Commons Sitting of 25 May 1965

Preamble
The House met at half-past Two o'clock
PRAYERS
[Mr. SPEAKER in the Chair]
PRIVATE BUSINESS
  BRITISH WATERWAYS BILL

    FLINTSHIRE COUNTY COUNCIL (HIGHER FERRY SALTNEY FOOTBRIDGE) BILL
    GREATER LONDON COUNCIL (MONEY) BILL
    Read the Third time and passed.

DURHAM MARKETS COMPANY BILL [Lords]
  SAINT MARY, ALVERSTOKE, BURIAL GROUND BILL [Lords]
    LONDON TRANSPORT BILL
    As amended, considered; to be read the Third time.
  ROCHDALE CANAL BILL [Lords]
  To be read a Second time Tomorrow.
  SAINT LAURENCE CATFORD BILL [Lords]
  Read a Second time and committed.
  COATBRIDGE BURGH EXTENSION ORDER CONFIRMATION BILL
  Considered; to be read the Third time Tomorrow.
ORAL ANSWERS TO QUESTIONS
  MINISTRY OF POWER

    Nuclear Power (Dungeness B Station)
    Mr. Wingfield Digbyasked the Minister of Power (1) what decision he has reached about the most suitable reactor system for the second nuclear power programme;
    (2) what will be the cost of generating electricity under the lowest tender for an advanced gas-cooled reactor for Dungeness B power station, assuming a life of 20 years and 25 years, respectively.
    Mr. Albert Robertsasked the Minister of Power when he expects electricity produced by nuclear energy to be on parity with coal produced in Yorkshire and the East Midlands.
    Mr. Mitchellasked the Minister of Power whether the lowest advanced gas-cooled reactor tender for Dungeness B nuclear power station would generate electricity at a cost below that of the best conventional stations; and what further economies would follow if a second order were placed for the same equipment.
    Mr. Ness Edwardsasked the Minister of Power whether a decision has now been taken on the type of nuclear power reactor; to what extent consideration has been given to the needs of the atomic energy industry in this country; and if he will make a statement.
    The Minister of Power (Mr. Frederick Lee): With permission, I will make a statement at the end of Questions.

    Agricultural Land (Pylons)
    Mr. Peter Millsasked the Minister of Power what compensation is being paid by the Central Electricity Generating Board and the area boards for the erection of poles and pylons across agricultural land; and whether he will seek power to revise the existing rates.
    Mr. Frederick Lee: I am sending the hon. Member a copy of a recent Electricity Council Press release giving details of increased rates which were introduced from 1st April this year, after discussions between the boards and the Country Landowners' Association and the National Farmers' Union. As the Press release states, the parties have agreed to conduct an immediate joint investigation to see whether further revision is now necessary.
    Mr. Mills: I thank the Minister for his reply and the information that there will be increases. Will he bear in mind that the most important difficulty relates to the siting of these poles and pylons and that what is needed is a little thought and the placing of them in hedgerows and places where they do not interfere with agricultural land? Is he aware that this has not been done in the past? Will he look into the matter to see what can be done to take the poles and pylons

    209
    out of the fields and put them in the hedgerows?
    Mr. Lee: In the discussions to which I have referred the appropriate organisations will bring this kind of thing to the notice of the Board.
    Mr. Baker: Can the right hon. Gentleman tell the House whether the increases were applied to Scotland as well as to England?
    Mr. Lee: I could not answer that with-out notice.
    Mr. Wingfield Digby: Is the Minister aware that last week in my constituency one of these new 110 foot pylons collapsed killing one man and injuring five others? Will the compensation produce an element of danger money for those living round about, or does he intend to make the process of erecting the pylons safer?
    Mr. Lee: I heard about that accident and I am sorry about it. I do not think that I can form an opinion about it now. As I have said, discussions are taking place now, and all relevant matters concerning safety will be discussed with the appropriate authority.

    Underground Electricity Transmission Lines
    Mr. Stratton Millsasked the Minister of Power what research is being carried out into reducing the cost of main underground electricity transmission lines.
    Mr. John Morris: The Electricity Council and boards are seeking to reduce the cost by developing cheaper methods of insulation, including the use of plastics and gas-filled cables. They are also studying the feasibility of using super conductors, although there are considerable technical problems to be overcome before this method is likely to be practicable, and ways of reducing the cost of transmitting electricity underground by direct current.
    Mr. Stratton Mills: Will the Parliamentary Secretary say whether there is any prospect of this research reducing substantially the price differential of 18 to 20 times between the alternative methods? Secondly, can he confirm that the amount spent by the Central Electricity
    210
    Generating Board on research in this field is about £100,000 to £200,000? Is he satisfied that that is a sufficiently high priority?
    Mr. Morris: On the last part of the hon. Gentleman's supplementary question, I am satisfied that no promising project is being neglected. On the first part, it is difficult to estimate how much the ratio between the cost of overhead lines and that of underground cable may be reduced as a result of research. We hope that reductions would be made, but even on the most optimistic estimate the capital cost of high voltage cable will still be much greater than that of overhead lines.
    Mr. Palmer: Would not my hon. Friend agree that if these high voltage overhead lines were placed underground it would add enormously to the industrial costs of this country?
    Mr. Morris: I am sure the House knows that it costs about £1 million a mile for a 400 kV cable to go underground compared with £54,000 for overhead lines. Those are some of the figures involved.

    Area Gas Boards
    Mrs. Renée Shortasked the Minister of Power if he will take steps to widen the representation on area gas boards.
    Mr. John Morris: At present my right hon. Friend sees no need to alter the arrangements whereby suitable persons are selected for appointment from the wide categories named in section 5 of the Gas Act, 1948.
    Mrs. Short: Will my right hon. Friend spread his net a little wider and see that there is greater representation of consumers and trade unionists on the gas boards?
    Mr. Morris: As regards the con-consumers, the chairman of the gas consultative council for the area is an ex-officio member of the board. There is also a trade union member on each board.
    Mr. Carmichael: Is not my hon. Friend aware that there is a growing feeling in many of the nationalised industries that not only should the boards' membership be increased, but that there should be some attempt at democratisation of the

    211
    whole industry, and that the sooner we begin to have a little more confidence in the people in the industries to participate in the organisation and running of the industries the quicker it will reach even greater efficiency than it has at present?
    Mr. Morris: As my hon. Friend is aware, there is consultative machinery in the gas industry for consultation on all matters affecting safety, health, welfare and matters of that kind, but the Government's mind is quite open on the question of direct representation of workers on the boards.

    Nationalised Industries and Local Authorities (Fuels)
    Mr. Martenasked the Minister of Power by what criteria the nationalised industries are to judge whether they use coal or oil.
    Mr. Geoffrey Lloydasked the Minister of Power what estimate he made of the additional consumption of coal by local authorities as a result of his recently announced short-term measures.
    Mr. Peytonasked the Minister of Power how much of the extra 4 to 7 million tons of coal will be used by the gas and electricity industries, respectively.
    Mr. Frederick Lee: I cannot usefully add to the statement I made on the 12th April and the reply I gave to the hon. Member for Yeovil (Mr. Peyton) on 15th April.
    Mr. Marten: Does the Minister not agree that that statement on 12th April amounted to grave interference in the duty of nationalised industries to use their commercial judgment? Secondly, is it not in direct conflict with the White Paper on Prices and Incomes?
    Mr. Lee: No. I think that I broadly answered this, as I said, in my reply to the hon. Member for Yeovil. Of course, the nationalised industries have a duty to break even on a year-to-year basis, but they also have other duties of a social nature, which were recognised in the former Government's White Paper on the Financial and Economic Obligations of the Nationalised Industries.
    Mr. Peyton: The right hon. Gentleman is becoming almost as skilled as his right
    212
    hon. Friend the Prime Minister at not answering Questions. Will he not recollect that he made this statement, which appeared at the time to be somewhat meaningless, six weeks ago? He has had plenty of time to consult these industries and the House is entitled now to ask him what contributions the gas and electricity industries, respectively, are making to maintaining the consumption of coal at 4 to 7 million tons above what it would otherwise have been? Would he answer?
    Mr. Lee: My skill in answering is a direct reflection of the lack of skill of hon. Members opposite in asking. The electricity industry, which, as I have said, is by far the biggest customer of the Coal Board, will naturally make the bigger contribution. Discussions are still going on between the Coal Board and the Central Electricity Generating Board as to the actual amounts, but they are ordering forward and stocking more than would otherwise be the case.
    There is also the domestic market. As the hon. Member knows, we are asking local authorities and others to help in this. The degree of success we achieve in the domestic market will represent the difference in the two figures on the cost.
    Mr. Geoffrey Lloyd: Has the right hon. Gentleman made any estimate of the effect on the rates of the uneconomic extra consumption of coal by local authorities?
    Mr. Lee: No, Sir, I have not.
    Mr. Mendelson: Is my right hon. Friend aware that where an installation either of a nationalised industry or of a local authority is operating in an area surrounded by a large number of coal-fields, it makes economic sense in the long term, and is in agreement with the best principles of location of industry, to make use of coal? Will he encourage that policy as much as possible?
    Mr. Lee: My hon. Friend is absolutely right. This is an illustration of what I have said, that for many years ahead the electricity industry will increase its demand on coal. If the proper orders for coal were not placed now it may not be able to spend the capital to increase the level of supply.
    Mr. Peyton: Do the right hon. Gentleman's answers mean that he is pushing the Central Electricity Generating Board into altering its "merit table" for power stations? If so, will he say whether or not he intends to issue a public instruction or directive?
    Mr. Lee: The answer to the first part of the question is "No, Sir."

    Sub-Tenants (Electricity and Gas Charges)
    Mr. Benceasked the Minister of Power if he will make a statement on the outcome of the action taken by the nationalised power industries to prevent the exploitation of sub-tenants, by excessive charges for using electric power or gas.
    Mr. Frederick Lee: As regards gas, I would refer my hon. Friend to the reply I gave to my hon. Friend the Member for Islington, South-West (Mr. Albert Evans) on 29th April. Of the fourteen electricity boards, twelve, including the two Scottish Boards, have so far fixed maximum charges for electricity re-sold for domestic purposes.
    Mr. Bence: There are still a large number of landlords and owners of property in this country who are exploiting tenants not only by high rents but also by having slot meters in houses. Will my right hon. Friend try to get them to do something to stop this ruthless exploitation?
    Mr. Lee: My hon. Friend will remember that we have taken a good deal of action on this issue. As I have pointed out, 12 of the boards have so far fixed the maximum price in line with the statement which I made to the House.

    Strip Mill Capacity
    Mr. Sheldonasked the Minister of Power what are his plans for the extension of steel strip mill capacity; and if he will make a statement.
    Mr. Frederick Lee: The Iron and Steel Board informs me that strip mill capacity is at present adequate but that some small addition, of the order of 250,000 tons, may be required by about 1970. The Board is considering how this should be provided.
    Mr. Sheldon: Is my right hon. Friend aware that the economies to be obtained from the integration of steel work capacity is one of the main arguments for nationalisation of the industry, and that this can largely come about through the concentration of productive resources? Will he make sure that, when the expansion of steel strip mill capacity is made, the principles of such concentration are followed?
    Mr. Lee: That is my intention.
    Mr. Ridley: Will the right hon. Gentleman give an undertaking that the political sword of Damocles which is hanging over this industry will not prevent the increase in strip capacity from being provided?
    Mr. Lee: No matter what attitude one takes to the industry, I do not think that anybody can say that they have not gone ahead with their programme as planned. We made it abundantly clear months ago that any such development would be taken very much into account.

    Electricity Boards (Payment of Wages)
    Mr. Dribergasked the Minister of Power if he will issue a general direction, in the public interest, to the electricity boards that their employees' wages are always to be paid promptly, and that, in an emergency, special arrangements are to be made for doing this.
    Mr. John Morris: No, Sir. The boards have the importance of this matter well in mind and special arrangements are already in operation.
    Mr. Driberg: Would my hon. Friend say what special arrangements are in operation at the power station at Barking? Is he aware that many of my constituents—including the wages clerks, who regret the present situation as much as anyone—are now drawing their pay more than a week late? [HON. MEMBERS: "Oh."] Is he aware that this is the first official dispute in the history of the clerical side of this industry, and is it not up to the board to agree to reopen negotiations?
    Mr. Morris: I understand that there has been a difficulty at Barking and that some delays in the payment of wages have

    215
    occurred as a result of the work to rule and ban on overtime for clerical and administrative workers. I understand that the boards are doing their best to avoid delays by making emergency arrangements, including the provision of advances on account.

    North Thames Gas Board (Lighterage Firms)
    Mr. Dribergasked the Minister of power if he will, in the public interest, give a general direction to the North Thames Gas Board not to close down their lighterage firms without full prior consultation with the trade unions and employees concerned; and if he will make a statement.
    Mr. John Morris: No, Sir; this is a matter for the Board, which is already engaged in consultations with the union concerned.

    North Sea Operations (Licences)
    Mr. Peytonasked the Minister of Power when he intends to issue the next batch of production licences for the North Sea, and on what basis; and what have been the reasons for the delay.
    Mr. Frederick Lee: I cannot yet add to the reply I gave to the hon. Member on 9th February.
    Mr. Peyton: Will the right hon. Gentleman take great care in this matter and appreciate that if he does delay decisions further on this important issue he is in danger, first, of losing the very great start which he got as a result of the actions of the former Government and, secondly, that other countries which are also interested in the Continental Shelf may step forward and take our place?
    Mr. Lee: I am aware of the point the hon. Gentleman makes. The area for which applications will be invited, as well as the timing of them, will depend on agreements with the other States to which he referred, which are States on the borders of the United Kingdom. Up to now we have reached agreement with Norway, but negotiations are still proceeding with Denmark and Holland. I could not now say when those agreements will be concluded.

    Anglo-French Co-operation
    Mr. Palmerasked the Minister of Power if he will consult the French Government with a view to Anglo-French co-operation in the joint development of nuclear and tidal power schemes, and the further interchange of power supplies to the mutual advantage of the economies of both countries.
    Mr. John Morris: There are considerable exchanges between the electricity industry here and in France, and the possibility of increasing them is borne in mind. If my hon. Friend has any particular suggestions for increasing cooperation, I would be glad to look into them.
    Mr. Palmer: Would my hon. Friend not agree that co-operation between the French and British electricity supply industries, which are both nationalised, is just as practical and possible as cooperation between the two countries on, say, aircraft construction?
    Mr. Morris: I accept from my hon. Friend that these exchanges of information are extremely valuable. Indeed, the other day I went to look at certain gas industry establishments in France.

    Steel Companies (Loans)
    Mr. Ridleyasked the Minister of Power what is the total amount of loans made by the Exchequer to steel companies that are in private ownership, since the time of their denationalisation.
    Mr. Frederick Lee: I would refer the hon. Member to the reply I gave the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd) on 11th May.
    Mr. Ridley: Is the Minister aware that he has been misleading the House about this—[Interruption.]—that there have, in fact, been loans of only £50 million and £27 million issued to private steel companies since nationalisation? Why does the right hon. Gentleman keep on repeating the figure of £400 million? Will he now admit that this is a misleading figure, and will he withdraw it from further utterances in the House?
    Mr. Lee: I will certainly not do anything of the sort. The figure of £400 million covers the Ministry's loans to R.T.B., which were £70 million—
    Hon. Members: Nationalised.
    Mr. Lee: What has that got to do with it? Hon. Gentlemen opposite must face the fact that we could not have got the necessary capacity in steel had we asked private industry to do it. Indeed, they refused point blank and the only way we managed to get it was by this huge injection of public money into the industry.
    Mr. Ridley: Is the Minister aware that he has repeatedly said in the House that £400 million has been put into the privately-owned steel industry? Is he aware that that is false, and will he now admit that?
    Mr. Lee: In that event, will the hon. Gentleman admit that his hon. Friends are wrong in saying that the industry is privately-owned?

    Steel Nationalisation (Discussions)
    Mr. William Yatesasked the Minister of Power what further discussions have now been held with the steel companies affected with regard to proposals, other than those laid down in the White Paper, for the future organisation of the industry.
    Mr. Frederick Lee: I wrote to the President of the British Iron and Steel Federation stating that I should be very willing to receive any representations from the Federation or from the individual companies within the ambit of the Prime Minister's statement of 12th May. I have not so far received any reply.
    Mr. Yates: Since the Minister says that he believes only in 100 per cent. nationalisation, how does he expect the companies to reply, and, secondly, does he not realise that this industry as well as the rest of the country no longer trusts either the Prime Minister or the present Government?
    Mr. David Griffiths: The Tories do not trust the hon. Gentleman.
    Mr. Lee: I do not think that I could improve on the reply given by my hon. Friend.
    Several Hon. Members rose—
    Mr. Yates: I regret that I did not hear the reply which the Minister gave to my
    218
    supplementary question. Would he care to repeat it?
    Mr. Lee: The hon. Gentleman concluded his supplementary question by saying that the industry and the country did not trust my right hon. Friend the Prime Minister or the Government, to which one of my hon. Friends replied that the party opposite did not trust the hon. Gentleman, either.
    Mr. Yates: On a point of order. The sort of reply which the Minister just gave, which was to repeat something said on the back benches, is not really good enough. I beg to give notice that I shall raise this matter on the Adjournment.

    Gas and Electricity Industries (Finance)
    Mr. Palmerasked the Minister of Power what steps he is taking, in view of the rapid increase in the sales of gas, to bring about more realistic competition with electricity by placing both industries in the same fiscal position in the matter of expected return on capital.
    Mr. Frederick Lee: This is a matter for consideration as part of the review I am conducting of fuel policy. The results of that review will be taken into account when the existing five-year financial objectives come up for reexamination.
    Mr. Palmer: I thank my right hon. Friend for that reply. Would he not agree that if there is to be realistic competition between the secondary fuel industries they should carry roughly equal financial burdens and that the electricity industry is at present carrying more than the gas industry?
    Mr. Lee: I appreciate what my hon. Friend has in mind, but in the terms of the White Paper on the Financial and Economic Obligations of the Nationalised Industries certain objectives were agreed in consultation with each industry for an experimental period of five years, which ends in May, 1967. It would not be advantageous to attempt to change those objectives during the course of that five-year period.
    Mr. Wise: Is the Minister telling the House that the ultimate purpose of the

    219
    Government is to raise the price of gas to the level of that of electricity?
    Mr. Lee: If the hon. Gentleman believes that he will believe anything.

    Fuel Industries (Advertising)
    Mr. Roseasked the Minister of Power what steps he is taking to curb unnecessary competition in advertising between the gas and electricity industries and to create a co-ordinated advertising policy according to the best interests of the two industries and the national economy as a whole.
    Mr. Frederick Lee: The scale of advertising by the nationalised fuel industries is largely a matter for the boards and councils concerned. I am, however, keeping the position under review.
    Mr. Rose: Is my right hon. Friend aware that the advertising costs of each of these two industries rose during the last five years of Conservative Administration by more than £1 million in each case? Is this not conclusive evidence that this competition between two go-ahead nationalised industries is getting out of control? Will my right hon. Friend take action to relate advertising to a co-ordinated fuel sales policy?
    Mr. Lee: It is a nice point that my hon. Friend has made, and we must watch it, but I remind him that both industries compete with oil as well as with each other. As to the point he made about advertising, in 1963 Press and television advertising alone for all products in Britain cost more than £200 million, whereas for these industries the costs were for gas, £3·3 million, and for electricity, £2·9 million.
    Sir C. Osborne: Would the Minister agree that while it seems reasonable for his hon. Friends to ask questions about gas and electricity, hon. Members on this side of the House are reprimanded from the back benches opposite when we ask questions about coal? Why should we be debarred from asking questions about coal when—
    Mr. Speaker: Order. It cannot be for the Minister to make pronouncements on these matters.
    Mr. Patrick Jenkin: Would the right hon. Gentleman repudiate the views of his hon. Friend the Member for Manchester, Blackley (Mr. Rose) who suggested that the consumers should ultimately be deprived of choice, which obviously postulates a high degree of advertising?
    Hon. Members: Answer.

    Overhead Power Line (Gloucester—Ystradgynlais)
    Mr. Gibson-Wattasked the Minister of Power whether he will hold a public inquiry into the proposed line of the 400 kV. overhead power line from Gloucester to Ystradgynlais.
    Mr. John Morris: My right hon. Friend proposes to hold a public inquiry into the contentious parts of the proposed line in Herefordshire and Monmouthshire.
    Mr. Gibson-Watt: Will the hon. Gentleman tell me when this inquiry is to take place, and, in view of the long correspondence I have had with his right hon. Friend and his predecessor, why I have not been told about this yet?
    Mr. Morris: My right hon. Friend will announce the arrangements for the inquiry as soon as possible.

  COAL

    Colliery Closures
    Mr. William Hamiltonasked the Minister of Power if he will give a general direction, in the public interest, to the National Coal Board that no colliery employing more than 400 men shall be closed until satisfactory arrangements are made for the redeployment of manpower.
    The Parliamentary Secretary to the Ministry of Power (Mr. John Morris): No, Sir, but the National Coal Board consults the unions about individual closures in accordance with the intentions of the Nationalisation Act and has been largely successful in finding men other jobs within the industry.
    Mr. Hamilton: Is my hon. Friend aware that no one would deny that the National Coal Board has had considerable success in redeploying manpower declared

    221
    redundant as a result of closures of collieries? Nevertheless, does not he recognise that, in the case of large collieries, a great deal of hardship is caused, not only by short-term or long-term redundancy, but by a considerable reduction in wages, even when the men are redeployed within the industry? Will he give an undertaking that he will take an active interest in collieries employing more than 400 men in order to see that this kind of hardship is reduced to the absolute minimum?
    Mr. Morris: I am grateful to my hon. Friend for the first part of his supplementary question. He will know that my right hon. Friend has no power to intervene in individual closures. As for the redeployment of men, I know that the Departments which are concerned with employment and planning keep these matters to the fore at all times.
    Sir C. Osborne: Can the Minister say how many pits employ more than 400 men? Does not he agree that no nationalised industry can be run exclusively in the interests of its workers?
    Mr. Morris: Perhaps the hon. Member will put down a Question on that subject.

    Uneconomic Mines
    Mr. McNair-Wilsonasked the Minister of Power how many uneconomic coal mines are operated by the National Coal Board.
    Mr. Frederick Lee: About half the Board's output comes from profitable pits and half from pits that are making losses.
    Mr. McNair-Wilson: That information is a great shock to everyone in this House and probably in the country as a whole. Can the Minister assure us that when he brings in his forthcoming policy he intends to introduce a state of affairs to ensure that the taxpayers do not have to go on supporting an uneconomic industry which cannot compete with its rivals?
    Mr. Lee: I think that the hon. Gentleman should look a little more closely at the industry. Many of the pits which are just economic today may well be thoroughly economic in a few weeks when they have been further reorganised and capital has been put into them. It
    222
    is also the case that if on a given day we closed down all the pits which were uneconomic there would be a severe shortage of energy in Great Britain the day after.
    Mr. William Hamilton: Is my right hon. Friend aware that the country is very grateful that this industry is showing a measure of social responsibility? Does he recognise that had it been under private ownership every one of the pits would have been closed and there would have been tens of thousands of men walking the streets, as there were in the 1920s and the 1930s? Will my right hon. Friend give an undertaking that when he comes to reconstruct on the capital side of the industry due regard will be had to the fact that it was geared to an annual production of 240 million tons for which the party opposite was responsible?
    Mr. Lee: I certainly will. The fact, often lost sight of, is that if we had not nationalised the coal industry when we did there would not be a coal industry at all. [HON. MEMBERS: "Nonsense."]
    Mr. Ridsdale: Is the Minister aware that the social costs of the Government's fuel policy were estimated in The Times on Friday at £600 million a year? Will he confirm or deny that figure? What estimate has he of the social costs?
    Mr. Lee: If the hon. Gentleman wants to ask me whether I have stopped beating my wife, I will not answer.
    Mr. A. J. Williams: Can my right hon. Friend tell me how much foreign currency would be involved in importing the coal needed to make up for the loss of output from the pits? Would not he agree that this type of very narrow accounting on a single unit basis adopted by hon. Members opposite is responsible for many of the difficulties in which we find the economy today?
    Mr. Lee: I agree. The balance of payments problem is bad enough now. Had it been left in that position I do not know where we should be.
    Mr. Peyton: Is the Minister aware that, while we all recognise that these industries have social responsibilities, he would be wholly wrong, in the interests of the country as a whole, to give way to the kind of pressure indicated in an

    223
    answer to an earlier supplementary question for the coal industry to become a social service? Is he aware that it has to contribute positively to the economy?
    Mr. Lee: I quite agree about its contribution to the economy. It has made a huge contribution to the economy. As a matter of fact, we are not asking for anything such as did the party opposite in finding the Lancashire cotton industry £30 million or £40 million. Nothing of that kind is being asked for.

    Underground Gasification
    Mr. McNair-Wilsonasked the Minister of Power what research is being carried on into the underground gasification of coal.
    Mr. John Morris: None Sir, since it was established in 1959 after 10 years' experimental work that the commercial prospects did not justify further expenditure.

    Coal Industry (Short-term Proposals)
    Mr. Ridleyasked the Minister of Power in settling his new short-term proposals for the coal industry, what estimates he received from the gas and electricity industries, respectively, of the effect these proposals would have on their prices in future.
    Mr. Geoffrey Lloydasked the Minister of Power what estimate he made of the additional cost to the Central Electricity Generating Board of giving a preference to coal.
    Mr. Fisherasked the Minister of Power, what estimate he made, before his recently announced measures to help the coal industry, of the extent to which the nationalised industries will need to increase their prices as a result of these measures.
    Mr. Frederick Lee: The effect of these measures will be small in relation to the total costs of the electricity and gas industries. I should not expect any increases in prices to result.
    Mr. Ridley: Has not the Minister made an estimate of what will be the increase in price? Surely he realises that saddling these industries with uneconomic sources of fuel must put up
    224
    their costs? Will he come clean and give the House what is his estimate of the cost? It is information that the House and the public should know.
    Mr. Lee: The hon. Gentleman has got this entirely wrong. Both the electricity industry—whose demands on coal will go on increasing—and the gas industry will be heavily dependent on coal for a number of years to come. It surely is not making any exorbitant demand on them to ask that they take into account that their principal supplier should be looked after during the short period of the next two years?
    Mr. Fisher: How can the right hon. Gentleman reconcile the Government support for the declining coal industry in relation to other heat and power industries with the Prime Minister's General Election theme of greater efficiency and modernisation and the policy of the First Secretary of State of a greater stabilisation of prices?
    Mr. Lee: One almost despairs of educating hon. Members opposite. This futile talk about the coal industry being some kind of declining asset with no future just is not true. It is the most efficient coal industry in the world. The coal industry of this country has a great future. If it were not the case that it is so highly efficient we should be in a shockingly bad state for energy in the near future.
    Mr. Ogden: Will my right hon. Friend bear in mind the suggestion made from the benches opposite to the Prime Minister when they urged that he should buy British and that now they are changing their mind to justify the purchase of American or Middle East oil?
    Mr. Ridley: If the coal industry is not a declining industry, can the Minister say why he finds it necessary to afford it special protection through economic misfortunes?
    Mr. Lee: I am not providing special protection through what the hon. Member describes as "economic misfortunes". I pointed out that we are improving productivity in coal at a faster rate than in almost any private industry in Britain. Because it is an extractive industry, it is necessary to contract some areas and to expand others. This is the process which is now going on.

    Coal Utilisation
    Mr. Benceasked the Minister of Power what research is being done into the more efficient use of coal.
    Mr. John Morris: Much of the research effort of the National Coal Board's Coal Research Establishment and of the British Coal Utilisation Research Association is concerned with the domestic and industrial use of coal. A large volume of work directed to the improvement of coal combustion systems and plant performance
    is being conducted by the Central Electricity Generating Board. The Gas Council is continuing research into new methods for the production of gas from coal.
    Mr. Bence: Is my hon. Friend aware that, in the previous five Administrations, every Minister of Power has praised the work of the coal industry? I do not remember an annual debate on the Coal Report without great praise from the Front Bench opposite for the coal industry. Will my hon. Friend see whether there is any shortcoming in research and development by consumers of this product which is so ably retrieved from the earth by British miners?
    Mr. Morris: If my hon. Friend has any particular point to draw to my attention, I shall gladly look at it.
    Mr. Snow: Is my hon. Friend aware that, in giving general support to the Question which has been asked, this side of the House and those of us who represent coalmining areas will thoroughly resent the series of Questions from the Opposition? Are they not, in effect, sly attacks on the mining industry, whose political attitude they object to?
    Mr. Speaker: It cannot conceivably be for the Minister to pronounce on a matter of that kind.

    Coal Mines (Safety Measures)
    Mr. Wainwrightasked the Minister of Power what was the total amount spent on safety measures in the coal mining industry by the Government and the National Coal Board in the years 1960 to 1964, respectively; and what is the estimated amount in 1965.
    Mr. John Morris: Expenditure by the Government on measures to promote
    226
    safety and health in mines and quarries was approximately £1,700,000 in each of the three years 1960–61 to 1962–63; £1,900,000 in 1963–64 and £2,350,000 in 1964–65. The estimate for the current year is £2,250,000. I am asking the Chairman of the National Coal Board to write to my hon. Friend about the Board's expenditure on such measures.
    Mr. Wainwright: Will my hon. Friend consider having discussions with the Chairman of the National Coal Board and representatives of the N.U.M. on future safety measures in the mining industry? Is he not aware that there has been a vast change in the types of machines used nowadays in the winning of coal, and that everyone, I think, feels that further safety measures should be discussed?
    Mr. Morris: I am deeply aware of the concern there is about safety in the mines. My right hon. Friend asked me to look particularly at all the aspects of the problem, but, as my hon. Friend is aware, most accidents are caused, not by lack of knowledge, but by failure to apply knowledge. If there is anything that my right hon. Friend or I can do in this matter, we shall certainly do it.
    Mr. Ogden: Will my hon. Friend bear in mind the fact that the vast majority of miners are engaged on a piecework basis and that piecework and safety are a direct contradiction in terms?

    Mines Inspectors
    Mr. Wainwrightasked the Minister of Power what was the number of full-time mines inspectors in the United Kingdom in the years 1960 to 1964, respectively; and what is the figure for 1965.
    Mr. John Morris: At the end of 1960 there were 144 full-time mines inspectors; at the end of 1961, 149 inspectors; at the end of 1962, 1963 and 1964, 153 inspectors. There has been no change in 1965.
    Mr. Wainwright: Does my hon. Friend realise that there are rather few members of the mining inspectorate, and would he consider having discussions with the Chairman of the Coal Board and representatives of the N.U.M. to try to find some solution that will enable more inspectors to be engaged by the Board,

    227
    so ensuring that every pit can be inspected more frequently during the year?
    Mr. Morris: The concentration of coal production in a smaller number of mines, particularly by the Board, and the reduction in the number of men employed have reduced the need for mines inspectors, but a competition is in progress to fill vacancies and the inspectorate is expected to be up to full strength in the near future.
    Mr. Albert Roberts: Will my hon. Friend bear in mind that it is not a question wholly of having more inspectors but of the mineworkers themselves obeying the regulations and measures already in force?
    Mr. Morris: I am well aware of that point, and I am grateful to my hon. Friend.

    National Coal Board (Non-Colliery Assets)
    Mr. Shinwellasked the Minister of Power what are the productive activities of the National Coal Board, other than coal production; and what is their total valuation.
    Mr. Frederick Lee: The main activities outside coal production comprise carbonisation, fuel processing, brickworks, workshops and housing. These and certain other non-colliery assets stood in the Board's 1963–64 Accounts at about £150 million.
    Mr. Shinwell: Will my right hon. Friend say which of these non-mining productive industries are profitable?
    Mr. Lee: I imagine that the Coal Board's large brick production is profitable. [Interruption.] Hon. Members opposite do not have a monopoly in dropping bricks. The Board is seeking to diversify activities a great deal more and we will do what we can to assist it there.
    Mr. Ridley: Does the right hon. Gentleman really say that he does not know how much of an investment of £150 million is or is not profitable? Is not that an extraordinary admission for him to make?
    Mr. Lee: Not in the very least. I was saying that practically all of it was
    228
    profitable, and I was trying to tell my hon. Friend which parts of it were even more profitable than others.
    Captain W. Elliot: Can the right hon. Gentleman say what is the return on that capital of £150 million?
    Mr. Lee: Not without notice.

    ATLANTIC NUCLEAR FORCE
    Mr. Martenasked the Prime Minister if he will make a statement on the latest position reached in the negotiations for an Atlantic nuclear force.
    The Prime Minister (Mr. Harold Wilson): I have nothing to add to the reply I gave to my hon. Friend the Member for Woolwich, West (Mr. Hamling) on 18th May.
    Mr. Marten: As the proposals for the Atlantic nuclear force seem to be meeting with such little support from our allies, and from the Prime Minister's allies on the Left wing of his own party, can the right hon. Gentleman tell the House, without being too laboured or long-winded about it—[Interruption.]—whether he has any alternative plan to offer?
    The Prime Minister: One reason why Questions are not as productive as they should be is that the hon. Gentleman puts the same laboured questions every week. We had all this last week and the week before. I answered this Question fully last week. This matter is being discussed at the Working Group in Paris. None of us expects real progress on the matter before the German elections.

    MANPOWER RESOURCES FOR SCIENCE AND TECHNOLOGY (COMMITTEE)
    Mr. J. H. Osbornasked the Prime Minister what have been the changes in the terms of reference of the reconstituted Committee on Manpower Resources for Science and Technolgy; to which Minister or Ministers it reports; and which Minister now appoints its chairman and members.
    The Prime Minister: The terms of reference of the new Committee on Manpower Resources for Science and Technology have been widened to include not

    229
    only consideration of the future supply of, and demand for, scientists and technologists, but also the use made of existing scientists and technologists. The reconstituted Committee reports to the Secretary of State for Education and Science and the Minister of Technology jointly. Members have been appointed by the Secretary of State after consultation with the Minister of Technology.
    Mr. Osborn: While thanking the Prime Minister for that answer, and saying how much we welcome the appointment of Sir Willis Jackson, may I ask whether the responsibility is entirely that of the Secretary of State for Education and Science, or is it the responsibility of the Cabinet as a whole? Has that been clarified?
    The Prime Minister: Of course, all decisions are the responsibility of the Cabinet as a whole, but I think the hon. Gentleman will realise that in the past this Committee has tended to do statistical surveys of the estimated need for scientists and technologists in the future in relation to the training programme and education. In the new situation, I think that there will be general support for the view that the existing use made of Britain's scientists and technologists in the application of their discoveries to productive processes in industry is of at least equal importance, and that is, of course, the function of the Ministry of Technology.
    Mr. Patrick Jenkin: Has the right hon. Gentleman impressed on the Committee the need to pursue its current review with the utmost expedition in view of the acute and growing shortage in certain branches of scientists and technologists?
    The Prime Minister: Yes, Sir. I am sure that the Committee is very well aware of that, and this, of course, means the most efficient use of the technologists and scientists who are already in industry—or, indeed, in any form of employment. I think that what the hon. Gentleman has said confirms the facts available to us and, of course, gives a very strongly different impression from some estimates made some time ago under the previous Government, when it was suggested that we had all the scientists we needed for several years ahead.
    Sir H. Legge-Bourke: Is the Prime Minister aware that the part that the Minister of Technology could play in this matter would be very considerably simplified if the Prime Minister could further clarify the responsibility of the Minister of Technology as between, for example, the Post Office and himself in regard to telecommunications?
    The Prime Minister: My right hon. Friend is perfectly clear about his responsibilities, and I am sorry if the hon. Member is not. I am quite prepared to make a further statement about it if it will help him. The duties of the Minister of Technology, particularly in those branches of the engineering industry in which he has sponsorship responsibility, are very clear and very central to the question. I do not think that the hon. Gentleman would really advise taking from the Post Office all responsibility for research into telecommunications.

    GOVERNMENT DEPARTMENTS (SAMPLE STATISTICS)
    Mr. Sheldonasked the Prime Minister if he will arrange for up-to-date sample statistics to be made available to Government Departments.
    The Prime Minister: Government Departments are well aware of the need to obtain up-to-date information and already make extensive use of sampling methods for this purpose, but I am always ready to consider improvements.
    Mr. Sheldon: Is my right hon. Friend aware that of the errors of the previous Government that of not knowing what was happening in the important field of exports and production last year was among the most grievous? Is my right hon. Friend further aware that sample statistics can materially assist here and enable the Government to make rather better predictions, and take rather better action, than were previously made?
    The Prime Minister: I go along with my hon. Friend in certain of his comments. I think that the facts are fairly generally known. They did not seem to get through. Having said that, I agree with my hon. Friend that there are still very serious deficiencies in central Government statistics, particularly in relation

    231
    to future export prospects and also, I think, in relation to production matters. There was very strong criticism by the Radcliffe Committee, which reported in 1959 on the adequacy of financial statistics. In all the years since then not enough has been done to improve the adequacy of financial statistics. Whether sampling will help in that case would be a rather difficult question to answer.
    Mr. Stratton Mills: Could the Prime Minister say what statistics the Chancellor of the Exchequer was using on Thursday evening when he said that the credit squeeze had not yet really started?
    The Prime Minister: All the statistics that are at present available. It is certainly the case—this is one of the matters which is being gone into as a matter of urgency—that the figures for bank advances, which was the basis for the last decision about special deposits, were part of the field referred to by the Radcliffe Report as quite inadquate for modern purposes.

    PAYMASTER-GENERAL (OFFICIAL RESIDENCE)
    Mr. Robert Cookeasked the Prime Minister whether he will provide an official residence for the Paymaster-General.
    The Prime Minister: No, Sir.
    Mr. Cooke: Would it not be more convenient for all concerned if the Paymaster-General were to move in to Number 10 on a permanent residential basis?
    The Prime Minister: I hope that the hon. Gentleman one day will get over this love-hate relationship for the Paymaster-General. I really think that he has now had a good run on this. He has not got very much out of it. I feel that the rather limited time available for Questions could be better used dealing with Questions which seek information in reply to which information is given, as with Question Number 2 this afternoon.
    Mr. Lipton: May we now assume that the Prime Minister regards any further questions on this subject of the Paymaster-General as tedious, irrelevant, boring and more and more juvenile?
    The Prime Minister: No, Sir. I will—
    Sir W. Bromley-Davenport: On a point of order. Some time ago, Mr. Speaker, you in your wisdom reproached me for using too many adjectives. The hon. Member for Brixton (Mr. Lipton) used four.
    Mr. Speaker: The hon. and gallant Gentleman is right, except that I did not reprove him. I pointed out that a supplementary question containing unnecessary adjectives was actually out of order. I am of opinion that the same consideration applied to the question just asked by the hon. Member for Brixton (Mr. Lipton) and that it was out of order on another ground, but I thought that on the whole we could get on quicker if I left it alone.
    The Prime Minister: Am I in order in answering it?
    Mr. Speaker: It excuses the Prime Minister from answering, unless he has a strong urge of an emotional character to do so.
    Mr. Webster: As the First Lord of the Admiralty now has no known function, would not the Admiralty building be appropriate for the Paymaster-General?
    The Prime Minister: The hon. Gentleman will find, after that very clever supplementary Question, that it was dealt with a few weeks ago.

    ANGLO-AMERICAN RELATIONS
    Mrs. Renée Shortasked the Prime Minister if, following his recent series of visits, he will make a statement on Anglo-American relations.
    The Prime Minister: Anglo-American relations continue to be extremely close, and are based on frank and friendly discussions at all levels, here, in Washington and at the United Nations.
    Mrs. Short: Will the Prime Minister say if those frank and friendly relations and discussions include frank and friendly remarks and points of view expressed about American aggression in Vietnam and Santo Domingo?
    The Prime Minister: They cover the problems of Vietnam and of the Dominican Republic. I think that the whole House will agree that it is best

    233
    conducted on that plane rather than by public statements on this question. If my hon. Friend is concerned to know what attitude we have taken about the Dominican Republic in the latest developments, she is free to study the statement made by my noble Friend, Lord Caradon, at the United Nations last Saturday—it was a very frank statement—and, indeed, to study the text of the resolution my noble Friend tabled at the Security Council last Saturday.
    Mr. John Harvey: Did the Prime Minister notice that his hon. Friend referred to "American aggression"? Would the right hon. Gentleman make it clear to his hon. Friend and to the House that he accepts that the Americans have not been aggressors in this matter?
    The Prime Minister: The United States Government and all others concerned know exactly what is the position of Her Majesty's Government on this, which I have made clear—[HON. MEMBERS: "Answer."]—which I have made clear repeatedly in the House. I have made it clear repeatedly in the House that we do not consider it to be aggression. Quite honestly, Anglo-American relations can function perfectly well without the help of the hon. Gentleman.
    Mr. A. Henderson: In view of the widespread Press reports that President Johnson acts first and informs his allies afterwards, will my right hon. Friend the Prime Minister make it quite clear that Her Majesty's Government are fully consulted on all problems of common interest by the United States Government?
    The Prime Minister: I have answered many questions on Vietnam. I do not think that I need to answer any more in that context. As to the Dominican Republic, on which I think I have answered hardly any at all, it is certainly the case that at all points our views about the handling of the situation have been made known to the President in personal talks with Mr. Dean Rusk, both by my right hon. Friend the Foreign Secretary and by myself, and in the frankest exchanges between Lord Caradon and Mr. Adlai Stevenson at the United Nations.

    EAST OF SUEZ COMMITMENTS
    Mr. Ridsdaleasked the Prime Minister what plans he has for changes in the near future in the long term commitments east of Suez.
    The Prime Minister: At present, none, Sir.
    Mr. Ridsdale: How can we operate air power east of Suez without the strongest reconnaissance aircraft with a range of 1,500 miles? If this is not to be another example of the Prime Minister's double standards, surely we have no alternative but to buy the F.111 with our scarce money resources?
    The Prime Minister: The double standards arise in the pretence that we have got the TSR2 or that it would be available in the time required. As my right hon. Friend and I have made clear many times, we are going through a very intensive review of our rôles in different possible theatres in relation to the cost, something which apparently our predecessors never did. [Interruption] This is clear in view of the escalation of defence costs in the last year or two. As soon as this is clear, I hope that we shall be able to report to the House about our conclusions. The answer I gave to the first question represents the position of the Government as at present until the review is completed.
    Mr. Grimond: As in the long-term our commitments for defence against aggression east of Suez can be discharged only with the co-operation of our allies on an international basis, will the Prime Minister say whether he is having any conversations with our allies, particularly with our European allies, on the question whether they are willing to bear any part of the cost of undertaking this matter?
    The Prime Minister: As to our European allies, this is highly relevant in connection with the excessive share of the cost of N.A.T.O. which we bear, particularly in payments across the exchanges. That is a matter for discussion with our European allies. As to the situation east of Suez, I agree that this is a question for discussion, but in this case I would have thought with certain

    235
    of our Commonwealth partners, particularly Australia and New Zealand, and with the United States.
    Sir Alec Douglas-Home: Our commitments east of Suez, as the Prime Minister will know, are linked to definite obligations. He himself has made that clear many times. Is it not right, therefore, that we should fulfil these, both in the case of Malayasia and in the case of the Gulf, which are the particular obligations? The Prime Minister has now been telling us for about four months that a review is in progress. Can he tell us when we shall have a statement about the defence situation?
    The Prime Minister: We are fulfilling the obligations to which the right hon. Gentleman referred, as I think the House will understand, but if one totals up all the obligations we have and all the other rôles which we have assumed, I think that the right hon. Gentleman may possibly agree that no one ever related these total rôles to the total economic possibilities or to the defence costs required to meet them. That is why we are having a review. I do not apologise that it has taken more than four months. The surprising think to me is that it has never been done before.
    Mr. Barnett: Is my right hon. Friend aware that many of us feel that our rôle east of Suez does not necessarily mean that we need this type of plane or any other?
    Mr. William Yates: In view of the most valuable services rendered my Mr. Gordon Walker in his outstanding diplomatic visits to Vietnam, China and elsewhere, may I ask whether it would not be possible, at a reduced price, to send Mr. Gordon Walker again to examine the whole problem of the Labour Party's rôle east of Suez?
    The Prime Minister: Mr. Gordon Walker's visit was extremely productive in the plans in relation to Cambodia. I am bound to say, and I am sure that I have the full support of the Front Bench opposite, that Mr. Gordon Walker's journeys abroad have been far more satisfactory to this country than those of the hon. Member for The Wrekin (Mr. William Yates).
    Mr. Wingfield Digby: Would the Prime Minister make it clear that this review of
    236
    which he has spoken includes the question of both naval and air bases?
    The Prime Minister: Yes, Sir. It will certainly cover that, and of course hon. and right hon. Gentlemen know the enormous intricacy of this question. One cannot divide it into theatres. The Middle East is obviously important not only as a base for that area but as a staging post for dealing with our obligations further east. Certainly that and the whole question of our striking power and the rest is at the very centre of this, but I have already said that we have also to look at it in relation to costs and economic development.

NUCLEAR POWER (DUNGENESS B STATION)
The Minister of Power (Mr. Frederick Lee): With permission, I should like to make a statement.
In accordance with the policy set out in the White Paper, "The Second Nuclear Power Programme", published in April, 1964, the Central Electricity Generating Board issued an inquiry for tenders for the second nuclear station to be built at Dungeness—Dungeness B.
While inviting tenders for an advanced gas-cooled reactor station, of the kind which has been developed in this country by the Atomic Energy Authority, the Board stated that it was also ready to consider tenders from British industry for water-moderated reactor systems of proved designs such as those developed in the United States.
The tenders, which were received in February, 1965, included proposals for both advanced gas-cooled and water moderated reactors.
The tenders for Dungeness B have now been assessed by the Generating Board, in conjunction with the Atomic Energy Authority, and it has informed me that the advanced gas-cooled reactor shows clear economic and technical advantages over the alternative systems and has a good potential for further development. It will also generate base load power more cheaply than a contemporary coal-fired station.
I have accepted the joint recommendation that an advanced gas-cooled reactor

237
system should be adopted at Dungeness B.
Mr. Wingfield Digby: Is the right hon. Gentleman aware that this is a very technical question and that we have not had a White Paper since last April? Would he lay another White Paper before the House, going into these details? Would not the right hon. Gentleman also agree that this is a success for the British A.G.R. system, and would he give the House an assurance that it will be developed on its merits regardless of any desire to help the coal industry?
Mr. Lee: The Central Electricity Generating Board will be making a very full statement this afternoon. The hon. Member quite rightly spoke about the technicalities of this matter and I will not try to anticipate the Board's statement now; it will be making a very full statement on all these points later in the day. We will consider the point about issuing a White Paper. Certainly, by now the situation must be different from that which existed when the last White Paper was issued.
Mr. Albert Roberts: Will my right hon. Friend bear in mind that costing in the atomic energy industry is far from satisfactory? Is he aware that it is many years since Sir John Cockcroft said that nuclear energy would be produced on a parity with coal in 1965? Will he also bear in mind that it has been proved without doubt that far too much of the taxpayers' money has been spent without giving a true reflection of the cost of its production?
Mr. Lee: I do not want to be pessimistic. I am quite sure that we have hit the jackpot with this. As one looks at the A.G.R. tenders one realises that the longer the life one attributes to the reactor the more the costing comes out in favour of the A.G.R.
Mr. Ness Edwards: Is my right hon. Friend aware that the industry will welcome his decision to give preference to the British design? Is he aware that he can be assured that the mothers and wives of those who were killed in the Rhondda last week will welcome this development in so far as it provides new employment in the fuel industry for those who now have to take such risks to obtain the fuel that we require?
Mr. Lee: I am grateful to my right hon. Friend for that very statesmanlike approach to this problem. We certainly have very much in mind the problems of the mining areas. Just as we rejoice at this greater break-through in two great nationalised industries, so we shall look after those at present employed in the nationalised coal industry.
Mr. Peyton: Is the right hon. Gentleman aware that we would expect him, representing a modernising Government, to be a little more forthcoming and enthusiastic? Will not he now give some facts? Can he tell the House how much cheaper this base-load power will be and what are the economic and technical advantages to which he referred? Will he say how this will fit into the national fuel policy and what the effect will be on coal?
In short, will he meet the request which
has already been made and issue a White Paper so that the House may judge the full import of what looks like a tremendous development? Will the right hon. Gentleman accept that sympathy is not sufficient on a matter of this kind and that it is not good enough to say that the Central Electricity Generating Board will be giving later the details in which the House of Commons is interested?
Mr. Lee: I am sorry that the hon. Gentleman is in such a tizzy about our great success. He and his hon. and right hon. Friends were worried sick about the nationalised industries not paying. Here we have the greatest break-through of all time. Why does not the hon. Gentleman rejoice with us? As he knows, we are having a long-term review of fuel policy and this will be fitted very closely into it. As we know now, there is something like a 10 per cent. advantage in this development, and it could be greater. I have already said that as yet we cannot tell what the full implications of all this will be until long-term arrangements are made. Certainly, a 10 per cent. saving is involved. When we have been able to do all this we will consider the idea of producing a further White Paper.
Mr. David Griffiths: Is my right hon. Friend aware that on this side of the House we welcome his statement? Is he cognisant of the fact that as Minister of Power he is doing a far better job

239
than did the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd) and the hon. Member for Yeovil (Mr. Peyton)?
Mr. Lee: I thoroughly agree with the last sentiment.
Mr. Lubbock: Is the right hon. Gentleman aware that, in its last Annual Report, the Atomic Energy Authority stated that, to bring the costs of electricity generated by the A.G.R. down to 0·35d. per unit, it would be necessary to plan for an installed capacity of 6,000 MW? What plans have the Government for following this up?
Secondly, does the right hon. Gentleman think that there will be room in our programme for a 6,000 MW A.G.R. station before the fast breeder reactor comes into commission, and does the present decision mean that lower priority will be given by the Atomic Energy Authority to development of the steam generating heavy water plant?
Mr. Lee: It is precisely because of considerations like those which the hon. Gentleman mentions in the second part of his supplementary question that we want time to review again the contribution of atomic energy to the programme after 1970. At this moment we are pretty sure that it will break even on economies and, indeed, lead to advance over the coal-fired station.
Mr. Palmer: Will not my right hon. Friend agree that this decision is a great tribute to the skill and knowledge of the British electrical engineering industry, both publicly-owned and privately-owned, and will be noted with great interest in the export field?
Mr. Lee: I thoroughly agree with my hon. Friend's suggestion. Whether interest is shown or not, it will, we hope, make a very big difference to the possibility of exports in this most important field.
Sir E. Boyle: Is there not here not only a major technical break-through, as the right hon. Gentleman said, but also a decision of the greatest importance for the future of the Atomic Energy Authority? If we are thinking of to whom credit is due, is it not due also to the repeatedly
240
expressed faith of my right hon. and learned Friend the Member for St. Marylebone (Mr. Hogg), when he was Secretary of State for Education and Science?
In view of the economic importance of this question, will the right hon. Gentleman seriously try to give both the House and the country as much information as possible, bearing in mind the widespread interest there will be in both the technical and the economic aspects?
Mr. Lee: I certainly will. I have said today that the principal issue is that the A.G.R.
is accepted by the Government, and it will go ahead. I have already said that arrangements have been made for the widest possible technical information to be given through the Generating Board itself, and this will happen during the course of the next hour or two. We shall do everything to ensure the success of such publicity.
Mr. Speaker: The Chairman of Ways and Means. Personal statement.
Mr. McMaster: On a point of order, Mr. Speaker. You will have seen that I have Question No. 40 down today to the Minister of Power on this subject, and that it was not reached. In view of the importance of this subject to Northern Ireland, is it possible for me to ask a supplementary question now?
Mr. Speaker: I am very sorry that I cannot, on these occasions, call for a question from all those hon. Members who want to ask one. The trouble is that they invariably exceed the time which, doing my best, I conceive to be available. I am sorry that that is so, but it is so.
Mr. Mitchell: On a point of order, Mr. Speaker. I heard the Minister of Power say earlier that he would answer certain Questions in his statement at the end of Question Time. Mine was one of the Questions, No. 32, and he did not answer it.
Mr. Speaker: I looked for the hon. Gentleman rising.
Mr. Mitchell: I did rise, Sir.
Mr. Speaker: I regret that I failed to see the hon. Gentleman rise. I ask the House to allow me to go back in his favour, because I had a hard look for him and, somehow or other, I failed to see him.
Mr. Urwin: Get off your knees.
Mr. Speaker: Not while I am on my feet.
Mr. Mitchell: May I direct the attention of the Minister of Power to Question No. 32 and ask him whether he will be good enough now to answer it and, in particular, the second part?
Mr. Lee: The statement I made included reference to costs, and so on, at Dungeness. This was taken into account in the general statement. If the hon. Gentleman will look at what I said when it appears in HANSARD, he will see that I mentioned the points he raises in his Question.

PERSONAL STATEMENT
The Chairman of Ways and Means:: With your permission, Mr. Speaker, and that of the House, I wish to make a personal statement.
Yesterday, in Committee, I allowed the hon. and learned Member for Crewe (Mr. Scholefield Allen) to make a personal statement. I ought to have known that personal statements are made in the House only, and only after being submitted to you, Sir. I wish, therefore, to express my very sincere regret to the House for having allowed what was entirely out of order.
Sir W. Bromley-Davenport: I hope that I shall not be out of order, Mr. Speaker, if, on behalf of the House, I thank the Chairman of Ways and Means for his charm and courtesy and full apology.
May I ask for your help and advice, Mr. Speaker? [HON. MEMBERS: "No."] I wonder whether, on this occasion, Her Majesty's Government will hear me in silence. I do not think that any other hon. Member within living memory has been placed in the position in which I am placed today. Ten minutes before I entered the Chamber yesterday, the hon. and learned Member for Crewe (Mr. Scholefield Allen) came to me and said that he would be making a personal statement which affected me. He did not give me a copy, and, when he came in, he delivered a personal—
Mr. Speaker: Order. I hear what the hon. and gallant Gentleman says. I realise the difficulty, and I have been think-
242
ing about it. But, with respect, he must not now, in asking for my guidance, contrive to get into criticism of another Member. That really must not be done.
Sir W. Bromley-Davenport: I am sorry, Mr. Speaker. I do not want to criticise him. I am just putting my position. I am in a very unhappy position. [HON. MEMBERS: "Oh"] Yes. What was said by the hon. and learned Gentleman—this is the point—will be in all the local newspapers in Cheshire. The statement which he made, which affected me, was not true, and, on top of that, the whole truth was carefully omitted.
Mr. Speaker: Order. The hon. and gallant Gentleman must remember my warning; otherwise, we shall get into a position more complicated than the one we are in now. I do not know whether I can help him. I have been thinking about possible remedies in these circumstances. I can think of only two. One would be that the hon. and gallant Gentleman should, if he wished it, table a further Motion. The other would be that he would submit to me a personal statement of his, and I should consider it. I should have to see what was in it before I could consider what I could allow. But beyond those two, I have not been able to devise any method which would help the hon. and gallant Gentleman in these circumstances.
Lord Balniel: Would not this be a solution to the problem, Mr. Speaker? The personal statement made by the hon. and learned Member for Crewe (Mr. Scholefield Allen) having now been stated to have been out of order, would it not be right for it to be expunged from the record? If that is correct, what steps are open to the House to expunge it from the record?
Mr. Speaker: The noble Lord will understand at once if he will contemplate the difficulties attached to expunging words from HANSARD, which is widely distributed already in all sorts of places. In fact, the process is not known to the practice of the House. It is different, of course, in relation to the Journal, but there is no machinery for doing what the noble Lord has in mind.
Sir W. Bromley-Davenport: I thank you very much, Mr. Speaker, for your help and advice. I greatly appreciate it.
Mr. Speaker: I am obliged.

ORDERS OF THE DAY

  FINANCE (No. 2) BILL
  Considered in Committee [Progress, 24th May].
  [Dr. HORACE KING in the Chair]
  3.50 p.m.
  The Chairman: I have added to the duplicated list on the notice boards the five or six non-marshalled Amendments which are to be found at the end of the Notice Paper of Amendments.

  FINANCE (No. 2) BILL

    Clause 17.—(AMENDMENTS OF CASE VII OF SCHEDULE D: CHATTELS SOLD FOR £1,000 OR LESS.)
    Mr. Joel Barnett: I beg to move Amendment No. 351, in page 13, line 12, to leave out from "the" to "disposal" in line 13 and to insert "market value on".
    My intention is simply to be helpful and it may well be that what my colleagues and I propose in this Amendment is covered somewhere else in the Bill. If that is so, I should be delighted to have that assurance from my hon. and learned Friend the Financial Secretary to the Treasury. Our intention is to remove any positive encouragement to avoidance or evasion. I am sure that all hon. Members will be in favour of such an Amendment. Indeed, yesterday, hon. Members opposite made it clear that they were fair, reasonable and logical. At least, that is what they told us and, of course, we accept it. I am, therefore, able to assume that they will accept this Amendment.
    I call in aid Clause 21(4), which uses the words,
    "… market value and arm's length …"
    in this connection. The words "arm's length" are used throughout the tax system and have been for a long time. Indeed, in Section 12(3) of the Finance Act, 1962, the same words are used. In this Clause, however, these words will not be used and I believe that this may leave a considerable loophole.
    I would rather see a much simpler tax system and if, in this way, one could reduce the work of accountants and others in the professions, I would be delighted. I am speaking, of course, purely for my?
    244
    self and not for my association. I might perhaps add that my association, when it speaks in connection with the Finance Bill, does not speak for me—which is, perhaps, not surprising because, on its executive, there is a member of the Front Bench opposite.
    I make it clear in referring to this Amendment that I do not pretend that it would stop the search for methods of tax avoidance generally. Indeed, I never could. Of course, it is right that people throughout the country, taxpayers generally, should be able to look for methods of reducing their tax liability in the same way as hon. Members are entitled to claim the maximum genuine expenses and so reduce their own tax liability.
    I submit that the Amendment would made the law sensible. I do not claim any more for it. Really to stop or slow down the desire for tax avoidance generally, we would need, as I have suggested on previous occasions, to widen the whole tax base and reduce the incidence of tax itself. From my experience, where the rates of tax are low there is a direct correlation with avoidance and evasion. This goes right throughout the tax system. We see it in Purchase Tax particularly. Where the tax rates are low, then the desire for avoidance is equally low and I would personally like to see a much wider tax base and a much lower tax rate generally. [HON. MEMBERS: "Hear, hear."] I hope that hon. Members opposite who are agreeing with me will cheer as much when I express my hope and expectation that the next Budget will contain, for example, a reduction of about 2s. in the standard rate of Income Tax.
    The Chairman: Order. The hon. Gentleman must keep to the Amendment. We have only one Budget to consider at the moment.
    Mr. Barnett: I was seeking to relate the Amendment, Dr. King, to the whole question of tax avoidance. But I realise that I must stick rigidly to the Clause. The Amendment seeks to delete a small loophole. Many loopholes will remain, and no doubt others will be found, but if my hon. and learned Friend is able to assure me that somewhere else in the Bill the point is covered, I will be delighted. Alternatively, if he does not

    245
    like the form of words used perhaps he will accept the principle. As I have said, it is not possible to block all the loopholes and, indeed, I would not wish to do so, because to attempt it would entail going to totalitarian lengths. I trust, therefore, that I may have an assurance from my hon. and learned Friend on this point.
    The Chairman: It will, I think, be for the convenience of the Committee if we discuss, at the same time, Amendment No. 352, standing in the name of the hon. Member for Ashton-under-Lyne (Mr. Sheldon), in page 33, line 3, to leave out from first "the" to "disposal" in line 4 and to insert "market value on".
    The Financial Secretary to the Treasury (Mr. Niall MacDermot): Without following my hon. Friend the Member for Heywood and Royton (Mr. Barnett) into a wider debate on tax avoidance, I think that I can give him the assurance that he seeks. As I understand, what he and his hon. Friends are concerned about is lest it should be possible for people, on disposing of chattels, to avoid tax by an arrangement whereby there is an artificially, low price in a sale which is not a sale at arm's length or, at the time of disposal, by gift at an artificially low valuation which would be relevant for the assessment of tax. That, however, is not so.
    The reason is—if I can give a legalistic answer—that Clause 16(10) provides that Clause 17 must be construed as one with Chapter II of Part II of the Finance Act, 1962. That brings into operation the provisions of Clause 12(3) of the 1962 Act, so if it is a sale between connected persons or if the article is given away, then the market value will be substituted for
    a consideration actually paid, or, equally, if there is no consideration, as in the case of a gift. I think that meets the point put by my hon. Friend.
    Mr. Barnett: I thank my hon. and learned Friend for that reply. I understand that Clause 16(10) means that the point is covered and I therefore beg to ask leave to withdraw the Amendment.
    Amendment by leave withdrawn.
    Mr. Peter Walker: Dr. King, I thank you for listening to the representations of my right hon. Friend yesterday concerning the Amendment I am about to move and dividing up the debate on the short-term and long-term aspects. I speak on behalf of my right hon. and hon. Friends when I say that we prefer to debate this when we come to the long-term aspects of the Capital Gains Tax.
    Therefore, I beg formally to move, in page 13, line 13, to leave out "one" and to insert "five".
    The Chairman: I would remind the Committee of the significance of what has been said by the hon. Member for Worcester (Mr. Peter Walker). Amendments No. 203, No. 204 and No. 205, all standing in the name of the right hon. Member for Harrogate (Mr. Ramsden) and the names of other hon. Gentlemen, which relate to Clause 29 and which we had proposed to discuss with the Amendment just moved, will now be taken and debated in full when the opportunity comes.
    Question put, That "one" stand part of the Clause:—
    The Committee divided: Ayes 200, Noes 194.

    Division No. 128.]

    AYES

    [3.59 p.m.

    Abse, Leo

    Buchan, Norman (Renfrewshire, W.)

    Diamond, John

    Albu, Austen

    Butler, Herbert (Hackney, C.)

    Doig, Peter

    Allaun, Frank (Salford, E.)

    Callaghan, Rt. Hn. James

    Donnelly, Desmond

    Allen, Scholefield (Crewe)

    Carmichael, Neil

    Driberg, Tom

    Armstrong, Ernest

    Carter-Jones, Lewis

    Duffy, Dr. A. E. P.

    Atkinson, Norman

    Castle, Rt. Hn. Barbara

    Dunn, James A.

    Barnett, Joel

    Chapman, Donald

    Edelman, Maurice

    Baxter, William

    Craddock, George (Bradford, S.)

    Edwards, Rt. Hn. Ness (Caerphilly)

    Bence, Cyril

    Crawshaw, Richard

    Edwards, Robert (Bilston)

    Bennett, J. (Glasgow, Bridgeton)

    Crossman, Rt. Hn. R. H. S.

    English, Michael

    Blenkinsop, Arthur

    Cullen, Mrs. Alice

    Ennals, David

    Boardman, H.

    Dalyell, Tam

    Evans Ioan (Birmingham, Yardley)

    Boston, T. G.

    Davies, C. Elfed (Rhondda, E.)

    Fernyhough, E.

    Bowden, Rt. Hn. H. W. (Leics S.W.)

    Davies, Harold (Leek)

    Fletcher, Sir Eric (Islington, E.)

    Braddock, Mrs. E. M.

    Davies, S. O. (Merthyr)

    Fletcher, Ted (Darlington)

    Bray, Dr. Jeremy

    de Freitas, Sir Geoffrey

    Fletcher, Raymond (Ilkeston)

    Brown, Hugh D. (Glasgow, Provan)

    Delargy, Hugh

    Floud, Bernard

    Brown, R. W. (Shoreditch & Fbury)

    Dell, Edmund

    Foley, Maurice

    Foot, Sir Dingle (Ipswich)

    MacCoil, James

    Rhodes, Geoffrey

    Fraser, Rt. Hn. Tom (Hamilton)

    MacDermot, Niall

    Richard, Ivor

    Freeson, Reginald

    McGuire, Michael

    Roberts, Albert (Normanton)

    Galpern, Sir Myer

    McKay, Mrs. Margaret

    Roberts, Goronwy (Caernarvon)

    Garrett, W. E.

    Mackenzie, Gregor (Rutherglen)

    Robertson, John (Paisley)

    Garrow, A.

    Mackie, John (Enfield, E.)

    Robinson, Rt. Hn.K.(St.Pancras,N.)

    George, Lady Megan Lloyd

    McLeavy, Frank

    Rodgers, William (Stockton)

    Ginsburg, David

    MacMillan, Malcolm

    Rogers, George (Kensington, N.)

    Gourlay, Harry

    MacPherson, Malcolm

    Rose, Paul B.

    Grey, Charles

    Mahon, Simon (Bootle)

    Ross, Rt. Hn. William

    Griffiths, David (Rother Valley)

    Manuel, Archie

    Sheldon, Robert

    Griffiths, Rt. Hn. James (Llanelly)

    Mapp, Charles

    Shinwell, Rt. Hn. E.

    Griffiths, Will (M'chester, Exchange)

    Marsh, Richard

    Shore, Peter (Stepney)

    Gunter, Rt. Hn. R. J.

    Mason, Roy

    Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)

    Hamilton, William (West Fife)

    Mellish, Robert

    Short, Mrs. Renée (W'hampton,N.E.)

    Hannan, William

    Mendelson, J. J.

    Silkin, John (Deptford)

    Harper, Joseph

    Millan, Bruce

    Silverman, Julius (Aston)

    Hart, Mrs. Judith

    Miller, Dr. M. S.

    Slater, Mrs. Harriet (Stoke, N.)

    Hattersley, Roy

    Milne, Edward (Blyth)

    Small, William

    Hazell, Bert

    Monslow, Walter

    Smith, Ellis (Stoke, S.)

    Henderson, Rt. Hn. Arthur

    Morris, Charles (Openshaw)

    Snow, Julian

    Herbison, Rt. Hn. Margaret

    Morris, John (Aberavon)

    Soskice, Rt. Hn. Sir Frank

    Hill, J. (Midlothian)

    Murray, Albert

    Stones, William

    Hobden, Dennis (Brighton, K'town.)

    Neal, Harold

    Strauss, Rt. Hn. G. R. (Vauxhall)

    Holman, Percy

    Noel-Baker, Francis (Swindon)

    Summerskill, Hn. Dr. Shirley

    Howarth, Robert L. (Bolton, E.)

    Noel-Baker,Rt.Hn.Philip(Derby,S.)

    Swain, Thomas

    Howell, Denis (Small Heath)

    Ogden, Eric

    Swingler, Stephen

    Hoy, James

    Oram, Albert E. (E. Ham, S.)

    Taylor, Bernard (Mansfield)

    Hughes, Cledwyn (Anglesey)

    Orme, Stanley

    Thomas, George (Cardiff, W.)

    Hughes, Emrys (S. Ayrshire)

    Owen, Will

    Thomas, Iorwerth (Rhondda, W.)

    Hunter, Adam (Dunfermline)

    Page, Derek (King's Lynn)

    Tinn, James

    Hunter, A. E. (Feltham)

    Palmer, Arthur

    Urwin, T. W.

    Hynd, John (Attercliffe)

    Pannell, Rt. Hn. Charles

    Wainwright, Edwin

    Irvine, A. J. (Edge Hill)

    Park, Trevor (Derbyshire, S.E.)

    Walden, Brian (All Saints)

    Irving, Sydney (Dartford)

    Parker, John

    Walker, Harold (Doncaster)

    Jones, Dan (Burnley)

    Pavitt, Laurence

    White, Mrs. Eirene

    Jones, J. Idwal (Wrexham)

    Pearson, Arthur (Pontypridd)

    Whitlock, William

    Jones, T. W. (Merioneth)

    Peart, Rt. Hn. Fred

    Wilkins, W. A.

    Kelley, Richard

    Pentland, Norman

    Willey, Rt. Hn. Frederick

    Kerr, Mrs. Anne (R'ter & Chatham)

    Popplewell, Ernest

    Williams, Alan (Swansea, W.)

    Kerr, Dr. David (W'worth, Central)

    Prentice, R. E.

    Willis, George (Edinburgh,E.)

    Lawson, George

    Price, J. T. (Westhoughton)

    Wilson, Rt. Hn. Harold (Huyton)

    Lee, Rt. Hn. Frederick (Newton)

    Probert, Arthur

    Wilson, William (Coventry, S.)

    Lee, Miss Jennie (Cannock)

    Pursey, Cmdr. Harry

    Winterbottom, R. E.

    Lever, L. M. (Ardwick)

    Randall, Harry

    Woodburn, Rt. Hn. A.

    Lewis, Arthur (West Ham, N.)

    Rankin, John

    Woof, Robert

    Lewis, Ron (Carlisle)

    Redhead, Edward

    Zilliacus, K.

    Lipton, Marcus

    Rees, Merlyn

    McBride, Neil

    Reynolds, G. W.

    TELLERS FOR THE AYES:

    Mr. O'Malley and Mr. Howie.

    NOES

    Agnew, Commander Sir Peter

    Campbell, Gordon

    Gibson-Watt, David

    Alison, Michael (Barkston Ash)

    Carr, Rt. Hn. Robert

    Giles, Rear-Admiral Morgan

    Allason, James (Hemel Hempstead)

    Chichester-Clark, R.

    Gilmour, Ian (Norfolk, Central)

    Anstruther-Gray, Rt. Hn. Sir W.

    Clark, William (Nottingham, S.)

    Gilmour, Sir John (East Fife)

    Astor, John

    Cooke, Robert

    Glover, Sir Douglas

    Awdry, Daniel

    Cooper, A. E.

    Goodhew, Victor

    Baker, W. H. K.

    Cooper-Key, Sir Neill

    Gower, Raymond

    Barber, Rt. Hn. Anthony

    Corfield, F. V.

    Grant, Anthony

    Barlow, Sir John

    Costain, A. P.

    Gresham-Cooke, R.

    Batsford, Brian

    Craddock, Sir Beresford (Spelthorne)

    Griffiths, Eldon (Bury St. Edmunds)

    Bennett, Sir Frederic (Torquay)

    Crawley, Aidan

    Griffiths, Peter (Smethwick)

    Bennett, Dr. Reginald (Gos & Fhm)

    Cunningham, Sir Knox

    Grimond, Rt. Hn. J.

    Berry, Hn. Anthony

    Dalkeith, Earl of

    Gurden, Harold

    Bessell, Peter

    Dance, James

    Hall, John (Wycombe)

    Biggs-Davison, John

    Davies, Dr. Wyndham (Perry Barr)

    Hall-Davis, A. G. F.

    Birch, Rt. Hn. Nigel

    d'Avigdor-Goldsmid, Sir Henry

    Hamilton, Marquess of (Fermanagh)

    Black, Sir Cyril

    Dean, Paul

    Hamilton, M. (Salisbury)

    Blaker, Peter

    Digby, Simon Wingfield

    Harris, Frederic (Croydon, N.W.)

