§ Fifth and subsequent Resolutions considered.
§ INCOME TAX.
§ CHARGE OK TAX.
§ 5. "That—
§ (1) Income Tax for the year 1938–39 shall be charged at the standard rate of five shillings and sixpence in the pound, and, in the case of an individual whose total income exceeds two thousand pounds, at such higher rates in respect of the excess over two thousand pounds as Parliament may hereafter determine;
§ (2) all such enactments as had effect with respect to the Income Tax charged for the year 1937–38 shall have effect with respect to the Income Tax charged for the year 1938–39.
§ HIGHER RATES OF INCOME TAX FOR 1937–38.
§ 6. "That Income Tax for the year 1937–38 in respect of the excess of the total income of an individual over two thousand pounds shall be charged at rates in the pound which respectively exceed the standard rate by amounts equal to the amounts by which the rates at which Income Tax was charged in respect of the said excess for the year 1936–37 respectively exceeded the standard rate for that year.
§ AMENDMENT AS TO RELIEF IN RESPECT OF
LIFE INSURANCE PERMIUMS.
§ 7. "That, in cases where the allowance to be given in respect of life insurance premiums and other payments under Section thirty-two of the Income Tax Act, 1918, is restricted by paragraph (f) of Subsection (3) of that Section as amended by Section twenty-three of the Finance Act, 1935, the rate of tax by reference to which the allowance is so restricted shall be ten thirty-thirds of the standard rate instead of one-third of the standard rate.
§ AMENDMENT OF SCHEDULE C AND CONSEQUN-
TIAL AMENDMENT OF SCHEDULE D.
§ 8. "That—
§ (1) for all the purposes of Income Tax under Schedule C and Rule 1 of the rules 906 applicable to Case 111 of Schedule D, the expression ' public revenue ' shall, except where the context otherwise requires, include the public revenue of any Government whatsoever and the revenue of any public authority or institution in any country outside the United Kingdom;
§ (2) where a banker or any other person in the United Kingdom, by means of coupons received from any other person or otherwise on his behalf, obtains payment of any foreign dividends elsewhere than in the United Kingdom, the tax under Schedule C shall extend to the dividends and the person obtaining payment shall be treated for the purpose of the paying agents rules as if he were intrusted with the payment thereof;
§ (3) where a banker in the United Kingdom sells or otherwise realises coupons for any dividends, being foreign dividends, and pays over the proceeds to any person or carries them to his account, or where a dealer in coupons in the United Kingdom purchases any such coupons as aforesaid otherwise than from a banker or another dealer in coupons, the tax under Schedule C shall extend to the proceeds of the sale or other realisation, and the paying agents rules shall apply to those proceeds as if they were dividends, and shall apply to the banker or dealer as if he had been intrusted with the payment thereof;
§ (4) the provisions of the last two foregoing paragraphs shall apply for the purpose of Rule 7 of the miscellaneous rules applicable to Schedule D (which relates to interest, etc., from colonial and foreign companies) subject to any necessary modifications;
§ (5) for the purpose of this Resolution—
- (a) the expression ' banker ' includes a person acting as a banker and, notwithstanding anything in the paying agents rules, includes the Bank of England and the Bank of Ireland;
- (b) the expressions ' dividends,' coupons' and 'coupons for any dividends' have the same meanings as in the paying agents rules and the expression ' foreign dividends ' means dividends payable elsewhere than in the United Kingdom, whether they are also payable in the United Kingdom or not;
- (c) the expression ' paying agents rules ' means the rules applicable to Schedule C as to interest, etc., with the payment of which persons other than the Bank of England, the Bank of Ireland and the National Debt Commissioners are intrusted;
§ (6) the provisions of Schedule C and Schedule D shall be deemed always to have had effect subject to the foregoing provisions of this Resolution:
§ Provided that, where at any time after the twenty-ninth day of July, nineteen hundred and thirty-seven, and before the twenty-seventh day of April, nineteen hundred and thirty-eight, tax could have been charged on or deducted from any profits under Schedule C of the said Rule 7 if the provisions of this Resolution had been 907 enacted at that time, but has not been so charged or deducted, those profits shall be chargeable under Case VI of Schedule D for the year of assessment in which the profits arose.
§ TRANSFERS OF INCOME ARISING FROM
§ 9. "That—
§ (1) where, in any year of assessment, the owner of any securities (in this Resolution referred to as ' the owner ') has sold or transferred or hereafter sells or transfers the right to receive any interest payable, whether before or after the sale or transfer, in respect of the securities without selling or transferring the securities, the following provisions shall have effect and shall be deemed always to have had effect:
- (a) that interest, whether it would or would not be chargeable to tax apart from the provisions of this Resolution, shall, for all the purposes of the Income Tax Acts, be deemed to he the income of the owner or, where a beneficiary is entitled to the income arising from the securities, the income of the beneficiary, and not the income of any other person, and be deemed to be income for that year;
- (b) in the case of a sale or other realisation the proceeds whereof are chargeable to tax under Schedule C or Rule 7 of the miscellaneous rules applicable to Schedule D, the amount of the interest deemed to be the income of the owner or beneficiary shall be an amount equal to those proceeds;
- (c) in any other case, tax at the standard rate in respect of the interest shall be chargeable on the owner or beneficiary under Schedule D;
§ (2) nothing in the foregoing provisions shall affect any provision of the Income Tax Acts authorising or requiring the deduction of tax from the interest, or from the proceeds of any subsequent sale or realisation of the right to receive the interest;
§ (3) for the purpose of this Resolution, the expression interest ' includes dividends, annuities and shares of annuities, and the expression ' securities ' includes stocks and shares."
§ FUNDING BONDS ISSUED IN RESPECT OF
INTEREST ON CERTAIN DEBTS.
§ 10." That—
§ (1) where any funding bonds are issued to a creditor in respect of any liability to pay interest on any debt to which this Resolution applies, the issue of the bonds shall be treated for all the purposes of the Income Tax Acts as if it were the payment of an amount of that interest equal to the value of the bonds at the time of the issue thereof;908
§ (2) where any person by or through whom any such bonds are issued in any year of assessment would be required under the said Acts to deduct tax from the said amount of interest if it had been actually paid by or through him, he shall retain bonds the value whereof at the time of issue is equal to tax at the standard rate for that year on the said amount of interest, and shall be acquitted in respect of the retention in like manner as if he had deducted such tax from the interest, and shall be chargeable with such tax accordingly:
§ Provided that the Commissioners of Inland Revenue, if satisfied that it is impracticable to retain bonds as aforesaid, may relieve any such person from the foregoing provisions of this paragraph on such conditions as they think fit, and thereupon tax in respect of the amount of interest treated as having been paid by the issue of the bonds shall be chargeable for that year under Case VI of Schedule D on the persons receiving or entitled to the bonds;
§ (3) the debts to which this Resolution applies are any debts incurred, whether in respect of moneys borrowed or otherwise, by any Government, public authority or public institution whatsoever, or by any body corporate whatsoever, and for the purpose of this Resolution the expression ' funding bonds ' includes any bonds, stocks, shares, securities or certificates of indebtedness;
§ (4) the foregoing provisions of this Resolution shall be deemed always to have had effect:
§ Provided that, where at any time after the twenty-ninth day of July, nineteen hundred and thirty-seven, and before the twenty-seventh day of April, nineteen hundred and thirty-eight, any bonds could have been retained under this Resolution if its provisions had been enacted at that time but have not been so retained, an amount equal to the value of the bonds at the time of the issue thereof shall be chargeable under Case VI of Schedule D for the year of assessment in which the bonds were issued.
§ PROVISIONS AS RESPECTS SETTLEMENTS.
§ 11. "That—
§ (1) there may be included in any Act of the present Session relating to finance such provisions as to Income Tax as Parliament may determine in relation to—
- (a) settlements which are wholly or partly revocable or otherwise determinable in any circumstances whatsoever (including settlements whereunder the settlor's liability might cease on payment of a penalty);
- (b) settlements whereunder any income or property of any description is, or will or may become, payable to or applicable for the benefit of the settlor in any circumstances whatsoever;
- (c) the disallowance, in computing total income for purposes of Surtax, of the deduction of sums paid by a settlor to the trustees of the settlement or persons connected with the settlement;
- (d) sums paid directly or indirectly, whether by way of loan or repayment of loan or otherwise, by the trustees of a settlement or persons connected with a settlement to the settlor;
§ (2) subject to such qualifications and exceptions as Parliament may determine, the said provisions shall apply to any settlement wherever or whenever made or entered into, and shall apply for the purposes of assessment to Income Tax for the year 1937–38 and subsequent years;
§ (3) for the purpose of this Resolution the expression ' settlement ' includes any disposition, trust, covenant, agreement or arrangement, and the expression ' settlor ' includes any person by whom a settlement was made or entered into directly or indirectly and, in particular, includes any person who has provided or undertaken to provide funds directly or indirectly for the purpose of a settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into a settlement; and references to a settlor include references to the wife or husband of a settlor."
§ AMENDMENTS AS TO AVOIDANCE OF INCOME TAX BY TRANSFER OF INCOME ABROAD.
§ 12. "That there may be included in any Act of the present Session relating to finance such amendments of Section eighteen of the Finance Act, 1936 (which contains provisions for preventing avoidance of Income Tax by transactions resulting in the transfer of income to persons abroad), as Parliament may determine, and any such Act may provide that the said amendments shall have effect for the purpose of assessment to Income Tax for the year 1937–38 and subsequent years, and shall apply in relation to transfers of assets and associated operations whether carried out before or after the date of this Resolution."
§ ADMINISTRATION OF ESTATES.
§ 13. "That—
§ (1) there may be included in any Act of the present Session relating to finance such provisions as to Income Tax as Parliament may determine in relation to the estate of a deceased person and the income arising therefrom before the completion of the administration of the estate, in relation to persons having an interest in the residue of an estate before, on and after the ascertainment thereof and persons to whom legacies are bequeathed by a will, and otherwise in relation to the administration of estates;
§ (2) any such Act may provide that the said provisions shall have effect for the purpose of assessment to Income Tax for the year 1937–38 and subsequent years and shall apply in relation to the estate of a deceased person whether he died before or after the commencement of that year."910
§ VALUATION OF TRADING STOCK ON DISCONTINUANCE OF TRADES.
§ 14. "That—
§ (1) when any trade is discontinued or treated for the purposes of Income Tax as if it had been discontinued, any trading stock then belonging to the trade shall be valued, in computing for the purposes of Income Tax the profits or gains of the trade, as follows:
- (a) in the case of any such trading stock which is sold or transferred for valuable consideration to a person who carries on or intends to carry on a trade in the United Kingdom and may deduct the cost of the trading stock as an expense in computing the profits or gains of that trade, the value thereof shall be taken to be the amount realised on the sale or the value of the consideration given for the transfer;
- (b) in the case of any other such trading stock, the value thereof shall be taken to be the price which it would have realised if sold in the open market at the discontinuance;
§ (2) provision shall be made for determining any questions arising under sub-paragraph (a) of the last foregoing paragraph for the purpose of computing the profits or gains of both the trades concerned;
§ (3) for the purpose of this Resolution, the expression ' trading stock ' includes property of any description, whether real or personal."
§ LOSSES OF CAPITAL REDEMPTION BUSINESS.
§ 15. "That—
§ (1) where any person carries on capital redemption business—
- (a) the capital redemption business, if carried on in conjunction with business of any other class, shall be treated for the purposes of Income Tax as a separate business; and
- (b) in ascertaining whether and to what extent he has sustained a loss in the carrying on of the capital redemption business for the purpose of setting off or giving relief in respect of the loss, any of his income derived from investments held in connection with the capital re-demptan business shall be treated as part of the profits arising from that business:
§ (2) in this Resolution the expression ' capital redemption business ' means the business (not being life assurance business or industrial assurance business) of effecting and carrying out contracts of insurance, whether effected by the issue of policies, bonds or endowment certificates or otherwise, whereby in return for one or more premiums paid to the insurer a sum or series of sums will become payable to the insured in the future."911
§ ESTATE DUTY.
§ ESTATE DUTY IN RESPECT OF RESIDUARY ESTATES.
§ 16. "That—
§ (1) there may be included in any Act of the present Session relating to finance such provisions as to Estate Duty as Parliament may determine in relation to the residue of the estate of a deceased person and to the inclusion of property representing such residue in the property that passes or is deemed to pass on the death of a person dying before the completion of the administration of the estate;
§ (2) any such Act may provide that the said provisions shall have effect and be deemed always to have had effect in relation to a person so dying whether before or after the commencement of the said Act."
§ ESTATE DUTY IN RESPECT OF PROPERTY TRANSFERRED TO, AND SHARES IN, CERTAIN COMPANIES.
§ 17. "That—
§ (1) for the purpose of determining the rate of Estate Duty, property which is deemed to pass on the death of any person by virtue of Section thirty-four or Section thirty-five of the Finance Act, 1930, shall not be an estate by itself but shall he aggregated with other property passing on the death;
§ (2) for the purpose of the definition of ' the value of the total assets of the company ' contained in Section thirty-eight of the said Act, the deduction to be made under paragraph (i) in respect of any debentures, debenture stock or preference shares of the company shall, instead of being the par or redemption value thereof, whichever is the greater, be the principal value thereof."
