§ (1) There shall be charged, on the profits arising in each chargeable accounting period falling within the live years beginning on the first day of April, nineteen hundred and thirty-seven, from any trade or business to which this Section applies, a tax (to be called the "national defence contribution") of an amount equal to five per cent. of those profits in a case where the trade or business is carried on by a body corporate and four per cent. of those profits in any other case.
§ (2) Subject as hereafter provided, the trades and businesses to which this Section applies are all trades or businesses of any description carried on in the United Kingdom, or carried on, whether personally or through an agent, by persons ordinarily resident in the United Kingdom.
§ (3) The carrying on of a profession by an individual or by individuals in partnership shall not be deemed to be the carrying on of a trade or business to which this Section applies if the profits of the profession are dependent wholly or mainly on his or their personal qualifications:
§ Provided that for the purpose of this subsection the expression "profession" does not include any business consisting wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts.
§ (4) Where the functions of a company or society incorporated by or under any enactment consist wholly or mainly in the holding of investments Or other property, the holding of the investments or property shall be deemed for the purpose of this Section to be a business carried on by the company or society.
§ (5) This Section shall not apply to any trade or business carried on by statutory undertakers and consisting wholly or mainly in the rendering in the United Kingdom of any of the following services, namely—
- (a) the supply of water, gas, electricity or hydraulic power;
- (b) the provision or maintenance of a canal, harbour, dock, pier, road, bridge, ferry, or tunnel;
- (c) the conservancy of a river;
- (d) the carriage of goods or passengers by railway, or the carriage of passengers by road.
§ For the purposes of this subsection and any other provision of this Act relating to the national defence contribution—
- (i) the expression "statutory undertakers" means any local or public authority
2172 authorised by or by virtue of any enactment to render any of the services aforesaid in the United Kingdom, and any other person so authorised who is precluded by or by virtue of any enactment from charging any higher price for those services than that authorised by or by virtue of the enactment or, in the case of a body corporate, is either so precluded or precluded by or by virtue of any enactment from distributing any higher rate of dividend than that authorised by or by virtue of the enactment;
- (ii) the expression "pier" means a pier wholly or mainly used for loading or unloading goods or embarking or disembarking passengers.
§ (6) If the Commissioners appointed for the purposes of the Special Areas (Development and Improvement) Acts, 1934 and 1937, certify that, for the purpose of inducing any persons to establish an industrial undertaking in any of the special areas, it is expedient that those persons, in addition to being provided with financial assistance under Section three of the Special Areas (Amendment) Act, 1937, should be given relief in respect of any national defence contribution which may become chargeable in respect of the profits of the undertaking, the Treasury may agree to remit the whole or any part of any national defence contribution so chargeable.
§ 3.55 p.m.
§ Mr. Michael Beaumont
I beg to move, in line 22, at the end, to insert:but this Section shall not apply to any trade or business where the profits or gains of the trade or business are computed for the purpose of Income Tax under Schedule A.This Amendment deals with the question of taxation under the National Defence Contribution in regard to Schedule A, and with your permission, Sir Dennis, I should like the Committee to consider it in conjunction with another Amendment which deals with the same subject. I am raising this matter solely in order to obtain from the Chancellor of the Exchequer a clarification of the position of those who are taxed under Schedule A, to know who will or who will not be liable to pay the National Defence Contribution. There is no desire on my part that anybody whom the Government wish to include in this new tax should escape, but although one of the purposes of bringing in the tax in its new form was to secure simplification, it is still far from clear, from the proposals as they appear on the Paper who, if anybody, taxed under Schedule A will have to pay this new tax, and if there are any such, how they are to be assessed. Tax under Schedule A is not, in the true sense of the word, Income Tax at all; it is a property tax. It is not a tax on profits, and it is extraordinarily difficult 2173 to assess what are the profits of an undertaking assessed under Schedule A. The number of cases which will come within the scope of this new tax is comparatively small, because these estates are not ordinarily businesses trading for profit within the meaning of these new proposals; but there are a certain number of private estates which have been turned into companies which do, in fact, make a net profit sufficiently large to bring them within the scope of these proposals; and what is not clear is how those people are to be assessed if, indeed, they will be assessed at all. It has been held that a Schedule A assessment does not come within the definition of a trade or business, but the Chancellor of the Exchequer has put down to-day a new Schedule, which appears on pages 1625 and 1626 of the Order Paper, paragraph 6 of which says that that income is exemptwhich is or would he exempted from Income Tax by virtue of Section thirty-nine of the Income Tax Act, 1918, or Section thirty of the Finance Act, 1921.Turning to the latter Act it would appear that what is referred to is Income Tax under Schedule A in respect of lands, tenements, hereditaments and heritages owned by a charity. Paragraph 6 of this new Schedule, speaking of income, also uses the words:or would be so chargeable if the profits of the trade or business were chargeable under that Case.Therefore, it seems to me that the new Schedule, on the one hand, exempts it, and, on the other hand, specifically includes it. What I want to know is, are any profits taxable under Schedule A subject to the National Defence Contribution, and, if so, how are they to be assessed? Schedule A is a property tax, and the actual net amount payable is very often not, assessed till four or five years after the original tax has been paid. What happens is that there is a quinquennial valuation, and for five years that assessment on the property remains. It can be subjected to certain alterations if circumstances change, but, normally speaking, that assessment is valid for five years. When you have paid your tax, supposing that your maintenance expenditure, the money spent on the property, increases, you are entitled within the next six years to make a maintenance claim, and that claim may not be, and 2174 very often is not, settled until four or five years after the tax has been assessed. But you cannot assess profits without taking that maintenance claim into account. The claim is part of your expenditure on the property. This tax is supposed to be for five years, and personally, in common with many other Members of the Committee, I hope that that will be the full limit of its duration. That is the clearly expressed intention of the Government. But it would be most undesirable, if you are to have a tax to last for five years, that the final assessment of the last year's profits cannot be paid until 11 years hence, or six years after the tax has ended.
