R., Sowerby)|
|Chadwick, Sir Robert Burton||Hudson, R. S. (Cumberland, Whiteh'n)||shepperson, E. W.|
|Chamberlain, Rt. Hon. N. (Ladywood)||Hume, Sir G. H.||Short, Alfred (Wednesbury)|
|Charteris, Brigadier-General J.||Iliffe, Sir Edward M.||Skelton, A. N.|
|Churchill, Rt. Hon. Winston Spencer||Inskip, Sir Thomas Walker H.||Slaney, Major P. Kenyon|
|Clayton, G. C.||Jacob, A. E.||Smith, Ben (Bermondsey, Rotherh'the)|
|Cobb, Sir Cyril||Jenkins, W. (Glamorgan, Neath)||Smith, R.W. (Aberd'n & Kinc'dine, C.)|
|Cochrane, Commander Hon. A. D.||Jephcott, A. R.||Smithers, Waldron|
|Cooper, A. Duff||John, William (Rhondda, West)||Somerville, A. A. (Windsor)|
|Courtauld, Major J. S.||Jones, G. W. H. (Stoke Newington)||Sprot, Sir Alexander|
|Cowan, Sir Wm. Henry (Islington, N.)||Jones, Morgan (Caerphilly)||Stanley, Lieut.-Colonel Rt. Hon. G. F.|
|Craig, Sir Ernest (Chester, Crewe)||Jones, T. I. Mardy (Pontypridd)||Stanley, Lord (Fyide)|
|Crookshank, Cpt. H. (Lindsey, Gainsbro)||Kelly, W. T.||Stanley, Hon. O. F. G. (Westm'eland)|
|Curzon, Captain Viscount||Kennedy, A. R. (Preston)||Steel, Major Samuel Strang|
|Dalton, Hugh||Kennedy, T.||Storry-Deans, R.|
|Davidson, J. (Hertf'd, Hemel Hempst'd)||Kenworthy, Lt.-Com. Hon. Joseph M.||styles, Captain H. W.|
|Davies, Rhys John (Westhoughton)||King, Commodore Henry Douglas||Sutton, J. E.|
|Davies, Dr. Vernon||Lamb, J. Q.||Taylor, R. A.|
|Davison, Sir W. H. (Kensington, S.)||Lane Fox, Col. Rt. Hon. George R.||Tinker, John Joseph|
|Dawson, Sir Philip||Lawrence, Susan||Titchfield, Major the Marquess of|
|Dean, Arthur Wellesley||Lawson, John James||Townend, A. E.|
|Dennison, R.||Lindley, F. W.||Tryon, Rt. Hon. George Clement|
|Dixon, Captain Rt. Hon. Herbert||Lister, Cunliffe, Rt. Hon. Sir Philip||Varley, Frank B.|
|Drewe, C.||Loder, J. de V.||Vaughan-Morgan. Col. K. P.|
|Duncan, C.||Long, Major Eric||Waddington, R.|
|Eden, Captain Anthony||Looker, Herbert William||Warner, Brigadier-General W. W.|
|Edwards, C. (Monmouth, Bedwellty)||Lucas-Tooth, Sir Hugh Vere||Waterhouse, Captain Charles|
|Elliott, Major Walter E.||Luce, Maj.-Gen. Sir Richard Harman||Watson, Sir F. (Pudsey and Otley)|
|Fairfax, Captain J. G.||Lumley, L. R.||Watson, W. M. (Dunfermline)|
|Fanshawe, Captain G. D.||Macintyre, Ian||Watts, Dr. T.|
|Fielden, E. B.||MacLaren, Andrew||Wellock, Wilfred|
|Foxcroft, Captain C. T.||McLean, Major A.||Wells, S. R.|
|Fraser, Captain Ian||Maclean, Neil (Glasgow, Govan)||Westwood, J.|
|Gadie, Lieut.-Col. Anthony||McNeill, Rt. Hon. Ronald John||Williams, Com. C. (Devon, Torquay)|
|Garro-Jones, Captain G. M.||March, S.||Williams, T. (York, Don Valley)|
|Gibbins, Joseph||Margesson, Captain D.||Wilson, R. R. (Stafford, Lichfield)|
|Gibbs, Col. Rt. Hon. George Abraham||Merriman, F. B||Windsor-Clive, Lieut.-Colonel George|
|Gillett, George M.||Mitchell, S. (Lanark, Lanark)||wise, Sir Fredric|
|Glyn, Major R. G. C.||Monsell, Eyres, Com. Rt. Hon. B. M.||Womersley, W. J.|
|Goff, Sir Park||Mosley, Oswald||Wood, B. C. (Somerset, Bridgwater)|