§ ESTATE DUTY IN RESPECT OF SETTLED PROPERTY.
§ 18. "That the exemption conferred by Subsection (3) of Section five of the Finance Act, 1894, in the case of settled property where the interest of any person under the settlement fails or determines by reason of his death before it becomes an interest in possession and subsequent limitations under the settlement continue to subsist, shall cease in cases where the property would, if that Sub-section had not been enacted, have been deemed to pass on the death otherwise than by reason of the failure or determination of the interest."
§ NATIONAL DEFENCE CONTRIBUTION.
- (a) so as to re-define the circumstances in which a body corporate is to be deemed to be a subsidiary of another body corporate for the purpose of Section twenty-two of the said Act (which provides for the amalgamation of the profits and losses of subsidiary and principal companies) and of any provision made in pursuance of this Resolution;
- (b) so as to alter the provisions of the said Section twenty-two relating to the giving of notice thereunder by a principal company as respects a subsidiary;
- (c) so as to disallow, in computing profits, any deduction in respect of any interest, annuity or other annual payment, or any royalty or rent, paid by one body corporate to another, where one of them is a subsidiary of the other or both are subsidiaries of a third;
- (d) so as to disallow the carrying forward of any loss under sub-paragraph (2) of paragraph (2) of the Fourth Schedule to the said Act, if and to the extent that the loss has been deducted from or set off against the profits arising from a trade or business, whether under the said Section twenty-two or otherwise;
§ RESTRICTION OF RELIEF FROM TRANSFER STAMP DUTY ON CERTAIN INSTRUMENTS.
§ 20. "That any Act of the present Session relating to finance may restrict, in such manner as Parliament may determine, the relief from Stamp Duty given by Section forty-two of the Finance Act, 1930 (which relates to instruments the effect whereof is to convey or transfer a beneficial interest in property from one associated company to another)."
§ Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."
§ 3.56 p.m.
§ The Chancellor of the Exchequer (Sir John Simon)
This Resolution is merely consequential upon the Resolution which has just preceded it. If we did not adopt this Resolution for the reduction of the modified life insurance allowance, cases would arise where the rate of life insurance deduction would be a higher rate than the rate of Income Tax which would be applicable to the individual. As long as we had the strict rule that within the reduced zone the rate of tax was one-third of the standard rate, that is to say, 1s. 8d. out of the 5s., 1s. 8d. might be the legitimate deduction, but the Statute as it is framed changes it into 1s. 10d., although, as the House will know, we are providing that only 1s. 8d. shall continue to be the reduced rate of Income Tax.
913 Therefore this is a purely consequential adjustment and goes with the Resolution preceding it.
§ Motion made, and Question proposed, "That this House doth agreed with the Committee in the said Resolution."
§ 3.59 P.m.
§ Mr. Hely-Hutchinson
I should like to ask a question in regard to Sub-section (Ell, which deals with the retroactive provisions that will become necessary in connection with this Amendment. As my right hon. Friend is aware, a proposal to make any taxation retroactive gives rise to considerable uncertainty in business, and I am only asking for some sort of assurance that it is not proposed to upset the results of litigation which has already been decided and cases which may fall in the same category.
§ 4.0 p.m.
§ The Attorney-General (Sir Donald Somervell)
I can give the assurance for which my hon. Friend has asked; it is not intended to interfere with the results of cases already decided. I think that is the only question my hon. Friend asked.
§ The Attorney-General
This and the following Resolution deal with interest on coupons, those little tickets attached to bonds which are detached year by year and presented at some place or other, and in return for them the interest is paid. It has been assumed by everyone concerned, those who cash coupons through bankers or coupon dealers, that until a recent case in the Court of Appeal this House by certain provisions in the Income Tax Acts had carried out what the intention of Parliament was, in particular in the case of coupons of bonds which cannot be presented to anyone in this country for direct cashing but are payable outside this country, being bonds of foreign Governments or concerns. Originally coupons of that kind were outside the provisions of the Income Tax Acts which provided for the deduction of tax at the source. In the case of an ordinary coupon payable in this country, a coupon which is presented to the issuing Government or country, of course tax is deducted at the 914 source. Coupons of that kind have been for many years dealt with by holders or by bankers acting on their behalf by being sold to persons called coupon dealers, who in normal cases get a small profit for themselves for undertaking to deal with the coupons by presenting them at whatever place, usually some place abroad, where they have to be presented. Naturally if a coupon can be cashed in this country the individual or banker presents it directly and it is not necessary to deal with a coupon dealer.
Parliament provided a number of years ago a provision in the Income Tax which, in ordinary popular language, meant that the provisions as to deduction of tax at the source were to apply to coupon dealers who dealt with coupons in this way, and since that provision was inserted in the Act coupon dealers have been accounting to the revenue for the tax in exactly the same way as other people who deduct tax. The recent case in the Court of Appeal decided that that provision inserted in the Act did not apply to cases where the coupons were payable solely out of the United Kingdom. I cannot but think that Parliament must have intended it to apply to such cases. The Court also decided that where a man sells one of these coupons to the coupon dealer he is not getting the interest as such but is getting the purchase price of a right to interest.
§ The Attorney-General
Yes, the Court decided that where someone takes one of these bits of paper to a coupon dealer and realises substantially, in normal cases the full amount he was receiving something which was not income. I think it is quite clear that Parliament must have intended the proceeds of these coupons to be income, because it did insert words stating that the coupon dealer was to deduct tax from what he paid. There was a further minor point, and that was that Schedule C of the Income Tax Schedules, which applies primarily to Government securities, has been as a matter of practice treated as applying to foreign municipalities. That is being dealt with in these two Resolutions. The Ninth Resolution deals with a case that is not very likely to arise, in which the coupon instead of being sold 915 to a dealer is sold to a private person. The House will not want me to go into the details at this stage.
The Resolution does not raise any further point of principle, but it is necessary, I think, because the failure of Parliament to carry out what was clearly its intention was due to the fact that in this very complicated statutory structure we inserted special words in one part without realising that in another and earlier part of the structure more general words would require amendment. This is a case in which the decision of the Court of Appeal has shown that what everyone concerned had thought was the law and had been acting upon, was not in fact the law. It is not merely the revenue which is concerned here, but banks and coupon dealers have been making deductions of tax which on this decision ought not to have been made. Therefore, I suggest that this is one of the cases in which it is right, in everyone's interest, that the position which had been understood to be the position in law should be validated retrospectively.
§ 4.10 p.m.
§ Mr. Pethick-Lawrence
I am sure the House is very much obliged to the Attorney-General for his lucid exposition of this particular Resolution. We did have from the Chancellor a very full account of most of these Resolutions when he was making his Budget speech, and those who followed him carefully can, I think, digest a good deal of what is in these very complicated Resolutions now. At the same time I think it is for the convenience of the House at this stage that we should know a little more than what the Chancellor gave us in his Budget statement, for these things are exceedingly complicated and we cannot carry in our minds precisely what the Chancellor said last week. Perhaps we may have on each of these Resolutions a little preliminary explanation before we discuss them. I understand that the matter with which we are dealing here is something which the Legislature quite definitely intended but which was not, in the opinion of the court, fully embodied in the Statute; and therefore the court, rightly or wrongly—I am not speaking with any disrespect—has come to the conclusion that under the law strictly the taxpayer has been entitled to relief from a tax which, from an equitable point of 916 view, it was the intention that he should bear. That being so, the Chancellor has very properly asked the House to re-impose the burden in words which are unmistakable. It would be quite ridiculous if it were suggested that people could escape their burden of Income Tax on what is really their income because something was not fully and implicitly stated in the legislation imposing the tax.
With regard to the paragraph (6) of the Resolution, I am not quite clear that I understood the Attorney-General. I understand that by paragraph (6) it is intended to say that it shall not be open to all and sundry who have paid taxation appropriate to their coupons to come before the court and demand relief on the ground that this legislation was passed only this year. I understood the Attorney-General to say that in so far as the particular persons who have already been before the court and have secured relief are concerned, that relief is not to be taken away from them. I suppose we can hardly ask that it should be otherwise, but it does seem a little unfair that one person who has taken a case into the court should get relief and that another person who has not taken a case cannot get relief. Probably in a matter of comparative fairness it is better to leave it in the way the Attorney-General proposes to leave it rather than take it away even from those people who have secured relief. The Attorney-General's attempt to prove that a coupon is in fact nothing but a bit of paper which has a certain value reminds me of a conundrum which was put to me by a lawyer: "Supposing a man were not to convey a property but were merely to sell the actual pieces of paper which formed the title deeds? "The Attorney-General began to explain the Ninth Resolution. I am afraid that he did not convey to me the details, and perhaps he will give a further explanation when we reach it.
§ Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."
§ 4.17 p.m.
§ The Attorney-General
This Resolution deals with the case in which the coupon 917 is sold to someone other than a coupon dealer in this country and with that part of the decision to which I referred which laid down that the proceeds of the sale of the coupon were not income. We must deal with the case where coupons are sold otherwise than to a coupon dealer for there would, of course, be a ready means of conversion of coupons outside the provisions for deduction of tax. Also, if you are able to sell it to someone not a coupon dealer and say, "This is not my income because I have sold it instead of cashing my coupon," there would be a ready means of reducing one's Income Tax liability. Therefore, it is necessary that one should deal with sales to persons other than coupon dealers and the general effect of the Resolution is that in that case the person selling to the person other than a coupon dealer shall be assessed on interest represented by the coupon. If, in fact, he got a very much smaller sum than the coupon was really worth, it might be said it was unjust, but as far as we can see no one would sell to anyone other than a coupon dealer unless he was enabled by so doing in some way to evade tax liability. The normal way of realising coupon values is by selling to a coupon dealer or presenting the coupon through a bank for encashment. If it were provided that where you sold to someone other than a coupon dealer, you would be assessed on simply what you get from him, it could be arranged easily to sell the coupon at much less than full market price and so reduce the amount of income. That is why the Resolution deals with the matter in this way. The position will, of course, be clearer when we get the actual Clause, but that is the general effect of the Resolution.
§ Sir Waldron Smithers
May I take it that a coupon dealer is registered as a banker for the purpose of making returns to the Excise for purposes of Income Tax on coupons he receives?
§ The Attorney-General
I am not sure whether registering as a banker is the right term. All I can tell my hon. Friend is that a coupon dealer in this country who buys coupons takes the place, as has been done in the past, of the person who is entrusted with payment of dividends and accounts for the tax deducted, in exactly the same way as the 918 banker does who arranges for the encashment of coupons.
§ 4.21 p.m.
§ Mr. Pethick-Lawrence
As I understand the Attorney-General, the position is that the Eighth Resolution stops up a gap which had become open owing to the decision of the court with regard to the intention of the Legislature, but that if the Resolution stood by itself it would be possible for a new gap to be opened up—the first person selling to a second person and the second person selling to a coupon broker. Therefore, in order to stop up the first gap it was necessary to anticipate that a second gap might arise, and therefore that gap is stopped by the Ninth Resolution. That, I presume, answers a question which would otherwise arise to our minds. If it were necessary at the end of the Eighth Resolution to put in paragraph (6) which makes the legislation retrospective, why has it not been done in this case? I take it the answer is that it is not necessary to do it in this case.
§ Mr. Pethick-Lawrence
I had expected to find it in the same place in this Resolution as it is in the Eighth Resolution. I take it there had been no cases along these lines and that Resolution will apply retrospectively in all cases?
§ Mr. Benson
I am afraid that I cannot square paragraph (1, b) with the explanation of the Attorney-General. I understand the hon. and learned Gentleman to say that but for this Resolution there would have been a possibility of tax evasion by the sale of coupons at a lower value than their face value. Here, apparently, if the sale takes place at a lower value than the face value, the lower value shall be taken to be the interest of the owner.
§ The Attorney-General
This paragraph refers to Schedule C or Rule 7 of the miscellaneous rules. It covers only cases where the payment is subject to deduction, that is to say, cases in which payment is made either by a bank or a paying agent or a coupon dealer. It is necessary for technical drafting reasons 919 to insert in this Resolution that it deals with cases not covered by paragraph (b), that is, cases where the tax is not deducted, where there is a sale to some one other than a person charged under Schedule D.
§ The Attorney-General
I am afraid that I cannot at the moment, but the sums involved, I think, are substantial. The effect of this Resolution is however only protective and is simply to continue this range of deductions which concern, broadly speaking, coupons and foreign bonds and securities.
§ Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."
§ 4.27 p.m.
§ The Attorney-General
This Resolution also arises out of a recent decision of the court of appeal. It has long been recognised, and was not in any way disputed in that decision, that Income Tax is payable on income whether that income is received in money or in money's worth. Thus, if a company makes an arrangement with its managing director under which his remuneration or part of it is made by way of receiving shares in the company or something of that sort, he is assessable to Income Tax on the value of the money's worth which he gets in exactly the same way as if he received money. The House will appreciate that otherwise, of course, there would be the readiest means of evading Income Tax by making payments in kind of a value which when sold would realise a sum of money which it was intended to transfer. That principle was established a very long time ago and there has been no dispute about it. The application of the principle arose in connection with the case of a foreign government. There have been other cases where foreign governments, having issued bonds bearing interest, find that in a given year they have not got, or have found it more con 920 venient not to produce, the cash which the original bond provided for the payment of interest.
