CHARGE ON GAINS FROM ACQUISITION AND DISPOSAL: LAPSE OF TIME RELIEF

HC Deb 22 May 1962 vol 660 cc236-328

1. In this schedule the word "year" means a period of twelve calendar months and also includes an incomplete year immediately before disposal.

2. A percentage of any gain accruing from the acquisition and disposal of a chargeable asset, being gains taxable under section nine of this Act, shall be disregarded for all the purposes of Chapter II of this Act other than the furnishing of information; and the percentage so disregarded is in that Chapter called "lapse of time relief".

3. The percentages to be so disregarded shall be those set out in the following Table:—

TABLE
Years between acquisition and disposal	Percentage where the disposal is of land	Percentage in any other case
1	Nil	Nil
2	Nil	12½
3	Nil	25
4	5	30
5	10	35
6	15	40
7	20	45
8	25	50
9 and 10	30	55
11 to 13	40	60
14 to 16	45	62½
17 to 20	50	65
21 to 25	55	67½
26 to 30	60	70
31 to 40	65	72½
41 to 100	70	75
over 100	75

Before calling the hon. Member for Cardiff, South-East (Mr. Callaghan) to continue the debate, I must make one point clear regarding the separate Divisions which were promised on the Amendment in the name of the hon. Member for Brierley Hill (Mr. Talbot), that in the name of the hon. Member for Enfield, East (Mr. Mackie), and the Amendment in line 31, if the Committee so desires. We shall have no difficulty in having a Division on the Amendment to line 31, but the position regarding a separate Division on the Amendment to line 29 in the name of the hon. Member for Enfield, East is not so easy, because that will depend on whether the Amendment in the name of the hon. Member for Brierley Hill is moved or not.

If the Amendment in the name of the hon. Member for Brierley Hill is moved and a decision is taken, with or without a Division, in the sense that the word "three" should stand part of the Clause, then we cannot immediately proceed to another Division on that identical question of the word "three" standing part of the Clause. It would mean that the Amendment in the name of the hon. Member for Enfield, East could not, in that event, be called for a Division. The fate of this Amendment is, therefore, dependent on what may or may not happen to the first Amendment to line 29, which may, in fact, not be moved at all, according to what is intended.

Mr. John E. Talbot (Brierley Hill)

Arising out of your statement, Sir William, may I say that I would have no wish to press the Amendment in my name to a Division, and that at the appropriate time I shall ask leave to withdraw it or have it negatived.

The Chairman

I take it that the hon. Gentleman does not wish to move his Amendment, and I think that this will meet the convenience of the Committee.

Mr. James Callaghan (Cardiff, South-East)

In resuming the debate I should like, first, to thank the Chancellor of the Exchequer for introducing into the Bill Clauses which give us the opportunity of discussing a capital gains tax because, as the right hon. and learned Gentleman truly said, his tax is not a genuine capital gains tax. It is a political gesture designed to appease certain people in this country, which it has entirely failed to do. It bears no resemblance at all to a strict capital gains tax.

The Amendment proposes to substitute for this imitation in the Bill a genuine capital gains tax. I hope it is clearly understood that that is our intention. We believe that this presents an opportunity for broadening the tax base by taxing a number of transactions which yield a substantial profit, which at present yield no revenue at all to the nation, but which provide an adequate reservoir of taxable capacity.

We see no reason at all, on grounds of morality or expediency, why such transactions should not yield some revenue to the nation if it is administratively possible to arrange this. I should like to hear what philosophical objections there are to the notion that any income in anybody's hands, no matter how derived, provided that it can be administratively collected, should not, if it is equitable, yield something to the Revenue for other purposes.

Mr. Frederic Harris (Croydon, North-West)

Does that mean that the Labour Party would definitely tax pools wins?

4.0 p.m.

Mr. Callaghan

It is remarkable—and perhaps a sign of guilt—that hon. Members opposite should, now for the third time in the couple of hours' debate we have had on this subject, seek to turn the whole of the discussion away from the tax of genuine capital gains into a discussion about football pools where they hope to play on the fear of the small investor so that by throwing out the proposed tax they might be left to their gains. If the hon. Member for Croydon, North-West (Mr. F. Harris) will possess his soul in patience and remain in the Chamber, he will find that I shall come to that point later.

It seems typical of the approach made by the Conservative Party throughout the whole debate that the first question, almost the only question, they have asked is not how we should deal with the vast profits arising out of land speculation and the vast gains made on the Stock Exchange which should yield some revenue to the nation, but whether they can frighten the football investor into throwing out this idea through being afraid for his own wins. I hope that we can raise the level of discussion beyond that, but I shall come to that point later and I shall deal with it.

There seems to be no argument that large gains have been made in this way. Some people would argue whether they derive from any particular skill. They certainly derive from very little sweat, but, if income is taxed, I cannot see any reason at all why capital should not be taxed. There has been the traditional distinction, thought up by a horticulturist, that the basis should be taxation of the fruit but not of the tree. True capital is supposed to represent a tree and income is supposed to represent the fruit. If we pursue that analogy a little we see how clearly inadequate it is. It is astonishing how a very clever metaphor can hide the truth from the nation for a long time.

If I pursued it I would say that certainly, in my gardening pursuits, if I want good fruit I must prune the tree. If I allow the tree to grow unchecked I cannot get good fruit from it. To continue the horticultural reference, there is no reason why we should not prune the tree as well as taking the fruit. The argument put up by hon. Members opposite bears no relationship to the reality of the situation. Large capital gains have been made which are escaping taxation and, as the Chancellor of the Exchequer will readily acknowledge, will continue to escape under his proposals.

Another reason why I support a proposal of this sort is that it would help to decrease tax avoidance. I am sure the Chancellor will not claim that for his proposal. Our Amendment would certainly make it mare difficult to avoid the payment of tax. I hope that the Chancellor will agree that that is a desirable thing. Tax avoidance has reached the level of a national sport. It has assumed such degrees that, to use the words of the Chancellor, some of the best brains in the country are engaged in finding ways of avoiding taxation. If I recall correctly, he used that very phrase about the capital gains tax when he refused to introduce it. I think that he will agree that the best brains in the country do not need to be engaged to avoid his taxation.

Even those of us who are not expert on Stock Exchange affairs can see that if we pay tax only on gains realised in the space of six months, by waiting for six months and a day we can avoid the tax altogether. I would not say that this tax was designed to be evaded, but I can see no easier tax to avoid than this one. A permanent capital gains tax levied on securities and land would yield a substantial sum and would be much more difficult to avoid because, by its very nature, it would be a permanent tax.

I hope that this argument will continue if the Government continue to oppose a capital gains tax. Let us continue the discussion in the country and see what the people think about the rights and wrongs of the situation. This is a challenge I should like to take up. I should like hon. Members opposite to take it up and argue on it because I believe that there is a very fruitful revenue yield to be derived from it. What could we do with that revenue? We could embark on some of the projects which the Financial Secretary told us yesterday he wants to see.

The hon. Gentleman agreed with me that he wanted to relieve people earning five guineas a week from payment of tax. He would like to assist a married couple who pay about 5s. a week in tax and have an income of only £8 10s. a week. I am suggesting to the Chancellor ways in which he could begin to do that. If I am asked whether I think that a capital gain made by buying a piece of land, holding it for a few years and then selling it, should yield a revenue to be used to relieve the poorest in the country, I have no doubt what my answer is. I should have thought that those on the Government benches should answer in the same way if they really believe in equity. I would be possible if we had a Conservative Chancellor, or, indeed, any other Chancellor, to consider the burden of direct taxation, of Income Tax itself.

We have got into a bit of a tangle in discussions about this matter. If I am partly responsible, I accept my share of responsibility. There seems to have arisen the idea that we hold the view that the direct taxpayer is not paying his full share. That is not my view. My view is that the distribution of the burden within the total amount of Income Tax paid is wrong, that the people at the bottom of the scale pay too much and people at the top pay too little. That has been so ever since 1955–56, when the big reliefs started to have effect in payment of Surtax and Income Tax. [An HON. MEMBER: "It was before that."] I agree that there was a reduction in Income Tax before that, but the real slide was undoubtedly after the 1955 General Election. Statistics show that quite clearly. Whether hon. Members opposite were rejoicing in their majority so much that they did not care about the country's situation I do not know, but the fiscal consequences are quite clear to anyone who studies the figures.

The Government have so distorted our fiscal system that they have made the poorer people—by that I mean anyone earning £15 to £20 a week—pay more and those in the Surtax bracket pay less. I am suggesting that a way in which we can recover some of that revenue is to adjust the burden inside the Income Tax field. When I consider the reaction which many people have had to this idea, I have no doubt at all that the country would find this socially acceptable. Indeed, it would blame the Government for not having taxed this fruitful field earlier.

It is not as though we were unique in considering this matter, or that it is the first time it has been considered. Estate Duty has been with us for many years, we have had legacy duty and succession duty and a whole series of taxes of that sort. Other nations do not hesitate to put a tax on capital. It is well known to everyone that in the United States there is a short-term tax such as that proposed by the Chancellor and there is a long-term tax as well. In Germany and in Switzerland capital gains are taxed.

I mention those countries because I want to meet in advance the arguments which I suppose will be put and which it is difficult to answer because the arguments are hypothetical, that a capital gains tax is a discouragement to investment. If that is so, how do we account for the situation in Germany, in Switzerland and in the United States? Clearly, a capital gains tax can be a discouragement to investment, but it depends on what kind of capital gains tax it is. It depends on the rates, whether we abate the amount of capital which has accumulated and a number of things, but that a capital gains tax can yield a substantial amount of revenue and, at the same time, not be a discouragement to genuine savings and investment, there can be little doubt.

In discussion of the Amendment, the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), speaking last night, said that it would freeze wealth and stop the sales of land. I just do not believe that for a moment. I doubt whether he had understood the full purport of the Amendment.

I do not want to attach any undue significance to the Amendment. It is a useful peg on which to hang this debate, because it serves as an illustration of how a capital gains tax could be devised. I attach no greater and no lesser weight to it than that. If I were asked to bind myself to the rates of tax or the number of years contained in the Amendment, I should have to refuse, for natural and obvious reasons. It would be foolish for the Opposition to try to construct a tax without the help of the Board of Inland Revenue and other experts, which we would have if we were the Government. I want to make quite clear that this Amendment is for the purpose of illustration.

To meet the point made by the hon. Member for Walsall, South, let us see what these illustrative figures would do. I take two examples under the Amendment which, he says, would stop the sale of land and slaw down, if not stop, the sale of securities. The first concerns a piece of land bought for £500 and sold ten years later for £1,500. That is not an unusual figure; indeed, it is a very modest figure. That is a capital appreciation of £1,000.

Under our Amendment we have, first, a disregard far the length of time that it has been held. It would mean, in this case, £300. We would then tax the balance at the standard rate of 7s. 9d. in the £, as it is at the moment. The tax payable on £700 at 7s. 9d. in the £ would be £270. So, out of a capital gain of £1,000, he would be left with £730, if the standard rate of tax had not altered meanwhile. If it had gone up, or down, naturally, the resulting sum would be more, or less. Will anyone tell me that this would freeze the sale of land? If a man bought a piece of Land for £500 and there is an interval of ten years between the buying and the selling, because it is not proposed to make the tax retrospective, will anyone tell me that he will not sell it because he will get only £1,200 instead of £1,500 for it? If so, I shall not believe it.

Let me take the case of a security. Under our Amendment, if it were bought for £400 and sold in eight years' time for £1,000—a modest rate of appreciation in present-day terms—the capital gain would be £600. Under the table which we have put in, we would disregard 50 per cent. of that £600. The investor would pay tax on £300, which, at the standard rate, assuming it to be 7s. 9d. in the £, would be £116. The net gain that such a person would be left with would be £484.

I ask hon. Members to accept those figures for the moment. They can check them later. I am saying that under the Amendment a security bought for £400 would still yield, after payment of the capital gain, even under the table which we have constructed for the purpose of illustration £884 instead of £1,000. Will anyone tell me that that will ruin the Stock Exchange or stop investment? It so, I shall not believe a word of it.

The simple truth, as I understand this, is that hon. Members opposite are massed here this afternoon to reject the Amendment, and I have no doubt that they will succeed in doing so. But the Chancellor has opened up a very fruitful financial vein, which could yield very great profit to the nation. It is one which would enable us to do a great many things which would assist both in the redistribution of wealth and in the creation of a number of fruitful enterprises that we cannot afford to finance at present. It is for these reasons that I have deployed at some length the case for a genuine capital gains tax.

I was asked earlier—indeed, the only question asked so far by hon. Members opposite—about football pools. A number of considerations come up straight away. If we have a capital gains tax, then, in theory, we should tax every capital gain, whether it is pictures, jewellery, football pools, or anything else. That, I think, is the theory of a capital gains tax and, indeed, that is the practice in a number of countries. Nevertheless, for the reasons which I shall give, I do not believe that it would be right to apply that in this country without adjusting a great deal of other taxation.

4.15 p.m.

One reason—it is a very important reaon—is that the football pool stakeholder pays at present a very considerable amount of revenue into the Treasury. He pays 33 per cent. duty on every stake. That is the contribution before we start. It is a very substantial sum. In fact, out of total stake money of £110 million, £33 million goes in duty —the amount of duty being the same as the percentage. This, to my mind, is a very considerable sum to mulct from this industry. I do not know whether hon. Members opposite want to tax football pools or not, but by their interest in them I begin to suspect that they do.

I say, for reasons that I shall give, that it would be unfair to do so in this case, and I also believe that it would be administratively impossible. How would hon. Members opposite envisage taxing every small gain of ls. 3d., £5, £10 or £15, all the dividends that accrue every week? If we did that, we should have to allow the stake money on which they did not get the dividend as a loss. Hon. Members opposite must answer this question if they are serious about this matter. I do not think that they are serious. I think that they are trying to use the football pools as a red herring to destroy the serious case that has been made from this side. It is administratively impossible, in my view, to tax football pool winnings in this way, nor, in view of the amount of tax taken out by means of a direct impost of this sort, would It be right to do so. The sum of £33 million out of £110 million is very substantial. I dismiss this because I believe that it is a red herring.

What we would like to do is what the Government are doing, but to make it a permanent tax, namely, tax securities and land gains in the way described in the Bill, but make it a genuine capital gains tax. I hope that that is clear. If any hon. Member opposite who is interested in football pools thinks that I have not made the position clear, I am ready to give way so that a question may be asked.

Mr. Edward du Cann (Taunton)

Would not the hon. Gentleman agree that there is a great deal more in this than mere mathematics? What is important primarily is the psychology of the matter. There are many of us who feel very strongly that, on the whole, it is quite wrong to encourage betting in any way. Indeed, I think that it would be right to discourage the populace if it is tending to become a nation of bettors. It would be much better if it became a nation of people concerned in putting their money into productive industry for the national economy.

Mr. Callaghan

I should have thought that there was sufficient discouragement to the pool stake holders when the Government take 33 per cent. of everything that they put in.

Mr. du Cann

It does not seem like it.

Mr. Callaghan

If it does not seem like it, the hon. Member will have to do something about it. No one on the Stock Exchange is told that, if he invests his money, 33 per cent. will go to the Chancellor of the Exchequer, irrespective of whether he gets anything from it or not. The scales are already heavily weighted against the football pool investor and very heavily in favour of the Stock Exchange investor, even taking the Stamp Duty into account.

Mr. F. Harris

If the hon. Gentleman reads HANSARD tomorrow he will find that he said that tax, in his opinion, should apply wherever profit is derived, so how can he leave out football pools and things like that?

Mr. Callaghan

If the hon. Member will look at the Finance Acts, he will find that they are studded with exemptions. The next Clause deals with the relief of taxation on the payment of Army bounties. It is exactly the same proposition. I do not know whether hon. Members opposite intend to make propaganda in the country about this or not, but I suspect that they will. If so, they will be telling deliberate falsehoods, in view of what I have said. I hope that they will meet the case on its merits. It is a very strong and difficult case to meet, if they do argue it on its merits and not on the basis of red herrings.

Sir Cyril Osborne (Louth)

It is unfair of the hon. Gentleman to say that we shall make deliberate propaganda and tell falsehoods when he does not know whether we are to make propaganda.

Mr. Callaghan

The hon. Gentleman knows very well that the Prime Minister won the last General Election on a falsehood.

Sir C. Osborne

Face the issue.

Mr. Callaghan

Do not ask me to face the issue. I am facing it strictly.

What I am frightened of is that hon. Members opposite will try to dodge it by talking about football pools all the time. The only questions we have had from hon. Members on the other side so far have been about football pools. Are they not interested in anything else? If they were, surely the discussion would turn on those other questions. It is rather shabby that hon. Gentlemen should spend all their time discussing football pools.

I have made quite clear what we would do. Let them state what they would do in these circumstances. Let them answer the case for a capital gains tax in the form in which I have put it. I believe that there is no answer to it. The right hon. and learned Gentleman's proposal is puny, weak, flaccid and irritating. He himself says that it will yield no revenue. In my view, it is a tax which bears no resemblance to the needs of the situation or what could be got. As the right hon. and learned Gentleman said, he has deliberately imposed it so that the wage earners should feel that there was fair treatment between the two sides of industry. But he is not going to raise any revenue from it. This is a foolish thing, both to say and do. Political taxes of this sort will not satisfy anyone.

We are meeting here today on the very day on which the Ministry of Labour's index of retail prices has had the largest increase that it has had within my recollection for eighteen months.

Mr. Douglas Jay (Battersea, North)

For ten years.

Mr. Callaghan

I can hardly believe that, but my right hon. Friend will no doubt look it up. It may well be right that it has not gone up two points in a single month.

What is true is that during the last twelve months it has increased by at least 5 per cent. The ordinary wage earner, who is being asked either to accept no increase in pay or to limit his increase to 2 per cent., is facing an increase in the cost of living of at least 5 per cent. He is being asked to face today a genuine reduction in his real standard of living because of the increase in the index of retail prices.

I cannot discuss an incomes policy today, because I would be out of order. If we are to have sacrifices like this, we on this side of the Committee have the right to ask that where there is taxable capacity, and it can be made to yield a source of revenue which would be available to meet the Chancellor's needs, it should be taxed. That is the case for a capital gains tax. It has been demonstrated in many countries that it can be done. It could be done here. What the Chancellor has proposed is merely a pale and feeble imitation of it. It is for that reason that we are pressing this Amendment this afternoon.

Mr. Frank Bowles (Nuneaton)

I had hoped to speak on this subject on the Second Reading of the Finance Bill, but at that time I was not able to complete sufficient studies to enable me to say what I wanted to say. When I was in America during the Christmas Recess I discussed with two lawyers, one in Washington and one in New York, how the capital gains tax worked there. As we are discussing this subject, I think the Committee might be interested to realise that nobody seems to be offended by it. There have always been controversies and arguments about whether capital gains should be taken into account in their system of income tax.

It is argued, for example, that a capital gain resulting from a decline in the interest rate has little in common with a gain attributable to profits being retained by a company. Another view is that capital gains should not be construed as income but should be completely free from taxation. The capital gains tax was said, in the arguments which have been going on for years, to be especially discouraging to the employment of risk capital. It has been said that it would block economic progress.

An additional argument has been that capital gains are usually the result of gradual capital growth over the years. Therefore, taxation of such a gain in any one year as though it were income accrued in that year is regarded as grossly unfair. In many cases capital gains do not indicate increased ability to pay taxes—for example, all those gains which arise from changes in prices.

As lawyers probably remember, in the post feudal Europe all land was usually entailed. Therefore, there was no possibility of selling land out of the family. In those days there was a conception that capital was a res—a thing. For example, a Government bond would be a res. So would land. They regard any fluctuations in the value of a Government bond as being no change in the investment. The bond would still be there, unless it was sold. In exactly the same way, the increased value of the bond would be rather like land where certain water had receded. The result would be that there was more land but the thing—the res—would be just the same.

The United States of America followed this conception of Europe. It was thought there, however, that a capital gains tax would be unconstitutional in the years when the Acts were first passed, unless the capital gains were realised.

Some people would make no differentiation between capital gains and other forms of income. It is pointed out that exemption benefits mainly the wealthier taxpayer. In the United States the federal tax on capital gains for many years represented a middle ground between the two views. From 1942 onwards only one-half of long-term gains has been taken into account in arriving at net income. The payer may elect to have long-term capital gains taxed at a special rate in lieu of the regular rates. Therefore, no long-term gain is taxed above 25 per cent. Short-term gains of six months or less are paid at the regular rates of income tax and surtax. Losses from sales of capital assets can be offset only against capital gains plus 1,000 dollars of other income.

