Land Settlement Association (Hansard, 11 July 2000)

§ Sir Nicholas Lyell (North-East Bedfordshire)
Thank you, Mr. Deputy Speaker, for calling me to open this debate on the problems of the former tenants of the Land Settlement Association. The Financial Secretary to the Treasury is aware of the long-standing taxation problems faced by those former tenants. Their circumstances are unusual and perhaps even unique in tax terms, and, unfortunately, the discussions that myself and parliamentary colleagues, several of whom are present, have had with the authorities on their behalf have run into the sand. I am, therefore, glad to have the opportunity to raise the matter in some detail in Parliament.
As a matter of background, I inform hon. Members that the land settlement schemes were originally set up in the 1930s in different parts of the country, including my constituency of North-East Bedfordshire, to provide a home and four or five acres of land on which unemployed people could earn their living. There are settlements in about 20 parliamentary constituencies throughout the country. Unfortunately, the scheme ran into serious trouble in the 1970s. It was badly managed and the tenants were obliged to buy their seeds, fertilisers and other essentials through the scheme and to sell their produce to it. The scheme was run by the Ministry of Agriculture, Fisheries and Foods, and was supposed to arrange cropping and market the produce. In practice, however, it was inefficiently managed, and the tenants and their families worked long, backbreaking hours for minimal rewards. They were often heavily in debt to the scheme, which was failing them at every turn.
In 1981, the decision was taken, rightly, to close it down. However, that left many tenants without jobs and potentially without homes. Eventually, most of them banded together to sue the Ministry. The claim was made under two headings. First, they claimed the loss of the earnings or profits that they should have made but did not. Secondly, they submitted a general damages claim for distress and anxiety, to compensate them for the acute hardships that they had suffered over so many years. Fortunately, most of them were entitled to legal aid and eventually, in the early 1990s, a settlement was reached. Overall, they settled for £7 million, to be divided between some 300 to 400 families. That represented about 25 per cent. of their formal monetary claim, leaving aside their important general damages claim for distress and anxiety—I use the words in which the claim was legally drafted. The average payment received by a tenant seems to have been about £20,000 to £25,000. That is no more, and perhaps less, than they could have expected to receive on their hardship claim alone. Such general damages claims are exempt from taxation.
132WH At the time of the settlement, the then Minister of Agriculture, Fisheries and Food, my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), who hopes to join us this morning, was given to understand that the settlement would not be taxable in the tenants' hands, as he has been good enough to explain publicly. The tenants were also so advised by their Queen's counsel at the time, albeit that his particular reasons for advising them that their settlement would not be taxable were incorrect in tax law.
Nearly all the tenants used their modest damages to help purchase the homes in which they lived. Most of them are now in their 70s, with few or no assets other than those homes and little or no income other than their state retirement pensions. The problem in their lives is the spectre of a tax bill that most of them do not know how they could pay. They are tired and frightened. Some of them have already sold up and moved away, hoping to avoid being chased for tax that they could have paid only by selling their sole home or by incurring a heavy charge against its value.
The problem on which we ask Ministers to focus, in consultation with their senior officials in the Inland Revenue, is that the tax burden as administered bears unduly harshly on the tenants. The established tax rule, which was laid down in a commercial tax case a considerable time ago—40 or 50 years—says that a claim for loss of profits over many years must none the less be treated as taxable in the year in which compensation is received. That is usually fair for a normal trading corporation, which can generally mitigate the effects by writing down plant and machinery, finding other offsets to mitigate the tax charge or by spreading the cost over future years. However, most of the tenants had no business to continue and, if they did, it was so poor that they were usually paying little or no tax. Many of them had had their businesses closed by the Ministry of Agriculture, Fisheries and Food when the scheme came to an end. Whereas in the ordinary course of events little or no tax would probably have been payable on the modest profits that they lost in each of the eight or so previous years, they now face something like a 25 per cent. tax burden on their damages.
A solution is available, if only the Inland Revenue could be persuaded to permit it, without forcing those impecunious tenants through the courts. It is well established, and common ground with the Revenue, that compensation relating to hardship claims—as theirs did—is not taxable. The Revenue has long made it clear that, provided that the tenants pay up the other half of their claim, it is prepared to treat 50 per cent. of the compensation as non-taxable. I welcome that, although I do not welcome the fact that the offer is held as a sword of Damocles over the tenants, which may be used if they seek to press their claim further. This country should not be administered in that way. I hope that the Revenue will take that point to heart.

§ Mr. John Burnett (Torridge and West Devon)
I pay tribute to the way in which the right hon. and learned Gentleman has led the campaign with great perseverance and skill. He has many hon. Members 133WH behind him. Does he agree that the fair and tax-efficient apportionment of damages is invariably agreed between parties at arm's length?

§ Sir Nicholas Lyell
I am grateful to the hon. Gentleman for making that point because, as I will seek to explain, the matter could have been organised at the outset so that we and the tenants were not troubled.

