§ Subsection (3) of section seventeen of the Income Tax Act, 1945, shall be amended by the substitution of the word "occurs," for the words "is due to a war risk connected with any war in which His Majesty is engaged at the date of the passing of this Act, or to the carriage, in connection with any such war, of explosives or other dangerous cargo in a manner which would be abnormal in time of peace, then whether the loss occurs before or after the conclusion of, or of hostilities in, that war."—[Mr. Maudling.]
§ Brought up, and read the First time.
§ 8.45 p.m.
§ Mr. MaudlingI beg to move, "That the Clause be read a Second time."
The wording of this new Clause is necessarily obscure. I hope that I shall be able to make the purpose of it clear very briefly. In the Income Tax Act, 1945, a system of balancing charges was instituted, the effect being that, if a company parted with a capital asset for a sum greater than the written-down value of that asset in the company's books, then a charge, amounting to the difference between the two values, should be imposed 149 on the company and tax levied on that amount. An exception was made in Section 17 (3) of the Act, and the provision did not apply to insurance proceeds in cases where a ship was lost as a result of the last war and hazards resulting from the termination of hostilities in the last war. The object of this new Clause is to extend the exemption from the balancing charge to all insurance proceeds which arise when a ship is lost from marine risk.
The theory behind the balancing charge and the balancing allowances is quite clear. It is that, if the asset when the company sells it fetches more on the market than its written-down value for Income Tax purposes, obviously excessive depreciation has been allowed beforehand, and the tax authorities are entitled to levy a charge which balances that up. I think the general principle of the balancing charge in the case of the sale of assets is fairly well-known and generally accepted, but when it comes to applying this principle to insurance proceeds, rather different considerations arise, and certainly in practice very different considerations do arise.
I read the other day of a very striking case which was quoted by Sir Ernest H. Murrant, Chairman of Furness Withy, concerning a ship built 24 years ago at a cost of £206,000, which was lost from marine risk last year. As it had been afloat for over 20 years, the company had been able to write off pretty well the whole amount of the initial cost of the vessel, and in doing so over the years had saved tax to the extent of £69,000. When the vessel was lost, it was insured for roughly the same sum as its initial cost, that is, about £200,000, and therefore a balancing charge arose on the whole of the insurance proceeds. That balancing charge amounted to £92,000, so that in effect, on the loss of that ship, the company were faced with a balancing charge which was £23,000 more than the amount they had already gained in tax remission through depreciation allowances. On top of that, after a large part of their insurance proceeds were taken for the balancing charge, they found that to build a ship of similar tonnage to replace the one lost would cost them an additional £650,000. These figures are really staggering, and the position of shipping companies faced with the loss of an important vessel and with the enormous cost of replacement is obviously very serious.
150 It will be argued by the Government spokesman that that applies equally to all companies which have to replace their assets as the result of sudden accidents or perhaps of inflated capital costs, but there is surely a different argument regarding the position of shipping companies. The position partly results from differing rates of taxation in the past, which means that depreciation allowances have been granted at a time when the rates of tax were lower than at the time when the charge arose. That is one reason. The other reason is the increasing cost of capital equipment. I suggest that, in the case of the loss of a ship through marine accident, special considerations arise. I want to put forward four arguments in support of that contention.
In the first place, it was recognised in the Income Tax Act, 1945, that in certain cases the insurance proceeds on the loss of a ship should not carry the balancing charge, and an exception was made in the cases of ships lost in the last war. The second point is that there is no other industry of which I can think where the amount at risk at any one time is as great as it is in the case of a shipping company running two or three large liners. The amount of capital at risk in each case is quite enormous. Very often, almost all the assets of such a company are in one or two ships. The loss of the ship can fairly be compared only to the total destruction by fire of a factory building with all its equipment, which surely is a much rarer occurrence that the loss of a ship. Therefore, there is an argument for saying that the loss of a ship involves a larger amount of capital for the company than does the normal risk of companies operating on terra firma.
The third point is this: When a ship is sold a balancing charge has to be paid if the sale price is higher than the written-down value. But when a ship is sold, the company concerned has usually made plans two or three years ahead for its replacement, so that the new one is relatively ready to come into service and carry on earning money for the company. On the other hand, when a ship is lost no replacement has been prepared beforehand, and there may be an interval of two, three or four years before it can be replaced. That is the third reason why ships lost should be placed in a special category.
151 It is true that in many cases, owing to the risk of loss of earning power, the ship is insured for a much higher figure than its book value, and in some cases higher than its initial cost. I understand that it is the practice of shipowners to cover not only the loss of the ship, but also the subsequent balancing charge as well. That is a permissible insurance, but the premiums paid in respect of it are not allowable for tax purposes. I noticed the other day in the last published accounts of the Cunard Fund that the company had had to insure against balancing charges to the extent of £2 million over and above an insurance of £11,250,000 in respect of the actual ships concerned. Therefore, a shipping company, in order to replace its ship if lost, has to insure for a sum a great deal more than the book value or the initial value.
