HC Deb 17 June 1941 vol 372 cc507-29
The Chancellor of the Exchequer (Sir Kingsley Wood)

I beg to move: That provision shall be made for modifying—

  1. (a)obligations to pay sums free of Income Tax or free of Income Tax other than Surtax or sums so calculated as to leave a specified amount after deduction of Income Tax;
  2. (b)obligations to pay sums in respect of the Income Tax of another person."
The matter which we have to deal with first to-day relates to the Resolution, which is followed later on by Clauses, in connection with certain proposals, which I desire to put before the Committee, in relation to tax-free incomes. I should like to explain briefly the reasons for, and the scope of, the proposals embodied in the Clauses, which I propose should be added to the Finance Bill in the event of the Resolution being approved. The proposals are directed primarily to remedying an inequity which results from the carrying out, at the increased rates of tax, now prevailing, of arrangements entered into before the war to make payments free of tax. I have had many representations from all quarters of the House on this matter, and I hope the suggestions which I shall make will receive the approval of my hon. Friends.

A common type of case, with which I think most of my hon. Friends are familiar, is where an annuity is payable free of tax. The gross income now required to pay an annuity of a given amount free of tax is, of course, much greater than it was before the war, and, in certain circumstances, the payment of this increased amount may inflict great hardship upon other beneficiaries dependent upon the residue of the income available, for example, under a will or settlement. I have had a number of cases brought to me where undoubtedly the intentions of the person who made the will or settlement has not only not been fulfilled, but where considerable hardship has resulted as a consequence of the present condition of affairs. Of course, this is due to the increased rate of taxation. Before the war, when the standard rate of Income Tax was 5s. 6d. in the £, £1 of gross income yielded trustees 14s. 6d. net, whereas to-day, with the standard rate at 10s. in the £, £1 of gross income yields only 10s. net. I will put it in another way, excluding for the moment any question of Surtax. An obligation to pay 14s. 6d. free of Income Tax required, before the war, a gross income of £1, while, to-day, an obligation to pay 14s. 6d. free of tax requires a gross income of 29s. The inequity, as I have said, which arises from this state of affairs results from the unexpected and steep rise in taxation, and that requires little or no elaboration. The same considerations apply to the type of case where, for instance, remunerations or directors' fees are payable on a tax-free basis.

I would suggest to the Committee that it is equitable to readjust matters so that the war-time increase of tax falls upon the recipient rather than upon the payer. I do not think the recipient can complain if he has to bear the same war-time burden as any other member of the community. The nature of the proposals can be summarised quite briefly, and the general proposition is this, that the same gross income as would have satisfied any covenant to make a free-of-tax payment before the war, shall be regarded as discharging the obligation in respect of all payments falling to be made in the year 1941–42 and subsequent years; that is to say, in the ordinary Income Tax case the parties making the payment will, in effect, be liable to make it free of tax at 5s. 6d., and the recipient will bear that proportion of the tax chargeable at the current rate which represents the war increase of taxation. I suggest that the division is fair to all parties, and I hope it will be regarded as unexceptionable. The proposal extends only to pre-war arrangements and not to arrangements entered into since the beginning of the war. The reason for this decision is that, while persons making such arrangements before the war might reasonably have hoped that direct taxation was reaching the peak, that hope obviously ceased to exist once the war had begun. It follows that persons entering into such arrangements after the outbreak of war must be assumed to have done so in the light of all relevant circumstances, including not only existing but prospective rates of taxation. My intention is not to interfere with war-time arrangements of that kind which people have made with their eyes open, but simply to remove an unexpected inequity arising in the pre-war type of cases.

I should like to say a word as regards the scope of the proposal. It will apply to free-of-tax annuities under wills and settlements, to free-of-tax alimony payments, to interest payments at such a rate as after deduction of tax yields a prescribed rate, and to contracts to pay remuneration free of tax. No particular point would appear to arise about these arrangements further than I have indicated, but I should like to say a word or two with reference to types of payment which will be outside the scope of the proposals. In the first place, they do not apply to any provision falling within Rule 23 of the General Rules for Income Tax, which render invalid agreements not to deduct tax. This Rule preserves the statutory right of deduction, for example, in the case of interest payments made by building societies. By long-standing tradition and arrangement with the Inland Revenue these payments are made on a tax-compounded basis, and the building societies account for the tax in bulk to the Inland Revenue. There is, however, nothing in law to prevent building societies deducting tax at the source in the ordinary way, and the new arrangements do not affect them. Mortgagors who under arrangement with the Inland Revenue pay interest to building societies without deduction of tax will be similarly unaffected. To remove any misunderstanding, I might add that in the not very common type of case where a mortgagor has contracted with a building society or indeed with any other lender to pay interest of such an amount as after deduction of tax equals a fixed rate, he will obtain the benefit of my proposals and will be required only to pay the same gross amount as if the pre-war rate of taxation had remained.

