§ Question proposed, That the Clause stand part of the Bill.
§ Mr. Higgins
I do not wish to detain the Committee more than is necessary, but this is a rather complex Clause, and we would be grateful if we could have some explanation of it. As I understand it, its purpose is to correct previous mistakes in drafting and also, in some respects, to clarify the position regarding entitlement to capital allowances. It involves a substantial element of retrospection, because the last part of subsection (2) says:The said section 56 of the Finance Act 1965 shall be deemed always to have had effect as amended by this subsection.As I understand it, this means that it will be possible henceforth for the 1213 Government to take action under the previous legislation, which they would not otherwise have been able to do.
I should like the Minister to tell us what will be the position if we do not accept the Clause. I think that this is the simplest way of finding out precisely what it means. The Committee is right to give due regard to any legislation which is retrospective, and I therefore think that it would be helpful if we could have some guidance on the matter. In particular, what will be the effect on the various categories which appear under paragraphs (a) (b), (c) and (d) of subsection 4, which cover the temporary disuse of a particular asset, an asset which is in existence for only part of the year, the question of leasing, and the question of initial allowances for cars. Are we to understand that if the Clause is not approved investment decisions which have been taken and which would be expected to receive capital allowances will not get them?
§ Mr. Diamond
I am sorry that I did not rise immediately, but there were several reasons for not doing so. First, I was waiting for the Question to be put. Secondly, I wanted to inform the Committee of the great luxury which it was going to enjoy—
§ The Temporary Chairman
Order. I had proposed the Question. It was the duty of the right hon. Gentleman to rise if he wished to speak.
§ Mr. Diamond
I apologise, Mr. Jennings. I was about to say that the Committee was going to have the luxury of hearing two Government Front Bench speeches, one of which, mine, was going to be very short.
The hon. Gentleman has made valid points. As he said, retrospection is a serious matter and deserves the most careful attention. It is a matter to which the Government give great care. I doubt whether I am capable of dealing with such an important issue as this because, as the Committee knows, I am no lawyer. The best legal brains that the Government can produce should be made available to help the Committee on this issue, and if you thought it satisfactory, Mr. Jennings, I would invite the Committee 1214 to listen to my hon. and learned Friend the Solicitor-General.
§ Mr. Higgins
We are delighted to have the expert advice of the Solicitor-General on questions of retrospection, and perhaps I might raise one matter with him. Subsection (2) says at the top of page 23:… so much of the said subsection (5) as requires an amount so carried forwardinstead of specifying the exact parts of the subsection. We should be grateful if the hon. and learned Gentleman would say whether this is the normal form of words, or whether it would be better to specify which parts of the subsection are not to have effect.
§ The Solicitor-General (Sir Dingle Foot)
I apologise to the hon. Gentleman and to the Committee for not having been present when the Clause was reached.
As the Committee will appreciate, this Clause is highly technical and is designed for two separate purposes. Since last autumn Parliamentary counsel and officers of the Inland Revenue have been working on the consolidation of the law relating to capital allowances for the purposes of Income Tax and Corporation Tax. In the course of their examination they discovered that two corrections should be made. Those are covered by subsections (1) and (3) of the Clause. They also discovered that, in certain respects, it was desirable to clarify the law.
The hon. Member for Worthing (Mr. Higgins) was particularly concerned with the question of retrospection. I must, in dealing with this matter, go into the technicalities involved. Subsection (1) deals with the attractive subject of initial allowances and investment allowances in relation to dredging. Capital allowances for expenditure on dredging were first introduced by Section 17 of the Finance Act, 1956. That provided for an initial allowance equal to one-tenth of the expenditure for the first relevant year's assessment, and for each subsequent year's assessment until the year in which one-fiftieth of the expenditure had been reached. The Finance Act of that year also suspended investment allowances.
The next stage was reached with the Finance Act, 1958, which increased the 1215 rate of initial allowance for dredging from one-tenth to three-twentieths for expenditure incurred on or after 15th April, 1958. The hon. Gentleman will have observed the references to one-tenth and three-twentieths in subsection (1).
