§ Mr. W. ClarkI beg to move, in page 72, line 20, leave out from "1952" to end of line 23 and insert:
together with actual expenditure on repairs. insurance and maintenance in the year of assessment".
§ The Deputy-Chairman (Sir Robert Grimston)It would be convenient also to take the Amendment in page 72, leave out lines 28 to 44.
§ Mr. ClarkIt must be very obvious to the Committee that my drafting of Amendments is not very good, but I should like to explain to my hon. and learned Friend the Solicitor-General what I am endeavouring to secure here. Over the years property owners have built up a tax reserve under a maintenance claim and at any one time there is a five-year debenture on which the owner has had one-fifth, two-fifths or four-fifths of the actual expenditure. When we are dealing with Schedule A in its own context and bringing these rents under Case VIII this means that we shall cut immediately any maintenance claim built up over the period. This is an anomaly which I think the Government did not envisage. It is fair to say that many landlords are very good landlords. We always see publicity about bad landlords, but there are many good ones and, over the years; these have spent money on maintenance and improving their property and have thereby built up a maintenance claim.
The object of the Amendments is to allow a property owner, whether it be a company or a private individual, to take advantage over the succeeding five years 1612 from 1963–64 up to 1967–68 of the decreasing part of the maintenance claim and so obtain it on an actual basis by adding the actual expenditure over the successive five years. I should like to give the Committee a simple example. Taking the period from 1958–59 to 1962–63, there is a maintenance claim of £100 a year, which gives a total of £500, and the normal one-fifth maintenance claim which, of course, is £100. Under this Bill, in 1963–64 the landlord will receive that £100 and in subsequent years he goes on to a basis of actual expenditure. There is an option to carry on the moving average, but this is merely putting off the evil day for the landlord.
Under my Amendment, taking the hypothesis of a £500 maintenance claim which has been built up over the period, in the first year 1963–64 the landlord would receive one-fifth, which is £100, plus his actual expenditure over the years 1963–64. Next year it will be only one-fifth of £400, making £80 past maintenance relief plus actual expenditure, but there is an increasing amount of carry-forward expenditure so that at the end of the period the landlord will have received the maintenance claim which he has built up.
Although I know that there has been a tremendous agitation in all parts of the country to get rid of Schedule A, it has been principally concerned with the position of owner-occupiers. A year or two ago some of my hon. Friends tabled an Amendment asking the Government to abolish Schedule A and to assess rents under Schedule D. I am sure that it was never thought by the business world that a property-owning company would have been a runner for the abolition of Schedule A, as it was thought that abolition was aimed at owner-occupiers. Consequently, there are landlords who have spent money on property thinking that they were building up a reserve of maintenance claim on future rents.
This provision therefore penalises the good landlord, because the landlord who has not in the past maintained his property and has not built up a maintenance claim to carry forward has enjoyed an additional profit because of the statutory allowance which he has received in respect of amounts which he has not spent on his property. This is 1613 another reason why the Government should look sympathetically on the Amendment.
Although I hope that this is a brief explanation of what I am attempting to do, I should not like my hon. and learned Friend to think that it is any less important because of my brevity. I hope that he will consider whether something can be done to remedy this anomaly which penalises good landlords.
§ Mr. Graham PageUnder this part of the Schedule to which these Amendments apply tae taxpayer is given an opportunity to elect to continue on the five-year average basis for a certain number of years up to 1967–68. The only reason why the taxpayer should choose to do that and elect to carry on on a five-year basis would be that over the past two or three years he has had a large expenditure on maintenance and repairs and he hopes to get that back again by averaging over the next few years. He has what one might call an unexpended balance of maintenance claim. This sounds rather like the Town and Country Planning Acts. We used to talk of unexpended balances when we discussed them. In other words, the taxpayer has a reserve of maintenance claim.
Over the past few years the Government have exhorted landlords to spend money on maintaining their property. There has been considerable agitation for this in recent years. Thus, landlords who have complied with that aim will be penalised by the Clause, but, worse still, they will see that the only way in which to get back that unexpended balance of maintenance claim will be to do no repairs for the next two years; to elect to continue on a five-year average and spend nothing on repairs. Surely, that is not something that we want to encourage.
I believe that this election is the wrong way altogether. These Amendments would prevent that happening, and would encourage landlords to continue to spend money on repairs and maintenance because, over the next few years, they will be getting back their accumulated balance of maintenance claim as well as the actual expenditure. They deserve it. Otherwise, whether the five-year average ceases now or in 1967 and 1968, the landlord who has spent or, as 1614 it were, overspent on repairs—that is to say, has spent more than he can get back—will lose, whatever be the year in which we stop the average applying, unless this provision is built into the Bill.
What is proposed is only fair, reasonable and just to the landlords who have complied with what the Government have wanted landlords to do, which is to maintain and repair their property. If this provision is not incorporated in the Bill, unscrupulous landlords who want to get back their maintenance reserve by not spending any money on repairs for the next two or three years will be encouraged.
§ 7.0 p.m.
§ The Solicitor-General (Sir Peter Rawlinson)My hon. Friend the Member for Nottingham, South (Mr. W. Clark) is wholly mistaken if he believes that anyone thinks that brevity is in any way to be complained of, or that it concealed the vigour and point of what he said. My hon. Friend has not only launched me into the Finance Bill, which is something most people regret. but he has also launched the Committee into what the hon. and learned Member for Kettering (Mr. Mitchison) has already referred to as the very complex matter of Schedule 4.
It would not be in order for me at this stage to deal with the whole of the Schedule, but, in order to set the scene for the Amendment, perhaps I may remind the Committee that with the ending of Schedule A after 1963–64 there is to be substituted—or so it is proposed—the system of direct taxation of rents and other income arising from property, under Case VIII, and Schedule 4 sets out a system which will operate in 1964–65 in allowing expenses as a deduction in arriving at the amount of taxable profits. The old system, of which we have recently been talking, of assessment of the net annual value under Schedule A, and the provisions of Section 175, will disappear.