§ Mr. Beaumont
The hon. Member is making the same point as I am making. The allowance is made, but it is not made until much later. Let me give an illustration. What might happen is this: Take an estate company whose taxation is assessed under Schedule A. In the year 1942, the last year of the operation of this tax, they are assessed under Schedule A. In 1948 they put in a maintenance claim which may reduce their taxable profit to a figure below the margin which brings them within the scope of the tax. Are they to pay on the original assessment? Are they to wait until a the final maintenance claim is pin before they pay at all? Or is the money, assuming that they pay and they find that they have paid too much or should not pay at all, to be refunded to them six years later? I do not mind what solution is adopted provided it is made clear what it is to be, but at present, as far as this part of this simple tax is concerned, people assessed under Schedule A do not know where they are. I have asked that the matter should be clearly explained. It may be explainable in a few words. It should be clearly laid down in the Bill and should be understanded of those who have to pay.
There are three possible alternatives. You may take the view of the Income Tax Act, 1918, and exempt properties under Schedule A. Actually, as I have said, the number of estates affected is very small. The advantage of that method is that you have already your 2175 Income Tax definition. You may alternatively say that you will pay on the original assessment and claim a refund after your maintenance claim has been made out; or you may say that you will not pay at all until the final maintenance claim and final assessment of profits have been made. Those are the three main lines upon which you can go. I do hope that one of them will be laid down clearly. There is a fourth possibility which I hope the Government will not adopt. As the Committee know, anyone who is assessed under Schedule A has the right of choice to be assessed under Schedule D if he so prefers. I do not believe that it is the policy of the Government or the desire of the Government or the Treasury to force people to be assessed under Schedule D if they do not wish it, but if that is their policy it is better that they should say so openly. I hope that they are not going to use this method of compelling people to be assessed under Schedule D because if they are assessed under Schedule A they do not know what tax they have to pay.
It is a very intricate and technical point of Income Tax law. I am not raising it merely on my own poor abilities, for I took some trouble to make investigations. I first of all went to the Treasury, where I got an answer which struck me as palpably absurd. I then consulted the four legal advisers of the four societies dealing with the people most affected, and asked what would be the result of the new Clause, and I got four entirely different and irreconcilable answers. Whether I shall get a fifth from the Chancellor of the Exchequer to-day remains to be seen. I do not wish anyone to escape a penny of the tax which the Government want them to pay, but I do hope that the Chancellor of the Exchequer will realise that this is a serious matter and that it should be clarified. If he agrees with me that the matter is not clear now, I hope that at a later stage he will introduce Amendments to clarify it, or if I and my advisers have merely been stupid, I hope he will be able to explain the point in language sufficiently clear to bring it home even to our intellects.
§ 4.7 p.m.
§ The Chancellor of the Exchequer (Sir John Simon)
I am grateful to my hon. 2176 Friend for raising this point if, as he tells us, it is a point which some persons have found obscure. I hope that in a very few sentences I shall remove some of that obscurity. If I may say so, for this purpose it really is a mistake to get ourselves all tied up with references to Schedule A. It is, I agree, a complicated Schedule in the Income Tax, but it really has nothing whatever to do with the matter in hand. I suggest that my hon. Friend should look at page 1613, where he will find the second of the Clauses we are to deal with, "Computation of profits and accounting periods." The question he asks is, how are the profits to be computed in the case of those companies which are carrying on the business, let us say, of letting blocks of residential flats or things of that kind? If my hon. Friend looks at the new Clause on page 1613, to which I have referred, he will find that it says:For the purpose of the National Defence Contribution the profits … shall be separately computed and shall be so computed on Income Tax principles.It says further:For the purpose of this sub-section the expression Income Tax principles' in relation to a trade or business means the principles on which the profits arising from the trade or business are computed for the purpose of Income Tax under Case I of Schedule D, or would be so computed if Income Tax were chargeable under that case in respect of the profits so arising.It follows from that, that you are not concerned with the machinery of Schedule A at all, but that the profits have to be assessed as though they were profits which in the case of Income Tax came under Schedule D.
