§ Motion made, and Question proposed, "That this House do now adjourn."—[Mr. Popplewell.]
§ 10.16 p.m.
§ Mr. Douglas Houghton (Sowerby)
In raising the matter of Income Tax evasion this evening, I have not the purpose to criticise the devoted band of public servants who are serving in the Income Tax offices throughout the country. Still less is it my purpose to criticise the general mass of good citizens and honest taxpayers who are bearing their burdens with admirable cheerfulness, fortified in many cases no doubt by wholehearted approval of the social and financial policies of the Labour Government. We have astonished the world by our willingness to pay taxes. There are three times as many taxpayers, paying in total three times as much money, as before the war. That alone is testimony to our capacity for social discipline. 1818 When we are accused of living beyond our means, our accusers should acknowledge the great sacrifices which the British people are making in taxation.
In an article in "The Economist" in August of last year, a very great tribute was paid to the British taxpayer. It was said there that the tax-paying subject, the British citizen, was one of the most remarkable economic phenomena of all time. But the taxpayer is human, after all. We all dislike parting with our possessions and, since Income Tax is a method of parting us from our possessions, there is a very strong temptation to avoid paying the tax. The rewards of avoiding taxation at the present level are extremely effective. The married man whose income is £500 a year and who escapes paying tax is approximately £73 better off. If a person pays on £500 instead of £700, he can be up to £80 better off. If he pays on £1,000 instead of £1,500, he can avoid paying tax up to £200. When there is evasion among taxpayers whose total income is above the Surtax limit of £2,000, the rewards of evasion are greater still.
1819 There are two kinds of evasion. A frequent one is legal evasion which in many cases is something worse than the mere arrangement of one's affairs so as to keep the charge to tax as low as possible. Legal evasion as we understand it is a contrivance and a device, and sometimes a dubious one, by which wealthy taxpayers, with the aid of astute advisers, are able to keep substantial sources of income outside the charge of tax under the Income Tax Act. However, since those matters require legislation to be remedied, I cannot refer to them now and I mention them only in passing to distinguish one kind of evasion from another.
I wish to deal with evasion which can and should be remedied by more stringent administration. There are two types of Income Tax payers today, those paying under Pay-as-You-Earn and those paying under Schedule D. I saw in an article in "The Economist" last year that certain inspectors of taxes confided to a contributor that tax evasion in the eyes of some inspectors is no longer a risky proceeding so much as a standard trade practice. Schedule D on profits and Schedule E on wages and salaries are two different taxes, and half a year's revenue is awaiting collection if evasion could be detected and arrears vigorously pursued.
I regret to say that in present circumstances the public cannot be even reasonably confident that the taxing machine is doing its job efficiently. There are obvious signs that it is not. Extravagant living on one of three sources of income is obvious to those who go about the streets and see evident signs of wealth which could not remain in the hands of individuals if taxation were doing its job. In many cases it may be capital gain, in some cases capital spending, and in others tax evasion. What is the nature and the extent of tax evasion? There are those who slip through the net because of lack of effective means of keeping track of tax evaders such as one-man and family businesses, shopkeepers, ice-cream vendors and fish-and-chip stalls, which I see my right hon. Friend the Secretary of State for War finds preferable to other and more luxurious forms of hospitality. There are garages, boarding houses, catering establishments, window cleaners, chimney sweeps and entertainment proprietors who never come to the attention 1820 of the tax inspectors through lack of any reliable sources of information.
Recently members of the public were shocked to find that the sequel to the investigation into the affairs of a person known as Mr. Sydney Stanley was that bankruptcy proceedings had been taken against him and that the Inland Revenue had put in a preferential claim for £21,000 Income Tax owing over a period of six years. They were shocked to find that under a system of taxation in which they had been led to have great confidence that sort of thing could happen to one whose operations were obviously on such a large scale that members of the public would think he would have fallen into the net of the Income Tax inspectors. Recently there was a music-hall artist against whom bankruptcy proceedings had been taken who, again, was found to owe considerable sums to the Inland Revenue.
