§ Where a payment being one to which subsection (1) of section twenty-seven of the Finance Act, 1950, applies was made before the sixth day of April, nineteen hundred and fifty, and no deduction was made therefrom in respect of income tax, the amount of such payment shall be allowed as a deduction in computing the amount of the profits or gains in respect of which tax is to be charged under Schedule D on the person by whom or on whose behalf such payment was made.—[Mr. Manningham-Buller.]
§ Brought up, and read the First time.
§ Mr. Manningham-Buller (Northants, South)I beg to move, "That the Clause be read a Second time."
It is just a year ago today that the Committee discussed Clause 21 of the Finance Bill of 1950, and it is now Section 27 of that Finance Act. That is a Section to which I must make some reference if the object of this new Clause is to be appreciated by the committee. It provides two 285 things; first, that tax should be deducted on making payments for easements or wayleaves in connection with electric lines, and, secondly, that the Clause should have an unlimited retrospective effect.
When he was asked for an explanation of that Section, the right hon. and learned Gentleman the present Attorney-General last year said: firstly, that it had been made retrospective to legalise the practice which had been followed for a great many years; secondly, to make sure that it was legal to deduct taxes in the future; thirdly, that those making these payments for wayleaves had always deducted tax and that they were large electric light companies. He clearly implied that there was no question of anyone paying that tax twice in consequence of the Clause, and he said in terms that it did not mean that anyone had to pay any additional taxes. In consequence of that persuasive explanation there was no further discussion upon that Clause, and the Amendment was withdrawn.
In fact, those operating the relay service of broadcasting programmes make payments for wayleaves for the carrying of wires to the loud speakers, the payments for which chiefly go to local authorities. This business of relaying broadcast programmes by wire has been going on for a good many years. I have details of one company which has been operating since 1935. The amount paid annually for wayleaves is in the region of £200,000 a year.
Under the law as it stood before the Finance Act, 1950, they had no power in law and indeed they were not required to deduct tax from the payments that they were making for rents for these wayleaves. The tax not being deducted by them, it presumably was payable by the recipient of the rents, and the right hon. and learned Gentleman confirmed that in what he said last year.
It is an astonishing thing to me that either the Inland Revenue did not know of this practice among relay service operators, who were making these substantial payments for wayleaves without reduction of tax, or, if they did know of it, that they did not inform the right hon. and learned Gentleman. He is the last person I would accuse of deliberately misleading the House of Commons, but I am sure that he will admit that, in fact, last year he did mislead the House, 286 for he represented that this Section only applied to electric light companies and that the Government were only regularising the existing practice. In terms, he also stated that it would not mean that anyone had to pay any more tax. As I said, the Committee passed the Clause with very little discussion in view of what was said by the right hon. and learned Gentleman.
This Section does impose additional taxation on some of those who make payments for wayleaves for this broadcast service. In fact, this Section has very serious results for those offering relay services. Prior to the Budget Resolution of 18th April, 1950, what these companies paid in rents for their way-leaves they were entitled to deduct from their revenue for the purpose of arriving at their taxable profits. One effect of that Section in the 1950 Bill is that they are no longer allowed to make that deduction.
For instance, for the fiscal year 1950–51 the basis is the profits earned in the preceding accounting year of the company, and amounts expended on wayleaves in that year will be added to their profits and be liable to tax. If they had deducted tax on the payments they made for way-leaves, the effect, of course, would only be to secure that the tax deducted on making the payments would be handed over to the Revenue. They would merely be acting as collecting agents for the Revenue, but those assessments for 1950–51, are based on some payments made before the Budget Resolution, which did not have tax deducted from them. In so far as payments were made before the Budget Resolutions, the companies concerned are asked to pay tax which they had not deducted when they paid for the wayleaves. That is one effect and one instance in which that Section of the 1950 Act imposes an additional burden of taxation.
Now the companies are being asked to pay tax in respect of those sums which they paid without deduction when, it may be, some of the recipients of those sums have also been liable to pay tax, and would have to pay tax, upon those sums. One objection to the operation of Section 27 as it now stands is that the same payment may suffer tax twice over and with Income Tax at 9s. and 9s. 6d. in the £ this is a serious matter.
