CLAUSE 32.—(Tax avoidance.)

HC Deb 14 June 1944 vol 400 cc2038-91

Sir W. Smithers

On a point of Order. May I respectfully suggest, as the Amendments on Clause 32 are interlocked, that you would be good enough, Sir Cyril, to take the views of the Committee to see if we cannot have a general Debate and then move the Amendments formally afterwards?

The Temporary Chairman

I think the sense of the Committee will be to discuss them all together on the Motion, "That the Clause stand part of the Bill."

Mr. Craven-Ellis (Southampton)

I beg to move, in page 21, line 27, to leave out from "effect," to "as," in line 28.

This is a retrospective Clause, and I submit to the Chancellor of the exchequer that, having regard to the fact that Section 35 of the Finance Act, 1941—which this Clause seeks to amend and bring back to the state that it was in originally—is quite adequate for the purpose of dealing with evasion, to make this Clause retrospective is opening the door to a very great deal of difficulty and possible litigation. It is true that the cases which have been before the Commissioners may, probably, not be reviewed, but there must be thousands of cases which may well be reopened if we allow this Clause to pass. Opening the door for a large number of cases to be reviewed, will upset the whole financial position of many companies. Many companies have paid their dividends, have contributed to their reserves and have paid their tax, and it seems to me that, if there had been cases which justified review and submission to the Special Commissioners, they should have been dealt with now. Surely the inspectors of taxes, who are very live men, are not going to allow a company to avoid taxation when there is a legitimate reason for its paying tax. I move this Amendment because I feel that to reopen these cases would be extremely dangerous and detrimental to our whole system of taxation. It would undermine the whole understanding of justice and, therefore, with the strongest recommendation, I submit my Amendment for approval by the Chancellor.

Mr. Levy (Elland)

I think the majority of the Committee will agree that if under a Finance Act, commercial firms, legally and properly, merge their businesses with other businesses, and have their accounts properly audited and examined by the Inland Revenue authorities and those Inland Revenue authorities are satisfied that such accounts come within the ambit of everything that is honourable and right, it would be wrong if engagements and settlements made by Inland Revenue authorities were not sacrosanct, but were open to retrospective legislation. To say that that which was perfectly legal and honest is, now, by retrospective legislation, to be deemed dishonest, because it is argued that the businesses so obtained were obtained for the purpose of evasion of tax, is unjust, If it were true that such businesses were acquired for the purpose of evasion, then the Inland Revenue have powers to take the matter to the courts. If it is proposed to reopen every case, in order to find out whether the main purpose was the avoidance of tax, and to reopen every account that has been audited and settled for the past year, then I think that this Committee ought to be very careful before they deal with such retrospective legislation.

If my recollection serves me right, this point was raised in 1940. If evasion had taken place, which was not considered to be honourable, why were not the regulations tightened up in 1941? Why did not the draftsmen do something in 1942 and 1943 instead of coming back now, in 1944, and talking of retrospective legislation? If retrospective legislation is to be the vogue for the future, no settlement can possibly be sacrosanct. There will always be the danger of the reopening of the matter, on some future occasion, even after funds have been distributed. In the event of the auditors of the Inland Revenue coming to the decision, rightly or wrongly, that the main object in 1941 and 1942 was evasion—even though it was perfectly legal and was passed by their own auditors and agreed to by their own authorities—the Inland Revenue can come back and demand a refund of the moneys which have already been paid out, moneys properly and legally disbursed to the shareholders upon which the Chancellor of the Exchequer has already received 10s. in the £. Then he comes back again and says, "We want you to refund this money." There may be some reliable firms, who, unfortunately, have not the money available, and to them the Chancellor will properly say, if this provision is passed, "We have to collect it," and they will have to go bankrupt in order that the money can be paid.

Mr. Kirkwood (Dumbarton Burghs)

Does the hon. Member say that the Chancellor of the Exchequer has no right to go after this crowd of individuals who have carried on this racket?

Mr. Evelyn Walkden (Doncaster)

It is cheating.

Mr. Levy

I am not defending cheating. I am putting a point of substance and principle to the Committee. I am dealing with ordinary business firms who make up their accounts in the ordinary way and who have, quite properly, bought other businesses. This does not apply to myself and therefore I am not prejudiced. I have no self-interest and no axe to grind. I am speaking in the interests of the business community as a whole, and any arrangements arrived at by my right hon. Friend and his officials should be sacrosanct when once they are made and agreed to by this House. I do not like retrospective legislation, and I think that the majority of the Members of the Committee will agree with me. It creates uncertainty in the minds of everybody. After the annual balance sheets have been made up and passed by the auditors, and have been examined and agreed to by the Inland Revenue that authority comes back with retrospective legislation. They say, "It is true that you have acted legally and have done nothing that can be described in any way as being even shady, but now, by this retrospective legislation, we are going to reopen all these accounts and go into everything that has taken place to see if, by a wide stretch of the imagination, it can be suggested that it was done for the purpose of evasion."

I do not like the word "evasion" applied in cases where there was a perfectly honest commercial transaction. It is not right, when people have been carrying on their businesses legally and honestly, to come back to them in a few years' time and say, "You had criminal intentions," and "It was a complete evasion." The 1941, 1942 and 1943 Finance Acts were passed without any effort being made on the part of the draftsmen to put the matter right. Yet in 1944 they bring in retrospective legislation which, I am certain, does not appeal to Members of the House of Commons and their constituents. We have to see that not only is justice done, but that it appears to be done. This retrospective legislation may affect a number of constituents of every hon. Member and no fault can be laid at their door. The fault lies with the drafting of the Measure. However stringent a Clause is made in the Finance Bill nobody will object if its object is to prevent that which is wrong taking place in the future. Therefore I appeal to my right hon. Friend to omit that part of the Clause which is retrospective, and to tighten up the Measure as far as he can, if it is not tight enough, by bringing in fresh Clauses on the Report stage. But do not let him make criminals.

Mr. Gallacher (Fife, West)

They are criminals, anyhow.

Mr. Levy

If such criminals exist, they should be dealt with in a court of law. Nobody will object if my right hon. Friend tightens up his Finance Bill, in order to prevent evasion, but he is now taking a step which will be resented throughout the country. In order to find out whether evasion has or has not taken place, there must be a re-investigation of all the accounts, which may run into hundreds of thousands of pounds. Who is to be the judge? [Interruption.] I am not trying to be provocative. I am putting forward, to the best of my ability, an honest and sound case. This is not a party issue.

Mr. Kirkwood

It is a party issue.

Mr. Levy

I am putting the position to my right hon. Friend with very great respect. He is a very able man and he knows the evils of this sort of thing. I am prepared to admit that he will be able to bring forward examples of mergers, and of businesses that have been taken over for the purpose of evading Excess Profits Tax. I will accept all that, but what they did, rightly or wrongly, was legal—it came within the framework.

Mr. Gallacher

It was immoral.

Mr. Levy

If it were not legal, then the authorities had sufficient power to take it to the court, and charge the people concerned. Therefore, I am asking my right hon. Friend to reconsider the retrospective part. It is true that some of these so-called criminals, people who have evaded, will get away with it but, whatever may be said to the contrary, probably before they did it, they had advice from the legal fraternity of which my hon. and learned Friend is such a distinguished member. If he were not in the position he is in to-day on the Treasury Bench but was engaged in public practice, some of these firms might even have sought his advice as to whether what they were doing was legal and I think, with his knowledge of the law, he would have said, "This is perfectly legal. There is nothing dishonourable or wrong with it." Therefore, it might have been on his advice that the merger would take place, and if he had advised to the contrary it probably would not have taken place. I suggest we ought to think a good deal before we pass this Clause which implies that that advice was wrong and ought to be retrospectively treated. I am asking my right hon. Friend to reconsider the repercussions throughout the country so far as industry is concerned. If an agreement has once been arrived at, definitely and conclusively, with his own officials, then that enactment and contract and agreement should remain sacrosanct.

Mr. John Wilmot (Kennington)

I venture to think that when the hon. Member for Elland (Mr. Levy) reads his speech in HANSARD to-morrow he will he rather sorry he made it, and I am sure that his friends must be sorry too. He will know, as we all know, that when auditors audit accounts of a company or a group of companies, they do not certify that everything which is being done is honourable, They certify that the accounts conform with the books and papers of the company as produced to them, and I feel sure the hon. Member is not serious in contending that, at this time of all times, Parliament has not the right to take steps to stop tax evasion when honest people are paying their due.

Mr. Levy

I am not suggesting that.

Mr. Wilmot

That was the suggestion. We all of us know that in this business of hawking round companies for sale, the only attraction to the buyer is the fact that it will excuse him from some pay- meat of Excess Profits Tax on another business, and it has been a lucrative line of trading to rather questionable characters in the City.

Mr. Craven-Ellis

Does the hon. Member deny that Section 35 of the Act of 1941 as it stands, would allow such, conduct to escape the attention of the Inspector of Taxes?

Mr. Wilmot

I am not really qualified to express an opinion on that, but if it were not necessary the Chancellor would not have brought forward this Clause. It is to stop this very thing, that the Clause is intended.

Mr. Levy

The Chancellor's Clause certainly will have the effect of stopping it for the future, if he tightens it up sufficiently, but I am talking about the retrospective part of it.

Mr. Wilmot

Is not the Chancellor always in the difficulty that unfortunately there is employed far too much ingenuity in finding loopholes in the law, as soon as the law is strengthened, and the Chancellor is driven to this retrospective legislation in order, amongst other things—and I think the hon. Member for Elland should reflect on this, if I may say so with respect—that honest and honourable and patriotic businesses shall not be penalised and put at a disadvantage by people of another kind. I cannot help feeling that all who are doing their utmost to pay their taxes and conduct their businesses on honourable lines, will thank the Chancellor for taking steps to remove advantages from those who have done otherwise.

Mr. Lewis

I must confess I view with considerable anxiety the amendment of Section 35 of the Act of 1941, which this Clause proposes. The position could fairly be described in this way. The Law Officers of the Growl have not advised the Treasury very well, and other lawyers, cleverer than they, have come forward and found loopholes which the Law Officers of the Crown did not foresee. What is the remedy for the Chancellor of the Exchequer? Surely his remedy is very clear. He can tell the Law Officers of the Crown about it and he can come to the House of Commons and ask for an altered form of words to operate in future, which he is doing, and to which I think no one raises any object- tion. But is there any reason why the Chancellor should go beyond that, and ask that this form of words, which is to be applied in future, shall apply retrospectively? I think that is open to very great objection. I feel certain that the Chancellor himself will agree with me that in taxation one of the most important things is that the liability of the taxpayer should be precise and definite. How can the liability of the taxpayer be held to be precise and definite, if nobody knows whether the law under which he is paying the tax is not going to be altered retrospectively in a few years' time? That is building up on an utterly insecure foundation. I ask the Committee to consider that point of principle for a moment.

I might be asked: Would you go so far as to say that retrospective legislation in the matter of taxation cannot in any circumstances, be justified? To that I would say: Can the Chancellor of the Exchequer stand at that Box to-day and tell the Committee that, owing to the unfortunate advice he received from the Law Officers, he has received seriously less revenue than he estimated for, and his Budget for the year as a consequence has been upset—in other words that the loss through the law not having had the effectiveness which the Law Officers thought it would have has been of a very serious degree? I do not know, but I venture to suggest that the Chancellor could not do anything of the kind. I do not believe he could name any figure of a loss incurred through such advice, which he now hopes to recover by making the legislation retrospective. If he can, well and good, but, as I say, I do not think he can. He may say vaguely, "There are lots of cases." Yes, but to what do they amount? We are asked to do a very serious thing; we are asked to tell a man that whereas we said two years ago that the law was so-and-so, we did not mean it. We ought not to do that without very grave reason, and I challenge the Chancellor to give to the Committee a substantial reason.

