Section three hundred and eighty-eight of the Income Tax Act, 1952, shall be amended by the addition of a new subsection thereto, namely:—
(3) Any sum paid by the employer pursuant to a scheme approved by the said Commissioners under subsection (1) of this section shall, in computing the profits or gains for the purpose of an assessment for income tax under Case I or Case II of Schedule D, be allowed to be deducted as an expense incurred in the year in which the said sum is paid and where the said employer is a body corporate entitled to relief in respect of expenses of management by virtue of the provisions of subsection (1) of section four hundred and twenty-five of this Act any sum paid by the said body corporate pursuant to the said scheme shall, for the purpose of subsection (1) of the said section four hundred and twenty-five be deemed to be an expense of management".—[Mr. John Rodgers.]
§ Brought up, and read the First time.
§ Mr. J. Rodgers
I beg to move, That the Clause be read a Second time.
1527 This Clause is concerned with the question whether contributions paid by a company under a retirement benefit scheme for its directors approved under Section 388 of the Income Tax Act, 1952, should be allowed as an expense in the computation of the tax liability of the company which pays the contributions.
About a year ago there was a decision in the High Court in the case of Samuel Dracup and Sons and Dakin which changed the law as practised before that case. I understand that the Inland Revenue authorities, while giving their approval to a scheme under Section 388 of the Income Tax Act, 1952, have resisted deduction of the pension distribution paid by the company under this scheme in computation of tax liability under Case I of Schedule D.
I understand that the Inland Revenue resist this deduction in cases where one or more directors may have together a de facto control of the business, although such a director is not a controlling director within the meaning of Section 390 (1) of the Income Tax Act, 1952, for the purpose of these pension schemes.
The argument adduced by the Inland Revenue authorities is that, first, there is no inducement to directors to work harder. A director is morally and, they maintain, legally bound to work as hard, as a director, in the interests of the firm, and, therefore, pension arrangements do not make him work harder.
Secondly, they maintain that he would not leave the firm if there were no pension provision, and, therefore, payment of premiums is not an expenditure wholly and exclusively laid out for the purpose of the trade of the company. Refusal by the Inland Revenue to allow the premiums paid out in these circumstances seems to be arbitrarily to nullify the fact of the pension scheme for family businesses, and discriminates unfairly against some of the working directors of such companies who may not be members of the family.
Under the practice adopted since last year's High Court decision a deduction may be obtained only for full-time executives, who are less likely to be concerned with the continued prosperity of the employing firm. Those most closely connected with the success of firms are clearly penalised.
1528 The new Clause proposes to make provision for the automatic deduction as a trading expense in the computation of tax liability of the premiums paid by that company under a retirement benefit scheme approved by the Commissioners of Inland Revenue under Section 388 of the Income Tax Act, 1952.
Until the decision in the Dracup case, it was always understood that this was the corollary to approval being given under Section 388. The new Clause removes any doubt and reverts to what, I understand, was always the position until last year and what, I am sure, was the intention of Parliament when introducing the pension scheme legislation in the Finance Act, 1947. Furthermore, the terms of Section 388 of the Income Tax Act, 1952, fully support my contention that premiums paid under an approved scheme for directors other than controlling directors shall be allowed as a trading expense, as Section 371 clearly shows that deduction of premiums as an allowable expense is part and parcel of any pension scheme approved under this legislation.
I hope, therefore, that my right hon. Friend will agree to accept the new Clause.
§ Mr. Simon
As my hon. Friend the Member for Sevenoaks (Mr. J. Rodgers) has pointed out, the new Clause relates to the contributions paid by a company towards the pensions of its employees. Those contributions can rank for deduction for tax purposes in computing profits in the case of a company carrying on a trade, but subject to conditions. One of the conditions that must be satisfied before a scheme can be approved is that the service as a controlling director is not taken into account. The reason for that was perfectly plain: that if contributions in respect of controlling directors were allowed to be taken into account, there was ample scope for tax evasion.
Arrangements were designed to defeat what was the perfectly clear intention of Parliament in that respect. They took the form that directors, while they retained de facto control of a company, would divest themselves of most of their shareholdings to members of their families or to family trusts—in other words, a colourable arrangement. They were no longer controlling directors as defined for the purpose of the retirement 1529 benefit legislation and, therefore, the Inland Revenue up to that point could have no right to withhold approval of the scheme.
The Inland Revenue did, however, contend that in that type of case, the company's contribution to the retirement benefits was not incurred wholly and exclusively for the purpose of the company's trade and was, therefore, inadmissible as a deduction in computing the company's profit. Those contentions were upheld by the court in the Dracup case.
What my hon. Friend wants to do is to nullify the Dracup decision and to leave the way open for what, I submit, is the plain intention of Parliament to be again set at nought. There would be no safeguard against the kind of arrangement that was adopted in that case, and directors who are virtual proprietors of a company operating through shares held by members of their family would be free to arrange retirement benefit schemes for themselves.
