§ 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, or concern, and where such a 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.
§ 3.58 p.m.
§ Sir BASIL PETO
I beg to move. "That the Clause be read a Second time."
If this new Clause appears to be somewhat long and somewhat complex it only shares what is common to all Clauses dealing with this very difficult question of Income Tax. Perhaps it would be convenient if I analysed the Clause so as 829 to show of what it is composed. It is divisible into five parts. The first is contained in the first two lines, which show that the purpose of the Clause is to enable deductions to be made from revenue in respect of expired capital outlay on inherently wasting assets. The Clause proceeds in the fifth line to lay down two conditions which must be fulfilled if the claim is to be substantiated. The words are:Where such a 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.That merely means that it must have been the customary practice in the business to make these deductions from the commencement of the employment of the actual assets in question or during at any rate a period of three years up to the end of the last financial year. The third part of the Clause comes in line 10.Provided such deduction is so made as to prevent the same being available as profits.The effect of that is that it must not be placed to an ordinary reserve fund used for various purposes such as the equalisation of dividends or anything of that kind, but must be definitely earmarked for the purpose of reducing the capital value of inherently wasting assets. The last portion of the Clause is in the proviso which deals with the definition on line 14: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.Those words rule out all such things as the value of leaseholds, goodwill, patent rights, copyrights, and so forth. Those are all assets which can be, and are, bought and sold in the open market, subject to the payment of Income Tax. It was the inclusion of all these assets that was the shipwreck of the wasting asset Clauses which for many years had been moved in this House. This actual Clause was first moved in 1912 by Lord Hanworth, now Master of the Rolls, then Member for Warwick and Leamington. It was moved by me a couple of years later, and has been before the House on several other occasions. While the 830 Clause does not include the things which I have already enumerated that ought not to be rightly included; on the other hand it includes a very wide field of wasting assets, not only plant and machinery, which are dealt with in another Clause, which you, Captain Bourne, have not selected, but it deals with all minerals such as oil, nitrate, coal and gold, and so on, subject to the conditions I have already mentioned, namely,where such a 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 yearOf course, besides the minerals, it includes all classes of plant and machinery subject to the conditions that I have enumerated. Had this Clause been accepted—and it was largely approved in principle by the Chancellor of the Exchequer of 23 years ago—there would have been much less need for Clause 24 of the present Finance Bill, because there would have been so much less machinery and plant required to be scrapped. I venture to do something which I do not think I have ever done before in this House, and that is to quote in order to show the Committee how we debated the subject all those years ago. On 2nd August, 1912, I said:The thing we have to recollect in this country is that the size of the scrap heap is a very good measure of progressive business management in any industrial affair."—[OFFICIAL REPORT, 2nd August, 1912; co). 2619, Vol. 41.]I believe that is absolutely true. Had the Clause I am now moving been accepted on that occasion, or subsequently, it would have been an extremely good thing both for the progressive development of industry in this country and of employment, because inadequate allowance for wastage and obsolescence of plant and machinery has been a constant hindrance to the development and employment of efficient and up-to-date machinery. If that were the case in 1912, when Income Tax was 1s. 2d. in the pound, I would like hon. Members to consider what it means in the post-war period when Income Tax has varied from 4s. 6d. to 6s. It becomes of enormous importance that the tax should be so adjusted as to be payable on what are profits, and not become a burden and 831 prevent progressive development in business by trying to collect and successfully collecting it on very large annual sums which are never, and never can be, divisible as profits. In the case of minerals, this method of collecting tax on wasting assets such as nitrate fields, oil wells and things of that kind has driven numerous companies who would otherwise register here, to register abroad, which has meant the loss of Stamp Duty to the Treasury and of employment for clerks and of orders for supplies of all kinds of things necessary for the development of these minerals.