The Finance Act, 1959, restored the investment allowances, and Section 21(4) of that Measure provided that expenditure on dredging incurred after 7th April, 1959, should qualify for an investment allowance of one-tenth; and there was a reduction of the initial allowance of three-twentieths to one-twentieth in respect of expenditure incurred after 7th April of that year.
That brings me to the Finance Act, 1966, which abolished investment allowances. If that had been all it did, then the rate of three-twentieths—the higher rate of relief laid down in the 1958 Act for initial allowances—would automatically have been revived. That did not happen because of the provisions in the previous year's Measure, the Finance Act, 1965, which made specific provision—I will not go into the details—for initial allowances for dredging.
In this year's Measure we have restored the three-twentieths. I agree at once that this is a form of retrospective legislation, but it is not retrospective in favour of the Inland Revenue. It is in favour of the taxpayer—and I am sure that the Committee will consider that it therefore falls into a wholly different category.
Subsection (2) of the Clause is designed to remove a doubt, but to appreciate that we must go back to the Income Tax Act, 1952, as amended by later enactments. Under that Act, capital allowances are given in relation to a trade; for example, one may have a property company which is the landlord of an industrial building. An allowance in relation to the building may be given against the income which the building produces. In other words, it may be set against the Income Tax of the year in which it is due and the excess may be carried forward against such income for later years.
In this case the taxpayer has an option. He can have the amount set against his general income for the tax year—not against the special income arising from 1216 the particular asset—but for that year and for one other year. What he cannot do, when dealing with Income Tax law, is to set it off against his whole income as distinct from his special income for more than two years. That was the system which has prevailed for a long time in relation to Income Tax.
In 1965 Parliament enacted the Corporation Tax. The scheme of that Act was that precisely similar provisions should apply to capital allowances. The intention, again, was that the taxpayer should have an option. He could set off the amount for any number of years against his special income but for only two years against his general income. It was intended that that result should be brought about in relation to Corporation Tax as it had prevailed in relation to Income Tax, and in my view that result was achieved by Section 56 of the 1965 Act. But some doubt has been cast on the matter and it is desirable to set that doubt at rest.
So much for subsection (2). I turn to subsection (3). The 1952 Act provided for balancing allowances and balancing charges where machinery or plant in respect of which an initial allowance or an annual allowance had been made for any year of assessment was sold or ceased to belong to the person carrying on a trade or was destroyed or put out of use. A later Section of the same Act gave the owner who replaced machinery and was subject to a balancing charge certain options. When investment allowances were introduced in 1954, they were an alternative at that time to initial allowances, and accordingly in Schedule 2 to that Act, the 1952 Act was amended so as to make the provision of the 1952 Act applicable in the case of a taxpayer who was not in receipt of initial allowances.
The Finance Act, 1956, repealed the whole of Schedule 2. If the matter ever came to be decided in a court, there might be arguments on the effect of the repeal. Does it mean that the law reverts to what it was in 1952? I am inclined to think that it does. However that may be, it is clearly desirable that assets qualifying for investment grants should be covered and not merely assets which qualify for initial allowances. The Committee will recall that under the 1966 1217 Act one cannot have both. Assets qualifying for investment grant do not qualify for an initial allowance. It is clearly desirable that taxpayers in receipt of investment grants should be able to avail themselves of the provisions of the 1952 Act. We therefore put the matter beyond doubt. Here again it is a form of retrospective legislation, but it is retrospective in favour of the taxpayer and not of the Crown.
§ Mr. Higgins
We could probably clarify the matter if we asked a question. While we do not want to create an overall precedent, we accept that if retrospection is in favour of the taxpayer, it is probably a good thing. May I ask whether there is any point on which this is not the case? If not, we should be happy to accept the hon. and learned Gentleman's explanation.
§ The Solicitor-General
There is no retrospection here except that in favour of the taxpayer.
Subsection (4) raises four extremely recondite points of revenue law. Each paragraph embodies the view which has so far been taken by the Revenue and that view has not been challenged in any case. I therefore invite the Committee to accept that subsection, too.
With those few words of explanation, I hope that the Committee will accept the Clause.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.