ACCRUAL BASIS OF ASSESSMENT OF INTEREST ON COMPENSATION (Hansard, 18 July 1979)

§ Mr. Graham Page
I beg to move, That the clause be read a Second time.
The heading is a rather complicated description of the new clause. However, it is a simple point which, I think, can best by illustrated by example.
The new clause seeks to ensure that interest on compensation paid for property acquired—whether compulsorily or by an authority which has compulsory powers—is assessed in the right year on the taxpayer who must pay tax on the interest.
When land is compulsorily acquired, the acquiring authority usually enters into possession long before the compensation is paid. When a local authority or Government Department acquires land for a public building or road, it will enter on the property before the compensation figure has been settled. The process of determination of compensation often involves long proceedings, perhaps finishing up before the Lands Tribunal. It is not unusual for anything between six and 10 years to be taken to settle the compensation. In that time there is the statutory authority for the payment of interest on the compensation from the date the authority enters on the land. In providing for interest to be payable from the date of entry, Parliament obviously intended that the person whose land was being taken away, and who was dispossessed of his land, should receive from that date an income equivalent to that 1870 of which he had been deprived by the compulsory acquisition of his property.
I will give an example which, except that I will give it under fictitious names and in round figures, represents an actual case of which I am aware. Let me call the owner of the property Farmer Giles. He has 10 acres of his farm taken away from him—for the purpose of motorway No. 1000—by the Department of Transport. The Department enters on his land as soon as it has served him with the necessary notices. In this case it does so as long ago as 1972. Two years later, in 1974, the Department makes him an interim payment of £50,000 on account of compensation, but makes no payment of interest.
Then another two years go by and the Department of Transport agrees that the total sum in compensation should be £75,000. But, of course, it does not pay that sum at that time. There is always a lapse of time between agreeing the compensation and the payment being made. It is not, therefore, until 1977 that the Department of Transport pays the balance of compensation, namely, another £25,000, and with it the interest calculated over the several years since it has taken possession of the property.
As hon. Members will know, the rate of interest payable alters frequently. Statutory instruments go through this House altering the rate of interest on compensation sometimes twice a year. At any rate, they are very frequent. The calculation of interest in this case, over that period of some six years, is £20,000 as a round figure.
The inspector of taxes for Farmer Giles assesses the whole of that interest, the £20,000, in the year in which it is paid, 1977, although it has accrued over the years from 1972 to 1977. The result of that on Farmer Giles' income is to put him up to a rate of 98 per cent. on that £20,000. I know that I shall not get much sympathy for a 98 per cent. taxpayer, but it is an exaggerated example. But in many other cases, when seven years' interest is assessed and paid in one year, it may frequently change the tax rate on someone's income.
It seems to me that the fair thing to do in the case I have mentioned would have been to apportion the interest over those six or seven years, calculate it on an 1871 accrual basis, and charge it in each year in which it accrues. It may be that in future this will not be so serious because, with the reduction in the rate of tax, it may be an advantage to be taxed in the year in which the payment is made and not in the year when it accrued. But it would need a very considerable reduction in the rate of tax to make that beneficial in most cases where large figures result, because frequently the fact of payment in one year may change the rate of tax for that year very considerably.
It is rather like the case of the actor who gets a very good part in one year and is resting for several other years. It is like the writer who writes a book and gets good royalties in one year and very little in other years. Both the actor and the writer suffer on this account. But there is no need in this case for Farmer Giles to suffer if the right assessment is made. Even with the law as it stands, I think the right assessment should have been for the years of accrual. But in order to make that quite certain for the future—and I would hope that it could be retrospective in some cases which have already been settled—there should be some provision such as that set out in new clause 13.
I doubt whether there can be any objection to the drafting of the new clause, because it is so simply worded. I have no doubt that my hon. and learned Friend may have been advised that something is wrong in the drafting of it, but I hope that, if there is something wrong in the drafting, he will accept the principle.

§ Mr. Peter Rees
My right hon. Friend the Member for Crosby (Mr. Page) has argued his case with his customary eloquence and lucidity, if he will allow me to say so. The principle needs no particular debate.
My right hon. Friend and the House will recall that there are echoes in his new clause of what was section 31 of the Income and Corporation Taxes Act 1970, under which it was possible to spread certain dividends—and interest payments—over a period of years if they represented the income of those years. That provision was eventually removed from the statute book because it added marginally to the cost of administering the tax 1872 system, and, indeed, not many taxpayers took advantage of it.
My right hon. Friend makes a powerful case in equity. I would not have the temerity to point to any technical defects in his new clause. I recognise his skill as a draftsman and have done so over many years. He will recognise, however, that the provisions would be rather haphazard in operation. It is not an option given to the taxpayer, as in the case of section 31. It would be mandatory in its operation and it would not, in every case, benefit the taxpayer. It would depend on the years in which the liability arose and on the taxpayer's other income for those years. I am not ce[...]ain in that all taxpayers would bless him for that.
My right hon. Friend was fair enough to recognise that the need for the new clause has been considerably reduced by the lower rates of tax proposed in the Finance Bill. Indeed, I hope the Government will move on from that and reduce the rates even further. Although the point is a real one, and I recognise it, I believe that the pressures in the country are not very great and hope that my right hon. Friend will recognise that they are outweighed by the administrative complications and the haphazard nature of the relief.
My reluctance to oppose my right hon. Friend is tempered a little by the fact that it is always open to a person who has his property acquired under the powers of compulsory purchase—my right hon. Friend will recollect section 52 of the Land Compensation Act 1973—to have a considerable proportion of the compensation paid to him by the local authority or the acquiring authority on entering. It lies to a degree in the power of a person in that position to control his tax liability. He is able to press, should he so wish, to have the compensation paid to him at an earlier date than might otherwise be the case.
Against the background that the taxpayer has a limited power of controlling this problem, and against the background of the slight administrative complication and the haphazard nature of the provision, I hope that, although I recognise my right hon. Friend's fundamental point, he will not feel it necessary to press his new clause to a Division.

§ Mr. Graham Page
I am very disappointed that my hon. and learned Friend should use the housemaid's excuse that it was "only a little one". I am rather shocked that he should say that for administrative convenience we ought to discard the arguments on this matter. I had thought, after tabling the new clause, that it might have been better to make it optional, so that the taxpayer would have the choice whether to be assessed all in one year or on an accrual basis. In many cases in tax provisions it is optional on the taxpayer to choose the best for himself, provided that he pays under one scheme or the other. Just to cast this aside and say that it does not affect many people and it ought to be optional is very unsatisfactory from my point of view. I hoped for a better answer than that.
At this stage of the Finance Bill, when we are on Report, and expecting Third Reading later tonight, there is little I can do except to lay down a marker so that when we come back to a more technical Finance Bill—as I hope we may do during the course of the year, and before we get round to the next Budget Finance Bill—this will undoubtedly be a matter that I shall seek to raise again. Under that threat, I beg to ask leave to withdraw the new clause.