§ (1) Subject to the provisions of this section, any provision, however worded, for the payment, whether periodically or otherwise, of a stated amount free of income tax, or free of income tax other than surtax, being a pro vision which —
- (a) is contained in any deed or other instrument, in any will or codicil, in any order of any court, or in any contract, whether oral or in writing; and
- (b) was made before the third day of September 1939; and
- (c) has not been varied on or after that date,
§ (2) Where any such provision as is mentioned in subsection (1) of this section is a provision for a payment free of income tax (and not merely a provision for a payment free of income tax other than surtax) the sum, if any, to be paid under that provision to make good the requirement that the payment shall be free of surtax shall, in the case of surtax for the year preceding any such year of assessment as is mentioned in the said sub section (1), be reduced to twenty twenty-ninths of the sum which would have been sufficient for that purpose if the rates of surtax in force for the year 1937–38 had applied to the year for which the surtax is payable.676
§ (3) A person who is entitled under any such provision as is mentioned in subsection (1) of this section to a payment free of income tax, or free of income tax other than surtax, shall be entitled to the following adjustment of his surtax for the year 1940–41, that is to say, his total income for that year, so far as it is ascribable to his rights under that provision, shall be reduced to what it would have been if in his case—
- (a) the rates of surtax in force for the year 1937–38 had applied also to the years 1938–39, 1939–40 and 1940–41; and
- (b) the 1938–39 rates of income tax other than surtax had applied also to the years 1939–40 and 1940–41; and
- (c) the rights and liabilities of the persons concerned had been modified accordingly.
§ (4) If, in the case of a payment to which subsection (1) of this section applies the relations of the payee and payor are such that the payee is accountable to the payor for so much of any relief from income tax which he receives as is ascribable to the payment, —
- (a) the liability of the payee to account to the payor shall be limited to twenty twenty-ninths of the sum for which he would have been accountable if the 1938–39 rates of income tax, other than surtax, had applied to the year of assessment in which the payment falls to be made and the foregoing provisions of this section had not passed; and
- (b) the relief to be given shall be calculated as it—
- (i) the gross sum represented by the payment were what it would have been if the 1938–39 rates of income tax, other than surtax, had applied to the year of assessment in which the payment falls to be made, and the foregoing provisions of this section had not passed; and
- (ii) that gross sum had borne income tax at ten shillings in the pound.
§ (5) This section shall not—
- (a) affect any provision falling within Rule 23 of the General Rules (which renders in valid agreements not to deduct tax);
- (b) affect any provision if, by virtue of any provision in the same or any other deed, instrument, will, codicil, order or contract, which contemplates rises in the rates of in come tax, the payments thereunder have ceased, or, in the event of further rises in the rates of income tax, may cease, to be wholly free of income tax, or, as the case may be, wholly free of income tax other than surtax;
- (c) apply to any emoluments of any office, employment, annuity, pension or stipend taxed under Schedule E; or
- (d) apply to any dividends or shares of profits. — [Sir K. Wood.]
§ Brought up, and read the First time.
§ The Chancellor of the Exchequer (Sir Kingsley Wood)
I beg to move, "That the Clause be read a Second time."
In moving this new Clause, I would like to make one or two additional observa- 677 tions, particularly in view of the discussion which took place yesterday and of the proposals which I see on the Order Paper to-day from some of my hon. Friends. I will then indicate my general position on this matter. I am proposing the new Clauses which appear on the Paper in order to deal with what I think was generally regarded in the Committee as an obvious inequity which arises from the present high taxation. That, of course, apart from the general question, is of importance to the Treasury, and I would emphasise that these proposals have been made because of the tremendous increase in taxation and the necessary adjustment that is required. It is true that I have excluded from these proposals preference shares, to take one example, which were the subject of discussion yesterday. I would emphasise the reason why I made that exception, which I am glad to see from various quarters to-day has received a considerable amount of approval, and I will only briefly sum it up to-day.
I differentiate, as I think a good many people do, between the position of a person who makes a contract with another individual, such as is covered by the new Clause, and the position which would arise if I endeavoured to deal with the rights of individuals in shares which affect many thousands of investors. There are a considerable number of people interested in preference shares, and all I have endeavoured to do in these proposals is to remedy the inequality and injustice which were generally recognised in the present position. I should, however, be doing an unsatisfactory thing if in order to remedy an inequality or injustice of that kind I created a good many more. That is the position which is emphasised in certain portions of the Press to-day, and that is one of the justifications for the differentiation I have made. It is, in fact, the position that a considerable number of investors have in good faith invested in shares of this character or have disposed of shares without having regard to any possibilities that would follow and -such as have been envisaged in the Clauses on the Paper. It is quite normal for companies to advertise for subscribers to this class of share on the basis that they are to be free of tax. I would like my hon. Friends who have raised this matter to have regard to this fact, that I differentiate, on that account and because of the reasons which I have 678 already given, between the position of a person who is affected under a will or a contract and the position of those who might be adversely affected in the way I have suggested if these proposals were applied to them. In other words, the differentiation which I have made has been made for practical reasons and on the grounds which I have ventured to indicate to the Committee.
There is another aspect of the matter which the Committee must not overlook. If any proposals such as are contained in this Clause affected preference shareholders, it would make a difference in the values as between buyer and seller and also a difference as far as the value of ordinary and preference shares is concerned. I see, for instance, this morning in the financial columns of the "Times," which so many people read, that they quote what I stated with regard to preference shares:To bring them within the scope of the resolution would be to penalise people who had made investments or dispossessed themselves of investments ' without any knowledge or expectation of legislative action calculated to undermine the whole basis of their transactions.'It is added that that is a sound reason. In order that I shall not unduly advertise one newspaper over another, I turn to a paper of very different political opinions, which I, personally, read every day, namely, the "Manchester Guardian". They take the same view. They do not adopt the reason which I have given, but they say this:Surely the reason for leaving free-of-tax dividends alone is an altogether more fundamental one, namely, the undesirability of varying legal contractual obligations, except in cases of great hardship.Therefore, I think there is, in fact, as I hope my hon. Friends who are interested in this matter will realise, a very considerable case for my proposal. It is for that reason and on practical grounds and in order that I may not in remedying one injustice create more injustices, that I have made this differentiation.
I turn now to the question which was raised, whether at this moment, when I am taking this very considerable step, I should not, as suggested in one Amendment, make a general prohibition of these agreements for the future. I wish to say a few words upon that obviously very 679 important aspect of the matter. Such a step as that could be taken only after very close consideration of the position and, as far as I am concerned, after consultaton with my colleagues who may be concerned. I wish to express not only my own opinion on the matter, but the views of a number of people who have made representations to me. I daresay that many of my hon. Friends have had opinions of the same kind expressed to them. Is it right that Parliament should prohibit altogether these tax-free provisions, either in contracts or wills or in any other form? Opinions vary a great deal on that point. Some of my hon. Friends yesterday seemed rather to indicate, judging from the short study I have been able to make of their speeches since, that it was morally wrong, or at any rate against the public interest, that such provision should be permitted. Again, let me say that I am not expressing my own view on the matter, but there is, of course, a considerable case to be made against a proposal of that kind. You cannot say that tax-free provisions are morally wrong.
