INCIDENCE OF INCOME TAX.

HL Deb 27 March 1935 vol 96 cc398-408

VISCOUNT ELIBANK rose to ask His Majesty's Government to consider the desirability of—

(1) altering the existing practice under which Income Tax is deducted from the leave pay of Colonial and Indian officials before any assessment has been made or Any opportunity for appeal has been provided;

(2) extending the six months income Tax exemption period to nine months in the case of Colonial and Indian officials and British business and professional men engaged in earning their living overseas who are not ordinarily resident in the United Kingdom, and who do not visit the United Kingdom more than once in three years;

(3) altering the existing practice under which Colonial and Indian officials and British business and professional men engaged in earning their living overseas, who maintain residences in Great Britain for their families, are regarded as residents for any Income Tax year during which they visit this country, however short the visit may be:

And to move for Papers.

The noble Viscount said: My Lords, the points contained in the Question which I bring before the House to-day are by no means new. In 1931 I raised these matters in a speech in your Lordships' House. About 1933 my noble friend Lord Iddesleigh raised similar issues. I am sorry to say that he is not in his place to-day. He sent me word just before the debate, saying that he was very sorry he was unable to be here, otherwise he would have been glad to speak in support of my Motion. present these points once more, to-day, in the hope that I shall receive a more favourable answer from the Government than I did on the former occasion. I am advised that since the year 1931, when I raised these questions first, there has been no alteration in the practice of the levy of Income Tax in relation to the particular classes of individuals who are mentioned in my Motion. The same disabilities exist to-day, in 1935, as existed in 1931, and the same reasons exist for those disabilities being remedied. But, since 1931, there has been a considerable economic improvement in the condition of the country, and that is why I have ventured once more to bring this matter before your Lordships' House, and to the notice. of the Government, in the hope that something may be achieved at last.

I think your Lordships will agree that more than ever to-day it is desirable to take such steps, or any steps, that will maintain contact and connection with our British people overseas, and that every facility should be granted to them, in fact every inducement should be granted to them, to come to the home country in their holidays and their leisure times. At least that is one way in which we can claim to keep contact with our people abroad, and maintain, as I have said, their British connections and outlook. This is so highly important that it cannot be over-rated, and I venture to submit that in spite of the comparatively small loss of revenue which I am told might result, the effect of the proposals indicated in my Motion will be, if I may put it in that way, good business and an act of true vision on the part of His Majesty's Government. With these few prefatory remarks I would like to deal with the points in my Motion categorically.

In the first place, the practice to-day is for Income Tax to be deducted from the leave pay of Indian and Colonial officials before any assessment has been made, or any opportunity for appeal has been provided. That seems not only unfair to me but also, I submit, an illegal action, because until the assessment has been made, obviously the amount payable in Income Tax cannot be decided. I am advised that, in the course of the last two years, in five cases Colonial officials have appealed against the decision of their Department, the Colonial Office, that they were resident in this country for the purpose of the payment of Income Tax, and in four of those five cases the appeal, either to the Board of Inland Revenue or to the Income Tax Commissioners, has gone in favour of the official. The result has been that those officials have had to meet the cost of the appeal to the Income Tax Commissioners, and, naturally, the amounts that had been deducted from their salaries have had to be refunded to them. I should like to know from the noble Earl, who I understand will be replying to my Motion, by what legal right the Colonial or India Office deduct these amounts for Income Tax before the officials leave their Colonies—whether they do so under any Statute which has been passed here, or there, or by what right they do it. I hope that the Government will take this point into consideration and see how it can be remedied.

Let me take the second point—namely, the extension of the six months Income Tax exemption period to nine months. When arguing this point in 1931 the Colonial Secretary of that time, the noble Lord, Lord Passfield, suggested that there was quite an easy way of getting round that difficulty, that the official or the business or professional man could come here for five months before April 5 in an Income Tax year and remain in this country for another five months in the next Income Tax year, and therefore have ten months in a year without coming within the provisions of the six months period. But in actual practice it, does not work out like that, because most of these officials and business men live in climates which render it necessary, or at any rate preferable, to visit this country from April to November—a matter of eight months, we will say, in the Income Tax year. As these people come from these places only once in three or four years for their long leave, they find themselves under the necessity of having to spend at least two months of their leave in foreign watering places in order to escape this unfair Income Tax provision. I submit that a compromise is possible, if the Government will accept it, by which the clause should be amended so that officials and British people from overseas who wish to visit this country shall be enabled. to do so at least once in three years for a period of nine months without the Income Tax provision affecting them.

