HC Deb 07 July 1930 vol 241 cc91-102

For the purpose of enabling deductions from revenue receipts of expired capital outlay on inherently wasting assets to be allowed by the additional commissioners claims in respect of those deductions shall be included in the annual statement required to be delivered under the Income Tax Acts of the profits and gains of any trade, manufacture, adventure, and concern, and where such deduction from the revenue receipts is made, and has been made, from the commencement of the actual employment of the inherently wasting assets in seeking profits, or during a period of not less than three years to the end of the usual financial year of the particular trade, manufacture, adventure, or concern last prior to the year of assessment, and provided such deduction is so made as to prevent the same being available as profits, the additional commissioners, in assessing those profits and gains, shall make such allowances in respect of those claims as they think just and reasonable.

For the purpose of this section the term "inherently wasting assets" means assets which necessarily waste in the process of seeking profits. Provided always that such wasting assets are not the value of transferred rights to future profits or increase which would have been chargeable with income tax if no transfer of such rights had been made.—[Sir B. Peto.]

Brought up, and read the First time.

Sir BASIL PETO

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

This is not the first time by any means that this question has been raised on different Finance Bills, but it is not on that account less important that it should be raised to-day, nor is the occasion of raising it less urgent. When this question was raised in 1910, and again in 1912, the Income Tax was 1s. 2d. in the £, while the Income Tax, by the present Finance Bill, is being raised from 4s. to 4s. 6d. in the £. Therefore, the question of the incidence of Income Tax upon what is not the income of a company at all, but is money which is necessarily put aside from year to year to meet wasting assets, becomes of infinitely greater importance. In 1910, the late Mr. Gibson Bowles raised this question on a Clause worded in much wider terms than the present very carefully drafted Clause, which was first moved in 1912 by the present Master of the Rolls, who was then a Member of this House as Sir Ernest Pollock. On that occasion the right hon. Gentleman the Member for Carnarvon Boroughs (Mr. Lloyd George) was Chancellor of the Exchequer, and he said then that there was a real case here which had to be dealt with. That was 18 years ago. It would be difficult to imagine a much more emphatic declaration than that. In 1923, I moved the same Clause, and on that occasion Sir Thomas Inskip replied and he indicated that, if the Government were in power in the following year, it would be dealt with in some way in the Finance Bill. The Government did not survive, but the hon. Member for Lewisham (Sir A. Pownall) moved the same Clause and the present President of the Board of Trade replied: The Chancellor of the Exchequer authorises me to give this promise. Recognising, as we do, the injustice, we are willing to undertake that there should be an investigation of this matter. I do not think it is necessary to appoint a Treasury Committee. In the light of what has been recommended by the Royal Commission, I think the question might be dealt with by the Board of Inland Revenue. I will undertake to have this matter looked into without delay and I hope, if we are in office next year, we may, without pledging ourselves to any specific thing, be able to place something on the Order Paper."—[OFFICIAL REPORT, 8th July, 1924; col. 2084, Vol. 175.] Again this very important question fell under very unfortunate circumstances, in that before the next year we had a change of Government again and I had to approach a new Chancellor of the Exchequer in 1925, to whom, of course, I could not quote the very emphatic words I have just given to the Committee. The right hon. Gentleman the Member for Epping (Mr. Churchill) was rather more guarded. He said: In the last four years there have been six Chancellors of the Exchequer who sat in the chair that I now occupy, and I am sure the Committee will feel that anything of that kind ought now to come to an end, and that we ought to have continuity. On that basis I can promise my hon. Friend that there shall be the most careful watching of the serious case which he has put forward with a view to seeing whether if them were a possibility in any future years of giving a further relief of Income Tax, it could be applied in the way suggested."—[OFFICIAL REPORT, 16th June, 1925; col. 455; Vol. 185.] In that year the right hon. Gentleman the Member for Epping reduced the Income Tax from 4s. 6d. to 4s. The plea I put before him was that in any future reduction of the Income Tax he should not let it fall like the rain on the just and the unjust, but should concentrate the remission on this urgent question of allowing adequate deductions from annual profits or gains of money that was necessarily placed to a sinking fund to meet the obsolescence of machinery and wasting assets. Unfortunately, however, though the Treasury only had one Chancellor of the Exchequer in the next four years we did not get the question dealt with.

