§ Mr. Stevens
I beg to move, in page 31, line 5, at the end to insert:(e) any payment made from a provident or similar fund to which no contributions have been made by either the employer or the employee in respect of any period after the fourth day of April, nineteen hundred and sixty.Subsection (1, d) of the Clause exempts from tax charge benefits paid from schemes approved for the purposes of Section 387 of the 1952 Act. During 1947, there was much legislation concerned with retirement benefit schemes which had the effect of freezing the funds of a number of those schemes at that date. Although the funds were frozen then, payments were still being paid from them, and it seems to me that those payments, also, should be exempted in exactly the same way as are payments from funds under Section 387. Can my hon. Friend the Financial Secretary say something about that?
§ Sir E. Boyle
I can answer my hon. Friend's question very shortly. I take his point. The Amendment is really unnecessary, because any payments of this kind would already be exempted under Clause 35 (6, a). This provision exempts…a payment made in pursuance of an obligation incurred before that date —That was the subsection referred to a few minutes ago by the hon. Member for Glasgow, Craigton (Mr. Millan). Clearly, the payments in question fall squarely and beyond question within this provision. In the light of that explanation, and the assurance that I give to my hon. Friend that in view of the drafting of Clause 35 this is an unnecessary Amendment, perhaps he might agree to withdraw it.
§ Amendment, by leave, withdrawn.
§ Mr. Denzil Freeth (Basingstoke)
I beg to move, in page 31, line 27, after "which", to insert "either of".
§ The Temporary Chairman (Mr. George Thomas)
This Amendment, and those in page 31, line 28, to leave out "are" and to insert "is", and in line 35, at the end to insert "or", could be discussed together.
§ Mr. Freeth
Yes, Mr. Thomas.
The purpose of the three Amendments is to ensure that the two main paragraphs, (a) and (b) of subsection (2) should be regarded as alternatives. At present, there seems some slight ambiguity as to whether a person, in order not to be charged with Income Tax would have to fulfil both conditions set down in those paragraphs, whereas it would appear to be more reasonable that the two should be regarded as alternatives—rather on the converse lines of Section 10 of the 1956 Finance Act.
§ Sir E. Boyle
This is purely a drafting point. I agree that, as drafted, the subsection does not make it quite clear that paragraphs (a) and (b) set out alternative conditions and that it is not necessary for both conditions to be satisfied. I think that, strictly, the matter could be put right simply by the third of my hon. Friend's Amendments, but, in the circumstances, I am quite prepared to advise the Committee to accept all three.
§ Mr. Millan
Was it the Government's original intention that these should be alternatives? Paragraph (a) refers to "any case," while in (b) there is an additional restriction, as it were, in the case of payments of compensation for loss of office. I must say that I found considerable difficulty in understanding why this additional restriction should have been placed on these payments of compensation for loss of office. Is the simple answer that the Amendment does not make any material difference to what the Government originally intended?
§ Amendment agreed to.
§ Further Amendments made: In line 28, leave out "are" and insert "is".
§ In line 35, at end insert "or".#x2014[Mr. Denzil Freeth.]
§ Mr. Roy Jenkins
I beg to move, in page 32, line 10, to leave out "five" and to insert "two".
This is our principal Amendment to the Clause and to the subject covered by it and by the preceding Clause, and it would probably be for the convenience of the Committee if, as I believe we can do within the rules of order, we expressed our general attitude to the Clause in the course of dealing with the Amendment.
741 The Committee will be clearly aware that the Amendment seeks to reduce the exemption limit from £5,000 to £2,000. We are fortified in our desire to do this by the Report of the Royal Commission. Indeed, the way in which the Government have chosen to bring forward their proposals for dealing with what are now generally called "golden handshakes" is, in a sense, typical of the Government's whole approach to dealing with tax avoidance measures in this Bill.
It is certainly the case that to a much greater extent than in preceding Finance Bills the Government have shown a desire to grapple with the problem, and the Chancellor and his colleagues have undoubtedly had a fairly difficult time from their back-bench supporters—if "supporters" is the appropriate word—as a result of this intention. I feel, however, that to a very large extent they have adopted an intermediate course that has given them the worst of both worlds; they have gone far enough to offend many of their supporters, but in many ways have not gone far enough really to deal with the evils to which they have been applying themselves.
That comes out extremely clearly in this Clause. The Royal Commission dealt with the whole question of compensation for loss of office, not at great length—it was fairly succinct and covered the subject in three pages—but it produced a clear analysis of the problem, and clear recommendations. Indeed, the Royal Commission dismissed—" dismissed" is, perhaps, the wrong word, but it did not altogetheraccept—the previous recommendations of the Millard Tucker Committee—and, of course, Sir James Millard Tucker was a valued member of the Royal Commission—partly on the grounds that those recommendations were perhaps rather too complicated.
What the Commission produced was a series of three rather clear-cut recommendations.
First, the Commission recommended that the existing arrangement by which large capital sums paid as compensation for loss of office escaped tax by reason of being treated as capital should certainly be ended, and should be ended in such a way that in future these sums should be taxed as income, except to the extent that, in the first place, one- 742 quarter of the sum paid, not exceeding £2,000 in any case, should be tax-free. In the second place, the Royal Commission recommended that the non-exempted part of the payment should be charged to tax by top slicing by reference to a period of five years. In the third place, the Commission said that ordinary remuneration from the office or employment in the year of receipt should not be taken into account for the purpose of top slicing.
That was the clear recommendation, not of a minority, but of the Royal Commission as a whole, and in this case I believe that it was unanimous. Having carefully considered the matter, it came to those conclusions which are different from the conclusions at which the Millard Tucker Committee had previously arrived.
The Chancellor has not accepted those conclusions. He has compromised. Some of the changes he has made may be largely technical, designed to put a series of rather bald recommendations into Finance Bill form, but the others are changes of substance which in all cases, I think, are designed to leave the loophole which Clauses 35 and 36 are directed to closing substantially larged than the Royal Commission recommended that it should be.
First, in place of the £2,000 there is the sum of £5,000. Moreover, the difference here extends a little further, since the Chancellor gives an absolute exemption to £5,000 although thte Royal Commission gave exemption to only £2,000 or one-quarter of the total sum, whichever was the larger. I do not, however, think that we should quarrel unduly with the right hon. Gentleman on this point. Our Amendment is designed only to change the £5,000 to £2,000, not to return to the one-quarter or a given sum, whichever is the larger. At any rate, beyond the difference between the £2,000 and the £5,000 there is a certain difference of approach here which is rather more favourable than that recommended by the Royal Commission.
Secondly, as regards the non-exempted part, the Chancellor's proposals, as I understand them, amount, broadly, to top slicing over a period of six years, whereas the Royal Commission said that the period should be five years. Thirdly, the Clause, when taken in conjunction 743 with its accompanying Schedule, treats superannuation benefits rather more favourably than was envisaged by the Royal Commission. We are not at the moment at liberty to discuss Schedule 4 and the very substantial Amendments—substantial in size, at any rate —which the Chancellor has put down to it, but I take it that it is within the bounds of possibility that the Schedule will be amended as the right hon. Gentleman wishes.
In three respects, the Chancellor has chosen to leave the loophole larger than it should be according to the unanimous view of the Royal Commission. I do not know what are his reasons for doing this. It seems to us that the proposals of the Royal Commission in this respect were extremely reasonable. Two thousand pounds was a sufficient exempted sum, bearing in mind that a sum over and above that amount would not, of course, be wholly taxed but would be subject to a spread-over for six years and that separate treatment would be allowed for any part of it having the nature of a superannuation payment.