Five categories of assets are excluded —inventories, property held for sale to customers in the ordinary course of the taxpayer's trade or business, depreciable business property, real property used in a taxpayer's trade or business, and obligations of federal and state governments issued after 1st March, 1941, on a discount basis and maturing in not more than one year.

In 1942 many industries—metals and metal products, machinery and accessories, automobiles and accessories, textiles, etc.—were asked this question, "Do you regard the present tax provisions covering capital gains and losses as reasonably satisfactory?" I need not go through them all. Metals and metal products returned 56 per cent. of affirmative replies. Textiles returned 65.2 per cent. of affirmative replies. Automobiles and accessories returned 33.3 per cent. of affirmative replies. Paper and paper products returned 71.4 per cent. of affirmative replies. Out of the total number of replies, 56.1 per cent. were in favour of this capital gains tax. In their opinion, it had worked satisfactorily.

4.30 p.m.

I might point out to the Chancellor that the difference is that the tax on long-term capital gains is not more than 25 per cent. It is not the full rate of Income Tax and Surtax, and it is very important to remember that. The view was that it was the extraordinary wide gap between the rate of capital gains tax and the rates of ordinary Income Tax which diminished the deterrent influence of the former and brought more realisation of capital gains. There seems little doubt that the 25 per cent. capital gains tax there now looks low as compared with the taxes on ordinary income. It was, therefore, a smaller psychological obstacle to sales than the absolute level might suggest. Because it was widely regarded as a bargain rate it probably gave some investors a positive stimulus to "take" the capital gains. In other words, the impetus for selling would not exist if capital gains were subject to the same high rates as dividends.

A capital gains tax has been in force in the United States for either 60 or 80 years—

Mr. Callaghan

Sixty years.

Mr. Bowles

Yes, I thought that it was sixty years. A Revenue Act introducing a tax on gains from stock was passed in 1862, but that was held to be unconstitutional unless the gains were realised.

As I say, this form of taxation has been going on in America for sixty years, and my hon. Friend the Member for Cardiff South East (Mr. Callaghan) has mentioned European countries where it also applies. Many people say that if we went in for this capital gains tax, our economy would go bust. The United States economy has not bust. It has done exactly the opposite—it is robust. There is therefore no need for the terror that hon. Members opposite appear to have of this very modest Amendment.

Throughout the history of this tax there have always been people finding loopholes in it. That occurs in the United States, and it will probably occur here when we get it into force. There will be those who, all the time, will be advising their clients how to get round it, and I hope that the Treasury's advisers, and the very learned Parliamentary draftsmen, will try to be just as clever in stopping up the loopholes in future Measures so that the tax will be really efficient and effective.

I have not gone into the social arguments of justice, and so on, because those have been already put forward, but I thought that it might be useful to show that the history of the tax in the United States demonstrates that there is no evidence that such a tax deters investment.

Yesterday the hon. Member for Walsall, South (Sir H. d'AvigdorGoldsmid) said of these Amendments: The force of them is to freeze the situation as it exists today. A little later he said: But the Amendment is not designed to achieve that object. Indeed, it will produce exactly the opposite result. If, by some strange stroke, the Amendment is adopted, people who own land will do nothing at all with it. Thanks to the guidance which we have been given. they will know that the best thing is for them to do nothing with their land, for seventy-five years according to the Amendment of the hon. and learned Gentleman, …".—[OFFICIAL REPORT, 21st May, 1962; Vol. 660, c. 157.] The history of the working of the tax in the United States of America and elsewhere shows that statement to be nonsense, and I hope that the Chancellor of the Exchequer, who shows great courage, although I disagree with him, will next year legislate for a tax not only on short-term but also on long-term capital gains.

Mrs. Barbara Castle (Blackburn)

I support the Amendment moved by my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) because it seems to be the only way in which we can bring any kind of sense at all into this Clause. I am interested to see that since my hon. Friend successfully laid, once and for all, the bogy of football pools on which hon. Members opposite have been so anxious to concentrate, they seem to have lost a considerable amount of interest in the Clause.

We are being asked to agree to the introduction of a new piece of taxation which, if the Clause goes through in its present form, is absolutely mystifying. I am quite genuinely bewildered as to what this tax is supposed to do, or what the Government think they are achieving by it. We know that the tax is not being levied to raise revenue. The Chancellor himself in his Budget speech said, "I can't tell you the yield but, in any case, I am not interested in the yield. That's not the idea behind this tax."

That, to begin with, is a rather astonishing admission for a Chancellor to make. For a Chancellor of the Exchequer to say that he is not interested in the yield of a tax is rather like a bookmaker saying that he is not interested in the odds. Neither is running a philanthropic institution. We do not have an elaborate tax structure except to raise revenue. We are told that this tax is to have a political effect, but how can tax which does not raise any revenue at all have any political effect? How can something which does nothing do anything?

It might be argued that, once again, the Government have introduced the tax for the sake of appearance, but this tax has fooled nobody. It certainly has not fooled the Stock Exchange. In fact, the day after it was introduced, there was an absolute boom in property shares, indicating the relief of the property investors when they found that this short-term speculative gains tax was completely phoney, and would not reduce their income at all.

Since the tax was introduced, The Times index of share values has continued to rise steadily. It rose the day after the tax was announced, and it has gone on rising—

Mr. du Cann

As a simple matter of fact, it is not true to say that the index of ordinary shares has shown a consistent rise since the introduction of this tax. The market has been particularly weak very recently. One of the immediate effects that the introduction of the speculative gains tax has had on the Stock Market—which many of us want to make the finest market in the world, particularly if we go into the Common Market—has been to decrease turnover, which is much to be deplored.

Mrs. Castle

The Times index of share values stood at 132.61 immediately before the Budget, rose to 133.45 at the end of the day after the Budget announcement, and had risen to 134 at the end of April, three weeks after the Budget.

It is perfectly true that there are constant admissions of economic failure and disaster peppering, as it were, the lifetime of this Government from month to month, but it is fairly clear, taking these three figures together, that the psychological effect of the tax was not one of alarm and despondency.

Mr. A. R. Wise (Rugby)

From the figures which the hon. Lady produced, I should not consider that there was a boom in share prices if there was a total rise of only 1¼ per cent.

Mrs. Castle

Had we had the introduction of a tax which was going to make capital gains pay their fair contribution to the income of the economy I am sure that the hon. Member for Rugby (Mr. Wise) would have expected share values to decrease and not to rise.

In addition to what I was saying earlier, I do not believe that the tax has fooled even hon. Gentlemen opposite. I wonder if hon. Members now present heard the moving speech made yesterday by the hon. Member for Brierley Hill (Mr. Talbot). He had no illusions about it having any fiscal or psychological effects. He said: … let us have no more talk of social justice. The spring of justice in this place "— has been running— through the muddy waters of expediency…" —[OFFICIAL REPORT, 21st May, 1962; Vol. 660, c. 153.] What, therefore, is the tax supposed to be? My hon. Friends and I are getting accustomed to having the Government steal our policies, distort them and then introduce their version because they know that our philosophy and economic analysis is irrefutable. To prop up their tottering administration they must borrow some of the main planks of our policy. We saw that happen over superannuation. We produced a national superannuation scheme of such obvious fairness that the Government had to rush through their distorted graduated pension scheme. Then we had planning. Despite what we had said, we were sneered at by the Prime Minister at one election after another about our being nationalisers and planners while he spoke of Tory freedom. Now we have "Neddy".

4.45 p.m.

For a considerable time we have agitated that a fair capital gains tax should make a contribution to the Revenue. The Government found this argument irrefutable and they have become known as the "copy-cat Conservatives" and they have, therefore, produced a copy-cat edition of the capital gains tax. As I say, they produced their graduated pension scheme and now "Neddy" is an edition of the real thing. The Government are not pretending that this is a capital gains tax, for we have heard the Attorney-General and the Chancellor of the Exchequer saying, in effect, "No, this is not a capital gains tax"—so what on earth is it supposed to be or to do?

It is not much use having a fig leaf so transparent as this one, for it is carrying political indiscretion—I am tempted to say indecency—to terribly great lengths. Yet the Government know perfectly well that one must, if one is attempting to introduce an incomes policy, have a capital gains tax to balance it. That is why they are making this half-hearted parade. If the Amendment is not accepted what will be the economic trend over the next few years? The Government are seeking to enforce an incomes policy, but so far it has merely taken the form of restraint on wage increases. Every time the Government are successful in denying to any section of the community—whether nurses, probation officers or engineers—an increase in wages they are enabling industry to make higher profits that will go to the people whose incomes are already very high.

No one can suggest that the Government have been proposing to offset that by equivalent restraint on dividends. In the Budget debate the Financial Secretary to the Treasury said that the Government do not believe in a policy of limiting dividends as one might limit wages. But even if they were prepared to limit dividends that would not get to the kernel of the matter, because it would merely mean that the dividends were ploughed back so that the shareholder would be merely postponing his increased enjoyment.

A wage denied is a wage lost for ever. A wage increase that is not enjoyed today is not put in the bank. We do not still have the post-war credits system and. anyway, some people arc still waiting to cash theirs. When the Government say to the nurses, "You shall not have the increase for which you have asked", they are denying them that consumption for ever. That denial is being made at a time when they are giving an immediate increase of enjoyment to other people. It is being done in such a way that the Government are increasing the long-term enjoyment of those who will stand to benefit from that wage restraint.

This is the overwhelming case for a capital gains tax. Hon. Gentlemen opposite know in their hearts that the Government are today carrying through an incomes policy in a free society, with a free trade union movement with free bargaining machinery and are, at the same time, saying to the workers, "Your restraint, sacrifice and patriotism will increase our profits." The Government can carry through such a policy only if they say, "Your restraint, sacrifice and patriotism will accrue to the benefit of the whole community."

There is only one way to make sure that the increased prosperity of industry that will come from the wage restraint of the community will benefit the whole community, and that is by taxing the capital gain. A successful incomes policy in this country will mean an enormous increase in share values and, therefore, an incomes policy without a capital gains tax merely means the stimulating of the process of concentrating the wealth of the nation into fewer hands.

My hon. Friend the Member for Ash-field (Mr. Warbey) pointed out yesterday that 45 per cent. of the private wealth of Britain is today in the hands of 2 per cent. of the population. If this Government's one-sided incomes policy goes through that process will be carried further still and that is why my hon. Friends have moved an Amendment to introduce a permanent and genuine capital gains tax, for it is only on this basis that any Government can ever hope to properly implement an incomes policy.

Mr. Alan Hopkins (Bristol, North-East)

The hon. Lady the Member for Blackburn (Mrs Castle) made the point that the Conservative Government in past years had taken over from the Opposition various of their policies. I sincerely hope that my right hon. and learned Friend the Chancellor of the Exchequer will not on this occasion take any lesson or pay any heed to the sort of capital gains tax to which the hon. Lady has referred.

The hon. Member for Nuneaton (Mr. Bowles) described extremely well the effects of the American capital gains tax and some of its history. He has obviously studied it and I am sure that he would agree with me that it is extremely complex.

Mr. Bowles

indicated assent.

Mr. Hopkins

The regulations enacted pursuant to the internal revenue code of America are some of the most complicated forms of administrative regulation that exist today. I suggest that this is one good reason for not seriously considering the specific Amendment moved by the hon. and learned Member for Kettering (Mr. Mitchison). It suggests a complicated formula. I readily concede that it can work and I accept the figures given to us earlier, but it will be of undoubted difficulty to the individual investor and to the professional advisers and accountants who have to see that the affairs of the individual investor are arranged and ordered properly.

The duration of time to which the Amendment refers imposes undoubted hardship upon certain types of investors. The hon. Member for Cardiff, South-East (Mr. Callaghan) gave the illustration of a share purchase held for ten years. He said that the tax by then would be just over £100 and the gain would be just over £400. But during that period of time, of course, it might well be that the value of money had declined. In an extreme example it might well be the case that the resulting purchasing power left to the investor after payment of tax might be less than he started with initially. This would be an undoubted hardship on the investor.

Another effect which we can learn from the American capital gains tax, which has now been in operation effectively for twenty years—the preceding legislation was rescinded for a period of time before the war—is in the case of shares in companies which are not actively quoted on the Stock Exchange. In that case marketability becomes very difficult.

The hon. Lady the Member for Blackburn referred to the small percentage of the population who own ordinary shares. I agree with her that this percentage is far too small. I would not want in any way to impose any tax or anything that could operate to reduce the spread of share ownership. I know that my hon. Friend the Member for Taunton (Mr. du Cann), who is interested in this matter, would agree that the capital gains tax in America has been seen adversely to affect the direct spread of stock ownership. The Amendment calls for a process which, by reason of the duration factor in it, could result in a substantial change in the nature of the original investment purchased, by involuntary conversion and by the issue of other classes of shares. This does not seem to have been taken into consideration by the hon. Member for Nuneaton. This is a lesson from the capital gains tax of America which has proved administratively extremely complex, and I suggest that the formula proposed by the Opposition would not cater for it.

Mr. Bowles

It may be true that there is complexity, but there is no serious suggestion that the American capital gains tax should be withdrawn, is there?

Mr. Hopkins

Not at all. I think that the American capital gains tax is generally as effective a way of running a capital gains tax, if one wishes to have one, as there is.

Mr. Jay

In that case, would the hon. Member not agree that, assuming the American form of capital gains tax, there should he a tax on long-term gains as well as on short-term gains?

Mr. Hopkins

That is certainly in the American tax and, as far as I would accept that it is a good system of taxation of capital gains, I would accept that.

The cost of collection of the capital gains tax in America is extremely high. I do not have the figures with me, because I did not think that this would be a point at issue, but it is segregated in reports published annually by the United States Internal Revenue Department and it is by far the highest of all costs of tax collection in America.

Mr. Roy Jenkins (Birmingham, Stechford)

I do not know that it matters a great deal whether the hon. Member for Bristol, North-East (Mr. Hopkins) approves or not of the American capital gains tax, but if he does he might tell us and not merely, when questioned, take refuge by saying, "If I accept the tax I might accept this or that view". It would have been more interesting if the hon. Member had told us what was his starting point and had said whether he was in favour of or against such a tax.

I do not want to deal at great length, however, with that point, but I was surprised that, calling in aid the hon. Member for Taunton (Mr. du Cann), who certainly knows a great deal about these matters, the hon. Member said he thought that the American system of capital gains taxation had restricted the spread of ordinary share-owning in the United States. It would be difficult to determine, but it might be that the spread of ownership would be wider without a capital gains tax. Certainly, with the tax it is wider in the United States than it is in this country without the tax. Therefore, it does not seem to me to be a very obvious or overwhelmingly powerful point to be made on this Amendment.

I agree with my hon. Friend the Member for Blackburn (Mrs. Castle) that the capital gains tax proposed to us under the Clause is an extremely weak substitute for a real capital gains tax. When I heard it proposed in the Budget statement and defended, so far as it was defended, in the Budget debate, I took the view that if the tax did anything at all it was most likely to discredit the idea of a capital gains tax. Nobody who has studied this matter thinks that this is a real capital gains tax, but I think that there is a vague hope on the part of some people that those who have not studied the matter may think that something approaching a capital gains tax was introduced in the 1962 Budget and that it did not produce any revenue and was rather complicated, and that they would ask whether it was worth bothering about.

This is an important new field of taxation which we ought to approach and consider very seriously. I do not think that there can be any dispute that a real capital gains tax with teeth in it would produce a sizeable amount of revenue. Obviously, there is dispute about exactly how much revenue it would produce. In the majority and minority Reports of the Royal Commission on the Taxation of Profits and Income varying views are expressed about it. I should have thought that the fairly high estimates in the minority Report of the Royal Commission were very well supported by the evidence. However, leaving that aside, there is no doubt that a real capital gains tax would produce an appreciable amount of revenue. The Chancellor himself disposes of the idea that this is a real capital gains tax when he says that he does not expect it to produce any sizeable amount of revenue.

5.0 p.m.

My hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) called attention to the fact that the Chancellor of the Exchequer has said that whatever system of taxation one produced the best brains in the country would be able to defeat it. However, for that effort at defeat to be called forth, one really needs a tax which shows some signs of having been devised by the best brains in the Treasury. This tax shows no such signs. I imagine that some of the most mediocre brains in the country will be able to defeat this tax, and that there is no need to call into the battle the best brains in the City or the best accountancy brains. It will be quite easy to do it without any problem of that kind.

In my view, the distinction between short-term and long-term capital gains is a rather artificial one. I do not really like the American system of taxation. It is much better than what is proposed here, but it is not ideal because, in my view, one cannot draw any true distinction between again which is realised within six months and a gain realised over a longer period. It is better to tax the longer-term gain at some rate than not to tax it at all, but, even if one does tax it at some rate, the distinction is essentially an artificial one.

In strict equity, though, perhaps, from a rather abstract point of view, I consider that the whole distinction between realised gains and accrued gains is artificial. However, from the point of view of making a practical approach to the matter, one probably does have to draw a distinction, although I do not think it has any validity in theory. One has to tax realised gains and not accrued gains. I think that it would be very much better not to draw this distinction in time. I said in my speech in the Budget debate that I thought that the rates of tax are to some exert too high. I should prefer rather lower taxes of tax but more effective rates, without this entirely artificial distinction between very short-term gains and real gains.

In a sense, the tax now proposed reflects in miniature a defect in our present system of taxation. What we are only too inclined to do is to erect very high rates of nominal taxation upon an extremely narrow tax base and then convince ourselves that we have a thoroughly egalitarian system of taxation. I think that it would be a good deal better to have a wider tax base and, if necessary, rather lower rates of tax. This tax falls to the ground entirely from that point of view, and it has made very little contribution to a more logical system of taxation. It is designed much more to discredit the idea of a capital gains tax—though I do not think that many people wll be convinced—than to make a real contribution.

The Chief Secretary to the Treasury and Paymaster-General (Mr. Henry Brooke)

I have no doubt at all of the importance of the controversy on this subject, an importance not fully reflected by the somewhat sparse attendance on both sides of the Committee.

Mr. William Warbey (Ashfield)

I wonder whether—

The Temporary Chairman (Mr. John Arbuthnot)

Order. If the Minister does not give way, the hon. Gentleman must resume his seat.

Mr. Warbey

The right hon. Gentleman has now given way, Mr. Arbuthnot. I am much obliged. He has just referred to the sparse attendance in the Committee. I remind him that this is due partly to the fact that some hon. Members, including myself, have to be in two places at once. I have just come down from the Standing Committee—

The Temporary Chairman

Order. We cannot go into that now.

Mr. Brooke

We have been debating this subject for three hours, and I think that it would be the wish of the Committee to hear a Treasury Minister on it. We have under discussion a variety of Amendments. I shall not be so discourteous to hon. Members opposite as the hon. Member for Cardiff, South-East (Mr. Callaghan) was when he described the Amendment in the name of his hon. Friend the Member for Enfield, East (Mr. Mackie) as wishy-washy. That was not the description I should have given to an Amendment which, as far as I can judge, would be likely to subject to Income Tax and Surtax a capital gain on land acquired up to ten years beforehand.

Of course, Amendments of that kind throw into high relief the difficulty inherent in making subject to Income Tax and Surtax in one year a capital gain which has accrued over several years. This is the weakness in all the proposals substantially to retain the idea that the gain should be subject to Income Tax and Surtax as ordinary income and yet that the period of the holding of the asset should be lengthened far beyond that indicated in the Chancellor's proposal.

My hon. Friend the Member for Brierley Hill (Mr. Talbot) went in the other direction. He suggested that the three years proposed in the Bill for capital gains on land should be shortened to two years. Two years, I suggest, is too short because land is not easily negotiable and transferable like securities. One can ring up a stockbroker and sell or buy a share at a moment's notice, but transactions in land, which necessarily refer to a particular piece of land, are usually fairly long drawn out. I fancy that, if my hon. Friend's Amendment were adopted, there would be cases where the negotiations for sale would be started almost as soon as the land had been acquired, and it would go too far in rendering it unlikely that there would be any yield at all from the tax.

The hon. Lady the Member for Blackburn (Mrs. Castle) and other hon. Members opposite alleged that the Chancellor was not hoping for any revenue at all from this tax. Of course, he is. What he said in his Budget speech was that it was quite impossible at this stage to estimate or evaluate the amount of revenue it would bring in. But this is a tax which is intended to bring in revenue, though he would be more than a speculator himself who attempted to say what amount of tax revenue it would realise.

