NINTH SCHEDULE.—(Treatment of farm animals, etc., for Income Tax and Profits Tax purposes.) (Hansard, 17 June 1947)

§ Mr. Gerald Williams (Tonbridge)
I beg to move, in page 86, line 6, leave out "and," and to insert: except that if the sale was one which the seller was compelled to effect by causes wholly beyond his control the amount included as a trading receipt in respect of any animal sold which is replaced by an animal of worse quality shall not exceed the amount allowable as a deduction in respect of the said animal of worse quality; and. This Schedule is a highly complicated and technical one dealing with farmers and the method by which they pay their Income Tax. A farmer may choose whether he will pay Income Tax on his trading during the year, or on what is called a herd basis—that is, the herd becomes his capital. Therefore, it does not enter into his trading account. The present Schedule clears up some doubt that has existed up to date. In actual fact, farmers have accounted in these two ways in the past, but this Schedule makes it amply clear. It is an excellent Schedule definitely fair to the farmer as far as it goes, but if a farmer elects to be assessed on the herd basis his choice is irrevocable. So it is very important that we should get this Schedule properly worded and made completely clear.
If the farmer elects to keep his accounts on the herd basis, it means that any animals he buys as an addition to his herd, or any animals he sells as a reduction of his herd, are not accounted for in his profit and loss account. But paragraph (3), subparagraph (iv), lays down that if an animal dies and is replaced, the amount that animal is sold for is credited to the profit and loss account. 1962 A replacement loss is also debited to the profit and loss account. But in the case of the replacement animal—that is, the animal which is replacing the original animal—the replacement cost must not exceed the amount of the sale. In the same way, if the replacement animal is of worse quality, receipts from the sale must not exceed the cost of replacement. If the herd is sold as a whole, paragraph (3), subparagraph (iv) holds good, and it may well happen that the whole herd may be sold because of foot-and-mouth disease or some other contingency.
There is also the point that the whole herd may be sold compulsorily, because a tenant farmer may have a herd and may be given notice to quit. Having nowhere to put his cattle, he then has to sell them. It may be that an owner occupier is dispossessed of his farm, has nowhere else to go, and in the same way has to sell his herd. He can sell it all right; but when he comes to start a new herd, under this paragraph if he gets inferior stock—which he may well do, because a lifetime can be spent building up a pedigree herd and he may not be able to buy stock of the same quality all at once—he may have to pay Income Tax on the difference between the sale of the original herd and the purchase of the new herd. This Amendment gets over that trouble. I would like to point out that if one treats it the other way round—where the replacement is of better quality—the Treasury is protected against a claim for tax under paragraph (3), subparagraph (iv). The purpose of this Amendment is merely to make it clear for both sides—for the Treasury and for the farmer We are not asking for any preferential treatment. We are trying to make the Schedule clear and to improve it Therefore, I hope the Financial Secretary will see our argument and accept it.

§ Mr. Glenvil Hall
The hon. Member for Tonbridge (Mr. G. Williams) has put the case very clearly and briefly, and extremely well. He leaves me very little to add. What he says is quite true. The object of the Amendment is to ensure that if a farmer who is compelled—through no fault of his own, but possibly because he has to give up a farm—to sell his herd, subsequently starts another herd and the price paid for the new herd is less than that which he received for the herd he sold, he shall not be compelled to enter the difference as a receipt. I 1963 understand that the National Farmers' Union, who have marched in step with us on this part of the Bill, have seen this Amendment, and have agreed to its terms, and I have great pleasure in accepting it.

§ Mr. Paget (Northampton)
I beg to move, in page 86, line 11, at the end, to insert: and provided further that where all or a substantial part of the progeny of the production herd are sold or otherwise transferred, and either

(a) the transferee is a body of persons over whom the transferor has control or the transferee is a body of persons over whom the transferor has control or both the transferor and the transferee are bodies of persons and some other person has control over both of them, or

