HC Deb 27 June 1938 vol 337 cc1626-40

8.35 P.m.

Captain sir William Brass

I beg to move, in page 34, line 32, at the end, to insert: Provided also that if the settlor shall within three months of the date on which this Act comes into force by deed release any existing power of revocation or declare that the settlement shall be irrevocable from the date on which the settlement was made, it shall be deemed to have been irrevocable from the date on which the settlement was made. I move this Amendment because I fear that if this proviso is not included in the Clause, certain injustices will result. In the course of his Budget speech, my right hon. Friend the Chancellor of the Exchequer said: I propose, therefore, that in the case of all trusts and settlements the income arising should be treated as the income of the settlor for Income Tax purposes—and this includes Surtax—if the terms of the settlement provide any power of revocation whatever by the exercise of which the settler might become entitled to the beneficial enjoyment of the income. In order to illustrate this point, I wish to cite to my right hon. Friend four settlements that have been made by a friend of mine. They were made in January, 1937, before the Chancellor's speech; they were made on relatives without any obligation whatever; they were for seven years; and they contained a revocation clause, which was allowed under Section 20 of the Finance Act, 1922. The revocation clause was included in order to safeguard the settlor in the event of certain things happening—for instance, that the beneficiary got into the bankruptcy court, was unworthy, or got into the hands of moneylenders. In those events, with the consent of another, the settlor could revoke the settlement. That was in accordance with the law as it existed then under the 1922 Act. The situation as my friend saw it was that he was anxious to try to help certain relatives by making settlements upon them in order to assist their income. He found that if he did that he was able, first of all, to deduct Surtax because the income was not his income, but the income of the recipients; and he also found that if he did that, as happens in the case of many hospital settlements, the recipient was able to claim back the Income Tax which had been paid by the settlor. That was how he worked the whole matter out, and he gave the maximum amount that he could afford to those relatives in order to help them as much as he could. That was in accordance with the law as it existed in January, 1937.

The Chancellor then said in his Budget speech: These two proposals will apply to all settlements, existing and future, and as regards existing settlements they will take effect for Surtax purposes for the year 1937–38, thus having the retrospective effect of which I gave due warning last year."—[OFFICIAL REPORT, 26th April, 1938; col. 53, Vol. 335.] I want to protest against the idea that a speech by the Chancellor last year can have force of law this year. I think that is completely wrong in principle. All my life I have been told that ignorance of the law, even of by-laws, is no excuse, but now I am being told that ignorance of the Chancellor's speech is no excuse. I think that is going rather too far. I think my right hon. Friend probably borrowed the idea from some of the road-menders, for if one goes along a road on which repairs are taking place, one sees a large notice warning one. I do not like the idea of restrospective legislation, I do not consider it is a good thing, and in this instance, I think it is a thoroughly bad thing. I would like to quote what was said on this point by an eminent lawyer in 1922, at the time the Debate was taking place on the Clause in the Finance Bill, 1922, which permitted the revocation clause. He said: It is a dangerous thing for the Government to introduce into a taxing Act, whether or not there is a precedent for it, proposals which are retrospective in their action. These settlements were perfectly legal, and great judges have said over and over again that the subject is entitled to avoid—not to evade—taxation if he can. People legally parted with income, and they cannot recover it. Later on, he said: It is an attempt for the law to be retrospective in its effect. I take great objection to that…The result would be that none of us would know whether a perfectly legal arrangement that we are making to-day would not five or ten years from now be made the subject of taxation.…I say the man who made a settlement before the Act was passed made it. believing. it would be free from the incidence of taxation, while the man who makes one after the passing of the Bill will do it with his eyes open, and will know he is parting with income notwithstanding that he will still have to pay taxation on it."—[OFFICIAL REPORT, 20th June, 1922; cols. 2206–1208, Vol. 155.] That was said by my right hon. Friend who is now Minister for the Co-ordination of Defence, and I ask the Chancellor of the Exchequer to discuss this question of retrospective legislation with his right hon. Friend in the Cabinet. I want now to give a picture of what is the position of my friend at the present time. He made the four settlements, and he now finds himself in the position where he is being charged Surtax retrospectively because the Chancellor made a speech about it last year. I think that is wrong. If the Chancellor wished to make a Clause that would have effect in future, that would be all right, but it is wrong for such a Clause to be retrospective. The proposal I am making is a very simple one. I understand that the real trouble in this matter arises out of the revocation clause. I understand that in certain instances—not, I may mention, in the instance of my friend—this revocation clause is abused. Consequently, I suggest that there should be the proviso which I have moved, and which is to the effect that if a settlor decides to make a settlement which has the revocation clause in it irrevocable within three months of the passing of the Bill, then that settlement shall be deemed to have been irrevocable from the start, and consequently he shall not have to pay the Surtax on it which he would have to pay if Clause 32 were passed in its present form. I consider that to be a reasonable suggestion. The person who wanted to keep the settlement open for tax evasion purposes would not be able to do so under the proviso. If he wanted to keep it open, he would have to pay the tax, but if he did not want to keep it open, and was willing to make it irrevocable, he would not have to pay tax retrospectively for 1937–38. I recommend this proviso to my right hon. Friend and ask him to consider it. I am not wedded to the words on the Paper and I am no lawyer and I do not profess to understand drafting, but the principle is clear and I ask my right hon. Friend seriously to consider it.