|Graham, Rt. Hon. Wm. (Edin., Cent.)||Murchison, Sir Kenneth||Wood, E. (Chest'r, Stalyb'ge & Hyde)|
|Greenwood, A. (Nelson and Colne)||Nelson, Sir Frank|
|Grenfell, D. R. (Glamorgan)||Newman, Sir R. H. S. D. L. (Exeter)||TELLERS FOR THE AYES.—|
|Grenfell, Edward C. (City of London)||Nicholson, O. (Westminster)||Major Cope and Mr. F. C. Thomson.|
|Grotrian, H. Brent||Nuttall, Ellis|
|Balfour, George (Hampstead)||Hannon, Patrick Joseph Henry||Remer, J. R.|
|Batey, Joseph||Hartington, Marquess of||Rice, Sir Frederick|
|Brown, Ernest (Leith)||Horne, Rt. Hon. Sir Robert S.||Riley, Ben|
|Buckingham, Sir H.||Hutchison, Sir Robert (Montrose)||Roberts, Sir Samuel (Hereford)|
|Caine, Gordon Hall||James, Lieut.-Colonel Hon. Cuthbert||Robinson, Sir T. (Lancs., Stretford)|
|Cecil, Rt. Hon. Sir Evelyn (Aston)||Jones, Henry Haydn (Merioneth)||Sandeman, N. Stewart|
|Couper, J. B.||Lloyd, Cyril E. (Dudley)||Shaw, Lt.-Col. A. D. Mcl. (Renfrew,W.)|
|Cowan, D. M. (Scottish Universities)||Lougher, Lewis||Strauss, E. A.|
|Crawfurd, H. E.||Macdonald, Sir Murdoch (Inverness)||Sugden, Sir Wilfrid|
|Crooke, J. Smedley (Deritend)||Macmillan, Captain H.||Thomas, Sir Robert John (Anglesey)|
|Davies, Maj. Geo. F. (Somerset, Yeovil)||Macquisten, F. A.||Tinne, J. A.|
|Dunnico, H.||Marriott, Sir J. A. R.||Wiggins, William Martin|
|England, Colonel A.||Meyer, Sir Frank||Williams, C. P. (Denbigh, Wrexham)|
|Evans, Capt. Ernest (Welsh Univer.)||Moore, Sir Newton J.||Williams, Herbert G. (Reading)|
|Frece, Sir Walter de||Nail, Colonel Sir Joseph||Windsor, Walter|
|Gates, Percy||O'Connor, T. J. (Bedford, Luton)||Wragg, Herbert|
|Grattan-Doyle, Sir N.||Pennefather, Sir John||Young, Rt. Hon. Sir Hilton (Norwich)|
|Gretton, Colonel Rt. Hon. John||Power, Sir John Cecil|
|Hamilton, Sir R. (Orkney & Shetland)||Rees, Sir Beddoe||TELLERS FOR THE NOES.—|
|Mr. Runciman and Sir Leslie Scott.|
Motion made, and Question, "That the Clause stand part of the Bill," put, and agreed to.
§ The DEPUTY-CHAIRMAN
The Amendment standing in the name of the right hon. Gentleman the Member for West Swansea (Mr. Runciman)—in the proposed Amendment, in line 37, at the end, to insert the words,(g) On the hearing of any case one member of the Board of Referees present at the hearing shall be a person representative of the industry in which the company engaged, and another member shall be an accountant acquainted with the industry"—is very much the same as the later Amendment, in the name of the same right hon. Gentleman—in page 17, line 28, at the end, to insert the words,The following shall be added at the end of paragraph 2 of the First Schedule to the Finance Act, 1922:'On the hearing of any case one member of the Board of Referees present at the hearing shall be a person representative of the industry in which the company is engaged, and another member shall be an accountant acquainted with the industry.'I will allow the right hon. Gentleman to choose which of them he proposes to move.