Secondly, the Clauses that I have tabled do not apply to dividends paid free of tax. No question of inclusion arises in the case of ordinary dividends, even though they are sometimes expressed to be paid free of tax. Actually companies are assessed on the full amount of their profits without regard to the particular proportion of those profits to be distributed as dividends, and it is immaterial to the shareholders whether the dividend is declared at a gross percentage less a specific deduction of tax or is a net percentage which is said to be free of taxation. The amount of dividend received by each shareholder is the same, which ever method is adopted. There is, however, a special case to which some attention has been drawn in the financial Press, not very common, I think, where preference shares are entitled to a given percentage free of tax. I have considered very carefully whether arrangements of this kind should be brought within the scope of these proposals. Although the amount receivable by preference shareholders is dependent in the last resort upon the existence of profits sufficient to meet the obligation, this factor would not in itself be sufficient to differentiate preference shares of this type from certain types of payment which my proposals cover. What does differentiate them, in my view, is the fact that they are a marketable commodity and that since the beginning of the war, and in the light of war increases of taxation, preference shares have been valued on a basis which has paid due regard to their tax-free privilege. This valuation has been reflected in the values placed upon the ordinary shares ranking behind them. Business has in fact been done in the full knowledge of the current rate of taxation and taxation possibilities, and I can see no sufficient reason in the public interest for penalising those people who have made investments, or dispossessed themselves of investments, without any knowledge or expectation of legislative action calculated to undermine the whole basis of their transactions. Those are the exceptions to the proposal. I have brought it forward after representations from many of my hon. Friends who are here. I think there is general agreement that a step of this kind should be made, and I commend the proposals to the Committee.

Mr. Pethick-Lawrence (Edinburgh, East)

I am very glad the Government have decided to bring in these proposals. I feel that they were very much required, and it certainly will be of great benefit to a number of people and, I think, to the general well-being of the State that this change should be made. In the first place, it is interesting to realise that a variety of persons will be affected by the proposal. It is a kind of miscellaneous bag. It reminds me of a dinner party which was proposed shortly after I became a Member of this House, to consist of all Members who had ever, at one time or other, defeated the present Prime Minister in an election. When the project was worked out, it was found that people of all parties and complexions would be included in that dinner party.

I dare say that each one of us, in considering this proposal, has been thinking of a different type of person who will be affected by the scheme. I was thinking largely, as I said in the Debate on the Second Reading of the Finance Bill, of the case of certain mortgagors who had entered into contracts to pay Income Tax as well as interest on their mortgages. I understand there is another set of people who have borrowed money, not on mortgage, but from solicitors and others, and upon whom, in some cases, extortionate demands have been made. My own reaction to many of these contracts for some years past has been unfavourable. I have often wondered whether the State ought not to prohibit contracts of a kind which really amount to an attempt to frustrate the intentions of Parliament. We, here, determine in what proportion certain obligations are to be met, and if private individuals can contract out of those obligations in advance, that is, to a large extent, in my view, a defiance of the intentions of Parliament.

Parliament itself in certain instances provides that that must not be done. I think I am correct in saying that in the ordinary case of landlord and tenant the landlord cannot force upon the tenant the payment of Schedule A Income Tax. I understand that a contract of that kind would be ultra vires. I have never understood why that provision should not be extended to other contracts of the kind I have indicated. Under those contracts considerable injustices have arisen. Therefore, I am glad that the Government have taken this opportunity of dealing with the matter. Broadly speaking, with one main exception of which I shall speak later, the Government proposal is to stereotype these contracts on the basis of pre-war Income Tax. In fact, I think they are going a little behind the pre-war Income Tax. The rate of tax for these purposes is being permanently fixed, as it were, at 5s. 6d. in the £, or at any rate it is proposed to apply that criterion during the present year. I understand that the Government's proposal does not relate to the two years which have just passed. The person who contracted to pay when the Income Tax was 7s., as it was in the first year of the war, or when it was 8s. 6d. as it was last year, will, I understand, be unaffected as far as those years are concerned. The proposal, I understand, affects only the present year, and I conclude that the scheme will remain in force in future years unless it is altered. Of course, the House will have to consider, in due course, what is to be the future of this matter and whether all these contracts, for all time, are to remain at 5s. 6d. or whether some other figure will be substituted.