There is another reason why this Clause becomes far more urgent now than it was in the earlier days when it was moved. It is not only because Income Tax has risen almost four times as high as it was then, but the life of the machine in the average industry is far shorter than it was 25 years ago, and still more than it was 50 years ago. If our industries are to be ahead of their competitors abroad, it is necessary for them to be constantly changing plant and machinery. If that be so, this Committee should do everything possible to encourage the people in control of our industries to seek to get machinery and plant better and more up-to-date than the machinery and plant in any competitive country in the world. A very great authority on Income Tax in the past, Mr. Leake, in a classic work on the subject, wrote:No annual profit arises until the inevitable annual wastage in the assets in which the capital was originally invested has been fully provided for out of gross receipts.I have quoted that before in the House, and I would like to remind the Chancellor of the Exchequer who, I think, has not been in that office at any time when this Clause has been moved before, that a predecessor in the office, the right hon. Member for Carnarvon Boroughs (Mr. Lloyd George) said, in reply to the Debate, on 2nd August, 1912:It is one of those problems which have embarrassed and perplexed every Chancellor of the Exchequer, because, on the face of it, there is a case to be met. In fact, I go beyond that and say that there is a real case that has got to be dealt with."—[OFFICIAL REPORT, 2nd August, 1912; col. 2622, Vol. 41.]The case has never been dealt with since, and I would urge that this is the appropriate time to deal with it, because if 832 the Committee will look at Clause 24 of the present Bill they will see that the principle of a complete deduction in the case of contributions to a scheme for the removal of redundant machinery in any industry isallowed to be deducted as an expense in computing the profits or gains of the said trade.Those words are in Sub-section (1), and in Sub-section (2, a) the Committee will see that the Board of Trade must certify a scheme if they are satisfiedthat the primary object of the scheme is the elimination of redundant works or machinery or plant from use in an industry in the United Kingdom.I am bound to say to the Chancellor of the Exchequer that if he is willing—if I may use a homely phrase—to lock the stable door after the horse has been stolen, would it not be better, and will he not take steps, to lock it now, so as to prevent further theft of British industry and employment? I would ask him and the Committee to consider the very appropriate words used by the Financial Secretary on 19th June, when speaking on Clause 24:In this instance, we have thought it wise to assist the tendency in industry to help itself and to get itself into better form to compete with its competitors all over the world as by introducing new machinery which will assist the whole industry, workers as much as the employers."—[OFFICIAL REPORT, 19th June, 1935; col. 485, Vol. 303.]I venture to say that the argument could not be put more concisely and cogently for the Clause I am moving. If it be right to do that in the case of machinery that has already become redundant or obsolete, in the interests of employment and industry as a whole, it certainly must be true of industry as a whole that you can do nothing better, as the Financial Secretary put it:to assist the tendency in industry to help itself and get itself into better form to compete with its competitors.That is all that I want the Chancellor of the Exchequer to do. I want to say one word as to the argument, if you can call it an argument, which has always been put up before us hitherto. No Chancellor has ever used the argument that it would not be good for industry, but we have always been told that it would cost so much money. In 1912, we were told—it was a very rough estimate, I believe— 833 that allowing for coal mines in this country and for mining abroad, it would cost as much as £2,000,000 when the Income Tax rate was 1s. 2d. At the present time, allowing for the extra allowances made in the 1932 Finance Act for deductions for obsolescent machinery, the cost might be perhaps £7,000,000. The Chancellor of the Exchequer may tell me that he could not have such a cut in his estimate of revenue receipts in the present year, but I would most respectfully put to him that surely this should be the very first subject with which he should deal in any contemplated reduction of the Income Tax. The best thing he could do to ensure improvement in the industry of this country would be to cease as soon as possible collecting, in a manner which hinders enterprise and development, a tax on what is not part of the profits of industry.
§ 4.16 p.m.
My hon. Friend has shown to the Committee that the subject of his proposed new Clause has been debated in this House for a good number of years, and he has quoted from debates which took place on the subject over 20 years ago. Hon. Members must have reflected that if, in all those years, so powerful a case has not moved the House of Commons to make the alteration, there must be something more in it than would appear from the considerations which the hon. Member has put before us. Indeed, this is one of the most difficult and complicated questions with which any Chancellor of the Exchequer could try to deal. It bristles with difficulties and is full of pitfalls.
In connecting the proposed new Clause with Clause 24 of the Finance Bill, my hon. Friend was confusing very different sets of conditions. His argument was that the purpose of the Clause was to encourage manufacturers to replace obsolete machinery by something more up to date and better calculated to enable them to compete with their foreign competitors, but the case dealt with in Clause 24 of the Bill is a different one. There is no question there of replacing obsolete machinery by that which is more up to date. There you have a state of affairs in which, owing to changes in trade and the falling off of the business which can be done by the Lancashire cotton industry, there is in existence a very large excess of machinery, more 834 machinery than can possibly be used. By the fact that the machinery is spread over a large number of competing factories, you arrive at the position that no factory has sufficient work to enable it to meet its overhead charges and make profits. The plan there is to reduce the total amount of machinery used in the trade so that work may be concentrated and overhead charges brought down to a more reasonable figure.
With regard to the general question of the allowances to be made for obsolete or obsolescent machinery, great alterations and improvements, from the point of view of the manufacturer, have been made in the last 20 years and since the date when the right hon. Gentleman the Member for Carnarvon Boroughs (Mr. Lloyd George) made the observations which my hon. Friend quoted. A good deal has been done for the manufacturer by way of increased allowances for obsolete or obsolescent machinery, and to-day the manufacturer is allowed not only to deduct a very substantial amount by way of depreciation for wear and tear year by year, but if, in any year, he replaces an obsolete machine by a new and more up-to-date machine, he may write off entirely from the profits of the year the value of the machine which has been scrapped. It is, therefore, difficult to see how you can do very much more than that to encourage the manufacturer to replace his obsolete machinery by something newer.
