HC Deb 16 June 1936 vol 313 cc849-54

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

5.8 p.m.


I have an Amendment on the Order Paper to leave out Clause 20.


I may as well put the hon. Member straight on the matter. He should know that it is not an Amendment. He has an opportunity of speaking against the Clause on the Question "That the Clause stand part of the Bill."


I wish to call attention to the new principle which the Chancellor of the Exchequer is introducing into the Finance Bill by means of Clause 20. The House will be aware that under the existing law an annual value allowance is granted, and that under the rules a deduction from taxable profits is allowed of one-sixth of the annual value of mills, factories, and other hereditaments. This allowance was always intended to recognise the extra depreciation to which industrial factories were exposed. The allowance has appeared in the Finance Acts of 1918 and 1919, and is definitely stated as being of one-sixth value. At one time, prior to the Finance Act of 1918 the allowance was a voluntary one made by the Inland Revenue people. The Finance Acts of 1918 and 1919 superseded the voluntary allowance and indicated definitely the form that the allowance should take. It takes the form of one-sixth of the annual value of the hereditament, and it is the general practice, for the purpose of Income Tax Schedule A assessment, to adopt, as the basis for this one-sixth, the annual value adopted for rating purposes. What is the change which the Chancellor of the Exchequer proposes in this Clause? At the present time the annual value of mills and factories for Income Tax assessment has a hypothetical tendency. The landlord undertakes the burden of repairs, insurance and other expenses necessary to maintain the factory or premises in such a state as to command a certain value.

This is the important point at which the change is being brought into being. Up to now annual value has always included both process machinery and structure. The annual value was the valuation for rating purposes until 1929, and the assessments to Income Tax Schedule A, and was based on the rating valuation, which included process machinery. When the valuers went round the various properties they took into consideration not only the value of the structure itself but of the process machinery. In 1925 the Rating and Valuation Act was passed, setting up a new basis for arriving at annual value, and the effect of that Act was to exclude from annual value for purposes of rating the value of all process machinery. This came into operation for rating purposes in 1929. Assume that the annual value prior to the 1925 Act was £10,000. That included the value of the structure and the machinery. As a result of the Rating and Valuation Act of 1925, process machinery was excluded from that valuation, so that, instead of the hereditament or factory having an annual value of £10,000, the annual value was reduced to £6,000, and that became the basis of rating. But the Rating and Valuation Act of 1925 was not concerned with anything but rating purposes. It was not concerned with Inland Revenue, but the Inland Revenue authorities adopted the annual value arrived at under the 1925 Act as the annual value which was to be the basis of their one-sixth allowance.

Throughout the country small and large factories alike received rather a shock, and after a time a case was taken to the General Commissioners. It was put forward by Hudsons, and was known as the Crawford versus Hudson case. They appealed to the General Commissioners that the Inland Revenue people were not playing the game and were adopting the basis of the Rating and Valuation Act in arriving at an annual value which was not in accordance with the intention of Parliament when it passed the Finance Acts of 1918 and 1919. It affected small and large factories in all parts of the country. An appeal was made by this firm to the General Commissioners of Income Tax, and it was decided that the Inland Revenue people were wrong and should have adopted the annual value, which included structure and process plant. The Inland Revenue were not satisfied and went to law, with the result that Mr. Justice Finlay gave a decision against them, and told them that they were bound to take as the annual value and which to base these allowances the value of the structure and the machinery. As a result of that decision the old annual value was restored and the Inland Revenue people made the allowance of one-sixth on the value of the structure and machinery. Then they appealed to the Treasury, with the result that the Chancellor of the Exchequer has introduced this Clause into the Finance Bill making legal what the courts declared to be illegal.

