HC Deb 22 July 1974 vol 877 cc1137-48
Mr. Joel Barnett

I beg to move Amendment No. 21, in page 14, line 11, leave out 'one-tenth' an insert 'one-quarter'

Mr. Deputy Speaker (Mr. Oscar Murton)

With this amendment we are to take the following:

  • No. 198, in page 14, line 11, leave out 'one-tenth' and insert 'one-half'.
  • No. 83, in page 14, line 11, leave out 'one tenth' and insert 'two fifths'.
  • Government Amendment No. 22.
  • No. 199, in page 14, line 17, leave out 'nine-tenths' and insert 'one-half'.
  • No. 84, in page 14, line 17, leave out 'nine tenths' and insert 'three fifths'.

Mr. Barnett

The first of these amendments increases from one-tenth to one-quarter the special deduction to be allowed under subsection (3) of Clause 19 in charging income, including a balancing charge, arising from an overseas trade, profession or vocation. Amendment No. 22 correspondingly reduces from nine-tenths to three-quarters the amount of relief to be given for losses or capital allowances. These are similar amendments to the one we debated a little earlier today applying to individuals. These relate to trades, professions and vocations.

Mr. David Howell

These amendments improve the existing provisions, and in that sense they are welcome, but it will be no surprise to the Chief Secretary to learn that my Friends and I are not by any means convinced that these amendments go far enough. I should like to spend a little time analysing exactly what is implied.

As the Chief Secretary says, he has enlarged from one-tenth to one-quarter the part of the income that can be deducted before tax liability is computed for partnerships. This may sound all right on the face of it. Further, the hon. Gentleman has an amendment about losses of overseas trade, so that relief for losses in any trade, profession or vocation may be given against any other foreign-earned income for the year of loss or the following year.

However, we are dealing here with groups and organisations which set up as foreign partnerships—not subsidiaries of British firms, but partnerships set up in a country, possibly in response to local national pressures for a partnership to be set up with a local partner from the country where the earnings have been generated. This is the form in which architects, consulting engineers, accountants, solicitors and other professions have found it desirable and in many cases necessary to set up operations to provide the basic services which often precede and form the spearhead for the generation of major projects which lead to substantial orders for exports from this country.

One has only to think of some of the vast public works projects and town developments, of bridges and roads built by British construction firms across the face of the globe, and the preparatory and legal work which may well have been done by partnerships of this kind, to realise what a substantial business we are talking about and what a substantial amount of invisible earnings is generated by activities of this kind.

These partnerships take time to build up. This is a point which was pressed in Committee, and the Chief Secretary thought that there was substance in it. He has made some concession about losses made in one year being set off against earned income in that year or the following year. But there are many cases which will not be helped. A typical case is the following. In the first year there is a loss of £20,000 as new offices, typewriters and other equipment are acquired, all of which has to come out of the partnership income and produces a net loss. In the second year there may be a net loss. In the third year one may expect to be going into profits, but under the amendment this will not help people of that sort.

I suspect that the kind of example I am giving is much more typical than the one which would have to come forward to qualify under the amendment, which is an example where the profits or income move into surplus in the second year and the losses in the first year could be set off against it. That is the first reason why we must look at this proposal with a jaundiced view.

The second reason is this. The amendment has reduced from 90 per cent. to 75 per cent. the amount of the partnership income liable to tax. It is arguable that if the partners are away for more than 365 days with the necessary leave provisions they do not pay tax at all. But the essence of the operation I am describing is one where the partners are necessarily travelling to and fro. There are bound to be constant matters to attend to at either end. There are bound to be needs arising for constant, hard-wearing and tough trips to make to and from the new partnership which may be set up in Africa or Arabia or wherever it may be. In the very nature of the kind of operation I am describing, the 365-day rule, when the partnership income becomes liable at the 75 per cent. rate, is of very little use at all.

Why tax it at all? Why hit on this area where everyone will accept—I suspect that the Chief Secretary is amongst them—that there are considerable benefits to British exports, to British construction companies, to the establishment of British supplies after the project may have been built up and to the general building-up of an infrastructure which will produce a feeling of trust, reliance and confidence in British goods, British firms and British professions backing up the supply of these goods and the carrying forward of those projects? This is an important area which generates a massive benefit to our balance of payments. Invisibles is one of the areas where there has been a remarkable and continuing success story. Perhaps it is because of their success that they have attracted a swipe across the cheek. That, in effect, is what even the 75 per cent. rate does.