§ The Attorney-General
I do not want to specify individual countries. Everybody knows that there have been many foreign countries which in recent years have found difficulty in meeting the interest on some of their foreign bonds. In many of these cases what they have done is to give to the bondholders what is called a funding bond. Suppose that a man has a bond for £100 and the Government in question say that is due in interest but that it is difficult to pay that £6 in cash. He is given a bond funding the interest, which may be worth £6 or, if the Government is not able to give a bond for £6, it may give a bond for £4 or £3.
§ Mr. Pethick-Lawrence
Does the hon. and learned Gentleman mean that the bond has a different face value or a different market value?
§ The Attorney-General
It may have a different face value or a different market value. It might have the face value of £6 but be worth, in fact, only £4 in the market; or there might be a case in which a Government said, "We cannot give you bonds to the full face value but will give you bonds for 50 per cent. of the face value." In cases in which bonds so given have a readily ascertainable market value, that is to say are marketable securities which can be realised in the ordinary way, it has been assumed that they came within what I may describe as the ordinary money's worth principle and were subject to tax, and in cases where they were paid through paying agents they were subject to deduction of tax by the paying agents. There have been large transactions through paying agents in this country in which, assuming the Income Tax was at the rate of 5s. in the £ and large quantities of these bonds were entrusted to the paying agents for paying out to a bondholder, they have handed out three-quarters of the bonds to the bondholder and handed over the other quarter to the Inland Revenue in satisfaction of the tax which, under the law, they have to deduct. Where owing to the size of the holdings or the denominations of the bonds it is impossible to split the bonds up into heaps of three-quarters 921 and one-quarter, other arrangements are made for realising the necessary amount to satisfy the obligation to the revenue, and the matter is settled in that way.
In the present case the bonds were, as I fancy these bonds usually are—like the Treasury Notes which we have in our pockets—in the form of a promise to pay by the foreign Government. That I think is the usual form of a funding bond"— The (so-and-so) Government promise to pay." The Court of Appeal decided in this case that where what is,prima facie money's worth takes the form of a promise to pay by the person from whom the interest is due, it is not right under the law to treat it as money's worth because, in fact, it is merely the substitution of one promise for another. That, very briefly, is the sort of line which was taken when the decision was given. It seemed to my right hon. Friend the Chancellor that if that was so it was contrary to what had been assumed to be the case by everybody concerned with these matters in the past; that while it might be perfectly correct in law it did not accord with the intentions of this House with regard to the matter, because when you are dealing with a foreign Government bond you are undoubtedly dealing with money's worth in the ordinary sense.
There was no intention in the past, nor is there any intention under this Resolution—in fact, it expressly provides the opposite—ever to assess anybody in respect of these bonds save upon their market value. From our point of view it is an ordinary case in which someone who is entitled to get interest has received instead of £10 in cash a Government bond worth £10 and by ordinary principles it seems that it should be subject to tax, and it has borne tax in the past and has been treated as money's worth. Therefore, it seems to my right hon. Friend to be a case in which what has been understood to be the law in the past should be validated retrospectively, and that money's worth of this kind obtained in respect of interest should be treated in exactly the same way as money's worth received in any other form.
§ 4.35 P.m.
§ Mr. Pethick-Lawrence
I have followed as well as I could the interesting explanation given by the Attorney-General, but 922 I cannot claim to understand it entirely, and I confess that I see a certain difficulty. As I understand the position, a foreign Government which should pay interest in a certain year may declare that it is unable or unwilling to do so and hand out to those who are entitled to the interest pieces of paper which are, in fact, promises to pay a certain sum at some future time. The recipients of those pieces of paper can do one of two things. First, they can sell them immediately for what is their market value and then they will be to all intents and purposes receiving an income which, though it may be different from the amount of the face value of the coupon or bond, has a definite value in money. I can understand that in those cases the Inland Revenue have taken their share of the amount which the owners of the bonds received. To take the illustration given by the Attorney-General, if the owner was entitled to receive £6 the Inland Revenue took £1 10s. and the owner was left with £4 10s.
§ The Attorney-General
The right hon. Gentleman was, I think, taking a case where a man gets a bond which may be worth less than the face value of £6. I did not intend to say—and if I did say so it was inaccurate—that the Inland Revenue have ever taken anything but its due proportion of the money's worth which the man received. If that bond was worth less than £6, was worth, say, only £4, then the Inland Revenue have taken only £1.
§ Mr. Pethick-Lawrence
It is my fault if I did not succeed in making my meaning plain, because I did understand what the Attorney-General said. I was taking the case where the coupon or bond was actually worth its face value. In such a case, when not only its face value but its market value was £6;, the man would take £4 10s. for himself and £1 10s. would go to the Inland Revenue. But there is an alternative course of action. The man could "sit on" the bond or coupon until the foreign Government does actually redeem it. This is the point upon which I am not clear. Do I understand that in cases where a man proposes to do that it has been the practice of the Inland Revenue to come down upon him and say, "You cannot keep the whole of these bonds or coupons, you must hand over one-quarter of them to us "? Is that correct?
§ The Attorney-General
As to what has been happening in the past let me take a case as an illustration. Suppose a man were entitled to receive instead of his interest £400 of bonds, and that they were issued in denominations of £100 each. There would be four bonds lying at the bank representing the gross sum of interest to which he was entitled. The bank has a statutory duty to deduct the appropriate amount of Income Tax in respect of payments made by way of interest. What has happened in the past in a case of that kind is that the holder of the original bond has gone to the bank and said, "I know that you cannot get the interest on the bonds in money but you have some bonds representing the interest." The bank would say, "Yes, you are entitled to £400 of bonds. We have to deduct tax and we give you three of these bonds of £100 each, which you can do what you like with, and we are handing over the fourth bond to the Inland Revenue in satisfaction of the tax."
§ Mr. Pethick-Lawrence
That is broadly what I had understood from the very lucid explanation which the hon. and learned Gentleman has given us of what is really a difficult matter. The point I am getting at is this: The Inland Revenue would actually get the bonds, and it would then be for them to sell them in the market if they wanted the money. What is proposed, as I understand, is that the rule which has been acted upon hitherto is to be retained, but that this Resolution is necessary because some doubt has been raised—perhaps more than a doubt in view of the decision of the court—that the Legislature had not fully covered that particular case. If that be the position this seems to be a sound method of dealing with it.
§ 4.41 p.m.
Lieut.-Colonel Sir A. Lambert Ward
Perhaps the hon. and learned Member will excuse me for putting a question, I hope that I shall make it intelligible, but I am not at all sure that I shall, because this is extraordinarily complicated. I should like to ask what is the position of a coupon dealer who, on receiving these funding bonds from a defaulting Government, has omitted to take a quarter of them and hand them over to the Treasury, but has handed over the whole of the bonds to the man who 924 handed in the coupons. I understand that this legislation has retrospective effect. What, then, would be the position of the coupon dealer? Apparently, as the courts have interpreted the law, he was correct in doing what he has done. What would his position be in the future?
§ The Attorney-General
I will make inquiries as to whether there were any cases of that kind prior to this decision. We have had communications since the decision asking what should be done, but I very much doubt whether there had been any such cases in the past. Of course if this Resolution becomes the law the position would be exactly the same as if the law was what it was thought to be at the time, namely, that he would not have made a payment which he ought to have made. He would be in exactly the same position as any other people who, having an obligation to pay interest and an obligation under the Income Tax Acts to deduct the appropriate amount of tax and pay it over to the Inland Revenue, have failed to do so. My hon. and gallant Friend's hypothetical coupon dealer would be in exactly the same position as anyone else who has failed to make a payment which the law said should be made.
§ Sir A. Lambert Ward
But the hon. and learned Gentleman said that the decision of the Court of Appeal was that he was not compelled to make that deduction.
§ 4.45 p.m.
§ Mr. Ede
I wish to ask the same question that I put upon a previous Resolution. We are dealing here with the question of raising revenue. The hon. and learned Member and the Chancellor of the Exchequer must be aware that there are wide divergencies of opinion as to the amount of money that would be obtained if all the alleged leaks in the Income Tax law were stopped up. I have seen a statement in a reputable newspaper that the amount would be equivalent to a yield of 6d. in the £ on the tax. I understand that the right hon. Gentleman himself does not feel that that estimate would be reached, even though every leak were stopped up. We are dealing with some of the leaks which have been most recently created by decisions of the court in regard to those that are most obvious. 925 The House is entitled to know what the yield would be if all the leaks were stopped up. I understand that the present situation has been caused because the Court of Appeal has said that when a foreign Government, who have not kept a promise which they have made, make a renewed promise, this promise is worth nothing. I am glad to find that that view, which I held on Monday, has some legal weight behind it. It may be that something may be realised after a time, even in financial matters. The House is entitled to some indication from the Government of the amount which they expect to get by stopping up these leaks.
§ 4.46 p.m.
§ Sir J. Simon
Although one may have a have a dog, a very good barking dog, I am occasionally willing to do a little barking myself.
§ Sir J. Simon
As this is a question of revenue it is right that I should answer the hon. Gentleman's question. We shall come to the other proposals a little later on, where the question has a different application. As regards this proposal and the one which was dealt with before, the hon. Gentleman will appreciate that this is a protective provision. Quite recently there has been an unexpected interpretation put upon the existing law and unless Parliament thought fit to correct the position as it is now declared to be, the leakage would ensue. What we are actually doing is not finding a new source of revenue but merely saying that we do not think that the House would desire that the law as it is now expounded should continue to be as it is. We are inviting the House, by its own legislative act, to put the law in a position in which it has hitherto been understood to be. There is no question under this heading therefore of how much this proposal will produce or of trying to estimate, for example, to what extent foreign Governments issue funding bonds. Estimates of the value of saving devices are peculiarly difficult to make.
I could illustrate that by an analogy of a boat. It is comparatively easy to 926 say how much more liquid you will get in a vessel which has not a hole if you increase the rate of flow or, in other words, enlarge the rate of charge. It is very much more difficult to answer the conundrum: Suppose this leaky condition continues, how many people would take advantage of it, or how far will the hole which now exists be enlarged and further used? We shall certainly do our best in this connection. This is really a protective provision and the hole ought to be stopped up promptly, because if we do not do so there may be a loss, and possibly an increasing loss.
§ 4.50 p.m.
§ Sir Waldron Smithers
I wish to make only one point—to which I do not expect an answer to-day—which may make this provision more workable. The Attorney-General stated that the Income Tax payer would be assessed only on the gross value of the bond. I suggest that the Government should provide some method of assessing that value. The Attorney-General talked about £400 worth of funding bonds, but suppose that they are in Mexican dollars, pesos or lire; ought there not to be some method between the taxpayer and the revenue authorities for assessing the value? It is easy to do so if the funding bond has been sold, when you know what the taxpayer has got for it, but suppose the revenue authorities or the taxpayer are sitting on the bond; it is not easy in those circumstances. I would ask the Government to consider what provision they can make in the Finance Act, either by referee or in some other way, for deciding between the Income Tax authorities and the taxpayer what is a fair value to put upon the bond for the purposes of Income Tax.
§ 4.52 p.m.
§ Mr. Gallacher
It appears to me that while the Government are patching up one hole and one leak they are creating a series if new leaks. Would it not be better and ensure complete security, as well as putting an end to all possible leaks, if the Chancellor of the Exchequer took all the money away from these people, over and above a certain amount?
§ 4.55 p.m.
§ The Solicitor-General (Sir Terence O'Connor)
Hitherto the House has been dealing with Resolutions about which it was possible to speak with a great measure of precision. I am afraid that this Resolution must necessarily lack some of that precision which gave my hon. and learned Friend an opportunity to give the House so lucid a statement. This Resolution is the bare bones, the skeleton, which will have to be clothed in flesh in the Finance Bill, for the purpose of enabling an end to be put to some of the tax-avoidance schemes which were outlined by my right hon. Friend when he opened his Budget. The House will see that the Resolution provides that legislation may be introduced into Parliament affecting four different types if settlement in respect of each of which an abuse has been discovered. The first example is of settlements which are wholly or partly revocable. The second is concerned with settlements which, although irrevocable, provide that the income may in certain circumstances revert to the benefit of the settlor. The third example relates to settlements where sums may be deducted by the settlor when paying to the trustees, and where use is made of the settlement in order to accumulate sums of money. The fourth example relates to the type of case where sums are paid by loan or repayment of loan, by the trustees of a settlement or persons connected with a settlement, to the settlor.
My right hon. Friend, when he made his Third Reading speech on the Finance Bill in 1937, referred to the subject of avoidance of tax and gave a warning that he would not hesitate to propose legislation to deal with the subject, and particularly with that type of avoidance of tax through the form of accumulating trusts, under which Surtax payers were able tto reduce their liability by transfer of income under trusts outside the provisions of Section 20 of the Finance Act, 1922. Under that Act, if the settlor has power, of his own volition, to revoke a settlement, the income is treated as his income, so that he is liable to Surtax upon it, 928 but if the power of revocation is subject to the consent of somebody else, he goes outside the provisions of the Act of 1922. The provision that we propose to embody in the Finance Bill when it comes forward will stop up a gap that is obviously available by virtue of that Act.