I note what my hon. Friend said about his drafting, and I quite appreciate what he has in mind, but his Amendment would allow landlords to deduct from rents during the period 1964–65 to 1967–68 both the expenditure on maintenance, repairs and other such matters according to the average over the pre- 1615 ceding five years, which is the present basis, and also the actual expenditure on maintenance and repairs—but not on management—in the year concerned. Thus, the whole expenses of maintenance, etc. incurred in 1964–65 would be allowed relief against the rents of 1964–65, and the one-fifth to which my hon. Friend referred—the average of the past five years—could also be used as a relief against the rents of each of the years from 1965–66 to 1967–68. That is the effect of the Amendment, although, as my hon. Friend has pointed out, what he is concerned with is the expenditure over the five years which has not so far been written off. My hon. Friend the Member for Crosby (Mr. Graham Page) has pointed out the difficulties and the problems of the man whom he described as the good landlord.
Normally, before 1964–65, when Case VIII comes into effect, subject to the deductions in this Schedule, rents will have been taxed under the Schedule A system and the excess rent provisions. Under those provisions the amount on which tax is payable is arrived at by first computing the annual value by reducing the rent by the tenants' rates, etc., that are paid by the landlord and by increasing it by the value of the repair obligations assumed by the tenant, and, secondly, by allowing from this the statutory repairs deduction based upon the proportion that my hon. Friend mentioned. The statutory repairs deduction is at present given whether or not the repairs are done, but if the actual expenditure on maintenance on the five-year average basis was greater than the statutory repairs allowance, relief can be given for the excess by means of a maintenance claim.
Perhaps the Committee will allow me to use an example in what, I fear, is a very complex Schedule. If, under the present law a landlord acquired a property in 1955-56, rented it at £700 a year and remained responsible for all the repairs, the annual value would be £700 and the repair deduction would be £120; that is, £20 plus one-sixth of the annual value over £100, namely, £600.
If it is an old property the landlord will be able to make claims in the first five years in respect of the expenditure 1616 of his predecessor in title, that is to say, if he were able to show that the five-year average in the period was in excess of £120. Alternatively, he would be able to make maintenance claims on the basis of his current expenditure for the first five years—1955–56 to 1960–61—and then use that expenditure over again in arriving at a five-year average for maintenance claims in subsequent years. If it is a new property, in five years the repairs deduction will have exceeded what has been spent on the property.
Thus, maintenance claims meet the case year by year where the average expenditure exceeds the statutory repairs deduction. The whole process is, and always has been, one of averaging, and I certainly accept that some items come into computation which would not on a current year basis, but that others are lost from it. What the claimant's predecessor spent may come into computation, or alternatively items may come in twice—under the new owner's concession, but, by and large, what has, in effect. been carried out is that the landlord each year has been given the equivalent of one year's expenditure against one year's income. That has been the approximate position under the existing law but, when Case VIII gets into its stride, the principle will be that the deduction is given against rents for the expenses of the current year, with a set-off of deficiencies, sideways if a pool property, or otherwise carried forwards. But it could be hard on landlords—and this is what the Government have accepted and as my hon. Friends have pointed out—who have incurred heavy expenditure in 1962–63 and who, under the maintenance claim, will obtain relief on only one-fifth in 1963–64.
With regard to properties in those circumstances, properties which are owned in 1962–63, provision is made that the landlord can remain on the five-year average basis up to 1967–68, or, of course, any earlier year. If they wish to change from that basis earlier than 1967–68 they can do so if they think that that is more favourable. In other words, they are given a choice. The choice is either to stay on the five-year average as it was under Schedule A or to go over to the current basis. I see the force in what my hon. Friends foreshadowed 1617 about the time limit for election because of what has happened in the past and the position of what has been properly described as the good landlord and those people who have built up a balance.
While I cannot recommend the Committee to accept the principle as set out in the Amendment, I think that my hon. Friend the Member for Nottingham, South, has made out a case for considering whether the time limit for election should be made more generous. If that happened, I can see the effect that it would have. I suggest to my hon. Friend that what I have said may meet the point he has in mind.
§ Mr. W. ClarkIf we extend the time limit, we are merely putting off the evil day. Between now and 1967–68, landlords, if they know that they will lose the maintenance claim in 1967–68, will go on to actual because there is no further election. This will mean that rented property throughout the country will, as a matter of policy, not be maintained. Therefore, landlords will lose the minimum on a built up maintenance claim. I do not think that the point is the timing of the election. If we are going to pay up to 1967–68, we have the five year moving average and we shall be faced with the problem in 1968 instead of in 1963.
§ The Solicitor-GeneralObviously, under the Bill, the current year basis is the basis on which the person has to go eventually. But it is appreciated that it could be hard for those who have built up a store or reserve who at some time have to transfer to the current basis. I do not think that landlords will adopt the attitude which my hon. Friend foreshadows once the transition has taken place, but I can see that if we make it too swift and too short there may be the hardship about which my hon. Friend spoke.
§ Mr. MitchisonI have certain practical experience, as I am sure many hon. Members have, of this type of claim. I am a little disturbed by what seems to me to be the underlying purpose of the Amendment.
Take the position of the landlord who, without doing anything imprudent or improper, but in the ordinary course of events, incurred very considerable expenditure, say, a year ago. There may have 1618 been all sorts of reasons for it. If he is in the part of Scotland where I live, he may have had a singularly bad attack of dry rot, but there are other reasons. He therefore has to spend a great deal more than usual.
7.15 p.m.
Under the present law, these "bumps up" and "bumps down", as it were, work themselves out in the ordinary course of events, and the five-year average has the advantage of corresponding with the way in which things happen. The limit has always been the statutory amount of deduction. One is concerned only with the excess over that. That is worked out in relation to the periodicity, as it were, of the expenditure. That will be abolished in favour of the current year's expenditure.
