HC Deb 24 May 1932 vol 266 cc267-80

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


This Clause is aimed at getting rid of a decision of the courts in a particular instance in which a schoolmaster was held not to be liable to pay Income Tax because a pension which he enjoyed was one that could be discontinued at any moment, and, accordingly, there was no contract under which he was entitled to the particular income. That being so, the money that he received was a voluntary payment, and, in accordance with a well-known principle of law, the money was deemed already to have borne tax in the hands of the person who paid the so-called pension. The situation that arises if this Clause goes through is that the money paid in the hands of the payee will bear taxation, but the question arises what will happen to the payment made by the organisation that makes the payment because, if it is one that bears tax, they will be obliged to deduct the tax in making the payment, in accordance with the regular rule of deducting tax at the source. The effect would be that the money would pay tax twice over, and I am sure no one desires that that should happen. I can well see that, in the case of some pensioners, this Clause would have a beneficial effect from the point of view of the Revenue, because it might be that the pension would be taken into account by the person receiving it, and, as a result of that, the individual might become liable to pay Super-tax, or even a higher amount of Super-tax, but it is very important that we should observe whether the amount is to be de-ductable by the person who pays it, because, if it is, the effect of the Clause would be that we should be transferring the burden of taxation from the person who paid to the person who received, and the Revenue would not be benefiting at all.

There is another matter that is, perhaps, worth more than a passing thought. This, I believe, is the first occasion upon which this House in its Income Tax legislation has proposed to tax payments which are other than payments made under contracts. One of the learned lords who gave judgment in the case to which I have referred called attention in another place to that well-known principle. That being so, we ought to be quite sure what we are doing, and we should realise that we are introducing for the first time into the Income Tax Acts the principle that in some instances voluntary payments are to be taxed. This instance may be a perfectly good one. I am not constrained to question that. But I do not think we ought to let this slip through without the attention of the Committee being pointedly called to the exceptional principle which I think we should be establishing if the Clause went through in its present form.


I wish to support everything that has fallen from the lips of my hon. and learned Friend. I certainly think we must have it from the Financial Secretary that, if this tax is taken off an income which is given voluntarily, suitable relief should be given to the person who pays the pension; otherwise, as I see it, the Revenue would get the tax twice. But I think I understand what is behind the Clause. In certain oases Government employés receive their pensions voluntarily, and the State now seeks to safeguard itself so that it can take, as hitherto, the tax off their pensions. But I take grave exception to the words in Sub-section (2): for the purpose of removing doubts. That is a thoroughly uncandid and dishonest statement, and I hope the Financial Secretary will take those words out on Report. What doubts can there be? I watched the Beloe case through the "Times," but I know nothing about it except as a reader of the "Times." Here was a taxpayer who appealed to the Commissioners. They had no doubt about their decision. The State appealed to the High Court, and the judge had no doubt. He gave his decision in the same way. The State appealed again and the Court of Appeal had no doubt. They gave their decision just as it had been given in the two previous instances. The State then dragged this man to the House of Lords, which for the fourth time gave a decision the same way. Where is there a doubt? In a Statute like this, it ought not to be possible to put in words that are uncandid and dishonest. We shall pass the Clause, but in the interests of candid and straightforward statement, especially in an Act of Parliament, the Financial Secretary must take out these words. There is no doubt to be removed. The fault lies entirely with the Revenue authorities, which have been under a misapprehension for years as to their powers. I do not like to find fault with the Treasury draftsmen but the reason is the unlucid way in which Acts of Parliament are drafted. In Clause 17 there are 200 words without a full stop. In the first Sub-section of this Clause there must be 150 words without a full stop. Macaulay, who was a Member of this House, would turn in his grave if he could see a sentence like this. There is no reason why the Treasury draftsmen should not break up a Clause into two or three paragraphs. We should not then have all the trouble we have in understanding Acts of Parliament, and it would not be necessary to put a taxpayer to the expense of having these cases carried through to the House of Lords. It is a shameful thing that a man should be taken to court four times to have a ease decided when there is not the slightest doubt.


I should like to put a question to the Attorney-General as to the words by the person under whom he held the office or by whom he was employed. 7.30 p.m.