287 These relay service operators, when they realised what the effect of the Section upon them would be because they had not deducted tax, and realised that the right hon. Gentleman's observations in explaining the provisions were quite wrong, had an interview—
§ Mr. Turner-SamuelsDo I understand that Income Tax can now be deducted from the amount of the way leave when the payment is made, and that the case which the hon. and learned Gentleman is putting and complaining about is one in which, for some reason or other, the deduction has not been allowed?
§ Mr. Manningham-BullerI will say it again, because I should like to get this matter clear. It is rather difficult and I am trying to put it shortly to save time. Up to the 1950 Budget Resolutions, there was no power to deduct tax. Since the Finance Act, 1950, there was power to deduct tax and a duty to do so, except in respect of very small payments. If tax is deducted, making the payments for wayleaves included in the profits means handing over to the Revenue the sums that have been deducted.
One complaint is that the operation of the change works in this way. The companies are being asked to pay tax in respect of wayleave payments which they made before the Budget Resolutions last year, when they did not deduct tax and had no power to do so. The second point I made was that these payments from which tax was not deducted at the source may have had tax paid upon them by the recipients. I hope I have now made it clear to the hon. and learned Gentleman who, I know, takes a great interest in these matters. I was saying that after the hardship had come to light there was an interview with the Inland Revenue. Despite all that was said there, and in spite of what the right hon. Gentleman had said, I understand that the operation of the Section was adhered to.
I have indicated two effects of the Section. There is a further effect to which I want to draw the attention of the Committee. The practice in the past has been that the companies got an allowance in one year of the amount actually expended for wayleaves in the year before, with the exception of the first and second years of making payments for wayleaves. 288 The first year's expenditure was the amount actually expended in that year. Perhaps I may give an actual instance, from figures, which may be easier to follow.
5.45 p.m.
Following that ordinary practice, the actual expenditure on wayleaves in 1950 of one company was £29,946. Because of the change, that company is not allowed to treat that expenditure as an expense of their business at any time. Tax has now to be paid on that amount although, as I indicated, some parts of that amount were paid out when there was no power to deduct tax. The result of that is—taking again that particular company—that the sum on which the tax has been deducted in 1951 is £19,000-odd. That does not help them, because that is what they deducted in making payments, and are now paying over to the Inland Revenue. The difference between £26,000 and £19,000 is £7,000. On that £7,000 they will now be required to pay tax at the rate of 9s. in the £. That clearly follows from the study of the figures.
If that is so, it is in spite of what the right hon. Gentleman said. I hope that he realises, although I am not blaming him, that this alteration has imposed additional tax on certain of these companies. I am sure that the Committee, when this Section was being considered, did not intend it and did not desire it to have that effect. I am sure that the right hon. Gentleman in explaining the Clause did not think it had that effect at all.
What we seek to do is to adjust the position so as to provide that the people affected do not suffer this additional tax burden. If they had always had power to deduct tax, then there would be no complaint. It really appears, in my submission, to be wrong that they should be required to pay tax on sums assessed on the basis that they were able to deduct it, when in fact they were not able to deduct it at all when making those payments.
I hope that I have done enough to explain that the Section has operated very differently from the way in which it was explained to the Committee and from what was intended. We have put down this Clause to remedy the matter. The people concerned do not in any way 289 wish to take advantage of any slip made by the right hon. Gentleman, but they wish to avoid being subjected to this additional taxation liability and being deprived of the tax allowance which, but for the change, they would have been able to get in 1951, equivalent to the amount which they had actually expended in the preceding year.
This is an involved matter, but I have done my best to make it clear. I hope that the right hon. Gentleman, even if he says that he cannot accept the Clause, will agree that there is a case calling for immediate and detailed examination. I hope he will make it clear that he will do his utmost as speedily as possible to see that some of those concerned are not unfairly hit as a result of this change.
