Eighth Schedule.—(EXCESS PROFITS LEVY: MODIFICATION OF PROFITS TAX RULES AS TO COMPUTATION OF PROFITS.) (Hansard, 26 May 1952)

§ Mr. Maudling
I beg to move, in page 94. line 37, at the end, to insert: (b) no initial allowance had fallen to be made under Part I, Part II or Part III of the Income Tax Act, 1945. in respect of expenditure incurred before the sixth day of April, nineteen hundred and forty-six; and. I ought perhaps to start by saying that the purpose of the Eighth Schedule is to provide that, in comparing the profits of a company between the standard period and the chargeable period, as far as possible no extraneous factors should be allowed to enter. This is a comparative tax based not on the actual level of profits but on the difference between the levels of profit in the given period and the subsequent period. Therefore, it is most important that they should be as near as possible to the actual operating profits of the company at the time, and certain additions or subtractions which have arisen for arbitrary reasons should for the purpose of E.P.L. be excluded.
From the taxpayer's point of view it is obvious that while for the chargeable period he wishes his profits to be as low as possible and therefore, the deductions to be as high as possible, for the standard period it is in his interest that his profits should be as high as possible, and any additional deductions from the standard period work against the taxpayer. The Amendment deals with a small point which, if it were not for the Amendment. might give rise to injustice.
Under the Income Tax Act, 1945, certain capital expenditure incurred between 1944 and 1946 was treated as having been incurred at a subsequent date and an initial allowance in respect of that expenditure was granted for the Income-Tax year 1947–48. As a result of that three-quarters of the initial allowance would fall in the year 1947, which is one of the standard years for E.P.L. purposes. Therefore, the taxpayers' standard in that 1038 year would, without the Amendment, be reduced by reason of a wholly arbitrary provision in the 1945 Act which brings into 1947 deductions which are really deductions in respect of previous years. I ask the Committee to accept the Amendment as it is designed to remove what might otherwise be a source of unfairness to the taxpayer.
Amendment agreed to.
Further Amendment made: In page 94, line 47, after "occur," insert: with the omission of subsection (4) of section two hundred and sixty-five and with the substitution, in the proviso to subsection (6) of that section, in the proviso to subsection (2) of section two hundred and seventy-nine, and in the proviso to subsection (1) of section three hundred and nine of 'nineteen hundred and forty-six' for 'nineteen hundred and forty-four.'"—[Mr. Maudling]

§ Mr. Maudling
I beg to move, in page 94, line 47, at the end, to insert: (c) any election made after the fifth day of April, nineteen hundred and forty-seven, under section seven of the Income Tax Act, 1945 (which, in the case of such an election, authorises the making of initial and annual allowances instead of allowances for depreciation of mills, factories and other premises), had not been made; and. This Amendment is also designed to ensure that the two assessments for the standard period and the chargeable period shall be, as far as possible, on a comparable basis. The Income Tax Act. 1945, introduced initial and annual allowances for industrial buildings. The taxpayer, in the case of buildings which already enjoyed the old depreciation allowance for mills, factories and similar buildings, was given the option to elect between continuing with the old allowance or changing to the new basis of the initial allowance.
In the case of the reconstruction or extension of a factory, it would be in the taxpayer's interest to change from the allowance for mills, factories and similar buildings to the new initial allowance basis. If he were allowed to do that in the standard period or subsequently in the chargeable period, it would introduce an element of disparity between the assessment of his profits in the standard period and the chargeable period.
The purpose of the Amendment is to say that any election of that kind shall, for E.P.L. purposes, be treated as if it had not been made and that buildings which started on one basis shall be treated 1039 throughout the E.P.L. periods on the same basis. This is done so that there shall be parity of profits between the two periods.
Amendment agreed to.
Further Amendment made: In page 94, line 50, leave out from "If," to second "the," in line 52.—[Mr. Maudling.]

