Clause 44.—(AMENDMENT OF S. 130 OF ACT OF 1952 (CESSATIONS)) (Hansard, 23 May 1963)

§ Mr. John Diamond (Gloucester)
I rise to save the Committee's time, having regard to the fact that the Financial Secretary gave us a clear and lucid explanation of the purpose of this Clause during the Second Reading of the Bill. He made it clear how this Clause was to be distinguished from the Clause we have just passed. He said: …I should say that the main object of the proposal is to limit the opportunities for avoidance."—[OFFICIAL REPORT, 6th May, 1963, Vol. 677, c. 53.] We understand and accept that, but immediately we are prompted to ask why it has taken so long for the Government to introduce this Clause. What I seek to do is to ask the Government two or three relevant questions.
This anti-avoidance provision, which we welcome up to a point, has been needed for a long time. From this side of the Committee we have many times made the case that these closing and opening provisions of a business were opportunities for tax avoidance, and that these should be stopped. Indeed, we have suggested methods by which they should be stopped, namely, that the assessments should be transferred from the previous year basis to the actual basis, and in this we have the support of distinguished bodies outside the House.
The Clause refers to the Income Tax Act, 1952, but the provisions which are being altered go back further than that. My first question, therefore, is: why has it taken the Government so long to deal with a Clause in respect of which there has been tax avoidance, bearing in mind that that tax avoidance has been brought to their attention time and time again by my right hon. and hon. Friends?
My next question is to ask the Government why, while they were tackling this problem, they did not go the whole hog? Why, instead of this adjustment which merely covers two years of the commencing years of a company's business, and merely has the effect of taxing the profits of the business on the basis of 674 the actual profits earned during those years, they did not go the whole hog and so adjust our taxation system that a company or a trader would pay tax on the profits actually earned during the lifetime of his business by being taxed on the profits?
What could be more just than that a trader should pay tax on the profits he makes, instead of on the profits he is deemed to make? What could be more just? What could be more equitable? I shall not go further and ask what could be more simple, because I recognise that there are perhaps one or two minor complications, but once we cross the bridge the matter would be straightforward for all time. The Government must recognise that we are moving more and more towards taxing profits on an actual basis, rather than on a previous year basis. Indeed—and I refer to it only shortly—the provision for substituting tax on rents for Schedule A Tax has been based on tax on actual rents received or earned as opposed to a notional figure, albeit that this may mean several readjustments and reassessments.
My third question is to ask why "1964–65" appears in the second line of the Clause? In short, why is it necessary for the Government to delay a whole year in closing this gap, once they have recognised that it exists and needs to be closed? Why is it that in recent years the Government have adopted the attitude of waving a red flag and blowing a whistle as hard as they can to show when they are proposing to apply tax avoidance measures? Why must we give an extra year's warning that anybody who seeks to continue the advantage which has been open to him for avoiding tax through manipulating in the closing years will be able to do so for a further year?
If the Economic Secretary says, in reply to my questions, "If the Opposition feel so keenly on these matters, why is it that they did not table specific Amendments to deal with the point about 1964–65 and the limitation of two years as opposed to going further?", I have a clear answer, which is a point of substantial complaint. The Financial Resolution on this was drawn so tightly—we 675 cannot debate it now, but perhaps I can refer to it—that it has been impossible to table Amendments on which to base a debate.
The Government have shown through their Financial Resolution that they are afraid to discuss the matter. What are they afraid of? Have they no confidence, no belief, in what they are putting forward? If this is not the reason, why should they tie us down so that we cannot put down Amendments to vary 1964–65? Why was it necessary to put 1964–65 in the Financial Resolution? We would have preferred to debate the separate matters and express our views on them.
All that we can do is to give a grudging welcome to the Clause which moves a step, but only a step, in the right direction, and this after years of delay and of prodding by my right hon. and hon. Friends.

