§ Again considered in Committee.
§ [Captain BOURNE in the Chair.]
§ Question again proposed, "That the words proposed to be left out, to the word 'and,' in page 13, line 12, stand part of the Clause."
§ 6.37 p.m.
§ Mr. Hely-HutchinsonI was saying that the first of these suits, the London Provincial suit, was decided in July, 1935, against the Government, by the Special Commissioners of Income Tax and it may be convenient if I briefly describe the subject-matter of the suit. The London Provincial Trust was the owner of certain Brazilian bonds. When the coupons on those bonds fell due, the Brazilian Government found it impossible to meet them. It therefore issued, in lieu of those coupons, funding bonds equal in face amount to the face value of those coupons. For instance, let us suppose that the face amount of a coupon was £3,the Brazilian Government gave the holder of that coupon, instead of £3 in cash, a promise to pay £3 at some future date 20 years ahead, and to pay interest on the amount of that promise in the meanwhile.
The suit which was decided against the Government by the Commissioners was later decided against the Government in the Court of King's Bench and in the Court of Appeal, but I would like at this stage to point out that the decision in the Court of Appeal went a great deal further than even the litigants themselves expected—and this also applies with greater emphasis to the Paget case—so that if the decision held, the result would have been apparently that in certain cases where bonds had not gone into default and the coupon was being paid in full and in cash, then, if that coupon was collected in a particular way and cashed outside the United Kingdom, the Government would find themselves unable to collect tax thereon.
That is undisputed ground and the general body of taxpayers would not wish 1330 such a situation to arise. It is for that reason that we do not advance our objections to the retro-active principle solely on doctrinal grounds. If it is necessary for the purpose of protecting the revenue in respect of cases which have not been in dispute; if it is necessary to protect the revenue against claims for taxes illegally collected, where the subject-matter of the tax has never been in dispute—if it is necessary for that purpose to apply the retro-active principle, then, little though we like that principle, we feel that it must be suffered. But we are not prepared to suffer its application to cases which have been in dispute between the general body of taxpayers and the Government for some considerable time past, and in respect of which when these cases were carried to court, decisions were given against the Government.
The other case, the Dorothy Paget case, was decided by the Special Commissioners of Income Tax in February, 1936. There were two items in that suit. One was on Yugoslavian bonds, in which the decision was against the Government and the other on Hungarian bonds, in which the decision was for the Government. Both the London Provincial case and the Dorothy Paget case were carried to the Court of King's Bench, and there, a decision was given against the Government in July, 1937. When this decision was given against the Government a number of paying agents who, up to that time, has been deducting from the proceeds of such coupons the relevant amount of tax and paying it over to the Government, under instructions from the Inland Revenue Department—although some of those paying agents disputed in their minds at any rate, the legality of such a proceeding—came to the Government and said, "In view of this decision what are we to do in the future? "The Inland Revenue Department replied on 19th August, 1937, in a memorandum issued from Somerset House. The substance of their reply was an instruction to the paying agents, that the consent of the taxpayer concerned should be obtained before tax was deducted and that he should be informed (1) that the relevant decision of the High Court was under appeal, (2) that any tax deducted in accordance with this arrangement would be refunded by the Revenue if it should ultimately be found not to be legally payable—that phrase is important—and (3) that if the tax was 1331 not deducted and was ultimately found to be legally payable, the taxpayer would be called upon to pay the tax under a direct assessment made upon him.
I refer to that document because it has a special application to one of the provisos to Sub-section (8) which we are now challenging. Proviso (b.) of Sub-section (8) specifically exempts from the operations of the retro-active principle all cases which arose between 29th July, 1937, the date upon which the suit was decided and 27th April, 1938, the date of the Money Resolution following the Budget. The insertion of paragraph (b) is an admission of the justice of the claims of those particular taxpayers, but it is an admission only for a certain period, namely, after the suit has been decided against the Government, and up to the date of this Bill.