Our Amendment No. 83 would have reduced the fraction to 60 per cent.: in other words, enlarging the deduction to two-fifths. We feel strongly about this. I recognise, however, that there is a difficulty—which the Chief Secretary will point out if I do not—that since the House has seen fit to reject our earlier amendment to reduce to 60 per cent. the amount of foreign earnings liable to tax for the individual, there would obviously be a problem, or illogicality, to put it no higher, if we were to press the partnership amendment now. It would create impossible situations and, no doubt, a strong incentive for people to invent partnerships in every direction enabling them to get a relief which they would not have as individuals now that the House, urged on by the Government, has rejected, wrongly in our view, the earlier amendment dealing with individuals.

I have to say, therefore, that I do not advise my hon. Friends to press our amendment, but I do this purely for that technical reason. It should not be assumed that we do not feel strongly that the Government's approach is quite wrong and that they are attacking a vital area of Britain's overseas earning capacity and British export capacity in the future. This is a far cry from the original objective of doing away with the remittance basis for overseas earnings. The Government are having a go at a quite different sector involving quite different aims and activities. They are hitting at the wrong target.

I should have dearly liked to suggest to my hon. Friends that we press the matter, but I recognise that a contradiction would be created if we did. None the less, we feel strongly about it—and I have no doubt that my hon. Friends will wish to express great concern.

Mr. Bryant Godman Irvine (Rye)

I offer strong support to my hon. Friend the Member for Guildford (Mr. Howell). I had the privilege for many years to be associated with just such a firm as the one he had in mind. About three-quarters of its work was done abroad. It was done through a number of partnerships and firms in other parts of the world in arrangements with local partners.

People of this kind do a great deal of valuable work in various parts of the world, but, in the nature of things, a great deal of their work has to be done in London. The partners are constantly flying to other parts of the world. I should have expected the Chief Secretary and the Chancellor of the Exchequer to wish to encourage that sort of activity.

Although I was not a member of the Standing. Committee and I have not heard the earlier discussions on this topic. I give strong support to everything my hon. Friend the Member for Guildford said.

8.15 p.m.

Mr. Peter Rees

The Chief Secretary moved his amendment in rather summary fashion, because he has had enough of the work on this Bill—we recognise that time has taken its toll of his cheerful nature—or, more particularly, I suppose, because he thought that the measure of relief which he proposes would be welcomed.

I have spent a good deal of time in Committee and on the Floor of the House looking in the mouth the gift horses which have been brought before us, and I must say that, after examination, they all too often turn out to be no good for much of a ride. The present amendment is another example.

I welcome the relief for losses. It was conceded in Committee, and I make no point about that. But I am concerned about the whole scope and nature of this clause, the effect of which was so ably analysed by my hon. Friend the Member for Guildford (Mr. Howell). We have to ask ourselves two questions. First, are we putting those who go from this country to trade abroad in a worse position vis-à-vis their foreign competitors? However much the Chief Secretary may deny it, it is a fact of life that the burden of taxation in most other countries is less than it is here.

Second, are we putting the United Kingdom resident partner of a foreign partnership—I take the case of partnerships because it is assumed, probably rightly, that this clause relates to foreign partnerships—in a worse position than his foreign partners? In other words, when the call comes for more capital, will he find that, because he is bearing the burden of United Kingdom taxation, he has less capital to contribute than his foreign partners have? Neither of those questions has been satisfactorily answered by the Chief Secretary's amendment.

Two points in particular worry me. It may have been assumed by some hon. Members that the 365-day rule which applies in relation to employees applies in this case. Unless I have misread the clause—I am quite capable of doing that at this stage of the Bill—I do not find that concession embodied in relation to foreign trades. In other words, a person may be engaged in a foreign trade as a member of a foreign partnership for the whole of a fiscal year but because he retains domicile here he will be assessed on his share of the partnership profits with whatever deduction may be conceded by the Chief Secretary. In other words, he will be in a worse position than he would be if he were an employee assessable under Schedule E and the various concessions which have been embodied in Schedule 2.

I ask the hon. Gentleman, therefore, to justify that difference in treatment. Why should the sole trader or partner be in a worse position than an employee?

My second question has, in a sense, been well brought out by others of my hon. Friends. What about the question of expenses? Are we to have another extra-statutory concession for United Kingdom residents who trade abroad? At present, it seems that in computing their foreign earnings they will have no relief for the cost of travelling out there and the cost of subsistence abroad. This is a gross and unwarranted hardship. If they fly out to do a job, as architects, doctors or, perhaps, even as lawyers or accountants, in foreign climes, why should they not be permitted to deduct the cost of travel'? How will the Chief Secretary meet that problem?

