CLAUSE 18.—(Amendments of Schedule C and consequential amendments of Schedule D.) (Hansard, 27 June 1938)

§ The Chairman
Sir John Mellor.

§ Mr. Benson
On a point of Order. I think I was in possession of the Floor when the Debate was interrupted. I believe that the hon. Baronet had already resumed his seat, and I had risen and been called upon by the Deputy-Chairman.

§ Sir John Mellor
I am afraid that it has been quite impossible for me to hear anything of what the hon. Member has just said.

§ The Chairman
Perhaps I might assist the hon. Baronet if the hon. Member for Chesterfield (Mr. Benson), will allow me—he will perhaps correct me if I do not state the matter quite as he wishes. I called the hon. Baronet because I gathered from the OFFICIAL REPORT that the hon. Baronet was in possession of the Floor of the Committee at the time the Debate was interrupted. The hon. Member for Chesterfield has just risen to a point of Order to say that he understood that the hon. Baronet had finished his speech and that he himself had been actually called.

§ Sir J. Mellor
My recollection is that I resumed my seat because I had put a question to the Attorney-General and expected an immediate reply. I thought that the Attorney-General was about to rise to his feet, but as soon as I found that he was not going to do so, I rose and asked for a reply. At that moment the Deputy-Chairman stopped the discussion, and left the Chair.

§ The Chairman
It is clear that the hon. Baronet did not finish his speech, and perhaps the hon. Member for Chesterfield would allow him to continue.

§ Mr. Benson
Certainly.

§ Sir J. Mellor
When the Debate was interrupted last Thursday for a discussion of the question of the bombing of ships in Spanish ports, I had asked the Attorney-General a question relating to the decision on the taxing of funding bonds. I understand that under the Bill as it is drafted funding bonds will be assessed to Income Tax on their money's worth at the date of issue, and I was putting to the Attorney-General the case where a funding bond had been issued, but no interest had ever been paid in respect of it, and the funding bond itself had never been redeemed. The case would then arise of the revenue having collected tax in some shape or form, although, in the result, no cash would ever have been issued for the bond by way of interest or redemption. I note under one paragraph of the Bill that it is competent for the responsible agents who issued the funding bonds to retain a certain proportion of funding bonds and hand them over to the Revenue authorities in lieu of the amount due as taxation, but it is also provided under another paragraph that, in the discretion of the Commissioners of Inland Revenue, they shall be allowed to dispense with that arrangement and that, in those circumstances, they shall be acquitted of liability upon furnishing to the Commissioners the names and addresses of persons who are ultimately entitled to receive the funding bonds.

§ Mr. Denman
On a point of Order. May I ask, in order to clarify our Debate, whether we are now discussing a question which arises on Clause 20 as well as this sub-section? If so, perhaps we had better have a considerable Debate now and have done with it.

§ The Attorney-General (Sir Donald Somervell)
I am entirely in the hands of the Committee. The Amendment moved by my hon. Friend relates to the question of retrospection in these matters. I understand the point which the hon. Baronet is raising now to be one which I should have thought arose under Clause 20. It has nothing to do particularly 1561 with retrospection, and there are other Amendments on the Paper on the question of funding bonds.

§ Sir J. Mellor
I appreciate the point made by the Attorney-General but, as the discussion last Thursday appeared to range over Clauses 18 to 20 of the Bill, I thought that if I did not raise this point now I might miss the opportunity altogether. I shall be glad of your guidance, Sir Dennis, whether you desire me to proceed or whether I shall have a future opportunity of raising the point.

§ Mr. Hely-Hutchinson
The point of the hon. Gentleman seems to cover the mechanics of the deduction of tax as well as its equitability. In replying, the Attorney-General touched on the whole question, on the ground that all these instances fell into a class which was, on ordinary principles, regarded as income.

§ The Chairman
I have had my attention called to what took place in regard to this matter when it was previously before the Committee. I could not admit upon this Amendment a general discussion which would cover two other similar Amendments on subsequent Clauses unless I received a definite understanding from the Committee as a whole that the later Amendments would not be debated, or would not be moved. There are, no doubt, certain points in which the Amendments could all be affected by certain arguments, but there are differences in the Clauses which would mean that certain arguments relating to Amendments to later Clauses would not be admissible on Clause 18. I do not know whether hon. Members who have their names to this Amendment wish to move the later Amendments, but if they do, the discussion, in so far as it goes beyond the general matter applicable to all the Amendments, would have to be reserved until those Amendments are reached.