That brings me to the question of the principal exception. I understand that the new arrangement is not to apply to contracts made after the beginning of the war. I gathered from what the right hon. Gentleman said that this is a perfectly general proposal applying to every form of contract. I am not altogether satisfied about that. I do not know what may be the level of Income Tax in years to come—though I do not know that it can go a great deal higher than it is at the present time—but I see the possibility in the future, as far as these contracts are concerned, that we shall get into the same sort of difficulty as those we are in at the present time and to meet which legislation has been devised. I had hoped that, in this proposal, we were taking the first step to get rid of the whole principle underlying those vicious contracts which I have described. It may be that this is as far as the Government can see their way to go at the present time, and in so far as it goes in the direction to which I have referred, it will be welcomed. But I think the House will have to consider the larger question of whether or not these contracts are in the public interest. My own view, as I have already said, is that people ought not to be allowed to make contracts which, in effect, thwart the intentions of Parliament and place burdens on certain shoulders which Parliament did not intend to bear them. I hope this legislation is a step in that direction, and as far as I am concerned—and I think I can speak for those who sit behind me—I thoroughly approve of this proposal.

Sir Irving Albery (Gravesend)

I was very gratified to hear the speech that has just been made by my right hon. Friend the Chairman of the Public Accounts Committee. I am glad that the Chancellor of the Exchequer has started on the way to deal with this matter, but, frankly, I am disappointed at the limited extent to which he has gone. I share fully the opinion just expressed by my right hon. Friend that these contracts are against the public interest. There may be some ground, but I cannot think of any, which renders them necessary or desirable, even for the people who make them, Obviously, they have great weaknesses, otherwise we should not be about to pass the legislation now proposed. This House takes a great deal of trouble and goes into much detail in apportioning the burden of taxation, and it is contrary to the public interest that contracts should then be made which are calculated to upset the apportionment made by this House.

That is one big ground on which I, personally, consider that at any rate for the future—I agree that one must deal carefully with contracts already made— it should be illegal to make such contracts. I regret that the Chancellor of the Exchequer has not seen his way to take that rather drastic step, which is not only desirable but, I think, almost necessary. I was sorry to hear him say that he is going to leave out the modification of contracts made since the war began. It is true that the people who made those contracts knew what they were doing, but they were also well aware of the position which had already arisen under previous contracts. A very undesirable position had arisen, and I do not see that any great hardship would be inflicted if these cases were included in the present modifications. There is this much to be said in favour of it. I have tried to study the legislation which is being put forward. Income Tax law, with all its complications, has got difficult enough already, and it has become necessary for most people when they make out their returns to seek the assistance of a chartered accountant. In future it will be necessary to have not only a chartered accountant but a lawyer before you can make out your Income Tax return.

Another point about which I do not feel satisfied is the differentiation which the Chancellor is making as regards dividends on preference shares. As far as I can see, the only justification he has put forward—I agree that this is a matter that ought to receive consideration—is that people have bought and sold preference shares on the basis of the large savings in tax which they will get. It is true that they did that with their eyes open, that they were aware of the extraordinary position which exists and the inequity of it, and that probably something would have to be done to alter it. The general basis on which these proposals are introduced is that a position has arisen which is untenable and which creates a great deal of injustice, and the Chancellor has said, "I agree that burdens which have been imposed since the war should be fairly spread and that the people who have made special contracts should not escape the extra burdens which have been imposed on account of the war." I do not see why people who escape through tax-free preference dividends should escape them any more than anyone else. Furthermore, the injustice which exists in cases which the Chancellor seeks to modify also exists as regards ordinary shareholders. I do not say it is general, but there are a good many cases in which, when properties have been sold to the public by the issue of shares, the very people who sold them have largely retained the Income Tax-free preference shares and have sold the ordinary shares mainly to the public. Under these proposals we shall have cases where the people who sold property to the public in the form of ordinary shares will collect the dividends, and the ordinary shareholders will get nothing. That may be an exaggeration, but it illustrates the point I want to make. I hope that the Chancellor will reconsider that point.

Sir Herbert Williams (Croydon, South)

Will my hon. Friend extend this a little further and agree that the principles which apply to preference shares should apply equally to National Savings Certificates?

Sir I. Albery

My hon. Friend has put a point which I am afraid I have not considered; therefore, I will not be rash enough to deal with it.

The Chairman

In any case, I do not think that it arises on this Resolution.

Sir H. Williams

May I congratulate the Chancellor on facing this difficult problem? I tried to help him by being rash enough to draft an Amendment, but when I came to read it I did not like it; in any case, it would have been out of Order, because it imposed a charge. I heard of a case the other day of a payment which, because of the other means of the recipient, is costing the paying people £100,000 per annum in order to provide a net income of £5,000. That is an intolerable scandal. I wonder whether the Chancellor is right in trying to restrict it entirely to pre-war contracts. I think that there may have been a certain number of cases where the directors of a company sitting round a board decided to grant one another tax-free service contracts. There was nothing to stop their doing that. They would be robbing their shareholders, although not in any criminal sense; it was legal, but improper. We ought to bring to an end a system which deprives people of their sense of responsibility as citizens. Underlying it all is that principle. Nevertheless, when we take a system which has been permitted and seek to alter it, there is a danger that we may inflict a measure of injustice. I have not yet studied this document very carefully. It is not too easy to study, and I am not clear what it all means.