Mr. Benson

I am very glad indeed that the Chancellor has made this Clause retrospective. For many years this House has been dealing with tax avoidance, which is quite a different thing from tax evasion. Year by year, we have had Clauses in our Finance Bills which attempted to stop leakages in the collection of tax due to the fantastic in- genuity with which tax avoiders arranged their affairs. We have had to stop more and more loopholes, and as we have done that, the methods of the tax avoiders have become more and more complicated. I doubt whether it will ever be possible to prevent tax avoidance in its entirety. There is always some ingenious person who will find a way round, if he cannot find a way through. For the last to years, the Chancellor of the Exchequer has threatened, time and again, that if these ingenious practices were continued then any legislation which was introduced to stop loopholes would be made retrospective. [An HON. MEMBER: "It is all wrong."] It may be wrong, but is it suggested that persons should be allowed to indulge in these ingenious practices and "get away with it?"

It was once said by a judge that every taxpayer is entitled to arrange his affairs in such a way as to attract the minimum of tax. That dictum has never been accepted by the House of Commons. It has been accepted only by some Members, and I trust never will be accepted by the House as a whole. I am glad that the Chancellor has given a warning to tax evaders that they will not in future "get away with it," as they have done in the past. In many cases, it has been worth while practising a tax avoidance scheme, because the sums involved have been large, owing to the knowledge that it would be stopped later. One method of preventing tax avoidance is to see that no one "gets away with it" between the time a scheme is evolved, and the time it is scotched by legislation. The hon. Member for Elland (Mr. Levy) asked why this Clause was not properly drafted in 1941. The same point was raised by the hon. Member for Colchester (Mr. Lewis), who said that the Law Officers of the Crown had given the Chancellor bad advice. They did not; it was an Amendment forced on the Chancellor from the opposite side, that weakened the Clause. The hon. Member for Elland said that this was not a party matter, but it is getting very near it. You will not find any Members of the Labour Party attempting to weaken this Clause; you will find that among a limited section of the Tory Party. [HON. MEMBERS: "NO."] Yes, you will, if you look at the record of past voting.

Mr. Levy

Is the hon. Member casting aspersions on the honour and integrity of the Tory Party as a whole?

Mr. Benson

I did not refer to the Tory Party as a whole, and I am casting no aspersions. I am merely pointing to facts. They may not please the hon. Gentleman but nevertheless they are the facts. If Members look at the voting lists, on these various attempts to weaken tax avoidance legislation, they will find that those who have invariably weakened it, come from a small section of the Tory Party.

What does this Clause propose to do? It proposes, practically, to put the legal position back as it would have been, had the 1941 Clause been carried as it was first drafted, without the weakening Amendment which was introduced from the other side. If the hon. Member looks at the Paper, he will find that, even now, there are attempts by members of the Tory Party to weaken the effort made to strengthen this Clause. It is no use saying that it is not a party matter; it is a party matter. It is no use saying that the House has accepted the dictum that a man should not pay tax if it can be avoided. Therefore, I am glad that the Chancellor has made this legislation retrospective, and has warned the people who use these devious and fantastic methods to avoid tax that they will not be allowed to "get away with it" in future.

Mr. Quintin Hogg (Oxford)

In spite of the assurance of the hon. Member for Chesterfield (Mr. Benson) that this is purely a party matter—

Mr. Benson

I did not say that. I said, "nearly a party matter" and applied it to a section of the Tory Party, the impure part of the Tory Party.

Mr. Hogg

I do not know anything about my own purity, and I should not like in this place to raise any matter regarding it. In spite of the hon. Member's suggestion that this is nearly a party matter, I find myself forced to ask the Chancellor to stand his ground for a rather narrower reason than that suggested by the hon. Member for Chesterfield. I had a great deal of sympathy with the argument of my hon. Friend the Member for Colchester (Mr. Lewis), but I cannot help thinking that my hon. Friend the Member for Elland (Mr. Levy) will, on reflection, think that he has not argued his case in such a way as to assist his side. He went a very long way. His contention was the intelligible one that what is legal, should be allowed to stand simply because it is legal, and in any circumstances; in other words, that persons who, in the middle of the greatest war in history, devote their ingenuity to finding loopholes in the Bill should be permitted to "get away with" what they have done. Well, whatever the merits or demerits of this Amendment, that is a proposition which no honest man can accept. It seriously affects the honour of those who put it forward, and it must be resisted at all costs.

The history of this matter, which I have been at some pains to look up, is as follows. In 1941 a fairly wide Clause of this nature was proposed, and in response to perfectly proper pressure which was brought at the time it was narrowed down to the present form of Section 35 of the Finance Act, 1941. At that time, the then Chancellor of the Exchequer, and his Financial Secretary, clearly enunciated the view and warned tax avoiders, that should the Clause prove too narrow, an amending Clause would be brought in in a subsequent Finance Bill, and if I am not mistaken the then Financial Secretary said that such an amending Clause would be retrospective.

The Solicitor-General indicated assent.

Mr. Hogg

I am glad to see that my hon. and learned Friend confirms my recollection. In those circumstances, the argument which ordinarily applies to retrospective legislation, cannot seriously be advanced in this case.

Mr. Lewis

My hon. Friend will appreciate that a mere Government statement to the effect that they proposed to introduce certain legislation would not bind the House of Commons afterwards. We are now taking the responsibility for doing this, and my hon. Friend cannot get out of it by saying that the Government said some years ago that they would do it.

Mr. Hogg

I fully agree with every word my hon. Friend has said. Of course the responsibility is ours, but I was addressing myself to the argument he previously presented, that businessmen who wanted to go in for this sort of thing ought to know where they stood. They were told where they stood. They were told that, if they attempted to avoid Ex- cess Profits Tax, they would probably have to pay for it afterwards. If they were so stupid and such bad businessmen, in addition to being bad citizens, that they did not put the sum into a suspense account, I hope they do go bankrupt.

Mr. Craven-Ellis

I am inclined to think my hon. Friend is rather moving away from the Amendment. We are objecting to this being made retrospective because of the danger of bringing into review quite innocent people. This Committee will support the right hon. Gentleman against anyone who is definitely and illegally escaping his responsibility as a taxpayer, but when the inspector of taxes has had an opportunity of reviewing all the cases my hon. Friend has referred to, if he had the opportunity and has not taken it, why should he be given another opportunity by amending the Section now?

Mr. Hogg

I was replying to the argument presented by my hon. Friend the Member for Elland, and his clear contention was that, if a thing was legal, it ought to be allowed to stand. That is not a contention to which, in the circumstances of this case, I should think the Committee would give its adherence. I was proceeding to deal with the point raised by the hon. Member opposite. It is not necessary on this Amendment to go into the whole question of tax avoidance. Everyone knows that, for certain purposes, before the war and with certain people, Surtax had very largely become a voluntary tax, but that is not the question we are discussing now. We are dealing with Excess Profits Tax, and therefore, in view of the clear warning given from the Treasury Bench in 1941, different considerations can be held properly to apply. I greatly sympathise with the arguments against retrospective legislation produced by my hon. Friend the Member for Colchester. I do not think there is a Member of my party, and I doubt whether there is any Member opposite, who would not wholeheartedly agree in principle that retrospective legislation is tyrannical and bad. But I do not see that that argument is applicable to the present Amendment.

The point seems to me to be this. We are being asked to amend a Section of the Finance Act of 1941. Rightly or wrongly—it may well be my hon. Friend thinks wrongly—that Section was itself retros- pective. It applied to all transactions the main purpose of which was to avoid taxation, or to reduce liability to tax, in respect of E.P.T. This Amendment does not propose to remove the retrospective character of the Section. What it proposes to do is something which will, inevitably, create an anomaly. The Clause of this Bill simply amends Section 35 of the Act of 1941 so as to substitute "one of the main purposes" for the original words, "the main purpose." Inasmuch as the two Sections will have to be read together so as to form a single amended Section, it makes the new Amendment retrospective, as the original Section has been retrospective from the first. What the Amendment does is to ask the Committee to pass a law which produces a single amended Section, part of which is to be retrospective and part of which is not. The part referring to the main purpose is to be retrospective from 1941, as it always has been, and the part that has been passed to-day is to be non-retrospective.

There are other canons of legislation besides one's natural dislike for retrospective legislation, and one of these is correctly stated by my hon. Friend the Member for Colchester when he makes a plea for clarity and consistency in legislation. It seems to me to be intolerable chaos to suggest that, where you have an amended Section which contains two phrases one of which reads "the main purpose of a transaction," and the second of which reads "one of the main purposes of a transaction," you should apply retrospective sanction to one and not to the other. For the reasons that I have given, I hope that in this case the Chancellor will End it proper to stand his ground.

Sir Adam Maitland (Faversham)

In a Debate which has included expressions of widely divergent views, I have found myself able to agree with something said by every speaker, and I have come to the conclusion that it is the method of approach to this question that will solve our difficulty, I subscribe to everything that has been said on the natural objection which most Members have to retrospective legislation. There is need for the greatest clarity of definition in our legislation, but in the case of Income Tax legislation that becomes merely a fond ideal. I still think that, in regard to this proposal, it is for the Govern- ment to make clear that they have proved their case. I do not rely upon a statement made by Members on the Treasury Bench in years gone by that, if the circumstances were such as to prevent their purpose being effected, they would introduce new legislation which would be retrospective, as a justification for opposing this Bill. What we ought to do, is to ask the Chancellor to demonstrate the reasons why he now asks us to consent to retrospective legislation in this case. I think he will be able to show, from cases which have come before him, and from the experience that he has had, that his powers need strengthening.

On the question of whether or not it is necessary to go to the length of asking for retrospective legislation, the right hon. Gentleman is entitled to do so in the circumstances, if the need is there. I do not think we should be prevented from granting the powers, if he has demonstrated that he really needs them. It may well be that the actual enactment and the further enactment of retrospective legislation would be the finest weapon to use to prevent the recurrence of what we are all anxious to prevent. It is particularly important that the Chancellor's powers should be strengthened, in view of the very high rate of taxation that we are likely to have to bear for many years to come. As between taxpayer and taxpayer, I think the Treasury has a special responsibility to see that there is fairness and equity, which we are here to protect.

I am not much concerned about the retrospective effect of this proposal. I think that it is already inherent in the Section which it proposes to amend, but what concerns me is that in the very words of the Bill, if it stands as at present drafted, there are likely to be brought in the ambit of the Clause many people who ought not to be brought in. Therefore, while not objecting to the Chancellor standing firm, I hope he will be sympathetic to Amendments, particularly one in the name of the hon. Member for Oxford (Mr. Hogg), in order to confine the purpose of the Clause to those people for whom it is really intended.