In certain big institutions, where there are some thousands of members, they arrange among themselves to have a benevolent fund for any member who, through ill-health or old age, comes upon bad times, and they subscribe to the fund. When a member or ex-member of the Association applies for relief and obtains an annuity or a pension, is it taxable under this Clause? Can it be said that the trustees of the fund are in any way the employers of the man who applies for relief? I shall be grateful if the Attorney-General can give me a definite lead in the matter, because it as of very great importance to people who have very little of this world's goods left, and whose only claim upon those funds is need and a good record. I hope that the Attorney-General will tell us whether those poor people are to be made to pay Income Tax or not.


It seems rather incredible that the relief granted from these funds could raise the income of a person to £120 a year. If that were so, they could hardly be described as ordinary benevolent funds. I think that in most cases the grants would not be sufficient to raise the income of the persons concerned to the taxable limit.


I was asking the learned Attorney-General to reply, and not the hon. Member opposite.


I am not attempting to reply on behalf of the Attorney-General, but as a Member of this House I am entitled to make a reply. It seems to me that the hon. Gentleman has put an absurd proposition. He is actually saying that here is a benevolent fund to which people make a contribution, and asking whether the money received by way of annuity, or relief or assistance should be exempted from taxation. Every hon. and right hon. Member knows very well that if there are funds of that description, they are not able to afford such relief, assistance and annuities as would raise the income of thy recipient to the level of taxable income. The whole point appears to be absurd.


I wish to associate myself with what has been said by my hon. Friends with regard to the Clause, which seems to violate the great principle which underlies the collection of Income Tax in this country. Our Income Tax law, with the enormous taxation it raises, is the envy of every other civilised country of the world, and anything which will in any way alter the basis upon which Income Tax in this country is levied is a matter which the House of Commons should very jealously guard against. The basic and cardinal principle of taxation under the Income Tax Acts is that income only should be taxed, whereas under the present Clause it is provided that something which the courts have definitely held is not income is to be deemed to be income. That is a step which we should hesitate to take. There is first the question, to which my hon. Friend alluded, of the danger of double taxation. If the income out of which those voluntary pensions are paid is to be relieved from taxation, it may very well be that the revenue may suffer. For example, if a pension is paid by a company, the company will be able to charge in its expenses which are relieved from Income Tax the amount of those pensions. The tax on the pension itself may be upon a lower scale than 5s. in the pound or whatever the Statute rate of the day may be, and there may well be a substantial loss to the State by reason of this proposal if companies who pay voluntary pensions are entitled to include them in their expenses so as to avoid double taxation. We then come to the question of the ordinary private individual who pays his secretary, gardener, butler, or any servant a voluntary pension. If the voluntary pension in question is now to be subject to Income Tax, surely it is not fair that the private individual should not be allowed to make a deduction from his return in respect of the amount he pays as pension. Otherwise the State would clearly be getting double taxation. I should also like either the Financial Secretary to the Treasury or the Attorney-General to state the position with regard to lump sum gratuities. The position is by no means clear under the Clause. The Committee is entitled to have the point cleared up. I should further like to know the position with regard to a pension or annual payment, such as a grant from a pension fund which is not a superannuation fund. Many people, without receiving contributions from their employés, themselves contribute towards a fund out of which they can pay their servants when the time arrives for them to retire. What will be the position of a superannuation fund of that kind? All those points are points of substance, and before the Committee alter the basis upon which the wonderful success of our Income Tax has rested for so many years, and allow something which the courts have held is not income to be deemed to be income, we ought to be fully satisfied as to the advantages of the Clause.


I wish to associate myself with the expressions of opinion of my hon. Friends near me. It is really unworthy of the House and of the Government to introduce such a Clause. I wish to ask the Financial Secretary if any estimate has been made as to the amount of tax which is likely to accrue to the country if the Clause is allowed to remain in the Bill. I cordially agree with the opinions expressed concerning voluntary payments. The cases sought to be met are extremely rare, and it is not worth while the Government pursuing the matter. Supposing an institution, realising that in future the pension or annual payment was to be taxed in this manner, said, "Very well, we will not make a pension or annual payment, but we will vote a gratuity each year." Take the case of Bradfield College. Supposing they had said that each year, "We will devote so many hundred pounds to the persons concerned." It would cease to be an annual payment, and would become a gratuity from time to time. Would those circumstances be covered by the Clause? I hope that the Government will see their way to withdraw the Clause.

