HC Deb 02 July 1958 vol 590 cc1515-26

(1) Subject to the provisions of this section an allowance (in this section referred to as "a depletion allowance") shall be made to a person carrying on a trade which includes the working of a mine, oil well or other source of mineral deposits in respect of the wastage of that source resulting from the working thereof during the year of assessment.

(2) The amount of the depletion allowance in respect of any source shall be the amount which results from applying to the residue of the qualifying expenditure the fraction of which—

  1. (a) the numerator represents the output from the source in question in the basis period for the year in question; and
  2. (b) the denominator represents the sum of that output and the total potential future output of the source estimated as at the end of that period,
or the fraction one-twentieth, whichever is the greater.

(3) Where the source ceases to be worked, the person carrying on the trade may elect that the depletion allowance, if any, for the year of assessment in which that event occurs and each of the five previous years of assessment shall be computed as if the reference in subsection (2) of this section to the total potential future output of the source estimated at the end of the basis period were a reference to the actual output of the source between the end of the basis period and the happening of the said event, and the said allowances shall be computed accordingly and, notwithstanding anything in the Income Tax Acts limiting the time for the making of assessments or the allowance of claims for repayment, all such repayments and additional assessments shall be made as are necessary to enable effect to be given to the subsection:

Provided always that where the qualifying expenditure consists of or includes expenditure on acquiring the site of a source and that site is subsequently sold there shall be made for the year of assessment in the basis period for which the sale takes place a balancing charge equal to the excess (if any) of the total of the depletion allowances made for previous years of assessment over the difference between the cost and the proceeds of sale of such site.

(4) (a) In this section "qualifying expenditure" means capital expenditure incurred after the passing of this Act on the acquisition of the site of or of rights in or over a source of mineral deposits but does not include any expenditure on the acquisition of buildings or structures or of plant and machinery.

(b) references in this section to the residue of any qualifying expenditure are references to the amount thereof which remains after deducting therefrom any depletion allowances made in respect of that expenditure or any part thereof for any previous year of assessment.

(5) This section shall be read as one with Part X of the Income Tax Act, 1952, and the provisions of section three hundred and eight thereof (which deals with the sale of a source or part of a source as a going concern) and section three hundred and twenty-seven (which makes special provision for certain sales) shall have effect in relation to depletion allowances including balancing allowances and charges as they have in relation to allowances under that Part of that Act but with the substitution for "the appointed day" in the said section three hundred and eight of the date of the passing of this Act.

(6) Nothing in this section shall authorise the making of any depletion allowance in respect of expenditure which qualifies for the grant of an intial or annual allowance under any of the provisions of Part X of the Income Tax Act, 1952.

(7) No company or person shall by virtue of this section be liable to pay any more tax than that company or person would have been liable to pay if this section had not been passed.—[Mr. Braine.]

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 the Clause is to give effect to a recommendation of the Royal Commission on the Taxation of Profits and Income that in future a depletion allowance should be made in respect of the cost of the acquisition of mineral-bearing land. I would add that the Clause as drafted includes a method of computing the allowance and provides reasonable safeguards for the Revenue against collusive transactions.

It will not have escaped the attention of the Committee, even at this late hour, that the Clause as drafted has attracted powerful support from hon. Members on both sides of the Committee and, what is equally significant, from every part of the United Kingdom. More than 80 hon. Members have added their names to mine, and I believe a great many more would have done so.

Mr. Stevens

Can my hon. Friend also give the Committee the number of hon. Members who have subsequently withdrawn their names from the Clause?

Mr. Braine

To the best of my knowledge over 80 hon. Members have added their names to my Clause. Their names still stand in support of it, and that is surely almost a record for a proposal of this kind. I have difficulty in understanding the purpose of my hon. Friend's intervention.