§ Sir Irving Albery (Gravesend)
I think if the right hon. Gentleman reads the speeches again, he will find that none of us suggested that it was morally wrong. We did suggest that it was against the public interest.
§ Sir K. Wood
Very well then, I will confine myself to that point. I admit that I have not yet had time to read through the speeches carefully. But the question arises: Are these provisions against the public interest and therefore, in that respect detrimental? It is argued that they are, but, on the other hand, a strong case can undoubtedly be presented against that assumption. The argument could be used, though I do not use it myself, that we issue Savings Certificates, for instance, free of tax. There may be various reasons why exception should be given on that account. But take the case of a man who wants to be absolutely sure that proper provision has been made for his wife. There must be thousands of people in this country at this time who are in that position. I think many of us know exactly what that means. To many of us, I am sure, the greatest interest that we have at this moment is 680 to secure, as far as is humanly possible, that our wives are suitably provided for against all eventualities. Each one of us is anxious to make such provision as he can for his wife and, if possible, protect her against the effects of any alterations which may be made in respect of Income Tax, Sur-tax or other taxes of that kind.
That applies to a very large number of people in this country, and I will endorse the argument on that ground to this extent, that I am sure a very large number of people would resent very much the proposition that it was against the national interest to make such provision for one's wife and that it should be prohibited by Parliament. If I may put it in a personal way, just to bring it home more vividly to the Committee, suppose I say, "I will leave my wife a certain annuity free of tax so that when my time comes, I shall feel sure that, as far as was humanly possible, I have made provisions for her to live in the condition in which I should like her to live without liability to any further increase of taxation and so that, if such taxation has to be paid, it should be paid by other people who are not as near and dear to me as she is. "That is a very strong case indeed against a general prohibition.
There is another point which I should like the Committee to consider, because this is a subject to which careful consideration must be given; it cannot be decided in a moment. We should not make a law which can be easily avoided and so treated as to hold up to ridicule Parliament and the Legislature. The Solicitor-General can add to these observations if necessary, because he can speak with the highest authority as one of the leading lawyers of to-day, but I do not think he would dispute with me when I say that if we absolutely prohibited the making of payments free of tax, such a provision would be easily avoided. If I so desired, still keeping within the terms of the proposal put down by my right hon. Friend opposite, I could, when leaving an annuity of £200 a year to my wife in my will, add the provision that my trustees should have power, in their discretion, to give a further sum of £50 a year if Income Tax were increased by any particular amount. I could go even further and say to my trustees, "It shall be your duty, if you think that with the increase in Income Tax her position will 681 be seriously affected, to add such further sums as you in your discretion think fit."
Therefore, I say again, we should not enter lightly into a proposal of this kind without seeing where it is we are going. We must not put on the Statute Book proposals which can be easily avoided, and quite properly avoided; there is no moral reason why they should not be avoided. I myself see nothing wrong in a man endeavouring to provide fully for his wife against all eventualities which may arise. As another alternative, as a testator I could say, "I will not bother about the amount I leave my wife. I will direct that she should be provided with an annuity to enable her to maintain a particular house, irrespective of her income. "I can say that my trustees must maintain her in that house, must maintain a car for her, must maintain a chauffeur for her. I could go through a long range of things which I might desire to secure to my wife, and then end up by saying, "I give discretionary power to my trustees to add such further sums as they may think desirable in order that she may be maintained as I should desire her to be maintained, and for which I have worked all my life." Therefore, these proposals would be most difficult to enforce. We must be careful before we embark on that line of country.
But let us look at the proposal which the right hon. Gentleman has put down —I have no doubt for the purposes of discussion. One effect of it would be that after to-day all transactions which were directed to making payments free of tax would be void. Where would that lead us? Under my proposals, and so far as pre-war contracts and arrangements are concerned, the Income Tax would be adjusted, so that Income Tax over the 5s. 6d. in the pound would be paid by the recipient and the other portion as set out in my Clause. My right hon. Friend's proposal does not deal in any way with all those arrangements free of tax which have been made from the beginning of the war until now, and all those people would be able to continue as now receiving payments free of tax. Finally, we should end up with the position that after to-day, there would be full and complete prohibition.
I wonder what would happen throughout the country if we did insert a complete 682 prohibition against all payments free of tax. At this moment we have thousands of soldiers, sailors and airmen oversea. They have very full facilities for making wills. They are not subject to all the conditions and restrictions which apply here. They can make a will very easily indeed. If one of them made a will to-morrow— they would not have read the OFFICIAL REPORT, and the decision of this House would not have reached them—leaving his wife £100 a year free of Income Tax, that bequest would be wholly void. If the unfortunate man were killed the day after, he would have made a will in which no legal provision had been made for his wife. We could not contemplate that state of affairs, and if there were to be a prohibition of this kind, there would have to be many exceptions and conditions. In addition, there would probably be numerous cases in this country in which, through inadvertence or some slip, wills were made containing similar provisions about tax-free payments to wives, and there could be no adjustment such as is provided for in my proposal but the whole bequest would be absolutely void. That is not a matter which any of us would like to contemplate.
What I do feel a good deal of sympathy for is the point of view of those who cite the case of directors who are paid as remuneration large amounts free of tax. I do not want to speak too strongly in condemnation of it, but I think it is an almost impossible position to-day, when to ensure that a man shall receive £3,000 or £4,000 a year free of tax involves a company in very heavy outlay. I do not think that is a situation which can be regarded with favour. I feel that when shareholders are called upon to sanction these payments free of tax all the cards should be on the table. It might be the subject of a statutory condition, though that is a matter on which the President of the Board of Trade would have something to say. It could be a statutory condition that, either in the report or in the proceedings before shareholders, shareholders should know exactly what a proposal of this kind means to them. It is true that if the shareholders want to give very large sums to directors, they can avoid the free-of-tax provision by voting the full amount. Well, let them vote the full amount. In that connection I feel there is a very considerable case indeed.
683 I hope I have not put this matter too strongly or argumentatively to the Committee, but I wanted hon. Members to see the danger of any immediate decision on the matter. I have expressed these views in regard to the objections made to the proposal which was put forward yesterday. Having taken the forward step represented by those proposals, I ought to see, in conjunction with my colleagues, whether any further steps can properly and legitimately be taken. The Committee having listened to me so patiently, I would ask hon. Members to leave the matter with me in this way. I would say, in conclusion, only this: Merely because some would like to go further, let us not think that we have not taken a very considerable step to-day, when we have passed this Clause. At the time when I first entered this House, which is a good many years ago now, many people would have been simply horrified at the Government's making a proposal interfering with the sanctity of contract as this proposal does, and still more those people belonging to the party to which I have the honour and privilege of belonging. I contend that the Clause, drastic in many respects as it is, is warranted by the conditions of the time, and that it lays down in an equitable and fair manner the proper adjustments to be made in the conditions and on the basis of taxation to-day.