We should certainly have much preferred to stand by the recommendations of the Royal Commission on this point. The Government seem very careless of the Royal Commission's recommendations this afternoon. Earlier today, the Attorney-General swept aside what the Royal Commission had to say about barristers, despite the fact that distinguished barristers were heavily represented on the Commission. Here, again, the Government are paying extremely scant respect to the detailed recommendations of a body which considered the matter objectively for a long time and came to certain quite clear decisions.
In a sense, of course, this whole matter and the question which we are now considering stems from the point put yesterday. My hon. Friend the Member for Gloucester (Mr. Diamond), with great force and lucidity, on several occasions showed that a great part of our taxation difficulties and a great part of the taxation difficulties with which we are dealing in this Clause and in other Clauses of the Bill stems from a complete but wholly unreal separation between the treatment of income receipts and the treatment of capital receipts. So long as this completely unreal distinction persists, so long 744 shall we have great difficulties at the margin, as we have them in this problem with which we are now dealing.
However, we cannot even on the Bill, let alone on this Clause or the Amendment, deal with the whole problem of the relationship between the taxation of capital and the taxation of income, and we must apply ourselves to the possibilities of dealing with this particular issue.
Our view, in accordance with the unanimous view of the Royal Commission, is that the Chancellor would have stopped up the loophole much better if he had accepted the Commission's recommendations. He would have been perfectly fair to the taxpayer. In bringing forward his proposal, he would, I am happy to assume from the rather sparser attendance on the benches opposite today than was the case yesterday, have incurred not quite so much hostility on this matter as on some of the previous Clauses, although, conceivably, the sparseness of attendance today may be due more to the tiredness of hon. Members opposite or the fineness of the weather than to their greater enthusiasm.
§ Mr. Roy Jenkins
It would be most improper for me to turn my back on you, Sir William, in order to gaze at the benches behind me, but I am sure that the benches behind me have been tenanted today by experts on these complicated questions, as they have been throughout our discussions on the Bill. The point at issue is not whether there is a large attendance on the Opposition benches but that, throughout the whole of these tax avoidance Clauses—and to a much greater extent on the others than on this—there has been a phenomenal attendance on the Government benches. Hon. Members have been here in great numbers in order to give their own peculiar brand of support to the Chancellor in the efforts he has been making to stop certain taxation rackets.
It looks as if the hostility may to some extent have exhausted itself, or, at any rate, it is not quite so strong on this issue as on some others. As I say, the right hon. Gentleman would have done much better to go the whole way and accept the recommendations of the 745 Royal Commission instead of compromising and only half dealing with the problem as he has.
§ Mr. Freeth
I do not know exactly why it was that the hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) sat down with so few supporters behind him—whether it is the weather, their feeling tired or what—but, however many might have turned out to cheer him, it was rather unfair of the hon. Gentleman to criticise my right hon. Friend for not having kept to the recommendations of the Royal Commission since he himself seems perfectly happy to slough off at any rate one of the major recommendations in regard to the alternative method of assessing the tax-free capital sum.
There is one point which the hon. Gentleman totally overlooked and which, in my view, completely vitiates his criticism. Since the publication of the Royal Commission's Report we have had not only the "golden handshake", but the "golden bowler" scheme, as well. By common agreement, I presume, since there are no Amendments down to it, subsection (1) excludes from the operation of the new scheme terminal grants or gratuities given under Royal Warrant to Her Majesty's Armed Forces.
A large number of the grants given as a result of the "golden bowler" scheme to former members of Her Majesty's Forces are in excess of the £2,000 in the Amendment and some in excess of the £5,000 in the Bill. It would be inequitable if we were, on the one hand, to approve as a House that a serving soldier who retires from the Forces for one reason or another is allowed to enjoy a tax-free lump sum whereas a person who has given a lifetime to a company and then severs his connection with it is unable to enjoy a tax-free lump sum of anything like the same amount. I therefore hope that my right hon. Friend will not accept the Amendment moved from the browbeaten benches opposite.
§ Mr. Millan
I should like to take up the point mentioned by the hon. Member for Basingstoke (Mr. Denzil Freeth). This is probably the line which the Government will take. The hon. Member spoke about someone who has spent a lifetime in the service of a company 746 being entitled, when he retires or when his employment is terminated for one reason or another, to expect a fairly substantial lump sum. I would point out to him that the Amendment does not eliminate the lump sum altogether. It simply reduces the figure from £5,000 to £2,000 which, as has been said, was the recommendation of the Royal Commission.
Properly to deal with this matter it is necessary that it should be taken in conjunction with the Fourth Schedule, which, as it stands, is almost completely obliterated by an Amendment in the name of the Chancellor of the Exchequer. If we look at the Fourth Schedule as it will eventually be, we find that it is not merely a question of excluding the first £5,000 of any lump sum payment from taxation, but of excluding either the £5,000 or the standard capital superannuation benefit, whichever is the greater.
In the case of a person who has been employed by a company for a lifetime, the sum which will be available as a deduction from the taxable amount will, provided his salary was sufficient, not be £5,000 but the higher sum called the standard capital superannuation benefit. If we must have this other concept of a standard capital superannuation benefit which is precisely related to the length of service of the individual who is retiring or whose employment is being terminated, the argument in favour of the £5,000 is considerably reduced.
The hon. Member referred to men retiring from the Army, but, as I understand, in these cases the amounts paid are related to the length of service. That is precisely why I say that the £5,000 in the Bill is too much. It is not related to length of service. It is possible that someone will have his employment terminated after three or six months or a year, and get a large lump sum payment of which the first £5,000 is tax-free. I can see no real justice in that. If we must accept the principle of a lump sum, I think that £2,000 is quite enough, particularly when it is considered in conjunction with the other provision in respect of standard capital superannuation benefit which would take care of any cases of people with a lifetime of service who are, perhaps, entitled to rather more generous treatment than those who 747 lose their employment after only a few months or few years' service.
I hope that the Government spokesman will say something about this aspect of the matter. I hope that he will not confine himself to the £5,000 but will say something about the standard capital superannuation benefit, because it seems to me that, having inserted provision for the standard capital superannuation benefit, it is no longer necessary to have this £5,000 in the Bill. I therefore think that the Committee could well accept the Amendment without in any way doing injustice to people who lose their employment after many years of service.
§ Sir John Barlow (Middleton and Prestwich)
Most of us on this side of the Committee dislike intensely the abuse of the "golden handshake", which has happened occasionally during the last few years. At the same time, we must recognise that certain payments of this character are warranted and, virtually, are necessary. I think that the figure in the Bill is certainly not too high. It may even be too low. When we consider the substantial salaries commanded by some of the great men in industry and the contribution which they make to the good of the country and of industry as a whole, these figures are comparatively small.
I will not go further into the point. I hope that my right hon. Friend will not give way on this matter. I think that the figure is even on the small side.
§ Mr. Anthony Crosland (Grimsby)
I want briefly to take up the point of my hon. Friend the Member for Glasgow, Craigton (Mr. Millan). It is important to the consideration of this Amendment in order to eliminate the idea that we are simply discussing a maximum of £5,000 and a maximum of £2,000. We are not. We are discussing a maximum of £5,000 plus something else on other eventualities. We are concerned with what happens under certain circumstances when lump sum superannuation benefits are paid.
