LEAVE PERMITS, MECHANICALLY-PROPELLED VEHICLES. (Hansard, 1 May 1940)

§ Sir Irving Albery (Gravesend)
I beg to move, in line 2, after "leave," to insert: from any of the Armed Forces of the Crown. From questions which have been put in this House, I have always understood it to be the desire of the House that anyone home on leave from the Services should have this privilege. I put this Amendment down only because I was not quite sure that the Resolution, because of the way in which it is framed, does not extend that privilege far beyond what the House would wish. It is our wish that it should cover only those on leave from service in the Forces at the time.

§ Mr. Charles Williams (Torquay)
I beg to second the Amendment.
I hope that some words will be put in to provide that all members of the Forces, from the Dominions and the Colonies as well as from this country, will be able to enjoy this privilege.

§ Sir J. Simon
I quite appreciate the reasons which have led my hon. Friends to raise this point. Frankly, the language of the Resolution is very wide and it usually seems to be counted a virtue when the Government put down a Resolution in wide terms, and a reproach to them when it is put down in unduly narrow terms. It is intended to give this relief which I think is a very welcome relief to those on short leave from the Armed Forces of the Crown, but I do not think it would be wise to put in the words of the Amendment. There may be a limited class, outside that, to whom we want to give this concession. If we were to limit it strictly to the case of individuals home on leave from any of the Armed Forces, it would not include such women's services as the nursing service, the Women's Auxiliary Territorial Service, the Women's Auxiliary Air Force, and so on.

§ Mr. Edmund Harvey (Combined English Universities)
The British Red Cross.

§ Sir J. Simon
That might be another case. At any rate, there are cases which we should wish to include which would be excluded if we were to put in the limitation suggested. It is not, of course, intended to make the thing of universal application. If somebody came home on leave, perhaps for a fortnight, it would be very hard for him to have to take out a licence from the beginning of the calendar month, perhaps to the end of the quarter. This privilege is, I think, one of the features of the Budget that are universally approved.

§ Mr. A. Bevan (Ebbw Vale)
What machinery is established in order to satisfy the House that the extent of the privilege is sufficiently limited? Who are to be consulted, the Service Departments?

§ Sir J. Simon
The idea was that there would be a permit issued on behalf of the individual by, let us say, the Admiralty; but also, for the sake of the Revenue, the consent of the Chancellor of the Exchequer would have to be given.

§ Mr. Bevan
While it is the desire of everybody that these privileges should be given, if too many privileges are given to officers, there might be dissatisfaction on the part of privates, who may not have cars.

§ Sir J. Simon
A great many of the men might have cars laid up.

§ Mr. Bevan
A very limited number.

§ Sir J. Simon
A car or a motor cycle.

§ Mr. Pethick-Lawrence
I do not rise to oppose this Resolution, but to say a few words in regard to it, and in regard to the prospective taxation of this country. This Resolution, as I understand, relates to three points. In the first place, it relates to the standard rate of tax during the present year, and it proposes to fix that rate at 7s. 6d. In the second place, it relates to a pos- 754 sibility, at any rate, of lowering the starting point for Surtax, the amount to be determined next year. In the third place, I think I am right in saying, it relates to the alterations in the basis of Income Tax applying in the present year.

§ Sir J. Simon
I do not quite follow the third point.

§ Mr. Pethick-Lawrence
Alterations in the abatements.

§ Sir J. Simon
No, they are all Statute law. They are in the last Finance Act.

§ Mr. Pethick-Lawrence
They only come into operation this year? It is not necessary to pass this to bring them into operation?

§ Sir J. Simon
No.

§ Mr. Pethick-Lawrence
Then the Resolution applies only to the first two points: the standard rate of Income Tax and the Surtax, as it may be decided next year. There is no doubt that the Income Tax is a very severe burden. I certainly should not dispute that. At the same time, we must recognise that the Income Tax is a means of raising a very large part of the Revenue of this country, and that if we are to raise a very considerable Revenue to meet the cost of the war, it is largely to the Income Tax that we must look. The Chancellor of the Exchequer, by a number of devices, has increased taxation of all kinds; but I think he will agree that the total amount so raised cannot, by its nature, be very large. I know that the Purchase Tax, if it is passed through this House, may produce further sums, but the Income Tax must remain, if not the sole or even the main, at least a very considerable machine for raising Revenue.
In the circumstances, I think it is unfortunate that in the September Budget the Chancellor of the Exchequer announced what was his intention, at any rate, for the current year. It is always, I think, a mistake for Chancellors of the Exchequer to declare months or years in advance what they are going to do. I remember that the late Lord Snowden, when he was Chancellor of the Exchequer, made that mistake in 1930. He announced that it was not his intention to make further increases in taxation in the following year. I thought at the time that that was a very grave error of 755 judgment. [Interruption.] Yes, I took steps to make that view known at the time. I think my view was proved to be correct afterwards. I believe that that announcement was largely the cause of the troubles that occurred in 1931. I think that the Chancellor, in making predictions about what he thought would take place this year, was unwise.
As I said, the Income Tax is a very severe burden, but I noticed that the hon. Member for Hastings (Mr. Hely-Hutchinson) supported me in what I said last week, that we must not shut out from our minds the possibility of quite substantial increases in Income Tax as the war proceeds. At the week-end, I was talking to a friend of mine, who, I think, is a Conservative. He said that, from a personal point of view, he was very thankful that Income Tax was not higher than it was, but he was surprised, because he had thought that it might go up to 10s. He said, "I loathe the idea of a 10s. Income Tax, but still more do I loathe the thought of what would happen if, owing to our failure to take appropriate action, the Germans were to win this war. "The Chancellor of the Exchequer last Thursday saw fit to twit me about something I had said in a broadcast speech the previous evening. I have no objection, of course, to the Chancellor's little jokes, particularly about the Red Queen.