I am not surprised at the large number of hon. Members who have added their names to the Clause, because the proposal we have to make is modest and fair, and does not go one inch beyond the recommendations of the Royal Commission. Anyone who would wish to pursue the matter beyond the recommendations of the Royal Commission would have very little chance of persuading the majority of this Committee—and certainly my right hon. Friend—of the validity of his case.

As the Committee knows, a mining concern is allowed to deduct all expenditure of a revenue character incurred in the course of winning minerals from the earth, and where mineral-bearing land is purchased overseas by a British company the cost of the land can be offset against taxable profits. By some strange anomaly this allowance is not permitted in respect of mineral-bearing land in this country.

Why was it that the Royal Commission recommended that a depletion allowance should be granted in future to extraction industries in this country? The main reason was that the existing method of taxation was one which did not take the true profits into account. This arises because, while the cost of the land purchased for extracting minerals is essentially the cost to the operator of acquiring what is in effect his stock, no allowance is made for that stock. The Royal Commission recognised this clearly and in paragraph 432 of its report said: We regard this as a system which taxes the mining venture upon a figure of profit which is greater than its true profit. It went on to say that it agreed with the first Tucker Committee which held that The general principle that an allowance should be given for all expenditure on assets that are used up in the course of carrying on a business seems to us particularly applicable to the position of a concern which has to pay a capital sum for minerals, or the right to work minerals … We cannot believe that the prohibition of any allowance or relief in respect of the wastage of the capital expenditure on the purchase of the land … can be regarded as consistent with a proper ascertainment of the company's business profits. The Royal Commission went on to say: It requires a strong weight of argument to maintain a position under which the tax authority is entitled to exact tax upon the basis of a profit which is obviously unreal. In paragraph 445 of their Report the Royal Commission made its recommendation on the lines which we have followed in the new Clause and suggested a method of giving the allowance. It said that it should be granted only in respect of sums paid after the date of the new system coming into force; that the basis of relief should be the actual monetary cost less any residual value of the land; and that any residual value of the land must be set off against the value of the allowance. This new Clause follows these requirements of the Royal Commission exactly.

May I give four good reasons why we should implement these recommendations without delay? Firstly, the present practice is unfair; secondly, it is illogical; thirdly, it runs counter to the country's best economic interests, and, fourthly, if accepted it would cost the Chancellor nothing in the first twelve months and very little for a year or two after that.

The present practice is unfair because the inevitable reduction in the value of the land acquired for mineral extraction is just as much a cost of production as the raw materials used in any ordinary manufacturing process. There is no possible justification for the present discrimination. It might be thought there is a residual value in the land when the minerals have been exhausted. That is true, but it is usually very small and, in any case, the Clause as drafted would ensure that that residual value would be accounted for by a balancing charge.

The present practice is especially unfair to sand and gravel operators. I single out this industry firstly because it is one I know best, and because it operates in my County of Essex, and, secondly, because, in relation to the value of the minerals extracted from the land, the land itself is far more costly than in any other extractive industry. Deposits are quickly worked out and if plant is to be used economically and continuity in production ensured operators must be constantly looking for new land.

1.0 a.m.

Obviously, there are limitations to the amount of land that an operator will require, and the amount of capital which he can lock up in it. Moreover, this is an extractive industry more widely spread over the country than any other. It must continue to be widespread because wherever there is building construction, one hopes that there will be cheap and accessible sources of sand and gravel.

Why is the present practice illogical? I would suggest that there are three reasons. Firstly, mineral-bearing land can be acquired on a royalty basis, or it can be bought outright. But nowadays it is difficult to acquire land on a royalty basis, and yet, while royalty payments are allowable for offsetting against taxable profits, there is no allowance available where land is bought outright. Secondly, there is discrimination between British companies operating overseas and those which operate in this country. The Tucker Committee was of the opinion that this discrimination ought to be removed, because wherever these operations go on, the assets are of a wasting nature. Thirdly, the practice is out of line with current legislative provisions for allowances for other capital expenditures, such as for industrial buildings, dredging, and mining exploration and developments.