    Box, Donald

    Dodds-Parker, Douglas

    Harvey, John (Walthamstow, E.)

    Boyd-Carpenter, Rt. Hn. J.

    Doughty, Charles

    Harvie Anderson, Miss

    Boyle, Rt. Hn. Sir Edward

    Douglas-Home, Rt. Hn. Sir Alec

    Heald, Rt. Hn. Sir Lionel

    Brewis, John

    du Cann, Rt. Hn. Edward

    Hendry, Forbes

    Brinton, Sir Tatton

    Eyre, Reginald

    Hiley, Joseph

    Bromley-Davenport,Lt.-Col.Sir Walter

    Farr, John

    Hill, J. E. B. (S. Norfolk)

    Brooke, Rt. Hn. Henry

    Fisher, Nigel

    Hirst, Geoffrey

    Bruce-Gardyne, J.

    Fletcher-Cooke, Charles (Darwen)

    Hooson, H. E.

    Bryan, Paul

    Fletcher-Cooke, Sir John (S'pton)

    Hopkins, Alan

    Buchanan-Smith, Alick

    Fraser, Rt Hn Hugh(St'fford&Stone)

    Hordern, Peter

    Burden, F. A.

    Fraser, Ian (Plymouth, Sutton)

    Hornsby-Smith, Rt. Hn. Dame P.

    Buxton, Ronald

    Gammans, Lady

    Howe, Geoffrey (Bebington)

    248

    249

    Hunt, John (Bromley)

    Monro, Hector

    Smyth, Rt. Hn. Brig. Sir John

    Hutchison, Michael Clark

    More, Jasper

    Spearman, Sir Alexander

    Irvine, Bryant Godman (Rye)

    Morrison, Charles (Devizes)

    Stainton, Keith

    Jenkin, Patrick (Woodford)

    Mott-Radclyffe, Sir Charles

    Stanley, Hn. Richard

    Jennings, J. C.

    Munro-Lucas-Tooth, Sir Hugh

    Steel, David (Roxburgh)

    Johnson Smith, G. (East Grinstead)

    Neave, Airey

    Stodart, Anthony

    Jopling, Michael

    Nicholls, Sir Harmar

    Stoddart-Scott, Col. Sir Malcolm

    Joseph, Rt. Hn. Sir Keith

    Nicholson, Sir Godfrey

    Studholme, Sir Henry

    Kaberry, Sir Donald

    Noble, Rt. Hn. Michael

    Summers, Sir Spencer

    Kerby, Capt. Henry

    Nugent, Rt. Hn. Sir Richard

    Taylor, Sir Charles (Eastbourne)

    Kerr, Sir Hamilton (Cambridge)

    Onslow, Cranley

    Taylor, Edward M. (G'gow,Cathcart)

    Kilfedder, James A.

    Orr-Ewing, Sir Ian

    Taylor, Frank (Moss Side)

    King, Evelyn (Dorset, S.)

    Osborn, John (Hallam)

    Thatcher, Mrs. Margaret

    Kitson, Timothy

    Osborne, Sir Cyril (Louth)

    Thompson, Sir Richard (Croydon,S.)

    Lagden, Godfrey

    Page, John (Harrow, W.)

    Thorneycroft, Rt. Hn. Peter

    Lambton, Viscount

    Page, R. Graham (Crosby)

    Tiley, Arthur (Bradford, W.)

    Lancaster, Col. C. G.

    Pearson, Sir Frank (Clitheroe)

    Turton, Rt. Hn. R. H.

    Langford-Holt, Sir John

    Peyton, John

    Tweedsmuir, Lady

    Legge-Bourke, Sir Harry

    Pitt, Dame Edith

    van straubenzee, W. R.

    Lloyd,Rt.Hn.Geoffrey(Sut'nC'dfield)

    Pounder, Rafton

    Vaughan-Morgan, Rt. Hn. Sir John

    Lloyd, Rt. Hn. Selwyn (Wirral)

    Powell, Rt. Hn. J. Enoch

    Walder David (High Peak)

    Longbottom, Charles

    Prior, J. M. L.

    Walker, Peter (Worcester)

    Loveys, Walter H.

    Pym, Francis

    Walters, Dennis

    Lubbock, Eric

    Ramsden, Rt. Hn. James

    Ward, Dame Irene

    McAdden, Sir Stephen

    Redmayne, Rt. Hn. Sir Martin

    Weatherill, Bernard

    MacArthur, Ian

    Renton, Rt. Hn. Sir David

    Webster, David

    Mackenzie, Alasdair (Ross&Crom'ty)

    Ridley, Hn. Nicholas

    Whitelaw, William

    Mackie, George Y. (C'ness & S'land)

    Ridsdale, Julian

    Williams, Sir Rolf Dudley (Exeter)

    McMaster, Stanley

    Roberts, Sir Peter (Heeley)

    Wills, Sir Gerald (Bridgwater)

    McNair-Wilson, Patrick

    Robson Brown, Sir William

    Wilson, Geoffrey (Truro)

    Marples, Rt. Hn. Ernest

    Russell, Sir Ronald

    Wise, A. R.

    Maude, Angus

    St. John-Stevas, Norman

    Wood Rt. Hn. Richard

    Maydon, Lt.-Cmdr. S. L. C.

    Scott-Hopkins, James

    Meyer, Sir Anthony

    Sharples, Richard

    Mills, Peter (Torrington)

    Sinclair, Sir George

    TELLERS FOR THE NOES:

    Mills, Stratton (Belfast, N.)

    Smith, Dudley (Br'ntf'd & Chiswick)

    Mr. McLaren and Mr. R. W. Elliott.

    Mr. MacDermot: I beg to move Amendment No. 121, in page 13, line 31, after "and", to insert"(a)".
    Perhaps it would be convenient if, with this Amendment, we discussed also Amendment No. 122, in page 13, line 32, after "person", to insert:
    "or
    (b) to persons who are acting in concert or who are, in the terms of paragraph 21 of Schedule 7 to this Act, connected persons".
    These Amendments are designed to ensure that the exemption limit for chattels under Clause 17 cannot be avoided by selling the component parts of a set of chattels one by one, in reality to the same buyer but through intermediaries who are either connected with him or acting in concern that whim. We have already had reference to this loophole in the Bill as it stands and quite clearly if we are to have this provision relating to a set of articles we must see that it cannot be avoided by the simple expedient of people being able to sell through an intermediary acting in concert with them.
    Amendment agreed to.
    Further Amendment made: In page 13, line 32, after "person", insert:
    "or
    (b) to persons who are acting in concert
    250
    or who are, in the terms of paragraph 21 of Schedule 7 to this Act, connected persons".—[Mr. MacDermot.]
    Mr. MacDermot: I beg to move Amendment No. 123, in page 13, line 34, at the end to insert:
    "but with any necessary apportionments of the reductions in tax, and in allowable losses, under subsections (1) and (2) of this section".
    This Amendment is designed to bring the present wording of subsection (3) of Clause 17 into line with the first and comparable pant of subsection (4) of Clause 29. There are similar words in Clause 29 and by an error they were omitted in the drafting of this Clause. The effect is to permit apportionments in cases where a set of articles is required for the purposes of this Clause to be treated as a single asset and where not all the articles comprising the set but only one or some of them are disposed of on a particular occasion.
    Amendment agreed to.
    Clause, as amended, ordered to stand part of the Bill.

    Clause 18.—(TAXATION OF CAPITAL GAINS.)
    Mr. John Hall: I beg to move Amendment 274, in page 14, line 10, to leave out "person" and to insert "individual".
    The Chairman: With this Amendment we propose to take Amendment No. 291, in page 14, line 12, leave out subsection (2) and insert:
    (2) For the purposes of this Part of this Act, a person shall not include a company as defined in subsection (4) of section 42 of this Act.
    and Amendments 275, 276, 277, 278, 279, 280, 281, 282 and 283.
    4.15 p.m.
    Mr. John Hall: We have now left the short-term provisions and come to the main meat of the capital gains provisions. Clause 18 which, personally, I regard as the charter Clause to the legislation covering capital gains, imposes tax on long-term gains of all forms of property and, by so doing, introduces a new element into our tax law. We shall have something to say about this new form of tax later.
    The Amendment I now move, and the consequential Amendments, are designed to exclude a company as is defined in subsection (4) of Clause 42 of the Bill. The Amendment will not have the effect of relieving the ultimate beneficiary from the liability to capital gains tax, but it will have the effect of avoiding double taxation and will also have the effect that the gain realised by the ultimate beneficiary will be taxed at 30 per cent. and not at the higher rate of Corporation Tax. At present, unit trust shareholders suffer a tax of 40 per cent., a higher rate than they would otherwise suffer if they were direct shareholders. I hope that we shall discuss this later and that there will be changes.
    Clause 31 is defective, as has been shown by the number of Amendments tabled. The fact that this relief is given under that Clause for the reinvestment in the proceeds of the sale of certain assets provided that they are reinvested in assets of the same class does not in any way weaken the argument that the imposition of a capital gains tax on a company and then, later, on the shareholder who sells his shares or in voluntary liquidation constitues double taxation.
    Let us consider the position which will arise. I will ignore the special rate of 35 per cent. tax which is to be imposed in the case of capital gains enjoyed by companies in the first year and take the 40 per cent., or even more Corporation Tax, which may be more normal. Take
    252
    a company which sells an asset and renders itself liable to Capital Gains Tax and does not reinvest it in an asset of the same class and, therefore, is liable to the tax. It will pay 40 per cent. or more capital gains. There would be left as an accretion to assets 60 per cent. of the realised capital gain.
    This will mean that the asset valuation will be increased by that amount. The company will have sold a capital asset and gained a certain capital gain that will be taxed at 40 per cent. and the rest of the 60 per cent. of that capital gain, will add to its asset value. To that extent the value of those assets in its balance sheet is increased and it will increase the value of the shares in the hands of those various shareholders.
    There are various ways in which shares can increase in value and this is one of them. When the shareholder comes to dispose of his shareholding the assumption is that the increase in the asset value is reflected in the value of his share which he sells either in the market or in liquidation or at death. He will then be called upon to pay a further tax at the rate of 30 per cent. This means that the total tax borne on that capital gain will be 58 per cent. We have always tried to avoid taxing income, or a receipt, which has already borne tax.
    I am not sure whether, through the long history of fiscal legislation in this country, we have always succeeded, but one scans one's memory to find examples where we have strayed from the path of strict rectitude in this matter. As a matter of principle, in this House, we have always been strongly opposed to the whole conception of double taxation. The Government itself have accepted this principle in attempting to avoid the double tax on capital gains which might otherwise have occurred as a liability on the shareholders of investments of unit trusts and they have tried to cover this in Clause 34, line 63.
    As they have realised that there is an element of direct taxation in some part of their proposals for Capital Gains Tax, and have taken steps to try to mitigate the effects of this in so far as it affects unit trust or investment trust holders, why are they proposing to impose it as between companies and their direct shareholders? I can think of only one

    253
    reason. It must be because the Government regard a company as a completely separate and, indeed, different entity from its shareholders. I cannot accept this view.
    A company is, basically, the property of its shareholders. They elect a board to conduct the affairs of the company on their behalf. They can replace all or any of the directors if they think fit. Any increase in the asset value, whether through the retention of profits not paid to shareholders or through an increase in the value of existing assets, does not benefit the company; it benefits the shareholders inasmuch as that increase in value is reflected in the value of their shares either on the market or on voluntary liquidation. Incidentally, it also benefits the employees in so far as an increase in financial strength enables the company to go on expanding and developing.
    If real capital is destroyed by penal taxation it is not the company but the shareholders who suffer. It is they who will lose their money and the workers who will lose their jobs. A company is an inanimate thing. It cannot starve. It cannot feel heat, cold or pain. Indeed, it is completely lifeless without the shareholders to give it financial strength and the workers to operate it. When we tax a company, we tax its shareholders—those who give it life.
    If the taxation is penal, it also probably affects the long term future of the employees. However, whether the taxation be penal or moderate, it should not be imposed twice. The Capital Gains Tax should be imposed at the point of ultimate realisation—that is, when the shareholder disposes of his shares or at death. To place a double burden on the shareholder is both unjust and contrary to our normal taxation philosophy. It is an encouragement to look for other ways of saving and investing which do not attract double taxation. If the Corporation Tax goes higher, it may have a serious effect on companies seeking financial support in the market or which seek to float themselves for the first time.
    This is a comparatively narrow point, although I am sure that many of my right hon. and hon. Friends will have something to say about it, because it concerns
    254
    only this one element of double taxation. It does not lead to an evasion of Capital Gains Tax, because in the end it is taxed in the hands of the ultimate beneficiary, the one who is able to obtain benefit by the gain which accrues from the sale of assets in the hands of a company.
    It is, therefore, a question, not of evading tax, but of trying to avoid double taxation and maintaining as far as possible in this imperfect world the principle of not imposing double taxation on any form of income or receipt.
    The Chairman: Before I call the next hon. Gentleman, may I suggest that it would be excellent if hon. Members followed the lead given by the hon. Member for Wycombe (Mr. John Hall) and confined their remarks strictly to the Amendment in view of the fact that we shall have a debate later on the Question, "That the Clause stand part of the Bill".
    Sir Tatton Brinton: I will endeavour to follow the example of my hon. Friend the Member for Wycombe (Mr. John Hall) by sticking to the Clause and emulating his admirable brevity.
    When considering any tax, particularly a new tax, there are three criteria on which we should judge it. The first is fairness; the second is what I would describe as efficiency—in other words, whether the yield from the tax is likely to be worth the trouble both to the tax collectors and to the public—and the third is what its overall economic effect is likely to be. On all these criteria, I would say that the extension of Capital Gains Tax to the internal operation of companies fails completely.
    My hon. Friend the Member for Wycombe dealt fully with the aspect of fairness. Double taxation will fall on shareholders when
    a capital gain is made by their company, which as my hon. Friend said is particularly unfair in the case of investment trusts and unit trusts. Although the Government have provided a method in Clauses 34 and 63 whereby certain investors in investment trusts and unit trusts will be able to use part of the Capital Gains Tax already charged to set off the capital gain which they may incur by selling their units or shares, there is a gap of 5 per cent. between the 35 per cent. to be charged in the coming

    255
    year on companies and the 30 per cent. personal tax. This is liable to rise to 10 per cent. or possibly more if Corporation tax is set at a higher level than 40 per cent.
    Moreover, it should not be forgotten that many of the investors in investment trusts and the holders of units are institutional investors of the charitable type. This sort of institution, particularly charities, is not liable to Capital Gains Tax. Therefore, presumably, they will simply lose on the capital gain which has been charged within their investment trust and will not be able to recover anything because they were not liable in the first place.
    How efficient will this tax be in respect of manufacturing companies? It introduces a complexity in the economic affairs of this country which is quite unnecessary. The Government have had to admit the logic that if a manufacturing company disposes of, say, a factory which is no longer required at a substantial capital gain and then replaces it with another factory in another place and reinvests the money, it shall not, at that point at any rate, incur liability to pay Capital Gains Tax. This overcomes the immediate objection raised by many financial writers when the tax was first proposed. It merely defers the liability for capital gains to a much later point. The fact that exemption had to be introduced underlines the inefficiency of this tax.
    If I may digress for a moment, the assumption of this exemption is that the financing of industry is solely related to fixed assets. This is not the case. It may well make very good economic sense for a company to dispose of a fixed asset in order to provide finance for its current requirements. Expansion does not come only out of bricks and mortar and machines. It may also come out of the increased finance required to carry on an enlarged operation.
    Therefore, the Government, in proposing this exemption, have already created what obviously is an anomaly economically in that they say, "Provided you make a capital gain, but reinvest it in bricks and mortar and machinery, you do not pay, but if you say that you are desperately short of working capital and
    256
    that you wish to dispose of one factory to increase the efficiency of another, you are mulcted." This produces a foolish anomaly.
    4.30 p.m.
    By the exemptions which the Government have had to introduce to bring some logic into what is basically an illogical tax, they have made so many exceptions to the bite of the tax that the amount realised by the tax will be relatively low.
    On the other hand, they are introducing into the conduct of a business an element which would be far better kept out. They are bringing in the trouble of constant valuations and the complexities envisaged in Clause 63 in the case of investment trusts and unit trusts, where certificates will have to be given to all shareholders once a year to show how much capital gain is included in the value of their shares, which they can then reclaim.
    A ridiculous situation will arise, because such an accountancy cannot take into account the fact that people may buy and sell their units or their shares at varying periods during the year, so that they will lose or gain according to the state of the accounting. I may be wrong about this, but no doubt I shall be corrected if I am.
    If an accounting period runs to 31st December, and at that date certain capital gains are included in the certificate which is given to the holder of shares, by 30th June that certificate will be out of date. Further accruals or losses may have occurred between then, but no certificate will be able to be issued until the next accounting period, so that anybody acquiring shares halfway through the financial year may be a winner or a loser.
    The Chairman: Order. I regret having to interrupt the hon. Member, but he is wandering all over the Bill at the moment.
    Sir T. Brinton: Dr. King, I was trying to show that, in relation to Amendment No. 291, by which we seek to exempt all companies, the sort of anomalies being created are neither worth while nor sensible, nor will they lead to efficient working, and it is in the light of that that I was drawing attention to the complications which have had to be introduced

    257
    to meet some of the more obviously ridiculous features of the Bill. I am sorry if I appeared to be wandering from the Amendment, but I was giving an illustration of what this means and why we think companies should be excluded from the tax.
    Taxation is already enough of a problem for the businessman. Far too many of his decisions are affected not by the direct relationship of efficiency, profit earnings, turnover, or productivity, but by the possible tax effects of it, and the bigger the businessman, the truer this becomes. Not long ago I was talking to a big businessman. He said that he spent half his time worrying about taxation, and he was indignant about suggestions made by hon. Gentlemen opposite that the effect of the investment allowances was not sufficiently taken into account by businessmen in deciding their business. I assure hon. Gentlemen opposite that that is not the case.
    Mr. Edmund Dell: Surely these suggestions are not being made only from the Government benches? They are being made by the National Economic Development Council.
    Sir T. Brinton: They were made from those beaches, as well. If we complicate investment decisions which have to be made by introducing a tax element at every point, we will distort the delicate mechanism of investment on which the progress of this country depends. If we make it so unattractive from a tax point of view to change the investment which an investment trust holds because it might incur liabilities for Capital Gains Tax, that institution will not fulfil the proper purpose which I am sure both sides of the Committee wish it to fulfil, namely, to reflect accurately the market opinion of the efficiency or inefficiency of the companies in which it invests its shares.
    If these investments are to be governed as much by tax liability as by a proper appreciation of the prospects of development, or of failure to develop, we shall lose a valuable asset which we have at the moment. This tax, thrown into the company pool, probably producing a low yield in relation to the enormous amount of accountancy and worry that it will cause, and of doubtful economic benefit—in fact I suggest of definite economic dis-
    258
    advantage as it will distort investment decisions—is a terrible mistake.
    In equity, there is no case for it. It is double taxation, and surely the basic idea on which a Capital Gains Tax can be made acceptable to the people, including many on my side of the Committee, is that it is to redress the balance between the capitalist who can make money in capital gains by the possession of capital, and those who depend on income which is heavily taxed. Up to that point I am with hon. Gentlemen opposite. Beyond that point, if we introduce a tax, the intention of which is to bring Capital Gains Tax to bear at every possible point in the economy every time a transaction takes place within companies, outside companies, and within families, then I am not with hon. Gentlemen opposite.
    I think that in what the Government have represented as an effort at social justice, they have introduced an appalling spanner into the works. In other words, they have gone about this whole business by monkeying about with future investment in this country with all the finesse of an all-in wrestler taking a pick-axe to a wrist watch.
    Mr. Geoffrey Hirst: My hon. Friend the Member for Wycombe (Mr. John Hall) rightly made the point that we were coming to a departure in our tax system, and it is very important that that remark should have been made when considering this Amendment, because it has a fundamental effect in principle.
    It is surprising that in a matter of this kind right hon. Gentlemen opposite have not been a little more cautious. There is a good deal of good will about the overall intention to have some form of long-term Capital Gains Tax. The great thing in this country is that people will take quite a lot provided they know that a thing is reasonably just. It is when they do not think it is just that the trouble starts.
    A principle is at stake here, and my hon. Friend drew attention to it in his speech. In all the years that I have been here—and this is the seventeenth Finance Bill in which I have taken part—I have fought for one or two definite things. I am sure that I need hardly say that one of the things that I have fought against, and which is an anathema to me, is double taxation, or even a smell of it.

    259
    Whatever the argument may be for trying to catch every miserable mouse in the country in the same trap, I do not think that it is any excuse for violating a principle as deep and profound as that under which we operate, by introducing double taxation. We will not get a dividend from it, because people can smell the injustice in it at every turn.
    I think that my hon. Friend's mathematics are right. This is an important factor, and there is another point that I wish to underline. If there is a tax which, in the opinion of most people—and I think that such an opinion is a fairly reasonable denominator in this case—is becoming penal, one gets a sense of injustice. I am the first to admit this fact because I have had to talk once or twice, not so severely as this, but mildly, to my own Government about this when they have been in power. When the rate of taxation gets over the 50 per cent. margin—because a line has to be drawn somewhere—then, quite frankly, there is not only that sense of injustice, but a feeling of an attempt to avoid it and a sense of extravagance, based on the fact that, rather anonymously, the Government are paying most of the bill. We all pay for it in the end. The Government have no money, except what we give them. The element is there, with the result that it leads to expenditure which all goes into costs, into competition in our business and trading, which otherwise would not be there, and the people responsible for it are the members of the Executive, by putting this burden on the nation. I only ask them to think about this matter very seriously.
    In departing on to a new tax they make a great mistake in thinking that they can get it right the first time. What a mistake, what an unholy mess this will be! Rates apart, as we cannot discuss them, why not try to be reasonable and give people the sense that there will be fairness in this matter? Then possibly there will not be a great deal of trouble. Otherwise, it will be unworkable because people will be given the idea that it should not be worked. If the Government are able to give them the idea that it should be worked and there is something wrong with double taxation, in my opinion they would meet any demand by the Government.
    260
    I do not know when the concessions are coming. There has been no sign of them. I hope that this item will produce the first of a shower of concessions of which we heard so much last night. This question of double taxation may be a small point in the debate, but by Jove, it is a big point in principle.
    Mr. Hugh Fraser: I hope, with my hon. Friend the Member for Shipley (Mr. Hirst), that this will be the first opportunity for one of those glittering and golden concessions we have heard about. As my hon. Friend the Member for Kidderminster (Sir T. Brinton) said, the intentions of the Government in this matter are good. They wish above all to see that the national economy is advanced, but precisely because they bring in this sort of taxation they have to ring it about with all sorts of arrangements such as Clause 31 to see that it does not fall unfairly on those who are replacing assets.
    As my hon. Friend the Member for Kidderminster said so well, this type of Clause, which is to mitigate the full effect of taxation both on companies and individuals, is a totally impracticable one. When we look at the other so-called concessions written into the Bill to mitigate the effect on unit trusts and investment trusts we see that much the simplest thing would be to accept the Amendment, which was so well put forward by my hon. Friend the Member for Wycombe (Mr. John Hall), so that the Chancellor may rid himself of the big difficulties which otherwise will be put not only on the Committee, but on those trying to run the business of the country.
    Clause 31, in general, deals with replacement of business assets. The money so derived must be put into precisely the same sort of asset. Otherwise, one would be guilty of a capital gain. This is precisely the sort of thing which prevents
    the reorganisation and modernisation of a company. I now have something to do with company reorganisation. I assure hon. Members opposite that this proposal will cause immense difficulties in the reorganisation of companies where assets are not fully employed. Hon. Members opposite must remember that quite often shareholdings are local. In the process of time there is a constant shifting of investment. "King

    261
    Cotton", which was the general description of the cotton industry before the 1914–18 war, now provides a minor investment in the country. It is precisely this type of taxation which makes it immensely difficult for companies to move their assets. It makes it immensely difficult for them to provide working capital by sales of assets.
    All the way through the various helps
    which the Government seem to intend to give to industry they appear to fall into the sort of errors which are contained in Clause 31. That makes it difficult, if not almost impossible, for people to shift and to re-employ assets. I hope that the Chief Secretary will accept that, having set out on this effort to tax not just the individual where the final gains would accrue but the company and to impede companies in their activities, the best way out of the mess which the Government are creating would be to accept this Amendment.
    4.45 p.m.
    Mr. Harold Lever: The hon. Member for Wycombe (Mr. John Hall) said that it was the shareholders who gave life to a company and that they and not the company were being taxed. I do not want to enter into a metaphysical argument about the philosophy of companies and their shareholders, but of course it is not the shareholders who give life to a company. It is the State which gives the corporate entity life. The limited company is a thing created by the State. If we are to assess—[Interruption.] If anyone wishes to make an intervention which is audible and intelligible, I shall give way.
    Hon. Members: Speak up.
    The Chairman: Order. May I ask the hon. Member for Manchester, Cheetham (Mr. Harold Lever) if he will speak up, as it is difficult for the Committee and for the Official Reporters to hear what he says.
    Mr. John Hall: I was able to hear the remarks of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) quite well from the Opposition Front Bench, although they may not have been so audible on the back benches. He said that the State gives the company life. It is true that the State provides the framework, but the
    262
    shareholders have to breathe life into that framework.
    Mr. George Y. Mackie: Is there not an analogy to be drawn from the fact that a child is registered by the State, but the State does not give the child life?
    Mr. Lever: The analogy between a child and a limited company which seems so obvious to hon. Members opposite may not seem so obvious to those of us who have given a little time to analysing the situation which gives rise on the formation of a company. In fact company status and existence as a corporation is a fiction created by the power of the State upon one or more individuals banding together to form a commercial enterprise. This fiction causes certain benefits to accrue to those who participate under the rules provided by the State. It is in no way persuasive to argue that a company is nothing more than a compost of its shareholders.
    The hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) was unwise to make an intervention in terms that too readily invite a reference to the infantile.
    But there are other arguments which are not so obvious to me and which cannot be disposed of so easily. One is the question of double taxation. This is a term which is very often loosely used. I shall at once define the way in which I use it. That is applying the same tax twice to the same body of profits. That is double taxation and that is why Surtax is not double taxation of profits, because it is a different tax applied to the same body of profits. It is not double taxation at all but merely another tax applied because we wish to make taxation progressive. What is objectionable in double taxation—I am speaking only on my own behalf—is where the same tax is capriciously applied twice to the same body of profits.
    If I may be allowed in an aside to correct my right hon. Friend the Chancellor, I believe that on Second Reading he appeared to be of opinion that Corporation Tax was a form of double taxation, anyway. That is not so. It is a different tax applied with Income Tax to the same body of profits. It is not double taxation because it is not the same tax applied to

    263
    the same body of profits. I am sorry to be repetitive and apparently so pedantic, but it is important that we should know what we are talking about.
    Very often a Chancellor is to be excused for not being meticulously equitable in the applications of his fiscal provisions because his main bent is to collect some revenue to pay for the running of the country so that we can enjoy battleships, schools and other amusements of modern society. But in the case of this tax the main motivation is to bring a sense of equity into the tax system and to give people the feeling that things are being more justly done.
    It therefore follows that any argument, as to ethics or equity, about the consequence of a tax has a force, in relation to this tax, which must be especially moving to the Chancellor, and he cannot resist these arguments on the basis of pure ethics as he can resist arguments in relation to so many other taxes, by saying that what he is about is to practise a necessarily rough and ready method of raising revenue. The Government owe the Committee some explanation why they cannot do more to avoid double taxation, in the sense in which I define it, namely, the same tax applied twice to the same body of profit.
    Since the Capital Gains Tax is not the sort of tax that I would have liked to see—which is a tax upon the ownership of capital, admittedly at an annual rate very different from 40 per cent.—but is a tax upon realised capital gains, why is it necessary to impose any tax at all upon capital gains which are retained by companies, since they are not realised in any true sense of the word? Such gains remain innocuously in these companies, whether or not they are expended in financing one or other aspects of the company's business.
    Given the kind of provisions that exist in the other parts of the Bill, it means that a person cannot borrow from his company or obtain an indirect benefit from its assets. All these detailed measures are properly taken to ensure that companies' profits are retained without a shareholder being able to enjoy their benefit by way of loan or other indirect form of assistance. So long as these capital gains are retained in the
    264
    hands of a company they are unrealised capital gains, according to my definition.
    Secondly, as a matter of justice, could not any company be given an option? If the Chancellor cannot accept my argument that retained capital gains are not realised capital gains, cannot companies be given the option that if they realise a capital gain and pay it out to their shareholders the shareholders will bear the tax and the company will bear no tax, because it will immediately have paid to its shareholders the capital gain that it has realised? As the matter stands at present there is grave danger of multiple taxation. I do not know the way in which the hon. Member for Wycombe arrived at his 58 per cent. —
    Mr. John Hall: It is very simple.
    Mr. Lever: It may be simple, but simplicity and accuracy are not always bedmates.
    I ask my hon. Friend the Chief Secretary, who is a man of great moderation, to tell us what objection there is to giving companies the option of unloading their capital gains upon their shareholders, willing or otherwise, so that they may be immediately assessed and therefore have a means of relief—not an ideal one, but a better one than is available under the existing proposals.
    Secondly, I would very much value the opinion of so fair-minded and knowledgeable a man as the Chief Secretary on the question why we cannot treat the gains of companies as unrealised capital gains so long as they are retained by those companies for any purpose whatever other than for the benefit of their individual shareholders.
    Mr. A. P. Costain: It is always interesting to follow the hon. Member for Manchester, Cheetham (Mr. Harold Lever), because we get the impression that he thinks very much as hon. Members on this side of the Committee think. Unfortunately, his feet do not follow his words. This is a question of double taxation, as the hon. Member has made quite clear. I would point out to the Chief Secretary that the first basis of taxation for the Chancellor to learn is that he can shear a sheep once a year, but if he skins it there is no more wool to collect.

    265
    This sort of taxation creates a lack of growth in companies. It presents boards of directors with a problem. They have to consider where their proper duty lies. If they are to sell assets to make capital profits, all well and good; we have been given previous examples by my hon. Friend the Member for Kidderminster (Sir T. Brinton) and my hon. Friend the Member for Wycombe (Mr. John Hall). In a progressive company the assets are being changed all the time, and if a company realises some of its assets for profit it becomes liable to taxation under the Clause. On the other hand, when a company's assets appreciate the shareholders themselves eventually become liable for tax. I object to the fact that the burden of taxation falls upon a shareholder most heavily when he realises his assets.
    I put this point particularly to the Chief Secretary, because on many occasions shares are realised only when people really need money. Many shares are held by small shareholders, and have been so held for many years. It is only when such people really require cash, because of illness or bereavement, that they realise their assets. We are now to have this double taxation, which will be imposed at a time when it hurts most. Rich shareholders or corporations, who have no need to realise their shares, escape this form of taxation.
    The Chief Secretary must make up his mind how he wants to collect this tax. Does he want it to be a progressive tax, which encourages initiative? I suggest that this sort of taxation does not achieve that object. This is a case in respect of which the concessions that we were promised late last night would be well justified. I am sure that the Chief Secretary wants to make progress with the Bill, and I suggest that he now has an opportunity to get on with the job by accepting the strength of my hon. Friend's arguments and saying that he agrees with them.
    Mr. Barnett: I have a great deal of sympathy with some of the arguments put forward by hon. Members opposite, especially about companies which will have to pay tax on the replacement of fixed assets. Unfortunately, hon. Members opposite are in danger of overstating their case. If a company is
    266
    replacing a fixed asset which at the moment is available for investment allowance or capital allowance, the balancing allowances and balancing charges which now exist mean that the company would not suffer in the way suggested. But in the case of the replacement of assets which are not available for capital allowances there is a case for my hon. Friend to consider the question of a concession.
    I was interested in the argument presented by my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever). I cannot agree with him at all. In my opinion this is a mixed-up argument. I cannot accept the case that has been made that this is double taxation. Once we accept the premise that we will tax an increase in capital together with, and in the same way as, an increase in income, Corporation Tax should become payable on realised increase of capital in the same way as a realised increase in income. I cannot accept the argument that it is, therefore, double taxation on a shareholder in a company if he has to pay Capital Gains Tax when he realises the shares of that company.
    I therefore do not accept the argument advanced by my hon. Friend the Member for Cheetham, that is to say, his definition of double taxation as the same tax twice on the same body of profits. I believe that my hon. Friend has not accepted the premise with which most hon. Members on this side of the Committee would start, that we wish to tax, in fairness to all taxpayers, increases in capital gains in the same way as increases in income. Once that premise is accepted I do not believe that there is any question of double taxation entering into this argument.
    5.0 p.m.
    Sir Douglas Glover: We have had a very interesting debate. I am sure that hon. Members on this side of the Committee must have been impressed by the arguments advanced by the hon. Member for Manchester, Cheetham (Mr. Harold Lever). I know that it may be a slow conversion, but what he has said will have impressed most hon. Members on this side.
    My right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) referred slightingly to the great cotton

    267
    textile industry which, in 1914, was the largest in the country, perhaps in the world, and suggested that today it is small beer. Compared with 1914 that is true, but during the last seven or eight years there has been vast reorganisation in the industry. If the provisions in this Clause had been in operation I doubt whether any of that reorganisation would have taken place. The fact that certain things were worth a certain amount would have had to be put on paper and would have shown a capital gain. If the capital gain had had to be paid out by the company I do not think the reorganisation would have been proceeded with.
    What will happen if this Clause is accepted in an unamended form will be a stulification and a slowing down of the tempo of modernisation in industry. Where firms would have amalgamated, which would have meant disclosing gains, such amalgamation and rationalisation will not take place. If this Clause is un-amended it will mark the day when we in this country began to eat the seed corn. If it is only to be a tax on the money paid out to individuals and does not involve the industrial growth of the nation, I think that most people, although they might argue about the rates, would feel that there was something to be said for some form of tax on that sort of gain.
    But if the industrial machine is to be involved, it will involve the Inland Revenue in the most awful headaches and the accountants in a great deal of paper work and computations. If anybody is anxious to make a capital gain the best thing for them to do will be to buy shares in paper-making concerns, whose production is bound to go up enormously in an effort to meet the Government requirements.
    The right hon. Gentleman the Chief Secretary—he is not "right hon." but he ought to be, although he is very rarely right—is always listened to with a great deal of interest. Unlike a number of hon. Members opposite, the hon. Gentleman has a good deal of business experience. He has more experience of what I might call the accountancy side of business than of the actual industrial growth of companies, and so I hope that he will advise his colleagues that what
    268
    we are discussing today is vital to the future of Britain.
    Hon. Members on this side of the Committee are not being ideologically foolish. We are trying to persuade the Government to modify a Bill which, in all conscience, is complicated enough. It will take the Inland Revenue and the tax gatherers all their time to work out what is due from individuals, without having all the ramifications of companies with which to be concerned and which will overload the tax machine. There is the new Corporation Tax coming in. Surely it should be the object of the Government to try to keep this as simple as possible, which is what we ask.
    We cannot escape the fact that if companies are included, there will be a definite form of double taxation on the disposal of a company asset when eventually it goes to the recipient shareholders. Had the assets not been realised to provide funds for the company, its shares would have been pushed up in value and payment would have been made on the price. Without doubt, it is a double payment on this operation.
    I ask the Chief Secretary to look at this again before the Report stage. All the arguments have been in one direction whether they were made from one side of the Committee or the other. With the exception of the hon. Member for Cheetham, who contributed weightily to our discussions, this is about the first time that we have had two or three speakers inclining more to the view of hon. Members on this side of the Committee than to that of the Government. For these reasons I ask the Minister to have another look at this before the Report stage.
    Mr. A. E. Cooper: I am surprised that the Chief Secretary should lend his support to this Clause, bearing in mind his long experience in industry. He knows perfectly well that the arguments adduced by hon. Members on this side of the Committee are irrefutable. This is the test of whether this Government wish to see the modernisation of British industry. I have heard it said that this Bill was intelligible in the original Hungarian, but that it has lost a lot in the translation.

    269
    We have to face the fact that in this Clause there are a number of new proposals. The Government have had second thoughts regarding later stages of the Bill and have brought forward all sorts of safeguards against the Clause, so that they must be very unhappy about it. This Clause represents a positive bar to the modernisation of British industry. It will take away the funds which companies will need to have in order to buy new plant and machinery or to erect new buildings, or even to acquire more land. When endeavouring to secure facilities from the bank, an industry will find itself in a parlous condition. The result will be that the directors will decide to "soldier on" with their existing plant and machinery.
    Mr. Barnett: I am sure that the hon. Member wishes to be fair to the Committee. He will realise that a company which sells a piece of plant and makes a profit will be subject to a balancing charge and will pay Income Tax and Profits Tax upon it.
    Mr. Cooper: I am aware of those considerations, but we are talking of different things. We are talking about taxation at a much higher level anyway, and about a situation where the sale of a particular asset, in order to attract any relief under Clause 31, must roughly be replaced by a new asset.
    This will be a bar to the modernisation of industry, because in all sorts of industries there is a continuous scientific development. A standard process in 1965 may be superseded in 1970 by something entirely new. This sort of development will be stopped if the Government have their way with this Clause.
    Let us take one very big industry which is situated particularly in Scotland, the linoleum industry. This industry has to have considerable capital investment. Over the years, and particularly in the last five or six years, there has been a movement away from the standard form of linoleum which we all knew in our younger days. The linoleum industry today makes an entirely different type of floor covering. They are slowly getting rid of the old plant, which cost them a good deal of money, but which today they may be able to sell at a higher price than they paid for it, for no other reason than that the price of metals has gone
    270
    up in the interim and these plants are huge and the tonnage of metal is great. To replace this plant, they need plant which is completely different. By no argument could it be called the same type of plant as they are replacing. The net result will be that scientific development will not proceed at anything like the pace that it is at present.
    It is quite wrong that this form of taxation should be imposed on industry at any time. It is even worse that it should be imposed at the present time when there is such a shortage of funds in companies and they cannot seek the resources which they need for development.
    Mr. Frederic Harris: I shall keep the Committee for only a few moments. I think that my hon. Friend the Member for Ilford, South (Mr. Cooper) was wrong to assume that the Chief Secretary will automatically turn down this Amendment, especially with his background of accountancy. I go along with the hon. Member for Manchester, Cheetham (Mr. Harold Lever) in this matter. I have listened to every part of the discussion and there is no question that the mistake here is for the Chancellor, to save the capital tax arising, to tie the problem down to having to use capital appreciation to purchase an asset of a similar kind. Obviously, in all commerce, one is constantly broadening the base of one's business, and one turns to various moves which will be helpful to the company and its employees. One should be free to undertake those developments.
    If the tax is tied with capital distribution only because of some capital gain which has been made by the company, this is the right move. I can say that we should go along with such a proposal. If I can myself declare a vested interest in this matter—because we were told yesterday several times to declare our interests—I am chairman and managing director of a public company which, years ago, sold a factory for a considerable sum of money and made a capital gain. Virtually all that money was ploughed back into the company for other further developments and it is now playing an important part in financing and handling exports from this country to certain under-developed countries. That would

    271
    not have been possible if we had not been fortunate enough to make the money from the sale of these premises.
    It seems to me entirely wrong that we or any similar company might be precluded from undertaking such beneficial moves—from the point of view of the country—of exporting overseas, merely because of the application of such a Capital Gains Tax as is now proposed.
    Mr. Harold Lever: Is it not a fact that if the money retained is not reasonably required for the purposes of the business, we have the powers to compel a dividend from it, thus attracting Income Tax and Surtax?
    Mr. Harris: I am not denying that. The hon. Member for Cheetham is an able accountant—
    Mr. Lever: Barrister.
    Mr. Harris: He is a barrister with a knowledge of accounts.
    I appreciate his points, but I was instancing the case of a company which sells certain assets for the redeployment of its interests, to everyone's benefit. This seems a very sound move to encourage. However, if the company obtains unusual liquidity because it has disposed of certain of its assets, I then agree that there should be a Capital Gains Tax charged upon the distribution. This is the point, as I understand it, which the hon. Member for Cheetham was putting across to the Committee, and I am completely in agreement with him upon it.
    5.15 p.m.
    Sir Lionel Heald: I am most anxious to follow your injunction, Dr. King, and keep the detailed arguments till later. I think that it would be appropriate, however, to make clear that there are a number of my right hon. and hon. Friends as well as myself who, if we were not to have the opportunity of dealing with these matters on more detailed lines, would wish to speak at this stage, because this is a fundamental point. I was delighted, though not surprised, to hear the hon. Member for Manchester, Cheetham (Mr. Harold Lever) express the view quite definitely that, in the practical sense of the word, double taxation is involved. I think that it is worth while reminding
    272
    ourselves that, in the Report of the Royal Commission on the Taxation of Profits and Income, there was a very clear parting of the ways between the majority—a very large majority—and the minority of three, Mr. Kaldor, Mr. Woodcock and Mr. Bullock.
    That minority definitely approved of double taxation, and said so. The majority did not. That was the cleavage between them. I take the view, as, I know, do a number of my right hon. and hon. Friends—we are delighted to know that some hon. Members on the Government benches take the view—that double taxation is being adopted here. Its ramifications and developments will be found as we go through the various Clauses. I think that sometimes the word "double" is somewhat misleading, that it is cumulative taxation in a sense. It is difficult to find proper language, but I hope that I did not misunderstand the hon. Member.
    I should also remind the Chief Secretary of what was said by the majority in the Report and their general feeling about this type of tax:
    "There was a danger that its general effect would be to tax a very large number of persons without the justification of any equitable design."
    I think that we are entitled to have now a full, clear, proper and logical answer from the Chief Secretary so that we may bear that in mind and make use of it for the purpose of getting the discussion on the right lines when we come to later Clauses. This is the fundamental approach to the whole matter.
    In view of what you said, Dr. King, I do not think that I should develop this any further. There should not be the slightest doubt, however, that this is only a very general, preliminary discussion, and that the same arguments will have to be developed very much more fully later on.
    Mr. David Webster (Weston-super-Mare): I too have a great desire to agree. In view of what the Chancellor said at close of play last night about certain concessions and what the Prime Minister said during the election—that this Government were coming into office pledged to modernise our society and economy—I hope that this will be the first concession. Modernisation depends entirely on mobility of investment. In

    273
    the case which my hon. Friend the Member for Ilford, South (Mr. Cooper) discussed—that of the linoleum factory which has to change its processes to keep up with modernisation and which sells its equipment as scrap in an inflationary period—that company will suffer as a result of any capital gain on a company. It is essential that companies should be able to shift investments and be thoroughly mobile in the form of modernisation.
    My hon. Friend the Member for
    Croydon. North-West (Mr. Frederic Harris) referred to the company which moves its factory. One would wish also to consider the company which sells its factory, at the behest of the Government, in order to move it to a development district. If it makes a profit in so doing, it does it public-spiritedly, and it seems certain that it would be penalised. On all these grounds, I hope that this concession will be made, so that we can get the modernisation which we were told about at the election.
    The Chief Secretary to the Treasury (Mr. John Diamond): I have been invited to give a clear, precise, logical and, I imagine, persuasive answer. I will try to do as many of those things as are within me, but certainly I am conscious of the fact that there is a good deal of common ground between the two sides of the Committee.
    In saying that I have in mind not only the remarks of my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), but the fact that several hon. Gentlemen opposite have said that some form of Capital Gains Tax is necessary—that it is wrong that those who earn their money by the sweat of their brow should pay large amounts of Income Tax while those who receive capital gains are not necessarily called upon to pay any tax at all. What I must try to do is to consider the Government's proposal and what would happen if the Amendment were accepted. It is against that general background that we must consider the Amendment.
    I congratulate my hon. Friend the Member for Cheetham on the way in which he explained, with such clarity and persuasiveness, the fact that a company is really something totally different from an individual. This is a matter which
    274
    he, as a lawyer of great experience, and as someone who speaks with great authority on these matters, knows full well. Anyone who thinks about the subject for more than two minutes must realise that what my hon. Friend said is certainly the case.
    Sir Kenneth Pickthorn: I suggest that five minutes would be a more reasonable time.
    Mr. Diamond: I did not quite understand the right hon. Gentleman's remarks.
    Sir K. Pickthorn: I just thought that if the Chief Secretary had gone on for about five minutes, instead of stopping his process of thought at the end of two minutes, he would have found that the argument had come round again.
    Mr. Diamond: I am not sure what bearing that has on the discussion. I stopped to allow the right hon. Gentleman time in which to elaborate on the intervention which he made from a sedentary position.
    A company is, of course, a totally different entity and it is interesting that we should be still dwelling on this point, because what we are doing in the whole of the Corporation Tax—and I refer to it only in passing because I do not wish to stray out of order—is to introduce a scheme of taxation which recognises for the first time what has existed for a very long time; that a company is something totally different from its shareholders.
    Unfortunately, we were in the position of having Income Tax first and companies second. When companies arose we tried to fit them into our preconceived ideas of the Income Tax system. It has been realised for a long time that this is a totally impracticable thing to do and that in our modern world we must have a tax system which takes account of the fact that a vast and increasing number of companies are being formed every day for carrying on business and for a number of other purposes. We are, of course, considering not exclusively companies which are carrying on business but corporations of other kinds.
    I do not need to dwell on this aspect at length. I need not, to illustrate the difference between a company and an individual, go beyond saying—since one hon. Member spoke about the birth of a

    275
    child in this context—that a shareholder can die but the company does on or that a company can be wound up, which is its legal death, but that the shareholder goes on. The shareholder may be a member of one body of people today and a totally different body of people tomorrow, or some of the shareholders might form one group of people today while tomorrow the group might be comprised of some of the present group and others.
    When we come to consider close corporations I will be interested to hear if the Opposition will maintain that there is no difference between a company and its shareholders and that every company should, therefore, distribute to the hilt every penny it earns because that is the income of the shareholders, because it belongs to the shareholders, and that they should pay tax on it, just as a partnership does. In a partnership every partner pays tax on the basis that he has taken every penny of his share of the profits and has put them into his pocket. Even if 100 per cent. of it remains in the partnership's coffers, the same rule applies.
    If hon. Gentlemen opposite want to say of companies, when dealing with close corporations, that the same arguments apply, I will be extremely interested to hear their remarks. But I realise that they will not say that. They are too intelligent. They realise as well as we do that there is a complete and utter distinction between a company and its shareholders. They are totally different things.
    I come to the example given by the hon. Member for Wycombe (Mr. John Hall), who took for his example the figure of 40 per cent. Since this matter will arise throughout our discussion of the Corporation Tax, although it comes within the scope of the Capital Gains Tax part of the Bill, we should get the position clear. In introducing the Capital Gains Tax we are introducing a new system and not a new rate of taxation. A comparison in terms of rate is, therefore, that rate of Corporation Tax which,
    other things being equal, would produce the same revenue as is produced on like profits and income today under the existing system. That figure is 35 per cent. and no more. My right hon. Friend
    276
    the Chancellor made this point perfectly clear. If one wants to talk about 40 per cent. one might as well talk about a different standard rate of Income Tax.
    Several Hon. Members rose—
    Mr. Diamond: I will willingly give way shortly. I want the Committee to realise that we are talking about two totally different things. One is a change of one system of taxation for another. The other is an increase in the rate of taxation which produces increased revenue. This year, the following year or the year after that the Chancellor of the day—and let us be non-committal about this—will have the right to say, "I propose, in the circumstances of today, a rise of such-and-such". What we are now doing is to substitute a new method of taxation which, to produce the same revenue, requires a rate of 35 per cent. The Committee will understand why, throughout our proceedings—which may go on for a few days yet before we come completely to the end of the Bill—I will be referring to the figure of 35 per cent.
    Mr. John Hall: I take up the narrow point of the rate of taxation which the Chief Secretary is discussing. I tried to make it clear in my opening remarks that I was ignoring the rate of 35 per cent. which will apply in the first year, because it is a special rate. I took the figure of 40 per cent., because that is the rate which was indicated by the Chancellor as the possible rate for the future. It was on that that I based my calculation.
    Mr. Diamond: That is why I thought that the Committee would forgive me if I spent a little time making the point clear. My right hon. Friend the Chancellor mentioned the figure of 40 per cent.—I do not have his exact words at hand but they can be read in the OFFICIAL REPORT—in totally different circumstances. He spoke of 40 per cent. as being the rate beyond which he did not think the figure would be fixed next year. That was the figure, as far as he could see ahead, but it has nothing to do with the point we are discussing now.
    To find a comparison between the Corporation Tax and Income Tax one must take a figure of not more than 35 per cent. because, on past information, we see

    277
    that that figure would fully produce the same revenue as profits being taxed under the present system. Therefore, we are speaking about 35 per cent. and 30 per cent.—30 per cent. for the Capital Gains Tax and 35 per cent. for the Corporation Tax on companies' capital gains.
    Mr. Frederic Harris: Did not the Chancellor in his Budget statement lead hon. Members and the country to believe that 40 per cent. was the sort of figure which he had in mind at that time? While we appreciate that it will not be until the next Budget—and goodness knows when that will be; it may be in a few months' time for all we know—that we will know precisely what the rate is, is not 40 per cent. the right figure on which to base our calculations? I assure the Chief Secretary that we in the business world would be delighted to know that it will be 35 per cent.
    5.30 p.m.
    Mr. Diamond: I am trying to be as helpful as I can, and I hope that I shall not bore the Committee by repeating what I have said. It is a very important point, and I, too, thought it worth making. What we are doing today is instituting a new form of taxation in place of an old form of taxation. If we are to compare like with like, as we all want to in this Chamber, we must take for Corporation Tax purposes a figure of 35 per cent. and no more, because that figure would fully yield as much as is yielded by existing rates of taxation under the existing system.
    To answer the hon. Gentleman's point, my right hon. Friend the Chancellor of the Exchequer in his Budget Statement, referring to the rate, said:
    "What I can say is that as I see it today there is every likelihood that the rate will not exceed 40 per cent."
    That is, next year. He also said with equal authority, though I do not have the quotation in front of me, that the figure that would produce the same revenue as is produced today under the existing system is 35 per cent. Therefore, let us be quite clear that if we compare like with like the figure is 35 per cent. —
    Sir L. Heald: Just before the Chancellor of the Exchequer said that, he stated:
    "Obviously, I cannot foretell today what the budgetary requirement will be next year and, therefore, I cannot say now the amount of tax
    278
    which industry, like individuals, will be called on to pay."
    He then went on with the passage that the hon. Gentleman has quoted. Therefore, while it may be convenient for the hon. Gentleman's argument, I should think that the reality is that it is likely to be 40 per cent.
    Mr. Diamond: I am grateful to the right hon. and learned Gentleman for interrupting me, because it gave me an opportunity to refer to what my right hon. Friend said immediately before that. He said:
    "First, the rate. I have said before that it is not my intention to throw new burdens upon industry, but rather to redistribute the existing burden in a way more likely to meet the economic needs of the country. I have also said that a rate of 35 per cent. would bring in revenue equivalent to the combined yield of Income Tax at 8s. 3d. in the £ on undistributed profits and Profits Tax at 15 per cent. on total profits. That is the situation today."—[OFFICIAL REPORT, 6th April, 1965, Vol. 710, c. 256.]
    It could not be much clearer than that. It is extraordinary how hon. Members opposite react to a plain statement of fact that they have not thought of themselves—
    Mr. Hugh Fraser: It is important to remember that the country has reacted to what is supposed to be a plain statement of fact by the Chancellor of the Exchequer by thinking of 40 per cent. What has been said today throws into fresh confusion what the right hon. Gentleman has said in the past. It is all very well for the hon. Gentleman to speak as he does, but there are two statements. One is that it will be not more than 40 per cent., but now the hon. Gentleman himself tells us that it will be not more than 35 per cent. We want this cleared up. No wonder the Government are falling into contempt amongst financial journalists.
    Mr. Diamond: I do not know what the Committee would like me to do. I am happy to repeat the explanation ad nauseam. The right hon. Member for Stafford and Stone (Mr. Hugh Fraser) must have known that he was misquoting my right hon. Friend, because I have just referred to what my right hon. Friend said—
    Mr. Fraser: He made a double statement.
    Mr. Diamond: The Chanceller did not make a double statement.
    Mr. Fraser: He did.
    Mr. Diamond: If the right hon. Gentleman has not the intelligence to understand the difference between the two, I must leave it at that.
    Mr. Raymond Gower: If the Chancellor was able, as a result of careful assessment, to say that 35 per cent. would yield the same as the former rate of tax, why the need to refer to another and different rate of 40 per cent.?
    Mr. Diamond: I am only too glad to answer that question. My right hon. Friend did so because he was being asked by everyone—it was alleged that there was great uncertainty about it—what rate people would have to pay next year. That was asked for the very good reason that people's accountants were saying, "We are already in the period earning the profits which may attract the new kind of tax. Therefore, how much, as sensible people, should we reserve?" My right hon. Friend said, "As sensible people you should reserve"—
    Mr. Hugh Fraser: Forty per cent.
    Mr. Diamond: He did not. It is a pity that the right hon. Gentleman keeps repeating what he knows to be untrue.
    My right hon. Friend said not more than 40 per cent., in order to help people make the reserve in their books, and I repeat, like with like, this year. We are not talking of next year. Perhaps the right hon. Member can understand the difference between next year and this year—I doubt it, but I hope so. This year, we are talking about the comparison between 8s. 3d. and 15 per cent. yielding a figure which, under the new system, requires a rate of 35 per cent.
    Mr. Hirst: If the hon. Gentleman will forgive my saying so, he is indulging in special pleading. The Chancellor of the Exchequer gave notice that he did not imagine that the rate next year would be more than 40 per cent., which is, in effect, an invitation to people in the City to work out their circumstances, not in the certainty—thank heavens!—but in the possibility. But as if we are now legislating forward, I think that the hon. Gentleman might apply himself to the
    280
    example we have given and tell us what would be the case were the Chancellor's prognostications to prove wrong. We do not want just this special pleading, and making out that our instance is not valid because circumstances are different.
    Mr. Diamond: I am trying to compare—
    Mr. Hirst: That is not the point.
    Mr. Diamond: How can the hon. Member for Shipley (Mr. Hirst) say that that is not the point when he has not heard what I am trying to compare? I am trying to compare Capital Gains Tax or Corporation Tax rate on a given gain, because that is what this Amendment is about—purely on whether a given gain should be taxed at Corporation Tax rates, or at the Capital Gains Tax rate of 30 per cent. That is the rate this year for Capital Gains Tax. I do not know—and this is my answer to the hon. Member—what the Capital Gains Tax rate will be next year. If we did, and if we knew what the Corporation Tax would be next year, we might start to compare like with like for next year.
    But what we do know for a fact is that 30 per cent. is the Capital Gains Tax rate this year, and what we do know for a fact is that 35 per cent. is the Corporation Tax rate to yield the same amount as is being collected in other ways this year. The comparison there is between 35 per cent. and 30 per cent.—a difference of 5 per cent. Neither I nor anyone else will attempt to indicate what the difference will be next year. It could be a larger gap or a narrower gap, or both might move, or either might move, or both might not move—nobody knows. I think that that is a fairly cautious statement.
    Mr. Harold Lever: Is my hon. Friend aware that there are some of us who wish that he would not try to make his explanation at a speed capable of absorption by the most obtuse members of the class?
    Mr. Frederic Harris: If the Chief Secretary's argument is followed through, is the statement of my hon. Friend the Member for Wycombe (Mr. John Hall) that it is only a difference between 58 per cent. and 54½ per cent. correct?
    Mr. Diamond: I am talking about the difference provided for in the Amendment

    281
    between Corporation Tax rate and Capital Gains Tax rate, which is a difference of 5 per cent. That is the measure of the great damage that will be suffered, as we have been told by several hon. Members. How is the damage to be suffered? It is because, they say, capital gains will be taxed in the same way as income and profits are to be taxed. If profits were not taxed at the present rate, there would be more money left over for reinvestment. If capital gains were not taxed, there would be more money left over for reinvestment.
    What I want to do, and what my right hon. Friend wants to do, is to help the whole industry by providing the lower rate of tax at that point at which business men ask, "How much is left over for investment, for ploughing back, for buying new plant, for factories and for development? How much is left?" Therefore, we are bringing in a Corporation Tax which will provide approximately 50 per cent. more than is provided under the present system so that all business men can say, "Now that I have made my profits and paid my tax, I have about 50 per cent. more available to invest in plant if I want to do that. If I want to distribute dividends, that is a different matter. If I want to invest in plant, I have 50 per cent. more available". It is that modernisation which we are introducing, but not one right hon. or hon. Member opposite ever seems to be aware of it or to pay proper attention to it. That is the real thing we are doing.
    Mr. Eric Lubbock: I remind the Chief Secretary that that is not what he is saying to close companies.
    Mr. Diamond: Perhaps you will forgive me saying, Mr. Grant-Ferris, that if I have the opportunity of catching your eye later this evening when we reach that Clause—it is only a few Clauses ahead—I hope to answer the hon. Gentleman fully.
    Mr. John Hall: On a point of order. The Chief Secretary seems to be directing his arguments exclusively at the moment to the effect of the Corporation Tax. My hon. Friends and I in our remarks attempted to confine ourselves to the Amendment, which deals with Capital Gains Tax and the double taxation effect of that. If the debate is to be widened into the whole effect of Corporation Tax,
    282
    may we be told, because we should like to continue on a widened debate on that matter.
    The Temporary Chairman (Mr. Grant-Ferris): No, I think that the debate cannot be widened. What the Chief Secretary is saying at present is in order on the Amendment.
    Mr. Diamond: We are discussing whether, as the Bill provides, these gains should be treated as part of Corporation Tax or whether they should be treated separately. Therefore, I must deal with Corporation Tax. I have been asked why these are being assessed. I am explaining in reply to the debate and in reply to appeals from hon. Gentleman after hon. Gentleman—they, as business men, have appealed to me because of my knowledge of business, as they say—why the best thing that can be done to modernise business and give it the opportunity to develop is to reduce the level of taxation which bears on it before dividends are paid. We are reducing it in such a way as to leave 50 per cent. more available for reinvestment.
    Because we are doing that, we have a new tax system which looks at companies only and says that a company is a different thing from the shareholders, whereas the whole of the argument which has been advanced by hon. Members opposite is that it is the same. We say that a company is a different thing from its shareholders. We therefore have a Corporation Tax. It cannot possibly be a Corporation Tax if one thinks for one second that a corporation and the individual are the same, because the essence of Corporation Tax is to separate the corporation and charge a rate of tax on its profits and to separate the individual who pays separate and different taxation. That is why I have explained to the Committee that with a Corporation Tax the other thing necessarily follows.
    It is no longer a question of why should this be treated specially. What we are saying is that Corporation Tax applies to a corporation. It is the function of a company to make profits. It does not matter at all to the company whether it makes its profits by way of realising capital gains or by way of realising income gains. It does not make the slightest difference. Its function is to make profits.

    283
    Here is the complete answer in terms of simplicity, which hon. Members appeal to me for the whole time. Why have too complicated a calculation when all that a company is doing is seeking to increase itself, either by income or by capital gains? Calculate the total increase, and on that total increase one rate of tax is paid. What could be simpler for the business man?
    I am therefore saying—this is my reply to my hon. Friend the Member for Cheetham—that one does not start with a kind of concept of what is being doubly taxed or what is not. One starts with the philosophy that this is a corporation—a company—which seeks to increase its profits one way or the other and it pays tax. There is one calculation of its total increase in wealth during the course of a given period.
    Mr. George Y. Mackie): Is the Chief Secretary separating the company and its managers entirely and completely from the shareholders? If so, he is saying in effect that when the board meets to consider the 70 per cent. or 65 per cent., or whichever it may be, which is left it has no obligation whatsoever to pay money to the shareholders. Surely the whole structure of company finance would break down if this were the attitude.
    Mr. Diamond: That is a separate issue to the Amendment. The short answer I will give straight away is that a company could distribute 51 per cent. under a Corporation Tax rate of 35 per cent. and still be in the same position as it is today with the present rate of taxation. It would not bear a single pennyworth of extra tax if it distributed as much as 51 per cent., which is a very full distribution indeed as compared with what most large companies do which are growing and which want to plough back. Therefore, it is all part and parcel of the system. It is an inevitable part of the system of a Corporation Tax. There is no distinction to be drawn between capital gains and income quoad a company. Hon. Members on both sides see the justice of having a tax on realised increases in capital, and that is why I regret to say that I cannot advise the Committee to accept the Amendments.
    5.45 p.m.
    Mr. Peter Walker: We welcome the Chief Secretary on one of his first appearances during the Finance Bill. We gather from what he has said that he is concentrating on the Corporation Tax. That may explain his very unsatisfactory reply this afternoon to the debate on Capital Gains Tax. We were surprised at the tremendous concentration of more than half his speech on an attempt to persuade the Committee that there was nothing to be considered in the 40 per cent. rate of tax. One can only presume that he is rather ashamed of the 40 per cent. rate of Corporation Tax. We hope that his remarks this afternoon mean that, should the Government introduce another Budget, Corporation Tax will be at 35 per cent.
    As my hon. Friend the Member for Croydon, North-West (Mr. Frederic Harris) pointed out, the whole result of the Chief Secretary's argument using 35 per cent. instead of 40 per cent. is that the element of double taxation works out at 54½ per cent. instead of 58 per cent. We on this side of the Committee still say that this is very much too high. Many arguments have been propounded. The argument advanced by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) was not answered by the Chief Secretary.
    I want to press upon the Chief Secretary the option suggested by the hon. Member for Cheetham. If in a private company a capital gain is made and the directors of the company and the shareholders in the company decide to distribute that gain immediately, is the Treasury willing for the individual shareholders alone to be charged the Capital Gains Tax on that capital gain? Or will the Treasury decide to tax it 35 per cent. within the company and then 30 per cent. to the individual?
    There was no doubt from the Chief Secretary's reply that this is what he intends to do. I point out the basic injustice of this system, which the hon. Member for Cheetham rightly tried to emphasise. I ask the Committee to consider the cases of two men, each owning two grocer's shops. One owns them within a company. The other owns them directly as an individual. The one owning them as an individual sells one of his grocer's shops. Upon that he pays

    285
    just 30 per cent. Capital Gains Tax. The other man owning the shops through a company sells one of his grocer's shops. He has paid 35 per cent. within the company and if ever he obtains the use of the money he then pays 30 per cent. as an individual. There is no justice whatsoever in this, and for the Chief Secretary to suggest—
    Mr. Diamond: In point of fact what the shareholder pays is on any realised increase on the sale of his shares.
    Mr. Walker: The Chief Secretary is now trying to get off this on a small technical point. [HON. MEMBERS: "No."] Let us suppose that the two shops were originally priced at £5,000 and they are now worth £10,000. He sells one within the company for £10,000 and on that £5,000 capital gain he will pay 35 per cent. Capital Gains Tax within the company. If he then distributes the balance left after that, that in turn will be taxed at 30 per cent. Is that so?
    Mr. Diamond: The hon. Gentleman is talking about distribution. It will not be taxed at 30 per cent., but at 35 per cent.
    Mr. Walker: The man sells within the company. Therefore, for the value that is left in the company and for the value of the remaining shop, the Chief Secretary will agree, he has paid double taxation and twice as much taxation as compared with the individual owner.
    Mr. Diamond Mr. Diamond indicated dissent—
    Mr. Lubbock: Will the hon. Member for Worcester (Mr. Peter Walker) consider the case where the shops are owned by a trust and there is a compulsory valuation every 10 years? Let us suppose that the shop is disposed of and 35 per cent. tax is paid by the company and immediately afterwards there is one of these 10-year valuations. The remaining 65 per cent. of the £5,000 is capital appreciation on the value of the shares and will attract tax immediately.
    Mr. Walker: The hon. Member is absolutely right and I am surprised at the Chief Secretary endeavouring to defend this point. This is something which in principle is so
    wrong and so much against the fundamental principles of British taxation. This results from the
    286
    fact that the Government have introduced the Capital Gains Tax in a tremendous hurry. They introduce the Finance Bill and within a few weeks expect us to go through the Committee stage when tax reforms of these dimensions should be considered in detail over a considerable period. I am certain that if any Government that respected the basic elements of justice in British taxation had considered this over a long period they would have accepted this Amendment or something like it. I recognise that there are certain snags in the Amendment on the broad issue. The reason is that it is impossible in detail to amend the Bill to meet the basic injustices of principle brought about by this Measure.
    The Chief Secretary has been thoroughly unsatisfactory in meeting the issue and he has failed to meet several hon. Members on both sides of the Committee who have raised it. I ask the Committee to look at the complications that follow from this system of double taxation, the complications with charities, with superannuation funds investing in such companies, and the results from the fact that the people whom one wants to exempt from Capital Gains Tax will not be exempt because within the companies capital gain is constantly taking place.
    My hon. Friends the Members for Ilford, South (Mr. Cooper), Kidderminster (Sir T. Brinton), Stafford and Stone (Mr. Hugh Fraser) Croydon, North-West, and Weston-Super-Mare (Mr. Webster) have all raised the basic point that if we want to modernise industry we must encourage the maximum mobility of capital. Let us suppose that a company goes to a development district and sells a factory in London and leases one in the development district. The company would normally use the proceeds from selling the factory on new plant and machinery and on everything that is going on in the development district, but then the Government come along and impose a 35 per cent. Capital Gains Tax.
    Mr. Cooper: May I point out also to the Chief Secretary that in a number of these development districts one can only lease factories, one cannot buy them?
    Mr. Hugh Fraser: Perhaps the Chief Secretary will now make clear that the

    287
    Capital Gains Tax next year on companies will not be more than 40 per cent?
    Mr. Walker: There are many other instances which we have quoted in addition to that of the development district. There is the instance of factories suffering from a fire and being paid up by fire insurance and not using the proceeds in the identical way that the money was formerly used. The whole social object, the incomes policy argument, for a Capital Gains Tax is that certain individuals benefit as a result of large capital
    gains. We are perfectly prepared for the tax to apply whenever the individual benefits, but it is wrong and it complicates industry and is against the whole theme of the mobilisation of labour and it completely lacks the basic element of justice in British taxation for the tax to be imposed in the way proposed. It is for these reasons that I hope that my hon. and right hon. Friends will divide the Committee.
    Question put, That "person" stand part of the Clause:—
    The Committee divided: Ayes 199, Noes 186.

    Division No. 129.]

    AYES

    [5.56 p.m.

    Albu, Austen

    Freeson, Reginald

    Mapp, Charles

    Allaun, Frank (Salford, E.)

    Galpern, Sir Myer

    Mason, Roy

    Allen, Scholefield (Crewe)

    Garrett, W. E.

    Mellish, Robert

    Armstrong, Ernest

    Garrow, A.

    Mendelson, J. J.

    Atkinson, Norman

    Ginsburg, David

    Millan, Bruce

    Barnett, Joel

    Gourlay, Harry

    Miller, Dr. M. S.

    Baxter, William

    Grey, Charles

    Milne, Edward (Blyth)

    Bence, Cyril

    Griffiths, David (Bother Valley)

    Monslow, Walter

    Bennett, J. (Glasgow, Bridgeton)

    Griffiths, Rt. Hn. James (Llanelly)

    Morris, Charles (Openshaw)

    Bishop, E. S.

    Griffiths, Will (M'chester, Exchange)

    Morris, John (Aberavon)

    Blackburn, F.

    Gunter, Rt. Hn. R. J.

    Murray, Albert

    Blenkinsop, Arthur

    Hamilton, William (West Fife)

    Neal, Harold

    Boardman, H.

    Hannan, William

    Noel-Baker, Francis (Swindon)

    Boston, T. G.

    Hart, Mrs. Judith

    Noel-Baker,Rt.Hn.Philip(Derby,S.)

    Bowden, Rt. Hn. H. W. (Leics S.W.)

    Hattersley, Roy

    Norwood, Christopher

    Braddock, Mrs. E. M.

    Hazell, Bert

    Ogden, Eric

    Bray, Dr. Jeremy

    Heffer, Eric S.

    O'Malley, Brian

    Brown, Hugh D. (Glasgow, Provan)

    Henderson, Rt. Hn. Arthur

    Orbach, Maurice

    Brown, R. W. (Shoreditch & Fbury)

    Herbison, Rt. Hn. Margaret

    Orme, Stanley

    Buchan, Norman (Renfrewshire, W.)

    Hill, J. (Midlothian)

    Oswald, Thomas

    Buchanan, Richard

    Hobden, Dennis (Brighton, K'town.)

    Owen, Will

    Butler, Herbert (Hackney, C.)

    Holman, Percy

    Page, Derek (King's Lynn)

    Callaghan, Rt. Hn. James

    Howarth, Robert L. (Bolton, E.)

    Pannell, Rt. Hn. Charles

    Carmichael, Neil

    Howell, Denis (Small Heath)

    Park, Trevor (Derbyshire, S.E.)

    Carter-Jones, Lewis

    Howie, W.

    Pearson, Arthur (Pontypridd)

    Castle, Rt. Hn. Barbara

    Hoy, James

    Peart, Rt. Hn. Fred

    Chapman, Donald

    Hughes, Cledwyn (Anglesey)

    Pentland, Norman

    Craddock, George (Bradford, S.)

    Hughes, Emrys (S. Ayrshire)

    Prentice, R. E.

    Crawshaw, Richard

    Hunter, Adam (Dunfermline)

    Price, J. T. (Westhoughton)

    Crossman, Rt. Hn. R. H. S.

    Hunter, A. E. (Feltham)

    Probert, Arthur

    Cullen, Mrs. Alice

    Hynd, John (Attercliffe)

    Pursey, Cmdr. Harry

    Dalyell, Tarn

    Irvine, A. J, (Edge Hill)

    Randall, Harry

    Davies, G. Elfed (Rhondda, E.)

    Irving, Sydney (Dartford)

    Redhead, Edward

    Davies, Harold (Leek)

    Jones, Dan (Burnley)

    Rees, Merlyn

    Davies, S. O. (Merthyr)

    Jones, J. Idwal (Wrexham)

    Reynolds, G. W.

    de Freitas, Sir Geoffrey

    Jones, T. W. (Merioneth)

    Richard, Ivor

    Delargy, Hugh

    Kelley, Richard

    Roberts, Albert (Normanton)

    Dell, Edmund

    Kerr, Mrs. Anne (R'ter & Chatham)

    Roberts, Goronwy (Caernarvon)

    Dempsey, James

    Kerr, Dr. David (W'worth, Central)

    Robertson, John (Paisley)

    Diamond, John

    Lawson, George

    Robinson, Rt. Hn.K.(St. Pancras,N.)

    Doig, Peter

    Lee, Rt. Hn. Frederick (Newton)

    Rodgers, William (Stockton)

    Driberg, Tom

    Lee, Miss Jennie (Cannock)

    Rose, Paul B.

    Duffy, Dr. A. E. P.

    Lever, Harold (Cheetham)

    Ross, Rt. Hn. William

    Dunn, James A.

