Clause 15.—(CHARGE TO INCOME TAX OF PROFITS AND GAINS ARISING FROM LAND.) (Hansard, 16 May 1963)

§ Mr. William Clark (Nottingham, South)
I beg to move, in page 12, line 36, at the end to insert: or in such other period as the Commissioner may direct". The subsequent Amendments, I fear, will be fairly complicated, but I am glad to say that this is simple. Under Clause 15(2) as drafted the Inland Revenue must take the whole of the income from property for the fiscal year and there is no means whereby the taxpayer can have a different basis from the 31st March to 5th April accounting dates. By concession of the -Inland Revenue, under Case VI at present, people in this category are allowed to take their normal accounting year as the year of assessment.
I hope that my hon. Friend agrees that this is a simple and small point, even though I regard it as important. I suggest that in the case of a company or an individual who owns property, the accounting year should be sufficient for his declaration of income and that it should be under this Clause exactly the same as under Case I, Schedule D.

§ Mr. Graham Page
I support my hon. Friend the Member for Nottinngham, South (Mr. W. Clark) on one point, which I think strengthens his argument. The charge for furniture and services is in a later Clause kept under Case VI. If under Case VI the taxpayer is allowed to choose his year, it will cause a certain amount of confusion if for the services and furniture charge he chooses one fiscal year and for the rent he has to choose the normal fiscal year. This shows one of the confusions which will arise out of the retention of Cases VI and VIII. I am sure that if the words in the Amendment were added to the Clause it would remove that sort of confusion.

§ The Financial Secretary to the Treasury (Mr. Anthony Barber)
Subsection (2), as it stands at present, provides that Case VIII assessments on a landlord shall be based on the amount of the rents and other receipts from land to which he is entitled in the year of 1600 assessment—that is to say, in the year ending 5th April. The Amendment would allow an assessment to be based on a period other than the year of assessment, where "the Commissioner", as he is described, which presumably means the Commissioners of Inland Revenue, so directs.
I can see that this Amendment is very relevant to the case of a property company which, as I understand, in the past has been assessed on the basis of its accounting year. It is suggested that Case VIII assessments on such companies should also be made on the basis of the company's receipts and expenditure in its accounting year. It is true that in practice the accounting year has frequently been adopted as the basis for excess rent assessments under Case VI in cases of this kind.
I can see the force of the argument advanced by my hon. Friend the Member for Crosby (Mr. Graham Page). It will obviously be more convenient, both to the taxpayers concerned and, I have no doubt, to the Revenue, to be able to adopt the company's accounting year as the basis for Case VIII assessments in appropriate cases. But no doubt in the ordinary way a small individual landlord will continue to be assessed on the basis of his receipts in the Income Tax year, as indeed has been done when making excess rent assessments in such cases in the past.
I certainly think that my hon. Friend the Member for Nottingham, South (Mr. W. Clark) has a point here, but I hope he will understand when I tell him that I cannot accept the Amendment as it stands. It does not, as I think it should do, restrict the period which may be adopted to a period of 12 months ending within the year of assessment. Nor does it specify which Commissioners—the Commissioners of Inland Revenue or the local Commissioners—should have the power to determine what period should be adopted. Having said that I think my hon. Friend has a point, I am bound to say that there are certain other difficulties, with which I will not weary the Committee at this stage, if my hon. Friend will pardon me, about drafting an Amendment to do what he intends. However, I have every sympathy with the objective he has in mind. We will certainly do our 1601 best to try to meet it. If we can meet it, of course we shall table an Amendment on Report. I hope that in these circumstances my hon. Friend will not press the Amendment.

§ Mr. Mitchison
One small point occurs to me. I recognise that this is existing practice, but it is, as I think the hon. Member for Nottinghamshire, South (Mr. W. Clark) pointed out, in fact a concession. I do not think that there is any authority for it in the Income Tax Acts. I stand to be corrected about that if I am wrong. If one puts half a concession on paper, may we not get into difficulties about the other half. That which is conceded as a matter of practice could perhaps continue to be conceded as a matter of practice. Once we begin to say that it shall be done in some cases, we may by inference leave it doubtful whether it will continue to be done in others. I merely mention this. It is no objection in principle to what the hon. Gentleman has mentioned and what the Government have accepted. Obviously one will have to consider who the right authority—at present designated as "the Commissioner "—is.

