New Clause.—(MODIFICATION OF S. 50 IN RELATION TO PARTNERSHIPS.) (Hansard, 5 July 1960)

§ The Solicitor-General
I beg to move, That the Clause be read a Second time.
This Clause is designed to extend the provisions of Clause 50 so as to make it work properly in relation to partnerships. The Committee will remember that Clause 50, in brief, provides that where an assessment has been made on any person within the normal six-year period for any year which is, in this Clause and in Clause 50, referred to as the normal year, in order to recover tax lost owing to his default, the assessment may be made on him for a year not more than six years earlier to recover tax so lost.
That is referred to in the other Clause, though not in this one, as the "earlier year". Where the assessment has been made on him for that purpose in the earlier year, an assessment may be made on him—but then only with the leave of the general or special commissioners—for the same purpose for a still earlier year, provided that it is not more than six years earlier, and so on.
That Clause does not work in relation to partnerships. It is doubtful whether it works even in the case of a simple partnership, where there has been no change in the members of the partnership between the normal year and the earlier year. The reason is that Clause 50, in terms, enables an assessment to be made only on the person in default, but in the case of a partnership, the assessment has to be made in the partnership name; in other words, on all the partners. Certainly, in the less simple case where there has been a change in the partners between the normal year and the earlier year, the Clause definitely breaks down.
The broad effect of the new Clause is that a person who is involved, whether as a partner or otherwise, in a Income Tax default in the normal year can be taxed for the earlier year, but if he is not involved in the normal year he cannot be taxed for the earlier year. For technical reasons, his name may have to appear in the assessment in the partnership name for the earlier year, but he is let out by an exemption clause.
10.15 p.m.
The scheme is that neglect by any one partner in relation to partnership affairs —that is to say, in relation to partnership return and accounts—is treated as 380 the neglect of all the people who are partners at the time. Neglect by one partner taints all the others who are his partners at the time. Therefore, where there has been no change in the partners between the normal year and the earlier year, neglect of any of the partners in relation to partnership affairs in the normal year enables an assessment to be made on the whole of the partnership profits for the earlier year, provided that there has been a neglect in the earlier year.
The same applies where the only change consists in taking in an additional partner. Where a person has gone out of the partnership between the normal year and the earlier year, the assessment for the earlier year for technical reasons has to be made in the name of the partnership, but as a general rule tax will not be charged on the share of the partnership profits which is appropriate to the partner who has gone out and the tax charged on the other partners' shares will not be recoverable from him.
There is one exception from that proposition. If the partner who left the partnership was himself in default in relation to his personal return for the normal year, the tax charged in the assessment on the partnership for the earlier year will include the tax on his share of the partnership profits as well as on the shares of the partners who remain in the partnership, because his own personal default will reopen the partnership accounts as against him.
As it is a complicated Clause, the best thing I can do is to explain the various circumstances in which it might work and show how it works. Take, first, the case where A is operating the business sole in the normal year and in partnership with B in the earlier year. A and B are jointly assessable in the partnership name for the earlier year, whether the neglect in that year in relation to partnership affairs was A's or B's. But B, the partner in the earlier year, is an exempted partner and the tax on his share of the partnership is not recoverable from him.
The second case is A and B in partnership in the normal year, but A sole in the earlier year. That is the converse of the first case I put. A is assessable for the earlier year, whether the neglect 381 in relation to partnership affairs in the normal year was that of A or B.
The third case is A and B in partnership in the normal year and B and C in partnership in the earlier year. B and C are then jointly assessable in the partnership name for the earlier year, whether the neglect in relation to partnership affairs in the normal year is that of A or B, or whether the neglect in relation to partnership affairs in the earlier year was that of B or C. But C, unless he was himself guilty of neglect in relation to his personal return, is an exempted person. His share of the tax is not recoverable. C was a partner in the earlier year, not a partner in the normal year, and the new Clause bites only on a person on whom an assessment is made in the normal year.
I apologise to the Committee for this involved explanation, but this is a complicated matter and I thought that it would be better, particularly as it may be studied elsewhere, if I gave the various permutations and combinations. The fourth case is A and B in partnership in the normal year, C and D in partnership in an earlier year—a complete change of partnership. An assessment cannot be made for the earlier year unless either C or D, or both of them, were in default in relation to their personal affairs in a normal year. If only one of them was in default in relation to his personal affairs in a normal year, an assessment for the earlier year can be made in the partnership name, but the other partner is an exempted partner and the tax on his share of the profits is not recoverable.
The last case, the Committee will be glad to hear, that I propose to give is this. A and B in partnership in the normal year, A sole in the earlier year. In the normal year the partnership affairs are in order, but B, not A, was in default in relation to his personal return. That case would be technically within subsection (3) so as to enable an assessment to be made on A in respect of the business profits for the earlier year, but the last two lines of subsection (5) preclude the making of an assessment on him.
I have already apologised for reducing our proceedings almost to an algebraical formula, and I apologise again for the complexities of this new Clause, but I hope 382 that it is apparent, as I have outlined it to the Committee, that it fits into the scheme of Clause 50 as outlined by my right hon. and learned Friend the Attorney-General in Committee and applies that scheme to partnerships.

Mr. Glenvil Hall
I am grateful, as all of us must be, to the Solicitor-General for that very full and lucid explanation. Frankly, it boils down to this: may we be assured that no partner who is responsible for a default, a neglect or fraud escapes even if he has left the partnership?

§ The Solicitor-General
Yes, that is so. What we are concerned with here is the reopening of an earlier assessment.

§ Mr. Houghton
Obviously at this time of night we will have to take a good deal on trust. It seems to me that this reinforces my plea, made so frequently, which has fallen on deaf ears, namely, that when new Clauses of this sort are introduced there should be an explanatory memorandum with them. It is straining the patience and application of the Committee to introduce a proposal of this kind at this hour and at this stage of the Bill without some prior explanation.
What the Solicitor-General has done is to read out an explanation for the benefit of those who will study HANSARD tomorrow rather than for the benefit of the Committee. Indeed, he said that the words would be studied elsewhere. He knows that probably they will be of more use to people who can read his words tomorrow than to those who have to deal with this proposal now. There he sits, stuffed, indeed bulging, with explanations of this and other proposals, yet we are denied a simple explanation until he stands up and more or less reads it to us.
Clearly, we do not want partners to be punished for the default of others or those who have left the partnership to be pursued for defaults. There are many difficulties about partnerships and we have had many permutations of them. As far as we can tell, it looks all right, but that is not saying very much at this moment.