Has the hon. Gentleman been keeping up his sleeve another extra-statutory concession to be produced to dazzle us at this late stage? Although we have heard a good deal about the impossibility of treating ad hoc the expenses rule relating to Schedule E, it is no good the hon. Gentleman now asking the House to embark on a fundamental revision of the rules not only of Schedule E but of Case I and Case II of Schedule D without a demonstration that the Government have thought through all the problems which arise in practice.

I remain entirely unconvinced by what I have heard both in Committee and on the Floor that the Chief Secretary has grappled in any conscientious way with the problems which have been put to us by our constituents or have been brought out by us with our own native wit and intelligence. I know that the hon. Gentleman thinks that I have treated him hardly during the passage of the Bill, but I can only do the best I can with the material presented to us and, frankly, I find the material extremely unattractive, unpalatable and only partly cooked. With those hard words I sit down, hoping that the Chief Secretary will be able to do considerably better than he has managed thus far.

Mr. Joel Barnett

I do not object to hard words from the hon. and learned Member for Dover and Deal (Mr. Rees). That I find him the most cantankerous Member I have ever come across is just one of the facts of life. I suppose that it is one of the facts of life which a Chief Secretary has to put up with—if I may adopt that well known form of words. I accept it, and I take it in the spirit in which it is given. I hope that I have been as courteous as possible to the hon. and learned Gentleman, bearing in mind the considerable difficulties with which, as he puts it, I have had to grapple. I have tried my utmost to do my grappling with good humour, though I confess that it has been rather difficult at times. I shall continue to do my best.

Let us be clear about what we are discussing. I shall not use the argument on this amendment which the hon. Member for Guildford (Mr. Howell) anticipated from me. I oppose the amendment on its merits, not simply because another amendment was carried which allowed employees a deduction of only 25 per cent. Admittedly, it would be nonsense to have a 25 per cent. deduction for employees and a larger one for sole traders and partners and so on.

The hon. Member for Guildford spoke about the problems of a partnership taking time to build up and needing to make frequent visits abroad, no doubt to harsh clinics like Kuwait and the Persian Gulf. I am sure that is an extremely difficult activity, and that is precisely why we made the concession of 25 per cent. Of course, it is not all that easy for a consultant engineer to have to travel around the United Kingdom, leaving his wife and family. That even applies to a Member of Parliament or a Chief Secretary, and we do not have the 25 per cent. concession.

Nevertheless, we recognise that there are problems here and we gave the concession in recognition of the hardship of frequent visits to unpleasant climates. However, most consultant engineers and sole traders working abroad would go abroad and have a business there permanently—that is, for more than 365 days—and, therefore, they would have a 100 per cent. deduction—wholly free of tax.

The hon. and learned Member for Dover and Deal tells me that the sole trader is put in a worse position than the employee. After my experience of the tax system, that is the last thing in the world I would suggest was true of the taxation of an employee compared with that of a sole trader and professional man, although as a professional man I do not pretend that I have not been taxed up to the hilt. I do not complain about that. That is the way the tax laws work, and I do my best to pay the least possible amount. That is perfectly and legitimately within the rules.

The Bill ensures that the tax system is as fair as possible between taxpayers, and that is why we have this clause. With the 25 per cent. concession, therefore, we have been just about as fair—indeed more so—as it is possible to be. I must tell the hon. and learned Member for Dover and Deal that the sole trader is no worse off than the employee. The Schedule E rule and the Schedule D rule on expenses are supposed to have exactly the same effect. Travel from home to work is taxable under both. The relief, therefore, ensures that there is no difference in principle between the employee and the businessman.

I do not accept the hon. and learned Gentleman's argument that we have been excessively harsh on the sole trader or partner. We have been most reasonable.

Mr. Peter Rees

I am grateful to the Chief Secretary for giving way, especially after his previous strictures. He seems to have failed to grasp the point. He has dealt with the case of a person who has to fly from this country, where he is resident, to a foreign country to perform the duties of an office or employment there, by an extra-statutory concession, and we will not reopen that particular argument. What does he propose for a person who is normally resident here and flies, say, to Kuwait to perform his functions as a partner in a civil engineering partnership? Will that man get relief for the cost of travel and subsistence?