§ Mr. John Gummer (Suffolk, Coastal)
I wonder whether my right hon. and learned Friend will take this point from me, as the Minister responsible at the time. There was no doubt in my mind or in the minds of the officials who advised me that the money was in no sense to be taxable. There was no question of that because it was seen as an ex-gratia payment, not for specific profits and the like, but because the LSA had been run appallingly and people's lives had been destroyed, simply because the Government—Governments of both parties—had failed to look after them as promised. We therefore always treated it as a non-taxable payment. This argument took place afterwards; had we known then, we would have made perfectly sure that the payment was not taxable. The Inland Revenue is reading back into circumstances matters that did not then exist. The sad thing is that successive Governments have failed to live up to their responsibility and to say that, if it is taxable—if the Inland Revenue will not listen—they should make a further payment to ensure that the tax is covered entirely.

§ Sir Nicholas Lyell
I am extremely grateful to my right hon. Friend. He makes a crucial point, which the Revenue and Ministers ought to take into account. It was an ex-gratia settlement; to divide it artificially into taxable and non-taxable parts to the disbenefit of the former tenants is not necessary.
My right hon. Friend also makes the excellent point that it is not a party political matter. There is all-party support for the case that I make today. The hon. Member for Forest of Dean (Mrs. Organ) represents about 40 tenants, and I hope, Mr. Deputy Speaker, that she will catch your eye. The right hon. and learned Member for North-East Fife (Mr. Campbell) and the hon. Members for Torridge and West Devon (Mr. Burnett) and for Torbay (Mr. Sanders) will speak for the Liberal Democrats. My hon. Friends the Members for South-East Cambridgeshire (Mr. Paice) and for South Cambridgeshire (Mr. Lansley) and my right hon. Friend the Member for Suffolk, Coastal are all concerned about the matter, as is my hon. Friend the Member for Salisbury (Mr. Key), who has to be in Scotland on public defence business.

Mr. Deputy Speaker
After that distinguished roll-call, it seems almost churlish not to have mentioned the Minister's parliamentary private secretary.

§ Sir Nicholas Lyell
I am most grateful, Mr. Deputy Speaker. I hope that all hon. Members will row in behind us, which is the object of the debate.
134WH Before I was so helpfully interrupted, I was saying that a solution was available if only the Inland Revenue could be persuaded to permit it without forcing those impecunious tenants through the courts. In so far as their compensation relates to their hardship claim, it is not taxable.
My question to the authorities is why the compensation should not all be treated as a hardship claim—at least to £25,000, which would cover the position of most tenants. I feel confident in saying that the general damages that a court might award for the sort of hardship suffered by those people for so many years would be at least £25,000; it might be substantially more. If this matter had been thought about correctly in the early 1990s when the settlement was reached, it could easily have been structured to do that.
Furthermore, there is no law to say that the Revenue cannot so treat it now; previous cases put no impediment in its way. No case that raises that precise issue has come before the courts. Case law is simply that such decisions must not be a sham. Payments cannot be treated as non-taxable if, in reality, they are made only as compensation for loss of profit. However, those payments were clearly claimed on the twin bases of general damages, which are untaxable, and damages for loss of profit, which are potentially taxable. As the total amount paid out would not exceed what could reasonably be attributed to the non-taxable proportion, I submit that that would be the fair way to do it.
To be fair to the Inland Revenue, this is, to some extent, a grey area. I have had a number of detailed conversations with its officials over the years and we reached the point at which they argued not that it could not be done but that it had never been done by the Revenue in such a way. The officials and I agreed that the matter should be taken to Ministers who, unfortunately, have persistently ducked, or been persuaded to duck, the issue. First, they have said that they are not allowed to get involved in individual cases because that is for the Revenue alone. Secondly, they have said that if the tenants wish to press their case, they must take it to the special Commissioners of the Inland Revenue.
I ask Ministers and their senior officials to think again. They know perfectly well that the tenants have no money to bring court cases and that legal aid is not available for cases that go before the special commissioners. There is no great issue of precedent because the situation of the LSA tenants must be virtually unique. The amount of tax involved in public terms is not large. The total, apart from interest, is probably no more than £1.5 million divided between the few hundred tenants. The problem is, however, that that represents many thousands of pounds for each tenant, which they have not got. There is also the difficulty of interest. That, too, is artificial. The former tenants have sunk their compensation into their homes and have no pot of money that is earning interest. Indeed, had they not invested in their homes, they would almost certainly have been drawing housing benefit for many years.
There is a way ahead. It is said that when the long-running litigation with the Ministry of Agriculture, Fisheries and Food was drawn to Mrs. Thatcher's attention, she simply ordered it to be sorted out and at least a settlement was reached. However, it is a pity that 135WH the settlement did not wrap up the overall tax position as it so easily could have done. The Revenue has argued that all the points must be fair to the general body of taxpayers. That is not really so. If the question of tax had been properly considered at the time of the settlement, the Ministry of Agriculture, Fisheries and Food could have agreed to attribute most, if not all, the settlement to the distress and anxiety factors.
Let me put in a word for the Revenue. It has tried to help with the debts forgone aspect, which affects a few of the tenants. We are grateful for that, but there is no rule to say that the two portions of the claim—the distress and anxiety factors and the loss of property factors—have to be split 50:50. The Revenue always has a wide discretion over interest.
In summary, this is a long and unhappy saga in which 300 to 400 families of modest means have been badly treated by Governments over the years. They are continuing to suffer great anxieties eight years after they reached what they thought was a final settlement. Ministers and the Inland Revenue have ample discretion to treat them fairly. Their tax burden should be kept to a minimum and they should be allowed to live out their lives in their own homes free from anxiety. I very much hope that the Minister will be able to say enough to show that there is a will to achieve this and that a way will be found to bring it about.

