CAPITAL GAINS TAX (MR. JOHN PENDLEBURY) (Hansard, 25 February 1970)

§ Mr. David Waddington (Nelson and Colne)

I am glad of this opportunity to raise a case which illustrates some of the things which are wrong with our tax system. This case is a good example of how the long-term capital gains tax, hailed in 1965 by hon. Gentlemen opposite as a splendid device for soaking the rich, can be used as a hefty stick with which to beat the small man over the head.

It is an example of how, because of the complexities of the tax system, the humble citizen—who, more often than not, does not have the advice of an accountant—may pay substantial sums in tax which he is in no way obliged by law to pay. It is an example also of how our harassed and overworked tax inspectors, while doing their best to implement a mass of complicated legislation, sometimes fail to make absolutely clear to the citizen just what his rights are. I wish to emphasise, however, that the inspectors should not have to bear any blame for what occurred in this case. The fault lies with the system and the Government who created it.

In 1964, Mr. John Pendlebury became the tenant of the Kings Arms Hotel, in Pateley Bridge, Yorkshire. Unfortunately, the house did not prosper, the inhabitants of the West Riding perhaps being more thrifty than thirsty. As a result, in 1968 the house was referred for compensation, and the upshot was that Mr. Pendlebury, as the licensee, received £548, that being his share of the moneys paid out from the compensation fund.

Mr. Pendlebury had no other job to which to go. Apart from during a few months in 1969, he has been out of work. Imagine his surprise when, on 20th January of this year, he received a letter from Her Majesty's Inspector of Taxes at Ripon, in these terms: I refer to your receipt of compensation for the refund licence of the Kings Arms Hotel, Pateley Bridge, in February 1968. This payment of compensation made was an occasion of charge for Capital Gains Tax purposes. I 1363 propose therefore to assess £455 for the year 1967/68 arrived at as follows:—

Goodwill disposal price	...	...	£548
Cost	...	...	Nil
Gain	...	...	£548
Chargeable Gain 34½/41½ X £548			£455

A formal Notice of Assessment will be issued shortly."

There was no attempt in the letter to explain the computation which, to Mr. Pendlebury, was utter gibberish. Nor was the letter accompanied by any pamphlet explaining to the taxpayer his rights in the matter.

Some hon. Members will know that, by virtue of Schedule 6(24) of the Finance Act, 1965, the amount of liability to capital gains tax is assessed by apportioning the overall gain in the value of the asset on a time basis to and from 6th April, 1965; and this is the explanation for the fraction in the letter. In other words, Mr. Pendlebury was in the public house for 41½ months, 34½ of which occurred after 6th April, 1965.

Some hon. Members may also know that under Schedule 6(25) of that Act a taxpayer can elect to have his gain calculated on a different basis; namely, by reference to the market value of the asset at 6th April, 1965, and it might be thought that Mr. Pendlebury would have been told of that right. But no. Not a word about this option was whispered to him and had he not come to see me—not about this matter, but about whether he was entitled to unemployment benefit—that would have been the end of the matter. The State would have extracted from a taxpayer money to which it was in no way entitled.

Naturally, I took the matter up with the inspector, pointing out that I could not see how it could be contended that there had been any increase in the value of the goodwill attached to the public house since 1965 because, obviously, the public house had been going downhill rather than uphill, otherwise it would not have been declared redundant.

I received a reply from the inspector on 3rd February. I need not trouble the House with the first two paragraphs of the letter. Suffice it to say that the inspector there explained how his assessment was arrived at on the time apportionment basis—in other words, he ex- 1364 plained the mathematics. In the last paragraph he said this: If the taxpayer wishes, it is open to him to have the chargeable gain calculated by reference to the market value of the asset at 6th April, 1965. To do this he must make a formal election to have the gain so calculated and once made the election is irrevocable even if found to produce a larger chargeable gain than the normal time apportionment basis. I would agree with you that in this case it is unlikely that there was any appreciation of value in goodwill between 6th April, 1965, and March, 1968. If Mr. Pendlebury will let me have a formal election as mentioned above, the assessment will be reduced to nil. Two leaflets explaining the position re elections are enclosed. I quickly pass over the fact that the time to send the taxpayer leaflets explaining his rights is not when someone else has already, fortunately, pointed out those rights to him and after the matter has already been put into the hands of the tax collector and a demand for payment is already in the post to him, because such was the case here. That right should be pointed out to the taxpayer at the outset, at the time when it is first proposed to make the assessment.

I pass over that, however, because I do not think it right, as I said before, that the blame for this incident should rest on the inspector. I say that there is something seriously wrong with the system when this sort of thing can happen. I therefore ask the Minister for an assurance that he will do his utmost to ensure that there is no repetition of this and that taxpayers are informed of their rights at the outset.

In conclusion, I am not impressed with the letter which the Minister sent me on 17th February. He there seemed to be suggesting that perhaps after all there might have been a chargeable gain, even if one did take as the base figure 6th April, 1965, and that Mr. Pendlebury was a lucky man and had been treated quite generously.