The Chairman

I can give the hon. Gentleman a little further time to study it, because his remarks should be made on the new Clauses and not on the Resolution. The hon. Member will agree that it will be more convenient to reserve that discussion until we come to the Clauses.

Sir H. Williams

There is one point which I think is in Order. It is in regard to annuities under wills paid tax-free. The person who made the contract is dead; it is not a contract between living persons. It may be necessary for the Chancellor to examine this problem so that on the Committee stage some Amendment may be made.

Colonel Sandeman Allen (Birkenhead, West)

I would like to continue where the hon. Member for South Croydon (Sir H. Williams) finished with regard to annuities granted by people who are dead. I know of a man who was offered a pension on retirement, and he said he would rather have two-thirds of the pension if one-sixth was continued to his widow on his death. I agree that the tax-free system is wrong, but here is a case where for some years a man lived with a smaller pension than he would otherwise have had in order that his widow should have a pension should she outlive him. I hope that the Chancellor will take that case into consideration and make up his mind what is the right and proper thing to do in the circumstances.

Colonel Sir George Courthope (Rye)

Several references have been made to tax-free payments as if they were almost designed for an unworthy object against the public interest. I intervene only to remind the Committee that there are certain classes of tax-free payments which are tax-free by Statute. Statutes were passed to provide that payments should be made tax-free because it was considered in the general interest that they should be so. There will be great complications in those cases, although I am not suggesting that they put the Chancellor in the wrong in his general proposal. May I give an example? I happen by chance to be chairman of the Lands Improvement Company. It is a company paying out for improvements such as land drainage, agricultural improvements, and so on under the administration of the Minister of Agriculture. At the time of the last war the company and some other companies of a similar nature were limited to charge a gross interest not exceeding 5 per cent. At the end of the war money was dear, Income Tax was high and loans could not be obtained at 5 per cent, gross. The Minister of Agriculture was anxious that improvements of this kind should be renewed, and it was generally anticipated that not only would money tend to become cheaper, but that Income Tax would tend to drop. In the public interest an amending Act was passed providing that this company should charge a rate of interest which, after deduction of Income Tax, yielded a sum approved by the Minister of Agriculture. I just wanted to draw the attention of the Committee to the fact that statutory dealings of that kind are not necessarily attempts to do anything underhand or against the public interest.

Sir I. Albery

The right hon. and gallant Gentleman will agree that although the transaction to which he refers was done in the public interest, it ultimately turned out to be against the public interest.

Sir G. Courthope

Not necessarily. It was not contemplated that there would be, in this year of grace, a combination of Income Tax at 10s. and cheap money, and no doubt the whole thing needs revision. But there are some millions not only on loan but on charges assigned to insurance companies and others on this basis, as long-term investments, and there would be very considerable complications. I agree that something has to be done, but there may have to be a close study of the detailed effect of my right hon. Friend's Clauses upon statutory transactions of that kind. I apologise for intervening, but I thought it just as well to remind the Committee that tax-free payments were sometimes not only not sinful but actually in accordance with the law.

Sir John Mellor (Tamworth)

I wish to support what was said by the hon. Member for Gravesend (Sir I. Albery) about the exclusion of tax-free preference 'dividends. The Chancellor is excluding them on the ground that there have been dealings in such shares during the war, and for fear that he might give a shock to those who have engaged in such transactions, a shock which would be very unpleasant to those who have purchased and perhaps slightly pleasant to those who have sold. I cannot feel that his reason for his action is an adequate one. There have been very few dealings in preference shares which carry tax-free dividends, because they are very rare in the case of public companies. For all I know, such preference shares may be common in the case of private companies. Probably only an accountant or solicitor could tell us to what extent they are common in the case of private companies.

