§ (1) Subject to the provisions of this section, capital expenditure incurred by any person after the fifth day of April, nineteen hundred and fifty-six, in connection with the working of a mine, oil well or other source of mineral deposits of a wasting nature, being expenditure on the acquisition of land which is to be used in connection with the working of the source, shall, notwithstanding anything in section three hundred and five of the Income Tax Act, 1952, be expenditure to which Chapter III of Part X of that Act applies, and Part X of that Act shall have effect accordingly.
§ (3) Section three hundred and ten of the Income Tax Act, 1952, and section twenty-one of and the Fifth Schedule to the Finance Act, 1952, shall not apply to expenditure to which this section applies.
§ (4) This section shall not apply—
- (a) to expenditure which, apart from the provisions of this section of section three hundred and ten of the Income Tax Act, 1952, and of section twenty-one of the Finance Act, 1952, is expenditure to which Chapter III of the Income Tax Act, 1952, applies; or
- (b) to expenditure on machinery or plant, or on any asset which has been treated for any year of assessment as machinery or plant; or
- (c) to expenditure on the acquisition of a building or structure for use in connection with the working of a source of mineral deposits, in so far as the expenditure is attributable to the building or structure and not to its site, if—
- (i) the building or structure when so used is an industrial building or structure
94 within the meaning of Chapter I of Part X of the Income Tax Act, 1952; and
- (ii) the interest acquired is the relevant interest within the meaning of that Chapter in relation to the capital expenditure incurred on the construction of that building or structure.
- (i) the building or structure when so used is an industrial building or structure
§ (5) In no case shall the amount on which a balancing charge is made upon a person be increased by virtue of the provisions of this section by more than the total amount by which annual allowances made to that person are increased by virtue thereof.
§ Brought up, and read the First time.
§ Mr. Bernard Braine (Essex, South-East)
I beg to move, That the Clause be read a Second time.
The object of this new Clause is to give effect to the recommendations of the Royal Commission on the Taxation of Profits and Income that a depletion allowance should be made in future in respect of the cost of acquisition of mineral rights and lands. The Committee will be aware that a mining concern is allowed to deduct all expenditure of a revenue character incurred in the course of extracting minerals. There are special provisions for the amortisation of capital expenditure on finding and developing mineral sources and on plant, machinery and buildings acquired or built and necessary for such development.
An allowance is also given in respect of mineral-bearing land purchased overseas, although the concession is limited to 95 the first United Kingdom purchaser, but no allowance whatever is given for amortisation of capital spent on purchase of mineral-bearing land in this country.
It is not surprising that the Royal Commission, having heard a great deal of evidence and having given careful consideration to the matter, should find that the present practice is one which does not take the true profits into account as the basis of taxation, and that it came to the conclusion that a change was necessary. It has long been the argument of those engaged in the mining and extractive industries of this country that the current tax practice is unfair, illogical and contrary to the national interest.
It is unfair because the inevitable reduction in the value of the land acquired for mining operations is just as much a cost of production as the raw materials used in any ordinary manufacturing process. Yet this cost is not recognised by the Inland Revenue when the producer's profits are assessed for tax purposes. It is true that in some cases there is a residual value in the land when all the minerals have been extracted. In others, there is little or no residual value.
I have a constituent who has been in business as a sand and gravel merchant over a long period of years. On the working out of a deposit he has to go further afield and acquire more land. Most of his land is what is known technically as "wet land". Material has to be extracted from wet pits. Water is always present. Therefore, when the extraction is completed it is extremely difficult to resell the land for any profitable purpose. It is true that trees are planted and the scars are hidden, but in terms of money the residual value of the land is nil and buyers are unlikely to be attracted. In any event, this new Clause would take into account any residual value that remained by means of a balancing charge when all the minerals have been extracted.
I said that the present tax practice was unfair, and it is particularly unfair in relation to the ballast and sand industry for three main reasons. First, in relation to the value of the minerals extracted, the land is more costly than in almost any other extractive industry. The seams are shallow. The whole of the surface of the land acquired is dis- 96 turbed because there is no question of driving a shaft. The exhaustion of the more accessible and easily worked seams means that the cost of land in relation to the value of output is rising steadily.