Now let us carry this a little further. Both cases were appealed by the Government to the Court of Appeal and were decided by a sweeping decision of the Court of Appeal in January, 1938. I think I am right in saying—the Attorney-General will correct me if I am wrong—that all three judges of the Court of Appeal decided against the Government. The Government gave notice of their decision to appeal to the House of Lords. On 17th March, 1938, the Secretary of the Association of Investment Trusts wrote to the Secretary of the Inland Revenue, because it was getting near to the end of the fiscal year, and it was necessary, in the view of members of the association, to protect themselves for six years back in respect of any claims they might have to make arising out of the cases decided against the Government. It has been the practice for many years, when test cases of this kind are brought, that only the test case itself shall be brought and that all dependent cases shall be deferred until a later time, but in view of the fact that the end of the fiscal year was approaching, it appeared to be necessary to get all these other cases on record, otherwise they might be excluded from claiming back in respect of the first of the six years, namely, 1932. The letter of the Secretary of the Association of Investment Trusts refers to an interview which took place between himself and the Secretary of the Inland Revenue and states:
In regard to the recovery of sums handed over to the Commissioners of Inland Revenue either (a) by deduction from the 1332 proceeds of the sale of coupons in default, or, secondly, (b) by deduction from funding bonds or other securities issued in purported satisfaction of the interest payable under bonds and other securities, or (c) by direct assessment of the bondholders who have received funding bonds for other securities as above.The letter goes on to say thatit was intimated at that interview that consideration was being given to the question of commencing proceedings on or before 5th April for the recovery of sums so paid over to the Commissioners and in order to avoid a multiplicity of such proceedings an assurance was asked that if particulars of claims of members of the Association were lodged by me (the Secretary of the Association) with the Commissioner before that date"—
The Deputy-ChairmanThis is a very complicated matter. I have been listening with great attention to the hon. Member, and it appears to me that he is dealing both with this Amendment and the subsequent Amendment in the same speech. I do not know whether he wishes to pursue that course, but, if so, I am agreeable.
§ Mr. Hely-HutchinsonIf that is agreeable to you, Captain Bourne, the whole matter could be discussed at one time. I think it would be much simpler, though it was not my intention to exceed the limits of order.
§ Mr. BellengerOn a point of Order. Are we discussing the next Amendment also?
The Deputy-ChairmanYes. I was listening very carefully to the hon. Member, and obviously it is very difficult to deal with this case without covering both cases. The point which he was just making was really the point of the second Amendment, and I think it will be for the convenience of the Committee to discuss them both together, reserving the right of the hon. Member to take a Division on the second Amendment if he so desires.
§ Mr. Hely-HutchinsonI am much obliged to you, Captain Bourne. The letter goes on:
then the Commissioners would agree that members so lodging particulars of their claims would be treated as being in exactly the same position as if they had individually commenced proceedings either by way of appeal or petition of right on or before 5th April, 1938.
§ Mr. BensonDoes that mean appeals going back for six years?