That leads me to my fourth argument. It is clear that the money paid to a shipping company by way of an insurance payment when a ship is lost arises in respect of the contract of insurance, and not in respect of the money paid for the acquisition and operation of the ship. It is an entirely different form of payment. When a company sells a ship, it is selling the asset and recouping itself for the initial capital expenditure and subsequent maintenance of the ship. When it receives money by way of insurance proceeds, it is getting a return for the premiums paid.
I suggest that is an entirely different matter, and I hope that the Chancellor of the Exchequer, with his fine appreciation of points of law or theory, will see that there is a difference between payment for a ship that is sold and payment in respect of a contract of insurance. It may be argued, if it is maintained that the insurance proceeds, arising as they do from separate contracts, should be free of tax, that the premiums cannot be a charge for tax relief as they are at the present moment. But surely that is not sustainable, for the reason that the payment of an insurance premium in respect of a ship is just as much part of maintaining the capital value of the shipping company's fleet as the paint put on it. The purpose of the payment in either case is to maintain the fleet of the company in being and to provide against loss, whether it be due to the use of the ship 152 at sea or the loss resulting from the sea risk.
I put forward the argument for this new Clause on those four bases. I must confess that I do not expect that the Government will accept the Clause as it stands. I do not quite know what they are going to do with it. Perhaps they will tucker it away; this seems the convenient way of treating new Clauses on this Finance Bill. If they cannot accept the arguments, I ask the Government not to close their minds to them. The matter is of immense importance, and one could quote many examples of the difficulties shipping companies often face as the result of the operation of these balancing charges.
It is true that most of our main shipping companies are doing well at the moment and earning a lot of money; but so are their competitors abroad. I fear that in many cases their competitors are able to put away into reserve a good deal more than our companies are allowed to do. As the House is aware, when more competitive conditions arise in future it will be the reserve position of a shipping company which is of vital importance in carrying on any competitive struggle that may arise. I therefore appeal to the Government, if they cannot accept this new Clause, at least to investigate it in the interest of the highly important shipping industry of this country.
§ Mr. G. P. Stevens (Portsmouth, Langstone)I beg to second the Motion.
The Clause was clearly proposed by my hon. Friend the Member for Barnet (Mr. Maudling). It seems to me that when Section 17 of the Income Tax Act, 1945, was framed the situation arising on the balancing charge from an insurance recovery on total loss of a ship was not entirely envisaged. The sort of thing that was in mind was a factory consisting of buildings, plants, machinery, also lorries and that kind of thing—and, perhaps, small ships, but certainly not a large liner—and the piecemeal wearing out or destruction, perhaps by fire, of those assets.
In such a case the balancing charges or allowances would be spread over the years, and so the incidence of those charges or allowances, from time to time, would not be very heavy. But in the case of a ship we have the whole thing in one 153 piece; we have as it were the buildings, factory, plant and machinery all in one. The consequence is that when that single entity is lost the resulting charge has to be borne wholly in one year alone, instead of being spread over a number of years.
I believe there are at present a certain number of single-ship companies and, certainly, a number owning three ships or less. The total loss of one ship and the insurance recovery with the following balancing charge must be very serious indeed for them. I must confess—and I feel this even more strongly after listening to my hon. Friend the Member for Barnet—that I fail to see the difference in principle between the loss of a ship in peacetime and the loss of a ship in any war in which His Majesty is engaged after the date of the passing of the 1945 Act. The result is exactly the same to the shipping company, whether the event has arisen out of war or out of conditions in peace time.
No piecemeal replacement of a ship is possible. If a factory is destroyed entirely by fire it is perfectly possible for the owners to repair it piecemeal and to start production, first at one-quarter capacity rising by stages to half capacity and then to three-quarters. No such progressive return to normal conditions is possible in the case of ships. I do not think there would be many offers of a passage to Australia in one-quarter or one-half of a ship.
The factory and the ship are on a completely different basis, and it seems to me clear that where a shipping company loses a ship, even where the loss may not arise out of war, the cost of replacement means very serious capital reorganisation, because not only is the cost of replacement very much greater than the original cost—that is inevitable in present circumstances—but, under present taxation, the balancing charge has to be paid. The consequence is that it is likely that capital will have to be raised on an uneconomic scale. It seems to me that there is clearly an injustice here. This Clause tends to remove that injustice, and consequently I support it.
§ 9.0 p.m.