I do not think the Chancellor has taken the private companies into account. Looking through the Stock Exchange list, one sees that there are very few public companies with tax-free preference issues; but, after all, if those were the only ones which had to be considered, I still cannot sec, why he should distinguish against them merely on the ground that transactions in such shares have taken place since the war began. After all, the financial decisions of the Government are always inclined to spring surprises on the community, particularly the commercial community, and I think it would be rather an unfortunate precedent for him to say that he cannot do this or that because it will take some people by surprise. Indeed, everybody can indulge in intelligent anticipation, and, as has already been said, by, I think, the hon. Member for Gravesend, everyone must have realised that preference shares carrying tax-free dividends were in a rather exceptional position and what one might call vulnerable. I do think the Chancellor should give a little more thought to the position of the ordinary shareholders, because by omitting tax-free preference dividends from this provision he is discriminating against ordinary shareholders. A company with a 5 per cent, tax-free preference issue will bear the burden, in practice, of a 10 per cent, preference share. There may well be some cases where the margin of profit is only just adequate to pay the preference dividend and companies may be driven into default in their preference dividends through having to find not only the 5 per cent, tax-free under normal taxation but the 5 per cent, tax-free with a 10s. in the standard rate of Income Tax. It would be very unfortunate if, because the Chancellor wishes to avoid giving some individuals who have dealt in the market an unpleasant shock, we were to run the risk of perhaps forcing some companies to default upon their preference issues.

The Chairman

I do not want to rule the hon. Member out of Order, but I think it would be unfortunate, from the point of view of the Committee, if we indulged now in a detailed discussion of these proposals. That will come more properly on the new Clauses. The wording of the Resolution is very wide indeed, and it is the better practice to discuss the principle of the Resolution and not the details of the Clause.

Sir J. Mellor

I am much obliged. I was dealing only with the question of public policy raised by the Chancellor himself.

The Chairman

Perhaps I ought to have added this, that when the Chancellor produces a Resolution of this sort he is practically bound to say what are his reasons for moving it, and therefore to outline his proposals, but a discussion upon those proposals comes more properly when we get to the Clauses, so that the hon. Member is in a different position from that of the Chancellor.

Sir J. Mellor

I am much obliged. I will not say anything further beyond asking my right hon. Friend to reconsider the question of including tax-free preference dividends within the scope of the Clauses.

Mr. Woodburn (Stirling and Clackmannan, Eastern)

The proposal of the Chancellor of the Exchequer will be welcomed by those people who have been placed in great difficulty by contracts made in the past. I would like to refer to the reasons which he gave for the exclusion of preference shares from" this concession. From his remarks I gathered that preference shares are to have this privilege because some people have speculated in them on the ground that they were tax-free. That seems to me a most remarkable reason to give, because that is practically saying that people who are lucky enough to be able to speculate in that way will be protected by the Chancellor of the Exchequer.

Sir I. Albery

I would point out to the hon. Gentleman that almost all the dealings in tax-free preference shares are investments.

Mr. Woodburn

If the vulnerable share is to rise as a result of speculation in tax-free investments, and there is to be a rise in price as a result of future legislation by the Chancellor of the Exchequer, it reveals a very substantial profit as compared with ordinary shares in the same company. People who are lucky enough to have bought these shares will be placed in a position of gambling benefit as a result of the Chancellor's new proposals. That seems to me a most improper reason for giving them protection. If, as has been suggested by the last speaker, the consideration was that these preference shares are very largely trustee stock, in order to yield a definite income, that position is protected by the other Clauses which the Chancellor is moving with this Resolution.

I respectfully suggest that, when it is purely a matter of luck and not of any real necessity, the preference shareholder should get no more protection than any other investor or purchaser of shares. There is a good deal to be said for the statement that, in some companies, the balance has been struck in such a way as to give the preference shareholders a claim on a very great part of the company's income, and that the ordinary shareholders who, after all, have financed the company, very often will be completely cut out of any income of the company, which will all go to the preference shareholders. There may be preference shares tax-free which may never have been paid for in cash at all, and which may be a recompense for some non-existent goodwill. The Chancellor may actually be giving a person of that kind very substantial benefits by this proposal. I hope that he will reconsider the proposal in such a way as not to select one small set of people for a particular benefit.

Mr. Craven-Ellis (Southampton)

I am very pleased to see that the Chancellor of the Exchequer has come forward with this proposal, but I am not satisfied that he has gone far enough. The matter is of such extreme importance that it should receive further investigation before a decision is taken. The question of preference shares free of tax has been referred to, but that is only one avenue; there are a hundred and one avenues down which certain holders of: stock are not favoured. I suggest to the Chancellor of the Exchequer that, if possible between now and the Report stage of the new Clauses, he should come to a decision that there shall be no income free of tax and that we should all pay, no matter on what standard we may be, direct to the State. That is point No. 1.

Point No. 2 is this: The Chancellor of the Exchequer said he would exempt contracts made since the beginning of the war. How would a case like this work out? A person makes a will before the war and leaves an annuity free of tax. During the war, or during the continuance of this legislation, the party making that will dies. The putting of the will into operation starts after the war, although the provision was made before the war. How will that operate? Point No. 3 is with reference to building societies. I think I am right in saying that they have a general flat rate of about 2s. 6d. or 3s. in the £. Borrowers do not deduct their Income Tax of 10s., so the building society receives the interest gross and pays to the State only 2s. 6d. or 3s., leaving the building society with the benefit of 7s., if the rate is 3s. This flat rate paid by the building society was arranged when taxation was 4s. in the £ is it not time for that matter to be reviewed?