§ Captain Hewitson (Hull, Central)I hope that my right hon. and learned Friend the Attorney-General will not turn down the Clause but will agree to the suggestion of the hon. and learned Member for Northants, South (Mr. Manningham-Buller), that there is a need for some examination. I speak with some knowledge of the broadcast relay industry, having been connected with it as a national trade union officer for approximately 20 years and having guided the trade agreements of that industry through their various phases, including helping in wayleaves and wayleave rights in the various areas. We have an intimate knowledge of the sum that has been paid from time to time to local authorities and private owners.
Listening to today's debate and having memorised and read the debate on what is now Section 27 of the Finance Act, 1950, it is quite evident that in replying to that debate my right hon. and learned Friend did not foresee some of the anomalies which have thrown themselves up. This is not a dispute involving my right hon. and learned Friend, but is something that has blown up because of the interpretation which has been applied by the Inland Revenue.
In common justice, I ask my right hon. and learned Friend, if he cannot accept the Clause, to seek to have it withdrawn on the assurance that he will have investigations made into this anomaly and its implications, so that some knowledge may be obtained on the subject before the Report stage. I hope that my right hon. 290 and learned Friend will look upon this matter with a very favourable eye.
§ The Attorney-General (Sir Frank Soskice)Both hon. Members who have spoken have suggested that further exploration of this matter might be helpful. That is a view to which I accede and I hope that the matter will be further explored. I should like however to make certain general observations. I think that a good deal of the case that has been made, and made very clearly, in support of the Clause is based on somewhat of a misconception. There are really two rival systems of taxation. Either one is taxed under Schedule D and 'in any given year is taxed upon his previous year's receipts. If one is taxed on that basis, when he looks at his previous year's receipts he deducts as an outgoing the way-leaves that he paid in the previous year. That is one system.
It was always thought that those who made these wayleave payments had not been taxed upon that basis but upon the alternative and different basis in relation to those wayleaves, namely, that they had retained the tax when making the payment to the recipient and that if the payment was made out of taxed income, they had in the ordinary course been allowed to retain the tax which they had deducted, thereby retaining tax relief in respect of the payments.
What we sought to do in the Clause that was incorporated in last year's Finance Act was this. We were under the impression that in all cases, except those where the payment was under £2 10s., the system of taxation which had been adopted in the case of these wayleave payments was that which permitted deduction and that they had not been taxed on the Schedule D basis, in which case they enter into the computation of the profits of the year.
I much regret that I inaccurately stated that all those who make these wayleave payments had deducted tax on them. That is what I was told. I am very sorry I should have misled the Committee in saying that. Those who advised me were, of course, genuinely bona fide under the impression that that was the case. They were aware of these radio relay companies, but thought that in their cases the payments did not exceed the £2 10s. limit in respect of which, under the Section which was included in last year's Finance Act, an option was given to be taxed on the other basis.
291 Therefore, what we thought we were doing in that Clause was to make lawful something which had always taken place, and taken place without any exception, but as to the legality of which certain doubts had been thrown. We thought we were legalising what had been done for a long time past, and done in all cases. We were mistaken in that respect with regard to the radio relay companies. When I made my statement I was making it in response to a request as to why the Clause was made to operate retrospectively. The statement that I made had relation to that position.
I do not want to be too technical, but I think I am entitled to say, on the substance of the matter, that the present Clause does not relate to the retrospective operation of the Bill. It relates to the taxation year 1950–51, which was the year which was being dealt with in last year's Finance Act. If I had not incorrectly represented the position as I did, I do not know what difference that would, or could, have made to the position.
The hon. and learned Member for Northants, South (Mr. Manningham-Buller) said it would have made a difference in that the Clause would have been further discussed. I dare say that that is the case, but after all, that debate took place during the Committee stage of the Finance Bill and the Report stage followed. Without breaking any confidences, I may say that the radio relay companies were fully aware between the Committee and Report stages that the Clause covered them. Whilst I quite agree that it takes a certain time to realise its implications—I do not hold this against anybody—nevertheless when it is said that had I not made that statement the matter would have been further discussed, it is perhaps pertinent to observe that when the Report stage of the Finance Bill was reached no Amendment was put down. I do not make much of the point, because not very long had elapsed between the two stages and it is possible that the implications of the Clause might not have been fully understood.