My hon. Friend said that that amounts to discrimination unfairly against the working directors of a family business. In fact, it is the reverse. It is to prevent the directors of family businesses securing an advantage which is not open to controlling directors generally and, therefore, throwing a tax burden on the rest of the community and controlling directors. It does not mean that the gentlemen in question cannot obtain any tax relief for sums set aside to provide retirement benefits. They are eligible as self-employed under the scheme introduced by my right hon. Friend the Prime Minister in his Budget. Since the new Clause would permit a limited class of directors who are in de facto control of a company to bring themselves colourably within a Section 388 scheme and to obtain part of their retirement benefits in lump sum form, I cannot, on behalf of my right hon. Friend, agree to accept the Amendment.
§ 1.30 a.m.
§ Mr. Mitchison
Would the hon. and learned Gentleman tell us about how many people got away with this before the case was taken to court?
§ Mr. J. Rodgers
I am very sorry to hear the reply given by my hon. and learned Friend, because while it may be true that certain controlling directors may have divested themselves of a controlling interest and become de facto directors in control of a company, and I dare say that there has been some proceeding along that line, the line which my hon. and learned Friend has taken penalises a good many ordinary working directors who have no intention whatever of defeating the purpose of the Finance Act in providing for benefits for directors. I hope that he will look at this matter again before Report. If he can give me that promise, I will ask leave to withdraw the new Clause.
§ Mr. E. Fletcher
Before the Financial Secretary gives that promise, let me say that I hope he will not give that promise because it seems to me, having heard the terms in which the proposal was put, and having heard the conclusive reply by the Financial Secretary that on control of the kind the hon. Member for Seven-oaks (Mr. J. Rodgers) suggested the decision of the court in the Dracup case gave effect to the intentions of Parliament when it passed that Section of the Finance Act, 1947, which is now represented by Section 388 of the Income Tax Act, 1952.
It seems to me that it would be going contrary to the expressed intention of Parliament if we were to enact a new Clause to reverse the decision in the Dracup case. Therefore, for my part—and I think I am speaking for my hon. Friends—I welcome the vigour with which the Financial Secretary has resisted the new Clause, and I hope that he will not give any further thought to it at all.
§ Mr. Diamond
I share that hope, but I would ask the Financial Secretary a further question relating to this case. I see some slight danger in the development of the argument. The Financial Secretary said, quite rightly, that the Inland Revenue chose this rather roundabout method of securing that the will of Parliament should prevail, instead of attacking the matter under the relevant Section by saying that they were not expenses wholly and exclusively incurred. Would it not, therefore, be much simpler to reconsider the conditions under which 1531 a controlling director ceases to be a controlling director to prevent abuse in that respect, rather than having to get at the matter by this roundabout method? Once the Inland Revenue starts to attack it on the basis that it is not expenditure wholly, necessarily and exclusively incurred, we do not know how far it will go and how far the will of Parliament, which permitted an allowance in appropriate cases, will prevail.
§ Mr. Simon
I do not think that there is any danger. Parliament said that controlling directors should not be eligible. I think that if one tried to enact various schemes to control the de facto control by a director when he transferred his shares to his family one would find oneself in very great difficulties of definition. It seems to me that the Inland Revenue has taken the right course in relying on the fundamental principle of our tax law, namely, that the expenditure must be necessarily incurred to rank as a deduction against tax.
§ Motion, and Clause, by leave, withdrawn.
§ Mr. Niall MacDermot (Lewisham, North)
On a point of Order, Sir Charles. I understand that the new Clause in my name "Right to obtain decision of Commissioners of Inland Revenue on gifts inter vivos" would be called.
§ The Chairman
It was originally selected, but I understood the right hon. Member for Huyton (Mr. H. Wilson) to say that no more new Clauses would be moved from his side of the Committee.
§ Mr. MacDermot
I think my right hon. Friend said that no more new Clauses which were official Opposition new Clauses would be moved from this side of the Committee. My new Clause is an inter-party Clause, and I understood my right hon. Friend expressly to say that that new Clause was not covered by his undertaking. The matter may be 1532 dealt with very shortly and I hope, Sir Charles, that you will be able to call it as was the intention.
§ The Chairman
I am in some difficulty. I do not want to go back on what the right hon. Gentleman the Member for Huyton said. He made it plain that he was hoping to have the Clause called on Report. This has nothing to do with me, but it might prejudice the right hon. Gentleman's opportunity if we went back on what he said.
§ Mr. Mitchison
I spoke to my right hon. Friend the Member for Huyton about this. However, he expressed his intention, I know that he did not intend to refer to this Clause, which is in the names of hon. Members on both sides of the Committee. I think that I can guarantee that my right hon. Friend would welcome the Clause being discussed shortly even now.
§ The Chairman
That does not bear out the conversation which I had with the right hon. Member for Huyton, but I will call the Clause if hon. Members wish it. They have to take the responsibility. It is not mine.