§ Mr. Barber
Perhaps I might mention that there is also a statutory provision in Section 101(7) of the Income Tax Act, 1952 to this effect— In computing the five-year average for the purposes of this section, the year shall be taken to be the year ending on the thirty-first day of March, or such other date as may be adopted by the owner of the land or houses with the consent of the surveyor of the district … I think, without checking it, that the hon. and learned Gentleman is correct that the practice of assessment under Case VI by reference to the accounting year of a company is mere practice. Certainly this is a factor to be taken into account in ensuring that there are not repercussions from any Amendment which we might table. I would merely say that this is a point which we should like to meet if we possibly can, and we will certainly do our best to achieve that end.

§ Mr. W. Clark
I apologise to my hon. Friend the Financial Secretary for the very loose wording of the Amendment. I am very grateful to him for accepting it in spirit In view of what he has said, 1602 I beg to ask leave to withdraw the Amendment.

§ Mr. Barber
In order to honour the pledge given by my hon. Friend the Economic Secretary, perhaps I should say at the outset that this Clause provides that rents and other receipts from land in the United Kingdom are to be charged to tax under Schedule D under the new Case which we have been discussing, Case VIII. The tax will be charged direct on the landlord instead of partly by assessment under Schedule A, which is normally made on the tenant, who, as my hon. Friend pointed out on the previous Clause, is entitled to deduct the tax from his rent, and partly by an excess rent assessment on the landlord under Schedule D, as at present. Case VIII assessments will be on a current year basis—that is, on the actual receipts, less the actual expenses of the same year.
By virtue of Clause 14(2) and Clause 20(1), the provisions of this Clause do not take effect until the year 1964–65. The reason is a simple one. It is that the staff in tax offices could not cope in one year both with the other changes instituted by the Finance Bill, in particular the P.A.Y.E. re-coding of 5 million owner-occupiers which is necessary in consequence of their being exempted from tax under Schedule A, and with the introduction of a new system for the taxation of rents and other income from real property. Much preliminary work will have to be done in this year—1963–64—to enable the transition to be carried out, I hope smoothly, in the following year.
My hon. Friend the Member for Crosby (Mr. Graham Page) asked why we had decided to operate this new system under a new Case VIII rather than under Case VI. As I have said, in the past, tax in respect of rented property has been assessed both under Schedule A and also under Case VI where there were extra rents to be taxed. There was a great mass of special rules which were applicable to Schedule A. As Schedule A is now going, we have had to replace it with other rules which will be in some cases exclusively concerned with rents and analagous income.
1603 Because of this, we thought that in the course of abolishing Schedule A it would be more convenient for all concerned if we included these new rules in a new Case VIII rather than in Case VI, which is the residual Case of Schedule D. The answer to my hon. Friend, in short, is simply that we thought that this was the more convenient way to do it. We had to lay down these new rules, which are set out in these 19 Clauses and a number of difficult Schedules, so we thought it best to have a new Case.
Much of this Clause is self-explanatory. I have tried to give the Committee the gist of it. If there are any special points which hon. Members would like me to answer, I will do my best to do so.

§ Mr. W. Clark
Would my hon. Friend comment on subsection (4), which penalises a person letting furnished accommodation with services—which at the moment is assessed under Case I of Schedule D—from getting earned income relief? Since that income is being put into Case VI of Schedule D it will not rank for earned income relief. This would seem to be against the principle which the Government are trying to put forward in regard to Schedule A. I am not sure, but I think that it was never envisaged that this legislation should penalise anyone who now comes under the new Case VIII.

§ Mr. Barber
I cannot give my hon. Friend an answer to that point without further consideration, although it is perfectly true that in certain cases, throughout these provisions in Chapter II, not everyone will find that they are better off or in the same position. A certain number of taxpayers here and there will find that, to a marginal extent, they have to pay slightly more tax. The main point of subsection (4) is to provide for rents of furnished lettings to be wholly chargeable under Case VI, unless the landlord requires the rent proper to be charged under Case VIII.
I understand, further inquiries having been made, that it is intended that the position will stay as it is. I agree with my hon. Friend that it seems unlikely that that will be the result under the Clause as at present drafted, but as to whether or not it will require to be 1604 altered, I will consider the point my hon. Friend has made to ensure either that it is covered at present or that an Amendment to the Clause is put down if required.

