§ (1) Where—
- (a) on or after the sixth day of April, nineteen hundred and fifty-four, an individual, otherwise than for the purpose of a trade carried on by him pays any fees or incurs any expense in connection with the preparation by an accountant of any statement, claim, list or declaration required by or for the purposes of the Income Tax Acts; and
- (b) those fees or expenses would, if they had been paid or incurred for the purpose of a trade have been allowable as a deduction in estimating the profits or gains thereof there shall be made to him for the year of assessment in which those expenses were paid or incurred an allowance equal to the amount thereof.
§ (2) An allowance shall be made by way of discharge or repayment of tax.
§ (3) In this section "accountant" means a person who has been admitted a member of an incorporated society of accountants.1190
§ (4) The provisions of the Income Tax Acts relating to appeals against assessment to income tax including the provision relating to the statement of a case for the opinion of the High Court on a point of law, shall with any necessary modification apply to any claim for an allowance under this section.—[Mr. Black.]
§ Brought up, and read the First time.
§ Mr. Cyril W. Black (Wimbledon)
I beg to move, "That the Clause be read a Second time."
The purpose of the new Clause is to rectify what I hope I can satisfy the Committee is an anomaly in the existing Income Tax law. Before coming to the main point that I want to develop, however, there are two preliminary submissions that I would make to the Committee.
The first is that the complexity of the Income Tax law nowadays necessitates the employment of qualified accountants in preparing Income Tax returns, except in the simplest and most straightforward cases. I do not think I need spend any time in developing that proposition, because all hon. Members who have become familiar with the Committee stage of a Finance Bill will realise the immense complexity which now surrounds the whole question of the liability of the citizen for Income Tax.
The second submission that I would make is that the employment of qualified accountants is alike advantageous to the Inland Revenue authorities as it is to the individual taxpayer, because it is quite clear that, where qualified accountants 1191 are employed in the preparation of Income Tax returns, the Inland Revenue Department is saved a great deal of work, because the returns are much more likely to be accurate and in a satisfactory form than if they are prepared by the taxpayer by his own unaided efforts. Furthermore, they are much more likely to be correct and in accordance with the law having been prepared by experts, and, therefore, there is less possibility of the Inland Revenue failing to receive the tax which is properly due from the individual taxpayer.
I now want to make clear to the Committee how the anomaly in the existing law arises and operates. It is a fact that, in the case of limited companies, both trading companies and investment companies, accountancy fees in connection with the preparation of tax returns are allowed as permissible expenses for tax purposes. The same allowance is made in the case of an individual carrying on a business in his own name or in partnership with other individuals.
The one exception to the general rule arises in the case of an individual dealing with his own personal tax affairs, including his investment income, which may, and in some cases clearly does, involve complicated taxation questions in respect of which the expert advice of qualified accountants is absolutely essential. Perhaps I may take one illustration to make clear the kind of case that I have in mind. I am deliberately taking an illustration of rather an extreme kind to show to the Committee the point I am trying to make.
Take the case of a great landed estate such as the Westminster Estate, the Portman Estate, or the Howard de Walden Estate, comprising hundreds if not thousands of properties where very complicated tax problems arise in connection with repairs and in respect of which the employment of qualified accountants to prepare the Income Tax returns is absolutely essential. The anomaly is that if the estate belongs to an individual and is held by him in his own name he can secure no tax relief in respect of accountancy expenses in dealing with the taxation matters relating to the estate. If his affairs are so arranged that his estate belongs to a limited company and he owns the whole of the shares, that company is in a position to obtain tax relief 1192 in respect of the accountancy fees involved in the preparation of the Income Tax returns.
There can in logic and reason be no case whatever for differentiating in the treatment, according to whether the individual owns his estate direct and in his own name, or whether he owns it indirectly through the ownership of the whole of the shares of a limited company which, in turn owns the landed estate. The illustration makes clear the nature of the injustice, which affects many people, small taxpayers as well as large.
The Economic Secretary cannot possibly resist making the concession on the ground that a very large amount of revenue would be lost by so doing. I do not know whether he can give us any estimate of the revenue loss by admitting accountants' fees for the preparation of Income Tax returns in the circumstances I have mentioned, but in the nature of the case it can be only a very small amount indeed. The acceptance of the Clause cannot be resisted on that ground, while the case in equity and logic for making this small concession is overwhelming.
§ 7.45 p.m.
