§ 11.15 p.m.
§ Mr. Annesley Somerville
I beg to move, in page 10, line 4, to leave out "as soon as it became due and payable to," and to insert "twenty-one days after its receipt by."
The object of the Amendment is to prevent the taxpayer from being made liable to pay tax on income which he has not yet received. Under the Clause as it stands income may become due and payable on 31st March, and yet may not be paid until the following May. The courts, I understand, have decided that income is not to be regarded as income until it is actually received, and it seems reasonable and just that under this Clause a man should not be called upon to pay tax on income which he has not yet received. I hope the Amendment will recommend it self to the Chancellor.
§ 11.16 p.m.
§ Sir J. Simon
I cannot accept the Amendment. I agree that it has a plausible air, as stated, but we must understand that this Clause has been devised—and I am sure my hon. Friend 1913 entirely sympathises with this object—to prevent, not genuine ordinary transactions, but artificial transactions under various forms. The whole purpose, for example, of Sub-section (2, b) of the Clause would be nullified if we were to introduce a limit like 21 days. If the Committee will allow me I will take this opportunity of offering a general explanation of the Clause. Hon. Members know that, generally speaking, Surtax, which used to be called Super-tax, is a tax borne by the individual. It cannot be borne by companies in the ordinary sense, because, of course, you cannot say that a company is rich because it makes a profit of £10,000 a year and another company is richer because it makes a profit of.£20,000 a year if the second company is a very big one and the first company is a very small one. Broadly speaking, we may say that whereas Income Tax is a tax which attaches to both individuals and to companies, Surtax does not attach directly to companies, though in fact it works back and catches the principal shareholders of a company or, it may be, well-paid directors, as individuals. But if you left the law like that, then it would be possible for an individual to get a few people to join with him and to turn himself into a company and by that operation, and nothing more, to escape Surtax.
That, of course, has been realised for many years, and I think as long ago as 1922 provision was made for dealing with an entity which in form was a company—what was called a "one-man company" or one in which control was actually in the hands of a very limited number of persons, so that really it was nothing more than a form in which the individual put himself. Then there were powers in the Inland Revenue, in proper cases, to challenge that company and to say that, even though it did not distribute dividend in ordinary management, it ought to have distributed dividend, and it would be treated as though the income of the company were the income of the members. There are many cases in which the Revenue has had knowledge of the adoption of these ingenious though, I must add, especially after what the hon—lady the Member for Jarrow (Miss Wilkinson) has said, perfectly legitimate but, as a matter of fact, highly artificial methods by which Surtax was in certain cases evaded.
1914 This Clause deals with three artificial arrangements which are sometimes adopted, mainly for the purpose of avoiding the payment of Surtax. The first is an arrangement of shareholding rights which are used to bring a company within the expression "a subsidiary company," an expression which was used, I think, in Section 21 of the Finance Act, 1922, and which for very good reasons was said not to be within the general law at that time. While, of course, genuine subsidiaries of a genuine public company ought to be, and are, protected, the tax-avoider, with his one-man company, can create a second company with a capital of a more or less nominal amount held equally by a number of persons not exceeding five. This second company is given the majority of the shares in the one-man company, and so the latter becomes a subsidiary company. Then, says the ingenious gentleman, you cannot call upon that subsidiary company to explain why it does not distribute its dividends, or whatever it may be, and it is entitled to all the advantages of being a limited company, because it is a subsidiary company and, therefore, not within the law affecting one-man companies. In Subsection (1) of this Clause we are proposing to limit the definition of a subsidiary company so as to exclude any company which has, under any one of the various tests of control, been found to be under the control of not more than five persons none of whom is a one-man company. I do not flatter myself that I have succeeded in making that rather elaborate proposition entirely plain to everybody, but I think I have probably made it plain to those who are familiar with the subject, and anybody who has studied the Clause will see that that is the effect of Sub-section (1).
The second device was quite different. It took advantage of the fact that under the law as it now stands the Special Commissioners of Income Tax—who are the people who would have to call a one-man company to account and, in certain cases, deal with its income as being the income of the person who owned the company—can only take action by reference to the year or other period for which the company has made up its accounts. Apparently a simple way of turning that corner has occurred to some people. They 1915 have a one-man company that does not make up its accounts, and that one-man company may sometimes link itself up with another one-man company, so that you are continually having a succession of one-man companies, none of which makes up its accounts in such a way as to come within the purview of the Special Commissioners. Perhaps we ought to have thought of that before, but we have found out how to stop it now. We propose to stop it by Sub-section (2). The Committee will see that it will not only be impossible for the taxpayer to escape indefinitely, but it will be impossible for him to bring about a time lag in payment. The Sub-section will give the Special Commissioners alternative power to deal with the income of the company by reference to the income of the year of assessment as an alternative to the income of an accounting period.