Mr. Radford (Manchester, Rusholme)

I hope that the Chancellor of the Exchequer will reconsider his proposal to exclude from the operation of his proposals tax-free preference shares. The reason he gave for their exclusion seems inadequate. It was that the shares and possibly the ordinary shares of the companies have changed hands on the ssumption that the preference shares were going to continue to be tax free. Is not the same true of annuities and other similar payments which have been left free of Income Tax? My right hon. Friend shakes his head. I may be wrong, but have not such transactions taken place? Somebody who was entitled to receive an annuity free of Income Tax may have sold his right to some person who was desirous of making an investment. I am not going to give way to my right hon. Friend on the point that certain people, say, residuary legatees and those who have a reversionary interest in estates which are subject to such payments, may certainly have had in mind the tax-free charges in front of them when they have sold their rights. The argument is just as strong in their case as it is in the case of preference shareholders. My right hon. Friend would do well to reconsider the exclusion of these tax-free preference shares. Let them share the common lot of other tax-free payments which he has in mind.

Mr. Hammersley (Willesden, East)

The question of tax-free payments is one of great technical difficulty. My right hon. Friend is to be congratulated in having gone as far as he reasonably could in the circumstances, and I would not have made any observations had it not happened that my right hon. Friend used words in his speech which might be interpreted as re-establishing the situation of certain tax-free payments. It was most unfortunate. The feeling on all sides of the House and in the country is that tax-free payments ought, if possible, to be done away with. Further, when he said that war-time arrangements were not interfered with, it did, in effect, establish a situation in which new people coming along may say, It is clear that tax-free payments are not against the public interest". There is a generality of view that they are against the public interest. I would not like my right hon. Friend to make the mistake of associating with this very good proposal statements which might be interpreted as being retrograde.

The Attorney-General (Sir Donald Somervell)

My right hon. Friend's proposals have had a very satisfactory reception from the Committee. The main criticism, apart from the preference shares point, with which I will deal later and which is a matter of detail, has been that he might have gone further, or that this form of payment is undesirable. That is a matter on which different views are held. We do not disagree with a great deal of what has been said, but, if one takes the position under a will, nobody in the past thought there was anything wrong —at least, Parliament never said so—in a man going through this form of reasoning: "Very well, I shall leave a widow. I have an estate out of which I can make some provision for her and for my children. I want her to be able to continue to live in this house and to ensure that she has £300, £500 or £1,000 a year to spend. That is the sum which, as far as I can foresee, will enable her to stay here for the rest of her life. If Income Tax goes up, I wish the burden to fall on my children as they will, in the normal course of events, be earning their own living. I want to die feeling that the burden of Income Tax will tall on the residuary estate and not on my widow." That is a point which makes some people feel that it is perfectly reasonable not to forbid altogether this class of bequest. I am perfectly certain that most of those who have spoken to-day have been against this class of settlement altogether, but if my right hon. Friend had sought to abolish it altogether, we should have found ourselves, quite rightly, involved in controversy.

There are two sides to this question. The general question as to whether this class of settlement should be altogether prohibited at some future date is clearly raised by this proposal, and my right hon. Friend and the rest of us can think about it. No doubt we shall discuss it on a later occasion. At this time it would have been impracticable to have taken so sweeping and in some respects so controversial a step. The people who have made these representations were not so much moved by the fact that they had suddenly awakened to thinking that the matter was contrary to public policy—it had been allowed and used on many occasions, in many relationships, for the past generation—but because the present rate of tax was imposing an intolerable burden on payers such as trustees and, in the case certainly of certain wills and settlements, obviously defeated entirely the intentions of the persons who made these wills and settlements. A rich man may have made provision for the payment of £5,000 a year to his widow tax-free, 30 or 40 years ago. He never contemplated that that would eat up £100,000 of income each year. In extreme cases you get fantastic and ridiculous results. Why did my right hon. Friend draw this line "at the beginning of the war"?

Mr. Pethick-Lawrence

In reference to what the right hon. and learned Gentleman has said, do I understand him to say that in some cases of tax-free annuities in order to provide £5,000 or £10,000 requires £100,000, because that involves the question of Surtax? In all these annuities freedom from tax includes Surtax. So far as this particular provision is concerned, I understand it deals only with Income Tax.