§ Mr. RUNCIMAN
I do not propose to move either, as the Chancellor of the Exchequer has said he will meet us on those points.
§ Sir J. MARRIOTT
I beg to move, in page 17, line 28, at the end, to insert the words:(6) The provisions of this Section shall not apply to any company engaged in commerce, trade, or industry.This Amendment raises, I think, in the simplest and most direct terms, the whole 1034 question that we have been discussing during these many hours past. If I understand rightly the protestations which have come from the front Government bench, the Government will be prepared to accept this Amendment, because they have told us all through the discussions of to-day that they are not in any way at all aiming at legitimate commercial or trading concerns, but that their sole anxiety is to catch the evader of legitimate taxation. I can assure my right hon. Friends on the Front Bench that all those for whom in this Amendment I am presuming to speak are entirely with the Government in that intention. We all desire that no one should be permitted to get through the loopholes which have been exposed by the Chancellor of the Exchequer. But, at the same time, all of those for whom in this Amendment I speak are supremely anxious that, neither by this nor by any other Clause of the Bill, should anything be done which will in any way harass or hamper legitimate commerce and trade. That being so, I hope that the Chancellor of the Exchequer will find no difficulty in accepting this Amendment. I confess that at many points of this Bill, and more particularly in this Clause, I seem to detect a greater anxiety on the part of those who are responsible for the collection of revenue to get revenue than to protect and encourage and nourish the sources of revenue. After all, it is more important to encourage the sources of revenue than to collect a non-existent revenue from sources that do not exist. [HON MEMBERS: "Hear, hear!] I am very glad at this late hour of the evening one sentiment should be enunciated that is received with universal assent. I hope 1035 the Government will not dissent from this unanimous expression of opinion.
§ Mr. STEWART SANDEMAN
I hope the Chancellor of the Exchequer can accept this Amendment. If he does not, I hope it will not be withdrawn. I dislike the whole Clause, but this might go a long way to alleviate the trouble I see in store. My feeling about the whole thing is that it is going to affect industry and employment at a time when we have no real need for any further interference. If we can get trade and industry going it does not matter so much about the stockbrokers and moneymakers. I am not so worried about them. I am worried about the effect this is going to have all over the country. Everyone will be affected. There is suspicion in the atmosphere and people do not know where they are. Trade and industry should have a free passage to go on with their daily work and try to get our people employed. This is an important Amendment towards that object. I am against the whole Clause and shall vote against it, but I hope we shall get this.
§ Mr. CHURCHILL
I keenly regret that I cannot possibly accept the proposal. It is a source of great regret to the Government that the numerous concessions that have been made to those who have studied the matter very deeply have not persuaded them to accept our view. This proposal asks that the provisions of the Clause shall not apply to any company engaged in commerce, trade or industry. Why should a company which otherwise would fall within the scope of this Clause be immune, no matter how gross the evasion from taxation because it is engaged in commerce, trade or industry. We have excluded, by the concessions which have been made, 90 per cent. of the whole business of the country and 85 per cent. of the company business of the country. We cannot possibly take further steps. There comes a moment when people must act in accordance with what they think is their duty, and, while I deeply regret that some of my hon. Friends should not be placated by the tireless efforts we have made in the last two or three weeks to adjust the difficulties of the situation, nevertheless the facts being as they are, I can certainly not accept an Amendment which I can only stigmatise as a wrecking Amendment 1036 and which would have the effect of rendering useless and vain all the work we have done during this long and difficult day. I must ask the Committee to support the Government in the attitude they have definitely and finally taken up.