As I understand it, this Clause affects, not superannuation benefits paid under statutory or approved schemes, but ex gratia payments, and that is what we are 748 discussing. On Second Reading. the Chancellor of the Exchequer, in discussing ex gratia payments, said that there may be paid by way of superannuation payments sums that could be much bigger than £5,000 in appropriate cases. I hope that the Chancellor can tell us what happened with regard to ex gratia payments.
The Royal Commission dealt with this point at considerable length and came to the conclusion, as I should have thought was self-evident, that one should treat compensation for lass of office and ex gratia superannuation payments on the same basis. That is what the Royal Commission attempted to do. On page 79 of its Report it stated:There is no real dividing line between the two kinds of payment, and if one kind of payment were to be taxed less onerously than the other, it is a practical certainty that future payments would be expressed in whatever form was more favourable to the recipient.I should have thought tha0t was obvious and one can see the logic of it.
How far does this Clause carry out the Royal Commission's recommendation on ex gratia payments and how far is it a departure from it? It is clearly a departure bath with regard to ex gratia superannuation payments and to the main compensation for loss of office.
There is also, presumably, a further departure from the recommendation of the Royal Commission, because as far as I can see there is nothing to suggest that these ex gratia payments could come to a lump sum or the equivalent of a lump sum substantially larger than the £2,000 which is the tax free element, whereas, according to what the Chancellor of the Exchequer said on Second Reading, these superannuation payments under the Clause could be substantially larger than the £5,000 tax free minimum.
Therefore, two things emerge. First, on the question of these superannuation payments, there is an even greater departure from the Royal Commission recommendations than there is on the main question of compensation for loss of office payments. Secondly, the hon. Member for Basingstoke (Mr. Denzil Freeth) is not giving an accurate picture to the Committee when he suggests that it is simply £2,000 versus £5,000. On the contrary, we are dealing in the Clause with 749 possible payments that come to much bigger amounts, in the Chancellor's own words, than £5,000.
It seems clear from the Amendment that hon. Members opposite are in general agreement with the idea that there should be a fixed exemption limit. What they are disputing is the amount of the limit. Whenever a fixed exemption limit is used, it must be to some extent an arbitrary figure. I do not think it can be said that there is any principle which determines whether, if one is adopting the alternative of a fixed rate, the figure should be £2,000, £5,000, £10,000 or some other figure. One has to look at the objects at which the legislation is aimed and to decide what figure seems to accord best in practice with those objects.
As I have said before, one of the main objects which I have had in mind in making these proposals is to deal with the very large sums which have been paid in a number of cases in recent years. The tendency for these payments to get bigger and bigger as time goes on and also to become more frequent is very apparent. On the other hand, I do not want to catch the modest and quite genuine payments which are made to employees of all kinds who, for instance, become redundant on the reorganisation of an industry or as a result of changes in certain businesses.
It is natural that such compensation should bear some relation to the remuneration which the individual was getting. It would not be at all unreasonable that if an employee in the middle range of income was displaced through no fault of his own, he should get a payment of substantially more than £2,000. In practice, if we look at all the cases that we are trying to meet, we should decide objectively that £2,000 would not be high enough.
Hardship in cases of redundancy is not limited entirely to the lower income levels. Reorganisation can also hit severely managers and administrative executives in middle life. Many of those men when displaced would find it by no means easy to get other jobs in line with their experience. Those types of people will often have financial commitments which make thing difficult for them during the period before they can get fresh employment. In many cases, it is much harder for 750 them to get fresh employment than for many others at a lower income level.
This is, I repeat, not the kind of payment at which these provisions are aimed. Most people would agree that the fairest thing to do is to exclude from the operation of the Clause all these kinds of cases that we are thinking of by fixing a limit such as £5,000.
There has also been criticism that the exemption limit is too low. I have had that criticism from outside this Committee as well as inside it. One can make a substantal case for justifying a higher figure. It has been said that £5,000 to a highly paid employee might be perfectly genuine and reasonable. As I have said, that may well be so. I would not suggest that all payments in excess of £5,000 are extravagant or unjustified. In certain circumstances, the Clause already recognises that a greater payment than £5,000 may be reasonably let out if it is measured by reference to years of service and retiring pay. I will have a word to say about that presently.
The Bill does not limit lump sums paid under approved superannuation schemes. They may amount, in addition to the pension, to three-eightieths of the final salary for each year of service—that is, salary and a half for forty years' service. Where there is past service but no superannuation scheme and the payment is a voluntary one, the Bill frees from tax a lump sum equivalent to one-twentieth of the final salary, averaged over three years, for each year's service. That is equivalent to the final salary over twenty years', or twice the final salary after forty years', service.
When, however, we are thinking of a payment outside these provisions, made at the discretion of the employer and which might reach amounts above £5,000, I believe that there will be a general feeling that at least some tax ought to be paid. The reliefs which are provided in the Fourth Schedule will ensure that the burden of tax on payments in excess of £5,000 is not likely to be onerous. That is the arrangement for spreading, "top slicing" as it is called.
It has been suggested to me that instead of a fixed exemption limit, there should be a sliding scale under which there would be an exemption up to, say, 751 twice the employee's remuneration. This would take account of one of the factors which determine the question whether any particular terminal payment is reasonable: that is to say, the remuneration which the employee has hitherto enjoyed. There is a superficial attraction about that sliding scale, but it would add greatly to the complications of the scheme in relation to cases in which more than one payment is made.
Moreover, my own feeling is that if an employee who has been getting £10,000 a year receives a terminal payment of £20,000 and the case is not one of a standard capital superannuation benefit calculated on past years of service, it would be over-generous to exempt such a payment from tax altogether.
Therefore, for pragmatic reasons and after considering all the different kinds of cases that we would wish to exempt, I came to the conclusion that a figure of £5,000 was the best and the one that I could most confidently recommend to the Committee. I am rather fortified in my opinion by the thought that that figure has been criticised from both sides, from one side on the ground that it is rather too high and from the other side on the ground that it is rather too low. That fortifies my opinion that it is probably about right.
The hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) asked whether it was not true that I was recommending a spreading more generous than that suggested by the Royal Commission. That is so. I am recommending spreading over six years as against the five years suggested by the Royal Commission. The hon. Member asked the reason. The Royal Commission's recommendations covered the rather wider ground than this question alone. The Commission made recommendations which would have brought greater relief to contributions and also greater relief to the income arising from the invested contributions. We cannot, therefore, make a fair comparison.
The hon. Member for Glasgow, Craig-ton (Mr. Millan) asked me to say a word about the standard capital superannuation benefit which is exempted by paragraph 3 of the Schedule. That can reach 752 a much higher figure than the £5,000. It is directly related to past service and the figures we have worked out here and included are intended to relate that and bring it on to a fair comparative basis with the amounts allowed free of tax under the approved superannuation schemes. I think that that is a reasonable way to tackle it.
I should like to emphasise two points in connection with the standard capital superannuation benefit. The first is that it only applies to voluntary payments and is not deductible from payment or compensation for loss of office. The second is that it is not given in addition to the £5,000 exemption and, in effect, the employee gets whichever is the higher, the £5,000 or the standard capital superannuation benefit.
After listening to all that hon. Gentlemen opposite have said, and particularly to the hon. Gentleman the Member for Stechford, I still feel that the figure I would wish to recommend with confidence to the Committee as the one which I think will do broad justice and give exemption to all the different kind of cases to which we would wish exemption to apply is the figure that stands in the Clause.
