§ Where a person has been assessed to tax for any year of assessment, not being a year prior to the year 1927–28, under Rule 21 of the general rules, in respect of a payment made wholly and exclusively for the purposes of a trade, profession, or vocation (not being a payment of or on account of copyright royalties to which Section twenty-five of the Finance Act, 1927, applies) the amount on which tax has been paid under that assessment shall, for the purposes of Section thirty-three of the Finance Act, 1926. be treated as though it were a loss sustained in that trade, profession, or vocation, and, subject to the provisions of that Section, relief in respect thereof shall he allowed in computing that person's liability to tax in respect of the profits or gains of that trade, profession, or vocation for the six years following the said year of assessment.
§ Provided that no relief shall be allowed under this Section in respect of any such payment or any part of any such payment which is not ultimately borne by the person assessed or which is charged to capital.—[Mr. Rye.]
§ Brought up, and read the First time.
§ Mr. RYEI beg to move, "That the Clause be read a Second time."
This Clause, which stands in the name of my hon. Friend the Member for Wavertree (Mr. Tinne) has been put down for the purpose of dealing with a very difficult situation which has arisen following a decision given in another place in an action brought by the Attorney-General against the Metropolitan Water Board. The matter which is the subject of the new Clause is a highly technical and extremely complicated one, but I have no doubt that the Chancellor of the Exchequer is fully aware of the circumstances, and I am hoping therefore that he will see his way to accept this Clause. To explain the position to the Committee I should mention that the position as regards a trader who borrows money and 1294 has to pay interest on that borrowed money, or has to pay an annual royalty, is that for the purpose of Income Tax he is not entitled to deduct the amount so paid for interest or the amount so paid for royalty. He is, however, entitled as between himself and his lender or the owner of the royalty to deduct Income Tax at the current rate, and consequently, having deducted his Income Tax at the source, he is therefore recouped and is not at a loss. That was the position prior to the decision in the case to which I referred. Now, unfortunately, it has been held that where a trader has made at loss, or has not made a profit equivalent to the amount of tax to be deducted, he is not entitled to keep in his pocket the tax which he has deducted as against the lender or as against the royalty owner as the case may be, but he has to pay that tax over to the revenue, and the result is that the unfortunate trader is neither able to deduct his payment for the purpose of arriving at his tax assessed upon his profits, nor is able to get it as between himself and the person who lends the money or who receives the royalty.
10.0 p.m.
The object of the new Clause is to enable him to regard the payment of interest or royalty as the case may be as being in the nature of a loss, and to carry it forward under the general rule for a period of six years, so that as against future profits he may have the benefit of that loss. If he does not get that benefit he is the loser. I think the Committee will agree that in the ordinary way a trader, before be has to pay Income Tax upon the amount of his profit, would necessarily be allowed to deduct any outgoings in the nature of a business expense. Unfortunately under the law as it now stands and on the principle of the deduction of Income Tax at the source—a very sound principle, as the Committee will agree—he cannot do so, and since the decision to which I have referred, the trader is placed in an extremely awkward position: for he can neither deduct it for the purpose of his trading account, nor can he deduct it as against the revenue. Having deducted it as against the lender or the royalty owner and, of course, with the intention of retaining the money for his own purposes, he has now to pay it all. It is with the object of relieving 1295 him from that hardship that I beg to move this Clause.
§ Mr. CHURCHILLMy hon. Friend the Member for Loughborough (Mr. Rye) has explained this matter to the Committee very lucidly and correctly. The new Clause which he has moved is the result of discussions between the Treasury and persons representing traders who may be affected by the decision to which he has referred; and it has been examined and agreed by the Parliamentary Counsel who drafted the Measure. It arises undoubtedly out of the recent decision in the Court of Appeal in the case of the Attorney-General v. The Metropolitan Water Board. The purpose of the new Clause is, as has been explained by my hon. Friend the Member for Loughborough, to ensure that the provisions of the Income Tax Acts with regard to collection at the source, which require a person paying interest to deduct the tax upon that interest, shall not so operate as to make that person pay a tax on an imaginary profit, but only on an actual profit. I, therefore, have great pleasure in accepting the Clause.
§ Mr. RYEMay I on behalf of my hon. Friend the Member for Wavertree (Mr. Tinne) and myself thank the Chancellor of the Exchequer for kindly accepting the Amendment.
§ Clause read a Second time, and added to the Bill.