    Lever, L. M. (Ardwick)

    Sheldon, Robert

    Dunnett, Jack

    Lewis, Arthur (West Ham, N.)

    Shinwell, Rt. Hn. E.

    Edelman, Maurice

    Lewis, Ron (Carlisle)

    Shore, Peter (Stepney)

    Edwards, Rt. Hn. Ness (Caerphilly)

    Lipton, Marcus

    Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)

    Edwards, Robert (Bilston)

    McBride, Neil

    Short, Mrs. Renée (W'hampton,N.E.)

    English, Michael

    MacColl, James

    Silkin, John (Deptford)

    Evans Ioan (Birmingham, Yardley)

    MacDermot, Niall

    Silkin, S. C. (Camberwell, Dulwich)

    Fernyhough, E.

    McGuire, Michael

    Silverman, Julius (Aston)

    Fletcher, Sir Eric (Islington, E.)

    McKay, Mrs. Margaret

    Slater, Mrs. Harriet (Stoke, N.)

    Fletcher, Ted (Darlington)

    Mackie, John (Enfield, E.)

    Small, William

    Fletcher, Raymond (Ilkeston)

    McLeavy, Frank

    Smith, Ellis (Stoke, S.)

    Floud, Bernard

    MacMillan, Malcolm

    Snow, Julian

    Foley, Maurice

    MacPherson, Malcolm

    Soskice, Rt. Hn. Sir Frank

    Foot, Sir Dingle (Ipswich)

    Mahon, Simon (Bootle)

    Stones, William

    Fraser, Rt. Hn. Tom (Hamilton)

    Manuel, Archie

    Strauss, Rt. Hn. G. R. (Vauxhall)

    Summerskill, Hn. Dr. Shirley

    Wallace, George

    Winterbottom, R. E.

    Swingler, Stephen

    Weitzman, David

    Woodburn, Rt. Hn. A.

    Taylor, Bernard (Mansfield)

    White, Mrs. Eirene

    Woof, Robert

    Thomas, George (Cardiff, W.)

    Whitlock, William

    Wyatt, Woodrow

    Thomas, Iorwerth (Rhondda, W.)

    Wilkins, W. A.

    Zilliacus, K.

    Tinn, James

    Willey, Rt. Hn. Frederick

    Urwin, T. W.

    Williams, Alan (Swansea, W.)

    TELLERS FOR THE AYES:

    Wainwright, Edwin

    Willis, George (Edinburgh,E.)

    Mr. George Rogers and

    Walden, Brian (All Saints)

    Wilson, Rt. Hn. Harold (Huyton)

    Mr. Harper.

    Walker, Harold (Doncaster)

    Wilson, William (Coventry, S.)

    NOES

    Agnew, Commander Sir Peter

    Glover, Sir Douglas

    More, Jasper

    Allson, Michael (Barkston Ash)

    Goodhew, Victor

    Morrison, Charles (Devizes)

    Allason, James (Hemel Hempstead)

    Gower, Raymond

    Mott-Radclyffe, Sir Charles

    Anstruther-Gray, Rt. Hn. Sir W.

    Grant, Anthony

    Munro-Lucas-Tooth, Sir Hugh

    Astor, John

    Gresham Cooke, R.

    Neave, Airey

    Atkins, Humphrey

    Griffiths, Peter (Smethwick)

    Nicholls, Sir Harmar

    Awdry, Daniel

    Grimond, Rt. Hn. J.

    Noble, Rt. Hn. Michael

    Barber, Rt. Hn. Anthony

    Gurden, Harold

    Nugent, Rt. Hn. Sir Richard

    Barlow, Sir John

    Hall, John (Wycombe)

    Onslow, Cranley

    Batsford, Brian

    Hamilton, Marquess of (Fermanagh)

    Orr-Ewing, Sir Ian

    Berry, Hn. Anthony

    Hamilton, M. (Salisbury)

    Osborn, John (Hallam)

    Bessell, Peter

    Harris, Frederic (Croydon, N.W.)

    Osborne, Sir Cyril (Louth)

    Biggs-Davison, John

    Harvey, John (Walthamstow, E.)

    Page, John (Harrow, W.)

    Birch, Rt. Hn. Nigel

    Harvie Anderson, Miss

    Page, R. Graham (Crosby)

    Black, Sir Cyril

    Heald, Rt. Hn. Sir Lionel

    Pearson, Sir Frank (Clitheroe)

    Blaker, Peter

    Heath, Rt. Hn. Edward

    Percival, Ian

    Bossom, Hn. Clive

    Hendry, Forbes

    Pitt, Dame Edith

    Box, Donald

    Hill, J. E. B. (S. Norfolk)

    Pounder, Rafton

    Boyd-Carpenter, Rt. Hn. J.

    Hirst, Geoffrey

    Powell, Rt. Hn. J. Enoch

    Boyle, Rt. Hn. Sir Edward

    Hooson, H. E.

    Prior, J. M. L.

    Brewis, John

    Hopkins, Alan

    Pym, Francis

    Brinton, Sir Tatton

    Hordern, Peter

    Ramsden, Rt. Hn. James

    Bromley-Davenport,Lt.-Col.Sir Walter

    Hornsby-Smith, Rt. Hn. Dame P.

    Redmayne, Rt. Hn. Sir Martin

    Brooke, Rt. Hn. Henry

    Howe, Geoffrey (Bebington)

    Renton, Rt. Hn. Sir David

    Bruce-Gardyne, J.

    Hunt, John (Bromley)

    Ridley, Hn. Nicholas

    Bryan, Paul

    Hutchison, Michael Clark

    Robson Brown, Sir William

    Buchanan-Smith, Alick

    Iremonger, T. L.

    Scott-Hopkins, James

    Burden, F. A.

    Irvine, Bryant Godman (Rye)

    Sharples, Richard

    Buxton, Ronald

    Jenkin, Patrick (Woodford)

    Smith, Dudley (Br'ntf'd & Chiswick)

    Carlisle, Mark

    Jennings, J. C.

    Smyth, Rt. Hn. Brig. Sir John

    Carr, Rt. Hn. Robert

    Johnson Smith, G. (East Grinstead

    Stainton, Keith

    Chichester-Clark, R.

    Johnston, Russell (Inverness)

    Stanley, Hn. Richard

    Clark, William (Nottingham, S.)

    Jopling, Michael

    Steel, David (Roxburgh)

    Cooke, Robert

    Kerby, Capt. Henry

    Stodart, Anthony

    Cooper, A. E.

    Kerr, Sir Hamilton (Cambridge)

    Stoddart-Scott, Col. Sir Malcolm

    Cooper-Key, Sir Neill

    Kilfedder, James A.

    Studholme, Sir Henry

    Costain, A. P.

    King, Evelyn (Dorset, S.)

    Summers, Sir Spencer

    Craddock, Sir Beresford (Spelthorne)

    Kirk, Peter

    Taylor, Sir Charles (Eastbourne)

    Crawley, Aidan

    Kitson, Timothy

    Taylor, Edward M. (G'gow.Cathcart)

    Cunningham, Sir Knox

    Lagden, Codfrey

    Taylor, Frank (Moss Side)

    Dalkeith, Earl of

    Lambton, Viscount

    Thatcher, Mrs. Margaret

    Dance, James

    Lancaster, Col. C. G.

    Thompson, Sir Richard (Croydon,S.)

    Davies, Dr. Wyndham (Perry Barr)

    Langford-Holt, Sir John

    Tiley, Arthur (Bradford, W.)

    d'Avigdor-Goldsmid, Sir Henry

    Legge-Bourke, Sir Harry

    Turton, Rt. Hn. R. H.

    Dean, Paul

    Lloyd,Rt.Hn.Geoffrey(Sut'nC'dfield)

    Tweedsmuir, Lady

    Digby, Simon Wingfield

    Lloyd, Rt. Hn. Selwyn (Wirral)

    van Straubenzee, W. R.

    Dodds-Parker, Douglas

    Longbottom, Charles

    Vaughan-Morgan, Rt. Hn. Sir John

    Doughty, Charles

    Loveys, Walter H.

    Walder, David (High Peak)

    Douglas-Home, Rt. Hn. Sir Alec

    Lubbock, Eric

    Walker, Peter (Worcester)

    Emery, Peter

    McAdden, Sir Stephen

    Walker-Smith, Rt. Hn. Derek

    Errington, Sir Eric

    MacArthur, Ian

    Walters, Dennis

    Eyre, Reginald

    Mackenzie, Alasdair (Ross&Crom'ty

    Ward, Dame Irene

    Farr, John

    Mackie, George Y. (C'ness & S'land

    Weatherill, Bernard

    Fisher, Nigel

    McMaster, Stanley

    Webster, David

    Fletcher-Cooke, Charles (Darwen)

    McNair-Wilson, Patrick

    Whitelaw, William

    Fletcher-Cooke, Sir John (S'pton)

    Maginnis, John E.

    Williams, Sir Rolf Dudley (Exeter)

    Fraser, Rt Hn Hugh(St'fford&Stone)

    Marples, Rt. Hn. Ernest

    Wills, Sir Gerald (Bridgwater)

    Fraser, Ian (Plymouth, Sutton)

    Maude, Angus

    Wilson, Geoffrey (Truro)

    Gammans, Lady

    Maydon, Lt.-Cmdr. S. L. C.

    Wise, A. R.

    Gibson-Watt, David

    Meyer, Sir Anthony

    Wood, Rt. Hn. Richard

    Giles, Rear-Admiral Morgan

    Mills, Peter (Torrington)

    TELLERS FOR THE NOES:

    Gilmour, Ian (Norfolk, Central)

    Mills, Stratton (Belfast, N.)

    Mr. McLaren and

    Gilmour, Sir John (East Fife)

    Monro, Hector

    Mr. R. W. Elliott.

    Clause ordered to stand part of the Bill.

    Clause 19.—(CAPITAL GAINS TAX.)
    Amendment proposed: In page 14, line 30, leave out "was" and insert "is".—[Mr. MacDermot.]
    Sir Hugh Lucas-Tooth: May I ask for your assistance, Mr. Grant-Ferris? I wish to address the Committee on the subject of the word "resident" which occurs several times in the Clause, and particularly in connection with this Amendment. I do not know whether I should be in order in doing so now or whether I should be better advised to wait till the Question, That the Clause stand part of the Bill.
    The Temporary Chairman: I think that the hon. Gentleman would be better advised to raise it on the Question, That the Clause stand part of the Bill.
    Amendment agreed to.
    Mr. MacDermot: I beg to move Amendment No. 125, in page 14, line 40, to leave out from "acquired" to the first "for" in line 41.
    This is designed to improve the wording of the Clause, and, as it is a little more than a drafting Amendment, perhaps I should explain it briefly. The purpose of subsection (2,b) is to impose a charge on gains realised on the disposal of assets situated in the United Kingdom and used or held for the purposes of the branch or agency or assets acquired for use by or for the purposes of the branch or agency.
    As it stands, paragraph (b) relates only to assets
    "acquired by the principal of the branch or agency".
    On reconsideration, it is thought that these words ought to be excluded because it is not really relevant whether the assets are acquired by the principal of the branch, who may well be no more than an employee of the overseas person, or by the principal of the agency. What matters is that the assets were held and used for the purposes of the branch or agency or were acquired for that purpose. It is not relevant or material by whom they were acquired. The Amendment will achieve this result.
    Amendment agreed to.
    Mr. George Y. Mackie: I beg to move, Amendment No. 43, in page 15, line 8,
    292
    to leave out "thirty" and to insert "twenty-five".
    This Amendment concerns a difference of 5 per cent. It is a case of the amount of the Capital Gains Tax which might be reasonable. We are not discussing the tax itself, for which we in the Liberal Party have always stated that there was a very strong case in equity as between managerial staffs getting high salaries and being taxed to the full and the shareholders who in many cases have been untaxed on very large gains. There is, as I have said, a good case for the tax itself, but we feel that the rate is all important. After all, a diet is very good for one and moderation is an excellent thing, as the Committee can see by looking at me.
    Mr. William Baxter: If the Government found it necessary to impose a 30 per cent. tax as against the suggested 25 per cent. tax and to use the extra 5 per cent. to pay the agricultural subsidies, would the hon. Gentleman be in favour of the rate of 30 per cent. then?
    Mr. Mackie: That argument has not been put forward by the Government. Their case is that of equity in taxation in order to help towards the creation of an incomes policy. I do not think that agricultural subsidies enter into this.
    The other essential thing—and I hope the Government wish to stimulate it—is a vigorous economy. For this, it is essential that the rate be set at a figure which will secure the co-operation of industrialists and of others in business, whether they be investors or owner-managers. As the Chancellor can see in the Press and by statements in this Committee on both sides, the Finance Bill is failing to do that at the moment. It is vital, however, that an acceptable rate should be set and that is why we suggest 25 per cent. as a much fairer figure than 30 per cent. There are many reasons for this. The Liberal Party, when advocating a Capital Gains Tax, has always allied it with a reduction in personal taxation when the tax started to bite.
    Mr. Emrys Hughes: How much will the Revenue lose if the Amendment is carried?
    Mr. Mackie: I do not think the Government themselves know how much revenue they will gain. What I am concerned with is not the revenue. This tax is not supposed to raise revenue. It is imposed to re-introduce a feeling of cooperation into the economy, and it is because of this that we suggest that the fair figure is 25 per cent.
    Mr. Baxter Mr. Baxter rose —
    Mr. Mackie: I have given way several times without seeing subsequently why I should have done so.
    Mr. Baxter: I can tell the hon. Gentleman why. It is because he seeks by this Amendment to lose approximately £20 million to the Government by reducing the Capital Gains Tax from 30 per cent. to 25 per cent. What would he tax to make up that £20 million?
    6.15 p.m.
    Mr. Mackie: I would tax betting. I would tax large winnings. Nevertheless, that point is still not valid and, as far as I know, the Government themselves have not tried to say how much they will gain from Capital Gains Tax. Furthermore, it is not at all sure that a high rate of tax would raise more money. Many clever people look for ways around unfair taxes and, in the main, are successful, as witness the amount of legislation we are continually introducing in order to circumvent the efforts of hundreds of thousands trying to do down the Revenue.
    It is high time that we had taxes which people can pay and feel proud of paying, introducing an element of respectability in paying taxes instead of putting them so high that it becomes a matter a doubt in people's minds as to whether it makes sense. But I have been led off the point. I had a serious argument before I was interrupted.
    The Government are taxing an element of inflation in taxing capital gains. Between this country and the United States there is a considerable difference in the amount of inflation. Here, under both Tories and Labour, it has been running at about 4 per cent. per annum. There is no Government advice and nothing in the Bill which allows for this element of inflation. When considering the rate of taxation that one should set in a new system, one should look at practical examples in other countries which are
    294
    using the Capital Gains Tax to collect money for social purposes. In this case there are plenty of examples, and one must tie them to the amount of personal taxation in those countries.
    It is interesting to take the most vigorous and successful capitalist or free enterprise economies, which far outweigh the Socialist ones. Britain is proposing the Capital Gains Tax as a flat rate of 30 per cent. with the top rate of personal Income Tax at 91¼ per cent. on very large incomes. In the United States the Capital Gains Tax top rate is 25 per cent. as against 77 per cent. top rate Income Tax on personal incomes of over 300,000 dollars.
    Japan has had a phenomenal rate of growth. Half of the capital gain is taxed as income, which comes to a great deal less than 30 per cent., and the top rate of personal Income Tax is 75 per cent. In West Germany—frequently held up as an example of the sort of expansion we require—only substantial interests are taxed and the rate is at half the income rate with a maximum of 30 per cent. The top rate of personal Income Tax is 53 per cent.
    There are other examples. I have quoted examples of vigorous, go-ahead economies which far exceed our rate of growth.
    That sort of practical example should
    be considered by the Government when introducing a tax of this character. There are many other factors, and one is the movement of capital around the economy. Let me take a simple example. There are many vigorous people who build up a business, but who, when the business is running at top level, want to move into something else. The rate of Capital Gains Tax is very important to them, for there is a point at which they will not consider it worth taking their money and putting it into some new venture, and yet that is the process which creates new wealth. There are plenty of examples throughout the countries I have mentioned of the vigorous movement of capital which would otherwise be restricted by too high taxes.
    If the Financial Secretary accepted the Amendment, he would do a great deal to restore that confidence which he needs if the Budget is to achieve what he hopes.
    The Deputy-Chairman (Sir Samuel Storey): I ought to add that with this

    295
    Amendment we can discuss Amendment No. 199, in page 15, line 8, leave out "thirty" and insert "fifteen".
    Mr. Hirst: I rise to support the Amendments of the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie), although I am inclined to think that his proposed rate is somewhat high. I entirely accept his arguments, but I note that the Amendment in the name of my right hon. Friend the Member for Harrogate (Mr. Ramsden) suggests a rate of 15 per cent. I am not absolutely sure what the right figure should be, but, in order to speed up our consideration of the Bill, I would be prepared to accept a compromise of 20 per cent. if the Government would.
    Obviously, the rate proposed in the Bill is too high. I fully agree with the comment of the hon. Member for Caithness and Sutherland, which rather follows something I said earlier, when he spoke of fairness and having a rate which would be relatively acceptable in all circumstances. I am not at all sure that in the long run, going a year or two ahead, the same result would not be achieved if the rate were a good deal lower. A great deal of thought is being given to this matter in the United States where it is thought that the rate may be somewhat too high, but where there are also far more of what we know as disregards. The American authorities do not try to get all the mice in the same trap, which is the peculiar habit of the Treasury under Socialist rule, but recognise that there are many other considerations and that if the rate is fixed at a reasonable figure, people will pay, while not willingly, at least with a reasonable sense of justice, not holding up the economy in the process.
    If we are to be progressive and have modernisation and proper growth—and we argue only about the means to the end and not about the need—we have to have mobility of capital in the same way as we need mobility of labour. There must be a willingness to move. This will not happen if the rate of tax is too high. Hon. Members can take it from me that it is considered to be too high. I am always sorry for Treasury Ministers, on whatever side of the Chamber I happen to be sitting. They always have a rotten
    296
    time because they always have to stick to a brief. The unfortunate part of the arrangement is that the brief is always marked "Reject" before the arguments are heard. That is my feeling after some years of experience.
    I hope that that will not be the case on this occasion, because in this Budget so much is being tried out, so much is unknown. As I said earlier, this is because the Government have not given themselves enough time for proper consideration. I hope that there will be more fluidity than is generally experienced on these occasions. It is vitally important in exercises like these that errors should be corrected before too much damage is done, but a great deal of damage can be done to that atmosphere in industry which is required for modernisation and growth.
    I cannot think of any tax at this rate—and it is the rate which we are discussing and not the principle—which can do more damage in the sense of making people hang on because of their decision not to pay 30 per cent. when that is regarded as too high a rate. The result is that capital is frozen in pockets all over the place.
    Do not let it be imagined that all this is big money. Much financing today comes from relatively small sums. Every company of any size abounds with thousands of small shareholders, and we all know it. Tremendous investment is taking place in unit trusts and investment trusts, all of it going into the capital of industry, There is thus that amount of concern with this proposal and unless we get the Bill changed for this type of investment, great damage will be done.
    Fundamentally, the proposal is wrong and we have the right to ask the Government and the country to recognise what is happening and to understand that too high a rate can do nothing but great damage to the economy. I ask for a better answer than merely the "Reject" which the Financial Secretary may have in his hands, and we will excuse him from the Chamber if he is prepared to go and get a better answer.
    I am disturbed that when we are dealing with this important factor in our economy we see no sign of the First Secretary or any of the other Economic Ministers in these debates. I do not know what thinking the right hon. Gentleman is doing—

    297
    perhaps it is "Buster Brown's biggest bluff", but whatever he is thinking about, he ought to be here to listen to our debates and to get the sound the Committee on a subject which will play no mean tune in the country's economy. I make a firm protest that we are ignored day after day and hour after hour by the First Secretary and the other Economic Ministers who ought to be here, because the Bill's proposal will strike a heavy blow at all they presumably stand for. I cannot understand why there should be a conflict in the Cabinet, unless it is that the First Secretary does not understand these things at all. There must be some sense in these proposals if the country is to receive them at all.
    Mr. Emrys Hughes: I have been disappointed by the irresponsible attitude of the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie). He is a Highland Member and presumably knows that the Highlands of Scotland require more expenditure on roads and schools and the reclamation of land and other aspects of capital development. On every possible occasion he has pressed on the Chancellor of the Exchequer demands for greater expenditure on the Highlands, and then, when the Chancellor comes along with a reasonable proposal for getting the money, expresses his opposition to it.
    Mr. George Y. Mackie: The Highlands at this moment are starved of investment—the hydro schemes are certainly hanging fire—because of the state of the economy, and it is therefore relevant to the Highlands of Scotland for the rest of the contry to be prosperous.
    Mr. Hughes: Precisely, but I am pointing out that we expect some contribution from the Liberal Party.
    Mr. A. E. P. Duffy: Would not my hon. Friend the Member for South Ayrshire (Mr. Emrys Hughes) agree that the Highlands of Scotland are largely dependent on public funds?
    The Deputy-Chairman: Order. I think that we should leave the Highlands and return to the Amendment, which is about the rate of the Capital Gains Tax.
    6.30 p.m.
    Mr. Hughes: Yes I quite agree, but I want to know from where the Highlands
    298
    will get the money. The Chancellor of the Exchequer comes along with a series of proposals for raising money, small enough, and to give the Highlands the things it needs. Yet we get no constructive proposals at all from the Liberal Party except one to reduce the money available for expenditure in the Highlands. When I ask where the money is to come from the hon. Member suggests taxing betting.
    Mr. George Y. Mackie: I have been asked where we can get the money. The Chancellor of the Exchequer gets over £140 million a year out of whisky in the Highlands.
    The Deputy-Chairman: We cannot discuss how the money is to be used. All we can discuss is the actual rate of taxation.
    Mr. Hughes: I quite understand. The hon. Member talks about getting money from whisky, and as far as I can gather the programme of the Liberal Party is more whisky and more betting. There will be consternation and discussion around the blacksmiths' smithies in the Highlands when they see that they want to have money and make no constructive proposals.
    The Deputy-Chairman: Order. We cannot discuss constructive proposals. Hon. Gentlemen must deal with what the rate of tax is to be.
    Mr. Hughes: My difficulty has always been that my imagination outstrips the particular Amendment being discussed. I have always to work within those limitations. I have pointed out how completely irresponsible the Liberal Party is when it comes to getting down to a real—
    The Deputy-Chairman: The hon. Gentleman must not use his imagination on this occasion.
    Mr. R. Gresham Cooke: The hon. Member for South Ayrshire (Mr. Emrys Hughes) is very worried as to how the Chancellor would have raised this money which would be taken from him if the rate were reduced. The Chancellor is not under an obligation to raise this money. He has already put £400 million extra on taxation. He is budgeting for a very substantial surplus and he is not introducing this tax in order to raise

    299
    money, but is for other reasons. I support my hon. Friend the Member for Shipley (Mr. Hirst), who said that he was opposed to the high rate of Capital Gains Tax because he was afraid it would lead to evasion. I do not want to breed a race of tax dodgers. I said during the Budget debate that 30 per cent. Capital Gains Tax was a very high rate, far higher than the rest of the world. I said that in my view people would try to find legal ways to avoid it.
    Mr. Baxter: Do I understand the hon. Gentleman to be saying that if this tax is imposed at 30 per cent. it will mean business people will become tax dodgers?
    Mr. Gresham Cooke: I am talking of the individual who is going to suffer this rate and I used "tax dodgers" in the generic sense. Many people will not want to pay 30 per cent. and will find ways and means of avoiding it. Once they have acquired something they will make sure they do not sell it in the first year when they will have to pay a very high rate of taxation. There are many other ways by which they can avoid the tax. For instance, they could attach a tangible movable object to an historic vintage car, to a mechanically-propelled vehicle for the carriage of passengers. If one had a beautiful pair of lamps and wanted to sell them, all one would have to do would be to attach them to a mechanically-propelled road vehicle constructed or adapted for the carriage of passengers and presumably one could avoid the tax.
    The American rate is said to be 25 per cent. But the American citizen does not reach that rate until his income is at least 40,000 dollars a year. The average family man in America earning 5,000 to 10,000 dollars a year pays Capital Gains Tax at the rate of 7 per cent. or 8 per cent. In Sweden, as my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) will explain a little later, there is a reducing Capital Gains Tax. Here we have a solid 30 per cent. going on year after year, starting in the first year at the very high rate of personal taxation.
    People are going to try to find ways to mitigate the full effects of the tax on tangible moveable objects. If they have a set of silver they will try to break it up before selling it. They may not be
    300
    able to do it with furniture, but this is going to be ordinary cocktail conversation: "I have got some beautiful pieces of silver upon which I do not want to pay the full rate. How can I get out of doing so?" This high rate of taxation will prevent the small man from accumulating capital. If he buys something he will not sell it, certainly, during the first year of acquisition. It is all very well to say that we shall never have another Lord Nuffield again. That is so and I am not talking of big capitalists but of the small man who is not now going to turn over his capital at a quick rate.
    This rate of 30 per cent. is too high. We could come down much more, to the American scale, starting at 25 per cent. at the top rate and going down according to one's earnings. If we do not do this I am afraid the tax will be a real disincentive to the small man to make small profits from which he can accumulate capital year after year.
    Mr. Gower: I have heard reports that there may be some valuable concessions during the next few days and I would have thought this was an opportunity for the Government to make most useful and valuable concessions. The Amendment moved effectively and clearly by the right hon. Gentleman the Member for Caithness and Sutherland (Mr. George Y. Mackie) merely calls for a fairly reasonable reduction in the rate. I should have thought this would be attractive not only to the Financial Secretary but to Ministers in general. This is a new tax and we can all derive some idea of how it may operate from the fact that there are similar taxes in other countries. In the United Kingdom this is an entirely new form of impost and it would seem reasonable when embarking upon a new tax of this kind to start cautiously.
    I doubt whether the Financial Secretary, or indeed the Chancellor of the Exchequer, can possibly forecast the ultimate effect of this kind of tax on our economy in the years ahead. It would seem that while there is a measure of agreement that we should tax capital as well as income in some form, that measure of agreement only extends on this side of the Committee, in so far as we feel this may be a fair tax, a tax which

    301
    is reliable in its incidence and a tax which will have no permanent and deeply injurious effects upon the British public.
    If the Government really believe that this is not merely a window dressing tax but something which will make a positive contribution to the effectiveness of our general taxation system, surely it would be far better if it were to start at a relatively low level. Like others, I should have preferred the first experiment with this tax to be at an even lower figure than the one which the Amendment proposes. Nevertheless, I hope that all of my hon. Friends and some hon. Members opposite will feel able to accept and support the Amendment.
    Although the Financial Secretary may not credit it, there is a great deal of anxiety about the impact of this tax. If he is doubtful about this, I can tell him that I have discovered this anxiety in my constituency, not in the minds of the directors of large companies—
    Mr. Walter Monslow: Or the miners.
    Mr. Gower: —but in the mind, for example, of a small shopkeeper who supported the Labour Party at the last General Election. He told me on Saturday that he is extremely anxious about this matter. He has put many years into building up a modest business and livelihood for himself and his family. This argument can be extended from retail distribution to small industry.
    Mr. Monslow: Would the hon. Gentleman extend it to land?
    Mr. Gower: I could do that, but I am much more concerned about the effect of this tax on industry and the economy. The hon. Gentleman will agree, I think, that this is the paramount consideration in estimating the importance of this tax.
    Mr. Donald Chapman: Would the hon. Gentleman say how this tax will harm the local shopkeeper to whom he has referred?
    Mr. Gower: I am merely saying that a particular shopkeeper displayed a great deal of anxiety about it. I can assure the hon. Gentleman that this anxiety extends to quite small people on an industrial trading estate not very far from
    302
    my constituency who, through hard work and in very competitive conditions and under a severe taxation system, have built up small industries. Like ourselves, they are uncertain about what the impact of this new tax will be on those industries.
    I think that the Financial Secretary could lessen this deep anxiety by accepting this fairly reasonable Amendment. The hon. Member for Caithness and Sutherland (Mr. George Y. Mackie), who moved it forcibly and effectively, pointed out that the rate of this tax is lower in countries which have advanced most dynamically in recent years. This should commend itself to the Chancellor of the Exchequer and to the Government. If a dynamic economy in West Germany and Japan can be reconciled with a lower rate of Capital Gains Tax, I do not think that the Government should allow the example to pass unnoticed. I hope that the Financial Secretary will be able to say that he will make one of these important concessions, and a very valuable one, by accepting this most reasonable Amendment.
    6.45 p.m.
    Sir H. Lucas-Tooth: The hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) made a sound point when he said that the yield of this tax might be better if the rate were lower. I think that that is the case, not so much because of the reason given by my hon. Friend the Member for Twickenham (Mr. Gresham Cooke), although there will certainly be evasion if the rate is too high, but because if there were a lower rate there would be a greater willingness on the part of people to sell their property and to change their investments. That is something which we should not discourage. No doubt the rate of 30 per cent. given in the Bill is variable in the sense that it can be changed from year to year, and no doubt future Chancellors will change it.
    Presumably the rate of 30 per cent. applies not only to gains but to losses. If so, can the Government say what will happen when the rate is changed? If a person makes a
    gain this year and is charged at 30 per cent. and a loss next year and is charged at 30 per cent. or perhaps 40 per cent., how will the two be set off against one another? We should know what the Government have in mind

    303
    and how it is intended that the Bill should work in that respect before we put any figure in the Bill.
    Mr. Duffy: I wish first to take a point made by the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) and which has been repeated by following speakers, notably the hon. Member for Barry (Mr. Gower). They expressed concern for the small businessman who has built up his business as a result of many years of toil and who is now concerned about a possible penal rate of taxation on his labours. I think that I can fairly say that there is no one on these benches who does not share that concern. However, I say with all respect to those hon. Members that this is not the way to go about the matter. If they were concerned for the small businessman, they might have framed an Amendment to distinguish between earned capital gain and unearned capital gain. We cannot alleviate the anxiety of small businessmen by a blanket Amendment of this kind.
    Mr. Webster rose—
    Mr. Duffy: No.
    The Temporary Chairman (Mr. James McInnes): If the hon. Gentleman does not give way, the hon. Member for Weston-super-Mare (Mr. Webster) must resume his seat.
    Mr. Duffy: I have no intention of giving way to the hon. Member for Weston-super-Mare.
    The major point to which I wish to address myself—and I think that it was the main point made by the hon. Member for Caithness and Sutherland—concerns his statement that there was nothing in the Bill which allowed for the element of inflation. I am surprised that the hon. Gentleman should take this view, because I thought that most of us agreed that one of the purposes of the Bill—some people would think that it was certainly the main social purpose of the Bill, apart from the fiscal purposes—was to provide the conditions for an incomes policy. I hope that the hon. Member does not seriously believe that all those workers who are being asked to accept wage restraint and to forgo the possibility of capitalising on their skill and,
    304
    above all, their youth, must do so when people who have an opportunity to make capital gains are being asked to pay a rate of tax less than that which workers are being asked to bear. We are in an age when more workers are taxed at the standard rate.
    All that we seek to do through this Clause is to tax capital gains at the rate of about 6s. in the £, whereas the hon. Member for Caithness and Sutherland and those who support him want to tax them at about 5s. in the £. Do hon. Members who support the Amendment believe that the organised workers of this country will accept this discrepancy?
    Mr. George Y. Mackie: Is the hon. Gentleman suggesting that because this is part of an incomes policy there will be no inflation? If he is, it is rather like saying that presumably he does not want to die, but this does not stop him insuring his life.
    Mr. Duffy: I did not suggest that. I cannot recall what I said which prompted the hon. Gentleman to ask me that. While on the subject of inflation, let me remind the hon. Gentleman that all the countries to which he referred, including North America, suffer from varying rates of inflation. The economy of the Western world is inseparable from an inflationary rate, and we are trying to do something to check the rate of inflation in our society.
    Mr. Gower: Does the hon. Gentleman seriously contend that the organised workers of this country, as he described them, faced with increased costs on their part, and having put in a claim for increased wages, will forgo their claim because the rate of the Capital Gains Tax is 30 per cent. and not 25 per cent.? Is the hon. Gentleman making such a case?
    Mr. Duffy: I did not say that. The hon. Member for Caithness and Sutherland said that the beneficiaries from capital gains should be taxed at a lower rate than workers are taxed on their earnings. I am saying that this will be unacceptable to the working man. I wonder whether hon. Gentlemen opposite realise that the economies of Western countries cannot free themselves from a rate of inflation? We are trying to do something about it.

    305
    Hitherto the holders of capital have been able partly to shield themselves against inflation, while the workers have not been able to do so. Several hon. Members who took part in the discussions on Clause 12 and Clause 16 agreed that to date capital had been treated lightly compared with income. The hon. Member for Shipley (Mr. Hirst) referred to this. There is now widespread acceptance of the need for a Capital Gains Tax, and the hon. Gentleman posed the question, what is a fair rate? I am rebutting the idea put abroad by hon. Gentlemen opposite that 25 per cent. is fair.
    Mr. Edward Heath: The hon. Gentleman is very intelligent and well-informed. Is he arguing that for the past 15 years wages have risen less than prices in this country? In the western world generally that is quite untrue. Wages have outstripped prices, and therefore real incomes have been rising.
    Mr. Duffy: The right hon. Gentleman, too, has not been listening to what I have been saying. I did not say that. I said that workers had no protection. In the free-for-all, which is all that is left to them, some have managed to get some protection, but only at the expense, not of those who hold capital, or who stand to benefit from capital gains, but of other workers.
    I should have thought that we were agreed on the need for an incomes policy, and on the need to check inflation. I should have thought, too, that we were all agreed on the need to make a fresh start in dealing with capital gains. There has been agreement on this so far in this Committee. The hon. Member for Shipley asked what was a fair rate. I cannot believe that the organised workers of this country will accept that they should be taxed at the standard rate, while those who benefit from capital gains are taxed at a lower rate. There are many people, quite apart from Mr. Kaldor, who believe that capital gains should be taxed at the standard rate. Then there are those who believe that they should be taxed at the marginal rate, and certainly not at 25 per cent., much less at 30 per cent.
    My right hon. Friend the First Secretary has been working hard to bring in
    306
    an incomes policy. All he asks is that we provide the conditions in which he can succeed. The Amendment will have precisely the opposite effect. It will undermine the work done by my right hon. Friend. I have tried to carry both sides of the Committee with me. If hon. Gentlemen opposite do not want a bipartisan approach, we do not mind. What we are trying to do is to push forward the tax frontiers from the incomes arena into the area of capital gains.
    I am sorry to see Liberal Members joining forces with the Conservatives to push back this tax frontier, especially when I look at the Liberal benches and see there four or five Members who represent constituencies which depend more than most on public funds.
    The Temporary Chairman: Order. The hon. Member is travelling very far from the Amendment. There is nothing in it about public funds.
    Mr. Duffy: I shall come back to the Amendment, Mr. McInnes.
    Mr. Lubbock: I wonder whether the hon. Gentleman would care to correct one statement? He said that the Amendment represented Liberals joining forces with the Conservatives. The hon. Gentleman will be aware that the Amendment is in the name of my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) and five of my hon. Friends.
    Mr. Duffy: In that case, I correct my statement and say that Conservative Members have joined forces with the Liberals. I hope that the hon. Gentleman is just as uncomfortable. The point is that we would have expected Liberal Members to join us in pushing the tax frontier forward into the area of capital gains.
    Mr. Gower: Would not the hon. Gentleman agree that on 11th March of last year, the present Chancellor of the Exchequer, when he was in Opposition, said that increased taxes meant increased prices, and, therefore, that the taxes which we are now discussing must mean increased prices? Increased prices, as the Chancellor has indicated, mean inflation, and therefore is it not the Government who are creating conditions in

    307
    which an incomes policy cannot, and will not work?
    Mr. Duffy: I do not accept that. We are trying to slow up the rate of inflation, and get down prices. This will eventually get down costs. We are trying to do precisely the opposite to that suggested by the hon. Gentleman.
    For years, hon. Members on both sides of the Committee have had to accept the position described by the hon. Gentleman. Now, by this Clause, and by Part III of the Bill, we are trying to create a different situation. We are trying to create conditions to enable a new start to be made, and my main concern is that a Liberal Member above all should have been responsible for introducing an Amendment such as this.
    7.0 p.m.
    Sir Harmar Nicholls: One of the ironies of this debate is that the hon. Member for Colne Valley (Mr. Duffy), of all hon. Members, should talk about a bi-partisan approach when his whole argument and the way in which he presented it was more certain than anything to split the Committee into splinters. Hon. Members of the Liberal Party and of the official Opposition have been trying to argue in the interests of the prosperity of the country. If the hon. Member wishes to advance good conditions for working people and small businessmen he must know that the general prosperity of the country must be maintained and allowed to grow.
    It is the belief of those of us on this side of the Committee— on this occasion both of the official Opposition and of the Liberal Party—that this rate of Capital Gains Tax will interfere with the prosperity of the country. That is an argument which can be well sustained. Perhaps the most significant part of the debate is that the hon. Member for South Ayrshire (Mr. Emrys Hughes) a past master at producing alibis to create a diversion when his right hon. Friends are in trouble, could not produce an answer to our plea. Even he had to be called to order and to resume his seat rather sooner than we would have expected.
    The hon. Member for Caithness and Sutherland (Mr. George Y. Mackie), who moved this Amendment, had a first-
    308
    class case. The Treasury Bench could use this as an opportunity to make one of the concessions which were hinted at last night. It would be in the interests of the Government for them to do so. I support the hon. Member who moved the Amendment. I do not think we can divorce the rate of Capital Gains Tax from the general rate of tax at the highest level. Those on the Treasury Bench should take into account the most significant point, that if they are thinking of putting up the tax to the highest possible level that should not be done without bearing in mind that the same sort of people are already taxed at the highest level in the world. The fact that the existing tax is so high ought to cause the Treasury Bench to be more reasonable when inserting a figure for the rate of the new Capital Gains Tax.
    We are not at the moment arguing the principle of a Capital Gains Tax. Some of us could do so, but that is not the point of the present Amendment. That is the rate and that is in the hands of those on the Treasury Bench. I hope they will take advantage of the opportunity to alter it. I said that the prosperity of the country was involved, and I believe it is. The continued growth of the country depends on the credit of this country remaining high in the world. For good or bad reasons—there may be different views on how we arrived at this position—our credit in the eyes of the world is pretty low. One of the reasons why the credit of the country has fallen in the eyes of the world is that the Government have given the impression that they are extreme in putting penalties on private enterprise.
    One hon. Member has said that he is prejudiced against private landlords. Others have given a hint that they have to be careful about the hands which feed them and that there is a special obligation on private enterprise to agree with the Government when their own experience tells them that they should not agree. I think that everyone would agree that 30 per cent. is undoubtedly the highest possible figure that could be thought of for this tax rate. If the Government want to give the impression that they value the country's credit in the world and have not a prejudice against private enterprise or an extremist approach, they ought to

    309
    retreat from the highest possible figure that can be thought of.
    Whether or not 25 per cent. is the right answer, or 15 per cent. which has been suggested in another Amendment, I should not be prepared to be adamant about at the moment, but I am certain that 30 per cent. will give the impression to the world and to people on whom we rely for credit that the Government have a prejudice against private enterprise. The existence of this figure in this Clause will add fuel to that fire and undermine the confidence which we need so much. I wish to make a bipartisan appeal which perhaps has a better chance of succeeding than that made by the hon. Member for Colne Valley. Now that the general principle of a Capital Gains Tax has been accepted, we ought to get together to see what figure would disabuse people of the idea that this Government are prejudiced in this way. I think they should agree that 30 per cent. is wrong. I urge the Government, in their own interest, in the interests of their image and the great efforts they are making, to re-establish the credit of this country following the mistakes they made earlier, to accept the Amendment.
    Mr. W. Baxter: I have listened to many speeches, but the one which I have just heard beats them all. The hon. Member for Peterborough (Sir Harmar Nicholls) suggested that a good case could be made for having no Capital Gains Tax. That point has been put forward by a great many hon. Members opposite. They are extremist in a matter such as this, for very few people believe that there should not be a Capital Gains Tax. The right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) originally introduced a Capital Gains Tax and he was greatly criticised by many members of the Conservative Party, but members of the public thought that he was doing a good job.
    The hon. Member for Peterborough congratulated Liberal hon. Members on being so sensible as to suggest that the tax rate should be reduced from 30 per cent. to 25 per cent. I counsel the Liberals that they would be well advised to consider very carefully praise coming from such a source. It is better that they should look at themselves in the mirror before they accept that praise at its face
    310
    value. The Liberal Party, I understood, were motivated from time to time—
    Mr. George Y. Mackie: On a point of order, Mr. McInnes. Has the Liberal Party, its history and the fact that it might look into a mirror anything to do with this Amendment?
    The Temporary Chairman: The history of the Liberal Party is not involved in this Amendment.
    Mr. Baxter: The hon. Member for Peterborough made the point that he was more or less in agreement with the sentiments expressed by the Liberal Party and I think I am entitled to reply to his remarks. He went on to congratulate on his sensibility the hon. Member who moved the Amendment. That hon. Member referred especially to Germany, Japan and America. I do not think a great deal of historical background is needed to understand the reasons why America, that great country of untold wealth, is able to keep its capital gains tax at a rate of 25 per cent. It is not difficult to appreciate why America can do that instead of having a rate of 30 per cent. It has had great advantages over this country in the last 50 or 60 years. Hon. Members opposite fail to recognise the reasons why heavy taxation is essential in this country. Perhaps I ought not to tell them, if they are so stupid as not know—but I will mention it in case they can derive some interest from it.
    Mr. David Steel rose—
    Mr. Baxter: Have patience! I am not running away. I would remind hon. Members that we have an expenditure of £2,000 million on defence.
    The Temporary Chairman: The Amendment has nothing to do with expenditure on defence or anything of that kind.
    Mr. Baxter: The hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) and the hon. Member for Peterborough spoke about comparisons with Japan and Germany. They introduced the question, to which the Chair took no exception. I am only explaining the reason why this is so.
    The Temporary Chairman: Order. The hon. Member is ignoring the fact

    311
    that what the hon. Members referred to was the expenditure involved. That was the difference.
    Mr. Baxter: I mentioned expenditure. That is the very word I mentioned. At any rate, I have said sufficient to convey the purport of my argument.
    Sir Harmar Nicholls: The hon. Member has made his point quite clearly. He was suggesting that it was wrong, for all all sorts of reasons, to compare the growth that has taken place in Germany and Japan with the situation here. He should remember that for two years before the election, and during the election, his party was quoting the improvements that had taken place in those countries as compared with what had happened here. One reason for the improvements is the fact that those countries acted more sensibly in matters such as this.
    Mr. Baxter: The reason why they are acting more sensibly than we are is that they do not have the defence expenditure that we have. That is the simple explanation—but I do not want to go into that because I do not want to come into conflict with the Chair. I would direct the attention of the hon. Member to a matter which has caused some concern among hon. Members opposite, relating to workers paying their share, and to inflation being caused by their receiving increases in wages. My hon. Friend the Member for Colne Valley (Mr. Duffy) tried to show that in the matter of capital gains, businesses have received more than their share. Why is that? It is because whenever prices rise the assets of businesses increase in value—and over the last 20 years they have increased in value more than wages have increased. That is why so many capital gains have been made. The assets of businesses have risen owning to the inflationary nature of business operations throughout the world. More than one company—and I am sure that many hon. Members know the names of some of them—has given away considerable amounts in bonus shares, and has made considerable capital gains. Am I to understand that those capital gains are the only forms of revenue or money which should not be taxed?
    I have a considerable experience of people who are subject to P.A.Y.E. There is no method by which they can "do"
    312
    the inspector of taxes and become the sort of tax dodger that a business man can become. There is no method by which the smaller employee in a firm, or the ordinary worker in a firm, can dodge the inspector of taxes through P.A.Y.E.
    I would tell hon. Members who speak about the tax dodgers in the business world, and the fact that there will be a greater temptation for them to dodge if this tax is levied at 30 per cent., that they are doing a disservice to their business colleagues and to British industry—a greater disservice than they appreciate, because the workers of this country are getting it straight from the horse's mouth—the business men's representatives—that ways and means will be found for business men to dodge this tax if the rate is 30 per cent.
    7.15 p.m.
    Mr. Webster: The hon. Member has said that in the building industry it would not be possible for the employees to dodge paying taxes. Is not he aware of the Report of the Public Accounts Committee which said that a considerable amount of tax evasion was practised by people employed in that industry by registering themselves falsely as self-employed, thereby avoiding P.A.Y.E.?
    Mr. Baxter: If that should happen[HON. MEMBERS: "It does."]—I will concede the point, if it satisfies everybody—only a very small percentage is involved. I employ more than 500 men, and this sort of tax avoidance has taken place only to a minor degree, in my experience. The cases concerned are in the bricklaying industry. I know a little about this matter. I do not condone the practice, but I can say that only a very small percentage is involved. I repeat that hon. Members who talk in this way are doing a great disservice to the business community. I will now give way to the hon. Member for Roxburgh, Selkirk and Peebles (Mr. David Steel).
    Mr. David Steel: The hon. Member has gone so far past the point that I wanted to tackle him on that I have no wish to interrupt him now.
    Mr. Webster: I hope that if the hon. Member has been made aware of instances of tax avoidance he has reported them to his hon. Friend the Chief Secretary.
    Mr. Baxter: I have come across one or two cases. These people carry out jobs on the "grip" principle. Those people are always reported to the inspector of taxes. The grip principle is almost a sub-contract to build a complete house for £X. It is true that some of these people can dodge the inspector of taxes for a short time, but in the long run he catches up with them.
    The Temporary Chairman: Order. I find it extremely difficult to appreciate the point which the hon. Member is making. The Amendment relates to the rate of Capital Gains Tax and the question whether it should be reduced from 30 per cent. to 25 per cent. I ask the hon. Member to confine himself to the terms of the Amendment.
    Mr. Baxter: I hope that I am a reasonable man. If I give way to hon. Members in order to allow them to ask me questions, and in replying depart from the strict rules of order, I hope that I may have your indulgence, Mr. McInnes, at least in replying. It would not be fair to the general public if it should get about that a question was asked of me and I failed to answer it. I do not want to delay the Committee further than to say that I deprecate party capital being made out of such an important subject.
    I have as great an interest in capital gains as anybody else. I have as great an interest in business as anybody else. But I have a greater interest in justice than in anything else. It is the justice of the case which should rule the motive behind the Amendments. I suggest for the consideration of Liberal Members that they should not get bogged down in trivialities about a shilling in the £; if they get bogged down at all they should get bogged down in the principles on which the Liberal Party was built in the past. The Liberals have given a great deal to this nation, but they are being hoodwinked for a little "pot of potash"—[Interruption.] That is a braw Scots expression. That is how we use the expression in Scotland, but I will use the proper term—a "mess of pottage." I apologise if I used a Latin phrase—or whatever it may be—with a Scottish accent, or a Scottish emphasis.
    The facts, irrespective of how one says it, cannot be denied. It is a regrettable
    314
    fact that the members of the Liberal Party should be so closely associated with the Tory Party on a simple question of justice. The justice of the case is that all tax on income, be it income subject to a Capital Gains Tax, or income subject to Pay-As-You-Earn, should be paid in an equitable and fair manner. It is our belief that 30 per cent. is not too much to impose on money which has not been earned by the sweat of the brow or the exercise of the muscles of the arms.
    Mr. Lubbock: I do not think, with respect to him, that the hon. Member for West Stirlingshire (Mr. W. Baxter) has read the Amendment at all. We were vastly entertained by his speech and I am sure everyone enjoyed listening to him, but may I point out to him that in this Amendment we are not proposing to evade charging a Capital Gains Tax altogether. Most of his remarks seemed to be addressed to that proposition, that is when he was in order—which was not very often during his speech, if you, Mr. McInnes, will allow me to say so.
    We propose a moderate reduction from 30 per cent. to 25 per cent. and I cannot imagine how it can be said that we are trying to make party capital out of that. The hon. Member advised us to be careful about the Amendment which had the support of the hon. Member for Peterborough (Sir Harmar Nicholls). The hon. Member seemed to think that in some way this support should make us think again about the Amendment. I might have taken his advice, had it not been for the intemperate opposition of the hon. Member for Colne Valley (Mr. Duffy). That made me hold even more fast to the Amendment than otherwise. I thought that the speech of the hon. Member for Colne Valley was absolutely disgraceful, particularly when he condemned the constituencies of my hon. Friends for being the recipients of public funds. He said that in some way this should inhibit us from talking about the machinery of taxation of the whole country. If the hon. Gentleman thinks carefully I am sure that he would like to take back that remark. Like the rest of us, surely, he is a supporter of the Government's regional policy of encouragement to industry to go to areas such as the north of Scotland where are the constituencies represented by my hon. Friends.
    Mr. Duffy: I am surprised at the hon. Gentleman. What I said I can remember clearly and I am sure that I have the support of my hon. Friend. I said that four of the five hon. Members of the Liberal Party who occupy the benches opposite at this moment represent constituencies which are largely dependent on public funds. That is no reflection on the constituencies, it is no reflection on the hon. Members. It only bears out—
    The Temporary Chairman: Order. I have already ruled the hon. Member out of order for mentioning the question of public funds. We are not discussing public funds.
    Mr. Lubbock: I am grateful to you, Mr. McInnes, for pointing to the irrelevance of the remark. I wish to point out to the hon. Gentleman that his constituency will have one thing in common with those of my hon. Friends—at the next election it will be represented by a Liberal Member.
    The hon. Gentleman made great play with the comparison between rates of tax on capital gains and those on income. He spoke of the workers paying direct taxation on their incomes at higher rates even than the 30 per cent. provided for under the Bill. I invite the hon. Gentleman to think again about this. The maximum rate of direct taxation, even after the increase imposed by the present Government, is, as he knows, 8s. 3d. in the £. The people to whom he was alluding would be entitled to the earned income relief of two-ninths which would make their marginal rate of taxation at the top end of their income 31·9 per cent., and I suppose that the hon. Gentleman is just right in saying that their marginal rate is higher than the actual rate of the new Capital Gains Tax.
    Has he considered—as his hon. Friend the Chief Secretary has not—the effect of double taxation on many people who are to pay this Capital Gains Tax? I do not wish to return to the Amendment which we have already discussed, except to say that I think it relevant, in considering the rate we are going to impose, that some of the capital gains will have already incurred tax at the rate of 35 per cent. I am not certain whether the Chief Secretary was being obtuse or whether he did not want to understand the point. I think he is a highly intelligent person and
    316
    probably did not want to understand that if a person is the owner of shares in a business, and the business realises a capital gain, on the disposal of assets the tax would be at 35 per cent.; and that if the shares were subsequently disposed of or the gains realised in some other manner, or were deemed to have been realised by reason of provisions with regard to trusts which we have not yet discussed, taxation would be paid on those shares realised, or deemed to have been realised, at the rate of 30 per cent. which we are discussing. Therefore, the maximum rate of taxation which may be paid by the individual is 54½ per cent. and not 30 per cent. at all. I do not suppose that many of the workers to whom the hon. Gentleman was referring are paying super tax at a high enough rate to bring up their marginal rate to 54½ per cent.
    Mr. A. Woodburn: I am very interested in the argument which the hon. Member is advancing. If the Chancellor is to
    acquire a given sum of money to pay for the services that everyone demands, and if there is a reduction of 5 per cent. in this respect presumably someone will have to find the difference. Can the hon. Gentleman suggest who should pay the difference?
    Mr. Lubbock: The right hon. Member for Clackmannan and East Stirlingshire (Mr. Woodburn) has been a Member of the House long enough to know that I should be absolutely out of order in referring to what other taxes might be adjusted in order to compensate for the loss of revenue which the acceptance of this proposal would entail. Perhaps the right hon. Gentleman might like to consider the taxation of betting, if I may be allowed just to mention that. I will not go into it in more detail.
    The other point I wish to make concerns the effect of inflation. I have pointed out that it is possible for a person to pay 54½ per cent. tax on capital gains whereas the marginal rate at the top end of income, unless a person pays Surtax, is only 31·9 per cent. If assets are held over a period of time the 30 per cent. will be paid—[Interruption.]—if the hon. Member for Colne Valley wishes to intervene I shall be only too happy to allow him to do so, but I wish that he

    317
    would not keep interrupting from a sitting position.
    Mr. Duffy: I was merely saying that the hon. Member's argument, so far, has been conducted on his own assumptions which I certainly do not accept.
    Mr. Lubbock: I do not know what the hon. Gentleman means. Perhaps he would care to listen to me, instead of muttering under his breath.
    I am talking about the effect of inflation. I hope that the hon. Gentleman understands what inflation is. It is something that we have experienced ever since the war, and before the war. I do not think that the Chief Secretary will tell me that suddenly in the Socialist millennium into which we have advanced inflation will cease abruptly. Therefore, suppose one acquired an asset today and disposed of it after 10 years. Obviously, it would be worth more in terms of £ notes. That might represent no increase in the real value of the asset on which 30 per cent. tax is to be paid. I wish to point out to the Chief Secretary, it may well occur to him, that the increase in the value of the asset in money terms is exactly the same as would be necessary to bring that value up to the terms of the 1965 £.
    Mr. Chapman: Will the hon. Gentleman repeat that? I have not gathered what he meant.
    Mr. Lubbock: I will try to put it into other words. Let us take some figures. Let us consider an asset worth £1,000 today which is disposed of in 1975. Then the asset is worth £2,000. That is what the holder would actually get for it. Let us say, for the sake of argument, that the £ has decreased in value to 10s. during the intervening period. Although the holder may have made a gain of £1,000 in money terms, the real purchasing power of the cash which he receives when he disposes of his asset is no greater than it was in 1965. He will have to pay £300 in tax on the disposal of this asset. I do not think that the Financial Secretary will seriously dispute my arithmetic. This is one reason that we say that the 30 per cent. rate is much too high. If the Financial Secretary can assure us that the rate will be modified to take into account the effects of inflation—we shall be dealing with Amendments on that sub-
    318
    ject later on—it would make a great deal of difference to my thinking and that of my hon. Friends on this subject.
    7.30 p.m.
    I would point out to the hon. Member for Colne Valley that inflation hits the worker as well as the capitalist. The trade unions have large funds invested in equities, on which they will pay Capital Gains Tax. I am not talking about pension funds. I am talking about their reserves, the balances which they hold against contingencies. They will pay 30 per cent. Capital Gains Tax on any realisation of those funds, even though they do not on the pension funds. [An HON. MEMBER: "They are not grumbling."] Naturally, they are not grumbling, as the hon. Member says. If they are grumbling, it is behind the scenes. For all we know, they may have gone to the Chancellor of the Exchequer and pointed out to him the effects of this tax on their funds, but I think that it is obvious that we should not expect them to come forward and make these points in public.
    The hon. Member for Peterborough asked whether the Government were prejudiced against private enterprise, and several hon. Gentlemen opposite said, "Of course not: this is rubbish." I say to those hon. Gentleman that this is a chance for them to match their deeds with their words. If they are not prejudiced against private enterprise and believe in the expanding economy which they say they want to see, let them accompany us into the Lobby on this Amendment.
    Mr. MacDermot: We have had a very full debate on these Amendments, lasting over an hour and a half. Perhaps it would be helpful if I were to state the Government's position. The question which we are considering is what should be the flat rate, as we have accepted that there should be a flat rate, of a Capital Gains Tax. We are all agreed, I think, that it should be a reasonable figure, but that does not get us much further. The hon. Member for Peterborough (Sir Harmar Nicholls) who, I am sorry to say, is not here, suggested that the figure which we have chosen of 30 per cent. is the highest possible figure which could have been thought of. I assure him that that is not the case. Higher figures were

    319
    thought of. There are very strong arguments and very good economic arguments for saying that the flat rate of Capital Gains Tax should be—that there would be advantages if it were—approximately the same as the flat rate of Income Tax or Corporation Tax.
    There are balancing factors and considerations here, and very few hon. Members who have spoken have attempted to weigh up what the different considerations are which one should have regard to in deciding the right level of tax. When one accepts the principle, which I think is now basically accepted—it is accepted by the Opposition—that one should have a long-term capital gains tax, and if one accepts that the reason is that it is not right for some sections of the community to increase their wealth free of tax, whereas others have to pay tax on all increases which they receive, in principle there is an argument for saying that the flat rate should be related closely to the standard rate. That is not what we have done, and there are good reasons for it.
    Mr. Heath: While the hon. Gentleman is dealing with that point, is he referring to real wealth or to notional wealth?
    Mr. MacDermot: I am referring to spending power as between different sectins of the community, judged in terms of money. If people increase their money incomes, whether they do so in the form of wages or capital gains, they have an increase in spending power. That is the basis of their taxable capacity. It is not right that one group of people should be able to increase their spending power and go free of tax, and that principle is accepted now by hon. and right hon. Gentlemen opposite—
    Mr. Heath: No.
    Mr. MacDermot: I thought that this was why they are accepting the principle of the Capital Gains Tax—
    Mr. Lubbock rose—
    Mr. MacDermot: I will develop this point a little further and then I shall be glad to give way.
    Mr. Lubbock: The hon. Gentleman is talking about spending power and he says that that means money. Of course, it means money as at a given date. Will he accept that and deal with the point
    320
    about the change in the value of money over a period?
    Mr. MacDermot: It is because I intend to come to the points—including that made by the hon. Member for Orpington (Mr. Lubbock)—and deal with all the arguments which have been put that I am not anxious to give way. If the hon. Member will have a little patience and see whether I meet the various points first, I suggest that it would save time. I am not one who tends to shirk giving way. I give way a great deal, but I find that I tend to waste time by giving way as much as I do—[HON. MEMBERS: "Hear, hear."]. At least there is one point on which the whole Committee seems to agree with me.
    I suggest that, when we are approaching the question of rate, we have to see that the rate is not so low that it would give an undue concession to the wealthier taxpayer and defeat the object of achieving greater social equity, which is one of the main objects of the tax. Let us bear in mind that, for the person in the higher Surtax brackets, the rate of 30 per cent. is a very low rate and is a very great concession.
    Mr. Peter Walker Mr. Peter Walker indicated dissent.
    Mr. MacDermot: Perhaps the hon. Member for Worcester (Mr. Peter Walker) will listen to the figures. The rate of tax for a person at the highest rate of Surtax on an investment income of over £15,000 is 91¼ per cent. It is those people who make the largest and most regular capital gains. They will be taxed on those capital gains at a rate of only 30 per cent. If that is not a valuable concession, if that is not a low rate for them, I do not know what is. If this is not to be a contemptible, ridiculous and derisory rate, it has to be one which does not give an undue concession to people of that kind.
    I suggest that we must see that there is not too great a disparity between the rate of the Capital Gains Tax and the standard rate of Income Tax, so as to reduce the inducement which always exists to dress up income as capital. That again, hon. Members will remember, is one of the main objects of the introduction of a Capital Gains Tax.
    There are arguments put forward the other way, for not setting the rate of tax

    321
    too high. One referred to by my right hon. Friend in his Budget speech was that one must bear in mind that there will be cases where people of moderate income will be realising in one year gains which have been accumulated over many years. Therefore, if they are to pay taxes in that one year at a rate which is too high, this could have a penal effect. The hon. Member for Barry (Mr. Gower) called attention to one case in which this could obviously operate more harshly. I shall not deal with it at any length, because it is the subject of a later Amendment. That is the case of the small businessman who, at the time of retirement, disposes of a business which he has built up largely by gains over a long period, and into which he has put a good deal of his own work. He is not comparable with somebody who receives a gain which is a purely passive matter, an investment which has appreciated in value without his making any contribution. I would ask the Committee to wait with patience—I hope that we do not have to be too patient—until we reach the appropriate Amendment.
    There is also the argument which was put forward by the hon. Member for Shipley (Mr. Hirst) that if we have a higher rate, it will be a discentive to switching. I do not feel very impressed by these arguments, because unless the motive is tax avoidance, as Capital Gains Tax should have no effect on the volume of switching.
    Some switching of course takes place for that reason, but the reason is that the tax takes only a proportion of the gain. If a man wants to sell a security he does so because the price of it has fallen or because he wishes to buy another. If it pays him to do that without there being a tax it will equally pay him to do it if there is a tax. The tax can only reduce the net gain from the switching. It cannot convert it into a loss or remove the incentive to switch.
    A lot has been said about examples in America. In the American Capital Gains Tax system there is what is known as the "death gap". It means, in effect, that death is not an occasion for tax. It is an inducement, which will not operate here, to lock in securities so that at death there can be a realisation without any liability to tax. Despite that, the amount of switching in Wall Street in proportion
    322
    to the value of outstanding issues is larger than in London—that despite the fact that the Americans have always had a Capital Gains Tax of this type.
    Mr. Hirst: But not at this rate.
    Mr. MacDermot: I will be coming to that. I suggest that there is not a great deal in this argument about locking in and switching, although it is an argument which has been put forward for not having too high a rate.
    Then there is the argument of inflation. It is said that the inflation element in long-term capital gains is another reason for not having too high a rate. I do not for a moment suggest that there is no force in that argument. I agree that it is a factor which must be taken into account when having regard to the rate, but let us remember, when considering the inflation argument, that it ignores the fact that holders of ordinary shares and real property are bound to gain at the expense of other classes of the community from the very process of inflation.
    This happens because in times of inflation the share of profits in the national income is greater as the real value of contractual debts and incomes is gradually wiped out. So wealth is transferred from the owners of contractual debts to the owners of real property and equity capital. Thus, while it is true to say that in times of inflation the real gain is less than it is otherwise, an offset factor is that the real gain itself is enhanced as a result of the inflation.
    Inflation causes a redistribution of wealth in favour of equity owners, so it is a poor argument to say that equity owners are treated harshly if they are taxed on their capital gains. It is the people with contractual incomes who lose in the process of inflation, including old-age pensioners, other pensioners and wage earners. Even those whose wages may keep pace with rising prices have to pay a larger part of those wage increases in taxation if personal allowances and reduced rates are not adequately adjusted. If we are to start making allowances for the effects of inflation, I suggest that, on any reasonable scale of social priorities, that process should snot begin with the owners of equity capital.
    Mr. Lubbock: What the Financial Secretary says may be true of equities

    323
    in general, but it is not true of particular equities. It cannot be true of the holders of dated gilt-edged securities—for example, the person who buys a security for redemption in 1970 and on which there may be a money gain completely inadequate to compensate for the fall in the value of money.
    Mr. MacDermot: The hon. Gentleman is arguing from a different standpoint, on something which is the subject of a separate Amendment, to which we will be coming. What I am saying applies broadly over the whole sphere of capital gains. As I said on Second Reading, we could not accept the idea of inserting into the tax system a built-in hedge against inflation, nor do we think that it would be desirable to do so. Balancing these factors together, we feel that 30 per cent. as a basic flat rate is about right.
    7.45 p.m.
    There remains the argument, about which we have not heard a great deal, that the 30 per cent. rate could, in certain circumstances, bear harshly on the small man. Perhaps we tend to talk too much about the "small man". We should also include in our consideration the man of moderate means who is, perhaps, a small investor, including the young manager, the young executive, the young technologist and the young professional man. These are men of moderate means who, from time to time, make some capital gains and for whom it might be thought the rate of 30 per cent. is too high.
    I remind the Committee that 30 per cent. is only the flat rate and that for the vast majority of taxpayers, when they have occasion to pay tax on a capital gain, they will not pay at that flat rate. It will be to their benefit to adopt the alternative basis of charge. That will be a lower rate; in some cases considerably lower than 30 per cent. What the rate will be on the size of the gain will depend on the individual's marginal rate of tax.
    Several things are quite clear. Consider the effect of the alternative basis of charge for anyone who is liable at less than the 45 per cent. rate on his marginal rate of tax, including Surtax if he is a Surtax payer. On the top slice of his income
    324
    it will be to his advantage to adopt the alternative basis. He will pay at a lower rate than 30 per cent. on capital gains.
    I gave the example on Second Reading of the way in which this would work. I spoke of a married man earning £5,000 a year with two children and with an unearned income of £200 a year. The alternative basis would be to his advantage if his gains did not exceed £600 in any year. That is an example of the extent to which advantage could be taken of the alternative basis.
    Mr. Peter Walker: If someone pays the standard rate of Income Tax this concession will, I take it, reduce the amount from 30 per cent. to 27½ per cent.
    Mr. MacDermot: If the person's marginal rate of tax is the standard rate, then what the hon. Gentleman says is correct.
    In dealing with the really small man, who gets brought into these arguments so much, I remind the Committee of the effect of the alternative basis and the fact that there cannot be a situation in which an individual will be paying tax on a realised gain while at the same time having any unused balance of his Income Tax allowances. To the extent that those allowances are not allowed against his other income, they will go in relief of his liability to pay tax on his capital gains.
    We were urged to start at a low level. I remind the Committee that this will operate at a low level for a considerable time to come because we are taxing gains as from Budget day. The result is that the
    gains which will fall liable to tax for some time to come will themselves be small gains. This is another factor which must be taken into account in assessing the right rate. If the gloomy prognostications of hon. Gentlemen opposite are proved right, then there will be plenty of time in which to adjust the rate. We have had to fix our judgment on what we think—not just in the immediate future, but on what we have been advised from the long-term point of view—is about a right, balanced and fair rate.
    As to the cost of the concessions which have been suggested, the Liberal Amendment, which calls for the relatively modest reduction from 30 per cent. to 25 per cent., would, by the time the tax

    325
    builds up to the full yield, cost about £20 million. That is the estimated cost of a reduction of 5 per cent. as proposed in that Amendment. The Opposition Amendment, which suggests a rate as low as 15 per cent. would, at the time of full yield, mean a reduction of £45 million in the yield of the tax.
    Mr. Heath: How many years ahead is the full yield?
    Mr. MacDermot: I do not have an estimate of when that is expected to be achieved, but I will ascertain it and let the right hon. Gentleman know. As the tax is only starting from Budget day, it is expected that the yield in the immediate future will be small, so the cost will be very small. It is estimated that the cost of the 15 per cent. rate in 1966–67 would be about £3 million—
    Mr. George Y. Mackie: The hon. and learned Gentleman is getting on to the question of yield, but he is missing out my main and substantial point that this is the highest rate in the world.
    Mr. MacDermot: Perhaps hon. Members will have patience.
    I come finally to the argument that we are advocating a high rate compared with that in other countries. I suggest that the only country with which it is reasonable to try to make any fair comparisons at all is the United States of America, because the other countries that have been mentioned have such very different capital gains system from ours that no comparison is helpful. In Western Germany, for example, capital gains arising in the course of business are taxed as normal business income, and this is the position in very many other countries. Therefore, the burden on business incomes in most of those countries is very much higher than the 30 per cent. rate. In Germany, there is, in addition, a wealth tax of, I think, 1 per cent. That is on the wealth of individuals. I therefore do not think that the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) will find much comfort from the experience of West Germany in arguing that this is a very high rate of tax.
    In Japan, individuals are taxed on normal rules at one-half on capital gains, and a special deduction of about £150.
    326
    The top rate is 75 per cent. on excess over £60,000. It is quite a different system from ours. The rate reaches 60 per cent. on excess over about £20,000. Corporations usually pay at normal rates on the full gain, and their top rate is 38 per cent. There, again, it would appear that businesses pay a higher rate. Sweden has a different system—a flat-rate system is not worked there.
    It was mistakenly suggested in our debate yesterday that the Americans have a tapering system, but they do not. They tried it in the 'twenties, and abandoned it. Their rate is 25 per cent., but I would remind the Committee of what I said at the outset about how we must relate our capital gains tax rate to our general rates of personal taxation. American rates of personal taxation are lower than ours. Their maximum rate is 70 per cent. on the top slice of investment income exceeding £35,700 a year. That compares with the figure I gave of 91¼ per cent. for investment income exceeding £15,000.
    When we bear in mind that the alternative rate exists for people of moderate means—and exists under both the American system and our system—and when we consider that the chief beneficiary of the low flat-rate tax is the Surtax payer, I suggest that if 25 per cent. is fair and reasonable in relation to the American maximum of 70 per cent., a rate of 30 per cent. is very moderate in relation to our maximum of 91¼ per cent. —
    Mr. Heath: This is such an important point that I hope that the hon. and learned Gentleman can reiterate it, and clarify it. What he says is that because we have a very much higher maximum level of personal taxation than have the Americans it is only fitting that we should also have a higher rate of Capital Gains Tax.
    Mr. MacDermot: Of course it is—[HON. MEMBERS: "Oh."] Hon. Members can laugh as much as they like, but if the purpose of this tax is to secure social justice, to secure some equity, and to see that one lot of people do not get away with vast and regular increases of wealth, and if the second objective is to prevent incentive to tax avoidance by people dressing income as capital, neither of these objects will be achieved if we

    327
    make too great a discrepancy between the rate of tax that wealthy people pay on their income and the rate of tax which wealthy people pay on their capital.
    Let hon. Members remember—
    Mr. Hirst: We shall not forget it.
    Mr. MacDermot: —that the flat rate of tax will, by and large, only be paid by the Surtax payer. So before hon. Members go round frightening their constituents by saying, "These wicked Socialists think that because there is a high rate of taxation there must be a high rate of Capital Gains Tax," let them remind their constituents that what they call a right rate of Capital Gains Tax is something that will bite on the Surtax payers, for whom it may be a very low rate of tax—
    Mr. Gower: Does not this remind us that the Labour Party is the party of excessively high taxation?
    Mr. MacDermot: I gave way because I thought that the hon. Gentleman had a serious question to raise.
    I was asked how long it is expected to be before the full yield will be realised. The answer is 15 or 20 years.
    Mr. Webster: The hon. and learned Gentleman is invariably courteous to the House and is a very honest man. In our debate on the vehicle excise duty we had the clearest possible indication that he would like to see a very considerable rise in that duty for the private motor car, particularly the heavier car. Today I got the impression that he would also like to see a very considerable rise in the long-term Capital Gains Tax, if that is the correct expression. We have had a lot of stories about social justice as between shareholders and wage earners, but if we were to compare the percentage rise in wages over the last ten years with the percentage rise in 2½ per cent. Daltons we would see where the social justice lay. I am concerned to know how the Financial Secretary works out his assessment of what the total yield of the long-term Capital Gains Tax will be, because it seems quite clear that he takes the view that there will be a long-term inflation if the Socialist Party remains in office. We know that the Financial Times Industrial Index has not gone up nearly as much over, say, ten years as has the
    328
    cost-of-living index, the wages index or the National Insurance pensions index, so it is in the interests of accuracy and justice that we should try to get the matter fully into perspective.
    The hon. and learned Gentleman spoke of the cost of the Liberal Amendment and of the Amendment tabled by my hon. Friends, but I just do not know how he can make an assessment over a period of 15 or 20 years, and how much inflation there will be, because, on the short term of, say, the first 12 months after this Budget, I should think that there would be practically no net yield at all because there would be no capital gains, because there will be progressively, as the Budget and as this Finance Bill will show, a declining profitability in industry. There will be inflation and, eventually, unemployment. There will certainly be a decline in employment.
    It seems to me that the principle we have to get at here on a long-term case of capital gains is that the higher it is the greater the built-in interest of any Government to inflate the economy. We hear a lot of stories now about declarations of intent. We have heard a little less about declarations of intent during the last few weeks. The best way to ensure that there is a declaration of intent is to have as small a long-term Capital Gains Tax as possible.
    8.0 p.m.
    One of my jobs is to advise on investment. I did not dissent from the short-term Capital Gains Tax. I thought that it caught the speculator and the stag, who in many cases is a bit of a menace, although he does perform a service. At the same time, it improves investment techniques. If the value of equities, goods or chattels rises over a period when there has been a 100 per cent. or 50 per cent. rise in the cost of living and the owner, because of reduced circumstances, is forced to sell them, he has at the time of realisation to suffer a 32 per cent. Capital Gains Tax.
    We tend sometimes to misname my hon. Friend the Member for Barry (Mr. Gower) and refer to him by his own name because there is a peninsula so-called not far from his own constituency. My hon. Friend spoke about the shopkeeper. We had a few crocodile tears

