HC Deb 24 June 1954 vol 529 cc618-32

Motion made, and Question proposed. "That the Clause stand part of the Bill."

Mr. E. Fletcher

The Committee will agree that this Clause is probably one of the most fascinating in the fascinating series of Clauses which we are now discussing, and I hope that before we part with it it will be lucidly explained by the Economic Secretary.

On Second Reading, the Financial Secretary was studiously careful to pass over this particular part of the Bill on the ground that it was far more fit for explanation from the Treasury Bench during the Committee stage. I would remind hon. Members that this was left in abeyance until the Committee stage in order that we might have it more fully ventilated and analysed in a manner which its importance and complexity so thoroughly deserves.

My hon. Friend the Member for Sowerby (Mr. Houghton) suggested that we could not consider Clause 17, which no one understood, without the use of a blackboard, but I think that the complexity of Clause 17 fades into insignificance when compared with Clause 19.

The Solicitor-General (Sir Reginald Manningham-Buller)indicated dissent—

Mr. Fletcher

The Solicitor-General shakes his head. I welcome the confidence of the right hon. and learned Gentleman in his ability to explain some of the conundrums in Clause 19 which occurred to me when I read it, and which I hope to put to him as clearly as I can.

Let us consider the general position. Clause 19 is designed to give effect to a limited and a rather guarded and reserved recommendation of the Millard Tucker Committee. To understand it, one must consider—as I am sure the Solicitor-General will agree—not only paragraph 83 (b) of the Report, but also paragraph 266, because, in some ways, those two paragraphs are inconsistent. The difficulty which always arises in this very specialised field is that the wear and tear allowance and other capital allowances are not treated as expenses which a company can set off against its profits.

Unlike all other expenses and disbursements, they are not treated as expenses and disbursements to be taken into account before a company arrives at its net profit. The net profit has to be calculated without regard to these capital allowances for wear and tear, and so forth. However, after the net profit has been ascertained, before there is any assessment or any liability, there is, by this second stage, a deduction in respect of these wear and tear allowances. I am sure that the Solicitor-General will interrupt me if he is not agreeing with what I am saying, but I am trying to keep it fairly right in layman's language.

That produces this anomaly, that whereas in ordinary Income Tax law losses can be set off against profits, one year as against another, if a company entitled to wear and tear allowances has made what a layman would regard as a loss, but is not technically a loss because those expenses have not been set off against his profits, they are only taken into account after his net profit has been arrived at, and, therefore, all general regulations about setting off losses and profits are put out of gear.

The Millard Tucker Committee had to consider that situation, which it recognised was an extraordinary one. It said, in paragraph 83 (b): Wear and tear and other capital allowances are not expenses in arriving at profits but a deduction from profits when ascertained. There are various practical reasons for this into which we need not enter here. (They are dealt with in paragraph 266 below.) The result, however, is that, in law, a loss for purposes of Section 34 has to be computed without taking into account any capital allowances. Then there is this significant sentence: There is a longstanding administrative concession under which the Board of Inland Revenue in certain circumstances and on certain conditions, permit a capital allowance to create or augment a loss for purposes of Section 34. This means that, owing to the complexities of the Income Tax structure, it is not possible to do it in the normal, straightforward way and treat these capital allowances as expenses in arriving at a loss.

Mr. Houghton

If my hon. Friend will permit me to interrupt, it is not a question of complexity but of equity. That was the only consideration involved.

Mr. Fletcher

I do not agree with my hon. Friend, and in a moment I shall be interested to hear what he has to say about it. Paragraph 266 deals with the method of giving capital allowances. There the Millard Tucker Committee point out that there are various reasons why capital allowances cannot be dealt with as expenses to be taken into account before the losses of a company are ascertained. The reason why it cannot be done in that way is because of the preceding year basis of assessment.