I see the difficulty, perhaps the impossibility, of doing the ironing out which hitherto has been done by the moving average, but it has some extremely difficult consequences. Assume that the landlord—and let us not impute motives to him one way or the other—is doubtful about whether he should incur certain expenditure during the current year, and elects to continue the moving average. This surely will swing him on the side of not doing repairs, which is the opposite of what we want to do,
I should have thought that, in dealing with this type of case, where there was a choice between two pieces of machinery, one should always favour the machinery which, on the one hand, corresponds with the facts and, on the other, presents an inducement to the landlord to do the repairs, or, to put it the other way round, does not present any inducement to the landlord not to do the repairs. I do not want to express myself strongly about this. I can see the very considerable practical difficulties involved. Indeed, they may be insuperable. There may be something inherent in a change which, on broad grounds, we would all welcome.
I hope that when the matter is considered regard will be had to these two factors. One is that in the nature of the case, with some properties at any rate, there are ups and downs in necessary expenditure, even if we regard the standard of necessity as the same all the time. The accidents of nature. whatever their form, are bound to have that effect. 1619 Therefore, one must, if one can, find some means of dealing with that. Secondly, one must be careful of putting the fiscal machinery in the position of becoming an inducement to the landlord —not necessarily a conclusive one but still an inducement—to refrain from doing repairs which he should do.
§ Sir E. ErringtonI think that it was hardly fair of my hon. and learned Friend the Solicitor-General to take new property as a test for dealing with this sort of matter. New property is very rarely the subject of a maintenance claim of any considerable amount. I therefore think that to look at the matter from the point of view of new property begs the important question which arises on the older type of property.
I do not consider that there is any merit at all in the election and to extend the time for election in which to decide whether to go on to the actual amount spent does not solve the problem.
I was further disturbed by the sort of suggestion that was made that on this arrangement those who own property would be getting two kinds of relief, namely, the actual and the relief of the balance of the maintenance claim, what is called the revolving claim. The actual amount spent is referenced to the particular year in which the amount is spent. The balance of the maintenance claim is in respect of other years prior to 1964–65. I am not sure that the amount is considerable, but what is clear is that the amount has been spent by those people who own the property. Whether it is done in the way suggested in the Amendment by making a decision definitely to go over to the actual in 1964–65 or whether it is done by giving something in the nature of a tax reserve certificate relative to each year for the unexpended balance of the maintenance claim, does not seem to me to matter.
What is clearly beyond doubt is that the suggestions in the Amendment do not involve any question of benefit being given twice over. It is clear, I hope, to everybody that the reference to the maintenance claim is prior to the question of the actual amount. In those circumstances, it seems only fair that the balance of the maintenance claim should be given 1620 even if the payment in regard thereto is made during a year when an actual claim has been made.
§ Mr. Graham PageI apologise for speaking again on the Amendment, but I do not feel that my hon. and learned Friend the Solicitor-General sees the point as we see it from these benches. I am sure that by his noises and shaking of the head, the hon. Member for Gloucester (Mr. Diamond) is not with us. I believe that I can bring him and my hon. and learned Friend with us by giving a simple if exaggerated example.
The whole point of the five-year average is, surely, that one does not spend the same amount on repairs and maintenance of a house every year. The repairs are phased. A very large amount might be spent on repairs in any one year, and it is averaged out over the five years and recovered on this average basis.
Thinking of the phasing and taking the exaggerated example, let us suppose that in the middle year of the last five years, a man spends £500, and nothing in the other years. Because the net annual value is £80, the amount which he can recover over the whole five years is £400. There remains £100 which he has not been able to claim. If the Bill takes effect as drafted, he would never be able to claim that £100 or to recover relief upon it. Whatever he may spend in future, whether it be Id., £100 or £500 in a year, he will get back his actual expenditure but he will never get back the relief on the outstanding £100.
Whether the formula suggested by my hon. Friend the Member for Nottingham, South (Mr. W. Clark) is correct is a matter for argument. I think that it would work out in fairness to the landlord. There should, however, be a formula which would allow the landlord to spread the missing £100 over the next years and so recover it as well as his actual expenditure for the next few years.
§ The Solicitor-GeneralI appreciate very much what my hon. Friend the Member for Crosby (Mr. Graham Page) has said. Nevertheless, the drafting of the Amendment would allow the landlord to deduct both the expenditure on maintenance and repairs according to the preceding averaged five years and the actual expenditure on maintenance in the year concerned.
§ Mr. Graham PageWhy not?
§ The Solicitor-GeneralThe whole of the expenses of maintenance incurred in 1964–65 would be allowed for relief against rents of that year and one-fifth of that expenditure could also be allowed in each of the next three years. That is what the Amendment would permit, although I understood my hon. Friend the Member for Nottingham, South (Mr. W. Clark) to be concerned over the expenditure during the five-year period before 1964–65. If there is, as the Bill provides there should be, transference from the five-year average period to the current actual period, there has to be a period of transition, and there will be a period in which in certain circumstances a landlord is in a position when he needs, and should get, more relief in the sense that he has paid out a great deal more than somebody else on a property. It was for that reason that I suggested to my hon. Friend that if this transference to the actual basis is made, the case which he had in mind might be met by extending the time during which the landlord could make the election.
I can only repeat, as my hon. Friends the Economic Secretary and the Financial. Secretary have said, that the points which have been made in this debate, particularly by my hon. Friend the Member for Aldershot (Sir E. Errington), as well as by my hon. Friends the Members for Crosby and for Nottingham, South, certainly will be studied and considered with the greatest care and attention. The matter is so extremely complex and the ramifications of each part of it are such that it needs, and everyone wants to have, the advice and comment of everybody in the Committee.
I have listened with great care to what has been said, but it would be wrong for me to say more than that consideration certainly will be given. I have indicated that the period of transference should be examined to see whether it should be extended. It will be examined with care in the fight of all the comments which have been made. In these circumstances, I hope that my hon. Friend will withdraw his Amendment.
§ Mr. W. ClarkI am grateful to my hon. and learned Friend the Solicitor-General for what he has said and I take particular notice of his word 1622 "generous". The point has been made that some landlords will be penalised because they have built up this reserve of maintenance. If the Government are to be generous in allowing landlords to recoup this built-up maintenance claim over a longer period. I am delighted and I shall look forward with great interest to see what comes out of this debate.
In view of what my hon. and learned Friend has said, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn
§ 7.30 p.m.
