§ Mr. Benson (Chesterfield)
I beg to move, in page 15, line 46, after "person," insert "other than a local authority."
I think that all local authorities will be grateful to the Chancellor for Subsections (1) and (2) of this Clause, but I am not certain that they will be anything like so grateful for Subsection (3), with which my Amendment deals, because Subsection (3) —which is a definite limitation on the first two Subsections —may involve, if the Board of Inland Revenue take a rather narrow view of the legal position which Subsection (3) attempts to stabilise, a considerable amount of litigation. Because Subsection (3) is a limitation on Subsections (1) and (2), I might explain what the Clause does. Most local authorities have profit-making enterprises, and 1413 on the profits they have to pay Income Tax, like any other profit-maker. They pay Income Tax on their gas and electricity profits. They also have certain services which are paid out of the rates —education, roads, health, and a good many others. In order to give these services, they have had to borrow on capital account considerable sums, and on those borrowings they pay interest. As a result of a number of local Acts, one or two national Acts, and certain legal decisions, local authorities now have the right to set off the interest they pay against the profits that they make out of their undertakings, before they pay Income Tax. These rights of set-off vary from local authority to local authority, according to the local Act under which they work, and Clause 19 generalises these rights and gives them fully to all local authorities, irrespective of what their private Acts had given.
Subsection (3), however, is a potential limitation of this right. This right to offset interest against profits is likely to be endangered by the tendency of recent legislation to transfer the services of local authorities, particularly non-county boroughs, to the county councils. For instance, in 1029 the Local Government Act transferred the responsibility of certain roads from the non-county borough to the county council. In 1944 the Education Act transferred, in the case of a large number of authorities, the schools to the county councils. This year we have the Police Bill, which will transfer, in the case of a number of authorities, the police and all the police buildings, etc., which the local authority has hitherto held, and in future there may well be a transfer of the health services as well, to the county council.
The effect of this transfer of property from the non-county borough or maybe the urban district council to the county council, has the effect of changing the liabilities of the borough or council in legal form though not in substance, and the effect of this change in the form of the liability has resulted in the fact that the local authority is subject possibly to a considerable increase in the amount of Income Tax it has to pay, and that increase in Income Tax will be a purely fortuitous windfall to the Board of Inland Revenue.
1414 This is all rather complicated. May I give an example because it is always much simpler to deal in examples? Perhaps it is as well that I should take my own local authority of Chesterfield because Chesterfield was one of the pioneers in its local Acts. It achieved the first really watertight Act, and many other local authorities have copied what are called the Chesterfield clauses. Chester-field is a non-county borough. It had a very fine educational system of which it was very proud. That now, under the Education Act of last year, vests in the county council, including the schools which Chesterfield built —and it built many fine new schools. But although these schools now vest in the county council, but the mortgages which Chester-field raised for the purpose of building them are still a legal liability upon the Chesterfield rates, because they cannot be transferred —owing to the fact that the mortgages may be part of a mixed mortgage and it is the local Chesterfield rates that are pledged. Chesterfield still pays the interest on those rates, and that interest hitherto has been allowed to be set off against its profits before assessment of tax. We are still, as I say, liable to the payment of that interest but, under the Education Act, Chesterfield is reimbursed for the payment of its interest by the county council because the schools vest in the county council.
I want the Committee to realise that the county council, which reimburses Chesterfield for the amount of interest it pays, now has the power to levy a prescript on Chesterfield for educational purposes, and it gets from Chesterfield the money with which it reimburses Chesterfield for interest payments out of Chesterfield's rates. The actual cash position is not changed in any shape or form. Chesterfield pays its mortgage interest and is reimbursed by the county council, but, first, it pays a larger sum to the county council than that with which the county council reimburses it. I am prepared to admit that, in the reimbursement and the levying of the prescript by the county council, the identity of the actual cash is lost. Once cash is paid into a common fund its identity is lost. That does not alter the fact that the transfer of the schools from Chesterfield to the county council has not lightened the burden which Chesterfield has to pay for education, but it may 1415 increase the burden it will have to pay in the way of Income Tax. I am not clear what the legal position is. The question of whether the right of set-off is allowable will not be cleared up until there has been a long series of actions.