The Solicitor-General

I felt that it might assist the Committee if I responded to the suggestion of my hon. Friend the Member for Faversham (Sir A. Maitland) that the Government should indicate why they consider that these powers are neces- sary. I think that it is the logical approach and that most helpful to the Committee if I indicated shortly what was the history of the matter, because that has a direct bearing on our request for retrospective powers. The proposal put forward by the predecessor of my right hon. Friend was that the wording of Section 35 of the Act of 1941 should be that if one of the purposes was the avoidance of tax the Commissioners of Inland Revenue would have the right to give directions. That, as has been said by some of the speakers to-day, was opposed during the Committee stage of the Bill, and eventually the Chancellor agreed to accept an Amendment to substitute "the main purpose" for "one of the purposes." He indicated, however, his misgivings at accepting that weaker form of words, and said specifically: I therefore accept the Amendment to-day with the warning that I may have to come back to the House and ask it to reverse its decision."—[OFFICIAL REPORT, 1St July, 1941; Vol. 372, c. 1277.] The Financial Secretary to the Treasury went further, and said: I will draw attention once again to what my right hon. Friend has said, namely, that if it is still found to persist in spite of these wide powers, he feels himself at liberty to take more strict action, retrospectively if necessary, because the one thing this House and the people will not tolerate is tax dodging in time of war."—[OFFICIAL REPORT, 1St July, 1941; Vol. 372, c. 1280.] That was put forward quite clearly in the Debates on the Finance Bill in 1941, and the milder form of words was adopted making it necessary for it to be shown that it was the main purpose to avoid taxation before directions could be given to restore the taxation position. My hon. Friend the Member for Southampton (Mr. Craven-Ellis) and my hon. Friend the Member for Elland (Mr. Levy) have talked, a great deal about re-opening of accounts. I ask them to apply their own financial and business experience. That provision came into being and the Finance Bill passed at the end of June or the beginning of July, 1941. A period had to elapse when accounts would be examined by the Revenue. My hon. Friends will be the first td know the delay which occurs in making up accounts in these days through understaffing. The accounts were made up by the accountants and they then had to be submitted and examined. The position was that the first cases began to come through the Special Commissioners about the beginning of 1943. It was thought right that we should see what was the flow and the nature of the cases before any action was taken. I do not think my hon. Friends who have opposed this Clause can criticise my right hon. Friend or the Inland Revenue for taking time to examine the flow of cases before they decided on action. That is the position, and it is really idle to say that in cases where people have used one of the tricks against which this Clause is aimed, where their accounts have had to be submitted and the matter taken up and discussed between them and the Revenue—it is idle to say that they are prejudiced to-day because, after an examination of a suitable number of cases, retrospective legislation is proposed.

I want the Committee to appreciate and to deal fairly with the arguments that have been put. My hon. Friend the Member for Colchester (Mr. Lewis) has said that the basis of the Committee being troubled with this matter was the advice that was given to the Chancellor. I am not going to weary the Committee by dealing with his quip about the Law Officers. I only ask him to realise that if the House is asked for a decision as a matter of policy, it is idle for him to say that that is a mistake as a matter of law. It is a mistake as a matter of policy which has been taken. Let us consider the position with which we are faced, and here I come to the point which my hon. Friend the Member for Faversham has made. He says, "Put your cards on the table and show us the problem you have to deal with." May I do that for a moment? Originally we had "the main purpose" was the avoidance of taxation. This is a sort of case we had to consider, and I shall give cases which have actually been before us. You have somebody who wants an increased working proprietor standard. He wants another working proprietor. He takes his son aged 16 or his daughter aged 17. He gives him or her 5.1 per cent. of the shares so that he will be within the original Section. He makes him or her a director of the company. When the direction is made he appeals to the Special Commissioners, and he says in his evidence, "There is nothing in my mind about an increased Excess Profits Tax standard. It is my solemn assurance that I did that in order to introduce Johnny or Maggie into the business so as to give them the experience of the business that they require." The Special Commissioners, being scrupulously fair to the taxpayer, say, "This sounds a most extraordinary story, but here is someone who has assured us on the point and we must act on the evidence. We are not prepared to say that he is an utter liar. Therefore, we are not prepared to say that the main purpose was the avoidance of tax."

I have given that as an example. I could give 1,400 of that type of case. Let me come to another. You get some group of people who will buy companies and add £1,000 a year to their Excess Profits Tax standard. You have companies with some nominal activity like storing furniture in old mills and that sort of thing. People have acquired the shares of as many as 17 of these companies in order to get an extra £17,000 on their Excess Profits Tax standard and to avoid paying to the Revenue tax on that £17,000 each year. I am, not going into detail on these matters because I do not think any good purpose would be served. When people come forward in these circumstances and are prepared to assert, and to pledge their honour to it, that the main purpose was not avoidance of taxation, we must take steps to meet that, and we must take steps in accordance with the warnings given by my hon. Friend's predecessor, so that if these lenient words are abused he may come to the House of Commons and ask for words which can deal with the situation.

Some of my hon. Friends have put up the argument of legality. They have said: "The law permits you to do it, and if a man can bring himself within the four corners of the law by such devices, he should not be disturbed." I would just ask my hon. Friend the Member for Elland if he will take an example which I think is very much to the point. If any Member of this Committee were to see a child of five drowning in three or four feet of water, there would be no legal obligation on any of us to go into the water and wet our clothes; but what would be the view of any Member of this Committee of anyone who did not go in, in those circumstances? What would be the view of someone whose motive for not going in was not merely to keep his clothes dry, but in order to get an advantage over those who had gone in and had wet their clothes? That is exactly the analogy here. People who carry out transactions such as those I have mentioned are not merely abstaining from going into the water of taxation in order to help their country, but, by their abstention, they are trying to get an unfair advantage over their competitors in the trade.

I hope I have demonstrated this matter to the satisfaction of my hon. Friend the Member for Faversham by the examples which I have given. When I have to deal with a situation of that kind, and, still more, to deal with the same problem of tax dodging in war-time, I have not the slightest hesitation in asking the Committee to approve of retrospective legislation. I agree with my hon. Friend the Member for Colchester as to the importance of certainty and practicability in tax legislation, but I know, he knows and everyone knows, that there is a section of a Community that is ready to indulge in tax avoidance in war-time. It is sufficient for their deserts that they receive a warning and that, if they do not take notice of that warning, legislation will be brought in. It is for that reason that I ask the Committee to reject the Amendment and to give us the Clause.

Mr. Muff (Kingston-upon-Hill, East)

I rise to thank the Solicitor-General for standing firm. Whilst the hon. Member for Elland (Mr. Levy) was speaking, the hon. and learned Gentleman appeared almost visibly moved by the lachrymose eloquence of the hon. Member. Therefore, I am glad that he stood his ground. The Solicitor-General has given tax avoidance the right term, which is "tax dodging." In Yorkshire we call these things bluntly. If these people with the mentality of card-sharpers use their ingenuity every time a Finance Act is passed, to see how they can avoid its lawful demands, it is up to this Committee to see to it that they go through the process of regurgitation. I was reminded of the Walrus in "Alice in Wonderland" shedding his tears, while the people in the City of London proceed to swallow oysters of the largest size. As the Chancellor would say, in his more classical language, these people should "cough up."

Mr. Gallacher

I notice that there is a nice division of labour in the Tory Party, the old gang protecting the City, and the young gang protecting the vote. I fully endorse what has been said, and I was glad to hear the Solicitor-General's speech in regard to the behaviour of the financiers and the artful dodgers. I do not think anything can be strong enough or ruthless enough for such people as the big moneyed man whom hon. Members opposite try to protect and cover up. I am not opposed to retrospective legislation, and I do not think it should be allowed to go out that it is essentially evil. It can be very good and very desirable. If we see that injustice has been done, it is good to pass retrospective legislation which will remove the injustice. If there is evil, and we see it, it is good that we should pass legislation to deal with it retrospectively. True, it would be better, if we were all perfect, to be able to detect the exact and desirable thing at the moment; but when we are dealing with business men that is not possible. The hon. Member for Elland (Mr. Levy) had me all mixed up. He said he was speaking for the honest and honourable citizens. The next moment he said he was speaking for the business men. If the Chancellor of the Exchequer put anything into the Clause to exclude the honest and honourable citizen from this retrospective legislation, I am certain that it would not affect one of the business men, about whom the hon. Member for Elland and the hon. Member for Colchester (Mr. Lewis) are concerned.

I say that this Committee and this House must be prepared to take the most ruthless action against these tax dodgers. I remember the discussions we had in the early days of the war on this question. I remember very well the very strong line that was taken in regard to this question, the many exposures that were made, and the very people who are now objecting to retrospective legislation were the people who made it possible for the dodging to take place between 1941 and 1944. If they feel now the effects of retrospective legislation they have themselves to blame for the fact that they tried to find a loophole to continue dodging. There is nothing so criminal and despicable as moneyed men grabbing at every penny they can get, utterly regardless of the welfare of the country and of the sacrifices other people are making. I am very glad that the Chancellor and the Solicitor-General are standing pat on this Clause.

Mr. Craven-Ellis

Not being a stranger to taxation, if I knew of any who was trying to evade their legal responsibility I would deal with them more ruthlessly than does the Chancellor of the Exchequer. I would like to put two points to the Solicitor-General. The first is this: He has stated his case for retrospective legislation, and it is true that the late Chancellor of the Exchequer gave a warning that legislation would be retrospective if the Revenue were satisfied that there was justification for it. Throughout the period from the 1941 Finance Act to date is it right or is it wrong to say that the Inspectors of Taxes have had every opportunity of questioning the accounts which have been submitted? Point number two is this: If the Inspectors of Taxes have had every right of querying accounts why have they not done it? Why come to the Committee and ask for retrospective legislation, to which even hon. Members opposite have expressed their objection if, in fact, the Inspectors of Taxes have done their job?

The Solicitor-General has quoted two cases. I really cannot conceive that it is beyond the ability of Commissioners to see that the two cases he has quoted are definite and deliberate evasions. It is a question of fact, not a question of law. He submitted two cases in supporting his argument, one of which was similar to a case put forward by the Attorney-General when he put forward the Resolution relating to this subject, and quoted the case of a boy of 14 years of age being made a director. Is it reasonable that a boy of such an age should be appointed a director? I think one question the Commissioners might well ask themselves is, Would that boy have been appointed a director at 14 years of age under normal conditions in peace-time? On the second case of buying 17 other companies, the same question might be asked. I do not care who examines them, when cases like that are put before people of commonsense I cannot conceive they would not decide there was evasion. Therefore, I submit that Section 35 of the 1941 Act give the Treasury and the Inspectors of Taxes every reasonable scope for protecting taxpayers who desire to be honest.

Commander Galbraith (Glasgow, Pollok)

Could the Solicitor-General tell us whether the cases he has quoted went before the Special Commissioners, and were decided in favour of the taxpayer?

The Solicitor-General

In answer to my hon. and gallant Friend, I would say that is so. Let me deal with the specific questions put to me and I will willingly answer any other points from any Member of the Committee. The first question was, Why have not the inspectors "spotted this," if I may use the colloquialism? I thought I had made it clear that they had not only found these cases but had made directions which were piling up to the extent of thousands of cases.

Mr. Craven-Ellis

Directions against innocent people. That is the position.

The Solicitor-General

My hon. Friend says "innocent people." The position, first of all, is that under Section 35 the Commissioners of Inland Revenue may, if they think fit, in their discretion, make a direction the effect of which is that the tax position is restored to what it was before the transaction in dispute has taken place. It was under the Finance Act passed in July, 1941, that they first had the power to do it. They then inquired into a number of cases and have made directions in thousands of cases, and a vast number of these are awaiting appeal. Some have come to appeal. Therefore, to my hon. Friend's first question as to why it was not done earlier, I reply that it was done during 1942, when the accounts would be made up, and the cases began to come before the Special Commissioners at the beginning of 1943. A large number of cases came before the Special Commissioners. My hon. Friend the Member for Southampton (Mr. Craven-Ellis) has given us a graphic picture, and I have no fault to find with it, of the way his mind would work if he were a Special Commissioner. I can only tell him that of these cases the first class I gave—the abuse of working proprietors—account for 70 per cent. Of those cases the Crown lost a lot more than half, because the Commissioners were not prepared to say that it was not the main purpose when the taxpayer was prepared to state on his honour, or it may have been on his oath, that it was not the main purpose. That is the position. The Revenue lost a large number of cases because of that wording. We make no bones about that. A suffi- cient number of cases have been dealt with in order to prove that point.