(b) it appears that the sole or main object of the transaction is to recreate at some future time a production herd in which an interest will be held by the transferor or his wife or children or some body of persons over whom the transferor or his wife or children have control,
and where within the period of five years a production herd is formed or begins to be formed from the said progeny, then for the purpose of this sub-paragraph the new production herd shall be deemed to have been acquired by the transferor. This is an important Schedule with regard to agriculture, and I think that in order to explain these complicated terms it is necessary to say what has been actually happening. As the hon. Member for Tonbridge (Mr. G. Williams) has told the Committee, farmers have had the option to treat their herds as capital or as stock in trade, but it is only recently that it has been realised that a herd can be treated as capital. Treating a herd as capital is a convenient way of reinvesting untaxed income. The way it is done is this. A pedigree herd is built up. The animals bred are taken into that herd at the cost of production. In point of fact, the building up of that herd costs a great deal more than the amount which can be brought on to the books. The real cost goes into the accounts as a loss, and that loss is allowed for Income Tax purposes and a capital asset is built out of a loss for which allowance is made. That is a system fairly widely adopted today by farmers, and, indeed, by business men who have been buying up pedigree herds.
1964 As I understand it, this Schedule is not aimed at that. There is the fact that it may be considered as something of a wangle. It is a wangle, but it is a convenient method of introducing capital into agriculture and introducing it where it is most beneficial—in improving the live stock of this country. The Chancellor has a soft spot in his heart so far as agriculture is concerned, and he is prepared to let it go by. But something which may be mischievous has been going on. The capital asset built up in a herd is not left in agriculture, but is taken out again. The production herd is sold and the capital profit taken out and spent as income, and the progeny of that herd and the breeding of that herd is retained. A new production herd is thus created out of the project at a cost of no milk supply while the young stock is growing up. No milk supply represents a loss of profit, and that loss is chargeable against Income Tax, and when the new production herd is built up, that can be regained and another capital profit taken.
Now, that is not only a loss to the Revenue—and illegitimate loss to the Revenue—but it is bad farming. You are not having your herd running on regularly with your farming. You are dropping your milk production during some periods, and I am sure that not only I, but hon. Members opposite, wish to stop that happening. That is precisely what this Schedule does not stop. It is a very obscure Schedule. I have had the advantage of discussing this at great length with my hon. Friend the Member for West Leicester (Mr. Janner), who is perhaps a leading authority on Income Tax law. We took an hour to work out one paragraph, and another paragraph seemed wholly incomprehensible.
There may be something to be said for that when one is trying to defeat tax evasion. If you have a very obscure provision, then when people devise schemes to avoid tax and they go to their lawyers for some advice on it, the lawyers tell them that the provision is so incomprehensible that they cannot say whether the plan is good or not. Then they say, "Well, we do not want to have a law case, do not do it." Obscurity may be one of the main purposes of this provision if it is to stop tax avoidance. Certainly it has been achieved, if, for instance, I 1965 may refer to paragraph 5 (b), which reads: it appears with respect to the transfer, of with respect to transactions of which the transfer is one, that the sole or main benefit or one of the main benefits which, apart from the provisions of this paragraph, might have been expected to accrue to the parties or any of them was a benefit resulting from the obtaining of a right to make an election for the herd basis, or from such an election having effect or ceasing to have effect, or from such an election having a greater effect or less effect— If anyone can say what that means—

The Deputy-Chairman
I do not find any of that in the Amendment.

§ Mr. Stanley
On a point of Order, Mr. Beaumont. I am a little puzzled. I do not pretend to have understood one word of what the hon. and learned Gentleman has said, but he has told us the object of this Amendment. He has told us that it is to stop tax evasion; in other words, to make someone pay a tax which, under the Bill as now drafted, he would not have to pay. If it is so designed, it imposes a charge and is not in Order.

The Deputy-Chairman
I thank the right hon. Gentleman for bringing the point to my notice. I am of opinion, on the assumption the hon. and learned Gentleman has made, that it would be a charge and that the Amendment is out of Order.

§ Mr. Paget
Further to that point of Order. What I am saying is that this does not impose a charge. It merely prevents a method of evading this tax. That does not impose a new charge.

The Deputy-Chairman
I do not want to enter into an argument with the hon. and learned Gentleman. The Amendment appears to be out of Order.

§ Mr. Paget
If somebody who today is not liable to tax would, by the Amendment be made liable,' that imposes a charge, but if this Amendment merely prevents somebody from adopting a device which in the future might enable him to avoid this tax, that does not impose any charge because nobody is liable at the moment.

The Deputy-Chairman
As the hon. and learned Gentleman has said, this is very complicated. It is confusing me. From what he has said, I rule that this Amendment is out of Order.

§ Captain Crookshank
May I ask a question, as the hon. and learned Member for Northampton (Mr. Paget) has said that this is a very complicated affair? I would be very much obliged if one of the Ministers could say something on paragraph (8). Having dealt with these other matters which, as I understood it, were merely to cover the point of using taxation procedure, it suddenly says: The preceding provisions of this Schedule shall, with the necessary adaptations apply in relation to trades other than farming. I thought the Schedule had to do with farming and nothing else. Can he, the Financial Secretary, say what further thing is envisaged? The whole basis of the Schedule is to deal with herds which, by definition, are flocks, or any collection of animals. In subparagraph (3) of paragraph 8, it says the provisions shall apply in relation to animals or other creatures kept singly as they apply in relation to herds. Single animals cannot be herds or a collection of animals. I wonder what exactly that is meant to cover. We think we know, but we are not quite certain.