§ Mr. Pethick-Lawrence
I suggest that we take now a discussion on the general retrospective principle, whether it comes in Clauses 18, 19 or 20. That is a definite issue by itself, and if we cover it, it would be open to us to deal with any other aspect of the Clauses on separate Amendments.

§ The Chairman
With the general assent of the Committee, that would be the most reasonable course. The other Amend- 1562 ments will be called in due course, but on this Amendment the discussion must be confined strictly to this Amendment on this Clause. When we come to the similar Amendments on the other two Clauses we shall have to rule out so much as has already been said on the first Amendment in regard to the general principle of the retrospective nature of the Clause. That would delimit the debate on the other Amendments to the particular points in which their effects on those Clauses differ from the effect of this Amendment on this Clause. I think that we shall have no difficulty in that respect.

§ Mr. Bellenger
May I remind you that the hon. Member for Hastings (Mr. HelyHutchinson) referred to this question of funding bonds in Clause 20, as will be seen in columns 1333–35 of the OFFICIAL REPORT for last Thursday? In reply, the Attorney-General touched on the question.

§ The Chairman
This is another point altogether. I have before me the OFFICIAL REPORT, and I gather that the hon. Member asked a question of the Deputy-Chairman: Are we discussing the next Amendment also?", that is to say, the next Amendment on this Clause—in page 13, line 12, to leave out "and," and to insert: or (iv) any written notice given before that date by or on behalf of any person of an intention to appeal against any assessment or to make a claim in respect of any deduction of tax in respect of any dividends or proceeds of sale or realisation referred to in this Section. I see no reason to disagree with what was said by the Deputy-Chairman on that occasion, whose reply was: Yes. I was listening very carefully to the hon. Member, and obviously. it is very difficult to deal with this case without covering both cases."—[OFFICIAL REPORT, 23rd June, 1938; col. 1332; Vol. 337.] As the Committee has already assented to these two Amendments to Clause 18 being discussed together, when we dispose of the first one the second will be put to the Committee, if that is desired, only for purposes of Division, and not for discussion.

§ Colonel Gretton
There are two Amendments later on the Paper to Clauses 32 and 34. Both relate to family settle- 1563 ments, and the principle of retrospective action is involved in them. Would your Ruling apply also to those two Clauses, which deal with an entirely different subject? The Amendments to which you referred relate to commercial arrangements, but the others deal with family matters, and there would be quite a different set of arguments, although they would be associated with the principle of retrospective application.

§ The Chancellor of the Exchequer (Sir John Simon)
I trust that we shall not take any matters arising under Clauses 31 to 34 now. They come in an altogether different Part of the Bill.

§ The Chairman
It is clear that what I have said does not apply to those later Clauses.

§ Sir J. Mellor
I take it from your Ruling, Sir Dennis, that it would be the proper course for me to discontinue my comments on the question of funding bonds and to refer only to retrospective legislation. Certain Clauses in the Finance Bill have been aimed at the question of evasion, and the Government justified their retrospective proposals on the question of evasion because they said that taxpayers had been warned last year that, if they found further loopholes for evasion, they would be dealt with by retrospective legislation. But in the cases under discussion there has been no suggestion whatsoever that anyone has been guilty of evasion, and, of course, no warning of any sort has been given. On the contrary, such discussions as appear to have taken place have been rather misleading to the taxpayer.
My hon. Friend the Member for Hastings (Mr. Hely-Hutchinson) read some correspondence between the Secretary of the Association of Investment Trusts and the Secretary of the Inland Revenue Department, and it was made quite clear, in a letter dated 18th March from the Secretary of the Inland Revenue Department to the Secretary of the Association of Investment Trusts that, in cases where members of the Association had notified the Inland Revenue that they intended to make a claim with regard to matters decided in the Paget case and the case of the London Provincial Trust, which were then the subject of possible; 1564 appeal, whatever might be ultimately decided in those two cases, members of the Association who gave notice to the Inland Revenue that they intended to make a claim would be in no worse position than the litigants in those two cases. There was a very definite assurance on that point. But the Attorney-General on Thursday, in his reply to the speech of my hon. Friend the Member for Hastings, did not deal with that correspondence at all, but made a reply which I do not think really meets the case. According to that reply, it seemed to me that members of the Association of Investment Trusts who, acting on the assurance contained in the letter of 18th March from the Secretary of the Inland Revenue, refrained from giving formal notice of appeal, and contented themselves with merely lodging a notice of intention to appeal, will be excluded from the protection provided in Clauses 18 to 20 of the Bill for those people who have given formal notice.