Subsection (3) says in effect that the status quo shall not be altered.Where any sum—has been or is to be reimbursed to a local authority by the Crown or by any other person.We do not quarrel with regard to the Crown, but the reference to "any other person" includes a local authority, and my Amendment inserts "other than a local authority," in order that we can be certain that this right of set-off shall not be lost. It is an important matter for local authorities. The effect with regard to schools alone will cost Chesterfield a two penny rate. It is not only schools; there are police buildings. There are what are known as "claimed" roads. We do not know the status quo at present because, suddenly, the Board of Inland Revenue appears to have changed its views. The "claimed roads." were transferred under the Act of 1929.Set-off has been allowed ever since 1930 and local authorities are still setting-off interest paid on the claimed roads against their profits, in spite of the fact that since 1930 they have been reimbursed by the County Council. Suddenly, the Board of Inland Revenue say, "No, you are not paying the interest because you are being reimbursed." The matter will have t be settled by a long series of local actions.
I suggest that it is very unwise to take away from a local authority services of which it is very, proud and then, by a mere side-wind, increase its liability to Income Tax.
§ Mr. Benson
This is not a very big matter from the point of view of the Revenue, but it may be a big matter from the point of view of the local authority. I want the Government to notice two things as far as the Inland Revenue is concerned. My Amendment does not lay any fresh burden. It merely asks that the Revenue shall not lay a fresh burden on the local authority, and, secondly, since all mortgages are subject to amortisation, 1416 it only denies the Revenue temporarily a windfall which will ultimately fade out. It is in order to establish that position and to avoid the necessity of unfortunate litigation between the local authority and the Inland Revenue which is no good for anybody but lawyers, and not many of us have any sympathy with them. [Interruption.] I had forgotten the presence of the learned Solicitor-General who will reply to me and may I withdraw that remark. In order to avoid litigation and the laying of an entirely unjustified and accidental burden upon local authorities, I propose to insert these words and I hope that the Solicitor-General, if he cannot accept the actual phraseology will either accept the principle, or at any rate agree to look into the matter.
§ Mr. Eccles
When I first saw the Amendment on the Paper in the name of the hon. Member for Chesterfield (Mr. Benson) I thought it smelt of municipal trading but, on looking into it a little further, and certainly on hearing the very lucid arguments of the hon. Member, I think it is a good point, and I hope the learned Solicitor-General will answer it with sympathy.
§ The Solicitor-General
The Committee are indebted to my hon. Friend the Member for Chesterfield(Mr. Benson) for his very careful argument, which obviously requires equally careful consideration in reply. I am bound to say that I cannot help feeling that he proceeded on a complete misconception. What does Clause 19 set out to do? The position was that, under Rules 19 and 21 of the rules applicable to all Schedules of the Act of 1918, if a single individual was in receipt of income upon which he paid tax, and if out of that same income he paid interest to some other person, then, inasmuch as the income he received, and out of which he paid, had already borne tax, it should not again bear tax by having to be taxed in the hands of the recipient of the interest. That was the position before this Clause was drawn up.
What does this Clause do? It simply places local authorities in the same position as individuals. Hitherto local authorities have been at this disadvantage. They had to regard the various incomes which they received as separate incomes and, therefore, if they had to pay interest to some other person, they could not lump together the various 1417 streams of income which they received and pay the interest out of that and retain the tax upon it in accordance with the principle which I indicated. But they had to separate their income, and if one stream of income was not enough to pay the interest, they had to bear tax on the excess of the interest for that particular stream of income. All that this Bill sets out to do, is to put local authorities into precisely the same position as the individual. The whole basis of the position as it existed, and as' it now exists, as affecting local authorities, is, that you must have an identity of income. You must have the same income being subjected to tax when it comes into the hands of the individual or local authority, as the case might be, and the interest paid out of that same fund.
The Amendment would involve a complete and absolute departure from that principle. What my hon. Friend is trying to say is that, even if a local authority does not pay interest out of its taxable income —by its taxable income, I mean the income it receives out of its undertakings —nevertheless, it shall still be entitled to retain tax on the interest that it pays out. If it pays that interest from some completely different source, namely, out of the sum paid to it by way of reimbursement from some out-side body, that is completely contrary to the theory and cannot possibly be sustained in any Bill.