8.45 p.m.

Mr. Clement Davies

May I ask your guidance, Sir Dennis Herbert, with regard to the Amendment on the Order Paper—in page 37, line 1, to insert a new paragraph (a)? That Amendment covers the whole of this Clause and as I understand it the Amendment moved by my hon. and gallant Friend the Member for Clitheroe (Sir W. Brass) covers only the first part of the Clause. I put down my Amendment at what I thought to be the best place. It covers Sub-sections (1) (2) and (3) of the Clause inasmuch as Subsection (7) provides that "the foregoing provisions" which include Sub-sections (1), (2) and (3)— shall apply for the purposes of assessment to Income Tax for the year 1937–38 and subsequent years and shall apply in relation to any settlement wherever made and whether made before or after the passing of this Act. Then follow certain provisos to which my Amendment proposes an addition. May we discuss the point of principle on this Amendment?

The Chairman

I had already considered that point to a certain extent and without committing myself on the question of what Amendments I shall call later, and whether I shall call the Amendment in the name of the hon. and learned Member or not, I think it would be convenient if all the questions which are covered by his Amendment were discussed on this Amendment, provided that the Committee agree.

8.48 p.m.

Sir Malcolm Barclay-Harvey

I urge upon the Chancellor of the Exchequer the desirability of giving favourable consideration to this proviso. It is not unreasonable to ask that when we are taking retrospective action on one side we should give people who have made these settlements an opportunity of bringing them into line with the law, even though their action will also be retrospective. I am anxious not to put into the Bill anything which would assist people to evade taxes which they properly ought to pay. If this proviso had any effect of that sort, I should not put my name to it, but I think my hon. and gallant Friend the Member for Clitheroe (Sir W. Brass) has made it plain that the object of the proviso is to allow people who have made bona fide settlements believing them to be legal, an opportunity of ensuring that those settlements shall still be legal, by withdrawing any revocation Clauses which they may contain. Personally, I dislike all retrospective legislation. I think it thoroughly unsound in principle. It opens doors which ought to be kept firmly locked. There is no excuse for saying that because we to-day, regard something as wrong it should necessarily have been regarded as wrong 10 years ago. I submit that this Amendment is eminently reasonable. It will not deprive the Chancellor of the Exchequer of any taxation which he ought to get, and in fairness to those who have already made settlements I ask my right hon. Friend to give it his sympathetic consideration.

8.51 p.m.