§ Sir J. Simon
It was the White Queen.

§ Mr. Pethick-Lawrence
I have the report here, and what the Chancellor said was "the Red Queen. "I understand him now to say that it was the White Queen. That is not a matter of supreme importance at the present moment. I rather gathered that the right hon. Gentleman wanted the House to think that I was taking advantage of a speech to the public to say what I would not say here in this House. That is quite foreign to my habit. So far from representing the nature of the proposal of the right hon. Gentleman more lightly in the speech that I broadcast than I did in this House, the contrary is the case. I spoke in that speech of an increase, whereas in this House I had said, and I defended my view, that the Income Tax at the standard rate for the year 1940–41 was actually going to be lower than it had been effectively for the six months that 756 had gone by, because for effective purposes the Income Tax for the six months since the outbreak of war has not been 7s.; it has for effective purposes been 8s. 6d. What the Chancellor has actually done is to allow the tax for the ensuing year to be actually lower than it has been for the past six months.
I will be frank with the House and the right hon. Gentleman. I have said from the beginning that many of the people of considerable wealth could not, having regard to their responsibilities and liabilities, pay unlimited extensions of tax, but I think that the right hon. Gentleman will have to consider carefully, not merely next year but possibly before this year is out, whether there will not have to be a further increase of tax. The right hon. Gentleman has taken the view with regard to Surtax—and it is a nice question upon which I do not intend to criticise him—that he could not very well lower the figure at which Surtax begins for persons whose Surtax was due in the current year, but he is proposing to take power in this Resolution to do so for a year later. The fairest and best way of imposing taxes upon income would be to have a graduated tax stretched all the way from the point at which Income Tax begins up to the highest income. We do not do that in this country mainly for administrative reasons. It is much easier to administer a flat-rate tax, with abatements and exemptions, on the one hand, and to confine strictly graduated duties to the much fewer number of incomes that start at a certain figure. It ought to be the object of the Chancellor of the Exchequer so to work these two engines as to produce a fairly regular rhythm all the way from the lower level to the highest. I imagine that the Chancellor of the Exchequer is right in thinking that the time has come when a much larger contribution will have to be borne out of income. A lower limit for Surtax will have to be imposed. Whether in fixing it at £1,500 the Chancellor of the Exchequer is right or not, I do not presume to say; we shall have to examine all that when we discuss it later. It is clear that the reduction of the amount from £2,000 is probably fully justified, and the sooner the Chancellor of the Exchequer is able to operate on that basis the better.
What I said just now about a higher tax on income even in this year will not be applicable to the question of a reduced 757 lower limit of Surtax. I think I am correct in saying that, assuming the view the Chancellor of the Exchequer takes is upheld, it could not be operated until April of next year, so that even if the Chancellor of the Exchequer finds it necessary to have a September Budget he will not be able to make use of that provision. I feel that it is very important to observe the right to impose burdens, however onerous, and however much in other ways they are regrettable, in places where the money can be found. Our difficulty is that among the people with large incomes there are some who have grave responsibilities and liabilities and who would be in the greatest difficulty in finding the taxes the Chancellor of the Exchequer imposed. At the same time, we know well from some of our picture papers, and from other sources, that there is a class of individuals who squander on personal luxury of all kinds money which the nation so greatly needs, and it was particularly to those people that I made the reference in the speech to which I have already referred.

