HC Deb 05 June 1930 vol 239 cc2506-21

Motion made, and Question proposed, "That the Clause stand part of the Bill."


I think that it would be better to have a general discussion on this Clause as we had on the last Clause.


Clause 14, as far as I understand the position as stated by the learned Attorney-General, is a corollary to Clause 13. Clause 13 starts the business, so to speak, and Clause 14 comes in, as it were, when the business is running down.


This Clause does not deal with the beginning of the business, but with hardship which may arise.


The hon. and learned Gentleman said on the Budget Resolution: I can explain it if it is desirable. It is very difficult to follow without writing it out on paper. You really want a blackboard. In the next sentence he said: It is quite plain. What did he mean? A question was put to the Chancellor of the Exchequer by my right hon. Friend the Member for Epping (Mr. Churchill). My right hon. Friend said: How will this Clause affect business? We want to know what it will do. The Chancellor of the Exchequer said: It is very difficult to give an answer to that. On the whole it is expected to help the development of business."—[OFFICIAL REPORT, 6th May, 1930; col. 844, Vol. 238.] I should like to ask the Attorney-General what the Chancellor of the Exchequer meant when he said that it was likely to help the development of business. As [...] see the position, the Clause operates in this way. The second and third year have to be linked together for the purposes of assessment. Why should not a man be allowed to say in the third year in what manner he should be assessed? I do not think that there is very much that is contentious in the Clause, and I hope that the Attorney-General will give the explanation for which we ask.


I am afraid that I cannot agree that the Clause should stand part of the Bill, because I have a notice on the Paper asking the Committee to postpone this Clause, at all events, till the end of the new Clauses. I hope that I shall be able to give very good reasons for this suggestion. My hon. Friend said that this Clause is intended to be a concession to taxpayers. As such, it is a very pleasant chapter in this terrible tale of taxation. I have had an opportunity of having some conversation with my hon. Friend the Financial Secretary upon this Clause, and I endeavoured to point out to him certain unfair anomalies which would come from the Clause, and I hope to show to the Committee also the unfairness of the Clause as it is at present drafted.

I am sorry that I find myself quite incapable of drafting any Amendments to the Clause which might meet the points which I am going to raise, and I sympathise with some of my hon. Friends who have Amendments on the Order Paper dealing with this Clause, because they have, obviously, met with the same difficulty that confronted me, and have put down Amendments which, in some respects, if they were carried out would do away with the whole of the advantage that is intended to be given to the taxpayers. I hope to show that this Clause requires more consideration and that it ought to be postponed. I trust that in my conversation with the Financial Secretary I made my point clear, and that he is now in agreement with me. This Clause, as drafted, undoubtedly gives a concession to new businesses, and the proviso at the end of Sub-section (2) is a very powerful agent in giving that concession, although it is the very thing that some of my hon. Friends desire to omit, the result being that whereas by omitting the proviso we should destroy any benefit attaching to the Clause, yet by leaving in the proviso I hope to prove that we shall be doing an unfair action towards certain classes of taxpayers.

Although this Clause will benefit new businesses, there is one class of new business that it will not benefit. I refer to those occasions when a change of partnership takes place in a business. Under the Income Tax Acts a change of partnership does not constitute a new business and, therefore, it does not benefit from any consequent adjustments that there may be in connection with new businesses. Let me take a case in point. Let me take the case of a partnership, and see how it would work out under the Clause as proposed. Messrs. A, B and C in the first year of their business make £10,000 profit. They are assessed upon the actual profit of that first year. In the second year of business they make £1,000 profit and, naturally, they give notice under this Clause that they should be assessed for the actual profit of that second year and for the third year also. At the end of the second year partner "A" either dies or retires, leaving Messrs. B and C to carry on the business. During the third year, Messrs. B and C make £30,000 profit. Obviously, Messrs. B and C will take advantage of the terms of the proviso and will give notice cancelling the notice previously given by Messrs. A, B and C. As the result of revoking the notice given by A, B and C there would be a re-assessment and A, B and Co. would be in the position of not having given any notice at all. The result would be that the A, B and C partnership would be re-assessed on the actual profit of the first year, £10,000, and in the second year on the profits of the preceding year which would be another £10,000. Consequently, they would be assessed on £20,000, although they had only made £11,000 profit in the first and second years. I hope that I have made the point clear. [HON. MEMBERS: "Oh!"] Well, it is a very difficult Clause to discuss.