The Amendment moved last night by the hon. and learned Member for Kettering (Mr. Mitchison), the main Amendment, is designed to continue the liability to Income Tax and Surtax on capital gains, but at a tapering rate, over one hundred years. If I were introducing a permanent capital gains tax, I should try to avoid the sort of mathematical conundra involved in the first of the two Schedules. But I do not want to argue that point nor to consider whether, under the first Amendment, a piece of land which has been held for eleven years would enjoy a rebate of 37½ per cent. whereas under the second Amendment it would enjoy a rebate of 40 per cent. The fact is that, under both those Schedules, as the hon. and learned Gentleman said, whereas at the beginning the Income Tax and Surtax would fall on 100 per cent. of the gain, as the years went by it would taper down to 25 per cent.

There are certain similarities between the hon. and learned Gentleman's proposal and the tapering arrangements in Sweden. If I may say so, I thought that the hon. Member for Cardiff, South-East was incorrect when he prayed Germany in aid. My information is that the Federal German Government do not have a long-term capital gains tax such as the Opposition wish to introduce. They have a short-term gains tax which is rather less severe in its incidence than that which my right hon. and learned Friend is proposing.

There is a clear-cut difference of approach between the two sides on this whole matter, and I do not seek to minimise it. It was fully recognised last night by the hon. Member for Gloucester (Mr. Diamond). He said perfectly fairly that the Chancellor was not proposing a capital gains tax, but that he is proposing something else; in fact, a tax on money which could easily be spent as income, because it comes in very much as income does, but which, at the present moment, happens to escape taxation. The hon. Member for Gloucestershire,West (Mr.Loughlin) said last night that the professionals would not pay it, but the real professionals in this field do pay, because they have to pay tax on the profits of their trade.

I do not seek to conceal the fact that somebody can avoid paying this tax by holding on one day, a few days or even a few months beyond whatever is the appropriate period for the type of property in question, but, nevertheless, I think that the Chancellor is right in saying that it is land held for a period of less than about three years and stocks and shares held for a period of less than about six months which are the normal subjects of speculation. I am certainly not saying that every sale that takes place within such a period is a sale following a purchase which was made with speculative intent. Nor am I saying that there are not speculative transactions which continue beyond these periods. I do not think that my right hon. and learned Friend the Chancellor himself would say that we could prove by absolute logic that six months, rather than five or seven months, would be appropriate or three years, rather than two-and-three-quarter years or three-and-a-half years, but one has to take what appears to be a reasonable period in each case.

The hon. Lady the Member for Blackburn—I am sorry she is not in her place—sought to inject into this discussion the subject of wage restraint and incomes policy. I do not demur at her doing so, but so that there may be no misunderstanding, I want to make it absolutely clear that the incomes policy envisaged by the Government is not a policy the necessary result of which is to inflate share values. Indeed, we can have a thorough-going incomes policy, with restraint on increases of salaries and wages, and, at the same time, a fall in prices, or, at any rate, stability of prices, which would in fact be a more desirable result than the kind of thing which the hon. Lady was envisaging.

The hon. Member for Cardiff, South-East, in effect, said "Here is taxable capacity; therefore let us tax it". There are a very great number of other fields where we can say that there is taxable capacity, but, for good reasons, Chancellors of the Exchequer of all parties over the years have decided not to tax them, because they have seen either that there would be unfairness in the operation of the tax or economic disadvantages flowing from it.

Mr. Bruce Millan (Glasgow, Craigton)

Would the right hon. Gentleman care to specify those fields of taxable capacity, apart from capital?

Mr. Brooke

I can tell the hon. Member at once that the whole field of advertisements has been discussed, and that successive Chancellors have rejected it, including one Socialist Chancellor, who decided that he could not carry out a project of his predecessor.

5.15 p.m.

The Government's conception is that we should impose a liability to Income Tax and Surtax on short-term gains which are regarded as income and which are commonly used as income. Longer-term gains are not normally used as spending money; they are normally regarded as capital. If, therefore, we tax these longer-term gains, as the Opposition desire to do, what we should, in effect, be doing is to tax savings. There is no doubt, therefore, that a long-term capital gains tax of that kind is bound to be to some extent a disincentive to savings. I would also judge that it would be a disincentive to economic growth, because a capital gains tax, as its effects in America and elsewhere have shown, discourages changes in property ownership. In general, I believe that economic growth postulates a willingness to buy and sell, and that it is thoroughly undesirable in this country in its present position that owners of property should have a tax incentive to hold on to property on if they sold, they would find themselves liable to a substantial tax.

Mr. Jay

Could it not be argued that this tax is an incentive to savings, because as it falls only on realised gains and not on unrealised gains, it is an incentive to people not to sell their capital?

Mr. Brooke

We can argue this at length, and I think I should be right in saying to the right hon. Gentleman that at the end of this debate, whether it goes on for four or five hours or not, there will still be a great deal to be said on both sides. Perhaps the right hon. Gentleman will now allow me to put the other side of my argument.

If the suggestion is that long-term gains are not used as capital, but are spent as income, then it would appear that the Opposition are looking upon their capital gains tax as a tax on expenditure. The answer to that is surely contained in the majority Report of the Royal Commission on Profits and Income, which shows how unfair it would be as between one person and another. It would be unfair in the case of two people who were seeking to enlarge their current spending power by selling off their property, if the man who sold a piece of property that had increased in value, was liable to tax, whereas the man who sold an equivalent amount of property that had not increased in value was free from tax. It was on that and similar grounds that the Royal Commission concluded that a capital gains tax would not achieve a more equitable distribution of the tax burden.

Mr. John Diamond (Gloucester)

Is not that a complete fallacy, if one assumes, as one is bound to assume, in the case of any reasonable, full-scale capital gains tax, that every property is realised sooner or later, and that the property which the second man in the right hon. Gentleman's illustration did not sell would be realised, at all events, no later than the point of his death?

Mr. Brooke

If we go into Estate Duty, we shall make this matter even further complicated. The fact remains that if the hon. Gentleman is suggesting that if at any one time a person who has property of different kinds has no choice as between selling that which has increased in value and selling that which has not increased in value, he is rather far from reality.

May I now turn in greater detail to the Opposition Amendment? It was made clear by the hon. Member for Cardiff, South-East and others that the Opposition regard this as an opportunity for additional taxation. There was no suggestion in any of the speeches from hon. Members opposite that I can remember that the revenue that would be brought in by their capital gains tax should be used to reduce other forms of taxation. The suggestion was made very clearly in his speech by the hon. Member for Cardiff, South-East that the additional tax would enable the Government to find more money for a number of things.

Mr. Mitchison

I must correct the right hon. Gentleman there. I said quite definitely in my speech that what I should like to see would be a reduction of Income Tax at the bottom end of the pay scale, and, for that purpose, the basis of taxation ought to be broadened. As I see it, this is a valuable and useful means of broadening it.

Mr. Brooke

One thing which is certain about a long-term capital gains tax is that it will not bring in a regular sum of revenue. Everyone who has examined this matter agrees on that. Most people who have seriously examined it have come to the conclusion that the average revenue over the years would be disappointingly small. It certainly would not be an amount which the Chancellor of the Exchequer could count on, year in and year out, in order to achieve substantial tax remissions elsewhere.

The Amendment envisages a long-term capital gains tax, and in the Table one can see the periods up to one hundred years. Do hon. Members opposite really think that, ninety-nine years hence, one could take two pieces of property, one which had been acquired in January, 1962, and one which had been acquired in May, 1962, and say that the latter was subject to tax and the former was not? This is the essential weakness in their proposal. They have not faced the most difficult task of all in bringing in a capital gains tax, and that is what should be done about all the existing property. Such a tax is bound to be unfair unless it is spread over property which is held at the time that the tax is first introduced.

Mr. Mitchison

I do not think that this is a very good argument, but I foresaw it because I did not stop at one hundred years. The right hon. Gentleman has not read the table properly. I should love to live to well over a hundred years, but I do not think the chances of my doing so are high. Nevertheless, companies go on.

Mr. Brooke

I agree. I am not sure that the Opposition have really given their attention to the difference between companies and individuals. Companies go on whereas individuals do not, and individual estates are subject to Estate Duty throughout.

The Opposition are suggesting that, by this Amendment, they are bringing before Parliament a capital gains tax which would be fair. My point is that that is not so, because the Opposition are failing to consider how it can be done. It would obviously be unfair if, after a number of years have passed, property acquired after Budget day, 1962, was taxable while property acquired before Budget day was not taxable.

Mr. Mitchison

The position is the same under the Government's proposal.

Mr. Brooke

It does not matter under our proposal because the period is so short. It is when we try to turn this, which is not a capital gains tax, into a full capital gains tax that we come up against this insuperable obstacle.

Quotations from American experience were made by hon. Members on both sides. It is one thing to carry on with a capital gains tax which has existed from the beginning and which was introduced in America as a mitigation of income tax and another thing to introduce an entirely new capital gains tax. I am sure that hon. Members familiar with tax matters know that, when considering the tax system of a country, there must always be a strong presumption in favour of carrying on with existing taxes as against introducing new ones because of the terrible complexity of introducing a tax of this kind for the first time.

To be fair, a capital gains tax would have to involve a valuation of all property which might be subject to the tax at a given date. That is what the Amendment fails to do. My feeling about the Opposition's plan, which is offered as a serious alternative to the Government's plan, is rather that of the Irishman who was asked the way to Sligo and who replied, "If I was going to Sligo, I should not be starting from here." That is the real trouble about the Opposition seeking to take the Government's plan, which is not a capital gains tax, and turn it into a capital gains tax.

Mr. Mitchison

These are rather gross errors. Our scheme no more involves a valuation than does the Government's scheme.

Mr. Brooke

Provided it is content to be increasingly unfair, it does not involve a valuation. But as years go by people will not accept as fair that there should be different tax treatment between property acquired before 9th April, 1962, and property acquired after that date. I ask the hon. and learned Member for Kettering to ponder on that.

Another point which hon. Members opposite have not addressed themselves to is the difficulty about changes in the value of money. They have assumed that any increase in money value will provide taxable capacity. Suppose that a piece of property acquired fifty years ago has doubled in money value. Is there any taxable capacity there? The real value of that property will be less than it was when first acquired. In trying to think out a permanent capital gains tax, one simply cannot ignore the factor of changes in the value of money.

Mr. Jay

Would the right hon. Gentleman apply that argument to death duties?

Mr. Brooke

I have my own views about death duties, but I do not think that this is the time to canvass them.

Mr. Roy Jenkins

Since the right hon. Gentleman puts these points forward as though they have never been considered, may I ask him whether he has read the minority Report of the Royal Commission, in which this issue was dealt with extremely fully?

Mr. Brooke

I have read that Report. It was discussed fully with the majority and failed to convince the majority. I am not aware that there has been an increase since 1955 in the number of people who agree with the minority Report as against the majority Report. This is arguable. I say willingly that we cannot in this debate take to a final conclusion all the factors and principles which require discussion in the course of settling what should be done about a capital gains tax. I am trying to reply to a limited Amendment which is put forward by the Opposition, not as the ideal way of producing a capital gains tax, but as the best way that they can think of to transform my right hon. and learned Friend's proposals, which, admittedly, are not a capital gains tax, into a permanent capital gains tax.

Mr. Roy Jenkins

Since the right hon. Gentleman rests his case solely on the intellectual ground that a majority is a majority and a minority is a minority, why does he go on speaking? Why not have the Division straight away?

Mr. Brooke

That is an idea which had occurred to me. The sooner we have the Division, the better.

I therefore propose to conclude by saying that, as against the Opposition claiming that here is a field of untouched taxable capacity, the Government are entitled to contend that savings and wise investment are at the heart of this country's increased prosperity and that we must be exceedingly careful before, ill advisedly, we do anything which may interfere with those savings and that investment. There has been very little criticism of the sound structure of my right hon. and learned Friend's proposals in this debate, and I therefore hope that the Committee will reject the Amendment.

Mr. Douglas Houghton (Sowerby)

The Chief Secretary must not despise minorities. Those who advocate the right course are nearly always in the minority to begin with. As time goes on, the public will realise the inadequacies of the Government's proposals and will conic round to our view that the only sound and equitable basis of a capital gains tax is to extend it very much further than is proposed in the Bill.

5.30 p.m.

The differences between the two sides on this matter are not only important, but are fundamental. The right hon. Gentleman has defined some of them. We do not believe that it is enough to tax only short-term speculative gains. It is true that the Chancellor is doing exactly what he said he would do—no more and no less. He never promised a long-term capital gains tax. He rejected the concept of this tax and confined himself to considering a tax to bring short-term gains within the existing structure of Income Tax and Surtax.

There is enough experience throughout the world in this branch of taxation to dispel some of the fears that hon. Members have expressed about the effect of a long-term capital gains tax. The United States has had one for many years. I do not think that it is an ideal system, but such accounts as one can read of the effect of the capital gains tax in the United States certainly do not lend support to some of the fears that have been expressed this afternoon.

I have before me an article by Mr. Walter A. Everitt in the Statist of 19th January, 1962, on the American capital gains tax. He states: Paradoxically, the capital gains tax has helped the American investor to become richer. No one likes to pay taxes, and there is no easier way of avoiding the payment of capital gains tax than not to sell, and not selling has been the right policy in the past twenty years. That at least gets rid of one idea about the American capital gains tax that it has been a disadvantage to investment in the United States.

There are a number of commentators on the principle of a capital gains tax, including the Board of Inland Revenue, who have seen no distinction in principle between the short-term and the longer-term capital gains. That was argued fully in the memorandum submitted by the Board of Inland Revenue to the Radcliffe Commission and in the minority Report of that Commission.

The hon. Member for Taunton (Mr. du Cann) is not in his place, but in an article in the Statist of 24th November, 1961, he said: Many believe that the only acceptable capital gains tax will be one which treats short-term and long-term gains alike. Our Amendment does not propose to treat short-term and long-term gains alike, at least not in the sense that they would be taxed on exactly the same basis. Our proposal, as the Chief Secretary has pointed out, provides for a tapering off of the amount of the assessment as the period between acquisition and disposal lengthens. That was to take account of the longer period of accrual of the capital gain and to make a set-off against the ultimate tax on realisation of the asset.

A good deal that has been wrong with our taxation system in recent years would not have needed this remedy had our definition of income not been so narrow. In that respect, our system of income taxation differs from many systems in other parts of the world. Some countries do not have a distinctive capital gains tax. They have a more comprehensive definition of taxable income. We have not had a definition of income which embraces the sort of transactions to which the new tax and our tax are proposed to be applied.

Over forty years ago, the Royal Commission was concerned about the transactions that were escaping Income Tax, transactions upon which the Commission thought that the badge of trade might fairly be put. The Commission recommended that any profit recognisable as a business transaction—that is, any transaction in which the subject matter was acquired with a view to profitseeking—should be brought within the scope of the Income Tax. The Radcliffe Commission considered that recommendation many years after it was made and concluded that the decisions of the courts in many particular cases had gone a long way to remove some of the criticism of the weakness of the definition of Income Tax for tax purposes.

As the Chief Secretary and the Committee know, decided cases do not always govern the liability of comparable cases arising thereafter. Many of these cases have escaped taxation in the past because the local Commissioners of Income Tax have decided against them. Unless a case is stated for the High Court, that is the final conclusion of the matter. There is general public opinion in favour of widening the scope of taxation on gains which are at present outside the scope of the narrow definition of Income Tax. Our view is that any asset which is disposed of creates thereby expendable resources. An asset is disposed of, money is therefore in the hands of the holder and the question is whether the tax gatherer should take any part of the realisation of the asset.

The right hon. Gentleman said a few moments ago that he considered it unfair that an asset realised as a profit should pay a tax whereas an asset realised for the same amount of money as was paid at the time of acquisition should not attract tax. If in selling an asset a man merely gets his money back, we would not propose to tax it. If, however, he makes money on the transaction, if it is over a short period we, as in the case of the Government proposal, would propose to tax it in full. If he had held the asset for a longer period, we would propose to reduce the amount of the assessment of the capital gain.

Whether the effect of this new tax will dissuade people from speculative activities on the Stock Exchange or in land one cannot say, but there are some remarkable happenings in the last few hours on an issue which has just been put on the market. In the Evening Standard of 14th May, there was a question mark after the heading Harder times for stags". One wondered what effect the new tax would have on those who were getting ready to fill up their forms to get an allotment in Ready-Mixed Concrete—which seems to be a suitable title for Her Majesty's Government. The stags, apparently, have been busier than ever This issue was oversubscribed sixty times.

Whereas it was anticipated a few days ago that the shares would open at a premium of ls. or 2s., they seem to have opened at a premium vastly in excess of that. Those who applied for 400 shares and were successful in the ballot were allotted 100. They will pay 24s. for each share. The shares opened this morning at 37s. 6d., they rose in the course of the day to 41s. 3d. and have settled down this afternoon at 39s. 6d. The Press says that this is a "bright light". We now have a guiding light and we also have a bright light. The guiding light is for the restraint of incomes and the bright light is for those who will make profits by stagging. Everyone who was successful in the ballot and was allotted 100 shares will have netted on the sale of the shares this afternoon £77 10s. This is the first harvest the Inland Revenue will have under the Government's new tax proposal. The tax has not dissuaded anyone. If I could have made £77 10s. this afternoon by filling up a form I should not have minded it having Income Tax on it. Obviously, many people are prepared to act in the same way.

That is the sort of thing the Government's proposals are intended to catch. Our proposals are intended to catch this kind of thing in respect of those who hold their shares for more than six months or a little longer than that. We see no obection in principle to the taxation of the longer-term capital gain, though on a reduced basis for the reasons that I have given.

The right hon. Gentleman said that it would be unfair to construct a long-term capital gains tax on transactions which began after Budget day. One has to make a start somewhere if one is to introduce a new tax at all. If we had proposed to have a valuation of all assets or, retrospectively, to go back to the date of acquisition and attempt to value them at the acquisition price, we should have had a thunder of objection from the benches opposite about retrospection and all the other charges that they would have made.

If we are to have a capital gains tax which will really stand up to criticism and, indeed, will meet with approval, it will have to be something better than that proposed by the Government. Also, the Government will have to make a beginning some time. Those who embarked on these transactions after the appointed day would know that the tax applied to them and it would be known that it would not apply to those who acquired their assets before the appointed day. That would govern the behaviour of individuals. I see no escape from that if we are to embark on a tax of this kind. If we are to adopt the philosophy of the right hon. Gentleman, we shall have to stick to the taxes we have and shall never be able to enlarge the scope of Income Tax and never be able to adjust it to the obvious social injustice and fiscal inequity of allowing large-scale expendable assets to go tax free while the earnings of the professional man, the executive and the worker generally are taxed up to the hilt.

Therefore, we have no hesitation in strongly pressing our Amendment on the Committee. We believe it to be the best thing we can devise as an alternative to the Government's proposals. This would at least make the beginning of a satisfactory tax. The proposals of the right hon. and learned Gentleman do not stand up and will not stand up. I believe that when the political purpose of the

tax diminishes it will go the way of the Excess Profits Levy introduced by the right hon. Member for Woodford (Sir W. Churchill) when he found that complaints were arising because of profit making out of rearmament. It lasted only two years. Whenever the political value of this tax goes, I believe that the tax will go with it. We propose one which would endure, would be modelled on the systems of other countries, and could be adjusted to the public conception of a better tax than the right hon. Gentleman is proposing.

Mr. B. T. Parkin (Paddington, North)

The Chief Secretary has made it clear that he is not open to conversion by the minority.

I rise only to lodge a strong protest against his murderous misuse of the English language in the earlier sentences of his speech where he described the problems outlined by my hon. and right hon. Friends as "conundra". I imagined the right hon. Gentleman describing the Trooping of the Colour to his nieces and explaining that some of the soldiers were beating "kettledra" some "side-dra" and others "bigdra". This word was not found in the English language, or in any other, before the 16th century. When Disraeli and Morley used the term in this House they used the plural "conundrums".

The Minister's claim to the fastidious use of Latin is as bogus as his pretence to an understanding of economics. We are accustomed to economists inventing their jargon as they go along, but if they are to murder Latin in the same way, there may be room even at this late hour in the discussion for a vigorous protest from a back bencher.

Question put, That the words proposed to be left out, to "three" in line 29, stand part of the Clause:—

The Committee divided: Ayes 264, Noes 188.