The Attorney-General

No, it deals with both on the same basis in not putting on the payer a greater burden than fell on him under pre-war taxes, whether Income Tax or Sur-tax. The beginning of the war has been taken, because it seemed to the Chancellor that one could see quite plainly that the extra taxation which this war has necessitated was something outside the contemplation of people who entered into transactions before the war broke out. No doubt, as the months of 1939 went on we realised that war was more and more probable, but direct taxation and the prospects of direct taxation were one thing before the war; they became a totally different matter once we became involved in the struggle. I find it difficult to believe that many people have entered into contracts of this kind since war broke out. It has been obvious since the first weeks of the war, and the first state- ment by the then Chancellor of the Exchequer, that all form? of taxation would be driven up to their maximum in the course of the struggle. Those who have made these forms of contract or settlement, if any, during the war, have done so with their eyes open. They cannot say that direct taxation has assumed a level which could not have been contemplated by those who entered into the contract or made the settlement. To have made this proposal apply to cases after the war would also have made the matter much more complicated. It is quite clear that we could not have legislation which, as it were, wiped out freedom from tax altogether from a settlement. It could not be said that a will made by a man leaving his widow £5,000 a year free of tax should be regarded as if the words "free of tax" were not there; it would be defeating his intentions completely. If this were carried on to contracts made during the war it would necessarily become very much more complicated. There would have to be special provision for the man who made such a provision when Income Tax was 7s. in the £, for another man who made a contract when Income Tax was 7s. 6d. in the £ for another who did so when Income Tax was 8s., and for another when Income Tax was 10s. We would have to have a multiplicity of schedules for each particular case.

As I have suggested to the Committee, the passing of these proposals will not prejudice the future consideration by this House of the very important question of whether this form of bequest or contract should be prohibited altogether. I believe that the best way of dealing with the problem that has arisen is to confine our attention to what we are doing to-day, to pre-war contracts and wills, and to deal with them in the way that my right hon. Friend has suggested. The hon. Member for Southampton (Mr. Craven-Ellis) asked a specific question with regard to wills. He asked what happened if a man made his will before the war and died after the war began. That would have the benefit of this proposal, because the material date in the case of a will is when the provision is made and not when the man dies. The hon. Member also asked about building societies. Of course, the flate rate which has, under administrative arrangements, been in operation for a long time, goes up if Income Tax goes up. On the question of preference shares, my right hon. Friend will consider what has been said. There are not a great many of these shares; it does not apply to preference shares generally. Although there may be isolated cases of annuities being sold, annuities are not conferred for the purpose of sale, and normally are enjoyed by the beneficiary. One of the essential characteristics of shares is that they are marketable, and if an investor wants to get rid of his preference shares, he transfers them to someone else. It seems to my right hon. Friend that this is not a very big point. If he set out to deal with these preference shares, it would really create more un-justices than were remedied. There would be cases of people who had sold their ordinary shares and got smaller prices for them because of the preferential position of preference shareholders and there would be cases of persons who had bought preference shares because they were free of tax. I repeat that it is really not a very big matter, and it would probably create more unjustices by applying this provision to this limited class than by doing what we are proposing to-day and leave them out.

Sir I. Albery

The point I wish to make was that the original contract, made as it were between the ordinary shareholder and the preference shareholder, is on all fours with all the other contracts which it is now proposed to alter, and I suggest that it merits consideration as much as do the others.

The Attorney-General

I do not think it is quite on all fours. Where a man gets an annuity under a will, that is not a bargain, it is a benefit. With regard to other contracts, however, what I was seeking to say was that in the vast majority of cases the money was intended to continue to be paid to the annuitant or beneficiary, whereas when a bargain is made between ordinary shareholders and preference shareholders one of the things contemplated is that the shares will be marketable and can be sold, whether they arc preference or ordinary, to other investors. In the case of shares, therefore, transfer is contemplated, whereas in most of the other cases with which we are dealing transfer was not contemplated, although, I agree, it was legally possible. It was for that reason that my right hon. Friend thought that by bringing preference shares into this scheme more injustices would be created than remedied, although he will, of course, reconsider the matter in the light of what might be said. Transactions in ordinary shares would be quite rightly made the subject of grievances if preference shares were brought in, just as much as transactions in preference shares themselves. These were the grounds which led my right hon. Friend to take the decision he did take.

Mr. Woodburn

Arising out of the right hon. and learned Gentleman's reply, may I put a point for the consideration of the Chancellor? Just as these transactions took place without the knowledge that there was going to be any change, is it not the case that, after the Chancellor's, statement, any tax-free preference shares will immediately become more valuable in the market in regard to transfers? If the Chancellor is not able to reconsider the matter from the point of view of changing the present rule, may I suggest that from the point of view of the Government's benefit he should look very carefully into the question of the transfer of tax-free shares in private companies? I understand that the Income Tax authorities practically allow the proprietors to value their own shares, and if these are going to be transferred by private companies behind the scenes, then the Chancellor should see that he collects increased Estate Duty or Stamp Duty by ensuring that the value of these shares is increased according to the benefit he is now giving.