10.0 p.m.

Let me re-state the position. A, B and C are partners. In the first year they make £10,000 profit, and they are assessed upon the actual profit of the first year. In the second year they make £1,000 profit and, therefore, they give notice asking to be assessed on the actual profit of the second year and the third year. At the end of the second year "A" dies or retires, leaving B and C, who in the third year make £30,000 profit. Under the notice which A, B and C have given the partnership would be assessed on the £1,000 profit and on the £30,000 profit. Obviously, that would not satisfy B and C. They immediately revoke the notice which A, B and C have given under the proviso, and the result is that the A, B and C original partnership will have an additional assessment made upon them for the actual profits of the first year plus the profit of the first year again, which would be the preceding year's profit.

I do not know whether I have made the point clear yet. It is exceedingly difficult to do so. That is obviously a case which requires consideration, and it would appear that the whole question of the effects upon partnerships have not been taken into consideration in framing the Clause. A change in partnership does not constitute a new business under the present law, and I have suggested to the Financial Secretary that the way to get over this anomaly, about which, so far as the figures are concerned, there is no possible question, is that changes in partnerships should in future be treated in the same way as the setting up of a new business. That would get over these difficulties and would simplify the matter very much. I know that there is a difficulty about it. I know that if changes of partnership were put upon the same basis as the establishment of new business there would be the possibility of a charge being put upon certain taxpayers, because in the winding up of a partnership and the establishing of a new one certain adjustments would have to be made which might necessitate a charge upon the partners in that partnership. Therefore, a charge might be put upon the taxpayers, and the House could not assent to that without a Resolution; but I am inclined to think that the Inland Revenue officials are ingenious enough to suggest a way out of the difficulty which would allow action to be taken for the present year of a temporary character, so that when next year comes along, and the new Budget Resolutions are before the House, the suggestion that I have made, if it were considered advisable, could be carried out.

That is not my only criticism of Clause 14. Under Sub-section (4), in the case of the death of a partner, in consequence of the Clause very great difficulties will arise, which would also be settled by my suggestion of treating new partnerships as new businesses. As the Clause stands, in the case of the death of a partner the executor of that partner's estate cannot possibly know for two years, and in an extreme case for three years, what the liability of the dead partner is. He has died in the second year, but his successor does not have to give notice until the end of the third year whether or not he is going to revoke the notice which his partner has given under the Clause. There may be resulting liabilities on the dead partner in consequence of the revocation of the notice given by the surviving partners. Therefore, no executor can be sure for two years, at any rate, what the liabilities of the estate would be. That is a serious position for an executor, and I hope the Chancellor of the Exchequer will be able to obviate the difficulty.

I admit that this Clause is intended to be a concession, and that it is so under certain circumstances, but I suggest that the extra year that is given to new businesses for the adjustment of their accounts is insufficient, and that a period of five years would be very much fairer and more satisfactory. Anybody, I think, would say that three years is not long enough for a business to show whether or not it is to be a sound paying business, but if the period were extended to five years there would be no reason for saying at the end of five years that there was any hardship arising to that firm, when the end of the period of choice had come. At the end of the third year they might find themselves in the position of making a lot of money, and then making another large sum in the fourth year, and having to pay twice because of the large sums they are making. These inequalities would not be so likely to arise if the concession were extended to five years.


The hon. Member for Guildford (Sir H. Buckingham), who has just addressed us on this very complicated Clause, was good enough to come, a few days ago, and explain the points that he intended to raise, and I have been able, therefore, to understand them more fully than I could have done merely by hearing his speech, clear though it has been in itself. I understand that he wishes to postpone this Clause, but I suggest that there is no ground for taking that course.