The second reason why the present practice is unfair is that since sand and gravel are among the cheapest minerals produced in this country, the cost of the land from which they are obtained represents a greater proportion of the cost of the final, marketed product than in many other mineral industries.
Thirdly, the cost of the production includes not only the purchase of the land, the extraction, processing and sale of the minerals and the administration of the business, but must also include the final restoration of the land. Admittedly, such costs are allowed as a normal deductible expense for tax purposes, but if, as often happens, these costs fall in the last year of working a deposit, it may be that profits are insufficient to offset the allowances and a taxpayer is unable to obtain the full relief due to him.
I said that the present tax practice was illogical. In my view, it is so for two reasons. First, if a mineral area in this country is worked on a royalty basis, so that the right of working is acquired by annual payments, the royalties are recognised as a charge against taxable profits. If, on the other hand, the same area is acquired outright, and exactly the same processes take place and the same quantities of minerals are extracted, the whole of the profits are brought into account for the purposes of computing the tax, without any allowance for the acquisition of the land which, after all, is the operator's stock.
The second reason why the practice is illogical is the distinction made between operators in this country and overseas. It may be within the recollection of some hon. Members that in 1920 the Royal Commission on Income Tax, which sat under the distinguished chairmanship of Lord Colwyn, went into this question. That Commission was not in favour of granting a depletion allowance to companies operating in this country. It laid down thatthe allowance must not be granted in respect of a right to any income derived from any asset.97 That was fair enough, but the Commission went on to recommend that where a foreign mining venture was acquired by a United Kingdom operator an amortisation allowance should be granted to the first United Kingdom purchaser.
I will not bother the Committee with the arguments which led to this differentiation being made because the majority Report of the Royal Commission, which reported last year, dismissed those reasons as fallacious. In any event, the Colwyn Commission's recommendation that a depletion allowance should be allowed for companies operating overseas was not put into effect until, nearly 30 years later, the Finance Act, 1949. Even then the concession, for reasons which I have been unable to discover, was not extended to companies operating here.
I am sure that the Committee will see, as did the Tucker Committee and the Royal Commission, which reported last year, the unfairness and the illogicality of this discrimination. Whether a company is operating in this country extracting minerals, or overseas, the land it acquires in the first instance is clearly a wasting asset. The Royal Commission came to the very proper conclusion that there was no case for such discrimination.
I said that there was a third reason why a change should be made. It is a weighty reason; for in my view the present practice runs contrary to the national interest. It does so because the disallowance of the cost of the land exercises an inflationary influence upon prices. Let me illustrate that point. I will take the sand and ballast industry as an illustration because it is one that I know better than any other extraction industry and because it is more seriously affected by the present practice.
The sand and ballast industry has an output second only to that of the coal industries in the United Kingdom. With cement, it provides the raw material for our housing programme, our industrial expansion, our roads and defence works. The price of its product is bound to exercise a powerful influence upon the whole national economy. The Treasury knows full well that the greater portion of the nation's capital investment programme consists of construction. Break down any capital investment programme and we find that construction is the major factor. 98 Thus, there is the closest possible connection between investment generally in this country and the extractive industries, particularly cement, gravel and sand.
The Committee may be interested to know that in 1938 the sand and gravel industry produced about 28.7 million tons of material. In 1953, its output was 50 million tons, and in 1955, 60 million tons. There is the closest connection between those figures and the growth of our capital investment programme. An oil refinery consumes half a million tons of sand and gravel and a power station anything between 100,000 and 150,000 tons. London Airport consumed enough sand and gravel, so I am told, to build a dual carriageway from London to Birmingham.
Even the ordinary house and its surroundings consumed about 55 tons. I may have gone a little bit wide of the mark, but here is good reason for bringing home to the Committee the simple fact that there is the closest possible connection between the value secured for the outlay on capital investment and the price of basic building materials.