§ Mr. Pethick-Lawrence (Edinburgh, East)
On a point of Order. I would ask you, Colonel Cilfton Brown, how you propose to conduct this discussion? I understand that we are now discussing the Question, "That the Clause be read a Second time." The Chancellor of the Exchequer devoted a good deal of his attention—I am not making the smallest complaint about what was an exceedingly interesting speech—to the Amendment which I have upon the Paper and which, strictly speaking, should come up for discussion later, after we have read the Clause a Second time. Naturally you would not wish us to have any discussion twice over, and I would like to know what you would advise. The hon. Member for Gravesend (Sir I. Albery) has also some Amendments on the Paper. Would it be desirable to deal with the whole matter now on the Second Reading, or would it be better to let the Second 684 Reading go through and then to put the Amendments as they are on the Order Paper?
§ Sir K. Wood
Perhaps I might add a word on this point of Order. All these things are so intermixed that I was hoping it would be for the convenience of the Committee if we had a general discussion, if you would permit it, including the matters to which the right hon. Gentleman has referred, and so discussed the matter as a whole. It is so difficult to discuss these matters apart. I suggest that a general discussion might be the best course.
There are Amendments on the Paper, as has been pointed out, but I am prepared to assent to anything which the Committee wishes. The Amendments are on the Paper, and will have to be called.
§ Sir I. Albery
I am quite in agreement that the Committee should have a general discussion, either on the Second Reading or upon the first Amendment, provided that subsequent Amendments are safeguarded and can be put without any detailed discussion.
If the Committee agree, we can have a general discussion, and I will subsequently put the Amendments so that they may be negatived; but it must be understood that there must be no prolonged discussion. Is that what the hon. Gentleman has suggested?
§ Sir I. Albery
I take it that there would be no general discussion, but one could say such few words as might be necessary, if they were still necessary, to explain the purpose of the particular Amendment.
The Committee would probably assent to that. It must be understood that the speeches must consist of only a few words. Does the right hon. Gentleman agree?
§ Mr. Pethick-Lawrence
Yes, I agree with that course. In the very interesting speech made by him, the Chancellor of the Exchequer dealt at very considerable length with the Amendment which I intended to move, and he devoted most of his attention to the question of the bequest. He has pointed out that men do, 685 quite naturally, desire to leave to their wives certain sums to make sure that the standard of living of the wife shall be maintained. He pointed out a flaw in my Amendment which I had not realised, namely, that if the Amendment were carried, not only would any wills or contracts in which provision were inserted to leave certain sums free of Income Tax, be at once affected, and the particular provision be rendered null and void, but the whole bequest would be rendered void. That was a slip of drafting. The Chancellor of the Exchequer will realise that my Amendment was put down in a great hurry. My intention was not that, of course. I did not suppose that the words I used would be embodied in the final form of the Clause. The Committee was greatly interested yesterday in the statement that I made, and I confess it was rather a surprise to find that hon. Members agreed with the view that I took that these arrangements were, generally speaking, undesirable.
I certainly should not wish to divide the Committee against the Government on a matter of this kind. Plainly, the Government must consent of its own good will in connection with the carrying of such a proposal. There are one or two answers I would make to what the Chancellor of the Exchequer has said. The matter of wills is only one part of the subject. The Chancellor himself mentioned another, that of directors' fees. He is quite well aware that even those two do not exhaust the whole field. There are questions of mortgages and other contracts made with the tax-free provision, and it was in regard to the generality of them that my Amendment proposed to deal. It is clear that my Amendment ought to be worded so that it covered the Income Tax-free provision and did not strike out the whole of the provision made by the legacy, contract or whatever it might be.
The right hon. Gentleman the Chancellor of the Exchequer says that it is unthinkable that we should take this step, in regard to wives. I venture to disagree with him even on that issue. It is open to a husband to make provision for his wife, allowing for a reasonable amount of Income Tax such as is likely to prevail during the years that follow. If we were to carry some such proposals as those suggested by myself, it would be quite open to a testator to propose a legacy of £300 686 or whatever he might think suitable instead of a legacy of £200. When we are dealing with a comparatively small sum of that kind, I see no difficulty in adding 50 or 60 per cent, to the bequest in order to cover the probable amount of Income Tax. But if it is a question of a sum running into thousands, which is to be subject to Sur-tax, then I do maintain, as I said yesterday, that it is contrary to public policy, and an attempt to thwart the intention of this House, if legatees are to be put outside the scope of Income Tax and Sur-tax provisions which this House sees fit to impose. We have been told that it requires an income of £66,000 a year in order to produce a net income, free of Income Tax and Surtax, of £5,000 a year, and I think it requires an income of over £200,000 to produce a tax-free income of £10,000.
It is very undesirable that a testator should seek to place any one of his legatees in a position which frees him from the consequences of the decisions of this House with regard to Income Tax and Sur-tax, and although I do not wish to prevent testators leaving their widows in a condition of affluence, I do not think it is desirable that in their wills they should put them outside the reach of this House, so that they cannot be dealt with in the way that applies to other people. When provision has been made for a widow in a will and this House comes to consider the imposition of a changed rate of Income Tax and Sur-tax, I think it is for this House to consider whether or not any exception should be made. As Income Tax and Sur-tax increase, I believe that the House will insist upon a much more detailed provision in regard to exemptions and allowances. Therefore, even in this special case of a widow, I do not see the great objection which the Chancellor of the Exchequer has raised, though, of course, I understand the point he is making, and if in consequence of any such position arising a widow's share were to be cut down to nothing or to a very small amount, I cannot see that there could be any objection to his proposed course of action.
In the matter of directors' fees, which the Chancellor himself said is a very important one, it is most undesirable that company directors should be able to vote themselves—or persuade the shareholders to vote, if they have to go before the shareholders—sums which appear to be 687 very moderate in amount, say, £2,000 or £3,000, but which according to the particular circumstances of the director in question may involve the company in sums running to over £100,000. That is an absurd position. I also think it is very undesirable that persons who are taking out a mortgage on some of their property should be pushed into a position involving them in arrangements which cost them a great deal more than the sum which they had in mind to pay, and it is for these reasons, in spite of what the Chancellor of the Exchequer had said, that I thought it would be desirable for the Government to carry a proposal prohibiting action of this kind in the future. After all, as I pointed out yesterday, it would not be unique. Already, in regard to landlords and tenants, we prohibit the landlord of any property from passing the burden of Schedule A Income Tax on to the tenant; I do not know the precise wording of the arrangement which makes that impossible, but at any rate it is effective in preventing any landlord from passing that burden on to the tenant, either directly or by implication, and I see no reason why what applies to landlord and tenant under Schedule A should not apply to other persons.
There was another point the Chancellor made to the effect that people would be put in three categories, the pre-war category, the category from 3rd September, 1939, to to-day, and hereafter. I think that is to some extent a necessary result of the method the Government are proposing though I do not blame them, for I think they have done exceedingly well to produce this legislation at all. There are ways of meeting that, and I think the cleanest and simplest was the way I put forward in the form of an Amendment, excluding all such arrangements made on or after to-day. I doubt whether people are now making wills with tax-free provisions, and I think the general concensus of opinion inside the Committee is in favour of some such proposal. I do not think the Government have any a priori objection to anything of this kind, and I suggest that if the Government cannot see fit to accept my Amendment at the present time, they should think the matter out and, at the earliest convenient opportunity, embody in some Statute or in some Amendment to this 688 Finance Bill a provision carrying out what I had hoped would be enacted by way of the Amendment I have put down.