§ Mr. Hely-HutchinsonI will try to explain that as far as I am able, but I dare say the Attorney-General will make it clear later on. The reply of the Secretary of the Inland Revenue was substantially as follows:
In reply, I am directed by the Board to give you their assurance that if you, on behalf of members of the Association, lodge particulars of their claim on or before 5th April next, the Board will treat the claims as being in exactly the same position as if those members had individually commenced proceedings whether by way of appeal or petition of right on or before that date.If I may refer to proviso (a) of Sub-section (8), it will be seen that proviso (a, i) exempts from the effect of this Sub-section the actual litigants, and I think I am right in saying that proviso (a, ii) does the same, merely amplifying that. Proviso (a, iii) exempts from the application of this Sub-section only those who have given notice of appeal against an assessment. There are two ways, as I understand it, of collecting tax. One is by deduction at the source, and the other is by making an assessment. If a tax is wrongfully imposed, and if it has been collected by deduction at source, the taxpayer's method of procedure to get it back is by petition of right, but if, on the other hand, it is imposed by an assessment, then his only way is to protest against the assessment within 21 days of receiving the assessment, or else he is out of court for all time. The effect of proviso (a, iii) is to allow those who appealed against an assessment, exemption from the retroactive provisions of this Sub-section, but, if I may say so, it is not a very generous allowance, because unless they appealed within 21 days of receiving the assessment, they are ruled out of court. Consequently, the danger to which the revenue is subjected by proviso (a, iii) is not very great. But no proviso is given for exempting from the operation of this Sub-section the very much larger body of taxpayers who have. during this long period, according to the decision of the court, suffered illegal deduction of tax at the source.We wish to establish, in the first place, that defaulted bonds fall into an entirely different category from non-defaulted bonds. There is an enormous number of different ways in which, on default of a bond, the defaulting debtor seeks to 1334 satisfy his creditor. One of the best known cases is that which is covered largely by Clause 20, to which it may be appropriate to make some reference later, where a funding bond is issued whose face value is equal to the face value of the defaulted coupons; but there are heaps of other ways whereby defaulting debtors have sought to satisfy their creditors; sometimes by paying in part cash and paying nothing on the balance—that is the case with regard to the Grecian bonds—sometimes, as in the case of the Budapest bonds, by paying in blocked currency, in the currency of some foreign country which is only available for payment in that country; and sometimes by payment partly in cash, partly in funding bonds, and partly in blocked currency, which I think is the case in Yugoslavia.
We feel that all those different categories of default require consideration, quite apart from the provisions which affect the collection of Income Tax on securities which are not in default, and I would like particularly to refer to the case of the London and Provincial Trust, where funding bonds were issued of a face value equal to the face value of the defaulted coupons. That arrangement was made in 1933, and for three or four years the Brazilian Government continued to pay interest on those funding bonds, but latterly it has stopped doing so. The essence of the transaction was that when the coupon itself, we will say for£3 became due, the Brazilian Government, instead of paying that coupon, handed to the holder of the coupon a promise to pay £3 at some future date, and the court held that that was not payment of the interest; and I think it can hardly be disputed that it certainly was not payment of the interest, for since then the Brazilian Government has gone into default on the interest on that funding bond, and the likelihood of the principle of that funding bond itself being paid at maturity is very remote.
The second point that we wish to establish is that if, as regards the future, Parliament decides to legislate on such matters as these defaulted bonds and to deem as income what hitherto the courts have regarded as not being income, we feel that that could only be done under the most careful consideration and that Parliament should know exactly what it was doing. Thirdly—and this is the 1335 strongest point of all—legislation with regard to these defaulted bonds should not be made retrospective. I shall leave it to hon. and learned Members who know more about the legal side than I do to deal with the very dangerous situation which may arise if these retroactive principles are applied without discrimination, but, in general, I would like to say that the business community as a whole regard these proposals with the very gravest anxiety.
A few weeks ago, when I was speaking in this House on the Budget, I ventured to make reference to some old-fashioned preconceptions which I entertained on the subject of the duty of Parliament to represent and protect the interests of the taxpayer, and I recall that my right hon. Friend who was at that time Financial Secretary to the Treasury adjured me to continue on that course. Well, here I am. I must say that in some respects I feel a little like Cinderella raking over the ashes of Parliamentary history to find whether any of the old embers are still alight, but I hope that my right hon. and learned Friends the Chancellor of the Exchequer and the Attorney-General will not now leave me alone with my historical reflections on the duties of Parliament, and will not compel me to regard them as the two ugly sisters who go off to the ball and have a good time spending the money.
§ 6.58 p.m.