Consider the question of price. The sand and gravel deposits near the great centres of population are being steadily worked out and operators are being forced to go further afield. This is already having a very serious effect upon the costs of the industry. I went into this matter in some detail and I was astonished to find that it is uneconomic to haul sand and gravel much more than 25 miles from the pit. A haul over 13 miles will double the cost of the material to the consumer. The price of mineral-bearing land is rising, for two reasons. One reason is that landowners are charging more for it.
§ Mr. Braine
Of course, that fact may well be used as an argument against making a depletion allowance, but, since a powerful case can be made out for the allowance, I do not think that administrative difficulty in collecting tax from others should be allowed to obstruct it.
The second reason is that mineral deposits are becoming more difficult to work and are more unrewarding. From this fact one unfortunate consequence flows; ever greater provision has to be made in profit margins for reserves for the replacement of the land.
99 Let me make it plain to the Committee that the Clause does not go beyond what the Royal Commission recommended. It provides that a depletion allowance should be given in respect of land acquired for mineral working and that it should apply only to transactions taking place after 5th April this year. It provides that the depletion allowance should apply to all companies operating mineral workings either in this country or overseas and, very properly, that the basis of the relief should be actual monetary cost of the land less its residual value when all the minerals have been extracted.
I believe that justice, common sense and the broad national interest all combine in this instance to argue the case for something being done along the line suggested in the proposed new Clause. It is in that spirit that I commend the Clause to the Committee.
§ Dr. King
I have been asked by a number of firms in my constituency which are engaged in extracting minerals to support the Clause. I have also been asked by a number of firms in the adjacent constituency of Eastleigh to do the same. Unfortunately, the hon. Member for Eastleigh (Mr. D. Price) is unable to come to the Committee. Had he come, I am certain that he would have added his representations to those which have been made so ably by the hon. Member for Essex, South-East (Mr. Braine).
The claim of the extractive mineral workers is equitable. Because of that, I am pleased to join with the hon. Gentleman in asking the Minister to give very sympathetic consideration to this Clause. Most firms are allowed to charge the cost of their raw materials before estimating the profits on which tax is paid. The annual wear and tear in most industries is far less than the annual seeping away of resources that takes place in an industry of this kind.
Firms which the Clause tries to help are steadily using up their capital asset, the mineral that is being worked. The profit to be taxed ought certainly to take into account the yearly loss of the capital asset. If such a firm bought its minerals year by year from somebody else, it would be entitled to set the cost of the minerals which it had to buy 100 against its income before arriving at the profit on which Income Tax is levied. At the end of a number of years, such a firm is left with a worked-out piece of land.
Everybody would agree—these firms agree—that the value of the land at the end should not be counted as something to offset against the profits that have been made, as distinct from the minerals taken out. They can sell the worked-out land, but they claim that they ought to be able to offset against the cash they take from their businesses each year something to allow in time for a complete working out of the minerals in the land. If he took away the net cost of the land from what was paid for the land plus the minerals and divided that over the estimated number of years the land may be worked and allowed them to charge that annual sum as part of their annual expenses, I believe the Chancellor would be dealing with them fairly.
Two eminent Committees have recommended that. The Tucker Committee on the Taxation of Trading Profits in 1951 said:the operating company's profits are not properly computed unless it receives an allowance based on the full amount it has expended on the acquisition of the minerals.The Royal Commission in 1955 recommended:in future a depletion allowance should be given in respect of the cost of acquisition of mineral rights or areas.It went on to say:The basis of relief should be the actual monetary cost less any residual value of the land at the close of working.As the hon. Member pointed out, the principle which we seek to establish for extractive industries in our country was conceded in 1952 by the Government for extractive industries overseas, and on that the Royal Commission three years later said:There is no material distinction between United Kingdom minerals and overseas minerals when the question at issue is the true computation of profit.Expert opinion and the wisdom of the Royal Commission of Taxation of Profits and Income, to which all of us pay such high tribute, came down on the side of the extractive industries in their claim that the Chancellor should accept such a proposal as this new Clause embodies.