We have seen, for example, and I have here a copy of one, a deed which can be completed by means of a 10s. stamp. It begins by reciting certain names of beneficiaries who are to receive annual payments made by the settlor to trustees for them, in such shares as the settlor may direct. It goes on to provide that he may remove the trustees and appoint new ones and that, with the consent of specified people—some accommodating friend, no doubt—he can revoke the deed in whole or in part, may appoint and make a new trust and, in particular, may require the trustees to hand over the trust fund to himself. The fact that revocation can be made only with the consent of an accommodating friend makes the Act of 1922 inapplicable to that kind of case. Of course, the annual payment which the settlor makes under the deed is a deduction when he comes to compute his total income for Surtax purposes, and he avoids Surtax by this obvious device. It is manifest that by selecting accommodating friends he can get back for himself the sums of money he has paid for the security, without the attendant and inconvenient payment of Surtax.
This device has to be dealt with, and what we propose is that in the case of settlements which can be revoked by the settlor with the consent of some other person the income in any year will be treated for Income Tax purposes as his income, irrespective of whether it is or is not accumulated by the trustees. As to example B, our proposal when clothed with form in the Statute, will deal with those cases where there is not a power of revocation in the settlement and in which the income under the settlement will, in certain contingencies, revert to the settlor or his wife. In these cases the settlor makes a settlement under which the income is to be accumulated over a term of years, and then provides that the whole of the accumulated income shall be paid over to his wife; and, the accumulated funds being a capital payment, when they are paid over under the terms of the settlement all the 929 accumulated income escapes Surtax. Settlements of this kind, which are commonly known as "Surtax accumulators," have been largely used in order to avoid Surtax.
It is now proposed that in the case of these settlements the income, to the extent to which it is accumulated, shall be treated as the settlor's income for tax purposes. If it is distributed to beneficiaries, it is, of course, treated as their income for tax purposes, as it cannot get back to the settlor. Certain exceptions to and modifications of this general scheme will have to be made in the Finance Bill—for example, to meet the case where funds are permitted to revert to the settlor on the bankruptcy of the beneficiary or in the event of an assignment or charge. This is the ordinary kind of provision, not a tax-evading provision at all, which is commonly inserted in respect of minors and in other cases that occur to one—in the case, for example, of a marriage settlement where the funds revert to the settlor on the death of the parties to the marriage. Provision will have to be made for the exclusion of bona fide cases of that kind, but the general scheme will he to prevent this easy method of saving Surtax when, notwithstanding that payments have to be made over a period of time, the benefit of those payments really reverts in a lump sum to the settlor.
Paragraph (c) deals with settlements which are irrevocable so far as the settlor is concerned, and do not provide for the reversion to him of the funds of the settlement. In that respect they are not covered by paragraphs (a) and (b). The settlor undertakes to make an annual payment to the trustees of the settlement, and, provided that they are made for a term exceeding six years, these payments constitute, under the existing law, deductions from his total income when calculating his Surtax liability. Supposing that those payments are made to a beneficiary, no question arises. If they are paid direct to the beneficiary under a deed creating the charge for a term of six years, he can obtain a deduction for Surtax purposes, and there is no reason why he should not similarly obtain a deduction when a payment is made through trustees, so that that case does not matter. But the case where the payments are accumulated in the hands of 930 trustees—in other words, where the settlor is using the trustees as a kind of savings box—is a case in which we think Surtax ought to be leviable, and proposals will be put forward to effect that purpose.
Paragraph (d) deals with what is perhaps one of the more obnoxious and reprehensible forms of tax evasion of this character. Articles have appeared lately in the Press calling attention to a device under which a settlor can, in effect, enjoy the income of the settlement by means of getting loans from the trustees under the settlement. He makes an irrevocable settlement, the trustees are directed to accumulate funds provided by the settlor for the benefit of somebody, a child or whoever it may be, and the trustees are empowered to make loans to the settlor out of the funds in their hands. In the exercise of that power they make an annual loan to the settlor. That was the kind of case which my right hon. Friend described in opening his Budget as a case in which not only the settlor got his income free of Surtax in the form of loans, but, in fact, does not have to face the inconveniences usually attendant on loans. His indebtedness is not of any importance either to him or to the beneficiary, because usually the beneficiary is a member of his family or some accommodating friend, so that in practice the situation is not a very menacing one from his point of view. I have given an example of the simplest kind of case that is dealt with in paragraph (d), but it will be necessary in the Act to amplify and extend the provisions to deal with very much more complicated matters.
I will give the House an example. A transfers securities to a company for £100,000. He then makes a settlement, quite a nominal one, on some beneficiary, say for £100, with the provision that the income is to be accumulated during the lifetime of A, the settlor. He then makes a loan of £99,900 to the trustees of the settlement, and with that £99,900 the trustees buy shares in the company to the value of £100,000. The company returns the £100,000 to A in payment for the securities. The House will see that the whole transaction is merely a paper transaction, a mere exchange of cheques. A can fix any figure he likes for the loan, and it need not correspond with the real value of the securities. The 931 company pays to the trustees the corresponding income from the securities, and the trustees use this income every year to repay the loan to A. That is a nice convenient arrangement whereby A avoids Surtax for the period of the transaction.
I will give another example of the kind of case that we shall have to cover in the fuller exposition of our treatment of these problems in the Finance Bill. Suppose that the settlor, instead of making a loan to the trustees, sells to them some asset at a figure much in excess of its real value, and that the arrangement is that the purchase price shall be paid by instalments over a period of years. The income of the settlement is used to pay the instalments, or to cover the fictitious element in the purchase price. This results in an accumulation of the income, and the accumulated income is used to make payments to the settlor in a nontaxable form. To defeat these schemes we propose to provide that any sum paid by trustees to a settlor shall be treated as the settlor's income to the extent to which there is accumulated income from the settlement. This will apply to all existing settlements, but it will only affect sums payable to settlors in the year 1938–39 and subsequent years. In the Finance Bill we shall have to fortify this provision by a provision, similar to some others which have been made, to cover the case in which a company or chain of companies is inserted between the settlor and the ultimate receiver.
The second paragraph of the Resolution enables retrospective effect to be given to the provisions. It provides that the proposals shall apply to all settlements existing or future, whether made in this country or abroad, and that the new provisions shall take effect as from the year 1937–38. But we only intend that the provisions of paragraphs (a) and (b), which deal with revocable settlements and settlements where the income reverts to the settlor, shall operate in respect of the year 1937–38 and for the purposes of Surtax only. They will not affect the standard rate tax until the year 1938–39, and that will be made clear in the Finance Bill.
Paragraph (3) of the Resolution defines the expression "settlement" so as to include any disposition, trust, covenant, agreement or arrangement; and the ex 932 pression "settlor" includes not only the person who has actually made the settlement, but also any person who has provided funds for the purpose or has made a reciprocal arrangement with some other person to make such a settlement. The paragraph also provides that husband and wife shall be treated as one for the purpose of the Resolution, so that, for example, if a settlor's wife undertakes to make an annual payment under a settlement, or if the trustees make loans to the settlor's wife, the respective provisions will operate as if the annual payment had been made by the settlor or the loans had been made to the settlor.
The question has been asked, with regard to previous resolutions, whether any estimate could be made of the value to the revenue of the Resolution. I think, however, it will be clear to the House that it would be impossible in this case to say what the effect on the revenue is likely to be. This is another instance in which one has to stop up holes lest the leakage becomes greater than it is at the present time. I remember in my youth reading the story of the boy who put his finger into a hole in a dyke in Holland in order to prevent the country from being swamped by the incoming sea. It may very well be that he would never have been able to estimate the damage that would have occurred if he had pulled his finger out. In the same way, it may very well be that, if we leave open the holes that we are here seeking to stop, very considerable damage might be done to the revenue, but I think the House will agree that it is impossible to make an estimate of what the potential figure is.
§ 5.13 p.m.
§ Mr. Pethick-Lawrence
I am sure the House is very much indebted to the Solicitor-General for his full account of these provisions. Obviously, it will be unnecessary for me to go over the ground which he has already covered so carefully, but there are one or two questions that I should like to ask. As I understood the Chancellor of the Exchequer last week, when he was dealing in his Budget speech with the question of settlements, all that the House was going to be asked to do was to amend certain provisions of the Act of 1936; but, as I understand the Solicitor-General to-day, it is only paragraph (a) that is really concerned with 933 the Act of 1936. If I understood him aright paragraph (b), and certainly paragraphs (c) and (d), carry us into realms that were not contemplated in the Act of 1936. Perhaps whoever replies—
§ Sir J. Simon
The right hon. Gentleman is quite right, but I did refer to these other points. I dealt with the first point at the bottom of column 52 of the OFFICIAI. REPORT for Tuesday, 26th April, and with the second point in column 53; and then I went on to say:There are two more proposals on this topic to which I attach importance. One deals with the device under which the settlor is enabled to enjoy the income of a settlement, without paying tax upon it, by way of loans made to him by the trustees. A loan is not income. It is first a debt."—[OFFICIAL REPORT, 26th April, 1938; col. 53, Vol. 335.]They were all mentioned in a summarised form, but it was not a very easy occasion on which the details could be given.
§ Mr. Pethick-Lawrence
I was not making a charge or a complaint against the Chancellor of the Exchequer. He is not bound to cover all the details in his Budget speech, although he does generally make some reference to the points that are to be dealt with in the Resolutions. The Committee on Budget day know that they have to pass the Resolutions at the end of the day, and they are somewhat in the dark because they cannot expect to have a full explanation from the Chancellor of the Exchequer. I gather that it is only (a) that is concerned with the Amendment of the 1936 Act. Again, without making any charge against the Chancellor of the Exchequer or his predecessor, if I remember correctly, such grounds as are covered in this Amendment formed the subject of debate on a former occasion.
A second point on which I am not certain is how far these provisions concern Surtax. I gather that in the main it is only Surtax that will be affected. I think that in the case of (c) it is specifically confined to Surtax, but I gathered from the speech of the Solicitor-General that there are parts which will also affect Income Tax. I think that comes particularly under (d). If a man makes a settlement, say, in favour of trustees for charitable objects, it is not merely Surtax but Income Tax that is avoided in that case.
My last point relates to leakage. My hon. Friend the Member for Chesterfield 934 (Mr. Benson) has raised this question before, and has asked how much is going to be saved. I understood from the Chancellor of the Exchequer that this is not a leakage that has occurred in the past but a leakage that is going to occur if we do not stop it, and, therefore, it is not a case where a specific sum can be mentioned. I agreed with the Solicitor-General when he said that he could not say how much new leakage was going to be stopped by carrying out the provisions envisaged in the Resolution, but I think we are entitled to know what is the estimated leakage that is taking place at the present time, which it is proposed to stop. I know that the estimate could only be uncertain. We are, however, entitled to some estimate, how ever conjectural, of what is the leakage at the present time. I should be obliged if that information could be given. There must be some figure which can be given as to the amount of leakage which it is estimated may be stopped.
§ 5.18 p.m
§ Mr. Assheton
I should like to congratulate the Chancellor of the Exchequer on having stopped up a good many more holes in our Income Tax legislation, and I should like to say how grateful we are on these benches that this policy is being rigorously followed. I should also like to congratulate the Solicitor-General on the explanation that he has given, and, if I may, to ask him a question. Take the case of a man who has a considerabe surplus income and who is able to put aside into a trust, say, £100,000 of capital, the income of which can either be applied for the benefit of his children or can be accumulated; am I right in assuming that in the event of that income being accumulated the income will be assessed as part of the income of the settlor? If that be so, may I go a step further and ask, what is to happen in the case of the settlor being dead and being no longer assessable to Surtax? There are cases when a settlement is made and the income has accumulated for a long time after the death of the settlor when it is, in a sense, nobody's income, and in that way a certain amount of tax is lost to the revenue. Possibly these points may be dealt with in Committee but perhaps the Solicitor-General would prefer to give me an answer now.
§ 5.20 p.m.
§ Mr. Benson
I am afraid that I cannot follow the hon. Member for Rushcliffe (Mr. Assheton) in congratulating the Government on pursuing this matter of tax evasion with rigour. They are limping tardily along. Take the matter dealt with under (a). That is a question which I raised in 1936, when I pointed out that this evasion was going on, but nothing was done. It is not until two years afterwards that we are to get any legislation. I am not certain the Solicitor-General is correct when he says that (d) does not arise out of the Finance Act of 1936. In regard to the liability of trustees, I raised the point that if the trustees were adequately safeguarded by the terms of the trust deed they would be able to hand over the income in such a way that it might come back to the settlor. I was told that that could not be done, but here to-day we have to legislate against it.
I am very much disappointed with the explanation given by the Solicitor-General. When I read the Resolution I was hoping that the Government were going to cast their net a great deal more widely than they propose to do. For instance, under (b) where part of the settlement can be used for the benefit of the settlor, I hoped that they were going to deal with foreign trusts, like the Archer Shee Trust. Our courts, apparently, have decided that our tax law in the case of foreign settlements must be subject to foreign tax law. A man makes a settlement in America and income is received out of the securities. Normally, the income received from securities by a person resident in this country is taxed whether it comes into this country or not, but because under the American law income received from securities which goes into the hands of trustees for beneficiaries loses its identity and is no longer held to be income from the specific securities, our courts have held on that change of identity, that only such income as is transmitted to this country shall be taxed. As a result of that decision it is possible for a wealthy man to make a settlement trust in America, to take advantage of American law and accumulate income there and to make investments there, and only have to pay tax if he transmits the income from the accumulated investment. Why is that not dealt with? It was thought worth while to fight an expensive legal case to decide the legality of these transactions 936 and try to upset the decision; why, then, cannot we take the simpler and cheaper method of quashing that decision in the Finance Bill?