The Question is, "That the Clause stand part of the Bill."


I did not understand that.


I was under the impression that I was talking on my own Amendment to postpone the Clause.


On a point of Order. I think you are under a misapprehension, Sir.


The Deputy-Chairman informed me that he had put the Question, "That the Clause stand part of the Bill."


I think I can probably satisfy the hon. Member. This Clause is in the nature of a concession to the taxpayer, because it was found under the existing law that the option that the taxpayer had was not wholly satisfactory. I do not think this is the place to go into the precise figures of years 1, 2, and 3, but under the existing law the taxpayer has the option to decide in the second year. It has been submitted that there might be changes in which, owing to high profits in the third year, the option exercised in the second year would prove very detrimental to the firm, and the Government were asked if they would make a further concession, so that there should also be an option in the third year. The hon. Member wants that concession extended, not merely to the third, but to the fourth and fifth years, but I am afraid the Government cannot go beyond the concession which is being made in this Clause, which is a very considerable concession.


Is it not true that the Government at the same time are taking the second and third years together?


I am coming to that. The hon. Member for Guildford asked that we should not merely allow an option in the third year, but that we should allow the option to go on to the fourth and fifth years, and I say that the Government cannot see their way to do more than is being done by this Clause on that point, The concession is limited in this way, that the taxpayer cannot have the best of both worlds. What we are offering is that in the third year we shall have the choice of which world he wants to get the best of, but he cannot at one and the same time get the best of both worlds. He can either in the third year confirm the decision that he made in the second year, one way or the other, or he can reverse the decision of the second year; and, therefore, so far as the second and third years are concerned, they will both stand on the same principle that he adopts in the third year. As far as the firm is concerned, that is quite adequate, and the concession is one which is very valuable, because he can choose in the third year whether he will take one method or the other.

The hon. Member is quite satisfied from the point of view of the firm, but he says that in the case where there is a change of partnership owing to the death of one of the partners, or some other cause, that as between partner A and partner B this Clause may work considerable hardship. The suggestion he made for dealing with that case was that in all such cases firms should be in a position to start business afresh. I do not think that would be very satisfactory. It would be more satisfactory, on the average, to the Exchequer than to the taxpayer, and if we incorporate it in the Finance Bill we should, I think, get considerable complaints from taxpayers for taking that course. Undoubtedly the point he has raised is of some substance. It is perfectly clear that as between partner A and partner B there may be some ground of complaint as a result of the working of this Clause.

There is also the further point that a considerable time might elapse in the case of the death of a partner and that during all that time there would be a certain amount of uncertainty as to the assessment. That is a comparatively small point, for which we are looking for a solution. We have not found an exact solution at the moment but we are hoping to meet that meticulous point between now and Report, and if we can find such a solution we propose to bring it forward in the form of an Amendment. If we cannot find any such solution we shall present the Clause as it stands to the House. It is a concession to the taxpayer, and there will be some loss of revenue as a result of it. We are not anxious to press it, and if it is found that this small blemish cannot be put right we have no great desire that the Clause should be carried. Still, even as it stands, it will be better for these people than no Clause at all. I feel confident, however, that we shall be able to meet the point of difficulty, and we propose to bring it forward as an Amendment which can be discussed on Report stage.


It is always interesting to know that anything which will be of benefit to the taxpayer is of no interest to the Government. It is very interesting to know that this Clause is intended to be a concession to the taxpayer, but I should be very much obliged if the Financial Secretary or the Chancellor of the Exchequer would explain what Sub-section (4) means and in what way it is a benefit to the taxpayer. The Clause provides that in the case of the death of a person who, if he had not died would have been liable to the tax, the tax for which he would have been chargeable shall be assessed and charged upon his executors. In other words, instead of merely taxing people who are alive, if someone dies his estate has to be taxed in the same way as it would have been taxed if he had lived. I cannot see that that is a concession in favour of the taxpayer, even the dead taxpayer. The Chancellor of the Exchequer must be referred to some particular set of circumstances which are in the minds of the Government, and I shall be very much obliged if some explanation can be given of the kind of case that the Clause is intended to cover.