What is the effect of this Clause? In the first place it was intended that the allowance of one-sixth should be given on an annual value which included the structure and process machinery, but the Inland Revenue by reducing the annual value obviously increased the taxation on industries generally. In the second place, when the one-sixth allowance was made on the gross annual value it was a uniform benefit to all industries, but once machinery is deducted from the annual value then the amount of the one-sixth allowance varies in different industries and different businesses. Take a large engineering works which is highly mechanised, the structure being merely a shell with expensive machinery inside. It is possible for the machinery to be 80 per cent. of the whole annual value and, therefore, the withdrawal of the value of machinery in calculating the annual value is a serious injustice to the owner of such a factory. Where you have steel works with huge furnaces the change in the method of calculating this one-sixth is not quite so serious, but the effect is that whereas before there was a uniform system of one-sixth allowance on structure and machinery you are now introducing a system of allowances which is not uniform. If it is right to give this one-sixth allowance to industry, then it is right that the method of its application should be uniform. I suggest that the Chancellor of the Exchequer should look at this matter again, and if he has to make a change it should be a change which will not wreck the system of uniformity which has been operating so successfully for some years. That is my objection to the Clause.

5.19 p.m.


I understand that the hon. Member for West Swansea (Mr. L. Jones) considers that machinery bears too large a proportion of the burden of rates and taxation. I am not sure that I am quite so keen about this matter as I used to be. There is a great difference between the machinery of to-day and the machinery of the old days. Machinery is supplanting man wholesale. Employers have no consideration for the displacement of men. Indeed, they are relieved from the payment of contributions to National Health Insurance and unemployment. In view of the huge installation of machinery during the last few years I think that the Chancellor of the Exchequer should give his attention to the rating of all machinery again in order to make it bear its fair shave of taxation.

5.20 p.m.


The hon. Member for West Swansea (Mr. L. Jones) has put his case in simple language, and it may be that hon. Members think that they completely understand the situation. But the difficulty about these simple matters is that they are simple because the hon. Member has not given the Committee quite an accurate and a complete picture of what the Clause is intended to do. Therefore, I think it necessary that I should give the Committee a short explanation of what the Clause is intended to do, and I will try to make the matter clear. It is not true that there was uniformity in this matter. There never was uniformity in the rating of machinery until the Act of 1925 introduced a new plan under which machinery was divided into two categories, one which was rateable and one which was not. In assessing valuation for the purposes of Schedule A it has been the practice to fallow the system adopted for valuation for rating purposes and, accordingly, the last valuation for Schedule A followed the Rating and Valuation Act procedure, with the result that valuations for Schedule A of mills and factories containing machinery were in some cases considerably less than they were before, because from that valuation was excluded the value of certain process machinery.

The result was to reduce the taxation of these mills and factories under Schedule A. It is true that the case to which the hon. Member has referred was decided against the Inland Revenue and, as the application in that case was that the valuation for Schedule A should be increased, the first result was an increase of the amount they would have had to pay in taxation. It may seem a remarkable thing that anybody should go to the courts to secure that their taxation might be increased, but the Committee will understand that it did not end there, and that the firm who applied for a reversal of the processes of valuation which had been followed did not do so for the purpose of increasing their taxation but for decreasing it. The decrease arose from this fact, that for the purposes of Schedule D, profits made under Schedule D, there are allowed two deductions, first, the actual amount spout on repairs and, secondly, a statutory repairs allowance. The gross valuation under 'Schedule A is subject to the statutory repairs allowance of one-sixth. When you come to make a deduction from Schedule D you are allowed to deduct not only the actual amount you spend on repairs but also the gross valuation under Schedule A. There are two allowances for repairs, the actual amount spent and also the statutory allowances for repairs.

What is the explanation of that? It seems somewhat anomalous and incongruous. It was a special concession intended to provide for extra depreciation on buildings which were subject to extra vibration on account of the plant and machinery. Therefore, the effect is that you include in your valuation under Schedule A not only the value of the buildings and structural plant but also the fixed processes plant. You increase, of course, the valuation but you also increase the statutory repairs allowances. But when you come to make deductions for Schedule D it is the gross valuation which you deduct, and that gross valuation has been increased by the inclusion of the process machinery. Therefore this double allowance extends from the buildings to the machinery itself. Of course hon. Members' are aware that there is a special allowance for the wear and tear of machinery, so that if the matter had been allowed to stay as it was after the decision in the case of Crawford v. Hudson the owners of factories and mills with process machinery would get two allowances for repairs, the statutory allowances and the extra allowances which are given under Schedule D, and that would have meant a considerable loss to the Revenue which was entirely unjustified on the merits of the case. That is the reason why, the case having been decided on questions of law, we have introduced this Clause in the Bill.

Clause 21 ordered to stand part of the Bill.