§ Mr. Benson
I beg to move, in page 10, line 32, to leave out from the beginning to the first "the" in line 34.
This is the first of a series of Amendments, and if this is accepted the remainder are consequential. The purpose of the Amendment is to deal with the operation of the Clause in relation to companies with estate or trading income. It is very curious and to my mind indefensible to except such income. The Clause has as its object the tightening up of Surtax legislation, makes all incomes of investment companies liable to Surtax, and forbids the building-up of untaxed reserves, but it makes an 365 exception of estate or trading income, which is in fact derived from landed property, and untaxed reserves may be built up subject to the permission of the commissioners. Why this exception is made in respect of agricultural incomes I do not know, because among the biggest offenders in tax avoidance have been the landed proprietors who have turned their estates into limited companies. They were among the very first to discover the advantages, from the point of view of tax avoidance, of the limited company, and they have used it not merely to avoid Surtax, but to avoid Income Tax, Surtax, and Death Duties. Why they should be singled out for special treatment, frankly, I cannot say. If I might quote one or two passages from a book issued by the Income Taxpayers Society, a book on "Tax Avoidance." by Mr. Jasper Moore, which has been described as the tax dodger's Vade Mecum, he refers to investment companies as follows:For many years it has been realised that there are many cases in which there is advantage from the taxation point of view by the transfer of property to a limited company. It is probably true to say that the greatest advantage is probably obtainable in connection with transfers of land.He goes on to say that in practice the result of such transfer to a company is to reduce very substantially liability to Surtax, that investment companies may also be the means of securing substantial savings of death duties, and that agricultural companies have been established very largely for the purpose of saving Income Tax under Schedule A, Surtax, and death duties. It seems to me that an agricultural company is the last company that ought to receive any concession or any advantage over other forms of investment company from this House. It has been argued that Schedule A is unfair in its incidence, and taken over one year it frequently is very unfair, but the quinquennial adjustment which is open to every landowner very largely removes those disadvantages and unfairnesses, and if after the quinquennial adjustment there still remains any serious disadvantage to the property owner assessed under Schedule A, then the method of dealing with that unfairness is by legislation directed to the point by this House and not by allowing roundabout concessions which affect only a certain percentage of landowners.
366 Why should we give concessions to a landowner merely because he has turned his land over to a. limited company of which he holds the shares, and he is also a Surtax payer? The landowner who holds his land in his own name and has not turned his land over to a limited company, is not allowed to build up reserves. Why should the mere transference from one form of ownership to another allow concessions to be made which are entirely illogical? I see no reason why this concession should be given to any income taxed under Schedule A.
In regard to the proposal to allow concessions on incomes taxed under Schedule B, the objection is still stronger. Schedule B is an old device, probably the oldest tax-dodging device in existence. It is a method by which 99 farmers out of 100 escape paying any Income Tax. It is usually defended by hon. Members opposite on the ground that the farmer is too big a fool to make out his Income Tax form, and therefore he must be assessed in some other way. I am not prepared to accept that explanation. Even if it be true as regards farmers, it is not true as regards a limited company holding and working land. If a limited company which owns land, a company which has probably been created on the advice of clever lawyers, and which is managed not by the owner but by an agent, puts in a Schedule B assessment, there is only one reason for it, and that is that it is designed to avoid the payment of Income Tax and Surtax. Therefore I strongly object and I hope the House will reject the idea of giving unwarranted concessions, to be applied only to landlords who have turned their land into limited companies, and to landlords who are Surtax payers, which do not accrue to a landlord, whether he be a Surtax payer or not, who retains land in his own ownership.
§ 11.7 p.m.
§ Mr. Spens
I sometimes cross swords with the hon. Member for Chesterfield (Mr. Benson), but sometimes we find a note of common agreement. In regard to his speech to-night, we have absolutely nothing in common. For many years the formation of agricultural companies has been a method by which a number of quite poor persons, in quite small farming partnerships, have been able to face 367 the agricultural difficulties of the last 15 years. They started 20 years ago, and they have been allowed to go on all this time. They have been of enormous value to the agricultural interests on the countryside. Without them, the country-side would have been in a far worse condition than it is to-day. I therefore hope that every hon. Member on this side of the Committee will do his best to prevent this Amendment from being passed.