Division No. 195]	AYES	[5.46 p.m.
Aitken, W. T.	Bennett, F. M. (Torquay)	Black, Sir Cyril
Allan, Robert (Paddington, S.)	Bennett, Dr. Reginald (Gos & Fhm)	Bowen, Roderic (Cardigan)
Amery, Rt. Hon. Julian	Berkeley, Humphry	Box, Donald
Atkins, Humphrey	Bevins, Rt. Hon. Reginald	Boyd-Carpenter, Rt. Hon. John
Baln'el, Lord	Biffen, John	Boyle, Sir Edward
Barber, Anthony	B'ggs-Davison, John	Bromley-Davenport,Lt. -Col. Sir Walter
Barlow, Sir John	Bingham, R. M.	Brooke, Rt. Hon. Henry
Barter, John	Birch, Rt. Hon. Nigel	Brooman-White, R.
Bell, Ronald	Bishop, F. P.	Brown, Alan (Tottenham)
Browne, Percy (Torrington)	Hirst, Geoffrey	Peel, John
Bryan, Paul	Hobson, Sir John	Percival, Ian
Buck, Antony	Holland, Philip	Peyton, John
Bullard, Denys	Hollingworth, John	Pickthorn, Sir Kenneth
Bullus, Wing Commander Eric	Holt, Arthur	Pike, Miss Mervyn
Burden, F. A.	Hooson, H. E.	Pilkington, Sir Richard
Butcher, Sir Herbert	Hope, Rt. Hon. Lord John	Pitman, Sir James
Campbell, Sir David (Belfast, S.)	Hopkins, Alan	Pitt, Miss Edith
Campbell, Gordon (Moray & Nairn)	Hornby, R. P.	Pott, Percivall
Carr, Robert (Mitcham)	Hornsby-Smith, Rt. Hon. Dame	Prior-Palmer, Brig. Sir Otho
Cary, Sir Robert	Howard, Hon. G. R. (St. Ives)	Pym, Francis
Channon, H. P. G.	Howard, John (Southampton, Test)	Quennell, Mist J. M.
Chataway, Christopher	Hughes Hallett, Vice-Admiral John	Ramsden, James
Chichester-Clark, R,	Hulbert, Sir Norman	Redmayne, Rt. Hon. Martin
Clark, William (Nottingham, S.)	Hutchison, Michael Clark	Rees, Hugh
Cleaver, Leonard	Iremonger, T. L.	Rees-Davies, W. R.
Cole, Norman	Irvine, Bryant Godman (Rye)	Renton, David
Collard, Richard	James, David	Ridley, Hon. Nicholas
Cooke, Robert	Jennings, J. C.	Ridsdale, Julian
Cooper-Key, Sir Neill	Johnson, Dr. Donald (Carlisle)	Roberts, Sir Peter (Heeley)
Cordeaux, Lt.-Col. J, K,	Johnson, Eric (Blackley)	Robertson, Sir D. (C'thn's & S'th'ld)
Corfield, F V	Johnson Smith, Geoffrey	Robinson, Rt. Hn. Sir R. (B'pool, S.)
Costain, A P	Jones, Rt. Hn. Aubrey (Hall Green)	Robson Brown, Sir William
Coulson Michael	Kaberry, Sir Donald	Ropner, Col. Sir Leonard
Courtney, Cdr. Anthony	Kerans, Cdr. J. S.	Royle, Anthony (Richmond, Surrey)
Craddock Sir Beresford	Kerr, Sir Hamilton	Russell, Ronald
Cowder, F. P.	Kershaw, Anthony	Scott-Hopkins, James
Cunningham, Knox	Kimball, Marcus	Seymour, Leslie
Currie, G. B. H.	Kirk, Peter	Sharpies, Richard
Dalkeith, Earl of	Kitson, Timothy	Shepherd, William
d'Avigdor-Goldsmid, Sir Henry	Lagden, Godfrey	Skeet, T. H. H.
de Ferranti, Basil	Lambton, Viscount	Smith, Dudley (Br'ntf'd & Chiswick)
Donaldson, Cmdr. C. E. M.	Lancaster, Col. C. G.	Smithers, Peter
Doughty, Charles	Legge-Bourke, Sir Harry	Spearman, Sir Alexander
Drayson, G. B.	Lewis, Kenneth (Rutland)	Speir, Rupert
Drayson, G. B.	Lilley, F. J. P.	Stanley, Hon. Richard
du Cann, Edward	Lindsay, Sir Martin	Stevens, Geoffrey
Duncan, Sir James	Litchfield, Capt. John	Steward, Harold (Stockport, S.)
Duthie, Sir William	Lloyd, Rt.Hn.Geoffrey(Sut'nC'dfield)	Stodart, J. A.
Eden, John	Lloyd, Rt. Hon. Selwyn (Wirral)	Storey, Sir Samuel
Elliot, Cant. Walter (Carshalton)	Longden, Gilbert	Studholme, Sir Henry
Elliott,R. W.(Nwcaetle-upon-Tyne, N.)	Loveys, Walter H.	Summers, Sir Spencer
Emmet, Hon. Mrs, Evelyn	Lubbock, Eric	Tapsell, Peter
Errington, Sir Eric	Lucas-Tooth, Sir Hugh	Taylor, Edwin (Bolton, E.)
Farey-Jones, F. W.	Mac Arthur, Ian	Taylor, Frank (M'ch'st'r, Moss Side)
Farr, John	McLaren, Martin	Taylor, W. J. (Bradford, N.)
Fell, Anthony	Maclean, SirFitzroy(Bute&N.Ayrs.)	Teeling, Sir William
Finlay, Graeme	McLean, Neil (Inverness)	Temple, John M.
Fisher, Nigel	Macleod, Rt. Hn. Iain (Enfield, W.)	Thatcher, Mrs. Margaret
Fletcher-Cooke, Charles	Macpherson, Niall (Dumfries)	Thomas Leslie (Canterbury)
Freeth, Denzil	Maddan, Martin	Thompson, Kenneth (Walton)
Gammans, Lady	Maginnis, John E.	Thornton-Kemsley, Sir Colin
Gibson-Watt, David	Manningham-Buller, Rt. Hn. Sir R.	Thorpe, Jeremy
Gilmour, Sir Jonn	Markhatn, Major Sir Frank	Tiley, Arthur (Bradford, W.)
Glyn Sir Richard (Dorset N)	Marlowe, Anthony	Touche, Rt. Hon. Sir Gordon
Goodhart, Philip	Marshall, Douglas	Turner, Colin
Gough, Frederick	Marten, Neil Mathew, Robert (Honiton)	van Straubenzee, W. R.
Gower, Raymond	Matthews, Gordon (Meriden)	Vane, W. M. F.
Grant, Rt. Hon. William	Mawby, Ray	Vaughan-Morgan, Rt. Hon. Sir John
Grant-Ferris, Wg. Cdr. R.	Maxwell-Hyslop, R. J.	Vickers, Miss Joan
Green, Alan	Maydon, Lt.-Cmdr. S. L. C.	Wade, Donald
Gresham Cooke, R.	Mills, Stratton	Walder, David
Grimond, Rt. Hon. J.	Miscampbell, Norman	Walker-Smith, Rt. Hon. Sir Derek
Grosvenor, Lt.-Col. R. C.	Montgomery, Fergus	Ward, Dame Irene
Gurden, Harold	More, Jasper (Ludlow)	Watkinson, Rt. Hon. Harold
Hamilton, Michael (Wellingborough)	Morrison, John	Wells, John (Maidstone)
Harris, Frederic (Croydon, N.W.)	Mott-Radclyffe, Sir Charles	Williams, Dudley (Exeter)
Harris, Reader (Heston)	Nabarro, Gerald	Wills, Sir Gerald (Bridgwater)
Harrison, Brian (Maldon)	Nicholls, Sir Harmar	Wilson, Geoffrey (Truro)
Harrison, Col. Sir Harwood (Eye)	Nicholson, Sir Godfrey	Wise, A. R.
Harvey, Sir Arthur Vere (Macclesf'd)	Noble, Michael	Wolrige-Gordon, Patrick
Harvie Anderson, Miss	Nugent, Rt. Hon. Sir Richard	Wood, Rt. Hon. Richard
Hastings, Stephen	Oakshott, Sir Hendrie	Woodhouse, C. M.
Heald, Rt. Hon. Sir Lionel	Orr-Ewing, Sir Ian	Woollam, John
Henderson, John (Cathcart)	Osborne, Sir Cyril (Louth)	Worsley, Marcus
Hiley, Joseph	Page, Graham (Crosby)	Yates, William (The Wrekin)
Hill, Dr. Rt. Hon. Charles (Luton)	Page, John (Harrow, West)
Hill, Mrs. Eveline (Wythenshawe)	Pannell, Norman (Kirkdale)	TELLERS FOR THE AYES:
Hill, J. E. B. (S. Norfolk)	Partridge, E.	Mr. Batsford and Mr. Ian Fraser.
Hinchingbrooke, Viscount	Pearson, Frank (Clitheroe)
NOES
Ainsley, William	Hayman, F. H.	Parker, John
Albu, Austen	Healey, Denis	Parkin, B. T.
Allaun, Frank (Salford, E.)	Henderson, Rt.Hn.Arthur(Rwly Regis)	Pavitt, Laurence
Awbery, Stan	Herbison, Miss Margaret	Pearson, Arthur (Pontypridd)
Bacon, Miss Alice	Hewitson, Capt. M.	Peart, Frederick
Baxter, William (Stirlingshire, W.)	Hill, J. (Midlothian)	Pentland, Norman
Beaney, Alan	Holman, Percy	Plummer, Sir Leslie
Bellenger, Rt. Hon. F. J.	Houghton, Douglas	Popplewell, Ernest
Bence, Cyril	Howell, Charles A.(Perry Barr)	Prentice, R. E.
Bennett, J. (Glasgow, Bridgeton)	Howell, Denis (Small Heath)	Price, J. T. (Westhoughton)
Benson, Sir George	Hoy, James H.	Probert, Arthur
Blackburn, F.	Hughes, Cledwyn (Anglesey)	Randall, Harry
Blyton, William	Hughes, Emrys (S. Ayrshire)	Rankin, John
Boardman, H.	Hughes, Hector (Aberdeen, N.)	Reynolds, G. W.
Bottomley, Rt. Hon. A. G.	Hunter, A. E.	Rhodes, H.
Bowden, Rt. Hn. H. W.(Leics, S.W.)	Hynd, H. (Accrington)	Roberts, Albert (Normanton)
Bowles, Frank	Hynd, John (Attercliffe)	Roberts, Goronwy (Caernarvon)
Boyden, James	Irvine, A. J. (Edge Hill)	Robertson, John (Paisley)
Braddock, Mrs. E. M.	Irving, Sydney (Dartford)	Robinson, Kenneth (St. Pancras, N.)
Brockway, A. Fenner	Jay, Rt. Hon. Douglas	Rodgers, W. T. (Stockton)
Broughton, Dr. A. D. D.	Jeger, George	Ross, William
Brown, Rt. Hon. George (Belper)	Jenkins, Roy (Stechford)	Royle, Charles (Salford, West)
Brown, Thomas (Ince)	Johnson, Carol (Lewisham, S.)	Shinwell Rt Hon E.
Butler, Herbert (Hackney, C.)	Jones, Dan (Burnley)	Short, Edward
Callaghan, James	Jones, Jack (Rotherham)	Silverman, Sydney (Nelson)
Castle, Mrs. Barbara	Jones, J. Idwal (Wrexham)	Skeffington, Arthur
Chapman, Donald	Jones, T. W. (Merioneth)	Slater Joseph (Sedgefield)
Cliffe, Michael	Kelley, Richard	Smith, Ellis (Stoke, S.)
Collick, Percy	Key, Rt. Hon. C. W.	Sorensen, R. W.
Collick, Percy	King, Dr. Horace	Soskice, Rt. Hon. Sir Frank
Craddock, George (Bradford, S.)	Lee, Frederick (Newton)	Spriggs, Leslie
Cronin, John	Lee, Miss Jennie (Cannock)	Steele, Thomas
Crosland, Anthony	Lever, L. M. (Ardwick)	Stones, William
Cullen, Mrs. Alice	Lewis, Arthur (West Ham, N.)	Strachey, Rt. Hon. John
Darling, George	Loughlin, Charles	Strauss, Rt. Hn. G. R. (Vauxhall)
Davies, G. Elfed (Rhondda, E.)	Mahon, Dr. J. Dickson	Stross,Dr.Barnett(Stoke-on-Trent,C.)
Davies, Harold (Leek)	McCann, John	Swain, Thomas
Davies, Ifor (Gower)	MacDermot, Niall	Taylor, Bernard (Mansfield)
Davies, S. O. (Merthyr)	Mclnnes, James	Thomas, Iorwerth (Rhondda, W.)
Diamond, John	McKay, John (Wallsend)	Thompson, Dr. Alan (Dunfermilne)
Dodds, Norman	Mackie, John (Enfield, East)	Thomson, G. M. (Dundee, E.)
Donnelly, Desmond	McLeavy, Frank	Wainwright, Edwin
Ede, Rt. Hon. C.	MacMillan, Malcolm (Western Isles)	Warbey, William
Edwards, Rt. Hon. Ness (Caerphilly)	Mapp, Charles	Watkins, Tudor
Edwards, Robert (Bilston)	Mason, Roy	Weitzman, David
Edwards, Walter (Stepney)	Mayhew, Christopher	Wells, William (Walsall, N.)
Evans, Albert	Mendelson, J. J.	White, Mrs. Eirene
Finch, Harold	Millan, Bruce	Whitlock, William
Fitch, Alan	Milne, Edward	Wilkins, W. A.
Fletcher, Eric	Mitchison, G. R.	Willey, Frederick
Foot. Michael (Ebbw Vale)	Monslow, Walter	Williams, D. J. (Neath)
Forman, J. C.	Moody, A. S.	Williams, LI. (Abertillery)
Fraser, Thomas (Hamilton)	Morris, John	Williams, W. R. (Openshaw)
Galpern, Sir Myer	Moyle, Arthur	Willis, E. G. (Edinburgh, E.)
George, LadyMeganLloyd(Crmrthn)	Mulley, Frederick	Wilson, Rt. Hon. Harold (Huyton)
Gourlay, Harry	Neal, Harold	Winterbottom, R. E.
Greenwnod, Anthony	Noel-Baker,Rt.Hn.Philip(Derby,S.)	Woodburn, Rt. Hon. A.
Grey, Charles	Oliver, G. H.	Woof, Robert
Griffiths, David (Rother Valley)	Oram, A. E.	Wyatt, Woodrow
Griffiths, Rt. Hon. James (Llanelly)	Oswald, Thomas	Yates, Victor (Ladywood)
Griffiths, W. (Exchange)	Owen, Will	Zilliacus, K.
Gunter, Ray	Paget, R. T.
Hale, Leslie (Oldham, W.)	Pannell, Charles (Leeds, W.)	TELLERS FOR THE NOES:
Hall, Rt. Hn. Glenvil (Colne Valley)	Pargiter, G. A.	Mr. Lawson and Mr. Redhead.

Amendment proposed: In page 10, line 29, leave out "three" and insert "ten".—[Mr. Mackie.]

Question put, That "three" stand part the clause:—

The Committee divided: Ayes 257, Noes 194.