§ Mr. Stanley R. McMaster (Belfast, East)I beg to move, in page 73, line 13, at the end to insert:
Provided that nothing in this paragraph shall affect the operation of Section 16 of the Finance Act 1954 (by which investment allowances are made in respect of capital expenditure on new assets).Like the one before, this is a technical Amendment, This subject has attracted the attention of professional people who have studied the Bill and whose duty it will be to apply its provisions. It is provided in Clause 22—Treatment of premiums, etc. as rent—that the tenant who is obliged by the terms of the lease to carry out work on the premises is deemed to have paid a premium of an amount equal to the increased value of the premises resulting from that expenditure. This deemed premium is then deductible to the extent which is chargeable on the landlord under sub-paragraph (a) of Schedule 4.It is provided by Section 330 of the Income Tax Act, 1952, that, for investment allowance purposes, capital expenditure is excluded expenditure allowed as a deduction in calculating profits. The result of this would appear to be that investment allowances may be precluded to the extent to which expenditure is deemed to be a premium and is deductible in calculating profits.
This effect is surely not intended, and the purpose of the Amendment is to make it clear that investment allowances will continue to be granted where they would normally be due. In addition to that, if this Amendment is not accepted, the effect will be that a lessor will be required to pay tax on a percentage of the value of the building and plant, although no receipts would have arisen in respect of 1623 the deemed premium. That is inequitable. It would also be inequitable to impose a tax on the cost of the work undertaken without making provision for possible reductions in value at the conclusion of the lease.
These are difficult points which I should like the Government to consider. Perhaps the drafting of the Amendment leaves something to be desired, but these points have been put by professional bodies, including the tax panels of the Federation of British Industries and the Association of British Chambers of Commerce, and the Association of Certified and Corporate Accountants also considers this to be a defect in the Bill.
§ The Solicitor-GeneralI hope that I can reassure my hon. Friend the Member for Belfast, East (Mr. McMaster). Some of his fears are groundless and there is no intention that there should be the effects he mentioned. The effect of his Amendment would be to ensure that any capital expenditure incurred by a tenant of premises which are subsequently sublet, under an obligation in the lease—which sometimes arises—to execute works, particularly industrial undertakings, would not be prevented from qualifying for investment allowances under Section 16 of the Finance Act, 1954, because the obligation would have to be taken into account in arriving at a charge on the landlord under Clause 22(2) of this Bill.
The fears that traders' investment allowances may be cut by reference to Section 330 of the Income Tax Act, 1952, which defines capital expenditure, are groundless. The capital expenditure of the tenant is not itself allowed to be deducted in computing his profits—and we are foreshadowing Clause 22 in this matter—although his deduction is related to a notional premium, which is, in turn, related to the work to be done and thus eventually reflects the expenditure.
However, I must advise the Committee that this connection is too remote to prevent the grant to the tenant either of the investment allowances or of the initial and annual allowances. So, to that extent, the Amendment is unnecessary. But I am glad to have had this opportunity of reassuring my hon. Friend. ft points to the fact that certain examinations may still have to be made of this part of the 1624 Schedule to ensure that the tenant does not get a double allowance for expenditure and also by reference to the taxable element in a notional premium. I only say that by the way, however. This is an important subject and it was useful to have this Amendment moved but I hope that, on reflection, my hon. Friend will realise that his fears are not as wide as he thought.
§ Mr. DiamondWhy does the hon. and learned Gentleman think it right that we should be compelled to consider this Schedule, which relates to Clause 22—indeed, without understanding Clause 22 one cannot understand the Schedule—in between Clauses 15 and 16?
§ The Deputy-ChairmanOrder. We cannot go into that now.
§ Mr. McMasterIn view of what my hon. and learned Friend has said, particularly the last point concerning the possibility of the tenant being doubly relieved—which I had not noticed—I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. W. ClarkI beg to move, in page 74, line 19, to leave out sub-paragraph (c).
§ The Deputy-ChairmanPerhaps it would be possible to discuss at the same time the other proposed Amendment to the Schedule in the name of the hon. Member—in page 76, line 17, at end to insert:
14. Where the deductions allowable for the purposes of Case VIII exceed the income for any year of assessment. such excess shall be available for relief under Section 341 of the Act of 1952, and in so far as relief cannot be given under that Section it shall be available for relief against any assessment under Cases VI or VIII for subsequent years provided that relief shall be given only once for such excess.
§ Mr. ClarkThey are related, Sir Robert.
This again is rather a technical matter. It is a question of Case VIII losses. I am sure that the drafting of the Amendment is again a little inefficient, but the spirit of the thing is that in Case VIII it should be perfectly clear that losses should be allowed to be carried forward even if they cannot be set off against other income, but that in any case any loss on one property should be able to be set off 1625 against profit on another property in the same year. Even then, of course, the thing remains a loss and I ask that it should be carried on as in any other case under our tax system.
§ The Solicitor-GeneralThe effect of the Amendment would be to deprive some taxpayers of some relief. Paragraph 11(2) of the Schedule lists the expenses allowable against Case VIII receipts other than rents, etc. First of all, it provides for relief for appropriate expenses of maintenance of premises, and, secondly, for reliefs for rents paid and then for these other payments which the Amendment would omit.
The kind of expenses envisaged, which wore foreshadowed by the hon. Member for Dunbartonshire, East (Mr. Bence) would be expenses incurred, for instance, by somebody in having persons shown round a stately home, which would not, however, be sufficient to amount to a trade assessable under Case I of Schedule D. At present. the receipts would be assessable under Case VI, but under the Bill they fall within Clause 15(1). These expenses would not be covered by paragraphs (a) or (b). If paragraph (c) were removed, as has been suggested, that would have the effect of depriving some taxpayers of relief, and I do not think that this is what my hon. Friend has in mind.
I turn to the other Amendment, which is an important matter. Although my hon. Friend was commendably brief, I find it more difficult to be brief in reply to him. The scheme of Schedule 4—I fear that I have to go back to this again t indeed, this is one of the difficulties which we all experience—is to allow, first, expenditure attributable to properties let under lessors' repairing leases at full rents against the income arising from the same property and other properties in the pool; secondly, expenses attributable in respect of other properties let at full rents but not on lessors' repairing leases in so far as they exceed income may be carried forward against rents from the subsequent letting of the same property; thirdly, deductions for expenditure attributable to properties which are not let at full rents would be allowable only against rents arising out of the current lease.
