§ 6.23 p.m.
§ The Attorney-General (Sir Donald Somervell)I beg to move, in page 10, 2124 line 23, to leave out from "deduction" to "shall" in line 25.
This Amendment and the next go together. The Clause contains no provision under which management expenses could be deducted before arriving at the figure of income due to be apportioned under the Clause. One reason for that is that in some of these companies efforts had been made, under the guise of management expenses, to distribute part of the income of the company. The remuneration to officials or others was some times not proportionate to the services rendered, and that was a way in which the general provisions in regard to companies were, in part at any rate, being defeated. On the Committee stage the point was made that injustice might be done to perfectly genuine companies which were incurring reasonable expenses in the management of their businesses, and which appointed to their boards persons who had skill in some special matter. That point appeared to us to be perfectly fair, and the two Amendments follow upon an assurance that I gave that the matter would be considered. The Clause covers such expenses of management as the Special Commissioners consider reasonable, having regard to the requirements of a company's business, and, in the case of payments to directors or other people, the actual services rendered to the company.
§ 6.25 p.m.
§ Sir H. WilliamsI should like to thank the Attorney-General for these two Amendments, which, in principle, are the same as those I put down on the Committee stage, and the same as the Amendments which, I believe, were put down by another group of hon. Members. It seems unfair that legitimate expenses should not be allowed as a charge against profits. The Attorney-General has met the matter in a satisfactory way, because the Special Commissioners have to be satisfied, and any attempt to inflate the profits improperly would be prevented. The Attorney-General has done justice to the interests of both the Exchequer and the taxpayer.
§ 6.26 p.m.
§ Mr. Pethick-LawrenceWhen this matter was before the Committee, I entered a caveat on behalf of my hon. Friends that we were not necessarily committed to supporting the proposal if it 2125 should commend itself to the Government. In view of the form of the Amendment and the speech of the Attorney-General, however I think I can recommend it to hon. Members on this side.
§ Amendment agreed to.
§
Further Amendment made: In line 29, at the end, insert:
other than deductions for any national defence contribution payable by the company or for any such sums disbursed by the company as expenses of management as the Special Commissioners consider reasonable, having regard to the requirements of the company's business and, in the case of director's fees or other payments for services, to the actual services rendered to the company."—[The Attorney-General.]
§ 6.28 p.m.
§ The Attorney-GeneralI beg to move, in page 12, line 10, at the end to insert:
(5) If in the case of any company the cost of maintenance, repairs, insurance and management (being expenditure of such a nature as to be capable of being taken into account for the purposes of a claim by the company under Rule 8 of No. V of Schedule A) incurred by it in any year of assessment exceeds the amount of the gross estate or trading income of the company for that year, the company shall be entitled, on giving notice in writing to the Special Commissioners within six months of the end of that year and on proof to the satisfaction of those Commissioners of the amount of the excess, to require that the amount of the actual income from all sources of the company other than estate or trading income for that year shall be treated, for the purposes of this Section, as if it were reduced by an amount equal to that excess:Provided that, where a deduction is allowable in computing the estate or trading income of the company for any subsequent year by reference to the said Rule 8, no account shall be taken in computing the amount of that deduction of any such excess expenditure which has been taken into account for the purposes of any such reduction as aforesaid.In this Sub-section the expression "maintenance" has the same meaning as in the said Rule 8 and the expression "the amount of the gross estate or trading income" means, in the case of any company, an amount computed by adding to the amount of the estate or trading income of the company the total amount of any deductions made in computing that income in respect of the cost to the company of maintenance, repairs, insurance, or management of the nature aforesaid (including any allowance made by reference to Rule 7 of No". V of Schedule A).This Amendment also arises out of a discussion on the Committee stage. As the House remembers, Clause 14 is directed against investment companies; but we have to deal with the case of companies which have both investment and 2126 other assets. The discussion arose, in particular with regard to estate companies which also had investments. It was pointed out that there was not likely to be a case in which an estate company had no investments at all. I pointed out, and it was generally accepted by those who took part in the discussion, that obviously one must not allow a company to get some special concession as an estate company by reason of the fact that some of its assets were in estate, if substantially it was really an investment company, the investment representing the major part of the assets. The point was put as to whether the Clause might operate unfairly, and the intention embodied in Sub-section (3) fail to be carried out if one had a case in which, on the estate side of the business, there was an actual revenue loss.In the Clause as drafted, in spite of there being an actual revenue loss on the estate side which would fall to be met by part of the income from the investments, the total income from those investments would be deemed to have been distributed and Surtax would have to be paid upon it. That appeared to my right hon. Friend to be a sound and a fair point and one which really fell to be dealt with and met within the general intention already embodied in Sub-section (3). The Amendment which I am now moving deals with that point. It is slightly complicated owing to the complex nature of these matters, but it provides that if on the estate there is an actual revenue loss—that loss, being estimated according to the Income Tax principles embodied in Schedule A—if there is an actual loss in a particular year the amount of investment income sufficient to cover that loss can be deducted from the amount of investment income deemed automatically to be distributed. The provisions in the latter part of the Sub-section merely provide the necessary machinery for making that effective. I hope that that sufficiently explains the Amendment to the House.