§ Mr. SpensMay I supplement very shortly what my hon. Friend the Member for Hastings (Mr. Hely-Hutchinson) has said on this subject, but from a rather different point of view? This is an Amendment to the first of a series of Subsections which appear in this part of the Bill making all these Clauses from Clause 18 onward retroactive in their effect, and I would, first, like to say a word generally about the effect of Sub-sections in the Finance Bill which are designed to make effective as from a past date a change in the law of taxation. My own personal view is that where a Chancellor of the Exchequer, as have my right hon. Friend the Chancellor of the Exchequer and his predecessor, gets up in this House and warns persons that if they persist in a certain course, they must expect to find legislation brought in, and that that legislation will be retroactive in its effect, then I feel that we in this House have very 1336 little reason to complain of the carrying out of that threat. But, on the other hand, when you come to cases founded on what has been a long dispute going on for five or six years between taxpayers and those representing them on the one side and the Executive on the other, as to whether or not the Inland Revenue has been right in the past in directing certain deductions of Income Tax at the source, or claiming direct assessments, and that develops after a great deal of discussion into one or more test cases deliberately brought to test the law, it seems to me that, when the Executive decides to change the law into the form in which it would desire it to be as from a past date, the House of Commons has to make very sure that the interests of the taxpayers, are not being unduly sacrificed to those of the Executive.
I want to associate myself again with what my hon. Friend has said as regards this group of Clauses. I do not want to reflect in any way on what was said in the courts, but there is no doubt that the decision in regard to these bonds went substantially further than the particular issues raised between the taxpayer and the Executive, and not only did the courts deal with the particular point brought to them for decision, but they also decided on collateral points which have been the accepted practice between the Revenue and the taxpayer and about which there had never been any doubt between the Revenue and any taxpayer that I know of. In these circumstances it seems to me that where you have a decision of the courts reversing what has been the accepted practice for a number of years, which unless it is reversed will involve the Revenue in having to repay a great deal of tax, and generally cause a great deal of disturbance, there is a fairly strong case for making your change of the law retrospective to some extent. But, when you come to an actual point in issue which has been deliberately fought as a test case, the circumstances should be considered very carefully and very fully in this House.
What does a test case mean? Why do we have test cases? To challenge the Revenue on a major point of real doubt in Income Tax law is a luxury which only a very rich man or woman, or a corporation with substantial funds, can embark upon at all, because once you 1337 start a test case there is only one end to it, either in the House of Lords or by legislation at an early stage before the House of Lords decision has been given, but, generally speaking, anyone who starts a test case has to look forward to being taken up to the House of Lords and, if the final decision goes against him, the costs will be enormous. There has, therefore, grown up in these commercial cases, which are common talk amongst chartered accountants and solicitors throughout the commercial community, a system by which an arrangement is made that a particular case in the name of a particular individual or company shall be taken and the Revenue shall be challenged on that. Everyone throughout the commercial community knows that that is being done. Then, naturally, people in a similar situation to the actual individual or company which is the litigant make an arrangement with the Revenue that their right shall stand or fall with the final decision in the test case. That is exactly what has happened in these cases to which this Subsection refers. You had not only the litigants, not only the persons who had entered formal notice of appeal against similar assessments, or filed a petition of right in order to recover tax, but you had a great number of individuals who either directly or through their accountants or solicitors gave notive to the Revenue that they were awaiting the decision in these cases before they took other action. By that means you avoid a multiplicity of litigation on the same point as the test case and, quite rightly, in these circumstances the Inland Revenue assures them that according to the result of the case their right will be determined.
When, therefore, the case is not allowed to go to its conclusion in another place but, after the decision of the Court of Appeal and before the final determination of the House of Lords, legislation is introduced to deal with the point at issue, it seems to me that it is the duty of the House to make certain that those persons who are interested, and those who base their commercial transactions on the knowledge that the case was being fought, should be fully protected against the retrospective effect of a change in the law. It is because I consider in the main that this Clause does not fully protect all those who should be protected, and that it is impossible in my view to amend it in 1338 detail, that I support my hon. Friend in suggesting that these words should be left out in order that at a later stage a proper Sub-section, drafted so as to protect all those who ought to be protected, should be brought in.