§ Mr. Benson (Chesterfield)
I am very disappointed both with the standard rate of Income Tax and the decision of the Chancellor of the Exchequer not to reduce Surtax below the level of £1,500. I agree with my right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) that the present rates of tax are a heavy burden. I do not think that anybody disputes that at all ranges, except the very lowest, Income Tax and Surtax are a heavy burden, but the question of the weight of the burden is entirely irrelevant. The question we have to ask ourselves is not, Is this burden heavy or is it grievous, but, Is the amount of taxation imposed adequate to our problem? And nothing else matters. The only point that we can really consider is the adequacy of the amount to be raised by taxation, and, frankly, I do not think that, under the Budget proposals, the taxation which is proposed to be raised is in any degree adequate. We have to meet the cost of this year's war out of this year's income, apart from such securities that we can sell abroad. We cannot put the burden upon posterity. If we could, I should be only too delighted to do so. In this respect I am rather like the Irishman who asked, 758 "What has posterity ever done for me?" I would be willing, if it were a feasible possibility, to thrust the burden upon posterity, but it cannot be done. You cannot fight this year's war with next year's guns, and whatever we spend on the war has to come out of the national income this year. We are not raising by taxation, and we shall not raise by taxation, even in addition to the loans from real saving that we may get, the full cost of the war. That is generally agreed.
There is no reason why the Chancellor of the Exchequer should not have brought his Surtax down to £1,000. I see that the highest rate of Income Tax on an income of £1,000, that is of a single person, is £306, less than 30 per cent. If you take the tax to be paid in respect of a married couple, with three children, it is £224, less than a quarter. The sum of £1,000 is an income which puts a person not in the wealthy class, but far above the range of those who can be described as the poorer classes. We are faced with an expenditure which will amount to something like half the total of the national income this year, and the taxation that is imposed upon people who are not even near the poverty line but are comparatively wealthy, as incomes go, is entirely inadequate. I am not disputing the weight of the burdens, but the fact that the burdens that are being imposed, heavy though they may be, are inadequate for the task. The money will have to be found. If it is not found by taxation and by genuine loans, it will be found by inflation. The burden will be placed upon the community in some way or other. The snag about bearing the burden by means of inflation is that it hits, not the person with £1,000, but the wretched individual with 30s., 40s. or 50s. a week. We cannot escape the burden. We cannot escape paying for this year's war during this year. It is far more equitable to face the burden boldly and see that it rests upon shoulders which can bear it. I do not dispute the crushing weight of it, but I do contend that the burden does not meet the situation.

§ Sir Stanley Reed (Aylesbury)
AH sections of this House always listen to the right hon. Gentleman the Member for 759 East Edinburgh (Mr. Pethick-Lawrence) with profound respect, especially as in financial questions he represents a tradition which, alas, has been swept away under pressure of sterner events. But I would ask him to reconsider the argument advanced to-day—that the Chancellor of the Exchequer was unwise in warning us that we would have to pay Income Tax at the higher rate of 7s. 6d. in the £ in the coming year. I think he will admit that these higher taxes mean a very difficult process of readjustment. Indeed he dealt with this point elsewhere in his remarks. These readjustments are not only painful to the payee but even more painful to those affected by the economies the taxpayer has to make in order to bring his expenditure into proportion with the higher scale of taxation. This was inadequately cleared up by my right hon. and gallant Friend the Financial Secretary to the Treasury last week. I would therefore ask the right hon. Gentleman the Member for East Edinburgh to reconsider this part of his argument, and if he is not able to do so, to urge the Chancellor of the Exchequer not to take account of it in his Budgetary arrangements, but rather to give us the longest reasonable time to consider the effect of the burdens he is bound to put upon us, so that the inevitable adjustments may not be unduly severe, either on the payee, or on those most affected by them, even more harshly than the payee himself.

§ Sir J. Simon
We have had an interesting short discussion on this very big question, naturally raised on the Resolution which deals with Income Tax, and I will just address a few remarks before we pass on. The right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) made reference—not intended in any censorious spirit I am sure—to what I had said about his broadcast. I did not in the least intend to suggest that he was whispering to his hearers some slander about the Budget; what I had in mind was that he did say, in the course of his address, that the Income Tax that I was proposing to-day was small. Those are his words. I cannot agree with that description. The circumstances we have to face to-day—expenditure measuring thousands of millions of pounds—is no reason at all 760 for calling the increase of Income Tax this year small. It is not small at all. It will produce in a full year £61,750,000 more money than before.

§ Mr. Pethick-Lawrence
The right hon. Gentleman professes to quote things which I said outside this House and to controvert them, but he is not quoting from the text of what I said. I did not say that the total additional yield of Income Tax was small; what I said was that the burden he was imposing on the smart set was small, which was quite a different thing. The fact that they will have to pay 7s. 6d. against what they paid last year is, so far as that particular section of society is concerned, a small increase.