Division No. 196.]	AYES	[5.57 p.m.
Aitken, W. T.	Barter, John	Biffen, John
Allan, Robert (Paddington, S.)	Batsford, Brian	Biggs-Davison, John
Amery, Rt. Hon. Julian	Bell, Ronald	Bingham, R. M.
Atkins, Humphrey	Bennett, F. M. (Torquay)	Birch, Rt. Hon. Nigel
Balniel, Lord	Bennett, Dr. Reginald (Gos & Fhm)	Bishop, F. P.
Barber, Anthony	Berkeley, Humphry	Black, Sir Cyril
Barlow, Sir John	Bevins, Rt. Hon. Reginald	Box, Donald
Boyd-Carpenter, Rt. Hon. John	Hiley, Joseph	Pearson, Frank (Clitheroe)
Boyle, Sir Edward	Hill, Dr. Rt. Hon. Charles (Luton)	Peel, John
Bromley-Davenport,Lt.-Col.SirWalter	Hill, Mrs. Eveline (Wythenshawe)	Percival, Ian
Brooke, Rt. Hon. Henry	Hill, J. E. B. (S. Norfolk)	Peyton, John
Brooman-White, R.	Hinchingbrooke, Viscount	Pickthorn, Sir Kenneth
Brown, Alan (Tottenham)	Hirst, Geoffrey	Pike, Miss Mervyn
Browne, Percy (Torrington)	Hobson, Sir John	Pilkington, Sir Richard
Bryan, Paul	Holland, Philip	Pitman, Sir James
Buck, Antony	Hollingworth, John	Pitt, Miss Edith
Bullard, Denys	Hope, Rt. Hon. Lord John	Pott, Percivall
Bullus, Wing Commander Eric	Hopkins, Alan	Prior-Palmer, Brig. Sir Otho
Burden, F. A.	Hornby, R. P.	Proudfoot, Wilfred
Butcher, Sir Herbert	Hornsby-Smith, Rt. Hon. Dame P.	Pym, Francis
Campbell, Sir David (Belfast, S.)	Howard, Hon. G. R. (St. Ives)	Quennell, Miss J. M.
Campbell, Gordon (Moray & Nairn)	Howard, John (Southampton, Test)	Ramsden, James
Carr, Robert (Mitcham)	Hughes Hallett, Vice-Admiral John	Redmayne, Rt. Hon. Martin
Cary, Sir Robert	Hulbert, Sir Norman	Rees, Hugh
Channon, H. P. G.	Hutchison, Michael Clark	Rees-Davies, W. R.
Chataway, Christopher	Iremonger, T. L.	Renton, David
Chichester-Clark, R.	Irvine, Bryant Godman (Rye)	Ridley, Hon. Nicholas
Clark, William (Nottingham, S.)	James, David	Ridsdale, Julian
Cleaver, Leonard	Jennings, J. C.	Roberts, Sir Peter (Heeley)
Cole, Norman	Johnson, Dr. Donald (Carlisle)	Robertson, Sir D. (C'thn's & S'th'ld)
Collard, Richard	Johnson, Eric (Blackley)	Robinson, Rt. Hn. Sir R. (B'pool, S.)
Cooke, Robert	Johnson Smith, Geoffrey	Robson Brown, Sir William
Cooper-Key, Sir Neill	Jones, Rt. Hon. Aubrey (Hall Green)	Ropner, Col. Sir Leonard
Cordeaux, Lt.-Col. J. K.	Kerans, Cdr. J. S.	Royle, Anthony (Richmond, Surrey)
Corfield, F. V.	Kerr, Sir Hamilton	Russell, Ronald
Costain, A. P.	Kershaw, Anthony	Scott-Hopkins, James
Coulson, Michael	Kimball, Marcus	Seymour, Leslie
Courtney, Cdr. Anthony	Kirk, Peter	Sharpies, Richard
Craddock, Sir Beresford	Kitson, Timothy	Shepherd, William
Crowder, F. P.	Lagden, Godfrey	Skeet, T. H. H.
Cunningham, Knox	Lambton, Viscount	Smith, Dudley (Br'ntf'd & Chiswick)
Currie, G. B. H.	Lancaster, Col. C. G.	Smithers, Peter
Dalkeith, Earl of	Legge-Bourke, Sir Harry	Smyth, Brig. Sir John (Norwood)
d'Avigdor-Goldsmid, Sir Henry	Lewis, Kenneth (Rutland)	Spearman, Sir Alexander
de Ferranti, Basil	Lilley, F. J. P.	Speir, Rupert
Donaldson, Cmdr. C. E. M.	Lindsay, Sir Martin	Stanley, Hon. Richard
Doughty, Charles	Litchfield, Capt. John	Stevens, Geoffrey
Drayson, G. B.	Lloyd, Rt.Hn.Geoffrey(Sut'nC'dfield)	Steward, Harold (Stockport, S.)
du Cann, Edward	Lloyd, Rt. Hon. Selwyn (Wirral)	Stodart, J. A.
Duncan, Sir James	Longden, Gilbert	Storey, Sir Samuel
Duthie, Sir William	Loveys, Walter H.	Studholme, Sir Henry
Eden, John	Lucas-Tooth, Sir Hugh	Summers, Sir Spencer
Elliot, Capt. Walter (Carshalton)	MacArthur, Ian	Tapsell, Peter
Elliott,R.W.(Nwcastle-upon-Tyne,N.)	McLaren, Martin	Taylor, Edwin (Bolton, E.)
Emmet, Hon. Mrs. Evelyn	Maclean,SlrFitzroy(Bute&N.Ayrs.)	Taylor, Frank (M'ch'st'r, Moss Side)
Errington, Sir Eric	McLean, Neil (Inverness)	Taylor, W. J. (Bradford, N.)
Farey-Jones, F. W.	Macleod, Rt. Hn. Iain (Enfield, W.)	Teeling, Sir William
Farr, John	McMaster, Stanley R.	Temple, John M.
Fell, Anthony	Macpherson, Niall (Dumfries)	Thatcher, Mrs. Margaret
Finlay, Graeme	Maddan, Martin	Thomas, Leslie (Canterbury)
Fisher, Nigel	Maginnis, John E.	Thompson, Kenneth (Walton)
Fletcher-Cooke, Charles	Manningham-Buller, Rt. Hn. Sir R.	Thornton-Kemsley, Sir Colin
Freeth, Denzil	Markham, Major Sir Frank	Tiley, Arthur (Bradford, W.)
Gammans, Lady	Marlowe, Anthony	Touche, Rt. Hon. Sir Cordon
Gibson-Watt, David	Marshall, Douglas	Turner, Colin
Gilmour, Sir John	Marten, Neil	van Straubenzee, W. R.
Glyn, Sir Richard (Dorset, N.)	Mathew, Robert (Honiton)	Vane, W. M. F.
Goodhart, Philip	Matthews, Gordon (Meriden)	Vaughan-Morgan, Rt. Hon. Sir John
Goodhew, Victor	Mawby, Ray	Vickers, Miss Joan
Gough, Frederick	Maxwell-Hyslop, R. J.	Walder, David
Gower, Raymond	Maydon, Lt.-Cmdr. S. L. C.	Walker-Smith, Rt. Hon. Sir Derek
Grant, Rt. Hon. William	Mills, Stratton	Watkinson, Rt. Hon. Harold
Grant-Ferris, Wg. Cdr. R.	Miscampbell, Norman	Wells, John (Maidstone)
Green, Alan	Montgomery, Fergus	Williams, Dudley (Exeter)
Gresham Cooke, R.	More, Jasper (Ludlow)	Wills, Sir Cerald (Bridgwater)
Grosvenor, Lt.-Col. R. G.	Morrison, John	Wilson, Geoffrey (Truro)
Gurden, Harold	Mott-Radclyffe, Sir Charles	Wise, A. R.
Hamilton, Michael (Wellingborough)	Nabarro, Gerald	Wolrige-Gordon, Patrick
Harris, Frederic (Croydon, N.W.)	Nicholls, Sir Harmar	Wood, Rt. Hon. Richard
Harris, Reader (Heston)	Nicholson, Sir Godfrey	Woodhouse, C. M.
Harrison, Brian (Maldon)	Nugent, Rt. Hon. Sir Richard	Woollam, John
Harrison, Col. Sir Harwood (Eye)	Oakshott, Sir Hendrle	Worsley, Marcus
Harvey, Sir Arthur Vere (Macclesf'd)	Orr-Ewing, C. Ian	Yates, William (The Wrekin)
Harvie Anderson, Miss	Osborne, Sir Cyril (Louth)
Hastings, Stephen	Page, Graham (Crosby)	TELLERS FOR THE AYES:
Heald, Rt. Hon. Sir Lionel	Panned, Norman (Kirkdale)	Mr. Michael Noble and
Henderson, John (Cathcart)	Partridge, E.	Mr. Ian Fraser.
NOES
Ainsley, William	Awbery, Stan	Beaney, Alan
Albu, Austen	Bacon, Miss Alice	Bellenger, Rt. Hon. F. J.
Allaun, Frank (Salford, E.)	Baxter, William (Stirlingshire, W.)	Bence, Cyril
Bennett, J. (Glasgow, Bridgeton)	Holt, Arthur	Peart, Frederick
Benson, Sir George	Hooson, H. E.	Pentland, Norman
Blackburn, F.	Houghton, Douglas	Plummer, Sir Leslie
Blyton, William	Howell, Charles A. (Perry Barr)	Popplewell, Ernest
Boardman, H.	Howell, Denis (Small Heath)	Prentice, R. E.
Bottomley, Rt. Hon. A. G.	Hoy, James H.	Price, J. T. (Westhoughton)
Bowden, Rt. Hn. H.W. (Leics. S.W.)	Hughes, Ciedwyn (Anglesey)	Probert, Arthur
Bowen, Roderic (Cardigan)	Hughes, Emrys (S. Ayrshire)	Randall, Harry
Bowles, Frank	Hughes, Hector (Aberdeen, N.)	Rankin, John
Boyden, James	Hunter, A. E.	Rhodes, H.
Braddock, Mrs. E. M.	Hynd, H. (Accrington)	Roberts, Albert (Normanton)
Brockway, A. Fenner	Hynd, John (Attercliffe)	Roberts, Goronwy (Caernarvon)
Broughton, Or. A. D. D.	Irvine, A. J. (Edge Hill)	Robertson, John (Paisley)
Brown, Rt. Hon. George (Belper)	Irving, Sydney (Dartford)	Robinson, Kenneth (St. Pancras, N.)
Brown, Thomas (Ince)	Jay, Rt. Hon. Douglas	Rodgers, W. T. (Stockton)
Butler, Herbert (Hackney, C.)	Jeger, George	Ross, William
Callaghan, James	Jenkins, Roy (Stechford)	Royle, Charles (Salford, West)
Castle, Mrs. Barbara	Johnson, Carol (Lewisham, S.)	Shinwell, Rt. Hon. E.
Chapman, Donald	Jones, Dan (Burnley)	Short, Edward
Cliffe, Michael	Jones, Jack (Rotherham)	Silverman, Sydney (Nelson)
Collick, Percy	Jones, J. Idwal (Wrexham)	Skeffington, Arthur
Craddock, George (Bradford, S.)	Jones, T. W. (Merioneth)	Slater, Joseph (Sedgefield)
Cronin, John	Kelley, Richard	Smith, Ellis (Stoke, S.)
Crosland, Anthony	Key, Rt. Hon. C. W.	Sorensen, R. W.
Cullen, Mrs. Alice	King, Dr. Horace	Soskice, Rt. Hon. Sir Frank
Darling, George	Lee, Frederick (Newton)	Spriggs, Leslie
Davies, G. Elfed (Rhondda, E.)	Lee, Miss Jennie (Cannock)	Steele, Thomas
Davies, Harold (Leek)	Lever, L. M. (Ardwick)	Stones, William
Davies, Ifor (Gower)	Lewis, Arthur (West Ham, N.)	Strachey, Rt. Hon. John
Davies, S. O. (Merthyr)	Loughlin, Charles	Strauss, Rt. Hn. G. R. (Vauxhall)
Diamond, John	Lubbock, Eric	Stross,Dr.Barnett(Stoke-on-Trent, C.)
Dodds, Norman	Mabon, Dr. J. Dickson	Swain, Thomas
Donnelly, Desmond	McCann, John	Swingler, Stephen
Ede, Rt. Hon. C.	MacDermot, Niall	Taylor, Bernard (Mansfield)
Edwards, Rt. Hon. Ness (Caerphilly)	Mclnnes, James	Thomas, Iorwerth (Rhondda, W.)
Edwards, Robert (Bilston)	McKay, John (Wallsend)	Thompson, Dr. Alan (Dunfermline)
Edwards, Walter (Stepney)	Mackie, John (Enfield, East)	Thomson, G. M. (Dundee, E.)
Evans, Albert	McLeavy, Frank	Thorpe, Jeremy
Finch, Harold	MacMillan, Malcolm (Western Isles)	Wade, Donald
Fitch, Alan	Mapp, Charles	Wainwright, Edwin
Fletcher, Eric	Mason, Roy	Warbey, William
Foot, Michael (Ebbw Vale)	Mayhew, Christopher	Watkins, Tudor
Forman, J. C.	Millan, Bruce	Weitzman, David
Fraser, Thomas (Hamilton)	Milne, Edward	Wells, William (Walsall, N.)
Galpern, Sir Myer	Mitchison, G. R.	White, Mrs. Eirene
George, Lady MeganLloyd(Crmrthn)	Monslow, Walter	Whitlock, William
Gourlay, Harry	Moody, A. S.	Wilkins, W. A.
Greenwood, Anthony	Morris, John	Willey, Frederick
Grey, Charles	Moyle, Arthur	Williams, D. J. (Neath)
Griffiths, David (Rother Valley)	Mulley, Frederick	Williams, LI. (Abertillery)
Griffiths, Rt. Hn. James (Llanelly)	Neal, Harold	Williams, W. R. (Openshaw)
Griffiths, W. (Exchange)	Noel-Baker,Rt.Hn.Philip(Derby,S.)	Willis, E. G. (Edinburgh, E.)
Grimond, Rt. Hon. J.	Oliver, G. H.	Wilson, Rt. Hon. Harold (Huyton)
Gunter, Ray	Oram, A. E.	Winterbottom, R. E.
Hale, Leslie (Oldham, W.)	Oswald, Thomas	Woodburn, Rt. Hon. A.
Hall. Rt. Hn. Glenvll (Coins Valley)	Owen, Will	Woof, Robert
Hayman, F. H.	Paget, R. T.	Wyatt, Woodrow
Healey, Denis	Panned, Charles (Leeds, W.)	Yates, Victor (Ladywood)
Henderson,Rt.Hn.Arthur(RwlyRegis)	Pargiter, G. A.	Zilliacus, K.
Herbison, Miss Margaret	Parker, John
Hewitson, Capt. M.	Parkin, B. T.	TELLERS FOR THE NOES:
Hill, J. (Midlothian)	Pavitt, Laurence	Mr. Lawson and Mr. Redhead.
Holman, Percy	Pearson, Arthur (Pontypridd)

Mr. du Cann

I beg to move, in page 11, line 4, at the end to insert: and (d) there shall be allowed as a credit in assessing the income tax and profits tax with which a person is to be charged a sum equal to the amount of any tax payable in respect of the gains under the law of a territory outside the United Kingdom. This matter can be very shortly explained. Indeed, the purpose of tabling the Amendment is largely to obtain elucidation and clarification. Although gains made on the disposition of chargeable assets abroad are taxable under the provisions of the Bill, the Bill none the less does not appear to contain any provision to give relief for foreign taxes levied in respect of those gains.

It will be appreciated that as a nation we are encouraged to invest abroad. Indeed, there are good reasons for doing so, particularly in the underdeveloped countries and especially those in the British Empire. It will also be appreciated that foreign taxation systems are very much changing things. Although from some points of view this may appear to be a theoretical point, it must be right that the Bill should provide for future contingencies.

If one accepts the view that it would be equitable to allow relief in respect of this other taxation in other countries, should it be levied at any time, I hope that my hon. Friend the Economic Secretary will be able to make it clear to those of us who at the moment do not understand the position, first, whether the Bill does so, and, secondly, if it does not, whether he will be prepared to consider the matter with a view, if the Amendment is not acceptable in its present form, to introducing another which would cope with the position.

The Economic Secretary to the Treasury (Mr. Anthony Barber)

My hon. Friend has explained clearly the purpose of the Amendment, and I hope that, quite briefly, I shall be able to convince him that it is unnecessary. I am grateful to him for giving me the opportunity of making the position clear, because I realise that this is a point of considerable importance.

The general position is that if a United Kingdom resident is charged overseas tax on a short-term gain made overseas, under the existing law relief would be due either under the provisions of an agreement with the other country, or, where there was no agreement, or the agreement did not cover the particular case, it would be given unilaterally.

As my hon. Friend knows, there are a number of countries with which we have agreements which contain express provisions to the effect that a resident of one of the countries is, in general, to be exempt from tax in the other country on gains from the sale or exchange of capital assets. These provisions do not, in general, apply where a resident of one country carries on a trade or business in the other through a permanent establishment. Moreover, there are many agreements which contain no provisions dealing expressly with capital gains, but both these types of case would normally fall under the general provisions in agreements under which a taxpayer resident in the United Kingdom can claim credit for tax paid in the other country on income arising from sources in that country.

Now I come to what I can describe as the ultimate safeguard. If, for any reason, relief was not due under an agreement, it would be due under the provisions for unilateral relief contained in Section 348 of the Income Tax Act, 1952, and in the Seventeenth Schedule to that Act. These provide that credit for tax paid in an overseas country on income arising in that country shall be allowed as credit against United Kingdom Tax or Profits Tax chargeable in respect of that income.

It is true that subsection (4) of Section 348 limits this provision to taxes which are charged on income or profits and correspond to income tax or the profits tax in the United Kingdom". but, as the United Kingdom will be imposing taxes on short-term gains as part of its Income Tax and Profits Tax, any tax imposed by an overseas country on these gains would fall within this definition.

Consequently, as my hon. Friend will see, in all circumstances relief would be provided either under the relevant provisions of an agreement, or unilaterally, so there would be no question of double taxation. With that explanation, I hope that my hon. Friend will withdraw the Amendment.

Mr. du Cann

In view of the extremely clear and helpful explanation which my hon. Friend has been good enough to give, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

6.15 p.m.

Mr. Mitchison

I beg to move, in page 11, line 8, to leave out "any previous year" and to insert: any of the three immediately preceding years". I am correcting a slip in the drafting of the Amendment on the Notice Paper, which reads either of the three immediately preceding years". In view of what has been said about conundrums I desire to take no chances.

The question here is over what period, or for what period, one is allowed to carry forward losses which have been incurred against gains. Assuming that a person disposes of an asset at a loss in the year one, is he allowed to carry that on indefinitely, or is there to be some limit to the time for which he may carry it forward? We suggest that year four is a convenient limit for this purpose.

There is no long argument to be produced about this point. It applies, of course, to the Government's proposals. We have finished with our proposals. The Government's proposals are intended to be a way of dealing with what they regard as the equivalent of income for these purposes, that is, short-term speculative gains. If we are dealing with such gains, it does not seem right that a person should be able to set off against them losses which were incurred a number of years ago when, whatever their character when they were first incurred, they have no longer any connection with the kind of subject matter with which the Bill seeks to deal.

It seems wrong that a person should be able to set off in, say, 1980, losses which he may incur in the current year. It is really the incongruity of the thing which calls for some limit, and the character of the gains which the Government are trying to catch. If that is the character of the gains there ought to be something similar in the losses which can be set off against them.

I have another feeling. I do not want to follow the example of the Evening Standard, and add to the number of methods by which people can illegally avoid the tax without too much fear of detection, but it is obvious that if we allow losses to be carried forward for a long time we will open the door to a rather simple system of fraud. One will only have to find a man who has incurred losses a long time ago and put through what one hopes will be a good transaction in his name. If it proves to be a good transaction and one makes a gain, it will be set off against his losses.

I think that the habit, in taxation matters, of allowing people to accumulate losses—though I know it exists in certain respects already—is for that reason and others, one which ought not to be extended. There has been a practice of companies acquiring a value not because they were carrying on any trade, not because they had any assets, but because they had a nice collection of losses against which future gains could be set off. Though there will be limits set on this, and rightly so, I do not think that this is a practice that we ought to encourage.

Mr. Geoffrey Stevens (Portsmouth, Langstone)

The hon. and learned Gentleman's argument is very interesting, but he is probably aware that one of the largest industrial concerns in the country, flourishing and providing good employment and good exports, incurred losses for the first twenty years of its existence.

Mr. Mitchison

I dare say it did, but I cannot see what that has to do with what I am talking about. I am saying that I do not like the idea of individuals or companies walking about labelled, "I have a fine collection of losses".

The same thing goes for bits of property. We have all seen in the newspapers that such-and-such a piece of property has some nice tax losses attached to it against which any future profit can be set off. This sort of thing ought not to be extended. I am not talking about the question of limiting it further. I am simply saying that I do not think it ought to be extended.

For those two reasons, which I now summarise, I ask the Committee to accept the Amendment. The reasons are, first, that the object of the Government's measure is to tax short-term speculative gains, and it seams inconsistent to allow people to set off against them what I might call "ancient losses" which have long lost the speculative character they may have had in the past. I am talking about the Government's measure, not about the Amendment which was rejected.

My second reason is that it is a bad principle to set up classes of people who are valuable for having lost money in the past and are a possible instrument to fraud if transactions can be put through in their names.

Mr. Barber

As the hon. and learned Member for Kettering (Mr. Mitchison) explained, the purpose of this Amendment is to restrict the carry-forward of losses under Case VII. As the Bill is at present drafted, a taxpayer who has a Case VII loss in a year can carry it forward indefinitely to set against short-term gains in any later year. Under the Amendment the carry-forward would be restricted to a period of three years following the year of the loss.

The provisions in the Bill regarding Case VII losses correspond to the existing loss provisions in the Income Tax Acts. A loss incurred in a trade carried on by a taxpayer can be carried forward indefinitely to be set off against his profits from the trade in question in a later year. Prior to 1952 there was a six-year limit for the carrying forward of trading losses, but following the recommendations of the Millard Tucker Committee on the Taxation of Trading Profits the limit was removed in the Finance Act of 1952.

If the hon. and learned Member considers that the analogy of trading losses is not a particularly good one, I should add that if a loss is incurred by the taxpayer in a transaction such that any profit would be assessable under Case VI of Schedule D, the loss can be set off against the profits arising from any transaction in respect of which he is assessable under Case VI in the year of loss or in any subsequent year without limit. Here again, there used to be a six-year limit.

The hon. and learned Member thought that there was some incongruity in the position laid down in the Bill, but there is certainly nothing new in the principle which is applied in the Bill. On the contrary, the provision is in line with the principle which is already applied, not only to Case I, but also to Case VI. The hon. and learned Member talked about consistency. I should have thought, since the whole scheme of the Bill is to treat short-term gains as income for all purposes, it is only consistent to apply in the Case VII sphere the rules which apply in other connections about the carry-forward of losses for set-off against future profits.

The fact that Case VII liability is determined by reference to a time limit, which was a point made by the hon. and learned Member, is no justification for making a special distinction because the essential principle, surely, is to stamp a transaction as of an income-producing nature if it is carried out within the time limit. This principle is surely equally applicable in relation to losses. Once a Case VII loss has arisen from the acquisition and disposal of an asset, there should be no special time limit on the carry-forward of such a loss against gains which are subject to tax under Case VII.

The hon. and learned Member said that there was no long argument to be made over this. I think that I can sum up my reply briefly by saying that in my view the proposed Amendment is illogical, inconsistent and also unfair. For these reasons, I hope that the Committee will reject it.

Mr. Mitchison

That comprehensive answer omitted half the argument, as comprehensive answers usually do. The hon. Gentleman said nothing whatever about the second point which I made, but I made it quite clear that there were two points.

Dealing with what he has said, it is not the terms of the Statute which I am considering so much as what the Government say their object is. If the object is to deal with speculative short-term gains, the long conservation of losses which may be appropriate in trading matters, or even under Case VI, seems somewhat inappropriate. I like to concede anything I can to the hon. Gentleman and I think that he has strict logic on his side when he says that once a speculative loss always a speculative loss, that was the way it arose and that is all that matters. He did not answer my second point. I feel uneasy about it. I do not think it right to leave these rather obvious loopholes, although there are so many loopholes in the Government's proposals that one more or less may not matter much.

For these somewhat cynical reasons I shall ask leave, with a reservation, to withdraw—

Mr. Diamond

No.

Mr. Mitchison

I beg pardon. I shall not ask leave to withdraw the Amendment, but await with interest the comments which my hon. Friend the Member for Gloucester (Mr. Diamond) has to make if he catches your eye, Sir Robert.

Mr. Diamond

I am most grateful to you, Sir Robert, that I have succeeded in catching your eye before my hon. and learned Friend the Member for Kettering (Mr. Mitchison) completed his sentence. I hope that he will not think me discourteous when I say that I think he was considerably over-generous in acknowledging the logic of the Government, for there was little logic there. The whole basis of the small answer which the Economic Secretary devoted to the main argument of my hon. and learned Friend—the very short part of his answer which was relevant to the question at all—was, once a speculative loss, always a speculative loss, but this depends on the loss having been made willy-nilly.

When we take the parallel of an ordinary trading profit we find that the person enters on a series of trading transactions. For the sake of convenience the line is drawn at the end of the year and it is determined whether he has made losses or profits. It is a continuing trade, in which he is endeavouring the whole time to make profits. Because he is endeavouring to make profits, taxability arises. During the course of making profits he may, as the hon. Member for Portsmouth, Langstone (Mr. Stevens) said, make losses for twenty years in the course of reaching those profits. He is allowed to set off those losses because dividing the trading by one year intervals is highly artificial. The endeavour is to take the whole life of the business and see what profit or loss it has made over the whole life.