Now I come to my third point, that is, with regard to altering the existing practice under which those who maintain residences in Great Britain for their families are regarded as residents for any Income Tax year during which they visit this country, however short the visit may be. I cannot do better in support of the contention contained in that part of my Question that read an extract from Lord Passfield's speech in 1931, in which he was replying to the same points put by me to him on that occasion. He said: There is a more serious class of case than that, to my mind, and that is the Colonial official, or the person engaged in commercial pursuits, who comes to this country under the head of those who come for a period of six months in the year and will become liable to income Tax, though only to the extent of the income that they receive here or is remitted to this country. If such a person has an abode here—for instance, if his wife is living here or he keeps a house in which his children are living—then if he conies to this country at all during an Income Tax year, he will become liable to Income Tax; upon the amount of the income which is received here or which is remitted to him here. That I think is a somewhat hard case. I am not Chancellor of the Exchequer. but I shall certainly take an opportunity of representing that case to the Chancellor of the Exchequer, because I have been brought into contact with it in the Colonial Office, and I think it is a little hard on the British official who has gone out to the tropics and comes home, that he should be charged in that way. He is not, as I have said, charged if he has not an abode here, but if his wife is here, or if he has a house for his children, he becomes liable, even if he only comes for one day. That seems a, little hard, and I should like to make a representation on the point. You will notice, however, that he is liable only for the income received or remitted.

Those are the words of the Secretary of State for the Colonies, Lord Passfield, spoken in 1931, and in spite of the great sympathy expressed by the noble Lord in that passage of the speech absolutely nothing has been done to remedy even that situation. I suggest to the noble Earl that the time has come when, economically at least, this country could afford to deal with a case which the then Secretary of State for the Colonies admitted was a very hard case indeed. Those are the three points in my Motion. I only ask the noble Earl to give as sympathetic an answer as he can, and in any case, to press upon the Chancellor of the Exchequer the real hardship under which these officials and business men suffer from the way in which they are treated by the Inland Revenue when they come here for temporary residence. I beg to move.

THE UNDER-SECRETARY OF STATE FOR FOREIGN AFFAIRS (EARL STAN-HOPE)

My Lords, as my noble friend says, this is by no means a new question to your Lordships' House. The matter was raised some four years ago, and I am afraid that I have nothing very much to add to the answers that were given to him on that occasion. But perhaps I might briefly go over the points again, so that I may make them clear to the House. They all really bring in the question of residence, which is one somewhat difficult to define. As your Lordships will remember, a visitor is chargeable as a resident, firstly, if in an isolated year he is here for six months or upwards. As my noble friend pointed out, that six months has to be within a financial year, and if it spreads into two financial years, then he escapes, unless it is a total of six months in any one of those two years.

VISCOUNT ELIBANK

You say "visitors": Are you talking about foreign visitors, or visitors from overseas?

EARL STANHOPE

All types of individuals who come, whether they are in Government service in the Dominions or in business, or are foreigners, because it applies equally to all types of residents. Secondly, anyone who comes here is chargeable in any year in which a place of abode is available for his use and is maintained here for his wife or family, and he comes even for a day. Thirdly, a visitor is chargeable if, as part of his habit of life, he is regularly here for a substantial period, which in practice amounts to an average annual stay of three months in probably a succession of years four in number or upwards.

VISCOUNT ELIBANK

I have not put forward any case with regard to foreigners coming to this country. We had all the information we wanted about that point four years ago. I am dealing with British officials and British people who come from the various places where they are working for holiday residence in this country—not foreigners.

EARL STANHOPE

I am perfectly aware of the point, but if I am to make my case properly, I hope the noble Viscount will not interrupt. I am pointing out to the House what residence entails, and I am going on to say that residence applies equally whether a man comes from the Dominions or from other parts of the world. In regard to the noble Viscount's first Question, under Section 17 of the Finance Act, 1923, those who come to this country are chargeable to Income Tax under Schedule E upon their leave pay. The particular paragraph provides that the provisions of the Income Tax Acts relating to the deduction, assessment and collection of tax in respect of official pay payable at a public office shall apply accordingly with any necessary modification. Anybody who sits on this Bench and all Government officials have their tax deducted as their salary is paid. That has been the law of the land since 1842, and therefore there is no very new point about it. It applies under this section to those who are paid their salary by the Colonial Office or by any other public office in this country.

