§ 4.13 p.m.
§ Mr. Spens
I beg to move, in page 11, line 26, to leave out "the whole of the," and to insert:if and so long as— (a) more than seventy-five per cent, of its.This is the first of a series of Amendments which all hang together and which attempts to put forward one of three alternative methods of dealing with what we consider is a hardship to those individuals who happen to be interested in small companies running agricultural estates and who happen to be within the Surtax limits. Before I develop my point let me remind the Committee, first of all, that this Clause has nothing whatever to do with the assessment of any companies, estate, trading, investment or other, to Income Tax. It has solely to do with the assessment to Surtax of individuals who are interested in that company. I cannot help feeling that there has been a good deal of misunderstanding amongst a number of people who are interested in trading and estate companies, because of the belief that the basis on which they are at present assessed to Income Tax is being radically revised by this Clause. Nothing of the kind is happening. What is happening is that the basis on which individual shareholders are interested in these companies for Surtax assessment is being revised in a very radical manner. It is not a revision of their basis of assessment on income which is distributed and paid to them and which they receive. The basis of that assessment is exactly what it was before, but a very radical change is being made in their liability to Surtax for income which is held up by the company and which is not received by them at all.
As the law stands, there is power in the Commissioners to say to any small 452 private company, whatever it is, "You did not distribute your income to the amount which you ought to have distributed it last year, and unless you give us very good reasons why the income was not distributed, we propose to assess the individuals, who would have got the income if it had been distributed, to Surtax on the basis that they, in fact, received the money." Hitherto, any individual threatened with such a Surtax assessment has had the right to go before the Special Commissioners and say that there was very good reason in the interests of the company why that particular amount of income was not distributed. Under the Clause there is to be an automatic assessment in respect of the income of these companies which is not distributed, and there is to be no special appeal to the Commissioners by any individual in respect of the assessment. Individuals will find themselves being charged Surtax in respect of money which they have not received at all, and may not be able to receive, because they may be one out of five others, and the four others may think it best in the interests of the company to hold up the incomes for that year. The individuals who may be in the position of being liable to Surtax feel that a great deal of care and attention is necessary as to how an automatic assessment of this sort is going to work out.
The two particular types of companies which will be chiefly affected, and in which by far the majority of hard cases will arise, unless special provision is made, are companies formed for the purpose of trading and companies formed for the purpose of running an agricultural estate. In both of these cases my right hon. Friend has thought it right to put into the original Clause, or by an Amendment, certain special provisions. It is as regards these special provisions in respect of agricultural estates that we are asking him to reconsider what he has done. He proposes to except altogether from the operation of the Clause companies running agricultural estates whose sole income is derived from those estates, that is, income coming under Schedules A and B. On the face of it, it looks a very generous exception, but one must realise that there is not a single small company running an agricultural estate or farm in this country whose income is solely derived from the estate, because 453 inevitably such a company, after it has been going on for a few months, is bound to receive rents of furnished houses which are assessable under Schedule D. Therefore, so far as Sub-section (3) is concerned at the present moment, while it looks as if it were a generous concession, it really does not except any single company at all as far as we have been able to discover.
The operative part, so far as these estate companies are concerned, is Subsection (4). That provides that where an estate company has partly income from the estate, which comes under Schedules A and B, and partly income from some other sources, then that other income has got to be treated as if it belonged to quite a separate company, and has to be divided up to the hilt, or the shareholders of the company have to be assessed for Surtax on the basis that they have, in fact, received it. Why does any company running an agricultural estate or a set of farms not distribute its income up to the hilt? The reason, of courśe, is that in such a precarious business you have good years and bad years, and out of the income derived from other sources you have to make good the losses on your farming operations, or you have to provide for the bad season which may strike you the year after next. Do not let the Committee imagine that these companies are the perquisites of rich men. Many of them are companies established by a small group of farmers, one of whom may be in the unfortunate position of being a Surtax payer, and that is the individual who is hit by this Clause. The result to the companies who do this, if the Clause is left as it is, will be that in the bad year, when you want to use some of your income from other sources to make up your losses on your fanning, that is the very year in respect of which the individual shareholder will find himself assessed to pay Surtax as if he had received money which he never had in his pocket.
Therefore, we say that really this exception in favour of these estate companies is a delusion and we have put forward three alternative ways of dealing with what we suggest is a hardship on this particular type of company which will not in any way handicap or interfere with the pursuit of my right hon. Friend after those who abuse this method of company formation for the purpose of evading 454 Surtax. The first: suggestion is contained in the Amendment which I am moving, that we should except from the Clause altogether not a company whose whole income comes from the estates but a company whose income up to 25 per cent. comes from other sources; that is to say, a company which relies normally for 75 per cent. of its income from the estate but receives in any normal year 25 per cent. of its income from some other sources. If that were done it would enable those companies who up to 25 per cent. have an income from other sources to go on under the existing law. They would not get off their Surtax and would still be liable to be hauled before the Commissioners to explain their conduct.
The second alternative which we suggest is contained in a later Amendment. We suggest that Sub-section (4) should be amended so that in calculating the income which must be distributed, or the shareholders' liability to be assessed for Surtax on it, you should allow losses of income on the estate to be made good out of the income from other sources. In other words, you would allow a percentage of your net income from other sources, if in fact it is used to make good losses on the estate, to be regarded as finished and done with, and you would only assess the shareholder on the balance, and not on the gross income from other sources. That is an alternative which will go a long way to get us over the difficulties of this Clause. The third and last alternative we suggest is by our Amendment to the proposed new Sub-section (6). It would specifically exclude from the operations of the Clause a company wholly or mainly formed for the purpose of running an agricultural estate, just as the right hon. Gentleman proposes that a company mainly or wholly formed for carrying on trade enterprises should be excluded, for somewhat similar reasons.