I have a special appeal to make to the right hon. Gentleman. I know I shall have his sympathy. I do so because, in raising the Income Tax, it is clearly a time when it is additionally important to consider whether in its incidence it really is a tax upon income or whether it is a tax to a large extent upon industry. All the statements the Chancellor of the Exchequer has made recently seem to assume that he is dealing with genuine Income Tax. During the debates on the Budget Resolutions he said that to tax large estates and large incomes was sound business and good for the State and that the limits had not yet been reached. Small doses, reasonable doses, applied at regular intervals might produce good results, but if the medicine was taken all at once it would kill the patient. Successive doses of increased taxation, of which we have a specimen this year, he holds to be positively useful. That cannot possibly apply to an Income Tax as heavy as at present without any adequate allowance for wasting assets. Before the report of the Royal Commission on Income Tax, we were always told, whenever we moved in this matter, that we must wait for the Commission's report. Since it reported, in 1920, we have moved on various occasions this identical Clause and we have always been promised by every Chancellor, or his representative, that the matter would be attended to. May I call attention to exactly what, the Royal Commission stated in the first paragraph (Paragraph 180) of Part III of their Report, which has never been given effect to: For Income Tax purposes, speaking in general terms, income is the surplus of receipts over the current expenditure necessary to earn those receipts, regardless of the appropriation of any part of the receipts or surplus for the purpose of writing off or amortising the capital value of any assets that waste in the process of producing the income. The only wasting assets for which Income Tax allowance is now made are plant and machinery, and certain buildings that contain plant and machinery. The primary reason for this exceptional treatment of plant and machinery appears to be that an allowance for the wastage of these particular assets is merely equivalent to that allowance for renewals and replacement of tools and implements, used for the purpose of a trade, which has from the first been recognised as a necessary expense under the Income Tax Acts. I think that that is important and interesting. From 1842, from the very inception of the Income Tax, it has always been recognised that there should be an allowance of some kind for replacement of industrial plant and machinery. That was extended in 1858 and again in 1878 to deal with Obsolescent machinery. In 1907 it was extended to a 4 per cent. allowance on ships, giving them a life of 25 years. So the principle has been recognised from the start and has been slowly extended, but the one part of the report of the Royal Commission which has never been given effect to is this question which has been raised again and again in the House. May I read the paragraph which contains the summary of the recommendation of the Royal Commission? Paragraph 200 reads: We come now to the general or main class of wasting assets to which we recommend that a depreciation allowance should be extended. Subject always to the limitation that their life falls short of 35 years, we recommend that an allowance shall be given in respect of all inherently wasting material assets which have been created by the expenditure of capital, such as buildings and foundations, surface works, permanent way and equipment of railways and tramways, docks, and shaft sinkings and initial work or development. In every case the allowance should be calculated by reference not to the absolute but to the relative liability to waste. I do not think that has ever been considered to be in all respects a satisfactory recommendation, because of the limitation of 35 years as the maximum on which the allowance should be made, and also because of the limitation, so far as mining operations are concerned, to their being mines abroad and not in this country. No doubt the recommendations of the report want looking into again. I think they want extending and not restricting, but clearly they want dealing with. The justification for the matter being dealt with is clearly more urgent the higher the Income Tax is raised.

There is another reason why I specially want to call attention to this matter today. It is that an increase in the Income Tax rate without such an allowance has a very deleterious effect upon foreign companies domiciled in this country. These foreign companies are estimated to have a paid-up capital of £1,800,000, and the taxes collected as the result of their activities are somewhat about £90,000,000 a year. The companies simply have their registered offices in England. They operate railways, they are interested in land and investment companies and financial trusts abroad, and their capital is sunk in properties all over the world. They operate in the development and working of mines, nitrate deposits, oil wells and shipping companies, many of whose ships never come to our ports at all, and rubber plantations all over the world. Beyond registratration and financial control from London, these companies usually are only represented here by a small office staff, yet the profits that are made by them are treated, as far as taxation is concerned, as if they were home industries. When you find that in America they recognise that the minerals in their own territory are wasting assets and they allow this deduction for which I am pleading, and when you realise that in none of the countries where these companies operate is there anything like the rate of direct taxation that there is in this country, and that they get very much better treatment from these Governments than they have hitherto been able to get from ours, it is clear that, by not dealing with this question of not charging Income Tax on matters which are not income at all, by not making a proper allowance for wasting assets, particularly in mining undertakings and things of that kind, we are running a very serious risk of causing these companies to change their registration to foreign countries and lose the many advantages which we have had before by their being located here. I have heard that since the introduction of the present Budget one or more of the very important companies have decided to register abroad. I would beg of the President of the Board of Trade, if he has not received his instructions definitely from the Chancellor of the Exchequer as to what he is to say when he comes to answer, to take very seriously into consideration that aspect of the question. It is certainly high time, with Income Tax at the present level, that we should see that we do not charge it in an unfair manner to these companies who do so very much for the prosperity of our country and for the balancing of our in and out overseas trade.

6.0 p.m.