If, during the early years, it had made a loss and that loss had been taken into account in the whole of the assessment, the profits in the life of the business would have been over-assessed. This is not a question of an investor endeavouring to make profits over a whole period, but deliberately making a loss for this purpose by deliberately selling part of his investments which have gone down in a period short of six months and keeping those investments which have gone up for a period of six months or more. If we took the whole thing together and valued everything there would be some justification, but that is not being done.

It is being said to the taxpayer, "You have perfect freedom to make yourself liable to relief from tax in respect of your losing investments and to make yourself free from tax on the profits of your winning investments. That being the case will you, Mr. Taxpayer, decide which investments it is now convenient to sell, it being just on six months from the time at which you bought them?" No investor has one stock, one share, or one debenture. He holds a series of stocks, shares and debentures, generally spreading over a variety of companies, some of which have gone up and some down. He will take the greatest possible care to sell those on which there are losses before the six months is up. Why is it right, in these circumstances, that this should be compared with the wholly different approach of a trading business, or even with Case VI, where it is the intention to make a profit over the whole period and the reason for the setting off of losses is merely that we would be taxing doubly if profits were made over the entirety of taxation of certain profits?

6.30 p.m.

I say to my hon. and learned Friend that I think, as is consistent with his character, he is being over-generous and over-courteous to the Government in accepting, up to a point, their argument. I would say that there has been no justification for what has been said by the Economic Secretary. The first part of his reply was wholly irrelevant to this issue, comparing, as he did, the setting off of losses against profits of ordinary businesses. There is no comparison there.

What we are saying is that we have to take into account that the investor has a complete option to decide not whether he has made a profit or a loss on the whole of his investments, but whether he has made a profit or a loss on certain of his investments and by realising those investments bringing them within taxability or freedom from tax at a given point of time. By realising his losing investments he can get freedom from tax on them for all time. He sells two days later, one day before and one day after the six months' period. On his winning investment he escapes completely.

In this way he will be building up an enormous store of losses just because there is an opportunity given to him of handling his investment as he thinks fit. This will lead to enormous tax avoidance. This is not a method of collecting tax, but of collecting losses and building them up. They will be particularly juicy losses—losses for sale. We shall have calls in the London streets, "Who will buy my losses?" Anyone who has nice fat Case VII profits on which to pay tax will lean out of the window at teatime on Sundays and hear the bell. Crumpets? No, lovely big losses under Case VII. That is what it will be.

I hope that the Economic Secretary will turn his mind to seeing what the real comparison is and whether there is any justification for giving freedom to the investor to determine his losses and exclude his profits for the purposes of Case VII.

Mr. Houghton

I will give the Economic Secretary a new slant on this before he replies. Let us consider the more unsophisticated speculator who decides to have a flutter. He may decide to have a flutter and lose money. Then his wife grumbles at him, and he decides to give it up and buy a new car instead. He will have a Case VII loss. He may not indulge in speculative activities for years afterwards, but he will still have this loss on his mind.

In due course, he will probably ask for a certificate, similar to the post-war credits certificate. He will keep this by him. It will be a very pretty document and every now and then he will take it out to look at it. Then his wife will say, "When will you got your money back?" He will say, "Until I go into the speculator's business again I shall never get it back." She will say, "That is unfair. They ought to allow you to set off those losses against your salary."

I warn the Economic Secretary that this inevitable carrying forward of long held losses against income will be tiresome to him. It would be much better to cut it short and to get it over.

Mr. Glenvil Hall (Colne Valley)

May I add, in case it is thought that the cases that have been put forward are rather speculative and even fanciful, that some record will have to be taken of these losses if they go on year after year. If they go on and people pile up credits in this way they should have some acknowledgment from the Treasury that their right to set off a loss exists. It seems to me that the Government will be pressed to issue some sort of certificate to individuals in this position so that when, in ten or fifteen years' time, they try to get credit on a loss of ten or fifteen years before the Treasury will not be able to say, "We know nothing about it. Where is your proof?"

Mr. Mitchison

Would not a medal be the best way of doing it?

Mr. Glenvil Hall

A medal would be one way, but how one can inscribe on a medal what the transaction was, I do not know. There will be pressure for something of this kind to be issued and, therefore, what my hon. Friend the Member for Sowerby (Mr. Houghton) said was not all that fanciful. There is something in it.

Mr. Barber

The principal point of the hon. Member for Sowerby (Mr. Houghton) was that the Government would in due course have pressure brought to bear to extend the loss relief so that a loss could be set off against other income. I do not think that I need go further than point out to him that this is not in the Bill and that there is no intention of doing this.

As to the argument of the hon. Member for Gloucester (Mr. Diamond), I can only say that the logical consequence of it is that there should be no loss relief at all.

Mr. Diamond

No.

Mr. Barber

That was certainly the consequence of his argument. This being so, he is obviously at variance with the hon. Member for Sowerby. The consequence is the arguments I adduced in relation to the hon. and learned Member's Amendment applying with redoubled force to the arguments of the hon. Member for Gloucester.

Mr. Mitchison

The Economic Secretary still has not answered the point about the inadvisability of equipping people with losses, with or without a medal, a certificate or other sign of their having them. I should have thought that the Treasury ought to be very careful about doing that. I suggest that it is inadvisable to extend the habit of carrying forward losses in this way. In this case it is certainly the open door to practices which, in the language of the Evening Standard, are undoubtedly illegal but difficult to detect. That is a very good reason for being careful about it. I wish that the Economic Secretary would tell us why he disregards all that.

Mr. Barber

We shall not have to consider in any provisions in a Finance Bill those who engage in what the hon. and learned Gentleman the Member for Kettering (Mr. Mitchison) quite frankly called fraud. There are obvious occasions in any new provisions for fraudulent practices. This is not mere avoidance which the hon. and learned Gentleman is talking about. It is fraud—a criminal offence. I should not have thought that, even taking into account the possibility of fraud, for that reason alone we should not do what otherwise, certainly prima facie is fair and equitable, which is to allow these people who are taxed under Case VII also to have an opportunity of setting off their losses against their profits.

Mr. Mitchison

I do not think that the hon. Gentleman appreciated the strength of the arguments adduced in favour of the Amendment. I think, on the other hand, that what he has said deserves more careful consideration than perhaps at first sight it appeared to deserve. For these reasons I should like to reserve the possibility of reverting to the matter, but for the present I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Stevens

I beg to move, in page 11, line 48, at the end to insert: (b) in the case of any chargeable accounting period, whether or not it is a period for which the accounts of the trade or business are made up, the gains to be included shall be those accruing during the period, and the losses to be allowed shall be determined accordingly and subsection (3) of section twenty of the Finance Act, 1937, shall not apply in relation to those gains or losses. The reason for the Amendment is another example of the complexities and difficulties which arise from our two-tier structure of taxation of the profits of limited companies and should be a further encouragement to my right hon. and learned Friend the Chancellor to press on with the inquiries he is making into the possibility of simplifying the whole of our tax structure.

In the ordinary way, the basis for assessment of the profits of limited com- panies for Profits Tax purposes is the same as that for Income Tax purposes, namely, the twelve-month period of account of the company. Subsection (7) deals with the Profits Tax charging of these short-term gains. While the basis of assessment for Profits Tax purposes is normally the same for Income Tax purposes, it is not always so. The Profits Tax basis will change, for example, if the accounts of the company concerned are made up for irregular periods.

That can happen in a number of different circumstances. It may be a new business. It may be an ending business. It may be that the board has decided to change the date up to which the accounts are made. For these and other reasons, the period of account of the company may be a period other than twelve months. In these circumstances, the Commissioners of Inland Revenue have power under Section 20 (2, a) of the Finance Act, 1937, to determine what the chargeable accounting period shall be. Obviously, in these circumstances the chargeable accounting period will not be the same as the period of account of the company.

As I read the subsection, there is a conflict, because the effect of the first part of the subsection is that regard is to be had to the amount of the gains less losses accruing in the period for which the account is made up, but paragraph (b) clearly states that regard shall be had to the actual gains and losses accruing during the chargeable accounting period. There is thus a clear inconsistency between, on the one hand, the accounting period and, on the other, the chargeable accounting period. The object of my Amendment is to remove that inconsistency.

Mr. Barber

My hon. Friend is quite right and I advise the Committee to accept the Amendment.

Amendment agreed to.

Mr. Stevens

I beg to move, in page 12, line 6, to leave out from "shall" to "be" in line 16 and to insert: be the same as if no notice were in force under that section, but— (i) where gains accrue in a chargeable accounting period of the subsidiary in excess of the losses allowable to the subsidiary under this Chapter against those gains, then in computing the profits arising in the corresponding chargeable accounting period of the principal company from its trade or business the excess shall, for the purpose of deducting losses allowable to the principal company under this chapter and accruing in that period and for the purposes of subparagraph (ii) below". I hope that this Amendment will be as successful and be greeted with the same brevity as was accorded to my last Amendment, which was dealt with in one of the best speeches I have heard from the Treasury Bench for a very long time.

This Amendment deals with a different point. It deals with oases where there has been a group assessment. For Profits Tax purposes a group of companies can elect to have group assessment under Section 22 of the Finance Act, 1937. A main feature of that for Profits Tax purposes is that losses of one company can be set off against the profits of another. There are three ways in which those losses within the group may occur. A subsidiary can have a loss which is deductible from the profits of a parent; a parent can have a loss which is deductible from the profits of a subsidiary; or one subsidiary may incur a loss which is deductible from the profits of another subsidiary. Paragraphs (a) and (b) of subsection (7) deal with the first two contingencies but not with the third, the setting off of the losses of one subsidiary against the profits of another.

The effect of my Amendment would also be that a small inconsistency in lines 6 to 8 on page 12 would be removed. The effect of the provision as it is at present written is that where a group assessment is in force the gains accruing to a subsidiary company will be included in the profits of both the subsidiary and the parent.

I hope that I have made my argument clear and that this Amendment will be greeted with the success and brevity accorded to my previous Amendment.

Mr. Barber

Yes.

6.45 p.m.

Mr. Mitchison

No. We should like a little more explanation than that. The Economic Secretary's speeches are becoming so short that he will not be able to Shorten them any further. Though there is much to be said against his longer speeches, there is also some- thing to be said against his shorter speeches. We would like to know from him in detail why this and the preceding matters were omitted by the Government. What has caused the Treasury to commit so many errors of draftsmanship in one subsection?

Mr. Barber

The honest answer is an equally brief one. We made an error in both cases. Now, my hon. Friend having sought to put it right in this way, we agree with him. I thought that it would be for the convenience of the Committee if I made the point as briefly as I did.

Mr. Mitchison

Let him not do it again.

Mr. Diamond

Notwithstanding the brevity with which the Economic Secretary has dealt with the Amendment, may we be assured that he has had an opportunity of looking at the drafting? We are all familiar with Amendments being introduced by back benchers which are acceptable in principle because a back bencher sees the point in question and seeks to put it right. Such Amendments are acceptable in principle, but, without the assistance which is available only to the Government Front Bench, it is often difficult to get the drafting precisely right.

I recognise that the hon. Member for Portsmouth, Langstone (Mr. Stevens), who is a very distinguished member of an acceptable profession, has to consider the drafting of Income Tax Acts, Companies Acts and many other Acts in great detail. He is, therefore, very familiar with draftsmanship as a whole. Nevertheless, it would be very reassuring to know that the Economic Secretary had an opportunity to look at the drafting and that not only is the principle of the Amendment acceptable to him, but the drafting has been carefully considered and is so right as to every single word, comma and every other mark in it that the Economic Secretary found it possible to accept it in one word.

Mr. Stevens

Although I very readily accept political jealousy between the hon. Member for Gloucester (Mr. Diamond) and myself, I very strongly resent this professional jealousy. The fact that he has never earned ten out of ten for one of his sums is no reason why I should not earn ten out of ten.

Mr. Glenvil Hall

I have no objection whatsoever to the Economic Secretary being brief in his replies, provided that what he says tells the Committee why he has rejected or accepted an Amendment. Particularly in view of what he said in reply to the query raised by my hon. and learned Friend the Member for Kettering (Mr. Mitchison), if the Treasury has slipped up and made a mistake it should apologise to the Committee. The Economic Secretary seemed to think that it was rather funny. At any rate, he took the matter very lightly, giving the impression that this was something the Treasury had had called to its attention and that it accepted straight away the Amendment tabled by the hon. Member for Portsmouth, Langstone (Mr. Stevens).

If the hon. Member for Langstone had not noticed this, what would have happened? Would there have been a gap in this legislation to which we should have had to return next year? It is obvious that if the Treasury has made a mistake it should not be allowed to ride off in the way that the hon. Gentleman seems to think it can. The least we are entitled to is an apology from the Dispatch Box by the Economic Secretary.

Amendment agreed to.

Mr. William Clark (Nottingham, South)

I beg to move, in page 12, line 34, at the end to add: (8) For the purpose of this section any profit not exceeding one hundred pounds in any year of assessment shall be ignored. The main reason for the tabling of this Amendment is that I believe that small savers should have every possible encouragement, and my fear is that the operation of the speculative gains tax, as at present envisaged, will act against them. The Chief Secretary to the Treasury said this afternoon that savings were necessary for our prosperity, and I would not want anything to stop small savers from carrying on with their saving.

What, for example, is the position in regard to unit trusts. Unit trusts are now used quite extensively for short-term savings over three months, six months, nine months, or even longer periods. If a man saves 10s. a week in a unit trust and continues to do so for two years, under the Bill as it stands, any capital appreciation on his unit shares in the first eighteen months will be exempt. In the last six months, however, he may be buying unit trust shares at different values—at 7s. 2d., 7s. 3d., 7s. 4.d., and so on. At the end of the two years, who is to calculate the exact amount of capital appreciation he has enjoyed?

I am sure that, as the Committee knows, this tax is really intended to catch the large man. I do not think for a moment that it was ever envisaged that it should catch the small man as well. I know, too, that in the Bill as it stands, the tax on capital appreciation is meant to be an extension of the definition of income according to the Income Tax laws, but is that so? Under Case VII, the income or loss is not allowed to be set off against any other income. That takes it out of normal income; consequently, it should be dealt with separately and differently for the small saver.

Again, we try, through the National Savings movement—and I think that the Treasury could do a little more to assist there—to help the small saver, in that the first £15 of interest on money in the Trustee Savings banks or the Post Office is free of Income Tax. If that is right for the small saver in that case, surely it is right to do the same for him in regard to this tax. I hope that my hon. Friend the Financial Secretary will give thought to this, because I rather fancy that, apart from the disincentive it will otherwise be to small savers, if the ordinary man has to work out when and what he bought at 7s. 2d. and sold at 7s. 3d. the whole thing becomes administratively impossible. Nobody would expect the Inland Revenue to do that work. The administrative difficulties would be enormous but, more important, the operation of the tax under the Bill as it stands would be a disincentive to the small saver.

Mr. Geoffrey Hirst (Shipley)

I want to support the Amendment, particularly from the administrative point of view. As the Committee knows, I have an absolute horror of increasing in any way Government expenditure on that bureaucracy which I have fought since I became a Member of the House, though not very successfully. Without this Amendment, a great deal of nonsense could go on, with lots of people fussing about over £12 or £15, which does nothing but cost more money.

As my hon. Friend has pointed out, this tax is aimed much more at the person who more or less makes an offside trade in speculative gains. We should not get embroiled in the administrative details resulting from chasing a few small people, who may not even be conscious that they have made a gain. I hope that we shall show some sense of proportion in this matter.

Mr. F. M. Bennett (Torquay)

As my hon. Friend the Financial Secretary may recall, I made this point a feature of my speech in the Budget debate. The effect on the small saver and the costs of administration have been dealt with, but there are one or two additional matters. The wording of the Amendment may, perhaps, have to be modified. It is always very difficult for back benchers to get the wording right, and, speaking for myself, I should be very happy were the Financial Secretary to express himself as being generally in sympathy with the object of the Amendment. Or perhaps we could employ my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) to do that work for us—or even the hon. Member for Gloucester (Mr. Diamond), if he wants to catch up with my hon. Friend—

Mr. Houghton

If the hon. Gentleman will permit me to ask it, are not the drafting resources which are available to the hon. Member for Portsmouth, Langstone (Mr. Stevens) available also to him?

Mr. Bennett

I cannot answer for that, because it did not occur to me until I realised that there was a professional feeling between my hon. Friend and the hon. Member for Gloucester.

As I was saying, the wording might have to be altered. For instance, at might be understood that we were thinking in terms of £100 profit on any one transaction in any one year. There is no such intention. It is £100 for the year, otherwise a "smart boy" could have a whole series of small transactions and so avoid the tax. I hope that my hon. Friend the Financial Secretary will not waste any time on that point.

As to administrative convenience, it is a fairly good rule—

Mr. Diamond

Before the hon. Gentleman turns to administration, and while he is still on drafting, and the distinction which rests on one side of the Chamber, where draftsmanship is available, and the other side, where draftsmanship is not available, to members of the same profession, could he tell me whether the words any profit" mean any profit after deducting the losses or before deducting the losses?

Mr. Bennett

I think that we have dealt long enough with the professional rivalry between the two sides of the Chamber. I am not in the same profession as either hon. Gentleman, so perhaps we can turn to the substance of the Amendment.

I was referring to the de minimis argument, and I think that more could be said on that than has been said by either of my hon. Friends. As the Bill stands, the Inland Revenue would not only have to spend a lot of time investigating small and, perhaps, isolated gains, but would also have to spend time checking up small losses. The result might be a very great administrative burden to deal with ludicrous annual losses of, perhaps, a few shillings. The administrative cost would be quite disproportionate to what was involved.

Apart from the small saver, I do not mind supporting the small gambler. There are large numbers of people who like small gambles on the greyhound racing, or horses, or football pools. When I made this point in the Budget debate I was told, in effect, that those people had already been taxed, because a tax is levied at source on stakes on these pursuits. That is not a valid point in this case because, except in regard to gilt-edged, Stamp Duty has been paid, so that there is also a tax at source. There is, therefore, a very fair case for allowing a man to have a small gamble without all the paraphernalia of a speculative gains tax being involved.

Quite apart from gambling, I hope that the Financial Secretary will realise that if the position remains as it is in the Bill, anyone who, most estimably, does not go in for gambling, but who buys gilt-edged fixed-interest stock within six months of the redemption date, will bear the full burden of the speculative gains tax, when all he has done has been to obey the Financial Secretary's urging to buy fixed-interest Government stocks.

At the moment any stock that is within six months of redemption will disappear from the market, otherwise the saver will be involved in the full burden of paying a speculative gains tax for what is not a speculative gain, for he is buying Government stocks with a view to gaining known appreciation on them on redemption; I hope that, in this instance, my right hon. and learned Friend will take this into account.

7.0 p.m.

Mr. Mitchison

I hope that hon. Gentlemen opposite will not object to my saying that the Tory Party provides me with continual amusement. Yesterday hon. Members opposite were engaged in opposing and voting against a proposal that small incomes should be exempted from taxation. They have today developed a sudden solicitude for the small saver—even the small gambler—which was entirely omitted when they voted yesterday. One always welcomes conversion as long as one can be certain that it is thoroughly sincere and extends to all aspects of the matter under discussion.

Mr. F. M. Bennett

Since the hon. and learned Gentleman's remarks appear to be directed at me, may I point out that in other respects the small saver has received from this Government over a period of many years one concession after another? I was pointing out that when a new tax is introduced some concessions should be made.

Mr. Mitchison

I was referring to the amusement which the Tory Party continually provides me and I find that observation rather funny. I wonder why it does not strike the hon. Member for Torquay (Mr. F. M. Bennett) in the same way? Yesterday Tory Members were voting against the exemption from taxation of small incomes and today they are justifying the Amendment by saying how anxious they are to protect the small saver and gambler. If they cannot see the inconsistency or irrelevancy of the remarks that have just been made I am afraid that I cannot help them to do so.

This is not merely a matter of drafting. There is a real difficulty about what is proposed and as the matter stands we are supposed to be dealing with gains. I take it that the word "profit" in the Amendment is intended to mean a single gain, although that is far from clear. Might I put this example to hon. Gentlemen opposite? Supposing one puts through a transaction in a considerable number of small parcels. One might find oneself exempted.

Mr. W. Clark

The hon. and learned Member for Kettering (Mr. Mitchison) cannot have been listening to the speech of my hon. Friend the Member for Torquay (Mr. F. M. Bennett) in which he pointed out that we agreed that the wording of the Amendment was not of great interest to us but that we were concerned with the principle behind it. My hon. Friend pointed out that we did not want it to be so worded that a man with ninety-nine profits worth £99 each could get through. It is the principle that matters.