Why does the practice run counter to the interests of the national economy? It does so in the sense that the disallowance of the cost of mineral bearing land exercises an inflationary influence upon prices. If one breaks down any capital development programme, whether it be for the provision of schools, factories or bridges, it will be found that a very high proportion of the cost is for building materials. There is the closest possible connection between the overall capital investment programme of the country and the extractive industries.

A disallowance of the cost of land means that a producer has to sell his product at prices which will not only give an economic return on his capital outlay, but also sufficient profit after taxation to amortise that outlay. In this connection I would call in aid the evidence given to the Royal Commission by the Sand and Gravel Association of Great Britain.

On the assumption that an operator was allowed to charge for taxation purposes the cost of land at, say, eightpence a cubic yard, he could fix his selling price at 6s. 6d. a cubic yard, which would mean a net profit of fourpence a cubic yard. But, as he is not allowed to charge the cost of the land, the selling price would have to be fixed at 7s. 6d. in order to yield the same final net profit of four-pence per cubic yard. Thus, the Committee will see that one shilling represents the amount necessary to meet the taxation applicable to the disallowed cost of land at eightpence a cubic yard.

I appreciate that this is extremely technical, and I would, therefore, try to put it in another way. [Interruption.] I hope that my hon. Friends will regard this as a very serious matter. The present tax practice imposes a charge on the cost of sand and gravel—on the figures given to the Royal Commission—of between 12 and 15 per cent. Consider the significance of this. In relation to building costs generally. The effect is enormous. I am told, for instance, that London Airport consumed about 3 million tons of sand and gravel—enough to build a roadway from London to Birmingham. A modern power station needs 100,000 to 150,000 tons. I am told that one mile of modern highway consumes 11,000 tons. The demand for sand and gravel in this country is running at about 1¼ tons per head of the population. In the United States it is running at 3½ tons per head of the population. Demand is bound to grow in this country.

Mr. Hugh Fraser (Stafford and Stone)

They are burying their heads in the sand.

Mr. Braine

I realise that the hour is late. Nevertheless, I am obviously carrying the Committee with me.

I know that my right hon. Friend is not unaware of the enormous influence which the cost of these materials has on the national economy. I know that the Government regard the building industry as a major balancing factor between inflation and deflation. If that is so, is it not high time that the Treasury recognised the inflationary effect on building materials of this present tax practice?

I must make it plain—because some of my hon. Friends seemed in some doubt—that the Royal Commission did not recommend that a depletion allowance should be granted in respect of mineral-bearing land already held by operators. I have a great deal of sympathy with those who already hold large plots of land, but the Royal Commission rightly recognised that that land had been acquired in the knowledge that no depletion allowance obtained. The Commission decided that a line would have to be drawn somewhere.

I have said that if he concedes the new Clause my right hon. Friend will lose no revenue in the coming year because its provisions are limited to new acquisitions. The reason for this is that it will take twelve months for planning permission to be obtained, for the necessary plant to be installed on the site and for profitable production to get under way. My view is that if he accepted the new Clause it would cost the Revenue next to nothing for two or three years. It is precisely for that reason that I ask my right hon. Friend to make the concession now, and not to fob us off for another year. He can afford to make the concession now. The Institute of Chartered Accountants, when asked about this recommendation of the Royal Commission by the Board of Inland Revenue, put it among the highest priorities. If my right hon. Friend made the concession now he would have the satisfaction of knowing that he was doing the just thing, the right thing without damaging the interests of the Revenue in any way.

Mr. Cronin

I do not pretend to have an extensive knowledge of this subject, and I do not think I know very much more about it even after the rather lengthy speech of the hon. Member for Essex, South-East (Mr. Braine). I feel, however, that I have a constituency duty in the matter.