§ Mr. Maudling
My hon. Friend the Member for Wimbledon (Mr. Black) has urged this proposition with persistence and, as usual, with eloquence, but I cannot find myself persuaded by his arguments—[HON. MEMBERS: "Hear, hear."]—any more than I can by arguments sometimes advanced from the other side of the Committee. I agree that the cost of making the concession is not very substantial. It is not for any such reason that I resist it. I agree that there is an appearance of anomaly here, but I cannot agree that there is injustice.
My hon. Friend is quite right in saying that, in practice, accountancy expenses incurred by a company in preparing Income Tax returns are allowed as a deduction, but that arises because a trader is entitled to deduct for Income Tax purposes any expenses incurred for purposes of his trade, and they normally include accountancy expenses. In practice, it is impossible to distinguish between normal accountancy expenses and accountancy work done in preparing a statement of tax liability. If my hon. Friend will consult a judgment given by Lord Porter in 1950.
1193 he will see set out in very clear language these words:It is true that as a matter of convenience the cost of making up accounts for the Inland Revenue is allowed by the authorities as a deduction from profits, as is the cost of making up the strictly business accounts of the trade, but this is not a matter of principle but of expediency. The two duties overlap and in practice are almost indivisible.That statement puts with great clarity the reason why this apparent anomaly exists. Any individual, says my hon. Friend, who employs an accountant to assist him should be able to deduct similarly the expenses of employing that accountant from his assessment for Income Tax purposes. I find that a very difficult principle to accept. The taxpayer is carrying out a statutory liability imposed upon him equally with all other citizens. If he chooses to employ expert assistance in doing so, I do not think that any substantial claim can be made for giving him a special tax allowance. This is a matter of principle, and it is difficult to accept my hon. Friend's suggestion.
I would, however, observe that this matter, or something akin to it, arose in the first Millard Tucker Committee's Report. Since then, the Royal Commission has been deliberating, and it is possible—although I do not know—that in the course of its final Report it may have something to say on the question of tax relief on expenses incurred in litigation against the Inland Revenue authorities. There may then be a case for saying that we should make some allowance for accountancy expenses incurred in preparing for litigation. That is only hypothetical. If the Royal Commission should have anything to say, my right hon. Friend will examine it with great care. Beyond that, I cannot regard the case made by my hon. Friend, however eloquent and persistent his argument, as one that I can accept on principle. Therefore, I must advise the Committee to reject the proposed new Clause.
§ Mr. Nabarro
I should like to ask my hon. Friend the Economic Secretary a question. He said that it was a matter of principle whether an individual should be permitted to have the cost of preparation of his taxation papers assessed as a charge for computing his liability to Income Tax and other forms of direct taxation. According to the Economic Secretary there is a statutory liability 1194 upon an individual to prepare his tax returns whereas there is evidently a different state of affairs with respect to a company.
Surely the position is exactly the same. A company has a statutory liability to prepare its accounts and to submit them for assessment to taxation. An individual has the same liability. If the cost of preparation of a company's accounts is admissible as a charge for the purpose of computing the company's liability to tax, the same principle should be applied in the case of an individual.
I do not wish to argue this point in detail. I would merely ask the Economic Secretary whether, as there is a sound case for the new Clause which my hon. Friend the Member for Wimbledon (Mr. Black) has put forward, he would be prepared to submit this specific point to the Royal Commission for further consideration. There should be equity as between the cost to the individual of carrying out his statutory liability, and that of a company in complying with its statutory liability.
If the principle applies to the one, then the same principle should apply to the other. I think, therefore, that the matter might be looked at again by the Royal Commission, and I ask my hon. Friend whether he would be prepared to put this specific point which. I would remind him, has come up on successive Finance Bills since the war, to the Royal Commission for further consideration.
§ Mr. Anthony Crosland (Gloucester- shire, South)
I very much hope that the Economic Secretary will not accede to that suggestion. For one thing, it would be an action of an extremely exceptional character if the Chancellor of the Exchequer were to direct the members of the Royal Commission to apply their minds to a particular small point of tax reform. That is something which has not been done since the Royal Commission was set up, and I hope that the precedent will not be set at all, and certainly not in a case like this.
The Economic Secretary opposed the Clause not on grounds of principle, but on grounds of administrative convenience. He quoted the judgment to which he referred to show that it would be difficult to differentiate between the 1195 work of the accountant in preparing tax figures and the work which he did for the company in other directions. That was the basis of the judgment which he quoted.
§ Mr. Nabarro
If that argument were correct, then the ordinary audit of a company's accounts must be associated in the mind of the hon. Gentleman with litigation. In fact, the two are not connected.