Having analysed whether capital allowances can be treated as expenses in the ordinary sense, the Committee, in paragraph 266, came to the conclusion that, on balance, it could not be done and, in principle, ought not to be done. It said: The reason for the distinction does not, however, depend so much on principle as on practical considerations. What it says, in effect, is that although, on principle, one ought to treat these capital allowances as expenses, there are practical considerations which provide inconveniences; in other words, Millard Tucker Committee goes on to say that, if a company could treat them as expenses, there would be a number of occasions on which certain companies would suffer grave disadvantages, and there would be other circumstances in which companies would get quite improper benefits and advantages; and that arises because in certain circumstances the earnings of one particular year are treated as the basis of assessment for more than one year of assessment.

It also arises from the fact that the initial allowances are correspondingly greater in the initial period than in all subsequent years, and there might be cases in which the initial allowances could be treated not only in one year but certainly in two years and perhaps in a third year. There is also the danger that, if we applied the strict principle, there would be taxpayers who would create technical cessations in order to obtain an allowance more than once or to avoid liability for charge.

Therefore, we are faced with this situation. As the Millard Tucker Committee says, in paragraph 266, one cannot apply strict logic or strict principle to these wear and tear allowances and capital allowances. We cannot call them expenses in arriving at profits. First, we have to arrive at profits and then make a deduction. That being so, it follows that there has in a number of cases been a sense of inequity, a sense of injustice, a state of affairs which has called for a remedy. So what has happened?

I do not know whether you agree with it, Mr. Thomas, and I am not sure whether I agree with it, but what has happened is that the Millard 'Tucker Committee says in paragraph 83 (b): There is a longstanding administrative concession under which the Board of Inland Revenue in certain circumstances and on certain conditions, permit a capital allowance to create or augment a loss. There has been no statutory authority for that, no authority given by this House. I have no doubt that it may be desirable to create the equitable conditions of which my hon. Friend the Member for Sowerby (Mr. Houghton) is such a distinguished apostle, although I do not know what some of my hon. Friends who are constitutional purists in this matter think about it. Yet in the long run, however it may be, I do not like these long-standing administrative concessions; I prefer that the Government should give statutory authority for what the Board of Inland Revenue do.

Therefore, the question that faces the Committee is to see whether or not, by Clause 19, we are producing the precise equity which we wish to produce, whether we are doing anything more or anything less than giving effect to these longstanding administrative concessions. It is those matters that I venture to think it is our duty this afternoon to examine with some care. Because we have accepted the principle that this is a matter for Parliament—this is essentially a legislative matter and we are essentially a body of legislators—we must now consider whether the provisions of Clause 19, in effect, transform into legislative form this administrative concession.

On that subject my first observation—which is rather against the principle I have just been enunciating—is this: where one is dealing with a complicated subject, as this is, I can well understand that there are certain advantages in administrative concessions over a legislative formula. I can well understand that administrative concessions have a much greater measure of flexibility and elasticity. They enable the Board of Inland Revenue to look at each case in order to produce a kind of rough and ready justice and equity which they think is called for. To some extent, that flexibility disappears if we try to put what has hitherto been a rather loose discretionary administrative arrangement into the watertight confines of a closely defined Section of an Act of Parliament, but, nevertheless, we must attempt it.

5.0 p.m.

I do not in any way criticise the Government for having attempted it in Clause 19, but I think we on these benches would be very remiss in our duty if we allowed the Clause to pass without the full statement of its implications that was promised us by the Financial Secretary to the Treasury in moving the Second Reading and in deliberately relegating this Clause for consideration in Committee.

Therefore, some of the questions which I should like to ask the learned Solicitor-General on Clause 19 are these. First, what precisely were the "certain" and "certain conditions" referred to in paragraph 83 of the Millard Tucker Report which enabled the Board of Inland Revenue, in its discretion on various occasions to depart from the strict law of the land as laid down by a series of enactments? Secondly, is the Solicitor-General quite certain that Clause 19, as now drawn, completely removes any possibility of the dangers of evasion referred to in paragraph 266, which recognises that unscrupulous taxpayers could create technical cessation in order to obtain the benefit of statutory allowances more than once?

