§ Motion made and Question propose, That the Clause stand part of the Bill.
§ Mr. Mitchison
I am a little puzzled by the Clause. Subsection (1) is quite general and has nothing whatever to do with discontinuance, and subsection (2), in effect, applies the same principle as is laid down generally in subsection (1) to discontinuance cases.
Let us assume a man carrying on a trade. He incurs a debt for the purposes of the trade by buying some stock or something of that sort. Afterwards he is 735 told that he need not pay for it. There-upon the amount which he has not been called upon to pay is taxed as a trade receipt. I could see some reason for this in collusive cases, but what is bothering me is how it will work in non-collusive cases.
Subsection (2) goes on to apply this so that if the man who has incurred the debt has been released from part of it at discontinuanceߞassuming him to be on an earnings basisߞhe would have to pay tax on the amount from which he was released. This is a notional payment, and I imagine that the discontinuance can arise in many ways.
Let us take the case of a man who cannot pay because he has "gone broke" I am not talking about a technical bankruptcy, but about a man with no money left. I wonder if the Clause may not be a little wide. I repeat that I can see the possibilities of collusion, and collusion which would result in tax avoidance. If there is no collusion, is it necessary for the purposes of this group of Clauses that the general provision of subsection (1) should be made? I say to the Economic Secretary at once that this is no more than an inquiry. I am a little puzzled by the Clause. Perhaps he can help me.
§ Mr. Barber
The purpose of the Clause is to deal with an anomaly which arises under the law as it stands at present. If a trader incurs a debt at present, he is allowed a deduction for tax purposes of the amount of the debt. If he subsequently gets the debtor to release him from either all or part of the debt, it has been held by the courts that the amount which is released cannot be brought in for tax purposes, notwithstanding the fact that the trader has had a deduction for the full amount of the debt.
Subsection (1) refers, in the second and third lines, to cases where a deduction has been allowed for tax purposes in respect of the debt. The opening words of subsection (2) are:If in any such case as aforesaid…Therefore, subsection (2) applies only to the case where a deduction has been allowed for the debt which was incurred, so that the trader has had a deduction for tax purposes, and at a later stage he is released from his obligation to pay the debt. As there is a qualification, which 736 by virtue of the opening words of subsection (2) is imported from subsection (1), the hon. and learned Gentleman will agree that it is a fair way of dealing with the matter.
§ Mr. Mitchison
I am glad that the Economic Secretary mentioned the court decision which had given rise to the trouble. I agree with the reasons he urges for the inclusion of the Clause in the Bill.
§ Mr. Diamond
I, too, am grateful to the Economic Secretary for explaining so clearly that this Clause is intended to put right an anomaly under which what would have been, in other circumstances, a normal trading receipt is regarded not as a trading receipt but as a capital receipt and, because we have not got a capital gains tax, escapes taxation. This is the tenth anti-tax-avoidance Clause and the eighth one with which we are being troubled solely because we have not got a proper tax structure under which capital gains, equally with income, are taxed.
§ Sir E. Boyle
Perhaps I might add that we have just listened to the hon. Gentleman's eleventh speech on the subject.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.