EMPLOYERS' SCHOLARSHIP SCHEMES: INCOME TAX (Hansard, 24 July 1978)

§ Lord BOYD-CARPENTER
My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.

§ The SOLICITOR GENERAL for SCOTLAND (Lord McCluskey)
My Lords, the new practice, which was announced by the Board of Inland Revenue on 14th June 1978, will be applied in respect of scholarships awarded on or after that date whether under existing schemes or under schemes subsequently created, but not in respect of awards made before that date. Income tax will accordingly be claimed in respect of future grants of scholarships made under schemes which existed prior to the announcement to the extent that they represent benefits provided by reason of the employment.

§ Lord BOYD-CARPENTER
My Lords, does the noble and learned Lord reconcile that with what he told the House at column 637 on 3rd July?

§ Lord McCLUSKEY
My Lords, that would be extremely difficult. I should be standing here, I think, in sackcloth and ashes and in a white sheet if I truly said what is recorded in that particular column, because I failed to make it clear that, although awards made under existing schemes would not be subjected to tax if they were made before the Inland Revenue's announcement, awards made after that date, even if made under schemes which existed prior to the announcement, would be treated as attracting liability to the extent that they represented benefits provided by reason of the employment.
The word that appears in column 637 should have been not "schemes" but "awards". I do not think that anyone has been misled, because the Inland Revenue's announcement of the matter on 14th June 1978 stated quite clearly: The new practice will be applied to income from scholarships awarded on or after today but not to income from existing awards. That was made equally clear on 11th July in another place by my right honourable friend the Chief Secretary.

§ Lord BOYD-CARPENTER
My Lords, whether anyone was misled by what seemed to be the perfectly clear statement made by the noble and learned Lord on the previous occasion, is it not quite wrong that, where funds have been put aside and trustees appointed on the basis that the scholarships would be awarded tax free, the Inland Revenue, supported, apparently, by the Government, should seek retrospectively to impose taxation with the effect of largely nullifying the value of the scheme and frustrating the excellent intentions of those who set it up?

§ Lord McCLUSKEY
My Lords, this of course goes to the merits of the matter. As I sought to explain on the previous occasion, there is not truly an element of retrospection here. The dating is to 14th June, when the announcement was made, and all that has happened is that the Inland Revenue have intimated their intention to seek to charge to tax awards which are made subsequent to that date.

§ Lord BOYD-CARPENTER
My Lords, with respect, how can the noble and learned Lord say that there is no element of retrospection here when funds 641 have been permanently allotted, sometimes irrevocably, to trustees on the basis of the law then operating that these benefits were tax free? That having been done, the Inland Revenue reverses its past practice and, without any reference whatever to Parliament or any statutory provision, suddenly imposes taxation. Is that not retrospection in its crudest and most offensive form?

§ Lord McCLUSKEY
My Lords, it is certainly not retrospection in its crudest and most offensive form because it does not apply to any award which is made prior to the announcement. Of course, funds may be set aside, but no particular person will he prejudiced by having the conditions of his actual award changed.

§ Lord CARR of HADLEY
With respect to the Minister, my Lords, may I ask whether he would not agree that the people to whom those funds belonged and who agreed to those funds being set aside for those purposes are being unfairly prejudiced in that they gave funds for certain purposes quite lawfully and those purposes are now being frustrated?

§ Lord McCLUSKEY
My Lords, I would remind the House again that the decision to seek to bring these benefits into tax is a decision of the Board of Inland Revenue, not a decision by the Government. I recognise, of course, that the Government can seek to introduce proposals to change the law, to bring the law into line with what was the previous practice, but your Lordships will no doubt be aware that a new clause was sought to be introduced into the Finance Bill to that effect in another place and was either not moved or withdrawn.

§ Lord PLANT
My Lords, would my noble and learned friend agree that this method is a way of hiding payments to employees which is not readily available to workers as a whole?

§ Lord McCLUSKEY
Ultimately that becomes a matter for the courts to decide, my Lords. If the creation of such schemes limited to the children of employees is seen to create a benefit arising from the employment, then no doubt the courts will hold that the new practice of the Revenue is sound.

§ Lord NUGENT of GUILDFORD
My Lords, is not a scheme for scholarships designed as an encouragement to strive for excellence, and is not the Government's policy in this respect a rather sad reflection?

§ Lord McCLUSKEY
The Government's policy is to uphold the wording of the income tax statutes, my Lords. They do not discourage scholarships. We seek to distinguish between scholarships which are open to the public at large and those which h take the form of scholarships but which are in fact benefits conferred on employees of companies.

§ Lord DRUMALBYN
My Lords, may I ask the noble and learned Lord for clarification about the position of students who have already started their courses? They will have received an award for the duration of their courses. Are we to understand that payments made after 1978 in respect of that award will be taxed?

§ Lord McCLUSKEY
My Lords, I understand they will not because the award was made before 14th June 1978. The fact that the payments fall to be made subsequent to that date is neither here nor there; the payments themselves are not then regarded as income or benefit in kind for this purpose.

§ Lord BOYD-CARPENTER
My Lords, in the light of the noble and learned Lord's statement that the Government's policy is to uphold the income tax Acts, may I ask him to explain how it was that last year, under the same statutory provision, these payments were treated as not being taxable while they are now being treated as taxable? On which occasion were the Government upholding the law?

§ Lord McCLUSKEY
My Lords, I said and I repeat —and I hope I will not have to say it yet again—that it is the day-to-day duty of the Board of Inland Revenue to apply the Statutes and for the courts to supervise that they are properly applied. The Government really should not—it would be quite improper if the Government were to do it—be interfering with the day-to-day administration by the Board of Inland Revenue of the matters which are properly theirs to decide.