BENEFITS PROCURED FOR DIRECTORS AND EMPLOYEES (Hansard, 23 April 1947)

§ Sir John Anderson (Scottish Universities)
This Resolution is cast in wide terms and it is not at all easy to judge at a glance just what it is proposed to effect under it, but as I think it is clear that it has something to do with the prevention of abuse in connection with tax-free allowances, I trust I shall be in Order if I occupy the time of the House for a few moments in developing a point I made in 1109 the earlier Debate. I dealt on that occasion with what I considered to be a difference of principle between Rules 9 and 10 under Schedule E of the Income Tax Act. I gathered from the subsequent proceedings—when, unfortunately, I was not able to be in my place—that the hon. Member for South Cardiff (Mr. Callaghan) and, I think, the Financial Secretary to the Treasury himself, sought to argue that there was really no difference at all because, as they pointed out, the same words which I had quoted appear in both Rules.
It is perfectly true that the same words do appear in both Rules, but they are contained in a different context, and I feel bound to draw attention to the material difference which I think appears in the application to the different sections of the tax paying community of these two Rules. Let me, however, first make it perfectly clear that in this matter I am not making an attack on His Majesty's Government, and not even criticising them. As was rightly pointed out in the last Debate, Rule 10, which is the rule under which the allowance in the case of the Prime Minister was settled, goes back a great many years and, as a matter of fact, I am myself implicated in its operation—not, I hasten to say, as a beneficiary but as a public functionary. The difference between the two Rules is this. Rule 9 makes the grant of any allowance depend on ascertained facts—facts ascertained under the ordinary machinery of the administration of Income Tax, subject to appeal to the courts and so on. The Rule begins by setting out two examples, one of which is the use of a horse and trap in connection with the performance of certain duties.

§ The Solicitor-General
On a point of Order, Mr. Deputy-Speaker. I waited for a while to see how the right hon. Gentleman would develop the point he was making, but it has now become clear, in my submission, that his argument has nothing whatsoever to do with this Resolution. The right hon. Gentleman Was talking about expenses within the meaning of Rules 9 and 10 of the Rules applicable to Schedule E. This Resolution makes no mention of expenses and has nothing at all to do with expenses. It is a Resolution which is designed to make it possible to impose a liability in respect of benefits. When I can, if I may, at a later stage develop the reasons 1110 for which the Resolution is put down, it will be perfectly apparent that it has nothing to do with expenses or with Rules 9 and 10 or with any argument which, so far as I can see, can be or has been based upon them. For this reason I respectfully submit that the right hon. Gentleman's argument is irrelevant.

§ Sir J. Anderson
May I make a submission on that point of Order? The relief from Income Tax can be given by an allowance for expenses or by ignoring for the purposes of assessment of tax benefits which the employed person receives. I gather that this particular Resolution which, as I said, is cast in wide terms—and we are at some disadvantage in discussing it because we have had no explanation—is concerned with bringing within the scope of tax certain benefits which now escape.

§ Mr. Glenvil Hall
Perhaps the fault is mine. When we were dealing with this matter on the Committee stage the question was put to me by the right hon. Gentleman as to what the Resolution meant and I indicated briefly then that, as my hon. and learned Friend has said, the Resolution was one to enable us to make provision in the Finance Bill to prevent avoidance of Income Tax. I feel that the right hon. Gentleman, basing his speech on that, imagined that the Resolution was going further than it does. I went on to say that it will still be legitimate under Rule 9 to claim the ordinary expenses which individuals can claim and that in order to allay suspicion, doubts and fears I should say at once that this Resolution has nothing to do with expenses. The right hon. Gentleman has assumed that it has something to do with expenses and is basing his speech on that. In fact, it has not.

§ Mr. Callaghan
Further to that point of Order. May I submit that the introduction of the dispute which has arisen about Rule 9 was in fact made by the right hon. Member for the Scottish Universities (Sir J. Anderson)? It was he who, in his speech, referred to the fact that the Chancellor had not himself spoken of Resolution 15, and went on to say: I concentrate on the words, 'We stand for justice.' I hope we all do. I hope that justice means one law for all. I am sure the Chancellor must realise that it is not so at present.''—[OFFICIAL REPORT, 16th April, 1947; Vol. 436, C. 207.] 1111 He then gave an illustration, and the illustration was the amount of the Prime Minister's expenses which are payable under Rule 10. As I understood the learned Solicitor-General in what he said tonight, Resolution 15, which we have not yet heard expounded, does not in point of fact deal with expenses at all. It deals with avoidance, and avoidance may be avoidance of Surtax. It may be avoidance under any particular heading, as in the Resolutions we had last year dealing with that subject. I do not know what would be for the convenience of the House, but I think it would be interesting to have a discussion on the right hon. Gentleman's point; it might be convenient if we heard what the object of the Solicitor-General is in trying to get Resolution 15, then we could see how wide we could go on it.