I do not think that my hon. Friends and I very much care which of the three alternatives we may succeed in getting, but we hope that we may get one of them. We feel that to make a man assessable to Surtax in respect of income which he has never received, and take away from him his right of appeal which he has at present, is putting a very strong weapon in the hands of the Commissioners, and we feel that if we can show, as I hope I have, that the Clause will in 455 many instances, and particularly in the bad years, work very great injustice on any shareholder of a small company who happens to be within the Surtax limit, I hope the right hon. Gentleman will be able to see his way to meet us in one or other of the three alternatives.
§ 4.29 p.m.
§ Brigadier-General Clifton Brown
I rise to support the Amendment which has been put forward so fairly and so plainly by my hon. and learned Friend. I quite understand the attitude of Members of the Opposition to these estate companies. It is quite logical. They contend that these estate companies are formed for dodging taxes. From that point of view they are quite logical in their attitude, but from the Government's point of view I cannot see that these proposals, so far as we understand them, are fair. Indeed, I think they are harsh on the small, struggling estate company which is really trying to develop the estate out of its income. I know several estates which have formed themselves into companies which have been able to bring water and electric light to the cottages on the estate and put the buildings in a better state of repair, and who, after some years, have been able to recoup themselves and make the company a paying concern.
The object of the Amendment is that investment income should be free of Surtax except where a profit is shown on the estate account. The Amendment provides that where an estate company shows a loss on the estate account its investment income to the extent required to cover its loss shall not automatically and without appeal be assessed to Surtax. It is very difficult for an estate company to remain a company interested only in land. You must have investment income. Changes take place. You may be ordered by a new Government or by some electrical undertaking to run electric poles on your land, and the cost of them, 7s. 6d., 5s. 6d., or 2s. 6d. people, may become a charge on your investment income. There are many things of that sort that can happen. It frequently occurs that you may have to sell some of your urban property and put the proceeds into your estate company so as to give yourself an investment income which will enable you to work the estate better. Whichever way you look at it, I think 456 these companies must have a certain amount of latitude in regard to changing land investments into money investments.
We had recently before this House a private Member's Bill relating to a local charity. The Charity Commissioners sought to sell some land that had been left to enable them to give blankets to the poor, and they desired to put it into money instead. That Bill was passed by this House. We want the same system in regard to an estate company so that you may be able to have a certain amount of investment income in your company. Our Amendments provide three alternatives for allowing a percentage of investment income in a company which shall not all be taxed for Surtax, I think the Chancellor of the Exchequer and the Attorney-General must know perfectly well that there are very few companies that are not bona-fide companies, and that many of them are spending the whole of their income and are making losses in developing their estates. That development is good for the countryside and for the people who live there. The English country estates are still our pride, but if the Government take millions of pounds out of them in taxation and do not allow the money to be put back into the land, because they are too severe on the ordinary bona-fide companies, it will be a great loss to the countryside.
§ 4.34 p.m.
§ Mr. Benson
I am not quite sure whether the hon. and gallant Member for Newbury (Brigadier-General Brown) has not forgotten certain knowledge which he acquired when he was in the Army. I was under the impression that when the military contemplated an attack, the first thing they did was to co-ordinate their forces. The hon. and gallant Member and the hon. and learned Member for Ashford (Mr. Spens) have not coordinated their method of attack on this Clause. The hon. and learned Member for Ashford put up a plea for the poor struggling company: the company that was poverty-stricken. I am not sure how he can square that with the fact that this is a Clause dealing only with Surtax payers. The hon. and gallant Member takes a rather different line. He admitted that owing to incorporation a number of estates had been able to spend large sums of money in development. He said that that was owing to incorporation. The advantage of incorpora- 457 tion is that it enables the owners of an estate to avoid paying Surtax.
§ Mr Benson
But the profit does not depend upon incorporation. The hon. and gallant Member said that they were able, owing to having turned themselves into limited companies, to do these developments, and the only source of extra income that would arise from the fact that they had incorporated themselves was that they avoided payment of Surtax. Therefore, I can only assume that the developments arose from funds which had the estate not been incorporated would have gone to the Exchequer in Surtax.
§ Brigadier-General Brown indicated dissent.
§ Mr. Benson
Certainly. That is the logical deduction. There are gradations of Surtax. The Surtax on the lower ranges of income is comparatively small. If, therefore, this development has occurred by the incorporation of the agricultural estate and the avoidance of Surtax, there are only two deductions to be made, (1) that it is a very large agricultural estate or, (2) that the whole of that agricultural estate paid very high rates of Surtax. Were it a question merely of a small struggling company, where perhaps one of the members of the company happened to be just over the Surtax level, there might be something to be said for the Amendment, although the amount by which he would be hit would be so small that it would not matter.
As the hon. and learned Member for Ashford said, large sums are involved, and that necessarily means large incomes of large estates. It is there where no hardship is involved. The Government's policy in this Clause is that certain reserves shall be allowed to agricultural estates because they are more or less in the position of running a business; but why should a landowner or a group of landowners who have incorporated their estates be allowed to add other forms of investment and hold parts of the income of that investment in reserve? I am not prepared to agree that reserves should be built up out of agricultural rents and profits which shall not attract tax. With regard to income which comes simply and solely as a result of investment, I see no 458 reason why that income should not attract tax. [Interruption.] He does not receive the income, but it is under his control.
§ Mr. Benson
Perhaps not necessarily, but even if it is not under his control he has the beneficial ownership. To say that you may save money out of income and add to your assets out of income, but if you do it in a certain way you avoid payment of Surtax, cuts at the whole basis and idea of Surtax, namely, that a man shall pay a differential rate according to the size of his income. I do not see why this question of incorporation should give any advantage to a person who desires for his own perfectly legitimate purpose to incorporate his estate or his investments. If the country requires savings, and it certainly does, and if certain savings are to be allowed to be accumulated without the payment of Surtax, the hon. and learned Member ought to be able to put by a certain amount of his fee per annum and say to the Government "I am. creating a reserve fund out of my fees; it is going into productive industry, and I am entitled to supply productive industry with capital just as is the owner who is a limited company and puts money to reserve. I am entitled to the same advantage and for the same reason."
