DAMAGES (SCOTLAND) BILL [H.L.] (Hansard, 3 February 1976)

§ The MINISTER of STATE, SCOTTISH OFFICE (Lord Kirkhill)
My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Lord CAMPBELL of CROY
I think it convenient to draw your Lordships' attention to the fact that my noble friend Lord Mansfield said on Second Reading on 18th December that he presumed either that there would be no Committee stage on this Bill or that it would be brief. He therefore made the two or three main points which we wish to make concerning the Bill at that moment. The Bill follows closely proposals made by the Scottish Law Commission and we welcome it. The points raised were not ones requiring changes in the Bill or replies from the Government at this stage. I am therefore not proposing to repeat my noble friend's points on Clauses 1 to 8, though I take this opportunity of referring your Lordships' to the record of what my noble friend said on 18th December.

Lord CAMPBELL of CROY
It seems to us that this is an improvement for the reason which the noble Lord has given. I am glad the Government have seen the possible danger of this being regarded as simply declaratory so that cases might arise in which the purpose of this clause would not be applied but rather some existing interpretation of the law would be successful instead.

§ Lord DRUMALBYN
I wonder whether it would be appropriate at this moment to raise a point which I raised on Second Reading on the taxation of damages and so on in comparison with what a man would have earned and been taxed on when he was alive. This is really a 1249 question of the taxation of the investment income from a capital sum received as damages. As I understand it, the income would fall to be taxed as investment income, whereas had the person in question been earning the same sum he would have been paying taxation at a much lower rate. I wonder whether it would he convenient for the noble Lord to comment on this point now.

§ Lord KIRKHILL
The noble Lord raised that point on Second Reading and I have today communicated with him in detail. In general terms, our tax system in this country has for many years now distinguished between earned income—consisting broadly of wages and salaries, pensions and other income derived directly from an office, employment or self-employment—and all forms of investment income. Before the unified tax system was introduced in 1973, earned income attracted the earned income relief but investment income was taxed at the full standard rate without abatement. Under present arrangements, this distinction is maintained by charging investment income above a certain amount to additional rates of tax under the investment income surcharge provisions. I realise that this distinction may seem a little harsh when the source of the investment income is, as in this case, some form of compensation. But this goes to the root of the justification for taxing investment income more heavily than earned income, which rests on a recognition that the former has the additional security of a capital sum underlying it. Given this fundamental difference from earned income, it would be invidious to seek to introduce distinctions into the taxation of investment income according to the source from which the underlying capital was derived in the first place.

§ Lord ROBBINS
I must say that the explanation given by the noble Lord seems to me to be almost entirely without justification. This seems to me to be an iniquitous anomaly in the system. Here is a man who is incapacitated from earning and who receives a sum in compensation. Under the existing law he is thereby subjected to a branch of taxation which, whether or not it is justified on broad principles, has relevance to circumstances quite other than the catastrophe from which he suffered. I am amazed 1250 that any Government can tolerate such an injustice.

§ Lord DRUMALBYN
I, too, should like to comment on what the noble Lord, Lord Kirkhill, has said. He indicated that it was not possible to distinguish the source of the capital. When we have legislation we all know that we start off on a broad basis and then find out where that legislation causes the shoe to pinch and adjust accordingly. I realise that this is not entirely germane to this Bill, but I thought it right to point out a consequence, and I quite realise that this is a matter for a future Finance Bill. I feel certain that sooner or later provisions will be made in a future Finance Bill, and all I am really asking the noble Lord to do, as I said on Second Reading, is to convey this point to his right honourable friend the Chancellor of the Exchequer and ask him to examine it with a view to easing the shoe a bit.

§ Lord HOY
I did not want to intervene at this time, and I am provoked only by the noble Lord, Lord Robbins. This is not a rule which has just been introduced. Indeed, this was laid down in the time of a previous Government. It may very well be that the noble Lord, Lord Robbins, neglected his duty to make his protest at that time, and perhaps he did not even come across it. All I am saying is that it has been going on for a little time. It may well be that this Government have now got to face up to it. I would not object to my noble friend saying, "I will have a look at it" when in fact there is a difficulty; but I do object to it being said to my noble friend that he is responsible for this decision. This decision was made a considerable time ago.
Indeed, I think the noble Lord, Lord Drumablyn, was a member of the Government which introduced this particular provision. It may be that, having done so, he has then come to the conclusion that he was wrong. It is not a bad thing, either in this House or in the other one, if in fact this is a view you take, though it takes a little courage, to get up and say, "I am not altogether sure, but I think I may have made a mistake". If the noble Lord is now saying so, I do not mind my noble friend looking at it again. I would have said 1251 to my noble friend, "If there is a mistake, or if there is something which is not fair, have another look at it to make sure that it is correct". All I would say to the noble Lord is that this is not something new. It has been going on for a year or two—and, indeed, under the previous Administration. It may be that they made a mistake. I will support the noble Lord if he is saying, "Yes, do not repeat the mistake; have a look at it and see if it can be put right".

§ Lord ROBBINS
May I have permission to say that nothing in my remarks was intended to cast personal aspersions on the noble Lord who is speaking for the Government? I think I can call noble Lords to witness that in the remarks which I occasionally make from this Bench I am indifferent as between Parties, in either praise or condemnation.

§ Lord KIRKHILL
I fully accept that no aspersion was cast against this particular noble Lord by the noble Lord, Lord Robbins. But I would point out to him that he should not be totally amazed at the Government view because we consider that to treat as earned income for tax purposes income arising on the investment of a lump sum received as compensation would be regarded as unfair by, for example, those who had saved and invested from their earnings, and whose total income and family commitments were otherwise the same; and I would rest on that point.