In my constituency I have a granite quarry. The Breedon and Cloud Hill Lime Works Ltd. apparently thought it important that I should see a letter which it had received from the secretary of The Limestone Federation, and I propose to confine my remarks to reading this letter, if I may have the patience of the Committee. It reads: Thank you for your letter of 18th instant and I note you have approached your Member for the Loughborough Division, Mr. John Cronin. I wonder if you could make it quite clear to him that the clause for which his support is desired is that of Mr. Geoffrey Stevens not the alternative one by Mr. Braine. The effect of the latter"—— —that is, the new Clause which we are discussing— will be completely useless to existing quarries and is being pressed by the gravel interests who are more concerned with short term development and will, if theirs goes through, be at a greater advantage still against long term existing stone development like your own. It appears that the new Clause has not the unanimous support of sundry interests which are concerned, and I think the Committee should have more information before coming to a final decision.

Mr. du Cann

I rise simply to say that if all the arguments in favour of the new Clause are not put forward in view of the lateness of the hour and in deference to the obvious wishes of the Committee, I nevertheless hope that my right hon. Friend will not think that they are unimportant. I should like an undertaking that he will keep an open mind on the subject until he has heard all the evidence, because this is an extremely important subject and a matter of very great concern not only to the sand and gravel industry but to other industries as well. A good deal could be said on this, subject, but it would probably be better to leave it to another occasion. I hope my hon. and learned Friend will give the assurance for which I asked.

Mr. Stevens

I do not propose to weary the Committee by setting out at length, as I might well do, my points of agreement with my hon. Friend the Member for Essex, South-East (Mr. Braine). I have only two points of disagreement with him. I do not think that he can have been to the appropriate office recently to check up on the difficulties.

The much more important point is this. This proposed new Clause deals only with lands acquired after the passing of this Measure. My hon. Friend said that that was implementing the recommendation of the Royal Commission, and he was right in that, but he did not quote from the Royal Commission's reasons.

In order to save the time of the Committee, which I know is so very valuable—I can see many tired faces around me—I will not quote at length from the Report, but if my hon. Friend will read the Report he will see that the recommendation that this allowance, if it is to be granted, should apply only to lands acquired after the date of the passing of the Bill was sketchy in the extreme and very debatable.

The vast majority of the extractive industries in this country are wise and prudent. They have acquired reserve lands sufficient for their needs for many years to come, and it seems to me illogical, improper and unfair that those companies which have been prudent, have looked to the future and acquired reserve lands to deal with their future requirements, should be put in a worse position than the less prudent companies which are only going to buy lands for their requirements in the months to come.

With that very important difference, I strongly support the arguments advanced by my hon. Friend, though I bear very much in mind what my hon. Friend the Member for Taunton (Mr. du Cann) has said. Perhaps this is not quite the occasion on which to debate this subject at length. I am certain that the feeling in the country as a whole is very strong on this point. I am sure that my right hon. Friend will realise how great that feeling is when he sees the number of hon. Members present who feel the same as my hon. Friend the Member for Essex. South-East and I do.

Mr. du Cann

Is my hon. Friend aware that many people believe that the recommendations of the Royal Commission do not go far enough?

Mr. Stevens

I am in entire agreement with my hon. Friend the Member for Taunton.

Mr. Norman Cole (Bedfordshire, South)

It is a pity that an important matter of this kind, whether it be the question of the appointed day or of existing undertakings, should be debated at this time of the morning. However, I will be as brief as most of those who have preceded me.

I support the principles of the Clause which was moved by my hon. Friend the Member for Essex, South-East (Mr. Braine). I am sure that no hon. Member will disagree with the principles which he enunciated. By the same token, I would agree with him in the reasons that he has given why this proposal should be accepted by the Chancellor because of its comparison with other industries which do not suffer from the defection of a wasting asset. As far as I can ascertain, this matter of wasting assets is peculiar to the extractive industries.

There I must part company from my hon. Friend the Member for Essex, South-East for the same reasons as were given by my hon. Friend the Member for Langstone (Mr. Stevens). The new Clause, good as it is, is not good enough and does not go far enough.