The hon. Member is right in saying that the value of these companies for assisting agriculture can be abused. I have no doubt that there have been a very few cases of rich men, who have been able to make use of these companies and have abused what is otherwise a proper procedure; but those are the exceptions. In the series of Amendments which I and my hon. Friends have put down, while we are in full sympathy with the main purpose of this Clause, which is to stop investment companies which can be used very effectively for the avoidance of Surtax, we are endeavouring to prevent this Clause dealing too heavily with those companies which have been formed for the purpose of carrying on private trading partnerships, and have been formed for the purpose of carrying on agricultural estates.
One is glad to see that the Chancellor of the Exchequer, by putting down an Amendment, has in fact accepted that view as regards investment companies. Had it not been so, you would have the ridiculous position that a small trading partnership which incorporates itself as a private company, which in the course of 20 years has built up some reserves, without any objection from anyone, when it struck a really bad year and had a very small or no trading income, would find itself for the first time coming within the definition of an investment company and in the one year when it could not distribute any of its income its shareholders would find themselves being assessed for Surtax on that undistributed income. We hope that some such consideration will also be given to agricultural companies. The hon. Member wants no consideration to be given to either one or the other. On that point I join complete issue with him and I hope the majority of the House will see that the Amendment is not passed.
§ 11.12 p.m.
§ The Attorney-General
As my hon. and learned Friend has said, the purpose of the Clause is to deal with investment companies. I am not using the word in accordance with its statutory definition, but those companies which hold investments in the ordinary sense of the word, and it is due to certain devices which some of them have resorted to that this Clause is put before the Committee. The hon. Member would take an estate company and say all its income was to be deemed to be distributed in the same way as under the Clause the income of a company which holds nothing but investments is deemed to be distributed. We do not think that is a right or fair suggestion. In the case of investments there are no outgoings, as there are in carrying on a trade or in the private management of an estate. The proper management of an estate involves outgoing for repairs, upkeep, management, insurance and all the rest of it, and is more analogous to a trading company than someone who is fortunate enough to hold investments and dividends come in or do not as the case may be. He does not incur any outgoings in connection with it. For that reason we advise the Committee to reject the Amendment. The distinction that we have drawn between the pure investment company, though that is not perhaps the most suitable epithet, and a company which is either solely an estate company or partly investment and partly estate is, we think, sound and fair, and we ask the Committee to reject the Amendment.
§ Amendment negatived.
§ 11.15 p.m.
§ Mr. Benson
I beg to move, in page 10, line 35, to leave out "investment."
This Amendment is not primarily aimed at tax avoidance, but at what seems to me to be an entirely illogical and unwarranted concession which is given to an individual or partnership whose business is turned into a limited company. There are, roughly, three forms in which a business can be run. There is individual ownership, ownership by a small private firm, such as that to which this Clause applies, and ownership by a public limited company. This Clause deals with the right of various types of companies to build up reserves which shall or shall not attract Surtax at the time when they are built up. There are three 369 different methods of dealing with reserves in reference to Surtax, according to the particular way in which the business is run. In the case of a public company, reserves do not attract Surtax in any shape or form. In the case of private companies, the reserves can be apportioned by the Commissioners, and then they attract Surtax according to the rates of tax payable by the shareholders to whom they are apportioned, but reserves may be built up without attracting Surtax. Then there is the case of the individual business where all the reserves have to bear Surtax for the year in which they are earned.
With regard to public companies, it is, of course, quite obvious that in a large public limited company, with hundreds of thousands of shareholders, the reserves that are built up cannot in any way be allocated to the shareholder who pays Surtax. To begin with, he has no beneficial ownership, and secondly, even if he had, administrative difficulties would make it impossible. With regard to the private company and the individual, you get, with regard to the reserves that are built up year by year, the very opposite to what you do in a public company. You get beneficial ownership and control, and you get ease of administrative apportionment. The one-man company is far more analogous to the private business than it is to the big public limited company. There is really little or no similarity, save in the limitation of liability, between the one-man company and the public company, but there is almost complete identity of real form between the one-man company and the private individual. Now, it seems to me to be entirely illogical to allow to a business which has been merely turned into a limited company concessions which are not allowed to the private individual.