Mr. Barnett

The hon. and learned Gentleman is talking about a man who goes there for fewer than 365 days, and in most cases that man will have a partnership here and a partnership in the foreign country too. If he travels in those circumstances, the overseas professional firm is related to the firm here, and in that circumstance relief would be allowed—

Mr. Peter Rees

As an extra-statutory concession or not?

Mr. Barnett

There is absolutely no need for an extra-statutory concession. I am sure that the hon. and learned Gentleman, with his great knowledge of these matters, will, when he is less tired, appreciate that there is no need for such a concession. Travel between businesses, whether abroad or at home, does not require an extra-statutory concession, because it is not taxable now. I am glad that he is looking for something to come down to him like some kind of manna from heaven.

I hope that the House will feel able to accept the Government amendment in preference to the others.

Mr. David Howell

I will, with permission, make further comments on the amendment. The more I heard of the Chief Secretary's cast of mind—this was best revealed not by his comments on his brief but by those little asides and bits of local colour that he adds as he proceeds—the more dismayed I became about the country's economic strategy and the way it is being handled.

There was one point in the hon. Gentleman's remarks which betrayed a complete contempt for what I thought was the main thrust of the country's economic strategy. He talked about consultant engineers travelling around the country and having a hard time, and somehow he compared them and their problems with the problems and difficulties facing consultant engineers and other professional people going overseas. He seemed to go on to imply that it was therefore very generous of him to make any concession at all for them. The fact that the Bill greatly damages the position of such people is, it seems, neither here nor there.

If we are to survive as a nation—when we hear pronouncements of that sort it begins to be in question—we have to get export-led growth. That means not only selling more manufactures but putting more incentive into earning overseas by professional services which produce the massive surplus on our invisibles. It requires a cast of mind by the Government, by the professions, by salesmen and by manufacturing to put export earnings out in front. That is what we should be doing, yet the Chief Secretary says that it is a generous consideration that such people earning overseas in a partnership should have any concession at all. It is particularly galling just now when there is a desperate need, in view of the vast oil deficit we have to pay for, to earn back some of that deficit from the hands into which it is passing.

There is just a hope, if we are not too pessimistic, that we can earn back from the Arab oil producers a substantial amount of that deficit over and above the shorter-term problems of financing it. That is because throughout the Arabian Gulf, throughout the oil-producing world, there are to be found British firms and, part-British partnerships setting the pace, paving the way for massive construction projects carried out by British construction engineers and civil engineering firms, ensuring that in country after country in the Middle East there is an enormous potential whereby we may earn back the money we have to pay out for higher-priced oil.

8.30 p.m.

That is all going on now. It was going on quite nicely before this Bill. Along comes the Finance Bill and the Chief Secretary says that he is making a concession because he is not hitting these people harder. To us that kind of approach seems absolute madness. It would be absolute madness at any time, but at this time, with the country in its present state, it seems total madness.

It is a regrettable but unavoidable fact that to press the amendment could mean the creation of a technical nonsense, a contradiction, an illogicality, because earlier amendments were rejected by the Government. Therefore, without in any way detracting from the strength of our feelings or the clear expression of opinion that we believe this to be a totally misplaced and damaging piece of legislation, I beg to ask leave to withdraw the amendment.

Mr. Deputy Speaker (Mr. Oscar Murton)

We are discussing Government Amendment No. 21. To put the record straight, the hon. Gentleman should have asked leave to speak again. Although we are discussing a group of amendments we are concentrating upon Government Amendment No. 21.

Amendment agreed to.

Amendment made: No. 22, in page 14, line 17, leave out ' nine-tenths ' and insert ' three-quarters '.—[Mr. Joel Barnett.]

Mr. Joel Barnett

I beg to move Amendment No. 167, in page 14, line 37, at end insert— (7) Where tax on the income from any trade, profession or vocation is chargeable for the year 1974–75 in accordance with subsection (1) above and would not, apart from this subsection, be computed on the income arising in that year, then, if the person charged so requires by notice in writing given to the inspector not later than six years after the end of that year, the tax shall be computed on the amount of the income so arising, and such adjustments shall be made, whether by repayment of tax, assessment or otherwise, as may be necessary to give effect to this subsection. This amendment adds a further subsection to Clause 19. The new subsection allows a person whose 1974–75 assessment on his income from an overseas trade, profession or vocation would otherwise be on the income arising in the preceding year—that is, 1973–74—to elect to be assessed for 1974–75 on his income arising in that year. This follows an undertaking I gave in Committee. I hope that it will be acceptable.

Amendment agreed to.

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