§ The Economic Secretary to the Treasury (Mr. Edward du Cann)
I am grateful for any welcome, even if it is only grudging, because, to quote the hon. Member for Gloucester (Mr. Diamond), this Clause is a step in the right direction. I agree with the hon. Gentleman's general opinion of this Clause. It is not a tremendous reform. I would not wish to pretend that it is, but it is, as he said, a step in the right direction.
The whole object of the Clause is to mitigate loss of revenue by the exploitation of the rules governing the assessment of trading and professional profits when a trade or profession ceases or is treated for tax purposes as ceasing. Because of his great experience the hon. Gentleman will know of the commencing rules and the cessation rules, and he will know—indeed he has emphasised the point—that there has been substantial trouble over this matter for quite a long time.
5.0 p.m.
In reply to the hon. Member's general complaint about tardiness, I hope that he will think it right to conclude that we have at least been progressing in the matter, in the sense that in 1954 we took specific action which cleared up some of the trouble. I do not suggest that no trouble remains, but we have taken some action, and this is a further piece of 676 action that we are taking in that progression.
The hon. Member asked how much further we were going, and why we had not gone further this time. I agree that the general aim must be to clear up the position entirely. As to the question of delay, I refer the hon. Member to the Budget speech of my right hon. Friend when he said: The Inland Revenue is examining with the outside experts the possibilities of bringing taxation of company profits for Income Tax on to an accounts basis, as it is already for Profits Tax, which will remove many of the complications and anomalies that are inherent in the present provisions dealing with the opening and closing years of a business and give rise to so many difficulties".—[OFFICIAL REPORT, 3rd April, 1963; Vol. 674, c. 466.] The hon. Member said that he thought that these difficulties were minor ones. That is not quite fair. They can be very serious. I have spoken of progress. My right hon. Friend foreshadowed consultations, and they are now taking place, so we are not delaying in that regard.
The hon. Member may ask why we are not legislating without consultation. He probably knows the answer to that better than I could give it to him. Any provisions made in a very serious, wide-ranging and most important matter of this sort must be generally acceptable to the people with whom we are dealing. I am not talking of those who may set out deliberately to defraud the Inland Revenue, but about the great mass of honourable people who are engaged in trade and industry.
I am sure that the hon. Member would agree that any system which seeks to provide for the taxation of these people must be one which is not only fair, but is seen to be fair—a system which is workable, practical, sound and sensible. I hope that the hon. Member will agree that in those circumstances it must be right that we should have these consultations, and base any future action that we may think it appropriate to take upon the results of those consultations.
In any event, I can go further and say that when we have a body of experience such as we so plainly have in the kind of bodies with which the hon. Member is so familiar, it is advantageous to the Inland Revenue to have the benefit of their advice and experience.

§ Mr. Diamond
The hon. Member suggested that I might not be in support of consultations taking place. Of course, I am in support of consultations. But I can see no reason why consultations should not have immediately followed the Act of 1954, which was passed nine years ago. Have the Government been engaged in consultations over those nine years? He said that it is right to take note of the views of bodies with which I am familiar. The Institute of Chartered Accountants has been making representations concerning a change to an actual basis for four or five years.

§ Mr. du Cann
I understand what the hon. Member is saying, and he is making a fair debating point, but he must agree that he seems to be suggesting that legislation on this subject is almost a matter of sitting down in front of a desk with a piece of paper and a pen and writing it. It is by no means as simple as that. He seemed to gloss over the complications and difficulties of the matter. This is an extraordinarily complex matter. Be that as it may, the past is past. The fact is that action is being taken now, and discussions are being carried on now.
The hon. Member's third question related to retrospection. If the change were to be made for assessments in 1963–64 it could affect assessments for 1961–62, and this could be criticised as being retrospective. It was with that point in mind that the Government decided to effect some sort of compromise.
I am grateful to the hon. Member for saying that the Clause has his support, even though he would like it to go further. I am glad to know, by inference at any rate, that he agrees that this is a useful and forward-looking proposal.