Thirdly, I should like to put this question to the Solicitor-General. He has, no doubt, recognised that, whereas the Millard Tucker Report was presented in April, 1951, and dealt with a state of the affairs which then existed, since that date there have been changes in the law in regard to this matter, and, in particular, as the Solicitor-General will have in mind, Clause 19 expressly makes reference to claims that might now be made by virtue of Section 15 (3)of the Finance Act, 1953, and it also refers in subsection (5) to a state of affairs which can arise under Section 19 of that Act. Both these Sections were brought into force at a date subsequent to the issue of the Millard Tucker Report, and, on this point, we are entitled to know from the Solicitor-General what bearing these Sections of the Finance Act, 1953, have on the earlier Report of the Millard Tucker Committee.

I hope I have said sufficient to indicate that this Clause seems to call for a good deal by way of explanation from the Government before we can accept it. I have not attempted in any way to endorse the comments made on Section 19 of the Finance Act, 1953, but I have no doubt that some of my hon. Friends will have other points to raise. These are matters which are well worth the study of this Committee.

Mr. Houghton

I do not know whether the fact that the learned Solicitor-General is in charge of this Clause indicates that it is more or less difficult than Clause 17. However, we shall look forward to having an equally lucid explanation from the Solicitor-General as we had from the Economic Secretary to the Treasury. When one sees what we get when an administrative concession is translated into legislative proposals. one feels that there is a good deal to be said for keeping it as an administrative concession, but I quite agree with my right hon. Friend the Member for Islington, East (Mr. E. Fletcher) that the time has come when this difficult question must be tackled and put into the Bill.

The Millard Tucker Committee found it pretty tough going, because, in paragraph 83 (b) they said that, for various practical reasons, capital allowances were not allowed as expenses, but that they had not gone into that question there. Later, they said that they would deal with it in paragraph 266, but, by the time they got to paragraph 266, they must have felt very depressed indeed. The world was very dark and dismal, because, in paragraph 267, they were dealing with land used for cemeteries and crematoria, which shows how unexciting the whole job was.

I presume that this Clause does no more or less than give statutory effect to the limited concessions which have been given over a long period. I see that I receive an affirmative answer in a nod from the Solicitor-General. It is true that these concessions have been in operation for a long time. I ask whether there is anything wrong with them, either in principle or because of what the Millard Tucker Committee recommended, by way of some extension, restriction or modification.

If this Clause does no more than give statutory effect to an administrative concession, I think that this Committee will be well satisfied. I agree that administrative concessions have not got the authority of the law. They are sometimes compromises, in respect of which the Inland Revenue have laid before the House a full list of what are described as extra-statutory concessions so that all taxpayers shall have access to them, which is important on the grounds of equity. These concessions are not something given in selected cases, still less under preferential conditions, and it is right that all taxpayers should have access to them, and that this House is able to raise the matter at any time when they come under criticism.

I have always thought that the fundamental reason why the capital allowances were treated as concessions over such a long period of years was that of the difficulty of bringing into the computation of profits expenses which are not incurred in the course of trade. The principle of allowing in the computation of profits only expenses which are incurred in the course of trade is one which has to be jealously guarded by the Inland Revenue if we are not to open some doors rather too widely.

There are, perhaps, some points in these administrative concessions which are of less importance now than they were before we extended them in an earlier Finance Act in the indefinite carrying forward of losses. That removes some of the importance of the choice of income against which allowances should be set off, because they can now be carried forward indefinitely and allowed against the profits of the business.

The only other point I wish to make is whether the Clause alters in any respect the practice with regard to the order of other income against which the allowances shall be set. My reading of it is that it merely determines the conventional practice with regard to that, and, from what the Solicitor-General has said, I think that the Clause is simply an implementation in statutory form of what for a long time has been generally accepted as an administrative concession.

Mr. G. R. Mitchison (Kettering)

I do not want to look an administrative concession in the mouth, especially as I happen to have benefited a bit myself from this particular administrative concession. It is one which affects people who do a little farming, and who are just between making a profit or a loss. In those circumstances, it can mean quite a bit, because it may throw the balance over from a small loss to a small profit by reason of the capital allowance or initial allowance given on such things as farming machinery. That is the way that I happen to have come across it.