Let us consider what is known as the discretionary trust. The discretionary trust in its inception was primarily for the purpose of safeguarding an estate from the depredations of an erratic heir, but since then it has been found that it can be used most effectively as a means of avoiding Death Duties. At the same time it can and does avoid Income Tax and Surtax. Under a discretionary trust the trustees have complete power to pay as they like any sums to A, B, C or D, A being the settlor. Although they have complete discretion to pay as they like, they are chosen with care and they will pay as the settlor desires. They may pay to his children and what goes to the children is not the income of the settlor but is income of the trustees, who can dispose of it according to their discretion. Here is a trust under which a certain amount of benefit goes to the settlor, and it ought to be dealt with. Are the Government prepared to deal with it?
My right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) raised the question of Income Tax. Under these tax-dodging settlements a very large amount of Income Tax is being avoided. Take the case of a man who settles, under a revocable trust, an income of £300 on his son. Although that revocable trust may have the effect of adding the income paid to the son to the settlor's income for Surtax purposes, it does not avoid the dodging of Income Tax. The settlor, when he pays his £300, pays it less tax amounting to £82 10s., but the beneficiary, having received his income less tax, is entitled to apply to the Inland Revenue for repayment. He can claim back, if the total is £300, £55 of Income Tax out of the £82 10s., so that the result is that Income Tax of £55 is avoided. In all these trusts, where they are taxed because they are revocable, the whole of the income for all purposes of tax ought to be treated as the income of the settlor and of nobody else.
Why have not the seven-year trusts been dealt with? It is one of the most common and extensive methods of avoiding tax. The Solicitor-General quoted 937 from a duplicated document when he said how easy it was for some of these trusts to be established. In the Debate on the 1936 Finance Bill the Chancellor of the Exchequer, with horror in his voice, described how certain of the educational trust documents were being widely distributed. There is scarcely an institution which depends upon public subscription that does not print these seven-year trust documents and distribute them broadcast. If a man wants to subscribe to any particular charity, why should he be able to compel the Government to subscribe anything up to two-thirds of what it costs him? If a Surtax payer paying the full rate makes an annual donation of £100 to some institution in which he is interested under one of these seven-year trusts it costs the Government something like £70 a year and the generous donor something like £30. Why should such a man be able to deflect from the Revenue 13s. 9d. of every £ that he gives? Why should the Chancellor of the Exchequer be compelled to subscribe to any particular institution, charity or trust which the subscriber likes to choose?
The Chancellor will not settle the matter of Income Tax avoidance by simply stopping up one hole after another. If he stops up one hole, it will merely means that another hole, which is not being very greatly used at the moment, will be expanded. Until the Government are prepared to take powers of a general character which will enable the courts or the Commissioners, subject to the courts, to look at the reality and not the mere form, we shall have an unending spate of tax evasion legislation. Let us settle the matter once and for all by giving powers to the Inland Revenue to enable them to deal with income as income and not continually to have to adopt these various piecemeal methods.
§ 5.35 p.m.
§ Mr. Ede
I would like to thank my right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) for supporting the plea that we should have more information. I was interested in the illustration which the learned Solicitor-General gave in his attempt to avoid giving the information. He seems to occupy the converse positon to that which Talleyrand thought Napoleon occupied, when he remarked: 938How unfortunate so great a man should have been so badly brought up.I would say, "How unfortunate that one who was so well brought up should now be Solicitor-General in the meanest Government of modern times." The hon. and learned Gentleman is the engineer whose job it is to estimate how much water will go through any given leak and to estimate how long it will take before the country is inundated. I am aware that it is now the custom of Members of the Government ostentatiously, as my right hon. Friend the Leader of the Opposition said the other night, to carry on conversations when hon. Members are directly addressing questions to them. The Chancellor of the Exchequer is not Prime Minister yet and he might at least conform to the ordinary courtesies of the House.
§ Sir J. Simon
I am very sorry if I appear to have been discourteous to the hon. Gentleman. I hope that he will understand that, if a complicated question is put, it is sometimes necessary for the Minister in charge to confer with the Law Officer on the particular Section which directly bears on the matter.
§ Mr. Ede
I cannot think that the point which I am putting to the hon. and learned Gentleman is as complicated as all that. The hon. and learned Gentleman himself said that the second of these evasions was so enormous that they could be called "Surtax accumulators," and he used the phrase, "They are widely used." This must mean that there must be some idea of quantity in the minds of the Income Tax officials and of the Treasury. It is not one of the small matters which have cropped up owing to a recent decision of the courts. It is one of those things which form the main topic at lunch at the offices of the Law Society where one member explains to another the most recent thing he has discovered and the best way to work it. It is not something which the Court of Appeal has decided during the last fiscal year, but it has been operated for some years and has secured a nickname from the people who are engaged in this particular form of in-industry. He described is as objectionable and reprehensible, and it must be assumed that it has occupied a good deal of attention at the Treasury.
It is desirable that the Treasury should convince the House upon these Resolu- 939 tions that this is not mere window-dressing. There is a very strong fear, as has been exemplified by the speech of my hon. Friend the Member for Chesterfield (Mr. Benson), that this matter is not being tackled in any way that really means the bringing in of a great amount of grist to the Treasury mill. Does the present legislation mean the bringing in of £2,000, £200,000, or £2,000,000? What idea is in the mind of the Treasury as to the extent to which they will be able to justify occupying the time of this House in dealing with this matter and putting a very complicated Clause in the Finance Bill? I would suggest to the Government that, in their own interests, it would be as well if they were to put before the House either some statement as to the kind of estimate they have formed, or say quite frankly, "We do not know."
I gather that the answer of the Chancellor of the Exchequer on the previous Resolution, although it took him three or four minutes to say, was really one of four words, "I do not know." That may have been a justifiable answer on that matter, but in view of the fact that we are now dealing with old and well-established malpractices, the Government cannot take refuge behind the statement of the Attorney-General. They must be prepared to give some estimate of what they hope to get in an ordinary year from being able to stop these practices.
§ 5.41 p.m.
§ Mr. Gallacher
I would like, first of all, to make a reference to the feeble joke which was attempted by an hon. Member opposite when he said that he and the occupants of the benches across the House were glad that the Government were chasing the tax evaders. It reminded me of the paraphrase of the old popular song, "I am laughing with tears in my eyes." That is how the tax evasion Resolutions have been received by hon. Members opposite, and, surely, after all the talk that we have had about the matter, it ought to be possible for an estimate of some kind to be given. This matter did not arise as a result of the speech of the Chancellor of the Exchequer on Budget night, for the present Prime Minister raised this question when he was Chancellor of the Exchequer and gave the impression to the House that the leakage that was going on repre- 940 sented a very considerable amount of money. There was no sense in the Prime Minister, when he was Chancellor of the Exchequer, making a speech of that kind and giving the House such a warning if there was not a considerable amount of money involved. Any independent estimates that have been given have created the impression that there is a very large amount of money being diverted from the Treasury through these various measures of tax evasion which these particular Clauses are supposed to try and stop. It is quite natural that hon. Members on this side of the House and people throughout the country should get that impression.
After all this talk and the threats of the present Prime Minister when Chancellor of the Exchequer as to what would happen if there was any more of it, the Chancellor of the Exchequer has estimated a sum round about £1,000,000. Is that what all the fuss is about? It is right that we should ask for an estimate of what will be saved by the stopping of these various practices which are so well known. The Prime Minister let us know a year ago that they had their eyes on this sort of thing, and surely they can now give us some explanation. I am sorry that the Chancellor of the Exchequer has left the Chamber. He is very touchy. Last night I had to draw attention to the same sort of thing. He is touchy; he has a guilty conscience. He knows the evil he is doing, and, at the least word from anybody he is in a huff. I should like this very relevant and important question conveyed to the Chancellor. When he makes up his mind actually to operate the Resolution to stop the leakage and to make the vessel watertight, if he finds that instead of getting about £1,000,000 he is getting £4,000,000, £5,000,000 or £6,000,000, will he then agree to withdraw the tax on tea? If those responsible work this as we would work it, they will get considerably more than the amount that has been suggested, and the tax on tea ought to be withdrawn.
§ 5.47 p.m.
Mr. David Adams
The hon. Member who has just spoken is rather overlooking the fact that the Chancellor is new to his office and is, therefore, likely to be more sensitive than a case-hardened person. I do not say that in any depreciatory way 941 of the Chancellor. I am glad that he is of that sensitive temperament which will enable him, no doubt, to perform the prodigies in the financial world which we expect of him, and which are required at the present day in those realms. It must be remembered that tax avoidance is not illegal, but that tax evasion is. If tax avoidance has been committed for a generation past it must have been known to the Treasury and the Board of Inland Revenue. But we are grateful that, under the particular headings which have been so clearly outlined by the Solicitor-General, it is clear now that, by settlements of this character, it will not be possible in future to avoid payment of Income Tax and Surtax.
I should like the Solicitor-General to apprise us as to why it is necessary to have this particular legislation. Could not there be a general instruction of this House, through this Measure, to the Board of Inland Revenue, that all such avoidances, under whatever head they may occur—and there are quite a diversity beyond what has been indicated here— which in the past have been perfectly legal, shall no longer be legal but shall be treated as though they were tax evasions, and that the inspectors of the board shall keep a watchful eye open for such avoidances? In that connection, there might be injustices perpetrated, but all who know anything about the operation of Income Tax law know that those who have grievances have an appeal to the Commissioners. The only fault with that—and I have always felt it to be a grave injustice—is that, whereas appeals may be made—
§ Mr. Deputy-Speaker (Captain Bourne)
That is a question of the administration of the Income Tax law.
Am I entitled to suggest that a more general method, instead of this particular legislation, should be under consideration at this moment?
§ Mr. Deputy-Speaker
The hon. Member is quite entitled to suggest alternatives, but he is not entitled to go into details.
The Board of Inland Revenue, for some years past, has been quite aware of avoidances that have been going on. These avoidances have been perfectly legal. The board, which has general powers in issuing directions, could 942 now be charged with general powers to say that in their judgment certain forms of tax avoidance constituted evasion, and after such a determination it would therefore become illegal. I have indicated— and I could hoi go into the matter now— that persons who have grievances would have a right of appeal, under which their alleged wrongs could be rectified by the Commissioners of Inland Revenue, while evasion could be stopped.
§ 5.53 p.m.
§ Mr. James Griffiths
I do not want to say much on this question, as I am not an expert on Income Tax dodging. I am a man whom all my life Income Tax has dodged. This is a matter, I understand, in which the Treasury are trying to find the best way to close up these holes by which tax dodgers have been escaping in the past. They have certainly closed up all the holes by which working-class people might escape. I would suggest that the Treasury might have a word with the Ministry of Labour and the Unemployment Assistance Board, and all those whose job it is to find out every penny that the working man has, so that he cannot get anything out of the Treasury that he is not entitled to.
§ 5.54 p.m.
§ The Solicitor-General
The right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) asked me whether, in addition to Surtax, these provisions are expected to affect Income Tax. Broadly speaking, the answer is no. I do not say that there is no instance in which Income Tax might be affected. For instance, there is the case in which trustees might hold securities which do not pay tax. Those securities might be affected. But the general principle applies. Except in the case of those who enjoy a certificate of exemption, the income arising from trustees is liable to standard rate of tax: it is the Surtax which is avoided; and it is, therefore, to safeguard the position in regard to Surtax that the legislation is introduced.
My hon. Friend the Member for Rushcliffe (Mr. Assheton) put to me a case relating to £100,000 of capital which was settled and in respect of which the income was to be accumulated. The instance he was quoting, I presume, relates to an ordinary irrevocable settlement. That will not be touched at all. The 943 hon. Member for Chesterfield (Mr. Benson) referred to what I know he will recognise when I describe it as the second Archer-Shee case. He seemed to think that nothing had been or was being done to meet that case. I think he must have overlooked the next Resolution, which it would not be in order for me to discuss at the moment, but on which my hon. and learned Friend will have something to say when the time comes, and if you take the Act of 1936 combined with the proposed provision that we expect to make by virtue of the next Resolution, a good deal of the attractiveness of the second Archer-Shee position will have disappeared.
§ Mr. Benson
I was assuming that the Twelfth Resolution was to be more or less on the question of motive, which was what the Chancellor dealt with in his Budget speech. The Archer-Shee case depends primarily, as I understand, on the fact that Income Tax from securities loses its identity when it passes into the hands of trustees under American Income Tax law.