§ The Attorney-General
I did deal specifically with this matter on Thursday. I said that, so far as appeals were concerned, those who under this letter were in a position to put in an appeal at this time—that is to say, in whose case the 21 days had not expired—would be in exactly the same position as if they had put in formal notice of appeal, and would come within the exception in paragraph (a, iii).

§ Sir J. Mellor
I am obliged to the Attorney-General for making it clear that in fact the assurances contained in the letter of 18th March will be fully honoured by the Government. If that is his assurance, I am quite satisfied, and have nothing further to add.

§ The Attorney-General
I do not want there to be any misunderstanding. I said exactly what I have just repeated with regard to appeals, but my hon. Friend now asks me if the assurances given in that letter will be fully honoured. That is rather a different matter, because I do not read the letter as saying what he says it did. A few moments ago he said that the letter stated that those who gave their names by this date would be put in the same position as the litigants,. by which I understood him to mean Miss Dorothy Paget and so on. But it does not mean anything of the kind. The letter 1565 says that they would be in the same position, not as any existing litigants, but as if they had commenced proceedings on that date. I pointed out on Thursday, and I now repeat, that, so far as claims for repayment of tax, by petition of right are concerned, they are excluded by the retrospective provision, but that appeals against assessments given in time would be within proviso (a) (iii).

§ Mr. Benson
I feel that I must apologise to the Government for butting into what seems to be a private quarrel between themselves and those who might, euphemistically in the case of this Amendment, be called their supporters. The hon. Member for Tamworth (Sir J. Mellor) seems to regard retrospective legislation as a punishment for tax evasion—

§ Mr. Macquisten
Retrospective legislation is a crime. It is always a crime.

§ Mr. Benson
I think that retrospective legislation is justifiable in any circumstances where it does not inflict an unjust hardship upon those whom it affects, and I do not think that the retrospective legislation proposed by this Clause of the Bill can be said to impose any injustice upon anyone. I should like very sincerely to congratulate the hon. Member for Hastings (Mr. Hely-Hutchinson) on the extraordinary clarity of his opening speech on these Amendments. The subject is an extremely difficult one, and he made it very clear. But I am not sure that his very clarity has not let him down; had he been a little more obscure, the weakness of his case would not have stood out in such bold relief.
He attempted to establish two distinct points. The first was that defaulted bonds fall into an entirely different category from non-defaulted bonds, and could not in justice be taxed. His second point was that the retrospective legislation proposed, that is to say, the barring of petitions of right, was also unjust. As to whether defaulted bonds are different from non-defaulted bonds, the hon. Member cannot take his stand upon the legal decision; if he is to establish his point, lie must establish it, not upon legal technicalities, but upon clear grounds of equity, because in fact the legal decision does put defaulted bonds and certain non-defaulted bonds in the same position. 1566 Therefore, he cannot possibly stand upon the legal decision, more particularly as he waives the right to retrospective repayment of tax on those bonds which come within the legal decision but upon which default has not been made. He must rest his case purely upon general considerations of equity. In his speech he used one argument only. Referring to the Brazilian bonds, he said: I think it can hardly be disputed that it certainly was not payment of the interest"— he was dealing with the issue of a funding bond in lieu of the coupon— for since then the Brazilian Government has gone into default on the interest on that funding bond, and the likelihood of the principal of that funding bond itself being paid at maturity is very remote."—[OFFICIAL REPORT, 23rd June, 1938; col. 1334, Vol 337.] The argument, therefore, is that, if a bondholder receives something which ultimately may become valueless, he should escape taxation. I suggest, however, that the ultimate value of what is received for a defaulted bond is no concern of the fisc. The fisc is concerned with the value given at the time of payment, and the Brazilian bonds definitely had a market value when they were issued, though it may not have been as much as the bondholders anticipated.