§ Dr. King
Yes, I think so. I would remind the Committee that when the matter was debated in this House three years ago on 18th June, 1952, my hon. Friend the Member for Islington, East (Mr. E. Fletcher) said, in what seemed to me an admirable speech:It seems to us quite immaterial whether the commodity is a metal or non-metal …We were debating tax concessions for metals. My hon. Friend added:The essential factor is that it comes out of the earth and there is a limited quantity in the earth, and therefore there should be some allowance for capital depreciation."—[OFFICIAL REPORT, 18th June, 1952; Vol. 502, c. 1420.]I believe that the hon. Member for Essex, South-East has done a service to equity by introducing this new Clause, and I hope the Chancellor will give it very sympathetic consideration.
§ Mr. Edward du Cann (Taunton)
I rise to support the new Clause which has been so ably moved by my hon. Friend the Member for Essex, South-East (Mr. Braine) and so well supported by the hon. Member for Southampton, Itchen (Dr. King).
Enough has been said about the objects of the Clause, and the basis of reasoning which lies behind the suggestion that it should be incorporated in the Finance Bill, to make the point abundantly clear. Therefore, I shall speak very briefly and emphasise only what has been said in part already, that the Clause is very much in line, not only with the former Finance Act which dealt with Income Tax allowances for overseas workings, but also with the recommendations of the Tucker Committee and the Royal Commission on the Taxation of Profits and Income.
It is a fair point to make, also, that the Clause is very much in line with two Clauses in this Finance Bill, Clauses 13 and 14, which deal with capital allowances for industrial buildings and for expenditure on dredging. Indeed, I think that I could put the matter as high as to say that probably the lack of taxation relief by way of depletion allowance for the extractive industries is out of line with current legislation.
My hon. Friend the Member for Essex, South-East has spoken about hardship and I shall not say more about that, but 102 there is a further point which has not been mentioned and which deserves some study when dealing with this Clause. The Clause as drafted deals only with matters of future acquisitions. It does not deal with the working of any land which is currently in hand. I appreciate that the prudent operator may well have purchased land with an eye to the future.
Although to do something for that class of operator in the extractive industry would perhaps go beyond the exact recommendations of the Royal Commission—and this Clause precisely follows what the Royal Commission recommended—I think the point should be brought out when discussing this matter that in equity it is probably right that we should go a little further than the Royal Commission recommended. If we look at the Report of the Royal Commission we find, in paragraph 444, some justification for so doing.
One ought also to point out that depletion allowances of one kind and another are granted in most other countries, but not in the United Kingdom. It is an anachronism that we do not have those allowances here. It is very much to be hoped that my right hon. Friend will see fit to look at the matter again. Many hon. Members on both sides of the Committee hope it might be possible for him to come to a favourable conclusion on the suggestion which has been made.
§ Mr. Norman Dodds (Erith and Crayford)
After the admirable way in which the case has been put by two hon: Members opposite and by my hon. Friend the Member for Southampton, Itchen (Dr. King), I am convinced that at this stage my greatest contribution in any effort I can make to persuade the Treasury to be sympathetic towards this new Clause is to be very brief. The case as put by interests in my constituency and throughout the district of north-west Kent is such that I think the interests behind the Clause are exceedingly reasonable in accepting its wording. There is no doubt that the date of 5th April, 1956, is by no means unanimously acceptable throughout the mineral interests; in fact, some are definitely of opinion that to be fair it would be wrong to put in that date; but those who have a claim for very much more than this are wise, in view of all the problems which are before the Treasury, to stand on very firm ground by 103 following the recommendations of the Tucker Committee in 1951 and the Royal Commission in 1955.
I should like the Treasury to bear in mind the words of the hon. Member for Taunton (Mr. du Cann) when he said that there is an excellent case for holdings which are already there to be looked at through the actions of wise men of the industry. Nevertheless, the Clause asks for no more than that sympathetic treatment should be accorded to a proposal on lines laid down by the Royal Commission and the Tucker Committee. I can but hope that the representatives of the Treasury with all their problems and difficulties, in view of the support which the Clause has received from both sides of the Committee, will be able to say tonight that they accept it. If not, I hope they will say with some deep conviction that the matter will be looked at before the next Finance Bill comes before us.