§ Mr. Graham White (Birkenhead, East)
From such consideration as I have been able to give this matter, and from the speeches I have had the advantage of hearing, I am led to the conclusion that the Chancellor's proposals in this matter are the best practical ones in the circumstances. At the same time, I think it would be very well indeed if the Government would take the earliest possible opportunity of seeing that we do not build up a further set of entanglements and difficulties in the future by taking action on the lines suggested by my right hon. Friend above the Gangway, or some other means for putting an end to this practice. I think it is, generally speaking, a sound principle that no citizen should be exempted from the full responsibilities of taxation, and I also take the view that the responsibility in the minds of the community for policy which leads to taxation would be very much lessened if people were sheltered from the full consequences of legislative acts. The Chancellor of the Exchequer said that he hoped he had not put the matter too strongly before the Committee. I do not think he did. I think he sought to be impartial, and I gathered that he had no particular views on the subject himself. He had not had time to reconsider some of the objections raised in speeches made yesterday in the House, but he had had the advantage of reading the "Manchester Guardian "—a course of action of which I strongly approve—and also, I gather, the "Times," and so he had been impartial.
§ Sir I. Albery
Does the hon. Member think it better for Ministers to fortify their opinions rather by reading the daily Press than by reading the speeches made in Parliament?
§ Mr. White
My hon. Friend the Member for Gravesend (Sir I. Albery) intervenes with a more direct approach than I should have ventured to make myself to a subject which I regard as of some little delicacy. But, as I was saying, the Chancellor has put this matter impartially to the Committee, and explained the sources of his information and his views. I think the conclusion to which he has come is the right one, but I do not 689 regard the matter as being settled. There is one point as to one section of these transactions, to which the Chancellor has referred, which I think does present an insuperable difficulty—and that is with regard to tax-free securities. There has been for years a large number of transactions with which he was dealing in relation to tax-free securities, in which persons in perfectly good faith had spent considerable sums of money in order to acquire a certain income. I do not see—I do not pretend to be an authority on these matters—any way of dealing with that situation equitably. I think probably the best we can do, having regard to the insuperable difficulties of dealing with that kind of transaction, is to act in future on the lines suggested by my right hon. Friend.
§ Sir Irving Albery (Gravesend)
When my right hon. Friend the Chancellor of the Exchequer made his speech in moving this Clause, he did so in his most persuasive manner. He took, if he will forgive me, a rather wide field, but I do not think he dealt very much with the basic principles which have more or less compelled him to bring this legislation before this Committee. I was a little surprised at the remarks he made concerning evasion. We in this House have had a good deal to do with evasion lately. I have no doubt that my right hon. and learned Friend the Solicitor-General can show him how this tax and many other taxes can be evaded. I have also little doubt, as the result of recent experience, that the Solicitor-General can equally show him how to prevent the evasion. My right hon. Friend has, in this Finance Bill, in some Clauses, measures to deal with evasion which, much as all of us wish to prevent evasion, we may, nevertheless, have to criticise upon other grounds. As regards the position of widows, after all, a widow will not be any worse off than a widow who is benefiting by a will which was made previous to the war. Secondly, there is nothing to prevent anybody, at any time, instead of leaving a certain amount of money free of tax, leaving a larger amount of money.
I want to come back, if I may, to the main reason why this Resolution is introduced. It is because of the very high and unexpected level to which direct taxation has risen, which has caused a set of circumstances which were never at any time 690 foreseen or contemplated by people who made wills and various other agreements and documents. The Chancellor of the Exchequer has been seized with the necessity of doing something to alleviate that position. Having decided to do it, he came to this House on these lines; he said, "I cannot wipe out altogether tax-free contracts, but I am going "—and I think it was a very sensible view to take —"to draw a line at what is additional post-war taxation and what was pre-war taxation, and I am going to let these contracts remain in force so far as they were affected by pre-war taxation, but I am going to make an alteration as regards additional post-war taxation." That view is accepted by the whole of the House and the whole of the country as a just and wise decision in all the circumstances. That is the basis of the present proposal.
Nearly the whole of the speech by the Chancellor of the Exchequer dealt with the exceptions that he proposed to make to the basic proposal, and the question really before the Committee is not whether the whole proposition is a good one or not—I think we have already agreed on that. The real question is whether it is necessary, after having arrived at that decision, which the Committee and the House think is just and equitable, to make exceptions. The Chancellor of the Exchequer seemed to me to put those who are against the exceptions in a wrong position. I really do not think it is for those who oppose the exceptions to make the case. It is for the Chancellor to make the case for the exceptions. If you have a basic principle and you are to make exceptions, you must justify them. The two principal exceptions the Chancellor proposes to make are first, that he says that contracts made since the outbreak of war should be excepted, presumably because the persons concerned, when they made them, knew of the high rate to which direct taxation was already being lifted, and therefore made the arrangement with their eyes open. Personally, I do not consider that a sufficient reason for altering the basic proposal. I do not see that they will suffer any hardship. They were aware that an exceptional situation existed, and in the knowledge of that—as no amending legislation had been passed they did what was quite right —they made a contract on the existing 691 basis. The existing basis is going to be changed. To make the exception is going to be very untidy. It is far better to stick to the basis which has been adopted. We have quite enough complications. Why add a lot more? Why have, in future, a category of wills and documents of those before the war, those during the war, and I suppose, those after the war? I cannot see that there is any real hardship to those who made contracts after the war began if those are amended like those made before the war.
The other exception the Chancellor wishes to make is with reference to preference shares. There again I do not think his argument is very strong. Personally, I do not think it is good enough to make the exception, and I do not see the need for making it. The principal arguments the Chancellor put forward were, firstly, that transactions had taken place in preference and ordinary shares, and that those transactions, and the prices fixed, have been governed by the tax-free conditions appertaining to them. I have not had the time to get the figures. I had hoped to show the Chancellor that as a matter of fact these securities which are free of this very high level of taxation give a bigger net yield than other securities not free of tax because it has been in people's minds that something like this might happen. Further, from the point of view of equity—of everybody bearing his proportion of the war burden—the ordinary shareholder is entitled to some consideration. The ordinary shareholders, when their shares were subscribed for originally, had not contemplated any more than did the person who made a will, that Income Tax would rise to 1os. in the £. There again, on grounds of reasonableness, and certainly on grounds of tidiness, it is desirable that this exception should not be made. I have one last argument, which is perhaps the most important argument, against it. I am convinced, and I am sure this House is convinced, that these tax-free contracts serve no good purpose, and that they should be done away with. The Chancellor of the Exchequer said that Members of my party are the last people he expected to see taking up this attitude. Quite frankly, I do not judge these things 692 from a party point of view, but from a practical point of view.