Mr. Mitchison

I have listened to everything that has been said on the Amendment but I must consider the actual words of it or it will become extraordinarily difficult to discover what it is aiming at. I am pointing out that there is an inherent difficulty about the Amendment and I wish to develop my argument. If hon. Gentlemen opposite will study paragraph 15 (1) of the Ninth Schedule they will find that where one gets a number of transactions carried out in order to effect a single bargain one must regard each transaction as a separate one attracting a separate gain or loss. I am trying to point out that if one puts through something with the intention that apparently lies behind the Amendment, one is simply inviting people who are putting through quite a large transaction to do so in a series of small bargains. According to what I understand is meant by the remarks that have been made, and certainly by the wording of the Amendment, the result would be that none of them would attract tax.

Another objection I have is that I do not think that there is any reason for drawing a line at this particular point in this particular case. The amount involved on £100 at the standard rate is just under £40 at the present rate of tax. This is not a negligible amount and I fail to see why this form of income—because that is what it is to be treated as under the Bill—should attract this kind of exemption.

As I say, I have in mind what hon. Gentlemen opposite did the other day when, on the total exemption of small incomes, they objected. Thus I fail to see why they have selected this case for exemption and I become doubtful about the real intention behind the Amendment. I have tried to do the best I can to extract it from the words of the Amendment but, despite that, I am told that whatever the Amendment means it does not mean what it says. This is an upsetting beginning. I do not know what hon. Gentlemen opposite think they are after and I really do not know if they know the answer themselves.

The Financial Secretary to the Treasury (Sir Edward Boyle)

After some years I derive a good deal of enjoyment and entertainment from Finance Bills, but I do not think that I should entertain the Committee if I attempted to respond to the invitation of the hon. and learned Member for Kettering (Mr. Mitchison) to have yesterday's debate all over again.

My hon. Friend the Member for Nottingham, South (Mr. W. Clark), whose speech I listened to in the Budget debate, and my hon. Friend the Member for Torquay (Mr. F. M. Bennett) both gave notice to the Government of the points they intended to raise on this subject in Committee. I am not quite sure that the Amendment really performs the function that the hon. Member for Nottingham, South has in mind. This is not just a matter of drafting because I imagine that my hon. Friend's object is not really to exempt gains not exceeding £100 on individual transactions because this could lead to the exemption of fairly substantial total gains. I imagine that my hon. Friend has most in mind the idea of exempting total gains not exceeding £100 in one year.

I can assure my hon. Friend that my right hon. and learned Friend the Chan- cellor of the Exchequer has considered this proposition most seriously. There is, however, a difficulty about it; that my hon. Friend's proposal would be inconsistent with the whole scheme of the legislation we are considering in Clauses 9 to 15. The House and the Committee may or may not approve this legislation but there cannot be any doubt about what the Chancellor has in mind. My right hon. and learned Friend is, after all, widening the concept of income. He is proposing to treat short-term gains as income. To provide for the exclusion of relatively small amounts from the charge would be inconsistent with the purpose of these Clauses.

The question of the rate of Income Tax to be charged on short-term gains will, of course, depend on the taxpayer's total income, just as it does in relation to any other item of income. This is a point which should be remembered. It is not very likely that the great majority of small savers who buy a small amount, perhaps of some gilt-edged security, will make a profit of £100.

Mr. Callaghan

They will be jolly lucky.

Sir E. Boyle

The Government's actions last year and this year have had a considerably improved effect on the gilt-edged market. I was saying that the great majority of small savers will not, in fact, be paying tax on these gains at a high rate. One should remember that if the taxpayer is liable to Surtax, small short-term gains should be brought in just as would a dividend from a small holding of shares. Taking into account the way my right hon. and learned Friend has introduced his Budget, I cannot see that there is any compelling reason to give better treatment to small savers than to others making short-term gains, any more than there is reason to think that the fact that a person's gains do not exceed £100 a year under Case VII will necessarily mean that he is a small saver, because I do not believe that that will always be true either.

My hon. Friend raised the question of the unit trusts. Here again, if they derive gains within Case VII, there does not seem any convincing reason to exempt them when other persons whose main activities are not speculative will have to pay tax on their short-term gains. Speaking for myself I would rather keep value judgment out of this. We do not want to think too much in terms of the idea that the person who makes large speculative gains is necessarily anti-social and should be caught and someone who just makes a small gain is a small saver and therefore ought to be encouraged by the tax system. What my right hon. and learned Friend says is that we should widen the concepts of income. In this Clause we are widening the concepts of income for everybody. We are not saying for a moment that there is something wrong about speculative gains, whoever makes them. We are saying that in our view they ought to come within the tax net.

My hon. Friend raised the point of the concession made in 1956. He drew attention perfectly fairly, to the fact that we had in 1956 an exemption from Income Tax given on the first £15 of interest received by an individual on deposits in the Post Office Savings Bank or the ordinary department of a trustee savings bank. I was Economic Secretary at that time and I remember the circumstances of that Budget and Finance Bill very well. Surely the aim of that concession was that it was not simply given in order to encourage the small savers as such but was given in the context of a savings Budget, with a large Budget surplus at a time when we had in this country an excess of capital investment over savings. It was done not just to encourage saving but to encourage small savers to lend direct to the Government at the long-established interest rate of 2½ per cent. paid by the institutions in question. It was an encouragement to small savers to make a voluntary addition to the Budget surplus through lending to the Government in that way. I hope that I am not to be considered offensive if I say that the purpose of that concession has not been always understood. In so far as my hon. Friend has misunderstood it, he is in good company because in the distinguished book on saving by my right hon. Friend the Minister of Health I do not think that he quite got that point either.

Mr. Jay

The hon. Gentleman surely is not suggesting that subscriptions to the Post Office appear as above-the-line revenue in the Budget.

Sir E. Boyle

I said that this concession was made in order to encourage a kind of voluntary addition to the Budget, in other words to lend money to the Government at the ordinary 2½ per cent. rate. The right hon. Gentleman can look up the debate at the time when these things were considered.

On the question of administration, I can absolutely promise my hon. Friend the Member for Shipley (Mr. Hirst) that when this Clause passes on to the Statute Book the Revenue will have something better to do with its available manpower, who are none too many, than to regard as a first priority chasing up small investors about these small sums. I can promise my hon. Friend that there will be no question of the Revenue behaving unnecessarily—

7.15 p.m.

Mr. W. Clark

How would the Revenue know whether it was a small loss or a small profit?

Sir E. Boyle

It is for the Revenue and not for me to say what its activities will be. We are bringing in here a considerable new aspect of our tax law. I thought that my hon. Friend the Member for Shipley rather exaggerated the extent to which the Revenue would be likely to be spending valuable manpower on pursuing what prima facie appear to be small amounts.

Mr. F. M. Bennett

The Financial Secretary said that the Revenue would exercise certain discretion where deals are extremely small, but the Revenue will not have discretion where the losses are small. The individual loss must be pursued at the wish of the taxpayer if we do not draw a line, as we suggest, for gains and losses.

Sir E. Boyle

I think that I was misunderstood. I was not saying that there is specific discretion. I was saying that the Revenue would administer the matter in the sensible way that it administers the overwhelming majority of tax cases. I cannot see that it would be sensible from the administrative point of view to say that we must take out of the charge a series of small transactions, because it would equally take out a series of substantial transactions involving large losses on the one hand and large gains on the other, leaving £100 net. We have to realise that the £100 might be the result of a very complicated case. The Amendment is not consistent with the general scheme of legislation. While I have listened with respect to my hon. Friends, I do not consider that the precedent from the 1956 Act is as powerful as they suggest.

I came back finally to the point that the Committee may or may not like my right hon. Friend's scheme but since he has decided to widen the tax basis in this way I do not think that there is a compelling case for having the kind of exemption which my hon. Friend has in mind under the Amendment, namely of total gains in one year not exceeding £100. It is for these reasons that I cannot advise the Committee to accept the Amendment.

Amendment negatived.

Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Jay

Our discussions so far have established two things. The first is that this is not a capital gains tax. The second is that it will not raise any revenue. It is useful to have that clear at this point of the discussion. What the Government have really done is not to introduce a capital gains tax, but to redefine what type of gains are to be classed as being liable for Income Tax, Surtax and Profits Tax. The Government have done that by choosing this rather queer criterion of a time limit as the test for the Inland Revenue. It does not seem to me, for two reasons, that the Government have made out their case for setting up a limit to the period during which this tax operates.

First, there does not seem to me any valid moral distinction to be drawn between gains made within six months on securities or within three years on land and gains made over a longer period. It is remarkable that the Financial Secretary, in his last speech, said, "Let us get away from moral judgments; let us not make value judgments", when the whole construction of the tax is based by the Government on a moral judgment between gains made in six months and gains made over a longer period. Because, in our view, that moral judgment —and it certainly is a moral judgment —is not valid, we do not consider that the time limit is justified.

Secondly, it is unjustifiable for the obvious practical reason that it makes the tax so easy to evade. No argument so far has in the least impaired the contention we have made from the beginning that the six months' time limit for the purpose of share transactions makes the tax fantastically easy to evade. Therefore, the Government have not made out the case for the limit, Which is, of course, the main cause of the extremely small amount of revenue, if any, Which the tax will yield.

In our view—I believe that hon. Members opposite really agree—it is as justifiable to tax capital gains over any period as to tax income. The other day, the Chancellor said that all taxes are odious. He will agree, I think, that some are more odious than others, or, to put it the other way, some are less odious. If one had to choose between taxing income and taxing capital gains. I should have thought that a capital gains tax would be, at least, the less odious of the two.

We are informed that Mr. Clore, who has been mentioned in our debates, has made a personal fortune of about £50 million since the end of the war, mainly, presumably, by capital transactions in land and securities. Without entering into any moral questions about how this was done, or whether it was in the public interest at this time anyway, I do not think that anyone can seriously argue that, if a person can make gains of that order, or of even a smaller order, which are, of course, receipts in the form of money, whether they be called income, gains or anything else, which he can spend and which add to his purchasing power, those gains ought to be exempt from taxation.

We have been very moderate on this side of the Committee. We have not attempted to argue that, with no time limit at all for defining taxability, the whole weight of Income Tax and Surtax should fall upon capital gains. We have proposed a tapering provision which allows to some extent for the Government's argument, in which there is, I think, some validity, that very long-term or fairly long-term capital gains probably have rather more element of investment in them.

The Deputy-Chairman (Sir Robert Grimston)

I am sorry to interrupt the right hon. Gentleman, but we must not go over again all the arguments which have been adduced on the series of Amendments discussed yesterday and earlier today.

Mr. Jay

I was not seeking to do that, Sir Robert. I was merely looking at the tax and saying what some of us on this side feel about it and about the future of the tax as it now comes before us.

A question has been raised about whether it is excusable to omit pool winnings from the tax. It seems to me that, for a tax of this kind, a pool winning is a quite different type of receipt from a capital gain or capital appreciation. To have capital appreciation, one must have some capital; one must have an asset which appreciates. The whole tax is based on the assumption that there is a capital asset which is worth something at one time and something else at another time, the gain consisting in the difference between the two.

A pool winning is not of this kind at all. It is more in the nature of a prize. There is no capital asset which appreciates. Although I think that the pools should be subject to taxation, as they are by a different form of tax, I do not consider that pool winnings are a valid object for the purpose of this tax. If it were to be argued—I do not know whether anybody would argue it—that the capital asset involved is the stake put down at the beginning of the operation, I suppose that the conclusion would be that, where there was a stake and no winning, a loss was made and this would have to be set off against any possible gain. That is such an obvious absurdity that it shows the absurdity of treating pool winnings in that way.

The Government admit that we shall get very little revenue from the tax, but I do not accept the argument that one could not expect any reasonable yield of revenue from the sort of tax we were proposing or from a real capital gains tax. It has been suggested that the revenue in the United States from the capital gains tax is irregular. So it is. Nevertheless, though not enormous, it is substantial and the average over the years is very well worth having.

We must remember also, in considering the yield, that the estimates of both the majority and of the minority of the Royal Commission which discussed the matter in such an illuminating manner were made before 1954, long before the great Stock Exchange boom which began really in 1958 and before the great boom in land values which was started by the Rent Act introduced by the present Chief Secretary of the Treasury. Those estimates were made long before the great rise in capital values which have since accrued in both Stock Exchange securities and land.

If one goes back to 1957 and takes Stock Exchange securities alone, one finds that there has been a capital appreciation of about £10,000 million over periods of not more than two or three years. Going back that distance of time from now, one finds an enormous rise of about £8,000 million or £10,000 million. If one studies the national income figures—here, I have had some instruction by correspondence from the Financial Secretary—I think that it is possible to argue that the increase which is accruing annually in the value of assets of companies, without any new money being put up, that is to say, the rise in the capital values of shares held by equity shareholders generally, is proceeding at the rate of about £1,000 million a year.

I fully admit that this, of course, is unrealised gains. So far as I know, no one is aware of what the figure of realised gains on these transaction is today, but I think that all these other figures indicate that it is probably very considerable, much larger than the minority or the majority of the Royal Commission allowed for, and that, therefore, potentially, if we had a real tax, there is a quite substantial source of revenue available to us here.

The Chief Secretary to the Treasury advanced what I thought was a quite extraordinary argument against any more serious more form of tax. He said that, over any substantial period of years, or even a moderate period of years, part of the rise in the money value of the capital assets might be due to the fall in the value of money and, therefore, he seemed to suggest, it ought not to be taxed. This argument applies to any estate values for Estate Duty In estate values for death duties nowadays, no doubt, a good deal of the money value is due to the decline in the purchasing power of the £ during the last twenty, thirty Or forty years, but nobody suggests that, for that reason, some portion of the estate should not be subject to Estate Duty.

The same argument could be applied to Income Tax at present. We have heard today that the cost of living has risen by 6.4 points during the last twelve months, a very remarkable rise in the year of the Government's pay pause, faster than in any year for a very long time. Some people have had small rises in money incomes during the past twelve months. Most of them, if they have been anywhere near the Government's 2½ per cent., have been much less than the 5 per cent. or 6 per cent. rise in the cost of living. Surely the Chief Secretary will not argue that, because some of those rises in salaries or wages have been to offset the rise in the cost of living, they should be exempted from Income Tax. If he does not argue that, he must accept that there is no weight or substance in his argument on those grounds against a real capital gains tax.

I do not believe that the tax will be temporary. It will be temporary in this farm, but I do not believe that we shall go back to a system in which we make no attempt to tax capital gains at all. It is interesting that the Chancellor did not even introduce it as a temporary tax. We are often told how Income Tax was introduced as a temporary measure and became permanent, and how the Purchase Tax was introduced as a temporary measure and became permanent. Here we have a tax which was not even introduced as being temporary. This is fairly good evidence, I think, that, far from disappearing, the tax will grow.

My hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) spoke about taxing the tree as well as taxing the fruit, and said that there was a good case for taxing the tree. I think that there is a good case in this instance, when looking at capital assets, for the tree is growing, and we are thoroughly justified in taxing it. I believe, also, that this tax will Brow as time goes on. We on this side of the Committee shall seek to make it a more substantial, a more valuable and a more equitable type of tax, but, as it has been introduced by the present Chancellor and the party opposite, it is little more at present than a hollow framework—designed, I suppose, to delude people into thinking that it is a real tax—from which very little revenue is to be expected, and which will have to be converted in the future into something much more substantial and much more effective.

7.30 p.m.

Mr. Humphrey Atkins (Merton and Morden)

I shall not attempt to go over the arguments that we have had during the last few hours. I rise only to seek clarification from the Government on one point concerning the application and the calculation of this tax, because I do not think it is at all clear in the Bill.

I refer to the position of trust funds, and perhaps I could illustrate what I mean by referring to a simple form of trust with which many members of the Committee must be familiar—the one in which a trust fund is set up and the income is paid to one person during his or her life, the capital sum in due course being paid to another. If the trustees carry out some transaction which renders the fund liable to this new capital gains tax, what I do not understand is how this tax is calculated. I feel sure that the Committee will agree that it is manifestly unfair that the tax should be calculated by reference to the income of the life tenant of the trust, because the life tenant has no direct interest in the capital.

My right hon. Friend the Chief Secretary to the Treasury referred to the tax as being a tax on money that may be spent as income. The life tenant cannot spend the money as income, because he or she has no title to it. It might appear that the obvious answer would be to calculate the tax by reference to the income of the remainder man, but, again, the same remark applies. If it is a tax on money which may be spent as income, the remainder man does not get it, at any rate, not straight away. Therefore, I do not think it would be entirely fair to calculate it by reference to his income.

If there is more than one remainder man, and there are perhaps two ultimate beneficiaries of the trust, how then does one calculate the tax? The Committee can imagine the situation in which there are two ultimate beneficiaries, one a child with no income and the other a grown-up, married to a rich husband or wife and paying a very high rate of Surtax. Is the tax to be calculated by some process of averaging, or how?

Mr. Diamond

On a point of order. There is an Amendment on the Notice Paper to Clause 15, page 22, line 6, at the end to insert: (3) Where gains accruing to trustees of a settlement are assessed and charged on them under Case VII, the tax chargeable shall be treated by the trustees as a proper expense to be set against the capital of the trust estate notwithstanding any contrary direction in the instrument creating the trust. That deals with matters closely associated with those to which the hon. Gentleman is now referring. I only want to know whether, as I understand that that Amendment is likely to be called by the Chair, there will be any restriction of the discussion that may take place on that particular Amendment.

Mr. Atkins

Further to that point of order. I have seen the Amendment in the name of the hon. Member for Gloucester (Mr. Diamond) and I have studied it. It seems to me, though I am open to correction, not to cover the points I am making. What I am addressing myself to at the moment is what kind of tax should be paid in the first place.

The Temporary Chairman (Mr. G. Thomas)

The hon. Gentleman may be quite sure that this discussion will in no way affect his Amendment. The hon. Member for Merton and Morden (Mr. Atkins) is quite in order in raising this point at this stage.

Mr. Atkins

Thank you, Mr. Thomas. I will not weary the Committee with endless examples of how complicated it would be to determine this tax. In many trusts, there are beneficiaries with no established right to a share of the trust, because they may die or others may be born before the shares can be finally determined. It is extremely difficult to know how this tax can be assessed. In so far as it is meant to be a tax on profits which can be spent as income, it is clear that no one can spend it as income, and I hope that my hon. Friend the Economic Secretary will say that, at least, it attracts no tax, but I doubt if that will be the case. It may be said that, by and large, trustees do not engage in speculations of this nature. I agree, but we can all see that this situation may arise and that it is extremely desirable that trustees should know exactly where they stand.

Mr. Anthony Crosland (Grimsby)

I am grateful to you, Mr. Thomas, for calling me now, because I should like to take up one or two points which have been raised on the other side of the Committee during the debate on this Clause.

There has been a good deal of discussion about football pools, but it seems to me that nobody has pointed out the basic distinction between football pools and a capital gains tax, apart from the one mentioned by my right hon. Friend the Member for Battersea, North (Mr. Jay). If losses or costs are allowed to be set off against any gains, there cannot be any gains made from football pools. The pools promoters expect to make a profit every year. If the costs of betting—the same is true of horse racing or any other form of betting —are set off against the gains, there can be no net gains from football pools, taking the population as a whole, even if net losses are offset against these gross gains.

The most striking feature of the debate has been the speech of the Chief Secretary. It should be said that the general level of that speech was a disgrace by Parliamentary standards. The right hon. Gentleman trotted out some of the most trivial and inaccurate arguments, many of which have been answered before. I think that he might have made some more elaborate attempt to deal with the points raised in detail. For example, on the point he made about inflationary gains. I should not have thought that, in 1962, that would have been raised from the Government Front Bench as part of a serious speech.

The right hon. Gentleman said that any comprehensive capital gains tax such as we favour would have a very damaging effect on incentives to invest, but he did not make it at all clear in what respect this damaging effect would operate. If there is to be a bad effect in this way, it would be far worse under this tax than under the kind of tax we are proposing. The marginal results of this tax will be much higher than under a real comprehensive capital gains tax which we on this side have always favoured, and any effect which there is likely to be will be much worse under this tax than under the alternative.

So far as yields are concerned, the Chief Secretary was extremely disingenuous. He referred vaguely, though without quoting it, to the Report of the Royal Commission on the Taxation of Profits and Income. He did not refer to the quite different conclusions of the minority Report, or to the fact that the figures in the Inland Revenue appendix to the majority Report were based on assumptions that were out of date even by the time that the majority Report was printed.

