HC Deb 10 June 1937 vol 324 cc2018-24

For the purposes of Section thirty-four of the Income Tax Act, 1918 (which relates to relief in respect of certain losses), the amount of a loss sustained in a trade shall, in all cases, he computed in like manner as the profits or gains arising or accruing from the trade are computed under the rules applicable to Case I of Schedule D: Provided that, where relief is claimed by virtue of this Section in respect of a loss sustained in a trade which consists wholly or partly in dealing in securities, Section ten of this Act shall apply, for the purpose of computing the amount of the loss, as if Subsection (5) thereof were omitted therefrom.—[Sir J. Simon.]

Brought up, and read the First time. 5.56 p.m.

Sir J. Simon

I beg to move, "That the Clause be read a Second time."

This Clause deals with an Income Tax point, not a very easy one to follow, but one which it is right to deal with because at present there is an anomalous situation which we ought to cure. The Clause is designed to remedy an omission in the existing law, with regard to cases where a person who has sustained a loss in trade and seeks repayment, against that loss, of the Income Tax which was borne upon other income, for example interest or dividends on rents. Then there is the case of a financial concern dealing either wholly or partly in securities. The unintended operation of the present law is that such a firm cannot claim adjustment of its liability on the same lines as other trading concerns can. The peculiarity of a financial concern is that the dividends or interest arising from investments belonging to the concern form part of its trading receipts. If an ordinary private citizen has an investment the situation is different from that of a financial concern whose business consists in dealing in securities, because in the latter case the securities are the stock in trade of the business, and the income from those securities is part of the trading revenue.

It follows from that that a financial concern cannot be said to have sustained a loss in its trade unless there is a loss resulting after taking into account the income from securities. Therefore, it is in a different position from other taxpayers, who can make a claim for loss, if a loss has arisen, without taking into account the income from securities. Suppose there is a total profit of 100,000 from securities and that the result of the other financial activities of the concern reveals a loss of £25,000; the true profit is, of course, £75,000. Under the existing law, the concern pays tax on the £100,000 because there is no loss sustained by the trade as a whole, but a profit. That is a matter which ought to be put right. There have been two possible remedies. The first is that the financial concern could carry forward its loss and set it off against the profits directly assessable to taxation, but that is an ineffective relief. It has proved illusory because the profits have tended to remain at a level below the total income from investments.

The second remedy is that the concern, in so far as it pays out interest on deposits might be regarded as paying this out of fixed investment income. There are cases where you are entitled to claim that the payment you are making is paid out of a taxed fund. There may be circumstances in which an adjustment has been allowed on those lines, but in other cases such relief is not available. This point was considered by the Macmillan Committee, and was included in the draft Income Tax Bill which the Committee prepared. The Committee met the point by providing that the losses on which relief is to be allowable should be computed without taking taxed income into account in any case. The proposed Clause gives effect to the change recommended by the Macmillan Committee, expressing the recommendation in proper drafting language. I have no doubt that the Clause is justified. It is a relieving Measure and is better than the existing law for the reasons which I have tried to explain. At present there is an injustice to one kind of taxpayer, who is entitled to be put into the position of being dealt with as others are dealt with. The cost to the Revenue would be negligible. The relief allowable to financial concerns under the Clause would coincide, except in a few cases with the relief which is already allowed by reference to deposit interest. I commend the proposed new Clause to the Committee in the hope that I have made these complicated matters as clear as possible.

6.7 p.m.

Mr. Alexander

It is always interesting to listen to the Chancellor of the Exchequer speaking upon a matter in which his very great experience comes to his aid, and explaining things to the House. I almost felt, as I listened to him, that he was once more briefed, at a suitable fee, to explain the intricacies of some obscure Income Tax point. I felt at the same time that, however brilliant he may be in that regard, it is a little unfair to many lay minds that we should be faced with a new Clause of this kind which was put on the Paper only last night, and which it is therefore difficult for us to follow. The right hon. Gentleman has assured us that, in the long run, the revenue will not suffer materially by the change pro- posed in the new Clause, but I am not sure that that is the real position. I feel that the special additional allowances now proposed by the Chancellor of the Exchequer are to help the process of combination and integration of corporate bodies, in order to include people in rather less favourable circumstances.

If I understood the Chancellor of the Exchequer aright, he said that this was a case in which a person interested in financial income would not get this kind of relief, but would be taxed on both sides. Where there were corporate bodies receiving a net return from an investment, the assessment at the present time always worked fairly. I speak on these matters not without some experience. If I were speaking solely from the point of view of the movement with which I am connected I should welcome the Chancellor's proposed new Clause, but when one looks at it with a sense of public duty it is evident that it would be better to let corporate bodies that want all the privileges and legal protection of a corporation stand upon their own footing, and not to give them special relief of this kind. I may not have followed quite the whole of the argument of the Chancellor of the Exchequer. I do not know whether my right hon. Friend the Member for East Edinburgh (Mr.Pethick-Lawrence) will want to challenge this proposed new Clause, but even though we do not vote against it, I want the Chancellor—