§ Sir J. Anderson
I would be quite agreeable.

§ Mr. Deputy-Speaker (Mr. Hubert Beaumont)
I am in some difficulty as I have only just entered the Chamber, and I have not heard the previous speeches. I think perhaps it would be for the convenience of the House, although it nay be somewhat irregular, if the learned Solicitor-General would speak and the right hon. Member for the Scottish Universities (Sir J. Anderson) would then follow him.

§ Captain Crookshank
Perhaps we could consider the learned Solicitor-General's speech as a rather long interruption.

§ Mr. Deputy-Speaker
I am quite willing to do that, if the House will allow me to interpret when I think the interruption should cease.

§ The Solicitor-General
I am sorry this misunderstanding has arisen, but I hope when the right hon. Gentleman realises the object of the Resolution he will agree that this particular matter does not arise upon it.

§ Sir J. Anderson
I hope the learned Solicitor-General will apply himself to the scope of the Resolution as it stands on the Paper, and not to the narrower question of what it may be in the mind of His Majesty's Government to do under it.

§ The Solicitor-General
I will certainly do that. I will first say what we want 1112 to do under it and then, so far as it is relevant, dilate upon its scope. What we want to do under this Resolution is to introduce into the Finance Bill an anti-evasion Clause to deal with the class of case in which a director, or any other member of a company, is given what is really a revenue payment in the form of what, apparently, is a capital payment, with the result that he will contend that Income Tax is not payable upon it. May I give a concrete case of the sort of payment with which we are trying to deal? Let us suppose there is a director of a company who is paid a certain salary as managing director, and he has a right to an annuity for a certain number of years on termination of office. That, of course, is a frequent service contract. When his office comes to an end, however, instead of being paid the annuity, he is paid a lump sum by way of commuting the annuity. That is the sort of thing that has been done. If the director were paid so much by way of salary during the time he held his office, he would obviously pay Income Tax on it, and if when he left his office, he were paid an annuity, he would pay Income Tax on that. What is done, and what we want to prevent being done, when he leaves his office or relinquishes his employment, is the making of a fresh arrangement whereby, instead of being paid so much year by year by way of an annuity subject to Income Tax, he is paid a lump sum in commutation of that annuity.
For example, and this is a case which is not very far away from what really happens, a director receives £2,000 a year for three years' service, acquiring also a right to an annuity after having done three years' service. The annuity is commuted for a payment of £20,000, and it is claimed that the £20,000, being a capital payment, is not subject to Income Tax. The common sense of it and I would respectfully submit the intention of it, clearly was that he should not be receiving £2,000 but a much larger sum by way of' salary, namely, £2,000, plus a proportionate amount of the £20,000 which he is afterwards paid as a lump sum, and which it is claimed is a capital payment. That, if it is allowable, is a clear way of evading the provisions of the Income Tax Acts and, as the right hon. Gentleman knows, one of the most difficult problems of Income Tax law is to determine what is an income payment and what is a 1113 capital payment. This is a method which is attempted and which must be stopped, because if it succeeds the Treasury will lose an enormous amount of money. There are similar cases connected with endowment policies. The endowment life assurance policy is being advertised; it provides that upon termination of employment a lump sum shall be paid—again, not an annuity, which would be subject to tax, but a lump sum. That again is a method by which, if it succeeds, very substantial sums of money which ought to go to the Revenue by way of Income Tax will not go to it. The attempt is made to disguise what really is an annuity payment or an addition to salary as a capital payment, and, therefore, to maintain that it is not subject to tax.
What it is sought to do is to stop that sort of thing. It is a purely anti-evasion Clause. The right hon. Gentleman says that, the Clause is widely drawn, so widely drawn that he can advance the argument that he was seeking to advance. I submit that it is not. After all, what are the governing words? That it is expedient to impose liability to Income Tax where benefits"— Nothing to do with expenses— (including benefits which are to be enjoyed only on the happening of particular contingencies)"— It refers, in general, to the termination of employment— are or are to be procured or provided by bodies for persons who,. as directors or otherwise, are taking part or are to take part or have taken part in the management of their affairs … That is a fairly accurate way, and on the whole a fairly concise way, of describing the sort of transaction I have just indicated. I have indicated two transactions. It is desired to introduce into the Finance Bill an anti-evasion Clause which will prevent those two types of transactions, and other transactions which are analogous to them, from being successfully undertaken with the result that a great deal of Income Tax is lost. That is what we want to do; it is purely an anti-evasion Clause, and has nothing to do with expenses, with Rule 9, or with Rule 10.