§ Mr. Douglas Marshall (Bodmin)
I wish to support my hon. Friend the Member for Taunton (Mr. du Cann) in the points he made. My hon. Friend the Member for Essex, South-East (Mr. Braine), who moved the Clause, will, I feel sure, agree that he made the case for the cement and sand industries, but that so far not a word has been mentioned with regard to the china clay industry.
As most hon. Members are aware, the china clay industry at the present moment has the largest basic raw material exports from this country, and the whole of that industry is affected in a different way from the industries already mentioned. The industry needs very heavy capital equipment, and, from the size of that heavy capital equipment, before it is made ready, it is necessary to have substantial future reserves in hand in order, ultimately, to supply the necessary materials for the capital equipment provided.
Consequently, the entire industry is based in such a way that the inclusion of this Clause on the Royal Commission's recommendation would not, in fact, help the china clay industry at all. Therefore, I would suggest to the Minister that he should bear that fact very much in mind, and I hope that, in replying, he will at any rate agree with the principle that has been discussed, and should he suggest 104 that, at some future date, he will look into this matter. I hope he will also see how this Clause would apply to the china clay industry, and realise that, in fact, it would not help that industry unless we removed from it the following words in the second line:the fifth day of April, nineteen hundred and fifty-six".In those circumstances, I would fully support the Clause subject to that alteration.
§ Mr. F. H. Hayman (Falmouth and Camborne)
There is one point which has not yet been explained by those who support the Clause, and that is when the depletion allowance is to be given. I gathered from what the hon. Member for Bodmin (Mr. D. Marshall) has just said that it would begin at once, but what then happens to the person who, or concern which, buys up the whole of the reserves of a particular mineral in order to keep other people from exploiting them? It seems to me that very careful note ought to be taken of that point.
Again, the hon. Member for Essex, South-East (Mr. Braine) referred to landowners forcing up prices because there is a great demand for certain minerals. That may be the trend of a free economic market, but I suggest that, if we are to give tax relief in order to give greater prices to landowners, we ought to think again. I should like someone, on behalf of the mover of the Clause, to say something on that subject.
§ The Economic Secretary to the Treasury (Sir Edward Boyle)
This is a Clause of considerable interest, and I am sure the Committee was obliged to my hon. Friend the Member for Essex, South-East (Mr. Braine) for the extremely able way in which he moved it. It was ably supported by a number of very interesting speeches from both sides of the Committee, and I could not help being reminded during my hon. Friend's speech of the times when a former Parliamentarian of distinction, the late Sir Herbert Williams, used to address us on sand and ballast from exactly the same seat.
I would say straight away that the Royal Commission's recommendations on allowances for mineral rights and areas and for land and buildings used in connection with mines are still being considered by my right hon. Friend, and the 105 Chancellor fully appreciates that this is a point of very considerable importance. If I cannot give my hon. Friends the answer they would like today, it is not because my right hon. Friend is not aware of what is at stake here. This subject of depletion allowances has frequently been discussed in this Committee. It is an important one, but I think it would be unwise for the Committee to hurry into deciding on what would be the best way of giving effect to the recommendations of the Royal Commission.
I think perhaps the Committee might like to be reminded of what the Royal Commission in fact recommended in its final Report in paragraphs 445 to 447. There were really two important points, or rather one important point and one subsidiary one. The important point in the Royal Commission's recommendation concerned the allowances for the acquisition of mineral rights, and these allowances, the Commission considered, ought to be widened as regards future acquisitions to include United Kingdom minerals.
They said that the allowance should be given by reference to the full cost of the mineral rights or areas, less any residual value at the close of working. That was the important recommendation, and the second and subsidiary one was for changes of a relatively minor character in the allowances made for land and buildings.
On the first recommendation, the case for an allowance for the expenditure on the acquisition of mineral rights and areas is that this expenditure is used up in producing the profits which are charged to tax, and that point was clearly brought out by my hon. Friends; that is to say, if no allowance is made, the concern is really paying tax on an unreal profit exceeding the true commercial profit. That is perfectly true, but the difficulty here is this. The question of an allowance to the purchaser of minerals at once raises the question whether we should levy a corresponding charge on the seller of the mineral rights, and there are a number of arguments here, with which I do not think I need trouble the Committee, which might lead us to give serious consideration to whether such a charge should be made.