To that I make these short replies. First, it is sheer nonsense to suggest that there was any gain, for the reasons that I have already advanced, namely, that the public house was going downhill. Second, the inspector, when he wrote to me on 3rd February, seemed sure that there was no liability if an election was made: he did not seem to have the doubts which the Minister now seems to have. Third, if there was any generosity of spirit 1365 abroad, it took a remarkably long time revealing itself.

The Minister knows perfectly well what the real point in this case is. It is one that cannot be avoided by a specious argument as to which method of computation in the particular case would have been more advantageous to the taxpayer. The point is a very simple one. Why was not the taxpayer told that he had an election. Is this the sort of thing that often happens? If so, what is to be done to put a stop to it?

§ The Financial Secretary to the Treasury (Mr. Dick Taverne)

The hon. Gentleman the Member for Nelson and Colne (Mr. Waddington) started by criticising the, long-term capital gains tax because it occasionally hit the small man. The principle behind the capital gains tax was accepted by his party. Indeed, it was introduced by his party when the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) introduced the short-term capital gains tax, which runs at a higher rate in most cases than the long-term capital gains tax.

The principle simply is that, if there is a tax on income, it is reasonable that there should also be a tax on other forms of receipts which are just as valuable as income in the hands of those who receive them. This is one way of broadening the base of taxation. There is, of course, an exemption for capital gains of a small amount below the sum of £50. It is otherwise applicable to all kinds of capital gains, irrespective of whether someone is a millionaire or rather less fortunate.

However, the hon. Member was mainly concerned with the election in certain cases to have a valuation at the date of 6th April 1965. I should like, first, to say something about the election. Theoretically, the right basis would in all cases be the value of the asset as at 6th April 1965, but if this were applied, the work which would devolve on the Revenue would be too great, because with unquoted securities, chattels, lands and other things which are not necessarily easily referable to some quotation it would be an enormous task to value the asset.

1366 Therefore, to ease the work and, at the same time, to benefit the taxpayer, the basis which was produced was that one took the date, provided that it was after 1945, or otherwise notionally in 1945, on which the asset was purchased or acquired and compared that with the sale price or the realisation price which came into the hands of the taxpayer at a subsequent date, and then apportioned the gain over the period, excluding that part of it which was derived during the period before April, 1965.

In case the taxpayer should be in certain cases disadvantageously affected, an option was provided to choose the 6th April, 1965, valuation instead. This is a system which is both less onerous in work and by and large fairer to the taxpayer than simply to go on the 6th April, 1965, valuation.

The hon. Members said that the individual was never informed at any stage that there was such a right, but, in fact, it is clearly stated on the tax return forms that in the case of any capital gain anyone has this right of election. Nevertheless, there are many occasions on which it is only right that taxpayers should be reminded that they have this right of the alternative option of valuation at 6th April, 1965.

The hon. Member is making the criticism that this was one of those cases where that should have been obvious. First, the right of compensation in these cases arises very rarely. The right to compensation arises only if the premises in question have been licensed before 1904, which is not something to be found every day. There is some difficulty in determining what asset it is which has appreciated in value.

The general view which was taken by the Revenue in the past was that the asset on which the gain had been made, if any, was the licence which was held by the licensee. If this was the correct view to take, clearly, the time apportionment basis would almost invariably be the most favourable for the person concerned.

In this case Mr. Pendlebury did not pay anything to acquire the licence by way of capital sum. Since some of the difference between the compensation eventually received and the original licence could be apportioned to the period 1367 before 1965, it was obviously advantageous to apply the time apportionment basis.

When the matter was raised by the hon. Member, the inspector looked at this again and decided that he should not treat this as a licence, but as an asset which was in being and which had the same sort of value in 1965 as it had when compensation was eventually received.

It is not an easy matter. It is by no means absolutely clear what is the right basis on which to assess, but, after looking at the matter carefully, the Revenue decided that perhaps it was not correct to look at the licence as the asset, but the right to compensation as the asset which was potentially always there, to regard the right to compensation as the asset.

If that is the basis on which the asset should be judged, it is possible for the asset to be worth as much in 1965 as it was later, and it might be more favourable to the taxpayer to go for the option of the 6th April, 1965, basis instead of the time apportionment basis. It is not an easy matter. Originally, the in-sector assumed, as had generally been accepted to be the basis by the Inland Revenue, that this was a case where time apportionment always favoured the taxpayer.

The position of other taxpayers is that the right of election is clearly stated in 1368 the return form. A special form—the C.G.21 form—is issued by inspectors whenever they think that the taxpayer may be prejudiced by making the wrong election. The form warns him of the dangers, in certain circumstances, of making an election on one basis rather than another, and what the various reasons for one election rather than another should be.

Certainly, in these cases, in future, since the Revenue has reviewed the basis on which the capital gains charge becomes payable, the C.G.21 form will now invariably go out. But this was not clear before. The situation is not simple. It is a rather rare case. But on the basis on which the Revenue previously worked it was correct and natural for the inspector to feel that the time apportionment basis was likely to be more favourable, and that the issue of this notice was not called for.

The case of Mr. Pendlebury has changed the basis on which this rather rare charge is made. The basis has been reviewed, and a different assessment has now been arrived at for the basis of charge. I am glad to say that in Mr. Pendlebury's case the result has been that he has not had to pay tax, and that in future, in rare cases of this sort, the C.G.21 form will be issued by inspectors.