§ CASH BASIS, ETC.
§ Mr. Diamond
I beg to move Amendment No. 76, in page 76, line 20, leave out 'twelve months 'and insert' two years'.
This is a relieving Amendment and deals with a matter which was raised by the Opposition. Out of the generosity of our hearts, we have not only granted what they asked but gone a little further. That is to say, we have met the points which they raised and have thought it right to adjust another Section of the Act in the same way.
§ Amendment agreed to.
Further Amendment made: No. 77, in page 76, line 29, at end insert:
(2) In section 33(3) of the Finance Act, 1960 (election as respects tax chargeable by virtue of section 32 of that Act corresponding to the election under this paragraph) for the words ' twelve months' there shall be substituted the words 'two years'.—[Mr. Diamond.]
§ Mr. Fletcher-Cooke
I beg to move Amendment No. 68, in page 77, line 5, at end insert:9.—(1) Where an individual who is chargeable to tax under subsection (1) of the principal section pays a premium or other consideration under an annuity contract for the time being approved by the Commissioners of Inland Revenue under this paragraph (hereinafter in this paragraph referred to as 'a qualifying premium') the amount of the qualifying premium shall, subject to the following provisions of this paragraph, be deducted from the amount which would otherwise be chargeable to tax by virtue of that subsection for the year of assessment in which the qualifying premium is paid, and if the qualifying premium exceeds that amount the excess shall be carried forward, and shall be treated for the purposes of this paragraph as the amount of a qualifying premium paid in the next following year, and so on for succeeding years (if necessary).(2) Subject to sub-paragraphs (3) and (4)' below, subsections (2) and (3) of section 22 of the Finance Act, 1956 shall have effect in relation to this paragraph as they have effect in relation to that section.(3) The Commissioners shall not approve the whole of a contract for the purposes of this paragraph unless it appears to them that the aggregate value of the benefits, of whatever nature, afforded by the contract and by any other contract or contracts made by the individual and approved by the Commissioners under this paragraph or under section 22 of the Finance Act, 1956 is reasonably comparable to the value of the benefits usually afforded 1739 by statutory superannuation schemes to persons who have held an office or employment during the period in which the trade, profession or vocation was carried on by the individual and whose emoluments therefrom were equal to the profits or gains which arose to the individual from the trade, profession or vocation, and the Commissioners may, if they think fit, aporove a contract made by an individual born before 6th April, 1917 subject to the condition that the relief afforded by this sub-paragraph shall be taken in substitution for the whole or part of the relief which the individual would otherwise obtain under section 19 of this Act.(4) The Commissioners may approve a contract under this paragraph notwithstanding that it provides for the annuity payable to the individual to commence after he attains the age of seventy if it provides for that annuity to commence within one month of the date when the contract is made.(5) The Commissioners may, if they think fit, approve a part of a contract, and where they do so this paragraph shall have effect as if the part of the contract which is approved and the part of the contract which is not approved were separate contracts, and the premium or other consideration paid by the individual shall be apportioned between the two parts in such manner as may be just.(6) The Commissioners may at any time, by notice in writing given to the persons by and to whom the premiums are payable under any contract for the time being approved under this paragraph, withdraw that approval on such grounds and from such date as may be specified in the notice.(7) Where an election is made under paragraph 6 of this Schedule as respects sums received in any year of assessment a qualifying premium paid in that year may be deducted from those sums notwithstanding that the tax is to be charged as if those sums were received immediately after the discontinuance, but no amount shall be deducted more than once under this paragraph.(8) Where an individual pays a qualifying premium within six months after the beginning of a year of assessment he may, by notice in writing sent to the Inspector before 6th October in that year elect that for the purposes of relief under this paragraph the premium shall be treated in the same way as if it had been paid in the preceeding year of assessment and not in the year in which it is paid, and any relief given in consequence of the election for the earlier year shall be given by way of repayment of tax.(9) Any annuity paid under a contract for the time being approved by the Commissioners under this paragraph shall be treated as earned income of the annuitant to the extent to which it is payable in return for any amount deducted under this paragraph, but this sub-paragraph shall only apply in relation to the annuitant to whom the annuity is made payable by the terms of the contract.(10) No relief shall be given under section 23 of the Finance Act, 1956 in respect of any amount deducted under this paragraph, and 1740 section 27 of that Act shall not apply in relation to any annuity to the extent to which it is payable in reurn for any amount deducted under this paragraph.The Amendment looks enormously long, but is in fact immensely modest and small. It makes a very small amelioration in the case of pensions for the self-employed. We have put down three or four new Clauses hoping to make some serious Amendments to the 1956 provisions for pensions of the self-employed, but they were not selected and I shall not attempt, on the peg of this Amendment, to hang the arguments which I would have liked to deploy then.
As is well known, under the self-employed pension arrangements, first there is no right of commutation; second, there is no effective carry-forward of any under-contributions for any year due to an insufficiency of earnings for that year; third—this becomes relevant to the Amendment—there is no provision whereby the income of the final 36 months, whether of trading or of professional earnings, can be related to the pension scheme, that is, the well-known two-thirds rule which applies in every other calling; and fourth, no regard is had to subsequent inflation.