However, I rather dislike the idea of these administrative concessions, of which there is quite a number. It is quite true that if one hunts long enough and carefully enough one can find out, more or less, what they are. But I do not think that that is the right way to leave it. One of the troubles about them was illustrated by what my hon. Friend the Member for Sowerby (Mr. Houghton) said just now. He wanted to be assured that this was merely carrying out what had, in practice, been carried out by the administrative concession.

If one looks at the Millard Tucker Report, one of the things one finds out in connection with these matters is what that Committee calls some diversity of practice on the question whether a loss should be set primarily against earned income…or primarily against unearned income. I am not quite clear whether this Clause touches that matter directly, but it serves as a sufficient illustration for what I propose to say.

It seems to me that in an administrative concession we do not necessarily get that exactitude of practice that there should be in matters of this sort. It becomes very difficult for taxpayers in a small way, who, perhaps, like the farmers whom I mentioned just now, live in the country, to discover what their rights are in the matter. Really, they are not rights at all in principle, but only rights in practice.

I noticed that when my hon. Friend the Member for Islington, East (Mr. E. Fletcher) said something about constitu- tional purists, he turned round and gave me a nasty look as though he did not know what I was going to say. I hope that I am not being a constitutional purist in any unconstitutional sense. After all, the Income Tax law is complicated enough. It is hard enough to understand, and it is a subject on which all sorts of guides are offered, which may or may not simplify it. But if, on top of the law, we add constitutional practices, which are only accessible with considerable difficulty, the matter is made even more complicated.

So far as I know, no great effort is made to see that they are made known to the taxpayers. They are not contained in any Government circulars, notes or tax forms, because such documents only purport to state the law. It is a regrettable practice, and so far as this Clause is removing one of those administrative concessions. I welcome it a great deal; but I should like to know that this is the first of many cases in which the Government are going to remove such concessions and to replace them by proper legal enactments with a view to eliminating altogether, at any rate as far as that is possible. the whole of this practice.

5.15 p.m.

After those general remarks, there are one or two questions I wish to ask. This is, of course, a rather complicated matter, and one need not exaggerate its complication. It all depends, not on a question of principle, but on the convenience, having regard to the Income Tax machinery, of treating this capital allowance as something which comes in after the computation of profit and loss.

I quite agree with the Millard Tucker Committee that that is certainly not a question of principle. Indeed, looked at as a matter of principle, it would seem to be nonsense for, after all, we are looking at the profit or the loss. Surely the consequent depreciation or appreciation is something which the ordinary business man would take into account. Therefore, it is a convention which has given rise to the whole difficulty. When, first of all, a preference for administrative convenience is introduced in place of a principle, and is then met by an administrative concession instead of an enactment, one really is getting into the realm of administrative excess.

I suggest that these kinds of provisions have another danger as well. Not only are they capable of small local variations, as between one place and another, but, in the end, they constitute a method of setting up something which, wherever else it may be dealt with, can hardly be dealt with in a court of law which takes no account of these matters.

I notice that paragraph 83 of the Millard Tucker Report contains two recommendations. One is the recommendation which we are now considering, and the other the suggestion that there should be a right of appeal from a decision by the Commissioners to the court in connection with claims under Section 34 of the Income Tax Act.

I have looked carefully through the Bill, but I cannot find that any effect has been given to that recommendation of the Millard Tucker Committee. I am sure that Committee was quite right in suggesting that there would probably be many cases of the sort, but it quite definitely, and, indeed, rather strongly, recommended it. It seems to me a little odd that, when we replace an administrative concession by a provision in a Bill, we should not give what could not be given in the administrative concession, namely, the right of appeal which was very definitely recommended by the Millard Tucker Committee.

Therefore, I hope that when the Solicitor-General rises to tell us what all this is about he will at the same time explain why it is that only half the cherry has been bitten off. I hope, also, that he will excuse me for a horrible mixture of metaphor in referring at the end of a speech to a cherry and, at the beginning, to a gift horse.