§ Mr. Maudling
I beg to move, in page 95, line 5, at the end, to insert: (3) An election under sub-paragraph (2) of this paragraph shall be made either—

(a) within twelve months from the end of the first chargeable accounting period of the body corporate or such longer period as the Commissioners may in their discretion allow; or

(b) within twelve months from the end of the period of charge to the excess profits levy or such longer period as the Commissioners may in their discretion allow;
and any election made under paragraph (a) of this sub-paragraph may be withdrawn by notice in writing to the Commissioners within the period mentioned in paragraph (b) of this sub-paragraph; and all such assessments, additional assessments, reductions of assessments and repayments of tax shall be made as are necessary to give effect to an election made under paragraph (b) of this sub-paragraph or to the withdrawal of an election made under paragraph (a) thereof. Under the Bill as drafted, the taxpayer, for initial allowances purposes, is given the right to elect between two alternatives either of which shall apply to both the standard and the chargeable periods. He can choose that his initial allowances throughout shall be treated on the basis on which they were treated before the Finance Act, 1949, which doubled them and the Finance Act, 1951, which abolished them, or he may elect that throughout both periods no account should be taken of initial allowances.
Under the Bill the election had to be made within 12 months of the commencement of the first chargeable accounting period. It has been represented to my right hon. Friend—there are some Amendments on the Order Paper on the point—that this is too short a period, that it should be extended and that a right of revocation should be given.
Under the Amendment the right of election may be exercised within 12 months from the end—not the beginning—of the first chargeable accounting 1040 period or, alternatively, within 12 months of the end of the period of charge to E.P.L., and the taxpayer shall have the right of revocation of his election within the second of these two periods; that is, within 12 months from the end of the period of charge to E.P.L.
The purpose of the Amendment is to give the taxpayer more latitude. It has been pointed out that he would in some cases have to make this election, which might have very serious consequences to him, wholly as a shot in the dark, and my right hon. Friend feels that the Amendment should be introduced so to give the taxpayer the fairest possible treatment.
Amendment agreed to.
Further Amendment made: In page 95, line 10, leave out from "allowances" to end of line 12.—[Mr. Maudling.]

§ Mr. Maudling
I beg to move, in page 95, line 36, to leave out "commencement," and to insert "end."
The purpose of the Amendment is very similar to that of an Amendment I have just been explaining to the Committee. Once again it is a question of an election being made, in this case not in respect of an initial allowance but in respect of an annual allowance. In the original draft the period during which the election could be exercised was 12 months from the beginning of the accounting period. The Amendment changes that to 12 months from the end of the accounting period.
Amendment agreed to.
Further Amendment made: In page 95, line 37, leave out "trade or business," and insert "body corporate."—[Mr. Maudling.]

§ Mr. Maudling
I. beg to move, in page 95, line 50, at the end, to insert: 5. The profits or losses shall be computed without regard to any balancing allowances and charges or to any charges on the sale of patents under sections three, seventeen, twenty-eight and thirty-seven of the Income Tax Act, 1945, or sections two hundred and sixty-seven. two hundred and ninety-two, three hundred and eight and three hundred and eighteen of the Income Tax Act, 1952. The purpose of the Amendment is to deal with two related points, balancing charges and the spread of capital receipts in respect of the sale of patents. The object of the Schedule is to ensure as far 1041 as possible that the two periods, the standard period and the chargeable period, shall be assessed in the same conditions. Balancing charges and balancing allowances may be quite arbitrary in their incidence. Take, for example, the really outstanding case of the loss of a ship. The ship may be lost suddenly, as a result of which the company may be subject to a very substantial balancing charge which will increase the company's assessable profits for the period in which it occurred.
It seems clear that these arbitrary charges or allowances should not be allowed to enter into the computation for E.P.L. purposes, because they are liable to cause serious injustice. The Amendment is designed to ensure that no account shall be paid to balancing allowances or balancing charges in making E.P.L. computations. The same consideration applies to receipts from the sale of patents. These receipts may be spread for tax purposes over a period of six years. It is quite clear that a sale in 1950, for instance, will enter into the chargeable period for E.P.L., and it will put an additional charge on the taxpayer which does not really relate to the charge on the body corporate in the chargeable period.
The Amendment has the two-fold purpose of dealing with balancing charges and allowances and the spread of capital receipts. It is designed to ensure the strictest possible parity in the standard with the chargeable periods.