There is no social benefit in having a business run as a private limited company as against private ownership. In the case of a one-man company, reserves can be built up without attracting Surtax just so far as the Commissioners are prepared to allow it. The Act of 1922 which gives the Commissioners power to tax undistributed reserves, lays it down that in the case of any company which is building up reserves the Commissioners shall have regard, not merely to the immediate but to the future needs of the business, as far as expansion and development are 370 concerned. That means, that if the needs of the business are sufficiently great, the Commissioners may for expansion allow practically the whole of the earnings of the company to be put to reserve without attracting Surtax. In a small growing business it is frequently necessary to put a large amount of. profits, year by year, into reserve for extension of plant and buildings and the general expansion of the business. These reserves which go into the expansion of the business will never be declared as dividend. They cannot be, because the money is not there; it is in bricks, mortar, and machinery. The result is that the small limited company, the one-man company, can act practically as a savings bank for the Surtax payer. He can steadily increase his capital by income which has not been declared but has been put to reserve, and has gone to building up the business. He can eventually float a company, as is frequently done, and the whole of that income, which, if he had not turned his business into a one-man company or small limited company, but had run it as a private concern, would have attracted Surtax year by year, will come back to him in the form of capital, and not one penny of Surtax will be paid upon it. It may be said that it is very desirable to make concessions to developing businesses which are in need of capital. That may be true, but it applies just as much to the private business as to the business which has been turned into a limited company. If the one-man company is entitled to have its reserves free of Surtax, then, in sheer logic, so is the ordinary privately-owned concern which puts its profits to reserve for purposes of business expansion. As a matter of fact, I think it is an entire fallacy to suggest that because earned income is being put to reserve for the purpose of expanding a business, it should, thereby, escape Surtax. If one takes that line, it means saying that increased savings are required and that, therefore, capital must be produced at considerable expense to the revenue. If one analyses this question of savings, however, one finds that there is no particular reason why this form of savings— the untaxed reserves which come under Section 21 of the Finance Act, 1922— should receive this concession.
There is no logical difference between the one-man company and the private 371 concern, and there is no logical reason, therefore, for giving what is frequently a very valuable tax concession to a concern which is, in effect, a private business, merely because it is cast in that form. We are steadily stopping up the holes for tax evasion. I suggest that if we make the investment company an impossible instrument of Surtax evasion the Surtax evader will be bound to take a trading company as his next best instrument, and I suggest to the Attorney-General that instead of waiting until evasion is rampant — because I do not suppose the trading company is used very much for the definite evasion of tax— we stop up the hole and prevent evasion taking place.
§ 11.26 p.m.
§ The Attorney-General
This Amendment goes further than the last one in this direction, and I quite agree that you can make the case, as the hon. Member did, that businesses run by companies may be one-man businesses only in the matter of effective control, and that they would get advantages which are not enjoyed by the business which is run in partnership. They can get an advantage which has nothing to do with Income Tax or Surtax in that they can limit their liability. But, broadly speaking, the policy of Parliament over the last 18 or 19 years, both in Income Tax and Surtax legislation, has been to encourage joint stock enterprises as a desirable form of carrying on business. In 1922, when Parliament first dealt with what is described as the unreasonable withholding from distribution of income of one-man companies, it clearly laid down that it intended the Commissioners, in considering whether an unreasonable part of the income was being withheld, to have regard to the normal business requirements, actual and prospective. One can look at that from the point of view of the policy of encouraging the development of businesses and look at it from the point of view of the nature of Surtax.
§ When Surtax was introduced it was as a tax on individuals and not on companies, A public company or a private company did not pay Surtax. It was a tax on individuals, on the money which they had to spend, and Parliament took the view that in the case of a trading company a man should not be liable to pay tax upon money which he did not take out to spend and which he did not merely leave there, as in a money box. to take out later in the form of cash, but which he did devote to the needs of the development of the business. That was so in 1922 as far as trading companies were concerned. While the Clause may have been subjected to abuse in connection with pure investment companies, as far as trading companies are concerned it was a wise and fair Clause, and one which conduces to the development of industry in this country, and I suggest that the Committee should not reverse that policy, as they would be reversing it if this Amendment were carried.