Mr. Craven-Ellis

Is it not a fact that the cases to which the Solicitor-General has now referred will never come under the retrospective legislation because having been before the Special Commissioners, they have now been decided and cannot be reviewed?

The Solicitor-General

My hon. Friend is quite right. I think I have said three times now, and I am sorry if I have to repeat it again, but I want it quite clear, that there are cases going into thousands. Of these thousands 70 per cent. fall into the first category of the abuse of working proprietors. Of that 70 per cent. a sufficiently large number of typical cases have been taken before the Commissioners to show what the result is likely to be in the many hundreds of cases that are left. I hope that is clear to my hon. Friend; I think it is clear to the Committee as a whole.

My hon. Friend's second point is, Why have the Commissioners come to that decision? I have endeavoured to explain that while it is quite true you can decide what a man's mind is by reference to the natural consequence of his acts you have also to pay attention to what he says was his main purpose. We have found that making the question depend on the main purpose, and therefore depend in turn on what the taxpayer says is his main purpose, simply does not work, because it produces the consequences I have mentioned, and results in these cases, of which I have given typical examples, being decided against the Crown and in favour of the tax avoider. My hon. Friend has said, "I have given two cases." I do not want to weary the Committee with cases, but there are over a couple of thousand cases which I could put in front of the Committee.

Mr. Lewis

I merely want to point out that the Solicitor-General has made his case rather worse. He now tells us that he has a number of these tax avoidance cases, of which some were selected to be taken to the Special Commissioners. He would not have selected the best cases, but some of the worst.

The Solicitor-General

There is no question of the Crown appealing to the Special Commissioners; it is only the taxpayer who appeals to the Special Commissioners. Therefore, it is the taxpayer who selects the cases.

Amendment negatived.

Mr. Hammersley

I beg to move, in page 21, line 40, at the end, to insert: any scheme of amalgamation approved by the Board of Trade shall be deemed to be outside the operation of this Sub-section. The two main theses which appear to me to be true in connection with this Clause are that this Committee should not connive at tax evasion and that it should not connive at tax avoidance. I am sure that, although Members on the other side have tried to insinuate that this is a political matter, there is, in fact, agreement on all sides that tax avoidance is wrong, and that we should not assist tax avoidance in any way. At the same time, we do not want to interfere with arrangements which have increased British industrial output. For my own part, I agree that retrospective legislation is necessary. Every section of the community must bear a fair share of taxation, and we should not help any section which, having been warned, takes the risk of tax avoidance. In 1941 the net was cast, but it was not cast sufficiently wide. It has been found that there have been arrangements which have escaped legitimate taxation. There are the so-called director-controlled companies which create dummy directors, and new working proprietors are brought into the business to raise the standard of excess profits. We are told by the Solicitor-General that that accounts for 70 per cent. of the cases. Then there are share transactions. It is particularly with these share transactions that my Amendment is concerned. They have been classified as being: Births, that is the formation of new companies; marriages, that is the association of one company with another; and divorces, that is the division of one company into two. It is with some of these that my Amendment deals.

We are instituting offences in this Clause, and I suggest that we should try to define what the offences really are. We are now saying that any kind of share transaction may—not necessarily will—bring the taxpayer into jeopardy. I consider that that is a very unsafe kind of legislation. There are many trades in this country which, for post-war purposes, ought to be strengthened. They ought to have closer association between various parts of the trade. Some want a stronger selling organisation, others want to be co-ordinated and amalgamated in their various producing sections. Any transactions of that kind which the President of the Board of Trade has himself specifically said are justifiable and necessary transactions, in the interests of British industry, will, as far as I understand, come within the net. It will be up to some inspector of taxes to initiate a direction, based on his judgment as to whether or not those transactions ought to come within the ambit of this Clause. In my judgment, the situation is so uncertain, and produces such a position for the taxpayer, or for those persons particularly concerned in the building up and strengthening of British industry, through amalgamation and methods of that kind, that we ought to look at it very carefully. For that reason, I and my hon. Friends have put down this Amendment. I do not know that we are particularly wedded to the precise form of words. I do not know that it goes quite far enough; but we feel very definitely—and I feel sure the 'Chancellor of the Exchequer will have sympathy with us on this—that it is an anomaly that many well-informed persons should be making proposals for the closer co-ordination of British industry and the amalgamation of various firms, while the Chancellor of the Exchequer, in the same Parliament, is introducing legislation which puts obstacles in the way. Therefore, I suggest that there should be words of this kind, or perhaps some recasting of the phraseology of the Clause, to make it perfectly clear that the people who are pursuing a desirable and necessary industry should not be placed in jeopardy when they find themselves engaged in these transactions, and I hope the hon. and learned Gentleman will find some form of words to make that quite clear.

Mr. Boothby (Aberdeen and Kincardine, Eastern)

I do not want to do anything more than formally support the Amendment which my hon. Friend has moved so ably. Our object, simply, is to see that nothing is done in this Finance Bill to jeopardise the efficiency of British industry. It is quite obvious that, in certain cases, amalgamations will be urgently necessary, particularly those referred to in the Amendment, and I hope the Minister will be able to satisfy us.

Mr. Tinker

I take it that this Clause is to strengthen the measures to prevent tax dodging and that this Amendment will exclude some firms from the penalties of doing it. If the Amendment does not mean that, what does it mean? It is only to help these people who are trying to avoid payment of a legitimate tax, and I want to know what is the idea behind it.

The Solicitor-General

I think I have gathered the point and I will endeavour to explain it to the hon. Member for Leigh (Mr. Tinker) and the Committee, and, if I have not got it right, perhaps my hon. Friend will put me on the right lines. As I understand it, the position about which my hon. Friends are anxious is this. You have two companies, say, in the cotton industry in Lancashire, in whose case the Board of Trade has approved an amalgamation. Incidentally, you find that the different position of these companies with regard to Excess Profits Tax is such that the amalgamation does improve their E.P.T. position; so that, apart from carrying out a plan which the Board of Trade has approved, they will also improve their Excess Profits standard. I put it quite neutrally, and I hope the hon. Member for Leigh appreciates that; but of course, it may be, as the hon. Member for East Aberdeen (Mr. Boothby) would be the first to agree, that, if you have the amalgamation approved for production or marketing reasons, there may be cases where the motive would be that of getting the Excess Profits Tax improved standard and getting more money. If that were the position, it would be right for the Inland Revenue authorities to move; but suppose we take the case which the mover and seconder of the Amendment had in mind, the case where there is a real need for the amalgamation, for business reasons, but where, incidentally, it does improve the Excess Profits Tax standard. What is their position? Are they in jeopardy? That is what I want the Committee to examine.

In our new Clause we suggest changing the main purpose, or one of the main purposes, but, of course, it does not stop there, because, in the part of the Clause, which we have not yet reached—if you, Major Milner, will allow me to refer to it in advance for the purpose of argument—if the main benefit which ought to be expected is the avoidance of taxation then that is deemed to be the main purpose. In the case which my hon. Friends contemplate, I should have thought they would have had no difficulty in saying that the main benefit to be expected from this amalgamation is increased production facilities, or increased marketing, or the like, or the rationalising of industry for the purpose of giving a better service to the community as a whole. If they do that, it gets them out. What is their difficulty? They make representations to the Commissioners of Inland Revenue, and the Commissioners have a complete discretion in the matter; "they do as they think fit," to use the words of the old Section. If they accept that point of view, and they do not make a direction, that is the end of the trouble for the hypothetical cotton company.

But if they do not accept that view, the company can go to Special Commissioners of Appeal and can say "It is quite true that you may find against us and think the main benefit to us is that the Excess Profits Tax standard would be increased in our favour, but still we have a right, under Sub-section (3) of Section 35 of the Act of 1941 to put to you that you, standing in the shoes of the Commissioners of Inland Revenue, ought not to make this direction. The Commissioners ought not to have made it, and you, as the reviewing body, ought not to make it." There is a perfectly independent body, trusted by the taxpayers after many years' experience, to review this matter and there should be no difficulty in putting it right. I think myself that the genuine company, the company that is making an amalgamation for production or marketing purposes, will be perfectly safe, and I am glad to think that these two points have been saved—the main benefit point, and, secondly, this appeal to the Special Commissioners, should it be necessary. I hope that I have been able to assure my hon. Friends that I appreciate their points, but I think, and this is the view held by my right hon. Friend, that they are in no danger from the Statute as it stands.

Mr. Hammersley

I think that the Solicitor-General has failed to appreciate the precise practical importance of this Amendment. He has pointed out that the matter goes first to the Commissioners of Inland Revenue and, secondly, by appeal, to the Special Commissioners. But, while this war is on, these companies are faced with a particular problem, and I suggest to him that, as a matter of practice, these companies, who ought to be amalgamating now, will say, "No, we are not going to take the risk of going to Special Commissioners and have the whole of our taxation matters upset. We would prefer to refrain from entering into this co-ordination, because there is a piece of legislation on the Statute Book which is causing us trouble." The point which the Solicitor-General has failed to appreciate is that it is only now that these matters are important, when they have to pay their Excess Profits Tax. I put it to my hon. and learned Friend that it is a matter of practical policy which ought to be discussed with the Board of Trade. I ask him whether it is not putting on the Statute Book something which will interfere with necessary co-ordination in industry, and whether he cannot meet us in some way by a form of words which specifically deals with amalgamations which a Government Department thinks to be necessary. If the Government consider that amalgamations are desirable, they ought not to be prevented by a piece of legislation so vague that the Solicitor-General has to say, "Yes, vague as it is, you can get over it by a series of two appeals." I suggest that business people are not going to run the risk of two appeals, but will postpone their amalgamations.

Mr. Benson

Will the hon. Member explain what there is to prevent amalgamations, and what detriment there is? All that happens is that they are not allowed to make more profits than they made before the amalgamation.

Mr. Hammersley

The arguments in connection with the amalgamation are put before the various individuals concerned. They are arguments of an industrial character, indicating a better selling organisation or something of that kind, and involving an admixture of shareholding. In the admixture of shareholding the excess profits position of the various people concerned is affected. Some may be adversely affected and some advantageously affected. You are not going to get these two sets of people to enter into an arrangement if nobody knows what is to happen when the first year's results are examined, and there is a risk of the whole thing being upset and the taxation authorities coming on to the people concerned. There may be such a situation, and I suggest as a matter of practical policy that people will not enter into these close associations unless they know where they are. Those associations which are first approved should be specifically outside the scope of the Clause. That seems to be a very reasonable suggestion.

Earl Winterton (Horsham and Worthing)

Although I do not possess the great knowledge of my hon. Friend the Member for East Willesden (Mr. Hammersley) I have some knowledge of companies. His point is not a strong one; the answer of the learned Solicitor-General is absolutely airtight. My hon. Friend admits, as indeed the whole Committee admits, that this Clause is necessary, because all who have been connected with business on a large scale know that, though not in the case of the most reputable companies, there has been tax evasion on a large scale. The Government bring in a new Clause which receives universal commendation. My hon. Friend says that he agrees with the Clause, but it should not apply to companies where the amalgamation has been approved by the Board of Trade. Why should he put them in that category? Why should he say that because the Board of Trade has approved the amalgamation such companies should not be subject to the same conditions as any other amalgamation? I cannot see any reason for that, and in seeking to put them into a special category he will do an injustice to any company whose amalgamation took place at an earlier date. I say to my hon. Friend—he and I move in the business world—that it is a mistake to oppose this Clause or to suggest Amendments to it. It is a very fair Clause. Although there has been a little evasion of tax by disreputable companies, the reputable companies wish to see an end of it as early as possible.