§ Sir JOSEPH NALL
It may well be that the particular words of the Amendment are not such as would be the most effective, but the Debate on this Clause, no less than the Clause itself, has really gone a very long way from the original intentions of the Government. After all, there is, as I understand it, complete unanimity on all sides of the Committee that the evasion of Super-tax by the individual should be dealt with. That, as I understand it, is the object with which the Government set out. There is all the difference in the world between preventing the evasion of Super-tax by the individual and, as would now appear to be the policy, a desire to impose Super-tax upon all company profits. It certainly is the case, as the Chancellor of the Exchequer has indicated, that certain Amendments and concessions he proposes to make will not make that effort quite so sweeping as would have been the case in the Clause as originally printed, but it is a very grave matter if we in this Committee are to proceed to levy Super-tax upon all company profits. It is obvious, particularly from the speech of the right hon. Gentleman the Member for Carnarvon Boroughs (Mr. Lloyd George) this afternoon, that he certainly, personally, would support any such move.
§ Sir J. NALL
I say that the Debate upon these Amendments is pointing in that direction. It is now considered that we should endeavour to levy Super-tax upon companies' profits. The prevention of the evasion of personal Super-tax is an entirely different matter, and I think it must be clear to the right hon. Gentleman the Chancellor of the Exchequer and to those who advise him by now that this Clause as originally drafted was designed to enable Super-tax to be charged upon a great number of companies. From that position the Government have gradually receded under pressure from this side of the Committee.
§ Sir J. NALL
My right hon. Friend may say that it is untrue, but the records of the Debates to-day are there to be seen, and the Clause as printed is there to be seen. I repeat that, as originally deposited in the Bill before the House of Commons, the primary intention of the Clause appears to be to levy Super-tax upon company profits and not, as is desired in all sections of the Committee, to prevent the evasion of personal Super-tax by individuals. It is obvious that that Clause, designed for the first and unintended purpose, cannot possibly be suited for the other and more urgent purpose. That is why, apparently, it would be futile to continue to debate Amendment after Amendment to a Clause which was designed to effect a purpose which the Committee never intended. I am perfectly certain in my own mind that my right hon. Friend will be well advised, even at this stage, to realise that this Clause as drafted and proposed to be amended is not the best means of effecting the purpose he has in mind and which the whole Committee are quite willing to support him in carrying into effect. In short, it ought to be withdrawn, thoroughly revised and then re-introduced for the single purpose of preventing the evasion of personal Super-tax by those methods which, it is now clear, have become customary in certain quarters, and which, I am perfectly certain, no section of this Committee or no section of public opinion would for one moment tolerate or seek to support.
§ Mr. BENNETT
I hope my right hon. Friend, the Chancellor of the Exchequer, will not agree to this Amendment. We have heard a great deal of opposition from this side of the Committee. I was one of those who objected most strongly to the Clause that we are discussing in its original form. I want to say quite frankly, the Chancellor of the Exchequer has met the reasonable objections of those who feel like I do. I say quite honestly that I think, by the Amendments that have been moved or accepted, he has removed at lease 99 per cent. of the apprehension I feel with regard to this Clause. Several hon. Members have stated that they had no personal interest in this Clause. I am the first Member to state 1038 that I have a direct personal interest in the Clause. I happen to be in control of one of these one-man companies. It is a perfectly legitimate company. It has always paid its Income Tax and whatever Super-tax there was. We have never been conscious that the 1922 Act existed in this respect, and I am equally convinced that we shall not be conscious that the present Finance Bill has been passed. But if the Government accept this Amendment, this company that I control can, if it choose, ride rough-shod through what we are trying to do by this Clause. That is a practical instance, which is far better than talking of theory. I sincerely hope that the Chancellor of the Exchequer will refuse to accept the Amendment.
§ Sir L. SCOTT
My name appears on the Paper in support of this Amendment. I put it down at a stage when I thought it was important that this aspect of the Clause as a whole should be discussed by the Committee. In my view all the points that I wanted to raise by the Amendment have been discussed in the initial general Debate of the Committee to-day, and so far as I am concerned I do not now propose to vote in favour of the Amendment.