In some instances these cases which surprise and dismay the public are due to the failure of the normal machinery of Income Tax to bring them to the notice of inspectors of taxes. In other cases they are due to confusion and muddle in the affairs of individuals which the good offices of their accountant have failed to get straight and to the fact that the Inland Revenue over a long period has been unable to grapple with the true liability of the individuals concerned. However it may be, there are signs there of circumstances which, quite rightly, give rise to disquiet amongst people who hitherto have had confidence in our Income Tax machine.
Other forms of evasion are the various devices whereby people escape their full liability through employing cash transactions instead of putting some of their business operations through their books; those who keep two banking accounts: those who employ personal staff charged to business account; those who make bogus claims to be employing their wives at a wage, when they are not, and other means of deceiving accountants and the Inland Revenue alike; or even the deliberate understatement of profits, relying on the pressure on the officers of the Income Tax Department at the present time to enable them to get away with it. There are also sources of income which derive from interest on securities, such as municipal and Government loans, 1821 and bank interest, which is paid without deduction of tax and which in many cases the Inland Revenue rely on the taxpayer to disclose if that source of income is to be brought into charge.
No reliable estimate can be made of the extent of this evasion. A number of guesses have been made, some are large sums, others are of more modest proportions. There is no doubt, however, that in aggregate the extent of evasion is serious today and the total amount of revenue being lost to the State is a large sum.
Now, what progress has been made so far in tackling this problem? We find on reference to the Appropriation Accounts that the amount recovered from fraud and evasion in the financial year 1947–48 was just over £4 million in 1,411 cases. That is only £1 million more than in the previous year, and it is little higher than in each of the four years before the war. It is £1 million less than in the year 1935, when tax was 4s. 6d. in the pound. So we find that, despite the fact that tax is now 9s. in the pound, and that the amount of income assessed under the heading of profits and gains is nearly twice what it was before the war, little more is being recovered by the Inland Revenue today in each year than when tax was 5s. 6d. in the pound.
That is a startling commentary on the slow progress which the Inland Revenue is now making to overtake the arrears of cases awaiting investigation, and is an indication, too, of the failure of the Inland Revenue to tackle effectively the wider field of taxation which now lies at their hand. When the number of joint stock companies registered is now approximerely twice what it was before the war, when the number of assessments on profits and gains has risen from approximately 1 million before the war to 1½ million today, the pressure of this work on the Inland Revenue has resulted in the relaxation of scrutiny. It has modified the vigour and the intensity with which the Inland Revenue has previously been able to pursue doubtful cases and to ensure that the full liability is charged in as many cases as possible. Here I ask the Financial Secretary to give the House and the public some assurances concerning the speed and effectiveness with which the Inland Revenue can tighten up its 1822 administration and introduce greater stringency of control.
I have one or two suggestions to make to my right hon. Friend. The first is that more manpower—more inspectors of taxes—is undoubtedly the major answer to the problem confronting the Department today. But since that takes time and since there are large numbers of officers in the Inland Revenue who, after a short training, could be turned over to the work of investigation, I urge on him that the full resources which the Inland Revenue already possess should be turned on to this job. Secondly, I think the Inland Revenue Department should seek greater co-operation from other Departments in regard to the supplying of vital information which will enable Income Tax liabilities to be traced and dealt with. Why, for instance, cannot the Ministry of Food let the Inland Revenue know of all the catering licences issued, and the licences for traders to deal in rationed goods? Why cannot they not know of establishments licensed to sell petrol, car and lorry registrations, particulars of Government contracts, which was a proposal made by the Royal Commission in their Report in 1920, particulars of moneys paid by Government Departments to chemists, doctors and dentists under the National Health Service?
The Inland Revenue should undoubtedly employ additional manpower on a visual survey of their respective districts with a view to seeking out Income Tax liabilities. It is not generally known that the law requires that persons liable to Income Tax make a disclosure of the fact to the Inland Revenue under penalties prescribed by the Income Tax Act, 1918. Many people wait to be caught into the Income Tax net by inquiries and researches and investigations made by the Income Tax inspectors. Members of the public should be encouraged to disclose their Income Tax liabilities. The Inland Revenue must encourage them to do so by having at its disposal the means to inquire into the resources of residents of luxurious blocks of flats, and residents of expensive hotels, who in many cases are able to evade Income Tax for long periods of time.