§ Mr. Benson
So could all the five members of the company. I am suggesting an advantage to the hon. and learned Member and why he should cast it aside I do not know. If savings are an advantage to the nation, I do not see why certain savings if they come within the ambit of a limited company should not attract tax, while the savings outside the ambit, which are put exactly to the same use, should attract tax. The hon. and learned Member made a moving plea for the poor Surtax payer. We have had that plea so often whenever taxation has been involved, and especially in regard to the marginal cases. What this Clause is getting at, and what I hope the Government will assist us to get at, is the large agricultural estate which has 459 been incorporated primarily for the purpose of the avoidance of Income Tax, Surtax and Death Duties.
§ 4.42 p.m.
§ The Attorney-General (Sir Donald Somervell)
My hon. and learned Friend the Member for Ashford (Mr. Spens) presented a precise and lucid explanation of the general intention of the Clause. The Clause is aimed at arrangements made in respect of income from investment and devices in connection with income from investment which have been put forward as justifying the non-distribution of investment income. It is because it was thought that that was not a really satisfactory position that this Clause has been introduced, the broad principle being that in respect of investment income, whatever you do with it, you should pay Surtax on it, although you have transferred your investment to a company more or less as if you were an individual. It is true that there are minor adjustments. You pay N.D.C., which you would not pay if you were an individual, and, as I stated last night, we propose to allow some reasonable expenses, which the individual would not have but he does not pay N.D.C. That is the broad principle of the Clause.
It was not desired or intended to apply the Clause to a company which is solely or mainly carrying on trading, or a company dealing solely with an estate and with the income from an estate. For that reason in Sub-section (3) it is stated:The preceding provisions of this Section shall not apply to an investment company the whole of the actual income whereof from all sources is estate or trading income.My hon. and learned Friend said, with some force, that although there is the letter of an intention, it would not, in fact, cover any actual estate company, or would be very unlikely to do so, because there would be practically no estate company which did not have some income other than estate income. You may have such a company where in its origin the sole asset transferred to it was the land, in the year before it had put by anything for contingencies and reserve. My hon. and learned Friend was quite right in saying that such a case would be very exceptional, if it existed, and that broadly speaking, there would be no estate company the income of which was solely estate income. I think that is a very forcible point.
460 Before dealing with the proposals that have been made, I should like to remove a further misapprehension that may exist. My hon. and learned Friend pointed out, quite rightly, that this Clause affects only Surtax, and not Income Tax. I would point out also that in the case of estate companies which have some income from investments, if they distribute an amount equal to or exceeding the income from their investments, they are not hit by this Clause, because they have, by that act, distributed the whole of their Investment income, and one proviso to the Clause states that income distributed shall be deemed in the first instance to be income on the investments. Some hon. Members who have studied the Clause may not have appreciated that fact. In considering the proposals, it is necessary to guard against an estate being used to mask—I do not use the word in an offensive sense —what is in substance an investment company. Suppose, for instance, that a man has a small estate and large investments, he might transfer them both to the company. The purposes of the company, as they appeared from the articles and so forth, would be the management of the estate, but the quantity of the investments transferred would be far more than the estate needed for any estate purpose. In fact, it would really be a combined company which was a company, in the main part, merely to hold investments, and in a smaller part, to hold an estate. I am sure that my hon. Friends will agree with me that it is necessary to see that there are provisions to safeguard that sort of device.
I come now to the three proposals that have been put forward, and on which I take it we are having a general discussion. The first one attempts to make the words in Sub-section (3) have a real meaning by applying a percentage test and saying that if an estate company has so much estate income, then if its investment income is only 25 per cent, of that amount, it shall be treated as an estate company for the purposes of this Clause and left outside the Clause altogether. That does not seem to me to be a good way of meeting the point, if it is a point which should be met, for the following reason. It would assist an estate company which did not need assistance, and it would not help an estate company on which the provisions of this Clause might in certain years bear hardly. If there 461 was a company with a flourishing estate, bringing in a large amount of estate income, then 25 per cent. investment income would be a large amount, and a flourishing estate would need so much the less in investment income. On the other hand, in the case referred to by my hon. and gallant Friend the Member for New-bury (Brigadier-General Brown), where the estate was actually making a loss, it would get no benefit by this proposal, because 25 per cent. of its estate income would be nil. Therefore, the very case which I think would appeal to the Committee most as being one where something should be done to meet the position when it existed, would not be assisted in any way by the proposal.
I will now deal with the third proposal, which takes the form of an Amendment to an Amendment that we shall discuss later, and states that a company which is run wholly or mainly for the management of an agricultural estate shall be exempted altogether. The difficulty about this proposal, I think, is that it would be difficult to apply in practice. One cannot merely accept the words used in the memoranda and articles; one has to go into the motives. If one sought to follow this proposal, one would either do too much or too little. One would have to draw the definition so narrowly as to cut out possibly a legitimate case where investment income from outside had been transferred in order that losses might be made up. One could not have a form of words which would open the door too wide and let in a company which said that it was managing an agricultural estate, but in fact had very large investments which had been transferred for other purposes.
Therefore, I come to the second proposal which, as was said both by my hon. and learned Friend and by my hon. and gallant Friend, is designed to meet cases where, in a particular year, revenue is lost on the running of the estate; that is to say, more money is spent on the maintenance, repairs and so on of the estate, than comes in. Let me give an instance of the position as the Clause is at present. An estate company makes a loss of £500. There is an investment income of £1,500, of which £500 has to go to make up the deficit in the estate income. Under the Clause as it is, the whole of the £1,500 would be deemed to be distributed, although in fact there 462 would be only £1,000 available for distribution. That is not a case of building up reserves for capital expenditure and development, and the creation of new estate enterprises; it is simply a case in which, on the actual revenue account for the year, there is a loss on the running of the estate.