Those are the three different kinds of property which have to be provided for 1626 in Schedule 4 and tae object of the change is the replacement of the conventional reliefs, reliefs which there have always been before and which hon. Members say are time-honoured practice, by the deductions for expenditure actually incurred. That does not mean that the excesses of expenditure over income arising from property would qualify for relief in the same way as trading losses. That has been considered, as some hon. and learned Members will recollect, in the House of Lords in various cases. It was pointed out by the Royal Commission that losses in respect of buildings or land were not comparable with losses in business. It is apparent that the receipts and rents chargeable under Case VIII are investment income and not trading income and I think that it is universally accepted that they should not qualify for earned income relief. The ordinary rule with investment income is that no allowance is made for expenses.
Therefore, the principle followed in Schedule 4—and this is why, I fear, it has taken me some time to reply to this Amendment—is that the landlord is not allowed relief for an excess of expenditure over income where the rent is not a full rent, in other words, where he is not expected to cover all his own obligations.under the lease and the expenses of upkeep. If there were such a letting, it would not be a business transaction and there would be no reason for the landlord to get relief against other income which arose from leases. The excess of expenditure over income arising from the lessors' repairing leases could be set against income arising under leases of the same kind, but not against income from ground rents, which are in the nature of pure profit income. Thirdly, where tenants' repairing leases give rise to a deficiency, that could be carried forward against future incomes for the same premises or set of premises, but not for another set of premises in the group or pool.
7.45 p.m.
I must therefore reject any suggestion which is inherent in the Amendment that excesses of expenditure over income arising from property should be assimilated to trading losses and set against property generally. But the other points which arise are such as to merit consideration and, though I fear that I have 1627 said it before and I continue to say it each time, we will certainly give further consideration to the points raised by my hon. Friend even—
§ Mr. W. R. Rees-Davies (Isle of Thanet)Before my hon. and learned Friend concludes; I am trying to follow and understand, but I cannot claim that I am satisfied, although I have no knowledge of this subject. Many constituents have been plaguing me with this question. Let us suppose that an owner has one property—this is typical of Margate and such places—and he lets off rooms or flats in it and, because of the outgoings and expenditure in one year, he has a bad year and suffers a loss. Could he catch up the following year in respect of that property, saying, "I was sustaining a loss last year and I want to carry that loss forward to next year"?
I have appreciated that that cannot be done for a pool of properties—one property could not be set off against the other—and I can see the strong case for saying that, because that is not like a business and one could simply plough a lot of money into the losing property and set off one against the other.
I have two questions. First, is there to be anything simple for the public so that the ordinary boarding house keeper, hotelier or other individual will be able to understand this provision? I will be quite blunt about it. I have not a clue about this and I am doing my best but still not getting very far and I am sure that the public will not. Secondly, if an owner suffers a loss on an individual property—and most of the people I have in mind own only one property—can he carry the loss forward into the following year? I am sorry to be dumb about this, but there it is.
§ The Solicitor-GeneralThe icy blast which has blown from my right should have been in another direction. Because of our procedure, we have to deal with Amendments before we are able to explain the Schedule itself. My difficulty is that here we have one of the most complicated Schedules with which the Committee has ever been presented, certainly for a long time, containing a major change in our Income Tax law. The difficulty is that we have to take bits 1628 and pieces out of it when replying to various Amendments. I am sorry that it is so complex and I am probably making it much more complicated, but it is very difficult.
The answer to my hon. Friend the Member for Isle of Thanet (Mr. Rees-Davies) is that the loss on that one property would be carried forward. He has under-estimated his powers of understanding or ability to grope through the murk of Schedule 4. He was quite right in his suspicions that the pool of property where there is a full rent and the repairing obligation is imposed fully on the landlord cannot be extended to cover the third class where there is not a full rent. What he believed to be right was right. The answer to his second question is that it can be done. In reply to his general comments and strictures, I hope that he will join in the discussion of Schedule 4 itself.
§ Mr. Graham PageThe point with which we are dealing is a fundamental one, whether a person can carry forward losses on rents and repairs to property in the same way as he can carry forward trade losses. I understand from what the Solicitor-General said that somewhere in Schedule 4, or somewhere else in the Bill, it is provided that a person can carry forward losses on property if it is let at a full rent. I have not spotted the Clause or line which contains that provision, but I accept what my hon. and learned Friend says.
The whole business of the management of property to let is surely the phasing of repairs and maintenance, and perhaps the repairing of one property when it becomes void. If a landlord is managing properties to let—and after all the Government are trying to encourage owners to build properties to let, and to keep those properties to let—in taxing him it would only be fair, when a loss is incurred in one year, to allow him to carry it forward to the next year in the same way as any other trading loss.
Why should there be a distinction between the man who owns one house and lets it and is able in one year to spend a lot of money on that house and make a loss which he can carry forward to the next year. and the man who owns five houses, or ten houses, or a hundred houses? Why should he be told that he 1629 can only carry forward the losses on one house at one time. If he is managing a whole estate, it might in any one year pay him to keep some houses void for a period and carry out thorough repairs to them. This might be an economic way of doing the job, and in that year he might make a heavy loss. Why should he not be able to carry that loss forward in the same way as a trading man would be allowed to do?
I think that we are tackling a fundamental point. if we are doing away with Schedule A, let us put this on a proper trading basis, and a basis which will encourage people to go into the business of letting houses, because the Government want to encourage people to go into that business.
§ Mr. BellengerIf there were 20, 30, 40, or 100 houses involved, would not it be possible for the owner of those properties to convert his holding into a limited property company, when the trading would be under a different Case from this one—probably Case I—in which event all legitimate expenses could be put against the income and losses carried forward?
§ Mr. Graham PageI am not sure that that would be Case I, but if it were it would prove my argument. Why should there be this distinction between the limited company and the individual who is trying to run a decent business?