§ Mr. Harold Wilson (Huyton)
The right hon. Gentleman began by saying that whatever figure we put in the Clause must be an arbitrary one. I do not think that he has satisfactorily explained on what arbitrary basis he chose the figure of £5,000. The only thing that is clear is that he has rejected the advice of the Royal Commission. We all know that the Radcliffe Committee has become a dirty word in Tory terminology so far as monetary policy is concerned, but we would have thought that the Chancellor would have more respect for the Royal Commission presided over by the noble Lord, Lord Radcliffe, and not be so anxious to throw over so many important recommendations of that Commission.
The suggestion has been made this afternoon that we on this side of the Committee are mean about the figure of £2,000. This is not a political matter. No one can say that the figure of £2,000 was recommended by the Radcliffe Royal Commission for political reasons. It was certainly not a politically constituted Royal Commission. It may 753 have been appointed by my right hon. Friend the present Leader of the Opposition, but I have never heard it criticised by anyone for leaning over in a Socialist direction. Quite the reverse. It includes some very distinguished businessmen and lawyers, who are not the sort of people likely to recommend too low a figure in respect of this "golden handshake." We have the rejection of that Report by the Chancellor.
The Chancellor told us that he thought that the figure of £5,000 was about right because it has been criticised as too high by some hon. and right hon. Gentlemen in the Committee and because it has been criticised as being too low not only by voices inside this Committee but by voices outside it. We know where those voices made themselves heard. It was not in this Committee. It was in the Committee to which the Chancellor pays far more attention in framing his taxation proposals—the 1922 Committee. There was no suggestion in the Budget speech that this was to be the figure. This was put in the Bill, together with a large number of other rather renegade suggestions, only after an interval in which Conservative opinion inside and outside the House was able to make itself felt.
In turning to the wider aspects of the subject arising from the Amendment, I ought perhaps to make one disclaimer. I have been referred to in the Press as the inventor of the phrase "the golden handshake". I cannot lay claim to that. I think that I was the first to use it in this House last June, but the phrase was in general use in the City and in business circles long before it was used in this House. Nevertheless, since this matter was brought into public discussion rather less than a year ago, more and more people have been realising what a terrible scandal it is.
A year ago I gave figures of eleven cases of directors eased out mostly under take-over bids—in one or two cases after board room rows—and the total amount of "golden handshake" compensation paid to the eleven characters was £575,000, an average figure of £52,000 or £53,000 each. Since this is more than Manchester City paid to Huddersfield for Mr. Law, an eminent inside right, it shows the monstrous sense 754 of values developing in the business community.
When we debated some of these takeover bids—we had a number of Questions on it last year and a big debate last June—Ministers said that take-over bids were good things and enabled one to ease out directors who were failing a company—failing to make it as profitable as it should be. Those people who on the Minister's argument had failed and were not worthy of their jobs and had therefore been eased out have been given £50,000, £60,000, £70,000 and £80,000 which, until this Clause is law, will be tax-free. Even so, with the rather generous terms that the Chancellor is putting forward in this Clause—he reminded us that it is not only a question of £5,000—still too much is being given tax-free.
The last time we debated the golden handshakes I got into trouble with hon. Members opposite for referring to a brewer who was eased out and given £50,000 or £60,000. I asked why he should be given that tax-free. I said that as an ex-Tory M.P. he would get a job fairly easily. Hon Members opposite suggested that this was an unworthy and unjustifiable remark, but I noticed that this gentleman got a job within a couple of weeks of that speech with the brewery company which had bought out the one which had compensated him. I think that my remarks were prophetic and not irrelevant to this situation.
I thought that the right hon. Gentleman dismissed rather easily this afternoon the problem of different income groups. He said, in a rather complacent way, that when there is a reorganisation scheme and managers and directors are eased out it is often harder for them to find other jobs than it is for the lower income groups. I wish that the right hon. Gentleman would go to a number of constituencies which I could suggest to him and which some of my Scottish hon. Friends could suggest to him—he might even go to some of the Lancashire cotton towns—and try to compare the ease with which unemployed mule spinners, for example, can get a job compared with some of the redundant directors to whom I referred last year. It would be interesting to see how many of those to whom I referred last year have got jobs at higher rates 755 of salary. In one of the most spectacular cases there has been re-employment at a very high salary indeed.
I was referring to the intermediate group—the middle income group—representing managers, adminis-trative people and executives. Those were the categories I was speaking about.
§ Mr. Wilson
I know that there is a very big problem, especially in middle life, for managers and other senior people to find jobs. I hope, however, the right hon. Gentleman will not suggest that it is harder for them in every case than for the lower income groups. In particular, I would suggest to him that he probably tends to underestimate the difficulty in finding work among clerical workers and a large number of white collared workers who are the young managers and top executives and who find it harder to get work than almost anyone else in almost any part of the country and not merely in the depressed areas to which I have referred.
The fact remains that the Conservative Party and the Chancellor of the Exchequer seem to think that it is fair that these "golden handshakes" should be continued, but they have at last, after a lot of pressure, come around to our way of thinking that it is unfair that these amounts should be paid tax free.
However, the Chancellor really must not try to delude himself into thinking that he is solving the problem of inequality caused by these payments. The mere fact that the Chancellor is being assailed by hon. Gentlemen behind him does not mean that he is pursuing a policy of social justice. It merely means that they are even more socially unjust than he is, and we have seen this developing in the debates of the last day or two.
The Chancellor still thinks it is right that these people should get away with these things. He is allowing tax to be spread out over six years—more than the Royal Commission suggested; and yet no one is more stony-hearted when any one comes along with a compensation proposal for which the Chancellor of the Exchequer has to find the money. We remember the trouble and struggle we had last year to produce even the 756 smallest compensation payments for unemployed cotton workers at a time when the owners of cotton mills were being lavishly subsidised for scrapping mills and equipment. The Minister of Aviation only this week sternly rejected any proposal that the workers losing their jobs through the cancellation of Blue Streak should get compensation. He rejected it, even though the whole thing is the result of Government policy.
§ Mr. Sydney Silverman (Nelson and Colne)
May I remind my right hon. Friend that, in the case of the cotton workers, as to part of their compensation, they lose it if they get another job?
§ Mr. Wilson
Yes, my hon. Friend is quite right, and I am glad he mentioned that. I think I did make a point of that in the debate last June, whereas in the cases which I have mentioned, when those men get another job they have already got nice tax-free "golden handshakes" tucked away.
There is one last point I want to make. The Chancellor, as I say, is tackling this problem only at the margin. I must say that I myself am very suspicious about some of these "golden handshakes". Many of them, I agree, are genuine; they are thoroughly genuine and thoroughly justified, provided they bear a fair rate of tax. I do not think we can speak as we were yesterday, when we were dealing almost exclusively with Clauses designed to deal with tax avoidance sharks. I think it is fair to say, what many hon. Members said, I think wrongly, yesterday, that it is a question of holding the balance between the nice, decent taxpayers on the one hand and the sharks on the other. There are among these people many honest, decent men, as we all know, but there are some sharks as well, and there have been some very seamy cases involved. Some take-over bids of which we have read in recent months and years have been extremely sordid and squalid. Many of them are in the courts, and, therefore, are sub judice, and it is not for me to go into the details now.
But, even so, I think there is something wrong where a director can come along and say to his fellow shareholders that they should accept the bid of Mr. X or Mr. Y, who may be making, perhaps, 757 a fairly generous bid for the shares, remembering that the director's advice is bound to have a very big influence on the independent shareholders, if one then finds that the director in question, on concluding the deal, goes out of the business with a lavish tax-free golden handshake. I think there is something there extremely suspicious, which might involve corruption on a very big scale. I think that this may be much more appropriate to the Jenkins Committee, but I hope that the Chancellor of the Exchequer views this very seriously, because I think that it affects business morality to a considerable extent. I am not referring to my hon. Friend the
§ Member for Birmingham, Stechford (Mr. Roy Jenkins) who moved the Amendment. That is another Jenkins.