I trust also that the Inland Revenue will encourage those who have been concealing Income Tax liabilities to come forward under the protection of the 1823 Chancellor of the Exchequer's statement about the Board's lenient policy toward malefactors who make a voluntary disclosure, the details of which were announced by the Chancellor to the House on 5th October, 1944. Finally, I think it should go forth from the Inland Revenue and from this House that the honeymoon of the tax evader is over and that the taxation authorities must now set about the task with a will and purpose. I would underline the opinion of the Royal Commission of 1920 about the willing acceptance by the public of increased stringency of administration.
In conclusion, I think the Government and the tax authorities are entitled to appeal for the co-operation of professional bodies, particularly those representing the accountancy profession, because they have a duty to the State as well as to their clients. High standards of professional conduct are plainly asked for in these critical times in the nation's affairs. I trust that assurances on these points may be given by my right hon. Friend.
§ 10.33 p.m.
§ Captain John Crowder (Finchley)
I am sire the public will be grateful to the hon. Gentleman for telling them how they can evade taxes in so many different ways. I gather that in the past the hon. Gentleman had some experience in seeing what was done by members of the public. I should like to make one point, briefly, because I know that the Financial Secretary wishes to reply. This is not all on the public's side as regards blame. After all, the public are entitled not to have to pay more tax than they are legally liable to pay. Not a single month goes by in which I do not receive some form of communication from the Inland Revenue, either a claim form to get tax back or an additional assessment. That goes on every month in the year. When I went away in August and September, I wrote to the Inland Revenue and suggested that these two months might be a close time for taxpayers. I was just about tired of it all.
There are tax accountants who work in the Inland Revenue, but they do not help the public very much. There was the case in my own experience of a man aged 80 who prepared his own Income Tax returns. I happened to be his executor. 1824 When he died we found that he had added up wrongly and that he had paid about £100 too much in tax. We found this out and got the money back. The Inland Revenue did not point out that he had paid too much. I do not think that the Inland Revenue always play fair with the public. In my opinion it is not the case that the public are always trying to evade the tax.
Modern taxation methods employed by all Governments of the last few years are so complicated that very few people can understand what their liability will be. I hope that in the near future the Government will find time to go into the whole question so as to make taxation clearer to the public. One has to employ an accountant or a bank if one wishes to understand it. I happen to be a member of Lloyds. I go to the bank and say. "Here is the balance-sheet; how much goes in taxation?" They say, "So much goes to N.D.C., so much comes off for E.P.T., so much comes off for Surtax. Therefore, we cannot say until the end of the year." I think the Inland Revenue makes life intolerable for the public, and it is not the fault of the public if they do not pay more than they are liable to pay.
§ 10.36 p.m.
§ Mr. Diamond (Manchester, Blackley)
I wish to intervene for only two minutes to say that I am sure that all members of the accountancy profession are more than conscious of the fact that their first duty is to the State, although they have a duty to their clients. I am sure that all who have experience of this matter will realise that in many cases accountants have a difficult time in making clear to their clients that the road to perdition is the road of attempted tax evasion, that those who get away with tax evasion do so only for the time being and at a very great risk and rate of interest to themselves.
I should also like to say, that it is not my experience, at all events—I can only speak for myself—that the Inland Revenue have been in any way reducing their vigour in going into inquiries with regard to the accounts of companies and the tax returns of individuals which are put before them. If my hon. Friend says that the Inland Revenue staff is too greatly reduced. I would accept that argument. Certainly, anyone who tries to 1825 get a repayment of tax knows the difficulties which are experienced and which must no doubt be due to that. I can assure my hon. Friend that all practising accountants are put to a considerable amount of trouble—some of them think wholly unnecessary trouble—in satisfying the inspector of taxes that the figures put before him are in all respects correct.
§ 10.38 p.m.
§ The Financial Secretary to the Treasury (Mr. Glenvil Hall)
I was rather surprised that the hon. and gallant Member for Finchley (Captain Crowder) attacked the hon. Member for Sowerby (Mr. Houghton). The hon. and gallant Gentleman indicated that my hon. Friend was giving away tax secrets, by indicating to people who might be so minded how they could avoid paying. It seemed to me he was doing much the same thing in another way. He was inviting people to believe that anyway they were paying too much, and should wait until the last moment and then pay only under duress.