§ The Solicitor-General
I think that if the hon. Gentleman will await the exposition of the Twelfth Resolution he may find that a good deal of his apprehensions about the second Archer-Shee case will have been modified. The hon. Gentleman also referred to the case of the discretionary trust. We certainly have power to deal with that under the Resolution. If I followed him rightly he was suggesting that, under an irrevocable trust, the child could recover Income Tax. I think that impression arises from a misreading of the Act of last year. The instance he gave was not a sound one. Of course, the child would not be able to treat it as his income for purposes of reclaiming tax. He would be faced with the provision which says that he has no power to reclaim. The Act of Parliament says that it is not his income for all purposes. I will not follow the hon. Member into his inquiry as to whether all charitable payments should not come within the full rigours of the Income Tax law. All I would say in regard to such a suggestion is that it would spread a good deal of alarm and despondency among charitable institutions in the country. The root of the present law is that charities are treated as an exception and are exempted from the ordinary provisions of 944 the Income Tax Acts. They are entitled to ask that taxes which have been paid upon such incomes shall be paid back. Anything which would vary the position in that respect would not be very acceptable.
§ Mr. Benson
It does not apply only to charities, because the Duke of Westminster paid his servants that way and then claimed exemption.
§ The Solicitor-General
I was dealing with the case the hon. Member gave. He was complaining that he could not understand why a gentleman should be entitled to make a settlement under which he undertook to pay to a particular hospital a sum of money over a series of years and why the hospital should be entitled to claim back from the revenue the Income Tax that had been deducted. I have given him the reason. By the operation of the law we put charities in a favoured position, and if they can show that the tax has been paid they can come to the revenue and get it back. It would be disastrous to charities if we now altered the favoured position which they enjoy. The hon. Member for South Shields (Mr. Ede) seemed to think that these proposals were only window-dressing.
§ The Solicitor-General
I apologise. I thought it was not a thing which the hon. Member would wish to say. But I repeat, we cannot exactly estimate with anything like precision what wastage to the revenue is likely to be prevented by these proposals. That is something which is completely nebulous. It depends on the patriotism of the people, on the extent to which they co-operate in making the system of taxation work, and on a whole host of other things. What the prevention of wastage will be is a thing which none of us can say. It would be only a guess. But what we can say is that we have given in the White Paper an aggregate figure of the advantage to the revenue in a full year in respect of the provisions relating to trusts and settlements, the transfer of assets abroad and the liabilities by residuary legatees, and we have put the figure at £3,000,000. That is a very substantial figure. Indeed, it will 945 be observed that the positive advantage to the revenue is about £500,000 more than the total of the Tea Duty to which the hon. Member referred.
That is not the end of the picture. If one were in a position to evaluate the imponderabilities and see the picture if these proposals were not carried into law, I have no doubt the figure would be very much more. The hon. Member for Con-sett (Mr. David Adams) was anxious to know why we should not have some general overriding legislation to enable the Inland Revenue Commissioners in the case of tax evasion to deal with the matter. While the hon. Member was speaking I looked at the hon. Member for Dundee (Mr. Foot) and I could see that he was somewhat disturbed. To vest in the administration, in the Executive, power to say, "We do not like the look of this sort of thing," or, "There is something in the flavour of this transaction," would be a complete abrogation of the functions of Parliament. It is for Parliament to put down in terms what is the law, and as long as the subject carries out the law he ought not to be subjected to inquisition by commissioners or anybody else, however benevolent they may be. The responsibility is on us here, and it will be for hon. Members when we table the full effects of these Resolutions in the form of a Bill to say whether they reasonably meet the problem.
§ Sir Arthur Salter
Would the learned Solicitor-General distinguish the proposal, which I think he has rightly criticised, from a proposal that the law should be so framed as to give to the Courts the right to quash particular arrangements on the ground that they were clearly designed to evade taxation?
§ The Solicitor-General
If the hon. Member will give to Parliamentary Counsel and myself the benefit of his assistance in drafting a Clause which would get through this House, I should be glad to have a talk with him.
§ 6.9 p.m.
§ The Attorney-General
This Resolution, which I agree is framed in general terms, is put down in order to give the House the necessary power at a later stage to strengthen Section 18 of the Finance Act, 1936, which deals with the transfer of assets to foreign persons or companies. In 1936, when this matter was dealt with, it was a common method of avoiding taxation to transfer assets abroad to a person or to a company, who might enjoy the income from those assets, but the arrangement was that the person in this country whose assets had been transferred could enjoy or had the power to enjoy when he wanted the income arising from the assets so transferred. Parliament in drafting the Section in wide terms, intended to except from its provisions the transfer of assets made in the ordinary way of trade and business, and which were made without any tax avoidance motives, though of course in some cases it has resulted in less tax being paid than would otherwise have been paid. In one respect this Section has been found to require strengthening, and that is with regard to the words which Parliament then used to cover the cases where such transfers were effected—mainly for some purpose other than the purpose of avoiding liability to taxation.Unless a person was able to bring himself within that exception he had to pay Income Tax and Surtax upon it. The word "mainly" has been so construed as to widen the exceptions beyond what Parliament intended, and my right hon. Friend gave an example in his Budget speech. In that case the transfer was mainly for the purpose of tax avoidance, and, of course, for some other purpose. Therefore, if the Section is left as it is the construction of the word "mainly" would defeat the intention of Parliament, which was to exclude normal and bona fide transfers of assets by way of business.
§ The Attorney-General
No doubt there are many other cases where one proves to be wrong, but they do not occur to one's mind with the same vividness as 947 when the event proves us to have been right. We have all had the same pleasant experiences, which I have no doubt the hon. Member is now enjoying. At a later stage we propose to strengthen this Section of the Act of 1936 and to deal with a point which has arisen owing to the construction put on the word "mainly." There are two other points with which it is proposed to deal. One is the case where the assets or income arising from the income are under the control of discretionary trustees, whether there should not be words inserted to make it clear that that fact does not prevent it being said that the transferor has the power to enjoy. The definition of the power to enjoy is wide, but doubts have arisen as to whether it would cover a case of that kind. In our view it should cover such a case, and therefore the Resolution is wide enough to enable an Amendment to be made in that regard.
The third point with which it is proposed to deal is this. The Section refers to "persons abroad "—I am not quoting textually, but that is the effect of it— and doubts have arisen as to whether a company registered abroad but controlled by persons here would come within the words used in that regard in the Section. I think it is right to say that a company, for taxation purposes, is regarded as being resident where those who control it are, as distinct from where it is registered. The point is a technical one, but it has come to our knowledge that possibly there might be a loophole in the Section which could well be stopped up. Those arc the three points with which we are concerned. I agree that the Resolution is in wide terms. It is not an easy matter, and I do not think that the Clause, when it is drafted, will be a simple one. The Section is one which I think had the full approval of the House in 1936, and I feel sure that hon. and right hon. Gentlemen in all parts of the House will desire this year to see that the full intentions of the Section are carried out.
§ 6.16 p.m.
§ Mr. Pethick-Lawrence
It is difficult to know what exactly the Government intend to do in this matter when we have not before us the Clauses of the Finance Bill, because the Resolution is a permissive one only, which we have to take entirely on trust from the hon. and 948 learned Gentleman. Although the hon. and learned Gentleman was inclined to make fun of my hon. Friend the Member for Chesterfield (Mr. Benson), I think he must admit that when the Government last tried their hand at this, they failed to some extent, and they failed in the direction in which my hon. Friends had suggested they would. Therefore, I think we are entitled, not so much to congratulate ourselves on the suggestions we made, but to give a warning to the hon. and learned Gentleman. We hope that the Government, having been defeated in their efforts in this direction two or three years ago, will be very careful not to make the same errors in the terms which they embody in the Finance Bill this year.
There is one point on which I would like to have an assurance from the Government. The Resolution which we have just passed contains provisions concerning settlements, and the Resolution which we are now discussing deals with the transfer of income abroad. What I want to be quite clear about is that where it is a matter both of a settlement and of a transfer abroad, between Resolution II and Resolution 12, it is not caught in a tertium quid, and that where there is a settlement and that settlement deals with a transaction resulting in a transfer abroad, if it is not caught under Resolution 11, it will be caught under Resolution 12. I would like to have an assurance that, in the opinion of the Law Officers, that will be the case, and that under Resolution 12 we shall not merely catch a transfer of income, but a settlement which is a transfer of income.
Finally, I would like to raise a wider point. The whole essence of the avoidance of Surtax is the successful attempt, within the terms of the law, to turn income into capital, and for the person concerned to get it back in the form of capital instead of in the form of income. That is done in a very large number of ways, by using settlements, transfers abroad and so on; but in essence the simple method is by putting it into the form of a company and letting the company redeem itself after a certain number of years and return to the person concerned his income in the form of an appreciation of capital. Can the Attorney-General give an assurance that, in his opinion, between Resolutions 11 and 12 949 and the law as it stands at present, such means of enabling a company to accumulate income and then return the proceeds in the form of capital to the person concerned, is effectively prevented? I do not feel satisfied that it is, and I should be glad if, at some stage, the hon. and learned Gentleman would express an opinion on this matter.
§ 6.21 p.m.
§ Mr. Benson
I am not quite sure that the Attorney-General has succeeded in easing my mind on what, if I understand the matter correctly, is the basic fact of the Archer Shee case, namely, that in the case of income arising from a foreign country, our tax laws are in some way subject to the laws of that foreign country in that the laws, and the difficulties arising under the laws in that country, decide what that income or benefit is, and that that is accepted by our judges as binding. It is obvious that in the Archer Shee case the income arose from securities, and had the trust been in England, there would have been no question but that the income would have been subject to tax; but because the American scheme was that the income had lost its identity once it got into the hands of a trustee, it could not, therefore, be held in our courts to be income arising from securities and was not taxable except in so far as it was brought home. From a very interesting article in the "Times" newspaper, I understand that some small countries, such as Liechtenstein, in order to attract this sort of companies, from which they can get taxes, alter their law whenever there is an alteration in our law so that they may help and assist tax evaders to put their companies into those particular countries. If decisions of the English courts are to be dependent upon decisions of foreign courts, obviously there is a weakness that ought to be stopped. I think it should be made clear in the Clause, when it is drafted, that an English decision shall carry, irrespective of what any foreign legal decision may be.
Are we to understand that the question of motive in the transference of income is being entirely discarded? Surely, the reason a man transfers income abroad is, for tax purposes, entirely irrelevant. The question should be as to what the effect is, and not what the motive is. If a man, for legitimate commercial reasons, 950 suddenly finds that, owing to some particular legal complexity, he is thereby relieved of normal taxation, it is an anomaly which ought not to exist. The mere fact that a man, for purpose A, establishes a foreign company or transfers income abroad, and then discovers, quite irrespective of anything which he had intended, that he is receiving benefit B, no harm is done to him by taking away benefit B. What we are asking is that an entirely unforeseen benefit in the form of a lower tax should not be allowed to operate. Once the question of motive was introduced, it would cause trouble such as already exists, namely, that the courts have to decide not merely questions of fact but questions of motive, which are always extremely difficult to decide.
A further point I wish to make is that, as the law stands at present, the prevention of tax avoidance applies only to the transferor or to his wife, and in the case of a man who makes some elaborate foreign scheme, the Attorney-General said nothing about what seems to me to he an important point, namely, that that elaborate scheme, although we may prevent it from operating during the period of the settlor's lifetime, immediately he dies his heirs may inherit the scheme and then, because the heirs are not the transferors, the whole question of tax avoidance will arise. That point was very clearly debated on the Finance Bill in 1936, and the then Financial Secretary, who is now the Minister of Agriculture, laid down definitely that the intention of the Government was that the prevention of tax avoidance should apply only to the transferor abroad and should not apply to his heirs when they inherited that particular scheme. If that be the case, and if the present attitude of the Government is the same, it opens the door for very considerable tax avoidance, because a good deal of tax avoidance is not directed primarily to saving the Income Tax or Surtax of the individual concerned, but to preserving the financial status of his children. The schemes for the avoidance of Death Duties are not for the benefit of the individuals who make the schemes or whose estates are to be inherited, but for the benefit of their children. Here we have a scheme which, although it will bring the settlor no advantage, will enable him to leave to his children tax-free income. I think it ought to be made 951 clear in the present Finance Bill that the provisions shall apply not merely to the settlor but also to his relatives, as defined in Section 19 (2) of the Finance Bill, 1936. I see no reason why, in the case of these foreign schemes, they should not apply with equal rigour to the relatives of the settlor. I hope that the Chancellor will see that this further extensive tax avoidance is included in the scope of the scheme.
§ 6.30 p.m.
§ Mr. R. Acland
I was extremely interested just now in the answer of the Attorney-General to the question put by the hon. Member above the Gangway as to the discovery of motive.
§ The Attorney-General
I wish to make that clear. The hon. Gentleman asked me whether it was the Government's intention to discard altogether the tests already on the Statute book. I shook my head and I intended to convey that it was not the Government's intention wholly to discard those tests.