It seems to me that that is a case which should be met. To do so would not, in my view, introduce any new principle into the Clause, but would simply carry out the general intention of Subsection (3) and meet a case which, I think, hon. Members in all parts of the Committee feel is one that ought to be met. The words of the Amendment dealing with the matter are words which I cannot accept. I think they go beyond the intention expressed in the speeches of my hon. Friends, and in any case, I am not sure that they represent the right way of dealing with the matter; but I hope that my hon. Friends will accept my assurance that I feel this is a point which should be met, that words should be introduced to permit a company to set against investment income a revenue loss on the estate, and that I will consider what is the best way of achieving that object and put down an Amendment on the Report stage. Having had these assurances, I hope my hon. and learned Friend will withdraw the Amendment.
§ 4.55 p.m.
§ Mr. Pethick-Lawrence
No doubt the hon. and learned Member for Ashford (Mr. Spens) will withdraw the Amendment, in view of what the Attorney-General has said, but before that is done, I want to put one question to the Attorney-General and to make a statement on the position of myself and my hon. Friends with regard to this matter. I want to ask what precisely would be the position of a private individual faced with the circumstances which the Attorney-General has been describing with regard to an estate company. If I am correct in my interpretation of the law, a person cannot write off, for Income Tax purposes, a loss under Schedule A against a profit under Schedule D. Therefore, I think I am right in saying that a person has to pay Income Tax on the full income under one Schedule, even though he has made a loss under another Schedule, and cannot write off one against another. I am not 463 sure of the facts with regard to Surtax. Is it correct that an individual faced with this position cannot, for Surtax purposes, write off a loss under one Schedule against a profit under another Schedule? My impression is that he cannot do it. Perhaps the Attorney-General will correct me if I am wrong.
Certainly, it has always seemed to me to be unjust that this should not be so. At the same time, if it is not so in the case of a private individual, I am not clear why it should be so in the case of this particular form of company. It may easily happen that a private individual is in such a position that he is likely to make a loss on one particular part of his property for some years, and if the Attorney-General is going to give this concession, surely it will open the door to a private individual to escape paying Surtax. It may be legitimate that he should escape it, but that is a matter I am not discussing now. As the law is at present, he cannot escape it, and if the Attorney-General intends to put down an Amendment on the lines he has indicated, it seems to me that, by means of a device, a private individual might succeed in doing what he is not allowed to do now. If the law is wrong—and I am not sure that it is not wrong—in the case of a private individual, I think it is right that it should be changed. I do not see why it should be changed in this particular case if it is not changed in general. As to the position of my hon. Friends and myself, of course if we agree that the Amendment should be withdrawn, if the hon. and learned Member desires so to do, it does not commit us in any way to approve any Amendment which the Attorney-General may move on the Report stage.
§ 4.59 P.m.
§ Mr. Benson
I should like to ask how a person achieves a loss under Schedule A? What is to be the criterion of loss in relation to Schedule A? Schedule A is an assessment of a peculiar kind. There are certain allowances made which depend upon the type of propery, and there is no tax payable, and no loss that can be shown, if the property is empty. It might happen that on the quinquennial average a person could show that he received a minus quantity over five years, but I am rather puzzled as to how a 464 company would, from the accountancy point of view, show a loss under Schedule A.
§ 5.0 p.m.
§ The Attorney-General
I will deal first with the point put by the right hon. Gentleman. There are certain provisions by which a loss under one schedule can be set off against the assessment to another. For example, a farming loss can be set off by an individual against his general income. There, are certain other provisions under Section 34, but in the case of an individual it is true to say that the loss that we are dealing with here could not be set off by him for Income Tax or Surtax purposes against the assessments on his other resources. To that extent the company gets an advantageous position. All I say, and all that I think the right hon. Gentleman would want me to say, at this moment on that matter is that, of course, there are, and always have been, certain tax advantages which flow from incorporation. Long before we ever heard of tax evasion in the form in which some individuals have done it, incorporation gave certain tax advantages, and this concession will be one of them. Whether the system is logical, or whether it could be altered in one way or another, is not a matter that we can go into now. The hon. Member for Chesterfield (Mr. Benson) did not know how a loss could be made under Schedule A.
§ Mr. Benson
No, I did not say that. I do not think many of them do, but I was puzzled about this, how you showed a loss under Schedule A and how are you going to set a quinquennial balance against any Surtax.
§ The Attorney-General
I understand the question. The admission that the hon. Member has just made will be noted by my hon. Friends behind me if there is any later discussion. The loss that we are concerned with is not a money loss. When a man has spent more in authorised outgoings on management, insurance, repairs, improvements to cottages and farmhouses, and so on, then he has made a loss and that is the loss that we are talking about. It is an actual income loss.
§ Amendment, by leave, withdrawn.465
§ Sir Herbert Williams
I beg to move, in page 12, line 40, at the end, to insert:(iii) if and so long as such a company is precluded by law from paying a dividend to the members of the company by reason of the value of the assets of the company being less than the par value of the issued share and loan capital the actual income from all sources of the company shall be treated as a whole and shall be deemed to be entirely attributable to estate or trading income.The purpose of the Amendment is to deal with what I am advised is a certain, though not perhaps a large, number of cases. It is not always the case that a private company is in fact precluded from distributing a dividend in the circumstances contemplated in this paragraph. On the other hand, there are companies, I am advised, which are in that position, and it would be a logical absurdity if this situation arose. The law says to a company, "If you distribute a dividend you commit a crime." If, at the same time, it says, "We have to assume that you have distributed not only a dividend, but what may be regarded as profits from one point of view, though they are offset by other things regarded as losses," that they should then presume that the dividend which it is illegal to distribute has, in fact, been distributed, seems a manifest absurdity. I hope the Attorney-General will not deal with it on the line which it has been suggested in some quarters it should be dealt with, namely, that such companies do not exist, because my information is that there are such companies and, if there are, I do not think they should be subjected to the kind of injustice that I have described.