§ Sir J. Simon
I have the text of the right hon. Gentleman's observations almost at my hand, and we can look at the actual words he used. I do not recollect any reference to the smart set in that connection. Now, Income Tax does not only touch the smart set and I think it quite foolish to regard one of the principal instruments of taxation in this country as though it operated only against a limited class of people. It is a severe burden on people of all kinds—business men, professional men and working people—and I will never subscribe to the view that, if in a single year we can get out of ordinary Income Tax over £60,000,000, that can be regarded as a small matter, although I do agree that it is a small fraction of the total we have to face this year.
I think the hon. Member for Aylesbury (Sir S. Reed) made a very just answer to the criticism that it was a mistake for me to indicate, last September, what might be the arrangement I should have to make when the present Budget came round. At any rate, I did not repeat the mistake of the late Lord Snowden in giving an undertaking that there would not be any increase of taxation. What I said was this: It is already the end of September and people who have to face Income Tax burdens have to consider carefully what arrangements they will make. It seems to me to be a service to the country and not an injury to say that, acting as I am, only in the second half of the financial year, I must severely increase the Income Tax, that I am not merely thinking of the next six months but looking further ahead, and that we ought 761 to accept for a longer period the sort of levels we may have to attain.
It is to be observed under this head, also, that while it is quite true that we may have to have recourse, before we have done with this war, to this instrument of taxation in the most formidable fashion—and I offer no assurance to the contrary—there can be no doubt as to how the taxation will have to operate. It will not operate simply by getting further contributions from what the right hon. Gentleman calls "the smart set". If you were to sweep away and put into the Exchequer every single farthing of income of everybody in the country who has over £2,000, not tax it, but shovel it into the Revenue, the total additional amount you would get would be not much more than £60,000,000. It will not be by adding all these burdens at that end of the scale of Income Tax that you will produce very large additional sums. I welcome the right hon. Gentleman's courage and candour when he insists that Income Tax shall be called upon, if this war continues, to make a great additional contribution, but do not let us come along and say that the smart set will have to pay. It must be remembered that just as two-thirds of the whole of the consumption in this country is consumption by individuals who are not getting more than £5 per week, so it is true that if you want to get greater additional amounts from Income Tax, it must not be merely at the top end of the scale. You must face the fact that there must be very substantial additional claims, many of them very hard to bear, at the end of the scale which is lower I do not mean the lowest of all; of course, we must let the lowest of all have such protection as we can give them, because they have so little. I am glad to have the support of the right hon. Gentleman opposite when I say that if in future years of this war we are to ask for a greater additional amount of money by the imposition of Income Tax, it has got to be on a curve which, make no mistake, is bound to cut deeply into the incomes which are at the lower end of the scale.
The right hon. Gentleman also referred to Surtax. The House, I am sure, appreciates the reason why I took the step that I did. If you do not enlarge in advance the field of income within which Surtax can be imposed, then when you 762 come to consider how Surtax is to be revised, you will necessarily be committed to the field which already exists. It seems to me my duty to take now the step of enlarging the field, with the result that it will be possible next year, if it is so decided, to get a contribution in the form of Surtax or additional tax not beginning at £2,000, but at £1,500. There, again, let there be no doubt as to what the effect of that will be. Without giving figures to the House, you may take it that the result of such changes as are hereafter made, in so far additional revenue may be got by way of Surtax from incomes from £1,500 to £2,000, will be comparatively small. The place where such changes might produce a substantial rise would be higher in the scale, the reason being that Surtax is really built up by charging a different rate on different slices of income and adding, them together. The result would be to push up the charge right through the scale. I have made these observations in order to make my purpose clear. I do agree that we have to face the big possibility—and I cannot say how soon or how much—of yet further taxation. I cannot but be struck by the slight difference in tone of the Debates on this subject and those in September last. The truth is, as I think my hon. Friend the Member for Was all (Sir G. Schuster) observed the other day, that, when I stood at this Box in September, and said that Income Tax would be 7s. 6d., a shudder went through the House. I can remember an hon. Member on the Labour benches making a speech that evening in which he said he was astonished at the length to which I had gone. So were a great many others. But in this respect, as in many other respects, familiarity breeds contempt, although it is extraordinarily easy to fall into the error of saying that this is not so very serious, after all. None the less, it is nothing to the seriousness of our failing to take the steps necessary to win the war, and I am sure of this, that the House and country will never fail to accept any other burdens that are imposed so long as they will help us to win the war.
Question, "That this House doth agree with the Commitee in the said Resolution," put, and agreed to.
Fifteenth Resolution agreed to.
763 Sixteenth Resolution read a Second time.
Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

§ Mr. Benson
I hope either the Chancellor or the Solicitor-General will give us some explanation of this Resolution. It is obvious what it means, but I would like to know exactly how far its operations will take us and whether it is likely to catch the Archer-Shee type of trust. Has there been any calculation of how much taxation it is likely to bring in? There is one point I would like to mention, and that is that I notice it excludes entirely from taxation any income from trade or profession except what is brought into this country. When we are in such desperate need for revenue, the legislation which deals with the small company under the control of not more than five persons might have been applied to trading companies abroad. I see no reason why a company, trading abroad, should be allowed to build up large reserves which, if they were brought over in the form of income to this country, would be liable to Surtax. I do not see any good reason why the Commissioners should not be in a position to demand that companies trading abroad, controlled by not more than five persons, should be compelled to have their profits placed to reserve, treated as if they had been dividend declared.