Sir Patrick Hannon (Birmingham, Moseley)

I believe there is some substance in the Amendment of my hon. Friend the Member for East Willesden (Mr. Hammersley) notwithstanding what the Noble Lord has said. The reconstruction of industry may involve in the near future a reconstruction of companies. I want to know whether the Amendment will apply in cases of that kind. Amalgamations will be of the most elaborate kind, and they have to be carried out with the approval of the appropriate Department. Is not that widespread process of reconstruction likely to be impeded by this kind of legislation? I would like some reply to be given on that point.

Sir J. Anderson

I would be the last person to wish to interfere with any rational process of reorganisation, but I think my hon. Friend, as well as my hon. Friend the Member for Southampton (Mr. Craven-Ellis), put the thing in a rather misleading light when he talked about obstacles being placed in the way. All that this Clause can do at the very worst, from the point of view of the firms concerned, is to leave them, as far as taxation is concerned, exactly where they would have been before. It may be that but for the Clause they might have improved their position, but why should they? Why should any improvement, if allowed, be limited, as my Noble Friend the Member for Horsham and Worthing (Earl Winterton) pointed out, to a particular category of transactions which happen to have the approval of some particular Department. There is only one other point I would like to make. Amalgamation under this Clause will not at the worst prejudice the position of those who enter into the amalgamation. At the best it may, as my hon. and learned Friend pointed out, if they had good luck with the Commissioners of Inland Revenue or the Special Commissioners, in some degree benefit them. I suggest that this Amendment might perhaps not be pressed.

Mr. Hammersley

I am not sure that hon. Members completely appreciate the point. It is argued that these companies should be neither better nor worse than any other companies, but that really is not the point.. The point is in the premise that it is desirable in the national interest that they should amalgamate. We introduce a piece of legislation in which any company amalgamating with another company has to run the risk of being subjected to this particular kind of taxation. That is my argument. I am suggesting that any amalgamation involving the transference of shares—I may be wrong, in which case my point will be done away with—and the ownership of shares affects the Excess Profits Tax position and as such, comes within the ambit of this very widely-drawn net. Therefore, amalgamations have been given some kind of detrimental blow by this legislation, and that, in my judgment, ought not to be the case. I feel still that we are making a mistake, and if we are making a mistake, I do not see why I should withdraw the Amendment.

Mr. Benson

This Clause is drawn so widely that it affects not merely companies that amalgamate, but every company or business in the country paying Excess Profits Tax. If they take certain steps in which the major object is to reduce their payment of Excess Profits Tax, they come under this Clause. It does not merely affect companies that amalgamate. If any two companies amalgamate for a purpose other than tax avoidance they will not be affected by the Clause. It is only where it is obvious that the major object is tax avoidance that they are in any way affected.

Mr. Hammersley

I think that my hon. Friend is wrong. At the present time the result of amalgamations will be of benefit. It may be that the industrial benefit cannot be shown until after the war. It may well be that the only initial alteration will be of benefit to the tax position, although the objective is an industrial one. Therefore it may be argued that the main result of this amalgamation is tax avoidance.

Mr. Wilmot

Suppose the worst did happen when they came under the Clause, would not that be that they paid tax exactly as they would have done, if they had not amalgamated?

Sir W. Wakefield

Is not the point there that in that case they might not amalgamate, and the public advantage would not arise? Because they would have to pay more tax, they might not amalgamate, and therefore you would not have the industrial advantage which it is desired to encourage.

Mr. Wilmot

The argument being used is that the amalgamation is sought for purposes of national advantage and rationalisation of industry and not for tax reasons. If that is the purpose of the amalgamation, this Clause can do nothing to hinder the purpose, and, so far as the tax position is concerned, unless I am wrong about it, it can at the worst leave things as they were before the amalgamation took place.

Sir W. Smithers

I want to support my hon. Friend the Member for East Willesden (Mr. Hammersley) because there is nothing so bad for business and for the future of business, especially at this time, than uncertainty, and it is very difficult for one not a lawyer to understand these things. I should think, however, that an amalgamation would come under this Clause because it is a question of the main purpose. The Clause as amended says "the main purpose or one of the main purposes." Therefore, if one of the main purposes happens to be that they get off better under E.P.T., then the amalgamation will not go through. The uncertainty is there, and the proper rationalisation of industry, of vital importance now, will very likely be deferred because of this uncertainly, and that is against the national interest.

Amendment negatived.

The Chairman

Sir Waldron Smithers.

Mr. Quintin Hogg

On a point of Order. There are two Amendments, Major Milner, following, one in my name and one in the name of the hon. Member for Moseley(Sir P. Hannon) in almost identical terms. It would assist us if you could say whether you propose to call either of those Amendments, because, if not, what we have to say might be in Order under the present Amendment.

The Chairman

I propose to call both Amendments and to suggest that they might be discussed together.

Sir W. Smithers

I beg to move, in page 21, line 41, to leave out Subsection (3).

Sub-section (3) says that if the main benefit which might have been expected to accrue from the transactions in question was the avoidance or reduction of liability to tax, such avoidance or 'reduction shall be deemed to have been the main purpose. Thus, even though it was not, in fact, the main purpose, under this Sub-section it is, in certain circumstances, to be deemed to be so and an innocent person will suffer. The danger contained in Sub-section (3) is the main benefit which might have been expected to accrue from the transaction. I will ask whoever is going to reply to note this. It will be observed that no indication is given as to the person to be chosen as the one who might have had that expectation of benefit. Is it to be sufficient if the Commissioners of Inland Revenue or one of their officials think that the main benefit which he would have expected was avoidance or reduction of liability to E.P.T. if he had engaged in this transaction? Secondly, is the test to be whether the taxpayer ought to have expected that the main benefit to accrue to him was avoidance or reduction? Thirdly, are the Special Commissioners of Appeal to decide whether they would have expected the main benefit to be avoidance or reduction if they had been engaged in the transaction?

Sub-section (3) contains a further danger. If the main benefit which might have been expected by someone to accrue was avoidance or reduction, there avoidance or reduction is to be deemed to be either the main purpose or one of the main purposes of the transaction. Accordingly, the question whether Section 35 should be amended as a whole, or in any given place, boils down to whether the main benefit that might have been expected by someone to accrue from the transaction was avoidance or reduction, because once that question is decided, all other questions arising under the Section, as amended, fall into their places and leave no room for any other question on this topic. For example, if the Special Commissioners of Appeal hold that the main benefit that might have been expected to accrue was avoidance or reduction then (1) avoidance or reduction is ipso facto a main purpose or one of the main purposes; (2) therefore the Section applies. I think we ought to be told in simple terms if that is so or not.

The Solicitor-General

I would like to do my best to deal with the difficulties of my hon. Friend the Member for Chislehurst (Sir W. Smithers) on this point because I appreciate the great attention he has given to this Bill and I really want to try to put the matter as clearly as I can to him. I do not want to repeat what I have already said, and the Committee will perhaps allow me to recall the gist of this problem as it has arisen in practice. It is that someone who has introduced as a new working proprietor into his business his son or daughter, aged 16 or 17, and has presented that child with 5.1 per cent. of the shares—

Sir W. Smithers

Would not that also be covered by the old Section 35?

The Solicitor-General

I was just going to explain to my hon. Friend how it is not covered. It is not covered because the person who has done that then comes forward and says, "I did not carry through that transaction in order to avoid paying Excess Profits Tax; I did it in order to introduce Johnny or Maggie into the business." Now when he comes forward and says that, he says, "That was my main purpose." If we alter it to make the test "One of the main purposes," he will still be able to say, "I did not know anything about Excess Profits Tax at all "; or else he will put it this way: "I knew there was some financial advantage to me which might be gained from it but that did not really weigh with me at all. That did not come into my mind. All I was thinking of was the historical connection of the Snooks' family with this company, which I was perpetuating by introducing Johnny or Maggie into it at this time." That is the position, and I assure my hon. Friend that that is the gist of the matter. It is because evidence of that kind has been accepted that we are asking for these powers from the Committee to-day.

We have to deal with a position where a financial benefit will obtain by avoidance of tax, and the taxpayer is either refusing to admit that that is the position or else saying that it had no effect on his mind. We say, bluntly, that any reasonable person ought to appreciate that if he transfers 5.1 shares to a youth of 17 and makes that youth a director he is carrying through that extraordinary transaction with financial benefit to himself. We ought to face that position and say that where the main benefit is a financial advantage it will be deemed to be one of the main purposes, and that hurdle will be overcome. My hon. Friend says, "Who was to expect that that was the main benefit?" That varies at each point. In Clause 3, first of all one looks at it with the mind of the person who carries through the transaction, and when it comes to the Commissioners of Inland Revenue, or the Special Commissioners, they have to decide it as a tribunal of fact. I hope I have made clear to the Committee what is our purpose in this Clause.

Major C. S. Taylor (Eastbourne)

Would my hon. and learned Friend give an example of a case where there might be financial benefit which would be re- garded as innocent? Is there any such possibility?

The Solicitor-General

If my hon. and gallant Friend will not hold it against me I will do my best, although my example is not perfect. Take the case we were discussing a short time ago in the other sphere of amalgamation, a case where amalgamation was urged by the Board of Trade in order to improve the position of the cotton industry. It may be, as I postulated, that there was a financial benefit resulting, and the main benefit may be an improvement in the marketing and production of the two businesses. Therefore, that would be outside the Clause, because the main benefit would not be a financial benefit.

Major Taylor: Surely it may be deemed that one of the main benefits was a financial benefit.

The Solicitor-General

If my hon. and gallant Friend will look at the words rather closely he will see they say: If it appears … that … the main benefit which might have been expected to accrue from the transaction or transactions … was avoidance or reduction of liability to the tax, the avoidance or reduction of liability to excess profits tax shall be deemed … to have been the main purpose.…. A condition precedent to that is that it should be the main benefit.

Question, "That the words proposed to be left out, to the word 'be,' in page 22, line 3, stand part of the Clause, "put, and agreed to.

Mr. Quintin Hogg

I beg to move, in page 22, line 3, after "shall," to insert "unless the contrary 'be proved."

I do not want to take advantage of the example which the Solicitor-General has just given to the Committee, but I submit that this is an Amendment that can reasonably be accepted by the Government without prejudice to the Crown and with some advantage to the innocent taxpayer. Under the provisions of Subsection (3) of this Clause it is proposed to raise a certain presumption of the law with regard to the intentions in the mind of a person carrying out transactions of a particular kind. The question raised by the Amendment is whether that presumption should be an irrebuttable presumption or a rebuttable presumption. The Amendment, if passed, would have the effect of making it only a rebuttable presumption. The Solicitor-General, in supporting the general terms of this Subsection, rightly says that it is necessary for the Crown to insist that a certain presumption should exist to assist the Special Commissioners in a case coming before them where a certain transaction has the result of reducing liability to tax. With that proposition I am in wholehearted agreement. It appears that in the absence of such presumption a number of persons whose intention it was to avoid tax should escape, and with such persons I can have no sympathy at all. The Crown says, "We will pass Sub-section (3), which provides that if any transaction has as its main benefit a reduction in liability to tax, or its complete avoidance, it shall be deemed that that will be one of its main purposes."

The criticism I have to make of that is this: It is true that in cases of this kind you cannot say effectively that a citizen is innocent until he is proved guilty. On the contrary, it is just, as the Crown proposes, that it should be presumed that a person understands the natural consequences of his acts, but it is not just that the Crown should say, "We shall presume he intends these consequences whether he intends them or not, and even on the assumption that he is able to prove by irrebuttable evidence that such was not his intention." That is going one stage too far. The Crown here is in a dilemma. The Solicitor-General may say that it is very difficult to see what explanation there could be in some cases, other than that of the intention of avoidance of tax. I put to him this dilemma: Either there are no cases at all in which a subject could conceivably be innocent of the intention to which he draws the attention of the Committee, and in that case there can be no objection to the Amendment, because, ex hypothesi, the Special Commissioners, as reasonable men, acting on the presumption, must inevitably find against the subject, or there are such cases in which it is presupposed that there is an injustice.