We are dealing here with an industry which has been long established in this country. I have one concern in my constituency which, so I am told on good authority, has been in existence for two thousand years. We are, therefore, concerned not only with new undertakings after an appointed day, but with those now existing. Most of the concerns working this great industry, whatever be the minerals they are extracting from the ground, are long established, having deposits likely to keep them going for a long time. An appointed day will not be of any help to them, except in regard to new acquisitions.

Secondly, and very important, if the new Clause were accepted, any new concern starting up with the benefit of the depletion allowance for tax would have a direct advantage in competition with an existing undertaking which did not enjoy the same benefit. I hasten to say that there is no reason that we should not obtain the lesser of the two concessions if we can have nothing more, but I feel that my right hon. Friend the Chancellor might feel it right, for the reason I have given, to extend it to include those companies which now exist.

This proposal is not a new one; it has been debated in previous years. The machinery for this kind of depletion allowance exists. Both machinery and precedent exist. I am reliably informed that, when the Excess Profits Levy was in force during two or three years soon after the war, a depletion allowance for tax purposes was allowed to those companies which were taking out more than the ordinary amount of minerals from their quarries. Due allowance was made in that respect for the depletion. If it can be done for excess amounts taken out of a quarry, then, I suggest, there is no reason for it not being done for all normal working.

1.15 a.m.

Mr. Maudling

I shall not follow my hon. Friend the Member for Essex, South-East (Mr. Braine) in his most interesting discussion on the economics of the gravel and ballast industry, though I certainly accept his two important propositions, that it is difficult to build roads or houses without gravel and that, in so far as the industry is relieved of a tax burden, that gives it some incentive for reducing the price of its product. It is not unlikely that those considerations were in the mind of the Royal Commission when making its recommendation. Any recommendation from the Royal Commission is, of course, a very important matter for the consideration of the Committee.

I was advised, before the discussion began, that there are difficulties of both practice and principle in adopting this particular recommendation. I will give two difficulties of practice first. The Royal Commission referred to the problem of how to treat residual value and the possibility of collusive sales. I do not think that either of those problems has been satisfactorily dealt with in the new Clause. There are also differences of principle as to what a move of this nature should cover—whether it should cover past or future acquisitions. Were there any doubt as to the existence of such differences of principle, certainly the discussion tonight has made it perfectly clear that such differences exist and are quite strongly felt.

Mr. Stevens

So far as collusive sales are concerned, has my right hon. Friend borne in mind Section 468 of the Income Tax Act, 1952?

Mr. Maudling

Yes, and I think that my hon. Friend, if he examines it carefully, will find that even that provision, which deals with collusive sales in general, will not deal with this particular type of collusive sale which might arise. If he still has some doubt about that, I should be delighted later to have a talk with him about it. The real issue is one of principle. My right hon. Friend feels that this is certainly one of the recommendations of the Royal Commission which has a good deal to commend it, but clearly, to meet the problem satisfactorily, long and complicated legislation would be needed. It is clear that there is not sufficient agreement in the Committee on this matter to reach a decision at this stage. Therefore, the Chancellor does not feel that the case put forward tonight is of sufficient urgency and priority to justify attempting to embark on the legislation needed to give practical effect to the recommendation of the Royal Commission. The Chancellor recognises the weight of the case, but for the reasons I have given he cannot at this stage accept this new Clause. There are matters of principle and practice involved for which no solution has, in his opinion, yet been found.

Mr. du Cann

In view of the fact, as I have suggested, that there are so many arguments that might be adduced in favour of this new Clause which have not been put forward, perhaps there might be an opportunity for considering these arguments in due time before a final decision is reached. It is something one wants to work towards when there is the weight of evidence available.

Mr. Maudling

I would be glad on a subsequent occasion to hear the arguments.

Question put and negatived.