§ However, having said that, having said that this is a matter for the Committee appointed by the President of the Board of Trade, I still feel that this does give us another reason why this Committee should be extremely scrupulous in examining a concession which will still be allowed, even after this Clause has gone into law, to the recipients of these golden handshakes".
§ Question put, That "five" stand part of the Clause:—
§ The Committee divided: Ayes 174, Noes 106.759
|Division No. 96.]||AYES||[7.15 p.m.|
|Agnew, Sir Peter||Finlay, Graeme||Maddan, Martin|
|Aitken, W. T.||Fisher, Nigel||Manningham-Buller, Rt. Hn. Sir R.|
|Allason, James||Fletcher-Cooke, Charles||Markham, Major Sir Frank|
|Alport, C. J. M.||Fraser, Ian (Plymouth, Sutton)||Marshall, Douglas|
|Amory, Rt. Hn. D. Heathcoat (Tiv'tn)||Freeth, Denzil||Marten, Nell|
|Atkins, Humphrey||Gammans, Lady||Mathew, Robert (Honiton)|
|Balniel, Lord||Gardner, Edward||Matthews, Gordon (Meriden)|
|Barber, Anthony||Clyn, Sir Richard (Dorset, N.)||Maydon, Lt.-Comdr. S. L. C.|
|Barlow, Sir John||Goodhart, Philip||Mott-Radclyffe, Sir Charles|
|Barter, John||Goodhew, Victor||Nabarro, Gerald|
|Beamish, Col. Tufton||Grant, Rt. Hon. William (Woodside)||Neave, Airey|
|Bell, Philip (Bolton, E.)||Grant-Ferris, Wg Cdr. R. (Nantwich)||Noble, Michael|
|Bell, Ronald (S. Bucks)||Green, Alan||Osborn, John (Hallam)|
|Bennett, F. M. (Torquay)||Gresham Cooke, R.||Page, Graham|
|Biggs-Davison, John||Grosvenor, Lt.-Col. R. G.||Pannell, Norman (Kirkdale)|
|Bingham, R. M.||Hamilton, Michael (Wellingborough)||Pearson, Frank (Clitheroe)|
|Bishop, F. P.||Harris, Frederic (Croydon, N.W.)||Peel, John|
|Black, Sir Cyril||Harris, Reader (Heston)||Pickthorn, Sir Kenneth|
|Bourne-Arton, A.||Harrison, Brian (Maiden)||Pitt, Miss Edith|
|Box, Donald||Harrison, Col. J. H. (Eye)||Powell, J. Enoch|
|Boyle, Sir Edward||Harvey, John (Walthamstow, E.)||Prior-Palmer, Brig. Sir Otho|
|Braine, Bernard||Harvie Anderson, Miss||Proudfoot, Wilfred|
|Bromley-Davenport, Lt.-Col. W. H.||Heald, Rt. Hon. Sir Lionel||Rees, Hugh|
|Brooman- White, R.||Hendry, Forbes||Rees-Davies, W. R.|
|Bullus, Wing Commander Eric||Hiley, Joseph||Ridley, Hon. Nicholas|
|Burden, F. A.||Hill, J. B. B. (S. Norfolk)||Ridsdale, Julian|
|Carr, Compton (Barons Court)||Hinchingbrooke, Viscount||Roots, William|
|Cary, Sir Robert||Hobson, John||Russell, Ronald|
|Channon, H. P. G.||Holland, Philip||Scott-Hopkins, James|
|Chataway, Christopher||Hopkins, Alan||Shaw, M.|
|Chichester-Clark, R.||Hornby, R. P.||Simon, Sir Jocelyn|
|Clark, Henry (Antrim, N.)||Howard, Gerald (Cambridgeshire)||Smith, Dudley (Br'ntf'rd & Chiswick)|
|Clark, William (Nottingham, S.)||Howard, Hon. G. R. (St. Ives)||Smithers, Peter|
|Cleaver, Leonard||Hughes-Young, Michael||Smyth, Brig. Sir John (Norwood)|
|Collard, Richard||Hutchison, Michael Clark||Spearman, Sir Alexander|
|Cordeaux, Lt.-Col. J. K.||Iremonger, T. L.||Speir, Rupert|
|Corfield, F. V.||Irvine, Bryant Godman (Rye)||Studholme, Sir Henry|
|Courtney, Cdr. Anthony||James, David||Sumner, Donald (Orpington)|
|Critchley, Julian||Johnson, Dr. Donald (Carlisle)||Temple, John M.|
|Crosthwaite-Eyre, Col. O. E.||Johnson, Eric (Blackley)||Thatcher, Mrs. Margaret|
|Crowder, F. P.||Kerans, Cdr. J. S.||Thomas, Peter (Conway)|
|Cunningham, Knox||Kershaw, Anthony||Thompson, Richard (Croydon, S.)|
|Curran, Charles||Kirk, Peter||Thorneycroft, Rt. Hon. Peter|
|Currie, G. B. H.||Kitson, Timothy||Thornton-Kemsley, Sir Colin|
|Dalkeith, Earl of||Lambton, Viscount||Tilney, John (Wavertree)|
|d'Avigdor-Goldsmid, Sir Henry||Legh, Hon. Peter (Petersfield)||Turner, Colin|
|Deedes, W. F.||Lewis, Kenneth (Rutland)||Turton, Rt. Hon. R. H.|
|de Ferranti, Basil||Lilley, F. J. P.||van Straubenzee, W. R.|
|Digby, Simon Wingfield||Linstead, Sir Hugh||Vane, W. M. F.|
|Doughty, Charles||Loveys, Walter H.||Vaughan-Morgan, Sir John|
|Drayson, G. B||Lucas, Sir Jocelyn (Portsmouth, S.)||Vickers, Miss Joan|
|du Cann, Edward||Lucas-Tooth, Sir Hugh||Wakefield, Edward (Derbyshire, W.)|
|Duthie, Sir William||McAdden, Stephen||Ward, Dame Irene (Tynemouth)|
|Errington, Sir Eric||MacArthur, Ian||Webster, David|
|Farey-Jones, F. W.||McLaren, Martin||Wells, John (Maidstone)|
|Farr, John||Maclean, Sir Fitzroy (Bute & N. Ayrs.)||Wilson, Geoffrey (Truro)|
|Wise, A. R.||Woollam, John||TELLERS FOR THE AYES:|
|Wolrige-Gordon, Patrick||Worsley, Marcus||Mr. Gibson-Watt and Mr. Whitelaw.|
|Woodnutt, Mark||Yates, William (The Wrekin)|
|Ainsley, William||Hall, Rt. Hon. Glenvil (Colne Valley)||Pavitt, Laurence|
|Albu, Austen||Hamilton, William (West Fife)||Peart, Frederick|
|Allen, Scholefield (Crewe)||Hannan, William||Plummer, Sir Leslie|
|Benn, Hn. A. Wedgwood (Brist'l, S. E.)||Hayman, F. H.||Proctor, W. T.|
|Benson, Sir George||Henderson, Rt. Hn. Arthur (Rwly Regis)||Redhead, E. C.|
|Blackburn, F.||Holman, Percy||Reynolds, G. W.|
|Blyton, William||Houghton, Douglas||Rogers, G. H. R. (Kensington, N.)|
|Bowen, Roderic (Cardigan)||Hughes, Emrys (S. Ayrshire)||Ross, William|
|Brockway, A. Fenner||Hunter, A. E.||Silverman, Julius (Aston)|
|Broughton, Dr. A. D. D.||Hynd, H. (Accrington)||Silverman, Sydney (Nelson)|
|Butler, Herbert (Hackney, C.)||Hynd, John (Attercliffe)||Skeffington, Arthur|
|Callaghan, James||Irving, Sydney (Dartford)||Smith, Ellis (Stoke, S.)|
|Castle, Mrs. Barbara||Jay, Rt. Hon. Douglas||Snow, Julian|
|Corbet, Mrs. Freda||Jenkins, Roy (Stechford)||Sorensen, R. W.|
|Crosland, Anthony||Johnson, Carol (Lewisham, S.)||Steele, Thomas|
|Grossman, R. H. S.||Johnston, Douglas (Paisley)||Stones, William|
|Deer, George||Jones, Dan (Burnley)||Summerskill, Dr. Rt. Hon. Edith|
|Dempsey, James||Key, Rt. Hon. C. W.||Swingler, Stephen|
|Diamond, John||King, Dr. Horace||Taylor, John (West Lothian)|
|Dodds, Norman||Lawson, George||Thompson, Dr. Alan (Dunfermline)|
|Dugdale, Rt. Hon. John||Lewis, Arthur (West Ham, N.)||Thomson, G. M. (Dundee, E.)|
|Ede, Rt. Hon. Chuter||Mabon, Dr. J. Dickson||Wade, Donald|
|Edwards, Walter (Stepney)||McInnes, James||Warbey, William|
|Evans, Albert||McKay, John (Wallsend)||Weitzman, David|
|Fernyhough, E.||McLeavy, Frank||Wells, Percy (Faversham)|
|Fitch, Alan||Marquand, Rt. Hon. H. A.||Wells, William (Walsall, N.)|
|Fletcher, Eric||Mendelson, J. J.||Wheeldon, W. E.|
|Foot, Dingle||Millan, Bruce||White, Mrs. Eirene|
|Forman, J. C.||Mitchison, G. R.||Wilkins, W. A.|
|Fraser, Thomas (Hamilton)||Morris, John||Williams, W. R. (Openshaw)|
|Ginsburg, David||Moyle, Arthur||Willis, E. G. (Edinburgh, E.)|
|Gordon Walker, Rt. Hon. P. C.||Noel-Baker, Rt. Hn. Philip (Derby, S.)||Wilson, Rt. Hon. Harold (Huyton)|
|Greenwood, Anthony||Oliver, G. H.||Woof, Robert|