§ Sir F. Soskice
The Schedule is designed, of course, to modify the rules for the purpose of computing profits. The Amendment is to leave out, in that computation, the balancing charge which may be made in certain circumstances upon the disposal of an asset. The Schedule does not in any place exclude the ordinary annual allowance and, unless I am mistaken, the trader is entitled to write off annually a certain amount in respect of his plant or machinery, and to compute his profits afterwards.
I am not cavilling at the Amendment.. There is probably a perfectly good reason, and I am asking what the reason is, why, when the trader has written his plant or machinery down to a figure which results in a situation in which normally a balancing charge would be imposed, he should be given tax free what is really a part of his annual income. 1042 The plant or machinery can be disposed of for a payment, after being written down, which would ordinarily give rise to a balancing charge. In effect, he has reckoned as part of his income, what he has lost by the writing down process.
The Minister has given one reason for attempting to produce parity as between the chargeable and the standard period. There is probably also a good reason why what the trader enters into his profit and loss account as part of his profits should not be subject to the Excess Profits Levy. I am asking whether it is right that the trader should receive, as he apparently will as a result of the Amendment, part of his income tax free from the Excess Profits Levy.
Speaking for myself, I entirely agree with the motive of trying to produce an analogous situation in the standard and the chargeable period, but it seems to me offhand, unless I have misunderstood the situation, that the result of attempting to do so by introducing the Amendment will be that the trader will receive a sum of money which otherwise would have to go into the balancing charge as part of his income, and which is to be freed from the Excess Profits Levy.

§ Mr. Maudling
As I understand the right hon. and learned Gentleman's argument, I think the answer would be that whichever course was adopted will benefit some traders and damage others. When a balancing charge occurs—it may be purely an accident, such as the loss of a ship—the effect is to increase the assessable profits for profit-making purposes. If the balancing charge is ignored, then quite clearly that is to the benefit of the trader. If the benefit were ignored in the standard period, then it would be to the detriment of the trader, because it is to the trader's advantage that the deductions from his assessable income in the standard period should be as small as possible.
I hope the right hon. and learned Gentleman will agree that whichever course is adopted, it is bound to affect some people one way and other people another way, because the interests of the trader are entirely opposite as between standard period and chargeable allowance. Therefore, my right hon. Friend considers that the satisfactory way of dealing with the matter is to eliminate 1043 any balancing charge or allowance altogether, because they refer to an incidence that has happened outside the particular year in which they arise. The balancing charge is levied because the trader is enjoying too much in the way of depreciations; and, on the other hand, the balancing allowance arises because the trader in practice has not had enough depreciation allowance. The whole thing may work both ways. My right hon. Friend thought it best to exclude both altogether.
This Amendment does not affect the ordinary wear and tear computation, and provision is made for that in line 6, of page 95, where it says: Nothing in this paragraph shall be construed as requiring any adjustment of the deductions falling to be made under paragraph 1 of Part I of the said Eighth Schedule otherwise than in respect of initial allowances. That means that no alteration shall be made in the wear and tear computations for the purpose of E.P.L.

§ Sir F. Soskice
I am much obliged to the hon. Gentleman, but I am not sure that his answer satisfies me. I see what he has in mind, but I can conceive of a case of a trader who, throughout the period which begins with the period of charge receives annual allowances against his capital equipment and receives a substantial sum in one of the periods because he disposes of the plant. The amount he receives greatly exceeds the written down value of the balance, and he receives that amount in that year. I should have thought that that probably was not going to raise the equalisation between standard and chargeable periods. I do not want to take the matter much further, and I see the point which the hon. Gentleman has in mind. I should not say that necessarily it is the right result, and possibly the hon. Gentleman will consider what I have said between now and the Report stage.

§ Mr. Maudling
z: Certainly I will consider it. I might add that the balance which the right hon. and learned Gentleman gives, when applying to the balance in charge, would be exactly the opposite way round if it applied to the balancing allowance.
Amendment agreed to.