It may be said, and always is said, more or less, in answer to all proposals such as this new Clause, "Oh, the cost is too much, and I cannot do it this year." I am not pleading for a remission of taxation; I am pleading for fair taxation. It is true that it would mean, if it were put into force immediately without any other provision, that the Chancellor of the Exchequer would collect less money this year. That fact cannot be denied. But in the long run it will be in the interests of the Treasury to look into this question and to settle it at once, because I am convinced that we shall be losing a great deal more Income Tax than we shall gain by charging it in an unjust manner. What we have to do now— indeed, the time has long past when we ought to have dealt with it—is to see that we return to the original intention of the Income Tax Act when Income Tax was first imposed; that it should be a tax upon annual profits and gains. Considerations with reference to allowances become so much more powerful when you have raised the tax from a level of 7d., as it was originally imposed, or 5d. in the £ as it was in 1858, to a level of 4s. 6d. But when you raise it to that sort of a level it is absolutely essential that you should levy it upon the true income of the industries in question, and not charge it upon what you well know every prudently conducted industry cannot, and does not, regard as income at all, but as money which it is necessary to set aside in order to carry on business successfully and properly in the succeeding years.

Therefore, without going into details as to the exact matters which should be included in wasted assets, as I have done on other occasions, I need only say that we have excluded questions of leasehold property and things of that kind which, it is generally agreed—and it was agreed by the Royal Commission—should not be wasting assets. This Clause has been drawn so carefully that it would need very little alteration actually to be incorporated into a Finance Bill and operated at once. It is a serious Clause which takes into consideration all the recommendations of the Royal Commission. It goes rather further than their recommendations in some directions, and it goes a less distance in others, but, on balance, I believe that it is a Clause which is absolutely required by industry in this country, and particularly demanded by those countries which use our hospitable City of London as their centre of world-wide operations, and which do so because they have reason to believe that our taxing system is fair and just. If they find that we do not go with the times and limit our imposition to the true income of these companies, we shall be running a very serious risk of losing them altogether.

Sir HENRY BETTERTON

I rise merely for the purpose of commending very earnestly the principle of this Clause to the right hon. Gentleman representing the Government. I believe that this Clause is one of the most important Clauses which have appeared on the Order Paper in connection with this Bill. It is particularly opportune that my hon. Friend the Member for Barnstaple (Sir B. Peto) should raise the question to-day, for two reasons. First of all, owing to the increase in the rate of Income Tax, it has become more important from that point of view. The other reason is, that we are told, and rightly, that the hope of industry in many directions lies in what is called rationalisation. Everybody knows that rationalisation is not merely the merging or the fusion of various concerns into one bigger whole, but that its value and importance lie very much more in the modernising and bringing up to date of the machinery, or whatever it may be, upon which a company depends for the production of profits. Therefore, it is to the interests not merely of the Treasury but also of industry that everything possible should be done in order to encourage that process, and to make it more likely to be adopted. Clearly, modernisation, whether it be of machinery, to which my hon. Friend referred, or whether it be of ships or what not, must come out of the accumulated profits, or, in other words, out of the accumulated resources.

Therefore, if you tax the very fund from which your modernisation is produced, you are to that extent discouraging the very process you want to encourage. Taking the long view, it is in the interest of the Treasury itself that this process should be encouraged. My hon. Friend referred to machinery. There is an allowance, as we all know, for wear and tear, but the allowance under the existing scale is quite insufficient to encourage the process to which I have referred. This point arises not so much in the case of machinery which is worn out as in the case of machinery which is obsolescent, but which still has some life in it and, if not renewed, will continue, but which, if you wish to encourage the business, should be scrapped and new machinery put in its place.

Perhaps the most striking instance we can possibly find with regard to the point I am endeavouring to make is to be found in the case of ships. Everybody knows that if a shipping company proceeded to raise money either by debentures or bonds every time they wanted to build a new ship, the company would be in the bankruptcy court in a very short time. New ships, like machinery, must be provided out of accumulated reserves and out of accumulated profits if the company is to prosper. I will read a note I have extracted which exactly illustrates the point the hon. Baronet has in mind, and which is the one I wish to stress. It relates to the case of a shipping company. The note is as follows: Obsolescence of plant and machinery. Steamer sold and replaced by another of a type more suitable for the particular concern. The appellants were the owners of eight steamships carrying coal from Newcastle to London. The steamers were purchased during the War when only standard pattern vessels were available, and in 1924 the appellants decided to replace them gradually with vessels to be built to their own specifications. The first new vessel was delivered in April, 1924, and one of the old vessels, 'Redriff,' which had been built in 1917, was sold in 1924. The new vessel was shown to be superior to 'Redriff' in speed, capacity, economy and on points peculiar to the appellants' trade, but it was admitted that in the ordinary course the 'Redriff' might have had many years of useful life before her. The special commissioners held that 'Redriff' had not become obsolete within the meaning of the Income Tax Act, 1918, and refused relief. The Judge held this decision must stand. There you have a direct illustration of the point which my hon. Friend was making. Where you have, as in this case, a ship—it might easily apply to machinery—which is not worn out, but which is obsolescent, and which it is necessary, in the interests of the company and of trade, to replace by another vessel, and the replacement can only come out of reserves, then I suggest to the right hon. Gentleman that it is not to the advantage of either himself, representing the Treasury, or of industry that a company should be subjected to the charge now placed upon it.