What is the complaint which is made? The substance of the complaint made by the radio relay companies is that they are being transferred from one system to the other. That really is not a ground 292 of complaint. If it was right and proper to confer the new system because it was better than the alternative system, then I do not think that on the merits the radio relay companies have any complaint at being brought into the new system.
The new Clause has been very carefully explained by the hon. and learned Member for Northants, South, and my hon. and gallant Friend the Member for Hull, Central (Captain Hewitson) has supported it. We could not accept the Clause because of what it would do. It has the effect in relation to the year 1950–51 of giving radio relay companies a double allowance—at least, that is its probable effect. There is conceivably—I say this with all respect to the Chair, who takes the view that it gives the double allowance—the other arguable view that it does not.
The view which the Chair takes is that the effect is to give a double allowance, and it does so in this way. In respect of the taxation year 1950–51 it would enable the company which has made the payment to claim, to deduct, in computing its tax liability for 1950–51—which, of course, is based on its previous year's profits—the payments which it made in the previous year. That would be giving it one species of relief in relation to these wayleave payments. It would also have the effect of enabling the company in the year 1950–51 to obtain further relief in respect of the wayleave payments that it actually makes in that year.
The effect of that, undoubtedly, is to give to the companies who make these payments a species of double exemption from tax, which cannot be justified upon any logical principle. They really get it twice over, because of the effect of the transfer from the previous system to the present system. Under the previous system, they got their relief in that they were taxed on the previous year's profits, and in computing that previous year's profits they deducted the payments they had made by way of wayleaves. Under the new system they lose that relief but they get a different relief—namely, that they are entitled to deduct from the payments they make in the actual Tax year tax on those wayleave payments, and to retain the amount of tax if they have made the wayleave payments out of taxed income. So they do not lose their relief.
293 6.0 p.m.
I am perfectly ready to concede that arithmetically it works out that in a given year the former system might have been more advantageous to them, but that is not a ground for complaint. That is simply saying that on an arithmetical comparison of their payments in one year as against another, the basis of the former year is in a given year more favourable to them. But the reverse may take place. Indeed, we apprehended that it would. If, and in so far as, the way-leave payments increase in the aggregate, then it is more to the advantage of the companies to be taxed, as obviously would appear to be the case, not on the basis of the preceding year but on the basis of the payments they make in the actual taxation year.
I am not breaking any confidence if I say that a great deal of discussion has taken place as to whether anything can be done to try to remove any sense of grievance which the companies may feel. It has been difficult to devise anything that would meet the case. Again, thinking it over carefully it seems to those who advise me that the only possible way in which it might be dealt with is that they might be given some kind of an option not to be included in Section 27 of the 1950 Act; that is to say, they could opt out of it.
The difficulty is that inasmuch as the payments made go to a recipient, if they opt out the tax liability of the recipient may be affected. Therefore, we feel that the only way of doing this would be to give an option jointly exercisable. Whether that would work out requires to be carefully thought about, but that is a possible way out. In this debate I would simply say that for the reason I have deployed we cannot accept the Clause because it gives a double relief. But we certainly do not regard the door as closed to further discussion with a view to trying to work out a solution on the basis of a joint option to be exempted from the Section exercisable both by the payer and the payee.
I hope the hon. and learned Gentleman and my hon. and gallant Friend will think that is a possible way of dealing with this problem. If so, we would welcome further discussion in order to see whether anything of that kind is possible. Upon the understanding that the matter will be further investigated on 294 those lines, I hope that the hon. and learned Gentleman may think it right to ask leave to withdraw his Clause which, in any event, has a fatal defect in it, in that it gives double relief.
§ Mr. Turner-Samuels (Gloucester)This is not an easy point, particularly for laymen, but the discussion as it has proceeded has obscured the matter still further. As I understood the complaint of the hon. and learned Member for Northants, South (Mr. Manningham-Buller), he was complaining of one thing only, namely, that an injustice is being worked by reason of the operation of Section 27 of the Finance Act, 1950, in that the advantages which payers of way-leaves would have got had that Act not been passed, they get no longer by reason of the effect of the provisions of Section 27 which in fact was passed to help them.