§ The Solicitor-General (Sir Terence O'Connor)
This particular Resolution must gladden the heart of the right hon. Gentleman the Member for East Edinburg (Mr. Pethick-Lawrence), because I seem to recollect that a good many times in preceding years he has advocated this change in the law. It arises in this way, as the hon. Member for Chesterfield (Mr. Benson) pointed out. Incomes derived by persons resident here from foreign possessions are charged under Case V of Schedule D. Foreign possessions may be either stocks, shares or rents, in which case the whole of the income is taxed or of possessions other than stocks, shares, rents and securities. In the case of the second category, only the income brought to this country is taxed. The second category includes cases governed by the Archer-Shee case, which decided that in- 764 come from trusts or settlements comes into the second category and therefore only income brought into this country is taxed. The hon. Member is quite right in saying that the effect of legislation to be introduced will be to put an end to that anomaly.
The other feature to which he called attention relates to the exceptions which it is proposed by the Resolution we should make. Dealing first with trades, professions, vocations and employment, in most cases these will involve considerable expenditure of the income abroad in the country where it is earned, and in those circumstances it has been thought right and fair that only the income brought into this country should be the subject of tax. In the case of businesses, I am afraid that I cannot agree with the hon. Member that it is not desirable at the present time to encourage people with genuine foreign businesses to devote a part of their profits to the extension and development of their business. At the present moment we are trying to make a great drive in favour of an increased export trade to build up assets abroad to strengthen the financial position of this country. One of the worst steps we could take would be to denude genuine foreign businesses of the power of extension by devoting some of their profits to the development and extension of their business. If they are not genuine cases then they are very liable to be caught under Section 18 of the Act of 1936. If they are tax avoidance cases, businesses designed only as a cloak for the transfer of assets abroad, they are caught, but in the case of genuine businesses it is thought that they should not be prevented from building up a reserve fund in order to extend and develop their businesses abroad.

§ Mr. Benson
That point is met by the legislation.

§ The Solicitor-General
I cannot agree that it is entirely met, but it will be met in future to a greater extent in the case of businesses abroad.
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
Seventeenth Resolution read a Second time.
Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

§ Mr. John Wilmot (Kennington)
Can the Financial Secretary tell me whether paragraph (a) of this Resolution means that a man has to pay tax on money which he has not received?

§ Captain Crookshank
This Resolution deals with the point raised in September by the hon. Member for Kennington (Mr. Wilmot) and the hon. Member for South Shields (Mr. Ede). The paragraph to which the hon. Member has referred is to ensure that, in future, relief will no longer be given in respect of unoccupied property where rent is payable. At present if a house is not occupied, though the rent is paid, it appears that taxation cannot be collected, and it is to get over that difficulty that the paragraph has been inserted.

§ Mr. Pethick-Lawrence
I think I raised this matter a year or two ago.

§ Captain Crookshank
I apologise to the right hon. Member, but I think the most recent instances are those of the two hon. Members to whom I have referred.

§ Mr. Benson
I should also like some explanation of paragraph (b), which refers to rents under leases for 50 years or less.

§ Captain Crookshank
This is a most complicated matter, but I will do my best to deal with it and explain why there is a difference made in the case of leases of over 50 years. It is thought that for the purposes of legislation it is wise to make this provision on the ground that whilst leases under 50 years represent expenditure of income, in the case of leases over 50 years the rent is more in the nature of a charge on income. In this paragraph we are concerned with three points. The first is that the Local Commissioners may have fixed the Schedule A assessment below the actual rent. That is one class of case. Secondly, the rent may have been raised after a year of revaluation, while under the law relating to Schedule A the old assessment based on the original rent must go on year after year until the next general revaluation takes place, although there has been a change in the rent. The third case is the most interesting; but it is an exceedingly complicated one, and I hardly dare venture to explain it. It is the case where there is a chain of sub-lettings. For instance, if tax is deducted at the lowest of the rentals in the chain, then a greater amount of tax 766 cannot be deducted on the higher rentals in the chain. Suppose there is a rental of £1,000 and there is a sub-letting of £600, then tax is deducted at the rate of 7s. 6d. on the £600 and more tax cannot be deducted on the £1,000 rental than has been deducted on the £600. There is a gap, and the purpose of this provision is to ensure that the right tax is paid for Income Tax purposes. Simultaneously provision is made in the other type of case. I am afraid that is not very clear. It is a very difficult point, but the provision is made to cover a gap in these rental problems. When the Finance Bill is seen I hope it will be more clear and I do not think there will be any controversy about the matter.