It may be that both points of view have unfortunately something in them, though both have been somewhat exaggerated. I would like to have details of the case which the hon. and gallant Member gave, because it is my view from some experience with the Inland Revenue that it can catch up on mistakes which have been made and it may well be that in the case of the particular individual to whom he referred the Inland Revenue would have found out that he had overpaid and that the money would have been refunded. If it happened during the war, there were, I admit, at that time some arrears. Things were not done with the celerity which we would have liked to see. But I, for one, was agreeably surprised a fortnight ago to be informed that I had overpaid £50 this last year. If they had not told me I would not have known. But there it is, these things do happen when the Income Tax law is as complicated as it is.
It is difficult, as I think we all know, to assess accurately the extent of the evasion. If we knew where it was, the evasion would not be there—we would be able to catch up with it and would be able to deal with those who are undoubtedly, at the moment, evading their fair share of tax payments. The experts of the Inland Revenue, however, are confident that the figure is nothing 1826 like that given by my hon. Friend; he did not mention it tonight, but during our Debates on the Finance Bill, I think he committed himself to a figure of something like £100 million. There is an amount of evasion, but we are quite certain that it would be unfair if that figure went out, for I am able to state that it is nothing like the £100 million which he feared. The number of people assessable has gone up considerably. We are not dealing here with people assessed under Schedule E; they pay under the P.A.Y.E. system. We are dealing with people who make their own returns, under what is known as Schedule D. Those assessed under Schedule D have increased by 400,000 since 1939, and that figure does not include the farmers who, under the last Finance Act, I believe, are now assessed under that Schedule.
The real reason why there is an amount of evasion, which we admit to be there, is because of the shortage of inspectors. Before the war, something like 1,700 were doing a far less volume of work than now; they had fewer with whom to deal. The number of inspectors ran down during the war, and 1,430 are at present in the service. It takes three years to give an inspector that basic training which makes him useful in this particular field. It was suggested that some in other grades in the Inland Revenue Department might be used to assist in this direction; and the Inland Revenue authorities would be only too delighted to use those very competent people in this way, if that were possible. But it does, as I have said, take several years to make an inspector competent to undertake this skilled work.
Also, I would like to remind my hon. Friend and the House that those in the Inland Revenue Department, now on other types of work than that of an inspector, have their hands pretty full anyway. Fourteen million people are now subject to Income Tax—four times as many as were subject to it before the war. Work of one kind and another does make the hands of the ordinary staff pretty full—I should say very full. We are building up the inspectorate as fast as we can, and my hon. Friend, and think the whole House, will ##he glad to know that the number of inspectors in 1951 will be in the neighbourhood of 1,630; only 17 short of the number in those posts in 1939.
1827 By 1951, also, another 400 will be partially trained; so that, if there are any individuals evading their tax who read the papers tomorrow, and take note of what has been said tonight, they will know that their days are numbered. The law has a very long arm in this matter; it can go back over the years, and it will catch them eventually. Let there be no mistake about that. The Inland Revenue authorities appointed a committee last February to see what could be done straight away in this direction, and in three districts have strengthened the inspectorate. I had better not name them, but results are expected at no distant date. We have invited the two unions concerned, including the one associated with my hon. Friend, to give the Inland Revenue the benefit of their advice in these matters.
In the minute left to me, let me assure the House that we have taken note of 1828 the suggestions which have been made, not only in the House tonight by my hon. Friend, but also by others. There is leeway to make up, but although the evasion may appear large, it is, I would assure the House, not so big as he has suggested, or as some people would have us believe. Under Schedule D there must be some evasion. People change their names like the man Stanley, they move about, and never have one address for very long. But it would be very unfair to the great body of taxpayers who loyally pay their taxes, for it to go out that a great many people are evading their due share.
§ The Question having been proposed after Ten o'Clock and the Debate having continued for half an hour, Mr. SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at Fourteen Minutes to Eleven o'Clock.