§ Mr. Benson
When the right hon. and learned Gentleman said it was fair, was he comparing it with the treatment of an individual trader who has not turned his business into a limited company?
§ The Attorney-General
No. If the individual owner of a business pays Surtax, he must have some special reason for not turning his business into a limited company. I agree that the hon. Gentleman can make out a case for a different position. It arises, not only in the case of Surtax. but in the case of limitation of liability and in other ways. But, taking joint stock enterprise as the normal way in which industry in this country is now carried on, I think it is a not unfair principle that money put to reserve for the purposes of a business should not suffer Surtax or be deemed to be distributed so as to incur liability.
§ Question put, "That the word 'investment' stand part of the Clause."
§ The Committee divided: Ayes, 184; Noes, 87.375
|Division No 200.]||AYES.||[11.32 p.m.|
|Acland-Troyte, Lt.-Col. G. J.||Beechman, N. A.||Brown, Brig.-Gen. H. C. (Newbury)|
|Albery, sir Irving||Beit, Sir A. L.||Browne, A. C. (Belfast, W.)|
|Allen, Col. J. Sandeman (B'knhead)||Bossom, A. C.||Bull, B. B.|
|Aske, Sir R. W.||Boulton, W. W.||Burgin, Rt. Hon. E. L.|
|Assheton, R.||Boyce, H. Leslie||Butcher, H. W.|
|Baldwin-Webb, Col. J.||Bracken, B.||Cary, R. A.|
|Balfour, G. (Hampstead)||Braithwaite, J. Gurney (Holderness)||Castlereagh, Viscount|
|Balfour, Capt. H. H. (Isle of Thanet)||Briscoe, Capt. R. G.||Cazalet, Capt. V. A. (Chippenham)|
|Beaumont, Hon. R. E. B. (Portsm'h)||Brooks, H. (Lewisham, W.)||Channon, H.|
|Chapman, A. (Rutherglen)||Herbert, Major J. A. (Monmouth)||Reid, W. Allan (Derby)|
|Clarke, Colonel R. S. (E. Grinstead)||Higgs, W. F.||Renter, J. R.|
|Cobb, Captain E. C. (Preston)||Hogg, Hon. Q. McG.||Rickards, G. W. (Skipton)|
|Colfox, Major Sir W. P.||Holdsworth, H.||Ropner, Colonel L.|
|Colman, N. C. D.||Holmes, J. S.||Ross Taylor, W. (Woodbridge)|
|Colville, Rt. Hon. John||Horsbrugh, Florence||Rowlands, G.|
|Conant, Captain R. J. E.||Howitt, Dr. A. B.||Royds, Admiral Sir P. M. R.|
|Courthope, Col. Rt. Hon. Sir G. L.||Hudson, Capt. A. U. M. (Hack., N.)||Ruggles Brise, Colonel Sir E. A.|
|Cox, H. B. Trevor||Hunloke, H. P.||Salt, E. W.|
|Craven-Ellis, W.||Hunter, T.||Scott, Lord William|
|Crooke, Sir J. Smedley||Hutchinson, G. C.||Seely, Sir H. M.|
|Crookshank, Capt. Rt. Hon. H. F. C.||Jennings, R.||Selley, H. R.|
|Cross, R. H.||Joel, D. J. B.||Shepperson, Sir E. W.|
|Crowder, J. F. E.||Jones, Sir H. Haydn (Merioneth)||Simon, Rt. Hon. Sir J. A.|
|Cruddas, Col. B.||Jones, L. (Swansea W.)||Sinclair, Col. T. (Queen's U. B'lf'st)|
|Davidson, Viscountess||Keeling, E. H.||Smith, Sir R. W. (Aberdeen)|
|De Chair, S. S.||Kimball, L.||Snadden, W. McN.|
|Dugdale, Captain T. L,||Lamb, Sir J. Q.||Somerset, T.|
|Duncan, J. A. L.||Lees-Jones, J.||Somervell, Rt. Hon. Sir Donald|
|Elliot, Rt. Hon. W. E.||Leech, Sir J. W.||Southby, Commander Sir A. R. J.|
|Emery, J. F.||Liddall, W. S.||Spens. W. P.|