§ Mr. G. P. Stevens (Portsmouth, Langstone)
I beg to move, in page 96, line 36, after "allowable," to insert: or a receipt, including sums falling to be treated as trading receipts under paragraph 2 of Part I of the Eighth Schedule to the Finance Act, 1947, would be included. This group of five Amendments to lines 36, 37, 39, 40 and 41 deal with the one subject of receipts. Paragraph 8 of this Schedule requires that where exceptional expenses are incurred and are proper deductions from the profits of a company, those expenses are attributable to a larger period than the one accounting period and they shall be apportioned over the accounting periods to which they properly relate. These five Amendments have the effect of making that apply to exceptional receipts as is required in respect of exceptional expenses.
I can think of one example which came to my notice only a few months ago. It happened to be a client company of mine, and they made Horsa gliders in large quantities during the war on the basis that the price which the Government would pay for them would be settled after the war. The gliders were probably made by the company between the years 1943 and 1945. I do not remember the exact years. The final settlement of the contract by the Government was in 1948, when the company received a very substantial payment.
That is a case which could easily be repeated under the present circumstances of re-armament, and if it is right and proper that exceptional expenses should be apportioned over a period these exceptional receipts should be dealt with in exactly the same way. For that reason, I hope that the Parliamentary Secretary to the Ministry of Civil Aviation will be able to accept this Amendment, or alternatively introduce an Amendment which will have the same effect.

§ Mr. Maudling
A large part of my hon. Friend's Amendment is already covered by the Amendment which I have just moved dealing with balancing charges and allowances. These are sums falling to be treated as trading receipts to which reference is made in the first of this group of Amendments, and beyond that I am afraid my right hon. Friend does not feel that in practice he can go. Provision is made for the disallowance of exceptional expenditure for the purposes of E.P.L., 1045 but not for exceptional receipts in any given year. This, in fact, follows the example of the old Excess Profits Tax Code, which was found to be necessary in order to ensure proper comparability 'between the standard period and the chargeable period.
If I can give examples of the sort of payment to which this paragraph is to be put, I can cite exceptional payments like compensation for loss of office, lump sums payable in commutation of pension and so on, and if there were not provisions to deal with exceptional payments of this kind concentrated in a given year, obviously there would be considerable opportunity for avoiding a part of the E.P.L. charge. The old Excess Profits Tax did not cover receipts for the same reasons as this provision does not cover exceptional receipts.
It would be quite impossible to determine what part of any company's trading receipts are exceptional. It could be argued that a company had a particularly profitable year or received a heavy dividend through a particular investment in the Excess Profits Levy period. The Revenue Authorities have, in fact, no information available which would enable them to test the position of the receipts, and no true comparison would be possible to achieve the result in the matter of exceptional receipts as it is not in practice possible to achieve in the matter of exceptional payments.
As I have said already, the main point behind this group of Amendments has been met by my right hon. Friend's Amendments about balancing charges and balancing allowances, and in practice it is quite impossible for us to go any further, but I would remind my hon. Friend that this is a comparative tax. It compares one period with another, but it does not fall on the total profits or excess profits in one period. If the same conditions are applicable to both periods, there cannot be any serious injustice to the taxpayer, and I hope in the light of that my hon. Friend will be prepared to withdraw his Amendment.

§ Mr. Horobin
I do not think that the answer we have just had is altogether satisfactory. Taking the first point, it is not true that the matters dealt with in the Chancellor of the Exchequer's previous Amendment deal with all those proposed 1046 to be dealt with under this. This Amendment includes sums which fall to be treated similarly. Those sums included are dealt with under the Amendment of the Chancellor which we have just accepted. As to the hulk, they obviously will not be dealt with unless something of this kind is allowed. It is difficult for fair-minded people in all parts of the Committee to accept the view put forward that in some extraordinary way it is possible to test an exceptional expenditure but it is not possible to test an exceptional receipt.

§ Mr. Maudling
That is a fact, because the information with regard to expenditure in the standard period is available to revenue authorities but there is no similar information available in respect of receipts.

§ Mr. Horobin
But the onus of proof is upon the company, and if the company can show, as it would have to show, that the receipts obtained in one of those years were exceptional, the same principle should apply as in the case of a deduction. I do not want to hold up the Committee, but I hope that the Parliamentary Secretary will look into this between now and the Report stage—

§ Mr. Maudling
indicated assent.

§ Mr. Horobin
—to see if he cannot meet something which seems to be reasonable, namely, that if the company is to be damnified because of its exceptional payments, it should have exceptional receipts taken into account.

§ Mr. Crosland
I am a little puzzled by what has been said from the benches opposite. I am puzzled by the example given by the hon. Gentleman of the Horsa case. I should have thought that if he were anxious to do his best for the company with whose affairs he was concerned, he would want the receipts for those Horsas to be accounted as accruing in the standard period and not in the period during the war to which they were attributable.