§ Mr. Macquisten
You could not have sold any of them.

§ Mr. Benson
Most certainly you could. They had a value at the time of issue, but, even if they had no value at the time of issue, that does not alter the principle. The principle remains that the value of the funding bond at the time of issue is the taxable entity. The hon. Member for Hastings has himself put forward that criterion as the measure of taxability under the next two Clauses, because he is proposing to introduce Amendments stating that the taxable value shall be the market value, and that, at the present moment, is all that is being proposed under this Clause.

§ Mr. Hely-Hutchinson
That will only be inserted if the principle of the subsequent Amendment is accepted.

§ Mr. Benson
It is a very good principle for the hon. Member to assert, anyhow, and a very sound one—far sounder than his present Amendment. The mere fact that a bondholder receives less than he anticipates is no valid argument for his 1567 escaping taxation on the smaller amount that he has received. Suppose that a holder, of cumulative preference shares, finds that the company in which he)1as invested is in difficulties, that it is unable to pay the full interest on its preference shares and pays, say, half rate; the other half may come at some future date. He is in exactly the same position as a bondholder who receives a funding bond of less value than the coupon he anticipated receiving. Does the hon. Member suggest that the preference shareholder should therefore be allowed to escape tax on the smaller rate? No. There is no difference in principle; the bondholder receives a mere percentage of what he anticipated—

§ Mr. Hely-Hutchinson
The hon. Member is arguing that it is the value of the thing that determines taxability; we say that it is the nature of the thing. If it is money, if it is cash, it is clearly taxable.

§ Mr. Benson
If it has value, it is money's worth. How many bondholders actually receive money for their bonds? I do not suppose that one in 10,000 does. They are paid either by cheque or by an entry in a bank book. Either of those is money's worth; and so is a funding loan, and so is blocked currency. There is no suggestion by the Chancellor that there should be any taxation except on money's worth. The hon. Member suggested that these funding bonds, although they might have an immediate value when issued, might ultimately have no value at all; and he asked what is the position of the taxpayer in that case. It is similar to the purchaser of a funding bond. These people pay money for something which is at present money's worth, but which ultimately becomes valueless. The bondholder who retains possession of a funding loan is logically in exactly the same position as a speculative buyer.
I want to refer to the question of retrospection. The hon. Member for Hastings complained, not so much in word as in tone, about the interpretation the Chancellor had put not on the letter of the Association of Investment Trusts, but on the memorandum issued by the Board of Inland Revenue on 19th August, 1937. So far as I can see, the Government have implemented every suggestion, every 1568 statement, made in that memorandum. The memorandum made no promise. It was not a guarantee. It was simply a series of instructions to paying agents as to how they were to deal with current deductions on current coupons. There is no suggestion that those instructions should be regarded as precedents, and the Government, in this Clause, specifically omit from the operation all bonds falling between the date of the legal decision and the introduction of the Finance Bill. Hon. Gentlemen behind the Government protest bitterly against retrospective legislation, but what they are demanding are retrospective legal decisions. They are demanding that the legal decision given last year shall have the effect of enabling taxpayers to apply, by petition of right, not for current bonds but for bonds going back indefinitely. The hon. Gentleman himself suggested that it should apply to bonds going back six years, but that is a purely arbitrary suggestion. There is no more justification for saying six years than for the Government to say, "We will allow nothing at all."

§ Mr. Hely-Hutchinson
I am not sure about this, as it is a legal point; but there is some doubt whether a petition of right does go back more than six years for Income Tax.