§ Mr. RADFORD
I apologise for intervening, but I wish to give one example of what would be the effect if this Amendment were accepted. I have no doubt that my hon. Friend who moved it did so on the assumption that the money retained in a business engaged in commerce, trade or industry is used for the development of that trade or industry. Only a few weeks ago I saw the balance sheet of a large private company in this country whose share capital is £200,000. Their business assets amount to practically the same total, and they have £2,000,000 of undistributed profits, which are represented by £2,000,000 of giltedged investments on the other side of the balance sheet. That company makes, on the average, £400,000 a year, and distributes only a comparatively small amount in dividends. If this Amendment were accepted, the shareholders of that company, who are evading Super-tax just as much as any individual in the country, would be able to go on with their nefarious work unchecked.
§ Amendment negatived.1039
§ Mr. D. HERBERT
I beg to move, in page 17, line 28, at the end, to insert the words:( ) For the purposes of the said Section twenty-one of The Finance Act, 1922, any part of a company's actual income from all sources for the year or other period in the said Section referred to which has been distributed among or paid to or for the benefit of any employés or former employés or widows or dependents of any employés or former employés of the company shall be deemed to have been distributed among the members of the company.My right hon. Friend has been good enough to say that if I satisfy him that some Amendment of this kind is necessary he will be prepared to meet me on the Report stage of the Bill. As the learned Attorney-General is present would like formally to move the Amendment so that I can put to him a point which I want him specially to consider. I have in mind the specific instance of a company which, under its articles of association, using the very wording of this Clause, out of the profits available for distribution among the members of the company, the directors may apply any amount, not exceeding 30 per cent. thereof, among employés or members of the staff of the company, or any of them, or their dependants, in such shares and in such manner as the directors in their discretion may think fit. Are profits which are distributed in that way by way of bonus among employés who have no right whatever thereto, which are given purely as a gratuity in respect of past services without any legal claim to them, to be treated as wages? Perhaps I may add that in a particular case I have in mind a very well-known firm of chartered accountants in the City has given an express and definite opinion to the effect that money distributed in that way cannot be treated as being remuneration for employment. If that be the case, it is perfectly certain that the Government would not wish that that money, distributed among employés instead of among the shareholders, should be treated as money improperly withheld from distribution, and I hope that the matter will be very carefully considered before the Report stage.
§ The ATTORNEY-GENERAL
My hon. Friend appealed particularly to me in regard to the legal case which he put, and, of course, he would not desire that I should at once answer positively things 1040 which he asks me to consider carefully, but I think I can tell him that, at any rate at first impression, apart from the fact that he brings it forward, I should have had really very little doubt on the particular case he puts. The first thing I should have asked myself is whether this is remuneration in the hands of the employés who receive it, and I have no manner of doubt that you could successfully tax those employés, either under Schedule E or Schedule D as the case may be, on the bonus they receive as part of their remuneration. I think it almost necessarily follows that the money paid, which is remuneration in the hands of the person who receives it, is equally payment for services out of the pockets of those who pay it, and I should not be in any doubt that in the case the hon. Member puts allowance would be made as a matter of course of the appropriate Income Tax deduction. As the hon. Member knows, what are called profits of distribution are a very different thing from Income Tax profits, but, as the point has been raised, I certainly will look into it and make sure that the view which is my prima facie view is correct, and, if there be any doubt about it, of course, the matter will be dealt with.
§ Mr. HERBERT
I am quite satisfied with the statement of the right hon. Gentleman, and I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ The following Amendment stood on the Order Paper in the name of Sir BASIL PETO.
In page 17, line 28, at the end, to insert the words:
(6) The provisions of this Section and of Section twenty-one of the Finance Act of 1922 shall not apply to any sums paid to reserve for the extension, development, or maintenance of the business of any company engaged in commerce, trade, or industry.
§ The DEPUTY-CHAIRMAN
The Amendment to which the hon. Member refers is covered by the Amendment which stood in the name of the hon. Member for York (Sir J. Marriott).
§ Sir B. PETO
With all respect, may I point out that my Amendment is entirely 1041 different. I had on the Paper for nearly a week an Amendment exactly in the terms of the Amendment in the name of the hon. Member for York and withdrew it because I considered it was too wide and redrafted it in the form on the Paper.