§ 6.33 p.m.
§ Mr. BensonThe effect of this Amendment can be fairly concisely stated by saying that in certain circumstances the losses on Schedule A may be put against income arising under other schedules. This concession has been limited to one class of people, namely, the farmers. Here we have an extension of the conces- 2127 sion which was granted to farmers, who can put losses under Schedule D against other losses. It may seem perfectly logical that, if you have your income divided into a number of schedules, a loss on one schedule should be allowed to be set against a surplus on other schedules. The particular schedule chosen here—Schedule A—is assessed normally in a different way front the assessment of other schedules. On Schedule A you pay according to a formula and not according to the actual net income received. That formula as a rule works against the Exchequer. If over a period of five years the Income Tax payer finds that he has not had sufficient allowance under Schedule A, he can put in a quinquennial claim, but if, on the other hand, he finds that he has received more income than the actual formula brings into charge for tax he makes no refund. Therefore Schedule A tends steadily to work against the Government.
If you are to make this change in our tax law, you ought to make the assessment under Schedule A actually coincide with the real income. If you are to make it possible for "the Schedule A income to be set against Schedules B, C or D, there is no justification whatever for limiting the concession to one small group of people, namely, the landowners who turn their estates into limited companies. If this concession is justifiable, it should be applied to all and sundry and not to a few wealthy people. A large number of advantages are to be gained by turning an estate into a limited company, and I do not see any reason whatever why under this Amendment we should add a further advantage to that small group when it is not extended to others who might be just as much entitled to it.
§ 6.39 p.m.
§ Mr. SpensAlthough one is very grateful for the Amendment, the suggestion that it is adding an advantage to owners of estate companies is quite wrong. The position under the law as it stands to-day is that you are entitled, so far as you have items chargeable under Schedule A, to charge them against the income accruing from the estate, and against no other income of the company. In addition to that, under the Section of the Act of 1921 which we are amending, the company is entitled to ask the Commissioners to 2128 absolve them from making their shareholders liable to Surtax on any additional income which the Commissioners consider has in the circumstances been properly spent on the land. Under that arrangement not only do landowners get the particular items mentioned in Sub-section (5), that is to say, cost of maintenance, repairs, insurance and management, which are very definite and limited in scope, but in addition, rightly or wrongly, for the last 15 or 20 years, landowners have been able to get additional income which has not gone into repairs but into modernising their farms and cottages for the benefit of the estate as a whole. In times past they have been allowed to apply the income of the company from whatever source in putting up, say, a modern electrified dairy for the benefit of the people of the country. If the Commissioners have been satisfied that the result of that expenditure was for the benefit of the estate, and to secure the future income from that estate for the benefit very largely of the Chancellor of the Exchequer, they have not required that sum to be distributed and Surtax to be charged.
This Clause is automatically providing that every penny of income that comes from any source other than the estate itself must either be distributed, or Surtax must be paid. Even if good owners of estates think fit not to distribute the income but to put it back in the form of modernised and improved buildings and so forth, none the less, those who are interested in the estate company will have to pay Surtax on income they have not received, but which, as good agriculturists, they have thought it necessary to put back into the land. One hates to look at any sort of concession in this way, but it would not be right to imagine that it will give more to the owners interested in those companies than has been the case in the past. Indeed, it will give them substantially less than what they are getting under the existing law. That may be right, but it is a substantial change of policy.
While this concession gives them the right either to pay out of the estate income, or out of any other income, everything that comes under the maintenance claim in Schedule A, and that income will not be subject to Surtax, this is a very much narrower field than hitherto the 2129 Commissioners have allowed to these companies. Although I thank the right hon. Gentleman for the concession, I must point out that fact. Take the case of the farm that perhaps comes back on to the hands of the owner who has to run it for a year at a loss. That is not a loss allowed under Schedule A at all. There are a number of items not of extravagant expenditure or anything of that sort, but such as the cost of insurance and repairs, and the good landowner who expends his income in that way and does not put it into his own pocket will find that he will have to pay Surtax upon it.