This Clause has been referred to by several speakers as a concession, but I think it is rather of the nature of an attempt to remedy an injustice. The fact of the matter is that this Clause is an attempt to remedy Section 29 of the Finance Act of 1926. Under that Section there was undoubtedly an injustice to the taxpayer. A number of taxpayers were called upon to pay taxes in respect of profits which were more than the profits they had made. I am sure that that was not the intention of this House when the Section was passed. I rose to ask the Chancellor of the Exchequer whether, between now and Report, he will consider the possibility of amending Sub-section (6), which reads: This section shall apply in relation to trades, professions or vocations set up or commenced in the year 1928–29 or any subsequent year of assessment. What happened in the past was that businesses, after the 5th of April, 1928, were paying more taxes than were necessary upon profits which had been made. The demand applied to profits from 5th April, 1927. I ask the Chancellor of the Exchequer to consider whether, in remedying this injustice, he cannot "go the whole hog" and do an act of justice to all taxpayers who have been adversely affected to an extent which was not in the minds of Members of this House, and alter the year for assessment to which this shall relate from the year 1929 to the year 1927–28.


The words in Sub-section (1) of Clause 14 referred to "trade, profession or vocation." Although the discussion has centred largely round partners, it seems to me that there is no mention specifically of partnership in this Clause, and that the Clause will apply to any trade that is set up. If a trade or business, upon a man's death, is sold by the executors, that business continues. Had the man who originally owned it been alive, he would have been liable for tax for the third year on the profits of that trade. Under Sub-section (4) his executors are liable for the taxation for which he himself would have been liable had he lived, and, the business having been sold, somebody else apparently also becomes liable for taxation on profits from that same trade. Sub-section (4), I submit, makes two different parties liable for taxation on the same profits. The Sub-section ought to be limited in some way because I think it clearly puts that liability on the executors but, if I am wrong on that point, I submit that it will certainly have this effect. In the case of a trade or business which goes on after the owner's death, the executors will not know until two years afterwards what their liabilities are going to be under this provision. They ought to be given the opportunity to settle these affairs within a year, the ordinary period within which executors are expected to settle all matters relating to the assets of a deceased person. It is right that they should pay taxation on the profits made by the man when he was alive, but they should not be charged on any profits accruing from the business after the man's death unless they are actually carrying on the business themselves. I hope that this point will be gone into before the Report stage, and that some limitation will be put upon Sub-section (4) to meet the objections which I have indicated.


I think the hon. and gallant Member for Uxbridge (Major Llewellin) is mistaken in thinking that this Sub-section involves an extra liability. I do not read it in that way, but I think there is every probability that it will create considerable confusion in the minds of executors and will tend to make the settlement of estates extremely difficult in cases where a number of persons are connected with a partnership. I cannot think that it is beyond the ability of the Financial Secretary to find words which would make the position clear. I am not going to press the matter because I understand that the Government have promised to consider it before the Report stage, but I would point out that, as the Sub-section stands, it appears to make the winding-up of partnership estates a very complicated and extended process. I am perfectly certain that such is not the wish of the Government, and I hope that the Financial Secretary will not take refuge in the idea that suitable words cannot be found to make the meaning of the Government plain. The mantle of the permanent official seems to have fallen on the hon. Gentleman when he says that this proposal might result in a slight loss of revenue to the Treasury and, therefore, if there is any real opposition, the Government may not feel it necessary to press it at all.

It is quite possible that this will cause a small loss to the Revenue, but I look upon it as a concession to the taxpayer and on that account I do not want to press the hon. Gentleman. I think that he wants to get the thing perfectly clear and to do the best that he can. In connection with the point on which I interrupted him, may I ask him again to look into that before the Report stage. Under the guise of relief, this Clause restricts a taxpayer by compelling him to take the second and third years together. The Treasury would lose no more money, in fact might gain a little, under the present position as laid down by the Clause, if the taxpayer were allowed to deal with each of the three years separately. I do not agree with the suggestion to carry it to the fourth or fifth year, but as far as the first three years are concerned, I cannot see that the Treasury would lose anything by allowing the taxpayer, if he desires to treat the profits of each of the three years separately.