§ Mr. W. ClarkMy hon. and learned Friend said that he would look at this again. Will he allow the carrying forward of losses because, as my hon. Friend the Member for Crosby (Mr. Graham Page) said, if there is a property company it will be assessed in any case under Case VIII and not under Case I. If it is assessed under Case VIII, whether it owns 10, or 100, or 1,000 houses, are we going to say to that company that it can carry forward the loss on the block of flats A to the future profits on block of flats A, but it cannot carry forward the losses in respect of block of flats B? This will make nonsense of any attempt to simplify the accounting and taxation of property companies. Should that happen, property companies and people interested in property will look back with nostalgia to the days when they were assessed under Schedule A.
1630 When I speak about property companies, I accept the point about ground rents. If there is an ordinary property company which has houses or fiats to let, it is impracticable to say that losses can be carried forward only through the channel of identifiable property. If my hon. and learned Friend is saying that in this mass of property which the company owns, losses, excluding ground rents, can he brought forward against successive profits, that is all right, but does my hon. and learned Friend mean separate properties being kept separate in accounts and being brought forward to offset losses against profits?
§ Mr. BenceI was confused at the beginning, and I am more confused now. I apologise for entering into the discussion on this technical matter, but it seems that if an owner of, say, 100 houses, pays out £300 on the repairs to one house in one year, he can only set that against the rent of that house, but if he forms himself into a limited company, he can write off his losses against his 100 houses.
§ The Solicitor-GeneralI hope that I shall not make confusion more confounded. If my hon. Friend the Member for Nottingham, South (Mr. W. Clark) looks at the beginning of Schedule 4, to which we shall come after we have dealt with this, he will see that the scheme is to allow three different kinds of procedures, and I think he will agree that they are reasonable and comprehensive.
The first is that expenses can be attributable to properties let under a lessor's repairing lease at a full rent against income arising from the same and other properties in the pool based on the same kind of lease. In other words, if there is a full repairing lease and properties are let at a full rent, the expenses can be, as it were, attributable over the whole of that pool. But there are other kinds of rents where the responsibility upon the landlord is not that where there is a full repairing lease and what is known as a full rent. The answer to my hon. Friend's first point therefore is that where there is a pool one can do what he thinks one should be able to do.
§ Mr. DiamondThat is the normality of cases. If we can get that into everybody's head, and then make everyone understand that the hon. and learned 1631 Gentleman is going to deal with the less normal case, I think that everybody will relax a good deal more.
§ The Solicitor-GeneralThough I should like to see everybody relax, I am afraid that dealing with Schedule 4 is not a relaxing occupation. It needs a great deal of concentration rather than relaxation.
The class of case to which I have referred is the first which the scheme under Schedule 4 is designed to allow. but then there are other cases of properties which are let at full rents, but not on a lessor's repairing lease. In other words, there are not all the full obligations on the landlord and their expenses can be carried forward against subsequent income for the same property.
There is the third case which I mentioned, that of expenses which are attributable to properties which are not let at full rents. This means not let at rents which would normally cover what the landlord pays out, and sometimes one has to provide for that. Those expenses are allowable only against loss arising under the current lease. That is because, for obvious reasons, if a person enters into such an agreement he cannot expect to have the advantages he would have if he were letting at the full rent.
I realise that this is an important matter. As I have said, the comments made by hon. Members on both sides of the Committee will be studied before the next stage of the Bill.
§ Mr. W. ClarkIn view of what my hon. and learned Friend has said, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ 8.0 p.m.
§ Mr. R. J. Maxwell-HyslopI beg to move, in page 75, line 12, to leave out "tidal".
The Amendment is a simple piece of surgery, involving the amputation of the one word "tidal." This matter has a somewhat lengthy history. Practically the whole phraseology of paragraph 13(1) of the Schedule is taken from the Finance Act of 1853—a century and a decade ago. Since then the provision has undergone no modification worth speaking of 1632 —nor, incidentally, has the meaning of the phrase "tidal river" ever been tested in the courts, to the best of my knowledge. Last night I was conducted through the mysteries of Halsbury by a learned friend, and the only thing I found that could be regarded as connected with it was the case of Hesketh and Bray, in the Court of Appeal, in 1888. That case decided another point, but not the question of what constitutes a tidal river.
On the probably unreasonable assumption that words mean what they say, I take it that any river is a tidal river which does not flow into an inland lake or river. The provision does not refer to the tidal portion of a river. Had that been desired, the provision could have been so worded. So perhaps a tidal river is not the main tidal river but the tidal portion of the river. If it means the tidal portion of the river, which is certainly not what it says, that is also unacceptable, on two grounds.
It is no less necessary for somebody to protect his property against the overflowing of the non-tidal portion of a river than it is to protect his property against the overflowing of the tidal portion. But if this means a tidal river it restricts the benefit of the allowance of one twenty first part of the capital cost of erecting a flood wall or embankment over a 21-year period to those whose property adjoins the tidal portion of the river or the sea. Even this is more unreasonable than it seems, because in the case of Hesketh and Bray the court established that it was not an encroachment or overflowing of the sea if the sea only moved between its normal high and low water marks. Nor is it an encroachment or overflowing if it merely spreads itself up to its high water mark over the land which it inundates whenever it wants to do so within the existing high water mark. The time when flooding from sea water or tidal portions of rivers is particularly offensive and destructive is when there is a high tide in conjunction with an on-shore gale. The sea then refuses to recognise the high water mark.
It is quite unreasonable about this, and I apologise to my hon. and learned Friend that it should be unreasonable about it. It is unreasonable then, and it goes right up the estuary, far beyond 1633 any high-water mark which the Minister of Housing and Local Government would ever recognise. Then it does not have the decency to confine itself to the natural water course of the river, but overflows on to property belonging to people who may not wish to have its visitation.
It is for the preservation or protection of such property—which was then called land but is now called premises—that our worthy forebears, in 1853, deemed it expedient to insert this provision, which is Section 37 of the Finance Act of that year, and which the Treasury draftsmen, in their economy, have embodied in every Finance Act since, to the best of my knowledge.