In the case referred to, Income Tax is only deducted or levied where there is a prima facie case in regard to the official being "resident" for the period which I have mentioned. Forms are issued after arrival to each officer, if he is in the Colonial Service or in the Army, explaining the provisions of the Income Tax Acts, and he is given an opportunity of providing the Inland Revenue with information in order to show that he is not liable to tax. He is also informed how to go about exercising his right of appeal to the Special Commissioners if he desires. I am not quite clear how the noble Viscount thinks a man is put to great expense in that respect, because I understand he has only to apply by letter and therefore, obviously, the expense is very small indeed. If deduction of tax were deferred until after an assessment had been made, contrary to the practice in the case of all ordinary officials of the Government of this country, in many cases the officer would have left the United Kingdom and in some cases it would be difficult to recover the tax. I think the noble Viscount will see that there is no very great hardship about this, because the officer has ample time during his residence here to apply to the Income Tax Commissioners, and ask that the deduction shall not be made and give proof that he is not going to make himself liable.

As regards the second Question, I would point out that the tax is only levied on leave pay and any remittances sent to this country and not on an individual's total income. I am bound to admit that when I first looked at the noble Viscount's Question I had a considerable feeling of sympathy with the cases he had brought forward. I felt there was perhaps some hardship imposed on those who live in unhealthy parts of the world doing the King's service and who then come back to this country. But when we come to look into the matter I think we shall find that perhaps we are inclined to exaggerate the claims which the Inland Revenue make. Your Lordships will remember that, after all, this country has to be maintained and therefore those who come here and have the benefit—and there are many benefits—to be found here, obviously have got to pay for them. When these individuals come back they are charged Income Tax only on their leave pay and on any remittances they may send home. As regards Income Tax on income from United Kingdom sources, they are in any event liable to that tax unless their money happens to be in three Government securities—namely, 3½ per cent. War Loan, 4 per cent. Funding Loan, and 4 per cent. Victory Bonds, when only those "ordinarily resident" in this country are liable to tax. In all other cases Income Tax is deducted at source.

I may point out that in regard to the six months falling in the financial year, these cases were all considered by the Royal Commission which reported in 1920, before we got into the financial difficulty of 1931, and that Royal Commission, having the whole facts before it. instead of suggesting that the period should be extended to nine months, as the noble Viscount proposes, recommended that the six months should count as the period after which the individual should become liable to tax, whether those six months fell in one financial year or over the junction of two financial years—that is to say, partly in one and partly in another. Successive Chancellors of the Exchequer have refused to accept that recommendation, and to that extent the policy of successive Governments since 1920 has been more favourable than the Royal Commission on Income Tax recommended at that time. In all cases full statutory allowances and deductions—that is to say, personal allowance for a man and his wife and the allowance for children—are made, although the tax is only chargeable actually on remittances received in this country and not on his total income.

As regards the third Question, the existing practice is based upon various judicial decisions as to what constitutes residence. If an individual maintains a residence for his wife and children, but does not visit this country, his wife is taxed as his agent on all remittances he makes to her which are made out of unearned income. If he visits this country he is taxed on remittances both from earned and unearned income, but only on remittances, not on his total income. Again the Royal Commission when they considered this question recommended that all remittances to this country which a man might make to his wife and family should be liable to tax whether they were made from earned or unearned income, but nevertheless Chancellors of the Exchequer have again refused to accept that recommendation, and remittances made to a wife during the husband's absence are only taxed when made out of unearned income and not from earned income. Further, of course, in regard to Questions 2 and 3, I would point out that if an individual is liable to Dominion. Income Tax in any part of the Empire he is entitled to claim Dominion Income Tax refund so that he does not pay Income Tax twice.

I understand that it is impossible to differentiate between the many different types of visitors who come to this country, and Income Tax must be made as simple as we can make it, particularly in these days when we are doing our best to make it such that the ordinary individual can understand it and to clarify it in a way that has not been the case for many years past. As the noble Viscount knows, that matter is being enquired into at this moment. If you were to extend the proposal contained in his third Question it would be obvious that the American millionaire who comes here for a period would be able to escape paying any taxes in this country and so, too, would the South African magnate. He would be able to say he was coming here on business, and therefore he would escape no less than the individual in the Colonial Service or in the Army in India.