That is provided for.


I do not press it, because the Government are going to consider the matter, but these points should be cleared up.


I am completely mystified by Sub-section (4). What the Government are offering to the taxpayer is that in respect of the new business, the notional year in respect of which the taxpayer is going to be taxed is to be during the second and third years left to the option of the taxpayer. He can exercise that option, but if he exercises it, it is to be exercised, whether he does it in the second or third year, for both years. The Sub-section goes on to devise something which is a complete departure in Income Tax law, namely, that when that option has been exercised, if the taxpayer dies at the end of the second year, you are nevertheless to treat the income which comes to his estate as though it were income which fell under this scheme, and you are going to charge it upon the executors. That is something entirely new. The Sub-section in its present form is entirely unworkable, because, as so often happens when people are considering making a new departure, they do not visualise all the different changes and circumstances which may arise. It has been pointed out already that the Sub-section is not confined to partnership. Take the case of a single individual, a member of my own profession, for example, who happens to die at the end of the second year. His business naturally ceases; there is nothing the executors can carry on, but under this Sub-section I am not at all sure—I invite the Financial Secretary to give it his consideration—whether it might not be possible for some extremely astute Income Tax official to say that there might be an assessment upon the executors of the deceased member of the Bar in respect of those earnings which would have been chargeable to tax if he had survived. Take the case of the business which is sold at the end of the second year, let us suppose, to the son of the gentleman who dies at the end of the second year. The son carries on the business, and what will happen? Are the executors to be charged in respect of the actual earnings of that business for the third year?


indicated dissent.


The Financial Secretary shakes his head, but is that the fact under the Sub-section? At the same moment, the son is carrying on the business, and is there not a possibility of some Income Tax assessor coming down upon the son, and saying, "Of course, it is true that the earnings made in this business are going to be treated as notional earnings with regard to your father's estate, but, so far as you are concerned, it is your business, and you are carrying on for the first year, and we propose to tax you for that year"? I am not suggesting that these observations are necessarily right, but I can see the possibility of very considerable disturbance, and many claims being made, and I suggest that this Sub-section might be considered before we reach the Report stage. I am puzzled by the whole Section, but then, in common with so many other people, I am very often mystified by the problems under the Income Tax Acts which one has to consider and obtain decisions upon. I am ready to be told that the cases which I visualise are not possibilities, but at all events there is a real doubt as to whether this Sub-clause achieves any purpose which is really fair to the taxpayer, and whether there is not a possibility that, in the guise of a relief against a real injustice, we may not put the taxpayer in a worse position than he was in at the beginning. The Financial Secretary says the taxpayer does not want to have the best of both worlds, but it rather looks as though, having gone to the next world, he is going to be chased there and taxed after all.


I think I can set the minds of hon. Members at rest with a very few words. The whole of this Clause applies to the options exercised by the firms in years two and three. We are dealing only with businesses in their first three years. The only case under the Clause as it stands where there will be any additional charge on the partners in the second year is the most unusual case of there being a very large profit in the first year, a very small profit in the second year and another very large profit in the third year. Those cases will be exceedingly few; and even in that position the only cases in which these difficulties will arise are cases where there has been a death or a change of partnership after the end of the second year and before the end of the third year. The number of cases will be very few indeed. With regard to sub-Clause (4), that comes in only where a man dies after the end of the second year, where all those conditions to which I have referred exist, and where his partner, at the end of the third year, wants to reverse the option exercised in the second year. In those circumstances there may be some small charge falling on the partner who is dead. It is the endeavour of the Government to make some modification whereby even these rare difficulties will not occur.


May I ask where in this Clause it says that it is limited to partnerships?


It is only in the case of a partnership that the difficulty arises. If a business is sold, if the executors sell the business, it is a new business, and the procedure would be wholly different.


