Clause 12.—(COMPUTATION OF GAINS.) (Hansard, 22 May 1962)

§ Mr. Ronald Bell
On this Clause, it would be appropriate to ask for an indication of the Government's view about whether gains of this character should count as earned or unearned income. I put down an Amendment to the Clause which has not been selected, possibly because it is starred, which suggests that such gains should be treated as earned income. As I interpret the Bill—I hope, correctly—they will be treated as unearned income and there would be no earned income allowance in respect thereof.
That seems to me to be a harsh step. Gains of this character have hitherto escaped taxation altogether, usually because they were infrequent in the case of the individual taxpayer and were able to be treated as casual profits. If he engaged in the operation sufficiently often, he became a trader or a person carrying on that operation by way of trade and so fell to be taxed in respect of its profits. The income was, however, earned income and the appropriate allowances were given. If a person did it once or at long intervals, no tax was payable and it was a casual profit.
What the Bill does is to catch the casual profit and subject it to tax, but illogically to subject it to a higher rate 376 of tax than would be incurred if the person carried out the operation repeatedly. This is difficult to understand.
In his Budget statement, my right hon. and learned Friend the Chancellor of the Exchequer said: Certain types of quick gains secured by those not engaging in such operations as a business are under the present law treated as capital receipts. Although ordinary people find it difficult to distinguish them from income… He said a little later: Those who make a business of such transactions are taxed already as traders. Those to whom the new arrangements will apply are those of whom it cannot be established that they are carrying on a business. In my view, however, it is wrong that such people should escape taxation on such activities."— [OFFICIAL REPORT, 9th April, 1962; Vol. 657, c. 979.] In Clause 12, which establishes the way in which the gains are to be computed, it says that the gain accruing to a person … shall be computed for purposes of Case VII in the like manner as it would fall to be computed for purposes of Case I of Schedule D if the acquisition and disposal … had been an adventure in the nature of trade. In other words, what we are doing is to say that the occasional profit which in the past has escaped taxation altogether shall in future be assimilated to those gains of a like character which have resulted from adventures in the nature of trade. Therefore, it seems to me that the logic of the argument—an argument which I do not in itself in any way resist—is that these should be treated as though they were trading profits as they would be if more frequently resulting and that, therefore, unearned income allowance should be given in respect of them.
I expect that there will be "technical difficulties"—there always are in Finance Bills—and, unlike my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), I am not sufficiently skilled in these recondite matters to be able even to understand the nature of the technical difficulties, let alone suggest a solution of them. But it seems to me to be on the face of it inequitable that something which was formerly thought to be immune to the tax and which it is now thought ought to be assimilated to the trading profit of the person who engages in that kind 377 of operation as a livelihood based upon capital gains, should nevertheless be differentiated in this disadvantageous way from the more frequent exercise of the same activity.
For these reasons, my view is that it should be regarded as earned income, and I hope that the Attorney-General will give some hope that this possibility will be examined.

§ Mr. Houghton
I entirely disagree with the hon. Member for Buckinghamshire, South (Mr. Ronald Bell). I must admit that I have been very surprised to read in various quarters an expectation that earned income relief would be applied to this tax. I always regarded earned income relief as quite inapplicable to a tax of this kind, and I was glad that the Government, in putting forward their proposals, were of the same opinion.
The hon. Gentleman has referred to subsection (1) with its cross-reference to Case I of Schedule D. It is true, of course, that the Clause refers to assessment under Case VII in like manner with Case I of Schedule D, but that, I have assumed, is merely to avoid a lot of tedious repetition. It does not mean that to be assessed in like manner with Case I carries with it the expectation that earned income relief will also be applied in a like manner. I think that is the obvious explanation of this cross-reference to Case I of Schedule D. It is an easy reference to the basis of assessment.
I have been wondering what would happen if a taxpayer said, "In order to get the benefit of earned income relief, I wish to be assessed under Case I of Schedule D." What would happen if the Inland Revenue said, "This profit is assessable under Case VII", and he replied, "No. I insist that it shall be assessed under Case I"? What would the Inland Revenue do? The taxpayer would certainly then get the benefit of earned income relief. But of course the time limit which might or might not be available to him would be removed—he would he assessable by the year. He might, however, employ the cessation provisions at a suitable point in time. I do not know.
It is an engaging question as to whether a taxpayer could insist on being assessed under a different case of Schedule D. He could presumably say, "This is not a speculative gain; I am 378 engaged in trade, and this in the nature of an adventure. Do not argue with me; I tell you what I am doing and I insist on being assessed accordingly." Perhaps the Attorney-General can tell us what would happen in that extraordinary situation.
On the general issue, I suggest that if a person does desire to have the benefit of earned income relief, then the tax assessment must come within the framework of the rest of the taxing code relating to earned income—that is to say, it must be in the nature of a trade and be assessable accordingly. Although it is very late for the right hon. and learned Gentleman to apply his mind to these hypothetical situations, he acquitted himself very well just now and probably he has the answer to this one.

§ The Attorney-General
That complimentary observation—unusual from the hon. Member for Sowerby (Mr. Houghton)—has done a good deal to allay the suspicion I feel when I find myself in agreement with anything he says. On this occasion, his last remark has done a good deal to remove suspicion.
We gave careful consideration to this problem long before this Bill was introduced, and I am sure my hon. Friend the Member for Buckinghamshire, South (Mr. Ronald Bell) will agree with the general principle that a gain or a loss on a particular transaction is to be computed as it would be under Case I of Schedule D in the case of an adventure in the nature of trade.
I got his argument based on the reference to a trade adventure. That is merely put in as a method for computing the gain, and it does not state that the gain comes from trading. Of course, up to the present there have been many people who have been seeking to make it appear that they are not trading and so avoid liability for tax. One effect of the Bill may be to reverse the trend, but one does not know. No doubt those concerned with these matters will give careful consideration to that issue.
As far as the Inland Revenue is concerned, there is a question of fact—whether the person concerned is carrying on a trade, profession or vocation. The Revenue will have to be satisfied 379 about that by evidence before acceding to a claim from someone who up to now has been claiming not to be carrying on a trade yet has suddenly become a trader after the passage of this Bill.
To seek a title to earned income relief on gain falling under Case VII would be going too far. One starts from the hypothesis that there is no trade carried on, and liability under Case VII will be of a much more casual nature than when trade is carried on. Often, the work will be no more than knowing that a piece of land can be bought cheap and sold at a profit, or speaking to a broker on the telephone, or getting a bank to sell the results of allocation. To treat such gains within the ambit of earned income, as though they were like the salaries of a miner or a Minister or the income from a genuine business, would be unfair and might lead to ridicule.
I am glad my hon. Friend raised this point, for others have raised it outside this Committee, and it is right that it should be discussed even at this late hour. I hope that now he will not find it necessary to press his objection.