|Griffiths, Rt. Hon. James (Llanelly)||Oram, A. E.||Zilliacus, K.|
|Grimond, J.||Padley, W. E.|
|Hale, Leslie (Oldham, W.)||Paton, John||TELLERS FOR THE NOES:|
|Mr. Cronin and Mr. Probert.|
§ The Solicitor-General
I beg to move, in page 32, line 13, to leave out from "payments" to the end of line 19 and to insert:in respect of which tax is chargeable by virtue of that section, or would be so chargeable apart from the foregoing provisions of this subsection, are made to or in respect of the same person in respect of the same office or employment, or in respect of different offices or employments held under the same employer or under associated employers, this subsection shall apply as if those payments were a single payment of an amount equal to that aggregate amount; and the amount of any one payment chargeable to tax shall be ascertained as follows, that is to say—The Amendment is designed to make the proviso to subsection (3) work properly in various sets of circumstances. At the moment, it is technically defective. I will not worry the Committee with that, but it also fails to take into 760 account certain circumstances which ought to be taken into account. Its object is to aggregate in certain circumstances two or more payments so that only one £5,000 deduction is allowed.
- (a) where the payments are treated as income of different years of assessment, the said sum of five thousand pounds shall be deducted from a payment treated as income of an earlier year before any payment treated as income of a later year; and
- (b) subject as aforesaid, the said sum shall be deducted rateably from the payments according to their respective amounts".
The circumstances which at present are taken into account are those where two payments are in respect of the same employment; for example, when one payment is made to compensate for a reduction in the emoluments of employment and the other where an employment is officially terminated. Secondly, there is the case where two payments are made in respect of separate offices under the same employer; for example, where one person occupies the posts of both secretary and director of a company and receives compensation in respect of each of those offices.
But there are two other types of case in addition to those I have mentioned which we ought to take into account. The first is where one payment is made by one employer and another by an associated employer. For example, a man could be a director of a number of companies in the same group and it 761 would be clearly wrong that he should be able to get up to £5,000 free of tax out of each of those. Subsection (5) deals with the associated employers, but does not cover all types of case and we are amending it in a later Amendment. As part of the process of amendment it is proposed to include a reference to associated persons in subsection (3) and to define the expression in the new subsection (5).
The second type of case which we have not taken into account at the moment is where payment is made to the executors of an employee who had died when he has already received a payment in his lifetime. To make quite sure that that case is covered there occur in the Amendment the words…or in respect of the same person …The subsection as drafted also omitted to say how the £5,000 was to be allocated between two of more payments. As the Committee will appreciate, that may be necessary because the payments may be taxed in different years, and even if they are taxed in the same year they may qualify for different reliefs.
The Amendment proposes to lay down two rules for determining the allocation. Where the payments are treated as income of different years the deduction should be given for the earliest year. The reason for that is that it avoids having to reopen settled liabilities when the second payment is made. But where the payments are treated as income of the same year the deduction is to be allocated rateably among the payments.
§ Mr. Diamond
May I ask two questions? I assure the Solicitor-General that this is for information only, because unless one has read the whole Clause and the Amendments in great detail it is very easy not to be aware of all the effects of the detailed conditions.
The first question is about the allocation of the £5,000. The £5,000 is not simply £5,000, but a minimum of £5,000, and that might apply in some circumstances, but, in other circumstances, might not apply at all. Where there are two amounts of compensation being paid in such circumstances where in one case the minimum of £5,000 would not apply at all, because it was covered by the other calculation, is the sum of £5,000 to 762 be allowed in one case and the other basis of calculation in the other?
The second question is what provision is there for the prevention of one person receiving more than one compensation from different employers who are not associated? The case to which my right hon. Friend referred was a case of associated companies, but the assumption behind this payment of compensation is that the person loses his job and does not get another job for some time at least, and in certain cases for a long time.
The racket is being covered in the case of associated employers, but what about the case of a man who goes from job to job and collects payments of compensation each time? These, apparently, are not covered, and he can get the full amount of £5,000 each time he is good enough to get a job and not good enough to keep it.
§ The Solicitor-General
I hope that the hon. Gentleman will excuse me from answering his first question. I should like to look into it and see how that works out under the Clause as amended.
On the second question, the hon. Gentleman is right. I do not think that the payment would attract the Clause at all, but there is a later Amendment which deals with a redraft of the definition of an associated person.
§ Mr. Millan
I am surprised at the reply to the first point made by my hon. Friend the Member for Gloucester (Mr. Diamond). My understanding of the Fourth Schedule is that the point made by my hon. Friend is dealt with there in great detail and with great complexity. Why has the Solicitor-General to look into this if it is in the Fourth Schedule? If it is not in the Fourth Schedule, what is the Schedule for?
§ The Solicitor-General
In that case, we can consider the matter when we come to the Fourth Schedule, and I am glad to say that my hon. Friend the Economic Secretary will be dealing with it.
§ Amendment agreed to.
§ The Solicitor-General
I beg to move Amendment No. 174. Would it be convenient to discuss also Amendment No. 175, which is an associated Amendment?