If the Financial Secretary to the Treasury had only made his first reply immediately after my hon. Friend the Member for Guildford (Sir H. Buckingham) had made his speech, I think we might have saved some time. This is a question which requires very carefully looking at all round. The debate has very wisely been confined to legal Members of the House, and to those Members who get their living by the interpretation of this and other complicated Acts of Parliament, and of course they are better qualified to deal with legislation like this which gives a very small concession wrapped up in a very large amount of sacking in the shape of legal verbiage.

We have had a definite point put on Sub-section (4) dealing with the case of death, and the Government have promised to consider that point on the Report stage. I would like to point out to the Financial Secretary that there is a grave doubt that under the Clause as it is worded an individual may, by reason of his connection with a partnership, whether he dies or not, be made responsible for a larger sum than he has earned. To meet this point, I suggest that the right hon. Gentleman should accept a proviso to the effect that nothing should operate to over-ride Rule 11 of Section 31 of the Finance Act of 1926, and that the provisions of Rule 11 should operate in every case. If such a provsion were put in this Bill, it would make it clear that in all these changing circumstances, where one partner drops out and another comes in, or one partner dies, in no case should any individual be charged Income Tax at a higher rate of profit than he has in fact earned. I hope we shall be able to get this little solatium for the taxpayer without doing anybody an injustice.

I ask the Chancellor of the Exchequer to consider the case in which one of the partners in a partnership dies and the executors have to deal with the question of a change in the partnership. In that case, I think that the old rule laid down in Rule 11 of Income Tax law should operate, and that no one should be charged at too high a rate. If that were done, the taxpayer would, in the words of the right hon. Gentleman, get the best of both worlds. On these grounds, I hope the Financial Secretary will very seriously consider making it quite clear that nothing in this Section shall operate counter to the provisions already existing for the protection of the taxpayer, and which have been in operation for such a long time. I hope the Financial Secretary will agree with me when I say that the taxpayer is entitled to all the protection he has had hitherto, and I trust that he will be given this small concession as well.


I only wish to ask two questions on this point. As I and some of my friends see Sub-section (4), we are not certain whether it is confined to partners in a firm or not, and I have reason to think that it might be made clear if the first line read: In the case of the death of a person who is a partner in a firm. That might clarify a great many of the doubts which have been raised on this side of the Committee, and, if it could be done on Report, I believe it would help a good deal. I should also like to ask one simple question in connection with the whole Clause. We have been told that this is a concession, and that the Treasury will lose money. I have never heard of the Treasury making a concession unless they had an estimate of what the concession would cost, and I think we are entitled to be told what the cost will be, because then we should know roughly what is the value of this Clause.

Lieut.-Colonel HENEAGE

I hope that the Chancellor of the Exchequer will not let us know how much it costs, because we do not approve of the system of looking a gift horse in the mouth, but receive the concession with thanks. I should like to ask whether the words "trade, profession or vocation" include agriculture. There are a certain number of agricultural partnerships which this concession would considerably benefit. I should also like to know how the question of Schedule A will be dealt with. Schedule A still remains, and if this Clause would apply to Schedule A, I think it would be a considerable concession.


We want to get on, and I hope we may hear from the Chancellor of the Exchequer that he will consider the point as to the further definition of the word "person," by inserting the words "person who is a partner in a firm," or some such words. That question might, perhaps, be considered between now and Report, with a view to making it clear that the intention is to pursue that share of the collective liability of a firm which properly attaches to a partner in the firm, but not to pursue in respect of Income Tax anything which trenches beyond those limits of actual income which hitherto have been the sole basis upon which the tax was levied. There is a considerable point of principle there. I will not ask the Chancellor of the Exchequer for any final or decided statement, but if he would indicate that the point will receive careful attention between now and Report, with a view to the localisation to which I have referred, I think it would enable us to quit this Clause now without further discussion.


I am always quite ready to consider any suggestion for the purpose of meeting a difficulty or making matters more clear, and certainly the point which the right hon. Gentleman has mentioned shall be considered.