§ 5.6 p.m.
§ The Attorney-General
I am not going to say that such companies do not exist if my hon. Friend says they do, but I was at a loss to understand how such a state of affairs could arise, because there is no general principle of law preventing a company from distributing a dividend because the value of its assets is less than the par value of the issued shares. The question whether a dividend can or cannot be declared is simply a question whether there are profits out of which it can be declared. One could not, of course, allow a company by its own act to preclude itself from declaring a dividend within some such provision as this. All I can say is that I do not appreciate how the position could arise. If my hon. 466 Friend could give us rather more detail as to how it could arise I will certainly look into it and see whether there is a point that could be met. I cannot carry it further at the moment.
§ 5.8 p.m.
§ Sir Alfred Beit
My hon. Friend is quite right in saying that such companies exist. I am, through an executorship, connected with such a one. Under the definition given in the Companies Act there is a considerable difference between investment companies and finance companies. I am rather anxious to know whether this differentiation, which is very marked when one reads the articles of association, is to be maintained, and whether a company carrying on a trade includes a finance company. It seems to me that the object behind the Amendment is to protect a finance company which may have had a loss from having to pay, through its members, Surtax on dividends which in point of fact have not been distributed.
§ Sir H. Williams
I did not know that I was going to have the luck that my hon. Friend would be in a position to declare that he, in fact, through a trusteeship, is a director of such a company as I have in mind. In view of the Attorney-General's undertaking, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ 5.10 p.m.
§ The Attorney-General
I beg to move, in page 13, line 5, at the end, to insert:(6) The preceding provisions of this Section shall not apply in the case of any company if the Special Commissioners are satisfied that the company exists wholly or mainly for the purpose of carrying on a trade or for the purpose of co-ordinating the administration of a group of two or more companies each of which is under its control and exists wholly or mainly for the purpose of carrying on a trade.It was never intended to bring within the scope of this Clause companies incorporated and carried on for the purpose of trading, and that is one of the matters dealt with in the Amendment. It has also been brought to our notice that the wording of the Clause, with previous definitions of investment companies, would cover the case of a holding company which exists for the purpose of co-ordinating the administration of a group of two or more trading companies. Neither class of company of that kind was within our 467 intention in drafting the Clause, and therefore we desire to omit them. The case of the holding company is quite obvious. With regard to the trading company, the matter arose in this way. Investment companies are defined under earlier Acts as companies whose income is mainly income of a character which, if an individual got it, would be unearned income. A trading company may have reserves and obtain some income from them, but the bulk of its profits are its trading profits. If it fell on bad times and made no trading profits, its income from investment would be the sole source of income, and it would in fact, only by an accident fall within the definition of an investment company for tax evasion purposes. No one desired or intended that, and these words are put down in order to omit these two cases which we do not desire to bring within the scope of the Clause. An hon. Member on the last Amendment raised the question of a finance company. I understand he meant a company actually trading in investments as distinct from a company holding investments. That would be excluded from the purview of the Clause.
§ Mr. Keeling
I should like to ask my right hon. and learned Friend whether this Sub-section would cover the case of a patent-holding company. A patent-holding company does not carry on trade in the ordinary sense. It may get the whole of its revenue from royalties. Such a company is formed for convenience, and not in the least for tax evasion, to carry on a bona fide business and, incidentally, if it gets royalties from abroad it is adding to our invisible exports. I do not think it can be intended that it should be hit by the Clause.
§ 5.14 P.m.
§ Lord Apsley
We have not heard from the Attorney-General how it is that the average agricultural estate is assessed as an investment and not a trading company. No one will pretend that the average trading company has not got investments from which it could meet losses in a bad year. It often happens that the senior partner of a trading company finds it necessary to draw money from his own private resources and put it into the company in order to tide over bad days. That is the normal way of running such a company. I gather that this Clause has been drawn by the Chan- 468 cellor of the Exchequer in order to meet hard cases of that kind. I cannot understand, on the Attorney-General's definition of an investment company, how it can be argued that an agricultural estate company is an investment company. Surely it is carrying on a trade or business and its main source of income is that business. The hon. Member for Chesterfield (Mr. Benson) has already raised a point about assessments under Schedule A. That is dealt with in another Amendment and I would not be in order in going into it deeply at this stage, but I would mention that originally Schedule A was drawn to deal with all income from land. Since that time things have changed and most agricultural estates now have certain sources of income which are not assessed under Schedule A. There are such things as quarries, timber, way-leaves and so forth, income from which is assessed under Schedule D.
That is going rather wide of the Amendment which is under discussion. We are not discussing the Clause itself or subsequent Amendments to it.
§ Lord Apsley
I am only raising the question of definition and the difference between a trading company and an investment company, and I wanted an explanation of why it is that, in the terms of the Attorney-General's definition, an agricultural estate company is regarded as an investment company and not as a trading company.
§ 5.18 p.m.
§ The Attorney-General
As to the case of a patent holding company, the answer is that the Amendment would include a patent holding company, if, to use the technical phrase, they "serviced" their patents, that is to say, looked after the marking of machinery or so forth and whether, in fact, they worked under the patents. If however, they merely held the patents as a form of property I think they would not come within the Amendment, but if my hon. Friend who raised the point will give me further details, I shall be glad to do my best to tell him what the position is in regard to any particular company. On the question raised by my Noble Friend the Member for Central Bristol (Lord Apsley), I would point out that in the earlier Acts an investment company was defined as a company whose income was mainly income 469 which, in the case of an individual, would be unearned income. As far as Schedule A income is concerned that is unearned income where it comes to an individual, and that is why, for statutory purposes, however much one may regard land-owning as a business, these companies have to be dealt with differently, and that is why this Amendment is necessary in respect of trading companies, which is not necessary in respect of agricultural estate companies.
§ Amendment agreed to.