|Emrys-Evans, P. V.||Llewellin, Colonel J- J.||Stanley, Rt. Hon. Oliver (W'm'l'd)|
|Entwistle, Sir C. F.||Loftus, P. C.||Storey, S.|
|Erskine-Hill, A. G.||Mabane, W. (Huddersfield)||Stourton, Major Hon. J. J.|
|Evans, D. O. (Cardigan)||MacDonald, Rt. Hon. M. (Ross)||Strauss, H. G. (Norwich)|
|Hides, Sir H.||McEwen, Capt. J. H. F.||Strickland, Captain W. F.|
|Fleming, E. L.||McKie, J. H.||Stuart, Rt. Hon. J. (Moray and Nairn)|
|Foot, D. M.||Makins, Brigadier-General Sir Ernest||Suater, Rear-Admiral Sir M. F.|
|Fremantle, Sir F. E.||Margesson, Capt. Rt. Hon. H. D. R.||Sutcliffe, H.|
|Furness, S. N.||Markham, S. F.||Thornton-Kemsley, C. N.|
|Fyfe, D. P. M.||Medlicott, F.||Tufnell, Lieut.-Commander R. L.|
|George, Major G. Lloyd (Pembroke)||Mills, Major J. D. (New Forest)||Turton, R. H.|
|George, Megan Lloyd (Anglesey)||Morgan, R. H. (Worcester, Stourbridge)||Walker-Smith, Sir J.|
|Gledhill, G.||Morrison, G. A. (Scottish Univ's.)||Wallace, Capt. Rt. Hon. Euan|
|Gluckstein, L. H.||Munro, P.||Ward, Lieut.-Col. Sir A. L. (Hull)|
|Goldie, N. B.||Nail, Sir J.||Ward, Irene M. B. (Wallsend)|
|Graham, Captain A. C. (Wirral)||Neven-Spence, Major B. H. H.||Waterhouse, Captain C.|
|Gretton, Col. Rt. Hon. J.||Nicholson, G. (Farnham)||Watt, Lt.-Col. G. S. Harvie|
|Gridley, Sir A. B.||O'Connor, Sir Terence J.||Wells, Sir Sydney|
|Griffith, F. Kingsley (M'ddl'sbro, W.)||O'Neill, Rt. Hon. Sir Hugh||White, H. Graham|
|Grigg, Sir E. W. M.||Owen, Major G.||Wickham, Lt.-Col. E. T. R.|
|Grimston, R. V.||Petherick, M.||Williams, Sir H. G. (Croydon, S.)|
|Guest, Lieut.-Colonel H. (Drake)||Pickthorn, K. W. M.||Willoughby de Eresby, Lord|
|Guest, Mai. Hon. O. (C'mb'rw'll, N.W.)||Pownall, Lt.-Col. Sir Asshttor||Windsor-Clive, Lieut.-Colonel G.|
|Hacking, Rt. Hon. Sir D. H.||Procter, Major H. A.||Womersley, Sir W. J.|
|Hammersley, S. S.||Radford, E. A.||Wragg, H.|
|Hannah, I. C.||Raikes, H. V. A. M.||Wright, Wing-Commander J. A. C.|
|Hannon, Sir P. J. H.||Ramsbotham, Rt. Hon. H.||York, C.|
|Harbord, Sir A.||Rankin, Sir R.||Young, A. S. L. (Partick)|
|Heilgers, Captain F. F. A.||Rathbone, J. R. (Bodmin)|
|Hely-Hutchinson, M. R.||Rayner, Major R. H.||TELLERS FOR THE AYES.—|
|Heneage, Lieut.-Colonel A. P.||Reed, A. C. (Exeter)||Lieut.-Colonel Kerr and Major Sir James Edmondson.|
|Hepburn, P. G. T. Buchan-||Reed, Sir H. S. (Aylesbury)|
|Hepworth, J.||Reid, J. S. C. (Hillhead)|
|Adams, D. (Consett)||Graham, D. M. (Hamilton)||Nathan, Colonel H. L.|
|Adams, D. M. (Poplar, S.)||Greenwood, Rt. Hon. A.||Noel-Baker, P. J.|
|Adamson, Jennie L. (Dartford)||Griffiths, J. (Llanelly)||Paling, W.|
|Alexander, Rt. Hon. A. V. (H'libr.)||Groves, T. E.||Parkinson, J. A.|
|Anderson, F. (Whitehaven)||Hall, G. H. (Aberdare.)||Pearson, A.|
|Barnes, A. J.||Harvey, T. E. (Erg. Univ's.)||Pethick-Lawrence, Rt. Hon. F. W|
|Bellenger, F. J.||Henderson, A. (Kingswinford)||Pools, C. C.|
|Benn, Rt. Hon. W. W.||Hendsrson, J. (Ardwick)||Price, M. P.|
|Benson, G.||Hills, A. (Pontefract)||Pritt, D. N.|