The third device fastens on this fact, that the Special Commissioners, in apportioning the income of the company for the purpose of charging the Surtax of the people who between them own and control the company, can apportion any income arising before the liquidation of the company only by reference to the rights which the members of the company have in distributions of income. It appears that investment companies which are avoiding tax are being formed with a small capital in which the one man in control holds only a few shares of a special class entitled merely to a small fixed dividend, but at the same time he is entitled on a winding up to the whole of the surplus assets after paying off the small amount of capital. A second class of shares held by several persons, usually persons with a very small income, is entitled to the whole balance of any income distributed after paying the small fixed dividend to the first person I have mentioned, but in winding up is entitled merely to repayment of the amount paid up. In working out that system the tax avoider retains full control over the affairs of the company and keep his hand on them, and he can secure that no distributions of income are actually made to the holders of the second class of shares, although most of the income has to be apportioned to them by the Special Commissioners. Sur-tax only attaches when income is of a certain size and the appor- 1916 tionment to these people involves little or no tax. That is a highly artificial arrangement.
These three matters have been brought to our attention, and, in order to defeat this extraordinarily artificial device, Subsection (3) gives the Special Commissioners, for the first time, power to apportion the income of an investment company by reference to the respective rights of members on winding up as an alternative to their present power of apportioning by reference to their rights to income distributed as dividend.
These are the three extremely artificial methods. They are perfectly within the law, but they are methods of the same general nature as those which my predecessor set out to stop in the Finance Bill last year. I would remind the Committee that he then said:I would wish to make it quite clear that I do not consider that, in The future, people will be entitled, if they find new methods of avoiding taxation of a similar character to these which are dealt with in this Bill, to say that they are protected by anything I do now from retrospective legislation. I give them fair warning, and after that warning I think they will have no reason to complain if retrospective legislation should be found necessary in this particular class of case."—[OFFICIAL REPORT, 1st July, 1936; cols. 442–3, Vol. 314.]We have thought it right that these provisions should be retrospective, and Subsection (5) provides that the provisions of the Clause shall have effect for the purpose of assessment for the year 1935–36 and subsequent years. I would point out that this is a very special case. Parliament set out last year to prevent artificial arrangements which would evade the intentions of the law. Three methods have been evolved which do give opportunities for evasion, and we propose not only to stop them from having effect in the future but to treat them as not having had that effect from last year. Ample notice was given by the Chancellor.
The speech of the right hon. Gentleman would have been more appropriate to the Question of the Clause standing part of the Bill. After that speech I think we had better have a discussion of the Clause on this Amendment, but on the understanding that it is not repeated on the Question of the Clause standing part.
§ Mr. A. Somerville
Will the Amendment standing in the name of the hon. Member 1917 for Cambridge University (Sir. J. Withers) be called?
No, not after the Chancellor's statement, but any question on it can be raised now.
§ Mr. Pethick-Lawrence
I would ask the Chancellor to explain the proviso under Sub-section (5). The Sub-section provides for retrospective action, but the second paragraph of it appears to make an exception, and I do not quite see why it is there.
§ 11.33 p.m.
§ Mr. Somerville
On the general question I should like to point out that Parliament has always objected to retrospective legislation. Last year my hon. Friend the Member for Cambridge University (Sir J. Withers) did raise the point and got some small concessions from the Chancellor. If legislation is retrospective it becomes very hard on the individual or the company. They do not know their position. It is a very dangerous weapon. For instance, the revenue officers may bring a case against a man in court and he may win, and then retrospective legislation may undo the result. Retrospective legislation might also increase the tax upon co-operative societies, on the ground that they have not been sufficiently taxed in the past. I submit that although this provision has been modified to some extent, retrospective legislation is a dangerous thing and not in accordance with the practice of the House.
§ 11.35 p.m.
§ Colonel Nathan
Notwithstanding what was said, by my hon. Friend the Member for North Aberdeen (Mr. Garro Jones) from these benches, I feel that all legislation for retrospective taxation must be looked at with the utmost care, otherwise real injustice may be done, and injustice which the Legislature never intended. Let us take this Clause and the explanations given by the Chancellor of the Exchequer. I refrained from putting down any Amendment to this Clause, and decided to await elucidation from the Chancellor of the Exchequer. The Clause relates to companies, but the right hon. Gentleman did not draw attention to Sub-section (4) which extends the definition of "company" so as to include industrial and provident and co-operative societies and friendly societies, which are thus put on the same footing as investment 1918 companies and other companies organised under the Companies Acts. In the Finance Act, 1936, Section 18 dealt with the question of tax avoidance and, in a proviso, provided that it was open to the person whom it sought to charge with the tax to go before the Special Commissioners and prove that the motives which actuated him in the transaction to which he was a party was not those of tax avoidance. The Chancellor of the Exchequer has drawn attention to-day to the warning—so described—given by the later Chancellor of the Exchequer on the subject of tax avoidance and retrospective legislation as regards taxation, but the Chancellor made it clear to-day that the warning related to transactions undertaken after the warning was given.