I can tell the Committee that any legislation that would be required to give 106 effect to the Royal Commission's recommendations would inevitably be long and complicated, and I am not in a position to announce any such legislation today. As a matter of fact, my hon. Friend's new Clause goes beyond the Royal Commission's proposal in quite a number of respects, with which I do not think I need trouble the Committee. I thought I should put the position before the Committee, explain what the Royal Commission recommended, and give the Committee an undertaking that we are considering the whole situation very carefully in the light of the Commission's recommendations and taking into account all the difficulties that arise.
§ Mr. Mitchison
For once, I am very glad that the Economic Secretary has been cautious. If he had been more rash, I should have felt it our duty to warn him, but I do not think there is any need.
I think that my hon. Friend the Member for Falmouth and Camborne (Mr. Hayman) hit one nail on the head, and it was a nail which escaped the attention neither of the majority of the Royal Commission nor of the minority. It is only too easy with a Clause in this form for the landowner to form a company.
Let us take the case which the Commission itself took—the sale at a very high price to the company by the owner who pockets his capital gains and leaves the company to recoup itself to some considerable extent at the expense of the Exchequer. For that reason, both the majority and the minority of the Royal Commission insisted on safeguards in the Clause, and what is suggested by the majority was that the Revenue should be able to turn from the actual price paid in proper cases to the true market value of what was bought. The Clause contains no such safeguard, and, for that reason alone, I suggest, it would be a very dangerous one, and I was glad to hear the Economic Secretary agree, not necessarily on that point, but in general.
But there is a second point. The minority Report, which differed in many respects on this group of matters, did, I agree, presuppose to some extent a capital gains tax as part of this machinery, and I listened with interest to the point which the Economic Secretary made that in cases of this sort, 107 the true system of taxation for the purchaser of mineral rights is very closely tied up with the treatment of the profits of the sale in the hands of the vendor.
I trust that when the Economic Secretary and his right hon. Friend are considering this matter they will not be so deluded by any doctrinaire objection to a capital gains tax as to shut that excellent conception out of their minds, for that was what the minority of the Royal Commission recommended in this respect. It is perfectly true to say that there is a sound general case for something of this sort being done. I am not speaking at the moment of the machinery or the form of taxation, but merely saying that there is some credence in the matter.
Nevertheless, the Economic Secretary will bear me out that there are close parallels with which the majority of the Royal Commission found itself unable to deal. If I may give one instance, the purchase of a lease at a premium was a matter with which the majority of the Royal Commission was unwilling to interfere, and successive Governments have long refused to allow any Income Tax concession on that premium. They have founded themselves on the distinction between Schedule A taxation and Schedule D taxation. That is taking us into the darker fields of Income Tax, and we need say no more than to point out that the anomaly exists.
Yet again, the concession which is made to foreign mines at present does not extend to every transaction. It simply extends to the first instance of a British purchase from a foreign vendor. That in itself, therefore, is not too logical. I will only say that I am glad that caution has been exercised.
There is one other matter I should like to point out to the Economic Secretary. If in any form whatever a concession of this sort is made to the owners and workers of mineral deposits, there is one very obvious owner and worker of mineral deposit who ought to have corresponding benefits. Goodness knows, the National Coal Board at present is being made to carry many strange imports, and a little relief in this respect would do no harm. When, with a liberal or, shall we say, a Conservative hand, the hon. 108 Gentleman dispenses—if ever he does—any concessions by way of taxation or otherwise to other mineral workers, I hope that the Exchequer will by that time have reached a sufficiently sound condition to be able to afford a similar concession to the National Coal Board, even if that means that some right hon. and hon. Gentlemen opposite will have to alter their views a little about what pays and what does not pay in the matter of nationalised industries.
§ Mr. Braine
I should not be human if I did not say that I am disappointed that nothing can be done, nor should I be realistic if I did not admit the weight of my hon. Friend's arguments. I am seized of the great difficulties. All I would say is that the Royal Commission recognised those difficulties and, nevertheless, came down on the side of action being taken.
However, since we have been promised that the whole question will be looked into very thoroughly, I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.