In my view it is impossible that legislation should not be retrospective to some extent. The Law Society and other bodies have been very concerned about the light-hearted way in which the House of Commons lets retrospective legislation go through, but I do not take the general view that you must never have retrospective legislation in connection with a change in the law of taxation. That may be theoretically perfect from the point of view of the lawyer but in practice it is quite impracticable. But I suggest that when we find retrospective provisions put into these Clauses altering the law of taxation, we ought to satisfy ourselves that full justice is being done to the taxpayer. It is because this Sub-section, as drafted, is far too narrow in the protection that it gives to those who would be affected by these decisions, that I think the Committee should strike it out and that my right hon. Friend should bring in another giving a wider protection in accordance with what might quite rightly be regarded as a promise by the Inland Revenue that they would be protected.
§ 7.10 p.m.
§ The Attorney-General (Sir Donald Somervell)Everyone would agree with my hon. Friends who have spoken that legislation with retrospective effect requires in all cases the very careful scrutiny of the House and this Committee, but I think there are certain principles which have in the past been held not only to justify it but to make it right and fair. Although one cannot lay down principles in specific terms I think one can give an indication of their nature. One is that, if the decision of the court makes it clear that the law is different from that which everyone has assumed it to be, and rights, whether of the Government or of taxpayers, have been approved and transactions have been settled on the basis that the law was as it has been assumed to be, there may be a strong case for this House saying that the law shall be deemed always to have been what everyone has assumed it to be.
My hon. Friend who spoke first referred to the decision on which Clause 20 1339 is based. That was a decision under which it was held that, if a foreign Government gave a bond in lieu of interest, the money's worth of the bond was not to be treated as interest. But it is implicit in that decision that, when the final date arrived and the capital value of the bond was paid up, that sum was to be treated as interest. Normally, of course, people have assumed that it was quite the other way and that the redemption of the bond was repayment of capital. Unless you went back and retrospectively made the law what it has always been assumed to be, the revenue would descend on the ultimate holder and say, "You thought you were getting £100 of capital. In fact you were getting £100 of the income of the person who originally held the bond. "That is an example to show that it is not just a one-sided principle applied to protect the revenue, but a principle of general application which may in certain cases protect the rights of the private individual just as much as the Government.
Although the Amendment seeks to leave out the whole Sub-section, my learned Friends agree that, so far as particular matters are concerned, this is a case in which Parliament should be invited to legislate retrospectively. In this matter I am in some difficulty. If I went into too great detail I should weary the Committee, and, if I went into too little, my hon. Friends might think I had not done their arguments justice, so I have to try to steer a middle course.
The point I want to make, first of all, in regard to the retrospective nature of these Clauses, is this. Broadly, everything that has been done is in accordance with practice. It is true that these particular cases were brought to dispute the practice as far as defaulting coupons were concerned. I have information to show that banks and others have always treated interest on defaulting coupons in exactly the same way as interest paid on coupons in respect of which there is no default. One may say that that is the view that everyone would normally take. Many of us may have had the good fortune in one sense, and the ill fortune in another, to have owned some bonds on which there was a partial default. Instead of getting £5, one gets £3but it has never occurred to any of us that that £3 was not income because 1340 it was only part of the sum which, if all the obligations had been fulfilled, we should have got.
§ Mr. Hely-HutchinsonI think that it does occur to a number of people that it is not income.
§ The Attorney-GeneralAll I am saying is that my information is that banks and others, and indeed the facts support it, treated defaulting coupons and bonds in this way until it was challenged, and deductions have always been made. I am not disputing that there are a number of people, rightly as it turned out, who contested the view that that deduction was in accordance with the law. That is why the case was brought. All I am saying is that the general practice has been to treat the interest on defaulting coupons in the same way as interest on non-defaulting coupons. That is an important point to bear in mind.