If Income Tax had remained at its old level, I should not have made any great song about it, although I should still maintain that it was against the public interest to make certain payments tax-free. I think it is against the public interest to pay salaries which are tax-free. All too little attention is paid in this House in peace-time to the question of finance. It seems important that people should be concerned about taxation, and that when they go to the poll to elect Members of this House they should take into consideration questions of finance in connection with the expensive improvements which they hopes to secure but which they do not always have to pay for. I certainly agree that tax-free directors' fees ought not to be allowed to continue. I believe—and the Attorney-General will correct me if I am wrong—that at present the remuneration of directors must be disclosed to the shareholders, but people seem to be too little aware that the remuneration of managing directors in many cases is not disclosed, and that there is no obligation under the 1929 Act to disclose it. Therefore, many companies are paying large sums in remuneration to managing directors about which the shareholders know nothing, and about which they have not the right to require information. That is a matter which calls for legislation in the near future. I do not share the view that it would be wrong to divide against the Government on a question of this kind in Committee. On the contrary, I think that on many occasions it may be right to divide against the Government in Committee. It is well to let the Government see our views in that way. But I do not think that that is likely to arise here. I appreciate what the right hon. Gentleman is doing, and I still have a faint hope that, on further reflection, he will come round to the view that it is far tidier to wipe out these exceptions.
§ Sir John Mellor (Tamworth)
My right hon. Friend the Chancellor of the Exchequer distinguished tax-free dividends on preference shares from other sources of tax-free income on the ground of the marketability of the source of that income. It is true that the shares of some public companies are to some extent, even in these days, marketable in a relatively free market, but that could not be said of the 693 shares of private companies. It is true that the shares of private companies change hands, but I do not think that they can be said to be marketable, any more than it can be said that there is a free market in such things as annuities and reversionary interests. These are, of course, bought and sold—I believe they are bought and sold at auction—and are in-vested in by insurance companies and others; but one would not say that they are marketable in the sense of being able to find a free market. The same applies to the shares of private companies. I do not: think that my right hon. Friend could really contend that the shares of private companies come within his description of being marketable, as do, to a very large extent, those of public companies. If that is correct, and if the ground of marketability upon which the Chancellor of the Exchequer distinguished tax-free preference shares is to apply, surely it ought to be confined to shares of public companies. 1 ask my right hon. Friend whether, in the event of his being unable to accept the Amendment standing in the name of my hon. Friend the Member for Gravesend (Sir I. Albery), he is prepared to consider an Amendment to confine the scope of the exception contained in pararaph (d) of Sub-section (5) to the shares of public companies, and so to bring back into the scope of the Clause the shares of private companies?
§ Mr. Benson (Chesterfield)
I find myself in a position which always slightly disturbs me, the position of wholeheartedly supporting the Chancellor. I think my hon. Friend the Member for Gravesend (Sir I. Albery) has been led away by a phrase used by my right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence), who said that tax-free contracts were contrary to public policy. I am not sure that that is not straining the situation rather far. It is true that certain tax-free contracts may be contrary to public policy, but there are innumerable perfectly legitimate relations which under certain circumstances may become contrary to public policy, but that is not to say that we must argue from the specific to the general. We are intervening, as Parliament frequently does, and as Parliament always retains the right to do, in respect of private contracts which have become too onerous. I do not think we 694 are really raising any basic principle. There are a number of foolish arrangements which have been entered into. There are a number of arrangements which have verged on the corrupt. I am thinking of the directors who vote themselves tax-free remuneration. Although the shareholders ought to know that the remuneration is tax-free, although the ordinary shareholders of companies whose debentures are tax-free ought to know that that is the case, the ordinary shareholder, in fact, knows very little about the financial arrangements of the company in which he invests. Therefore, there is very good ground for further investigation.
It may be that these contracts cannot be altered in the case of debentures and that we cannot make these contracts illegal in the future. But the various contracts within the ambit of this Clause ought to be considered very much more carefully and specifically, for some should be definitely forbidden. No directors' fees ought to be allowed to be paid in future tax-free, and we can evolve legislation to prevent it. As to mortgages, I cannot see any particular reason why, if anybody wants to enter into them, he should not be able to do so. It is bad, but there again it is a contract into which a man enters with his eyes open, and the mortgage can always be paid off within six months. I would not go as far as to say that these should be made illegal, in view of the fact that the average mortgage is a temporary arrangement. I do not see why bequests should be interfered with. My right hon. Friend spoke as though the widow receiving a tax-free annuity was avoiding an obligation to the community.
§ Mr. Pethick-Lawrence
I did not suggest that, and I saw the objection of the Chancellor of the Exchequer and said that the testator could leave his wife in an adequate position, but I objected to the widow being put into a privileged position over all other taxpayers.
§ Mr. Benson
Is the widow being put into a privileged position over all other taxpayers? No. I entirely disagree with that contention. A widow is left a proportion of the estate of her husband, who, if he can do it in a certain way, can leave other people something in the meantime. We do not impose taxation 695 for the purpose of imposing a moral sacrifice upon the taxpayer, but for the purpose of raising money. We favour the greater taxation of large incomes, not because there is anything wrong in large incomes, but because such incomes can afford a great deal more than smaller incomes. As Income Tax and Surtax rise the tax-free income has to be grossed up and attracts a higher and a higher rate. From the point of view of the Chancellor of the Exchequer this is a very excellent arrangement. When a testator having the opportunity of leaving everything to his wife arranges that she shall have a certain tax-free income up to the limit, it may be a good arrangement.
§ Sir Joseph Lamb (Stone)
The hon. Member says that a man has every right to leave everything to his wife, but he cannot leave it tax-free.
§ Mr. Benson
He can leave the whole of his estate to his wife, and he has the alternative of leaving her a smaller portion and making it tax-free, and of making other requests if he wishes. I do not think that it is a matter of high public policy or of fundamental principle, but one of expediency. The Chancellor of the Exchequer should go a little further than he has done in this Resolution and look into commercial contracts, where it is far more a question of public policy and there is the possibility of corruption, though this is perhaps rather too strong a word, but the right hon. Gentleman knows what I mean.
§ Sir Adam Maitland (Faversham)
The Debates which have taken place upon this new provision have demonstrated how difficult it is to interfere with the fundamental principle of upsetting existing contracts. That is a matter which has not been sufficiently stressed. In my judgment, Parliament should be very slow indeed to depart from a principle which has always so far recognised that there should be no retrospective legislation which would undoubtedly interfere with arrangements freely and voluntarily made between parties. The De- 696 bates have shown that when attempts are made, no matter how justifiable, they bring before the House a good many examples of hardship and also create—the Chancellor of the Exchequer very properly put the case—greater anomalies than those that existed before Parliament intervened at all. Another matter has not been sufficiently stressed, and it might be misunderstood by anyone who is not familiar with this kind of contract from reading our Debates. It might be thought that these arrangements represent an evasion of taxation. I want to make the point, first of all, that that is not the case. The fact that a certain sum will be paid by way of interest at such a rate as would give a clear 3, 4 or 5 per cent, clearly represents an arithmetical formula. The tax is paid to the Exchequer. As my hon. Friend the Member for Chesterfield (Mr. Benson) has- said, the arrangement which provides for this provision free of tax will in many cases accrue to the greater benefit of the Treasury than would otherwise be the case. That is the point that I make from the Treasury point of view.