§ 5.20 p.m.
§ Mr. Spens
I beg to move, in page 13, line 8, after "B," to insert:or which would have been so chargeable if Section twenty-eight of the Finance Act, 1926, and Section twenty-one of the Finance Act, 3934, had not been passed and income arising from the ownership or occupation of property which is chargeable to Income Tax under Case VI of Schedule D.Perhaps I may be permitted to refer to the Amendment which follows this on the Paper—in line 13, page 10, at end, to insert:and income which is shown to the satisfaction of the Special Commissioners to be de-lived from the proceeds of assets which produced estate or trading income and have been acquired by the Government or any local authority or statutory undertaking for a purpose for which authority for the compulsory acquisition of the same has been or could have been obtained—which raises very much the same point. The Committee will realise that the definition of an estate company depends to a large extent on the provisions of Subsection (6) of Clause 14 as to how the company's income is chargeable to Income Tax. "Estate or trading income" is defined as income which is chargeable for Income Tax under Schedules A or B. As a result of recent legislation, Section 28 of the Finance Act of 19,26 has given directions that a large variety of income which is derived from land and which used to be assessed under Schedule A shall now be assessed under Case VI of Schedule D, in the same way as Section 21 of the Finance Act of 1924 has also directed that certain amounts shall be assessed under Schedule D. But there are, and always have been, certain odds and ends of income which have never come under either Schedule A or Schedule D, such as receipts from furnished lettings, payments for rights of way or things of that sort. If therefore, the definition—depending on the Schedule 470 under which the ordinary average estate income comes to be assessed—is accurately set out in Sub-section (6) we shall get into difficulties over the question of what is an estate company and what is not.
I have here a detailed list of the various things which have been shifted by recent legislation from one Schedule to another and I propose to hand it to my right hon. and learned Friend and to ask him to consider it in relation to these two Amendments. Whether we have succeeded in making it right or not in these Amendments I am not certain, but I am certain that Sub-section (6) as now worded is too narrow and that some words are required which will allow a company to be regarded as an estate company, while receiving those odds and ends of income from land which happen to be assessed under one or other of the cases of Schedule D. The second Amendment is slightly different. It deals with cases where, for instance, land has had to be realised compulsorily and the proceeds have had to go into stocks. The simplest case is that of tithe, which is now a Government stock, and there are other matters of that sort. There is included in the income of a great number of these companies small portions of stock of that description, which they have had to acquire, whether they want it or not.
§ 5.24 p.m.
§ Mr. Benson
I hope the Government will resist both these Amendments. I oppose the first Amendment because, personally, I thoroughly dislike a large number of these various odds and ends to which the hon. and learned Member has referred. He is very innocent in his suggestion about such things as furnished lettings. There are also such things as tolls on roads and bridges and a large number of irritating ancient manorial rights, and out of sheer personal enmity to charges of that kind I hope that no concession will be made in respect of them. With regard to the second Amendment, it is simply a proposal to make a concession on the proceeds received from the compulsory purchase of land, and it seems to me an outrageous proposal. Landowners are only too pleased to have compulsory purchase orders served upon them, because they know they will get thundering good prices from the local authority or the Government as the case 471 may be, and why we should earmark the money received from these transactions in the way proposed by the Amendment, is beyond my comprehension.
§ 5.25 p.m.
§ The Attorney-General
The purpose of this Amendment is to arrive at a reasonable definition of an estate company. My hon. and learned Friend who moved it has two horses in his stable. One is a good horse but I do not think that the other is in sound and warrantable condition. As regards the first, I am obliged to him for drawing attention to this matter. If the hon. Member for Chesterfield (Mr. Benson) will rid his mind for a moment of his dislike of those relics of medievalism which form a picturesque, though as he thinks an irritating feature of life in some parts of the country, he will see that all this Amendment is doing is trying to get at a fair definition of income which comes from land or is associated with land. Judged from that aspect I think it is fair to say that the additional matters which are brought in by this Amendment, are matters which should be included within the definition of estate income. If the hon. Member will reflect I think he will see that what he has in mind is very much what I have in mind, namely, to see that these companies are not loaded with investment income which has nothing to do with the land. These matters all arise out of the land and I think that this proposal is in the direction of improving the definition. The actual words will require examination because these things have been scattered about the various Schedules for machinery purposes, but in principle we agree that income arising from or connected with land should be included within the definition of estate income.
As regards my hon. and learned Friend's second horse, that is to say his proposal about compulsory purchase, I am bound to say that I think there are objections to it. If one takes a limited case, suppose that an estate is transferred to a company and is then bought in toto, compulsorily or otherwise, the company would cease to be a land-owning company and would become an investment company. Though I appreciate that there may be cases where something on these lines might be desirable, I think it would be difficult to justify, in principle, a provision of this kind. I hope, therefore, that 472 my hon. Friends will appreciate that difficulty and will not press the second Amendment. I think the first Amendment is reasonable and I will undertake that my right hon. Friend will seek to cover the point substantially by putting down suitable words on the Report stage.
§ 5.29 p.m.
§ Lord Apsley
May I put in a word for the second horse? I do not know whether what I have to say will improve its chances, but I would like the Attorney General to consider the fact that there-are cases—many arising at the present time—in which there will be great hardship. There is an enormous expenditure at present on various expansion schemes. A great many landowners are having land taken from them compulsorily for use as aerodromes. The acquisition of land for an aerodrome may ruin five or six farms. It is true that the value of the land maybe put up by these schemes and that the owner may receive a payment slightly higher than its agricultural value, but whatever is gained in that respect, is not to be compared with the eventual loss caused by the taking over of those farms. Furthermore, most landowners and estate companies know that these expansion schemes will not go on for ever. Some day or other, whether there is a war or whether there is a pact, these aerodromes will have to be dismantled and abandoned and the land will be left in. a derelict condition. It will be very hard indeed to get it back to ordinary agricultural use and quite impossible to develop it for any other scheme. Therefore, I suggest that the point made by my hon. and learned Friend is one that should be carefully considered.