    329
    from the hon. Member for South Ayrshire (Mr. Emrys Hughes), who asked how many shopkeepers were involved. Obviously the hon. Member has failed to listen to the debate on a previous Amendment, when attention was drawn to the situation in which a shopkeeper has to sell his shop and he has to pay a 30 per cent. Capital Gains Tax. If he forms himself into a company and has two shops, he must pay 30 per cent. and 35 per cent. This penalises the shopkeeper who profits, who does well and who saves his earnings, because, after all, that is what capital is. Hon. Members opposite are apt to forget that all capital is earnings which have been saved.
    We heard a good deal from the hon. Member for West Stirlingshire (Mr. W. Baxter) about P.A.Y.E. evasion. I was interested in that discussion. Later we shall discuss an Amendment on that subject. The hon. Member, speaking of evasion, said that he sought to assist the person who earns by the sweat of his brow. Whether it is by the sweat of one's brow or by the ingenuity of one's brain, it is hard work. Those who earn and save are the people whom we on this side, whether we are Liberals or Conservatives, are trying to protect. The best way to run the country is for every member of it to have a stake in it by having sound earnings, by being encouraged to save, and by being encouraged to invest in the companies in which they work, which is what is happening in the most enlightened companies. It is in this way that the people have a stake in the country. We believe in building a capitalist society—capital for all, not class war. Hon. Members opposite believe in the erosion of capital, in the withering away of capital. This is what will happen if there is a 30 per cent. tax on capital gains.
    Mr. Norman St. John-Stevas: I had not intended to intervene at this stage in the debate, but I have been moved to do so by the Financial Secretary's extraordinary speech. The hon. and learned Gentleman told the Committee a few moments ago that it was a great concession to the Committee that the rate of Capital Gains Tax should run at only 30 per cent. The presumption behind that extraordinary statement is
    330
    that we should be grateful that we are left with 70 per cent. of our property.
    Mr. MacDermot: I am sure that the hon. Gentleman does not want to misrepresent me. I did not say that it was a concession to the Committee. I said that to the Surtax payer at a top rate of Surtax who is paying regular capital gains it is a great concession that he is being taxed at only 30 per cent. on those gains.
    Mr. St. John-Stevas: I shall deal in a few moments with the question whether this is in fact taxing capital gains. The idea that it is a concession
    to anyone to have a rate of taxation of 30 per cent. imposed upon him suddenly shows a basic philosophy of confiscation which sheds the light of truth for a few moments on the philosophy behind the whole Budget. Some argument can be advanced for a confiscatory tax, but the idea that one should be grateful for a confiscatory tax is a montrous piece of Socialist impertinence.
    The second point in the Financial Secretary's speech which struck me as
    being extraordinary was his logic when he stated that, because we had a high rate of Income Tax, we should have a high rate of capital tax as well. This is a complete non sequitur, unless one thinks of high taxation as a good in itself. If one thinks of taxation, as we on this side do, as a necessary evil, the higher the rate of personal tax the lower the rate of capital tax should be if indeed there should be one at all. One can only conclude from the Financial Secretary's argument that the Labour Party is in favour of high taxation for its own sake. I hope that that will be noted by every potential saver, large or small, and particularly by those, especially young married couples who are starting out on life and who hope to save something in the course of it.
    The premise behind the Financial Secretary's argument seemed to be that capital and income should be equally taxed. This is called a Capital Gains Tax. As has been demonstrated by the hon. Member for Orpington (Mr. Lubbock), it is a capital tax, because the capital gain is a purely notional thing in the vast majority of cases, owing to inflation. In the past, inflation has averaged about 2 per cent. a year. We

    331
    have every expectation that in the future it will be higher, at any rate as long as the present Government are in power. It has been higher since they came to power. This so-called Capital Gains Tax is a tax on capital as such, although it is concealed as a Capital Gains Tax.
    The Financial Secretary said that he would advance some economic argument for the tax being at the rate of 30 per cent. I listened to his speech carefully, but I did not hear that argument. There are some arguments for having the tax at this penal rate. They are doctrinal Socialist arguments. They are certainly not economic arguments. Applying the principle of economics here, a basic Conservative principle which is also a
    good economic principle is that capital and income should not be equally taxed. This is because the capital accumulation in the country constitutes the assets of the nation as a whole. These assets may be held in private hands or in public hands, or there may be a mixed economy, as we have here, in which they are spread between the two. Whoever holds them, the nation as a whole benefits.
    On the whole, the nation benefits much more if capital assets are held in private hands than if they are held in public hands. What this tax at this high rate proposes to do is to convert the nation's capital assets into income which will be frittered away in current expenditure. If the record of past Labour Governments is anything to go by, the rate of frittering is likely to increase, rather than diminish, in the period of this Government. Therefore, I am opposed to this high rate of tax, because it is a tax which will penalise saving.
    The Amendment moved on behalf of the Liberal Party would to some extent limit the impact of the tax. Therefore, the Amendment is desirable up to a point. The hon. Member for Orpington demonstrated very convincingly why it was undesirable to have a tax at the rate of 30 per cent. He did not prove in any way that a tax at the rate of 25 per cent. was desirable. It seemed to me that every argument he produced against having a Capital Gains Tax at a rate of 30 per cent. applied equally against having a Capital Gains Tax of 25 per cent. For technical reasons, we are discussing the issue of principle on that
    332
    Amendment. There is an Amendment which has not been called which would seek to reduce the rate of tax to 15 per cent.
    Amendment No. 199 is a more desirable Amendment, because it is at least 10 per cent better than the Amendment which has been moved, but although I consider this Amendment an imperfect one it is at least a step in the right direction and I hope that the Committee will support it. I hope that we shall have the support in the Lobby not only of Conservative and Liberal Members but of perhaps some hon. Members opposite, including the hon. Member for Manchester, Cheetham (Mr. Harold Lever), who I know takes exactly the same view as I do on the principle of this tax. Unfortunately the hon. Member is not now in his place, but I hope that he will be back later to vote for the Amendment.
    Mr. Heath: I hope that the Committee will be prepared to bring this long, extremely interesting and important debate to a close. Everything that the Financial Secretary has said in reply to the Committee has reinforced what I said on Second Reading about the rate of tax. I said then that this tax, taking its rate and its comprehensiveness together, is the most severe of any long-term capital gains tax in the Western world. This is undeniably the case, and nothing said today has in any way altered that.
    We have to take the rate in the context of its comprehensiveness. We have to accept for the purpose of debate that the tax remains as it is in the Bill and that there are no exemptions therefore for chattels, as there are, for example, in West Germany and in practice in the United States. There is no tapering off as there is over 10 years in Sweden, as the Financial Secretary indicated. There is no exemption for gifts or transfer on death as there is in the United States, as again the Financial Secretary indicated. There is no allowance for inflation as there is in Denmark for real property. There is none of these things in the structure of the tax here. This is why, taking just the rate with its comprehensiveness alone, I believe that this tax is the most severe in the Western world.
    In addition, we have the phenomenon of the double taxation of companies. The Chief Secretary tried to argue that there

    333
    was complete separation of the company and the individual. The whole Committee found this entirely unconvincing. One of the problems that we are up against in discussing the Bill is that there is a complete difference of approach and analysis on the whole nature of Corporation Tax. This will make the last stage of the Bill even more difficult than the one which we are now going through. The Chief Secretary's premise has been undermined in that under the Bill special arrangements have had to be made to deal with such things as unit trusts and life policies, and in the indications in the Press, and from the Chancellor of the Exchequer when he moved to report Progress last night, that further special provisions may be made. If there is this distinction between the two, as the Chief Secretary argued, these special arrangements would not be necessary. It is because there is not a distinction that these special arrangements have been made and I believe that more will be necessary.
    Again, returning to the context of this tax, we have the special difficulty of the discretionary trust, the valuation every 10 years and the possible break-up of the trust to meet the Capital Gains Tax. This again makes it a more severe tax than it is elsewhere. Again, on death, apart from the death gap which the Financial Secretary indicated, we have the deduction from the capital of the estate before the estate pays death duties.
    Mr. MacDermot: And the £5,000.
    Mr. Heath: I accept that correction—plus the mount of the capital gains before Estate Duty is paid on the whole of the remainder of the estate. These are all aspects of the severity of the application of the tax and this makes the rate of 30 per cent. all the more important.
    8.15 p.m.
    When it comes to the special case mentioned earlier of an owner of a small business, we have a specific example of double taxation on the realisation of assets in the company and then by the owner when he himself realises the company. Again therefore the
    30 per cent. rate is of particular importance. The Financial Secretary kindly indicated that one of the concessions may possibly come on this point. We shall be delighted if it does.
    334
    We have the necessary Amendments ready now. But this again makes the point that a special concession has had to be made because of the effect of the Corporation Tax and the Capital Gains Tax when one comes to the individual who builds up his own business and wants to retire on the proceeds when he sells. This is a genuine case and only proves our earlier point. The Chief Secretary was not obtuse, as the hon. Member for Orpington (Mr. Lubbock) suggested, but was very ingenuous, again probably influenced by the Financial Secretary who was not here when that point was made.
    The rate of company taxation is moving to 64 per cent. Estate Duty is up to 80 per cent. Personal taxation goes up to 91 per cent. All of this is extremely heavy taxation—arguing at the maximum; because the Financial Secretary was arguing at the maximum—and to that must be added the 30 per cent. Capital Gains Tax. This makes it an extraordinarily severe tax in the context of these other figures, and this is how we should look at it.
    If one takes international comparisons, apart from the exemptions which I have already mentioned and which make a great deal of difference to the actual burden of the tax, in the United States the maximum rate is 25 per cent. In addition, the individual has the option of only 50 per cent. and not 75 per cent., which is the figure in the Bill. This for the individual is a great advantage. In addition, for all practical purposes chattels are excluded in the United States and transfers on death are excluded.
    Mr. MacDermot: We had this statement about chattels made yesterday with no evidence to support it. My information from our investigations is that all chattels there are subject to tax. The suggestion that the United States is ceasing to levy tax on chattels, which appeared in a leading article in one newspaper, is quite untrue according to my information.
    Mr. Heath: We did not take this from newspapers. We had a study made of the capital gains tax in a large number of Western countries. This provided a detailed examination of the operation of the tax in the United States. It is the best information that we have been able to obtain. This makes to the general

    335
    burden a difference of 25 per cent., and only 50 per cent. as far as the individual option on Income Tax is concerned.
    The Financial Secretary repeatedly says that we must tell our friends that this tax applies only to the Surtax payer. Apart from the question whether the Surtax payer does not also demand some consideration, is it not true as we said yesterday—and we were not contradicted—that this becomes operative at the unearned Surtax level which is £2,000 after adjustment for allowances? This is not a question of operating at the normal Surtax level as one thinks of the Surtax payer, but at £2,000 after making the necessary adjustments for allowances.
    Mr. MacDermot: It is quite right. It operates at Surtax level in the sense that it is treated as unearned income and the taxpayer earning £2,000 pays on unearned income. But many Surtax payers will still find it to their advantage to adopt the alternative basis, and I gave the example of the man with £5,000 earned income and £200 unearned income. He will be paying Surtax and it will still be to his advantage to adopt the alternative basis for gains up to the extent of £600 a year every year.
    Mr. Heath: It may be that it will be to the advantage of the person who is paying Surtax on earned income to adopt this procedure—
    Mr. MacDermot: And unearned.
    Mr. Heath: And unearned—yes, that may be; but it does not alter the fact that the level comes down to £2,000 and is not the normal Surtax level that one thinks of when the hon. and learned Gentleman refers to the Surtax payer.
    Mr. MacDermot: It is still to his advantage.
    Mr. Heath: It may be, but it still does not alter the fact which I have emphasised, and the hon. and learned Gentleman's suggestion that it will not be of any significance until one comes to the normal Surtax payer is, I suggest, not really accurate.
    As regards the international comparisons, what is important from the point of view of taxation as a whole is that no longer do people look only at the results of taxation in their own countries
    336
    in considering their future employment. When they were in Opposition, we heard a good deal from the Chancellor and his hon. Friends about the brain drain, about the movement of young executives, professional men, and so on. There is no doubt whatever that those who are trained and educated as executives and technicians, a very large number of people in this country or in any country of the Western world, will compare circumstances in different countries. In this respect, the level of this tax and its relationship to other taxes are of very great importance because they will affect the decisions of those who have technical abilities, degrees and specialised training in considering in which country they choose to make their future.
    It seemed to me—I put a question to the Financial Secretary and he was kind enough to refer to it—that his general approach is that, if one realises something which is normally regarded as an investment or an item of property, whatever it may be, there is no difference whatever between the proceeds of that and income. It is all spending power, and the main thing must be to tax spending power. Indeed, the hon. and learned Gentleman said quite frankly that he had considered taxing it at normal Income and Surtax rates as a long-term gain. He had examined that as a possibility.
    We cannot accept the view that, if one realises a particular item of property, a chattel or a security, the proceeds become spending power and they must be dealt with fairly severely. The Chancellor decided on 30 per cent., not as severe as Income Tax or Surtax, but this is not a general philosophy which we can accept. The Financial Secretary said that one must not give undue advantage to the rich. On the other side of the Committee, the whole of the debate
    has really been dominated by the person who is paying 91 per cent. and who is, apparently, making enormous capital gains every year. It cannot be good law to govern one's general decisions on the maximum case, yet this is what the Treasury Bench has done for so much of the time. When the Financial Secretary was dealing with Surtax levels, he spoke in terms suggesting that the whole of this was income. Again, I cannot accept that.
    On the question of switching, the hon. and learned Gentleman tried to prove

    337
    that having to pay 30 per cent. on a switch of security would not affect one's conduct at all. Not even his hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) who, I assure the Government, is doing his utmost to be loyal, could possibly accept the Financial Secretary's argument when he said that it would not affect switching. It is bound to affect one's judgment on whether to change from one security to another, and, if it affects the judgment of investors in this way, it will affect the capital structure and investment of industry as a whole. It is bound to do so.
    This has been the effect in the United States. United States industrialists or bankers will immediately tell one that a capital gains tax, even though it averages only 8 to 9 per cent. in the United States undoubtedly has an effect on switching and on the volume of investment in different securities, industries and companies. Plainly, a tax at 30 per cent., or much nearer 30 per cent. than 8 to 9 per cent., will have a considerable effect.
    The Financial Secretary made a point which was not really worthy of him when he gave the figure of £45 million in respect of my hon. Friend's Amendment and £25 million for the Liberal Amendment. When I challenged him, he said that this would not come about for 15 years. I do not think that he will pretend that we are being irresponsible in supporting the Liberal Amendment, having regard to a figure of £45 million in 15 to 20 years. In any case, it would be a very bold prophet who would try to foresee that far.
    The hon. and learned Gentleman's next argument will really come up on the Amendment which deals with inflation. I say only in passing that I do not accept the argument that, at times of inflation, it is the wage-earners and old-age pensioners who suffer and that those with investments gain. This is obviously much too broad a generalisation. Broadly speaking, State pensioners in this country, under the insurance scheme, have not suffered through inflation because the increases in pension under the last Administration—I take it that the hon. and learned Gentleman would argue even more strongly on what his Administration have done—have been greater than the
    rise in inflation. For wage earners, average earnings have risen faster than prices and inflation. All this is true.
    When the hon. and learned Gentleman says that contractual recipients suffer. I can only say that I think that those in receipt of controlled rents have probably suffered most since 1945, and some of those in receipt of contractual pensions from
    firms which have not been able to make them up have suffered. The great majority in the other categories have kept pace, and wage earners have more than kept pace.
    One comes back to the question which is really the crux of the matter, with which the hon. and learned Gentleman did not deal. If one has an investment of any kind which one has earned and saved and it keeps pace exactly with inflation, is it right that, if one exchanges it for another one, or in any of the circumstances visualised in the Bill, on death and so on, one should immediately lose 30 per cent.? I know of no intellectual argument to justify it. The hon. Member for West Stirlingshire (Mr. W. Baxter) said that the point on which he wanted to finish was justice. Where does justice lie in that case? We cannot go on talking about justice to wage earners when they have managed to maintain a position against inflation and when it is said, at the same time, that justice to a person who has property for which he has worked and saved and which maintains its position in relation to inflation requires that he shall lose 30 per cent. if he changes it or an event occurs in any of the circumstances covered by the Bill.
    This is the crux of the matter, and it is in this connection that the rate of 30 per cent. is so important. I hope that I have explained to the Committee why I believe that, in the context of the taxation system of this country as a whole, the comprehensiveness of this tax and its importance, this rate is too high and why I urge my right hon. Friends to support the Amendment put forward by the Liberal Party.
    Question put, That "thirty" stand part of the Clause:—
    The Committee divided: Ayes 178, Noes 169.

    Division No. 130.]

    AYES

    [8.29 p.m.

    Abse, Leo

    Allen, Scholefield (Crewe)

    Baxter, William

    Albu, Austen

    Armstrong, Ernest

    Bence, Cyril

    Allaun, Frank (Salford, E.)

    Barnett, Joel

    Bennett, J. (Glasgow, Bridgeton)

    Bishop, E. S.

    Hill, J. (Midlothian)

    Probert, Arthur

    Blackburn, F.

    Hobden, Dennis (Brighton, K'town.)

    Pursey, Cmdr. Harry

    Blenkinsop, Arthur

    Holman, Percy

    Randall, Harry

    Boardman, H.

    Howarth, Robert L. (Bolton, E.)

    Redhead, Edward

    Boston, T. G.

    Howell, Denis (Small Heath)

    Rees, Merlyn

    Bowden, Rt. Hn. H. W. (Leics S.W.)

    Howie, W.

    Reynolds, G. W.

    Braddock, Mrs. E. M.

    Hoy, James

    Rhodes, Geoffrey

    Bray, Dr. Jeremy

    Hughes, Cledwyn (Anglesey)

    Richard, Ivor

    Broughton, Dr. A. D. D.

    Hughes, Emrys (S. Ayrshire)

    Roberts, Goronwy (Caernarvon)

    Brown, Hugh D. (Glasgow, Provan)

    Hunter, A. E. (Feltham)

    Robertson, John (Paisley)

    Buchan, Norman (Renfrewshire, W.)

    Hynd, John (Attercliffe)

    Rodgers, William (Stockton)

    Buchanan, Richard

    Irvine, A. J. (Edge Hill)

    Rogers, George (Kensington, N.)

    Butler, Herbert (Hackney, C.)

    Jones, Dan (Burnley)

    Rose, Paul B.

    Callaghan, Rt. Hn. James

    Jones, J. Idwal (Wrexham)

    Ross, Rt. Hn. William

    Carmichael, Neil

    Jones, T. W. (Merioneth)

    Sheldon, Robert

    Carter-Jones, Lewis

    Kerr, Mrs. Anne (R'ter & Chatham)

    Shinwell, Rt. Hn. E.

    Castle, Rt. Hn. Barbara

    Kerr, Dr, David (W'worth, Central)

    Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)

    Chapman, Donald

    Lawson, George

    Short, Mrs. Renée (W'hampton,N.E.)

    Craddock, George (Bradford, S.)

    Lee, Rt. Hn. Frederick (Newton)

    Silkin, John (Deptford)

    Crawshaw, Richard

    Lee, Miss Jennie (Cannock)

    Silkin, S. C. (Camberwell, Dulwich)

    Cullen, Mrs. Alice

    Lever, Harold (Cheetham)

    Silverman, Julius (Aston)

    Dalyell, Tam

    Lever, L. M. (Ardwick)

    Skeffington, Arthur

    Davies, G. Elfed (Rhondda, E.)

    Lewis, Arthur (West Ham, N.)

    Slater, Mrs. Harriet (Stoke, N.)

    Davies, S. O. (Merthyr)

    Lewis, Ron (Carlisle)

    Small, William

    Delargy, Hugh

    McBride, Neil

    Smith, Ellis (Stoke, S.)

    Dell, Edmund

    MacDermot, Niall

    Snow, Julian

    Dempsey, James

    McKay, Mrs. Margaret

    Stewart, Rt. Hn. Michael

    Diamond, John

    Mackie, John (Enfield, E.)

    Stones, William

    Doig, Peter

    McLeavy, Frank

    Summerskill, Hn. Dr. Shirley

    Duffy, Dr. A. E. P.

    MacMillan, Malcolm

    Swingler, Stephen

    Dunn, James A.

    MacPherson, Malcolm

    Taylor, Bernard (Mansfield)

    Dunnett, Jack

    Mahon, Simon (Bootle)

    Thomas, George (Cardiff, W.)

    Edelman, Maurice

    Manuel, Archie

    Thomas, Iorwerth (Rhondda, W.)

    Edwards, Rt. Hn. Ness (Caerphilly)

    Mapp, Charles

    Thomson, George (Dundee, E.)

    Edwards, Robert (Bilston)

    Mason, Roy

    Thornton, Ernest

    Ennals, David

    Mayhew, Christopher

    Tinn, James

    Evans Ioan (Birmingham, Yardley)

    Mellish, Robert

    Urwin, T. W.

    Fernyhough, E.

    Millan, Bruce

    Walden, Brian (All Saints)

    Fletcher, Sir Eric (Islington, E.)

    Miller, Dr. M. S.

    Walker, Harold (Doncaster)

    Fletcher, Raymond (Ilkeston)

    Milne, Edward (Blyth)

    Wallace, George

    Foley, Maurice

    Morris, Charles (Openshaw)

    Weitzman, David

    Fraser, Rt. Hn. Tom (Hamilton)

    Morris, John (Aberavon)

    Wells, William (Walsall, N.)

    Freeson, Reginald

    Murray, Albert

    White, Mrs. Eirene

    Galpern, Sir Myer

    Neal, Harold

    Whitlock, William

    Garrett, W. E.

    Noel-Baker, Francis (Swindon)

    Wilkins, W. A.

    Garrow, A.

    Norwood, Christopher

    Willey, Rt. Hn. Frederick

    George, Lady Megan Lloyd

    Ogden, Eric

    Williams, Alan (Swansea, W.)

    Gourlay, Harry

    O'Malley, Brian

    Willis, George (Edinburgh,E.)

    Griffiths, Will (M'Chester, Exchange)

    Orme, Stanley

    Wilson, Rt. Hn. Harold (Huyton)

    Gunter, Rt. Hn. R. J.

    Oswald, Thomas

    Wilson, William (Coventry, S.)

    Hamilton, William (West Fife)

    Palmer, Arthur

    Woodburn, Rt. Hn. A.

    Hannan, William

    Pannell, Rt. Hn. Charles

    Woof, Robert

    Hart, Mrs. Judith

    Park, Trevor (Derbyshire, S.E.)

    Zilliacus, K.

    Hattersley, Roy

    Pearson, Arthur (Pontypridd)

    Hazell, Bert

    Peart, Rt. Hn. Fred

    TELLERS FOR THE AYES:

    Heffer, Eric S.

    Pentland, Norman

    Mr. Harper and Mr. Grey.

    Henderson, Rt. Hn. Arthur

    Prentice, R. E.

    Herbison, Rt. Hn. Margaret

    Price, J. T. (Westhoughton)

    NOES

    Agnew, Commander Sir Peter

    Carlisle, Mark

    Fletcher-Cooke, Charles (Darwen)

    Alison, Michael (Barkston Ash)

    Carr, Rt. Hn. Robert

    Fletcher-Cooke, Sir John (S'pton)

    Allason, James (Hemel Hempstead)

    Chichester-Clark, R.

    Foster, Sir John

    Anstruther-Gray, Rt. Hn. Sir W.

    Clark, William (Nottingham, S.)

    Fraser, Rt Hn Hugh(St'fford&Stone)

    Awdry, Daniel

    Cooke, Robert

    Fraser, Ian (Plymouth, Sutton)

    Barber, Rt. Hn. Anthony

    Cooper-Key, Sir Neill

    Gibson-Watt, David

    Barlow, Sir John

    Craddock, Sir Beresford (Spelthorne)

    Giles, Rear-Admiral Morgan

    Batsford, Brian

    Cunningham, Sir Knox

    Gilmour, Ian (Norfolk, Central)

    Bennett, Dr. Reginald (Gos & Fhm)

    Curran, Charles

    Gilmour, Sir John (East Fife)

    Berry, Hn. Anthony

    Dalkeith, Earl of

    Glover, Sir Douglas

    Birch, Rt. Hn. Nigel

    Dance, James

    Goodhew, Victor

    Black, Sir Cyril

    Davies, Dr. Wyndham (Perry Barr)

    Gower, Raymond

    Bossom, Hn. Clive

    d'Avigdor-Goldsmid, Sir Henry

    Grant, Anthony

    Box, Donald

    Dean, Paul

    Griffiths, Peter (Smethwick)

    Boyd-Carpenter, Rt. Hn. J.

    Digby, Simon Wingfield

    Grimond, Rt. Hn. J.

    Boyle, Rt. Hn. Sir Edward

    Dodds-Parker, Douglas

    Gurden, Harold

    Brinton, Sir Tatton

    Doughty, Charles

    Hall, John (Wycombe)

    Bromley-Davenport, Lt.-Col. Sir Walter

    Douglas-Home, Rt. Hn. Sir Alec

    Hall-Davis, A. G. F.

    Brooke, Rt. Hn. Henry

    du Cann, Rt. Hn. Edward

    Hamilton, M. (Salisbury)

    Bruce-Gardyne, J.

    Elliott, R. W. (N'c'tle-upon-Tyne,N.)

    Harris, Frederic (Croydon, N.W.)

    Bryan, Paul

    Emery, Peter

    Harvey, John (Walthamstow, E.)

    Buchanan-Smith, Alick

    Errington, Sir Eric

    Harvie Anderson, Miss

    Burden, F. A.

    Eyre, Reginald

    Hawkins, Paul

    Buxton, Ronald

    Fisher, Nigel

    Hay, John

    340

    341

    Heald, Rt. Hn. Sir Lionel

    Maude, Angus

    Spearman, Sir Alexander

    Heath, Rt. Hn. Edward

    Maudling, Rt. Hn. Reginald

    Stainton, Keith

    Hendry, Forbes

    Maydon, Lt.-Cmdr. S. L. C.

    Stanley, Hn. Richard

    Hill, J. E. B. (S. Norfolk)

    Mills, Peter (Torrington)

    Steel, David (Roxburgh)

    Hirst, Geoffrey

    Monro, Hector

    Stodart, Anthony

    Hogg, Rt. Hn. Quintin

    More, Jasper

    Studholme, Sir Henry

    Hopkins, Alan

    Morrison, Charles (Devizes)

    Summers, Sir Spencer

    Hordern, Peter

    Mott-Radclyffe, Sir Charles

    Taylor, Sir Charles (Eastbourne)

    Hornby, Richard

    Munro-Lucas-Tooth, Sir Hugh

    Taylor, Edward M. (G'gow,Cathcart)

    Howe, Geoffrey (Bebington)

    Neave, Airey

    Taylor, Frank (Moss Side)

    Hunt, John (Bromley)

    Nicholls, Sir Harmar

    Thatcher, Mrs. Margaret

    Hutchison, Michael Clark

    Noble, Rt. Hn. Michael

    Thomas, Sir Leslie (Canterbury)

    Irvine, Bryant Godman (Rye)

    Nugent, Rt. Hn. Sir Richard

    Thompson, Sir Richard (Croydon,S.)

    Jenkin, Patrick (Woodford)

    Onslow, Cranley

    Thorpe, Jeremy

    Johnson Smith, G. (East Grinstead)

    Osborne, Sir Cyril (Louth)

    Tiley, Arthur (Bradford, W.)

    Johnston, Russell (Inverness)

    Page, R. Graham (Crosby)

    Turton, Rt. Hn. R. H.

    Jopling, Michael

    Pearson, Sir Frank (Clitheroe)

    Tweedsmuir, Lady

    Joseph, Rt. Hn. Sir Keith

    Percival, Ian

    van Straubenzee, W. R.

    Kerr, Sir Hamilton (Cambridge)

    Pitt, Dame Edith

    Vaughan-Morgan, Rt. Hn. Sir John

    Kilfedder, James A.

    Pounder, Rafton

    Walder, David (High Peak)

    King, Evelyn (Dorset, S.)

    Powell, Rt. Hn. J. Enoch

    Walker, Peter (Worcester)

    Kirk, Peter

    Pym, Francis

    Walker-Smith, Rt. Hn. Derek

    Kitson, Timothy

    Ramsden, Rt. Hn. James

    Ward, Dame Irene

    Langford-Holt, Sir John

    Redmayne, Rt. Hn. Sir Martin

    Weatherill, Bernard

    Legge-Bourke, Sir Harry

    Rees-Davies, W. R.

    Webster, David

    Lloyd, Rt. Hn. Geoffrey(Sut'nC'dfield)

    Renton, Rt. Hn. Sir David

    Whitelaw, William

    Lloyd, Rt. Hn. Selwyn (Wirral)

    Ridley, Hn. Nicholas

    Wills, Sir Gerald (Bridgwater)

    Loveys, Walter H.

    Roberts, Sir Peter (Heeley)

    Wilson, Geoffrey (Truro)

    McAdden, Sir Stephen

    Robson Brown, Sir William

    Wise, A. R.

    MacArthur, Ian

    St. John-Stevas, Norman

    Mackenzie, Alasdair (Ross&Crom'ty)

    Scott-Hopkins, James

    TELLERS FOR THE NOES:

    McLaren, Martin

    Sharples, Richard

    Mr. Lubbock and

    McMaster, Stanley

    Smith, Dudley (Br'ntf'd & Chiswick)

    Mr. George Y. Mackie.

    Maginnis, John E.

    Smyth, Rt. Hn. Brig. Sir John

    Mr. Edmund Dell: I beg to move Amendment No. 296, in page 15, line 17, to leave out from first "a" to "any" in line 18 and to insert:
    "husband and wife living together in a year of assessment".
    This Amendment is intended to clarify the meaning of subsection (5). On page 8 of the White Paper on the Taxation of Capital Gains, it is said that subsection (5) means: "Allowable losses of husband or wife are to be set against gains of the other spouse, unless they claim otherwise."
    Those are twenty simple words which, I imagine, not a lawyer nor an accountant could fail to understand.
    Unfortunately, in the Bill itself, we have more than four times as many words which succeed simply in reducing the whole matter to complete obscurity. As I read it, subsection (5) means that whereas a woman's losses can be overspilled against her husband's gains, it does not make clear that the husband's losses can be overspilled against his wife's gains.
    Because of this apparent obscurity, my hon. Friends and I wish to have it made clear that the subsection means what the White Paper says and why it is necessary to have what is perfectly clearly stated in the White Paper, stated so clearly that even I as a layman can understand it, put
    342
    in words of such complexity as to put it beyond the understanding of even an accountant or a lawyer.
    Mr. MacDermot: I can assure my hon. Friend that the wording of the Clause as now drafted will achieve the object which he wants and the wording of his Amendment, which on the face of it looks so much plainer and clearer, would not. I confess when I first read the Clause I had rather the same reaction as he had, but such are the intricacies and mysteries of draftsmanship that, as I have explained, the words he is suggesting would achieve a different object. I assure him that the effect of subsection (5) of the Clause is that the losses of a husband would be allowed to be set off against the gains of a wife or vice versa. The trouble about the wording which he proposes is that the words "married women living with their husband" have a precise meaning which has been laid down by Section 361(1) and (2) of the Income Tax Act, 1952. This is imported into
    this Clause by Clause 41(3) of the Bill. These technical words include also couples not actually living together, for example because the husband is working away from home. That is the reason why this form of wording has been chosen.
    Mr. Dell: I thank my right hon. and learned Friend for the explanation he has given me of the art of Parliamentary draftsmanship. In view of his explanation, I beg leave to withdraw the Amendment.
    Amendment, by leave, withdrawn.
    Sir L. Heald: I beg to move Amendment No. 349, in page 15, line 46, at end add:
    (8) A gain accruing from the disposal of an asset which was acquired by a person more than ten years prior to the disposal shall not be a chargeable gain and a loss accruing on such an asset shall not be allowable under this Part of this Act.
    (9) A gain or loss accruing from the disposal of an asset which was acquired less than ten years but more than five years prior to the disposal shall be abated for the purposes of this Part of this Act—

    (a) by 20 per cent. if the assets have been held for more than five years but less than six years,

    (b) by 35 per cent. if the assets have been held for more than six years but less than seven years,

    (c) by 50 per cent. if the assets have been held for more than seven years but less than eight years,

    (d) by 65 per cent. if the assets have been held for more than eight years but less than nine years,

    (e) by 80 per cent. if the assets have been held for more than nine years but less than ten years.

    The Deputy-Chairman: We can discuss with this Amendment, Amendment No. 348, in Clause 19, page 15, line 10, after "gains", insert "in excess of £400".
    Amendment No. 428, in Clause 21, page 20, line 17, after "every", insert "real".
    Amendment No. 429, in line 22, at end add:
    (11) In the preceding subsection "real" gain means the money value of the gain diminished by reference to any increase in the cost of living index since the date of acquisition.
    Amendment No. 452, in line 22, at end add:
    (11) The tax chargeable in this Act in respect of capital gains shall be reduced by a proportion equivalent to the decline in the purchasing power of the pound during the period in which the assets have been held.
    Amendment No. 425, in Schedule 6, page 128, line 19, at end insert:
    (d) any increase in the money value of the asset since the date on which it was acquired or was deemed to be acquired, so far as it was attributable to any increase in the cost of living index since the date of acquisition.
    Amendment No. 117, in line 36, at end insert—
    (3) (a) In this paragraph the following expressions and symbols shall have the following meanings, namely:—

    Expression

    Meaning

    the Deduction

    The sum allowable as a deduction under paragraph 4 of this Schedule.

    the Index

    The Index of Retail Prices prepared for each month by the Ministry of Labour.

    X

    The Index for the month in which falls the date of the disposal of the asset.

    Y

    The Index for the month in which fall the date on which the expenditure comprising the deduction was made.

    basis figure

    The Index which in arriving at any subsequent Index is treated by the Ministry of Labour as the standard by reference to which any change in the Index as between one month and another is measured.

    (b) The Deduction shall in every case be multiplied by the factor X/Y
    Provided that if in any case X and Y are not arrived at by an arithmetic progression from the same basis figure appropriate adjustment shall be made in the said factor to take account of the adoption of any new basis figure after the date on which the expenditure comprising the deduction was made.
    Amendment No. 117 can later be moved formally for Division if so wished.
    Sir L. Heald: The Amendment is designed to secure that the Capital Gains Tax will not be chargeable on assets held for more than ten years and will be chargeable on a sliding scale on assets held between five and ten years, abatement being given in this Amendment by reducing the proportion of the gain which is chargeable for tax. This Amendment follows quite logically from the discussions we have had.
    The right hon. Gentleman the Member for Orpington (Mr. Lubbock) described very clearly and briefly the effect of inflation in connection with the matter with which we are now concerned, and I would not add any more detail in this respect except for this one case. There are a number of small people who put their money into equity shares—they might be shares of Shell or something of that kind—and leave it there, intending to draw upon it during their retirement or at some future date if the time comes when they require sums of money. In

    345
    perhaps 15 years the value of the £ may have depreciated to such an extent that the value of the equity has even doubled in order to catch up. But, in real terms, that investor will have exactly the same money as he had at the beginning.
    8.45 p.m.
    Under the proposed tax system the investor will be called upon to pay Capital Gains Tax on the nominal value, not on the real increase in the value of his holding. Unless provided against in some way, that is clearly an injustice. We must assume that, however much we dislike things, once they are decided we must go forward in a logical way, and the logical consequence of the decision on the last Amendment but one must be that provision should be made in that way. The Capital Gains Tax should be based on money value and not on face value.
    Amendment No. 349 starts with the proposal that if more than ten years have elapsed before the disposal there shall not be a chargeable gain. In subsection (9) of the Amendment we say:
    "A gain or loss accruing from the disposal of an asset which was acquired less than ten years but more than five years prior to the disposal shall be abated"…
    by 20 per cent. if the assets have been held for more than five years but less than six years; by 35 per cent. if they have been held for more than six years but less than seven years; by 50 per cent. if they have been held for more than seven years but less than eight years; by 65 per cent. if they have been held for more than eight years but less than nine years; and by 80 per cent. of they have been held for more than nine years but less than ten years.
    I understand that this method has been applied in Sweden. I believe that hon. Members opposite have a great respect for what goes on there, and that may be a matter of some interest. But we may come to the conclusion that if this is to be done there is another way of doing it which I must
    not deal with but which for clarity I would say is the method described in Amendment No. 117 which will be moved later. This would be a more accurate way of dealing with it on a mathematical formula.
    The Deputy-Chairman: Order. The right hon. and learned Gentleman can
    346
    discuss Amendment No. 117. We are taking it with Amendment No. 349 and a Division can be called on it later.
    Sir L. Heald: I did not want to tread on the toes of my hon. Friend the Member for Worcester (Mr. Peter Walker), but I thought it right to point out that there was an alternative method of a more scientific character. It is arrived at by comparing the index at the time of disposal and the index at the time of disposition. There are two possibilities.
    I do not believe that anybody could seriously suggest that the way suggested in the Bill is a just way of dealing with the matter. We may be told that for some extraordinary reason social justice requires that it should be done in this way. "Social justice" is an expression about which we hear a great deal. It covers a multitude of things. I have always wanted to have the opportunity, perhaps this is it, of proposing that, instead of social justice, it should be called Socialist justice, that is to say justice which is justice to a Socialist but to no one else.
    Mr. David Mitchell: I rise to speak to the Amendment, and also to draw the attention of the Committee to Amendment No. 452. It would be a national disaster if the Government were to weaken or to destroy the motive power and the driving force behind the country's economy. I should like to draw the attention of the Committee to the effect which these proposals will have on smaller businesses. If one looks at the breakdown of businesses in this country, one discovers that an extraordinary number of them are small ones, and they are the ones which will be seriously affected by these proposals. The figures show that 91 per cent. of farms are small businesses, 35 per cent. of manufacturers are small businessmen, and 77 per cent. of the distributive firms belong to small businessmen. These people will be picked out and seriously affected by the proposals.
    What do the Government consider to be the driving force behind our economy? What makes people tick? Why do people go out and sweat to build up a business? Why do businessmen seek to make their businesses more efficient? Is it love? It certainly is not love of the Chancellor of the Exchequer, with all due respect to him.

    347
    I think that hon. Members will agree there are four main driving forces at work. First, those concerned desire a higher standard of living for themselves. Though not all of them seek to eat at Prunier's as a result, this is a factor, but I believe that it can be exaggerated. The second and more important factor is the desire to build up a business to provide security for themselves in their old age, and for their wives or widows. The third factor is the desire to give their sons and heirs a better start in life, and better opportunities than they themselves had. Hon. Gentlemen opposite may not approve of this, but, whether they do or not, it is a major factor in a man's desire to build up a business which he can pass on to the next generation. There are also those family businesses which have been passed down from generation to generation. Those who inherit them feel that, as trustees, they are bound to pass on to the next generation something at least as good as that which they inherited.
    Those are the four major reasons which drive the small business man forward in the building up of his business. They are the reasons why he uses his skill, his energy, his ingenuity, and his enterprise, and they are the things which have built this country into the great trading nation that it is.
    Mr. W. Baxter: I think that the hon. Gentleman ought to be fair about this. It is not only members of the Conservative Party who have built up businesses and have tried to do well for their families. Ordinary working people, even though they are not in business, are motivated by similar desires. The hon. Gentleman should not imply that as members of the Labour Party we do not want to do well for our families.
    Mr. Mitchell: I am grateful to the hon. Gentleman for that intervention. I did not suggest that the Conservative Party was the party of business, and that the Labour Party was not. I said that I did not believe hon. Gentlemen opposite knew what they were doing in including these proposals in the Bill.
    The enterprise, the energy, the skill, and the ingenuity to which I have referred are important for the nation, and they are important when one realises that
    348
    it is the small businesses which will be seriously affected by these provisions. If this proposal goes through and a 30
    per cent. rate of Capital Gains Tax is imposed, there will be a drastic weakening in the motive power and the driving power behind these firms and businesses.
    Earlier in the debate an hon. Member asked what harm this would do to the shopkeeper. I wish to take that up, because I am quite convinced that the shopkeeper, the small farmer, and the small businessman will be seriously affected. I shall give one or two examples. Suppose a man has started a business and worked it up to provide a reasonable standard of living. He may ask himself, "Should I expand the business or not?" Why should he bother to expand it when, if he works and strives to expand his business, he will not be working for himself and for benefit in his old age but for the Chancellor of the Exchequer? [HON. MEMBERS: "Oh"] Hon. Members get very heated about this, but these are the sort of things which businessmen say to themselves when they are deciding whether to expand businesses.
    Mr. MacDermot: I am not sure whether the hon. Member was in the Chamber when I gave an answer to the hon. Member for Barry (Mr. Gower) in an earlier debate. I indicated that we are alive to the problem to which the hon. Member is now referring of the small businessman who, from time to time, will realise the value of assets he has built up. As the hon. Member is no doubt aware, there is another Amendment to be considered later when we shall deal with that specific problem.
    Mr. Mitchell: I hope that means that the comments which my hon. Friends and I have been making are falling on certain receptive ground and that a concession will be made. At the moment there is no such concession, so I shall continue to press the case that there should be such a concession. Look at the case of the businessman deciding whether to expand his business or not.
    The Deputy-Chairman: Order. The Financial Secretary has just pointed out that there is a later Amendment. When we reach it we can discuss this matter.
    Mr. Hirst: We want to get this clear. The Financial Secretary has not mentioned any form of concession in relation to this Amendment. He has referred only to the possibility—we have not had it concretely stated—of an instance where someone retires from business.
    Mr. Peter Walker: My hon. Friend the Member for Basingstoke (Mr. Mitchell) has been arguing about the inflationary aspect, which I think comes into discussion of this Amendment.
    The Deputy-Chairman: If the hon. Member refers what he is saying to inflation, it will be in order.
    Mr. Mitchell: This Gentleman opposite is getting very heated. Shall I allow him to interrupt, and get that out of the way?
    The Deputy-Chairman: The hon. Member must not refer to another hon. Member as "this Gentleman".
    Mr. Cyril Bence: I am grateful to the hon. Member for Basingstoke (Mr. Mitchell) for giving way. I am sure that he wants to be fair. He referred a great deal to the effect of inflation on the small investor providing for the future. In this country in the last 40 years 15 million people have been saving by means of facilities provided by the National Debt Commissioners, trustee savings banks, building societies and the Post Office Savings Bank. We have all seen the value of the £ which we saved in 1920 fall to 1s. 4d. Does the hon. Member suggest that the artisan and those in the lower middle-class who have saved through saving institutions have not made as great a contribution to the economy and the thrift of the nation as the small businessman, and what compensation are they to get?
    Mr. Mitchell: I think it is quite clear that that interjection bears no reference to the point I am making.
    Mr. Nigel Birch: Those who save irredeemable securities will have to pay tax on top of that.
    Mr. Mitchell: I think I am right in saying that to discuss that matter would be out of order on this Amendment. It would be a flagrant denial of justice and
    350
    of the word of the Government if, having issued gilt-edged securities redeemable at a later date, the Government ratted and charged people a Capital Gains Tax. If one spelled the words "gilt-edged" in a different way, one could understand why.
    9.0 p.m.
    I come back to my original remarks. Here we have a businessman—a shopkeeper, a small farmer, or whoever it may be—who says to himself, "Shall I put money into my business to expand it? Shall I put more effort and more work into it?" He sees that if he does this he will, in his old age, pay back to the Chancellor 30 per cent. of all the extra effort that he has put in. It will obviously pay him more to say, "No, I will put the money into a swimming pool in my house, or into central heating, because that will be free of tax, and it will represent 5 per cent. a year added value. It will be far better to do that than to put the money into the business." He will ask himself, "Shall I be more efficient; shall I modernise my firm, and bring in new methods and new machinery?" He will say, "Why should I bother?" What will it be worth for him to do it? He would do far better to sit back and take a personal assistant or an extra secretary, and spend his time playing golf.
    There is no driving force if a man is not allowed to profit from the efficiency that he brings to his business. The more we weaken the profit motive which drives a man to become more efficient the less people will be prepared to make their businesses efficient. We should hardly be surprised if people who are considering the effect of the Capital Gains Tax on small businesses say, "This is a tax which says, 'Eat, drink and be merry now, for tomorrow we pay capital gains'", rather than, "We should build up our business for future generations". If we consider the problems that will arise in the case of those people who have family businesses and who are seeking to pass them on from generation to generation, we appreciate how impossible is the situation that will develop if this Amendment or a similar one is not accepted.
    I am not the only Member to be bewildered by reading the Bill. I have come to the conclusion that it was probably easier to understand in its original

    351
    Hungarian. Be that as it may; I want to ask three direct questions which I hope will be answered directly by the Financial Secretary.
    First, is it proposed that every farmer, every garage proprietor, every country solicitor, every grocer, every village shopkeeper, and the like, who finds himself paying 30 per cent. of the increased value of his business—whether the increase has arisen because of inflation or because of the amount of capital which has been sunk back into the business after hours of sweat and toil have been put into it—should realise that all the time he is building up his business 30 per cent. of what he is putting into it will be taken away by the Chancellor at a later date?
    Secondly, what happens if a man decides to change his trade or business? If a hairdresser in Basingstoke decides to become a grocer in Andover will he, on the sale of his first business, have to pay 30 per cent. of its value, including the goodwill and all the work that he has put into it, so that he is unable to find the money with which to purchase his second business? This is the very serious effect of the tax, which we have to consider in the light of our endeavours to get some mobility not only in labour but also in business.
    Thirdly, if such a person decides to retire and leave the business, will he pay to the Chancellor 30 per cent. of all that he has put into it? Finally, what happens if, as is the case with so many men who have built up businesses during their lifetimes, a man wants to pass on his business to his son? Does he pass on the business and then have to find 30 per cent. of its value in cash? If so, I can tell the Government that such men as these have not got the money. It may be the case that the value of the land owned by farmers in my constituency has risen, but they have not got that much cash in the bank—
    Mr. Gresham Cooke: Does my hon. Friend agree that his constituents will probably call this tax an "Andover" tax?
    Mr. Mitchell: I think that the point I am making is very important. The farmer who is passing on his farm to his son has not got much in the bank. He has to pay up to 30 per cent. increase in the
    352
    value of his land but he has no more money. He has to pay cash and he will have to sell off a large part of the land and so break up the farm. This sort of thing would have a disastrous effect on the farming community. The whole effect of the provision in this Clause will be to reduce and to remove the motive power and the driving force behind the business community. This would apply to the one-man or the two-men family businesses and especially to the farming industry in which there is such a high proportion of one-man or two-men businesses. I can only say that the running form will be prescription for sluggish economy out of Socialist dogma leading to disaster.
    Mr. Anthony Grant: I wish to support what has been said by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) and by my hon. Friend the Member for Basingstoke (Mr. Mitchell). I believe that the inflation argument is very important particularly for the man with a small investment. I wish to draw the attention of the Committee to another Amendment, in my name and that of a number of my hon. Friends, in which we seek to present a rather different aspect of the picture. We desire to remove the first £400 of income from the imposition of the Capital Gains Tax. I believe this to be of great importance to the small investor about whom we have heard so much.
    I speak in support of the Amendment first from the notion that we should believe that increases in savings and investments are absolutely vital in this country if our economy is to expand rather than stagnate. Secondly—I hope in this I carry some hon. Members opposite with me—it is important that increased savings should be made by an ever—increasing number of people, by the broad mass of the community. If one accepts this premise it is with sorrow rather than anger, but not entirely with surprise that one finds that the Finance Bill generally and particularly the Clauses relating to capital gains, so far from helping the concept, are a direct and positive disincentive. They attack saving directly.
    The real defect is that in attempting to hit the rich investor, which has been the tenor of the Government action—

    353
    they have been trying to hit the rich man who is usually able to duck the blow—they have in this Finance Bill delivered a great thumping whack at the small man who cannot duck. He has been affected by the Corporation Tax, the increase in Income Tax and now we come to the Capital Gains Tax. It is a staggering blow which the small investor has had to suffer at the very moment when he should be encouraged. The real difficulty is, as we have seen earlier, that the Government have been completely obsessed with the problem of catching someone. We have continually heard remarks about getting away with tax evasion and trying to catch the rich man. During the Second Reading of the Finance Bill the Financial Secretary said:
    "The introduction of the Capital Gains Tax is an attempt to achieve social justice in a considerable measure by ensuring that a lot of people who have been escaping the tax net will be caught by it."—[OFFICIAL REPORT, 20th May, 1965; Vol. 712, c. 1777.]
    This indicates the thought which has gone into the Finance Bill, and also, in my submission, indicates the entirely wrong sense of priorities of the Government, the desire to catch, whereas I believe that the test should be what is in the best interests of the country as a whole.
    The trend ought to be towards the spreading of wealth and the increasing of savings. At a time when we should be channelling the surplus income away from bingo and gambling into savings and investment, it is extremely ironic that the Government have introduce a Bill which taxes savings while letting gambling go scot-free. The argument advanced is that it is much too difficult and complicated and that much more thought is wanted before gambling can be taxed. I should have thought that that precise argument should be advanced about capital gains. The taxation of savings should receive much more thought than the taxation of gambling.
    Mr. W. Baxter: I take it from the hon. Member's remarks that he deprecates the amount of gambling which is going on at the moment. I hope that he is under no misapprehension about the complexion of the Government which introduced the Measures which permitted this excessive amount of gambling
    Mr. Grant: I do not see what relevance that has. If it is any consolation to the hon. Member, I have nothing against gambling; nor do I have anything against capital gains.
    The Amendment which stands in my name is designed, to a large degree, to lessen the burden of Capital Gains Tax on the small investor. The Wider Share Ownership Council has estimated that there are approximately 4 million investors in this country, many of them very small holders. Perhaps a more dramatic figure is that, according to its survey, about two out of every three adults in this country have an interest, either direct or indirect, in the stock markets, through pensions funds, insurance, direct investment or unit trusts. These people go into investment with a view to making a capital gain. I should like to hear a little less about the apparently implied immorality of capital gains. I see nothing particularly moral in going into an investment with a view to making a capital loss, though that is usually my fortune. It is right, proper and sensible to make a capital gain and there is nothing immoral about it.
    It is also right that there should be a hedge against inflation, on the lines laid down in the other Amendments. Speaking on the Second Reading of the Finance Bill, the Chancellor seemed to advance the theory that the Government have been terribly generous over the Capital Gains Tax, that because this is below the standard rate of Income Tax, because it is 30 per cent.—27½ per cent. in some cases—and the standard rate of Income Tax is 41¼ per cent., they are being very generous. What they have overlooked is that, in Income Tax, there is a level up to which no tax is charged at all, whereas, if I understand the Bill aright, the smallest investor with the smallest of gains will attract Capital Gains Tax. To rectify that is the purpose of my Amendment. I think that it has received wide support throughout the country, and I believe that it is something on which the Government should think very carefully.
    That is the first argument which I advance in its favour. The second is the administrative one. In 1952, the Inland Revenue submitted a memorandum to the Government indicating some of the
    things which would have to be done in

    355
    that Department in order to collect Capital Gains Tax. It said that the Department would be concerned with searching through all cases of liability or prospective liability, obtaining returns from the persons concerned, examining returns, testing their reliability by all means in its power, making estimates or causing them to be made, and dealing with appeals against rating to the appellate body. An enormous amount of work would be involved and the conclusion at that time was that it would be too big a burden for the Department to bear.
    9.15 p.m.
    I should have thought that the position is even more complex today, because at that time it was estimated that there were about 2,500,000 transactions on the Stock Exchange alone to be investigated. I should have thought that there would be a far greater number of transactions to be investigated today. It seems ludicrous that if I make a capital gain of a couple of pounds or so a year the whole weight of the Inland Revenue should descend on me, with new departments to go into valuations, arguments and counter-arguments, followed by appeals if necessary, and all the rest of the machinery, just for that small amount. It is so absurd that it is a strong argument for excluding amounts up to a certain sum. Perhaps £400 would be a reasonable minimum. I call in aid the theory of no less an authority than the minority Report of the Royal Commission. Signed by no less an authority than Mr. Kaldor, it said:
    "We are in accord with the view that for an initial period the tax should be limited to gains arising from the sale of businesses and securities of all kinds and … that there should be an exemption limit of £50 or less on any sale when the annual gain is £400 or less to reduce the administrative costs involved".
    It would indeed reduce administrative costs if such a step were taken, although I do not rest my case solely on the administrative argument, however powerful it may be. It is vital that the Government should give a concession for the small investor, for they should do something to encourage share ownership in this country.
    Being a naive man, I take at face value some of the remarks hon. Gentle-
    356
    men opposite made prior to the last election. I completely agreed with the words of the President of the Board of Trade who, writing in the Stock Exchange Journal in September, 1963, stated:
    "… I would like to see private ownership of the 'growth' types of property, which give rise to capital gains, far more evenly spread among our population".
    He went on later:
    "It must, therefore, also include share ownership".
    I agreed and I still agree with every word of that, but the Government do not help share ownership and encourage savings by introducing a tax of this sort. There must be incentive on the lines indicated by the Chief Secretary, who I am pleased to see in his place, for speaking to an Investors Chronicle conference last year he said:
    "… may I say that it is perfectly understood by every intelligent Member of my Party"—
    at which point there appears in brackets the word "laughter"
    "that it is the profit motive which makes the private sector tick … you would be a complete lunatic to try and do anything to detract from the incentive capacity of the profit motive and, therefore, the profit motive is understood. The private sector will be encouraged, will be fostered, and everything will be done to make it as successful and useful as is possible."
    I agreed, and I still do, with every word of that, although I am not so sure about the intelligence of hon. Gentlemen opposite. Although only a few hon. Gentlemen opposite at present appear to be taking an interest in this discussion, I hope that the Chief Secretary will draw their attention to that quotation.
    I detect mounting enthusiasm, not only on this side of the Committee but also on the Liberal benches and by at least one hon. Gentleman opposite—the hon. Member for Manchester, Cheetham (Mr. Harold Lever), who is no longer in his place—for the concept of spreading ownership and encouraging investment. I am prepared to accept that the Chancellor meant what he said and that we may expect a small chink of concession on this occasion. The spread of ownership and encouragment of savings is not only economically and socially desirable, but I believe that it is the cornerstone of freedom in our society, providing a bulwark against the ever-increasing power of the State.
    Mr. Hirst: The Chief Secretary having been put on the spot by my hon. Friend the Member for Harrow, Central (Mr. Grant) in an excellent speech, I want to turn my attention, not for the first time, to the Financial Secretary. I support the Amendment moved by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald)—as I do Amendment No. 117, which I can only call a brilliant composition, and one that might be described as a variation on a theme by Chertsey.
    The Financial Secretary has been very naughty, and I shall be very cross with him. It is very bad for the reputation of the Government that on the last Amendment he should have said that the Government cannot accept in any way whatsoever the inflation argument that we are now discussing. That is not the right way to proceed in this Committee, either for harmony or for the constructive development of our work. The Financial Secretary should not make that sort of statement before he has even listened to one argument on this extremely important range of Amendments. It is wrong—and the public's attention must be drawn to anything that is wrong—that a Minister should so prejudge an issue before it has even been discussed in the slightest outline. I hope that the hon. and learned Gentleman will realise, too, that it is rather offensive to the Committee that that should happen. I am somewhat surprised that he, of all people, should have acted in that way.
    My right hon. and learned Friend was perfectly right in developing the case of inflation with that economy of words and wisdom that is natural to him. Inflation is nothing new. Has the Committee realised what has been happening right through the pages of history? I shall not go too far back—only to Queen Anne. Where would we have been if the argument had then been adduced that capital gains were immoral, and that everything had to be creamed off in the way suggested? Where would have been the development of industry and commerce? Where would we have been in this race against other nations? Nowhere.
    I am surprised that, having set this sort of theme, members of the party opposite should have blanked their minds to the consequences of their mundane arguments. Inflation has gone on at different
    358
    rates throughout the ages, with one particular exception that will be in mind, and it is now rapidly getting back to the phenomenally high rate we associated with the Labour Government in the 'forties and 'fifties. The fact of inflation is just the same—it is only a question of the rate. If any regard had been taken of that, where would the incentive and capacity to develop our industrial life have come from?
    Sir Knox Cunningham: Does not my hon. Friend agree that it is an extraordinarily naïve and unrealistic attitude on the part of the Government to argue as they have done?
    Mr. Hirst: Certainly. That is absolutely standard. They are naïve. All that they have done is to accept a certain theme. I do not want to go back all over this. I said all this on the first Finance Bill. The Government took certain political decisions without any regard to any other factor and said, "This, according to Socialist ideas, is wholly writ. This is what will be. Everything has been bent towards it". Surprisingly enough, the Labour Government have even discarded their arch-adviser Kaldor in the matter of exemptions. I cannot fathom what is working in their minds. What I can fathom is the effect of the decisions which they are trying to place on the country as a whole.
    The effect will be precisely on the lines developed by my hon. Friend the Member for Basingstoke (Mr. Mitchell). In a very good speech, my hon. Friend outlined the effect of this in perfectly simple language which anyone outside the House of Commons, as well as anyone in it, even someone on the Government Benches, could understand. It will obviously be a disincentive if people are to be robbed of the reasonable standardisation and maintenance of their money in real terms. Money terms do not mean an awful lot. People will soon begin to ask themselves these questions; "Am I to put my back into it? Am I to do this saving? Am I to sweat hour after hour, week after week? Am I to take my books home at weekends?" People do that. I spent most of my early life sweating at the weekends. I did not just work at the office. But I had an incentive to do it. I know many people who say that it is not worth

    359
    while. This is the factor which breeds effort in this country. If it is killed, there cannot be a Socialist paradise on the basis of social equality, on bottom domination. It is human nature. Human nature cannot be bent to political wills. Political wills must dictate in the last analysis the politics of the country. They will.
    This is what right hon. and hon. Members opposite fail to see. There is no doubt about it whatever. If the Labour Party pursues this line with the present generation, with the growing conditionings of our people and the inspiration which opportunities are giving them, it will knock itself for six. There is nothing I want more. I want much less than that, in fact. I do not want the country to suffer in the process. I shall stand here and argue that this should not happen, although if the Labour Party goes on as it is doing it will cut its own throat. We have a public duty to do all we can to protect the people and also to ensure that our country can grow in stature, in stability and in progress. Whatever our political views may be, we must put this consideration first.
    I ask the Financial Secretary to address himself to this argument. I ask him not to prejudge the argument before he even enters the Chamber, because that is not up to his stature. He is being overworked. We forgive him much, but to prejudge a matter is an insult to the Committee. We will not be insulted and take it lying down. In the last analysis, the Government will take it. The hon. and learned Gentleman must be true to himself. He is an intelligent man. He is a decent chap. Let him be true to himself. If he is not true to himself, he has no rightful place in his party. I ask him to be honourable to the Committee and not prejudge an issue before he has heard one argument. It was terrible that he should have said on the last Amendment that the Government are not interested on the question of inflation. That was before we had been allowed to develop it, except for a general remark en passant which was strictly out of order. Is that in character with the present Government? I am beginning to think that it is. It will be their death knell. What is much more serious, it will undermine confidence and enterprise. No man, whatever
    360
    position he holds in the Government, has the right to do anything which will bring about that state of affairs.
    9.30 p.m.
    Mr. Lubbock: I very much agree with the concluding remarks of the hon. Member for Shipley (Mr. Hirst). I do not think that the Financial Secretary or the Chief Secretary or any member of the Labour Party appreciates how seriously the question of inflation is taken in relation to the Capital Gains Tax outside the Committee in the country as a whole. They must address their minds to this great objection to the Capital Gains Tax in its present form which many people who are sympathetic to the idea of the Capital Gains Tax hold. For a long time I have been one of those who are so sympathetic. I have always thought that it was quite wrong that capital gains should go scot free when we have taxation at the present level on incomes. But one has to make a distinction in one's mind between the taxation of real capital gains and the taxation of money gains which have been swallowed up by the effects of inflation.
    The Chief Secretary may be about to tell the Committee that under a Labour Government inflation will not continue. We find that difficult to believe in the light of the experience of the last six months, but that is the proposition which he might seek to advance. If he does, I urge upon him that there can be nothing lost by accepting one or other of the Amendments. I think in particular of Amendments Nos. 428 or 429 in the names of my hon. Friends, my right hon. Friend and myself, but I think that Amendment No. 117, as far as I understand it, is designed to meet the same point. I am sure that if he wishes to do so the hon. Gentleman can put these matters to the draftsmen and come up with something to deal with the points that we have in mind, which is that people should not be required to pay tax on gains which do not represent a real increase in the purchasing power of the assets.
    I do not want the hon. Gentleman to say that this will be dealt with in later Amendments, whether it is a matter of the small businessman or the holder of gilt-edged securities or any other type of capital assets. To take the holder of

    361
    gilt-edged securities, if he buys medium-term fixed-interest stocks with a redemption date of 1970 or 1975, as part of the total yield he gets a capital appreciation of perhaps 2 per cent. or 2½ per cent. a year. In the light of our experience since the war, we know perfectly well that that small percentage of 2½, or 3 at the most, will be inevitably swallowed by the effects of inflation. Will the Chief Secretary say that the Government will tax these people on 2½ per cent. per annum which does not represent a gain to them at all? It will be quite contrary to the principles of our taxation system and the principles of British justice.
    Would the hon. Gentleman say that if a person did not receive income in a year, that should be deemed to be taxable? It is tantamount to saying that if my income is £3,250 I am going to be taxed on £4,000 or £4,500 and the Income Tax will be levied at rates applicable to a much higher rate of income than I have actually received. This is what the Government are saying. To put the example which I mentioned on the last Amendment, one can easily have a case where a person acquires an asset for £1,000 and after 10 years or 15 years disposes of it for £2,000. Under this Capital Gains Tax he is deemed to have made a profit of £1,000, and he will pay £300 in tax on that. But suppose that in the intervening period the purchasing power of the £ has fallen to 10s. He is still left with an asset not more valuable than it was at the beginning. This might apply to many types of assets and not only to gilt-edged securities which I quoted.
    It might apply to the holders of units in unit trusts, or shares in investment trusts. Whilst the Chief Secretary may say that equities as a whole have increased faster than the rise in the cost of living, that may not be true of a particular investment into which the small investor might have put his money. One cannot, therefore, say that because this tax will be generally-speaking fair to the body of taxpayers one has to be inequitable to a taxpayer who may not be in that position. This argument applies to the owner of property of any kind, not only gilt-edged securities but equities of all sorts, holdings in unit trusts, in investment trusts and in real property.
    The Treasury Bench must address themselves seriously to this argument if they
    362
    are to satisfy not this side of the Committee, whether the Conservatives or the Liberals, but people in this country as a whole, who are very anxious about the effect of the Capital Gains Tax and the inflation which we shall inevitably see in the immediate future.
    Mr. John Hunt: I am delighted to have the opportunity to support the case so persuasively put by several of my hon. Friends in urging this group of Amendments on the Government. I shall argue the case for a sliding scale of Capital Gains Tax liability on two main counts. First, it is necessary in order to maintain a high level of private investment in this country and to protect long-term equity shareholders from the penal effects of the proposed tax. Second—this point has not yet been made in the Committee—it is necessary in order to prevent what I believe could happen, that is, a contraction of turnover on the London Stock Exchange on such a scale as to jeopardise its continued existence as one of the great financial centres of the world.
    Although the Chancellor implied yesterday that we on this side had been exaggerating the extent of his unpopularity in financial and business circles, I can only say that, if he will come with me tomorrow on to the floor of the London Stock Exchange, he will be surprised at the kind of reception he receives. Perhaps that invitation will be conveyed to him.
    The Chancellor has promised us many concessions, which we are still breathlessly awaiting. Perhaps they will come, in the famous words of my hon. Friend the Member for Worcester (Mr. Peter Walker), tomorrow. I must warn the Financial Secretary that, unless he is prepared to give way to us on this group of Amendments, he and his right hon. Friends will be branded not only as anti-business but as anti-investment as well. As the Committee knows, we are in this Clause dealing not with gains from short-term speculative activity but with gains resulting from genuine prudent investment over a period of years, just the kind of activity which hon. Members on both sides should be anxious to encourage in the country's interest.
    Anyone who sat through the Chancellor's Budget speech will recall that

    363
    the section which received the loudest cheers from his hon. Friends behind him, apart from that dealing with business expenses, was the one dealing with capital gains. There is an almost pathological hatred on the part of hon. Members opposite towards anyone who has any connection with the City of London and its activities. Time and again, this is reflected in the speeches of hon. Members opposite and the proposals in the Finance Bill itself. Yet this hatred and antagonism springs from a fundamental misunderstanding of the part which the City of London plays in the successful functioning of our free enterprise economy. Hon. Members opposite invariably choose to ignore the vital rôle which the Stock Exchange plays in the channelling of new investment to assist the growth and expansion of British industry, and with it, of course, the employment and prosperity of those who work in it. The total market value of securities quoted on the London Stock Exchange amounts to £50,000 million. This gives some idea of the great scope and importance of London as an international market in stocks and shares.
    My great fear and foreboding is that London's position in this sphere will be prejudiced and undermined by the Chancellor's proposals to impose a flat rate 30 per cent. Capital Gains Tax ad infinitum. The decision to impose a flat rate tax is bound to act as a disincentive to savings and to lead to substantially restricting the turnover and status of the London stock market. Perhaps I should disclose the fact that, in my spare time, of which I have not had a great deal in the last few months, I am a member of the London Stock Exchange, but I hasten to add that, contrary to what some hon. Members opposite seem to imagine, those who work on the Stock Exchange are not sharks or get-rich-quick operators and that the speculation we heard so much about yesterday is only the froth on the top of the great mass of genuine investment business transacted there every day.
    The men who follow careers in the City are charged with a very heavy responsibility for handling investment decisions on behalf of pension funds, unit trusts, banks, investment trusts and discount houses as well as individual clients. I hope that hon. Members opposite will not
    364
    underestimate the number of people in the country who are directly or indirectly affected by what goes on in the City and the way in which it is treated by the Government.
    I am sure that the proceedings of this Committee, the proposals of the Chancellor and the way in which he reacts to our recommendations will be watched very closely by a very large section of the community. Quite apart from the four million or so people who invest directly in stocks and shares or unit trusts, two out of three adults have some kind of direct or indirect interest in the stock market through life assurance, private pension funds or as members of a trade union or a co-operative society. This should be borne in mind.
    The Government would be well advised to take note of these figures, because I believe that the effect of a flat-rat Capital Gains Tax will be not only to penalise those now investing for the future but also to restrict turnover and gravely damage the operations of stock market upon which so many people directly depend.
    Perhaps the most powerful argument against the Chancellor's proposal and in favour of the Amendment is that a Capital Gains Tax in the flat-rate form is a positive disincentive to savings. I understand that the Financial Times index of share prices today stands at about three and a half times the level it was 30 years ago. This means, as has been said, that if we take into account the inflation during this period those who have held shares throughout those 30 years are no better off today in real terms than when they originally purchased the shares. All they have managed to do is just keep pace with the general rise in living costs.
    In common with my right hon. Friend the Member for Bexley (Mr. Heath), I was not impressed with the validity of the argument put on this point by the Financial Secretary in our earlier debate. From now on, under the Chancellor's proposals, if these people want to maintain the value of their savings it will not be enough merely to keep pace with inflation. They will have to do 30 per cent. better than that if they are to offset the penal and damaging effect of the Capital Gains Tax.
    This is a very grave penalty and injustice upon an important and valuable section of the community and the purpose

    365
    of our Amendment is to restore some equity and common sense to the treatment of these long-term investors. For all the very cogent and powerful reasons which have been advanced from this side of the Committee, I shall support the Amendment.
    9.45 p.m.
    Mr. W. R. Rees-Davies: I may be wrong, but I sense a feeling that the Committee does not want to go on too much longer on this group of Amendments, although it will want to deal with others which are following. For that reason, I shall be brief and confine myself to certain arguments.
    My hon. Friend the Member for Harrow, Central (Mr. Grant) is quite right to say that there must be some measure of tolerance inserted after the word "gains". I will not develop this argument at great length, but if the Financial Secretary will read what I said last night alone about valuation for Capital Gains Tax purposes, he will see the large margin of error which can be taken up. When my hon. Friend spoke of a person engaged in making small capital gains arising from income trusts or unit trusts, or other small matters of that kind, I could not fail to observe, although he was not directing it to the Financial Secretary's attention, the vigorous nodding of my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) when it was said that it was vital to discount a small measure of gain before capital gains began to be taxed.
    My hon. Friends have been arguing that the figure should be £400. I care not whether it is £400, £300 or £250, but even with Income Tax the taxpayer is allowed £120 or £150 free and there is then a further amount which is taxed at a lower rate before the standard rate is reached. I would have thought that it was plain beyond peradventure that in a Capital Gains Tax there must be some figure disregarded before the tax is applied. I should have thought that it was the plainest possible argument that the figure ought to be fairly substantial when it was likely to be difficult to evaluate the capital gains.
    As I said last night, tax inspectors one and all dislike the idea of the Capital Gains Tax generally when the gains are calculable and when they are incalculable
    366
    the Inland Revenue recognises the many extra difficulties, especially when there are capital gains across the board, not only in shares, but in racehorses.
    Hon. Members should think of the sort of position which may arise for some people. Somebody may own a couple of racehorses and a few pictures and may have done some property dealing and may own some stocks and shares. All these will be related one against the other. In such an example, it will be extremely difficult to calculate what the tax should be. Whether the small investor is investing in stocks and shares or across the board, even on the grounds of administrative convenience, if they are not attracted by the other arguments, the Government should agree that there ought to be some tolerance.
    There is one other matter which has not been adverted to. The Amendment of my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), Amendment No. 349, deals with the position when someone has bought an asset and held it for a period of ten years or more. My right hon. and learned Friend was arguing that in such an event it ought not to be a chargeable gain nor a computable loss. [Interruption.] I wonder whether the birdcage opposite could keep quiet for a moment, or go out for a smoke, when we will have only two or three in the Chamber and it would be rather easier to hear. [HON. MEMBERS: "We are buying racehorses."] Perhaps they can take their ponies to the East End.
    The Chairman: I would be grateful if the hon. Gentleman would get on with his speech on the Amendment and leave the Chair to keep hon. Members in reasonable order.
    Mr. Rees-Davies: They can more easily hear you, Dr. King, than me, but comments tend to disturb the chain of thought and I do not want to be too long.
    The Government have still not applied their minds to the basic argument on capital gains. The reason why one should not pay capital gain in respect of an asset held for more than ten years is that it is not part of your trading asset. These things were not bought for trade and there is a world of difference between what is

    367
    acquired for a hobby and what is acquired as income. This is an intellectual argument and is not concerned with general taxation. What I am trying to explain is that whether a person is a professional man or engaged in a trade or some form of commerce he will have to pay on his income.
    I am for a Capital Gains Tax. I believe in it, and I would like to have one in respect of income howsoever earned in the course of trade or profession. I tried to say this last night, and it is beginning to have some effect, because, like Alice in Wonderland, I believe that what is said three times is true. When a man has purchased something, say, a picture, and held it for many years, he has purchased it in the course of his hobby and not because it was part of the living he earned.
    For example, it has been known for a great many years that if a person engages in the breeding of racehorses then he has to pay, very naturally, for that occupation. If he purchases a racehorse it is regarded as a hobby and he is not able to lay off the expenses on the basis that he is engaged in an occupation. It is the same in the case of a picture, or an asset owned for a period of about ten years. These are not things
    which are taxable on the basis of income or trade and this is what has not been got across. The whole of the argument for the exclusion of so many of these categories is based upon this. I hope the hon. Gentlemen opposite have the point.
    There are three main points. The first is the inflationary argument, and that has been well developed on these benches. The second is that whatever the amount shall be some tolerance must be given in respect of capital gains. An allowance must be given on a very much lower rate, but I should think that a certain amount, whether for administrative convenience or to deal with casual capital gains which might come about, should be made.
    The third point is that there are certain spheres which are unattractive for the purposes of capital gains. These are usually not those in which people are seeking to earn their living. If this principle is adhered to, I think we may be able to get some way in what is, after
    368
    all, a highly experimental Measure in which it might be advisable to go slowly. As this debate deals with the question of incomes and economic policy, I think it is about time we had some Minister from the Ministry of Economic Affairs participating in the discussions instead of leaving the right hon. and hon. Gentleman to have to carry the burden in the heat of the day. I hope that they will join in and not leave the Treasury to paddle its canoe as best it can.
    The Chairman: The debate is running rather wide of the Amendments. I should bear that in mind when I consider what to do about the debate on the Question, "That the Clause stand part of the Bill". I will not allow hon. Member's to repeat on that Question the arguments which they have advanced in this debate.
    Mr. MacDermot: I take the hint of the hon. Member for the Isle of Thanet (Mr. Rees-Davies) that perhaps the sense of the Committee is that we have had a very full debate on these Amendments. It is almost exactly one-and-a-half hours since we moved to this interesting and important group of Amendments. May I seek to deal with them as briefly as I can.
    The right hon. and learned Member for Chertsey (Sir L. Heald) moved Amendment No. 349 which proposes a system of abatement in our Capital Gains Tax system. The possibility of writing into our system of Capital Gains Tax a system of abatement was, naturally, considered by my right hon. Friend the Chancellor of the Exchequer, but certainly never in anything like the form in which it is proposed in the Amendment, which is, in fact, a wrecking Amendment because this abatement system is tied to something which starts by being a flat-rate system of taxation.
    All the countries which adopted the abatement system—and they have not been many—linked it to capital gains which at the outset and in the initial years were treated like normal income and were taxed as ordinary income and the equivalent to Surtax rates, and then that was abated in later years. To have an abatement system such as is proposed in the Amendment linked to our 30 per cent. Capital Gains Tax would mean that something like four-fifths of the yield of this tax would be lost. That is why I

    369
    call this a wrecking Amendment. The Capital Gains Tax would become absolutely derisory.
    That does not alter the fact that I must meet and answer the arguments about why we rejected the abatement solution, because, as has been said, other countries have adopted it. The Americans adopted it. They started it in the 1920s, and they abandoned it and adopted a system of the kind which we are introducing. Sweden, it is said, has this system. They have two systems of abatement—one for real property and one for other assets. But this is
    something which has been much criticised in Sweden and I am advised that the Swedish Government have set up a committee to investigate the whole of the Swedish capital gains tax system. One of the things which it is considering is the possibility of going over from the abatement system to a system of the kind which we propose.
    I suggest that the experience of the countries which have tried an
    abatement system is not very happy. Let me try to explain why. The main and all-important reason is that it has a very adverse effect on the market for shares and securities. If anything is likely to have a locking-in effect, it is an abatement system under which there is an obvious inducement to hold and hang on. This was the paramount reason why the Americans abandoned the abatement system. All the advice which my right hon. Friend the Chancellor of the Exchequer has had from those very responsible persons whose duty it is to advise him on the effect of measures on the market for securities has been unanimous and emphatic against introducing an abatement system and in favour of a permanent flat-rate system.
    10 p.m.
    The smooth functioning of the market depends, amongst other things, on the ability of analysts to compare the yelds of different kinds of stocks, including comparing the yields on Government stocks with those on other fixed interest securities, and if there was a variable rate of tax according to the length of time for which a person held a security, an investment analyst would have to study the individual position of each potential investor before he was in a position to offer any advice.
    370
    The investor himself would not know for how long he was going to hold on to the security, so it would not be possible to calculate what would be the rate and degree of abatement which would be taking effect at the time of his disposal, and if, as I suggest must be the case, any abatement scheme was linked to the basic rate of Income Tax and Surtax, he would not know what would be his own personal effective rate of tax during the year of disposal.
    It is for those reasons, which appeared to my right hon. Friend to be quite overwhelming, and in accordance with the advice which he received, that he rejected the abatement solution.
    One of the arguments put forward in favour of the abatement solution, as indeed of this group of Amendments which we are considering, is the desire by hon. Gentlemen opposite to build into our Capital Gains Tax system a hedge against inflation. I know that the Committee wearies of listening to me, and does not want me to repeat the arguments which I put forward when considering the last Amendment. The hon. Member for Shipley (Mr. Hirst) criticised me for having dealt with it on the last Amendment, but the argument was raised there, and I thought it right to deal with it. But, as the right hon. Member for Bexley (Mr. Heath) pointed out in reply, this is obviously a relevant argument in considering this Amendment, so I ask hon. Gentlemen to take, as part of my argument on this group of Amendments, what I said in giving our reasons for rejecting the idea that it would be right or proper to build into a Capital Gains Tax system a hedge against inflation.
    We have heard a lot about the position of the investor who makes a gain in money terms which does not reflect the real gain in terms of purchasing power. To put it the other way round, there is not a real gain in purchasing power because it is posited that the monetary gain is only sufficient to maintain the value in terms of purchasing power of the original investment. But in that situation, which is one of inflation, one must also look at the position of investors who do not make gains, investors who have invested in other forms of investment where they do not make gains.