I want to take up the right hon. Gentleman's point that a comprehensive capital gains tax would yield very little revenue, even if we assume that, unlike the last few years, profits are going up only at the same rate as income, and that dividends are going up at the same rate as profits. In other words, we are making a more pessimistic assumption than the last five years warranted. If profits and dividends are going up at the rate which the Chancellor set as a gross target, namely, 4 per cent. per year of the gross national product, the yield of any capital gains tax on a comprehensive scale will be very considerable. It seems to me that this argument is completely unanswerable.

There has been discussion about the effect on the Stock Exchange. I wish that the hon. Member for Taunton (Mr. du Cann) were here, because he was quite right in saying that the market has not been very strong since Budget day, due primarily to this Clause of the Bill, but partly to the fear of a dock strike and to the fear of a Labour Government, I am happy to say, and partly to the weakness of Wall Street.

There was another point on which the hon. Member for Taunton was inaccurate. He trotted out, after the event, the fear which was widely put forward before the Budget that it would have a very serious effect on the number of markings per day, on the volume of Stock Exchange transactions. There is no clear evidence that it has had this effect. There have been one or two days of particularly heavy marking since. This certainly appears from a consideration of what has happened on the Stock Exchange during the past month. It is impossible to say, therefore, that this fear has been realised in practice.

The main points have been gone over several times in this matter, and one comes back to the main case against the Clause and in favour of our alternative proposal. We take the view, like the minority Report of the Royal Commission, that one cannot distinguish between income in the normal sense of the term and capital gains. The only intelligent way of ascertaining income is to consider what one spends during a week or, perhaps, six months. Capital gains increase one's spending power in the same way as income. In logic, that is an irresistible case for taxing capital gains as well as conventional income.

The possession of capital confers on the lucky capital owner an advantage which cannot be measured in terms of income or capital gains. It can only be measured in terms of freedom, in terms of security, or in terms of the Crichel Down type of case in which one stands up against bureaucracy and public or private authorities. There is enormous room for manœuvre and general easement of life which cannot be measured by the income profit, nor, I would say, even by the capital gains profit.

On these two grounds, it is not worth the Government bothering about a so-called capital gains tax from which the yield will be zero, and there is an irresistible case for a proper comprehensive tax of the kind which we propose.

Mr. Graham Page (Crosby)

It has frequently been said in discussing Amendments to the Clause and during this debate that we are redefining the gains which were previously taxable and which the Chancellor of the Exchequer wishes to bring into charge. I, for one, cannot justify the tax freedom which that sort of gain has had in the past, and it is right, in present circumstances, to bring it into charge for tax, so long as one can do that without causing damage to the sort of activities which one would wish the capitalist, if I may so call him, to undertake. We have in this Clause chosen a form of tax which will cause the least damage, first, to the use of capital for development and, secondly, to savings.

What disappoints me about the form of tax which appears in the Clause is this. We have not excluded disposal which is made for immediate reinvestment. This will hit, in particular, the normal, prudent trustee. Only a few months ago we passed an Act dealing with the duties of a trustee, and we imposed a number of greater duties on trustees than they had before. One of them was that they should look, from time to time, at the investments which they hold in trust and, if necessary, should change those investments.

It should be put on record that this Clause will put trustees in a very difficult position when they see that, in accordance with prudence in dealing with their investments, they ought to sell an investment at a gain and to reinvest in something else. They will have to consider whether it is right for them to increase the capital at the expense of the income beneficiary paying this tax. As I understand it, the tax will fall on the income beneficiary.

7.45 p.m.

I wish that we could have relieved trustees of these further problems that will be imposed on them and on the individual of paying this tax when disposing of savings merely to plough them back again into savings. We have not done that and, therefore, the individual and, in particular, trustees will be put in this difficult position of having to pay tax when they are merely changing their investments. In the case of trustees, it is not the same person doing the transaction who has to pay the tax. He has to think of two classes of person—his capital beneficiary and his income beneficiary—and I fear that he will be in great difficulty.

Mr. Jay

The trustee already pays Stamp Duty when he buys equity shares and, of course, he pays Income Tax on the dividends from them. Is there any-think more wrong in this tax being payable also?

Mr. Page

Yes, because, when he pays Stamp Duty, that is a capital expenditure and he is charging it against only one individual, the capital beneficiary. Now he will have to consider whether he is right in increasing the capital at the expense of the income beneficiary paying the tax.

Mr. Diamond

Apart from the issue whether the duty falls on one class of person or another, on the beneficiary or on the remainder man, will the hon. Gentleman say whether it enters into the trustee's mind, when he decides to sell for the purpose of re-investing, that one argument for selling is that the stock he is proposing to sell stands at a high price and, therefore, one of his duties is to look after the various interests as well as he can and to sell because the stock is high since he will make a profit? If the trustee sells with a view to making a profit for those in whom he stands in trust, what is the argument against the tax being payable?

Mr. Page

My point was that he will have to consider this when he carries out the duties he has been directed to carry out under a recent Statute, namely, to examine his investments from time to time. When he does that and decides that it is right to sell, take the gain and re-invest, he has to decide on which individual the liability should fall.

That is a development of the main argument which I wished to advance, that I wish we could have included in the Clause an exclusion of disposal which is purely for the purpose of ploughing back any savings. We have not done that, and, to that extent, I regret the presence of the Clause in this form in the Bill. I should have liked to encourage the man with savings to look at them every now and then, to sell if sale is warranted, and to increase his capital and invest it in savings. I cannot see anything wicked or immoral in that. If a person has capital, he should not leave his talents in the ground, so to speak, so that they do not prosper. This Clause will be a discouragement to the ordinary saver who is looking after his Investments.

Dr. Alan Thompson (Dunfermline Burghs)

We on this side certainly welcome the Clause as far as it goes, but, as we have amply said, it does not go anywhere near far enough. The only satisfaction that we get from it is that at last the door has been opened and the Government have accepted the principle that a tax on capital is no longer unthinkable. The old arguments about it being confiscatory and the argument of my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) about the difference between the tree and the fruit, and that it is permissible to tax the one but not the other, have perished for ever. I liked my hon. Friend's analogy. I shall have to work out the implications of stripping a tree of its inflationary branches and pruning it for further production. However, my hon. Friend's analogy was a lively one and should find its way into economic text books in future.

We are a little doubtful about whether the Clause as it stands can meet the many and complex objectives which any new tax in 1962 has to meet. We know that it will be a complicated tax. Any capital gains tax must be fraught with complications. As the Greeks used to say, however, it is not the easy things, but the difficult things, which are beautiful. I am sure that this quotation will appeal to the scholarly and sensitive classical minds of the Treasury. Nevertheless, a capital gains tax can be tailored to meet important objectives. In this respect, the Clause fails.

The first and obvious objective is equality. It may be late in the evening, although I hope not, to quote Adam Smith; but as he comes from Fife, perhaps I may be permitted a quotation from his well-known canon on equality of sacrifice: the subjects of every State ought to contribute to the support of government as nearly as possible in proportion to the revenue which they respectively enjoy under the protection of the State. Can anybody say that this miserable Clause comes anywhere near to fulfilling that objective?

Emboldened by the attention given to that quotation, I should like to give another, from Adam Smith's canon on economy in raising tax. When I look at the elaborate paraphernalia of the Clause, the rules governing it, the elaborate details covering artificial transactions, and so on, when, by holding the investment a day longer, it is possible to avoid the whole lot, I am reminded again of Adam Smith on economy of taxation, that Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the State. The paraphernalia of administration in this case and the miserableness of the revenue stand in sharp contrast.

Our charge is that the Clause makes little contribution—one might almost say no contribution—to equity. The old idea of equality of sacrifice as a kind of philosophical principle has given way to the idea of equality of sacrifice as a psychological necessity. Everybody in the community must be convinced that they are all bearing equal burdens. What our ancestors regarded as natural law, we think of as psychological. Even as a psychological gambit, however, the Clause fails. It will have no impact on trade unions or anybody else about equality of sacrifice. It leaves wide openings for avoidance. It will be expensive and cumbersome proportionately to the amount of tax collected. From that point of view, the Clause is a bad one.

Another objective of taxation which, with our much more sophisticated ideas on public finance nowadays, we must consider is taxes for counter-cyclical purposes, using our tax system to offset booms, depressions and movements in the economy. This is an important point to which thought should have been given in preparing the Clause.

It is true that as a counter-cyclical move, a capital gains tax is rather long term. It does not have the immediate effect of, say, indirect taxes on consumption, which can be put into effect immediately by means of regulators which we have discussed at other times. The delays in collection blur its impact in this respect as a counter-cyclical weapon. Nevertheless, it is, or could be, useful if more thought had been given in the Clause to using a capital gains tax in a counter-cyclical way. Properly designed, it could have been a useful offset to long-term inflationary tendencies.

To develop the principle of using the Clause for what might be called compensatory finance, I think that both sides of the Committee are agreed—now that knowledge of Keynesian economics is the prerogative of both sides although not always properly followed through—that automatic fiscal adjustments are, perhaps, the best way of dealing with cyclical movements. These automatic fiscal adjustments can be brought out by a sensible taxation policy.

To make the obvious point, during a period of inflation and rising money incomes, the yield of taxes increases even though tax schedules remain constant. It is an automatic stabiliser in this respect. On the expenditure side, unemployment and social benefits tend to expand in a depression, but they contract in periods of rising income and employment. Therefore, these automatic correctives of a proper flexible taxation system have significant economic as well as political advantages over other kinds of controls.

We do not rule other kinds of controls out of the question, but other kinds of discretionary controls which, nobody denies, are more administratively cumbersome lend themselves to difficulties and delay. We try the discretionary controls when our automatic fiscal working has broken down. In the Clause, however, capital gains has not been brought in to play its part in what might be called the compensatory finance of dealing with trade movements.

To quote from the Review of Economic Studies, of February, 1962, to which I direct the attention of Ministers, Mr. P. H. Pearce, a Canadian economist now working with O.E.C.D., states that The inclusion of capital gains in taxable income would prevent a most volatile part of total income from escaping tax and hence would increase the responsiveness of tax yields to income changes. Thereby, he goes on to argue, it would act as a counter-inflationary means in times of rising prices and vice versa in times of falling prices.

What we might say, therefore, is that if we had had a proper capital gains tax, had the Clause gone far enough, we could have broadened the base of our system and we could have built it into an automatic compensatory system of finance. This is what anybody who wants to tidy up our ridiculously obsolete tax system is always anxious to do. It can also be argued that the less discriminatory the capital gains tax, the less the likelihood that it twists capital sup- plies into the wrong channels. The more comprehensive it is, the fairer it is.

I sometimes find myself in agreement with what is said on the benches opposite about Purchase Tax. The analogy is the same. Two extreme variations in Purchase Tax distort and misallocate resources. A flat, wider tax is better. For the same reason, by bringing in everybody a wide capital gains tax would discriminate against no particular form of enterprise. The more comprehensive the capital gains tax, the less one can argue from the viewpoint of the individual that he is being victimised or the less one can argue from the point of view of the country as a whole that resources are being in some way misallocated. For these reasons, we believe that the capital gains tax as proposed in the Clause is inadequate.

A capital gains tax, too, is a good incentive to avoid inflation, quite apart from its compensatory factors. The most effective means of damping down the rate of capital gains is to control inflation. The question of capital gains assumes a completely different magnitude in, say, a period of stable prices, on the one hand, or a period of prices rising, say, at 5 per cent., on the other.

Perhaps I may be allowed to sum up with a quotation from the late Lord Dalton, who said that public finance was one of those subjects which lie on the borderline between economics and politics. He said that studies in public finance raise the conflict between the analytical and the practical man and that excess of abstraction in this sphere is unreal and an excess of conventional rule of thumb is especially half-witted.

8.0 p.m.

What we have to do in the whole of public finance is to satisfy the ordinary person's sense of justice. This is the plain man's rule of economics. It is very real, and has been conceded on the benches opposite. Certain kinds of money have been escaping taxation, whereas others have been paying tax. We must satisfy the plain man's sense of justice and, at the same time, fit the tax into what nowadays is a complex and difficult system of raising and spending money.

On the lines that I have suggested, it is open to argument whether one uses the money raised from the capital gains tax for special purposes, for compensatory fiscal purposes in times of inflation, for Income Tax relief, for the Health Service, or whether, as the late Lord Dalton once suggested in his original proposals for a capital levy, one uses it to write off the heavy compensation debt of the nationalised industries and so gives the public boards a freedom and flexibility of manoeuvre with regard to prices and other policies which they do not at the moment enjoy, and also raise morale in the public sector.

Whatever we use the fruits of the tax for, the Opposition would argue that Clause 9, as it stands, is a rather miserable, pettifogging effort conceived without enthusiasm and, we suspect, intended from the outset to fail—to fail from the point of view of its objective of equality, and to fail from the point of view of bringing it into harness to serve any real purpose, which any tax should, in solving the problems of our economy.

Mr. Barber

The Committee will remember that when the Bill was debated on Second Reading my right hon. and learned Friend the Attorney-General, in winding up, dealt at some length with the position of the varying types of insurance companies. He concluded by assuring the House: that between now and the Committee stage we shall give very careful consideration to everything said on this topic."—[OFFICIAL REPORT, 3rd May, 1962; Vol. 658, c. 1345.] Therefore, I hope that the Committee will bear with me if for a brief moment before I try to deal with some of the points which have been raised in the debate on the Question, "That the Clause, as amended, stand part of the Bill", I touch on the question of mutual insurance companies.

For the reasons which were given by my right hon. and learned Friend on Second Reading, we do not propose any change in the position of mutual non-life companies from that which results under the present provisions of the Bill. If such companies, which are not now charged to Income Tax on their profits, should make short-term gains, they will be liable on them. But as regards mutual life companies, we have reached the conclusion that the case for a relieving provision is well founded. These companies are not charged to tax on their profits as such, but in general they pay tax on the same basis as non-mutual life companies; namely, on their investment income, subject to due allowance for management expenses. This gives a bigger liability than if they were charged on profits.

We are clear that it would be wrong to subject the mutual life companies to a charge under Case VII which would not fall on ordinary life companies, and my right hon. and learned Friend the Chancellor of the Exchequer intends to introduce an Amendment on Report to exclude mutual life companies from the change to tax under Case VII.

We have had a long debate—

Mr. Jay

Is the hon. Gentleman not going to explain to us the reasons for this decision? I gather that he is now saying that the mutual non-life companies are to be subjected to the tax. How about the non-mutual non-life companies? Are they subjected to the tax now? Is the hon. Gentleman making any distinction there? Can he explain exactly why he has drawn the distinction in this way?

Mr. Barber

I will go over the whole ground again if the right hon. Member for Battersea, North (Mr. Jay) wants me to. I will try to explain it briefly, but I hope he will bear in mind that on Second Reading my right hon. and learned Friend went very carefully and in full detail into the distinctions between the two types of companies. However, I will go into it in detail if he would like me to. Briefly, in the case of life insurance companies both ordinary companies, in general, and mutual life companies pay tax on their investment income only and not on Case I. In fact, in law the ordinary life insurance company is liable to tax under Case I. Because of this, the ordinary company —that is, the non-mutual company—will not be liable to tax under Case VII. The right hon. Gentleman will remember that companies which are liable already under Case I come outside the scope of this charge.

This means that the ordinary Company—this is the ordinary life insurance company—of the non-mutual type will normally pay tax on its investment income only. The mutual life company will also pay tax on its investment income only, but, as the Bill is at present drawn, it will in addition pay tax under Case VII because it is not liable under Case I. This would obviously be inequitable, I think, if one compares the position of the ordinary company with the mutual company—I am concerned solely with life insurance companies—because it would in effect impose an additional burden on the mutual life companies. Therefore, we thought it right to take the action we have suggested.

Mr. Jay

Does it mean that ordinary companies and mutual companies will now be in exactly the same position; that is to say, that the life companies in every case will be exempt whereas non-life companies will not?

Mr. Barber

It is true that the life companies will be in the same position. I have put the matter very briefly. It is difficult to explain briefly, but I hope that my right hon. and learned Friend the Attorney-General will agree that I have put it correctly. I emphasise that it is lot easy to explain in a few moments.

We have had a series of debates on the Clause, first, on the Amendment, and then a final debate on the Question, "That the Clause, as amended, stand part of the Bill", and these debates have gone on for a considerable time. The right hon. Member for Battersea, North, who spoke first for the Opposition in this last debate, made two main points. First of all, he said that, in his view, there was no particular validity in the periods of six months and three years selected by my right hon. and learned Friend. Surely the point that he made there raises once again the basic distinction between the view of the Chancellor and the right hon. Member for Battersea, North? We have been over this ground not only in the four-day debate that we had on the Budget and also on the Second Reading of the Bill but again this afternoon in connection with the Opposition Amendment to which my right hon. Friend the Chief Secretary replied.

I hope that the Committee will acquit me of any discourtesy if I do not go over the same ground again. My right hon. and learned Friend has already explained why he is not in favour of the kind of scheme which is advocated by the Labour Party, and the Chief Secretary repeated many of the arguments again this afternoon. I thought that the hon. Member for Grimsby (Mr. Crosland) was a little unkind. After all, my right hon. Friend the Chief Secretary was replying to many points which had been put previously in our debate.

Briefly, I think one can draw this distinction. The Opposition's scheme is directed to taxing the appreciation on genuine investment—it is a point of view, and it is the one which the Opposition hold—whereas my right hon. and learned Frend's scheme is directed more to the taxing of the fruits of speculation.

The right hon. Member for Battersea, North went on to say that the whole basis of my right hon. and learned Friend's proposals involves a moral judgment. Here again, I do not wish to weary the Committee by going over the whole ground again. This is the same point as the right hon. Gentleman made in the debate on the Budget. Perhaps I might just remind the right hon. Gentleman that, in columns 1535 and 1536 of HANSARD of 12th April, I dealt with this point at some length. I again, with respect, draw his attention to what I said.

My hon. Friend the Member for Crosby (Mr. Graham Page) referred to the position of trustees. As a solicitor he has had much more experience than I of the practical workings of these matters, but from the discussions I have had about this Bill I doubt very much whether the difficulties of trustees will be as serious as he suggests. In any event, I am sure he will agree that it would be out of the question to exempt trusts from any form of tax on capital gains. This being so, even if the difficulties which he foresees were as serious as he suggests, I cannot see how, as a practical matter, we could, in the context of a tax of this kind, do anything to meet his point.

The hon. Member for Dunfermline Burghs (Dr. A. Thompson) criticised what he called the "elaborate provisions and paraphernalia" of the Bill. I must confess that I have a great deal of sympathy with that point of view, and if it had been possible to produce a simpler and shorter Bill, that would have been done. But, of course, we are extending the scope of Income Tax into an entirely new field, and in these circumstances it is inevitable that the legislation should be rather complex, not only to prevent doubt by trying to cover all these various points but by trying to cover the great variety of differing circumstances where the new tax is intended to operate.

I hope that the Committee will forgive me if I do not deal with the point about automatic fiscal adjustments to deal with cyclical movements. That went a little wider than I had anticipated.

Mr. Houghton

Has the Chancellor made any rough estimate as to whether the cost of the administration of the tax will be greater than the yield?

Mr. Barber

I am not sure whether that is a trick question or not, but the hon. Gentleman will recall that repeatedly during the Budget debate and also, I think on Second Reading, Government spokesmen said that it is not possible in the case of a new tax of this kind to give any estimate of the yield. This being so, it is impassible to compare the yield with the cost of administration.

Mr. Houghton

So this is a speculation in itself.

Mr. Barber

I come finally to the point raised by my hon. Friend the Member for Merton and Morden (Mr. Atkins). He asked about the case of a trust where the income is paid to one person during his or her life but the capital fund is ultimately distributed to another person. He said that trustees might find that funds under their control attracted the new tax under Case VII, and he asked what the position was.

As he knows, for tax purposes, the gain will obviously be treated as income. Whether or not it will be treated on a par with income for the purposes of the trust will depend on the terms of the trust instrument. By virtue of Clause 11 (6), trustees of a settlement are to be treated for Case VII purposes as a single and continuing body of persons. The consequence of this and of the general law in this matter is that in the normal case—by which I mean a case where the special anti-avoidance provisions do not operate—in respect of a gain chargeable under Case VII, there will be no liability to Surtax, and Income Tax will be charged at the standard rate.

I have tried to cover as briefly as possible the various points raised, and I hope that the Committee will now come to a conclusion.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.