§ Mr. Tomlinson (Farnworth)
Does it always work the other way? If tax is paid on the £1,000, can the man on the £600 mark claim a rebate on the amount which has been paid on the higher rent?

§ Mr. Craven-Ellis (Southampton)
The Financial Secretary has not said whether, if the rental is below the quinquennial valuation, there will be any reduction in the assessment.

§ Captain Sir William Brass (Clitheroe)
I want to put the same point. I want to know whether, if the assessment is too high for the rent, there will be a rebate the other way.

§ Sir I. Albery
I also should like to put the same question. In the case of property where the rental, say, is £1,000 per annum and there is a sub-let at £600, is there any adjustment in the other direction?

§ Mr. Benson
I know from long experience that if property is valued at £1,000 in the quinquennial valuation and is let at £800 later on, I have never had any difficulty in arranging a reduction in the assessment with the local surveyor.

§ Captain Crookshank
The hon. Member has really said what I had in mind. There is always the right of appeal.

§ Mr. MacLaren (Burslem)
I take it that the amendments which are going to be made in regard to quinquennial valuations will get over the difficulty of quinquennial valuations being fixed for five years?

§ Mr. Craven-Ellis
Is it possible for the Financial Secretary to reply to my question?

§ Captain Crookshank
I think we had really better wait until we see the Clause in the Finance Bill before we embark upon a detailed discussion.
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
Eighteenth Resolution read a Second time.
Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

§ Sir I. Albery
I want some explanation of this Resolution. I have read it carefully, and I must confess that I cannot see what the effect of it will be. I do not think the House should part with the Resolution without understanding it.

§ The Attorney-General (Sir Donald Somervell)
I think I can explain this matter fairly briefly in the following way. Any hon. or right hon. Member who is fortunate enough to have shares in a company will from time to time, unless he is very unlucky, receive dividends. Although he may not have noticed it, I am certain he will always have received those dividends in one or other of two forms. The form will either have been, say, 10 per cent. and then a deduction of Income Tax, leaving, say, £7 10s.; or, he will have received a sum which will have been expressed to be free of tax. Of course, in both cases the sum which he gets in his pocket, having borne tax as part of the profits of the company, does not bear Income Tax again. On the other hand, if he had got the same sum by reason of the exercise of a profession—that is to say, in circumstances in which it had not already been taxed—he would have had to pay tax under a direct assessment. Therefore, £5 from a company's dividend represents more by the amount of the tax deducted than the same sum would represent if it had to bear tax after coming into one's pocket.
This is important to three classes of people. It is important to those who are in the lower ranges of income, and who, therefore, have a right to recover Income Tax which may have been deducted from dividends which they have received, because they have a right to a rebate. It is important, from the Chancellor's point 768 of view, when one comes to Surtax payers, because a Surtax payer's total income is the gross sum before the tax has been deducted. It is also important to charities which may have a right to recover, under certain Sections, the tax referable to the sums which they receive as dividends. This system went on perfectly well until it occurred to some ingenious gentleman who was anxious to reduce his tax liability that, instead of having 10 per cent. and then deducting the tax, instead of using the magic words "free of tax"—which had been construed by the courts as entitling what is called a grossing-up to the gross figure—by using the magic words "without deduction of tax, "he could say, "You cannot gross up this sum; it does not represent a sum from which either actually or notionally tax has been deducted. "Therefore, for Surtax purposes, instead of grossing it up, it had to go in as the actual amount of cash that had come into the shareholder's pocket.
In a recent case, the House of Lords held that that was right. Of course, the tax law dealing with companies goes back to the old days before joint stock companies existed in their present form. I do not want to go into the legal technicalities of that decision of the House of Lords, but it was held that Parliament had inadvertently used words which enabled or necessitated this result taking place if the magic words "without deduction of tax "were used. All that this Resolution does—there have to be special provisions for preference dividends—is to say that a person is not in any better position as regards paying Surtax if the company accompanies the cheque with a little slip saying "without deduction of tax" than he is if the company accompanies it with a little slip saying "free of tax." The realities are clearly the same in both cases, and the Resolution enables this technical flaw to be put right.

§ Mr. Benson
We are continually discussing the most complicated provisions of Income Tax law arising from some decision of the House of Lords. Would it not be simpler to pass a short, simple Clause amending the House of Lords?
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
769 Nineteenth Resolution read a Second time.
Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

§ Mr. Benson
I should like to raise one or two points with regard to this Resolution. I can quite understand paragraph (b) of this Resolution in so far as it deals with businesses which hold stocks and shares. In dealing in Government securities from which tax is not deducted by a person who is living abroad, apparently the profits from dealing in those securities, as well as the revenue arising from them, are excluded. That seems to me to be illogical. There may be some good reason for this, but I should be glad to know why profits arising from dealing in securities, as well as the interest on the securities, are to be excluded. With regard to paragraph (c), if interest is excluded in this case, there is to be a reduction made in respect of management expenses. That is legitimate, but how much deduction is there to be? Is the reduction to be equivalent to the amount of interest which is excluded from taxation, or is it to be some proportionate sum? I should be glad if these points could be explained. I should also be glad if the right hon. and learned Gentleman would explain paragraph (e).