The other point that is of interest to us in considering retrospective legislation is to have a look at the particular merits and to ask whether these deductions are those which can be plainly shown to have been within the general intentions of Parliament in imposing Income Tax. In that respect I suggest to the Committee that we are on strong grounds in asking them to give these provisions retrospective effect. They all deal with money or money's worth which is given to someone who owns a security. To take the ordinary case, the terms of the security are written out on a piece of paper, on the bottom of which are a number of coupons or tickets which bear half-yearly dates. These are torn off one by one each half year and are negotiated, sold to a coupon dealer, or realised at a bank, or by some means or other they produce money or money's worth. I suggest to the Committee that the money or money's worth received in respect of interest coupons of that character is plainly income. The source, that is, the bond itself, remains. The fruit is in some cases the full fruit, but in some cases unattractive fruit in the form of blocked currency or in the form of bonds may be substituted. I submit that whichever form it takes it is plainly income, and the sort of income which this House clearly intended to come under the general provisions of the Income Tax Acts. I could, indeed, refer to past Acts to make clear that Parliament obviously did intend that these things should be included.
1341 If that is right, it seems to me that we are justified in asking the Committee to give all these provisions retrospective effect, subject to the exceptions which we are making. My hon. Friend the Member for Hastings (Mr. HelyHutchinson) has told us that he was appealing for the taxpayer. I do not quarrel with that at all, but, after all, there are all the other taxpayers, apart from those who own bonds in respect of which there is a partial default. It is for this Committee to say that people who are in fact receiving income should, as far as possible, be treated alike. Suppose A. B. owned a large block of bonds on which there was a partial default, and two or three years ago received in respect of them £1,000 or £1,000 worth of income. He got it subject to deduction of tax. Clearly it was, from an ordinary point of view, income in his hand. If my hon. and learned Friend will not accept that he will put people who own this kind of security in a preferential position as compared with those who get £1,000 of income from bonds on which there is no default. Therefore, it seems to me that, dealing with this matter in this way, we are not asking the Committee to do anything which is unfair.
Just a word or two about the exceptions which are being made. In the case of anybody who has made an appeal against an assessment or is put in the same position as if he had made an appeal against an assessment, his rights are preserved. An assessment is made and in 21 days the taxpayer can object that he is being charged too much. He has not paid anything, and if he objects any rights of that kind are preserved. But there is also the position where we are dealing with a tax which has been deducted without objection in the past and in many cases years ago. The tax has been deducted and the money is in the hands of the Revenue. It seems to me that to allow claims either over the whole field or in a particular class of case to be made against the Crown for repayment of tax deducted in respect of something which is on ordinary principles income, and can only be described as such, would not be justified. My right hon. Friend in making the exceptions in paragraphs (a) and (b) has prevented any legitimate criticism being levelled against the general retrospective effect of 1342 these provisions, which is not challenged in principle by my two hon. Friends.
§ Mr. ToucheWill my right hon. and learned Friend deal with the position of those who lodged claims before the test case of 1938?
§ The Attorney-GeneralIf they were in a position to make an appeal against an assessment they will, under paragraph (a, iii), be exempted from the retrospective provisions. If their position was that they thought they were entitled to make a claim for repayment of tax, either already paid under the assessment or deducted, then the retrospective provisions prevents that claim being made.
§ The Attorney-GeneralI give my hon. and learned Friend the assurance that these people will be in the same position as if they had personally made an appeal against the assessment.
§ 7.29 p.m.
§ Sir John MellorMy right hon. and learned Friend referred to those cases where there has been a partial default in payment of interest and funding bonds are issued in lieu. In some cases as my hon. and learned Friend the Member for Ashford (Mr. Spens) has mentioned, there has been default in payment of interest on those funding bonds. Is it the intention of the Government that the funding bonds when issued should be assessed for Income Tax on their money's worth at that time? If that is so, in some circumstances it might have the consequence that the Government would in fact reap a tax on something worth nothing. Suppose we get the case where funding bonds are issued in lieu of interest and the interest on those funding bonds is never paid and they are never, in fact, redeemed, the recipient will receive nothing in cash at any time. None the less, the Government will have assessed those funding bonds to Income Tax at their money's worth at the time of issue and will have received a tax upon something which in the result is not worth anything at all.
§ It being Half-past Seven of the Clock, and leave having been given to move the Adjournment of the House under Standing Order No. 8, further Proceeding was postponed, without Question put.