It is hard in these days of war to think about conditions of peace, but on the point of public policy, it would be a very dangerous thing to lay down such a suggestion as that embodied in the Amendment of the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence). Is there anything which is contrary to public policy in the Government making arrangements with the building societies which enable them, because of their peculiar conditions, to make their financial arrangements with a large number of people who are ordinarily exempt from the Income Tax provisions altogether? That is a matter of practicability, and, as the hon. Member for Chesterfield has said, it is not a matter of high fundamental principle but of expediency. Is there anything contrary to the public interest in the fact that in the days of peace—they may be a long way ahead, but it has happened in the past—the Treasury in its wisdom, in order to attract money from foreign countries should offer tax-free investments to nationals of other countries? There is surely nothing contrary to public policy in that.
§ Sir I. Albery
Does not that show that it is against the public interest? This 697 never happens unless the Government are very hard put to it in raising money and cannot see any other way of raising it, and they always take the first opportunity of repaying that money.
§ Sir A. Maitland
That is not a complete answer to what I was saying. The circumstances of the future will not be quite on all fours with the circumstances of the past. It may very well be that because we want foreign currency this will be a great consideration in our post-war conditions. No, in my judgment the Chancellor has found himself confronted with difficult circumstances created by the very high rate of taxation. I do not think we need worry unduly about the gentlemen who are presumed to be getting high fees free of Income Tax, and I will tell you why. I think these gentlemen will shortly find—many are discovering it now—that to receive fees in that form is contrary to their personal interest. What happens is this. Because of the high rate of taxation the sum paid tax-free, has now assumed such dimensions that for every pound received there is a colossal sum put on additionally to meet increased taxation, and it brings the level of surtax charged to a higher rate than it would be if higher fees were received subject to tax. The Treasury not only get the tax which is deducted, but they get tax on the tax and its cumulative effect is heavy over a period of years. These high-fee directors get such a rate as brings them within the high figure for Sur-Tax purposes. Incidentally Sur-Tax people have been harshly treated by the House because they are the people who have never had any redress from the impositions put on them by the Budget of 1931—a redress which was promised. It is said in these days that people presumed to have the money can pay, but that is quite a fallacy. People who are presumed to have the most money have the greatest possible difficulty in meeting the demands of the Treasury, and I say quite seriously that they may meet those demands once, twice or perhaps three times, but they cannot go on at the existing rate of taxation.
I believe the Chancellor has met the difficulty by a compromise. The difficulty, of course, has not altogether been removed, but the Chancellor has dealt with it in a way which meets the objections of those who believe that these legal arrangements are valid. I have not 698 the same objection to the principle, because I can see so many cases where it is quite right and where no possible objection can be offered. The Treasury may always be trusted so to arrange our affairs that they have the first bite, and they are still doing it, but on the whole I think the provisions which have been suggested are reasonable and go a long way towards meeting some of the objections which have been raised.
§ Mr. A. Edwards (Middlesbrough, East)
I am impressed by the ingenuity of the argument of the hon. Member for Faversham (Sir A. Maitland), but methinks he "doth protest too much." He thinks we ought to help these people because they are in great difficulty. The Chancellor has made out a case for the widow, but he has not said a single word in defence of tax-free salaries, and I do not think he wants to do so. However, I would like to know whether he would accept an Amendment to make it illegal to draw tax-free salaries. The hon. Member for Faversham tried to minimise the effects of drawing salaries free of tax. Well, I happen to have a fairly substantial investment in one company whose dividends have been halved since the war, with the consequence that the market value of the shares has been halved. I wonder whether the hon. Member has thought of this case. In this particular company we go to the annual meeting and assume that the directors arc almost philanthropists and that they draw only a few hundred pounds a year each in salaries. The ordinary shareholder goes there and thinks they are doing a considerable amount of work for a nominal sum. But the company happens to have a good many subsidiary companies, and it is impossible to find out what the directors draw as directors and managing directors of subsidiary companies.
§ Sir A. Maitland
In the case of a parent company there is a statutory liability to declare the amount they receive as directors from the parent or subsidiary companies. The hon. Gentleman is quite right in saying that for services other than as directors, under the existing Statute, it is not necessary to declare the fees received, but surely that is a matter for ordinary amendment of our company law.
§ Mr. Edwards
The hon. Member is quite right, but he knows how modest directors 699 are and that there are ways and means of getting considerable sums of money. We cannot find out whether they are paid tax-free or not. When he talks about companies doing things, how many people turn up at the annual meeting of a company with a capital of £1,000,000? A small group of people do pretty much as they like, and when times are prosperous nobody interferes. But nowadays more people turn up, and some want to know a few things. For the first time in their lives certain directors are being questioned, and quite rightly. However, I think the Chancellor should not allow this occasion to pass without rendering it illegal for directors to draw salaries free of tax. It is not fair to the company, it is not honest, and I do not think the directors doing it are doing the decent thing. Why should they not say quite plainly, "We cost the company a certain amount of money each year"? It must be for some dishonest purpose if they do not disclose that, and I hope the Chancellor will agree to accept an Amendment which will declare such agreements as that quite illegal.
Mr. Craik Henderson (Leeds, North-East)
So far most of the speakers to-day have appeared to think that the Chancellor has, possibly, not gone far enough, but I would like to raise one or two points as to whether he may not have gone too far. The worst of well-meaning legislation is that there is often the danger of doing more harm than you do good. I agree with previous speakers that this is a purely practical question. It is quite ridiculous to say that if a man leaves his wife £1,000 free of Income Tax, he is thereby doing something contrary to the public interest, but that if he gives her £2,000 subject to Income Tax, that is quite a meritorious and proper thing. The Chancellor probably thought, rightly or wrongly, that there were certain problems that must be dealt with, but I think he was in a little difficulty to-day in that, in defending his action in not dealing with preference shares, he put forward the arguments which applied equally to his own proposals. For example, in declining—I believe properly—to bring preference shares within the ambit of these provisions, my right hon. Friend said, first, that these payments are the result of contractual obligations and that con- 700 tractual obligations ought not to be interfered with. I am sure he fully realises that a great many of the deeds at which he is now striking are equally the result of contractual obligations; and I think Parliament should interfere very reluctantly with contractual obligations, unless it is absolutely necessary to do so. The second thing which the Chancellor said with regard to preference shares was that if he were to make the provisions apply to them, it would affect the value as between ordinary and preference shares. Obviously, it is true that thereby, by a stroke of the pen, the ordinary shareholders would be benefited to the detriment of the preference shareholders, but surely that is exactly what the Chancellor is doing at the present time, by these provisions, with regard to the annuitant and the residuary legatee.