Sir J. Simon

I do not know how it has happened that longer notice has not been given. I am sorry, because this is a complicated matter. I heard the right hon. Gentleman speak as though this Clause would operate to the relief of the corporate body and not of a partnership or of individuals, but that is not so. I have just inquired. I did not think it could be so, from the terms of the Clause. It depends upon the kind of concern—not that any special adjustment has to be made for a corporate body. The reason is that, when you take a financial concern whose business is the buying and selling of securities, under the general law the interest earned by. the securities is treated as part of the ordinary trading income, Schedule D, whereas with any other person, or, for that matter, any other corporation, whose business is not that of buying and selling securities, the interest from securities is not taxed as part and parcel of their trading income. This is a purely technical point. The right hon. Gentleman will appreciate that the point does not turn upon the distinction between corporate bodies and individuals. I apologise for interrupting him, but I thought it well to get the point clear.

Mr. Alexander

I am much obliged to the Chancellor of the Exchequer. I should like to have the chance of reading the statement of the Chancellor in cold print before I am asked to give a vote upon the proposed new Clause, which is very far-reaching in its effect. If it is not so, I cannot understand the position. The Chancellor of the Exchequer told us that this matter has been actually investigated at length by the Macmillan Committee. What has been taking place in the meantime? I do not quite grasp the situation. If the Chancellor were prepared not to press this new Clause to-night and would give us an opportunity to study it at length, we might be in a position to give a considered judgment upon it if it were brought forward upon the Report stage. If we found, after careful examination, that it met our views, we should be prepared to agree to it. If it be pressed now, I am afraid we should have to divide against it.

6.14 p.m.

Mr. Bellenger

As far as possible I want to elucidate the real object of the proposed new Clause. Even the Chancellor of the Exchequer, with all his legal skill and knowledge, was under considerable difficulty himself, as was evident to the Committee, in explaining the Clause. Am I right in assuming that the Clause affects only the class of company affected by Clause 10, to which this new Clause refers? Do I understand that dividends accruing to ordinary trading companies come into their profit and loss account in gross form? While on the opposite side of the account are debited legitimate charges either for collecting those dividends or for carrying on the business of the trading concern; that the complete profit and loss account is made up, on the credit side, of profits from trade plus gross dividends received, and on the other side, naturally, trading expenses and that the net profit then becomes subject to Schedule D.

Do I understand that this Clause refers to financial trading concerns which, as it were, throw the whole of the dividends on to one side of the account and set off on the other side of the account legitimate trading expenses, so that the net result is the figure under Schedule D? If that be the purpose of the Clause, it would be interesting if the Chancellor would say whether the example I have given is correct, and it would probably enable the Committee to arrive at a better understanding of the Clause. I support the plea which has been made by my right hon. Friend that, as this is a very complicated Clause, and at present very few Members of the Committee can follow it, we should have a further opportunity of considering it, perhaps on Report.

6.17 p.m.

Sir J. Simon

I must say that I think the request made by the right hon. Gentleman is, in the circumstances, quite reasonable. I am satisfied in my own mind that, when there has been time to examine the terms of the Clause, it will be seen that it is as I have described it. If I may say so, I think the hon. Member for Bassetlaw (Mr. Bellenger), as far as I can follow the example which he has given at very short notice, is right, but it is not for me to say. I think, however, it is quite right that there should be no failure on my part to give a proper length of time for the study of a complicated Clause. I have made inquiries, and understand that no difficulty is likely to follow from such a course. We want the Clause, but I am very glad to meet the right hon. Gentleman, and accordingly I ask leave now to withdraw the Clause and I shall put it down for the Report stage. That will not only give an opportunity to hon. Gentlemen opposite to study the Clause, but to myself into the bargain to become more confident of my ground, and I hope we shall be able to add the Clause to the Bill by general consent. I think that this would be a fair course to follow.

6.19 p.m.

Mr. Lees-Smith

The right hon. Gentleman has with great tact and skill withdrawn himself from a situation in which the Government ought not to have allowed themselves to be placed. The point I am raising might equally be raised by hon. Members on the other side of the Committee, as well as by those on this side. Surely no one on either side of the Com- mittee wishes to be put in a position of automatically passing a new Clause which obviously we must all pass without knowing what we are voting about. The Government have, for some reason or other, proposed to put the Committee in that position, and we have not had any explanation why a Clause like this should have been put down only last night, thus placing the Committee and the Government in a position which certainly does not reflect any credit on the Government in having to beat this retreat. Obviously the Government have acted upon advice, and very bad advice. I raise the point because the remark was made to me the other day, and it may be true, that it is the general opinion of Government Departments that they can get away with anything in the House of Commons to-day. This is an example. There is plenty of opportunity. The Clause could have been put down to-night, and then we should have had days in which to see it on the Order Paper. Why should it have been put down last night in order that it might be discussed to-day? The Government have rightly withdrawn from an impossible position, but, although they have withdrawn, we nevertheless protest, not only on behalf of the Opposition, but on behalf of the House of Commons as a whole, at the putting down of the Clause in this way.

Motion and Clause, by leave, withdrawn.