Mr. Mathers (Linlithgow)

The reasoning applied by the right hon. and learned Gentleman causes me to rise to say that there are many other transactions which very closely approximate to those which have been described. What he has been dwelling upon are settlements, payments to individuals that come into operation as the result of a will, after a person has died. What has come into my mind is that there are many settlements in respect of continuing payments which fructify not in the case of death but in the case of arising at a particular age.

The Attorney-General

They are all covered.

Mr. Mathers

Then do I understand that payments in respect of superannuation, which have been contracted for by an individual paying over a long period of years, will also be protected and will be maintained at their pre-war level, and that individual taxation will not be applied in respect of superannuation payments? I do not understand that from the Clause itself, and I did not take it from the description given. I thought they referred only to cases where there was a will or some such settlement involved. Perhaps the Attorney-General would explain what I have endeavoured to put to him.

The Attorney-General

I was merely referring to wills on the question of the case against prohibition. But, as my right hon. Friend explained, these Clauses apply to all arrangements of this kind, whether they are contained in a will, deed, settlement or instrument of any kind. In all cases the operation of the Clauses, as my right hon. Friend explained, is to put the increased tax due to the war on the recipient. Therefore, if there was a superannuation payment free of tax, the people paying the annuity would pay tax up to 5s. 6d., but in so far as there was tax exigible in excess of 5s. 6d.—the rate now being 10s that would be borne by the recipient. Of course, if the recipient is a person whose income is so small that he or she is not liable to pay Income Tax at all, he is unaffected, and all the personal allowances, etc., are, of course, taken into account. But having taken that into account, if these proposals are accepted, the person receiving the superannuation allowance will be called upon to pay a share. Supposing the total Income Tax liability of that person were £11 in respect of pre-war gross income, the people paying the superannuation allowance would bear 11–20ths of the total present taxation and the recipient would bear 9–20ths.

Mr. Mathers

I should explain that my remarks did not apply to tax-free income. I was talking about the limited amount available to recipients of superannuation allowances in having their allowance taxed on the increased scale arising out of the exigencies of the war. There may be contracts prior to the war to bring them in what was then thought to be a suitable income, but which is now being infringed upon.

The Attorney-General

My hon. Friend is at a disadvantage in not having heard the Debate. The only kind of contract which we are discussing is the contract under which there is to be a payment free of tax.

Sir William Davison (Kensington, South)

Most people in the country would, I think, be in general agreement with the object of the Resolution which is now before us, as explained by the Chancellor of the Exchequer and by the Attorney-General, but it seems to me that in carrying it into effect the wording of the Clauses should be crystal clear and that phrases containing fractions and anything of that kind should be avoided, so that in a matter of this importance the taxpayer should know exactly where he stands without having to consult the learned Attorney-General or any other lawyer. It is desirable that at the earliest possible moment a protest should be made against embodying the matters referred to in this Resolution in a form which cannot be easily understood by the taxpayer who is affected.

The Attorney-General

We have drafted these Clauses so as to tell taxpayers exactly what they have to do, and instead of setting out some elaborate general formula which would have been very difficult to understand, we have told taxpayers that they will have to give up a particular fraction—20–20 ths—and it is not necessary to be a lawyer—you only need to be able to do simple arithmetic —to find out how these Clauses operate in a particular case.

Mr. Woods (Finsbury)

A thing which is still obscure is the position with regard to directors' fees which are paid free of Income Tax. I know they have been mentioned, but there is still some difficulty, because we are not quite clear how they will be affected.

Sir K. Wood

We will discuss the matter further on the Clauses. I made it perfectly plain when I introduced this Resolution that such contracts would be included in their operation.

Mr. A. Edwards (Middlesbrough, East)

The Attorney-General said that it was not a very extensive practice and that, therefore, it was not worth while dealing with it at this time.

The Attorney-General


Mr. Edwards

I thought that he said something to that effect. If you do not deal with the practice, you will encourage it to develop into a much larger problem. Here is a splendid opportunity to say that these things are entirely undesirable and that they are going to be made illegal. It is an opportunity that may not occur again.

Mr. Gallacher

I should like the Chancellor to abolish, scientifically and painlessly, all sharps and shareholders and directors fees altogether.

Question put, and agreed to.

Resolved, That provision shall be made for modifying—

  1. (a) obligations to pay sums free of Income Tax or free of Income Tax other than Surtax or sums so calculated as to leave a specified amount after deduction of income Tax;
  2. (b) obligations to. pay sums in respect of the Income Tax of another person."

Resolution to be reported upon the next Sitting Day.

Committee to sit again upon the next Sitting Day.

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