§ Mr. W. Clark
Am I to understand that if people are going from Case I to Case VI a suitable Amendment will be tabled by the Government on Report?

§ Mr. Barber
All I can tell my hon. Friend is that it is certainly not our intention, in those circumstances where there has been a Case I charge in the past, that those taxpayers should now be taken out of Case I. How that is to be achieved I am not quite sure without further consideration; but certainly that is not our intention.

§ Sir Eric Errington (Aldershot)
I wish at this point to raise a practical question about the actual payments to be made under the proposed Case VIII. One of the most annoying things is that at present under Case VI, charging excess rents, for one receives an intimation of liability when a lot of properties are concerned before the liability has been settled. One must then appeal against the assessment some months before it is possible to arrive at the true amount—that is, if there are certain changes in regard to the properties—if the property is either void or otherwise.
I should like to be satisfied that under Case VIII the liability is arrived at and that that liability will be for payment of Income Tax at the beginning of the following year and not, as now exists, under Case VI. Under Case VI there is often a notional liability which requires adjustment and which involves an immense amount of paper work. It is at present dealt with by the experts in these matters who send in a pink appeal form which in effect puts the whole amount in issue. I hope that we will get away from the automatic appeals against assessments and come to the position where the exact final liability is arrived at, and payment made after that has been decided.

§ Mr. John Diamond (Gloucester)
I rise to give the Financial Secretary a little more time in which to discover what he wants to tell us, because at present we are all in a complete fog. It is, perhaps, easier for me to say that than it is for the hon. Member for Nottingham, South (Mr. W. Clark).

§ Mr. W. Clark
I am not in a fog. I know what my hon. Friend said about Case 1 and Case VI.

§ Mr. Diamond
May I say that I am in a fog?

§ Mr. Clark
Yes.

§ Mr. Diamond
By the time I am finished I hope that the hon. Member for Nottingham, South will realise that there is a fog around which may envelop a great number of hon. Members. I do not wish to be difficult about this; I merely want to give the Financial Secretary more lime to make inquiries so that we may be clear about this matter.

§ Mr. Barber
I intend to clear it up.

§ Mr. Diamond
Subsection (2) states: Tax charged under Schedule D by virtue of this section shall be charged under a new Case VIII… which, presumably, includes all amounts of profits and so on and is not limited to the rent being received but to the income in respect of services and other things going with it—the boiler, heating, cleaning and a variety of things that may be related to the rent. All sorts of things can sometimes be included in the rent, sometimes paid separately and sometimes a varying figure. Varied though they may be, they are almost always covered under the terms of the lease. As I say, we are told that the Tax charged under Schedule D…shall he charged under a new Case VIII.. and subsection (4) states: notwithstanding anything in subsection (2) … to which I have referred, and it continues: …where rent is payable under a lease tinder which the tenant is entitled to the use of furniture or to services.… Here we have mention of the services to which I referred …tax in respect of the rent (as well as in respect of the payment for the use of the furniture or for the services) shall be chargeable under Case VI of Schedule I) unless the landlord…requires that the rent shall be charged under Case VIII. The rules are different, or they may be different in certain respects. Surely there are assessments now under Schedule D and not under either Case VIII or Case VI. Thus we really have three eases to consider; the first is where it is being 1606 assessed under one case—where it will be assessed unless notice is given—and the other where the case will be assessed when notice is given. It may be one or the other, or, conceivably, a combination of both—which gives us the third ease. I am glad to say that so far the hon. Member for Nottingham, South, whose knowledge in these matters I respect, is, I think, with me.
For these reasons, it is important for us to know whether or not this will remain the position—if that is the Government's intention—or whether the Government propose to alter the position and suggest something different and, perhaps, a great deal more simple. It is not simple, for example, when one deals with a very regular form of income—services in connection with the use of the premises, a form of income which, I would remind the Financial Secretary, is not simply calculated but which must be calculated not only by reference to the gross income but to expenses properly deductable in earning it.
A charge for cleaning, for example, by a landlord is not simply what the landlord receives for the cleaning but what he receives, less what he paid out, which may be less equal to or greater than a given figure. The question of profit or loss arises as well as that of income. We should know whether it will be assessed under one or other of the new arrangements and is not simple to have it all assessed under one Schedule, unless one is giving notice and requires it to be assessed under one case or the other.
I think that I am not altogether wrong in this and that the matter is by no means simple and straightforward as the Clause is at present drafted. We are making rules. Let us have them as clear as possible. If the Government are now saying that they are not certain that the present position is what they really want, and that they want another situation, we should know all the details of what is in their mind so that the matter can be fully considered.
One of the reasons why I am on my feet is that I wish to give the Financial Secretary ample time in which to discover the facts so that he can give us a satisfactory answer. I hope that the hon. Gentleman is receiving some assistance from those who are here to help the Government Front Bench. As I say, I am on my feet 1607 to allow for the passage of a reasonable amount of time so that the Financial Secretary can gather the necessary information on how the Clause will work in its final form.