The ATTORNEY-GENERAL (Sir Thomas Inskip)

There has been a good deal of misapprehension about this Clause, and my hon. Friend the Member for Farnham (Sir A. M. Samuel) in particular seemed to engender a great deal of heat about the provisions of Sub-section (2) of the Clause, which he would not have felt justified in doing if he had been more perfectly informed as to the scope of that Sub-section. I do not propose to follow him in his discussion of the way in which Acts of Parliament are drafted. We have all passed our criticisms upon the way Acts of Parliament are drafted. We have all found ourselves more or less powerless to suggest any improved methods, although we make many sweeping and general statements about the matter. But this is certainly not an occasion to enter upon the entertaining topic as to improvement in the drafting of Acts of Parliament. As to Clause 17, I have, therefore, nothing to say.

To come back to Clause 15, let us try to understand the scope and intention of the Clause. First of all, let me say a word as to the case which was taken to the House of Lords—the case of Brad- field College and the gentleman who had been headmaster of the college and had retired, I think, owing to ill-health. Let me correct the statement, or the inference from the statement, made by my hon. Friend the Member for Farnharn. He suggested that the Inland Revenue authorities dragged this poor gentleman up to the House of Lords, I think he said through four courts, as though they made him the victim of some rapacity on their part. When the question as to whether a voluntary pension was subject to tax was raised by Mr. Beloe or his advisers, it was a novel point, because such voluntary pensions or allowances had been taxed in exactly the same way as contractual pensions or annual payments were taxed until the point was taken by Mr. Beloe. But the point having been raised and an interesting legal question having been mooted, the Inland Revenue authorities agreed to pay the costs of the litigant as between solicitor and client right up to the House of Lords so that this poor gentleman, who in the words of my hon. Friend was dragged up to the House of Lords, was certainly not a victim as far as any costs were concerned.

The result of the decision in the House of Lords was really to cause a new departure. Voluntary pensions or annual payments, once you got to the point of their being pensions or annual payments, had been treated in precisely the same way as contractual pensions or annual payments. I do not think that any hon. Member in the Committee would have it otherwise. Let me take, for example, the cases of two men. One man is employed by a company which has a contributory pension scheme, that is to say, a scheme under which contractual rights to a pension are to be enjoyed by the employé upon retirement. He is taxed. The Bradfield College case has not affected his liability to taxation in the least degree. His friend, however, is employed by a company which has not a contributory scheme. He retires at a certain age, and his employer, not being under any contractual obligation, agrees to pay him a pension or an annual payment, which cannot be enforced as against the employer, but which the retiring servant enjoys for the rest of his life, and enjoys it under the good will of his late employer. He, according to the decision in the Bradfield College case, is not to be subjected to tax, and I defy anybody in the Committee to suggest any principle, any distinction or any equity which requires one who is employed by a company which has a contributory scheme to be taxed, and the other who is employed by a company which has not a contributory scheme to be let off.

Before taxation of what is called a voluntary payment can be imposed it is necessary to arrive at a decision as to whether it is a pension or an annual payment. If it is a pension or an annual payment and not merely a gratuity, given once as an act of charity or kindness, it has always been regarded as liable to tax. It has never been thought to make any difference whether there was or was not a binding contract to pay the pension or annual payment, or whether there was any obligation that could be enforced in a court of law.

The Bradfield College case proved that there was a defect in the letter of the law that would have led to inequality, and the first part of Clause 15 deals with that case. It is for the Committee to decide whether or not in the circumstances that I have mentioned it is the proper course to make the law what it has always been supposed to be, both in practice and in the intention of those who have administered the law. It would produce a condition of inequality between different taxpayers if a voluntary pension or annual payment was to be free from tax, when a contractual pension or annual payment was to be subject to tax. Let the Committee once more realise that in what I have suggested for their consideration I am assuming that it is a pension or annual payment. Of course that will always be a question which the commissioners will have to decide upon the particular facts of the case.