Since I understand that the matter has never been tested in the courts it is presumably a point which does not often arise. It is not, therefore, likely to be a point which would involve the Treasury in any great loss of treasure. I am informed by the Financial Secretary to the Treasury that this provision does not apply to factories or to agricultural land, because they have much larger allowances under other provisions. This applies only to property which is not factory property or agricultural property.
I hope that my hon. and learned Friend will treat the Chamber to his learned advice on the meaning of the phrase "tidal river", even though it will not he an opinion that is based on any decision of the courts that I have been able to discover.
§ The Solicitor-GeneralMy hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) has introduced a refreshing breeze into the arid debate on Schedule 4. The only thing that has concerned me a little is the question of whose advice he took late last night, and where he conducted his researches. He is quite wrong in telling the Committee that these words have not been the subject of litigation or pronouncement by the courts. Indeed, it started as long ago as the seventeenth century—and that is a long time even by the standards of the law.
Even in those days Lord Hale said that a river that is called an arm of the sea where the sea flows and re-flows and so far only as the sea flows and re-flows is a tidal reach. Again—and my hon. Friend asked for quotations—I should tell the Committee that Mr. Justice Grove, 1634 in the case of Reece v. Miller, dealt with the question of what constitutes a tidal navigable river. He said that that had been discussed in various cases, which he referred to. I appreciate the concern that has driven my hon. Friend to set down the Amendment, but he has had the misfortune of not having had very good advice on the interpretation of the words "tidal river".
§ Mr. Maxwell-HyslopBut the first case which my hon. and learned Friend quoted did not concern a tidal river, but a tidal reach of river. Will he quote specifically the extract which he recommends to us from the case of Reece and Miller?
§ The Solicitor-GeneralMy hon. Friend must have misunderstood me. According to Mr. Justice Grove the definition of a tidal river was that it went to the tidal reaches. Mr. Justice Grove said that the question of what constitutes a tidal navigable river had been discussed in various cases. The judgment, which also cites Lord Hale, goes on for a considerable time, and I would not be justified in presenting it to the Committee. These words do not have the difficulty of interpretation which my hon. Friend fears.
He is right in saying that the landlords of factories and manufacturers receive relief for work done to prevent flooding from anything, he it the wicked sea or the wind and the rain. They get them by capital allowances on industrial buildings and structures.
Secondly, agricultural landlords and farmers get relief for work done in this respect under Section 314 of the Income Tax Act, 1952. They get a ten-year period of writing off. So we are left with other landlords, commercial landlords and residential landlords. They are given relief by the provisions in paragraph 13 of this 4th Schedule which repeats broadly what has been the law and what is at present the law. My hon. Friend says that it is wrong in that it provides relief only from the sea or tidal river flooding. I can only say to him that it has not been the practice or the law to give relief for protection against other kinds of flooding.
§ Mr. Maxwell-HyslopWhy not?
§ The Solicitor-GeneralIt has been, as it were, the relief or protection which has 1635 always been considered to be a Crown duty—this is really going back into history—in respect of the sea rather than the river. Therefore, the river is a tidal river in such parts only as are within the regular ebb and flow of the highest tide, and relief is given. That is why relief under paragraph 13 is only and has only been given in respect of such tidal invasion, which is invasion as it were from the sea. It has never been given for any other kind of flooding. For tat reason I cannot advise the Committee to accept the Amendment.
§ Mr. Maxwell-HyslopDoes my hon. and learned Friend accept that the sea can and does flood above the high water mark to which he has referred the Committee, and therefore it might be prudent and necessary for a landlord to erect an embankment or sea wall at a point above the high water mark on the tidal reach, as my hon. and learned Friend defined it, in order to protect his property against encroachment not of a river but of the tidal part of a river?
§ The Solicitor-GeneralIf it were the sea which came into the river and reached this particular height and caused particular flooding, it would be within the tidal reaches at a particular time. But I cannot say whether a man would be wise or not to engage in such a building or claim such relief. All I can say is that it would be a matter of interpretation of what caused a particular flood, which would probably give joy to a number of lawyers.
Mr. J. Grimood (Orkney and Shetland)As an amateur, I am interested in this difficult point of definition, upon which I do not pretend to speak with authority. I am sure that the Solicitor-General has convinced the hon. Member for Tiverton (Mr. Maxwell-Hyslop) that the Government know what is a tidal river. But I did not find the Solicitor-General altogether convincing in answering the second question from the hon. Gentleman. He seemed to say that this provision is in the Bill simply because it is repeating what has always been the law, and he implied that it had a long historical justification, and that that is the reason why it is confined to a tidal river.
The hon. and learned Gentleman failed to advance any reason why it should 1636 continue to be confined to tidal rivers, I should have thought he might have said that he would look at this matter again. Apart from the historical reasons, are there any reasons why a landlord who protects his property, and who is not an agricultural landlord but a private landlord protecting his property, should continue to be excluded? Would he benefit under some other legislation, and if not, is there any reason why the differentiation should continue, and will the Government look at this matter again?
§ The Solicitor-GeneralSchedule 4, dealing with Case VIII, when it comes into effect will relate to deductions allowable in certain circumstances against income. That is why paragraph 13 is brought into this part of the Schedule, to provide in this respect.
§ Mr. BenceI am not satisfied with the answer given by the Solicitor-General regarding the definition of a tidal river and of flooding. In the part of Glasgow where I live, which is not far from the Clyde, there is a brook or a burn as it is called, which runs into the Clyde. This brook floods not because of sea water but because the high tide in the Clyde prevents the fresh water in the brook from getting away, and so property is flooded and we have to take precautions against flooding. Am I being flooded by a fresh water burn or by the high tide in the Clyde. I admit that it is fresh water, but was it caused by the tidal reach in the river? Am I being flooded by a tidal river or not? If I take precautions to protect my house from the effects of a high flood tide on the Clyde, am I entitled to set that off as a claim? I am not satisfied with this definition of a tidal river extending to the tidal reach.
