§ 6.25 p.m.
§ Mr. Spens
I beg to move, in page 16, line 12, after the first "the," to insert "market."
This Amendment, to insert the word "market," is moved in order that we may have some statement from the learned Attorney-General on exactly what basis the bonds will in fact be paid, and how they will get at the amount of interest equal to the value of the bond at the time of issue, there being obviously a great difference, on occasions, between the nominal value of a bond and its market value in this country.
§ 6.26 p.m.
§ The Attorney-General
One or two questions were raised earlier in our discussions with regard to this question of the valuation of funding bonds, and I might pick them up and deal with them now. I might say that in a great many cases in which these funding bonds are distributed to agents in this country no question of valuation has arisen, because the distributing banks or houses have received "X" pounds' worth of bonds, and they have deducted Income Tax in bonds and handed over to the Revenue Income Tax in bonds—with Income Tax, say, at 5s. in the —, a quarter of the bonds they received from the foreign Government—and distributed the remaining three—quarters among those entitled to the bonds. In that case you avoid any difficulty about evaluating the money's worth of the bonds. But there are cases in which it has not been possible to arrange to do that, because the amounts 1594 are small or the denominations of the bonds do not enable that to be done, and in those cases the person receiving the bonds in lieu of his interest is directly assessed on the value of the bonds.
Let me say, first of all, that this is a perfectly general case which has been applied over many years in other connections. It became obvious at an early stage in the development of Income Tax law that a very easy means of avoiding income Tax was available if no tax had to be paid on money's worth. The principle is that the tax should be paid on the value of the money's worth. Those are the words in the Clause—the value at the time of issue—and I suggest that it is better to keep those words in that form and not to try and particularise them in greater detail. In the case mentioned by my hon. Friend the Member for Tamworth (Sir J. Mellor), the principle on which the law proceeds is to take the value in January when the bonds were issued and disregard subsequent fluctuations in one direction or another,
Broadly speaking, the value that is taken is the fair realisable value at the time when the bond is issued and in the circumstances in which it comes to the purchaser. The Commissioners should not be tied down with too great particularity to, say, some particular quotation at 12 o'clock on a particular day. They have to look at the general circumstances. In many cases bonds are realised within a short time of their receipt, and in the absence of any special circumstances that value would be taken as the value for Income Tax purposes. If a man decides to hold on to his bonds instead of realising them, as he does with other securities in order to speculate whether the value will go up or down, his Income Tax is assessed on the basis of the fair realisable value at the time he gets them. I suggest it is better to leave the word "value" in without its being qualified by "market." I am not sure what market value "is. If "market value" were put in the Commissioners might think they were constrained to take the Stock Exchange quotation on the day of issue, and that might be an unfairly high figure to take. What they consider is what the taxpayer could have got for his bond if he decided to realise it within a reasonable time of having received it.
§ 6.33 p.m.
§ Mr. Bellenger
The object the hon. and learned Gentleman had in putting down the Amendment is a good one because this is a case where we ought to get as much simplicity as we can. I am not quite certain of the learned Attorney-General's explanation. As I understood him, he said that the value would be the value in the January of the year in which the bonds were issued and that it was not necessarily the Stock Exchange value, if there were such a value at all. If there were no Stock Exchange quotation what would be the value which the Revenue would place on those bonds? The learned Attorney-General has excluded the possibility of commodities being issued in satisfaction of interest claims, but I am not at all sure whether, in these days of bartering, it might not happen that for a defaulting Brazilian bond coffee might be issued to those entitled to the bonds, and in Germany, perhaps, machinery or something else. We ought to know what is in the mind of the Attorney-General if there is no Stock Exchange value. How are the bonds to be valued?
§ The Attorney-General
I did my best to explain. It is the fair realisable value. There are cases over and over again in which securities have to be valued where there is no Stock Exchange quotation. The people entrusted with the duty of valuing them—in this case the Commissioners—can hear evidence as to what is the fair realisable value of the securities in question. I agree that Stock Exchange quotations are very good evidence of what can be got. In other cases the Commissioners have to do the best they can, and what they direct their minds to is the value which can fairly and reasonably be realised by the taxpayer at the time of issue.
§ Mr. Spens
I put down the Amendment in order to make certain that in cases where there is any difficulty in ascertaining the value there should be no possibility of the nominal value being taken. I prefer the fair realisable value, and if that is the basis on which the bonds are to be valued perhaps my right hon. and learned Friend will consider between now and the Report stage inserting some provision to that effect.
§ Amendment, by leave, withdrawn.
§ Motion made, and Question proposed, "That the Clause stand part of the Bill."1596
§ 6.38 p.m.
§ Mr. Denman
This Cause is already in force in accordance with the Resolution that we passed at an earlier stage. That being so, can we be told how it is operating? I believe this Clause to be very lucid and simple, but it would be to the convenience of many Members to know exactly what is happening. A bank holds bonds and receives funding bonds by way of satisfaction of the interest due. It then proceeds, I understand, to retail a portion of those funding bonds for the purposes of the Revenue. When there was a 5s. Income Tax that was relatively simple, but with a 5s. 6d. Income Tax there will, I suppose, in most cases be some additional amount due to the Revenue. Will the bank thereupon debit the bondholder's account with the excess amount beyond that which is satisfied by the funding bonds retailed to the Treasury? I presume that will be so. So far the process is relatively simple.