§ Sir J. Anderson
I am sure the House is obliged to the hon. and learned Gentleman for his explanation of what is obviously a very complicated matter. I would still like to submit, Mr. Deputy-Speaker, that this Resolution is obviously 1114 drawn in terms wide enough to make it possible for legislation to be included in the Finance Bill to provide that the benefits accruing to employed persons in respect of their employment which at present escape taxation shall in future be held liable to taxation. And that being so, we on this side, in criticising the Resolution, are entitled to argue that before authority is given to the Government to bring within taxation benefits by way of remuneration accruing to employed persons which now escape, we should be assured that proper allowances, fairly calculated on uniform principles, will be made to employed persons under the Income Tax law.

§ The Solicitor-General
What sort of allowances?

§ Sir J. Anderson
Allowances for expenses, allowances of all kinds which may have nothing to do with this except that the Government are asking authority to extend the scope of Income Tax to cover elements in remuneration which at present escape. I submit that we are entitled to argue that the Government should only be given such authority if we are satisfied that in other respects the law with regard to the exemption from Income Tax of other elements in remuneration is in a satisfactory state. That is my submission.

§ Mr. Deputy-Speaker
Having heard the hon. and learned Gentleman the Solicitor-General and the right hon. Gentleman the Member for the Scottish Universities (Sir J. Anderson), I must rule that this Resolution has nothing to do with the question of expenses.

§ Mr. Eccles
I am grateful to the Solicitor-General for his explanation, but as one reads the Resolution, one puts the question, "To what kind of benefit does it refer?" If the Solicitor-General wants to have a simple example, I will give that of the benefit which a cricketer gets if there is a benefit match for him; at present that benefit is excluded, but on reading the Resolution, it seems to me that that sort of benefit might be included. I now understand it is not.

§ The Solicitor-General
If I may have the permission of the House to speak again, I would like in one sentence to reassure the hon. Member for Chippenham (Mr. Eccles) that the legislation will 1115 not in any way alter the existing law in regard to the payment of benefits in kind, such as board and lodgings, or payments of necessary business expenses.

§ Sir A. Gridley
I am afraid that in my ignorance of the law I am a little anxious after what I have heard from the Solicitor-General. He gave as an illustration the case of a director or an employee who received a certain amount as a capital payment instead of a pension or an annuity, and said that sum would be liable to Income Tax under this Resolution. Am I right in that?

§ The Solicitor-General
For the second time, I ask permission to address the House. The hon. Member for Stockport (Sir A. Gridley) begs the question, because he refers to a case in which a capital payment is made. The whole question is whether these lump sum payments in their true light are capital or revenue payments. We say they are not in their true light capital payments, and that is why we want this Resolution to prevent a revenue payment being described as a capital payment.

§ Sir A. Gridley
May I develop the point? It is not an uncommon arrangement, and I think it is an arrangement which is beyond question, for an employer to provide for an employee a fixed salary up to a retiring age and then to provide a pension for The pension conditions may include an option that when the retiring age is reached, instead of the person taking £500 or £700 a year, or whatever the figure may be, he may exercise his option to take a capital sum instead of a continuing pension. A person may be suffering from an incurable illness and may wish the sum to be invested by trustees on behalf of his surviving widow. Is that capital sum to be caught under this Resolution and treated as a sum liable to Income Tax? If so, a very great injustice will be done.

§ Mr. Callaghan
I think the right hon. Gentleman the Member for the Scottish Universities (Sir J. Anderson) put a most powerful case. There is a great deal to be said for his point of view, that as the Resolution is at present drawn we are in some difficulty. The only point I want to make is that when we come to the Finance Bill, it will be very interesting to See how this provision is drafted in 1116 order to avoid the difficulties which the right hon. Gentleman the Member for the Scottish Universities foresees. On that occasion, if the provision is still drawn as widely, the right hon. Gentleman will want to put the point again, and we shall continue the discussion which has been started and broken off. The draftsmen will be in some difficulties on this matter in the Finance Bill if they are to make the provision so narrow that it catches only the sort of cases which the Solicitor-General has enumerated. It will be a matter of very considerable difficulty, and we shall scrutinise the provision in the Finance Bill.

§ Mr. Jennings
The hon. Member for South Cardiff (Mr. Callaghan) has said a good deal of what I had in mind. We have to remember that the inspectors of taxes who will have to administer this provision may have different views as to what it means, and I think it is only fair to those officials that the provision should be clear. The Solicitor-General was clear as to what he had in mind, but I think there is some doubt, and for the sake of those who have to administer the provision, it should be clarified.

§ Mr. Assheton
I do not always agree with what the hon. Member for South Cardiff (Mr. Callaghan) has to say on matters of finance, but on this occasion I find myself largely in agreement with him. After listening to the discussion, I think it is clear that the terms of this Resolution have been much too widely drawn. The Solicitor-General has been good enough to give the House several assurances. We shall watch with very great care the drafting of the Clauses of the Finance Bill which will put into law the proposals of the Government on this matter. I wish to make it clear that in not dividing the House on this Resolution, we are relying very largely on the assurances which the Solicitor-General has given, and we shall look forward to seeing a Clause in the Finance Bill which will explain very clearly the limited matters which are to be put before us.