§ 6.44 p.m.
§ Mr. Pethick-LawrenceI have listened very carefully to what has been said with regard to this Amendment. The hon. and learned Gentleman the Member for Ashford (Mr. Spens) has stated the facts correctly, but I do not quite understand him when he says that the landowner will have to pay for this, that and the other, and will not get the advantage, when in all these matters an estate which is turned into a company will continue to get an advantage over an estate which has not been turned into a company. That is where I agree with the hon. Member for Chesterfield (Mr. Benson). I do not see why there should be this distinction. I am prepared to admit that the law is not sound with regard to a failure to set off losses against gains. There may be something in what the hon. and learned Member has said about a landlord who puts his money into the repair of buildings being unfairly treated under the existing law, but the fact is that we are not changing the law in regard to a landlord who is the owner of an estate and has not turned it into a company.
There are all sorts of proposals for amendments of the Income Tax laws. A committee sat for over seven years and produced a most profound volume of qualifications and amendments, but the Government have done nothing about it, and are not proposing to do anything. I think it is time that we altered our Income Tax laws, which are in some ways unfair to the taxpayer and in some ways too lenient. I do not see why we should put certain taxpayers in an advantageous position as compared with others. I have never been able to see why we should give a favourable position to people who choose to turn their estates into companies. If you are going to enforce the 2130 law as against the man it is still more unfair if you make a distinction between a man and a company. I should be quite prepared to consider an amendment of the law but I do not approve of the proposals contained in this Amendment.
§ 6.48 p.m.
§ The Attorney-GeneralLet me deal with the points raised by the hon. and learned Member for Ashford (Mr. Spens) with regard to farming losses, to which I think the hon. Member for Chesterfield (Mr. Benson) also referred. Losses of that kind can be in the case of individuals set off against other income. I can assure the hon. and learned Member that under the Amendment these losses in the case of a company can equally be set off against the investment income, and in so far as they are farming losses they can, under the Clause as originally introduced, be set off, in the case of a company owning an estate and investments, against the investment income, that is in Sub-section (2), paragraph (a). As to the more general points which have been raised, I think the remarks of the hon. Member for Chesterfield may have been misunderstood when he suggested that the principles of Income Tax operate to set off losses of one Schedule against another. This proposal has nothing to do with Income Tax. What the Clause does is to say that in the case of an investment company the income shall automatically be deemed to be distributed in to to. Under the legislation since 1922 in the case of all companies who come within the Section, whether they run businesses, own assets or hold investments they could specify to the Special Commissioners that they had made provision for current requirements and developments, and under the application of those words money which has been put to revenue account, money spent on capital account, and reserves for capital development, have all been treated as legitimate items in considering what balance was available for distribution.
The Amendment removes that provision in the case of investment companies and in the case of a company which holds nothing but investments the problem is easy if the principle of the Clause is accepted. It was never designed to operate in the case of trading companies or in the case of estate companies. The problem which arose was with regard to 2131 the case where both elements were present. The hon. and learned Member stated the position quite accurately. This is not a case, therefore, of raising any general question of Schedule against Schedule; it is simply trying to get the right provision for applying the principles of the Clause to investments but making a proper provision for the mixed estate investment company; while dealing with investments on lines which are applicable to an investment company does not remove in an unjust way the general principle of an estate company regarded as an estate company or a trading company regarded as a trading company running a trade or business. I therefore suggest that this is not introducing a new principle, it is simply considering within the provisions of the Clause how we can properly draw the line.
The hon. and learned Member said that he was grateful for the Clause, but disappointed that it did not go as far as it should go, and he quoted examples of the type of expenditure which are not capital in any extreme sense; they are not new developments of capital within the Income Tax principles in the sense that they are putting up something new and not merely maintaining or improving
§ existing farmhouses and buildings. The House, I think, appreciates that this problem which has led to the Amendment proposed by the Government arises in the case of a company which distributes none of its estate income, but in addition to its estate income also has investment income. If it distributes all its investment income it is not hit by the Clause at all.
§ We feel that these are the fair lines on which to meet the problem which has been raised. I have said since the point was raised that the problem as to how exactly the line should be drawn to preserve the principle of the Clause as applied to all investments and at the same time make a fair provision for estate companies in particular, is not an easy one; it is not a thing which on simple academic principles leads to a result. Of course, it can be considered, as can all other matters, in the actual working. We believe that the proposal will meet the hard case, and as it is based on a fair principle I hope the House will accept it.