§ Sir J. Simon
It says that they shall be separately assessed. Therefore it is another assessment. Let me state the matter in business-like terms. You have companies owning blocks of premises, business premises or premises for private residence, like flats. We all know of them all over the country. In the first place surely it cannot be disputed that those companies which are carrying on the business of letting those premises of the class we are discussing now, come within Sub-section (4), which says:Where the functions of a company or society incorporated … consists wholly or mainly in the holding of investments or other property …2177 for instance, a block of flats, that shall be deemed, for the purposes of this Clause, to be a business carried on by a company. If there is a company that owns a block of flats or chambers or business premises and carries on the business of letting them for profit, such a company is within this Clause. Are we going to tax it? The answer is that it is not to be assessed by reference to Schedule A at all, but the tax will fall upon the sum total of the full rents which it receives after subtracting all expenses. There may be a difficulty in determining what those expenses are, but that is a cause of difficulty in many cases under Income Tax, and it will be solved, of course, in the ordinary way.
I can relieve my hon. Friend's mind. He need not concern himself with the refinements of Schedule A, which has nothing to do with the matter in hand. All that happens is that you have a company which is carrying on the business of letting premises at rents for profit. It will be included under this Clause because it is regarded as carrying on a business. I think the tax could hardly be drawn in plainer terms. It says that the company shall be separately assessed and assessed on Income Tax principles, and the Clause clearly states what Income Tax principles mean. I should imagine that the authorities whom my hon. Friend consulted cannot have had their attention drawn to the passages in the Clause to which I have referred. If they will look at them again I do not think they will have any doubt about them.
§ 4.13 p.m.
§ Mr. Bellenger
The explanation of the Chancellor of the Exchequer is very clear indeed, but I would ask this question. As he knows, property is generally assessed under Schedule A, but it seems to me that under Sub-section (4) of this new Clause the test will be, whether the profit is assessed under Schedule A or Schedule D, as to whether the holders of that property happen to be a company or a society incorporated. If one individual, two, three or more individuals if you like, do not form themselves into a company or a society incorporated, but nevertheless hold large properties, will they still continue to be assessed under Schedule A or will they be subject to the new tax because they will be assessed under Schedule D?
§ 4.14 p.m.
§ Mr. H. G. Williams
I am afraid that the Chancellor of the Exchequer has made me more perturbed than I was before he spoke, not that this matter affects me personally. The Chancellor of the Exchequer's illustration was of a company holding a block of offices or flats. He said that their total rents would be taken into account and expenses deducted, and they would be taxed as if they came under Schedule D, Case I. Let us take the case of a man—not of a company—who has bought a block of houses, or a number of separate houses. If the Chancellor's explanation is right, he will be brought into the tax. [An HON. MEMBER: "No."] Certainly, why not? Let us look at the terms of the next Clause which deals with the computation of profits and accounting periods. It reads:For the purpose of this Sub-section, the expression "Income Tax principles" in relation to a trade or business means the principles on which the profits arising from the trade or business are computed for the purpose of Income Tax under Case I of Schedule D, or would he so computed if Income Tax were chargeable under that Case in respect of the profits so arising.In other words, the profits arising from the letting of houses are not considered under Schedule A, but are to be treated as though they come under Schedule D.
§ Sir J. Simon
I think it is a mistake to start reading the provision as to how people are to be assessed until one has mastered sufficiently Sub-section (1), as to who are to be assessed. If my hon. Friend will look at Sub-section (4) he will find:Where the functions of a company or society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this section to he a business carried on by the company or society.It is only when you have a company which is holding property and carrying on a business of this nature that the tax will attach. The only addition I need make, for completeness, to the assertion I made as to a company which owns a block of flats or chambers and carries on a business, is the case which sometimes arises of a private landowner who turns his landholding into a private company for the purpose of carrying on the business and letting it. If he does that, the business will be taxed. There will be no 2179 tax upon the individual owner of houses merely because he lets the houses to somebody else.
§ Mr. H. G. Williams
I am very grateful to the Chancellor. I would mention the case of one gentleman of my acquaintance who builds houses and sells them. He lets a number of houses also. He carries the whole thing on as one kind of business. [An HON. MEMBER: "He is a company!"] No, he is not a company. He is a builder. He does a certain amount of land speculation, and at any given time he owns a lot of houses. He treats all those activities as being part of the business in which he is engaged, and—
§ Whereupon the GENTLEMAN USHER OF THE BLACK ROD being come with a Message, The CFIAIRMAN left the Chair.
§ Mr. SPEAKER resumed the Chair.