The Committee will perceive that the proposed new Clause which my hon. Friend has moved goes a great deal further than merely the question of machinery and plant, and deals with inherently wasting assets. That would apply to a coal mine which is, of course, an inherently wasting asset. My hon. Friend has endeavoured to make certain that in such cases the proprietor of the mine should make a deduction from his profits, by way of sinking fund, to meet the wasting character of his capital, which is the coal in the mine, and he has inserted words which are intended to provide that such a deduction must be made, and that such deduction shall not be available as profits. I appreciate my hon. Friend's intention in putting in those words, but I am bound to say from the point of view of the Inland Revenue that I find it very difficult to believe that any effective check could be placed 835 upon such a deduction, to make sure that the deduction was not subsequently made available in some form as profits.
I would remind the Committee that the whole subject was exhaustively investigated in 1920 by the Royal Commission on the Income Tax which was presided over by Lord Colwyn, and that that Royal Commission made a number of recommendations upon the subject, one or two of which are very relevant to the consideration of this Clause. The Commission found it impossible to make any general recommendation that, from the income produced by any asset, allowance should be made for amortisation of its capital value, because once you admitted the principle it might be carried a great deal further than at first sight would seem possible. The first instance of a wasting asset that would occur to anyone is a mine—not necessarily a coal mine—where the source of profits is the mineral to be mined and where there is only a limited stock of mineral which, in process of time, will be exhausted. You might also take the case of the professional man, say the surgeon, whose skill and value lie in his fingers. Everybody knows that the years in which a surgeon is at his best, and can use with the greatest advantage the skill which he possesses, are strictly limited. His capital lies in his own body, which is an inherently wasting asset. One might say the same thing about a barrister or any other kind of professional man.
What the Royal Commission said, in effect, was that they did not believe that people, in considering what was their spendable income, made a careful actuarial calculation in order to make certain that they were not spending some portion of it, and that where there was a reasonable length of life of capital, people ignored it altogether and considered that the whole of the income was spendable. The Royal Commission therefore said that although they could make no general recommendation that allowance should be made for amortisation of capital value, in certain cases an allowance should be made. They recommended that when the life of a wasting asset was estimated at 35 years or more, no allowance should be made. In other words, the allowance should be confined 836 to cases where the life of the asset was under 35 years.
I would quote two other recommendations. The first was that no allowance should be granted to incomes arising from wasting assets which consisted of the proprietorship of natural resources in this country. Ownership of minerals and oil is ownership of natural resources. They made a recommendation also that the allowance for depreciation of mills and factories and other similar premises should not take the form of a percentage of the annual value. The result of that would be to withdraw the special allowances made in 1918, and as in many cases those premises will last more than 35 years, they could not get the benefit of the allowance under the recommendation to which I previously referred. It is not surprising in this situation that the recommendations of the Royal Commission, although made as long ago as 1920, have never been given legal effect. The representatives of industry and commerce in this country, such as the Associated Chambers of Commerce, have never come forward with any expression of desire to see the recommendations carried into effect. They recognise that, though there are some things in the recommendations which they would like to see done, there are other things which they would not like at all and it is impossible to pick out the plums and say that those alone shall be accepted, because the withdrawal of the special allowances would go a good way to compensate for the heavy cost which, my hon. Friend recognises, the adoption of his proposal would mean to the Treasury. In recent years they have confined themselves, not to asking for anything like this, but to discussing more limited questions of allowances for wear and tear and obsolescence of machinery and plant.
I hope that I have said enough to show the Committee that it is a very difficult subject, and one which has engaged the attention not only of my hon. Friend and his Friends but also of a Royal Commission, which went into every aspect of the case and made recommendations which are in many respects at variance with the proposed new Clause of my hon. Friend and that nevertheless the recommendations have not yet found any general acceptance among the representatives of trade and industry.
§ 4.29 p.m.
§ Sir WILLIAM WAYLAND
I suggest that the Chancellor of the Exchequer should give power to the surveyors of taxes in regard to depreciation of machinery. In the case of some machinery, especially that used in the chemical industries and which does not last half or one-sixth of the time that ordinary machinery lasts, owing to the corrosive chemicals which are manufactured in vessels made of iron or copper, the surveyor might be given power to deal with special cases and a great many of the complaints could, in that way, be met.
The case which the hon. Member brings forward is obviously one of wear and tear and not of obsolescence. If there are special circumstances which he would like to bring to my attention, I shall be happy to go into them, if he will communicate with me.
§ Sir B. PETO
In view of the very full explanation which has been given by the Chancellor of the Exchequer, I beg to ask leave to withdraw the Clause.
§ Motion and Clause, by leave, withdrawn.