To what is the hon. Gentleman leading us? He is putting this position, that if an outside body reimburses the council, the council, although it does not pay interest out of its taxable income may, nevertheless, retain the tax on the interest although the interest is paid out of the sum it receives by way of reimbursement. If that view is accepted what is to happen when dealing with a reimburser who seeks to claim to retain tax in respect of the amount he pays to the local authority because he has paid that amount of his own taxed income? Clearly, the position must be that if the local authority seeks to retain the tax it must establish that it pays the interest out of its own taxed income. If a reimbursing authority, the county council, has taxed income —income which is subject to tax —and out of that income reimburses the borough council, the county council itself can also say, 1418 "Inasmuch as we have paid that interest out of our taxed income, we ourselves are going to retain the tax upon it."
If the Amendment is adopted that second position becomes untenable, and the result will be that the revenue is deprived of the tax upon the interest it has paid. That, I submit, is a complete and absolute answer. The Amendment cannot possibly be accepted, because it runs counter to the theory on which Rules 19 and 21 were based, namely, that if you want to retain tax on the income you pay you must show that you have already paid tax in respect of that interest, because you have paid it out of income in respect of which you have paid tax. This Amendment involves a departure from that fundamental thesis.
§ Mr. Bracken
Perhaps the learned Solicitor-General could answer this point. Chesterfield has a magnificent educational record. Her schools are taken over by the county council and they have a liability for them. How can the Solicitor-General satisfy the argument, put forward in such an extremely capable way by the hon. Member for Chesterfield (Mr. Benson)? Chesterfield Borough Council had this responsibility and had no means of making themselves financially secure.
§ The Solicitor-General
It seems that my hon. Friend was under a misapprehension when he used the words he did, that the local authority had to pay more Income Tax and they were not being damnified in that respect. That is not the correct representation of the position. What is happening is this. Whereas. before they had to take their interest out of' their taxable income, and for that reason were allowed to retain the tax, the position now is that they no longer have to pay that interest at all because someone else is paying it for them. The county council is paying the interest for them, and reimbursing the amount they have to pay out on interest. Therefore, it is quite a reasonable thing that they should no longer derive the advantage they previously had of being allowed to retain the tax on that interest. My hon. Friend was saying that it is rather hard lines on the ratepayers. He was confusing the ratepayers with the two municipal bodies —the county council and the borough council. You have to regard this in terms 1419 of the county council and borough council, and that is the effect of it. So far as the borough council is concerned, they can no longer retain the tax, but they are no longer under the obligation to pay; instead someone else is paying for them. The hon. Member shakes his head.
§ Mr. Benson
What the learned Solicitor-General said is not correct. Chesterfield still has a mortgage on its rates, and it is Chesterfield's rates which are responsible for the payment of the interest to the people who loan the money. It is perfectly true that payment of interest, along with a large number of other expenses, is reimbursed by the county council, but the cash position is not altered in any shape or form inasmuch as Chesterfield will have to pay £3,500 a year more in Income Tax.
§ Mr. Bracken
. While I would not like to create any difficulties between the Members of the Party opposite, this is a substantial point, and I think that the Solicitor-General ought to address it as such.
§ The Solicitor-General
I am sorry that it is thought that I have not addressed myself to the immediate point. I listened with interest when my hon. Friend ventured to correct me. He said that they still have a mortgage, and will have to pay interest in respect of that mortgage, and, then, rather apologetically, he said it is true that they are reimbursed of that sum. That is exactly what I have been saying. What I have been saying is admittedly that they may have their mortgage, of course, they have; and in respect of that mortgage they are paying interest, and then I quote the passage which began with the rather shy words, "It is of course true" and that read "They are reimbursed the amount of that interest." They are reimbursed the amount, of interest by the county council, and if the county council reimburse them, if they have taxable income, it raises the same point; they can say, "We pay that interest out of our taxable income, and we want to be allowed to retain the tax on it." I am sorry that my hon. Friend thinks that I am not correctly representing the position. T listened carefully to him and I 1420 am satisfied that what I have said takes place, namely, that they had to pay interest before and retained tax on it; they no longer pay it and cannot retain tax on it.