§ Amendment, by leave, withdrawn.
§ 5.31 p.m.
I beg to move, in page 13, line 13, to leave out "1938–39," and to insert "1939–40."
This again introduces the question of retrospective legislation. I quite understand that individuals who pay Surtax pay it on the previous year's income and 473 that it is up to those individuals to set aside in the current year such sums as may be required on 1st January in the following year to pay their Surtax. It is true that they very seldom do so, but that is their folly as well as their misfortune. It is, however, rather different in the case of these estate companies. After all, the Attorney-General will appreciate that individuals have known that they have got to make these payments on 1st January in the following year, and they therefore know what sum of money they have to set aside, but in respect of these estate companies, if this Clause comes into operation as it is, these companies, which have quite legally, it may be, spent some of their investment income in keeping up their estates or may have set some of it against what otherwise would have been a greater loss—at any rate, the money has been spent in the countryside on the improvement and maintenance of the estates—these companies, or the individual shareholders in them, may be called upon to pay Surtax on money which has been spent, and perfectly legally spent, in the land on their estates. I therefore ask the Attorney-General to consider whether he could not insert "1939–40" in place of "1938–39," because then these companies will know, by this Clause, that they have to set aside, or may have to set aside, a certain proportion of their investment income to pay Surtax next year. If I may mention the following Amendment—in page 13, line 13, to leave out from "years" to the end of the Clause—we put that down to try and get an interpretation of what appears to us to be a very complicated Sub-section, and I shall be glad if the Attorney-General can give us any information on that Sub-section.
§ 5.34 p.m.
§ Mr. Hely-Hutchinson
I wish to ask my right hon. and learned Friend a question with regard to this rather complicated Sub-section, and I am not sure whether I ought to raise it here, or on the next Amendment, or on the question that the Clause stand part. I am not quite sure whether, as a result of this Sub-section, the Government are going to collect Surtax in one year on income which really belongs to two years. While it may be fair that Surtax should be collected on the income of each of those two years, nevertheless, if it is collected all in one year, it lumps two assessments together, 474 and the rate of Surtax is therefore very much higher. If I should have raised that point at another stage, I will not press it.
§ 5.35 p.m.
§ The Attorney-General
To deal first with the Amendment, as my hon. and gallant Friend said, Surtax paid on Ist January next year is the Surtax which is technically that for 1938–39 and based on that Income Tax income. The rate is fixed by this Finance Bill, and it has been the practice of successive Finance Bills that both the rate and other provisions dealing with the Surtax to be paid on any particular 1st January are dealt with by the Finance Bill immediately preceding that payment. Though I quite agree that my hon. and gallant Friend has made a distriction between the individual who knows he has to pay and the cases which may arise under this Clause, it is true to say that really nobody knows, until the Chancellor makes his Budget statement, how much the Revenue will take in Surtax on the following 1st January, although it is on a previous assessment. I do not think that can be regarded as retrospective legislation; it is rather retrospective assessment. I hope the hon. and gallant Member will not press his Amendment. I will ask him to bear in mind that there would have been a very strong case if my right hon. Friend had not agreed to admit as a principle reasonable management expenses—and we are considering that matter again before the Report stage, but that does not apply to this Amendment and, of course, we also extended the definition of estate companies. I therefore think the points which have been admitted go a long way to meet the hardships to which my hon. and gallant Friend drew attention.
With regard to my hon. Friend the Member for Hastings (Mr. Hely-Hutchinson), he asked, May you not be getting more than one year's income taxed in one year? It is perfectly true that that may result, but under the existing system dealing with these companies the Commissioners can take the year of accounting of a company or the year of assessment from April to April. So far as this Clause is concerned, after this Bill becomes an Act it will always be April to April. You might, therefore, get a gap of income, which I do not think any- 475 body desires, but there is a provision in the Schedule to the original Act which enables the Commissioners, broadly speaking, to spread the income over more than one year. You sometimes get the position, not under these Sections at all, but where a company for its own purposes changes its accounting period, where you may get two accounting periods in one year. There is a similar provision there giving the Commissioners discretion so far as possible to spread out the tax, and it may be very important for the purpose of the rate, so as not to inflict undue hardship.
§ 5.40 p.m.
§ Sir H. Williams
In effect, these assessments have already been made, and, therefore, I do not think my right hon. and learned Friend was quite right. It is true that the notice of assessment has not formally been served by the Commissioners on the taxpayer, but the assessment was really made last June, because every taxpayer is required in these days to make a complete statement of his income from all sources, and it is on the basis of that document that the Special Commissioners make the assessment for Surtax. Therefore, here is an assessment which is already 12 months old, and it is now proposed to be altered. That really is not changing the rate of tax. We know that we do that every year, but this is altering the rules of the game after the match is started. The assessment has been completed, and I think that is an aspect to which the Attorney-General did not fully direct his attention.
§ 5.41 p.m.
I understand from what the Attorney-General has said that he was sympathetic to my point, but this is not a question of an increase in the rate of Surtax. This is really a question of the levying of Surtax on income which was previously legally exempt altogether from Surtax. However, in view of what the Attorney-General has said, that he will reconsider the whole matter of management expenses and so on, I am prepared to ask leave to withdraw my Amendment now, although I hope the Attorney-General, who has admitted that there is a real point of grievance and difficulty here, will consider it again before the Report stage.