|Bevan, A.||Jagger, J.||Richards, R. (Wrexham)|
|Bromfield, W.||Jenkins, A. (Pontypool)||Ridley, G.|
|Burke, W. A.||Jenkins, Sir W. (Neath)||Ritson, J.|
|Charleton, H. C.||John, W.||Robinson, W. A. (St. Helens)|
|Cluse, W. S.||Kennedy, Rt. Hon. T.||Sexton, T. M.|
|Cocks, F. S.||Kirby, B. V.||Simpson, F. B.|
|Collindridge, F.||Kirkwood, D.||Smith, Ben (Rotherhithe)|
|Daggar, G.||Lathan, G.||Smith, E. (Stoke)|
|Dalton, H.||Lawson, J. J.||Smith, T. (Normanton)|
|Davidson, J. J. (Maryhill)||Leslie, J. R.||Sorensen, R. W.|
|Dobbie, W.||Logan, D. G.||Stewart, W. J. (H'ght'n-le-Sp'ng)|
|Dunn, E. (Rother Valley)||Macdonald, G. (Ince)||Taylor, R. J. (Morpeth)|
|Ede, J. C.||McEntee, V. La T.||Tinker, J. J.|
|Edwards, Sir C. (Bedwellty)||McGhee, H. G.||Tomlinson, G.|
|Fletcher, Lt.-Comdr. R. T. H.||MacLaren, A.||Walkden, A. G.|
|Frankel, D.||Mainwaring, W. H.||Watkins, F. C.|
|Gallacher, W.||Marshall, F.||Watson, W. McL.|
|Garro Jones, G. M.||Milner, Major J.||Welsh, J. C.|
|Westwood, J.||Wilmot, John||Young, Sir R. (Newton)|
|Whiteley, W. (Blaydon)||Windsor, W. (Hull, C.)|
|Wilkinson, Ellen||Woods, G. S. (Finsbury)||TELLERS FOR THE NOBS. —|
|Mr. Adamson and Mr. Mathers.|
Resolution agreed to.
§ 11.40 p.m.
§ The Attorney-General
I beg to move, in page 11, line 12, after "deduction," to insert:other than deductions for any National Defence Contribution payable by the company.Investment companies pay National Defence Contribution with other companies but, of course, it was never intended that the sum paid for National Defence Contribution should be distributed to shareholders for easing their liability to Surtax. This was an accidental omission in the drafting, but it is made good by the Amendment.
§ 11.40 p.m.
§ Mr. Spens
I beg to move, as an Amendment to the proposed Amendment, in line 2, at the end, to add:and for reasonable sums paid by the company for management expenses and directors' fees.I appreciate that the Chancellor of the Exchequer and the Attorney-General are endeavouring to stop the avoidance of Surtax by these small investment companies. As I have said before to-night, I should be the last to suggest that these companies have not been used for the purpose of avoiding Surtax, but there are a large number of small companies which come within the definition of investment companies which have nothing to do with the avoidance of Surtax. In the division where I spend my laborious days practising, it has been the constant practice of judges, when there is a difficult will to work, to authorise the formation of a small company, which would have as shareholders only a few trustees and as its assets investments which would materialise only over a long period of years. That type of company would come within the definition, and the persons interested in its assets would have to pay Surtax on the income from those investments even though part of the income was, by order of the court, applied in payment of an accountant or other skilled person put there by order of the court.