§ Mr. Benson
It makes no difference to the argument. Here, upon a purely legal technicality, the hon. Member proposes that a legal decision should be made retrospective for six years, or for 50 years, as the case may be. I can see no justification whatever for that. It is hon. Gentlemen opposite who are demanding retrospective legislation. The Government are merely stating that they will maintain the status quo. If the demand for equity is to be met fully, hon. Gentlemen opposite cannot be satisfied merely with allowing petitions of right to go back indefinitely. Full equity in that case would demand that the Government should pass further retrospective legislation, allowing anybody who has suffered in respect of taxation by assessment to open up all their previous assessments. It is obviously unfair that anybody who has suffered through taxation by deduction 25 years ago should be entitled to claim it back, while anybody who has suffered from taxation by assessment should have to put up with it because an 1569 appeal has to be made within 21 days. The Government have taken up a reasonable course, and I shall be interested to see whether the hon. Member and his friends can make a stronger case for their argument that a defaulting bond is not interest.

§ Mr. Bellenger
I am not quite in agreement with my hon. Friend. This is not merely a private quarrel between certain Members and the Treasury. It is quite a good principle for this Committee to protect individual taxpayers, as far as they can, from the machinations—if I might call them that—of Government Departments. It is up to the Chancellor to get his taxes as and when he can, and to get this House to give him the authority to impose taxes. The question arises as to whether this is an injustice which the hon. Member for Hastings (Mr. Hely-Hutchinson) and the hon. and learned Member for-Ashford (Mr. Spens) have brought before the Committee. After listening to the Attorney-General, I do not think we can find fault on this occasion with the retrospective action which he proposes to take. Indeed, the hon. and learned Member for Ashford himself admitted that there would be occasions when retrospection would be desirable, or at any rate legitimate; and think this is such a case. As far as I understand, this confusion has arisen owing to the Treasury themselves not being quite certain whether the taxation should have been deducted at the source.
I rise only to try to elucidate one or two points. In the case of non-defaulted bonds the income is quite definite, if the bondholder receives the face value of the coupon that is his income, and it is the assessment on which he is taxed; but when we come to the case of defaulted bonds and promises to pay which are given by the defaulting Governments, I should like to know what actually is the income which is taken by the Treasury as arising on these defaulting bonds. For instance, the Attorney-General gave an example of a case where a bondholder was due to receive £5 interest on a coupon, but did not receive it; he may have received only £3; it may have been in blocked currency or in various other ways. Where a bondholder receives a promise to pay, what is the figure which the Treasury assess as the income of the bondholder? How do they assess that 1570 figure? If bonds are issued for interest which should be paid, is that assessed according to stock exchange or market quotations at the time they were issued? If so, I can readily understand that that becomes the income of the person who holds that promise to pay. On this occasion, although I think the hon. Member for Hastings and the hon. and learned Member for Ashford have been quite within their right in bringing this matter before the Committee, I think the Attorney-General is also within his rights in taking some retrospective action.

§ Mr. Touche
I would like to associate myself with the arguments put forward by the hon. Member for Hastings (Mr. HelyHutchinson) and the hon. and learned Member for Ashford (Mr. Spens). I think, in principle, all retrospective legislation is wrong. It can be justified when there is a case of tax evasion, but in this case there is no question of tax evasion. As far as I understand, the retrospective taxation of this Clause will not apply where the taxpayer can appeal against assessment, but it will apply when he starts a claim for repayment. I would ask the Attorney-General what possible ground there is for that distinction? It means that the same coupon in different hands will be treated differently. If a person sells coupons abroad, to Vienna or Budapest, he will make a return and will receive an assessment. Under this, taxation will not be retrospective; therefore, he will escape the tax. If, on the other hand, he sells a coupon in London, he will have to pay the taxation, and he gets no protection from the Clause.

§ The Attorney-General
I think that arises on Clause 19. Perhaps the hon. Member will raise it then.

§ Mr. Hely-Hutchinson
Does not this make a distinction between two ways of treating the same coupon on the same bond?

§ Mr. Touche
I am much obliged to my hon. Friend the Member for Hastings for clarifying that point, and perhaps the Attorney-General will deal with it. The other strong objection to retrospective legislation in this case is that it is interfering with the process already before the court and not yet completed. Last March the Inland Revenue were informed that 200 petitions of right might be 1571 lodged. It was agreed that one petition of right should be lodged, and that 200 claims should formally be put in. A month later the Chancellor of the Exchequer comes down to the House and introduces a Budget Resolution which vitiates the claim made by the petitioners. It is difficult for any taxpayer to make any claim against the Inland Revenue, and it is a great burden, after a petition has been lodged, that the law should be altered in the following month against the taxpayer.