§ Mr. Charles Williams (Torquay)
I realise that there are complications between the local authorities, but I represent the taxpayers. I think that the Committee should know what this would actually cost in the way of revenue. Would it mean a surrender of any revenue? If it is merely a matter of book-keeping, I am not very interested one way or the other. But from the taxpayers' point of view, does it mean that if the Government accept the Amendment which was so skilfully put, we, as taxpayers, would have to find any more money? Can I have an answer to that?
§ Sir John Mellor (Sutton Coldfield)
May I ask the Solicitor-General whether, in the circumstances described by the hon. Member for Chesterfield (Mr. Benson), and if this Clause were enacted, the revenue would gain?
§ Mr. Benson
If this is going to be the attitude of the Government, I do not wish to press the matter and, with the consent of the Committee, I will withdraw the Amendment.
§ Mr. C. Williams
I object to that. I am afraid that I am bound to object to the withdrawal of the Amendment. I think that we are entitled, when an Amendment is put forward seriously, and carefully argued by an hon. Member who has the respect of both sides of the House, to ask a very simple question, and have an answer as to what this will cost.
§ The Solicitor-General
I cannot give the figure because I do not know it. If this Amendment is accepted it may well mean, and, indeed, is bound to mean, that the Government will lose revenue. It is a practice which has never previously been put into operation and therefore, it is impossible to say what it would cost. But if it means that tax is going to be deducted from interest which is not paid out of taxed income every time £1 is paid in respect of that interest, it means the. Government loses 10s. and the longer that practice goes on the more the loss will be. Ultimately it will be very substantial. If it is accepted in the case of borough councils that this principle should be adopted, it may, with equal cogency. be 1421 suggested that it should be adopted in the case of individuals. It would completely undermine and upset the whole basis on which the revenue authorities allowed tax to be retained in respect of income which had already paid tax, and the consequences one cannot foresee because they will be very far reaching.
§ Captain Crookshank
We have listened to this very interesting point, but when 1 saw the Amendment on the Paper I realised that it was a matter impossible for ordinary people to assess. The hon. Gentleman the Member for Chesterfield (Mr. Benson) has made what seems to be a powerful case, and the Solicitor-General has made an equally powerful case from the other side. Quite frankly, without my hon. and learned Friend on this Bench I am not in a position to assess the value of respective legal arguments, nor, so far as I am concerned, have I had any representations from my own local authorities. Therefore, it may be a Chesterfield point rather than a Great Britain point. I merely wanted to say to the hon. and learned Gentleman in charge of the Clause that if between now and the Report stage we find there is something we want to raise I hope he will not take exception to our doing so then.
§ Sir J. Mellor
I do not think it is only a Chesterfield point. I am grateful to the hon. Gentleman the Member for Chesterfield (Mr. Benson) for having drawn attention to if. I want to ask the Solicitor-General whether, if this Amendment is not accepted and the Clause is enacted in its present form, the Revenue is going to gain from the local authorities. 1 should like to get that answered first. It would be rather difficult to appreciate which local authority might gain and which might lose. What I want to know is whether the Revenue is going to get something out of it from somebody.
§ Mr. C. Williams
I think I must, out of courtesy, thank the hon. and learned Gentleman for the answer he gave me. I appreciate it very much. But I must express astonishment, because I have listened to Budget Debates for a fairly long while now and I have hardly ever come across a case in which the Treasury have no estimate of the cost. I am sorry to sec the Treasury reduced to such a state that they cannot give us any figure.
§ Lieut.-Commander Gurney Braithwaite
May I make a suggestion in the hope that 1422 the Committee may be able to reach a compromise? It seems to me we have passed from the local sphere of the Debate to the financial sphere. The hon. and learned Gentleman said there is a substantial loss of revenue involved, but he did not know what the figure was. But the Minister should know. Cannot the Financial Secretary draw the necessary inspiration while I am speaking and come back and give us the figure, and then we could get on?
§ 8.15 p.m.
§ Sir J. Mellor
May I submit this, Mr. Chairman? I was not asking the question about the amount, but whether there would be a gain or not to the revenue if this Amendment is not accepted and the Clause enacted as it stands. I should have thought I was entitled to an answer to such a very simple question as that. There has been no attempt to answer it.
§ Amendment negatived.
§ Clause ordered to stand part of the Bill.
§ Clauses 20 and 21 ordered to stand part of the Bill.