When we come to Sub-scetion (2), we are dealing with a different subject matter. We are not dealing with a pension or annual payment that may be paid by a company or some individual but to a class of pension payable to retired civil servants, either in the Home or the Colonial Civil Service. I very much doubt whether pensions or annual payments of that sort are affected at all by the decision in the case of Bradfield College. The advice which I think has been re- ceived is that the case does not touch these pensions. I would ask the Committee what justification was there for the language which my hon. Friend the Member for Farnham used when he charged the Government with being un-candid and dishonest because they preface Sub-section (2) with the words: For the purpose of removing doubts. It has been suggested by some ingenious person that now this question has been mooted even the pensions which retired civil servants receive—which, as everybody knows, are not contractual and cannot be enforced in a court of law—would escape tax. I do not believe that they would escape tax, but it has been suggested that they might. Nobody believes or contends that they ought to escape tax. It is only in theory that they are voluntary payments that cannot be enforced in a court of law, because everyone knows that the pensions that are paid to retired civil servants are just as good for the lifetime of the retired civil servant as if they were contractual pensions and capable of being enforced in a court of law; but to prevent litigation, which might lead to some unfortunate taxpayer being dragged up to the House of Lords, through four courts, for the benefit of the lawyers, and in order to remove doubts, it has been thought right to say in Sub-section (2): For the purpose of removing doubts, it is hereby declared that the expressions 'annuity' and 'pension' in the charging provision of Schedule E and in Sub-section (1) of Section seventeen of the Finance Act, 1923, include respectively an annuity and a pension which is paid voluntarily or is capable of being discontinued. As everyone knows, the pension of a civil servant may be discontinued in certain cases, which are very exceptional in character and which I do not need to specify. The hon. Member for Farnham, having charged me and the Government with being dishonest, has been particularly careful not to wait for the reply. I hope the Committee will not agree with the hon. Member when he charges the Government with dishonesty. I can give the assurance that Sub-section (2) has nothing in the world to do with the case of Beloe. It is merely a case where opportunity has been taken to set at rest the hopes of, perhaps, some ambitious lawyer, shall I say, who scented a nice piece of litigation. Sub-section (3) provides that earned income shall be deemed to include any annuity, pension or annual payment to which this Section applies. Sub-section (3) is wholly in favour of the taxpayer. It provides that the appropriate Section of the Income Tax Act shall be interpreted so as to enlarge the ambit of the expression "earned income."


I understood that Sub-section (3) was put in as a consequence of a request made from this side of the House when the Financial Resolution was in Committee. We are very grateful to the right hon. Gentleman for giving that definition in the Bill, but we should like to know whether the expression "earned income" also covers covenanted pensions. It is not made clear whether covenanted pensions are included in the definition of "earned income."


Covenanted pensions are already dealt with in the definition of "earned income." The only thing that is necessary has been to provide that uncovenanted or voluntary pensions shall also be included. The hon. Member is right in saying that the point has been raised from the benches opposite. I can give him an explicit assurance on the point that he has raised. The hon. Member for Chislehurst (Mr. Smithers) asked whether the persons to whom an industrial benevolent society applied its benevolence would be subject to tax. I agree with one hon. Member opposite that it is a little difficult in one's conception of poverty and benevolence to see how anyone who enjoys such benevolence as that to which the hon. Member referred could come within the reach of Income Tax provisions, but assuming they do, I can assure my hon. Friend that a benevolent fund of that sort would not be the person under whom the pensioner held office or by whom he was employed. He need have no anxiety on that point. The hon. Member for South Kensington (Sir W. Davison) asked whether a lump sum gratuity would be touched by this provision. It is a question partly of law and partly of fact whether it is a pension or an annual payment, or a lump sum gratuity. If it is an annual payment, on the facts of the case, it will come under the provision. If it is merely a lump sum gratuity such as you give to a servant who leaves you once and for all, it is not, and it is difficult to see how it could be, an annual payment.


The case I had in mind was that sometimes when an office is terminated a man may get £2,000 or £3,000. Presumably, he will invest that and will pay Income Tax on it. Is that the sort of case that is contemplated?


If it is a lump sum gratuity of £2,000 or £3,000, quite clearly it cannot be a pension or annual payment. He invests the sum and receives income on it, on which he pays Income Tax.