There is a lot of flooding by the river Wye at Monmouth and in Gloucestershire, where the river rises as much as 30 ft. at high tide. There is no flooding in the estuary where the land is high. But at Monmouth, far beyond the tidal reach, where the land is lower, there is flooding. This definition of a tidal river has been taken from the seventeenth century when people did not have the understanding given to Lord's Advocate and Solicitor's-General in these days. At that time Parliament was not so erudite 1637 nor had its Members so many resources for research and they were not so qualified in the use or appreciation of language. It is about time that this definition was changed. I do not suggest that I am competent to do it, but I think it should be changed. I hope that the definition will be looked at again and the word "tidal" removed. so that we may obtain protection from flooding whether tidal or otherwise.
§ 8.15 p.m.
§ Mr. McMasterI am also confused I think I was able to follow what my hon. and learned Friend the Solicitor-General said in distinguishing between a tidal river and non-tidal river. In my constituency there is the River Lagan, which flows into the sea through Lisburn. Is the river a tidal river at Lisburn because it flows into the sea? I should have thought that it was. If it floods at Lisburn, is the flooding there caused by a tidal river, taking the words here.
… against the encroachment or overflowing of the sea or any tidal river …"?Suppose that it is not the sea? There is here the word "or" in the paragraph and I should have thought that above the reach of the tide would come under the ordinary meaning of these words. In the same paragraph there is reference to the… making of any sea wall or other embankment…If that is meant to be limited to a sea wall or other embankment, I should have thought that the drafting of this paragraph means it is to apply not only to the sea portion but to the rest of the river.
§ Mr. HoughtonI think now that the debate has got going we had better all mention our rivers. I have the River Calder. It is a long way from the sea, but storms take place on the Yorkshire Moors and torrents of rain come down into the lower parts of my constituency and flood them doing serious damage to property. One sees river walls holding up gardens and houses where otherwise serious damage would occur.
I am getting more and more interested in this question of tidal rivers. If the hon. Member for Tiverton (Mr. Maxwell-Hyslop) presses the Amendment to a Division, I shall certainly support him. When the Solicitor-General replies, as he has been studying this matter very closely, will he give information about the tide 1638 which is running so strongly against the Government at present?
§ Mr. Denys Bullard (King's Lynn)I added my name to this Amendment because I was interested in the definition of a tidal river. As the matter has now worked out I am not yet fully aware of the reason why a person who happens to he above the extent of the tidal reaches of the river should not have this benefit as well as the person who is below that part of the river.
I heard the Solicitor-General answer the right hon. Member for Orkney and Shetland (Mr. Grimond) about the idea of the Schedule, but I do not think he pave any reason why a person further up the river should not have the same benefit. Although I hope that my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) will not press the Amendment to a Division, I should like to be satisfied on this point before we leave the matter.
§ The Solicitor-GeneralIn answer to the hon. Member for Sowerby (Mr. Houghton), tides do ebb and they do flow, as we have shown very considerably in the course of this debate.
Perhaps one may build up very substantial walls against tides and sometimes see those tides withdraw completely so that one lives very much more happily seeing the tide in the distance than if it is beating against the wall. This provision involves the tidal reaches, and that is a question of fact. It will be a question of fact in each case as to what has caused the particular flooding. Paragraph 13 is to maintain what has always been the position. It is to accept responsibility by giving a relief where flooding is caused by the encroachment or overflowing of the sea. Then it involves the question of a tidal river.
My hon. Friend the Member for Tiverton and my hon. Friend the Member for King's Lynn (Mr. Bullard) have asked, if this relief is given for those concerned with the tidal part of the river, why should it not be given in respect of other types of river? My hon. Friend the Member for Tiverton illustrated how this happens in his part of the world and other hon. Members have said that it happens in their parts, not apparently by the encroachment of the sea, but above the tidal reaches and having nothing to do with the sea.
1639 I understand the point made that the word "tidal" should be removed, but I can only say to my hon. Friend that we deal with a river in that sense because never before has this relief been given. Are we in the middle of this Bill, at this time, on paragraph 13 of the Fourth Schedule, to change what has always been the position? [HON. MEMBERS: "Yes."] A case has been made that if the relief is given for this Act of God, or act of the sea, why should it not be given for other matters and other considerations? Then we should have to consider the implications. In paragraph 13 a capital expense is allowed against income. That is very unusual. The same provision—this is not always a good reason, but it sometimes appeals to lawyers—has been applied since 1853 and we thought there was not sufficient reason for the change suggested by my hon. Friends at this time. For that reason the provision has been drafted in this way to include a tidal river because it is the responsibility—I use the term in the broadest sense—an historical responsibility of the Crown. It involves a capital allowance and it seems right to restrict it to tidal rivers.
§ Mr. Maxwell-HyslopI gave notice of this matter on 2nd May in a letter to the Chancellor of the Exchequer. I cannot see that any very good reason has been put forward against what seemed quite sensible questions. On the first, the question about definition, I understand that if one is up the river one is "up the creek". This is not only a question of being flooded by river water above high tide mark, but also that under certain circumstances the tide does not respect the high tide mark. The object of the manœuvre is to put up a wall, not after one has been flooded by the sea, but before, in advance of the flooding rather than after it has happened, that being a precautionary rather than a funereal measure.
The only way to prove that the sea is coming up or will in certain circumstances come up beyond the normal high tide mark is to wait until the sea does so. If the Committee takes the view which my hon. and learned Friend has put before us one may erect a sea wall or embankment against an encroachment of the sea, not even the river above the 1640 high tide mark, and then have to wait until the tide demonstrates its ability to flood above that point. That does not seem a reasonable thing to do, nor does it seem reasonable that the benefits under this aged Section should be restricted to cases when the water contains a certain amout of salinity rather than other forms of unpleasantness. I feel I must press the Amendment to a Division.
§ Question put, That "tidal" stand part of the Schedule:—
§ The Committee proceeded to a Division: —
§ Mr. PYM and Mr. MACARTHUR were appointed Tellers for the Ayes and Mr. MAXWELL-HYSLOP was appointed Teller for the Noes; but no Member being willing to act as second Teller for the Noes, The CHAIRMAN declared that the Ayes had it.
§ Amendment negatived.
§ Schedule agreed to.