§ Mr. Barber
The hon. Gentleman is very understanding. I shall try to deal with the two points raised, first, by my hon. Friend the Member for Aldershot (Sir E. Errington), and then by the hon. Gentleman.
My hon. Friend asked when the tax would be due under the new Case VIII. As he will see, the conjoint effect of Clauses 15 and 16 is that the assessment is made on the basis of the current year, but necessarily by reference to the profit of the previous year and the rents and expenditure of the previous year. There is an Amendment which my hon. Friend has put down, which we shall be considering in connection with Clause 16, to deal with the case where the circumstances of the taxpayer change in the year. Perhaps I may leave comment on that aspect until we come to the Amendment.
On the point raised by the hon. Member for Gloucester (Mr. Diamond), I quite recognise that many of the provisions in Chapter II are complex and take a considerable amount of understanding, but obviously, as he knows, they have not been drawn up in a complicated fashion because we wanted them to be complicated. In many cases they are complicated because we wished to be fair and do what we thought was the right thing by the taxpayer. I think that Subsection (4), to which he has specifically referred, is just such a case.
In Subsection (2), besides giving the new case the label of Case VIII, we are providing that the tax shall be charged by reference to the rents or receipts to which the person becomes "entitled"—it is an important word in this context—in the year of assessment. All that we are doing here is preserving the present basis of assessment under Schedule A, which is technically a current year basis, although the fact that revaluations have been made only at intervals of five years, and not at all, I think, since 1935–36, have made it far from that in practice. The anomalies, as I think the hon. Gentleman will see, follow where the recipient's liability is affected. Where the1 1608 rents fell temporarily into arrears, for example, his Surtax liability might be increased, or his rents might be received in a year when the standard rate of tax had been altered. That is the reason for the reference to entitlement, which I pointed out a few moments ago.
Subsection 4 provides for rents for furnished lettings to be charged wholly under Case VI, unless the landlord requires the rents as distinct from the payments for the use of furniture and services to be charged under Case VIII. The reason why it is possible for the rents to be charged under two cases, either Case VI or Case VIII lies in the interests of the landlord. He is given the option because it may suit the landlord in a particular case to be charged under Case VIII in order to take advantage of the provisions in the Fourth Schedule under which excess expenditure on one property assessed under Case VIII can be set against income from another property assessed under that case.
On the other hand, where rents are paid for furnished lettings, it may be that it is convenient—indeed, I would have thought that it would be in the normal case for both taxpayer and Revenue—to charge the whole payment in one assessment under Case VI. Here again it would, of course, have been quite easy to specify one particular case and to leave it at that, but we thought it right to give the landlord the option because it may be to his advantage.
I hope that I have had said sufficient to explain to the hon. Gentleman why there are these three Cases involved, Case VIII, Case VI and Case I, which was referred to earlier on on this same Clause.