§ Mr. Pethick-Lawrence
I should just like to say where my hon. Friends and I stand on this matter. The general principle against retrospective action is a thoroughly sound one. This House, as my hon. Friend the Member for Basset-law (Mr. Bellenger) said, should be the guardian of the taxpayer against the Government, and should scrutinise very carefully any proposal for retrospective action. The taxpayer is entitled to know where he stands, and, having summed up his position, it would be very unfair and improper, except in cases of deliberate evasion, if the Government were afterwards to come down to this House and, by means of their automatic majority, alter the position from what the taxpayer believed it to be, in order to gain a wholly improper advantage to the Treasury. I think that we are all agreed upon that point. There are cases, however, where the law turns out to be different from what the taxpayer himself believes, except in isolated instances, and the question is whether that is or is not the case with regard to this particular matter.
Having listened to the Debate and heard the explanation of the learned Attorney-General, I have come to the conclusion that the Government have made out their case in this particular instance for retrospective action. An hon. Member opposite said that this was not a case of evasion. I do not think that anyone has ever suggested that it was. It is an entirely separate ground on which retrospective action has to be justified, if it can be justified, and this is really to put the law into the position in which the bulk of the people have always supposed it to be. On the question of the merits of the particular proposal as a whole, I have no hesitation in saying that I think 1572 the Government are justified in this particular instance in making the law retrospective.

§ Mr. Spens
The right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) says that we are dealing with a Clause which makes legal what the bulk of the people thought was the law in the past. The difficulty is that that statement is quite true as to a number of transactions dealt with by the courts, but the real issue is a transaction which, I believe, the bulk of the people thought was not affected by the Income Tax law. That was one in which the taxpayer had for a number of years protested against the action of the Government on the basis that he had either given directions to the bank to deduct tax from the bonds at the source or to make direct assessment upon the taxpayer. For the future, as I said on Thursday, no one has the slightest objection to the Government altering the law, but when it comes to retrospective action, it affects those particular transactions where there was a bona fide doubt and a contest for a number of years between certain taxpayers. There is not a very large bulk of citizens affected by these transactions, but the amounts are very substantial. These people constantly find that, although they have turned out right in their views, none the less they are to be treated as having been wrong from the start, with certain exceptions. The exceptions are the actual litigants and those persons who had entered notice of appeal against assessments.
Now, thanks to the assurance that my right hon. Friend the Attorney-General has given, also those people who refrained from giving formal notice of appeal against assessment but intimated that they were in a position to make an appeal, are to be included. As far as I am concerned, I very much prefer to have that assurance from the Front Bench on this matter than to make any attempt to amend the Sub-section further so as to try and get these people in. One knows the practice of the Inland Revenue, and an assurance given by a Minister on the Front Bench, I am certain, would be honoured on behalf of these people. There is a complete exception as regards the people who have Income Tax deducted from the source, and it produces the anomaly, which my 1573 hon. Friend the Member for Hastings (Mr. Hely-Hutchinson) pointed out, that, where these coupons have been dealt with in one way so that Income Tax has been deducted at the source, there is no relief for anybody. Where they have been dealt with in another way, or when a direct assessment has been made upon the people, those who have appealed or are in a position to appeal are to be given relief. The House may think that that is desirable in this case, but nothing is going to induce people who have had deductions made at the source under protest for a number of years to be satisfied with this solution of retrospective legislation on this particular Clause. While thanking my right hon. and learned Friend for the further concession in the course of this Debate, I regret that the Government cannot go further and make some concession to these people who have been subjected to a deduction of Income Tax from the source in spite of their protests for a number of years, and who have been proved right in the legal view they have taken all along. Subject to these remarks, I suggest that the Amendment be withdrawn.

§ Mr. Hely-Hutchinson
I beg to ask leave to withdraw the Amendment.

§ The Chairman
I take it that the next Amendment in the name of the hon. and learned Member for Ashford (Mr. Spens) will not be moved.