The Solicitor-General

I can deal with the last question shortly. I am advised that there is a right of appeal under Section 15 (4) of the Finance Act of last year. Therefore, that point goes by the board.

The Clause, as the hon. Member for Sowerby (Mr. Houghton) suggested, does no more than put a long-standing administrative concession into a statutory form. It is one that has been in existence for many years. I do not know for how long, but I am under the impression that it first came into existence rather as an accident in the belief that there was statutory provision for it. Then, having acted in that belief, it was discovered that there was no statutory provision for it and it went on as a concession.

It is true to say that all concessions of this character are published in the annual reports of the Board. I must say that they are not documents which I have ever read, but perhaps it might be worth while studying them in future.

Mr. Mitchison

Farmers do not always read them.

The Solicitor-General

They do not always read all that they ought to read. One welcomes the view of the Committee that it is desirable to replace the longstanding concession by a Clause in the Bill. Indeed, that desirability was recognised by the Millard Tucker Report, which recommended that this should be done. The difficulty was that in assessing the profits or losses for the year a capital allowance is not really an item of expense incurred for the purpose of earning gain. It is an allowance made when one is charging the profits to tax.

The whole of the point of the concession was to enable someone who could not take advantage of the whole of his capital allowances because his profits were too small—the charging amount—to carry the surplus back and take it into account in assessing the profit or loss. I put the point shortly, because I do not think that there is any dispute as to what the object was, I think that the Clause satisfactorily implements what was done administratively, although at first sight the language may be a little complicated.

The hon. Member for Islington, East (Mr. E. Fletcher) started by comparing Clauses 17 and 19. He expressed the view that this Clause was more complicated than Clause 17. I am inclined to disagree with him. If one has to choose between the two, I would say that Clause 17 is a little more complicated. The hon. Gentleman seemed to think that I was shaking my head expressing the view that the Clause was as clear as crystal. I do not think that it is. It would be most unusual to find a Clause dealing with a complicated matter that was as clear as crystal.

However, I assure the hon. Gentleman that we have done all we can—all one can do in a Finance Bill—to remove as far as possible every danger of evasion. The hon. Gentleman drew attention to the possibility of claiming these allowances more than once. If he studies the Clause I think he will see that that possibility is completely eliminated by subsection (4). Then he drew attention to the reference to Clause 19 of the 1953 Finance Act. That Clause is based on the Millard Tucker Report. Subsection (6), in which I think that reference appears, is specifically put in to deal with the technical cases of partnerships to ensure that excessive relief cannot be claimed in the case of a partnership and on the break up of a partnership.

I have listened with interest to the speeches which have been made. The Committee will see in the course of time that, even though they may not accept my word for it, the Clause is intended to do no more than to implement the longstanding administrative concession and to put it in the statute. It is intended to do no more than to stop that from now being abused. I hope that the Committee will see as time goes on that it does no more than that, and that what it does it does effectively.

Mr. Mitchison

I should like to put two simple questions. The right hon. and learned Gentleman will remember that the Millard Tucker Report calls attention to a diversity of practice in the question of setting off as between earned and unearned income. I do not find any-thing about that in the Clause.

The Solicitor-General

My recollection is that we dealt with it last year.

Mr. Mitchison

My second question is whether the right hon. and learned Gentleman is sure that he meant subsection (6) and not subsection (5).

The Solicitor-General

Subsections (5) and (6) both deal with the matter.

Mr. Jay

I should like to ask the Solicitor-General a few questions, because we have the benefit of his legal guidance. I realise that all Governments have indulged in the so-called extra statutory concessions but, speaking as a layman, I wish to ask the right hon. and learned Gentleman whether it is true that when we legislate we normally impose an obligation on the Inland Revenue to charge certain taxes. We say, "You must levy these taxes in this fashion. We do not say, "You have got power to levy such and such a tax when you feel inclined to and to refrain from doing so when you do not want to."