§ Mr. Acland
It was not exactly in that point I was so much interested, as in the fact that on this question the Government are doing on a small scale what the hon. Member for Oxford University (Sir A. Salter) suggested should be done on a wide scale. As I understood it, the hon. Member for Oxford University suggested that we would not be able to deal with this whole question satisfactorily unless we gave, not to the Commissioners of Inland Revenue, but to the courts the power to look into all these transactions and to ask the question, "Is this being done with the intention of avoiding Income Tax, Surtax or Death Duties?" and also the power to upset any transaction carried out with those motives. I believe that is a proposal which ought to be applied not only to transfers abroad but to all these machinations. Therefore, I await with great interest the Clause in the Finance Bill which will deal with this matter in order to see how the Government draftsman approaches what is admittedly a difficult problem. I believe that knowlingly or unknowingly the Government are breaking new ground in this respect. At any rate, they are going a little bit further into the ground which was first broken in 1936, and they are introducing a proposal which, in the opinion 952 of many, will shortly extend itself to cover all these matters of tax avoidance.
§ 6.34 p.m.
§ Mr. Lathan
I, too, hope that the Government will examine this question from every point of view. It would be unfair at this stage to express too definite an opinion, but some apprehension has developed in the minds of hon. Members because of the limited assessment now made of the revenue likely to be derived from steps to prevent tax avoidance. We must await, as my hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) indicated, more definite proposals from the Government showing the lines on which they intend to proceed. The Government must be aware that feeling is growing in the country in regard to this scandal of widespread tax evasion. Hundreds of thousands of taxpayers with small incomes, who have to pay every penny which is due from them to the State, are becoming intensely annoyed when they read in the newspapers of the devices which are adopted by others, with the assistance of various legal gentlemen, for the purpose of avoiding taxation responsibilities. I hope the Government will extend the range of their survey as widely as possible.
I hesitate to speak too definitely about this matter in the presence of so many hon. Members who are learned in the law and wise in financial transactions. But is it not possible so to arrange matters as to provide that any money derived from trade or other transactions in this country, shall be taxable whether it is transferred abroad or not? Is it not possible to devise proposals to deal with cases such as one which was described to me a few weeks ago. That was the case of a business which, having been conducted very profitably, in relation to recent developments in the armament industry, was transferred, lock, stock and barrel, with the profit in it, to a new company. I was informed that the profit of the company for the period covered was in the region of £30,000. Not only did they pay no Super Tax, but they paid no taxation at all, because under an arrangement which I am told is legally possible, this was regarded as a capital improvement and not as taxable profit. I hope the Government will inquire fully into all these matters.
§ 6.38 p.m.
§ The Attorney-General
I wish to say, in the first place, that not only has this matter been examined, but it will be kept under constant examination. It is a matter to which my right hon. Friend attaches the greatest importance, and on which he is prepared to receive with sympathy any suggestions and if they are helpful and practicable, to consider putting them into operation. It is obvious that every Chancellor of the Exchequer must approach this question in exactly the same way. He must, of course, desire that Income Tax or Surtax should not be avoided by particular groups, but that everybody should pay his proper share. Therefore, it was with no lack of sympathy towards any of the suggestions which have been put forward that my hon. and learned Friend just now made some observations as to the impracticability of the course proposed by the hon. Member for Oxford University (Sir A. Salter). No doubt the hon. Member's suggestion is extremely attractive, but I assure hon. Members that when we come down to detail there is a great deal of difficulty about it.
I am not sure whether the hon. Member for Barnstaple (Mr. Acland) realises that the motive test has been on the Statute book since 1936. We are not making any new departure in that respect. We are only making an amendment of the law owing to the fact that the motive test has not worked very satisfactorily. It is quite true that the proposal is more or less on the lines of the general principle suggested by the hon. Member for Oxford University, but the transfer of assets abroad is not in itself the sort of transaction which is carried out hundreds or thousands of times in the course of ordinary business and it is when you get into the area in which the tax evader uses a transaction of that kind that one of the chief difficulties arises in the practical application of any such proposal. However, I must not be led away by general considerations from dealing with the points which have been put to me in the course of the Debate.
The hon. Member for East Edinburgh (Mr. Pethick-Lawrence) asked what was our main object. The subject is a complicated one. Some of the accumulations by companies were dealt with in the Finance Act, 1922, and any transaction 954 which comes within the specific wording of either the 11th or 12th Resolutions will, of course, be hit by them. As far as transfer and settlement abroad are concerned, those transactions will, for the most part, fall under the Resolution which we are now discussing. Section 18 as amended certainly applies to transfers of capital abroad which is producing incomes and is not restricted in the way suggested. The hon. Member for Chesterfield (Mr. Benson) raised the question of the effect of foreign law. The relevance of foreign law arises in this way. If someone in this country has certain rights in a foreign trust or in any other foreign contract or settlement governed by foreign law in order to see what those rights are, it is necessary to consider the foreign law governing that trust settlement or contract. It would, of course, be wrong to tax a person on rights which he did not possess under the law applicable to the trust concerned and that is a principle on which we could not impinge as I think the hon. Member will agree.
Reference was made to a case in which the American law had been upheld in relation to persons here who had transferred assets to trusts of that kind. Of course, we have to take steps, and will be prepared to take steps in the future if we find that, as a result of the application of some foreign law, persons who are capable of enjoying the income are not liable to tax. That is exactly the kind of device which has been dealt with in the past and will be dealt with in the future. The hon. Member also raised the question of heirs. They were not covered, as he knows, in 1936 by the intentions expressed, and with regard to this Resolution, I am not sure whether they are technically covered. But it is not our intention to deal with that matter and it appears to me that there is great objection to dealing with it on the basis of the motive test as some hon. Members have suggested. It seems extremely difficult to apply the motive test in such cases. If you ask a son what were his father's motives when he carried out a certain transaction it would seem to be asking a question which the son would have extreme difficulty in answering unless he had communications with the other world—and those are not generally recognised in a court of law. No case of the kind has as far as we know, arisen and it certainly is not proposed to deal with 955 the matter in the Clause which will be based on this Resolution. It is possible that the point might arise in the future and might have to be dealt with then.
§ Mr. Speaker
I am informed that it is the general desire of the House that this Resolution and the Sixteenth Resolution which deal with the same point, should be considered together.
Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."
§ 6.45 p.m.
§ The Solicitor-General
As you have just said, Mr. Speaker, these two Resolutions really deal with different facets of the same matter, and both of them, I think, arise as a result of a casualty which occurred in the Court of Appeal in a recent case. The question arising is, What is the position of income payments received by executors during the period after the death of the testator and before the estate is fully administered? This sum reaches the executors' hands, and in the normal course of events the executors will pass on some part of the money either to the life tenant or to the residuary legatee in anticipation of the estate ultimately being administered. The difficulty has arisen that in a recent case it has been decided that before the administration of the estate is complete, there is no residue, so that there is no source from which a person receiving the money can be said to be receiving income, and, therefore, those sums of money, although they reach the executors' hands minus tax, because the tax is deducted before coming to them, when they are passed on by the executors to the life tenants or the residuary legatee are held not to be the income of the residuary legatee or the life tenant, as the case may be, and reach that person's hands, therefore, in a condition in which he does not pay Surtax.
We propose to restore the law to what most people thought it was before the recent case. Such a situation in law has not presented itself either to us or to the Revenue authorities, and no doubt the 956 country at large has cheerfully gone forward on the assumption that when a gentleman left his estate for the benefit of somebody, and it took some time to wind up that estate, the payment made to the ultimate residuary of money which reaches the executors' hands as income is money passing to the beneficiary. Unfortunately, that is now shown to be not the correct view of the law, so that we propose to restore the law to what most people thought it was before the Corbett case was decided. We propose that, in the case of the life tenant, payments made to him during the administration or on completion of the administration will be taxed as part of his total income for Surtax purposes. We propose also that, in the case of the residuary legatee, the income arising during the administration will be treated as his income for Surtax purposes to the extent that he enjoys it, but that his liability to pay Surtax on the income will, of course, only arise, as it should, when he comes to enjoy it and not until it reaches his hands.
The main effect of these proposals will be to fortify the Revenue, but a counter loss to the Revenue of a kind which I am sure the House will approve will necessarily result. There will be an advantage now to charities which they do not at present enjoy, in consequence of some rather difficult legal decisions to which I need not refer. After the Barnardo case some years ago, there was a provision put in an Act of Parliament by which charities can recover tax which, under the Barnardo decision, they were not entitled to do, levied upon the income of the estate in which they were interested from a date one year after the death of the testator. In consequence of the legislation which we shall introduce in implementing this Resolution, charities will in future be able to claim repayment of tax as from the date of the death of the testator. That will be a necessary corollary of this legislation.
In this case I am in a position to satisfy the hon. Member for South Shields (Mr. Ede) with something in the nature of figures. We are able to make some estimates as to what advantage will accrue to the Revenue from these proposals. We estimate that the Surtax loss to the Revenue in the case of beneficiaries entitled to an absolute interest as residuary legatees is not less than £750,000 a year, and that in addition the casualty to which 957 I have referred, which occurred in the Court of Appeal, would involve a loss of nearly £750,000 a year in the case of the life tenants, so that the sum of those two figures is something like £1,500,000 of possible loss to the Revenue, which will be prevented by the effect of Resolution 13 as implemented by the Act of Parliament when it is passed.
I do not desire it to be thought that the whole of these provisions relate to the avoidance of tax. That was not suggested for one moment to be the fact in the Corbett case. Of course, it must normally happen that in the case of large estates it takes some time to wind them up, and as the law now stands you cannot charge Surtax on the income during that interval, but the House will readily see that it does offer a considerable inducement to people to be a little sluggish, shall we say, in winding up estates if they know that until they are wound up, they are not in an income-producing condition. I can give some examples. There is a case where the date of death was 1919, the annual income is £1,100, and the annual Surtax £220, which is lost at the present time. There is another instance of an estate with an annual income of £150,000. The death was in 1929, the residue was only ascertained in 1935, and the Revenue lost annual Surtax of £55,000. Resolution 13 and the legislation which will follow will, we hope, put that situation at rest.
With regard to Resolution 16, this is in case there be any doubt as a result of the Corbett decision as to what is the position in regard to the Estate Duty. It simply gives effect to the practice according to which Estate Duty is levied at present. In the case where, for example, a life tenant dies before an estate has been completely administered, where is the burden of Estate Duty to rest? The practice has for years been based upon a decided case, and everybody has thought that in those circumstances the estate passed upon the happening of the event during the period of administration, that is to say, upon the death of the life tenant. Everybody has assumed that to be the law. It appears to us that in view of the decision in the Corbett case, it may be doubtful, and it may be said that the beneficiaries in those cases have no direct interest in the specific assets of the estate, because it has 958 not yet been administered, and that, therefore, those assets cannot truly be said to pass. So, on the death of the life tenant, before administration is complete, and after the death of the testator, it may be said that there is no estate passing and, therefore, that Estate Duty is not payable.
§ Mr. Pethick-Lawrence
I understand that the learned Solicitor-General is not talking of the whole estate, but of that part which has arisen as income?
§ The Solicitor-General
Where, during the period of administration, the life tenant dies, and, therefore, the portion of the estate which is the source of the income that goes to him now becomes available for whomsoever ultimately becomes entitled on the administration, it has always been assumed that that amount of the estate passed on the happening of the event. Corbett throws some doubt on that as a proposition. The law has been administered for years and years on the footing that the other view is right, and we propose to make it perfectly clear, by Resolution 16, that in those circumstances the Estate Duty shall continue to attach to the estate as passing on the happening of the event.
§ Sir Robert Tasker
In the event of a man dying and leaving his estate to four daughters, and on their death it reverting to the son, who becomes the residuary legatee, do I understand the learned Solicitor-General to say that although Death Duties have been paid, the son will again have to pay them on the death of the sisters?
§ The Solicitor-General
Let me take a simple case. "A" by his will leaves his residuary estate to "B," the daughter, for life, with remainder to the son, "C." Supposing "B," the daughter, dies before the estate is administered, then a claim for Estate Duty under the existing practice is made on "B's" death in respect to the estate which passes to "C "; that is to say, it was made on the death of the daughter in respect of that part of the estate which represents that income and which passes to the son. On that basis we have always treated the property as passing, and Estate Duty must be paid. The Corbett case throws doubt on the question of whether that is right or not, because it: can be so con- 959 strued as suggesting that in those circumstances, the estate not being administered, nothing has yet passed to the daughter. In those circumstances, since doubt might be cast upon a practice which has been very general and very long continued, we propose by legislation to make the position clear.
§ 6.59 p.m.
§ The Attorney-General
This Resolution affects only certain kinds of enterprise, namely, those which deal for their stock-in-trade in things which increase in value: for example, a company which buys land with a view to future development, land which it believes will increase in value, because it will be demanded for building purposes, or companies which deal in securities, which buy and sell securities and shares. One might perhaps, in order to explain the effect of the Section, take the simple case of a company which bought a large consignment of immature wine or whisky with a view to retaining it for five or six years and then disposing of it at a profit at the enhanced value which it would then rightly have. As things are at present, if you take a company which goes on trading continuously, it is assessed on its trading profits made by buying and selling its stock-in-trade as and when those profits are realised by sale. Until the trader sells, you do not tax him on the ground that what he bought at 5s. is now worth 7s., but if he sells it at 8s. there will be a profit of 3s. to come into his trading account. A company which has a stock-in-trade of this kind may, in certain circumstances, avoid paying Income Tax by discontinuing business and transferring the stock-in-trade, which has appreciated in value, to a newcomer, the sum that he gets from that newcomer, which represents the increased value of the stock-in-trade, being the sum received as the purchase price of the business, and therefore a capital sum, and not a sum received by way of sale of stock-in-trade in the ordinary way.