When we come to the Surtax payer it is not quite so easy. Assume that a funding bond has been paid this month. Next spring the Surtax payer will have to fill in his form for Surtax payable in January, 1940. He will then have to discover two unknowns—the value of the bonds, which he has no means of knowing, and the date of issue. Are there arrangements by which the bank's information as to the date and the value will be accepted for the purposes of Surtax returns? If so, of course, the Surtax payer can make out his return with fair ease, but if he has to satisfy the Revenue with evidence of his own with regard to the value and even the date of issue, he Will be put to considerable trouble. What procedure is being adopted and whit sort of instructions have been given to the banks and collecting agents in this matter?
§ 6.41 p.m.
§ Mr. Assheton
I world like to enter a mild protest against funding bonds being assessed for Income Tax purposes. The Attorney-General said that they were assessed because they were money's worth, but I suggest that they are not always. Suppose you lend £1,000 to a foreign Government, which decides not to honour its obligations. On 1st January, instead of receiving '3 per cent. interest and a cheque for £30, you receive a piece of paper promising you what is already due to you. you are not receiv- 1597 ing anything that is worth anything. When you get it, that which you have received from the foreign Government together with your original bond is worth exactly what the original bond was. You receive that piece of paper and it is a false assumption that that funding bond is in fact income. It may be that one day, if the foreign Government honours those funding bonds, they then become income. They then ought to be assessed for Income Tax as income. If the Chancellor were fortunate, instead of these bonds being assessed for Income Tax at 30 per cent. of their par value, they might be assessed at 100 per cent. of their value for Income Tax. On what principle does the Chancellor base his suggestion that these funding bonds are either money or money's worth?
§ 6.43 p.m.
Lieut.-Colonel Sir A. Lambert Ward
The funding bonds which one receives in settlement of interest due from a foreign Government are negotiable in the market, and the market value is a definite indication of the value of the bonds to the holder. In the case which my hon. Friend the Member for Rushcliffe (Mr. Assheton) imagined, you lend £1,000 to a foreign Government, which defaults on its obligations to the extent that it cannot or will not pay in gold or in the currency of the country in which you reside the interest due. Instead of that, it hands over funding bonds of the nominal amount of the interest due. Those bonds can be sold at the Stock Exchange price, which, in my opinion, is a fair indication of the' interest which one has received. If you put one of those bonds on the market, the price you get will indicate the value of it and indicate accurately the amount of Income Tax you ought to pay, because it is something you have received in lieu of actual interest.
§ 6.45 p.m.
§ Mr. Assheton
I quite agree with a large part of what my hon. and gallant Friend has said, but let me put the position in this way. The hon. and gallant Member receives his funding bonds from foreign Government. What happens? piece of paper comes from that foreign Government. He then finds somebody in the market, or elsewhere who is willing to give him something for it. No income has come into this country, no money has come from abroad; some other citizen of 1598 this country is prepared to give my hon. and gallant Friend some consideration for a promise to pay. The better the Government which issues these bonds the better will be the consideration; but no money, I repeat, has come into this country. What the Chancellor of the Exchequer is going to do is to tax an income which has never come into this country, and that means that somebody in this country has got to sell a certain proportion of his capital to find the money for this tax. It is but another instance of the Treasury absorbing capital when they think they are taking income.
§ 6.47 p.m.
§ The Attorney-General
The hon. Memmer for Rushcliffe (Mr. Assheton) has raised rather an abstruse point, but I am bound to say that I think my hon. and gallant Friend the Member for North-West Hull (Sir A. Lambert Ward) really put the matter in the common-sense way and as I think Parliament would intend to deal with it. The hon. Member for Rushcliffe made a point about a bond being no more than a piece of paper. A cheque for a million pounds is only a piece of paper, but nobody can suggest that because a cheque is only a piece of paper there is no obligation to pay Income Tax. If a man receives a foreign cheque what he does is to sell it through his bank, just as a foreign bond is sold through a stockbroker. Suppose a foreign government paid 100,000 francs to a bank here for distribution. [Interruption.] Perhaps it will save any criticisms if, instead of mentioning the currency of any particular country, I take the case of the State of Ruritania, arid suppose that it has issued bonds of 1,000 units bearing interest at 10 per cent.—the credit of Ruritania not being very good. Every year the holder of one of those bonds would expect to get 100 units as interest. Normally he would get a cheque for 100 units, which he could sell to a bank, and for which he would receive a sum varying according to the rate of exchange. He would be assessed accordingly on the money's worth of that part of his income, because Income Tax naturally descends in terms of sterling; he would be taxed on the commercial equivalent of the foreign cheque or warrant.