§ Mr. Crosland
The hon. Gentleman really must take up this with Lord Porter and not with me, because I am merely basing myself on the perfectly clear and well-known judgment to which the Economic Secretary referred.
This new Clause, of course, must be seen as part of this year's Tory campaign on behalf of the accountancy profession. We had the most extraordinary encomium last night of accountants by the hon. Member for Heeley (Mr. P. Roberts), and, indeed, a definition of Toryism by the practice of going to the cleverest accountant in order to get off paying the maximum amount of tax. It is interesting to see a further effort being made on their behalf in this new Clause.
Even if there were none of the difficulties to which the Economic Secretary referred, I see no case for the Clause. It was moved by the hon. Member for Wimbledon (Mr. Black) on the ground that at present there is a differentiation between an individual and a company. That, of course, is true. But there are all sorts of differentiations between individuals and companies. After all, individuals are subject to Surtax and companies are not. This differentiation between an individual and a company goes right through our taxation law, and is not confined to the minor matter of accountancy expenses.
It may be that certain people experience the difficulties to which the hon. Member for Wimbledon referred. He talked in heart-breaking terms about the difficulties which the Westminster Company might have in making out its Income Tax return, but we must surely retain a sense of proportion in the matter. Why should the Revenue help companies to minimise their tax liability in this way? The hon. Member for Wimbledon said the Revenue would gain from it. That is 1196 an extraordinary opinion. I should have thought that the whole idea of going to an accountant was in order to minimise one's liability to tax. I cannot see that the Revenue would gain in the way of receipts by making this concession because then far more people than now would have their affairs looked after by an accountant.
I can see no justification for the Clause, and I am sorry that it should have been pressed so strongly and so enthusiastically immediately after we have had from the benches opposite such a lack of enthusiasm for the two or three previous new Clauses. I can only say that I think that this represents part of the general campaign of the Tories and of a party of business men on behalf of the accountants.
§ Mr. Sydney Silverman (Nelson and Colne)
Far be it from me to intervene in this contest between the accountants, on the one hand, and the economists on the other, but it has been said on both sides that there is at the moment a difference of practice in this matter as between individuals and limited companies which amounts to an anomaly.
I am not aware of any difference of practice. If an individual is in business, if he carries on a trade or a profession, and if he is wise enough and prudent enought to employ an accountant to deal with his accounts year by year, then his accountancy charges are an allowable deduction for Income Tax purposes. He does not have to be a limited company in order to claim them. Just as in the case of the limited company, if his accountant prepares his Income Tax returns and is paid a fee for doing so as part of his general accountancy fees for what is done, then those fees, as well as those of a limited company, are eligible for Income Tax deduction.
§ Mr. Black
A limited company holding investment or owning property is in a position to obtain taxation relief in respect of accountancy expenses, but an individual holding the same investments or owning the same property cannot so obtain that relief. That is the anomaly.
§ Mr. Silverman
It appears to me that what the hon. Gentleman is saying—of course, I may be completely wrong—is that if, to reduce his liability to Income Tax, a man forms a limited company which never carries on any business at all, he derives the advantage from doing 1197 so. What the hon. Gentleman wants to do, apparently, is to give the same advantage to all those who have not employed that device, because, otherwise, the man who has been paying in full suffers as against the man who has adopted the device for reducing his liability. That is what the hon. Gentleman calls an anomaly. If it is an anomaly, then I agree with the Economic Secretary that it is not an injustice.
§ Sir William Darling (Edinburgh, South)
A good deal has been heard from the Opposition about tax evasion and avoidance, and some general strictures have been made on Members on this side of the Committee because of the quite legitimate desire to pay no more taxes than they should. This idea which we are now discussing raises a peculiar question. It almost forces me to consider doing what others have done in the past, that is, turn myself into a limited company. It was certainly done by Edgar Wallace, and there are many other examples.
If we were to do that, we should, of course, claim support for the action from the hon. Member for Gloucestershire, South (Mr. Crosland) and also from the hon. Member for Nelson and Colne (Mr. S. Silverman), so that when we converted ourselves into a non-personal organisation in order to meet an anomaly we should not be blamed even more than we are at present, because we would have de-individualised ourselves to please right hon. and hon. Gentlemen opposite.
I think that this is a very trifling matter. In the interest of the Revenue there should be skill in the presentation of our accounts, and until there is a turnover tax, which would be simple if not just, it is desirable to encourage the expert presentation of our accounts in a proper way in order to see that the Revenue is not defrauded and receives less than it should. Therefore, I think that my hon. Friend might well accept this new Clause.
§ Question put, and negatived.