§ The Attorney-General
This Resolution is also slightly complicated, but it has arisen in the following way. I will deal first with foreign, Dominion and Colonial securities. Under the Income Tax Acts, foreign, Dominion and Colonial securities which arrange for their dividends to be paid through an agent here are prima faciesubjected to tax, but there is a provision that if the shares are held by a non-resident they shall escape taxation, for the very good reason that the securities, not being here, since they are foreign, Dominion or Colonial securities, and the person owning them not being here, since he is a non-resident, the mere fact that there is an agent here who acts as the channel for payment would not justify us in bringing the securities within the general net.

§ Mr. MacLaren
Why should the money come here at all?

§ The Attorney-General
It comes here simply because there is an agent here through whom it goes. It comes in and it goes out. In dealing with private citizens and individuals who are non-residents that is fair, and no difficulty or question arose; but the matter arose in the case of a bank in one of the Dominions. Being a Dominion bank, it was a non-resident. It opened a branch here and carried on business here, and in those circumstances, it became liable to tax on such part of its business as was carried on by the branch here. That went on all right for a time, until one day this point was raised. In the banking business carried on here there were certain of these foreign and Colonial securities. They were part of the bank's stock-in-trade, and the interest or dividends on them would fall, under the principles on which banks are assessed, to be assessed as part of its income. Those particular securities in the hands of a non-resident were exempted from tax. The argument that was made against the bank was, "This would be true if they were held by a private person, but in your case they are part of your income as a trader, falling to be assessed on you as a bank carrying on trade." The court held, however, that the words conferring the exemption applied, because the bank was a non-resident, and that one could not read into the words an exception for the case of a non-resident who came within the net because he was carrying on a trading business here. The House will see that if this were allowed to stand it would put the Dominion or foreign bank which comes here and opens a branch in a favoured position in competing with our banks. Therefore, I think there will be no controversy about this being put right.
There was also the case of War Loan. That is a little more difficult because the court held, when the point was raised as to the War Loan which was exempted from taxation, that the application of that exemption to banks, and I think probably insurance companies, which came to trade here was not only in accordance with something in the Income Tax Acts as passed from time to time, but also in accordance with the prospectus on which the money was raised. That being so, although it may have been that Parliament did not intend to give a trading advantage to non-residents who 771 came here, it was felt that it would be quite wrong, as a matter of principle, to take away an exemption which the court had said was to be found expressed in the prospectus on which the money was subscribed. Therefore, in this Resolution, we deal differently with those Treasury securities and the foreign and Colonial securities.
The second point of the Resolution is this: Having dealt with those classes of securities and said that they were exempted from tax for the reasons I have given, the Crown said, in that case, if the securities were to escape taxation, the proportion of expenses attributable to them should not be allowed to be deducted. If the income was ruled out, the expenses attributable to it should be ruled out. However, the court, although it saw a good deal of commonsense behind that argument, said that there was no provision in the Act which enabled that division to be made. What we propose to do in the Resolution is this. We leave the Government securities exempted, but since they are exempted, we say that such proportion of expenses as can be properly attributed to that part of the income cannot be deducted. The hon. Member for Chesterfield (Mr. Benson) asked what would be the proportion of management expenses. The proportion depends on the amount of income affected, and as a matter of fact, very little difficulty ever arises in adjustments of that kind between the Inland Revenue and banks or insurance companies. As far as foreign and colonial securities are concerned, exemption will no longer apply in the case of either banks or insurance companies. I do not think there will be any objection to that. The provision places them on a par, as far as business here is concerned, with the British banks and insurance companies with which they are in competition. As to the reason for bringing in "profits," I have already explained that the object is to eliminate the approximate expenses. What you are doing is to carve out a certain slice of the business, including profits or losses. Paragraph (E) is quite different. There was passed, two or three years ago, a Section directed against tax avoidance by the transfer of assets to companies abroad. The possibility occurred to us, in view of this very general decision of 772 the courts about the War Loan exemption, that if the tax avoider among the assets which he transferred to the company abroad included War Loan, he would be able to say that that War Loan was now held by a non-resident and he might go on to say, "It cannot, therefore, be deemed to be my income within the Section." We are satisfied—and that is why this will have a declaratory form—that that is not the result which the words used by Parliament bring about, but as it was a point which might obviously occur to these rather ingenious people, we thought it would save litigation, prevent disputes and remove doubts if we declared in the Finance Bill this year that no point of that kind could be sought to be made.
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
Twentieth and Twenty-first Resolutions agreed to.
Twenty-second Resolution read a Second time.