Perhaps this point has not been sufficiently stressed. Suppose that a testator quite deliberately worked out the minimum sum that would provide for his wife and made that sum free of Income Tax; and suppose he provided that the residue should go to some other people in whom he had not the same interest, for instance, a charity or some other relative, by the provisions which have now been introduced, the Chancellor gratuitously and, quite contrary to the intentions of' the testator, makes a gift to the residuary legatee of 3s. in the £or whatever the sum may be. I submit that there ought to be some safeguard against too gross hardship being inflicted on the annuitant. I suggest that the Chancellor would have achieved his aim, and at the same time inflicted less hardship, if he had given the right to go to the courts and show cause why these payments should not be tax free. I still believe that there should be some proviso to safeguard the position of the annuitant who is probably being much prejudiced to the advantage of somebody else in whom the testator had not so much interest. I think that when Parliament intervenes in a case of this sort, it should try to see that substantial justice is done between the two interested parties, and that where there is no question of anything unlawful having been done, the position between the two parties should be kept equitable as far as possible.
The other point I want to make is whether my right hon. Friend has kept in view that the result of these proposals 701 may be that charities will be prejudiced. As things are at present, a man may say to himself, "I want my wife to have £1,000; I know what her obligations are, and I want her to have £1,000"; and therefore, he provides in his will to leave her £1,000 free of Income Tax, and to leave the residue to charity. I think the Committee would be surprised to know how frequently in wills the wife is given an annuity of a certain amount and the residue goes to various charities. Now if tax free payments were illegal a man would not be in the position of determining in a direct manner that his wife shall receive £1,000, and I think the tendency would be that testators would be inclined to provide that the whole estate shall go to the wife, or that the wife shall have the complete income, and that the trustees shall be given discretion to draw on capital. The result of such proposals might be that the amount going to charities would be diminished. I should like my right hon. Friend to keep in mind particularly the point whether something cannot be done to deal equitably with the position between the annuitant and the residuary beneficiary. There is, in my opinion, no justification for giving the residuary beneficiary a benefit which the testator never intended.
§ The Solicitor-General (Sir William Jowitt)
I want to bring this matter to a head after what, I think, has been an interesting and informative discussion. I confess that when I first applied my mind to this matter and wondered what advice I should tender to my right hon. Friend the Chancellor, I found that, in the course of our discussions, my mind fluctuated from time to time and the advice which I expressed round the table altered from time to time. I think that anybody who considers this matter with no preconceived or a priori or political ideas will probably have the same experience. It is necessary to get one question clear in one's mind, and that is, on what ground are we interfering? After all, it is quite sound to say that it is a paramount matter of public policy that we do not unnecessarily interfere with the freedom of contract. There may be some moral issue or something of that sort which compels one to do so, but there is no issue of that sort here, and the highest at which it can be put is that it is a question of convenience. 702 Therefore, we have to ask ourselves on what basis are we interfering.
There were two rival bases. One was that the public convenience was such that this sort of contract ought to be disallowed and ought not to be made; and the other was—and it leads to quite different results—that the people who made these contracts in pre-war days had no conception of what taxation would be, and that by arbitrarily altering the bargain they made, whether by deed or by will, we are really giving effect to what the testator or the contractor would have said had he been alive and had he known what the position is to-day. On the whole, I came finally to the conclusion that it was the latter basis and not the former basis on which we ought to act. Once one accepts that, it follows that one has no justification for interfering with or altering contracts or wills which have been made with a full knowledge of the facts. For instance, if three or four months ago somebody made some provision by contract, deed or will, knowing full well what the rate of Income Tax was, and stipulated that somebody—friend or relative or wife—was to be paid a certain amount free of Income Tax, I see no possible ground on which we could interfere with such a contract, except on the ground that the contract is so much against the public interest that it ought to be struck at as one would strike at an immoral contract. Having rejected that view, we naturally did not interfere with such contracts.
§ Mr. Pethick-Lawrence
My right hon. and learned Friend says that he can see no grounds, and that the man acts with full knowledge of all the facts. I venture to suggest that he does nothing of the kind. He may know what the Income Tax is in this particular year, but he is in complete ignorance of what it may be in the year 1942–43, and he is still more in complete ignorance as to what it will be in 10 years' time.
§ The Solicitor-General
That is true. He cannot foresee the future, but he knows perfectly well that Income Tax is in the region of 10s., and that in all probability, unless the Chancellor of the Exchequer can be a good deal more lenient to us than I fear is the case, we shall be for some time in the region of a very high rate of tax. Supposing a man 703 with that knowledge has left£200.or£2,000 a year free of tax. Upon what right are you going to interfere with the arrangement he has made? We came to the conclusion that we could not interfere with these contracts, and once that principle is accepted, it follows that we do not interfere with the future either. We simply interfere with a contract which has been made in the past for the reasons I have given. Anyone who applies his mind to this carefully, and thinks out what he can do, will find himself in extraordinary difficulties.
The right hon. Gentleman has not the advantage of a Parliamentary draftsman. He fell into an error, and we can understand that and sympathise with him; but, even if he had had that Parliamentary draftsman at his beck and call, he would have found it extraordinarily difficult to know what to do. For instance, would he in the future eliminate that part of the Clause which provides for freedom from tax? If there was an annuity of £200 a year free of tax, would you treat it, not as null and void, but simply as being an annuity of £200 a year? If so, you are getting into the region of the three parts into which Gaul used to be divided. Firstly, there would be the pre-war part, which you would treat effective up to 5s. 6d. Then there would be the period between the war and to-day, which you would allow to operate fully with no retrospective alterations, and the third case you would treat as effective only in so far as it was an annuity and you would eliminate the free-of-tax part. The difficulties are immense, but once we have accepted the principle which I have indicated, I think we have done all we reasonably can.
There are one or two other matters to which I should like to refer. It also follows from accepting that principle that so long as parties, with their eyes open and with the full knowledge of the facts, make an arrangement, we should not interfere. I apply that to directors. So long as the shareholders of a company have, with a full knowledge of the facts and a knowledge of all the implications of what it really means, made a contract, it is very difficult for us to interfere. There are, I believe, cases, although I have never seen one, in which directors are sometimes paid fees not only free of In- 704 come Tax, but free of Surtax. Supposing you were to pay a director £5,000 a year free of all taxes, the sum involved would be in the neighbourhood of £100,000 a year. I should like to see a resolution put before the shareholders in this form: "We propose to pay A.B. the sum of £100,000 a year, which will yield him £5,000 a year free of taxes." So long as the shareholders decide to pass such a resolution—and, after all, it is their money —knowing perfectly well what they are doing, I do not see that we can interfere. Therefore I think the Chancellor of the Exchequer has thrown out what seems to me to be a very useful suggestion. He may pursue this matter with the President of the Board of Trade, to see whether, by some alteration to our Company Acts, we can assure that the fullest possible disclosure is given, so that the shareholders in the company, and all the world, know precisely what is being done.
Now I come to the distinction between the exceptions we have made in regard to preference dividends. We have had interesting suggestions from the hon. Member for Tamworth (Sir J. Mellor. I can assure him that this matter has given us a great deal of thought, and that we have not, as it were, brought down a portcullis upon further thought. He has made an interesting suggestion, that it is possible to differentiate between a private and a public company. I very much doubt that. There are transactions and sales of preference shares or ordinary shares in both companies. People, in making up their minds how much they will pay for shares, consider what privileges are attaching, and it seems to me that the same sort of objections will apply equally to private and public companies. The suggestion has been made, however, and I know the Chancellor of the Exchequer will consider it as well as the other suggestions which have fallen during this very helpful Debate. I submit that the Chancellor of the Exchequer, in dealing with the matter in this way, is endeavouring to give effect to what the various persons making these provisions would have done had they been here, in the light of present circumstances. I suggest that it is the safest and wisest course to pursue, and that to pursue other courses would land us in very great difficulty. I hope, therefore, that the Committee will proceed to give us our Clause.