§ Mr. H. Wilson
On a point of order. It has become common practice to number the Amendments. That is done as a matter of convenience to the Committee, but surely it is not in order for the learned Solicitor-General to move an Amendment by referring to its number and not giving the Clause to which it refers and moving it in the usual way?
§ The Temporary Chairman
No doubt the Solicitor-General will move the Amendment in the normal form in the course of his speech.
§ The Solicitor-General
I think that on the last occasion I ended with the usual form, but so that there shall be no doubt I will start with the usual formula.
I beg to move, in page 32, line 29, to leave out subsection (5) and to insert:(5) For the Purposes of this section and of the Fourth Schedule to this Act, offices or employments in respect of which payments to which the last foregoing section applies are made shall be treated as held under associated employers if, on the date which is the relevant date in relation to any of those payments, one of those employers is under the control of the other or of a third person who controls or is under the control of the other on that or any other such date.Would it be convenient to discuss, also, the Amendment in page 32, line 42, at the end to insert:or to a person controlling or controlled by an employer".
§ The Solicitor-General
The object of the Amendment is to make sure that two deductions of £5,000 are not given in certain circumstances where it would be wrong for them to be given. If a man gets two separate payments connected with two employments under two quite separate employers he will be entitled to a deduction of £5,000 against each payment. That was the case which the hon. Member for Gloucester (Mr. Diamond) put to me.
If the two employers are associated, that is, if one is under the control of the other, or both are under the control of a third person, only one deduction of £5,000 should be allowable. A case that will obviously occur to the Committee is that of a director of two or more com- 764 panies in the same group. Subsection (5) as drafted dealt with the situation by providing that two payments should be treated as having been made by the same employer if one payment was made by the employer who at the date of either of the events with which the payments were connected was associated with the employer who made the other payment, and it went on to define the term "associated with" as referring to persons one of whom controlled the other, or who were under the same control.
But the subsection as drafted does not cover the case where a payment is made by one company in year 1, and another company in year 3, both companies being members of the same group in their respective years, but where there is a reconstruction of the group in between. The reason is, of course, that they are not both members of the same group at either of the relevant dates.
For example, company A makes a payment to an employee in year 1 when it is a subsidiary of company B. In year 3 company B makes a payment to the same employee at a date when it has just become a subsidiary of company P. In the meantime, by the time company B has become a member of the group, company A has gone into liquidation. That case is not covered, because at neither relevant date were both A and B under the control of P, and the Clause as drafted would allow more than one payment of £5,000 to be exempt in circumstances where it would obviously be unfair for that to occur.
The subsection as redrafted, together with the proviso to subsection (3) as amended, remedies the omission to deal with that type of case.
§ Amendment agreed to.
§ Further Amendment made: In page 32, line 42, at end insert "or to a person controlling or controlled by an employer".—[The Solicitor-General.]
§ Motion made, and Question proposed, That the Clause, as amended, stand part of the Bill.
§ Mr. Powell
I think that it would be wrong for the Clause to be added to the Bill without allusion being made to a very important matter which it involves. 765 If you look at subsection (1, a), Mr. Arbuthnot, you will see a reference to a payment made… on account of injury to or disability of the holder of an office or employment.If we add the Clause to the Bill the result will be that any such payment as that will not attract tax and I gather that there is no disagreement on either side of he Committee that a payment of that sort ought not to create a liability to tax.
If that is the view of the Committee, such a view implies that we regard that payment as compensation for a capital loss suffered by the person to whom it is made. He has suffered an irreplaceable capital loss of the ability to earn. By putting this into the Clause, we are declaring our opinion that being a capital loss no compensation in respect of it should be taxable.
It should follow logically again from that view of this Committee that in assessing, what compensation should be paid in those circumstances the prospective earnings of a person injured or disabled should not be reduced by reference to the hypothetical tax which he would have paid on those earnings if he had not been disabled or injured and had gone on to earn them. Unfortunately, even when we have added this Clause to the Bill, that will continue to be the position as long as this matter is governed by the decision of another place in the case of the British Transport Commission v. Gourley.
You will recollect, Mr. Arbuthnot, that in that case the compensation awarded to that late and distinguished engineer was reduced on appeal from the sum of some £37,000 to a sum of between £6,000 and £7,000, on the ground that allowance ought to be made, in computing the sum, for the tax which he would have paid had he not been injured but continued to earn at his full earning capacity.
The payment of compensation in the cases where payments of the kind described in subsection (1, a) fall to be made is at present governed, and will be governed unless Parliament does something about it, by the decision in Gourley, and the effect will be, if that situation continues, practically to frustrate what we are doing here and to defeat the declared and clear intention of the Committee. It will mean that, 766 although we have stated that we regard this as a capital sum not taxable, it will reach the recipient only after, in effect, the deduction of tax.
What is at least equally important is that it will put a dangerous weapon into the hands of the employer, who may be negotiating for a settlement out of court with the disabled or injured employee, for he will be able to say to him, offering him a sum which is manifestly inadequate, "If you do not like the sum I am offering, you can take the matter to court, but I may warn you that if you do take it to court, you will find"—see Gourley "that the —sum you will be awarded will be severely reduced in regard to your potential tax liability" This is a matter which could seriously affect literally hundreds of thousands of people, from the most high salaried to the most humble, to varying degrees.
It is something which should be of concern to all hon. Members, not least to those who are connected with trade unions, no small part of whose work is in connection with cases of this sort. It would be wrong for us to part with the Clause until we have heard from my hon. Friends and right hon. Friends on the Treasury Bench some recognition of the relationship between what we are doing here and the decision in Gourley and some indication that the quite unsatisfactory position which that present relationship represents will, at no distant date, be remedied.
§ 7.45 p.m.
§ The Solicitor-General
It may help the Committee if I intervene at this stage on the very important topic which my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) has raised. We recognise that this provision has a bearing on Gourley's case. On the other hand, it would clearly be quite unsuitable to use the Finance Bill to legislate on the decision in Gourley's case. My own guess is that the courts will not proceed on the basis that Gourley is unaffected by the Bill. The courts may well say that Clause 36 (1, a) strikes at the very ratio decidendi in Gourley and they may well go back to awarding gross damages, not net of tax, in the sort of case which my hon. Friend postulated.
§ Mr. Powell
My hon. and learned Friend of course recollects that in the discussion on the Gourlay case in another place it was common ground between both parties that the sum as awarded would not attract tax in the way that is provided in this Clause, so I find it difficult to share my hon. and learned Friend's conviction.
§ The Solicitor-General
I did not put it as high as a conviction, but it is a distinct possibility that that will be the approach of the courts. My noble and learned Friend the Lord Chancellor, particularly in the light of this new provision, will keep the matter under review with a view to legislation. I think that it would be desirable to see how the courts react to this provision. My noble and learned Friend's freedom of manoeuvre is not increased by the fact that his Law Reform Committee not only disagreed on its recommendations of what should be done on the Gourley decision, but split into three separate groups. However, I think that this brings a fresh factor in that situation.
The courts may well decide that this provision strikes at the basis of the decision in Gourley's case. I assure my hon. Friend that we will watch the situation very carefully and that my noble and learned Friend has the possibility of legislation in mind.
§ Mr. Mitchison
I am sorry that the hon. and learned Gentleman was not able to wait for me to ask him some questions, but perhaps he will now answer them when put to him. I find Gourley's case somewhat off the point here. What we are discussing is whether tax should be charged under the previous Clause in respect of payments on the termination of an office or employment.