There has come under my observation a series of transactions relating to industrial and provident societies which conducted their business through a certain organisation, with no idea of tax avoidance, because they did not come under the Finance Act, 1922, at all. For a period of years it had been a matter of convenient machinery adopted by the societies in question. These societies have all been wound up, and a liquidator has distributed their assets, which other people have bought. It happens that these societies were finally liquidated a few clays after the beginning of the financial year 1935. I put it to the Chancellor that in such a case the question, "taxation or no taxation" was not an element taken into account. A great injustice would be inflicted by the imposition of retrospective legislation.
§ Mr. Garro Jones
I should like to find a basis of agreement with my hon. Friend who has just spoken. Is it not possible for accountants, in investigating the accounts for the purchase or transfer of a business, to satisfy themselves, as they do on other points, that there has been no tax avoidance which would lessen the value of the transaction?
§ Colonel Nathan
I do not follow the interjection. The question of taxation or no taxation is not one for accountants, but depends upon an Act of Parliament. The question whether there was any liability or not for taxation was dealt with in the proviso which the Government advisedly inserted in analogous circumstances in Section 18 of the Finance Act, 1919 1936, for the express purpose of meeting such a case as I have related, and to enable the taxpayer or the person sought to be charged with tax, to go to the Special Commissioners to prove that the motives of tax avoidance did not enter into this series of transactions. Therefore I would ask the Chancellor of the Exchequer to consider the advisability and desirability of inserting some such proviso in the Bill on Report.
§ 11.40 p.m.
Sir Alfred Belt
In the Debate on this and the preceding Clause so much has been said on the question of retrospective legislation that I hope I may be allowed to offer two or three brief observations on the subject. The proposal to introduce in this Clause a comparatively innocuous innovation has led certain members of the Opposition to open their minds to the Committee as to how they would like to see that innovation extended if, I assume, they were in office. The hon. Member for Jarrow (Miss Wilkinson) said that whereas certain persons were successfully evading payment of taxation in her constituency, poor people were being brought before the law for matters of 3s. or 4s. Every Member who represents a poor constituency, as I do myself, feels great sympathy for those who have to pay these sums, which it may be very hard for them to pay, but I think it should be pointed out that the reason why they are before the law is that they are actually breaking the law as it stands, whereas—
§ Sir A. Beit
I was only contrasting the argument of the hon. Member for Jarrow with the allegations made against persons who are said to be breaking the law by evading taxation when they are not breaking any law, and the law is now being amended to deal with the action they have taken in the past. If this principle of retrospective legislation is further adopted, I can imagine some Government in the future, less benevolent than the present one, introducing an Act, say, to increase the Income Tax by is. in the over the previous four or five years, and that is with that in mind that I rise to make a protest against the innovation of retrospective legislation.
§ 11.43 p.m.
§ Mr. Ede
I listened with great interest to what the Chancellor said, and noticed that in speaking on this Clause he used a word that he used on the previous Clause; he described the transactions which he now proposes to make illegal as having been legitimate in the past. Perhaps, on some strict dictionary meaning of the word, they may have been legitimate, but I should have preferred to say they had been legal in the past. The word "legitimate" would place them in a category that is almost honourable, and I do nod` think that even the right hon. Gentleman, special pleader as he can be on occasion, would care to have to get up and say that the transactions he has been describing have ever been in the category of being honourable. Unlike the hon. Member who has just spoken and my hon. and gallant Friend the Member for Central Wandsworth (Colonel Nathan), I welcome this indication that the Government intend to implement the promise, or the threat—according to the point of view from which it is regarded—that was made by the present Prime Minister last year in his Budget speech. It is a very good thing that it should be understood thaf these dishonourable practices, which may have been legal in the past, but which were designed by people to enable them to avoid what were undoubtedly their just dues to the nation, are to be brought to an end.
If the right hon. Gentleman finds that even this wonderful watertight Clause has leaks in it by the time he comes to us next year, if we have the misfortune to be faced by him next year, he will have our support in endeavouring to stop those leaks and getting some of the water hack that may have been spilt in the meantime. I can only express my surprise that the hon. Member for Cambridge University (Sir J. Withers) and the hon. Member for Windsor (Mr. A. Somerville) should have seen fit to put their names to an Amendment designed to prevent the retrospective application of the Clause. I should have thought they might be more profitably employed than in standing up for this the worst of all lost causes.