§ Mr. Ernest Evans (University of Wales)
The Solicitor-General has told us that this has been a helpful Debate. I am sorry that I cannot agree with him, because the Chancellor of the Exchequer made the most preposterous speech which any Member has ever heard from any Chancellor of the Exchequer. His speech to-day consisted of a series of statements, that he was not expressing his own view but the views which had been published outside, and that he had had no time to read the Report of yesterday's Debate. The Chancellor of the Exchequer is the last man I would wish to attack, but he told us to-day that he had read the reports in the "Times" and the "Manchester Guardian" and that from these reports be had drawn certain conclusions as to the criticisms made yesterday.
I wish to confine myself to two points. The first is in connection with what the Solicitor-General said a few minutes ago in regard to companies. I think he rather exaggerated the difficulties of dealing with the situation. He referred to the powers which shareholders have in their hands in regard to the fixing of fees. I do not suppose anyone has more experience of company working than the Solicitor-General, and I want to ask him whether the Government will introduce an amendment to the Company Acts which will ensure that the shareholders of a company shall know exactly what fees are being paid to directors, irrespective of the incidence of Income Tax. I think that is a perfectly fair question to ask.
§ The Solicitor-General
From my understanding of the Chancellor's statement, the Answer is "Yes" He did, however, guard himself by saying that he had to consult the President of the Board of Trade. Obviously he cannot give a definite assurance without the approval of the President of the Board of Trade.
§ Mr. Evans
That is a perfectly fair answer to my question, and I am satisfied with it, but I hope that the right hon. and learned Gentleman, with all his experience, will use all his influence to get that very fair reform effected, because it is one which impresses itself very much upon the country generally. There is a sort of suspicion about the existence of companies and the way in which their operations are conducted. I do not think there is really much difficulty about gifts 706 left by will. It is only right to put up this principle that, whatever may be the wishes of any particular testator, his widow and family shall have to bear exactly the same responsibility as any other member of the community for the additional taxation which circumstances may enforce upon us.
§ Sir Joseph Lamb (Stone)
I should like to support what the hon. Gentleman has just said with regard to articles in the Press. I consider that Members of the Government have a right to read the Press, the same as anyone else, and I hope they do. But I do not think they have a right to tell the House of Commons, what the Press thinks we ought to do. The House of Commons is the place where that should be said by its Members elected for the purpose. We were asked by the right hon. Gentleman on what grounds of principle we view this new Clause. I agree with it, and with the principles involved in it, but I do not agree with the exceptions that are being made, because I hold most strongly that no exceptions should be made to the principle of the obligation which rests upon every member of the community to pay taxation. It is a national obligation and a responsibility upon the individual to pay taxation, and any relief from that should come from the Government themselves when they are imposing the taxation. Money left under wills and money paid to directors is all a matter of income, and should be treated in the matter of relief given on the basis of Income Tax as to the amount that the individual receives and his ability or otherwise to meet the obligations placed upon him.
I agree with the new Clause, except that I think it should apply to all, both before the war and since, because all contracts are made under conditions existing at the time. We do not know what Income Tax will be in the future. People say it cannot possibly be more than 10s., but we do not know what is possible until the war is over, and a contract made now that it should be tax-free, which 1 understand would not come under the Clause, would be under the condition that Income Tax was 10s., or possibly something more. We do not know what the conditions may be in the future. All money received under this would be income and should be treated as income for the purpose of taxation and relief of taxation.
§ Mr. G. Strauss (Lambeth, North)
Where a company is paying a salary free of tax, and under the provisions of this Bill will be allowed to continue to do so, I suggest that it is not only the relationship between the company and the manager himself that is at stake, but that the State has an interest in that payment by the company of a very large sum for the manager. The effect of deducting a large sum from the profits of a company so that the manager may be able to receive the£2,000 to which he is entitled free of tax will sometimes, possibly often, substantially affect the Excess Profits Tax assessment of the firm. It may be that in the case which the right hon. and learned Gentleman gave, where the "manager is entitled to £5,000 a year free of Income Tax, the company has to put aside a very much larger sum which is deducted from the profits of the company, and the Excess Profits Tax assessment, as I see it, will be very materially affected and the revenue may lose substantially. I may be wrong, but I should be very much obliged if the Solicitor-General would enlighten me on the point.
§ Mr. David Adams (Consett)
The point that I desire to raise is very much on the lines indicated by the previous questioner. The Chancellor has dealt with what he terms the sanctity of contract. I have had the greatest difficulty, and am still unable to appreciate where the sanctity of contract comes in with regard to beneficiaries under wills, because, clearly, those who made the arrangement could not have anticipated what the taxation of the future would be, and there was nothing sacred in the engagement they made that taxation should not be increased with the necessities and urgencies of the country. The purport of the two Amendments is to deal with that situation and to see that the interests of the Chancellor and of the country are not impaired. For that reason I am sympathetic towards the Amendment, particularly that of the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence). Perhaps the Chancellor will take the advice that has been tendered to him and bring the matter to an end this year.
But the particular matter that I wanted to raise is with regard to the question of contracts. Complaint has 708 been made regarding tax-free contracts and the question whether they should or should not be prohibited in future. There is another form of contract which I find is being violated, in my judgment to the detriment of the community. I refer to contracts in the cases of persons who retire from business, by which they are entitled to certain pensions. In a case I have in mind the pension is £3,000 per annum. This happy individual is not content to receive £3,000, which would bear a proper portion of taxation, and a new contract is being made under which this sum will be commuted for a capital sum, which I am advised is £35,500. It is clear that if such an arrangement is tolerated the Chancellor of the Exchequer will be deprived of a considerable sum of money and the retired manager concerned will have benefits of a new sort for which he did not originally contract with the company. The question I should like to ask, which is of considerable importance not only to companies but to the revenue, is whether such a new arrangement deliberately entered into to avoid payment of taxation is legal, and, if it is legal, whether steps will be taken to make it illegal.
§ Question, "That the Clause be read a Second time," put, and agreed to.
§ The Financial Secretary to the Treasury (Captain Crookshank)
I beg to move, as an Amendment to the proposed new Clause, in line 5, after "court," to insert "in any local or personal Act."
I must apologise to the Committee for having to move this manuscript Amendment. It is due to the fact that the definition in the first paragraph is not quite complete. There are cases where there is provision in either a local or a personal Act. Our attention has been more particularly called to it by a speech made in the Committee yesterday.
§ Amendment to the proposed new Clause agreed to.
§ Further Amendment to the proposed new Clause made: In line 53, after" order, "insert" local or personal Act." —[Captain Crookshank.]
§ Motion made, and Question, "That the Clause, as amended, be added to the Bill," put, and agreed to.