In other words, for the year 1949–50, had the 1950 Act not been passed, there would have been deductions which, by reason of Section 27, they are now not able to get. I understood that the hon. and learned Member for Northants, South, was saying that something ought to be done now by the Treasury to make that deduction possible and not to prejudice these payers in the way they are, in fact, being prejudiced.
Whilst the hon. and learned Member says that wayleave payers are having to pay double taxation, on the other hand, the Attorney-General now tells us that if this Clause is adopted it would mean double exemption. Whilst it may be true that if this Clause were to operate in the future it might mean double exemption, it is clear that so far as the way-leaves paid during the year 1949–50 are concerned, it does mean that these payers cannot get the deductions they would otherwise be entitled to, and that is really the case the hon. and learned Gentleman is seeking to make.
In those circumstances this matter should be looked into by the Attorney-General. It was never intended that these people should be prejudiced in that way. As I recollect, there was a clear understanding that the Act would not work in this way but was in fact intended to remove an anomaly, and inasmuch as this injustice has arisen, it is only right that the Treasury should devise some way of rectifying it.
295 As I understand it the area of the difficulty is as narrow as that. If that is true, there should be no difficulty about the matter, and the Treasury ought to look into it again with a view to achieving the end I have indicated.
§ Mr. Manningham-BullerI am grateful to the right hon. and learned Gentleman for his frank explanation of how the Committee came to be misled a year ago today. The Attorney-General has contended that our Clause would in some instances give a double allowance. I can assure him that it was not the intention in drafting the Clause to do anything of the sort, but merely to give an allowance to avoid double taxation. If the system had been allowed to continue under which these people were operating, there would have been no question of a double allowance or double taxation.
Equally, if the system, brought into operation so far as they are concerned for the first time by the Finance Act, 1950, had been in operation since they commenced making these payments, there would be no case either of double taxation or of double allowance. The difficulty arises solely with regard to the transition and when the right hon. and learned Gentleman said he apprehended that the reverse would take place to what has taken place, I was wondering when he formed that opinion.
If I may give him one instance, a company with an expenditure of £26,000 in 1950 and in 1951 with a sum deductible under the new system of £19,000, has to pay a tax on the difference between the two figures which they would never have had to do before—
§ The Attorney-GeneralAnd vice versa.
§ Mr. Manningham-BullerAnd vice versa. Perhaps one company might benefit, but we do not want to place on other companies an additional burden of taxation of no mean figure—in the case I have mentioned it would be £3,500—merely because of a change-over of a system of taxation.
The right hon. and learned Gentleman has thrown out a possibility of exempting these categories from the operation of that part of the Finance Act, 1950, by giving an option to the recipients of the payments. I welcome his attitude and 296 I hope that suggestion can be explored. It might be possible, on examination of the books of the companies, to go back to see what the position would be if they had adopted the present system from the time they first started making the payments and made adjustments accordingly. I am sure that if there is goodwill on the part of the Revenue in this matter a position can be reached when both double allowance and double taxation are avoided.
I welcome the reception by the right hon. and learned Gentleman of this suggestion. The only thing that remains is the time factor. One would have hoped if possible to have got this cleared up before we parted with the Finance Bill. The right hon. and learned Gentleman referred to nothing having been said last time about the Report stage. Both sides of the Committee are fairly familiar with the figures and I hope that, with goodwill on both sides, something may be done to enable us to rectify the position on the Report stage.
§ The Attorney-GeneralI am advised that there are difficulties about that which would make it impossible to do anything on Report stage. I thought that I should indicate that to the hon. and learned Gentleman.
§ Mr. Manningham-BullerThe right hon. and learned Gentleman has been very frank in saying that. I believe it might be possible to overcome those difficulties. If that is so, I hope that we shall endeavour to do it and then we may be able to do something on Report stage. We can examine that. In view of the attitude of the right hon. and learned Gentleman and what he has said, I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.