§ Question put, "That those words be there inserted in the Bill."
§ The House divided: Ayes, 227; Noes, 123.
2135§ 7.5 p.m.
§ The Attorney-GeneralI beg to move, in page 12, line 29, after "B," to insert:
income arising in respect of the ownership or occupation of land which is chargeable to Income Tax under Schedule D.This and the next Amendment on the Order Paper are related to each other. They arose out of a discussion on an Amendment in the name of the hon. and learned Member for Ashford (Mr. Spens) in Committee. He pointed out that under the Bill as drafted the provision for defining estate income referred to Schedules A and B, but that certain incomes arising from land and formerly chargeable under those Schedules had been transferred to Schedule D, and therefore under the Clause as originally introduced would fall outside the definition of estate income. That seemed to me a good point, because this Clause is directed against investment companies holding ordinary investments. An estate company which had nothing but interests arising out of land was excepted altogether. The sort of items which arise from land and which used to be under Schedules A and B are such things—here I have to go carefully because the hon. Member for Chesterfield (Mr. Benson) is apt to get slightly indignant at any mention of them—as manorial dues, profits from quarries and mines, income from mining rents and royalties—which are being turned into securities under recent legislation, income from the furnished letting of house property, sporting rights, and so on. These are clearly incomes which can properly come within the definition of estate income for the purposes of this Clause. They all arise from land. For the convenience of machinery, and possibly for other purposes, they were transferred to Schedule D some time ago, but we think it right that for the purposes of this Clause they should be regarded as estate income.
§ 7.9 p.m.
§ Mr. BensonThe explanation of the Attorney-General does not in any way modify my opposition to these Amendments. I am prepared to admit that if you except income arising under Schedules A and B from the operation of this Clause a good case can be made for the income referred to in these Amendments, but I am not prepared to admit that Schedules A and B should be 2136 removed from the operation of this Clause. Under Section 21 of the 1922 Act, limited companies are allowed to build up reserves to a certain extent and these are not brought into charge for Surtax, whereas in the case of a private individual the income would have been brought into charge before it was placed to reserve. I strongly object to a man who may turn his property into a limited company having tax advantages which do not accrue to a man who retains his property vested in himself. To allow untaxed reserves to be built up is diametrically opposed to the basic principle of Surtax, which is that a man shall pay a differential rate of Surtax on his income irrespective of whether he saves every penny or spends it. The mere fact that he interposes a limited company between himself and the Exchequer is no reason why he should be allowed to escape.
My opposition is not only to manorial rights, fair dues and the like, but to such irritating things as bridge tolls. Under this Bill a man who has some ramshackle wooden bridge—I remember having to go over one in a Yorkshire town and pay Is., and the memory still rankles—would be entitled to put aside part of the income from his tolls for the purpose of rebuilding that bridge untaxed if he had transferred the bridge to a limited company. Apart from the type of income which the right hon. and learned Gentleman is proposing to except, the whole principle of allowing a limited company advantages which a private individual does not get is indefensible.
§ 7.13 p.m.
§ Mr. SpensMay I thank my right hon. and learned Friend for these Amendments? I entirely understand the attitude of the hon. Member for Chesterfield (Mr. Benson) that it is not right that a limited company should get an advantage over an individual, but the circumstances with which we are dealing have been the law of the land for a great number of years and now you are altering it retrospectively. You are making the alterations under this Clause refer to the Surtax of 1938–39. It is because we are altering the law and attempting to preserve some of the advantages that an estate company has had in the past that these Amendments are necessary. But as originally drafted the intention of the 2137 Clause would not have been carried out, because an estate company's sole income would not have come under Schedules A and B. As it is now the intention of the Clause will be carried out, and I thank my right hon. and learned Friend for the Amendments.
§ Mr. Pethick-LawrenceI listened to what the hon. Member behind me said, but in view of the explanation given by the right hon. and learned Gentleman I do not propose to oppose the Amendments.
§ Amendment agreed to.
§
Further Amendment made: In page 12, line 31, at the end, insert:
For the purposes of this Sub-section the expression 'land' means lands, tenements, hereditaments and heritages, and the expression 'income arising in respect of the ownership or occupation of land,' in relation to any building or part of a building, includes profits from the letting thereof furnished."—(The Attorney-General.)