    371
    If one is going to take the idea of building into the tax system this hedge against inflation, is there to be some kind of rebate for those people, and, if so, where is it to stop? I suggest to hon. Members that if they think about this for a
    little they will see that it would be unworkable to build in, in any way which would be fair, and which would produce equity between different classes of taxpayer, a hedge against inflation. As I said on the last Amendment, if one was going to try to do so, the place to start would not be with the equity investor.
    The right hon. and learned Member for Chertsey derided the idea of social justice, and said that it appeared to him as Socialist justice. I should be very glad to accept the description, because this is what we mean by Socialism. The object is to achieve social justice, and we do not think that it is social justice to build in a hedge against inflation in favour of one class of taxpayer.
    The hon. Member for the Isle of Thanet, in support of the abatement argument, and in support of the whole group of Amendments, put forward again an argument that he put forward last night, and urged me to accept, in the words of Alice, that what he says three times is true. It was not Alice, it was the Bellman who said, "What I say three times is true", but however many times the hon. Gentleman says it, it will not convince me or my hon. Friends. His argument is that the theoretical basis for a Capital Gains Tax is that the capital gain to be taxed is part of the trading assets, but that is exactly what it is not.
    If it is something which one sets out by way of trade to gain and one is successful, generally it gets taxed as part of income as in the example the hon. Member gave of the racehorse breeder who breeds horses by way of occupation. If the individual owner
    does it by way of a hobby that is not part of his trade. The horse is a capital asset and is not liable to tax. If that person has had a successful racing season and sells at a profit, up to now he would escape tax, but in future he will not. If one accepted the argument of the hon. Member the result would be no Capital Gains Tax at all because his description would exclude virtually every type of capital gain.
    372
    The hon. Member for Basingstoke (Mr. Mitchell), who moved the first of the group of Amendments directed quite specifically to the built-in hedge against inflation having an offset against the decline in purchasing power, supported his argument with the case of the small businessman. He referred to the shopkeeper and many other examples of a man who by his own efforts has built up a business and then realises his business and retires. I quite see the force of the argument in this instance and I do not propose to deal further with it, because there is another Amendment on the Notice Paper dealing with that situation which we shall discuss later on.
    The hon. Member asked what would be the effect on the gentleman who moved from Basingstoke to Andover. If he were pursuing the same occupation and trade he could postpone paying the tax on capital gains, but if he changed his occupation completely and moved to another business, having completely wound up the first and realised the capital gain on it, he would be liable to tax.
    Mr. Mitchell: I thank the hon. and learned Gentleman for his explanation. If the man were a shopkeeper, a chemist in the one case and a grocer in the other, would that mean that he would be charged for capital gains?
    Mr. MacDermot: I do not think that people often change their occupation from that of a chemist to that of a grocer, but if one did so he would not be pursuing the same trade or occupation.
    The Amendment put forward by the hon. Member for Harrow, Central (Mr. Grant) proposes an exemption of the first £400 on capital gains. That was something which we considered when we were considering the form of this tax. If I may say so to people inexperienced in these matters, as I myself was when approaching the subject—hon. Members may think I still am—this was an obvious idea which we considered straight away. Should we exempt the first slice of capital gains? But one sees at once that that would be a highly inequitable thing to do. One might think that this was helping the small man about whom we hear so often. If I may use a somewhat Irish expression, being of a suspicious nature when I hear hon. Members

    373
    opposite pleading the cause of the small man, I suspect that there is a Surtax payer lurking behind the skirts of the small man.
    In any event, whatever may be the purpose of the Amendment, if this concession were made it would give most benefit to the wealthiest taxpayers. It would give the greatest amount of benefit to those who pay the tax at the full flat rate of 30 per cent. on their gains and, by comparison, it would be worth little or nothing to the person living on a small investment income and who realises a small gain when he changes his investments, and who would be liable to pay tax at less than the standard rate of Income Tax on only two-thirds of his gain.
    Thirdly, it would operate unfairly as between the person who realises exactly £400 in each of two years and the person who realises no gain in the first year and a gain of £800 in the second, of which £400 would be taxed. In other words, the person who is able to realise gains at or below the level of £400, at whatever level, if he realises them each year, will enjoy the benefit of the exemption each year. On the other hand, the person who only occasionally realises a gain, and perhaps not a very substantial one—who is probably the person with whom we would have more sympathy, and would like to help—will derive less benefit from the exemption.
    Finally, there would have to be a special provision for losses. It would be over-generous to exempt the first £400 of gains in a year when there were no gains and then, in a year when there were net losses, to allow them to be carried forward to be set against the first gains which were not covered by the exemption. This leads on to the argument about the great administrative advantage and convenience that would be derived from an exemption of this kind. The advice that we have is quite firm and clear on this; it is that there is not much, if any, substance in this point, because unless the £400 of net gains in a year were exempt but the net losses were to be carried forward against the first net gains liable to tax, gains and losses would still have to be returned to the Inland Revenue and as carefully recorded, whether or not the gains were exempted, so that the work of
    374
    calculating the gains would have to continue. It would only be the final stage of charging the tax which would be omitted.
    In connection with this matter the minority Report was cited. We have frequently been chided with having followed blindly the minority Report—with references to the hand that is guiding the hand of my right hon. Friend. Here is an occasion when we have come to the conclusion, on looking into the matter, that the minority Report was plainly wrong.
    We do not propose to follow it. I was surprised to hear the hon. Member say that our motive in trying to catch people who were escaping the tax net showed a sense of wrong social priorities. I can only say that it is perhaps because the country at large does not accept that view of social priorities that hon. Members opposite now find themselves on that side of the Committee and not on this.
    Mr. Mitchell: I am sorry to interrupt the hon. Member. He has been very kind in giving answers to two of the three questions that I have put to him. He has omitted to answer the third, concerning the farmer who passes on his farm to his son. Does he have to pay 30 per cent. in Capital Gains Tax on the increased capital value of the farm in cash? He does not have that sort of money. [Interruption.] I know that that is the case. No less than 91 per cent. of farmers of this country are small businessmen. A farmer's land may increase in value, but there is no more of it. The land is no greater in area than it was when he started. Will he have to break the farm up—
    The Chairman: Order. I am sorry, but the hon. Member's intervention is becoming suspiciously like a speech.
    10.15 p.m.
    Mr. MacDermot: I did not deal with the hon. Gentleman's question separately, because I thought that it was included in the argument he was making in general about the transfer of surplus on retirement—[Interruption.]—the answer is that—[HON. MEMBERS: "Answer."]—I have answered. Hon. Gentlemen may not like the answer, but we shall have plenty—
    Hon. Members: Answer.
    Mr. Mitchell: I did not hear that answer, Dr. King.
    The Chairman: Order. The hon. Member for Basingstoke (Mr. Mitchell) must not seek to intervene through the Chair. He can only intervene if the hon. Member who has the Floor gives him permission.
    Mr. Mitchell: Thank you for your guidance, Dr. King.
    Mr. MacDermot: The hon. Gentleman will have plenty of opportunity to pursue the specific points when we come to deal with the Amendments raising these specific matters. I am not going to be led off the main path of what is a very general argument on general principles by interventions of that kind.
    I wish finally to deal with one other main argument which was adduced in support of this group of Amendments. It was the argument that without some abatement or allowance for inflation of the kind suggested, this tax would be a disincentive to saving, a disincentive to capital formation. I suggest that this is a very dubious argument. People do not derive their incentive to save from the hope of making capital gains, they derive—[HON. MEMBERS: "Oh."]—it is interesting to hear the reaction to that assertion. Shall I say that the vast majority of people in this country do not find their incentive to save from the hope of making capital gains. They save because they need to save to provide for their own future, to provide for their retirement and so on.
    The form in which they save, the mood in which they are saving may of course, and will be, influenced by considerations of whether or not they make a capital gain. But we are talking about the incentive to save. In fact it is highly questionable whether taxation on capital gains reduces the incentive to risk investment—which I think is what the hon. Gentleman who advanced this argument really had in mind—or whether on balance it increases it. There are many authorities in the field of economic theory who would argue that, on the contrary, providing a tax is framed so as to make a reasonable allowance for losses, a tax on capital gains will enhance the incentive to put money into risk capital because the prospect of reduced risk and no loss
    376
    bears more heavily in the mind of the investor than the prospect of increase. What stops people putting money in risk is the fear of loss not the fact that in case of success the size of the gain is higher in one set of circumstances than another.
    Hon. Gentlemen may not agree with this but I am pointing out that not all human beings are influenced by the same motives and certain hon. Gentlemen who have been doing certain special pleading on behalf of certain people who would be affected in a particular way by this tax need not think that their experience is shared by the common run of humanity which is influenced by quite different motives.
    Sir Alexander Spearman: Would not the hon. and learned Gentleman agree that people are deterred from saving by the fear of inflation and they are not deterred so much by the fear of inflation if they think they can have capital gains to offset that inflation?
    Mr. MacDermot: The answer is, "No, I do not agree".
    Sir Knox Cunningham: I wish to add my support to these Amendments, and I can do so in a dozen or so words. The Government, in their Capital Gains Tax, have made quite clear that they are determined to ignore the effect of inflation on values. The people of this country will not lightly forgive the Government for that action. They think it unjust and immoral to ignore the effect of inflation in this tax. I think they are right, and that is the reason why I wish to support my hon. and right hon. Friends.
    The Earl of Dalkeith: I should like to ask one short, simple and straightforward question of the Financial Secretary. Will he come clean with the Committee and with the country and admit that, so far as this Capital Gains Tax is a tax on the appreciation of an asset which is necessary to enable it to maintain its value in a period of inflation, it is not a Capital Gains Tax, but a capital levy? Will he be honest and admit that this is so? This is the only thing which I am asking him to do. At present, as we know only too

    377
    well, when we have a Socialist Government in power, the chances are that we have a period of inflation. The Government are thereby living on ill-gotten gains. Will he be bold and honest enough to admit this?
    Mr. MacDermot: If the hon. Member for Edinburgh, North (The Earl of Dalkeith) wants a direct answer to his question, the answer is "no". The Capital Gains Tax in these circumstances is not a capital levy. The confusion, I think, in the hon. Member's mind is this. Of course, during a period of inflation persons who hold capital suffer the effect of a levy on their capital, but this is produced not by the taxation system but by the inflation.
    Sir D. Glover: We have had a very interesting debate this evening. If I may say so, the Financial Secretary has achieved a triumph. He has at last convinced me by his arguments, he has overwhelmed me with his logic. Whereas, when the Finance Bill came in I had an open mind on the Capital Gains Tax—[HON. MEMBERS: "Oh."] This is perfectly true. I have made a good many speeches in the country saying that I was in favour of a limited Capital Gains Tax, but the Financial Secretary has, by his arguments, convinced me that I was wrong. He has convinced me now to be a total opponent of any Capital Gains Tax. All his arguments lead me to that conclusion.
    His arguments in the debate do not lead me to moderate my opinion or to accept his arguments. They have made me even more convinced that any Capital Gains Tax must be at a very low level and must take account of inflation and the individual circumstances of the person. As I listened to the arguments which he put, trying to convince me to support his cause, I became far more determined that my original conclusion on this subject was wrong.
    Let us deal first with the question of inflation. It is all right for the Financial Secretary to say that we all live in an inflationary society—
    Mr. MacDermot: I did not.
    Sir D. Glover: Yes you did—
    The Chairman: Order. The hon. Member must address the Chair.
    Sir D. Glover: You are far too wise, Dr. King, to say anything of that sort, but the Financial Secretary did say this.
    Let us take the facets of the population of this country. I do not think that there has been any valid argument from either side of the Committee that the wage earner and salary earner does not manage to opt out of inflation by getting increases in salary. We hear soul-searching arguments about pensioners being the people hit by inflation, but the Financial Secretary knows perfectly well that, excluding the Labour Government from 1945 to 1951, which did not increase the pension to control inflation, every other Government from 1951 to the present time—including the present Government because of their increases in the pensions in the autumn—have made certain that the pensioner is kept in front of inflation—[Interruption.] They have kept in front of inflation. Those in need have kept pace with inflation; the pension today has a higher purchasing power than it had in 1948, and it is in front of inflation.
    Let us go back in history a little because that is probably the best way to consider this matter. A person—and such a person could still be living—who invested £1,000 in a shop or shares in 1900 might feel that his investment is worth about £8,000 today. However, that sum means that his investment has not increased by a penny in terms of real purchasing power. Indeed, I doubt whether it has the same value as the original £1,000 had in 1900. If the present holder left it to a beneficiary, he would have to pay £2,500 on that capital gain, although the sum inherited would have the same value as it had when originally invested in 1900. I am speaking in terms of purchasing power. [interruption.] I suppose that most hon. Gentlemen opposite are not particularly interested in what I have to say. I know that the Financial Secretary is.
    Now consider the position in present-day terms. Under the former Government, although inflation went on at a slower rate than under the Government which were in power during the 1945–51 era, it still went on at the rate of about 2½ per cent. per year. I am not a senior wrangler, but I understand that 2½ per cent. per year means than one's money is halved in 15 years.
    Thus, a person with an investment worth £1 would, when disposing of it

    379
    after 15 years, have to pay 6s. in Capital Gains Tax because of the amount by which the sum had increased due to inflation during those years, although the real value in terms of purchasing power would not have increased at all. Under the present proposals of the Government a static investment could, purely and simply because of inflation, be reduced in real value from £1 to 5s. in 30 years. This is, therefore, a confiscatory tax. It is taking capital from people who are not tycoons. [Interruption.] Many of them are very humble and moderate people, some widows and even orphans.
    An Hon. Member: Tory knights?
    Sir D. Glover: Because a man happens to be a Tory knight it does not necessarily mean that he is wealthy. [Interruption.] Because of the noise among hon. Gentlemen opposite I will direct my attention to the benches above the Gangway.
    I have shown that in 30 years a perfectly stable investment could be reduced in purchasing power from £1 to 5s. because of inflation and the Capital Gains Tax. Perhaps hon. Gentlemen opposite consider that this is a just thing to do. I assure them that the majority of people in this country do not think so. The Financial Secretary said that people who invest do not expect to make a gain. It is obvious that he does not understand human nature.
    Why does he think that about 30 million people fill in football coupons each week? Does he consider that when they fill in their football pools and receive
    profits which are not subject to the Capital Gains Tax they are doing something very different from people who invest money in other ways? It is obvious that the hon. and learned Gentleman does not know what makes human beings tick. If it applies to football pools and premium bonds it applies to other investments. The possibility of making a gain applies to every investment of this type and it is one of the things that has been responsible for building up our capitalist society.
    I am not impressed by the Financial Secretary's arguments about what goes on in other countries, what the United States is doing or what is happening in Sweden. We are dealing with a tax which even in the United States has only a comparatively short history.
    380
    10.30 p.m.
    We have no idea what is the long-term result of eating the seed corn rather than ploughing it back into production. Of course, the United States may have had no adverse effect from this, because the United States is a country rich in minerals and natural resources, producing wealth out of the ground, whereas we in this country produce little wealth out of the ground. Far more are we dealing with the inheritance of centuries which the Government now propose to use for day-to-day activities in connection with consumer expenditure. There is not enough history in the world to show whether these Capital Gains Taxes are conductive to increased investment and to a dynamic economy because all the examples we have got are not analogous to the situation in this country.
    This is probably the most vulnerable country in the world to a change in capital structure. We are a trading country; we are not a raw material producing country. In a raw material producing country one may squander one's raw materials and still increase one's wealth, but we have few raw materials. Under the Capital Gains Tax when we spend the accumulated savings of hundreds of years we produce a situation whereby it is only too likely that we shall deal a death blow to the saving incentive on which our economy has been built.
    Having listened to all the arguments that have been put from both sides of the Committee, I am convinced that the Government's proposals are unworkable, unfair and very damaging indeed to our competitive economy. I am convinced that all the proposals in this Clause will make it less likely that people will invest on a risk basis. People who invest on a risk basis do so to make a profit and they balance that against the possibility of a loss.
    I wish the Chief Secretary to the Treasury would give me his attention. Of course, the small investor can lay off his losses against his capital gains, but when we consider that the average investment in this country is something between £500 and £1,000 we appreciate that he is not concerned with laying off his losses

    381
    against his profits. If he makes an investment and, having made a profit, disposes of the profit for domestic reasons, his wife, finding that one-third of the profit has to be paid to the State in Capital Gains Tax, will say, "We will not have any more of those investments. We might as well use our income for some immediate benefits." All the Gov-
    382
    ernment's present intentions will make it less likely that people will invest in risk-taking operations.
    Therefore, completely convinced by the hon. Gentleman's argument that he is absolutely and utterly wrong, I hope that hon. Members on this side of the Committee will vote for the Amendment.
    Mr. Peter Walker: This is probably the most important group of Amendments to be discussed under the capital gains side of the Bill. One faces it with rather more alarm than one otherwise would after having heard the Financial Secretary wind up the debate on the previous Amendment, because we now not only have to consider the inflationary effect but the new theme and thesis that the Government have brought to taxation, which is that the higher the rate of Income Tax the higher must be the rate of Capital Gains Tax. We know that under a Labour Government we always get increased taxation and inflation, and we recognise that in considering this group of Amendments we are faced with the possibility of a rising rate of Capital Gains Tax and of inflationary erosion as well.
    The main topics under discussion now fall under the three heads of the effect on the elderly, the effect on the private company and the small business, and the effect on the small investor. As to the elderly, we noted when my hon. Friend the Member for Ormskirk (Sir D. Glover) was speaking the hilarious shouts from the other side about widows and orphans. Let there be no mistake; one group of people who will be particularly watching this group of Amendments will be the widows, because the very form of this tax makes it of maximum importance to widows in the future, as one of its applications is at the time of death. At the time of a death, the business assets and savings and investments of the deceased person will be subject to Capital Gains Tax, and if no account is taken of inflation it will be a very serious matter for widows.
    The hon. Member for Orpington (Mr. Lubbock) illustrated by his example of the person whose investment of £1,000 had double over a period of years, the basic injustice of not taking the inflationary effect into account. That effect is extremely adverse to the elderly, because if in 20 years' time someone reaching old age decides to realise an asset, it will be subject to a form of Capital Gains Tax which purely taxes the inflation that has taken place, whereas the person who has made a profit during the previous 18 months, with no difference at all in the purchasing power of the money
    384
    he has invested, will be subject to exactly the same level of taxation. That must be fundamentally wrong.
    I hope that at this stage the Financial Secretary will pay attention, because he certainly did not pay attention to my hon. Friend the Member for Basingstoke (Mr. Mitchell) when he referred to the problem of the farmer. This is another section of the community which will be watching the fate of this group of amendments with great interest. Farmers will find in 20 or 30 years' time, if inflation has taken place, that when they realise their farms or pass them on to their sons they will be subject to a 30 per cent. tax on inflation. They will not have the cash to meet the tax, and the farms will have to be sold. That is another effect of not taking inflation into account.
    I turn now to the small investor. The hon. and learned Gentleman made out a most remarkable case for not accepting the modest proposal of my hon. Friend the Member for Harrow, Central (Mr. Grant) that the first £400 of capital gains should be tax free. I should be glad to have the Financial Secretary's attention, because it is a very important matter, and the hon. and learned Gentleman was willing to say that he had no intention of assisting four million small investors in case there was the possibility that a Surtax payer might benefit to the maximum extent of £120. And because of this the Government were unwilling to consider giving any concession to the small investor.
    Mr. MacDermot: The hon. Gentleman knows that that is not right. What we were saying was that we did not accept the £400 exemption limit as the way of doing it and that we believed that the way to help the small investor was on the basis of the alternative mehod of charge.
    Mr. Walker: This is the second time that the hon. and learned Gentleman has made great play of this alternative method of charge. The sole result of this alternative method for the person paying the standard rate of Income Tax is that the Capital Gains Tax is reduced from 30 per cent. to 27½ per cent. If that is the maximum concession that the Government intend to give to the small

    385
    investor he will not be very pleased about it. There are administrative advantages and the advantage of encouraging small savings and the small investor will be considerably adversely affected if these Amendments are not taken into consideration.
    We are tired of hearing constantly about the Government's generosity in these matters. Last night they were generous in allowing us to give £100 in gifts tax-free. Tonight they are generous in allowing only a 30 per cent. Capital Gains Tax. We are concerned about inflation. This is something which affects savings and small businesses, and we are particularly worried about inflation while this Government are in power. It is something of an irony that within a few weeks of a Finance Bill being published which brings about a 30 per cent. tax on inflation we should have the biggest rise in the cost-of-living for 10 years. The Government are now putting themselves in the position that they actually obtain revenue and benefits from inflation and higher taxation. I certainly urge my hon. and right hon. Friends to support the Amendment in the name of my right hon. Friend the Member for Bexley (Mr. Heath) and myself and so protect the small investors, the small businesses and the elderly people of this country.
    The Chairman: The Amendment to which the hon. Member for Worcester (Mr. Peter Walker) refers is Amendment No. 117 when we come to the Schedule. Does the right hon. and learned Member for Chertsey (Sir L. Heald) wish to press his Amendment No. 349 to a Division?
    Sir L. Heald: I beg to ask leave to withdraw the Amendment.
    The Chairman: In view of what the right hon. and learned Member has said I ask the Committee to give him leave to withdraw the Amendment.
    Mr. Peter Walker: Are we able to take a Division on Amendment No. 117 now?
    Sir L. Heald rose—
    The Chairman: Can I help both the hon. Gentleman and the right hon. and learned Gentleman? If the Opposition wish to divide on Amendment No. 117, that Amendment is on Schedule 6 and the Committee can divide only at that Amendment's place on the Order Paper. If it wishes to divide at the moment on Amendment No. 349 it can do so now. I am in the hands of the Committee.
    Hon. Members: Divide.
    Sir L. Heald: On a point of order. I am afraid that I may have misunderstood what you were saying, Dr. King. In the circumstances, I certainly would not wish to withdraw the Amendment.
    The Chairman: I was not endeavouring to persuade the right hon. and learned Gentleman to withdraw. The Chair only wants to know exactly where it is. I had understood earlier that this was in the mind of the Opposition.
    Question put, That those words be there added:—
    The Committee divided: Ayes 162, Noes 170.

    Division No. 131.]

    AYES

    [10.45 p.m.

    Agnew, Commander Sir Peter

    Bryan, Paul

    Emery, Peter

    Alison, Michael (Barkston Ash)

    Buchanan-Smith, Alick

    Errington, Sir Erie

    Allason, James (Hemel Hempstead)

    Buxton, Ronald

    Eyre, Reginald

    Anstruther-Gray, Rt. Hn. Sir W.

    Carlisle, Mark

    Farr, John

    Awdry, Daniel

    Carr, Rt. Hn. Robert

    Fisher, Nigel

    Barlow, Sir John

    Chichester-Clark, R.

    Fletcher-Cooke, Sir John (S'pton)

    Batsford, Brian

    Clark, William (Nottingham, S.)

    Foster, Sir John

    Bennett, Sir Frederic (Torquay)

    Cooke, Robert

    Fraser, Rt Hn Hugh(St'fford&Stone)

    Bennett, Dr. Reginald (Got & Fhm)

    Cooper-Key, Sir Neill

    Fraser, Ian (Plymouth, Sutton)

    Berry, Hn. Anthony

    Crawley, Aidan

    Gibson-Watt, David

    Bessell, Peter

    Curran, Charles

    Giles, Rear-Admiral Morgan

    Biggs-Davison, John

    Dalkeith, Earl of

    Gilmour, Ian (Norfolk, Central)

    Birch, Rt. Hn. Nigel

    Dance, James

    Gilmour, Sir John (East Fife)

    Black, Sir Cyril

    Davies, Dr. Wyndham (Perry Barr)

    Glover, Sir Douglas

    Bossom, Hn. Clive

    d'Avigdor-Goldsmid, Sir Henry

    Goodhew, Victor

    Box, Donald

    Dean, Paul

    Gower, Raymond

    Boyd-Carpenter, Rt. Hn. J.

    Digby, Simon Wingfield

    Grant, Anthony

    Boyle, Rt. Hn. Sir Edward

    Dodds-Parker, Douglas

    Griffiths, Peter (Smethwick)

    Brinton, Sir Tatton

    Douglas-Home, Rt. Hn. Sir Alec

    Gurden, Harold

    Brooke, Rt. Hn. Henry

    du Cann, Rt. Hn. Edward

    Hall, John (Wycombe)

    Bruce-Gardyne, J.

    Elliott, R. W. (N'c'tle-upon-Tyne,N.)

    Hall-Davis, A. G. F.

    Hamilton, M. (Salisbury)

    Longbottom, Charles

    Ridsdale, Julian

    Harris, Frederic (Croydon, N.W.)

    Loveys, Walter H.

    Roberts, Sir Peter (Heeley)

    Harrison, Col. Sir Harwood (Eye)

    Lubbock, Eric

    St. John-Stevas, Norman

    Harvey, John (Walthamstow, E.)

    Mackenzie, Alasdair (Rost&Crom'ty)

    Scott-Hopkins, James

    Harvie Anderson, Mist

    Mackie, George Y. (C'nsss & S'land)

    Sharples, Richard

    Hawkins, Paul

    McLaren, Martin

    Spearman, Sir Alexander

    Hay, John

    Maginnis, John E.

    Stainton, Keith

    Heald, Rt. Hn. Sir Lionel

    Maude, Angus

    Stanley, Hn. Richard

    Heath, Rt. Hn. Edward

    Maydon, Lt.-Cmdr. S. L. C.

    Steel, David (Roxburgh)

    Hendry, Forbes

    Mills, Peter (Torrington)

    Stodart, Anthony

    Hiley, Joseph

    Monro, Hector

    Studholme, Sir Henry

    Hill, J. E. B. (S. Norfolk)

    More, Jasper

    Summers, Sir Spencer

    Hirst, Geoffrey

    Morrison, Charles (Devizes)

    Taylor, Sir Charles (Eastbourne)

    Hogg, Rt. Hn. Quintin

    Mott-Radclyffe, Sir Charles

    Taylor, Edward M. (G'gow,Catheart)

    Hordern, Peter

    Munro-Lucas-Tooth, Sir Hugh

    Taylor, Frank (Moss Side)

    Hornby, Richard

    Neave, Airey

    Thatcher, Mrs. Margaret

    Hornsby-Smith, Rt. Hn. Dame P.

    Nicholls, Sir Harmar

    Thomas, Sir Leslie (Canterbury)

    Howe, Geoffrey (Bebington)

    Noble, Rt. Hn. Michael

    Thompson, Sir Richard (Croydon,S.)

    Hunt, John (Bromley)

    Nugent, Rt. Hn. Sir Richard

    Thorpe, Jeremy

    Hutchison, Michael Clark

    Onslow, Cranley

    Tiley, Arthur (Bradford, W.)

    Irvine, Bryant Godman (Rye)

    Osborn, John (Hallam)

    Turton, Rt. Hn. R. H.

    Jenkin, Patrick (Woodford)

    Osborne, Sir Cyril (Louth)

    Tweedsmuir, Lady

    Johnson Smith, G. (East Grinstead)

    Page, R. Graham (Crosby)

    van Straubenzee, W. R.

    Johnston, Russell (Inverness)

    Pearson, Sir Frank (Clitheroe)

    Vaughan-Morgan, Rt. Hn. Sir John

    Jopling, Michael

    Percival, Ian

    walker, Peter (Worcester)

    Joseph, Rt. Hn. Sir Keith

    Pitt, Dame Edith

    Ward, Dame Irene

    Kerr, Sir Hamilton (Cambridge)

    Pounder, Rafton

    Weatherill, Bernard

    Kilfedder, James A.

    Powell, Rt. Hn. J. Enoch

    Webster, David

    King, Evelyn (Dorset, S.)

    Prior, J. M. L.

    Whitelaw, William

    Kirk, Peter

    Pym, Francis

    Wilson, Geoffrey (Truro)

    Kitson, Timothy

    Ramsden, Rt. Hn. James

    Wise, A. R.

    Langford-Holt, Sir John

    Redmayne, Rt. Hn. Sir Martin

    TELLERS FOR THE AYES

    Legge-Bourke, Sir Harry

    Renton, Rt. Hn. Sir David

    Mr. Ian MacArthur and

    Lloyd, Rt.Hn.Geoffrey (Sut'nC'dfield)

    Ridley, Hn. Nicholas

    Mr. Dudley Smith.

    NOES

    Abse, Leo

    Foley, Maurice

    Manuel, Archie

    Allen, Scholefield (Crewe)

    Ford, Ben

    Mapp, Charles

    Armstrong, Ernest

    Fraser, Rt. Hn. Tom (Hamilton)

    Mason, Roy

    Barnett, Joel

    Freeson, Reginald

    Mayhew, Christopher

    Baxter, William

    Galpern, Sir Myer

    Mellish, Robert

    Bence, Cyril

    Garrett, W. E.

    Mendelson, J. J.

    Bennett, J. (Glasgow, Bridgeton)

    Garrow, A.

    Millan, Bruce

    Bishop, E. S.

    George, Lady Megan Lloyd

    Miller, Dr. M. S.

    Blackburn, F.

    Gourlay, Harry

    Milne, Edward (Blyth)

    Blenkinsop, Arthur

    Grey, Charles

    Morris, Charles (Openshaw)

    Boardman, H.

    Griffiths, David (Rother Valley)

    Morris, John (Aberavon)

    Boston, T. G.

    Griffiths, Will (M'chester, Exchange)

    Murray, Albert

    Bowden, Rt. Hn. H. W. (Leics S.W.)

    Gunter, Rt. Hn. R. J.

    Noel-Baker, Francis (Swindon)

    Braddock, Mrs. E. M.

    Hamilton, William (West Fife)

    Norwood, Christopher

    Bray, Dr. Jeremy

    Hannan, William

    Ogden, Eric

    Brown, Hugh D. (Glasgow, Provan)

    Hart, Mrs. Judith

    O'Malley, Brian

    Brown, R. W. (Shoreditch & Fbury)

    Hattersley, Roy

    Oram, Albert E. (E. Ham, S.)

    Buchan, Norman (Renfrewshire, W.)

    Hazell, Bert

    Orme, Stanley

    Buchan, Richard

    Heffer, Eric S.

    Oswald, Thomas

    Butler, Herbert (Hackney, C.)

    Herbison, Rt. Hn. Margaret

    Page, Derek (King's Lynn)

    Callaghan, Rt. Hn. James

    Hill, J. (Midlothian)

    Palmer, Arthur

    Carmichael, Neil

    Hobden, Dennis (Brighton, K'town.)

    Pannell, Rt. Hn. Charles

    Carter-Jones, Lewis

    Holman, Percy

    Park, Trevor (Derbyshire, S.E.)

    Castle, Rt. Hn. Barbara

    Howarth, Robert L. (Bolton, E.)

    Pearson, Arthur (Pontypridd)

    Chapman, Donald

    Howell, Denis (Small Heath)

    Peart, Rt. Hn. Fred

    Craddock, George (Bradford, S.)

    Hoy, James

    Pentland, Norman

    Crawshaw, Richard

    Hughes, Cledwyn (Anglesey)

    Popplewell, Ernest

    Cullen, Mrs. Alice

    Hughes, Emrys (S. Ayrshire)

    Prentice, R. E.

    Dalyell, Tam

    Irvine, A. J. (Edge Hill)

    Price, J. T. (Westhoughton)

    Davies, G. Elfed (Rhondda, E.)

    Jones, Dan (Burnley)

    Probert, Arthur

    de Freitas, Sir Geoffrey

    Jones, J. Idwal (Wrexham)

    Pursey, Cmdr. Harry

    Delargy, Hugh

    Jones, T. W. (Merioneth)

    Redhead, Edward

    Dell, Edmund

    Kerr, Mrs. Anne (R'ter & Chatham)

    Rees, Merlyn

    Dempsey, James

    Lawson, George

    Reynolds, G. W.

    Diamond, John

    Lee, Rt. Hn. Frederick (Newton)

    Rhodes, Geoffrey

    Doig, Peter

    Lee, Miss Jennie (Cannock)

    Richard, Ivor

    Duffy, Dr. A. E. P.

    Lever, Harold (Cheetham)

    Roberts, Albert (Normanton)

    Dunn, James A.

    Lever, L. M. (Ardwick)

    Roberts, Goronwy (Caernarvon)

    Dunnett, Jack

    McBride, Neil

    Robertson, John (Paisley)

    Edelman, Maurice

    MacDermot, Niall

    Rodgers, William (Stockton)

    Edwards, Rt. Hn. Ness (Caerphilly)

    McGuire, Michael

    Rogers, George (Kensington, N.)

    Edwards, Robert (Bilston)

    McKay, Mrs. Margaret

    Rose, Paul B.

    Ennals, David

    Mackie, John (Enfield, E.)

    Ross, Rt. Hn. William

    Evans Ioan (Birmingham, Yardley)

    MacMillan, Malcolm

    Sheldon, Robert

    Fernyhough, E.

    MacPherson, Malcolm

    Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)

    Fletcher, Sir Eric (Islington, E.)

    Mahon, Simon (Bootle)

    Short, Mrs. Renée (W'hampton,N.E.)

    388

    389

    Silkin, John (Deptford)

    Thomson, George (Dundee, E.)

    Willey, Rt. Hn. Frederick

    Silverman, Julius (Aston)

    Thornton, Ernest

    Williams, Alan (Swansea, W.)

    Small, William

    Tinn, James

    Williams, Albert (Abertillery)

    Snow, Julian

    Urwin, T. W.

    Willis, George (Edinburgh,E.)

    Stewart, Rt. Hn. Michael

    Wainwright, Edwin

    Wilson, William (Coventry, S.)

    Stones, William

    Walden, Brian (All Saints)

    Woof, Robert

    Summerskill, Hn. Dr. Shirley

    Walker, Harold (Doncaster)

    Wyatt, Woodrow

    Swingler, Stephen

    Wallace, George

    Zilliacus, K.

    Taverne, Dick

    Wells, William (Walsall, N.)

    Taylor, Bernard (Mansfield)

    White, Mrs. Eirene

    TELLERS FOR THE NOES:

    Thomas, George (Cardiff, W.)

    Whitlock, William

    Mrs. Harriet Slater and

    Thomas, Iorwerth (Rhondda, W.)

    Wilkins, W. A.

    Mr. Joseph Harper.

    Question proposed, That the Clause, as amended, stand part of the Bill.
    Sir David Renton: I wish to draw the attention of the Committee to the effect of the Clause on the supply of much-needed capital for agriculture. The main problem of British agriculture for several generations has been that of finding enough capital for modernisation, for mechanisation, for improving fixed equipment, and for the expansion of output. This problem has increased, if anything, by the decline—
    The Chairman: Order. There is a general background of noise which makes it difficult for the Chair and the Committee to hear the speaker.
    Sir D. Renton: I was saying that this problem has increased by the decline of the landlord and tenant system, because landlords used to provide much of the capital, but now we find that more than 55 per cent. of the land which is farmed is farmed by owner-occupiers who have to find the capital themselves by one means or another.
    It is because of the need to ensure that farming has enough capital for the purposes which I have mentioned, namely, mechanisation, modernisation, improving fixed equipment, and expanding output, that Parliament has done three things to try to help the situation. First, we have provided a rebate of 45 per cent. on Estate Duties on farm land. Secondly, we have by statute established the agricultural credit scheme. Thirdly, we have provided considerable sums of money under the Farm Improvements and the Small Farmers Schemes.
    All those provisions were intended to improve the value of the fixed equipment on our farms. I therefore find it rather strange that the Government should now apparently be completely changing the policy. Instead of the Government and Parliament making it their responsibility to ensure that there is
    390
    enough capital for our greatest industry to achieve prosperity, the Government are using the Capital Gains Tax to get much-needed capital away from agriculture and divert it to the general revenue of the State.
    The combined effect of Clauses 19, 23 and 25, on the death of a farmer—and if I am wrong no doubt I shall be corrected by whoever replies to the debate—will be as follows: If the farmer is an owner-occupier, on his death, whether the estate is inherited by his son or by his widow, the land itself, and any securities, will be valued, and to the extent that they exceed £5,000 jointly—that is the land and the securities—they will come in for Capital Gains Tax if there has been any appreciation in the land or the securities since the farmer acquired them or inherited them. They will come in for Capital Gains Tax at 30 per cent.
    In this connection it is only right to bear in mind, and only fair to the farmers to mention, that agricultural values today are considerably inflated—I think quite artificially in many cases—by the fact that there is a great demand for land. Perhaps I might illustrate that by pointing out that the South-East Study says that only about 3 per cent. of the farm land in the South-East region will be needed for development over the next 17 years, but we know that although only 3 per cent. of the farm land will be taken, the value of all the farm land has gone up, partly because of the general shortage of land for building. It is a strange position, but it is not one for which the farmer should be made to suffer.
    11.0 p.m.
    After the Capital Gains Tax has been assessed the total amount of the assessment will be deducted from the gross value of the deceased farmer's estate before Estate Duty is calculated. When Estate Duty is

    391
    calculated the securities, which are part of his reserve capital and which have enabled him to get an overdraft on somewhat better terms than he might have got a mortgage will be fully valued for Estate Duty. The land will be subject to the 45 per cent. rebate, but in the end the widow or the son or the trustees, as the case may be, will have to pay a much larger amount when the Bill has been passed, as a result of the Capital Gains Tax, than has to be paid at the moment. To that extent the farm will deprived of what I can only describe, and I think accurately describe, as its reserve capital. Coming on top of the Price Review, the increase in vehicle duties and other increases, this is a severe blow to British agriculture.
    It is a complete reversal of policy. For several generations it has been our concern to see that farming was not deprived of its much-needed capital. In all earnestness I press the Government to reconsider the effect of the Clause and subsequent Clauses to ensure that a blow is not dealt which perhaps was not intended. It may be that the Government did not even think these things out beforehand. But if they intended a blow, they should justify the change of policy and justify this imposition. I hope that the Committee will not pass the Clause unless we have a full assurance from the Government that these matters will he properly considered.
    Sir H. Lucas-Tooth: I wish to ask a question about the meaning of "residence" for the purpose of the Clause. Perhaps I should declare an interest. I am half-Australian, I have an interest in Australia and I am a trustee for Australian interests which may be affected—although I do not know whether they will be affected.
    Clause 19(2) charges the United Kingdom trading assets of a person who is "not resident" and "not ordinarily resident" in the United Kingdom. Why are both those expressions used? What is the difference between being resident and being ordinarily resident? Why are they coupled with the word "and"? In subsection (7) the same expression appears but there the words are "individuals resident or ordinarily resident". Why is there "and" in one case and
    392
    "or" in the other? Is there any significance in that difference?
    Somewhat different phraseology is used in subsection (1)—
    "Subject to any exceptions provided by this Act, a person shall be chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident in the United Kingdom, or during which he is ordinarily resident in the United Kingdom."
    I should have thought that if he were resident in any part of the year in the United Kingdom it was sufficient. Why is that phraseology used, and why is it different from the phraseology in the other two subsections which I have mentioned? I know that the meaning of "resident" is defined in a later Clause—I believe it is Clause 39—by reference to the Income Tax Acts; but subsection (2) of that Clause harks back to this Clause now under discussion. I must read it to the Committee. It states,
    "Subject to section 19(2) of this Act an individual who is in the United Kingdom for some temporary purpose only and not with any view or intend to establish his residence in the United Kingdom shall be charged to capital gains tax on chargeable gains accruing in any year of assessment if and only if the period (or the sum of the periods) for which he is resident in the United Kingdom in that year of assessment exceeds six months."
    The question which one has then to ask is this. Does this mean that a foreign trader, or a Commonwealth trader with a branch in the United Kingdom who happens to spend six months of any year in this country, will become liable to tax in respect of any property wherever that property is situated? I would suggest that that would be the result of these two subsections read together, and if that is so, then the Government is creating a complete deterrent to any such people spending any length of time in the United Kingdom. They will certainly not stay in order to incur this liability for all sorts of charges.
    What is the position of the long-term visitor to this country; for example, the student who spends more than six months in Britain but who has property in his own country? Such a person, as I read these two subsections, would be liable to be charged on his property, wherever it is situated, and this might well deter many students from coming here at all. What about the wife of a British subject who is herself of foreign origin? Australia immediately springs to mind,

    393
    and the same argument would apply to many Americans. Such people are often interested in trusts made by their parents in their countries of origin and, as I understand this Clause, the property in such trusts would become subject to this charge if the individual remained in this country for six months; and that would be normal in the case of a wife.
    If that surmise is right, then what is the position of the trustees because the charge would fall on the property and only the trustees could meet it. They would be people who, normally, would not come to the United Kingdom, but the charge would be recoverable and the wife or student would become liable; or, in the case of a wife, the husband would become liable and the total amount might exceed his whole income for a year. What about the student who is in the fortunate position of having some assets overseas? Conversely, what about the position of the United Kingdom trustees for a person who is a nonresident in respect of property which is overseas or, indeed, in this country? Is there any liability? Where the property is overseas, how will the tax be recovered?
    May I have answers to these questions, and also to a question which I put on an Amendment? What is to be the position where there is a capital gain in one year and a capital loss in another year and the rate of tax changes between the years? Will the Government answer that question now? They have had plenty of time to consider it.
    Sir Charles Mott-Radclyffe: In the light of the speech we had a little time ago from the Financial Secretary to the Treasury we cannot allow the Clause to stand part of the Bill without a little further discussion. I got the impression that the Financial Secretary had very little idea of the impact which the Capital Gains Tax will have upon the whole economy. He has a complex, like a great many of his right hon. and hon. Friends, about the Surtax payers. He talked as if he were a schoolmaster addressing a form of boys, and saying, "All you Surtax payers have been very naughty. Therefore you shall not have a half-holiday for the rest of the term—nor will the rest of the school." That is the tone used by the hon. and learned Gentleman.
    394
    I can explain my criticisms of the Capital Gains Tax very briefly. I accept that there is a very strong argument for some kind of tax on speculative gains, but my first criticism of the Capital Gains Tax as outlined in Clauses 18 and 19 is that it makes no attempt to discriminate between a clearly speculative transaction and one which by no conceivable stretch of the imagination could be called speculative. It lumps together, in this typical Socialist way, the man who is playing the market—this strange creature who drifts around behind the scenes—and the man who realises some hard-earned savings made over many years in order that he can retire. In the name of social justice that would appear to me to be a complete farce.
    The second argument put forward by hon. Members opposite was that there was something almost immoral about somebody who spends capital as income—something in the nature of tax evasion. There may be something in that argument, but the reverse side of the coin must be considered. Hundreds of thousands of man-hours are worked—particularly at this time of the year—by non-Surtax payers in somebody else's garden, painting somebody else's greenhouse or clipping somebody else's hedge for a couple of hours each evening, providing that the payment for their services is made in notes and is not returned for tax purposes.
    My next criticism is that the whole impact of the tax appears to be completely negative. In every Clause the whole idea of the Government appears to be to trip up anybody who wants to do anything. There is no encouragement to anybody to "get on with it." At every stage he will be tripped up. I do not see how any new firm or business can, within the terms of the proposed tax, build up enough new capital to expand from a small start.
    I ask the Committee to reflect: let us suppose that there had been a Capital Gains Tax of 30 per cent. over the last 30 or 40 years. Would there have been a de Havilland in the aircraft industry? Would there have been a Morris, an Austin, a Humber or a Hillman in the motor car industry? I do not know, but I suspect that it would have been very difficult. It may not have been

    395
    impossible, but it would have been very difficult.
    The fact remains that real economic progress and the real breakthrough that happens from time to time in a nation's economic life depends not on men of ordinary capacity but on men of extraordinary capacity. It is the men of ordinary capacity who benefit from the wit, skill, "know-how" and push of the men of extraordinary capacity. In a country with our present economy, I would have thought that it would have been one of the stupidest acts for any Government—whatever its colour—to bring in a Capital Gains Tax coupled with the present rates of Income and Surtax thereby attempting in any way to discourage the genius or the near-genius in the early stages of a man's career. If we do that we all swim along at the pace of the slowest horse in the race. On that basis, the economy does not expand to the
    degree which it ought to.
    11.15 p.m.
    My third criticism of the Capital Gains Tax is that it produces ridiculous anomalies, a great many of which we have heard about in discussion on previous Amendments. My right hon. and learned Friend the Member for Huntingdonshire (Sir D. Renton) talked about the problems of agriculture. What sort of social justice is it that a farmer who wants to sell his farm to move to another does not pay Capital Gains Tax if it is the same type of farm, whereas if a farmer who has farmed for 40 years wants to sell his farm before he can retire—very few people can afford to retire unless they sell their business—he gets socked for the Capital Gains Tax? Take the case of the small shopkeeper, who cannot afford to retire unless he sells his business. He is socked for the 30 per cent. Capital Gains Tax.
    The Surtax payer is much better off. The idea that this tax socks the Surtax payer and leaves the rest is quite untrue. By a strange paradox, the Surtax payer, or the man with a great deal of capital, is better able to weather the storm. It will pay him hand over fist to convert his income into capital. It is the man who does not have a great deal of capital, who has been building up his capital and saving it for his retirement
    396
    who takes it on the chin. This is all in the name of social justice.
    My next criticism is of the impossibility of valuations. We had some discussion of this last night in relation to chattels. That is only a very small part of it. If an agricultural holding is sold at Michaelmas 1970, the owner-occupier will have to pay tax on the difference between what he got for that holding at that time and what it was worth on Budget Day, April, 1965. What was it worth? No one knows, unless one rewrites the Domesday Book with a schedule of condition for every agricultural holding in the country, including the fences, the ditches, the buildings and everything else. It is absolutely impossible.
    What about the shop in a quiet side street, which, in three years' time becomes a major thoroughfare because of a town redevelopment plan? I suppose that the value of the shop and its goodwill increases if the shopkeeper wants to sell in 1967 or 1968. What was the value of his business in the small side street in April, 1965, and who values it? Nobody knows. This is a nonsense.
    I am very glad to see the Chancellor here, as I have been waiting for a long time to put this question to him. Does he realise the advice which he is giving to the British public in every line of Clause 19? He is saying, "Do not invest, do not save, but gamble. You can clock up £200,000 in the football pools and you are home and dry. Bin if you realise £500 of hard-earned savings, and you are soaked." This is the advice which he is giving: "You can gamble and bet as much as you like, and if you win you are home and dry. You can back good horses to beat indifferent ones, and bad horses to beat worse ones. You can bet on the date of the next General Election, whether next August Bank Holiday will be wet or fine, or when the First Secretary of State will drop his next brick, but you must not invest prudently and save for your retirement".
    In common with a number of hon. Members, I was in this House during the 1945–51 period. I saw the then Labour Government create, I admit unwittingly, a "spivs'" paradise. I tell the present Labour Government that the Capital Gains Tax Clauses in the Bill will deliberately create a "spivs'" charter.
    Mr. Ian Gilmour: My hon. Friend the Member for Windsor (Sir C. Mott-Radclyffe) and my right hon. and learned Friend the Member for Huntingdonshire (Sir D. Renton) have drawn attention to the deleterious consequences which his Clause will have for agriculture. I need not, therefore, emphasise the harm that will be done by this provision, in addition to the blow to agriculture dealt by the Price Review and the other blows struck at this important import saving industry by the Chancellor. This Clause means double taxation and as well single taxation at far too high a level.
    Yesterday and today, the hon. Member for Manchester, Cheetham (Mr. Harold Lever) regaled the Committee with some excellent speeches. It is unfortunate that the Treasury spokesmen who have been as it were answering the debates should have paid attention to them only on those occasions when the speeches of the hon. Member for Cheetham fell below their normal high level. Yesterday the hon. Member for Cheetham advised the Financial Secretary to ignore the experience of other countries. Today the Chief Secretary, in grave difficulties, took hold of the life-line which he thought he saw in the speech of his hon. Friend the Member for Cheetham when he said that companies were not created by shareholders but by the State.
    That is quite untrue. The State has created no companies. What happens is that the State creates conditions in which companies can be formed and to which those companies must conform. But the idea that the State creates companies is utterly untrue. So pleased was he by this one crumb of comfort dropped by the hon. Member for Cheetham that the Chief Secretary went into a great disquisition about it. He fell into great errors, particularly when he spoke about a company being completely different from its shareholders. That is fundametally untrue. He tried to illustrate his argument by saying that the shareholder dies but the company goes on. In other words, a family is utterly different from those who compose it because, according to the hon. Gentleman's argument, if a child, father or mother dies the family goes on. Does the Chief Secretary seriously believe that the family is quite
    398
    different from the people who compose it? Does he really believe that because people die, England or any other country is different from its inhabitants?
    He should realise that that doctrine could lead to political implications which he would not like. The whole foundation of modern tyranny is that the State is something different from the individuals who compose it. That is the whole foundation of fascism, and if class is substituted for State it is the foundation of communism as well. On a small but extremely important Clause like this the hon. Gentleman should not repudiate the whole democratic tradition of this country, which is what he was doing. Whatever the Chief Secretary said, this is double taxation. Although he tried to pretend that it is not by saying that a company is something quite different from its shareholders, the fact still remains. A company is not something quite different from its shareholders and this is double taxation.
    Yesterday the hon. Member for Cheetham tried to defend the Chancellor from the suggestion that the right hon. Gentleman was actuated by class malice and class hatred. The Chancellor intervened in a somewhat Walter Mittyish way to say that nobody thought that except my hon. Friends. This is not borne out by what one knows of the attitude of business. I certainly would not think that there was any hatred or malice on the part of the Chancellor. It is, however, reasonable to assume from the Budget that there is a good deal of anti-business prejudice. For this reason: whenever the Chancellor is faced with a choice of calling in aid American or European practice or of doing something different in England, he always comes down on the side of heavier taxation on business. Whichever choice is offered to him, it is always more taxation: double taxation, a higher rate than in America or whatever it may be. It is always higher taxation.
    It is not fair to say that this is entirely a matter of anti-business prejudice. It is much more positive than that. The Chancellor, like most of his party, seriously believes that there is something positively good in taxation. This is the new attitude of the Labour Party, that taxation is good in itself and that people

    399
    and the country will be saved by taxation. Taxation is a new sacrament. If one reads the writings of Dr. Kaldor, one gets the distinct impression that he believes that taxation has some curative and regenerative properties which will do great good to the country.
    That is certainly the belief of the President of the Board of Trade, who in his rather sombre book "Socialism in the Sixties" allowed himself only one moment of emotion when he let out the exultant cry,
    "As surely as there will always be an England, there will always be direct taxation."
    Sir D. Glover: Did the right hon. Gentleman get a degree for that?
    Mr. Gilmour: No. The right hon. Gentleman is academically extremely distinguished and he is well larded or decorated with academic honours. As a result of the Budget, however, I think that the Chancellor certainly worships at the same shrine, as, above all, does the Financial Secretary. We had the extraordinary doctrine tonight that because other taxation was high, therefore capital gains taxation had to be high.
    That brings us into an infinite logical regress, or, perhaps, in the context of taxation, logical progress. Because Income Tax is high, Surtax must be high; therefore, Capital Gains Tax must be high. Goodness me, cigarettes have got far behind; they must go up, too. What about beer, and so on? It has long been known that many workers have a cost of living agreement written into their wages agreements. Now, we are to have taxation worked in too. As the cost of living goes up, taxation will go up, too.
    We have been used to leapfrogging claims in wages. Now, we are to have them in taxation, too. Because one tax goes up, the other must go up as well. This shows the extraordinary religion of taxation which the Chancellor and the Labour Party have got themselves into believing. They believe that taxation is a good thing in itself. The followers of Baal believed that their deity produced fertility, agricultural and animal, and it seems to me that the Chancellor now thinks that taxation also produces fertility in the economy. Taxation, however, like Baal, is very much a false god; it does not produce anything. It
    400
    produces, if anything, the exact opposite to fertility. The only thing that it produces is extreme damage to the economy, and its only fortunate by-product is that it produces extreme damage to the Labour Party as well.
    Mr. Paul Bryan: For most of today, we have enjoyed the company of the Financial Secretary to the Treasury and I am sorry that he is not with us now. In the spring of last year, the hon. and learned Gentleman spent many days at Aylesbury prosecuting the train robbers. This year, he is having a rather less uplifting time defending another lot of robbers. Unfortunately, however, during his period last year, neither the hon. and learned Member nor his hon. Friends seemed to learn the lessons of the success of the train robbers: the maximum use of intelligence and the minimum use of violence.
    11.30 p.m.
    From experience abroad one thing is clear. In every case we hear that Capital Gains Tax has been a happy hunting ground for tax avoidance. Every time we use the expression "tax dodgers" from this side of the Committee there is a corresponding excited and highly-strung noise from the other side. Tax avoidance is not some inherent sin belonging to any particular race. It is the logical consequence of any tax which contains infuriating absurdities and injustices.
    The reason that we in this country think that we have less tax dodging than exists in many other countries is that those who have made our taxes in the past have succeeded in avoiding making taxes which contain infuriating absurdities and injustices, at least to the extent that other countries have them. But this tax that we are discussing today simply overflows with absurdities. Yesterday we were talking about selling a house and buying a smaller house, in which case there is no Capital Gains Tax payable. On the other hand, if at the same time one sells one's pictures because they are too big for the new house, Capital Gains Tax arises. One can talk about this sort of absurdity well into the night, but I do not intend to do that. [HON. MEMBERS: "Why not?"] I will leave that to some other hon. Members. These absurdities sow the seed for the plant of tax avoidance.

    401
    What is more, the Government have no way of policing this tax. In fact, they ask the taxpayers to police it. Only yesterday we found from replies that we received that there will not be the staff to police the tax, as far as valuation is concerned, at any rate. We shall have neither the quality of people nor the numbers we require. Therefore, in fact, one is asking the taxpayers to cross-check on each other and to police the tax themselves.
    If we do this, we require the maximum of good will for the tax. It cannot be expected to work on its own. Therefore, it seems to me the height of folly, if the tax depends on the good will of the taxpayer, to go in for all the snooping which we shall be debating on Schedule 9. We have the most sharply progressive Income Tax in the world. If, on top of that, there is to be imposed—probably paid by much the same people—the highest Capital Gains Tax in the world, this is the height of provocation.
    What is more, it is even more provocative when the Financial Secretary positively rejoices in this. It was the strongest point that he made all the afternoon—this leapfrog tax which we shall be talking about for a long time to come. The other day I was talking to a man who is fairly high up in the art world about the possible effect of our Amendment in increasing the limit on the short-term Capital Gains Tax from £1,000 to £5,000. He said, "I would not bother to do that. It will have very little effect. If you leave it as it is, the whole thing will sink under its own weight anyway."
    The longer we attend debates on this Capital Gains Tax it seems to me that we are probably in error on this side of the Committee in trying to improve the Bill as much as we are, because we are getting no replies from the other side. The Ministers are not stonewalling. They are standing back from their wicket and allowing us to bowl them out time and again; but they see no reason, when the wicket is shattered, to retire from the crease.
    I ask the Ministers, when they get time, to look back on the debates of the last two days, when they will find that they have not answered 50 per cent, of the questions that we have put to them.
    Mr. Chapman: Absolute nonsense.
    Mr. Bryan: Only yesterday my hon. Friend the Member for Worcester (Mr. Peter Walker) asked whether the effect of the tax on horse racing would turn out to be a subsidy, but he got no answer. The answer was not known. We had the ridiculous business of the set of antiques, the set of chairs, and we had to be content with the answer that we must have a rule for this sort of thing, but there is no sense in having a rule if it cannot be observed. On valuation, once again, after having made a most devastating attack we have had no reply.
    I mention all this because I want a reply to the straight question: how will the tax be made to work administratively? In page 34 of the Royal Commission's Report we read:
    "… it would be unrealistic to suppose that it would not require a substantial addition of staff to administer it. We have been supplied by the
    Board with a tentative estimate that
    the increase of staff in the Chief Inspector's Branch would be of the order of 500. To this must be added a formidable addition to the work of the Valuation Office of the Inland Revenue and of that branch of the Estate Duty Office that is responsible for the valuation of unquoted shares."
    May we be told what is to be done about staffing? Are these numbers available? What is the recruiting position? The figures I have quoted are from a document ten years old—are they still true, or what is to be done? The more one looks at the question of valuation, the more impossible it seems.
    One has to remember that with the ordinary valuations for Estate Duty purposes the problem is quite easy compared with what will be faced under this provision, because there is a good deal of good will all round. The executors of the dead man are almost always given the benefit of the doubt, mainly for the one good reason that the Government do not have the equipment, or have very little equipment, with which to challenge the executors' valuation in any case.
    Here we shall have a different position. It is not the case of a dead man but of a live man, with his own personal interest in the matter. That is quite a different situation. If big sums of money are involved, the man will have first-class valuers on his side—who will the Government put up against them? It is just not on. Whom are they to recruit? We

    403
    hear that curators of museums are not allowed to occupy themselves in this way—perhaps we will find the Government recruiting 24-year-olds from the Courtauld Institute to value some of the finest works of art in the land.
    We have learned one thing from abroad about administration. The hon. Member for Manchester, Cheetham (Mr. Harold Lever) said that we should not take any notice of foreign experience, but since we have no experience at home, and since no notice is taken of the Royal Commission, foreign experience is all that we can turn to—it is all we have to go on. It has been discovered abroad that this is a very expensive and a very difficult tax to administer. Then why, under those conditions, have the Government chosen to make it even harder here than other countries have found it by including in the Bill such an unduly wide basis of taxation? One is told that in America the main yield from the Capital Gains Tax comes from stocks and shares and real estate. Why not limit this tax to that? Those are the things on which the higher income groups—which are what I suppose the other side is trying to penalise—pay the most tax. It would greatly simplify matters if we were to reduce the tax to those items.
    We would all like to know more about the yield of this tax. It is far too much in the air. The hon. Member for Colne Valley (Mr. Duffy) said earlier that the First Secretary had made a bargain with the trade unions. I have a suspicion that when the trade unions see what sort of bargain they have made and what a tiny return they will have on this side of the bargain, they will begin to think that the First Secretary has once again made a bargain very similar in value and type to the bargain he hade with the hon. Members for Bosworth (Mr. Wyatt) and Pembroke (Mr. Donnelly).
    Finally, we keep on coming back the longer we go on with the debate to why on earth the Government have chosen to bring in the tax in this way, and we come back each time to the sinister figure of Dr. Kaldor. We all know the effect of his advice in other countries, which has ranged from chaos in one place to riots in another. Surely this must be his finest hour. He has taken the hand of
    404
    the Chancellor of the Exchequer of what is supposed to be the most financially sophisticated country in the world—
    Mr. Diamond: On a point of order. Is it in order on the Question, That the Clause stand part of the Bill, that an hon. Gentleman should be allowed to make an attack on a civil servant? If so, will J be in order in replying fully?
    The Temporary Chairman (Mr. Grant-Ferris): It is only in order to make such a speech if it is germane to the Clause.
    Mr. Bryan: I was complimenting Dr. Kaldor. I was saying that this is his finest hour. In his wildest dreams he could never have dreamed that he was going to take the Chancellor of the Exchequer of the most financially sophisticated country in the world by the hand and lead him up the garden path and say to him, "The ants are getting at the strawberries. My advice to you is to bring a steam-roller into the garden and drive it across all the beds." The whole of this tax has been brought forward in the name of social justice, but the imposition of it will bring more unfairness and cumbrous complications than any injustice that it is supposed to remedy.
    Mr. Diamond rose—
    Sir Harmar Nicholls: On a point of order. Is it in order that back-benchers opposite who seek to speak should be pressured into silence by the Government Front Bench? The hon. Member for Manchester, Cheetham (Mr. Harold Lever) was eager to make a speech—and a previous speech of his has been referred to at some length—but was pressured into silence by the Patronage Secretary with the offer of a life peerage or something of that kind—
    The Temporary Chairman: Order. That is not a point of order for me.
    Mr. Diamond: The debate on this Question has included many references to earlier discussions which have taken place today on Amendments and even to yesterday's debate. I am sure therefore that the Committee would not wish me to go over all the ground that has already been covered. Hon. Members can refer to HANSARD for the speeches on the points made and the answers given. [HON. MEMBERS: "Not always."] I hope

    405
    therefore that it will be for the convenience of the Committee if I deal only with the points raised on the Question that the Clause stand part of the Bill.
    The right hon. and learned Member for Huntingdonshire (Sir D. Renton) asked whether it was wise that farms should be the subject of a Capital Gains Tax. His argument seemed to be that inasmuch as we treat farming favourably in many respects why did not we treat it exceptionally favourably in this respect. [HON. MEMBERS: "No."] Yes, this was his argument. We did this, that and the other for farming, why did not we do this yet further thing for farming? One is not leaning against or in favour of farming in the Capital Gains Tax. The right hon. and learned Gentleman will not mind my reminding him that this tax is levied on realised gains. There is no question of being asked to pay the levy until the gain has been realised.
    From the point of view which he raised, the question of providing adequate money for running the farm and adequate working capital, there is no distinction between money provided out of realised capital gains and money provided out of realised profits in the running of the farm. In each case, funds are provided. In the one case, they have been taxed, and always have been, according to the rate of profit, which is a fair way of dealing between one farmer and another or one income earner and another. What have not been taxed are realised capital gains. Now they are to be brought in in just the same way as every other business or individual is brought in.
    11.45 p.m.
    Sir D. Renton: In the example I gave, the gains are not in fact realised at all. The assets merely pass from one member of the family to another—from husband to widow or from father to son—and the business is continuing. The assets are not realised in any actual sense at all, and the use of the word "realised" in this context is so artificial as to be misleading.
    Mr. J. M. L. Prior: The Chief Secretary does not understand.
    Mr. Diamond: The right hon. and learned Gentleman is on the same point. He is trying to draw a distinction between farms and everything else, and I
    406
    am saying that there is no such distinction to be drawn. If he is on the further point about realisation, he will appreciate that capital gains generally, not merely in the hands of farmers, could never be realised if there were not some point at which one said, if they had not been sold but if they passed from one hand to another, that they must be treated as being realised. There are special provisions to which we shall come later which apply to both farms and any other kind of property passing on death.
    The hon. Member for Windsor (Sir C. Mott-Radclyffe) asked what the position would have been if there had been a Capital Gains Tax over the years. I can offer him two answers. If there had been a Capital Gains Tax over the years, those who have been called upon to pay high rates of taxation on what they have earned by their ability, their industry and the sweat of their brow, whatever it may be, would have been asked to pay less tax to provide the same total revenue. That is a simple matter of arithmetic. If the same total revenue is to be obtained for the country and an additional source is brought in, one of the existing sources must be subject to less taxation. That is one answer I can give.
    The other answer is that, if we had had a Capital Gains Tax over the years, there would not have been anything like the tax avoidance, the dodging and the "fiddles" which have gone on year after year and which the previous Government had to deal with year after year by bringing in special provisions to try to catch those who, as the hon. Member for Windsor said, adopted the simple expedient of turning their income into tax-free capital and so avoided the tax which they would have had to pay on income.
    I come now to the series of rather technical questions which I was asked by the hon. Member for Hendon, South (Sir H. Lucas-Tooth).
    So far as the question of carry-forward on losses is concerned that is a straight-forward matter. Any losses or deficit on a realisation is simply carried forward in the normal way and set off against a gain made at a future date and the gain at a future date is reduced pro tanto by that amount and the balance of the gain suffers Capital Gains Tax at the rate ruling at that time so far as that year is concerned.