§ Amendment, by leave, withdrawn.476
§ Mr. Dodd
I beg to move, in page 13, line 29, at the end, to add:Provided that if the Special Commissioners are satisfied that there has been no substantial avoidance of Surtax they may certify the facts to the Commissioners of Inland Revenue, and if those Commissioners do not lodge an objection within three months from the date of such certificate no further action shall be taken under this Section.Since we adopted the Chancellor's Amendment a few minutes ago, the wording of this Amendment will not perhaps recommend itself to the Committee, but I should like my right hon. and learned Friend to consider one or two aspects of my Amendment and its effect on the Amendment which has been accepted. I think the Committee as a whole accepts the principle that there should be as few loopholes as possible as regards the payment of Surtax. Nevertheless, while the Government Amendment exempts companies that are formed for the purpose of co-ordinating trading, I have no doubt there is a considerable number of companies which exist, quite legally, for other perfectly good reasons and not for the purpose of the avoidance of tax; and I think it is essential that the Clause should be drawn as widely as possible, so as to allow a right of appeal, for the Special Commissioners to decide whether a case for exemption is or is not made, and for them to be able to make a recommendation accordingly to the Commissioners of Inland Revenue. As I read the Clause now, it means that the basis of assessment is to be on the gross income, and that raises, I think, the possibility of double taxation in certain cases where charges are at present allowed in some investment companies to be offset for specific reasons. Duplication may not arise, but there is a possibility of its arising, and I think the Clause should allow for cases of that type that do arise to be dealt with.
I am not sure whether the right of appeal is covered under the Clause as already amended, and whether there should not be a definite date put down to limit the period within which an assessment can be made. In other words, if these companies are operating continuously over a period of time, it is only right to say that the people operating them should know whether or not they are liable to tax, and a date should be put in limiting the period within which 477 the assessment can be levied or made. While I do not wish to press the exact wording of the Amendment—I propose later to ask leave to withdraw it—I would like my right hon. and learned Friend to consider whether the Government Amendment which we have adopted could not be extended to cover something wider than companies formed for the purpose of carrying on trade or co-ordinating companies. I think in operation we shall find that there is a considerable number of other cases than that covered by the Chancellor's amendment which ought to be brought in, and it is only right and fair that there should be justice done all round rather than that we should inflict hardships on any particular section of the community, whether they are wealthy or not.
§ Mr. Watkins
May I call the attention of the hon. Member to a word in his Amendment which strikes me as being extraordinary and that is the word "substantial." Does the hon. Member consider that a certain amount of tax avoidance is permissible but that if it reaches large proportions the law should be put into operation?
§ Mr. Dodd
No, I appreciate the hon. Member's point. Perhaps it is not too good a word in the circumstances. The position really is that we shall have companies formed part of whose duty will be trading or co-ordinating various company activities and the other part will be purely of an investment character. "Substantial" is not perhaps the best choice of word and it could give rise to a considerable amount of discussion, but the word itself is not of essential importance. It is the principle that is important.
§ 5.47 p.m.
§ Sir H. Williams
I apologise, Colonel Clifton Brown, for the fact that when you called the Amendment on the same subject which stands in my name—In line 5, at the end, to add:or if the Special Commissioners are satisfied—478 I was beyond the Bar of the House, owing to having received a green card, and could not rise in my place in time. That Amendment agrees in principle with the one we are discussing, and I am inclined to think that the drafting of my Amendment is better and, further, that it would come in at the appropriate place, namely, as an addition to the Chancellor's new Sub-section (6), which is the exemption Sub-section. It has already been indicated that there are companies which could be drawn into this net which are not doing anything improper or seeking to avoid their legitimate share of taxation. If there are such cases, and I am advised that there are, this proposal does not automatically exempt them, because they have to satisfy the Commissioners that the conditions specified in paragraphs (1) and (2) of my Amendment are as they are set forth. Having regard to the experience of the Commissioners in these matters I think those are tests which are reasonable tests and ones to which the Commissioners could quite well apply their minds in coming to a decision. I hope, therefore, the Attorney-General will be in a position to indicate that there is a point to be met and that the method of meeting it may be on the lines of my Amendment.
- (1)that the company was not incorporated and does not exist for, and
- (2)that the business of the company has not been and is not being carried on for the purpose of diminishing or avoiding the liability to Surtax of any member of the company."
§ 5.49 p.m.
§ The Attorney-General
Both these Amendments introduce, though in slightly differing forms, what has been described as a motive test. In the Amendment of my hon. Friend the Member for South Croydon (Sir H. Williams) the motive is clear on the face of it, but as regards the Amendment before us there is the difficulty about the word "substantial," which has been appreciated in all quarters of the Committee. I think both Amendments are based upon a misunderstanding of the general lines of this Clause and how to make it into a workable Clause. The general idea is that if we find income from investments is being held up by a one-man company, Surtax shall be paid in respect of that income by those to whom it can be apportioned under the earlier Acts. In that way the individual who has formed one of these investment companies will make substantially the same contribution to our national needs as the individual who holds his investments and has not transferred them to a company. When they have been transferred for the purpose of avoiding Sur- 479 tax it is irrelevant whether there is substantial avoidance of Surtax or not. I quite agree that there are many companies to which investments have been transferred for some quite other purposes. In some cases the only motive was a right motive, having nothing to do with the question of Surtax liability, although there may be a diminished tax liability, and I have done my best to meet that situation by making certain conditions as to the distribution. But I would ask the Committee not to import a test of motive into this Clause.
The way to deal with the question is to meet legitimate cases in the way I have sought to meet them, and not by introducing a motive test. It would be inappropriate here and would be very difficult to work. If a man comes forward and says, "I did not form my company for the purpose of avoiding or diminishing liability to Surtax; though it is true that I have avoided it to some extent, that was not my purpose," it is impossible to dispute his statement. It is a most difficult form of test to work. It has been inserted in some cases where it is necessary, but I do not believe it to be necessary here, and I hope the hon. Member will not press his Amendment.
§ The Attorney-General
I do not think that point arises, because under this Clause the direction is automatic. If this Clause does apply to certain incomes the money is automatically deemed to have been distributed. We do not have the problem which arose under the old Acts when no distribution was deemed to have taken place unless the Commissioners directed that it was to be regarded as having been distributed. This is an automatic distribution.
§ Amendment, by leave, withdrawn.