§ Mr. Stevens
I agree with the hon. Gentleman so far as that example and those years were concerned. I was giving it simply as an example of what could happen in 1952 as easily as it happened in 1948.

§ Mr. Crosland
I agree with what the hon. Member for Oldham, East (Mr. Horobin) has just said. It is a little unconvincing to say that an expense can be traced and identified so easily yet nothing can be done about receipts. I thought the hon. Member had a very fair point when he said that the onus of proof would be on the company, since it is the company which will try to get, not unfair, but legitimate advantage, by showing this, and it would not try to do so unless it had evidence which would be satisfactory to the Commissioners.
I should have thought the Horsa case was a common type of case. For the company concerned it would be the easiest thing in the world to show that it was an exceptional receipt, not attributable to anything which happened during the standard or present chargeable accounting period. I should think this was worth looking at in detail to see if such exceptional cases could not come under some formula which would satisfy the point raised.

§ Mr. Stevens
I thought the Parliamentary Secretary sounded a little vulnerable when he replied, and that was evidenced by the nod he gave to my hon. Friend the Member for Oldham, East, when he suggested that it should be looked at between now and the Report stage. Accepting that nod for the word, I beg to ask leave to withdraw the Amendment.
Amendment, by leave, withdrawn.

§ Mr. Maudling
I beg to move, in page 98, line 7, to leave out from "commenced," to "and," in line 8, and to insert: before the first day of January, nineteen hundred and forty-seven. This, together with the next bunch of six Amendments standing in the name of my right hon. Friend the Chancellor of the Exchequer, is consequential upon the change in the standard period in the three years 1947, 1948 and 1949 to a choice of two of those three years.
Amendment agreed to.
Further Amendments made: In page 98, line 16, leave out "period," and insert "years."
In line 19, leave out "period," and insert "years." 1048 In line 24, leave out from "than," to "bears," in line 25, and insert "two years."
In line 30, leave out "or years." In line 31, leave out from "election," to "and," in line 32, and insert "were not a standard year."
In line 34, after "(b)," insert" or paragraph (c)."—[Mr. Maudling.]

§ Mr. Maudling
I beg to move, in page 98, line 35, at the end, to insert: 11. Any deduction which, but for this paragraph, would fall to be made in respect of expenses incurred by the body corporate in the restoration of assets situated in territory which, at any time during the years nineteen hundred and forty-two to nineteen hundred and forty-five, was under Japanese occupation shall be made only to the extent (if any) that the expenses have not been and are not to be met directly or indirectly by the Crown or by any government or public or local authority, whether in the United Kingdom or elsewhere. This Amendment is designed to give further assistance to rubber growers and others in the Far East who have suffered as a result of Japanese occupation. The object of the Amendment is to eliminate the cost of rehabilitation expenditure incurred by rubber growers and others which has been met, or may be met, by way of compensation. If the cost of this rehabilitation expenditure were not excluded, it would be a further deduction from the profits of the rubber growers and other traders in the Far East in their standard years and, therefore, would increase their liability to E.P.L.
A good deal of such expenditure will have been incurred in the standard years, and so far as the companies are to be compensated it would, clearly, be unfair that their standard profits should be reduced by the expenditure, and it also would be unfair to charge the compensation payments to the Excess Profits Levy if they are received during the chargeable period.
The effect of the Amendment, therefore, is that both compensation and the corresponding expenditure are to be left our of account in computing the profits of the standard years and the chargeable periods. This is designed to give further assistance to these companies which operate in the Far East and which have suffered so severely from the Japanese occupation. My right hon. Friend hopes that in addition to the substantial concessions that he 1049 has already made, this will be of some assistance to these companies in their very important work.