    407
    The general position on residence is that if a person is resident here he is liable on all his capital gains. If a person is ordinarily resident here he is similarly liable. A person can be ordinarily resident without being resident for a particular year. "Ordinarily resident" has a meaning which has been decided by case after case and it is a different point from being resident for a particular year. Therefore, if a person is ordinarily resident he is again liable. The next question asked was whether an overseas resident was liable. The answer is that if he is neither resident nor ordinarily resident he is liable only if he is carrying on a business here through a branch or agency. The liability is limited to the gains on assets connected with that business.
    If such a man comes here for six months and is resident, he is not liable on his world gains, that is his gains made in other areas of the world. Unless he is domiciled here his overseas gains are only taxable to the extent that they are remitted to the United Kingdom. If the foreign-born wife of a United Kingdom citizen living here is a beneficiary under an overseas trust she is not liable on the trust gains unless the settlor is resident or ordinarily resident or was so when he made the settlement. A United Kingdom resident trust is liable in respect of world gains.
    Mr. Ian Gilmour: The right hon. Gentleman said he was going to give way on a question of agriculture. He referred to agriculture being treated exceptionally. If agriculture has been treated exceptionally in the past, it is presumably because it is an exceptional industry. Would the right hon. Gentleman tell the Committee what happened on April 6th, 1965, to stop agriculture being an exceptional industry?
    The Deputy-Chairman: Order. The hon. Gentleman has sat down. Mr. Heath.
    Mr. Heath: I associate myself with the regret expressed by my hon. Friend that the Chief Secretary has not found it suitable to answer the specified point put to him. It is only typical of the way in which the Chief Secretary and his colleagues have been constantly out-argued
    408
    in the whole of the debate. If we had not done it ourselves it was admirably done by the hon. Member for Manchester, Cheetham (Mr. Harold Lever). The Chief Secretary has given some detailed answers to the questions put to him and we shall study them carefully because this Bill is the sort of Bill to which we can return on innumerable occasions in the future if his answers are not satisfactory.
    As my hon. and right hon. Friend's wish to divide against the Clause, I shall explain why we are taking this action. We want to vote against it, first, because of the rate of taxation contained in the Clause, which we have debated at length, and I have put on record our views about it. Secondly, we want to vote against it because of the structure of the tax as expressed in the Clause, which again we have discussed at length, and on which we have expressed our views clearly. Thirdly, we want to vote against it because both the rate and structure have to be considered in the context of the remaining taxation in this country at the moment, and we have expressed our views about this. Fourthly, we want to vote against it to express our immediate wholehearted disagreement and disapproval of the views expressed by the Financial Secretary, which I can only describe as MacDermot's law.
    This is very interesting, because unfortunately the Chief Secretary was not here at the point of the exposition of the major exposition of the law, and therefore we have an advantage over him. What the hon. and learned Gentleman said has been in contradiction with the law already. He was asked what would have happened if there had been a Capital Gains Tax in the past, and he replied that those who had been paying high rates of tax would have had those rates reduced. He must realise that under MacDermot's law the Capital Gains Tax would have had to be reduced as well, and therefore the revenue from the Capital Gains Tax would have been much less than he anticipates, and therefore there would not have been this benefit. This is the automatic consequence of MacDermot's law.
    MacDermot's law can be defined as follows: When raising a new tax, the objective should be to raise the tax sufficiently to ensure that the next adjacent

    409
    tax is raised sufficiently to ensure that the next adjacent tax is raised sufficiently to ensure that the next adjacent tax is raised sufficiently. This is how it goes on. If we reduce the tax, which the Chief Secretary suggested, we have to reduce the Capital Gains Tax as well, and so his argument does not hold water, except to this extent, that nobody can really believe that if there had been additional revenue the Government would have reduced the higher levels of taxation. That is the whole weakness in the hon. Gentleman's argument. We know that the Government are only too anxious to raise the maximum levels of taxation and to keep them there.
    This epitomises the whole purpose of the Government in the rate of tax and the structure of this tax. It is not to perform the genuine purpose of catching speculative gains, or unjust gains, but to take a sufficient level of capital to make a major redistribution of wealth. That is the Government's purpose, and it is the great weakness of the Chancellor that he has not stated that frankly as being the object of this tax as he has framed it in the Bill. We have come to the end of the Clause, and for the four reasons which I have stated I advise my hon. Friends to divide against it.
    Question put:—
    The Committee divided: Ayes 158, Noes 148.

    Division No. 132.]

    AYES

    [11.59 p.m.

    Abse, Leo

    Hamilton, William (West Fife)

    Pentland, Norman

    Allen, Scholefield (Crewe)

    Hannan, William

    Popplewell, Ernest

    Armstrong, Ernest

    Harper, Joseph

    Prentice, R. E.

    Barnett, Joel

    Hart, Mrs. Judith

    Price, J. T. (Westhoughton)

    Baxter, William

    Hattersley, Roy

    Probert, Arthur

    Bence, Cyril

    Hazell, Bert

    Pursey, Cmdr. Harry

    Bennett, J. (Glasgow, Bridgeton)

    Heffer, Eric S.

    Redhead, Edward

    Bishop, E. S.

    Herbison, Rt. Hn. Margaret

    Rees, Merlyn

    Blackburn, F.

    Hill, J. (Midlothian)

    Reynolds, G. W.

    Blenkinsop, Arthur

    Hobden, Dennis (Brighton, K'town)

    Rhodes, Geoffrey

    Boardman, H.

    Howarth, Robert L. (Bolton, E.)

    Richard, Ivor

    Boston, T. G.

    Howell, Denis (Small Heath)

    Roberts, Albert (Normanton)

    Bowden, Rt. Hn. H. W. (Leics S.W.)

    Hughes, Cledwyn (Anglesey)

    Roberts, Goronwy (Caernarvon)

    Braddock, Mrs. E. M.

    Hughes, Emrys (S. Ayrshire)

    Robertson, John (Paisley)

    Bray, Dr. Jeremy

    Irvine, A. J. (Edge Hill)

    Rodgers, William (Stockton)

    Brown, Hugh D. (Glasgow, Provan)

    Jones, Dan (Burnley)

    Rogers, George (Kensington, N.)

    Brown, R. W. (Shoreditch & Fbury)

    Jones, J. Idwal (Wrexham)

    Rose, Paul B.

    Buchan, Norman (Renfrewshire, W.)

    Jones, T. W. (Merioneth)

    Ross, Rt. Hn. William

    Buchanan, Richard

    Kerr, Mrs. Anne (R'ter & Chatham)

    Sheldon, Robert

    Callaghan, Rt. Hn. James

    Lawson, George

    Short,Rt.Hn.E.(N'c'tle-on-Tyne,C)

    Carmichael, Neil

    Lee, Rt. Hn. Frederick (Newton)

    Short, Mrs. Renée (W'hampton,N.E.)

    Carter-Jones, Lewis

    Lee, Miss Jennie (Cannock)

    Silkin, John (Deptford)

    Castle, Rt. Hn. Barbara

    Lever, Harold (Cheetham)

    Silverman, Julius (Aston)

    Chapman, Donald

    MacDermot, Niall

    Small, William

    Craddock, George (Bradford, S.)

    McGuire, Michael

    Snow, Julian

    Crawshaw, Richard

    McKay, Mrs. Margaret

    Stewart, Rt. Hn. Michael

    Cullen, Mrs. Alice

    Mackie, John (Enfield, E.)

    Summerskill, Hn. Dr. Shirley

    Dalyell, Tam

    MacMillan, Malcolm

    Swingler, Stephen

    Davies, G. Elfed (Rhondda, E.)

    MacPherson, Malcolm

    Taverne, Dick

    de Freitas, Sir Geoffrey

    Mahon, Simon (Bootle)

    Taylor, Bernard (Mansfield)

    Delargy, Hugh

    Manuel, Archie

    Thomas, George (Cardiff, W.)

    Dell, Edmund

    Mapp, Charles

    Thomas, Iorwerth (Rhondda, W.)

    Dempsey, James

    Mason, Roy

    Thomson, George (Dundee, E.)

    Diamond, John

    Mayhew, Christopher

    Thornton, Ernest

    Doig, Peter

    Mellish, Robert

    Tinn, James

    Duffy, Dr. A. E. P.

    Mendelson, J. J.

    Urwin, T. W.

    Dunn, James A.

    Millan, Bruce

    Wainwright, Edwin

    Dunnett, Jack

    Miller, Dr. M. S.

    Walden, Brian (All Saints)

    Edelman, Maurice

    Milne, Edward (Blyth)

    Walker, Harold (Doncaster)

    Edwards, Rt. Hn. Ness (Caerphilly)

    Morris, John (Aberavon)

    Wallace, George

    Edwards, Robert (Bilston)

    Murray, Albert

    Wells, William (Walsall, N.)

    Ennals, David

    Noel-Baker, Francis (Swindon)

    White, Mrs. Eirene

    Evans, Ioan (Birmingham, Yardley)

    Norwood, Christopher

    Whitlock, William

    Fernyhough, E.

    Ogden, Eric

    Willey, Rt. Hn. Frederick

    Fletcher, Sir Eric (Islington, E.)

    Oram, Albert E. (E. Ham, S.)

    Williams, Alan (Swansea, W.)

    Foley, Maurice

    Orme, Stanley

    Williams, Albert (Abertillery)

    Ford, Ben

    Oswald, Thomas

    Willis, George (Edinburgh,E.)

    Fraser, Rt. Hn. Tom (Hamilton)

    Page, Derek (King's Lynn)

    Wilson, William (Coventry, S.)

    Garrett, W. E.

    Palmer, Arthur

    Woof, Robert

    Garrow, A.

    Pannell, Rt. Hn. Charles

    Wyatt, Woodrow

    George, Lady Megan Lloyd

    Park, Trevor (Derbyshire, S.E.)

    Zilliacus, K.

    Gourlay, Harry

    Pearson, Arthur (Pontypridd)

    TELLERS FOR THE AYES:

    Griffiths, David (Rother Valley)

    Peart, Rt. Hn. Fred

    Mr. Brian O'Malley and

    Griffiths, Will (M'chester, Exchange)

    Mrs. Harriet Slater

    NOES

    Agnew, Commander Sir Peter

    Gower, Raymond

    Mott-Radclyffe, Sir Charles

    Alison, Michael (Barkston Ash)

    Grant, Anthony

    Munro-Lucas-Tooth, Sir Hugh

    Allason, James (Hemel Hempstead)

    Griffiths, Peter (Smethwick)

    Neave, Airey

    Anstruther-Gray, Rt. Hn. Sir W.

    Grimond, Rt. Hn. J.

    Nicholls, Sir Harmar

    Awdry, Daniel

    Gurden, Harold

    Noble, Rt. Hn. Michael

    Barlow, Sir John

    Hall, John (Wycombe)

    Nugent, Rt. Hn. Sir Richard

    Batsford, Brian

    Hall-Davis, A. G. F.

    Onslow, Cranley

    Bennett, Sir Frederic (Torquay)

    Hamilton, M. (Salisbury)

    Osborn, John (Hallam)

    Berry, Hn. Anthony

    Harrison, Col. Sir Harwood (Eye)

    Osborne, Sir Cyril (Louth)

    Bessell, Peter

    Harvey, John (Walthamstow, E.)

    Page, R. Graham (Crosby)

    Biggs-Davison, John

    Harvie Anderson, Miss

    Pearson, Sir Frank (Clitheroe)

    Bossom, Hn. Clive

    Hawkins, Paul

    Percival, Ian

    Box, Donald

    Hay, John

    Pitt, Dame Edith

    Boyd-Carpenter, Rt. Hn. J.

    Heald, Rt. Hn. Sir Lionel

    Pounder, Rafton

    Boyle, Rt. Hn. Sir Edward

    Heath, Rt. Hn. Edward

    Powell, Rt. Hn. J. Enoch

    Brinton, Sir Tatton

    Hendry, Forbes

    Prior, J. M. L.

    Brooke, Rt. Hn. Henry

    Hiley, Joseph

    Pym, Francis

    Bruce-Gardyne, J.

    Hill, J. E. B. (S. Norfolk)

    Ramsden, Rt. Hn. James

    Bryan, Paul

    Hirst, Geoffrey

    Redmayne, Rt. Hn. Sir Martin

    Buchanan-Smith, Alick

    Hogg, Rt. Hn. Quintin

    Renton, Rt. Hn. Sir David

    Buxton, Ronald

    Hordern, Peter

    Ridley, Hn. Nicholas

    Carlisle, Mark

    Hornby, Richard

    Ridsdale, Julian

    Carr, Rt. Hn. Robert

    Hornsby-Smith, Rt. Hn. Dame P.

    Roberts, Sir Peter (Heeley)

    Chichester-Clark, R.

    Howe, Geoffrey (Bebington)

    Scott-Hopkins, James

    Clark, William (Nottingham, S.)

    Hunt, John (Bromley)

    Sharples, Richard

    Cooke, Robert

    Hutchison, Michael Clark

    Smith, Dudley (Br'ntf'd & Chiswick)

    Cooper-Key, Sir Neill

    Irvine, Bryant Godman (Rye)

    Spearman, Sir Alexander

    Curran, Charles

    Jenkin, Patrick (Woodford)

    Stainton, Keith

    Dalkeith, Earl of

    Johnson Smith, C. (East Grinstead)

    Stanley, Hn. Richard

    Dance, James

    Johnston, Russell (Inverness)

    Steel, David (Roxburgh)

    Davies, Dr. Wyndham (Perry Barr)

    Jopling, Michael

    Studholme, Sir Henry

    d'Avigdor-Goldsmid, Sir Henry

    Joseph, Rt. Hn. Sir Keith

    Summers, Sir Spencer

    Dean, Paul

    Kerr, Sir Hamilton (Cambridge)

    Taylor, Sir Charles (Eastbourne)

    Digby, Simon Wingfield

    Kilfedder, James A.

    Taylor, Edward M. (G'gow.Cathcart)

    Dodds-Parker, Douglas

    King, Evelyn (Dorset, S.)

    Taylor, Frank (Moss Side)

    du Cann, Rt. Hn. Edward

    Kirk, Peter

    Thatcher, Mrs. Margaret

    Elliott, R. W. (N'c'tle-upon-Tyne,N.)

    Kitson, Timothy

    Thomas, Sir Leslie (Canterbury)

    Emery, Peter

    Langford-Holt, Sir John

    Thompson, Sir Richard (Croydon,S.)

    Errington, Sir Eric

    Legge-Bourke, Sir Harry

    Tiley, Arthur (Bradford, W.)

    Eyre, Reginald

    Longbottom, Charles

    Turton, Rt. Hn. R. H.

    Farr, John

    Loveys, Walter H.

    Tweedsmuir, Lady

    Fisher, Nigel

    Lubbock, Eric

    van Straubenzee, W. R.

    Fletcher-Cooke, Sir John (S'pton)

    MacArthur, Ian

    Walker, Peter (Worcester)

    Foster, Sir John

    Mackenzie, Alasdair (Ross&Crom'ty)

    Ward, Dame Irene

    Fraser, Rt Hn Hugh(St'fford&Stone)

    Mackie, George Y. (C'ness & S'land)

    Whitelaw, William

    Frascr, Ian (Plymouth, Sutton)

    Maude, Angus

    Wilson, Geoffrey (Truro)

    Gibson-Watt, David

    Maydon, Lt.-Cmdr. S. L. C.

    Wise, A. R.

    Gilmour, Ian (Norfolk, Central)

    Mills, Peter (Torrington)

    TELLERS FOR THE NOES:

    Gilmour, Sir John (East Fife)

    Monro, Hector

    Mr. Martin McLaren and

    Glover, Sir Douglas

    Morrison, Charles (Devizes)

    Mr. Jasper More

    Goodhew, Victor

    Mr. Heath: I beg to move, That the Chairman do report Progress and ask leave to sit again.
    I move this Motion in order to ask the Chancellor if he would convey his views to the Committee as to how we should conduct our business. Today, again, we have had a hard day's work with some serious debates, and nobody who has been present would disagree that hon. Members opposite have played their part—not perhaps so much as have my hon. Friends, but to a certain extent—and I would suggest that we have reached a convenient position with the end of Clause 19. I ask the Chancellor if he does not think we should resume tomorrow with the important Clause concerned with the two-thirds charge in the matter of personal arrangements. Could
    412
    the Chancellor convey his views to the Committee?
    Mr. Callaghan: I agree with the right hon. Member for Bexley (Mr. Heath) that we have all done a hard day's work. I have listened to the debate without taking much part in it, but in my opinion those hon. Members who have taken part in it have made constructive speeches. Whether ten different Members making the same constructive speech is ten times as constructive as one constructive speech made by one Member is not for me to say, but certainly all the speeches have been constructive in that sense.
    Despite all the hard work that has gone into our discussions, however, I cannot say that without a little more effort it would not be possible to get a few more Clauses. Last night the right

    413
    hon. Gentleman—[Interruption.] I would not say that that sneeze from the right hon. and learned Member for St. Marylebone (Mr. Hogg) was the most intelligent speech that he has made, but it was certainly very close to it. The right hon. Member for Bexley told us last night how eager he was to hear about some of the concessions that my hon. Friend wishes to make on some of the later Clauses, and he was apparently willing to go through. If we take this opportunity we shall be able to get to some of those Clauses and the Committee will be better instructed on some of the points in respect of which my hon. Friend, in the light of his consideration of the Amendments which have been put down, wishes to make some alterations in the Bill.
    If we apply ourselves constructively to our work, as we have done so far today, this should be possible. We have had a long debate on this Clause—six hours, including our discussions of the Amendments—and I need not multiply the number of Clauses in the Bill by 6 to find out what the answer will be. I believe that we ought to make progress tonight with some of the other Clauses and get a little further on before we finally conclude the proceedings for the day.
    Sir Harmar Nicholls: I support my right hon. Friend the Member for Bexley (Mr. Heath) in his suggestion that this is an appropriate time to break off our proceedings. We have dealt with a distinct phase of the Capital Gains Tax in Clause 19, and Clause 20 brings us to a new phase of the argument. Ten minutes past midnight is not the time to start on this new phase. I appreciate the desire of the Chancellor to get various Clauses, but it was pretty clear to all those of us who have seen previous Chancellors going through the same moves that he was trying to negotiate, even against the common sense of the clock, a quick decision in his favour on some of the other Clauses.
    In my opinion, if he had given proper consideration to the matter he would agree that Clause 19—which has had a very full investigation—marks the end of a phase, and that at this hour it would be sensible to break off and start with Clauses 20 and 21 on a new day. Those Clauses can be taken together.
    414
    It is clear to all of us who have sat through other Budget and Finance Bill debates that the Chancellor is merely going through a manoeuvre. He has produced no argument to warrant continuing our discussions on the following Clauses. He has gone through the normal motions of trying to get, on the cheap, one or two quick decisions in his favour. I hope that we shall be able to put enough pressure upon him—and I hope that the pressure will come not only from this side of the Committee but from some of the independent-minded hon. Members opposite—[Interruption.] Yes, there are a few independent-minded Members opposite. Not all of them are easy Lobby fodder. Some of them have the interests of the nation at heart, and quite a number realise that at this hour it would be wrong to start discussing the Clause that we are now approaching. I hope that we shall be able to convince the Chancellor, who is often quite reasonable, that this is the time to break off our discussions for today. It would be a good thing to break away from the maneouvres of the past of trying to get Clauses easily and to agree that now is the time to break off so that we can start afresh on a new and important phase.
    12.15 a.m.
    Mr. Lubbock: I also think that we should accept the Motion. The Chancellor said that many of the speeches during the debate have been constructive. I cannot apply the same adjective to his own speech. He gave no indication of how far he expects to get, and he must know that we are about to start on an extremely important Clause. He has also given a vague indication that there are Amendments on which he or his hon. Friend will give some concessions, but we have heard all this before. We have
    been told by the Financial Secretary and by the Chief Secretary that if we will only be patient and wait we shall come to some Amendments which the Government are able to accept. That has not happened so far.
    I think this is a ruse to persuade us to go on until very late tonight. I am not prepared to accept this. [AN HON. MEMBER: "It makes no difference whether the hon. Member accepts it or

    415
    not"] It is not dignified for the Committee to continue sitting late into the night, night after night, when the Government benches can muster only two hon. Members in the debate. There are plenty of them there at the moment, but they are only waiting to know when they can go home. As soon as we have finished discussing the Motion they will all disappear into other parts of the building and we shall not see them again until the next Division. Very little has been said from that side of the Committee during the whole of this long session of afternoon and evening. At one time, only two hon. Members were sitting on the benches opposite behind the Chief Secretary and the Financial Secretary.
    This is another reason that I urge the Chancellor to think again about this. If his hon. Friends are not disposed to take part in the debate, perhaps they might like to return tomorrow at 3.30 p.m., when we should be willing to hear what the attitude of Government back benchers is to the Amendments under discussion. It may be that they do not mind staying when they know that television is on upstairs and they can watch the big fight. I do not think that the Chancellor should presume on the sporting instincts of hon. Members to make us stay until three o'clock in the morning. I ask him to think again about this.
    Mr. Heath: I think that the Chancellor and the Leader of the House will have seen the strong reaction to the Chancellor's suggestion that we should continue now to deal with the very important Clauses which are coming. I appreciate the Chancellor's problem, but I am not certain that he altogether appreciates the immense size of some of the issues with which we have been dealing today. The debates have not been unduly long—for the most part two hours, which is not an undue length of time when four or five Amendments on a very important subject have been discussed together.
    I do not think the Chancellor can suggest to us that we have not made reasonable progress in dealing with these big issues. I do not think he was serious in suggesting that that half of the Committee on this side should get together and select somebody to represent them and make a speech about an Amendment. There has not been duplication of
    416
    speeches—[HON. MEMBERS: "Hear, hear."] I do not know how hon. Members opposite can murmur "Hear, hear" to that when not more than three or four of them have been here during the debate.
    We are now coming on to Clause 20, a very important Amendment to which has been selected, and to Clause 21 and Amendment No. 192, a very important Amendment, with which at least six other Amendments will be taken. We indicated that we were willing to have a short debate on short-term gains because the main debate would take place on long-term gains. That is the situation in respect of the forthcoming Amendments.
    I make this point because on Clause 21 two very important debates will take place, one of which is bound to be lengthy because of the nature of the subject. All sorts of interests are raised—chattels, agriculture and so on—and many of my hon. Friends will wish to speak.
    I urge the right hon. Gentleman to reconsider the matter or at least give an indication of what he considers would be a reasonable part of the Bill to aim at at this late hour. In this connection, I remind the Leader of the House that the House meets tomorrow at 10.30 a.m.
    Hon. Members: Today.
    Mr. Heath: Not tomorrow at 10.30 a.m. but today at that time. It is, therefore, not an ordinary Parliamentary day in that sense. This is a serious matter from the point of view of the organisation of the House of Commons and the Committee as a whole. In view of the strength of feeling on this matter, I trust that the Chancellor will reconsider his decision. Otherwise my hon. Friends and I will have to express our view accordingly.
    Mr. Callaghan: In responding to the right hon. Gentleman's invitation to reconsider the matter, I assure him that nothing would please me more than to feel that we could leave now feeling that we had done our day's work, in which we must all participate.
    I am rather concerned about what the right hon. Gentleman said about the probability of there being a long debate on the issues of chattels, detachable and movable property and so on. I thought that we had a very long debate on that yesterday. The same principles apply today on these matters as applied

    417
    yesterday. With respect, there is little new argument that could be adduced that we have not already heard. But if it is to be a long debate, the sooner we get on with it the better. There is no suggestion that if we start tomorrow at 3.30 p.m. we shall make faster progress, but as to the rest, we had better see if we can, with co-operation from all sides of the Committee—in making the speeches which we have to make and expressing the point of view of our constituents—see how far we can get.
    Certainly there will be no obstruction from anybody. I am certain about that. We will do our best to facilitate business. I hope, therefore, that the Committee will agree—particularly since we have discussed at some length the issue of chattels; yesterday we spent the whole day, in effect, discussing one subject—that we should now make more progress, especially in view of the slow progress of the last two days.
    Without wishing to claim any particular credit, I do not think that any hon. Member can say that there has been any great pressure brought to bear on the Committee to move at a faster pace. It is, therefore, reasonable to ask hon. Members, no pressure having been brought on the Committee, to now proceed to continue our consideration of the Bill in an orderly and constructive manner.
    Mr. Hirst: I will not delay the Committee. [Interruption.] Right hon. Gentlemen on the Government Front Bench need not get worried. I will not speak
    for more than a minute or so. I merely wish to appeal to the Chancellor to be fair to hon. Members and reconsider his decision. I readily admit that some of the discussion may have been a little longer than some of us had hoped. There is no need for the Chief Secretary to smile at that remark. He is partly the culprit. Perhaps we have taken longer over certain matters because the answers we have been getting from the Government Front Bench have not been adequate to our questions.
    There have been one or two technical points on which the Chief Secretary has been handed a brief and has cleared them up but, generally speaking, he has not answered our questions in a satisfactory way. I hope, therefore, that the Chancellor will either have some fresh batting on the Treasury Bench or insist that we get quicker answers to our questions so that we can proceed more quickly.
    The Financial Secretary obviously annoyed the Committee by trying to anticipate a lot of the discussion by saying what the Government were not prepared to do on certain things, such as the inflation issue, before waiting to hear the discussion. That annoyed many of my hon. Friends. I do not want to delay the Committee because if we are to stay here we had better get on. I hope that the Chancellor will realise that the fault does not rest on these benches but on the extraordinarily bad performance of the Treasury Ministers.
    Question put:—
    The Committee divided: Ayes, 147, Noes, 157.

    Division No. 133.]

    AYES

    [12.25 a.m.

    Agnew, Commander Sir Peter

    Carr, Rt. Hn. Robert

    Foster, Sir John

    Alison, Michael (Barkston Ash)

    Chichester-Clark, R.

    Fraser, Rt Hn Hugh(St'fford&Stone)

    Allason, James (Hemel Hempstead)

    Clark, William (Nottingham, S.)

    Fraser, Ian (Plymouth, Sutton)

    Anstruther-Gray, Rt. Hn. Sir W.

    Cooke, Robert

    Gibson-Watt, David

    Awdry, Daniel

    Cooper-Key, Sir Neill

    Gilmour, Ian (Norfolk, Central)

    Barlow, Sir John

    Crawley, Aidan

    Gilmour, Sir John (East Fife)

    Batsford, Brian

    Curran, Charles

    Glover, Sir Douglas

    Bennett, Sir Frederic (Torquay)

    Dalkeith, Earl of

    Goodhew, Victor

    Berry, Hn. Anthony

    Dance, James

    Grant, Anthony

    Bessell, Peter

    Davies, Dr. Wyndham (Perry Barr)

    Griffiths, Peter (Smethwick)

    Biggs-Davison, John

    d'Avigdor-Goldsmid, Sir Henry

    Grimond, Rt. Hn. J.

    Bossom, Hn. Clive

    Dean, Paul

    Gurden, Harold

    Box, Donald

    Digby, Simon Wingfield

    Hall, John (Wycombe)

    Boyd-Carpenter, Rt. Hn. J.

    Dodds-Parker, Douglas

    Hall-Davis, A. G. F.

    Boyle, Rt. Hn. Sir Edward

    du Cann, Rt. Hn. Edward

    Hamilton, M. (Salisbury)

    Brinton, Sir Tatton

    Elliott, R. W. (N'c'tle-upon-Tyne,N.)

    Harrison, Col. Sir Harwood (Eye)

    Brooke, Rt. Hn. Henry

    Emery, Peter

    Harvey, John (Walthamstow, E.)

    Bruce-Gardyne, J.

    Errington, sir Eric

    Harvie Anderson, Miss

    Bryan, Paul

    Eyre, Reginald

    Hawkins, Paul

    Buchanan-Smith, Alick

    Farr, John

    Heald, Rt. Hn. Sir Lionel

    Buxton, Ronald

    Fisher, Nigel

    Heath, Rt. Hn. Edward

    Carlisle, Mark

    Fletcher-Cooke, Sir John (S'pton)

    Hendry, Forbes

    Hiley, Joseph

    Mackie, George Y. (C'ness & S'land)

    Roberts, Sir Peter (Heeley)

    Hill, J. E. B. (S. Norfolk)

    Maude, Angus

    Scott-Hopkins, James

    Hirst, Geoffrey

    Maydon, Lt.-Cmdr. S. L. C.

    Sharples, Richard

    Hogg, Rt. Hn. Quintin

    Mills, Peter (Torrington)

    Smith, Dudley (Br'ntf'd & Chiswick)

    Hordern, Peter

    Monro, Hector

    Spearman, Sir Alexander

    Hornby, Richard

    Morrison, Charles (Devizes)

    Stainton, Keith

    Hornsby-Smith, Rt. Hn. Dame P.

    Mott-Radclyffe, Sir Charles

    Stanley, Hn. Richard

    Howe, Geoffrey (Bebington)

    Munro-Lucas-Tooth, Sir Hugh

    Steel, David (Roxburgh)

    Hunt, John (Bromley)

    Neave, Airey

    Studholme, Sir Henry

    Hutchison, Michael Clark

    Nicholls, Sir Harmar

    Summers, Sir Spencer

    Irvine, Bryant Godman (Rye)

    Noble, Rt. Hn. Michael

    Taylor, Sir Charles (Eastbourne)

    Jenkin, Patrick (Woodford)

    Nugent, Rt. Hn. Sir Richard

    Taylor, Edward M. (G'gow,Cathcart)

    Johnson Smith, G. (East Grinstead)

    Onslow, Cranley

    Taylor, Frank (Moss Side)

    Johnston, Russell (Inverness)

    Osborn, John (Hallam)

    Thatcher, Mrs. Margaret

    Jopling, Michael

    Osborne, Sir Cyril (Louth)

    Thomas, Sir Leslie (Canterbury)

    Joseph, Rt. Hn. Sir Keith

    Page, R. Graham (Crosby)

    Thompson, Sir Richard (Croydon,S.)

    Kerr, Sir Hamilton (Cambridge)

    Pearson, Sir Frank (Clitheroe)

    Tiley, Arthur (Bradford, W.)

    Kilfedder, James A.

    Percival, Ian

    Turton, Rt. Hn. R. H.

    King, Evelyn (Dorset, S.)

    Pitt, Dame Edith

    Tweedsmuir, Lady

    Kirk, Peter

    Pounder, Rafton

    van Straubenzee, W. R.

    Kitson, Timothy

    Powell, Rt. Hn. J. Enoch

    Walker, Peter (Worcester)

    Langford-Holt, Sir John

    Prior, J. M. L.

    Ward, Dame Irene

    Legge-Bourke, Sir Harry

    Pym, Francis

    Whitelaw, William

    Longbottom, Charles

    Ramsden, Rt. Hn. James

    Wilson, Geoffrey (Truro)

    Loveys, Walter H.

    Redmayne, Rt. Hn. Sir Martin

    Wise, A. R.

    Lubbock, Eric

    Renton, Rt. Hn. Sir David

    TELLERS FOR THE AYES:

    MacArthur, Ian

    Ridley, Hn. Nicholas

    Mr. Martin McLaren and

    Mackenzie, Alasdair (Ross&Crom'ty)

    Ridsdale, Julian

    Mr. Jasper More.

    NOES

    Abse, Leo

    Hamilton, William (West Fife)

    Prentice, R. E.

    Allen, Scholefield (Crewe)

    Hannan, William

    Price, J. T. (Westhoughton)

    Armstrong, Ernest

    Harper, Joseph

    Probert, Arthur

    Barnett, Joel

    Hart, Mrs. Judith

    Pursey, Cmdr. Harry

    Baxter, William

    Hattersley, Roy

    Redhead, Edward

    Bence, Cyril

    Hazell, Bert

    Rees, Merlyn

    Bennett, J. (Glasgow, Bridgeton)

    Heffer, Eric S.

    Reynolds, G. W.

    Bishop, E. S.

    Herbison, Rt. Hn. Margaret

    Rhodes, Geoffrey

    Blackburn, F.

    Hill, J. (Midlothian)

    Richard, Ivor

    Blenkinsop, Arthur

    Hobden, Dennis (Brighton, K'town.)

    Roberts, Albert (Normanton)

    Boardman, H.

    Howarth, Robert L. (Bolton, E.)

    Roberts, Goronwy (Caernarvon)

    Boston, T. G.

    Howell, Denis (Small Heath)

    Robertson, John (Paisley)

    Bowden, Rt. Hn. H. W. (Leics S.W.)

    Hughes, Cledwyn (Anglesey)

    Rodgers, William (Stockton)

    Braddock, Mrs. E. M.

    Hughes, Emrys (S. Ayrshire)

    Rogers, George (Kensington, N.)

    Bray, Dr. Jeremy

    Irvine, A. J. (Edge Hill)

    Rose, Paul B.

    Brown, Hugh D. (Glasgow, Provan)

    Jones, Dan (Burnley)

    Ross, Rt. Hn. William

    Brown, R. W. (Shoreditch & Fbury)

    Jones, J. Idwal (Wrexham)

    Sheldon, Robert

    Buchan, Norman (Renfrewshire, W.)

    Jones, T. W. (Merioneth)

    Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)

    Buchanan, Richard

    Kerr, Mrs. Anne (R'ter & Chatham)

    Short, Mrs. Renée (W'hampton,N.E.)

    Callaghan, Rt. Hn. James

    Lawson, George

    Silkin, John (Deptford)

    Carmichael, Neil

    Lee, Rt. Hn. Frederick (Newton)

    Silverman, Julius (Aston)

    Carter-Jones, Lewis

    Lee, Miss Jennie (Cannock)

    Small, William

    Castle, Rt. Hn. Barbara

    Lever, Harold (Cheetham)

    Snow, Julian

    Chapman, Donald

    MacDermot, Niall

    Stewart, Rt. Hn. Michael

    Craddock, George (Bradford, S.)

    McGuire, Michael

    Summerskill, Dr. Shirley

    Crawshaw, Richard

    McKay, Mrs. Margaret

    Swingler, Stephen

    Cullen, Mrs. Alice

    Mackie, John (Enfield, E.)

    Taverne, Dick

    Dalyell, Tam

    MacMillan, Malcolm

    Taylor, Bernard (Mansfield)

    Davies, G. Elfed (Rhondda, E.)

    MacPherson, Malcolm

    Thomas, George (Cardiff, W.)

    de Freitas, Sir Geoffrey

    Mahon, Simon (Bootle)

    Thomas, Iorwerth (Rhondda, W.)

    Delargy, Hugh

    Manuel, Archie

    Thomson, George (Dundee, E.)

    Dell, Edmund

    Mapp, Charles

    Thornton, Ernest

    Dempsey, James

    Mayhew, Christopher

    Tinn, James

    Diamond, John

    Mellish, Robert

    Urwin, T. W.

    Doig, Peter

    Mendelson, J. J.

    Wainwright, Edwin

    Duffy, Dr. A. E. P.

    Millan, Bruce

    Walden, Brian (All Saints)

    Dunn, James A.

    Miller, Dr. M. S.

    Walker, Harold (Doncaster)

    Dunnett, Jack

    Milne, Edward (Blyth)

    Wallace, George

    Edelman, Maurice

    Morris, John (Aberavon)

    Wells, William (Walsall, N.)

    Edwards, Rt. Hn. Ness (Caerphilly)

    Murray, Albert

    White, Mrs. Eirene

    Edwards, Robert (Bilston)

    Noel-Baker, Francis (Swindon)

    Whitlock, William

    Ennals, David

    Norwood, Christopher

    Willey, Rt. Hn. Frederick

    Evans Ioan (Birmingham, Yardley)

    Ogden, Eric

    Williams, Alan (Swansea, W.)

    Fernyhough, E.

    Oram, Albert E. (E. Ham, S.)

    Williams, Albert (Abertillery)

    Fletcher, Sir Eric (Islington, E.)

    Orme, Stanley

    Willis, George (Edinburgh, E.)

    Foley, Maurice

    Oswald, Thomas

    Wilson, William (Coventry, S.)

    Ford, Ben

    Page, Derek (King's Lynn)

    Woof, Robert

    Fraser, Rt. Hn. Tom (Hamilton)

    Palmer, Arthur

    Wyatt, Woodrow

    Garrett, W. E.

    Pannell, Rt. Hn. Charles

    Zilliacus, K.

    Garrow, A.

    Park, Trevor (Derbyshire, S.E.)

    TELLERS FOR THE NOES

    George, Lady Megan Lloyd

    Pearson, Arthur (Pontypridd)

    Mrs. Harriet Slater and

    Gourlay, Harry

    Peart, Rt. Hn. Fred

    Mr. Brian O'Malley.

    Griffiths, David (Rother Valley)

    Pentland, Norman

    Griffiths, Will (M'chester, Exchange)

    Popplewell, Ernest

    Clause 20.—(CAPITAL GAINS ACCRUING TO AN INDIVIDUAL: ALTERNATIVE CHARGE TO TAX.)
    Mr. Peter Walker: I beg to move, in page 16, line 12, to leave out "two-thirds" and to insert "half".
    This Amendment is designed to be of particular assistance to those on small incomes. The Financial Secretary will, I hope, at last be able to shower upon us some of those concessions we were promised 24 hours ago but which are still not forthcoming, particularly as the granting of this concession will not give any great benefit to people on very high incomes. We have noted from his dealing with previous Amendments that the hon. and learned Gentleman is always unwilling to give any concession affecting millions of small people if it should in any way benefit one or two people of high income.
    The Amendment is certainly in line with capital gains tax practice abroad. It has been interesting to see how throughout the day the Financial Secretary has used international comparisons whenever that has suited him, but I noticed that yesterday, when using the United States comparison, he decided that although the Americans had not carried out what he was doing they had thought about it. Today he has told us that although what he was doing was different from the practice in Sweden, the Swedes were thinking of doing it, too. This
    concession by which 50 per cent. of the capital gain can be put against a person's rate of Income Tax and Surtax has been followed in the United States, and it is one that quite rightly takes note of the fact that people who are paying a low rate of Income Tax or Surtax should not be affected in exactly the same way as those with higher incomes. That is the essence of the Amendment.
    I am rather surprised by the lack of realisation on the part of hon. Members opposite of the extent of the ownership of odd shares and other securities by great numbers of people. My hon. Friend the Member for Harrow, Central (Mr. Grant) gave a figure of four million people who owned shares either directly or through unit trusts. That is a very large number. Thinking of it in terms of our constituencies, it amounts to 8,000 in every constituency, probably meaning that
    422
    8,000 homes in every constituency are directly affected by and interested in investment.
    We on this side of the Committee have always tried to encourage the small investor, and we rejoice in the fact that there has been a considerable increase in the numbers of people taking an interest in investment matters and participating in the ownership of British industry in recent years. We brought in several Measures to assist them, including Measures which basically affected their capital position, such as amendment of Stamp Duty.
    The present Government have done just the opposite. They have detracted from the advantages of investment for these people by increasing the standard rate of Income Tax, and now by applying this Capital Gains Tax which makes no concessions for inflation or for anything else. It is surprising that the Government should not only have decided to impose a higher rate of Capital Gains Tax but should, at the same time, have decided to give a lower concession to people on low incomes. This reflects a Government which appear to want to discourage the spread of ownership rather than to encourage it. Perhaps it is a Government that wants the only ownership to be public rather than private ownership. We on this side very much want to encourage the spread of small investment. Therefore, on this point alone there is a very strong argument.
    Another major factor is that throughout the afternoon, first the Chief Secretary and then the Financial Secretary have used as an argument against various Amendments the very real concession involved in giving this two-thirds option.
    I tried to point out to the Financial Secretary during one of his speeches that in practice this two-thirds option amounted to very little for the person who was paying the standard rate of Income Tax. If instead of paying the 30 per cent. Capital Gains Tax that person decides to go for adding two-thirds of the gain to his income the effect is to reduce the rate of Capital Gains Tax from 30 per cent. to 27½ per cent., a level which we consider to be still very much too high. That reduction, therefore, is a very small concession.

    423
    The effect of my Amendment would be that a person paying the standard rate of Income Tax would pay the Capital Gains Tax on something like 21 per cent. It would mean that persons paying no level of Income Tax would have to pay no Capital Gains Tax. I think that there are few hon. Members who would want to see somebody who has such a low income as to be paying no rate of Income Tax if he came across a small capital gain having that gain taxed at 30 per cent. Thus this concession gives a heavy weighting to those on small incomes. It does not in itself encourage the spread of share ownership, because the very imposition of the tax at all discourages that, but it in some way relieves the burden which the Government are putting on the small investor and the people who are affected by the Capital Gains Tax.
    In urging the Financial Secretary to accept the Amendment I would point out that so far he has disappointed the Committee in that wherever the Minority Report on capital gains suggests some way of limiting the imposition of this tax he has rejected those proposals but whenever it has gone for the high level of taxation he has acceded to it.
    Mr. MacDermot Mr. MacDermot indicated dissent— —
    Mr. Walker: The hon. and learned Gentleman shakes his head, but on the imposition of the short-term tax yesterday, on Amendments put forward by my hon. Friend the Member for Harrow, Central (Mr. Grant) earlier today, and the proposals of the Minority Report which would have helped the small investor the Government have rejected our suggestions. This proposal will not cost the Revenue very much. We have been told the staggering news, and I should have thought surprising news for hon. Members opposite, of how long it will be before any worthwhile revenue will be obtained from the tax.
    The staggering reply from the Financial Secretary earlier in the debate was that the figure of £100 million eventually to be raised by this tax will not be reached for at least 12 or 15 years, and the amount of revenue to be raised this year is very small. The Amendment therefore will not cost the Treasury the loss of any great revenue this year. It
    424
    will directly assist those who are on small incomes and I strongly urge the Government to accept at last an Amendment from this side of the Committee.
    Mr. Grant: I support the Amendment. It will be within the Committee's recollection that earlier in the debate the Financial Secretary dismissed rather cursorily and arbitrarily a suggestion of mine that that there might be an exemption from Capital Gains Tax up to the first £400. The reasons
    which the hon. and learned Gentleman gave for rejecting that Amendment were wholly inadequate. This is an opportunity for him to redress the balance and give some assistance to the small investors on whose behalf I was arguing earlier.
    12.45 a.m.
    The hon. and learned Gentleman rejected the idea we proposed earlier today on the ground that there was no administrative saving in excluding a band from the lower level of capital gains, and the main weight of his argument seemed to be that he could not give a relatively small but important saving to a very large number of small investors because a few rich tycoons at the top would get some advantage. This is entirely in keeping with the Government's attitude. Their concern is not to assist people, not to further the economic growth of this country, but to catch someone at the top end. Their concern is to soak the rich even though the poor suffer as a result. It is very much like the attitude of the puritan in the seventeenth century whose objection to bear-baiting was based not so much on the pain suffered by the bear as on the pleasure experienced by the baiters. Moreover, the Financial Secretary never explained why, on the one hand, it was right, sensible and administratively practicable to have a band of people at the lower level of Income Tax who were exempt from tax altogether and, on the other hand, it was wholly unacceptable to have a similar approach in regard to capital gains.
    The Amendment would go some way to overcome the difficulties which the Government have put in the path of wider ownership and investment. A survey carried out some years ago by, I believe, Mark Abrams showed, quite contrary to the Financial Secretary's view, that the main reason why the small investor went

    425
    in for investment was to get a capital gain. Those who are starting investment clubs or are thinking of investing for the first time will be astounded to learn that, in the Financial Secretary's view, so far from discouraging them, the Capital Gains Tax will be a positive incentive. I did not understand the hon. and learned Gentleman's argument, and I am certain that the great mass of small investors will not understand it either.
    After the very cursory, illogical and inadequate arguments which the Financial Secretary put before us earlier, here is an opportunity for him to redress the balance and show that the Government really mean what they say when they talk about giving a concession. Let them pay rather more than lip-service to the cause of ownership and the small investor in particular by making a concession on the lines suggested in the Amendment.
    Sir John Foster: I support the Amendment on a ground other than that advanced by my hon. Friends. It has been shown clearly in our debates today and yesterday that there are many injustices in the Capital Gains Tax. Let us assume for the moment that it is right for the Government to try to impose injustices on those who are better off. That seems to be their object. When confronted by injustice, they say, "It does not matter; it is not an injustice, There have been a lot of tax fiddles in the past, so let us get on with it". The great justification for the Amendment is that it would reduce the rate of Capital Gains Tax for people of smaller means and, therefore, the injustices which they would suffer would be accordingly reduced.
    Here are two examples of injustices which have not hitherto been mentioned. A person from the Commonwealth settles in this country—and by "settles" I mean becomes domiciled or ordinarily resident, using a shorthand term for it. When he gets here be becomes liable to all the capital gains which he has realised from property abroad and sold in the year of assessment before he arrived in this country.
    Let us suppose the man has come from Australia where he has sold his sheep farm for £50,000. He finds when he arrives in this country on 1st June that
    426
    he has to pay Capital Gains Tax on the amount realised on the property sold. That seems to be an obvious injustice. But if he is a small man the justification of this Amendment is that at least before he comes into the country the rate is reduced from two-thirds to a half and the injustice is diminished. The Government are faced with the difficulty of adjusting their Capital Gains Tax to remove the injustice.
    In another situation the same small man settles in this country from abroad and sells his assets abroad after he arrived on 1st June. If the capital gain has entirely accrued before the date of his arrival he still has to pay the full tax on the capital gain, even though he can prove that the whole of the capital gain was made before 1st June. This is another obvious injustice which the Government have not yet dealt with. If the rate is reduced the injustice is reduced, too.
    The Financial Secretary justified taxing inflation by saying that people with capital or equities benefited from inflation. There is an obvious fallacy in that argument, because if an asset is valued at £100 and towards the end of the period its realisation increases 10 per cent.—it is sold at £100 and realised at £110. Capital Gains Tax is paid on that and it is then found that inflation has been 10 per cent. so the person has not benefited at all. In fact his purchasing power has diminished by the amount of Capital Gains Tax on the increase.
    There is no justification for saying he has benefited, even assuming that the inflation is just exactly equal to the increase in the value of the assets. The Government may say that they want to redistribute wealth and see that the wealth of the rich is diminished. We do not agree with that point of view, but the Government are rather shy about coming into the open about it. It can be seen clearly that the instance which I have given of £100 to £110 exactly equalling the inflation is an injustice, and if we reduce the rate from two-thirds to a half we temper the injustice to the small man. We enable him to suffer a little less when he is taxed on the value of the asset which has been raised by inflation.

    427
    One could give many instances of the injustices of Capital Gains Tax, even admitting its principle. I am only on the point that, admitting its principle for the purpose of my argument, it results in inequitable injustices to particular individuals. I could give complicated instances of injustices, like trustees, and so on, but I want to confine myself to this Amendment where the rate of tax, if it is reduced to half, will mean that the small man will see that it is still unjust, but the amount of the injustice, which will be measured in terms of £ s. d., will be reduced, and for that reason I urge the Committee to support the Amendment.
    Mr. MacDermot: Sir Samuel, you were obviously much more percipient than I, because it was not until his closing sentence that I realised the relevance of the remarks of the hon. and learned Member for Northwich (Sir J. Foster) to the Amendment. He is anxious to mitigate injustice. The Amendment was moved by the hon. Member for Worcester (Mr. Peter Walker) on the basis that it was intended to help those on small incomes. We are glad to know that the hon. and learned Member for Northwich thinks that it will help the Australian sheep farmer who sells his farm and comes to live in this country.
    The hon. Member for Harrow, Central (Mr. Grant) suggested that I had rejected his earlier Amendment—which I hope he will accept I approached with sympathy—on the ground that a few rich tycoons would get some advantage. That was not the reason for rejecting it. The reason was that it would be the rich who would get the most advantage, and this did not seem to me to be a very suitable way of trying to help the small man.
    I also pointed out earlier in my speech that I thought that the rate at which we have fixed the tax gives a great advantage to the rich tycoons, because those who will be able to add to what I regard as their total income every year regularly by capital gains, instead of paying at the marginal rate of tax, which may be anything up to 91¼ per cent., will pay it at only 30 per cent. Whatever hon. Gentleman opposite may think, this will be a considerable advantage to the rich tycoons.
    428
    That is the starting point when one is looking at the effect of all this on the rich tycoons, and it does not seem that an Amendment which is designed to help the small man is very suitably framed if its effect is to give still more advantage to those gentlemen than to the people whom we want to help.
    Mr. Grant: If there is some advantage to the broad mass of small investors, does it really matter that a small number of rich people get some benefit as well? Secondly, perhaps my Amendment was unhappily framed, but surely it would not have been beyond the wit of the Revenue and the Government, with all the resources at their command, to produce something which did not have that effect, but still gave the advantage to the small man?
    Mr. MacDermot: It is not beyond our wit. That is why we provide in the Bill for the alternative basis of tax.
    The hon. Member for Worcester said—and I accept the basis on which he moved the Amendment—that it was intended to help those on small incomes. He is accepting for the purpose of this Amendment that our approach is right, but he is saying that we ought to go further, and instead of saying that two-thirds of a gain will be taxed as income, there should be an allowance of a half instead of one-third.
    1.0 a.m.
    He cites the experience of the United States where they have a concession of a half and he thinks it illogical that we have both a higher rate than the United States and a lower rate of concession. I must go back to what has been characterised in my absence as MacDermot's law; the law that if we are trying to have a fair and equitable tax system, and if we unfortunately live at a time when we need a high rate of Income Tax, then relatively the Capital Gains concession should be lower. What is Heath's law? Is it that the more Income Tax the ordinary wage earner pays, the less Capital Gains Tax the tycoon should pay?
    It is not that I like high taxes. I should be delighted if we could lower taxes. But whatever level of taxation we need, the burden should be fairly spread, and if we are to have higher rates of Income Tax than the Americans have, the fair proposal is that we have a higher

    429
    rate of Capital Gains Tax, too—if we believe that the Americans have found the right relativity between Income Tax and Capital Gains Tax. Hon. Members opposite are apparently asking us to accept that the American relatively is right, and I am pointing out that if it is right, and if we apply it here, since we have a higher rate of personal taxation, the corollary is higher rates of Capital Gains Tax and less high rates of concessions.
    Mr. Peter Walker: If we have a higher rate under MacDermot's law, whatever the reasons may be, it follows that if we have any regard for the smaller investor we should give a bigger concession because of the higher rate.
    Mr. MacDermot: We all have to bear our share, the small taxpayer as well as the high taxpayer. We have a graduated taxation system. The hon. Member suggests that we are not anxious to encourage small investors but in assure him that the contrary is the case owe welcome that many more people in our society should invest, and invest i equities, so that their savings benefit from the increased growth and prosperity of our society. There is something wrong with a savings system in which only the wealthy are able to save in forms which share this increase and in which the ordinary worker's savings are in a form in which he does not share in the increase.
    In his Budget Statement the Chancellor said that a proposal had been made to him for a State unit trust, that he had looked at it with sympathy and would like to give it further consideration, but that as he was introducing a new measure in relation to Post Office savings he felt that he could go no further this year than state that he was looking further into the proposal. That is clear evidence that the hon. Gentleman's charge is false.
    What is the correct rate of concession to make? The argument has been made with force that the concession at the two-thirds rate does not give much to the man on the standard rate. The majority of taxpayers do not pay at the standard rate, and there are very many who are paying at the reduced rates. They will gain considerably more benefit but the
    430
    taxpayers on the standard rate would have their effective rate reduced from thirty to 27½ per cent.—a reduction of only 2½ per cent.
    The Chancellor feels that there is considerable force in this point and that there would be a real advantage if we could devise a workable way of conferring a greater degree of benefit than that offered by the alternative basis. But some of the difficulties include, for example, the fact that the proposal for going as low as one-half would mean in effect that such would be the way in which this concession climbs, and such the rapidity with which it climbs, that the alternative basis of charge would then accrue to a very large proportion of taxpayers, including a large proportion of Surtax payers, and there would be very few people indeed paying the basic rate of thirty per cent. This would erode the whole principle of the basic rate, making it a very complicated way of reducing the basic rate from thirty per cent.
    We cannot accept the amendment which seeks to reduce the figure to one-half, but we have looked at the possibilities of a further reduction cut off in some way at a given level. However, here the administrative difficulties would be quite appalling. It would involve tapering provisions and, bearing in mind the way in which this tax will have to be administered, and the large number of tax officers involved, it could lead to a grave danger of administrative breakdown. [HON. MEMBERS: "There will be as it is."] Those who will be responsible for the tax advise us that the tax is quite workable but that this plan would be extremely difficult to work.
    At the same time, it is possible that we might get a further reduction amounting to a substantial benefit for the taxpayer on the standard rate; a three-fifths reduction, for example, which would, rather surprisingly in my view, reduce the rate for the standard rate taxpayer not to 27½ per cent., but to 24 per cent. It would mean a considerable reduction for him.
    Mr. Peter Walker: I cannot understand this point. I believe that the lowest rate of Surtax is two shillings, so that a person hitting the lowest rate would pay 10s. 3d. and this so-called concession would be no concession at all.
    Mr. MacDermot: I assure the hon. Gentleman that it would. If he would like to have detailed figures I should be pleased to give them to him. [An HON. MEMBER: "We want them now."] Well, if hon. Members have a thirst for statistics, let me give them some. Let me show what the comparison would be between the two-thirds proposal as it stands in the Clause and the half for which hon. Members opposite are asking. I spoke earlier of the married man with two children with £5,000 a year income and £2,000 worth of investments. He would gain at the maximum rate, £600 a year. If that figure were changed to one-half he would be able to benefit up to a maximum gain of £8,637.
    One may wonder whether a concession of that kind is what we have in mind when talking about providing relief for the small man. A married person with two children, both aged 16, and with £2,000 earned income and £500 from investments on the present basis would benefit from the alternative basis of charge up to a maximum gain of £948; on the basis suggested in the Amendment that figure would be £9,322. I could give many other examples, but to take the extreme case at the other end, I would point out that a single person with earnings of £900 and an investment income of £100—perhaps a small shopkeeper—who then realises an exceptional gain on selling a property, would benefit under the present arrangements up to a maximum gain of £2,795, whereas on the basis proposed in the Amendment he would benefit up to a maximum of £13,127.
    I hope that hon. Members will see from what I have said that this is not a simple matter to solve. But my right hon. Friend is satisfied that this is a point on which we should yield and find a solution which will give more benefit to the man whom we all want to help and whom we have been calling, for short, the "small man". If the Committee will accept that assurance from me, on behalf of my right hon. Friend, we shall be very glad to give an undertaking to look further at the matter to see what is the best workable solution to put before the Committee which will give the maximum benefit to the people whom we want to help, without getting out of hand by running up the scale.
    432
    On that basis I shall be glad to give an undertaking to bring forward a further proposal on Report.
    Mr. Grimond: At this time of night, no one wants to look a gift horse in the mouth, and I understand that this is a gift horse, although it was rather carefully wrapped up. Nevertheless, in the middle of the pill there is a little jam. We welcome that, and I do not want to deter the Government from looking at the matter again.
    But whenever what is now called MacDermot's law is mentioned some protest should be made. It is absolute nonsense to say that because personal taxation in this country is so high other forms of taxation must also be high. This is nonsense for everybody. It is not only Liberal or Conservative nonsense; it is Labour nonsense as well. If the Government say that the reason for bringing in this Capital Gains Tax at the present level is Income Tax and Surtax are now at as high level, even those who are in favour of as Capital Gains Tax must think again about it. The whole idea, I thought, was that this would enable us to reduce other forms of tax on income and not to increase them. To put forward the argument that the hon. and learned Member did as a reason for introducing the Capital Gains Tax is to destroy the whole rational basis for it.
    Is this argument to apply throughout our taxation system? If we increase the tax on tobacco, must we also increase every other tax? If we increase the tax on alcohol, must we raise every other tax? This is nonsense. If MacDermot's law is now to be Labour policy the sooner the country is aware of this the better.
    I started on this debate rather in favour of many of the proposals made in the Budget. I was not opposed to the Corporation Tax or the Capital Gains Tax. But my reason for supporting the Capital Gains Tax was that it would enable us to reduce some of the other taxes; it was not that it would enable us to increase them. Let use suppose that next year we decide to increase the Capital Gains Tax; must Income Tax and all the other taxes be raised as well?
    I regret that at a time when the Financial Secretary must make friends and influence people in his direction he should

    433
    introduce an argument that is more calculated to influence them against the Government than anything else that he could have said. Although I do not want to deter him from making these concessions, whatever his views about the tax may be everybody must repudiate the doctrine that because personal taxes are high the Capital Gains Tax must also be high.
    1.15 a.m.
    Mr. Peter Walker: While agreeing with the right hon. Member for Orkney and Shetlands (Mr. Grimond), the leader of the Liberal Party, in condemning MacDermot's law, I would also condemn the extension of MacDermot's law which we heard in the Financial Secretary's speech. The original MacDermot's law was bad enough, that one should increase taxation in accordance with increases in all other forms of taxation, but now we have the addition to the law, which is that the bigger the tax the smaller the concessions. I join in condemning this.
    We must take hope from the attitude of the Financial Secretary on these Clauses, because, although he has now started another doctrine of MacDermot's law which is bad, there are other doctrines in which he persevered to begin with but from which he is now beginning to shift. There was a time when he said that there would be no administrative difficulties in imposing this tax. We now hear that because of the great burden of administrative difficulties we had better not look at other concessions which could be made. We had no concessions at all to people who invest in equities, unit trusts, or any other form of investment.
    After the speeches of my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) and my hon. Friend the Member for Harrow, Central (Mr. Grant), there has obviously been a rapid compromise and it has been decided that this is something on which the feeling is strong and perhaps shareholdings are widespread. I accept the Financial Secretary's undertaking that the Government will look at this again. We feel on this side of the Committee that we have done something by our arguments to reduce the penalties which this Government are imposing on the small investors. We shall, of course, examine very carefully the proposals which the Government make and the Amendments
    434
    which they will presumably bring forward on Report. In view of the promise that substantial concessions will be made, I beg to ask leave to withdraw the Amendment.
    Amendment, by leave, withdrawn.
    Mr. MacDermot: I beg to move, Amendment No. 126, in page 17, line 6, to leave out "on" and to insert:
    "in respect of chargeable gains accruing to".
    This is a purely drafting Amendment.
    Amendment agreed to.
    Mr. MacDermot: I beg to move, Amendment No. 127, in page 17, line 43, to leave out "the" and to insert "an".
    I think that it will be evident that this also is a drafting Amendment.
    Amendment agreed to.
    Question proposed, That Clause, as amended, stand part of the Bill.
    Mr. R. H. Turton: Before we leave the Clause, I should like the Financial Secretary to explain to me the meaning of subsection (2, a), under which the amount which is allowed to be set off as annual personal reliefs and what is excluded is the annual allowance under the Income Tax Act. The case about which I am thinking particularly is that of a trader who sells up on retirement at a loss on his trading in his final year. I gather that he would probably be kept out of the provisions of this Clause, because he would not be allowed to deduct from his income or his capital gain the trading loss which he had made in his final year.
    Another case which illustrates the point which I am making is that of a farmer whom is retiring. Normally, for Income Tax purposes, that farmer is allowed to deduct not only any loss on trading but also depreciation of his assets, and any depreciation, under Section 314 of the 1952 Act, of improvements which had been made to his holding. It looks to me as if this will produce a certain inequity, that those who have made a loss are kept out of the provisions of this Clause, but otherwise ought to enjoy it. I may be wrong about this. It is not clear as the Bill is drafted, and I should be grateful for an explanation.
    Mr. MacDermot: I am afraid that I cannot at this stage do other than merely

    435
    confirm that the right hon. Gentleman is correct. I will gladly look into the matter and let the right hon. Gentleman know the position, with any other comments I can make, by letter. I will do that when I have had a chance to look into it. At this point all I can say is that the position is that as the Bill is drafted it is the ordinary personal allowances and reliefs which may be taken into account.
    Sir Henry d'Avigdor - Goldsmid: It is verging on the obscene at this hour that we should be discussing a Clause as complicated as this and occupying two and a half pages in the Bill when its purpose could have been served by one sentence.
    I was glad that for our benefit my hon. Friend the Member for Worcester (Mr. Peter Walker) repeated the new addition to MacDermot's law, which is that the higher the tax the more important it is not to grant any rebates because of the benefit which some might get from those rebates. It is clear that for the small investor the purpose of the Clause would be served if the first £100 or £200 of the capital gain in any one year were excluded from the charge. This would not take any complicated drafting. However, the argument against it is that the large investor would benefit much more than the small one. We cannot, even at this hour, conduct our national affairs on the basis that all taxpayers pay 94½ per cent. We cannot spend our time legislating about the 94½ per cent. taxpayer because he is a very rare bird indeed.
    Surely the Financial Secretary appreciates that there must be a sum—that anybody in any country must appreciate that this is so—below which the law does not pay attention; and does he not consider that £100 would be reasonable? What is happening is that except in cases of death and other forms of involuntary disposal this tax will prevent anybody from changing their investments. People will not incur the tax voluntarily, so it will not arise until death. We can none of us escape death or taxation. We must abhor the introduction into our tax system of a principle which will make the normal conduct of commercial affairs that much more difficult.
    Mr. Hirst: I was not altogether happy with the reply of the Financial Secretary, and I hope that he will give some further information, although I appreciate his difficulty. I am always suspicious—and I mean no disrespect to the hon. and learned Gentleman—when rather vague assurances are given. Years of experience in Parliament have made me suspicious of such assurances, particularly since there is a danger that after the matter in question has been looked at further by the Government nothing more is heard about it.
    I am not certain that I understood the difference between the rate of 30 per cent. and 24½ per cent. Let us be clear about this and I trust that the Financial Secretary does not imagine that what he has said on this issue will meet our views on Report. It goes nowhere near halfway between the two things. We ought to know whether that was an aside or how the hon. and learned Gentleman was thinking. I am surprised that he could not give a concrete example. I do not expect him to have a whole range of schedules or statistics galore—I am not unreasonable—but when discussion is supposed to have been going on in the Treasury I expect an explanation.
    The hon. and learned Gentleman readily admits that it is not quite fair to draw this sort of distinction when anyone on the first shilling or two of the standard rate is given an advantage of only 2½ per cent. Surely, there must be some thinking about what the Treasury is getting at. The drafting may be a bit difficult, but the hon. and learned Gentleman could be a bit clearer about what the Government are thinking about in concrete examples so that we can judge whether it is worth waiting for this matter on Report.
    I hate this business, because I have been sold down the river far too many times in my lifetime here on all sorts of Measures on the basis of the Report stage. It is an old one. I do not think that anybody is being directly dishonourable or dishonest, but the fact is that the Government have not thought it out. It is a mehod of pseudo progress with the Bill and sometimes it takes hon. Members "for a ride". I have been taken "for a ride" several times. I am an old soldier, but I have been learning rapidly for a long time, and I do not like it.

    437
    The hon. and learned Gentleman should give us an idea about this. I am not happy about it. We have this extraordinary version, to which people are drawn, of the MacDermot law with a sort of superimposed Kaldor kissing ring on top of it which makes one wonder what it all amounts to. It is absurd that a large number of small investors have to suffer in any way whatever because a relatively few rich people might get an odd £100. It is such an idiotic way of approaching the whole thing.
    The truth is that the easiest way to deal with this matter would have been on the lines of the Amendment of my hon. Friend the Member for Harrow, Central (Mr. Grant) —
    The Chairman: Order. I am sorry to interrupt the hon. Member, but he must not now discuss Amendments which might have been made to the Clause. We are now discussing the Clause in its entirety and not Amendments.
    Mr. Hirst: I appreciate that, Dr. King. I was only showing by example that it would have been an easy way of meeting the Committee had the Financial Secretary come forward with an indication of how the Clause could have been altered to meet the views which have been strongly expressed from this side. We cannot be tied in our context now to any Amendments because none of them would be correct to discuss in detail, but now that we are discussing the Question, "That the Clause, as amended, stand part of the Bill", the hon. and learned Gentleman might have indicated, when he has accepted the principle that there should be a change, the type of thinking that has taken place.
    I am only suggesting to the hon. and learned Gentleman a range of ideas. He probably has more fertile ideas in the Treasury than I can think of, but one of them might well have been on the lines of an Amendment which we had earlier, without going into its merits. That would have given us confidence that the Financial Secretary was thinking on lines that we might be willing to accept on Report.
    We should not let the Clause go—I certainly shall not be happy about it—unless the hon. and learned Gentleman can be a little bit clearer to the Committee about what he is thinking, so that
    438
    we may feel the element of confidence that we have a right to feel in the Treasury when its representative makes a statement and the confidence that, I am sure, the hon. and learned Gentleman would like us to feel. We should have a little more idea of what he is thinking about, what the aim and object will be and whether he will go anywhere near the lines of our request or will still be wide of the mark.
    Question put and agreed to.
    Clause, as amended, ordered to stand part of the Bill.