§ The Solicitor-GeneralAs the hon. Member for Barnet (Mr. Maudling) said, this is a case which would fall within the 154 purview of the Tucker Committee's inquiry, and I think I am in a position to say that representations have already been made to that Committee on this point. No doubt, Mr. Tucker will consider them very carefully, and possibly his Committee will make recommendations upon them. In the meantime, I am bound to say that, subject to what Mr. Tucker's Committee may say, it does not seem to us as at present advised that a sufficient case has been made out for this new Clause.
The special provision in Section 17 (3) of the 1945 Act was made in the circumstances that the war was still on. The war with Germany had come almost to an end when the Income Tax Act, 1945, was passed, but the war with Japan was still on, and it was represented that ships were still at risk whereas plant situated in this country was practically free from risk. It was because ships which were lost before the appointed day for that Act were not subject to a balancing charge whereas ships which were lost after that day were subject to a balancing charge, that this special provision was made. In those circumstances, I do not think it carries the matter much further to say that recognition has already been given in the Income Tax Act, 1945, that ships in this particular connection stand in a special position. That was so, but only because the war was still on and ships were therefore subject to risk, whereas plant and machinery at home were not subject to risk.
The hon. Member for Langstone (Mr. Stevens) sought to distinguish the position of ships from that of other plant and machinery, and the hon. Member for Barnet quoted a case, which I believe was mentioned to him by the Chairman of Furness, Withy and Co., in which a balancing charge had been more than anticipated, but that was owing to rising costs and a differential taxation rate, as. He himself said. If and in so far as that is the case—and, of course, I accept from him what he says—it would be equally applicable to all types of plant, and that would not be a reason for giving preferential treatment to ships in the kind of way that this Clause proposes.
Similarly the hon. Gentleman gave four reasons which he said differentiated the position of ships from that of other 155 plant machinery. The first reason he gave was that the fact that ships were in a special category was recognised in the Income Tax Act, 1945. I have already given what I submit is an adequate answer to that point. Another reason he gave was that insurance money was not really the same as money accruing from a sale of an asset. That certainly is not recognised in the drafting of the Income Tax Act, 1945, as being the case, because money arising from the sale and insurance money are treated exactly on the same footing, but if it is the case that there is such a distinction it is equally applicable in the case of ships and other plant and machinery. That would not be a reason for special treatment in the case of ships.
The hon. Gentleman said that when a ship is at sea it represents an enormous value at risk to the concern which owns the ship. That may be so, but, after all, other concerns also have extremely expensive plant and premises at risk which possibly, owing to some misfortune may be destroyed. I should have thought—although Mr. Tucker's Committee may take a different view about this—that that of itself did not justify this special treatment being accorded to ships.
I would also bring to the attention of the House the fact that the Income Tax Act of 1945 provides that where the owner of plant replaces it he can, if he wishes, have the balancing charge which is made on the replaced plant treated as a deduction from the cost of the new plant, with the result that he gets a smaller initial allowance on the new plant and smaller annual allowances because the cost is deemed to be less than in fact it was by reference to the deduction of the balancing charge. That was a Section inserted in the Act of 1945—Section 18—I think at the insistence of or as a result of representations by shipping interests. In the kind of case to which the hon. Member has referred it would considerably assist the shipowner, particularly in the kind of case mentioned to the hon. Member by the Chairman of Furness, Withy and Company where there was a very high replacement cost. No doubt to some extent that kind of case was in view when the Section was introduced.
156 Thus the Section in the Act of 1945 already provides some measure of relief for the difficulties which the hon. Member has described. In our view, therefore, the arguments advanced by both Members opposite do not afford a sufficient reason for distinguishing shipping and giving it this special preferential treatment.
§ Mr. MaudlingI wonder if the right hon. and learned Gentleman would deal with one point which I raised. I mentioned the loss of earning power to the shipping company during the exceptionally lengthy period before the ship has been replaced.
§ The Solicitor-GeneralI had dealt with that. I said that perhaps there might be some difference in the circumstances, but that that was the kind of situation which might arise in any concern. If a large factory or extremely expensive plant is destroyed owing to some misfortune, then the enterprise of the concern may be interrupted for a long period. The interruption may be very serious and lengthy. That is the kind of risk which may befall anybody who conducts a large-scale enterprise and it is not exclusively confined to shipping.
I took that point into account in submitting to the House that there was not sufficient reason for this preferential treatment to be given to ships. As I said at the beginning of my argument, and as the hon. Member for Barnet himself said, this is a matter which is before the Tucker Committee. It may be that after considering it Mr. Tucker may make recommendations on the subject and I have no doubt that any recommendations this Committee may make will receive very careful consideration by the Government, although I do not know what he may say on the subject. In the meantime, I urge upon the House that no sufficient case has been made out for this new Clause.
§ Mr. MaudlingIn view of the undertaking which the right hon. and learned Gentleman has given that the recommendation of the Tucker Committee on this subject will be carefully considered by the Government, I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.