§ Mr. Glenvil Hall
The answer to the right hon. and gallant Gentleman is that sub-paragraph (1) makes it clear that when you are talking of farming it includes trades other than what might be described strictly as farming. For example it includes someone who goes in for horse breeding. He is not using working horses, but is keeping them to breed from them. It includes poultry and animals, and covers all kinds of animal breeding and some of that might be said, in the normal everyday use of words, not to be strictly farming. Sub-paragraph (2) provides as I have already indicated, that election shall apply to all living creatures other than animals. For example, poultry are not animals; they are birds. Subparagraph (3), which applies to individual animals, was actually put in at the request of the National Farmers' Union. It is not of great practical value, but they thought it was essential when making these regulations that herds should include single animals because on occasions you might find someone had a herd and also had a single animal of some other breed. That is rather disjointed, but it is the best explanation I can give the right hon. and 1967 gallant Gentleman, and it has the additional merit of being the correct one.

§ Captain Crookshank
Perhaps at this time of the night we may leave it there.

§ Mr. Paget
I was not able to move my Amendment, but I would like to point out that that paragraph (6) provides that, where the capital herd is sold, it shall be treated as subject to a proviso that if the owner of the herd starts another production herd within five years, it shall no longer be treated as capital, but the new herd shall be treated as replacement. In point of fact, the proviso will not do what it is required to do, because the position has been somewhat obscure and where production herds have been sold and their young stock have been retained with a view to creating another production herd, a new trading entity has always been created for that purpose. This is done particularly in Ayrshire. There this practice of creating a new trading entity to take over the young stock and reform the herd has always been adopted. I could give the right hon. Gentleman a whole series of instances where that has been done.

§ Mr. G. Williams
On a point of Order I think the hon. and learned Gentleman is talking about paragraph (3), sub-paragraph (6), and not paragraph (6), which does not seem to have anything to do with what he is talking about.

§ Mr. Paget
I think I mentioned paragraph (3), sub-paragraph (6). I am extremely sorry if I did not. The position is that a number of gaps are blocked up, but the gate is left open. The Amendment, which you ruled out of Order, is designed to close that gate.

The Deputy-Chairman
It was ruled out of Order, therefore the hon. and learned Gentleman cannot discuss it

§ Mr. Paget
I hope my right hon. Friend will reconsider the Schedule, because if he wants to prevent the selling off of production herds with a view to creating new herds by retaining the young stock, which is a practice of bad farming and takes from the revenue, then he will have to provide protection in addition to that which he has put in the proviso I have 1968 mentioned. The present proviso leaves the matter wide open.

§ Mr. Glenvil Hall
Perhaps I may clear this matter up. Frankly, paragraph 3, sub-paragraph (6), to which my hon. and learned Friend has drawn the Committee's attention, does deal almost purely with Income Tax, and the words in brackets are there to prevent the owner of a herd spreading the assessments over periods in, excess of 12 months. I will say nothing more on this point. On the other point, I think if he reads paragraph 5 carefully he will see that it provides all the safeguards he wants to pre-Vent the sort of tax evasion he wishes to stop. If we do discover during the course of the year tax evasion of this kind, obviously it would be possible for the House to close that, gap and see this kind of tax evasion stopped. I cannot go farther tonight because we have worked hand in hand with those primarily interested in this matter—the National Farmers' Union—and it would be unfair to agree to accept an Amendment not discussed with them beforehand. If my hon. and learned Friend's fears are realised, we will see next year that some attention is given to this matter.

§ Mr. Paget
May I refer my right hon. Friend to paragraph (5), which deals with a production herd which is transferred to. a controlled body. It is not done in practice. It is not the production herd, but the young stock which are transferred.

§ Colonel Gomme-Duncan
We have heard of bad farming from the hon. and learned Member for Northampton (Mr. Paget) and we have heard from the right hon. Gentleman that the National Farmers' Union were consulted. Was the National Farmers' Union of Scotland also consulted?

§ Mr. Glenvil Hall
I cannot imagine Scotland permitting itself to be left out.

§ Colonel Gomme-Duncan
I can very well imagine Scotland being left out whether she likes it or not.

§ Mr. Glenvil Hall
I will look into that point.