    Clause 21.—(DISPOSAL OF ASSETS AND COMPUTATION OF GAINS.)
    Mr. John Hall: I beg to move Amendment No. 192, in page 18, line 14, after "property", to insert:
    "other than tangible, movable property".
    The Chairman: With this Amendment, we will take also the following Amendments: No. 301, in line 14, after "property", insert:
    "other than decorations awarded for valour".
    Amendment No. 194, in Clause 26, page 28, line 7, leave out subsection (1) and insert: Tangible, movable property shall not be a chargeable asset.
    No. 198, in page 28, line 35, at end insert:
    (7) Works of art purchased during the lifetime of the artist shall not be liable to capital gains tax when disposed of by that purchaser.
    No. 257, in page 28, line 10, at end insert:
    "but vehicles classified as vintage vehicles either used or on display shall not be a chargeable asset".
    No. 245, in page 28, line 20, at end insert:
    (2) Livestock shall not be a chargeable asset.
    No. 369, in page 28, line 10, at end insert:
    (2) Books and manuscripts shall not be chargeable assets.
    Amendment No. 264, in page 28, line 35, at end insert:
    (7) Any gain accruing on the disposal of a production herd in respect of which an election has been made under paragraph 2 of the Twentieth Schedule to the Income Tax Act 1952 (Treatment of Farm Animals etc.) shall not be a chargeable gain unless the said election was made after 6th April 1965.
    1.30 a.m.
    Mr. Hall: Yes, Dr. King.
    It is a little difficult to know quite where to start, because this will be a long debate, but perhaps, as it has been fashionable to quote from "Alice in

    439
    Wonderland" during today's debate, one might take the advice which the King gave to Alice to begin at the beginning, to go on to the end and then stop.
    Most of the Amendments that we are considering relate to Clause 26 and cover a fairly wide field. When we debated the short-term gains on Clause 16 I pointed out our difficulty in dealing with the short-term Clauses before the long-term ones, and I said that there was bound to be an overlapping of argument and that we would find it necessary, in order to make the argument clear at a later stage, to deploy some of the arguments again. I therefore hope you will understand, Dr. King, if I traverse some of the ground that I covered before, although I shall try to avoid it as much as possible.
    We are taking with this Amendment
    others which are very important and which will be referred to by various of my hon. Friends. Amendment No. 301 refers to decorations awarded for valour. In passing, I would say that it is difficult to decide how one would value a decoration awarded for valour. Some would say that such decorations are priceless and impossible to value. We have the familiar case, in Amendment No. 257, of vintage vehicles. Amendment No. 245 covers livestock. Then there is Amendment No. 369 concerning books and manuscripts, and I am delighted to see that Amendment because it relates to an interest of my own. No. 198 covers certain works of art and No. 264 relates to production herds. Therefore, a wide range of chattels, moveable and tangible property, will be debated at this hour of the morning.
    I do not intend to debate vintage cars. We have been told by the Financial
    Secretary that the Government are giving way on this point and that vintage cars will not be caught by the Capital Gains Tax. Indeed, this news was received with much elation outside and it almost made headline news in the Press.
    Sir D. Glover: It had nothing to do with vintage cars. If the Government had not given way on vintage cars the tax would have applied to all cars.
    Mr. Hall: The fact is that this doubt was cleared up and the news has been received with great joy by the public. Perhaps this is one of the golden con-
    440
    cessions that we heard about yesterday. My hon. Friend the Member for Chippenham (Mr. Awdry) may wish to return to this matter later. He may require some greater detail, but I think some of us are satisfied that we got what we asked for, and we are very grateful.
    It is interesting to contrast the concession given for vintage cars with the system applicable to modern plant under these capital gains Clauses. However, I will leave my hon. Friends to deal with the specific points raised on other Amendments.
    I want to deal with our main objections in principle to the inclusion of chattels in the purview of Capital Gains Tax. I think I have traced the article to which I believe the Financial Secretary was referring when he said that he thought I had based some of my information about the customs in the United States on a certain article. Actually, I did not base my information on that source, but the information appears in a rather modified form in an article in the Daily Telegraph of 4th May. I think it is interesting because it confirms in part what I said and it also brings to light certain other points of reaction to the Government's proposals.
    I should like to quote some relevant parts of the article. It stated:
    "The experience of the United States is often pointed out to us as an example of a capitalist country that has lived with a capital gains tax for years. But the American Treasury itself regards the taxation of capital gains as the most troublesome and complicated part of the tax system."
    I think that should be borne in mind. It continues:
    "It has failed to date to find a formula which is both practical and equitable: it recognises that the capital gains area is a most contentious area. The lawyers in the Temple, and the accountancy profession, will long toast Mr. Callaghan as the best begetter of new business, better even than the man who draws up his own will or the man who writes up his own tax return."
    I am sure that some of my hon. Friends will be grateful to the Chancellor of the Exchequer for the additional work that is to be given to them. The article goes on:
    "Mr. Callaghan has cast his net on capital gains very wide indeed. He has given a hostage to fortune by including personal chattels of over £1,000 within the scope of the scheme. This is hardly wise, because the United States

    441
    Treasury has long since ceased to chase transactions in personal property except in special cases.
    The quiet abandonment of this area of capital gains by the Administration with the most experience on the subject should have taught Mr. Callaghan a lesson. We shall have to learn all over again that this area is not really productive of tax, for the simple reason that it is most easily driven underground by cash or barter transactions."
    It goes on:
    "To chase what cannot be collected only results in growing contempt for the law. Those few people who will be caught will be the exceptions. There will be a build-up of resentment."
    The Government should bear the last paragraph in mind. It says:
    "The Revenue is already pretty worried by the anti-social public image of the department. Snooping after capital gains on Chippendale chairs and Georgian silver will hardly improve that image. We don't want a return to the days when a Revenue man could enter a house to inquire about dog licences and the like. Recruitment into the Department, already difficult, will become as difficult as the recruitment of prison warders."
    That is a rather interesting parallel.
    I think that the authors are absolutely right; and that this tax will be practically impossible to administer and enforce. A few will be caught, but most of those most likely to be concerned will treat the law with contempt. It will be avoided in the same way as people try to avoid death duty, and probably for the same reason, which is that the duty is regarded as unjust.
    Will the Financial Secretary tell the Committee how the tax will be administered and policed? What additional staff has been added to the Inland Revenue since the 1962 Act, which, one presumes, must have required certain additional staff? What additional staff will be necessary if this Amendment is accepted and tangible removable property is taken out? Indeed, what additional staff will be necessary if the Amendment is not accepted, and we have a capital gains tax to administer with all its complications, including the tax on chattels?
    Above all, where is the Inland Revenue to obtain the staff? Every professional and industrialist in this Committee will know that the recruitment of responsible executive staff is becoming almost impossible. One of the biggest headaches of the industrialist and the professional man encounters lies in finding good responsible staff of any calibre. How is
    442
    the Inland Revenue to recruit this additional army of valuers and inspectors who will have to visit the private homes of individuals in order to examine and value the property there? How will it recruit the additional office staff necessary to record the returns of auctioneers and dealers?
    Above all, how will it get the right calibre of people? It appears to me that the inspectors who will be recruited will need to have exceptional tact and charm. We have all read Schedule 9, but perhaps I may refresh the memory of the Committee by reading paragraph 13, which states:
    "… If for the purposes of this Part of this Act the Board authorise an inspector or other officer of the Board to inspect any property for the purpose of ascertaining its market value the person having the custody or possession of that property shall permit the inspector or other officer so authorised to inspect it at such reasonable times as the Board may consider necessary."
    Hon. Members may remember that I suggested this point yesterday, but what I then forgot to point out was that the paragraph also states:
    "… If any person wilfully delays or obstructs an inspector or other officer of the Board acting in pursuance of this paragraph he shall be liable on summary conviction to a fine not exceeding five pounds."
    It is an interesting departure from our normal procedure to give this kind of authority to Inland Revenue officers to enter private homes at any time that the Board may consider necessary. It is for that reason that one would have to recruit inspectors of considerable tact and charm. They will have to point out to the housekeepers or custodians of the property that if they do not cooperate they will be liable to a fine. They will have to destroy the fine image of every Englishman's home being his castle, and they will have to cope with dogs and other hazards that face canvassers. I do not think that it will be easy to find people of charm to do this job. [An HON. MEMBER: "Or of knowledge,"] We shall come to that point later. The inspector takes with him another officer. When I pointed this out we were told, as I suspected, that he would be a valuer.
    I should have thought it even more difficult to secure the services of people who are properly qualified as valuers. They would have to apply a vast range

    443
    of expertise. Expertise would be required in silver—perhaps I would offer my own services there at a suitable fee—in old china, in furniture—and there I could recommend some of my constituents in Wycombe—in pottery of the Greek and Roman empires, in books and in paintings. There is a vast field of expertise in painting. There are experts on various schools and indeed on individual artists. An expert on one artist or one school may know nothing about others.
    There would have to be valuers capable of valuing livestock. Perhaps it would be easier to find those than some of the others whom I have mentioned. There would have to be valuers capable of valuing the old steam engines and omnibuses we heard about yesterday, a very special field. To quote a well-known but nevertheless telling phrase, when one thinks of the problem facing the Inland Revenue in recruiting the necessary valuers the imagination boggles.
    Some of the many loopholes in this tax
    which are already apparent were mentioned yesterday. Normally a new law has to be in operation a little while before these loopholes are discovered and legislation is passed to close them, but here we have a case where before the law has been passed people have already seen that there are loopholes in it. I do not want to refer to them. Some have been mentioned already. Nor do I want to put fresh ideas into people's minds, but there has been no suggestion about how some of the loopholes which have already been drawn to the Financial Secretary's attention are to be stopped up.
    There is a fruitful field for evasive action, for example, in the £1,000 proviso. I would imagine that it is impossible to value all the objects which are likely to be put up for sale in the next few years in thousands of houses all over the country. What is to stop somebody by arrangement with an intending purchaser putting up for sale two objects, one worth over £1,000 and the other worth under £1,000 and arranging that they are bought for just under £1,000 each so that the seller gets what he wants and the articles can be said to have been sold for not more than £1,000 each.
    444
    There is another interesting query to which I do not fully see the answer. How does the £1,000 proviso operate on death if chattels are bequeathed in £1,000 lots? If someone with a good deal of furniture, silver, objets d'art and paintings decides that he will bequeath these possessions to a number of people in lots not exceeding £1,000 in value so that, in total, the gain after valuation on death is in excess of the £5,000 which will be allowed on death as not subject to tax, would these bequests be caught, or would they come under the chattel provisions and be excluded from taxation? I am sure that the Financial Secretary knows the answer, and perhaps I ought to know it myself; but I am not entirely clear.
    The attempt to tax chattels will create chaos and confusion. It will overload the Inland Revenue. It will create appalling difficulties of valuation, many examples of which have been given already. Because of the difficulty of valuation, it could lead to grave injustice. It will certainly damage London as a great art centre and market. It will encourage evasion and concealment. It will tend to bring the law into disrepute, not just the law relating to tangible and moveable property but the general tax law as well. Nothing good can be said for the inclusion of chattels in these Clauses. As nothing good can be said for it, let us away with it.
    The Chairman: Before I call the next speaker, may I remind the Committee of the excellent example set by the hon. Member for Wycombe (Mr. John Hall) and ask that, if it is possible, hon. Members do not repeat any of the arguments which we had on chattels in relation to short-term capital gains.
    1.45 a.m.
    Mr. Dennis Walters: In supporting the Amendment moved by my hon. Friend the Member for Wycombe (Mr. John Hall), I shall refer mainly to the Amendment which stands in my name and the names of my hon. Friends the Members for Norfolk, Central (Mr. Ian Gilmour), York (Mr. Longbottom) and Bromley (Mr. Hunt) which relates specifically to books and manuscripts and requires that they be exempt from tax. Very few books are valued at £1,000 or even approaching that figure. The great majority of books which appear on

    445
    antique sellers' shelves do not even reach £100, let alone £1,000. Therefore, there could be no conceivable yield of any relevance, and neither is there any question of substantial evasion.
    There has always been a convention that books and manuscripts are not taxed, and it is very sad to see a departure from it. This convention is even referred to in a U.N.E.S.C.O. Convention of which the Chancellor of the Exchequer spoke earlier this year.
    Occasionally in the case of books, and nearly always in the case of manuscripts, there are two choices open to a vendor: either he can sell as a single object or he can break up a collection and sell as separate objects. Under the Clause as at present drafted, a vendor would be allowed to sell a set of objects to different people as though they were separate objects, and amalgamation would apply only if the sale were to a single person.
    It follows that if a vendor had a collection of letters which could be of great historical importance and value, valued financially at say, £2,000, and if he sold them to one purchaser he would be subject to tax, but if he broke up the collection and sold them to 12 different purchasers then there would be no tax liability. By doing this he would have broken the collective aspect which could
    be lost forever and irreparable damage could have been done to something of great historical value. This also applies in the case of illuminated manuscripts. Here again the vendor would have the choice of either selling miniature by minature, and thereby escaping tax, or selling as a single object and thereby being hit fully by the operation of this Clause.
    It seems obvious that the tax would produce next to nothing but would operate against the interests of literature and could do a great deal of damage to items of value and importance. I hope the Financial Secretary will find it possible to make a concession on this point.
    Mr. James Ramsden: I wish to recommend to the Financial Secretary what is, in the view of this side of the Committee, the main point of this group of Amendments, namely the desirability of exempting totally works of art from the operation of the Capital Gains Tax. In Monday's debate the Financial
    446
    Secretary made a reply which I hope he will not repeat when he replies to this debate. He was dealing with chattels in connection with the short-term tax. The main burden of his reply to our Amendments is in column 120 of HANSARD. He said:
    "These substantial gains are being made, and if they were allowed to go tax free one of the main objects of the tax would be lost. The tax is designed to produce a sense of equity, because it is well known that there are privileged people who are able to make substantial increases in their income and also to escape all tax in the process."—[OFFICIAL REPORT, 24th May, 1965; Vol. 713, c. 120.]
    He argued that if this Capital Gains Tax is to be effective it must be applied right across the board and its objects would be frustrated if any exceptions were allowed, and that only if it is so applied will it produce this sense of equity to which the Government apparently attaches such importance.
    I think that I have the support of my hon. Friends when I say that it might be possible for society to pay too high a price for the attainment of this sense of equity. If it is to be attained by including works of art within the operation of a tax such as this, and if as a result of that we disrupt the market in works of art in this country, which holds a pre-eminent place among the art markets of the world, and if another effect is to bring the growth of private collections in this country virtually to a stop, and if, finally, it has the effect which was dwelt on by my hon. Friend the Member for Wycombe (Mr. John Hall) of bringing the law into disrepute because of the difficulty of administering this tax, and, what is more important, it sets the officers of the Inland Revenue, whose job it is to administer the law, at odds with the public, it will be too high a price to pay. If that is to be the effect of resisting the Amendment, I believe that it is not short of the truth to say that it is too high a price to expect the country to pay.
    This is particularly true when one considers what the Government apparently hope to gain from the institution of this tax. What do they hope to gain? Certainly they cannot hope to gain very much revenue. The Financial Secretary will no doubt correct me if I am wrong, but no great yield in revenue is expected from the operation of this tax on works of art. The Government are apparently pinning their faith on the proposition that

    447
    if they tax capital gains, and if they make the operation of this tax universal, they will put the trade unions in a frame of mind where they will be more disposed than they are at the moment to accept the operation of an incomes policy. We were told this by the Chancellor of the Exchequer in the opening passages of his Budget statement, and I take that to be one of the arguments, if not the main one, for the institution of this tax.
    If that is so, and the Financial Secretary does not seem to be disagreeing with me, I do not think that it is a sound basis for a far-reaching change in the tax system, such as this proposal to tax works of art adds up to. For one think, it is problematical whether it will have the result that is intended. This is not the time, and I do not wish, to discuss the likelihood of success of the Government's incomes policy, but to anybody who follows the papers it does not look as though the announcement of the forthcoming Capital Gains Tax before Christmas has done much to moderate the flow of wage claims or to influence favourably the course of wage settlements. It certainly does not look as though the policy is succeeding, and if it fails a great deal of harm will have been done by the Government by the introduction of this tax.
    I should have thought that there was plenty of room for two views as to what constituted privilege in this connection. Who are these privileged people who are supposed to be caught by this tax?
    2.0 a.m.
    Among those I meet around the country in all walks of life I do not find this burning resentment against a supposed class of privileged people who make large gains as a result of collecting and disposing of works of art. This point of view is not widely held among people to whom I talk. If there is a class of person about whom there is a general feeling that they are over-privileged in the present day, it is those who appear to go on strike, often for fairly trivial reasons, and who cause the public to miss their trains and be late for work as a result of failing to turn up for their own. I do not say that there is resentment, but there is a fairly general sense of exasperation at these activities, which are the activities of a class of
    448
    people whom, we are told by the Government, this tax is expressly designed to appease. There are very much two views on what constitutes privilege in the country at present. The Government have not chosen a good theoretical basis for this tax—especially for a tax which will certainly do harm. It is extremely problematical whether any good will result.
    Will the tax do harm, and what harm is it likely to do? In certain respects the answer is that it will do a great deal of harm. I take the position of the private collector. Because there has been inflation, anyway since the war, private collecting of works of art has been attractive for other than aesthetic reasons. But it need not therefore be regarded as an anti-social practice. There are extraordinary misconceptions in the Labour Party on the motives and thoughts of the private collector. The hon. Member for Salford, West (Mr. Orme) yesterday said:
    "The sale of works of art has become a disgrace in this country and in the western world as a whole. Works of art are now regarded as a form of investment and are often hidden away in bank vauls."—[OFFICIAL REPORT, 24h May, 1965; Vol. 713, c. 104.]
    It is almost impossible to be more wrong. This is almost the only country in Europe, if not in the world, in which works of art are not hidden in bank vaults but are freely open to the enjoyment of large numbers of the public. The reason is that in other countries there is a tax on works of art and a strong incentive for their owners to conceal them, but in this country there is no such tax.
    Mr. Ridley: The only vaults in which works of art are hidden in this country are those where there is the national collection of 12,500 pictures which the public are not allowed to see.
    Mr. Ramsden: That gloomy congeries will be vastly increased if the Amendment is rejected. Nor need we accept the view mentioned by my hon. Friend the Member for Wycombe yesterday—the view of a noted Socialist economist who thought that the collecting of works of art was snobbery and a "fashionable" activity in the worst sense of the word. That point of view is not even widely held by the Labour Party. I was glad to see a much more just and sound

    449
    appreciation of the rôle of the collector of works of art in our national life in a speech by Lady Gaitskell in another place last Session. I would like to remind the Committee what she said:
    "Now we come to ourselves, and what we feel about culture generally. The British are always faintly apologetic about the Arts, and regard them as a kind of highbrow sport, and a rather expensive one at that. This feeling has not been dispelled by some of our younger painters and dramatists, whose works a large section of the public regard as a kind of shock treatment to which they will not submit. However, in the last decade or so there has been a change in their attitude to painting, because no longer is a picture a beautiful and valuable object in itself, but it has been upgraded. It has become an investment—a word which is music to British ears. In fact, the prices of pictures and other works of art are as sensitive a barometer of national prosperity as are the prices of shares on the Stock Exchange."—[OFFICIAL REPORT, House of Lords, 3rd June, 1964; Vol. 258, c. 529.]
    The noble Lady very successfully and with a very balanced view, was welcoming the growth of private collecting as a source of enrichment to our national culture and national life.
    It is a great mistake for anyone to think that all private collectors are very rich men. I would like to give the Committee one example of an acquaintance of mine, a neighbour, who began life as a not particularly successful engineer working on his own. He happened also to be a passionate collector of 18th and early 19th century English drawings, and when he had any spare money to invest he made a practice of buying such drawings in the knowledge that, chosen with discretion, they would hold their value and be available to cash in on if his business activities ever left him in need.
    But he prospered and enlarged his collection, which is now of national importance and will eventually find its way to the Courtauld Collection. The point is that a decision made by a man like that—the first decision to collect—is a decision made at the margin, with economic considerations in mind every bit as much as the aesthetic ones. If this tax is to come into operation, such decisions will not in future be made; or they will be made by far fewer people, to the immense impoverishment of the enjoyment of the arts by many people in this country.
    I would also say a few words about the likely effect of this tax on the market
    450
    for works of art. The active interest of private collectors is growing year by year and sustains in London what is acknowledged now to be the leading art market of the world. That has not always been so. Before the First World War, the market was between London and Paris and between the wars it was shared between Paris and New York; but now London has re-established itself, despite the competitive advantages of Switzerland and America because of the international standing of their currencies.
    I invite the Committee to consider how this has come about. There are a number of reasons, but perhaps the main one is the determined and—in the highest sense—skilled efforts of a comparatively small number of firms in the trade. They have been able to succeed because their activities have been founded upon the presence of a live and active home market for works of art. There is in this country an unrivalled cumulative treasure house of works of art in private hands, and they come on to the market. The market has access to them. It is therefore an active market.
    The overheads of those who deal on it, and therefore the costs to both buyers and sellers, are lower than they are in America and France. There is a long tradition in this country that art dealers in London buy for stock and not just on commission. This adds to the confidence both of buyers and sellers, and brings customers into the London market. The great, world-renowned auction sales in London could not continue without the support of the buying of London dealers, and they, in turn, are sustained by the buying of private collectors.
    Perhaps the most important of all these features is that the market has access to a steady supply of works of art which are its raw material. If this tax comes into operation the market will dry up straight away, and this access will cease, because in the first stage sellers and buyers will postpone all their decisions until they see whether it is possible to sustain this tax and to continue with it at the same rate. The market will be completely frozen on the first stage. On the second stage, when eventually things start up again and people find they have to sell, or want to buy, they will begin to seek out not the reputable dealers but those

    451
    who are prepared to countenance transactions in cash and to make out misleading invoices—and we shall have the whole paraphernalia of underground practices of the kind that take place outside this country in places and in markets where taxation upon works of art is prevalent and established.
    Those who will gain are the least reputable businesses in this trade. Those who will suffer are precisely the reputable firms whose activities have made the London market what it is, and who have become the leading names in the world in this trade, simply because the last thing they will touch is a transaction which is not in the highest degree reputable and above board.
    If the Financial Secretary can demonstrate to us that this will not happen, well and good, but it is certainly the opinion of the trade and of all of those with whom I have talked, and my hon. and right hon. Friends—many of whom are immensely knowledgeable—that these effects will certainly ensue if the tax is sustained. I leave out of account the consequent effect upon the export trade and all the
    advantages which arise to this country through the international market in works of art. I do not wish to detain the Committee longer. My hon. Friends will no doubt refer to many other points which can be made in this connection.
    2.15 a.m.
    To sum up: I am convinced that if this tax is applied to works of art it will have the effect of severely cutting down private collecting, together with the impoverishment of the opportunities for artistic appreciation and the general richness of our cultural life. I believe that it will destroy London's pre-eminence as an art market and hazard the very important and growing advantages of this export trade to which the Financial Secretary referred yesterday. Finally, I believe that it will prove impossible to administer. For this reason, it is likely to bring the law and the officers of the Revenue into disrepute, and the yield which will result will be practically negligible. I hope, therefore, that the Financial Secretary will accept the Amendment.
    Sir L. Heald: I shall not detain the Committee for more than a moment or
    452
    two, but I should like to support my right hon. Friend the Member for Harrogate (Mr. Ramsden) by reminding the Committee of a brief quotation. It is as follows: The argument is
    "… that the taxation of the most prosperous reduces the scope for envy … Of this argument it can be said that it panders to some of the least creditable motives of which the human mind is capable … As it is impossible for everyone to own a Rolls-Royce, the factory should be closed and the existing cars sold for scrap … If champagne is not available for all, it should be drunk by none. There is some significance in the fact that the arts which flourish least are those which are most heavily taxed, for heavy taxation creates a preference for the ephemeral rather than the permanent pleasures … A lost weekend in Paris or a day at the races are alike in this, that they leave behind no taxable asset."
    That comes from an admirable volume by a gentleman called Parkinson—
    Mr. MacDermot Mr. MacDermot indicated assent.
    Sir L. Heald: I am glad to know that the Financial Secretary is familiar with it. Our discussions have brought to my mind a number of such passages. I hope that he will read it again, and that he will bring it to the notice of his colleagues.
    Mr. Bryan: When the Motion to report Progress was being debated, the Chancellor said that he hoped we would not spend a long time debating the Amendment concerning chattels because most of the points had already been covered in the debate on the short-term capital gains. I think that in that one remark he dropped the most resounding clanger, because it showed that he has not the slightest idea what his tax would do, what its effect would be on the art world. In an article entitled "Bulls in China Shops", Dennis Sutton, the editor of "Apollo", says of this tax:
    "It is one which could damage, possibly beyond repair, a section of the community which has contributed much to our international prestige."
    It may be said that that is an interested Englishman giving a biased view.
    Let us look, therefore, at what the French say. The French authority, M. Pierre Cabanne, in an article entitled—I translate for the benefit of the Committee—"How France has Lost Her Place in the International Art Market", explains not only how it lost that place
    but to whom it has lost it. He analyses,

    453
    from the French point of view, how this has happened. His tone is a little bitter, because he regards France as being preeminent in the production of painters, and I do not think that we can quarrel with that. He says that one reason is that in France, they have a ten per cent. auction tax. The second reason is a two per cent. income tax, and he goes on to ridicule this, saying that the yield from this tax is so small that they could probably get it back from the expenditure of foreign buyers spending their money in Paris if this tax were not there.
    He then takes a good slam at the Minister for Cultural Affairs because of his undue power to control exports. He goes on to praise the initiative and drive of British firms and explains how after the war, New York temporarily held the lead. London gradually took over, culminating in last year's purchase by Sothebys of Parke Bernet.
    He says that our firms are virile and go-ahead and that the market here is highly competent and manned by men of great expertise. He implies other reasons, in particular the fact that the London market enjoys freedom. Hon. Gentlemen opposite probably do not like hearing that. The market prospers because it is left alone. Freedom in the market means no tax or tiresome recording. People do not always want their sales recorded or published. There is no earthly reason why there should not be privacy in sales.
    There is also, largely because of this freedom, the wide variety of goods going through the London market week by week. It would be interesting to know the number of lots that have gone through Sothebys, Christies and other leading firms in the last few years. It would give us some idea of the size and turnover in the market. This variety is obviously an attraction for foreign buyers. The large turnover only continues because of the freedom of the market.
    A Capital Gains Tax is bound to put the break on. I hope, therefore, that the Government will have second thoughts. They should realise that London is an agreeable and attractive place for the foreign buyer. We have wonderful museums and so on, with top-class experts in charge of them. We have some of the best theatres in the
    454
    world. Our market in art has been built up by hard work and skill—not by accident. If we lose it it will also be no accident. The Capital Gains Tax will have lost it for us. It will have stopped the steady flow and variety. The atmosphere and conditions for success will have gone. The trade will be driven underground and the most reputable firms will suffer.
    We have been asked from the Chair not to repeat the arguments which we adduced in earlier debates on this subject. We are obliged to repeat some of them because we were not given answers to our questions. We cannot allow the Financial Secretary to ignore our questions. We must ask them again. The other day a strong case was put on the valuations issue by my hon. Friend the Member for the Isle of Thanet (Mr. Rees-Davies) but the Financial Secretary did not even rise to answer him. We must, therefore, have these answers tonight.
    As a start may we have an explanation of exactly how these valuations will be conducted. If there is disagreement between a seller's expert and the Treasury expert, who decides—a tribunal or arbitration? If at the end of the day two reputable valuers, one for either side, heartily disagree, what value is to be accepted? Time and time again questions come up, to which there seems to be no answer. May I quote again from the article by Dennis Sutton:
    "To take but a single instance, it would be interesting to know the answer to the following proposition. An owner possesses an inherited work which he submits to Expert A in April, 1965. This authority believes it to be by Schiavone, and on this attribution its value would be X pounds. However, two years later, Expert B examined the work in question and comes to the conclusion that it is by Tintoretto. Expert A is then called in again and, after discussing the matter with Expert B, agrees with his findings. The owner then disposes of the work at a sum which is vastly more than the value placed on it in April, 1965. What then was its true value at that date?"
    It is insoluble. One could go on for ever thinking up equally unanswerable conundrums.
    What will happen if I sell a painting in ten years' time to someone in San Francisco? How do we arrive at its valuation in April, 1965? Will a Government inspector go to San Francisco to inspect it? It is hard to value when going

    455
    back ten years in any event, but an article cannot be valued without seeing it. Someone might say that he knows the type of painter and the price his works fetched, but it might be a good painting but an utterly ugly subject; and there is also the question of its condition.
    When I was on holiday at Easter in Ireland, I went round Westport House, the home of the Marquess of Sligo. I remember seeing two enormous candlesticks, about 4 ft. high, which were presented in the eighteenth century to one of his forebears who was Governor of Jamaica. How on earth would one value such things as in 1965 in 20 years' time? What price would one put on these unique articles? They have no class, type or parallel; absolutely nothing to guide anyone.
    We have not yet got down to the business of sets. In the explanatory White Paper, we are told about the set of Chippendale chairs as if a set is established at six, eight or whatever the number is, but that is not so. A set from a huge palace might comprise 50 chairs. One would not know whether one was selling a half, a quarter or a whole set.
    What about the pictures in the Royal Gallery? There are a dozen pairs of kings and queens. Are they all a set, or are two of them a set because they are of a husband and wife? One can play with this for ever. As far as I can see, there is no answer. We must have answers.
    When I spoke about an hour and a half ago, I asked a certain question but we made not the slightest progress. I will therefore repeat what I said. I read to the Chief Secretary the passage from the Royal Commission's Report stating that
    "it would be unrealistic to support that it would not require a substantial addition of staff to administer it. We
    have been supplied by the Board with a tentative estimate that the increase of staff in the Chief Inspector's Branch would be of the order of 500. To this must be added a formidable addition to the work of the Valuation Office of the Inland Revenue and of that branch of the Estate Duty Office that is responsible for the valuation of unquoted shares."
    2.30 a.m.
    May we have an answer to that? What is the staff position? The Royal Com-
    456
    mission's Report refers to 500. That was the estimate 10 years ago. Is it now 700 or 1,000? What are the possibilities of recruiting these people? Where are the qualified personnel to come from? Are they available or not? Nobody on these benches can imagine that they are. We still have not had anything like an answer to the question who is going to value these articles. In the end, the only people one can think of are the people in the trade, and it is almost impossible to think that any of them will come forward. Why should they value against their own prospective customers? So we come to an absolute deadlock, unless the Financial Secretary has a trump card up his sleeve which none of us has heard about so far.
    I should like to refer to the question of the patronage of the arts. We are going through a period of tremendous interest in the arts and I think this will continue to grow. It is obviously highly desirable for any promising painter to get all the encouragement he can. If people buy
    his paintings, that is the most encouraging thing that can happen. But if we apply this tax it cannot do anything but discourage patronage of the arts.
    For all these reasons I am very much against this tax. But I repeat for about the seventh time that I hope we can have some answers.
    Mr. James Scott-Hopkins: I wish to direct my remarks to Amendment No. 264. I ask the Committee to turn their attention from the problems concerning the arts, which have been so ably stated, and to consider the question of the farmer and agriculturist who is caught by this tax. The Amendment to which I refer is very narrow and deals with one small category of people, namely those who have elected in the past to have their herds accounted on a herd basis under the Twentieth Schedule to the 1952 Act.
    It might be convenient if I were to explain the situation. When the party opposite were last in office in the period 1945–51, they introduced in 1948 a choice for the farmer. He could decide whether to have his herd accounted on a herd basis or not. If the herd was not accounted on a herd basis, the buying, selling and upkeep of the herd were accounted in the ordinary trading way,

    457
    and, whatever the profits or losses made by the farmer, the herd was liable for Income Tax. If, on the other hand, the farmer elected to have his accounting done on the herd basis, the whole cost of acquiring, adding to or improving the quality of the herd was treated as capital, and for that he obtained not one penny of relief. This was the bargain which was struck, on the clear understanding that the farmer did not get Income Tax relief at all. So that when he disposed of the herd, or part of it, if there was a profit the profit would not be taxed, and if there was a loss there would be no relief for that loss.
    This was the offer which was made to the farming community. If they chose not to elect for the herd basis, the profit and the loss and proper maintenance appeared in the normal trading account and was liable to tax.
    Mr. MacDermot: I do not know whether hon. Gentleman was in the Chamber when I made my statement in our previous debate on this question of the herd basis. I do not think it has been universally realised that the exemption for chattels valued at under £1,000 would apply in such a case to each animal within the herd. So that I do not think there is any real risk of the kind of situation that the hon. Gentleman is contemplating by which the herd would become subject to Capital Gains Tax on disposal.
    Mr. Scott-Hopkins: I am grateful to the Financial Secretary for that statement. I was here at the time, and I have also read his words. I have in front of me a letter from the Inland Revenue, dated 13th May and addressed to Mr. Turpitt, of the National Cattle Breeders' Association, from which it appears that what the hon. and learned Gentleman says is the reverse of the existing position. If I read the letter, hon. Members will realise that it explains exactly what has happened. It says:
    "The Board of Inland Revenue direct me to reply to your letters of 8th April and 3rd May, and to say that the capital gains tax will not apply to gains which are otherwise chargeable to income tax or corporation tax. Where therefore a taxpayer who has elected for the 'herd' basis sells an animal, or it dies or is destroyed, any sum realised for it will be brought into account in determining his
    458
    liability to income tax and further liability to capital gains tax will not arise."
    That is the first point, if I may interrupt my reading. It means that those people who have elected to have their herd treated on a herd basis will, when they are disposing of part of their asset, have it put in the normal trading account, and they will now have to pay Income Tax if a profit has been made. That is a clear breaking of the 1948 bargain.
    The letter continues:
    "The new tax will only apply to the disposal of the whole or a substantial part of a herd, which is not at present taxable, but the Bill as drafted exempts from capital gains tax the gain realised on each animal if its sale price or market value is not more than £1,000."
    That is the point made by the Financial Secretary:
    "(The Bill tapers off the relief by providing that when the sale price or value exceeds £1,000 the tax payable is not to be more than one-half of the excess.)"
    That is quite splendid, as long as the beast is valued at under £1,000, but, as the hon. and learned Gentleman, knows, many beasts, and particularly those in pedigree herds, are worth far more than that. It could easily happen in this case, as in other cases and with other types of goods and chattels, that the animals in question would be worth more than £1,000.
    I do not think that the Financial Secretary has tried to differentiate the very small category of people who since 1948 have elected to use the herd basis as the method of accounting. He does not mean to differentiate for those people—on the one side, the pedigree breeders and, on the other, the commercial breeders whose individual animals might each be worth less than £1,000. If he seeks the advice of the Ministry of Agriculture, he will find that pedigree animals are normally worth over £1,000—sometimes the price is extremely high.
    Why should this particular category of people who have elected to have herd accounting to be the ones to suffer? This is not a very wide point, and I ask the Financial Secretary to give exemption from Capital Gains Tax to these people who elected to have their herds dealt with on a herd accounting basis. It is not an excessive demand to make, but it is something that should be granted in this case, because it was the hon. and

    459
    learned Gentleman's predecessors in Government who offered this choice to the agricultural community. I do not think it right that they should now go back on their promise, although I must confess that after hearing some of the hon. and learned Gentleman's remarks—his ominous remarks on the farming industry—I should not be surprised if they did. However, I hope that the hon. and learned Gentleman will not do this, because to do so would be most inequitable.
    Sir D. Glover: In an interesting debate we have had two of the most remarkable speeches made on the Finance Bill from my right hon. Friend the Member for Harrogate (Mr. Ramsden) and my hon. Friend the Member for Howden (Mr. Bryan). It is not accidental perhaps that they both come from Yorkshire. Theirs were the best thought-out speeches in the debate. Watching the Financial Secretary whilst both were speaking, I was increasingly disturbed that he was finding it almost impossible to stay awake.
    Mr. MacDermot Mr. MacDermot indicated dissent—
    Sir D. Glover: I must also draw attention to the fact that in 10¾ hours of debate we have not had a single word from the Chancellor of the Exchequer. We are now dealing with one of the biggest changes in the tax structure and surely we should have had the Chancellor's views put forward in the debate. I place that on record because it should be on the record. In listening to the debate on the Amendment, I was increasingly reminded of those two magnificent books "I, Claudius" and "Claudius the God." Claudius, who married Messalina, organised Saturnalia parties and, because he was not a very bright individual, she left him at the gate to take the money.
    I am forced to ask what the Government think they are going to do to police and control capital gains. All the objects of art which we have been discussing and all these movable chattels are things which an ordinary person can value. Only an expert can value them and the expert is not somebody who can value pictures and china and all the other ramifications. If one is to have a good valuation one must have not only an expert on china but even an expert on
    460
    one particular type of china. One may require one expert on Ming and another on European china. One cannot have just one expert engaged by the Department to value things which are subject to Capital Gains Tax on their disposal. If the Financial Secretary is still awake—[HON. MEMBERS: "Order"]—I say it with great sympathy.
    Mr. MacDermot: I assure the hon. Gentleman that even when he is addressing the Committee I find no difficulty in keeping awake.
    Sir D. Glover: I am glad to hear it. I was very disturbed because some time ago not only was the hon. and learned Gentleman yawning, but his eyes were closed and he was finding it difficult to keep awake.
    This tax on shares and other transactions is expected to bring in about £125 million at its very peak, but on the question of movable chattels we have had no information from the Government about what the tax will bring in. I doubt whether the total figure in any one year will be anything like £1 million. It will probably be about £500,000. The Financial Secretary has not told us how he visualises the policing of this tax will be carried out from the Inland Revenue. My right hon. Friend the Member for Harrogate, in his very fine speech, pointed out that the only too likely result of the tax will be to drive dealings in these sorts of things into the hands of disreputable rather than reputable dealers. There will have to be a far stronger policing of this part of the Capital Gains Tax than has been indicated by the Government so far if that is true, as I believe it to be. Where will the experts come from? Will they be engaged on each item at a commercial fee, at a fee laid down by the Inland Revenue, or will they be recruited and become full-time employees of the Inland Revenue? If the latter, how many of them, and at what salary?
    2.45 p.m.
    These are all relevant questions. I very much doubt that these experts could become employees of the Inland Revenue. There are very few of them, and the Inland Revenue will not be able to get them at anything like the Civil Service salary. Is the Inland Revenue quite

    461
    sure that an independent valuer in the commercial market who today is working for the Department and tomorrow will be working on the other side will be able to give a fair valuation? Who will give the third valuation if there is a dispute? If a man gives his son an object of value and says that, in his view, it is worth £900 and, therefore, does not incur Capital Gains Tax, but the Inland Revenue hears about it and wants it valued, is a valuer to be sent all the way from London to Northumberland to value it or will the Revenue ask for the article to be brought to London for valuation? The valuers are not in Northumberland or Cumberland, but a lot of objects of art are in houses in those parts of the country.
    We have been given no idea of the on-cost in the detailed administration of a tax which will bring in virtually no revenue whatever. It is a tax brought in out of spite. It is playing down to the lowest emotions of the Chancellor's supporters. It is thought to be popular in the country. It appears to be fair to the proletariat, but, in fact, it will bring in no revenue, so what is its purpose? It will damage one of the best export markets we have, a market which is respected all over the world, for no advantage to other taxpayers. I can understand the Government bringing in swingeing taxation which I might disapprove of if it would bring in revenue which could be used for a purpose which they regarded as socially desirable. But I cannot see how the Treasury will get any real net benefit from this tax on moveable chattels.
    Mr. Timothy Kitson: Will my hon. Friend deal with the question of Capital Gains Tax on the professional footballer? The Minister with responsibility for sport is here, and it would be interesting to know how that would be administered.
    Sir D. Glover: I am grateful to my hon. Friend. I suppose that a professional footballer is an asset of diminishing value and, therefore, would probably show a capital loss. I am not quite sure how a football club would claim back for a capital loss in respect of a footballer who was valued at nothing after a period of years.
    462
    The Amendment in my name deals with decorations, and I am sure we will get some concession here. There is no money involved; it is purely the personal, human problem. Perhaps people do not realise that today, as a result of the shortage of decorations like the Victoria Cross, these medals fetch over £1,000 at auction sales. Their price will almost certainly go up. We bought one in my Territorial battalion—we had one V.C. of the 1914–18 war—about three months ago at a cost of £1,170. As the Financial Secretary will realise, that would have incurred capital gains, being over £1,000. There are quite a lot of decorations in families, or belonging to widows, because so many of these decorations were awarded posthumously. It may be that the widow dies and because of death duties and that sort of thing it is necessary to sell this decoration.
    I am certain that no one in this Committee would wish to have the State extract some form of capital gain on a decoration originally awarded for valour. I would qualify my Amendment by saying that I am only talking of those sales from the family to which the medal was originally awarded and not of sales between dealers. When it is being sold by that family the decoration would not incur tax. I am sure it would be contrary to the wishes of the people of this country. No widow sells that sort of decoration unless she is in financial need, so she is selling not to get a capital gain or make a profit but because she is forced to. I am sure the British people would think it a sin and a shame if the State inflicted this tax upon such a transaction.
    Mr. Michael Alison: I would like to refer particularly to the asset of livestock among the category of tangible moveable property, and especially racehorses. An amendment stands upon the Order Paper in the name of myself and my hon. Friend's on this, and I hope the Financial Secretary will be able to agree that this is rather a special category of livestock, giving rise to rather peculiar problems of computation in terms of capital gains.
    I am interested in this because the town of Wetherby is included in my constituency, and the races there are without

    463
    peer in the North of England, compared to which those at York and Catterick are but a pale shadow.
    It is of real significance to trainers, breeders and owners of racehorses in the Wetherby area. Neither as a matter of practical politics, which is the art of the possible, nor as a matter of quality, can racehorses or similar bloodstock be assessed for long term capital gains, having regard to the provisions which Ministers have set down in their own Bill.
    I am not going to deny that racehorses can be sold at a capital profit, but what I assert—and this is particularly in reference to paragraph 4 of the Sixth Schedule—is that, first, the scale of costs which must be allowable in equity in computing the gains to be realised on disposing of an asset in this category worth more than £1,000 will be so colossal in relation to the sort of gains to be realised, especially having regard to the rarity of gains realised in this class of asset, that there is nowt in it for the Treasury, and it is not worth the collection. This is a serious point, to which I shall return when considering the implications of the Sixth Schedule in relation to computing allowable costs.
    Secondly, it is a tax which will not only have nothing in it from the Treasury's point of view, but will be positively discouraging, particularly to hobby racehorse owners and breeders, if the only fixed and immutable feature in reality in the risky, changeable, chancey business of breeding horses is the capital gains charge. It will be very discouraging if the only thing which is universally present whenever there is a racing gain is a Treasury impost.
    It will be so discouraging that the body of people who do this voluntarily to amuse themselves, and many others as well, will be driven into extinction. The creeping paralysis of the Treasury battening this tax on to this form of sport will drive it into extinction. This is a serious matter, because, as the Peppiatt Committee has made clear, racehorse breeding is a considerable undertaking for the community as a whole, not only in terms of pleasure, but in turnover in bloodstock sales abroad. This tax will be a positive disincentive, having regard to the rarity
    464
    with which a capital gain comes the way of the racehorse owner or breeder compared with the frequency of his losses.
    I come now to the main burden of the question of computing all allowable costs, and I draw the attention of the Financial Secretary to paragraph 4 of the Sixth Schedule where it says:
    "the amount of any expenditure wholly and exclusively incurred on the asset … for the purpose of enhancing the value of the asset"
    is to be an allowable cost in computing the gain. It stands to reason that if one is considering this in regard to racehorses, the expenditure involved in enhancing the value of the asset must include training fees. After all, the whole point of possessing a racehorse is to possess a winner. This is the only circumstance under which this asset acquires an enhanced value. It does so only if it wins races. Thus, any training expenditure must be directed towards enhancing its value, and enhancing its capacity to win races, and therefore the fees incurred in training, which may be anything from two to six years, must be allowable costs. If it is a progressive process of breeding and training a horse to win races, it must indubitably come under the heading of allowable costs.
    3.0 a.m.
    Another aspect is the fee paid to the jockey. The chances are that one will produce a winner if one can afford in the long run to get the best jockeys. The best jockeys cost money. Yet employing the best jockey is a way in which the value of the asset is enhanced by putting the horse in the way of winning races. This cost must be allowable in computing the deduction. What about entry costs, insurance and transportation, the cost of moving the horse from A to B, petrol, depreciation of the vehicle—all related to entering the horse in a race. This expenditure must be an enhancement of the value of the asset and not a maintenance cost. Enhancement value can hardly be separated from all aspects of possessing a racehorse and bringing it to the point of entry and winning or losing a race.
    Another enhancement cost is the cost of the other horses. The successful and business-like hobby racehorse owner or breeder has a string of horses. The collective unit
    of perhaps two dozen racehorses contribute to producing a winner.

    465
    There may well be only one winner in a dozen, but the emergence of the winner will be due to some extent to the existence of the collective group of racehorses which produce not only enthusiasm among those attending to the needs of the string of racehorses but also a stimulus in the collective life of the stables. The whole cost of maintaining a string of racehorses is, strictly speaking, a cost of enhancement in producing one winner.
    Mr. Kitson: Is my hon. Friend suggesting that if an owner has a horse he thinks good enough to win the Derby, and he buys a lead horse for the string, he will he able to offset the price of the lead horse against the eventual value of the Derby winner?
    Mr. Alison: Not only the lead horse but all those associated with it. These are all costs of producing a winner, and they are enhancement and not maintenance costs. The conclusion is that especially when the training may cover many years there will be an immense allowable enhancement cost in respect not only of one horse but of a whole group which must be set against the capital gain which, in the rare cases where it exceeds the £1,000 limit, is to be taxable. There is "nowt" in it for the Treasury, but there is a serious disadvantage to the hobby racehorse owner and breeder because gains in terms of the realisation of livestock are as rare as a jackpot in the pools. In the many years that a racehorse owner or breeder trains a string of racehorses, if he succeeds in producing a winner the element of chance is at least as great as the element of chance referred to in Clause 26 (5) which states that winnings from pool betting or lotteries are not chargeable against duty.
    In other words, if one makes one's packet on backing the right horse at the Derby, then one gets off scot free, but if one gets a gain from reselling the horse which wins the Derby, one is charged for a capital gain. It is simply not logical. A capital gain realised on a successful horse race contains just as much element of chance as anything specifically included in betting and lotteries, and if the hon. and learned Gentleman cannot accept this Amendment, I hope he will at least say that it is impossible to differentiate between enhancement and other costs. The
    466
    unfair penalising of racehorse owners and breeders will be something of a national disaster for which no political party should covet the parentage.
    Mr. MacDermot: I hesitate to intervene when other hon. Members wish to speak, but we have been about an hour and a half on this group of Amendments. I thought that the hon. Member for Ormskirk (Sir D. Glover) brought himself in his last few sentences to refer to the Amendment which appears in his name but that, until then, he had reinforced the arguments which we heard earlier. The hon. Member for Barkston Ash (Mr. M. Alison) reinforced, I thought, his own arguments which he had put when we discussed this matter in connection with the short-term gains tax and which I sought to answer on that occasion.
    At the beginning of our discussion the hon. Member for Wycombe (Mr. John Hall) introduced the first of these Amendments saying that what he was concerned with was the main objection of principle to the inclusion of chattels at all. He began by advising us on this side of the Committee to learn from the experience of the United States Treasury who, he contended, had found this to be the most unsatisfactory and complicated part of their Capital Gains Tax law. I assure him that we have sought to profit from the American experience in our system of taxing chattels, and there are some marked differences.
    The American law is very wide indeed
    and covers all chattels; and not only are all chattels subject to this charge, but any loss on chattels is not allowable. That, one would assume, is not the system which is likely to command universal support here; and it is one which would encourage considerable attempts at evasion. The Commercial Clearing Houses Organisation has provided advice to American taxpayers when filling in their forms, and says that most things are included; stocks, bonds, and real estate; one's house, automobile, and the tools and equipment one uses around the house; and even the supply of coal and oil.
    If the hon. Member thought we had modelled ourselves on the American system for taxing chattels, he would have reason to think we were getting into difficulties. We have exemptions for residences and automobiles and all chattels of less than £1,000 value; and taxpayers here

    467
    are allowed to set off losses of chattels against gains. That is an entirely different matter.
    He then sought to make our blood curdle with imaginations of the difficulties of administration and the army of snoopers who would be descending upon our homes. He let his imagination run to the point where it boggled. On the question of snoopers, to start with—
    Mr. John Hall: I must point out that I did not use the word "snoopers." I talked about the charming, courteous and tactful inspectors who would be employed.
    Mr. MacDermot: I think, with respect, that the hon. Member did use the word "snoopers." We shall be able to check it later on. Anyhow, he read in awesome tones the provision in the Schedule which gave power to people to enter and inspect, as if it were some terrible new draconian provision. In fact, it is modelled on a provision contained in Section 9(8) of the Finance Act, 1894, which confers a precisely similar power for the purposes of Estate Duty.
    Mr. Callaghan: A Conservative Government.
    Mr. MacDermot: I do not think the idea that we have suddenly departed from all principle and invaded the Englishman's home in some impermissible way will stand up.
    We were then asked various questions about the way in which the provisions for valuation will work in relation to chattels. I concede that difficulties arise in this respect, but we do not consider that they are so great as to outweigh what we think would be the objections in principle to the complete exclusion of chattels from charge. That is what we have to balance. As everybody knows, very substantial capital gains are made on some chattels. These attract a great deal of publicity and attention. If we were to exempt all chattels, and people were to hear and read of these gains being made and find that these are exempt from all charge, it would tend to bring the whole tax into disrepute.
    Mr. Robert Cooke rose—
    Mr. MacDermot: I cannot give way. As I explained earlier, my experience is
    468
    that if I give way too much during the course of my argument it usually wastes time. If I have not met the hon. Member's point when I have reached the end of my remarks I will gladly give way then. There are difficulties of valuation. We have to weigh up the question whether the administrative difficulties are such as to counter-balance the real disadvantages which would come from a total exclusion. The difficulties have been exaggerated, although they exist.
    One of the reasons why they will be fewer than people have feared is that there is a time apportionment basis of valuation. One hon. Member gave the example of a picture which had been discovered to be a Tintoretto, and which was disposed of at a high price. He said that we had to try to discover what its value was on Budget day. The value at the time when it was originally acquired would be known, and when it was thought to be a worthless picture its value would have been negligible. A time apportionment basis in such a case would be bound almost always to operate heavily in favour of the taxpayer. He would opt for the time apportionment basis, which he can do as of right. We have taken no power for the Revenue to exercise any option for a valuation, even when it is patent that the time apportionment basis operates quite illogically and adversely to the interests of the Revenue. It is only the taxpayer who has the option. In those cases where he does opt, he does so because he has a view on advice of what he thinks the value was on Budget day which is more favourable to him than the time apportionment basis.
    3.15 a.m.
    He would, therefore, submit a scheme with an expert valuation. If it is one which is accepted by the Revenue, it would depend on the authority and repute of the valuer. I am asked what happens when there is a dispute between valuers. That is not a new problem. It arises, of course, over estate duty valuation in connection with pictures and works of art, and there is properly recognised appeal machinery and machinery for settling disputes. Let us not let our imaginations run away with us. The great majority of these things are sold

    469
    by negotiation, and this will continue to be the case.
    Mr. Alison: There is a distinction here between the problem of computation and base value duty in the case of a chattel such as a picture, and that of a racehorse, to which I referred.
    Mr. MacDermot: I have not yet come to the hon. Member's point about race-horses. What we are discussing is valuations of works of art. I cannot deal with everybody's points in the same breath.
    It was suggested that the £1,000 provision would lead to people seeking to conceal from the Revenue that a chattel had been disposed of for £1,000. We must recognise that in this tax on chattels there is plenty of scope for avoidance. What we should weigh up is whether it would be better that there should be, in effect, a wholesale avoidance of Capital Gains Tax as a result of our removing chattels from charge, so that—
    Sir D. Glover: They should be.
    Mr. MacDermot: I entirely agree with the hon. Gentleman that, from a legal point of view, avoidance would not occur if chattels were not subject to charge, but I am looking at this in my non-legal capacity, from the point of view of an ordinary member of the public. He understands that this tax sets out to be fair, and then sees that people who have the capital can make very substantial capital gains over a period and escape the net altogether. I was asked who are the privileged class. They are the people with the available time and cash, and either with the necessary knowledge, or with the ability to hire it. This is what has to be weighed up against the fact that there is considerable scope for evasion of this tax.
    Just because there is that scope for evasion, we do not think that it is right that we should say that we do not think that the chattels should be subject to charge at all. An important point raised by many hon. Members was the alleged effect of the tax upon the London art market. We appreciate the real value and importance of the success which the London art market has had since the war. London has been built up into the leading position in the art world,
    470
    which is something we did not have between the wars.
    I have referred briefly to the figures of both exports and imports. They have risen considerably in recent years. Last year they reached an all-time record; £29½ million for exports and £21¼ million for imports. The average net exports of this trade in the last five years have been just over £4 million a year. There are, of course, other incidental financial advantages to this country as a result of our being such an important art centre.
    Mr. Ramsden: I thought that the figure of £4 million was given by the hon. and learned Gentleman the other day in connection with the average growth which had taken place in the trade. Is he not confusing the two points?
    Mr. MacDermot: I did not refer to the figure in terms of the average growth. I am referring to the average net exports in the last five years. The average growth in the same period can be judged from these figures; that in 1961 exports and imports were about £16 million, whereas last year the figures which I gave apply. We accept the importance of this market.
    It is suggested that this tax will seriously prejudice our position as an art centre. One must look at the reasons why we have had this astonishing success and why London is paramount at present as an art centre. I have received two deputations from the trade and have gone into the matter with some care. I was also personally interested in the subject before.
    I think it is accepted that the first reason is that London is unique for the large number of art dealers who can and do buy for stock and pay cash. This means that anyone who has an important work of art to sell has the great advantage of being able to bring it to London to sell it here, the dealers here not having to depend on inviting an individual customer who wants that particular work of art. Such a person knows that in the London art market the dealers will be prepared to offer a fair price. That is the first and most important reason.
    The second is the acknowledged expertise and integrity of the London dealers. The third is the lower commission which they charge compared with other countries. The fourth is the tax

    471
    advantage. Compared with other art centres, there is no tax here on art transactions, whereas in the leading other centres there are substantial taxes.
    With the introduction of the Capital Gains Tax, and even at the point where it has reached its full weight—which, as the Committee will realise, will not be for 15 or 20 years, which is the figure we have given—still the burden of tax will be less here than it is in other art centres. For example, in France there is a turnover tax of 10 per cent., plus further taxation. In addition, the foreign buyer—remembering that a large part of this trade concerns foreign buyers—will not be subject to the Capital Gains Tax.
    Sir C. Mott-Radclyffe: Does it not occur to the hon. and learned Gentleman that all that the French Government need do to recapture this market is simply to lower their own taxes?
    Mr. MacDermot: That point has been suggested to me, but I do not accept it. If that was all that the French needed to do to recapture this market, considering that they have been anxious to do so, that would have been done, but they have not been successful in recapturing this trade for a multiplicity of reasons, which I have been outlining. I do not believe that that is the answer. In any event, we must consider and argue the matter as matters stand. If there is an alteration and it is seen to be affecting this trade, that is a matter which could be considered for revision in a future year.
    What we are considering is whether it is proper to apply this tax now and whether, in present circumstances, it will seriously impede the London art market. For the reasons which I have given, and I have gone into the matter with some care, I do not believe that these fears are well founded.
    I am sorry to take so long, but these are important matters and I have been asked many detailed points. The argument is put that because of the opportunities for evasion, there will be people who are dishonest and who will not want to include in their return their disposals of works of art worth more than £1,000, that they will therefore not lend their
    472
    pictures for showing at public exhibitions, that they will not sell through the trade or the ordinary market but will sell through a subterranean method, and that a subterranean, dishonest trade will grow up to avoid Capital Gains Tax.
    From the advice which I have had, I think that a certain amount of what might be called subterranean art dealing is already taking place for other reasons. I am also advised that people who choose to dispose of and sell through those channels, unless they have an ulterior motive which drives them to do it, are ill advised. They will not find the best price through those channels. Somebody who has a valuable work of art and who wants to dispose of it in this country would be much wiser to go to one of the reputable dealers or put it up at the well-known auction rooms, where he is much more likely to command the best price. This will continue to be the case. The tax—which is a tax on the gain, not on the total value of the chattel—will still leave every inducement to any sensible person to continue to dispose of his chattels openly and properly through the reputable trade.
    We were asked how we would police these provisions and a large army of snoopers was referred to as part of the vast machinery for preventing loss of revenue. That is not the way the Bill will operate. There are provisions in the Bill whereby the Revenue can obtain returns from dealers, auctioneers, and so on, of transactions and it will be the duty of people to make returns of their disposals in their tax returns. I am sure that as the vast majority of our people are honest, the vast majority will make honest returns. There may be some evasion or escaping, but that is not a sufficient reason to exclude this field from the tax net altogether.
    I was asked specifically about the tax on books and manuscripts and it was suggested that this conflicted with the U.N.E.S.C.O. agreement. I will gladly look further into this, but my advice is that that is not so. The object of the U.N.E.S.C.O. agreement is to avoid a tax on knowledge, on current books, whereas what we are dealing with in the Clause is rare books of great value. They have to be worth over £1,000, or a set of books over £1,000. We are not dealing in the ordinary way here with the kind

    473
    of publications which, I am advised, were covered by the U.N.E.S.C.O. code. This is not intended to cover things which are analogous to expensive works of art.
    It was suggested that the tax would have the effect of tending to break up a set of letters. I am not sure what a set of letters is. One may collect a collection of letters, but if somebody merely collects a lot of things written by the same person, that, as I understand the meaning of "a set", does not turn them into a set. In any event, that is not a matter for me to decide. It will be a matter of fact which, in the event of dispute, will be determined by the Commissioners.
    3.30 a.m.
    But let me take the point of substance. It will obviously apply to some sets. It is suggested that there will be an inducement to people who own a set of articles, each individual article being worth a little under £1,000 and the total set being worth several thousand points, to break up the set and dispose of the articles separately in order to avoid the tax. Surely the essence of these "set" cases is that it is precisely because the articles are a set that they have a much higher value than they would have individually. It is that value which the owner will want to realise when he disposes, and that is why he will dispose of them as a set.
    The "set" provisions are an anti-avoidance device. They are aimed at seeing that when "A" disposes of a set of articles to "B" he does not avoid paying tax on the true value either by disposing of them through intermediaries or by making separate contracts direct between himself and "B" for particular articles. Because of this enhanced value of the set it still would be in the interest of the owner to dispose of his articles as a set rather than to break them up.
    Mr. Walters: Would not the Financial Secretary agree that the yield from this tax will be absolutely tiny and that the damaging effect on works of literature and scholarship could be very considerable?
    Mr. MacDermot: I am trying to be patient. I have not yet reached the question of yield. However, since the hon. Gentleman interrupts my train of thought with that question, I will deal with it. It is not possible to form any view of
    474
    the yield of this tax on chattels, and no attempt has been made to do so. We are not putting forward the justice of this tax on the basis of yield. I have explained the reason why we have not only justified the inclusion of chattels but why we think it is essential to do so. I think I have dealt with all the main points raised by the right hon. Member for Harrogate who I know takes a very great interest in this subject.
    Then I was asked in particular by the hon. Member for Cornwall, North (Mr. Scott-Hopkins) about the herd basis of taxation in relation to livestock. The hon. Gentleman put forward arguments which have been put forward to us in representations by the National Farmers' Union. The position is that in the ordinary case there will be considerable benefit to owners of herds from the fact that the application of the chattels exemption will result in a substantial part, if not all, of the capital gains realised by farmers and others on the disposal of their herds being tax-free. This is an advantage which they will get over many other people who are disposing of assets.
    It has been represented that a tax should only apply to the disposal of the herd when the election to the herd basis was made after 6th April, 1965. It is claimed that the terms of the 1947 Act, that any gain on the sale of a herd would not be taxable, should extend to Capital Gains Tax as to Income Tax. But the 1947 legislation made it possible for farmers to deal with their herds for tax purposes in the same way as any other businessman treated his capital assets. There is no capital gain on the disposal of these assets as being assessable to Income Tax, though losses have, through the operation of capital allowances, been effectively relieved for some types of assets.
    Farmers are not being singled out for special treatment here. They are in the same position as business men possessing capital assets. There is no retrospection involved in taxing for capital gains farmers who, like those in other businesses, up to now have escaped assessment.
    It is also said that the imposition of the tax would be unjust to those farmers who elected for the herd basis, because it would be treating the owner of one type

    475
    of productive herd differently from another. That is not so. The farmer who has not made the election has already been assessed at ordinary rates of Income Tax or Surtax on any gain he realises from the disposal of animals in his herd, but the only herds that could be affected would be pedigree herds, and it is not many of those that would have in them animals worth over £1,000 each.
    To accept that Amendment, therefore, would be rather a gesture—as we made a bargain in 1948, and it was consolidated by a Government of the party opposite in 1952. But I know that there has been strong feeling on this matter, and I am quite willing to give the hon. Gentleman an undertaking to look further into it to see whether what I frankly say would be a gesture, which I feel, in strictness, has not a great deal of merit to it, could be justified. I will look further into that point.
    The hon. Member for Ormskirk (Sir D. Glover) asked me to deal with the question of medals awarded for valour. I should like to look at this subject again, if I may. It is an argument and a case that arouses an emotive sympathy—one concedes that at once. It is also one that is difficult to justify in logic. What makes me want to look at it again is that the hon. Gentleman particularly pressed that he only wanted his exemption to go to the disposal of the medal by the family of the recipient.
    If we can find a way to do that, I am sure that the Committee would be very glad. This is not, of course, what the Amendment as drafted would do. It would mean that anybody who was speculating—if that is not an abusive word to use—in these chattels would have the benefit of the Amendment. May I look at the point to see whether we can find words to meet what is sought? I cannot give an undertaking, because I know how difficult it is to define these things so as to limit them properly.
    Sir D. Glover: The Financial Secretary has been very generous in what he has said. I realise that there are a lot of difficulties, but I am perfectly satisfied if he will look at the matter sympathetically, as he says he will.
    Mr. MacDermot: The hon. Member for Barkston Ash (Mr. Alison) referred to the
    476
    special position of racehorses, in which I understand he takes a keen and constituency interest. It is fair to comment that the man who breeds racehorses by way of trading is already covered because he is taxed by way of trade. What we are concerned with here is the person who owns a racehorse or two and races them as a hobby, and who, up to now, has not been liable to tax. Again, we have first to approach the question of principle as to whether, if an individual buys a racehorse, races it successfully and then sells it again at a considerable gain, he should have that gain exempt from tax. In principle there seems to be absolutely no case for exempting a gain of this kind from the scope of the tax any more than a gain in relation to a valuable chattel.
    Mr. Alison: This seems to me to be a crucial matter of principle. There is no difficulty in assessing the value of a racehorse on the date of acquisition and on the day of disposal. It is the nature of the way in which the enhancement of value occurs that is the point, namely the element of chance. There is just as much chance of gain by enhancement of value through the horse winning a race as there is the chance of winning £1,000 or more by backing the horse.
    Mr. MacDermot: It is not unique in that respect. In works of art fashions change. I do not know how many hon. Members would have predicted that as a result of the "Early Bird" auction last night one of Sir Winston Churchill's paintings would have gone for £14,000. It was perhaps because of the element of chance that there happened to be a Texan millionaire who was interested in that sale. There are chattels which will fluctuate considerable in value from time to time, but that does not seem to afford a reason of principle that one should exclude those chattels from liability to Capital Gains Tax, particularly since someone who makes an unusually large gain can also take advantage of the situation if he makes an unusually large loss, in the sense that he is able to set that loss off against other forms of gain.
    This led the hon. Member to say that there is "nowt in it" for the Treasury. That may or may not be so, but I am not arguing the case for taxing racehorses on the basis that this will be a great source of revenue to the Treasury.

    477
    There is not a great deal of money at stake. The question is what is a fair way of introducing the tax, and if one starts on the principle that chattels over £1,000 are included it is for those who wish to have exemptions to show reason for them.
    Mr. Alison: I am sure that the majority of the Committee will be bound to agree that there cannot be a distinction in principle as far as the element of chance is concerned between the farmer who acquires a horse in Ireland for £30 which happens to prove to be a Grand National winner which he then disposes of at a substantially increased capital value and the man who backs that horse as a complete outsider and makes a large sum of money.
    Mr. MacDermot: There is the difference that when one bets one does not acquire an asset. There is no capital gain on an asset. We all know that there are people in the Committee who are interested in the idea of a gambling tax and my right hon. Friend has said that he is looking into it. It is a matter of great interest to me and almost of comfort as a Treasury Minister to see enthusiasm on the benches opposite for our introducing a gambling tax in my right hon. Friend's future Budgets.
    The hon. Member for Barkston Ash also raised the question of computing allowable cost. I have no need to add to what I have said before. Maintenance cost as such will not be allowable. Costs which do not go to
    enhance the value will not be allowable. The hon. Member raised the interesting question whether training fees and expenses of training will come under the words "enhancing its value". I should not like to predict what the answer will be when the matter is tested.
    Mr. Simon Wingfield Digby: Will the hon. and learned Gentleman deal with the question of travelling expenses and entry fees, which are a very large element in the cost?
    3.45 a.m.
    Mr. MacDermot: Those appear not to he costs to enhance the value of the animal. They are ordinary costs. If one has a race horse, one has it not pri-
    478
    marily for capital gain but for the enjoyment one gets from racing. This is the use of the chattel, and the costs incurred in the ordinary way of use and enjoyment of the chattel or in the maintenance or preserving of it will not be allowable.
    Mr. Wingfield Digby: How would one enhance its value unless one entered it in a race? Unless it wins a race, one cannot enhance its value.
    Mr. MacDermot: One would have to see how that turned out when it was put to the test.
    Mr. John Hall: At this hour of the night, perhaps I missed the answer which the Financial Secretary gave to a question I put earlier. I asked that the Committee be told the estimated increase in the staff of the Inland Revenue which would be required to implement the provisions of the Capital Gains Tax. If the hon. and learned Gentleman gave an answer, I did not hear it.
    Mr. MacDermot: No, I did not give any answer. I have no figure for the estimated numbers. There will be additional numbers wanted, of course, and some people are already in training.
    Mr. Ridley rose—
    The Parliamentary Secretary to the Treasury (Mr. Edward Short)The Parliamentary Secretary to the Treasury (Mr. Edward Short) rose in his place and claimed to move, That the Question be now put.
    Mr. John Hall: I am very surprised that this Motion—
    The Chairman: Order. It is not debatable.
    Question, That the Question be now put, put and agreed to.
    The Chairman: The Question is, That the proposed words be there in-King?
    Mr. Robert Cooke: Am I entitled to speak now on the Amendment, Dr. King?
    The Chairman: No. No speech can be made while I am putting the Question. The Question is, That the proposed words be there inserted.
    Amendment negatived.
    Sir Martin Redmayne: I beg to move Amendment No. 395, in page 18, line 33, to leave out subsection 3.
    In moving this Amendment, which, I think, goes with Amendment No. 332, in page 18, line 43, to leave out paragraph (b) and Amendment No. 396, in Clause 22, page 21, line 17, to leave out "and" and to insert "or", I wish to apologise for the fact that it was yesterday a starred Amendment, put down at short notice. This is, of course, always irritating to the Treasury Bench, but notice has had to be short in this Committee stage.
    It has been pointed out to me that the Chancellor, in having this Clause drafted, has taken no note of problems which may arise in connection with the disturbance of land arising from mineral working, whether opencast or deep mining, or even from such minor disturbance as the laying of pipelines. In any such event, there would appear to be a notional disposal of assets, and in every case in which there was at least an expectation of gain, that disposal would be a part of a larger asset, say, a farm in the case of a pipeline or a whole estate in the case of mineral workings, even if those workings affected only some part of the estate.
    Any such part-disposal, if there is expenditure involved in defence of rights, as there might well be, involves a valuation of the whole asset.
    The second point is that, on the first occasion on which such a notional disposal takes place, a decision has to be taken by the owner as to whether the valuation is to be on the line basis or is to be as at 6th April, 1965; and that decision taken in respect of what could well be a trifling occurrence, perhaps the laying of a pipeline across a small part of land, is binding for the whole of the asset involved, binding for any further part-disposal of it, and—I think I am right in saying—binding for all time that it remains in the same ownership.
    Therefore one has a situation when one might be negotiating for a sum of perhaps £10 for the laying of a gas pipe, or some other main, involving an enormous degree of trouble at the time and capable of having recurrent ill-effects throughout the tax payer's ownership of the property. As I understand
    480
    it, the immediate transaction might show no gain at all because the value of the land undisturbed—that is before the transaction, would equal the value of disturbed land plus compensation. On the necessarily resulting valuation on the whole which must arise, there could well be inconvenience, anomaly and tax burden, at the time of the transaction and in the future. If it happened in the future it would bear no relation to the compensation received and would be wholly out of proportion with the original cost of it.
    Time did not permit the drafting of a suitable Amendment to cover this point, but it might be that the drift of that Amendment should be that no compensation of the type I have described, arising from mineral working, large or small, caught or appearing to be caught by Clause 21(3) should in fact constitute a part disposal. It is certain that if Ministers do not wish the Bill in this respect to cause hardship and inconvenience out of all proportion to their avowed aims then they should come forward with an Amendment of some such sort on Report.
    The second Amendment in my name deals with Clause 22. It is true that Clause 22(6) appears to avoid the need for a notional disposal if a loss arises, but I am informed that the drafting of the Clause in line 17 of subsection 6 of Clause 22, which deals with compensation for damage and restoration does not reflect common practice. In some cases restoration, in the case of the laying of a pipe-line for example, or on the larger scale, opencast working, rests as duty and is charged to the developer or the user of the rights for which compensation is paid. Therefore, the use of the word "and" combining damage and restoration would appear to invalidate the purpose of the subsection. In any case Clause 22 relates only to losses. In the main the sort of operation I have described, while probably neither at a loss or profit, would be expected to be at a profit and, as I have suggested, it should be excluded from the provisions of this Clause on that account.
    The Chairman: In case some hon. Members have not noticed it, may I point out that this morning I added Amendments Nos. 449 and 451 to this group of Amendments.
    Mr. Robert Cooke: I should like to say a word about Amendment No. 332 which stands in my name and which is being discussed with the Amendment moved by my right hon. Friend the Member for Rushcliffe (Sir M. Redmayne). It seeks to exempt from the tax:
    "capital sums received under a policy of insurance of the risk of any kind of damage or injury to, or the loss or depreciation of, assets."
    As we see it, it would appear that if a work of art suffers damage and insurance has to be claimed, or if it is lost through fire or through theft, or even if it is recovered, and the insurance moneys have been paid, the miserable collector who has lost his work of art is unable to replace it because the money that he has received for it, if it is over the value that appears in the Bill, will catch the Capital Gains Tax, so he will be unable to replace something which was lost through no fault of his and his new tax falls on it.
    I could develop this argument at great length, but I shall not do so because there are many other things about which I wish to speak at a later stage. The Chancellor has not got a stony heart. I am sure that he would not want to see someone who has suffered the grievous loss of a work of art unable to replace it because he is taxed before he can provide the money to buy something else.
    Sir Eric Fletcher: Perhaps I might reply briefly to the points raised by the right hon. Member for Rushcliffe (Sir M. Redmayne) and the hon. Member for Bristol, West (Mr. Robert Cooke), in connection with Amendment No. 395 and the four others being taken with it. I think that the right hon. Gentleman realises that the form of his Amendment, which is a starred one, is not very apt to enable him to raise the precise point which he indicated he wanted to raise. The Amendment in the name of the hon. Member for Bristol, West raises a somewhat similar point, but perhaps I could deal with it first.
    In terms, the Amendment seems to delete subsection (3) from Clause 21, but I am sure that those who have studied the Clause will realise that subsection (3) is integral to the purposes of this part of the Capital Gains Tax. It would be anomalous if a sum arising to the owner of a chattel as a result of an insurance
    482
    claim following a loss, or indeed any other capital sum arising by the sale of an asset such as copyright, was able to escape the liability for Capital Gains Tax which would arise on any similar disposal.
    In the case put by the hon. Gentleman, he will realise that if the owner of a valuable work of art, or any other chattel, were to sell it, there would arise a claim to Capital Gains Tax on the difference in the value between the date of acquisition and the date of disposal. It would be unfair if an owner lost it, through his own negligence or because it was stolen, and he received a capital sum from the insurance company and then found himself in a different position from a person who sold it.
    4.0 a.m.
    Sir C. Mott-Radclyffe: But the owner has paid an annual insurance premium over a number of years, and the rate of premium has been assessed in accordance with the total sum for which the object was insured.
    Sir Eric Fletcher: That may well be, but precisely the same consideration arises if an owner has insured it over a number of years and then sells it. He has paid a premium, and it would not be reasonable for him to be able to offset the amount of the premium paid while it has been in his ownership against the amount of capital gain which has arisen.
    Mr. Anthony Barber: If a person owns a chattel which is involuntarily destroyed and there is a genuine replacement of that chattel, it cannot be right that the Capital Gains Tax should be chargeable. Assume that someone owns a chattel valued at £2,000 which is destroyed involuntarily and that he purchases with the £2,000 a precisely similar chattel. It seems grossly unfair that this can give rise to a charge of capital gain.
    Sir Eric Fletcher: On reflection the hon. Member will see that it is not unfair. Consider the man who loses a chattel which is not insured. He incurs a capital loss which he can offset against capital gains arising during the same accounting period. One has to take the rough with the smooth. To ensure a state of equity between those who have and those who have not insured, it must

    483
    follow that if a person loses something either through his own negligence or otherwise and thereby receives a capital sum, he is in precisely the same position with regard to other comparable taxpayers as if he had sold it. It is not a relevant consideration to inquire what he does with the insurance money. He is free, if he sells the chattel, to purchase another chattel or not to do so; and if he loses a chattel and receives a sum from the insurance company, he is in precisely the same position. He is free to use the insurance money in the same way as the purchase price, and it would be wrong to place one in a more favourable position than the other.
    Sir J. Foster: In many insurance policies there is a right to exact replacement. Does he think his argument right in a case where an article is destroyed by fire and the insurance company can insist on it being replaced?
    Sir Eric Fletcher: I am familiar with that provision in insurance policies, but if the hon. and learned Member will look at subsection (3) of Clause 21, which this Amendment is proposing to delete, he will see that it deals not merely with capital gains received under a policy of insurance, but capital sums by way of
    "… compensation for any kind of damage or injury to assets …"
    so that one has to consider any sum recovered from a third party and not simply from a policy of insurance. It concerns capital sums accruing from the exploitation of assets and covers, for example, the sale of copyright, or receipt of a capital sum for the surrender of a covenant. It would be wholly inconsistent with the policy of capital gains taxation if sums received in any of those ways were relieved from the liability to capital gains taxation.
    Mr. Robert Cooke: Before the hon. Gentleman leaves that point, I would suggest that he is obsuring the argument. When a person sells a painting, he presumably makes a profit; but when he loses it by fire or from other causes he will want to replace it; but he is taxed.
    Sir Eric Fletcher: What is proposed in this Amendment would involve the deletion of subsection (3), and that subsection is an integral part of the Bill and is essential to the whole object of capital
    484
    gains taxation. If deleted it would relieve a whole series of persons who on any consideration of equity and justice should incur the same kind of Capital Gains Tax as they would if they had sold or otherwise disposed of an asset.
    I was asked about Amendment No. 396 which suggests that Clause 22 would be better drafted if the word "and" was deleted and "or" was included. This Amendment was put down only late yesterday or the day before, and so far as my researches have gone at the moment I think that there is some substance in the argument adduced and I will undertake that we will consider, between now and the Report stage, whether there are good and sufficient grounds for making a provision in the alternative way suggested.
    Mr. Alick Buchanan-Smith: I think the case which the Government have put forward is utterly monstrous in that it is forcing a person involuntarily into a position of having to pay tax. I put forward the case where someone has received chattels through a family gift of sentimental value, and in which there is no commercial interest at all. This chattel, say, is lost by fire. For sentimental reasons he wants to replace it with something similar, but because he is forced to pay tax he may not be able to replace it. This kind of possible repercussion should be borne in mind. This is a real intrusion upon personal freedom of choice, where somebody has quite involuntarily got himself into this position. It was said that people must take the rough with the smooth; with this Socialist Government it seems to be rough all the way.
    My second point concerns the original Amendment, concerning the case where, on land of one sort or another, damage has occurred through pipelines or electricity power lines, and compensation is paid, part of which is on capital value. Over the last two years I have had experience of this in the area where I stay, and other people round about have had the same experience. A huge power line has run right across the countryside, and there has been a certain element of compensation for disturbance and physical damage, but also an element of capital payment.
    In relation to the rate of compensation and to the tremendous amount of

    485
    work which individual landowners have to go to in negotiating this compensation, what is gained out of the body concerned, in terms of capital value, is often very small compared with the damage done or the capital value lost. To put on a further tax in addition to everything else that is involved in terms of worry and trouble, quite apart from financial considerations, provides a case for excluding this from the Capital Gains Tax.
    Sir C. Mott-Radclyffe: I am not sure that I have quite understood the purpose of the hon. Member's remarks. Is he saying that if a car—which is an asset or a chattel if it is worth more than £1,000—is insured for £1,500 and is written off completely in a smash, or because it is completely burnt out, £500 of the £1,500 paid out by the insurance company is regarded as a capital gain? Will this apply to a house?
    Mr. Ramsden: Motor cars are exempt.
    Sir C. Mott-Radclyffe: I am not talking about vintage cars. What about a caravan? What about a combine harvester? What about a house? Let us suppose that the contents of a house, let furnished, are insured for £2,000 and that the whole house is burnt out at night. It may be one of a whole row of houses which catch on fire. Is the hon. Gentleman saying that if the insurance company pays the owner the sum for which the contents of the house were insured—and it may be part of the man's livelihood to let this as furnished accommodation—anything over £1,000 will be taken into account as a capital gain? I cannot believe it. I beg the hon. Gentleman to explain how wide this nonsense goes.
    Mr. Ramsden: I do not believe that the significance of what the hon. Member has told the Committee tonight has been appreciated outside. I believe that these Amendments were put down by my hon. Friends for the purpose of seeking clarification and to elicit answers which hon. Members on both sides expected would be given in relation to these insurance cases. What the hon. Member has said will come as a complete bolt from the blue both to hon. Members and to the world outside. It seems to me to make no sense in logic, in law or in common-sense. Perhaps the hon. Gentleman can tell me straight away what representa-
    486
    tions he has had from the insurance companies about this. Has he had any representations from them? I believe that the significance of this matter has not been appreciated outside the Committee, or inside it, until the very moment of this debate. This is not surprising, because this is a highly technical and complicated Bill, and it is likely that such points as these may be overlooked.
    4.15 a.m.
    Our discussions have underlined the gravity of this problem, and I do not believe that the hon. Gentleman's arguments have convinced hon. Members on either side of the Committee. I think that the hon. Gentleman and the Government owe it to us and to the insurance companies, who are vitally concerned in this matter, to say that they will look at this again, that they listen to the representations from the insurance companies and other interested bodies, reconsider the Clause, and bring in an Amendment on Report. I hope that the hon. Gentleman will feel that this is a reasonable course of action. The answer which he has given has taken hon. Members completely by surprise. We are far from convinced that what he has said makes any sense or has any foundation in equity or justice.
    Mr. Peter Bessell: The hour is late and minds may be somewhat be-fuddled, but I find it difficult to believe that the Chancellor of the Exchequer can seriously have considered the implications of this Clause. I should like to support the Amendment in the name of the hon. Member for Bristol, West (Mr. Robert Cooke). It is surely the height of injustice to penalise somebody who has not sought to make a profit nor to sell the asset of his home. If, when someone expropriates his property, or it is destroyed by fire, he honestly sets out, with no intention of making a profit, to replace his asset, his property, he suddenly finds that he cannot do so, because he is penalised by a tax which surely cannot have been designed to apply in such an instance.
    The case of the family heirloom has been mentioned, as has that of the motor car, though I think that there may be a difference in the latter case. But there is the case of the ordinary family, who, finding their house burned down and all the contents destroyed, may have among

    487
    the contents things which are of considerable value, which have been carefully insured against such an eventuality. When they come to refurnish their home, they find that they are unable to do so, because the full amount of the insurance money which they have claimed is not available to them. They are therefore penalised in this way.
    I beg the Treasury to look at this matter again. I would beg the Minister without Portfolio to look at it again, if necessary to make it a condition that the money should be used to replace the goods which have been destroyed, stolen or burned. I cannot feel that it is the intention of the hon. Member and his right hon. Friend the Chancellor of the Exchequer to create a situation which would be a montrous injustice, and which has come as a considerable shock to hon. Members on both sides of the Committee.
    Sir J. Foster: This subsection also applies where a capital sum is paid, although there is no asset. This should be reconsidered. I think that the hon. Gentleman will see that, if an asset is only injured and a capital sum is then paid by the insurance company, if that capital sum is applied to restoring the asset, that is undoubtedly an expenditure wholly and exclusively attributed to enhancing the value of the asset.
    If one has a picture which is damaged and if the cost of its acquisition was, say, £100 and it is injured to the extent of £40, the insurance company pays the £40, the picture is sent to the restorer, who restores it for £40 and one is back to where one started, without any Capital Gains Tax being paid. If, however, the picture is entirely destroyed and the insurance company pays out the insured sum, Capital Gains Tax must be paid on that sum and one cannot replace the picture because the true value of the asset is not available. Thus, on an involuntary disposal—because we are considering fire or theft—the Government tax the amount involved. There might be some logic in the Government proposal if the money recovered on, say, the loss of a picture were applied in acquiring something other than a picture, but that is another argument. Obviously if the insured article is to be replaced at the
    488
    market value, then unless no Capital Gains Tax is applied it cannot be replaced.
    I imagine that it would be possible to get round the change. If the insurance policy provided an option to the assured for the asset to be replaced, no Capital Gains Tax would be paid because there would not be a capital sum involved. I suggest, therefore, that insurance policies should have such an option up to the value of the amount of the insured so that the asset could be replaced. In that way the Capital Gains Tax could be avoided.
    Mr. Paul Hawkins: The only point I wish to raise concerns an estate owner with farm buildings and cottages. If those buildings are burnt down they must be replaced so that the business can carry on. It seems extraordinary that while those buildings, which might have been erected 50 years ago, must be replaced at present-day costs, there will be a Capital Gains Tax charged on the capital amount involved. The same applies to, say, a pair of cottages. I feel that this has not been fully looked into by the Treasury and I trust that the Department will have second thoughts about it.
    Mr. J. E. B. Hill: If we were debating this important matter at a reasonable hour and if the Government reply which we have so far received were published in the Press, there would be such a sharp reaction of public opinion that the Government would have to change their mind. I assume, therefore, that the Government will change their mind.
    I do not wish to delay the Committee, except to ask the Minister to assist the Government to change their mind by considering the cases where the Government themselves are the destroyers of property and the payers of compensation. I refer to the destruction of herds of cattle in the foot and mouth slaughter and compensation policy. That will impinge directly on the cattle kept on a herd basis, which the Financial Secretary said he would study further. I do not have great confidence in the Financial Secretary's capacity to deal with such a wide range of difficulties quickly. I am, therefore, soliciting the assistance of the Minister.
    Sir L. Heald: It is now getting lighter outside and it is getting darker inside. I wonder whether the Minister without Portfolio would consider suggesting that we might have the opportunity of looking at the matter again. We do not want to be unreasonable or unkind at this time of the morning and, rather than the hon. Gentleman committing himself to something that he might later feel had been a mistake, it would be much better if we deferred consideration of the matter and had a chance of looking at it again.
    Mr. Barber: The Minister without Portfolio will have appreciated the genuine and strong feelings of the Committee on this subject. I recognise the difficulty with which the hon. Gentleman is faced, but if one looks at the question from the point of view of the individual taxpayer, this surely must be unjust.
    One of my hon. Friends referred to a caravan. Many road engineers live in caravans as they travel around in the course of their work. I understand that as the Clause is drafted, if a road engineer were living with his family in a caravan valued at £1,200 and it was destroyed by fire and replaced by another caravan, also valued at £1,200, nevertheless Capital Gains Tax would be payable by that person.
    That is not social justice. It is scandalous and it cannot be what the Government intended. It is quite different from the example given by the hon. Gentleman of a voluntary disposal. The obvious case which we all wish to cover is the case where insurance moneys are genuinely used to replace an asset which has been involuntarily destroyed. I hope that this point, and also the point raised by my right hon. Friend the Member for Rushcliffe (Sir M. Redmayne), who moved the Amendment, will be considered again by the hon. Gentleman. I have no wish to press the matter further if we can have that assurance.
    Sir Eric Fletcher: This discussion has been valuable. If it has done nothing else, it has shown that there is a large variety of cases that require consideration. One thing which emerged is that there is a complete difference between the case in which an article is completely destroyed and insurance money is paid, and the case in which an article is damaged and insurance money is paid.
    490
    To take an illustration, if the house in which a person lives is burnt down, no question arises because the matter is outside the Capital Gains Tax in any event. Suppose, however, that a house which is owned by somebody and which is let is burnt down. Suppose that the house had cost, say, £3,000 and that at the time of the fire it is worth £5,000, and that it was insured for that time and the owner receives £5,000 from the insurance company. It is difficult to see why, in equity, he should be treated any differently on the receipt of the £5,000 from the person who had sold the house for £5,000, because in either case they would be free either to replace the asset by purchasing another one or to refrain from doing so and keeping the money.
    In the event of the insurance policy providing as a condition of the policy that the money should be spent on a replacement, a sum of cash would not be received by the insured and there would be a replacement. Therefore, no problem would arise.
    The Committee must also remember that if a person suffers a loss of an asset by fire, as a result of subsection (3), which states
    "the occasion of the entire destruction, dissipation or extinction of an asset"—
    and that covers the case of destruction by fire—a loss arises because that is treated as the disposal of an asset and the individual is entitled, as a result of that loss, to set off that loss against any capital gain. Therefore, in that situation being provided for by Section 22, it would be quite inequitable if he could both set off the loss and also not incur any liability when he received a payment from the insurance company.
    4.30 a.m.
    I was about to add that different circumstances arise where there is not total destruction of an asset but where there is damage to an asset as a result of which a sum is received from the insurance company and is used to repair that asset. In that case there might be a loss or there might not be, but I recognise the force of the argument that the sum received from an insurance company to repair damage to an asset ought not to be brought into account for calculating Capital Gains Tax unless at the same time one takes into account the sum spent on the repair of the asset.