§ Mr. Mitchison
I am sorry to take up the time of the Committee, but' it will be remembered that in a previous discussion we were told that a grave objection to proposals we made by way of amendment was that they woud mean the continuance of assessment under Schedule A. I am rather puzzled as to what will happen, for instance, in such cases as Section 175 of the 1952 Act. This relates to the taxation of excess rents of immediate lessors arising under 1609 certain short leases. The effective provision is subsection (1) that the immediate lessor …shall be chargeable to tax under Case VI of Schedule D in respect of the excess, if any, of the amount which would have been the amount of the assessment of the unit for the purposes of Schedule A, as reduced for the purpose of collection.… I looked at the Schedule to see whether this had been repealed. Apparently it is not in the list of repeals. There may be an Amendment somewhere which answers the matter. Otherwise, one wonders what will be the basis of assessment in the future—whether it is to remain as it is at present, and, secondly, whether, if so remaining, it does not lead to the continuance of that to which the Chief Secretary took such objection in Schedule A machinery.

§ Mr. Barber
It is not easy when one is looking at these Schedules of repeals, which occupy a considerable number of pages, to find a particular point without any notice whatsoever. As far as I know, all the necessary repeals are set out in the Schedule to ensure that in the future the assessment of rents will be under Case VIII and not, as previously, under the Schedule.

§ Mr. Graham Page
If the hon. and learned Gentleman the Member for Kettering (Mr. Mitchison) had read the Schedule properly he would have seen that on page 90, lines 48 and 49, it repeals Sections 172 to 179. If my mathematics are right, 172 to 179 includes 175.

§ Mr. Mitchison
I am sure that the hon. Member's mathematics are perfectly right, and I am much obliged for the reference. That leaves the other part of my question unanswered: what is going to be done by way of assessment in these cases now?

§ Mr. Barber
Is the hon. and learned Gentleman talking about excess rents?

§ Mr. Mitchison
Yes.

§ Mr. Barber
In future, the new Case VIII will replace both the assessment under Schedule A, which is normally on the occupier, and the assessment under Case VI of excess rents, which was on the landlord. In future, Case VIII assessment will replace both those and will be made on the landlord. One would look at the gross rent he received and at expenses 1610 in accordance with Schedule 4 and the net result would be the amount on which he would pay tax.

§ Mr. Diamond
We are grateful for what the hon. Gentleman has just said about excess rents, but what he has not said is whether the Clause as it now stands is or is not the Clause that he wants in the Bill. The hon. Gentleman is about to ask us to pass the Clause, because that is the Question which will shortly be put to us. We can see what is on the Paper and what is in the Bill, but we do not know what is at the back of the hon. Gentleman's mind, or rather in the mind of the Parliamentary Private Secretary, because, as we know, in these things Parliamentary Private Secretaries have sources of information which are not open to those who sit on the Government Front Bench. I should be grateful, therefore, if the hon. Gentleman will tell us whether the Clause as it stands is the Clause he wants, or whether it is the one which the Government are about to revise or amend in a substantial way.

§ Mr. Barber
There is no question, as a result of points raised in the debate, that the Clause will be revised in a substantial way. Two points raised in the debate seemed to be desirable to be looked into. One was on the Amendment in page 12, line 36, which seemed an extremely good point which we ought to try to meet, though my hon. Friend the Member for Nottingham, South (Mr. W. Clark) would be the first to agree, I am sure, that it is a comparatively minor point. We shall, however, try to deal with it.
Then there was the point raised concerning earned income relief. Our intention was that earned income relief in the circumstances mentioned should not be lost, and if an Amendment is necessary, which I very much doubt, the Bill will be amended. But I am surprised that the hon. Member for Gloucester (Mr. Diamond) should suggest that anything in the nature of a substantial amendment of the Clause is necessary. I hope that nothing that I said gave that impression. At the outset of discussions on this difficult technical matter, it seems to me that the Committee stage is the proper place for suggestions to be made for improving the Bill. I know that the Economic Secretary and the Solicitor-General and I will take very seriously 1611 any points of this kind which are made. Indeed, we welcome them. Even when these Clauses have passed the Committee stage, if any hon. Member cares to write to me or my hon. Friends we should be delighted to receive advice on how the Bill might be improved. If any questions are asked of me and I can help the Committee by answering immediately, I will always do so, and if I cannot I shall say so quite frankly and do my best to provide the information later.