Mr. Denman

I expect the Chancellor of the Exchequer will have little difficulty in defending the case for retrospective legislation in some circumstances, and I am not prepared to go as far as the last speaker in a general condemnation of that practice. It has been a common feeling for the last few years that drastic action was needed to prevent tax avoidance and evasion of the more disreputable kind, and it is only if the threat of retrospective action is clearly held out and acted upon from time to time that you can put an end to this pernicious practice—pernicious, not merely because the wicked man "gets away with it" but also because he imposes upon the shoulders of others a burden which he himself ought to carry. Therefore there is a case for retrospective legislation carefully selected and carefully controlled.

At the same time, I make a plea to the Chancellor to look again at these proposals. I think he will agree that he is including settlements which are entirely innocent and even beneficial and which I am sure he would like to encourage. At least if he does not want to encourage them in the future, he will realise that they have been so beneficial up to now as to make retrospective action against them undesirable. I give the case of a wealthy man who was able to settle over £1,000 a year for a period of seven years on a certain number of charities. He did so by means of a revocable settlement not because of any desire to evade taxation but simply because his income was subject to fluctuations and as a prudent man he foresaw that it might not be possible for him to arrange his support of these charities for a considerable period ahead. He therefore made this settlement revocable and there is nothing wrong with that.

Sir J. Simon

What was the period?

Mr. Denman

It was for seven years and was revocable with the assent of a third party. That was to comply with the law so as to enable him to make a settlement of this substantial amount on certain charities. He is prepared to readjust this settlement now that the law has been changed. But to ask him to pay Surtax on sums which have already been paid out under the settlement, seems to go too far. I think that probably he has a long enough life before him to enable him to recoup himself at the expense of the charities and to recover that Surtax by lessening the amount which the charities receive but surely the Chancellor would not think that a desirable result. He, I am sure, would not desire to mulct these charities in sums which they are expecting because he is making this Clause retrospective in relation to certain settlements. I ask him to look into the subject again and to realise that there are hard cases which might reasonably be excluded from the ambit of the Clause.

8.55 p.m.

Mr. C. Davies

I do not want to discuss this matter on the question of hard cases. We are not here discussing whether it is right or wrong to tax settlements where the income has been alienated by the settlor and he has reserved the right of regaining that income in certain events. What we are discussing is whether it is right to legislate retrospectively on that matter. I understood from various statements made earlier that everyone in this Committee objected fundamentally to retrospective legislation. The hon. Member for Central Leeds (Mr. Denman) suggested that there might be, in certain circumstances and at certain times, exceptions to that rule, but I think there is universal consent to the general rule, and I am not at all sure that I did not catch the Chancellor of the Exchequer himself assenting to the general statement that legislation should not be retrospective. Certainly it should not be retrospective with regard to taxation, for the whole theory of taxation is that His Majesty requires to carry on certain services in the country, that he ask this House to vote money for that purpose, and that this House then considers what money it shall so devote, what persons shall be subjected to taxation and to what extent, and no farther.

One hears that there are certain persons who exade taxation. If you evade taxation, then you are liable to certain penalties, but if you avoid taxation, it is an entirely different matter. The hon. and gallant Member for Clitheroe (Sir W. Brass) very rightly reminded us of words which had been used by one who afterwards became Attorney-General, calling attention to the distinction that there is between evasion and avoidance. If you are within the ambit of taxation as laid down by this House, you must pay that taxation, but if you are without that ambit, you are not called upon to pay. It does not matter what form the taxation takes, whether it is Income Tax, a tariff, or a Customs Duty, you pay according to the directions laid down by this House. People thereupon make their arrangements accordingly. The House lays down what the taxation shall be, and people should then know how they stand. A man will pay out his income accordingly, reserving, we will say, so much for taxation, and the rest is there to be disposed of. It is entirely wrong then to come at a later date and say to that man, "Ah, you were wrong. We will now tax you in respect of that which you were free to spend untaxed a year or two ago." Where is it to stop? If you go back a year or two, why not go back six years, or 12 years, or even 20 years? But that would so offend our ideas of what is fair, that no one would dream of suggesting it. It is a fundamental principle to which this House has steadily adhered—I am afraid that the principles which have guided us in the past are getting fewer and fewer every day, but it is now time that we stuck to something-and unless there is a really good reason to the contrary, this legislation ought not to be retrospective.