Of course in all these cases the Inland Revenue has to make up its mind how far it is going to lose money by making conditions severe. We wish to encourage visitors to come here, and we wish them to spend money here to the utmost possible extent and so increase the trade and industry which would supply them with their needs while they are here. But if you extend that too far, so that those who visit this country do not pay any taxation at all, they are not contributing their fair share of the revenue derived from those who live here, and we should become not only their hosts in fact but also their hosts in regard to taxation. Therefore Governments have had to draw the line somewhere, and they have come to the conclusion that six months residence for those who come only periodically is a fair line to take, and they feel that to extend it further would not be fair to those who are resident here throughout the year. I shall be glad to represent what has been said to my right honourable friend the Chancellor of the Exchequer, but in view of the recommendations which were made by the Royal Commission on Income Tax in 1920 and the practice which has grown up over such a long period of years, I am afraid I cannot hold out much hope of success in the representations I shall be glad to make. I must add that I am afraid I have no Papers that I can lay before the House.

THE EARL OF BREADALBANE AND HOLLAND

My Lords, I should like to support what my noble friend Viscount Elibank has said. I understand from the reply which has just been made, that British officials are regarded for purposes of Income Tax as being on the same footing as rich magnates who may come over here for sport or pleasure. I think that those whose case has been so admirably put by my noble friend deserve sympathetic treatment from the Government.

VISCOUNT ELIBANK

My Lords, I thank the noble Earl for the courteous reply that he has given to my representations, but I must confess that to me it is a very unsatisfactory reply indeed. The noble Earl ended his speech by telling your Lordships that the Income Tax Commissioners came to a certain decision in the year 1920.

EARL STANHOPE

The Royal Commission, not the Income Tax Commissioners.

VISCOUNT ELIBANK

I beg the noble Lord's pardon. The Royal Commission came to a certain decision in 1920, and successive Governments have supported the conclusions of the Royal Commission.

EARL STANHOPE

I said exactly the opposite. I said they had not gone so far.

VISCOUNT ELIBANK

I do not quite follow.

EARL STANHOPE

I said the Royal Commission recommended more stringent regulations, and the Governments since that date have not accepted those regulations, but have been less stringent.

VISCOUNT ELIBANK

I am coming to that point. At the end of his speech the noble Earl said that the Government had supported the Royal Commission in certain of their recommendations. Earlier in his speech he said they had not sup ported the Royal Commission and had gone further than the Royal Commission. I submit to your Lordships, having already departed from what the Royal Commission recommended, that is not a reason for not accepting now these very reasonable proposals which have been put forward three times in the last five years. Again the noble Earl stated that it was difficult to differentiate between the different classes of individuals. I submit that differentiation has already been made. The noble Earl kept referring to visitors and mixing up, if I may say so with all respect, the British Colonial officials and other British business men with the foreign visitors who come here. They, I know, are on an entirely different basis. They can only come for three months in the year, for, I think, three years, and then at the end of three years they have to pay Income Tax on the whole of the three years, because they have been in this country for longer than three months. With regard to the officials, I will ask the noble Earl if he will be good enough to do me the honour of reading my speech in 1931 in which I stated on good authority—

EARL STANHOPE

I am sorry to interrupt, but I cannot continue to be misquoted by the noble Viscount made it quite clear that the position is exactly the same whether the visitor is a Colonial official or a foreigner. If they come for four succeeding years, then three months is an adequate period for taxation.

VISCOUNT ELIBANK

If the noble Earl says that is so, then there has been some change in the position, apparently, since 1931.

EARL STANHOPE

It is exactly the same.

VISCOUNT ELIBANK

It seems to be no good pursuing that particular point. I wish to say that so far as Colonial and Indian officials and business men are concerned, they ought nut to be treated on the same basis as foreign visitors. There ought to be a differentiation. I believe that the Government are wrong in treating them in the same way as other visitors to this country. Look at the conditions under which they live. They go out to these Colonies and some of them live under the most ghastly conditions. They are doing work for this country and for the Empire and they are entitled to receive better consideration than the ordinary foreign visitors who come to this country. It is on that basis that I raise this matter, and I am exceedingly sorry that the Government are not able to consider even the last point in my Motion which the Secretary for the Colonies in 1931 agreed was a most reasonable one. I am sorry that the Government are not able to accept it. This is not the last time I shall raise the question in this House. I shall raise it again next year on the Estimates, and I hope that on that occasion I shall have the support of other members of this House in trying to induce the Government to see that this is a wrong and absolutely unfair treatment of the Colonial Indian and British residents doing business overseas. I beg to withdraw the Motion.

Motion for Papers, by leave, withdrawn.

House adjourned at twenty-five minutes before seven o'clock.