§ Mr. Powell
No. We are discussing a paymentmade … on account of injury to or disability of the holder of an office or employmentthe words are disjunctive.
§ Mr. Mitchison
What we are discussing is paymentsmade in connection with the termination of … an office or employment by the death of the holder, or made on account of injury to or disability of the holder of an office or employment.768 All that the Clause does is to provide that tax is not to be charged on such payment.
I do not see how the Gourley case comes into the picture. When the courts have to assess damages in these cases they will take account of the change of the law made by this provision and it is not for us in this Finance Bill to tell them what they should do about it, unless we know quite clearly something which is within the scope of the Finance Bill and which we think requires to be done.
Is it not the position in respect of the Gourley case that something which was previously taxable and in respect of the taxability of which some damages were assessed in certain circumstances now becomes no longer taxable? Accordingly, it seems impossible, in the circumstances of Gourley's case being repeated, that if that were taken into account the result would be the same. If the Solicitor-General has anything to add to that I am sure that he will add it, but if that is the position what is all this about?
§ The Solicitor-General
Perhaps I should say that that is precisely what I intended to say and what I hope I did say.
§ Mr. Millan
Before we go any further, I wonder whether we could be absolutely clear about what this Clause does. The hon. Member for Wolverhampton, South-West (Mr. Powell) has assumed that this Clause will cover the sort of payment made in the Gourley case, but as far as I remember that was a payment not of an employer to an employee, but a payment by a third party. I was assuming, and, of course, I may be completely wrong, that the natural assumption was that this Clause had to be read in connection with Clause 35. In fact, the rubric to Clause 36 refers to exemptions and reliefs in respect of tax under Section 35.
When one reads Clause 35, the only construction which one can suggest on subsection (2) of that Clause is that this payment arises directly out of the termination of the employment, which would normally be a payment by the employer, although in the circumstances 769 provided for in subsection (1) it may be by any other person. The whole construction seems to be a payment by the employer in circumstances in which the termination of the employment has had something to do with the employer, and I therefore wonder if the Gourlay case comes under Clause 36 at all.
§ Sir Hugh Lucas-Tooth (Hendon, South)
I do not think that it is the effect of the Gourley case on this Clause with which we are now concerned, but that it is rather the other way round. In the Gourley case, counsel on both sides agreed that there would be no tax leviable on the payment, whether it was the larger one of £37,000 or the smaller one of £7,000, and that view was accepted by the court. Therefore, there is no impact on this Clause of that case.
What this Clause does is to make it clear beyond any doubt that if a payment is made out of court, that payment will be made free to tax, but as the Clause does not alter the Gourley ruling, it is equally clear that under the law as it will stand after this Clause becomes law, the court will still be bound by the decision of the House of Lords to award the smaller amount. Therefore, the position is that in the case that is settled out of court, the larger amount should be payable than in a case decided by the courts, because the court will be bound to take account of the existing law. That may produce entirely unfair results because, clearly, the employer will always be able to say, as my hon. Friend pointed out, "If you accept this from me now out of court, I can pay you a larger sum than you will be able to get, because the court will be bound to take account of the fact that Income Tax will be deductable under the law as it stands."
For that reason, I would press my hon. and learned Friend to consider this matter urgently. I do not think that the position is altered as a result of the change in the law so far as the law itself is concerned. What is clear is that the practical position will be altered because those who are concerned with making these arrangements will be able to point to this specific provision and to say, "There is no doubt about this. You should take what I am giving to you and be thankful for it, because you may get less otherwise".
§ Mr. Diamond
The Committee will be relieved to hear that I do not propose to refer to the case even by the name of the gentleman by which it is known, because I think that there has been enough diversity of opinion about it already. I want to ask for the views of the Government in regard to subsection (1, a).
I fear that the exemption granted is too great. This may seem odd, because on the face of it it would seem reasonable that a payment made to the estate of a dead person should not be taxable, but I think that it goes a little deeper than that.
I take the ordinary case in which a director of a company which he controls wants to provide his estate with a capital sum which would be provided out of the taxed profits of the company, yet neither he himself nor his estate would be required to pay Income Tax or Surtax. The company then proceeds to appoint him a director for life, and let us assume that he works adequately and satisfactorily up to the age of 75. At the age of 78—and I hope that I am making no reference to anybody present about that age—he begins to feel a little uncertain. His mind works a little less well than usual, and he begins to show signs, or his colleagues conveniently so regard them, of suffering from a disability, and not being able to carry out his job.
They award him a very substantial pension, which becomes a free-of-tax charge on the company's accounts, and therefore the revenue is deprived of tax in respect of that large sum. The director receives this large compensation, which may be £20,000, £30,000 or even £40,000, free of tax, because Clause 36 (1, a) says that tax shall not be charged on payments made on account of the disability of the holder of the office. Or, if the person concerned is appointed a director for life, at some time or other he will die and he will die in office. He is appointed for life, and unless he retires or is dismissed by virtue of his disability, advancing age and lack of mental capacity to do the job, he will die in office and his estate will receive this very large sum of money.
Is it right and is it what Parliament intended that there should be large sums of money awarded which would be charged to the accounts of the paying 771 company, on which the Revenue will lose the tax and on which the recipient will bear neither Income Tax nor Surtax? Would it not, therefore, be reasonable to do what one surely has in mind in these circumstances and have regard to the death of a person in employment? Let us assume that he retires at a reasonable age, say, 65. If he dies in employment up to the age of 65, presumably, it is a misfortune, but why carry on until, inevitably, either he dies or suffers a disability and inevitably gets a tax-free income out of the company?
§ 8.0 p.m.
§ The Solicitor-General
I will deal, first, with the point made by the hon. Member for Gloucester (Mr. Diamond). I think that he was correct in his reading of Clause 36 (1, a). Of course, in cases of death after retirement the position would not be affected, but where death occurred during the holding of an office, or a payment was made in connection with the termination of the holding of an office or employment by death, the position would be affected.
Obviously, the case with which the whole Committee would wish to deal by way of exemption is that, say, of a man in middle life who, suddenly, is struck down, it may be with a coronary thrombosis. Clearly, it is right that such a man should be able to cover himself by an appropriate scheme, or by a voluntary payment. I do not see how we can draw the line other than by dealing with it in the way we have. The case of the aged director is met by provisions in the Companies Act and I think that we must leave it at that. I cannot see any reasonable way of relating the amount of compensation to the degree of injury and fitting that into a sliding scale of age.
I should say that it is right to proceed in the way we do in this subsection. The point has occurred to us. Obviously, it is open to abuse in the way the hon. Gentleman described, but I think that the cases would be so rare and the complications of legislating for them would be so great that they should be disregarded. However, I will look into that aspect again.
I do not think that there is much I can add about the case of Gourley except to say, in answer to the hon. Member for Glasgow. Craigton (Mr. Millan), that I 772 am sure that my hon. Friend is right when he says it is relevant to this Clause; and the reason why it is relevant is that Gourley's case did not turn on the fact that the injury was caused by someone other than his employer. If, for example, the injury had been caused by the employer to the employee in the course of his employment by reason of the negligence of the employer, the decision so far as I can see would have been the same.
Therefore, the problem is raised squarely in the way that my hon. Friend mentioned. He and my hon. Friend the Member for Hendon, South (Sir H. Lucas-Tooth) may well be right, but I say that another view is possible. I think that we ought to see how the courts react, but I assure the Committee that this matter will be kept in mind.
§ Question put and agreed to.
§ Clause, as amended, ordered to stand part of the Bill.