The Deputy-Chairman

It might be for the convenience of the Committee if this Amendment and the following Amendment on the Order Paper in the name of the hon. Member for Moseley (Sir P. Hannon)— in page 22, line 3, to leave out 'deemed,' and to insert 'presumed until the contrary is proved'"— were discussed together.

Sir P. Hannon

I support the Amendment. The whole point centres round the intention to evade tax liability or to secure a reduction of tax. In the industrial world people feel that, before a decision is taken, some value ought to be given to the evidence that can be produced. I realise the subtlety of dealing with the question of intention but, on the whole, I believe the arguments my hon. Friend has submitted ought to be accepted by the Government. It seems to be a real hardship that an innocent man who brings his case before the Special Commissioners will, under the Clause, be practically adjudged to have the intention of defrauding the revenue of tax before he can bring evidence in support of his contention. It is difficult to interpret a man's intentions and I agree that the law is embarrasing in that respect. Nevertheless, I think some cognisance ought to be given to the position of the innocent taxpayer. We know that where decisions have been given by the Special Commissioners in cases already heard the Clause will not apply, but what is to become of cases which have been before the Inland Revenue Commissioners and are now advanced to the Special Commissioners?

Until the Bill becomes law those cases, like Mohammed's coffin, are still hanging between heaven and hell. I am sure that, speaking for the large volume of industrial life, we should all repudiate any attempt to avoid tax or to reduce liability, because the other taxpayers will have to foot the bill, and anyone trying to evade taxation should be regarded as an enemy of the community. That is the attitude that I take up but, all the same, I think there is the danger in certain cases of submitting an innocent taxpayer to an ordeal in which he will be penalised without having an opportunity to rebut the accusation against him by evidence. My hon. Friend has handled the case with the skill and dexterity of a lawyer. May I recall what was said at a celebrated election at Bristol a long time ago? After Burke had made a brilliant and stimulating speech, his fellow candidate standing beside him said, "I say ditto to Mr. Burke." I say ditto to my hon. Friend.

Mr. Benson

This Amendment is a very subtle one and the position that it raises is rather more difficult to argue than Amendments previously raised. I rather suspect—I do not think the hon. Gentleman intends it—that it weakens the Clause. The first Sub-section deals with motive. The third gets away from motive and makes actual fact the main criterion as to whether a certain transaction shall or shall not come under the Clause. The right hon. Gentleman again reintroduces motive, in that motive has to be proved before the Sub-section is operative. He says that is perfectly reasonable, because the Special Commissioners are themselves reasonable men. I do not know who the Special Commissioners are. The Solicitor-General has given us a number of cases in which the decision of the Special Commissioners has been that certain persons have introduced their children, aged 16 or 17, and given them a special qualification, and they have persuaded the Special Commissioners that they have done it with a very obscure motive, certainly not the motive that the Commissioners themselves assumed. This is not the first time that we have had difficulty over the question of motive, and it is not the first time that the Special Commissioners have come to extraordinary decisions on the question of motive.

I believe the first time that motive was raised in regard to taxation was in the Finance Bill, 1936, with regard to the transfer of assets abroad. There was some hot discussion and we strongly opposed the motive test, and it was found in a couple of years that the motive test had to be very considerably strengthened. I remember that, when defending the strengthening of it, the Solicitor-General of the time instanced a type of motive suggested by the tax avoider and accepted as real and genuine by the Special Commissioners. I do not know whether the Special Commissioners are reasonable men. I rather suspect that they are a group of elderly maiden ladies who have been kept unspotted from the world. They seem so completely innocent and incapable of suspecting guile. I am afraid, once again, of introducing motive, particularly motive which has to be judged by the Special Commissioners, into this Subsection. We have only had two Sections of Acts dealing with taxation which rested on motive as far as I know. On both occasions they have broken down because the Special Commissioners were so willing to take extraordinary motives as the real ones. The right hon. Gentleman is once again introducing this question of motive, because he allows motive to be proved in Sub-section (3) where, as it is drawn at present, it is fact and not motive. I hope the Solicitor-General will give us some assurance about the innocence of the Special Commissioners and will be able to show either that the Amendment does or does not weaken the Clause.

Major Taylor

I support the Amendment really for want of a better, because I should like to presume the individual innocent until he is found guilty, whereas the hon. Member who has just spoken would presume him guilty even if he can prove himself innocent.

Mr. Benson

That is not my position. My position is that, where you are dealing with motive, you are dealing with something that is incapable of proof, and it is much wiser to stick to the Sub-section, where fact and not motive is the criterion.

Major Taylor

If that is so, I see no objection to this form of words going into the Clause. The individual concerned would, under the Amendment, be presumed guilty unless he could prove himself innocent. I believe that is contrary to the usual principles of British justice hut, for want of a better solution, I would certainly support the Amendment.

The Solicitor-General

I should first like to deal with the point raised by my hon. Friend the Member for Oxford (Mr. Hogg). I think that the answer has really been given by my hon. Friend the Member for Chesterfield (Mr. Benson), that this is a substitution of main benefit for main purpose where the main benefit test can be applied. I would like, in deference to my hon. Friend's argument, to say that it is not a sound argument here that if there is an injustice it is only a little one, like the infant in "Mr. Midshipman Easy." Much though I respect the logicality of the position of my hon. Friend the Member for Oxford, I do not think that he can imagine many taxpayers who have introduced a child of 16 or 17 as a director and given him 5.1 per cent. of the shares, who are yet able to say that one of the main purposes in his mind was not the avoidance of Excess Profits Tax. I do not think my hon. Friend can really imagine a case, but he is entitled to say to me, "It may exist." I say to him, suppose it does exist, suppose the Committee takes that pure and old-world attitude of mind which my hon. Friend the Member for Chesterfield is apt to deprecate in these Special Commissioners; suppose we imagine a person who carries out that curious transaction knows nothing about Excess Profits Tax. Is there any reason why he should benefit from it? I cannot see it.

Therefore, we really get down in this matter to the substitution of main benefit for one of the main purposes where you can prove it. If you cannot prove that the main benefit was the avoidance of tax, you are thrown back on proving that it was one of the main purposes. You have to prove it by acts, the sayings and the letters of the taxpayer in the case. But where you can prove it is the main benefit, whether or not the man is innocent—if it is possible to imagine an innocent person who has carried through this sort of transaction—or on the other hand, if he is guilty, I suggest that the only sensible approach is to be bold and make the substitution, and say that where you can prove that the main benefit was the financial advantage of avoiding taxation, that is enough and that stile is got over. I ask my hon. Friend to remember that that is only the first stile. A man has a perfect right to go to the Special Commissioners and say, "It was not the main benefit, or, even if it were the main benefit, this direction ought not to have been made having regard to all the circumstances of the case."

Mr. Hogg

I do not think we have had the worst of the argument, and before I ask leave to withdraw the Amendment, which I propose to do at a later stage, I hope to show why. The hon. Member for Chesterfield (Mr. Benson) accused us of being subtle. I see nothing subtle about the Amendment. I agree with my hon. and gallant Friend the Member for Eastbourne (Major Taylor); he is old-fashioned enough to think that a man is innocent until he is proved guilty. I think in this case he should be assumed guilty unless he can prove himself innocent. The Solicitor-General, supported by the hon. Member for Chesterfield, says that he must be assumed guilty whether he is innocent or not. I see nothing subtle about that. The issues are perfectly plain. We are told that this is not a question of motive and that the Act, although it talks about motive, does not deal with motive. It substitutes a factual test for a test of motive. I cannot see why the Solicitor-General could not have said so if that was his intention. I do not share the hon. Gentleman's views about the difficulty of proving motives or intentions. No criminal case can be proved before the Assizes and practically no civil case without proving one way or the other—

Sir Edmund Findlay (Banff)

What about the Milk Bill, which the hon. Gentleman condemned before it was tried?

The Deputy-Chairman

There is, definitely, not any milk to-day.

Mr. Hogg

It is clear that the issue whether a person intended something or not is tried in almost every criminal and civil court. The hon. Member for Chesterfield says that I am wrong in saying that the Special Commissioners are reasonable men and says they are maiden aunts unspotted from the world. It surprises me that a long career of dealing with tax dodgers has had such a purifying effect on these gentlemen. Even if it had, to proceed in this Committee on the basis that the court which the House has set up is not a reasonable court, is lunacy. If they are not reasonable men they ought not to be allowed to exercise their functions. Our argument must be allowed to proceed on the basis that they are reasonable. The Solicitor-General I thought rashly adopted an argument of the hon. Gentleman the Member for Chesterfield to the effect that this is a substitution of a factual test, a test of main benefit, for a test of motive. That is not what the Sub-section says. It says that in certain circumstances a person shall be deemed to have a certain intention.

This Clause is designed rightly to hit the tax dodger. What the Solicitor-General is really saying is that you shall be entitled to brand a man as a tax-dodger whether he is or not if only certain apparently relevant facts proved. That seems to me to be going too far. It is an unpleasant thing to be branded as a tax-dodger, and one should not be branded if one could prove one- self innocent, even if one does not go the whole length of the hon. and gallant Member for Eastbourne. The Solicitor-General says that he cannot imagine an innocent case. I feel sure that if he carried his mind a few minutes back he could imagine one. We have been talking on the previous Amendment about a case in which the Board of Trade approved an amalgamation for quite a different reason, and it might very well be that the immediate benefit in such a case would be a financial one.

Mr. Benson

There is no question of "immediate" here; it says "benefit."

Mr. Hogg

It would be a question of fact for the Commissioners, which they would decide in different cases. But of those cases where amalgamations were approved by the Board of Trade, a certain number would be found to be innocent, but none the less, they would be cases in which the main benefit was a reduction in tax. I do not think the Solicitor-General's arguments are sufficiently powerful to persuade me that we have had the worst of the matter. In the circumstances, I beg to ask leave to withdraw the Amendment. It is clear that we are not going to get very much further with the Solicitor-General to-day.

Amendment, by leave, withdrawn.

Motion made, and Question proposed, "That the Clause stand part of the Bill."

Mr. Tinker

I want to put one or two points to the Solicitor-General. The intention of this Clause is to prevent tax avoidance. Before the Clause was strengthened; there were cases in which there were certain firms, who paid their directors £1,000 a year as salary. When amalgamations took place, those firms paid off the directors with a lump sum, giving them perhaps £5,000 or £10,000. The point that troubles is that those payments were not liable to tax, whereas the £1,000 salaries were liable, when paid, as they previously were, just like anybody's wages. The High Court has held that, as the law is constituted, taxation could not be charged on the lump-sum payments.