§ Mr. Douglas Marshall (Bodmin)
I wish to put just one point to my hon. Friend. There is no doubt that the shipping industry will welcome a number of the Amendments which the Chancellor has put down to the Schedule. There is, however, one point which needs to be clarified and which, I hope, my hon. Friend will be kind enough to say that he will consider before the Report stage.
In levying a tax which is based on the comparison of profits of one period with those of another, my hon. Friend will, I am sure, agree that it is necessary to compare like with like. For example, in the case of need—that is to say, the nation's need—it is necessary to keep in service ships which one would describe as "over age," for longer than usual, simply because of the physical limitation of our shipyards and also because of our war losses.
The Chancellor will realise that the initial wear and tear allowances are calculated on the straight-line method as far as the shipping industry is concerned. A fixed proportion is written off each year until it is fully written off, and then it stops. In other industries this is not the case. Therefore, there will be cases where ships' wear and tear allowances will have been taken into account as a deduction in arriving at the profit of the standard years, but there will be no corresponding deductions at all in 1952 and subsequent years.
Even if the ships are earning no more than in the standard years, there will be E.P.L. merely because of the accident of writing down the ship and unless the shipping industry get an adjustment, the Position will be that every ship of mature age will automatically earn E.P.L., not because she is cheaper to run—no doubt, as the Parliamentary Secretary may know, in all probability she will be more expensive to run—not because the freight earnings are, in fact, greater—they may be less—but simply because the wear and tear allowance has ceased.
1050 The justice of this claim is based on the comparison of like with like and it was conceded for E.P.T. purposes. During the passage of E.P.T. it was conceded in principle and agreed. I should like the Parliamentary Secretary to say that he will look at this and give it further consideration.

§ Mr. Houghton
While the Parliamentary Secretary is reflecting on the answer to that point, I wish to put another to him which as far simpler.
I wish to draw attention to paragraph 6 of the Schedule, which is headed, "Unreasonable or unnecessary expenses." As the Committee will see it provides that: No deduction shall be allowed in respect of expenses in excess of the amount which is reasonable and necessary…. and so on. There is nothing new in these words. We have seen them before in provisions for excess profit legislation. But the fact of having seen these words before did not prevent right hon. and hon. Gentlemen opposite from bitterly criticising my right hon. Friend the Member for Leeds, South (Mr. Gaitskell) last year when he was introducing provisions against tax avoidance.
Some of his provisions were criticised either on the grounds that they were vague or that they were too severe. None will criticise this paragraph on the ground that it is too severe, though I suppose it could be criticised on the ground that it is vague. I should like to hear from the hon. Gentleman an assurance that his right hon. Friend does feel that this paragraph is a necessary part of his equipment against the avoidance of Excess Profits Levy.
I think it worth while having that assurance on the record in case of future need, because the mere re-introduction in the Finance Bill last year of safeguards against tax avoidance did not reduce in any way the strength and vehemence of the attack on my right hon. Friend by right hon. and hon. Gentlemen opposite. I think that either a little repentance or a removal of the hangover of synthetic indignation and humbug of last year will not be amiss.

§ Mr. Mitchison
May I ask the hon. Gentleman one question? An expenditure has to be reasonable and nesessary. Would he explain what that means? If expenditure is necessary can it also be 1051 unreasonable? Are the words, "reasonable and" an addition to or a limitation of the necessity?

§ Mr. Maudling
Several interesting points have been raised. I must say that the one raised by my hon. Friend the Member for Bodmin (Mr. D. Marshall) is a new one. I imagine that it arises from the practice in the shipping industry of using the straight line rather than the reducing balance method of computing wear and tear. I should like to examine this point carefully and to discuss it with my right hon. Friend before the Report stage.
The hon. Member for Sowerby (Mr. Houghton) tempts me to enter into discussion of certain features of last year's Finance Act, which I am sure would be out of order and which I feel we may have subsequent opportunities to discuss. My right hon. Friend considers that it is necessary to avoid certain methods of escaping E.P.L. law to have this provision which is carried on from the old Excess Profits Tax provision.
I think that it would be most unwise of me to enter into a discussion with the hon. and learned Member for Kettering (Mr. Mitchison) on the meaning of the words "reasonable and necessary." These words appear fairly often in the tax statutes—in Schedules D and E and so on. So far as I understand the position, the condition is twofold. The amount should be both reasonable and necessary. Speaking without notice, I imagine that the difference would be that one can spend money on something which is necessary, but nevertheless one can spend an unreasonable amount upon it. There were many examples during the tenure of office of the previous Government where they spent unreasonable sums on what were wholly necessary purposes.

§ Mr. Mitchison
So far as I can see, it is the amount which must be reasonable and necessary.

§ Mr. Maudling
If I should be incorrect, I will withdraw, but I think that the amount must be both reasonable and necessary, and my right hon. Friend considers this provision necessary and reasonable.