    491
    In view of what has been said on this subject, particularly with regard to the Amendment that we have last been discussing, Amendment No. 499, I will certainly, with my hon. Friend, consider this matter between now and Report to see whether any Amendment is required to the provisions of this subsection.
    Mr. Kitson: Will the hon. Gentleman also consider the point in so far as it relates to a tenant of property? He might find himself in great difficulty. I hope the hon. Gentleman will consider the matter in that light as well.
    Sir Eric Fletcher: I will, but it is difficult to see how a tenant of a house can incur any capital losses as a result of the destruction of the house.
    Mr. Kitson: The tenant might find that his landlord was loth to replace the loss or damage.
    Mr. Michael Jopling: The whole Committee has been shocked by the implications of this Clause, and I think we are all worried about it. I urge the Minister, when he looks at the matter again as he has promised us, to look at it closely in terms of the small man. There are many thousands of small shopkeepers and, for instance, small haulage contractors whose assets are tied up with one thing. Take the case of a small man whose whole savings, together with borrowings from the bank, are tied up in one lorry. Suppose that that lorry is completely destroyed. On whatever amount that man is able to get back from the insurance company he has to pay Capital Gains Tax.
    There is no question but that a man in those circumstances will be bankrupt. If the Clause is allowed to continue in its present form there will be many thousands of small men who will be placed in jeopardy of complete bankruptcy and ruin, should their asset be destroyed overnight by terrible act of God such as fire or some similar occurrence.
    Mr. Robert Cooke: Do I take it that the Minister's assurance to look at this matter again before Report covers the point which I raised about the unfortunate person who suffers a grievous loss and finds that he is unable to replace the work of art or whatever the article
    492
    may be, because he is caught by the Capital Gains Tax? The Minister has gone over this matter and has somewhat bemused us with a variety of argument, some of which he has retracted. May we take it that he will cover this point in his thoughts before Report?
    Mr. Barber: I think we might have an answer to that question. I understood that the point that my hon. Friend raised was also to be covered.
    Sir Eric Fletcher: I thought I had made it clear that while the Government adhere to the principle of this subsection, the deletion of which is proposed and the deletion of which we resist, I have undertaken that in respect of a number of somewhat unrelated points which have been raised, my right hon. Friend will consider what has been said, and we will see whether any Amendments are required between now and Report to cover any of the points which have been raised in the debate.
    Mr. Robert Cooke: But my point on paragraph (b) is quite separate from the main body of the Clause.
    Amendment negatived.
    Mr. Diamond: I beg to move, in page 19, line 7, to leave out "by" and to insert "to".
    This Amendment deals with a very minor error in the wording, and I do not think I need delay the Committee further on it.
    Amendment agreed to.
    Mr. Diamond: I beg to move, in page 20, line 5, to leave out from the beginning to the first "the" in line 6 and to insert:
    (8) An asset shall be treated as having been acquired free of any interest or right by way of security subsisting at the time of any acquisition of it, and as being disposed of free of any such interest or right subsisting at the time of the disposal; and where an asset is acquired subject to any such interest or right.
    The purpose of this Amendment is to clear up any doubt about a possible ambiguity in subsection (8) which, as it stands, clearly implies that the whole of the asset is being transferred. As I say, the Amendment is intended to put the matter beyond any doubt. If the Committee wishes me to explain it at length, I will gladly do so, but I think that it is a perfectly simple point of which the Committee is fully aware.
    The Chairman: With this Amendment we can discuss Amendment No. 267, in page 20, line 9, at the end to insert:
    For the avoidance of doubt, a tenancy, easement, profit à prendre, or other unsecured interest in land shall not be a charge or encumbrance for the purposes of this section.
    Mr. Jasper More: I am sure that in a Finance Bill that has more than 200 pages, the Committee will not jib at having three lines added to subsection (8) of this Clause in order to obtain greater clarification, as the Chief Secretary has explained to us. My Amendment No. 267 was put down to obtain clarification, the point being that it was desired to be certain that there was in this context an entire distinction between what might be called secured and unsecured interests in land.
    As will appear from the debates that may take place on later Amendments, important questions may arise in regard to the values and valuations of tenancies and land, and it was therefore of great importance to establish in this Clause that tenancies, easements, profits à prendre or other unsecured interests in land should not be a charge or incumbrance, as the Clause was originally drafted. If the Chief Secretary can give an assurance that that will be the case in the amended draft, it would be very acceptable.
    Mr. Diamond: I can give that assurance. It is no longer necessary, although it might have been necessary in the earlier draft. If the words proposed to be inserted are inserted, what the Opposition seek is already secured. I therefore hope that they will not think it necessary formally to move the Amendment.
    Amendment agreed to.
    Sir M. Redmayne: I beg to move Amendment No. 398, in page 20, line 9, at the end to insert:
    (9) Where in the interests of good husbandry or sound estate management agricultural land is exchanged between different owners, and the exchange is the sole or principal consideration given or received by the owners, the exchange shall not be treated for the purposes of this Part of this Act as involving any acquisition or disposal of assets, and for the purposes of this section agricultural land means land used for agriculture as defined by subsection (1) of section 94 of the Agricultural Holdings Act 1948.
    The Deputy-Chairman: We can also discuss with this, Amendment No. 343 in page 38, line 40, at end insert:
    "and the expression 'trade' shall include an agricultural or forestry enterprise".
    Sir M. Redmayne: I hope that this will prove of some interest to the Committee. At least it will be a change of thought and atmosphere because it relates solely to a farming problem. The Price Review White Paper contained a somewhat vague reference to the desirability of voluntary amalgamations of farms. The purpose of Amendment No. 398 is in a sense related to that general objective but deals with a more precise problem which is of considerable importance in some agricultural areas. This is the problem of trying to secure the better integration of scattered farm holdings.
    This was in my mind a short time ago on a visit with other hon. Members to a number of small farms in a Yorkshire dale. In that dale there had been at one time a good deal of lead mining. By virtue of the fact that men employed in that industry at that time had acquired small parcels of land and, as the industry had died, had disposed of that land haphazard, the result is that the ownership of the land by farmers is now haphazard too.
    I recollect particularly one small farm, farmed single-handed by a young son of a widow, who found himself working 70 hours a week. He had 90 acres lying in six different parts of the parish, as a result of which part of his working day was spent trudging or tractoring from job to job round the parish looking after his stock and trying to carry out some organised work in an extremely difficult situation. This was an admirable young man, "working like a black" and making out of it far less than it was worth.
    On inquiry I found that his neighbours suffered the same handicap. Indeed, it was widespread elsewhere. The National Farmers' Union in Darlington had made for me a large-scale map of that parish, which unfortunately is too large to bring to the Committee even if it were in order to do so. It is lying on the floor of my room in Bridge Street and one would think that it was a genuine patchwork quilt. The key to it shows 17 to 19 different colour patterns showing the

    495
    ownership of farms in that parish. I assure the Committee that they could not be more kaleidoscopic on the map if it had been done by an artist rather than by natural evolution of ownership.
    This problem of the fragmentation of farming land is not solved by waving a wand, and certainly not in this Committee, but it would be a pity if the Capital Gains Tax acted as a further disincentive to the process of integration which is hard to achieve in any case. It may be said that the problem is of small proportion and therefore negligible in the scope of all this additional burden of taxation which the Government are imposing upon us, but I ask the Treasury to treat this point with some sympathy.
    As I understand, the exchange of one field of one farm for another field of another farm, since it can never be an exact balance, must entail a notional disposal of the whole farm. If the resulting assessment of gain for either farm, or for both, created a liability for tax of just a few pounds or as much as £100 or so, the consequences for the sort of farmer I have been describing, of whom there are many, would be disastrous.
    One does not need to argue the point only on that kind of marginal example. Exchanges are equally desirable for the outlying acres of larger and more prosperous units, and precisely the same problem would arise. Therefore, there is a strong case for exempting exchanges of farming land.
    4.45 a.m.
    In considering this Amendment, I have from time to time been persuaded that I ought to find the answer elsewhere in the Bill. For instance, it might be said that in an exchange no profit can arise and, therefore, no liability for tax; but, as I read Clause 21, the fact that there can be no profit in the exchange does not avoid the circumstance that a disposal of part of the asset is a disposal of the whole, and the whole thus made liable to assessment might involve a crippling payment of tax on the appreciation of the whole over some years, based on the original exchange. Equally, the Minister may seek to find the answer in Clause 31, in that exchange of field for field is only a nominal reinvestment of
    496
    assets; but here again the assessment of the whole asset necessitated on partial disposal may disclose capital gains which, since they themselves are not to be reinvested, are immediately liable for tax.
    Compared with the scale of what we have been discussing hitherto, this is a matter of no significance to the Treasury, but I am sure that I shall have the support of the Parliamentary Secretary to the Ministry of Agriculture, whom I am glad to see in his place, in pressing the Amendment on the Government. The policy of trying to get a better integration of farming land in this country is of great importance to agriculturists, and this particular way of helping should have a sympathetic reception from the Government.
    Sir Eric Fletcher: The Committee will realise that this also is a starred Amendment, and the right hon. Member for Rushcliffe (Sir M. Redmayne) observed that, when it was put down, he was not sure whether the point was covered by a later Clause. He and his supporters are, quite properly, concerned with the desirability of facilitating the exchange of farming land and they wish to ensure that there is nothing in the Bill adverse to that desirable end, in which my right hon. Friend the Minister of Agriculture also is deeply concerned.
    The point which has been raised is met by Clause 31, as the right hon. Gentleman half recognised. That Clause provides that where there is an exchange of assets there is no question of capital gains, and the position is that although an exchange of two pieces of land would count as a disposal of one and the acquisition of another there would be no Capital Gains Tax payable on the exchange to the extent that the whole of the consideration received from one piece of land was re-invested in the other, as would presumably be the case automatically in a situation in which two pieces of land were exchanged without any cash passing.
    Subsection (6) makes it quite clear that a trade includes a farmer, and asset includes land used for farming. Therefore, in the case supposed by the right hon. Gentleman of an exchange of agricultural land between two farmers, there would be no question of any liability for

    497
    capital gains arising. I ought to emphasise the fact that I am dealing specifically with farmers, because different considerations might arise in the case of dealings by landlords who were not also engaged in trade as farmers.
    Sir M. Redmayne: I do not think any of us have quite understood to what section of the Bill the hon. Gentleman is referring. He spoke of Clause 31(6), but this refers to exchanges in various forms. There is nothing in the Clause to suggest that, as far as I can remember. Is he referring to some part of the Schedule?
    Sir Eric Fletcher: No. I was referring to Clause 31 which deals with the replacement of business assets, and I was saying that the replacement of business assets is so defined, particularly in subsection (6) of Clause 31, as to make it quite clear that land is included under the definition of assets and a farmer is included as a trader. I am advised that the provisions of Clause 31 are adequate to meet the point which the right hon. Gentleman has in mind. Therefore his Amendment is unnecessary, but since it was a starred Amendment and put down at a very late stage and in view of the difficulty which I am sure he has had, and some of us have had, in appreciating the position I will certainly verify my impression between now and the Report stage.
    Mr. Kitson: Would the hon. Gentleman clarify this? Is he not saying that this would apply only in a case where there was no involvment of any exchange of two portions of land, because this Amendment goes a good deal further than that? In some areas it is almost impossible to get farmers to swop without sums of money being involved and I think he is misleading the Committee a little if that is what he is saying.
    Mr. J. E. B. Hill: Would the Minister answer one technical point? Supposing the parties to this transaction are not actually engaged in farming. One party may be a land owner, the land being let to a tenant and we want to be clear that all the parties—the owner who is to make the transaction—will be included.
    Mr. Scott-Hopkins: My right hon. Friend the Member for Rushcliffe (Sir M. Redmayne) put forward the case of an exchange of farm land taking place. By
    498
    the very fact of the exchange there is bound to be a notional valuation, and in that case there will be a liability to Capital Gains Tax.
    I do not believe that there is anything in Clause 31, and particularly in subsection (6), which gives an exemption in this case. This is a separate case. I accept what the Minister has said, namely, that he will look at this again. I believe that the case made by my right hon. Friend the Member for Rushcliffe (Sir M. Redmayne) is without challenge. I believe that the notional
    value which is bound to be set up when exchanges are made should, and must, be exempted. The Minister accepts that they should be exempted, because he thought that they were under Clause 31. I think he will find that they are not, and I hope that on Report he will table an Amendment to exempt them, because I think that he and the Committee are at one in wanting to help the agricultural industry to develop and rationalise where possible, and in wanting to help the Minister of Agriculture to carry out his policy with regard to the industry. If the Minister finds that Clause 31 (6) does not cover the point put forward by my right hon. Friend, I hope that he will deal with the matter on Report.
    Sir C. Mott-Radclyffe: If the hon. Gentleman had the proper brief, he could have answered this point satisfactorily when it was put to him by my right hon. Friend the Member for Rushcliffe (Sir M. Redmayne). [Interruption] I do not know why anybody should object to me or any other hon. Member speaking. I want to put another question to the Minister. I presume that that is the purpose of the Committee stage of a Bill.
    The Minister says that he will look into this before Report. I want him to bear in mind the point made by my hon. Friend the Member for Richmond, Yorks (Mr. Kitson) that if, in the interests of sound estate management and good husbandry, it is necessary or desirable that there should be a swop of fields, it is no good the hon. Gentleman saying that this can happen provided only that there is no difference in the value, because the mathematical odds of finding two fields belonging to farmer A coinciding in acreage and value with two fields belonging to farmer B, are very long

    499
    indeed. Therefore, there is almost bound to be a minor financial difference between the value of one holding and of the other, and in that respect there is an asset set up.
    That is the point which is worrying some of us, and I was not certain from the hon. Gentleman's reply whether he fully understood it. It was for that reason that I rose to reinforce the point made by my hon. Friend, and I hope that on Report the Minister will be able to give us a clearer answer to a very technical point than he has been able to give hitherto.
    5.0 a.m.
    Sir Eric Fletcher: I do not think that I can add anything to what I have said. I have said that the point
    raised in the Amendment is effectively dealt with by Clause 31. Certain other points have been raised during the discussion, and it is my impression that they are covered as well, but, as we are discussing a starred Amendment, I have undertaken to consider what has been said, and if I find that further words are necessary, I shall deal with the matter between now and Report.
    Amendment negatived.
    Question proposed, That the Clause, as amended, stand part of the Bill.
    Mr. Robert Cooke: I must rise even at this late hour to attack the Clause with all the vigour that I can command. Subsection (3,b) contains one of the most iniquitous provisions that I have encountered in more than 10 Finance Bills through which I have sat in this House. We see here that someone who, through misfortune, loses a valuable and cherished work of art will be unable to replace it because the Capital Gains Tax will fall on the money that he receives by way of insurance.
    I am glad that the Financial Secretary has returned to the Committee because earlier he made one or two statements which should be challenged. He said that the purpose was to catch those capital gains which had received widespread publicity. But gains which receive widespread publicity are very large gains, and he could easily have got out of his difficulty by raising the limit from £1,000.
    He said that the difficulty of valuation on Budget day could be overcome by the
    500
    victim of the tax opting to be charged on a time apportionment basis, but he has a right to elect to be charged on the value on Budget day. I suggest that in certain instances it would be impossible to discover what was the value on Budget day 1965. The Financial Secretary himself used the phrase "a fluctuating market". The taxpayer has a right to elect to be charged under this provision but it will not be possible to find a proper value. The other day we discovered that the short-term gains tax produced no yield and caused everybody a great deal of misery. Many questions were unanswered. There will be a monumental total of questions unanswered—
    The Chairman: Order. The hon. Member cannot go back to a previous debate. He must confine himself to what is in the Clause.
    Mr. Cooke: You will understand, Dr. King, that I am under extreme provocation, and it is difficult to restrict myself to the Clause when I have been frustrated by what happened earlier.
    Looking at the Clause one might be beguiled into thinking that the Government are out to stop speculation in works of art. From time to time one reads of big profits but one seldom hears about the big losses. In his attempt to catch occasional successful speculation—and there must be many unsuccessful speculators—the Chancellor will destroy our position in the art markets of the world and will drive out of public sight works of art at present available to the public. He will remove much of the romance and interest in the collecting of works of art and he will create a new criminal class. That is what will happen with those who believe that this is an immoral tax and that it will not be an immoral act to seek to avoid it—[Interruption.]—it is no use hon. Members opposite shouting "Oh", because this is a point which has been made again and again, although I realise it is out of order to refer to it.
    There is a great slab of prejudice written by Dr. Kaldor in his book on the expenditure tax. I do not think the Committee would want to hear all that sort of thing again, but in that book the point is made that, unless we have the provisions of what is contained in Clause 21, with taxation of works of

    501
    art, there will grow up a false complacency about the progress of the arts; that living art will be stifled. I say that an artificial state of affairs will be created by this Clause in the work of living artists. Anyone thinking of buying a painting by a living artist who is successful, and whose works consequently may gain in value, will think twice about it. They will be discouraged by the provisions of this Clause.
    We have had discussions on the effect on the art market in London and it must not be forgotten that we reached our present position by hard work, unhampered by restriction. This Clause will restrict and hamper the free working of that market. To carry out the provisions of this Clause, and to collect this tax, the Government will have to employ auctioneers and valuers and dealers of one kind or another who will be the unwilling agents of the Inland Revenue.
    Then there will be the question of cost. Enormous cost will be involved in paying all the people necessary to make all the valuations. There is the point that if the Government have destroyed confidence in the London market by introducing this tax, others will be very ready to leap into the gap, and we shall never get back our pre-eminent position. Nobody will pay this tax willingly—[Interruption.]—hon. Members may shout "Nonsense", but with this tax in operation there will be a reluctance to sell, although some people will be forced to do so; but, they will try to find a way around the tax, and the availability of works of art on the open market will be sadly and savagely reduced.
    There will be higher costs of administration in the sale rooms, resulting in higher commissions, low turnover, and the law of diminishing returns in full operation and flourishing—or, perhaps, a new Clause of MacDermot's law. The Socialists seem to have an aversion against golden geese, but this is a goose which should be cultivated and not have its throat cut.
    We come on to the cultural effect, because this Clause will have a very bad effect on our cultural heritage—[Interruption].
    Mr. Barber: On a point of order. I think we all want to make progress, but if these continual interruptions go on
    502
    we cannot proceed. I listened to all that may have been said by hon. Members opposite, and I think that they should give my hon. Friend a hearing.
    The Chairman: I think that the point of order is a reasonable one. Even at ten past Five in the morning hon. Members ought to be willing to listen to opinions which they do not share.
    Mr. Cooke: I am very grateful for your protection, Dr. King, even if I did not ask for it. I am glad that you have made that observation; it might help us to get on with the proceedings. I realise that some of the things that I am saying are controversial, and that some hon. Members opposite may not like them.
    If the Clause is agreed to the tax will go on. I would remind the Committee that the vast majority of our great national collections owe their origins to private individuals who have made collections in times gone by, unhampered by the petty restrictions here mentioned. A jealous Government, in the shape of an unwilling tax collector, is now to breathe down the necks of private collectors, and collections like the Wallace Collection and the Courtauld Institute, and private collections like the Methuen Collection, the Weld Collection and the Banks Collection, in the West Country, all of which are accessible to the public, will never again be made, because under the provisions of the Clause a collection is likely to remain static.
    Collectors will not be able to change their minds about an article, once it is bought, without incurring tax, so they will tend to become magpies and to build up miscellaneous collections of valuable objects. None of the specialists in scholarship who have built up the great collections of the past will be allowed to continue their work.
    Hon. Members opposite laugh about this. They seem to think that it is a small point, which does not matter. They probably take the view that these collections are sufficient, and that the nation does not need any more of them. There is a great prejudice among hon. Members opposite against works of art of times gone by, and a great emphasis on modern art. They should remember that the later nineteenth century works of art still

    503
    have to be collected and classified, and preserved for the future. Under these provisions it will be very difficult to do that, because it is a field where experiment and change in collections is necessary.
    Because of the restriction imposed by this tax on collectors all the great national institutions and local art galleries will suffer severe hardship. It is from the partnership between the private collector and the public institution that the public benefits. The private collection is seldom a public loss; it is seldom hidden away. But under the provisions of this Clause there will be a tendency for collectors and owners to hide their works of art so that they will not be caught by this iniquitous provision.
    Hon. Members opposite seem to take the view that private collectors already hide their collections away. That argument is not a valid one. If we look back into recent history we see that private collectors have always been generous in showing their works of art to the public. One of my predecessors in Bristol had a great collection—the Hart-Davis Collection, bought by Miles, another Member for Bristol, and exhibited to the public on Thursday afternoons all through the 19th Century—[Interruption]—throughout the whole of the 19th Century. The collection was again sold, and passed into the hands of another great collector—
    5.15 a.m.
    The Chairman (Dr. Horace King): Order. The hon. Member is not in order in going into detail about the Thursday showings of the 19th Century.
    Mr. Cooke: I am very grateful. My trouble was that it was very difficult to get off the Thursdays when hon. Members opposite were interrupting me.
    The point which I was making was that the private collector has never been anything but generous in allowing the public, and students and scholars, to enjoy his collection. The restrictive provisions of the Clause and the imposition of the tax will mitigate against the public enjoyment of works of art.
    The other important point about this tax is that it would prevent the
    504
    rationalisation of collections of works of art. In the case of a historic house and its contents, it may be a rather large house; part of it may be surplus to requirements and may have to be demolished; the money from the demolition may be used to repair the permanent part of the house which should be preserved for the nation; the surplus collection may be sold. In all those cases, it can be caught by Clause 21. If the surplus part of the collection is sold, it catches the Capital Gains Tax, which would also apply in the case of the demolition materials from the surplus part of the house, and if the original part of the house is improved by the demolition of the surplus part, it will be caught by this tax.
    This sort of thing is against the public interest, and that is why I oppose the Clause. The sort of thing which the
    late Duke of Bedford did in demolishing part of his historic house and rebuilding it would be stopped by the Capital Gains Tax. The public will be the losers all along the line. We have heard very little about this evil, and about the fact that all this trouble will not be worth it in the end. [An HON. MEMBER: "Read on."] This tax encourages owners of buildings to sit in them and let them rot—[Interruption]—instead of trying to use some of their resources to repair the buildings, so that they will be enjoyed in another generation—[An HON. MEMBER: "The hon. Gentleman is reading very well."]
    The Chairman: Order. I must ask hon. Members to remember the dignity of Parliament.
    Mr. Cooke: I am very grateful to you, Dr. King. I realise that, at this time in the morning—
    The Chairman: I hope that the hon. Member will not comment on the comments I have made, and that he will get back to the Clause.
    Mr. Cooke: I did not mean to put it in that way, Dr. King.
    Perhaps I might reply to one of the interjections from a seated position from the other side of the Committee, to say simply that, perhaps, after a long night with very little to do—hon. Members opposite have not contributed much to the debate—they may find it a little difficult to listen to some of the things which

    505
    some of us have waited a long time to say.
    The restrictive provisions of the Clause will cause the hiding away of works of art. That, in addition to the other effects which I mentioned, will result in the prevention of loan exhibitions of one kind or another. Many of the finest exhibitions, a great number of them for charitable purposes, are put on as a result of works of art being loaned from historic houses and other private sources. They will not be available if people know that by showing their works of art—[Interruption]—the Inland Revenue will be watching for them, looking to see if certain people still have them. The same applies to the owners of books. Works of scholarship—
    Mr. Hugh Delargy: Still reading.
    Mr. Cooke: —will be impeded because people will not be able to draw on the wealth of material which people are willing to share. Many people will not be prepared to let the Inland Revenue know where such works of art are. If the Inland Revenue is to administer these provisions properly it will have to go into considerable detail, discover where works of art are located, and so on. That will mean contacting not only individuals but seeking out catalogues and looking up past records. Someone may have had an assorted boxful of labels, perhaps—
    Hon. Members: Get on with it.
    Mr. Cooke: —with the names of old masters—[Interruption]—and the Inland Revenue will be confused by all these things.
    Mr. Delargy: Yet another page.
    Mr. Cooke: The hon. Gentleman says, "Yet another page". I have three more pages of notes to go, but if hon. Gentlemen opposite will stop interrupting while seated I will conclude my remarks. [HON. MEMBERS: "Hear, hear."] My remarks would have been shorter and more intelligible to the Committee had certain hon. Gentlemen opposite chosen to listen to me. I am used to such behaviour from them. I was about to say that not only are such matters misleading to the Inland Revenue, but in addi-
    506
    tion to examining catalogues and so on there is a lot of published material about certain art collections in our historic buildings. All forms of property are mentioned at the beginning of the Clause and there is no doubt that if the Inland Revenue is to carry out its duties thoroughly it will have to go into considerable detail in these matters, including guide books, catalogues and so on to see where these art treasures are located.
    I could go at length into the question of identification and valuation for the purposes of the tax, but that has already been covered by my hon. Friends. I could also go on at length into some of the detailed questions of how one might get around the provisions of the Clause. Since I would be doing a disservice to many people who, no doubt, regard it as not immoral to try to avoid paying this tax, I will not do that.
    I turn, instead, to the question of exchanges. There is bound to be a market in barter of works of art. There is also the question of Inland Revenue staff valuers, how they are to be trained and how long will be spent in training them. The provisions in the Clause produce the maximum intrusion into private life, interference with the private citizen, the maximum administrative cost, unwilling agents in the form of auctioneers and dealers, and it will produce a ludicrously low yield, no benefit to the community and the public will get less of a chance to look at many of the works of art attacked in the Clause. The continuing process of sharing in culture—[Interruption]—will be seriously hampered by the Capital Gains Tax.
    It is no use the Chancellor shrugging off the vast weight of criticism which has been levelled against these provisions, because what I have said is what this is all about. That is why I have made this speech. I could have gone to my bed hours ago—[HON. MEMBERS: "Hear, hear."] I thought that would invite that sort of response from hon. Gentlemen opposite. My hon. Friends and I feel strongly about this matter—[Interruption.]—and when hon. Gentlemen opposite read the speeches on the Clause they will realise that, perhaps inadvertently, they are doing a serious disservice to something which they themselves care about. It has been suggested

    507
    that this is a rich man's tax, but it will affect the position of the poorest in the land and take away from their education and cultural enjoyment.
    Mr. Delargy: Greedy.
    Mr. Barber: On a point of order. I think that the hon. Member for Thurrock (Mr. Delargy) is ill, Dr. King, or there is something very peculiar about him. He is continually intervening.
    The Chairman: What the right hon. Gentleman has said is not a point of order.
    Mr. Cooke: The rate of this tax is purely arbitrary and it paves the way for a future Chancellor, without the humanity of the right hon. Gentleman whom we know so well, perhaps with an even more sinister set of advisers to egg him on from behind, to make this tax an even more crushing burden in the future.
    For all these many reasons, after the many years of experience which I have had in the House of Commons and in local government and various other fields in this matter of the arts and public enjoyment of the arts, I am utterly convinced that this tax will do nothing but harm to the general public. It has nothing to do with the rich man. The poorest in the land will suffer as a result of this tax. Their enjoyment will be taken away. If the Chancellor really meant what he said about concessions, here is one that he ought to make.
    Mr. Nicholas Ridley: I was in two minds as to whether to seek to catch your eye, Dr. King, in the debate on the Question, "That the Clause, as amended, stand part of the Bill", but hon. Members who have come here to listen to the debate did not, perhaps, hear all the excellent speech of my hon. Friend the Member for Bristol, West (Mr. Robert Cooke). They were making such a noise that it seemed to me that some of his points could well bear repetition in view of the performance of the last half-hour.
    I regret very much that the hon. Lady the Member for Cannock (Miss Jennie Lee), the Joint Under-Secretary of State for Education and Science, has not been
    508
    present in the Chamber during this debate. The Clause does more to affect the arts than any other part of the Finance Bill or than any Finance Bill before. The fact that the hon. Lady has not graced our proceedings and taken part in our debate is a matter of great regret to all of us on this side.
    Sir Geoffrey de Freitas: She has been here.
    Mr. Ridley: It is a typical example of the double-talk of the Government that on the one side they put out a White Paper dealing with their imaginative plans for the arts while, at the same time, they stab them in the back with the Finance Bill. This is typical of the sort of thing that we have come to expect from the party opposite.
    I want to say something further about works of art. This is not a true field for the speculator. Nobody thinks that it is. The Financial Secretary has dismissed the idea of trying to get revenue from this tax, so small is it in amount. He could not tell us how much be expected to get or where it is to come from. He could tell us little about the review and he has relied upon the fact that very large financial gains are being made which could bring the whole of the Capital Gains Tax into disrepute.
    5.30 a.m.
    It is established that this tax is not being imposed on works of art from the viewpoint of somehow trying to stop the speculator. It is hard to imagine a speculator, the traditional top-hatted cigar-smoking character whom hon. Members opposite raise up as a bogy all the time—the man who is very good at dividend stripping, bulls, bears and handling hot money, the capitalist thug which he is always made out to be. He is not the sort of man who will come into the art market and buy with discrimination and discernment, and then keep what he has bought for 30 years until it appreciates in value and he can make a profit. He is not going to have the knowledge or the time to do that. Nor will he be able to recognise a budding young artist and buy his works in the early part of his career and keep them till they are worth thousands of pounds. That is not the sort of thing that a speculator will try to do.

    509
    I suggest that there are two forms of gain which might happen. The first form of gain could arise when a work of art appreciates in value, when it is suddenly discovered, for instance, that a painting in a person's possession is a Guardi or some such valuable picture which will rocket up in price. The Financial Secretary, who is now fast asleep, brings in a Finance Bill and keeps us sitting all night. Now he has dropped off.
    Mr. MacDermot: The hon. Member can rest assured that I am listening to every word he says and as soon as he says something which has not been said before I will open my eyes.
    Mr. Ridley: If a large profit is made in the circumstances that I have outlined, this is a windfall, a gambling win. It is a piece of luck. When the Financial Secretary was challenged on the difference between a gambling win, a windfall, and a profit on a work of art, his only answer was that an asset, a piece of property, was concerned. I ask the Committee: why should one pay Capital Gains Tax when one makes a profit on a transaction involving an item, when one is not asked to pay any tax at all on a transaction which does not happen to concern property? This seems to me to be the most extraordinary piece of reasoning that I have ever heard.
    I am not particularly in favour of a tax on gambling. I am not particularly in favour of Capital Gains Tax, but surely the position is insupportable when a windfall is taxed if it concerns a picture or a pedigree herd or shares but not a win on Premium Bonds or football pools or a horse race or bingo or any of the other forms of speculative gain.
    I have mentioned one possible way in which tax would be paid under this Clause. The other way is simply through the accretion of value due to the effects of inflation. I do not propose to go over the whole inflation argument again, but I believe that over many years works of art more or less hold their real value. One can go back 200 years and ascertain the prices obtaining for pictures in that period, and one can find that the value is not greatly dissimilar from the rise in the cost of living, or the fall in the value
    510
    of money, whichever way one cares to look at the question.
    The two things which the Chancellor is taxing are, first, the windfall appreciation which is very rare and is in the nature of a gambling win, and, secondly, the normal appreciation in value due to the increase in the cost of living. All the results of this policy have been mentioned and discussed fully by my hon. Friends. It will do damage. It will affect the London art market. It will affect auctions. It will do damage left, right and centre.
    I wonder whether the objective of hon. and right hon. Members opposite is really worth all this damage? Is it worth risking all that has been claimed in this field for the sake of what is known as social justice carte blanche? There is no attempt to link this damage to the good that it might possibly do. As my right hon. Friend the Member for Harrogate (Mr. Ramsden) asked: is there any evidence that this announced decision in the Finance Bill, including this Clause, which will do great damage, will instil a sense of co-operation and fair play in people who are putting in wage increases which are far more valuable?
    The risk that has been taken by the Chancellor of the Exchequer is one that he should not have taken. He should exempt from this tax chattels and works of art which have played a very great part in our past, and should play an equally great part in the future. I hope that even at this late hour—or early hour, as it now is—the Chancellor will still have second thoughts about the desirability of his policy. Country after country has dropped this provision from their capital gains tax; the warnings are everywhere to be seen.
    Why do hon. Members opposite think that they are sitting there so late? It is not because we on this side are filibustering, but because we have a genuine fear that a mistake is being made here. Has not the lesson of this long vigil tonight taught hon. Members opposite that some of us on this side care about these things?
    Miss Harvie Anderson: Most of us on this side of the Committee have listened to this debate for rather longer than others. We have listened to the whole of the argument.

    511
    While it is true that the Financial Secretary has been obliged, regrettably, no doubt, to him—to listen to the arguments also, I suggest that we have done so out of some concern for what is being discussed while he and his colleagues in the Government have done so by compulsion. It is very curious but it is the fact that almost none of the hon. Gentlemen opposite has sat there throughout the earlier part of the debate.
    From our earlier arguments, we got three replies from the Financial Secretary. The first was to the effect that it was not relevant to discuss on this Clause how much money the Treasury would gain and what would be the cost of collection. It is true that that is often a discredited argument, but it is very relevant when related to this Clause.
    The second argument put to us by the hon. and learned Gentleman was that if there were to be certain exemptions they would bring a certain discredit, because the principle of exemptions was not acceptable as it aroused a degree of doubt about whether they would be in order or would merely draw attention to the more flagrant examples, which are rare, whilst at the same time, as many of my hon. Friends have made clear, all the gambling and betting gains are to be regarded as exemptions in fact. It seems a curious argument to say that there can be no exemptions under this Clause whilst accepting the exemptions in these other fields.
    The Financial Secretary's third point—and I do not think that he has referred to it again—was that there would be no cause within the terms of the Clause for foreign buyers to leave the country's markets. As I understand it, there is in a wide range of goods an additional tax which foreign buyers will now have to pay if they bring into markets here goods under 100 years old but over £1,000 in value.
    Mr. MacDermot Mr. MacDermot indicated dissent.
    Miss Harvie Anderson: I am glad if that is not so. There is certainly considerable misunderstanding on this point if it is not so.
    The other point which has not been set
    out clearly in relation to the Clause is the question of inheritance. At this late hour I do not propose to go into
    512
    that, beyond emphasising what was said by the Chief Secretary earlier—that special provision for inheritance on death will be considered on a later Clause. I only hope that this is so, because the provisions in this respect are not clear in the earlier part of the Clause.
    It would be out of order for me to mention the details of the Schedule which arises from the Clause, but cumulatively the effect of the Clause is such that it makes it wholly reprehensible in the view of many of my hon. and right hon. Friends and myself. I hope that the Financial Secretary will think over the full implications of the content of the Clause, because I believe that it will contribute considerably towards the corruption of public morals.—[HON. MEMBERS: "Oh."]—Yes, because in the opinion of many of us this Clause is unenforceable in law. It is therefore a bad service to the public to enact it. If we proceed with it we shall be taking a step towards the lowering of public morals which we have no right to take in this Committee.
    The second and more important point, and with respect to the Financial Secretary, this has not been mentioned in the debate, is that the Clause will destroy pride of possession. Hon. Members opposite may laugh, but I am thinking of the difficulties which our young people face and the many things which we have to seek to make them appreciate. We can do this to some extent through that very pride of possession which this Clause seeks to destroy, and for that, if for no other reason, I would resist the Clause. I hope that the Financial Secretary will seriously reconsider it.
    Mr. MacDermot: I think that the Committee will be aware that I have been following the debate very closely and that I have tried to answer all the points which have been put forward. I addressed the Committee somewhere about three o'clock for a space of nearly a half-hour during which I dealt at some length with all the points relating to the effect of the Clause on works of art, the art market and kindred questions. I have been listening attentively to the last three speeches. Every single point, with one exception, was made in earlier debates on the Amendments, and every single one I answered to the best of my ability, including the point raised by the hon. Lady

    513
    the Member for Renfrew, East (Miss Harvie Anderson), which she said was new, namely, the position of the foreign buyer. A person from abroad who brings works here to be sold or who comes here and buys works will not be liable to Capital Gains Tax because it does not apply to people who are not resident.
    The only exception was a point made by the hon. Member for Bristol, West (Mr. Robert Cooke), who made the surprising and, to my mind, immoral suggestion that, when the Bill became law, it would not be immoral for a person to seek to avoid the tax. That is a surprising view to hear any hon. Member of the Committee express. If the hon. Member really holds it, it destroys his own argument and the argument of so many of his hon. Friends that the effect of the Clause will be to corrupt morals.
    5.45 a.m.
    Sir J. Foster: The Bill is very complicated and several technical points arise. Those which have been dealt with have been only those raised by Amendments, and I have two further points to put to the Financial Secretary. The first arises on subsection (4,a) and comes from the Association of Certified and Incorporated Accountants. I think that the Association's fear may be ill founded, but I want to be reassured because it may well be right and the Government and I may be wrong. The subsection provides that
    "a person's acquisition of an asset and the disposal of it … shall be deemed to be for a consideration equal to the market value"
    and there is then a specific reference to
    "in particular where he acquires it by way of … distribution from a company in respect of shares in the company".
    The Association's fear is that that subsection, as drafted, would mean that scrip issues of fuly paid shares would be subject to Capital Gains Tax before they were realised. If that were so, I am sure that it would not be the intention. The reason I say that is that, when a scrip issue of fully paid shares is made, one is only dividing the shares in the company. If there is a one for one issue, no one gets anything extra. A person with 50 shares in the company will in the end have 100, but his aliquot part of the company remains the same.
    514
    Therefore, it would be wrong to charge Capital Gains Tax on fully paid shares before they were realised.
    I think that the Association may have based its apprehension on the assumption that the original share was, so to speak, split into two—in America it is called a split—and that that was a disposal of the share. I myself feel that its fear is misplaced and that a scrip issue would be liable to the tax only when it was disposed of. However, the point was raised in a memorandum by this learned and responsible Association, and I am sure that the Financial Secretary will wish to consider it.
    The other point deals with the now rather famous subsection (3) in Clause 21 read with Clause 22(5). I interpret the subsection as saying that if a house, for instance, is burned to the ground the Clause says that a person "may"—and one does not know whether it must be so or may be so, because in law "may" can be either "must" or "may"—divide the building from the land. The land is then deemed to have
    been re-sold, disposed of and re-acquired by the owner. It seems a strange way of proceeding, but there it is. That raises a capital gain. The land was acquired for, say, £100, then the building was destroyed. The land is deemed to have been disposed of at market value of £150 and gone back to the owner.
    If that is right a position arises where, assuming there is no capital gain in the insurance on the building—and hon. Members who heard me earlier will remember that the effect of subsection (3) is to render a person liable for Capital Gains Tax if insurance money paid on property destroyed produces a capital gain—a loss is turned into a capital gain in some cases.
    The building and the land were worth together £200. The building is worth £50 and the land £150. When the building is destroyed there is no capital gain upon it. But by Clause 22 the land is deemed to have gone out at £150, so the unfortunate person has his building destroyed and a site worth more when it is cleared of the building and he is liable to Capital Gains Tax. I hope that the Financial Secretary will tell me if my analysis is correct and, if it is, whether the fact is as I stated it; and, if it is, whether he thinks it is just.
    Mr. J. E. B. Hill: The Financial Secretary said that the tax on chattels was not so much concerned to raise revenue as to reduce envy. In other words it was not a rational reason but an emotional one. He said that this was because on balance it appeared that some people were repeatedly carrying out transactions in works of art and deriving therefrom an income with which they expanded their general standard of living, and this gave rise to a sense of unfairness in the ordinary man. If that is so I would have thought that such people should be classified as carrying on a trade under the existing law and that the Government's job would be to strengthen the Inland Revenue and put it in a position to enforce the law and stop such evasion.
    Instead of doing that, which seems to be the sensible thing to do, this tax has been imposed. It has been shot to pieces from both sides of the Committee, because there has been speeches against it from the other side, too. There have not been many such speeches, but they have been effective.
    This new tax will require further Inland Revenue staff, hard enough to recruit, to administer it, and the Financial Secretary has admitted that this in turn will breed more evasion. He does not know the measure of it, but there will be some. It is therefore a safe assumption that such Inland Revenue staff as can be recruited will be fully occupied in checking on all the honest returns that are made, and inspecting all the pictures which are disclosed, and so on, and they will not have time to catch the evasions. Thus, the ultimate position will probably be rather worse than the present one, plus all the damage that will be done.
    Having heard this long debate, I cannot see why the Government have brought in this tax, unless it is that the Lobby Correspondent who spoke to me about nine hours ago was right when he said that he thought this tax had been added to the Bill to act as a sort of buffer in time against bringing in the Steel Bill, on the ground that the Government wanted to have no room for it.
    I turn now to deal with a new point—treasure trove. Can the hon. and learned Gentleman tell us what the position is
    516
    there, because this matters in East Anglia? Every ploughman hopes that as he ploughs a bit deeper he will have the luck to find another Mildenhall treasure, or something else of great value. It is rather the same idea as winning on the football pools. These treasures are valuable, and it is the usual practice of the Treasury to repay to the finder the full value of such objects as are found, which the Crown then retain for the nation.
    That value may be considerable, and only last week some valuable Saxon gold ornaments were turned up in Norfolk. This sort of thing happens quite frequently, and, as I say, it is the ploughman's hope that one day he will hit the jackpot. At the same time there would appear to be an acquisition and a disposal very quickly, because by law he is obliged to disclose his find, and I should like to know whether it is taxable, and, if so, at what rate—the long-term rate, or the short-term rate? This is a matter of some moment. If the lucky finder is going to be severely penalised, I hope that the Financial Secretary will tell my constituents just what a Labour Government are going to do to their luck.
    Mr. MacDermot: I am grateful to the hon. and learned Member for Northwich (Sir J. Foster) for having relieved the tedium by raising some new points. The first point is a simple enough one to answer. It is whether distribution by scrip issues will be subject to Capital Gains Tax before they are realised. The simple answer is "No", and the explanation of the answer will be found in Schedule 7, paragraph 4 (2).
    The hon. and learned Member's second question was related to fires. I am beginning to think that I am learning to thread my way through the maze of the Bill, because I arrived at the right answer before I received a helpful note. What needs to be appreciated is that the sole purpose of subsection (5) of Clause 22 is to ensure that a person will not be deprived of a relief. It is to ensure that a person whose building has been burned down is not prevented from claiming relief under subsections (3) or (4) of Clause 22 merely because the value of the site is never negligible. Subsection (5) says that the building may be divided

    517
    from the site but that the loss on the building is to be offset by any increase in value of the site.
    6.0 a.m.
    Sir J. Foster: It is optional.
    Mr. MacDermot: It is optional in the taxpayer's favour.
    I was asked about treasure trove. If it is right—and I do not know the answer to this—that in law there is immediate acquisition and disposal, then disposal follows upon acquisition so quickly that there is no alteration in value to give rise to a claim by the Revenue for a gain or by the taxpayer for a loss.
    Mr. Edward Short Mr. Edward Short rose in his place and claimed to move, That the Question be now put:—
    Question, That the Question be now put, put and agreed to.
    Question put accordingly and agreed to.
    Clause, as amended, ordered to stand part of the Bill.

    Clause 22.—(LOSSES.)
    Amendments made:
    In page 20, line 36, leave out "11" and insert "14".
    In page 21, line 33, after "gains", insert "tax".
    In line 42, leave out from "Acts" to end of line 43.—[Mr. MacDermot.]
    Question proposed, That the Clause, as amended, stand part of the Bill.
    Mr. Barber: May I put to the Financial Secretary a point which arises in conjunction with Clause 21(3). The hon. and learned Gentleman was not here when we had a somewhat lengthy discussion on that subsection and his right hon. Friend gave me an assurance that he would consider my proposal that where insurance money was received by a person in respect of the total destruction of some chattel and that chattel was replaced by a similar chattel, with that money, it should not give rise to a capital gain. We shall need to consider the point between now and Report, and it would be helpful if he would elaborate a little on the point to explain that subsection and subsection (6) of this Clause.
    Mr. MacDermot: We shall wish to look at subsection (6) in the light of the undertaking. Subsection (3) of this Clause provides that the destruction or extinction of an asset shall be treated as the disposal of the asset even though no capital sum by way of compensation is received in respect of the asset. It is an extension of the concept of disposal, for it treats as disposal an occasion on which there is no change of ownership of the asset and no capital sum is received in respect of it. If a person owns an uninsured asset which is entirely destroyed, or for any other reason an asset ceases to have any value, it is clearly right that at the point at which the asset ceases to have value that should be the occasion on which to strike the capital account and to give relief for any loss which might have been incurred.
    The fact that no capital sum has been received in respect of the asset is insufficient reason for continuing loss relief indefinitely. Subsection (6) lays down a special rule for the kind of insurance case where the asset is damaged and the compensation is used to restore the asset. In a situation of that kind, the receipt of the compensation is not to be treated as a disposal of the asset giving rise to a loss, but the amount of the compensation is to be treated as reducing the acquisition cost of the asset.
    Sir J. Foster: There is one point in subsection (3) which provides that if an asset is destroyed, dissipated, or extinguished, that shall constitute the disposal of the asset, but I do not think that this covers burglary. In that case, the asset is not destroyed, dissipated, or extinguished, but I imagine that the Government want such a misfortune to be compensated and I suppose that this is a drafting point.
    Mr. MacDermot: Yes, our attention has been drawn to this by the Press. We are looking at it and, if it is not sufficiently wide, we shall bring forward an Amendment at a later stage.
    Question put and agreed to.
    Clause, as amended, ordered to stand part of the Bill.
    Mr. MacDermot: I beg to move,
    That the Chairman do report Progress and ask leave to sit again.

    519
    I move the Motion because we have made some progress, even at this hour.
    Question put and agreed to.
    Committee report Progress; to sit again this day.

CONSOLIDATION, &c., BILLS
Mr. Leo Abse and Mr. Paget discharged from the Select Committee appointed to join with a Select Committee appointed by the Lords on Consolidation, &c., Bills. Mr. Paul B. Rose and Mr. William Wilson added.—[Mr. Whitlock.]

RAILWAYS (MELDON QUARRY)
Motion made, and Question proposed, That this House do now adjourn.—[Mr. Whitlock.]
6.9 a.m.
Mr. Ernest Popplewell: I rise more in sorrow than in anger at this hour for having kept the Parliamentary Secretary up so late and especially because he must be setting a record for the number of times he has had to remain in the House to answer Adjournment debates. But, perhaps, that very fact illustrates the considerable disturbance there is about transport and I think that my subject is of importance.
Meldon Quarry is a long way from my constituency, sited as it is on the borders of Dartmoor, near Okehampton. It is a railway-owned asset, and has been within the ownership of the railways for well over 60 years. It is alarming to hear that this very efficient quarry is to be sold to English China Clay. I understand that although no agreement has yet been signed the company has expressed a wish to take over the quarry, and that it will take control at the end of the year. I would ask my hon. Friend to confirm that that is the exact position, and that a contract has not yet been signed.
The Railways Board has been trying to sell this quarry for a long time, and has approached many undertakings with a view to its sale. I hope that my hon. Friend can tell the House what price English China Clay is paying for this quarry. I also hope that he will be able to inform me to what use English China Clay will put the quarry.
520
From the information available at present we know that the quarry has a staff of 130. From available reports we understand that English China Clay will employ only 27 of these people, leaving 103 highly-skilled quarry workers whose services will be dispensed with. There is no other work available in this rural area. This quarry is the economic and social life of the area. Twenty-three of the workers whose services are to be dispensed with are over 60 years of age, and have spent a lifetime in the quarry, and there is no hope of their getting a job anywhere in the area.
Of the remaining men the younger ones may be dealt with under the relevant redundancy arrangements, but the British Railways staff officer has told the men who will become redundant that he cannot offer any permanent employment to them at all, and that should it become possible to fix them up elsewhere he will not be able to offer them any accommodation when they move from their homes. This indicates the human problem involved in the sale. I do not raise this matter solely because of the effect upon these men; I say that it is not possible to stress too highly its important social consequences.
There is no question about the efficiency of the work of this quarry. Labour relations are excellent. Everybody is working together as a team. It is a good quarry. It is worked at three levels and has been highly commended by H.M. Inspector of Mines and Quarries for its safety and efficiency. The layout of the quarry is such that the cost of crushing the stone is very low and the movement of the stone to its final crushing is by gravitation. It is producing 350,000 tons of stone per year, and covers 200 acres of land. That is the background story of the quarry.
Tests made by the Department of Scientific and Industrial Research indicate that the life of stone from Meldon Quarry is 13 years, compared with 10 years for that from the Frome Quarry, where the Railways Board will now get its stone. This appears to be disgraceful. The one-third greater life of the Meldon stone should be an important factor in determining the cost involved. It would appear that the Board is not concerned too much

521
about the quality of the stone. Its argument seems to be based entirely on £ s. d. The old London and South-Western Railway bought the quarry originally. It has been working ever since, and has formed the main source of stone for the Southern Region. It is the only railway-owned quarry in the country and provides an extremely useful yardstick of production costs and is very beneficial in checking prices, compared with the private quarries.
Some new plant is required at the quarry, particularly a secondary crushing plant and some modern loading facilities. The manager is an expert in quarry workings, holding high qualifications, and he claims that, if he were given this small amount of new plant, he would be able to reduce even the present prices of stone by at least 1s. 6d. per ton. As an example, he quotes the fact that, since 1960, when he had a new primary crushing plant installed, the stone from the quarry cost less now than it did in 1958, which indicates the efficiency of the quarry. It is very difficult indeed to analyse the Railways Board's figures. The Board says that if it supplied this new plant, the price of the stone would go to 12s. 10d., compared with the Frome stone at 10s. 8d. No reference is made to the longer life of the Meldon stone.
Experts in quarry technique and management cannot understand how the Railways Board has arrived at this figure. Experts inform me that the Railways Board's figure is grossly overweighted, and that this has evidently been done deliberately to support its case.
The Railways Board argues that the haulage from Meldon to Salisbury, which has been done ever since the London and South-Western took over the quarry—a distance of 100 miles—would cost 7s. a ton. Experts in cost and management accountancy holding high degrees have worked out, according to the Railways Board's own figures, that if the present steam engines were replaced by the diesels and the fitting wagons were employed—the liner trains principle about which we hear so much—it would not cost more than 2s. per ton for haulage. This makes absolute nonsense of the Railways Board's claim that the quarry is losing £147,000. There has been a considerable dispute
522
over these figures, with the National Union of Railwaymen taking a particular interest.
The behaviour of the Railways Board has been astonishing. I hope that the Joint Parliamentary Secretary will initiate a thorough investigation into all these matters, particularly this point. The Board informed the hon. Member for Torrington (Mr. Peter Mills)—who hopes to speak in this debate if he gets an opportunity to do so—that the railway unions had completely surrendered their claim in view of the financial figures which had been put forward and had accepted the Board's figures. Only last night I received a letter from the Meldon Action Committee which included this passage:
"Dear Mr. Popplewell,
You might like to know that the Plymouth reporter of the Daily Mail telephoned today asking for information about Meldon. Mr. Endle said he had telephoned the B.R.B. and had been told that although the unions had not at first accepted the figures submitted by the Board claiming savings on haulage costs, the unions had since accepted the Board's figures. We have telephoned the N.U.R. who have completely denied the Board's statement."
From the information I have to hand, including information from the general secretary of the N.U.R., I can confirm that it was indeed a totally incorrect statement. It was dishonourable of the Board to tell a deliberate lie to the Press about the N.U.R. and I sincerely hope that the Joint Parliamentary Secretary will have the fullest inquiries made into this case. I regard it as shocking behaviour, and I am sure that the hon. Member for Torrington will support me in this view.
Another alarming matter comes into this and the N.U.R. was in communication with my right hon. Friend the Minister of Transport about it. The Minister's reply was interesting, because in it he stated that the N.U.R. had accused him of deliberately giving permission for publicly-owned assets to be sold to private enterprise. The Minister stated that that was not the correct position and he went on to speak of how the railways were extending their shipping fleet. It is obvious that
false information is being given to my right hon. Friend by the Railways Board. I realise that I am making a grave

523
charge and I trust that the Joint Parliamentary Secretary will inquire into the allegation I am making.
Evidently the Board told the Minister that it is extending its shipping fleet. When we consider the changes which have been taking place—on the Southampton—France run and so on—and the fact the Board sought to get the Norwegian Thoresen Line to take over the Southampton—Le Havre service which, the Board said, was not a paying proposition, we see what the actual position is. The Thoresen Line has put two car ferry services on that run and is about to introduce a third. I should not mind too much about that if it were not for an announcement which appears in The Times this morning drawing attention to another service—the Goole—Copenhagen shipping service—which is railway owned. The Board has deliberately approached the Ellerman Wilson Steam Line with a view to taking over the British Railways services on this run. The T.U.C.C. is advertising this change.
Mr. Francis Noel-Baker: I know that my hon. Friend realises that there is the greatest anxiety through the country, particularly in the railway centres—in particular Swindon—about the disposal of railway assets, sometimes profitable ones, and that the railwaymen in my constituency do not know what is going on.
Mr. Popplewell: How true that is. That is why I am raising this matter even at this late hour. I have a great deal more evidence to prove my case, but I must allow the hon. Member for Torrington time in which to say a few words.
There is an outstanding case of efficiency, on costs, on quality of stone and on the general layout and convenience. For instance, the quarry is being closed and yet the Great Western line will bring stone from North Wales to lay down in the Meldon area. I plead with the Minister to give a directive to the Railways Board refusing to allow the sale.
6.26 a.m.
Mr. Peter Mills: I am grateful to the hon. Member for Newcastle-upon-Tyne, West (Mr. Popplewell) for allowing me two or three minutes
524
in this debate, and I will speak quickly to cover the points. This is a serious problem for the town of Okehampton in my constituency and one which will affect many people. That is why I have pressed with all the strength I have and in every avenue to reverse this decision by the Railways Board. The story goes way back to the time of my predecessor, when we had doubts and fears that the quarry might be closed.
I have raised the problem of Meldon quarry by at least four Questions in the House. I have been in touch with the Prime Minister, the Minister of Transport, the Minister of Labour, the Department of Economic Affairs, Dr. Beeching, the managers of Western and Southern Regions and the chief civil engineer, all to no avail. This, to say the least, is a very sorry state of affairs.
It seems to me that this is a deliberate effort on the part of the Railways Board to have an excuse to close the Exeter—Okehampton line. If the major portion of the freight is taken away, there is a very good excuse to close the whole line. This would have even more serious consequences to my constituency. There is no doubt that Meldon Quarry has been starved of capital over the years to bring about the position in which it can be said to be uneconomic.
I also feel that if Meldon Quarry continued under the control of Southern Region, we should not have any fear of closure, because I believe that Western Region never liked Meldon Quarry and has sought to close it all along. Southern Region knows the value of the stone. I believe that Southern Region will require this stone in the years ahead.
I should like to make one other point, which concerns the costing figures. There seems to be serious disagreement over this. I know that figures can be made to prove anything, but I should like to know the truth. Why does not the Minister set up an independent inquiry into the costing figures to satisfy us all? It is important to know what is right. It is important for the sake of the manager, who has done a first-rate job, to prove that his figures are correct. I certainly would like to know what is correct.
What of the future? This closure will cause grave social problems for the district. I have said all along that I would

525
fight it on that basis. The men who are redundant must be looked after. If we cannot get the decision reversed, they must be cared for. There are many elderly men in the employ of this quarry. They have given their life to its service and have done their job well and loyally.
However, I hope that if there is no reversal, the quarry firm of E.C.C. will make a success of it and expand it as rapidly as possible to absorb the men who will be without a job. Let there be no mistake: there are no other jobs in the district for these men. My main fear is the closure of the line. This is the excuse which the Railways Board has. I should like the Minister's assurance that the line will not close.
6.30 a.m.
The Joint Parliamentary Secretary to the Ministry of Transport (Mr. Stephen Swingler): I have only about 10 minutes in which to reply and I hope the House will forgive me if I go rapidly over the ground.
Some very serious allegations have been made, of some of which I have had notice, of others not. All of them will be
carefully investigated by us, and if necessary a public statement will be made. May I deal with one of the allegations straight away? The hon. Member for Torrington (Mr. Peter Mills) has mentioned something which I have noticed in the West Country Press, namely, that there is some connection between the proposed closure of Meldon Quarry and the Exeter—Okehampton line. I say quite definitely that nothing could be further from the truth.
Earlier this year the British Railways Board told my right hon. Friend that there was an urgent need to do something about the bridges carrying the Exeter—Okehampton—Barnstaple lines north of Exeter. The expenditure needed was so great that it would make it uneconomic, said British Railways, to maintain this service. My right hon. Friend immediately made an urgent examination of the implications which the
closure of passenger services on these lines would have. He decided that it would be essential to maintain passenger railheads at Okehampton and Barnstaple. As a result I can say that the Board is going ahead with the repairs to the bridges. I can state definitely that these lines will re
526
main open. That disposes of one of the points.
My hon. Friend the Member for Newcastle-upon-Tyne, West (Mr. Popplewell), who is ever-vigilant about the interests of railwaymen, raised another serious allegation. He will appreciate that the question is very difficult. The proposed closure by the Railways Board of Meldon Quarry is undoubtedly a blow to a small isolated community. As the hon. Member for Torrington said, many of the workers there are between 50 and 60 years of age and some are over 60. Many of them have spent all their working lives in railway service there. We can well imagine what their feelings are.
May I say a word about the position of the Railways Board and of ourselves in the Ministry of Transport. The Railways Board is managerially responsible for the whole of this situation. It tells me that the quarry, the only quarry it has, was found to be uneconomical to operate. It said that it could get the stone it needs for its ballast more cheaply elsewhere than at Meldon Quarry and that this would save the Board £146,000 per annum, a substantial sum. That is the Board's case.
I understand that in January, therefore, the Board wrote to the trade unions and informed the staff employed at Meldon Quarry that it would close down at the end of this year. This is entirely a matter for the Board's commercial judgment. Where the Board obtains ballast for railway purposes is a matter for the Board, and the closure of the quarry, or the disposal of assets of the Board, with the consequent reduction in railway staff, is an operational decision for the management of the Board which my right hon. Friend must leave to the Board itself.
My right hon. Friend recently announced that the Government had decided to free the nationalised industries, including the railways, from the statutory restrictions on their manufacturing powers, but this, I fear, cannot change in any way the decision in this case. In fact, we understand that the new owners who are acquiring this quarry from the Board intend to change the character of the business entirely. A large sum of money, I am informed, will be spent on new plant for the purpose of going into the business of road-making

527
materials. As this appears to be the only way to make this quarry financially viable, the Board too would have been faced not only with the need for large redundancies but also for considerable capital investment in order to make it a going concern.
I am informed by the Board that it has studied the market for crushed stone as it is now produced at the quarry and finds that it would be a totally uneconomic proposition to keep Meldon Quarry on the present basis, even if it were statutorily permitted, which it is not at the moment, to sell its products in the open market.
We are very concerned about the position of the workers affected by this decision.
I have been assured by the Board that it intends to do everything possible between now and the end of this year to find alternative work for those displaced. As my hon. Friend knows, the Board has a Director of Resettlement whose task is to ensure that the fullest use is made of the resources available through the Board and the Ministry of Labour to assist displaced workers to find new employment.
What steps are being taken? First of all, the Board gave about 12 months' notice to those concerned that it intended to sell the quarry as a going concern. That fact would provide reemployment for some of the quarry staff, as my hon. Friend said. The quarry has been sold to English China Clay Quarries, which will take over operation on 1st January of next year, and the firm is prepared to offer re-employment to 27 of the existing staff.
Secondly, I understand that the Board has now interviewed personally every worker at the quarry, and has offered each one alternative employment in the Southern Region. But I know that, as in many cases the alternative work offered may not be suitable and may involve disruption of the lives of those concerned, the Board is urgently examining the possibility of suitable openings in the Western Region for those who are displaced.
528
If any of the men are willing to accept transfer to other railway employment, the arrangements agreed between the Board and the trade unions have been specifically designed to reduce, as far as is possible, the human and individual problems that arise in situations such as this. There are generous safeguards for former rates of pay, and provisions for free residential travel, lodging allowances, disturbance payments, free removals, and so on.
Thirdly, the Board tells me that it has approached the Devon County Council about the question of alternative work in the district. My right hon. Friend the First Secretary of State has been in touch with the new regional Economic Planning Board at Bristol and has asked it to keep in mind the needs of Meldon. The Ministry of Labour, of course, is prepared to offer all its facilities—including retraining, where appropriate—to those seeking its help.
The Government have given the assurance that the Board of Trade will give sympathetic consideration to the issue of an industrial development certificate to any firm that is willing to establish a suitable project in the Meldon area. These are the steps that have been taken by the Board, by the Government Departments concerned and by notification to the new Regional Economic Planning Board to help between now and the end of the year those being made redundant as a result of the sale by the Board of the Meldon Quarry.
The displaced employees will be covered by the Railway Board's redundancy arrangements which have been agreed with the trade unions. They provide for redundant staff who cannot, for some reason or other, accept transfer to other work, to receive lump-sum compensation and continuing resettlement payments—
The Question having been proposed after Ten o'clock on Tuesday evening and the debate having continued for half an hour, Mr. DEPUTY-SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
Adjourned at twenty-one minutes to Seven o'clock a.m.