I said that I would not mention any hard cases, but I can mention one, because it is one of the hardest cases that I know of. It is the case of a civil servant who has attained quite a high position, but, high as his position is, his salary is still a small one. He has had a family, and, like all civil servants, he has not been able to save much out of the small income that is paid to him. Unfortunately, one member of that family, although now some 25 or 26 years of age, has the mentality of a child of 12 months or two years. That child was, as a child, kept at home, but when he grew towards manhood he had to be put away. The civil servant could not possibly put him in a public institution, so a good part of his income has had to be devoted to putting that man, who would otherwise to-day, obviously, be an asset to the family, in somewhere where he is a continuous debit to that family. A settlement was made within the law as laid down by this House, but the civil servant, very rightly, reserved the power of revoking it. It is not that he desired to evade taxation. What he wanted was to protect it, not to protect himself, in regard to the young man.

Sir J. Simon

Who would revoke it?

Mr. Davies

The trustees had the power to revoke under certain circumstances. The circumstance that he had in mind was not anything that might happen to the beneficiary, but something that might happen to him—that he himself might break down and his income become, let us say, a half or a third of what he gets to-day. Thereupon, he could not possibly pay out this sum, and the whole position would again have to be considered. That was a perfectly sound settlement, but under certain circumstances, even if he now does away with the power of revocation, he will be taxed in respect of an income which he has signed away, merely because he has reserved to himself the power of revocation. What we want is to say that next year, if the Chancellor is so minded, by all means let this be done, but let him do more than give a mere warning in a speech. It is a matter, not for the Chancellor, but for this House, and if the House lays it down that settlements with a power of revocation of income shall be taxed in the hands of the grantor, so be it—we are not discussing that—but let not this House say that what was treated as legal and right last year shall be illegal and wrong this year. For these reasons, I support as strongly as I can the appeal that has been made by the hon. and gallant Member for Clitheroe. The Amendment which stands in my name raises exactly the same principle. It is only that it deals with the three Sub-sections, whereas I think the present Amendment deals only with one Subsection. The principle is the same, and I appeal to this Committee to stick to the principle.

9.4 P.m.

Sir J. Simon

The speeches that have been made raise quite a serious question for the Committee to consider. I think the speech which most justly expressed the considerations to be weighed was the speech of the hon. Member for Central Leeds (Mr. Denman). Last year I uttered a warning. There was then on sale in Chancery Lane a form which anybody could buy, and if he had a 10s. stamp put on the top of it, it undoubtedly had the effect, if he cared to use it, of enabling him to avoid taxation by what is really a device. It is a device, or it may be a device, if, to get over the well-known position that you do not escape a tax by reserving a right of revocation to yourself, you merely include a right of revocation to yourself and somebody else whom you can direct to do exactly what you want, whenever you choose. I do not deny that that is legal. Certainly it is legal because the law left that loophole. We may safely assume, however, that the policy of Parliament was that unless the settlement was a settlement for seven years at least and was in the ordinary sense of the term irrevocable, the person making the settlement should not escape tax. This was a device which was open to be used by persons who wished—I agree within the strict law—to keep within their own choice the putting an end of such a settlement. It was even possible for the other person to be such person as should hereafter be nominated. All the person making the settlement had to do was to go among his friends and find somebody willing to do what he said.