The Amendment is really concerned only with the third of those objectives. Under the Bill as drafted, those who have to pay tax from now on on their post-cessation receipts are, of course, allowed to write-off, although they have discontinued trading, certain expenses of the trade. Even though they have discontinued trading, they are allowed against the receipts subsequently received after the dates of cessation of trading to write off expenses. Schedule 10, by paragraph (1), provides for certain allowable deductions on the footing that, if the trade had not been discontinued, they would have been admissible in computing for tax purposes the profits or gains of the individual.
What we seek to do by this Amendment is, basically, to add to that permission the premium for a self-employed person, that is to say, he would be able to debit against the new subject matter of the charge, the post-cessation receipt, the cost of providing for his retirement annunity. This is a modest Amendment because even that opportunity, modest as 1741 it is, is hedged about with many restrictions. It will be subject to precisely the same requirements as are laid down by the Finance Act, 1956, but with an additional safeguard. Only where the individual can show that the retirement annuity secured by him at the date of the discontinuance is less than two-thirds of the yearly average of his final three years' income or salary, could he use the amelioration at all, and even then his chargeable contribution will be limited to securing the difference between the annunity provided at discontinuance and the two-thirds ceiling.
The two-thirds test is precisely that which is applied in relation to schemes approved by the Commissioners under Section 388 of the 1952 Income Tax Act. Even after that safeguard, there is a further safeguard. There can be no duplication under the fading provisions of Clause 19 to those of a certain age under the Bill as it is drafted. In other words, one cannot have it both ways. If one wishes to take advantage of this Amendment, one cannot also take advantage of those fading provisions.
I marvel at the modesty of the Amendment considering what a blow the self-employed have been struck by these two Clauses and the Schedule in the Bill.
§ Mr. Diamond
The hon. and learned Member marvels at the modesty of this Amendment. I marvel at his capacity to use the word"modesty"in describing an Amendment which would wreck the whole scheme. Perhaps I had better concentrate on his use of the word. I hope that he will bear with me while I take him through the figures.
The aggregate value of the benefits usually afforded on a statutory superannuation scheme—and on that the hon. and learned Member was modelling his proposal—is roughly for the full lifetime service, 40 years' service, six times the average annual salary in the last three years. A professional man who has just retired and wishes to provide equivalent benefits for himself to start immediately would have to pay a premium of something like six times his average annual profits over the last three years. It is almost inconceivable that post-cessation receipts will ever be as large as that, so the relief under the Amendment would complete!)' wipe out the tax charge on 1742 the post-cessation receipts if they were used to buy an annuity.
The proposal, modest though it is, is a proposal to eliminate completely the liability for practical purposes to tax of post-cessation receipts. It would return to the situation where those who have their tax calculated on an earnings basis pay their normal, proper, fair tax, and those who have their profits and accordingly their tax, calculated on a cash basis are sought to have this benefit of having their post-cessation receipts entirely free, in the majority of cases, of tax.
In those circumstances, as obviously the hon. and learned Member wishes to make progress, I do not think I need deal with any of the other points in the proposal. I hope that, in those circumstances, he will not wish to press it.
§ Mr. Fletcher-Cooke
I am not sure whether I require the leave of the House to speak again. If so, I ask for it. I am amazed at the attitude of the Chief Secretary. This is a modest proposal. It would apply only where the individual can show that the lifetime annuity secured by him is less than two-thirds of the average of his yearly income. Even if he can use that, his chargeable contribution would be devoted to securing the difference between that and the two-thirds ceiling.
§ Mr. Diamond
I hear what the hon. and learned Member is saying about an annuity, but I am sure that he has taken my point on board. I am not talking about the amount of the annuity, but the sum set aside to purchase an annuity which has to come out of the post-cessation receipts.
§ Mr. Fletcher-Cooke
I think that is a misunderstanding. One takes account of the premiums paid under the 1956 Act. I agree that by a fell swoop one cannot buy an annuity to be paid for out of the post-cessation receipts and seek to put oneself in that favourable position, but the professional people who would be hit by this Clause would already have taken out self-employed insurance under the 1966 Act to a greater or lesser extent. What we are seeking to do is to ensure that out of their post-cessation receipts they should be allowed to pay sufficient to bring themselves up to within the two-thirds rule. Of course, many would not be able to do so because they would not 1743 have sufficient post-cessation receipts. All we are seeking is in a modest, moderate and partial way to treat those who are hardly hit by the Clause in the same way as others.
Since we want to make progress and the Chief Secretary has taken an extreme opposition view to this proposal, all that I can ask him to do now is to recognise, as I thought he partially recognised in Committee, the fact that on commutation of the two-thirds rule the difference between the self-employed and those who can have the benefit of Section 388 of the 1952 Act is now monstrous. I hoped that if he could not accept this Amendment, he would at least say that the Treasury was thinking how to reconcile these two classes of Her Majesty's subjects so that there would not be the unfairness which here will prevail.
§ Amendment negatived.