So far as the £2,000 or £3,000 is concerned it is a gratuity and not an annual payment, on the facts mentioned. Now I come to the position of the non-contractual pensions. I have tried to explain that we are putting the non-contractual pensioner on the same basis as a pensioner under a contractual scheme, and I do not think that any hon. Member will see anything wrong in principle in putting them on the same basis. The question of double taxation arises. In the case of Bradfield College there was no question of double taxation. Bradfield College is an educational institution, a, charity, and does not pay Income Tax. Therefore there was no case of double taxation in that case, but there might be double taxation in the case of a company that makes one of these payments to a former employé. When a company is carrying on business such pensions or annual payments have always been treated as proper deductions from profits and they will still be treated as proper deductions by a trading company.

Suppose, however, that an individual wanted to deduct from his profit, from his income, the pension which he pays to a butler, or a gamekeeper, or some other personal servant. That could not be deducted any more than any of us could deduct the money which we are at present paying to our servants, or the money which we pay to our tailor for the clothes that enable one to come to the city decently clad. We all of us experience double taxation in one sense. Taxation is never ending. People who employ us pay taxation upon their income. People whom we pay out of those sums which we receive pay taxation upon their incomes, and so it goes on, ad infinitum. The answer is that if it is a trading concern that is making these payments there will be allowance but if it is a private individual the deduction cannot be made. I hope that I have answered the questions put to me by hon. Members and by the hon. Member for Farnham.


I did not hear a word of the reply.


The hon. Member who is now in his place, says that he did not hear a word of what I have said. I propose to spare the Committee a repetition of what I have said for his benefit. He will have to read it to-morrow in the OFFICIAL REPORT.

8.0 p.m.


I am afraid that the Attorney-General has left me completely unconvinced. Perhaps he will not be surprised at that. I suppose the sort of argument that he has advanced will be advanced on Friday in support of another Bill. His argument is that voluntary pensions have always been regarded as liable to tax, that no one ever thought that it made any difference whether they were contractual or not, and because it has been found according to law that they ought not to be taxed the law is to be altered to bring them in. Very much the same argument I suppose will be made on Friday. The right hon. Gentleman is stretching the point much too far. He did not tell us whether there is any definition of what is a pension. In the Clause it says: Any pension or annual payment. … paid to him …by the person under whom he held the office or by whom he was employed. We know how the Income Tax people can stretch these matters, and that may be stretched to mean a very small amount of employment, possibly a gift, or a sum which most people would consider as an allowance. The Clause is opening a door which a grasping Chancellor of the Exchequer in coming years will push open. It is wrong this year to make such an alteration in our Income Tax law when the whole question of Income Tax legislation is being considered by the Committee set up by the right hon. Member for Epping (Mr. Churchill). Surely we should hold our hands for the moment. The Attorney-General did not indicate that there was any money in this. He did not give us any idea as to how much was involved.


There is certainly money in it, but of course it depends on the extent to which people take advantage of the decision in the Bradfield College case. Let me give an illustration of the way in which advantage might be taken of that decision. A director of a company holding the majority of the shares, the controlling interest, might resign his position as a director, taking care that he was voted an annual payment, a substantial sum, by way of pension, which he would call a gratuity. He might escape Income Tax on the whole of that sum, and having control of the company he would be able to vote himself that sum year after year. If many people did that a large sum of money might be involved. There is certainly money in it. This Clause is put in to protect the revenue.


If the learned Attorney-General gives a case by which the existing law can be evaded and does not take steps to see that it is put right, naturally some clever people will think of it. But has anybody thought of it before?


Oh, yes.


I am not yet convinced that there is much money in it. It is one of those legal tricks which ought not at the moment to trouble the Committee. The Attorney-General has not made out a case on financial grounds. He has made out a case on the ground that people who have contractual pensions pay Income Tax and that those who get pensions on a non-contractual basis get off. If we are going to start legislating on those grounds I shall be prepared to give the Attorney-General in numerable other cases on which he will be glad to legislate. I protest against this Clause. I think it is wrong to take advantage of the decision in the courts to try and reverse something which has been the practice for a long time.


As I understand it, a voluntary payment which is not a legal pension cannot be deducted by a company from their expenses on which Income Tax is not paid, but if you now make this a legal payment, on which the voluntary pensioner has to pay tax, it will be open to a company in the future to add such pensions to their expenses on which they do not pay Income Tax. A company always pays Income Tax at the standard rate 5s. in the £, but probably the pensioner will have allowances for family and may only pay 2s., 3s. or 4s. in the £. In that way I think it may result in a loss instead of a gain to the Revenue.