The only reason I issued the warning last year was that there was not time to make this provision then, because the full character of this device had not been appreciated. The effect of the warning has been greatly to limit the practice. That was one of the purposes of the warning. While that is true, it is also true, as my hon. Friend has said, that there are other cases in which undoubtedly the reason why this arrangement was made is a reason which is perfectly understandable, straightforward and honourable. It is undoubtedly the case that there have been settlements made that have had the result of saving the income of the settlor from tax, which could not be terminated simply at the settlor's own choice, but required the assent of the second person. That second person was put in for the purpose of exercising a deliberate judgment and the particular circumstances of the case were such that for perfectly good reasons it was felt right, fair and reasonable to include that provision. Undoubtedly that was all within the law.

The Committee have to make rather a difficult choice. There are cases in which the settlement may be revocable for some good reason, and there are cases in which a loophole in the law has been taken advantage of. But the general policy of Parliament was that a person should not escape the tax unless the settlement was irrevocable. It was not irrevocable if they could bring in somebody at their will. On the other hand, there are certain cases which will be hardly hit. We must make this legislation retrospective but it is only retrospective in this sense that Super-tax which is due to be paid next January is, in fact, calculated on income for 1937–38. I have considered what ought to be done. While none of us want to let off a case which is not a thoroughly meritorious case, on the other hand, there are other cases which are cases of hardship. It might be suggested that I should draw a distinction between what was called a bona fide settlement, and other settlements, but I do not think that that is for this purpose a practical distinction. We cannot judge as between one case and another in that way, but I think that there is a pretty practical choice which my hon. and gallant Friend the Member for Clitheroe (Sir W. Brass) suggested. You would say, "If you do not use this power of revocation and if you are prepared now to turn your settlement into a really irrevocable settlement, these are such indications of your real intention to get within the spirit of the provisions of the law, that you ought not to be retrospectively hit." But if anybody in the meantime having professed to have made one of these arrangements has proceeded to use these so-called powers of revocation or has used any provision of the settlement to get money back and pay no tax on it, I do not think he ought to be shown any mercy, because his own action goes to show that it was not a genuine and straight-forward settlement.

If we adopt that course there will be a certain number of people, whose actions in the matter are not necessarily very meritorious, who will not pay in respect of the past year, but, after all, we have to choose which we will do. It is whether we will inflict a hardship on people with whom I have sympathy, such as the case mentioned by my hon. Friend the Member for Montgomery (Mr. C. Davies), or will give them the opportunity of promptly turning what was at the time they made it a lawful and effective arrangement into an arrangement which will be effective under the new law, and which is effective because it is a really irrevocable settlement. I would sooner avoid doing an injustice to a certain number of people who acted bona fide than make them suffer because there are some other people who, to use a vulgar expression, got away with it during the past year. I do not differ from the general propositions which have been put with regard to the danger of retrospective legislation, though I think we have to look at the individual case. We have had one case to-day where the Committee agreed that we ought to act retrospectively. I do not feel very strongly on the subject of securing that Super Tax only due next year should be calculated on what would be in many cases a fair and reasonable calculation. The reason I come down on the side of making the modification is because I am conscious that there are cases where, if we persisted in the Clause as it stands, we should be mulcting retrospectively persons who acted honestly and within the law.

I cannot accept the Amendment of my hon. and gallant Friend the Member for Clitheroe, but if what I have said commends itself to the Committee, I would suggest that the Amendment be withdrawn and we will put down on Report stage a carefully drawn Amendment in its place. I have not the slightest intention of letting anybody off in the light of my warning 12 months ago unless they change any settlement which was at that time effective in relieving them from tax into such a condition of irrevocability as will meet the new law. Those people who thought they really could not afford to make a particular arrangement unless they reserved the right to stop it when they thought fit must think again. We really cannot let people off the ordinary operation of the tax unless they do irrevocably commit themselves to making such settlements. Where the settlements are made irrevocable my point is that I am satisfied that there are a number of perfectly deserving cases which came into existence at the time when this way was open to them, and when very honourable people pointed out that the way was open, and I do not think we should be justified in penalising them retrospectively even though we may feel, as I certainly do feel, that there are some other people who may have made use of this device for purposes which cannot be justified.

9.16 p.m.