I would ask the Solicitor-General whether, now that the Clause is being strengthened, cases like that can be reexamined for the purpose of getting pay- ment of tax from the people concerned. I am not accusing those men of being tax-dodgers, but it is evident that there has been tax avoidance because of a weakness in the law. Is that weakness to be put right now? There are many cases of that kind. I dealt with the matter fairly "fully on the Second Reading of the Bill, but the Chancellor of the Exchequer did not make any reference to my arguments. I would like to have an answer now, because the point is important. Perhaps I might read to the Committee a quotation from the "Financial Times" which I previously read to the House. It is as follows: A lump sum payment to an employee, including a director, as compensation for loss of office, is not taxable. The reason is that the payment is in return for the giving up of the right to receive further annual profits, and is therefore capital. Where, however, the terms of a person's employment give him the right to a lump sum payment on termination, whether by resignation, death or any other cause, such payment is regarded as deferred remuneration and is taxable. The subject of lump sum payments to directors was considered by the House of Lords, in February, 1943, in the case of Wales v. Tilley. A limited company agreed in 1937 to pay its managing director a salary of £6,000 per annum, and undertook, in the event of his ceasing to hold that appointment, to pay him a pension of £4,000 per annum for ten years, following such cessation. In 1938 a new agreement was concluded whereby the managing director agreed to release the company from its obligation to pay the pension and to continue to serve as managing director at a reduced salary; in consideration there for, the company agreed to pay him £40,000. That shows the weak point of the law at present. I am asking for some kind of explanation from the Treasury Bench as to whether the alteration now being made covers up the weak points, whether these people will he responsible for tax and whether tax will have to be paid when such cases arise in the future.

Sir W. Smithers

I want to put forward a plea that the Clause does rope in innocent people. The late Chancellor of the Exchequer, speaking on this subject, said: Finally, it has to be borne in mind that the assessing authorities for Excess Profits Tax are the Commissioners of Inland Revenue, and while they are not likely to attempt to apply the avoidance powers of Clause 30 to innocent. trading transactions they are.…."—[OFFICIAL REPORT, 1st July, 1941: Vol. 372, c. 1276.] The real reason why the Inland Revenue now wants to amend Section 35 again is not that there is something really wrong with the Section as it stands; but inspectors of taxes up and down the country, under instructions from Llandudno, have been making all sorts of extravagant claims under this Section 35. Then, when a taxpayer appeals, and wins, the Revenue immediately thinks there is something wrong with the Act, and rushes to the Law Officers of the Crown to have the Act amended, in accordance with their preconceived ideas of what it ought to provide. When things go against the Treasury, they come to this House to get stronger powers, but the taxpayer has not the same opportunity of introducing legislation, if the matter goes the other way.

The Solicitor-General gave us two examples; perhaps I might give two examples to match his. Some clients of a barrister friend of mine had shares in a company, to the extent of about 50 per cent, of the issued capital. They found that the holder of the other 50 per cent., who was one of their directors, had accepted a directorship on the board of a rival company. It would have been impossible for his clients to have conducted their business with somebody, sitting on their board, who was also a member of an enemy camp, and in order to get rid of him they had to buy his shares in the subsidiary company. That gave them a holding of well over 90 per cent. This conferred upon the people concerned an Excess Profits Tax advantage, but, from start to finish. Excess Profits Tax was never in their minds as one of the purposes of the purchase of the shares. All the facts were fully and frankly laid before the Revenue. They did not deny the facts, but nevertheless they made directions against the people, under Section 35 of the Finance Act, 1941. When they got before the Special Commissioners, the Commissioners had no hesitation in discharging the direction, but it had cost several hundreds of pounds in legal expenses to do it.

There are a number of other cases. I should like to mention one which is that of another barrister friend of mine, who at one time argued 13 appeals under Section 35 without losing one of them. In every case the Commissioners came to the conclusion that there was no evidence to support the view that Excess Profits Tax avoidance had been in mind. The Com- mittee will see how the thin end of the wedge works in this kind of legislation. First of all it was introduced to stop tax-dodging, with which object we all agree. Then the Revenue seeks to apply it, where there has been no intention of tax evasion, or where that intention was a purely subsidiary one. They get defeated in the courts, and straightway come to Parliament and ask Parliament to accept a Clause, which deems tax evasion to have been one of the main purposes, even though in fact it might not have been. We are thus right outside the realm of deliberate tax evasion. Parliament is being asked to pass legislation to punish people who may be quite innocent. I could adduce further arguments, but I do not want to keep the Committee. I thank the Solicitor-General for the patience and kindness he has shown during this Debate.

Sir A. Gridley

I am afraid I cannot subscribe to the proposal that this Clause should stand part of the Bill. I desire to see the Clause omitted, not because there should not be a Clause 32, but in the hope that a better Clause 32 may be substituted for it. No Clause in the present Finance Bill has created more misgivings throughout the length and breadth of the country in industrial circles, than this Clause. It is all very well to hear arguments, that this is or this is not the intention of this Clause; that it will work this way, or that it will not work in that way. This kind of argument, as I am old enough now to realise, carries no weight, once one gets before a court.

If I may bring this home I would remind the Committee that we have passed and granted to Ministers during this war tremendous powers under the Defence of the Realm Act. One of those powers enables Ministers to take over companies and do pretty well what they like with them. The aggrieved company may take its case to court on the ground that the Minister has exceeded powers granted to him by this House. But what does the judge say? "It is not for me to consider whether the Minister has done something which is against the national interests, or against the interests of this company. All I am concerned with is; was he within his rights in taking the action he did according to the Order or Regulation?'' The judge may be entirely stopped from considering any other ques- tion except whether the Minister has exceeded his powers or whether the action he has taken is within them. That is the way in which Acts of Parliament, once we have passed them, have to be interpreted by lawyers who act for or against a company.

Therefore, when an important Finance Bill of this kind is printed and circulated throughout the country, wise and prudent business men and others likely to be affected by it call upon their lawyers or chartered accountants, or both, for a report as to what effect certain Clauses in the Finance Bill may have upon them, and the future of their business, and the kind of transaction they may be asked to enter into or may consider entering into with other people. The result of the consideration that has been given in that way by learned members of the law, and the practised chartered accountants, is that a great many perfectly innocent transactions could have been carried out under Section 35 of the Act of 1941, which may be caught by this Clause if it goes through as it is. The position in which some of the perfectly innocent things which one might do under the Section, could, if the Clause were carried to its extreme limit, put an unfortunate company or employer, is absurd.

We have heard a great many arguments seeking to modify the Clause here and there. Some of the arguments I found myself in agreement with; others, had they been pressed to a Division, I should certainly have opposed. You get all sorts of conflicting opinions when you try to modify suitably a Clause of this kind. Some of us tried to see what Amendments we could put down, which would give the Treasury all the powers they needed to catch the man who was trying to be dishonest. As has been said, many times to-day, none of us wants to withhold from the Treasury for one moment, all the powers that may be necessary to catch the people who have been described as tax dodgers. But unless we have all the information at our disposal, which the Treasury and Inland Revenue officers have, we do not know who it is, or what class of trader it is, that it is essential to catch. We have heard to-day for the first time from the learned Solicitor-General that 70 per cent. of the many cases which the Treasury have had to consider, have been working partnership cases. I have no doubt there is another percentage of another class. Can we have a modified Clause brought forward which will give the Treasury the powers they need to entrap those people? If such a Clause can be drafted, those of us who dislike the present Clause will certainly promise to give full, fair and a careful consideration to any substitute which can be devised.

I do not want, at this stage, to go over the arguments submitted on the various Amendments which we have disposed of. But I do ask if the Treasury, the Chancellor, the Solicitor-General and their advisers, will undertake to consider the matter between now and the Report stage, having heard from us here in this Committee and, as I well know, having learned from outside from other sources, the grave objections there are to this present Clause. If they will undertake to think again about this, if they will appreciate that there are many objections to the great width of this Clause as it now stands, and if they bring forward a modified Clause couched in such terms as will give them all the powers they really need, I am sure we will do everything we can to meet them in the difficult situation in which they find themselves. I do hope they will not insist on sticking to the letter of the Clause as it stands, but will endeavour to meet us so far as they reasonably can.

Mr. Hutchinson (Ilford)

I join with my hon. Friend the Member for Stockport (Sir A. Gridley), in inviting the Chancellor of the Exchequer to take this Clause back again and see whether he cannot devise a Clause which will give him the additional powers which he desires to have but which will be free from the objections to which this Clause is open. The Debate to-day has shown that this Clause does contain certain matters which are, generally speaking, repugnant to both sides of the Committee. [An HON. MEMBER: "No."] Yes, even my hon. Friend the Member for West Fife (Mr. Gallagher} was prepared to agree that retrospective legislation is, upon grounds of constitutional principle, a device which ought to be avoided as far as possible.

Mr. Tinker

The Clause may be repugnant to us but we think it is necessary in the circumstances.

Mr. Hutchinson

I do not disagree with my hon. Friend's intervention. That is what I intended to convey. This Clause does contain certain matters which are, generally speaking, repugnant to both sides of the Committee. We all agree that retrospective legislation is an undesirable device to which recourse ought not to be had if it can be avoided. I think that we are all agreed that subsection 3, which means that every transaction must be regarded as a transaction which has for its main purpose the avoidance of tax, merely because the main benefit is the saving of tax, is a form of legislation which is also undesirable, unless it is essential. That being so, I invite my right hon. Friend to consider-whether he cannot take this Clause back again, having regard to the very strong objections which have been taken to it, both in this Committee and outside, and see whether it is not possible to devise a Clause which is free from these objections.

I listened with particular interest to my hon. and learned Friend when he was explaining the type of case which it is desired to bring within the scope of this Clause. It seemed to me that my hon. and learned Friend went too far in proving his case. The cases which he described were cases in which it was very difficult to see how the Special Commissioners could have come to the conclusion to which they were said to have come. I cannot help thinking that there must have been some evidence which justified the Special Commissioners in reaching conclusions which seem to be so completely out of accord with the facts, as my hon. and learned Friend gave them to us. Are the Inland Revenue going to be any better off in these cases if they get this Clause? Take these cases, where a young person is brought into a business at an early age, made a director, given an allocation of shares, and so on; yet it is held that the main purpose was not the avoidance of tax. It seems to me that the result in those cases would probably have been exactly the same if the Section had been worded in the way which is now proposed. My hon. and learned Friend gets over the difficulty by saying that, if the result of the transaction was the saving of tax, that shall be deemed to have been the main purpose, or one of the main purposes. I think that the sense of the Committee is against that sort of legislation, and, unless it is essential to bring the tax dodger within the ambit of the tax, that is a type of legislation which ought to be avoided. I can see, and I am sure my hon. and learned Friend can see too, that if that is to be the criterion a great number of perfectly innocent cases will be 'brought within the scope of the tax, cases which were never intended to be brought with the scope of the tax at all. I would remind the Committee that, as was said earlier in the Debate, it is not only important to bring the tax-dodger within the ambit of the tax; it is equally important not to bring the person who is not a tax-dodger within the ambit of a tax which was never intended to apply to him. If the Clause goes into the Bill in its present form, that, undoubtedly, will be the result. I think that the sense of the Committee will be strong that, however desirable it may be to bring all the wrongdoers within the tax, it will be grossly unfair if we bring in someone who never was a wrongdoer, and to whom this tax was never intended to apply. I invite my right hon. Friend the Chancellor to look at this again, and to see, with the assistance of the law officers, whether it is not possible to devise a Clause which will be free from these objections.

I was one of those who added their names to the Amendment which was put down by my hon. Friend the Member for Stockport to leave out this par-particular Clause. That Amendment was not put down because we desired that those who have been evading their responsibilities should be allowed to go on evading them. We decided to put the Amendment down in that form, rather than as an Amendment to the Clause itself, because we felt that the only person who could devise a suitable form of words was really my right hon. Friend, and that private Members, not having knowledge of the type of case which he desired to bring within the ambit of the tax, could not be expected to frame suitable Amendments. I think that the Debate on the various Amendments which have been moved to-day shows that in that we were right, and that the only persons who can frame the proper Amendments are the Inland Revenue authorities, because only they have the necessary knowledge. Therefore, I invite my right hon. Friend to consider whether, in these circumstances, having regard to the difficulties which private Members have in amending legislation of this sort, he and his advisers, before the Report stage, cannot devise some form of words which, while giving him all the powers which he considers to be necessary, will not be open to the very serious objections to which this Clause is open.