Quite apart from that type of company, there are companies in connection with which individuals, in order to preserve investments, employ accountants or 376 other skilled persons in the management, and pay them a fee. Even though the money has been paid into the pockets of those skilled advisers, the investors are to be taxed on that money. That, I consider a very unwise proposal for the future; but when, in addition, this Clause is made retrospective for a year, so that in all these cases none of the people in charge of the companies has had a chance to make arrangements to prevent it happening, I believe it to be most unfair. I suggest to my right hon. Friend that although there are undoubtedly abuses in connection with these investment companies, the use of them is, generally speaking, in the interest of the Revenue in the end. They are formed because the beneficiaries are persons who know nothing about investments: who do not know how to select them, or when to sell them or change them. If you get an estate in favour of people like that, the common course which any responsible solicitor, accountant or anybody else would advise them to adopt, would be to form a small investment company and emply a skilled accountant or some such person as managing director to take charge of it for them.
The hon. Member for Kennington (Mr. Wilmot), who is nodding his head, knows as well as I do that that sort of thing takes place every day of the week. Is it right that the people who form these companies are to be Surtaxed in respect of the reasonable fees which they pay to a skilled accountant or other person to manage their affairs for them? I suggest that it is not. I have put in the word "reasonable" so that there should be no question of any ramp, and no fancy fees either to the skilled manager or to the directors. If the word "reasonable" is put in, the special commissioners will be in complete charge of the position. Wherever they find there is any unreasonable charge for management expenses or for directors' fees they can put their blue pencil through it. If they are satisfied that it is reasonable, I suggest that it is a proper allowance which ought to be made against the Surtax to which shareholders and other persons who are beneficiaries are entitled.
§ The Deputy-Chairman
The next Amendment to the proposed Amendment on the Paper in the name of the hon. Member for South Croydon (Sir H. Williams) — in line a, at the end, to add,and the amount of any expenses in respect of which relief has been allowed under Section thirty-three of the Income Tax Act, 1918.— falls in consequence of this Amendment to the proposed Amendment. The Amendment to the Clause in the name of the hon. Member for Oldham (Mr. Dodd) — in page 11, line 24, at the end, insert:(c) there shall be deducted, in computing the income of the members of the company for any year or period—
— also falls in the same manner.
- (i) any amount paid or payable in respect of that year or period, on account of National Defence Contribution, such apportionments being made as may be necessary.
- (ii) the amount of any expenses in respect of which relief has been allowed under Section thirty-three of the Income Tax Act, 1918, such apportionments being made as may be necessary."
§ The Attorney-General rose—
§ 11.48 p.m.
§ Sir H. Williams
I was called by the Chair. I do not quite understand this procedure. I was called, and, in response to pressure from hon. Members opposite, the Attorney-General rose. I see no reason why I should give way because of any pressure from Members of' the party opposite.
§ Sir H. Williams
I have often to sit and listen to the right hon. Gentleman, and he must listen to me. The Deputy-Chairman has drawn attention to the fact that the Amendment to the proposed Amendment in my name comes within the scope of that now before the Committee, and I want to take the opportunity before the Attorney-General speaks to point out thatI think that the Amendment to the proposed Amendment which has just been moved is better than mine, because my hon. and learned Friend has introduced the word "reasonable," which would prevent an abuse which might conceivably arise under the similar Amendment 378 in my name. There is one other point I want to make. In certain cases the directors of such a company might include persons who are shareholders. Therefore, let us see what is the consequence of that. If the Clause stands as it is, the whole of the profits of the company, including the sums paid away in expenses, which are written back and treated as profits, are deemed to be profits distributed to the shareholders, one of whom may be a director. He is presumed to have had the whole of his share, and included in that share is his director's fee, and later on his director's fee is brought into his income. In fact, he will pay on that amount of income twice over.
§ Sir H. Williams
The hon. Member says, "Hear, hear." If by chance he were assessed at £1,200 on his Parliamentary salary of £600 a year, I do not think that he would say, "Hear, hear." I am satisfied that the hon. Gentleman does not understand the point, but he would understand it if he were asked to pay twice the amount of Income Tax. It is not desirable that we should count an element of income twice over. Unless the Amendment of my hon. and learned Friend is carried, we shall have, in a certain number of cases, double taxation.
§ 11.51 p.m.