§ Mr. Benson
I should like an explanation of this Resolution. It seems so clear, that I have a suspicion that I have misunderstood it. Reading it in connection with Section 11 of the second Finance Act of last year, it looks as if this provision had been droped out of that Section by accident. In the form in which Section 11 was passed, under the concession given to the Surtax payer, it seems to me that he would pay on less than his actual and not merely on less than his assessed income for the year, but for this new Resolution. Had the terms of this Resolution been embodied in the last Finance Act, I should have felt certain that I understood it, but the fact that it was not then included and is being put in now makes me suspicious. It is, I submit, valuable to have explanations on points of this kind on these Resolutions, rather than on the Finance Bill itself, because they help us to understand the Clauses of the Bill. That is why I ask for a statement on this Resolution.

§ The Solicitor-General
I am not surprised that the hon. Member has not entirely understood what this Resolution does. It deals with a mistake, a flaw 773 which exists on account of the wording of Section 11 of the Finance Act of last September. The House may not remember what Section 11 of that Act was designed to do, and I shall proceed to tell them, in order to make clear what is the mistake which we are trying to repair. Section 11 dealt with the very difficult case of people whose incomes had been substantially reduced owing to the war, and it provided that where a person's income was reduced by 20 per cent. or more on account of circumstances arising directly or indirectly out of the war, he could claim to be assessed for tax, not according to Income Tax law on his income of the previous year, but on the actual earned income of that year. Machinery was set up for dealing with that position. Similar machinery was set up to enable the Surtax payer to invoke the assistance of the Section in order that next year, when dealing with this year's income, he should be charged for Surtax only on the actual earned income and not on the income as assessed.
As I pointed out when the matter was under discussion in September, there were marginal cases. Suppose that a man, although he had earned more than 80 per cent. of his previous year's income, had earned only 80 per cent. plus £10. To deal with that marginal case, there was a provision that he could, at his option, surrender the £10 and claim a rebate of the tax which he would otherwise be called upon to pay. That is a not uncommon provision in the Income Tax Acts. In framing the Section dealing with these marginal cases we had a faulty Sub-section (3), and I can best illustrate the fault we are now trying to cure by giving a few figures. Suppose a case of £1,000 a year of Surtax income. If the man had, in his actual earnings for the year, only £800 then Section 11 settled the matter. His income was reduced by 20 per cent. and he could claim to be assessed for both purposes on the actual income of£800. But suppose his actual earnings were £850. Then he would invoke the marginal provision. He would say, "My income, it is true, is reduced by less than 20 per cent. If it had been reduced by 20 per cent. I would be entitled to have returned to me all the tax appropriate to the £200—the difference between £800 and £1,000. But I must allow that reduction of tax to be abated to the extent by which what I 774 have actually received exceeds £800. That is to say I must deduct from the tax appropriate to £200, which happens to be £56, the surplus over £800 which is £50. Therefore, I am entitled to relief of £6."
That is a clear case, and exactly the same transaction applies in estimating his Surtax liability. But suppose his income to have been £890. He does not get any standard rate tax back by invoking that because the amount he has to surrender overtops the tax which he will recover. He does not gain any benefit on the Income Tax provision. But as the Surtax provisions are drawn, he is able by means of a flaw in the drafting of the Income Tax Section to say this, "Although it is true I did not gain any rebate of standard rate tax, I came within the Section, and by virtue of that, I am entitled in making my return for Surtax to say that I have shown a reduced income, amounting only to £800."Therefore, he includes in his return of total income, not the actual income earned of £890, not the notional income—the income of the preceding year—but a figure of £800 which he has no right to do at all. Everybody knows the haste with which this legislation was drawn up last September and this was obviously an accident. It is to cure the effects of that drafting accident that we are taking the powers contained in this Resolution and that is why I have been involved in this, I fear, confusing and difficult explanation.
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
Twenty-third Resolution agreed to.
Twenty-fourth Resolution read a Second time.

§ Mr. Lees-Smith
I think we should have some explanation of this Resolution. Is it intended to deal with the various negotiations between the Treasury and the representatives of commercial organisations?

§ Captain Crookshank
My right hon. Friend the Chancellor of the Exchequer, in his Budget speech, indicated the type of amendment of the law to be proposed in the Finance Bill, as a result of the further study of this matter which was promised when we were discussing the 775 original Excess Profits Tax in September. The answer to the right hon. Gentleman is, "Yes."
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
Twenty-fifth Resolution read a Second time.
Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

§ Captain Crookshank
May I say that as the National Defence Contribution and the Excess Profits Tax are alternative duties, in many cases some of the amendments which will be made with regard to Excess Profits Tax will have to be taken into account, in relation to the National Defence Contribution, in order to enable suitable Clauses to be introduced where necessary. That is why we are proposing this Resolution.
Question put, and agreed to.