Mr. Wilmot

I have listened with very great care to the arguments of the hon. and learned Member for Ilford (Mr. Hutchinson), and I wonder if the Solicitor-General, when he replies, will make quite sure that we understand the meaning and effect of the Clause. As I understand, Section 35 of the 1941 Act gave powers to the Commissioners in certain cases to make directions, the effect of which, at the most, was to offset the tax advantage which had accrued to those who carried on the transaction. As I understood the hon. and learned Member for Ilford, he was afraid, and I can understand his fears, that this Clause might have the effect of punishing the innocent with the guilty.

Mr. Hutchinson

It will have that effect.

Mr. Wilmot

If it has that effect, I think it will be desirable for the Committee to oppose it; but does it have that effect? The innocent parties to whom the hon. and learned Member refers are surely only those who are amalgamating businesses for purposes other than the avoidance of tax.

Mr. Hutchinson

The effect of this Clause will be, as I understand, that every transaction which results in a saving of tax will be deemed to be a transaction the main purpose, or one of the main purposes, of which is the avoidance of tax. It is for that reason that I say that this Clause is bound to bring within its ambit a large number of perfectly innocent persons, to whom the tax was never intended to apply at all.

Mr. Wilmot

But in the case of these innocent persons, who did not attempt to get a tax advantage but some other advantage, is not the maximum effect of this Clause, at the worst, to deprive people who did not seek to get a tax advantage of the tax advantage for which they did not ask?

Commander King-Hall (Ormskirk)

I rise to make a few remarks in support of the point of view put by my hon. Friend the Member for Leigh (Mr. Tinker). They will be brief, partly because of the hour, and also because I have some difficulty in seeing how the subject of compensation for loss of offices by directors is in Order under Clause 3, unless—and perhaps my hon. and learned Friend will deal with this point—it is allowable to charge up the cost of getting rid of redundant directors as a working expense for that year. If the matter is not covered by this Clause, I suggest that the Chancellor should look into this, because I see opportunities of evasion here by the device of appointing a director under a contract for 10 years, and then suddenly discovering that he is redundant and has to be compensated for loss of office.

Sir P. Hannon

I would like to make an appeal to the Chancellor. He has had, in the course of this Debate, many cogent, and I think clearly thought-out, reasons why this particular Clause should be reconsidered in order to meet the views of the Committee. It has always been the case, during the many years I have been in Parliament, that, when representations are made moderately and considerately to Chancellors and other Ministers of the Crown, and those views are supported by sound commonsense and evidence of factual merit, Ministers do take them into consideration and reconsider the structure of a particular Clause in a Bill. I am quite sure that the Chancellor must have been impressed by the speech of my hon. and learned Friend who sits beside me, who made a very substantial case far the reconsideration of this Clause. I know how strong is the sympathy of the Chancellor with the revival of industry after the war, which is one of the biggest problems of our time, and I would add that the generous consideration which he has extended to industry is generally appreciated by everybody connected with productive enterprise in this country. But I hope he will not endeavour to put into an Act of Parliament something which excites the suspicion of everybody who is liable to E.P.T. I hope he will not place the innocent taxpayer in the position of having to defend himself in every instance against the Commissioners. Nobody appreciates more fully than I do the reasons for the sound commonsense proposals he has made, and we all admire his statesmanlike actions since he took charge of the Exchequer.

We are all anxious to secure our economic stability in this country. I represent a very large number of small manufacturers, and the organisation of which I happen to be the head embraces 2,000-odd small manufacturers, and I think that, in justice to them, the Chancellor ought to see his way—indeed, I think the exchange of views in the Committee today would induce him—to reconsider the actual text of this Clause so as to meet the general wishes expressed throughout the Committee. Everyone of us wants to trap the fellow who is trying to evade the tax, but let not the House of Commons be a party to placing the innocent taxpayer in the position of having no opportunity to defend himself.

Sir P. Bennett

It is quite clear to every hon. Member that the Committee is agreed that the Treasury, having made up its mind that it cannot do its work properly, is asking for these additional powers, and it would be almost a Vote of Censure if they did not get them. What I am concerned about is giving the Treasury powers to do things which I am quite sure they do not intend to do. We have heard a great deal about amalgamation and directors' salaries, but I do not think it is realised that you cannot do anything today in the way of expenditure or of reducing your prices without affecting the amount of Excess Profits Tax that you will produce. I am concerned with matters which might be questioned, but which are quite legitimate, and with which I am sure the Revenue will not interfere, but which I am quite sure are not excluded by any form of words in the Bill.

Take the single case of advertising. It might be said, "What is the good of advertising your products to-day? You will not sell them." The war has been going on for five years and we have a short-memory public, and many business people feel that it is legitimate to spend an amount on advertising in order to keep their names alive as long as possible. There are slogans which have been in existence for some time and which are never questioned, but if those people stopped advertising for five years they would find that they would never establish their rights to them again. You must keep on expenditure which is not vitally necessary for the products of to-day or for the war effort. There is the scientific work that is being done, some of which you cannot prove will produce results in the war period. It may be said, "That has been done out of Excess Profits Tax. You have no right to do it and we will charge it back." There is the extreme case: "Can I reduce the price to a Government Department without reducing the amount of Excess Profits Tax that I should pay?" These are things which I am certain that the Inland Revenue authorities feel, as we in business do, that as long as they are legitimate it is not tax evasion. It should be made clear that we are not to be told afterwards that, because we carried out business in an indirect way, we are dodging tax. The Chancellor should make that transaction perfectly clear.

The Solicitor-General

With the consent of the Committee, I would like to divide the few remarks with which I shall trouble them into two parts, and, first, to deal with the point raised by my hon. Friend the Member for Leigh (Mr. Tinker), supported by my hon. and gallant Friend the Member for Ormskirk (Commander King-Hall), which was rather beside the general stream of our argument—the question of compensation for loss of office. I would remind my hon. Friend the Member for Leigh of the position as it stands to-day. He has, if I remember his speeches correctly, had a look at the case of Wales and Tilley, which was decided in the House of Lords. There is a good example of the different sides of the line. The decision was that so much as was paid to Mr. Tilley as a lump sum instead of salary, which he would have got year after year, had to pay tax, but so much as was paid to him in substitution for his pension rights had not to pay tax. My hon. Friend is right in the view, which I am sure he has clear in his mind, that, if someone is paid a lump sum for giving up the right to a job of some sort, he is deemed to have parted with a capital asset in income rights, and, therefore, he receives that money free of tax and it is a capital payment. I am sure that my right hon. Friend will be only too glad to look into the problem which my two hon. Friends have raised. It is rather off the line of this Clause, and I do not think that my hon. Friend would ask me to say any more, except that we shall look into the disquiet which is obviously in their minds and consider the matter.

Mr. Tinker

I am satisfied with the assurance the Solicitor-General has given to pay close attention to what has been said.

The Solicitor-General

I am very much obliged to my hon. Friend and have pleasure in giving him that assurance. Now I come to the question of the Clause, and I should like to deal together with the speeches of my hon. Friend the Member for Stockport (Sir A. Gridley), my hon. and learned Friend the Member for Ilford (Mr. Hutchinson) and my hon. Friend the Member for the Moseley Division of Birmingham (Sir P. Hannon). I will deal separately with my hon. Friend the Member for Edgbaston (Sir P. Bennett).

Let us try to look back at this Clause as we have all viewed it. Most of us here have heard a great deal of the Debate to-day and I think the vast majority are convinced that retrospective legislation was necessary. I will not put it higher than that; I will not say every one, but I think the vast majority are now convinced of that, in view of our problem. I think, again, that the vast majority are convinced that the old test of the main purpose would not do and we have to have a different test. Again, I think the vast majority of those who have followed it out are convinced that we have to have some factual basis like "main benefit" as being the true guide to the Comissioners as to what was the main purpose or one of the main purposes. That is the general basis of our approach, and I do not think that the majority of this Committee would welcome that my right hon. Friend should give way on these points.

Let us look at the Clause from another point of view. What are we really trying to hit by this Clause? I will endeavour to put it to the Committee. We are trying to hit, in the main, two forms of avoidance. In the first place, a change or changes in the person or persons carrying on the trade or business or part of the trade or business. That is putting in general language what I have said more than once to the Committee—misuse of the working-proprietor class of cases. That is the main thing we are trying to hit. We are also trying to hit the transfer or acquisition of shares in a company which produces increased advantage in respect of Excess Profits Tax. I want to be quite frank with the Committee and I think the Committee will acquit me of being anything else during the day, for I have tried to put the point quite bluntly to them. These are undoubtedly the ones we are trying to hit. I think we are all impressed by the sort of points put by the hon. Member for Edgbaston. He mentioned matters such as advertising, prices and so on. I see his point of view. If he will allow me to paraphrase his words, "That is not the target you are aiming at; therefore, do not hit that target by mistake."

I abide by an old and true rule in legislation, that is: "Look at the law as it exists, look at the mischief which you are trying to cure, and then look at the best way of curing it." I am quite prepared—and my right hon. Friend authorises me to say this for him—to look at it from that point of view, to see that we are not going off the target. Equally, however, my right hon. Friend allows me to say this, that we are not departing from these three main bases which we think are necessary to cope with the two mischiefs which we think we have proved quite conclusively to the Committee. We are always prepared to consider legislation from the point of seeing that it is truly drawn to meet the evil with which we are dealing, but we are not prepared to flinch one inch from meeting the evil as we see it. On these lines we are prepared to consider the matter, and I hope I have made clear the sort of line on which we are prepared to consider it. I hope I have the general assent from all quarters of the Committee in considering it in that light.

Sir P. Hannon

Do we understand from what the Solicitor-General has said that, with the approval of my right hon. Friend the Chancellor, there will be some modified improvement in the text of the Clause?

The Solicitor-General

If my hon. Friend has in mind the question of the main benefit being deemed to be the main purpose it was not my intention to hold out any hopes of altering that. I wanted to indicate to the Committee that my right hon. Friend and I wanted to hit these two forms of evasion—the abuse of the working proprietor and the abuse of the transfer of shares. We are prepared to look at it from the point of view of delimiting our missile to hit that target, but I do not want anybody to have a false impression that we are prepared to go beyond that.

Mr. Colegate

I think that the Solicitor-General has satisfied us on a good many of the objections we felt, but I should still like to be quite clear. We have felt that this is rather like a photograph that is a little out of focus, and we would like a clearer picture. We are certain that the two evils he mentioned should be dealt with by retrospective legislation and defined and marked off so clearly that no other cases can come in. One thing that has not been mentioned to-day is that there are thousands of E.P.T. cases in arrear in the country, and the prospect of reopening them on the chance of catching one guilty man is a serious matter. I was glad to hear that that is not the intention of the Chancellor. I think it would help if the Solicitor-General would make it quite clear that he will produce on the Report stage some modification in the wording of this Clause which will make it clear that no innocent cases can come in.

The Solicitor-General

I do not like using loose terms like "innocent cases," because there may be different opinions about them. We are trying to hit the abuse of the working proprietor and the abuse of the transfer of shares. If I can get some words—and my right hon. Friend is prepared to consider this—which will direct the Clause more closely to these admitted evils we will do our best to do so. That is quite clear to those who have listened to the Debate, and that is what my right hon. Friend is prepared to do.

Sir W. Smithers

I am sorry, but I have not quite understood yet what the offer is. Is it that there will be a redrafted Clause on the Report stage, which will embody the points which have been put by my hon. Friends?

Question, "That the Clause stand part of the Bill," put, and agreed to.

Clauses 33 to 46 ordered to stand part of the Bill.