960 It is a matter which my right hon. Friend thinks should clearly be dealt with. It was dealt with by Parliament on the same lines as this Resolution in connection with Excess Profit Duty, enabling appreciated value of this kind to be brought in, but it has not previously been dealt with under Income Tax law. I do not say that it is a very big thing, but some cases have come to the attention of the Revenue where this device of discontinuing business and transferring it to a new concern has been used and thereby tax avoided on what clearly is a proper trading profit.
§ Sir Robert Tasker
In the case of land, if it lay derelict for a number of years could not some interest be calculated on the initial outlay in purchasing it?
§ The Attorney-General
Under the present system allowances are made in respect of the time the money has been out of use and all the rest of it, and allowances are made for expenses. The point is this. If the company continues business and sells the land at a greatly enhanced value, subject to all proper deductions, that is a trading profit which will bear tax. If they transfer their whole business to another company, getting the enhanced value of the land as a capital sum in the purchase price of the business, it is kept out of the charge for tax as a trading profit. The purpose of the Resolution is to see that it comes in as a trading profit subject to exactly the same deductions and adjustments as would have been made if the company had realised the value in the ordinary way by selling it.
§ The Attorney-General
That does not arise upon this Resolution. It arises in exactly the same form in the case of a company which does not discontinue business. The answer is probably that the company borrows money from the bank to purchase its stock in trade and brings the interest in as an expense.
§ 7.10 p.m.
§ The Attorney-General
This is a Resolution, which I understand insurance companies agree is fair, to put what is called capital redemption business on the same basis as life assurance business. Life insurance, of course, is a scheme under which one pays so much a year and either on an endowment policy gets a lump sum at 60 or, in the case of a full life policy, other people get it when one dies. In addition to that business there is a considerable business carried on under which capital or lump sums become payable not from the point of view of life insurance but at a certain date, say for paying off a loan when it becomes due or for some purpose of that kind, but normally, as the name that is used to describe the business implies, for the redemption of capital. A sum of money may have been borrowed to be repaid in 15 years and, in order that the money may be available, arrangements are made with an insurance company for capital redemption assurance. At present business of that kind is not assessed on the same basis as life insurance business. Life insurance business has its own special rules. An ordinary life insurance company's main source of income is from the investments that it makes with the premiums that it receives, just as the ordinary trading company's main source of profit is the realisation of the goods that it buys and sells. It is, therefore, desirable that this capital redemption business should be dealt with by the same methods as are applicable to life insurance business.
May I give a short example of how it works out at present? In computing profit or loss for the purpose of assessment under Case i of Schedule D, there is deducted from the profit actually made the amount of taxed income that is included in that profit. Tax has already been paid on that. If you want to find whether there has been a trading loss, you have to take into account that the trader has paid tax on that part of his income that he has received from investments. If a capital redemption business produces an investment income of £100,000 and the profit actually made is £10,000, the £100,000 has to be deducted 962 from the £10,000 in order to arrive at the Income Tax profit or loss, with the result that the business is found to have an Income Tax loss of £90,000.
§ The Attorney-General
It is a minus quantity, and therefore there is a loss. If the company has other insurance business —not life insurance—on which the profit for assessment under Case 1 of Schedule D amounts, say, to £500,000, the loss that I have described on the capital redemption business is set off against the £ 500,000 profit, with the result that the assessment on that business is reduced to £410,000. In that case the revenue has lost tax on £90,000, because this artificial loss has been deducted from the other business carried on by the company.
§ Mr. Tinker
The Attorney-General has attempted to explain what this Resolution means. If this is what is called high finance, I am entirety lost. In order to understand it I shall have to go to school again.
§ 7.15 p.m.
§ The Solicitor-General
This Resolution is to prevent the avoidance of Estate Duty through the one man or family company and to amend Section 34 and Section 38 of the Finance Act of 1930. Those sections were specifically designed to deal with the case of the person who in anticipation of death conveyed his property to a company from which he continued to derive a good deal of benefit. It was provided in Sections 34 and 35 that the benefits which he so derived should not 963 be aggregated with other elements of his estate. The effect of that has been to enable considerable evasions to be made of what Parliament desired to effect. The first proposal that we make in this Resolution is that for the purpose of determining the rate of duty payable the property shall be aggregated with other property passing on death. Let me explain what Sections 34 and 35 of the Act of 1930 do. They impose the charge of Estate Duty where property has been transferred to a one man company in such a way that under the previously existing law no charge of duty had been existing although the owner had been enjoying the benefit of it. Section 34 deals with the case where the deceased was the absolute owner of the property transferred and Section 35 dealt with the case of the man who was a life tenant. Under Section 34 a notional sum of money is deemed to pass on his death. A sum not exceeding the value of the assets transferred to the company by the deceased which bears the same proportion to the value of the total assets of the company as the benefits drawn from it by him bears to his own total income. Under Section 35 the actual property transferred is deemed to pass on the death of the life tenant.
The important point to note is that under both sections the property which is deemed to pass on death is by express statutory authority not aggregable with the rest of the property passing at death. To some extent these non-aggregating provisions were due to an oversight left out of both sections. There is no good reason really why you should not aggregate, and the result of the existing law, which was devised to prevent tax avoidance, has been to provide a new loophole for tax avoidance because tax dodgers can reduce their Estate Duty liability by the simple expedient of splitting the property which it is proposed to transfer, and then transferring it to several companies thereby securing lower rates of duty on various parts which are not aggregated. I can give an instance. The worst case that has been come across is in reference to a property of the value of £800,000. It was split up between five companies to which Section 34 applied, and instead of there being one non-aggregable estate, there were five and this aggravation of the principle of aggregation saved the estate from £164,000 Estate Duty. It is obvious 964 that this is a leakage which ought to be stopped, and the effect of the two limbs of this Resolution will be to cure the defects that have been discovered.
§ Mr. Pethick-Lawrence
I am very glad that the Government are remedying these defects. I remember the facts of the case described by the hon. and learned Gentleman. It was due to an oversight, and it was felt that the two parts should be of the same kind and that the legislation should be amended at a later date.
§ Motion made, and Question proposed, "That this House cloth agree with the Committee in the said Resolution."
§ 7.21 p.m.
§ The Attorney-General
This Resolution deals with another rather technical point, and I am not sure whether the hon. Gentleman the Member for Leigh (Mr. Tinker) will regard it as any more intelligible than the previous one. It arises out of an article in the "Law Times" which suggested that the particular provision of the Finance Act, 1894, which was put in as a relieving section to prevent Death Duties being levied where they ought not to be levied, could be used to get round the provision that if property is transferred within three years of the death of the transferor it is aggregated with his estate for the purposes of estate duty. The relieving section dealt with a case of this kind. Suppose a man settles property on himself for life, and, on his death, on B for life, and, after B's death, to B's children. The Section to which I have referred dealt with the position on the basis that B dies during the life of A. There was a passing of property in this sense, that the children, as it were, came up a step, but obviously it was not a passing that should be made the subject of Estate Duty. This Section made it clear that in a case of that kind Estate Duty should not be payable.
What the writer in the "Law Times" said was this. Suppose somebody desires to make a gift by settling property on B for life, and on B's death on his children. That is done by A. But if A puts in a life interest for himself after B saying, 965 " I transfer this property now to B for life and on B's death, if I am still alive, it is to come back to me and then it is to go to the children." Then A dies within three years of making that transfer. The writer in the "Law Times" suggested that the provisions of this Section were such that in his view it would prevent the provisions which bring in gifts within three years as part of the estate from being applicable. This is a technical matter and I think probably the Committee will not want me to go into details. The point is that a Section which was intended to prevent Death Duty being exigible on a death which really did not bring about a passing of property could by an artificial method be used to prevent a transfer within three years of death from being made liable to the duty.
§ 7.26 p.m.
§ The Financial Secretary to the Treasury (Lieut.-Colonel Colville)
This Resolution is for the purpose of remedying two defects in the law which has been passed relating to national defence contribution and it paves the way for the legislation which we shall lay before the House for that purpose. Its first object is to prevent the deduction, in computing the profits of a company which belongs to a group of parent and subsidiary companies, of interest on loans and other annual payments to other companies within the group, which really affect the internal and not the external finance of the group. Such payments are not true expenses of earning the profits of the group but are merely transfers of profits dictated by the structure of the internal finance of the group. In the existing law there is a provision which disallows a deduction of interest paid within the business to proprietors of the business or to directors having a controlling interest in the business, but the provision does not extend to the case of parent and subsidiary companies. It is our view that 966 these payments which are in essence internal arrangements should not be allowed as deductions.
The second object of the Resolution is to prevent a double allowance of losses. Owing to a technical flaw in the existing law, in certain circumstances a loss in one trade or business may be set off against the profit arising in another trade or business, and may also be carried forward by the concern making the loss so as to secure a second allowance of the loss by deduction from its own future profits. It was clearly not the intention of Parliament that that should be so and it arises owing to a flaw in one of the Schedules. I could give the House several examples of what I mean in actual practice, but if the House will allow us to have this Resolution now we shall be able to discuss the matter in more detail when we are considering the precise proposals.
§ Lieut.-Colonel Colville
Yes, Sir. Supposing a principal company makes a profit of £100,000 in the first accounting period and in that same period a subsidiary company makes a loss of £40,000. Under the existing law the principal company can ask that the profits or losses of the subsidiary company shall be treated as the profits or losses of the principal company, and the principal company is accordingly assessed to National Defence Contribution upon £60,000 only. In the second period the principal company makes a profit of £150,000 and the subsidiary company this time makes a profit of £90,000. The assessment upon the combined profits ought to be £240,000, but under the paragraph in the Fourth Schedule which we say needs correction the subsidiary company is entitled to claim that the loss of £40,000 sustained by it in the first accounting period shall be carried forward and deducted from the profits made by it in the second period. The profits of the subsidiary company for the second period are, therefore, computed, not at £90,000, but, after deducting the £40,000, at only £50,000. The loss of £40,000 has thus been allowed for twice over. That is due to a flaw in the existing law, and it is a flaw which we wish to put right and we shall bring forward proposals based upon this Resolution to remedy it.
§ 7.33 P.m.
§ Mr. Croom-Johnson
I wish to call attention to the last line of the Resolution. I have not had any experience of the particular point to which my right hon. and gallant Friend the Financial Secretary has called attention, and the explanation he has given sounds all right, if he will allow me to say so, but I do observe that it is intended that this change in the law shall be deemed to have effect as from the date on which Part 111 came into operation. There may be, and there probably is, a very good reason indeed for suggesting that this amendment of the law should be made retrospective in effect, but when the House is dealing particularly with taxing legislation I do not think we ought to allow such a point to pass without someone calling attention to it, so that we may all have our minds upon it in order to see what the reason, which I have no doubt is a good reason, is when we come to consider this proposal when it is translated into the Finance Bill.
§ 7.34 P.m.
§ Lieut.-Colonel Colville
If I may have the permission of the House to speak again, I will answer the point put by my hon. and learned Friend. He quite properly called attention to the fact, which I had intended to mention, that this provision is retrospective. I think the reason for making it retrospective will appeal to the House, although of course he was quite right in drawing attention to it. In the case of a tax such as the National Defence Contribution, which was imposed for a specific period of five years, it is important that it should be levied upon the same lines as far as possible over the whole period. It would be inequitable as between different classes of taxpayers if an obvious defect of the law should not be remedied as from the inception of the tax. We have not yet had a full year of the tax and in order that all trading concerns should pay in a common measure throughout the whole period of charge it is a fair thing that we should in this case make the alteration retrospective.
§ 7.36 p.m.
§ Lieut.-Colonel Colville
This Resolution authorises the introduction of a Clause which is designed to prevent the avoidance of Stamp Duty which is taking place in connection with the sales of property by one limited company to another. Instruments of conveyance or transfer on sale are, in the ordinary way, liable to duty at the rate of £ per cent. ad valorem. Where, however, two limited liability companies constitute, as parent and subsidiary company, one financial whole, or where they are both subsidiaries of a third company, the law has, since the Finance Act of 1930, recognised that such a transfer does not represent a real change in ownership, and so exemption from the ad valorem duty was given. The right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) will remember that when his Government was in office that point was discussed fully, and it was agreed that there should be this exemption, which was granted partly to encourage wise grouping in the interests of rationalisation, but I am sure the Government did not intend the exemption to be misused as we find that it is being misused in some cases at the present time.
A quite unjustifiable advantage has been taken of this relief by certain companies having no financial or other connection except that they happen to have contracted, as ordinary vendor and purchaser, to sell property to each other In such cases there is a real change of ownership. But by interposing a small limited liability company created for the purpose they can avoid the payment of Stamp Duty. I think the right hon. Member for Hillsborough (Mr. Alexander) was interested in this matter and mentioned it in the House of Commons last year—this avoidance of Stamp Duty by the interposition of a small bridge company. It is clear that such a proceeding is an abuse of the present law and we propose to bring in provisions to put a stop to it. We have been frequently asked during this Debate whether we can give any estimate of the amount of money saved to the revenue by the provisions we have been proposing, and in this instance I am able to say that we think that the amount of Stamp Duty which is being avoided at present is about £100,000 annually.