My second question is to ask the right hon. and learned Gentleman to explain what the distinction is between something which is extra statutory and something which, in the words of the plain man, is illegal. Finally, can the right hon. and learned Gentleman say whether the Clause means that the Government have now decided as a matter of general policy to put all these extra statutory concessions in future into legal form, or have they simply picked out this one because it was in the Millard Tucker Report or for some other reason?

The Solicitor-General

As last year we sought to carry out some of the recommendations of the Millard Tucker Report, so, again this year, we are seeking to carry out more. I am sure that attention will be paid to the right hon. Gentleman's remarks about concessions made by the Revenue. I will not venture upon any general observations in that field. I cannot speak of all the concessions. I have not seen the document in which they are published. We take note of the view of the right hon. Gentleman.

Mr. Glenvil Hall

Surely my right hon. Friend was not expressing a view; he was asking a question. We should like an answer. When does something which to many people is illegal become quite in order when the Inland Revenue do it?

The Solicitor-General

I do not think that that question arises on the Question, "That the Clause stand part of the Bill." The practice of giving concessions is one of long standing. Views may differ upon its advisability. The view has been expressed by the hon. and learned Member for Kettering (Mr. Mitchison)—which is. one which many lawyers share—that it is desirable that as far as possible these concessions should be embodied in statutory form. That I think is a view held in many quarters. It may be a lengthy process, if it can be done, depending on the nature of the concessions and their extent and whether one Bill or more than one is necessary. The view among lawyers upon that issue is fairly clear.

5.30 p.m.

Mr. Fletcher

We cannot possibly leave the matter like this. The Solicitor-General has said that he has not seen the list of extra-statutory concessions to which my hon. Friend the Member for Sowerby (Mr. Houghton) referred. In the Clause we are translating what has hitherto been an administrative extra-statutory concession into a concession under an Act of Parliament. The concession is long-standing, because it has been given over the years. I was surprised to hear the Solicitor-General say that he had not seen it. I must confess that I have not come across it for some time, but I have more excuse than he has.

A great deal of our debate on the Clause has dwelt on the subject of extra-statutory concessions, and in view of the recent interchange, I ask the Solicitor-General to give us an assurance that the list of extra-statutory concessions on which the Inland Revenue have worked and are working will be brought up to date and published so that we can see not only what concessions no longer—

The Solicitor-General

I said that a list has been published.

Mr. Fletcher

Can the right hon. and learned Gentleman say whether, after this year's Finance Bill has been passed, an up-to-date list will be published?

Mr. Mitchison

Might I ask the Solicitor-General one other question? If there is any statutory sanction for an administrative concession, it would be interesting to know what it is. If there is not, surely this keeps open a very dangerous door which seems to have been open a very long time. One does not want to look gift horses in the mouth, hut, after all, we are supposed to control both the expenditure of public money and its collection, and this provision could easily be misused. Perhaps the right hon. and learned Gentleman would let us have an answer to that question if it is not putting too much upon him.

Mr. Glenvil Hall

Before the right hon. and learned Gentleman replies, perhaps I might put another point to him. In all parts of the Committee we realise that these extra-statutory concessions have been given over a long period of years. There is a list published—I do not know whether it is completely comprehensive—and, on the whole, the concessions are extremely worth while and acceptable to the vast body of taxpayers. We have begun to make the extra-statutory concessions legal.

In the Clause we take the matter a step further. I should like to know whether the Government, as a set policy, are clearing up the matter. Obviously, the Government cannot put them all into one Finance Bill, and they are certainly not all in this Bill, but is it the policy of the Treasury gradually over the years to see that the extra-statutory concessions, certainly the more important ones, are brought to an end?

The Chairman

We are dealing with only one concession at the moment.

The Solicitor-General

As you say, Sir Charles, we are really dealing with only one concession, but I think I can answer the hon. Member very shortly. I am authorised to say that, as time permits, these concessions will gradually be replaced by statutory provisions. It may, of course take some time to achieve that.

Mr. Mitchison

Is the right hon. and learned Gentleman unwilling or unable to answer the question which I addressed to him?

The Solicitor-General

It does not arise at the moment.

Question put, and agreed to.

Clause ordered to stand part of the Bill.