§ The Attorney-General
In considering the investment companies, against which the Clause is directed, we had in mind that attempts have been made to use the expenses provision in order to distribute the income. The actual, reasonable expenses of what I may call the tax evasion company are negligible, but there have been attempts to distribute the income and so evade Surtax. It is that kind of case which we had particularly in mind in drafting the Clause so that the management expenses were not deductible in the case of investment companies. My hon. and learned Friend has put before the Committee what are the cases that really deserve consideration and which have nothing to do with tax evasion. There are undoubtedly investment trust companies conducted on prudent lines, where perfectly legitimate expenses are incurred, but not to a. great amount, for the proper management of the companies, and I believe there is a case for an Amendment on the lines that my hon. 379 and learned Friend puts forward. I could not accept the actual words on the Paper; the sort of words we have in mind would include a rather more substantial definition of "reasonable," such as "reasonable, having regard to the services rendered," or some qualification of that kind. That would make it clear that expenses of that kind would be allowed. Such words would prevent the expenses provision from abuse. The last Amendment which I moved made it clear that these investment companies were, as companies, to pay National Defence Contributions, and that it would be reasonable, particularly having regard to the suggestions of my hon. and learned Friend, to adopt that principle. If my hon. and learned Friend will withdraw the Amendment as on the Paper I undertake, on behalf of my right hon. Friend, to put forward on the Report stage some such words as I have indicated.
§ 11.54 p.m.
§ Mr. Gallacher
When we are discussing these questions, what strikes me is the persistence of hon. Members on the other side in finding ways to open the door to tax-dodging. The hon. Member for South Croydon (Sir H. Williams) made an argument about company directors' fees and introduced something that was entirely irrelevant about what would happen if a salary were charged on two separate occasions. We are not discussing salaries, but profits from investments. Part of these profits from investments are presumably paid out to skilled men as the Mover of the Amendment suggested, but some of them are paid out to directors, as suggested by the hon. Member for South Croydon, and so directors, who direct nothing, derive their profits from investments and directors' fees. A director has to pay taxation on his profits from investments, but he wants to be clear of paying taxation on his director's fees.
§ Mr. Gallacher
The argument of the hon. Member was in connection with a director who draws fees. According to 380 the wording of the Clause, profits from investments will be counted.
§ Sir H. Williams
May I put a simple case to the hon. Member? A company has a profit of £1,000, and it uses £100 of that to pay the director's fees, but the director happens to be the proprietor of the company. The £1,000 will be counted as part of his income for Surtax purposes, but unless the Amendment is accepted the £100 will also be counted, and, therefore, he will be assessed for Surtax not at £1,000, but at £1,100.
§ Mr. Gallacher
The director in most cases as a director gives no service to the company, and when directors' fees are paid they are paid for the purpose of avoiding the payment of a tax on the profits which are coming from the investment company.
§ Mr. Gallacher
The point I am dealing with is the question raised in the Amendment of excluding "reasonable payments," which might mean anything. Once you open the door to the exclusion of reasonable payments to skilled men or exclude fees which are taken by directors, you are opening a way for every kind of tax evasion, and I suggest that directors' fees are charged in such a manner for the deliberate purpose of cutting down, as far as possible, the available amount of profits which are made and which are there for Income Tax and Super-tax purposes. There should be no question of accepting the Amendment. If as a result of this playing about with directors' fees they are caught in their own trap, I am happy to hear it.
§ 11.59 P.m.
§ Mr. Bellenger
I should like to ask the Attorney-General whether he agrees with the example given by the hon. Member for South Croydon (Sir H. Williams)? If that example is correct, it would appear that an injustice would be done by the Clause as now drawn, but it seems rather strange that the draftsman should have introduced a Clause which would penalise unfairly the total profits, however distributed, arising from an investment company. If £1,000 profit is made, presumably only £1,000 should be taxed.
§ The Attorney-General
On the wording of the Clause, I think my hon. Friend the Member for South Croydon (Sir H. Williams) was right, but the principle that you cannot impose Income Tax on the same person twice in respect of the same income would in fact be used to prevent the obvious injustice which would arise in that case.
§ Amendment to the proposed Amendment, by leave, withdrawn.
§ Proposed words there inserted. Ordered, That the Chairman do report Progress; and ask leave to sit again. —
§ [Captain Margesson.]
§ Committee report Progress; to sit again To-morrow.