Mr. W. GRAHAM

It is impossible to dispute the very great force of many of the contentions which have been used by the two hon. Members who have supported this Clause. The hon. Member for Barnstaple (Sir B. Peto) will remember that in other days—I think that it was during the Parliament of 1918 or later—he and I were sometimes almost alone in pressing for the consideration of wasting assets depreciation, obsolescence and kindred problems in this country. Therefore, I do not approach the Clause this afternoon in any light way, and I will try, as briefly as possible, to describe the position as it now is, which, I am glad to think, is a little more hopeful, perhaps, from some points of view than the hon. Member indicated in his speech. It is plain to all of us, more particularly when we think of our industrial efficiency and try to relate this problem to employment, that it is desirable that there should be the greatest speed in the replacement of these wealth-producing machines in this country, and that provision should be made for wasting assets or for depreciation or for obsolescence.

That matter was considered by the Royal Commission on the Income Tax in 1919 and the programme which the Royal Commission outlined was, roughly, in the following terms. I will not detain the Committee by going into it in detail; I will mention only the broad recommendations. First of all, it was clearly suggested that any plan which might be worked out under a Clause of this kind or on this subject should be confined to assets with a lifetime of less than 35 years. Anything over 35 years was definitely to be excluded. And then, in the next place, while the Royal Commission were quite unable to make a recommendation giving an allowance to the income from wasting assets at large—that is, in a broad or loose sense—they thought that it should be possible to work out plans, having regard to the period by which the life of an asset fell short of the 35 years. They went into certain other proposals, perhaps the most important of which related to the exclusion of any allowance for the exhaustion of natural resources, such as mines. Broadly speaking, this was their suggestion for consideration in dealing with wasting assets was one which, when the Royal Commission reported, my hon. Friend and I on several occasions joined in pressing the Government to consider.

I understand well the vicissitudes to which reference has been made to-day. In 1924 when I was at the Treasury I promised that this matter would be considered in the following year but, unfortunately, we were driven from office in October of that year and in the five years following the country had not the advantage of our beneficent administration, so that it was not until 1929 that we were able to take up the matter again, and some progress has been made. The Royal Commission rather indicated that if we were to try to deal with wasting assets we ought to look to the existing allowances that were given as depreciation allowances for such buildings as mills and so on. My own view has always been that if there was an attempt to deal with wasting assets on a large and comprehensive scale we might have to alter, if not to abolish, the existing depreciation allowances and replace them by some other device. I know that hon. Members sometimes consider that these allowances for depreciation are inadequate, but on certain types of buildings they do represent a substantial part of the annual value. I think they represent from one-sixth to one fourth of the annual value, the latter figure in regard to smaller buildings.

What are the steps which have been taken during the past year? I think we can claim to have been carrying out to some extent the promise which was made in 1924. There has been consultation with the Federation of British Industries and the Associated Chambers of Commerce. I have not the least doubt that the conference began with the hope that a basis might be found for agreement in the recommendations of the Royal Commission on Income Tax in 1919 but, unfortunately, that appears not to have been the case. As I understand it, these industrial and commercial interests have opposed the time limit of 35 years and have also opposed certain other proposals, I think, relating to depreciation, particularly the exclusion of the natural resources, that is, mines or similar enterprises. They have made counterproposals which undoubtedly would make a large inroad on the revenue in existing conditions. Therefore, up to this point no agreement has been reached and the difficulties in discussion are undeniably considerable. I need not remind my hon. Friends of the great technical complexities which are involved. To cite only one case, if the time limit of 35 years were abolished we should be confronted with a task of making some kind of estimate of the life of all assets, and that would be by no means an easy task. I do not like to show an unsympathetic or obstructive attitude, because we are all agreed as to the importance of this subject relating to the speed in turning over these assets, and the efficiency of industry and employment. Without committing the Chancellor of the Exchequer, which I am not in a position to do, to any precise proposal, I would express the hope that this consultation will continue and that together we shall seek as soon as possible to work out a programme which can be considered in a future Budget. Beyond that I am not able to go this afternoon, and I trust that my hon. Friends will see that certain steps have been taken in continuity of our promise of 1924.

Sir B. PETO

In view of the right hon. Gentleman's promise and the statement that he has made that he is negotiating and intends to continue these negotiations, I beg leave to withdraw the proposed new Clause.

Motion and Clause, by leave, withdrawn.