Mr. Benson

I listened with great interest to the hon. and learned Member for Montgomery (Mr. C. Davies) but I feel that this is an excellent example of a hard case making bad law. It was evidently a very moving case, because it touched the heart of the Chancellor, but when we come to analyse such data as the hon. and learned Member gave I do not think we shall be prepared to admit that he established that retrospective action would create any very great hardship, because retrospective action is entirely confined to surtax. The hon. and learned Member spoke of the case of a civil servant, but the income of civil servants is not usually a very high one.

Mr. C. Davies

I used it merely as an illustration of where a settlor had reserved to himself, for good reasons, the right of revocation. I did not use it as anything else than an illustration of a settlement.

Mr. Benson

So that actually the hon. and learned Member has wrung the Chancellor's feelings with a purely hypothetical case.

Mr. Davies

Oh, no.

Mr. Benson

Even if it is not a hypothetical case, evidently it is not a case where there is any great hardship, because the retrospective collection of tax cannot be on a very large scale. The tax cannot be at a very high rate, and this Clause relates only to Surtax on that part of the income which is involved in the settlement. When one comes to analyse it it becomes a question of whether, on the case cited by the hon. and learned Member there was more than £10 of tax involved. A civil servant would not have a very high income, and if only a small section of that income was liable to retrospective collection of Surtax the amount could not be very much. This is the hard case which is put before us in order to obtain a modification of this Clause, when we know that a modification will apply not merely to hard cases where the Surtax is at a very low rate but will apply to settlements which have been definitely evasive in their object, and those evasive settlements are generally those which would attract tax at a high rate, because it would not be worth while to make an evasive settlement unless the tax to be avoided was at a fairly high rate.

If the Chancellor does modify the Clause along the lines suggested, I do hope that he will not accept the suggestion to break into the middle of a seven years' trust and, if it has three or four years to run, allow those three or four years to be outside the scope of tax. These settlements in the past have had the advantage of two things: first the advantage of avoiding tax and, secondly, the advantage of revocability. If they are going to receive the added advantage that retrospective action is not to apply to them, I think the very least the Chancellor can do is to ask them to make their trust irrevocable not only for a remaining, broken part of seven years but irrevocable for the full seven years.

Sir W. Brass

I beg to thank the Chancellor of the Exchequer for what he has said, and to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendments made:

In page 35, line 6, after "arising," insert "under the settlement."

In line 16, after "arising," insert "under the settlement."—[Sir J. Simon.]

9.22 p.m.

Sir Alfred Beit

I beg to move, in page 37, line 4, after "but," to insert: in all cases other than cases to which the provisions of Sub-sections (1) and (2) of this Section apply. I do not think it will be necessary for me, in view of the generous statement just made by the Chancellor of the Exchequer, to press this Amendment, but as he has said that it was not possible for him to distinguish between genuine and non-genuine trusts, I would draw his attention to the fact that I made my Amendment rather more restricted than that of the hon. and gallant Member for Clitheroe (Sir W. Brass) and others. I restricted it to Sub-sections (1) and (2), referring to settlements of property where normally there is no question of the settlor drawing the income, and I omitted Subsection (3), which deals with what I think are known as accumulator trusts—at least, I am informed that that is what it deals with, though from the wording it is rather difficult to understand it. I wanted only to call the attention of the Chancellor of the Exchequer to the fact that in this Amendment he may find a suitable means of distinguishing between the good and the bad trusts.

9.24 p.m.

The Attorney-General

I do not think my hon. Friend will expect any statement from me. As he has said, the point raised by the Amendment is covered by what my right hon. Friend the Chancellor of the Exchequer said just now. I am not certain whether the distinction which he thinks can be drawn between bona fide and non-bona fide trusts will quite satisfy my hon. and learned Friend the Member for Montgomery (Mr. C. Davies), but undoubtedly we shall see whether assistance can be drawn from it in considering the Amendment to be put on the Paper.

Sir A. Belt

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Clause, as amended, ordered to stand part of the Bill.