§ Those hon. Members who have heard many Budget statements will not be surprised when I say that at this point it is necessary to turn aside from the main course of my story and to deal with certain minor changes in the legislation which controls our taxation, which I shall have to propose in the Finance Bill. In the first place I want to call the attention of the Committee to a practice which is growing very rapidly among the public, of adopting one or more of various methods, all of them completely within the law, of avoiding Income Tax and Sur-tax. Of course, it is very natural that the higher you raise a tax the greater is the inducement to avoid it if you can. Smuggling becomes worth while just in proportion as the import duty is large enough to create a margin which will offer opportunities to make a profit. Total prohibition may evoke such effective methods of evasion as ultimately to bring about its own complete dissolution. In our direct taxation the burden at the present time is high enough to attract the attention of ingenious minds, and their discoveries and inventions have now proceeded to such a point that it is necessary to ask Parliament to intervene.
§ In the time which I have at my disposal this afternoon it would not be possible for me to describe in detail all the various ways, no doubt extremely interesting to hon. Members, in which Income Tax and Sur-tax can be avoided. I shall confine myself, therefore, to just sufficient to explain the Resolutions which later on I shall have to ask the Committee to pass. The first proposal concerns the avoidance 46 of tax by an individual living in this country who transfers his property to persons abroad in such a way that, while he himself retains control over the property and himself enjoys the income from it, in the light of the Income Tax law as it stands at present he does not appear to be in receipt of the income. I am going to deal with that by providing that the income arising from property of this kind shall be taken as the measure of tax liability.
§ The second proposal deals with what are known as one-man companies at home. The existing law contains provisions which are expressly designed to deal with avoidance of Sur-tax by manipulation of companies of this kind, but these provisions have been found to be defective, and I shall propose, therefore, to strengthen them in such a way that it will be possible to put a stop to certain devices which have been successfully employed for evading Sur-tax. As these two proposals I have mentioned both mainly deal with Sur-tax, and as the Sur-tax which is assessed as payable in the current year is the Sur-tax for the year 1935–36, I propose that this legislation shall operate as from that year. The financial effect of these two proposals is expected to give me £2,000,000 in the present year, and in a full year about £4,000,000.
§
There is another practice which concerns both Income Tax and Sur-tax, to which I must draw the attention of the Committee. There has been a very rapid growth, especially recently, in a form of deed, which is, I believe, known as an educational trust. The procedure is of this kind: A parent signs a deed giving part of his income to his child. In his capacity as guardian of the child he receives that income from himself. He applies it to the maintenance and the education of his child. Of course, he is not doing anything more for the child than he would do anyhow, but by just signing that deed he relieves himself of the liability to Income Tax on that part of his income. The knowledge of that device is becoming exceedingly widespread. The other day I came across a printed document which I am told is being issued wholesale all over the country and which gives the most careful directions as to how Income Tax may be avoided by this method. It says, for instance:
47
In our opinion you would meet technical requirements if you draw a cheque payable to Deed of Covenant or Bearer, and pay it into your own Bank Account as if it were a dividend Warrant. This constitutes a desirable contra entry in your Bank Book, but does not involve an out-of-pocket transaction.
It concludes by saying:
Your friends will thank you for an introduction to our scheme, and I should he happy to send you a cheque for 10s. 6d. in respect of any new client introduced and accepted by us.
It is easy to see what is happening. A householder in one of our suburbs receives this document one morning at breakfast and, seeing that it is about Income Tax, of course he reads it with interest, and with growing delight, as he finds that, with perfect safety to him self and in strict accordance with the law, he can substantially reduce his liability to Income Tax. Of course, as soon as he has assimilated this plan, he remembers the precept that you should do to others as you would be done by, and, not despising the half-guinea, he does an act of neighbourly kindness by passing the document over the fence. In due course his neighbour also makes himself acquainted with the plan and earns another 10s. 6d., and before long it has gone right through the street, and there is not a householder in the neighbourhood who has not been introduced to this philanthropic agent who has come to the assistance of the British taxpayer. But there is by no means a monopoly in this business. Agents and canvassers are busy hawking about schemes of this kind on behalf of various companies, and they are making them a means of getting insurance business. I have seen another document left by an insurance agent, which says:
We are going to save you money, and the only condition which I wish to make is that you regard this as confidential and apply every penny of the savings for the benefit of yourself, wife, and children on a Policy with my Company. This would be the only gain I should receive, and as this is my profession I depend upon your word not to divulge the scheme to any other insurance representative.
I would not have the Committee suppose that every transaction by which a man parts with some of his income for the benefit of his child is done for the purpose of avoiding Income Tax, I have no doubt that there are many cases in
48
which the motive is perfectly proper and even laudable, but the effect is the same. The effect in all cases is that Income Tax is in fact avoided, and thus there is created a disparity between taxpayers who are otherwise situated in the same circumstances. Whether you ought to ask a man to pay Income. Tax upon that part of his income which he devotes to the education and maintenance of his children is a matter upon which opinions may differ, but I think everybody will agree that all parents ought, to be treated alike in this matter, and chat it is extremely unfair that, while some are obtaining relief in this way, others, either because they have scruples about employing methods of this kind or because they simply do not happen to know how to apply them, are not only getting no such relief themselves, but are actually having to pay more than their fair share of taxation in order to fill up the gap in the revenue.
§ I propose to provide that the Income Tax liability of parents shall not be affected by these educational trusts, and the legislation will take the form of saying that the income of an infant and unmarried child which is in any way derived from the parent shall be aggregated for all purposes of Income Tax law with the income of the parent. Income, of course, falling to the child aid arising from other sources, such as earnings, or as a beneficiary of a settlement made upon it by some other person than the parent, will be completely unaffected by the change. I anticipate that in a full year the saving from dealing with these educational trusts will amount to £2,500,000.