§ 11.46 p.m.
§ Mr. Gallacher
I cannot understand how it is possible for anyone associated with the great movement which represents the masses of the people to take a 1921 stand against such a proposal as a retrospective tax of this kind. We have continually had to face the fact that taxation was being evaded. Last year there was quite a difference of opinion as to whether it was evasion or avoidance, but the fact of the matter has always been that great patriots will not be taxed if they can find a method of dodging it. What prompted me to rise was not the support for the dodgers which has come from this side, but the right hon. Gentleman's reference to the hon. Member for Jarrow (Miss Wilkinson). He said, in connection with her statement in relation to the unemployed and the tax dodgers, that their dodging was quite legitimate. It is always legitimate when they dodge, but it never is when the workers dodge. Let the Government make a comprehensive Clause so that if these people in any way evade payment of taxation they will be liable to a month, or six or 12 months in gaol. We are told that it is the fellows on the Stock Exchange who have helped to prepare this, but they would not face up to the regulations that the Unemployment Assistance Board makes. If you get the sheriffs on the job they will stop tax-dodging, by applying to the men with big incomes exactly the same kind of treatment as is applied to people in such areas as Jarrow. I object to the right hon. Gentleman getting away from his responsibility and the argument of the hon. Member in such a way as that. We on this side cannot support the artful dodgers, but I wish that the Government had dealt with them in a clear and comprehensive Clause which would have stopped all forms of tax evasion by these people.
§ 11.52 p.m.
§ Lieut.-Colonel Colville
I do not propose to follow the hon. Member for West Fife (Mr. Gallacher) because if he will forgive me for saying so, it is obvious that he has not listened to the Debate. He is under a complete misapprehension as to what my right hon. Friend said. The right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) asked the purpose of the proviso to Sub-section (5). It is this: If a company had made up accounts before 21st April, 1937, that in itself is proof that there was no intention to defraud by the device of delaying making up accounts. The reason the clause is made retrospective is because of the forth- 1922 right warning given by the then Chancellor of the Exchequer and quoted by my right hon. Friend the Chancellor of the. Exchequer to-night that, if those concerned deliberately evaded the provision then made, the further legislation which would be necessary would be retrospective. I agree with those hon. Members who have urged that retrospective legislation should not be indulged in without very good reason, but in this case there is no justification for the complaint. With regard to the appeal made by the hon. and gallant Member for Wandsworth I can assure him that the type of companies he mentioned need have no fear of the kind he suggested. The clause is designed to catch the deliberate tax evader only.
§ Colonel Nathan
May I say, in view of what has been said, that I was not supporting those who indulged in tax evasion, but asking for a safeguard which was supported and voted for on these benches last year?
§ Amendment negatived.
§ 11.55 p.m.
§ Lieut.-Colonel Colville
I beg to move, in page 11, line 23, after "which," to insert "before the twenty-first day of April, nineteen hundred and thirty-seven."
This is little more than a drafting Amendment. The Committee will remember that Sub-section (2) of this Clause is intended to enable the Special Commissioners to meet the case where a "one-man" investment company has not made up accounts and where, heretofore, they have not been able to take action. So far as the year 1935–36 is concerned, it was thought reasonable to limit the effect of the Sub-section to cases where no account had been made up; where such an account had been made up for a period ending in that year, the Commissioners would already have had their opportunity of taking action. But, as the proviso is at present drafted, its effect is not confined to cases where an account has already been made up in normal course. Its wording would leave it open to a company to prepare now an account to some date ending in 1935–36; and in doing this they could easily choose some period for such an account during which practically no income has been received. The company would then come within the proviso and the Commis- 1923 sioners could take no action under Subsection (2) in respect of the rest of its income, which might be very large, for the remainder of the year. We think that it is, therefore, desirable to insert these words and make it perfectly sure that a company could not now prepare an account which would defeat the intention of this proviso.
§ Amendment agreed to.
§ Further Amendment made: In page 11, line 24, to leave out "that year," and insert "the year 1935–36."—[Lieut.Colonel Colville.]
§ Clause, as amended, ordered to stand part of the Bill.1924
§ Motion made, and Question, "That the Chairman do report Progress, and ask leave to sit again," put, and agreed to.—[Captain Margesson.]
§ Committee report Progress; to sit again To-morrow.
§ The remaining Orders were read, and postponed.
§ It being after Half-past Eleven of the Clock, Mr. DEPUTY-SPEAKER adjourned the House, without Question put, pursuant to the Standing Order.
§ Adjourned at Two Minutes before Twelve o'Clock.