Then suppose that Ruritania gets into a bad way and, instead of sending 100 units sends only 50 units in payment of 1599 interest. Nobody would suggest that the recipient should not pay Income Tax on what he got from his bank for the cheque for 50 units. Next suppose that instead of getting a cheque for 100 or for 50 units he gets another piece of paper which is a bond for, say, 100 units which he could sell in the market and get for it the same amount as he would get from his bank for the cheque for 50 units. There may be some subtle argument, which I have not appreciated, to show that a tax on that money would be a tax upon capital, but it strikes me that whatever amount the man has received becomes part of his income. He is entitled, say, to half-yearly interest on his security, and he has got a piece of paper which he can sell for £5 or £10. That is income, and is to be treated as income, and I should have thought it was not an unreasonable thing to say that he must pay Income Tax upon it. I will consider later the question of whether, from some other point of view, it is to be regarded as not being income, but I think we can for this purpose of Income Tax treat it as income. These, I believe, are the real considerations upon the point which has been raised by my hon. Friend the Member for Rushcliffe.
Now let me tell my hon. Friend the Member for Central Leeds (Mr. Denman) what the procedure is. In certain cases the procedure is to settle the payment of Income Tax by handing over an appropriate proportion of the bonds to the Revenue and the appropriate portion to the persons entitled to the money. He says that there may be fewer cases in which that can be done now with Income Tax at 5s. 6d. than when it was 5s. If that cannot be done, the bank or paying agency in this country can hand over the bonds in toto to the recipients, not attempting to make any deduction for Income Tax purposes. The Income Tax payer, who has received the gross amount of the bonds to which he is entitled, is then directly assessed. The issue then is between the taxpayer and the Commissioners of Income Tax as to what is to be regarded as the realisable value of the bonds on the basis I have just described. If the Stock Exchange quotation is reasonably constant that can be taken as indicating the value. However, the taxpayer can put forward any representa- 1600 tions he likes on the point, and if necessary it can be fought out before the Commissioners as an issue of fact and evidence can be called.
I gather there is not in practice often any dispute about this matter. Most of these cases are cases in which there are a substantial number of the holders of these bonds in this country, and therefore when funded bonds come over there will be a substatntial number of cases in which people will tell their stockbrokers or banks to realise the bonds. I have no doubt that is what is ordinarily done, and possibly a great many Members of this House may have done it, or it may have been done for them without their realising it. Of course that value also settles the value for Surtax. I quite agree that in cases where the payment of the standard rate of Income Tax is disposed of by the deduction of bonds the Surtax payer can take up with the Commissioners the question of their value and discuss it with them. If he thinks too high a value is being set upon the bonds he can take the matter before the Commissioners and offer his own evidence, but I do not think those are cases in which much difficulty arises.
§ Mr. Denman
I would ask the Attorney-General to be quite definite on these points—that a mixed payment of half bonds and half cash will not be permissible and that in the case of Surtax no payment by bonds will be permissible at all.
§ The Attorney-General
In the case of Surtax no payment by bonds would be permitted. I will look into the other point. I would not like to pledge myself at the moment that there might not be a case where it would not be substantially to everybody's convenience for the claim to be met by what I call a bond deduction accompanied by a small cash adjustment—that is in cases where a small amount is involved—but whether that can be done I will inquire.
§ Sir Robert Tasker
Will the Attorney-General say why bonds should not be accepted in payment of Surtax?
§ The Attorney-General
Because they would not be there. The position arises in this way. Up to the time of the default and the issue of bonds instead of cash the bank in this country would be receiving from the foreign Government, say, £100,000 with which to pay the in- 1601 terest in this country. The bank deducts the Income Tax, £25,000, and distributes the remainder of the £75,000. Suppose that instead of getting cash the bank receives bonds. Where it could be done it was felt to be for the convenience of everybody if the Revenue were willing to accept in lieu of the standard rates of Income Tax, say, a quarter of the bonds which came over for distribution, leaving the bank with the remaining three-quarters of the bonds to be distributed among the other holders. The Revenue said they were prepared to accept that as a convenient arrangement. The Revenue got money's worth and the taxpayer was not inconvenienced. In the case of Surtax, which arises only where somebody has an income above a certain limit, the taxpayer is not called upon to pay Surtax until some months later, and he might by then have sold the bonds, and there would be no conceivable reason why he should pay Surtax, which would be calculated on his total income, including the money's worth of those bonds, in securities any more than anybody else, and the usual rule would apply to him. I do not think there could be any justification for saying that because a part of the income on which he was paying was in the form of foreign bonds that therefore he should be entitled to pay Surtax in bonds.
§ Sir R. Tasker
Payment of Surtax is delayed 12 months, being calculated upon the income derived the year before. If it is equitable for the authorities to accept payment of Income Tax in bonds why if the taxpayer is still in possession of the bonds should not the Treasury accept bonds in payment of Surtax a year afterwards?
§ The Attorney-General
The Treasury can only accept bonds because it enables them to get the tax at the beginning. That consideration does not arise with Surtax and there is no reason why the should accept payment of Surtax in bonds.
§ Question, "That the Clause stand part of the Bill," put, and agreed to.
§ Clauses 21 and 22 ordered to stand part of the Bill.