§ Mrs. Diana Organ (Forest of Dean)
I am grateful to the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) for securing the debate on the Land Settlement Association. I pay tribute to his tireless campaign on behalf of ex-LSA tenants. It is interesting that I am probably the only Labour Member who intends to contribute to the debate. This is not a party political issue. We are all concerned about the history of the case and the way in which the ex-tenants have been treated by various Governments over many years.
The issues raised this morning are a source of considerable anxiety, hardship and distress to several of my constituents and their families in the Forest of Dean—hard-working growers who pay their taxes appropriately, but find the pressure from the Inland Revenue very disturbing. In the Scarr area of Newent, there were 40 ex-Land Settlement Association tenants. Unfortunately, since the compensation was agreed and the dispute began in 1991, five of those tenants have died. The Inland Revenue has agreed to put a temporary hold on collecting the tax as a result of the dispute about tax liability on the compensation. That has real implications for the widows and next of kin of the growers, because they cannot fully wind up the estates of those ex-tenants.
Now is the time for the question to be fairly settled. In my constituency, the case for the ex-tenants has been staunchly put by Mr. Duncan Reed of Newent on behalf of the other growers. I was first made aware of the problem within three weeks of my election in May 1997. Following correspondence and meetings with Mr. Reed and other ex-tenants, Treasury Ministers suggested in correspondence that the group should present individual cases to the Newent division of the General 136WH Commissioner of the Inland Revenue, an independent tribunal. That option was offered to the Newent growers five years ago, but was rejected.

§ Mr. Gummer
I wonder whether the hon. Lady would accept that it was not intended that those circumstances should arise. By saying that those people should go to the independent commissioner, the Government are avoiding their responsibility, because, in terms of the tax advice that they gave, the Government got it wrong in the first place. Therefore, they should not ask people to appeal; they should put it right. Would not the newspapers be appalled if a private company or organisation had got it wrong, but refused to do the decent thing by way of compensation?

§ Mrs. Organ
The right hon. Gentleman is right. The episode was bungled by politicians and must be put right by politicians, not by the General Commissioners. I have sympathy with the Newent group's decision to reject that option because, as we all agree, the episode was bungled through the incompetence of previous Governments. It should be put right by politicians.
According to my constituents in Newent, the scheme was poorly run, poorly managed, inefficiently marketed and wasteful. Growers worked for long hours with very little return. The closure came in the early 1980s. Again, questions were asked about the management and legality of the procedures taken with regard to closure. Closure meant that the growers had to band together with very few resources and sue the Ministry of Agriculture, Fisheries and Food. No consideration was given to the legal consequences or the suffering of tenants that would flow from the decision. The ex-tenants and I feel that, as the previous Government caused that unfortunate situation through their incompetence, the issue should be resolved by politicians, rather than by the Inland Revenue and the independent appeals commissioner, who adjudicates in normal tax disputes. This is not a normal tax dispute; it is a unique situation.
The argument of the Newent ex-tenants is clear and, I believe, wholly justified. When the scheme was wound up, they were given compensation of about £20,000 to £25,000 on average. That hardly covered their general damages claim, which was non-taxable. It is absolutely clear that the then Minister of Agriculture, Fisheries and Food, the right hon. Member for Suffolk, Coastal (Mr. Gummer), intended and believed that the settlement would not be taxable. He has made that quite clear publicly, especially in his letter of 25 January 1997 to Sir Anthony Battishill, chairman of the Board of Inland Revenue, in which he said: it was quite clearly Ministers' intention at the time of the settlement that the out-of-court payments were intended to compensate the ex-tenants of the LSA for personal hardship caused by their association with the LSA. It was not, therefore, intended as taxable compensation for loss of earnings. The letter also states that it was Ministers' intention that the overall settlement was intended to compensate the ex-tenants for personal hardship and not for pecuniary loss. It seems that the whole scheme—including the running of it, the closure of it, the settlement of it and the tax liability dispute—has been a fiasco. The Tory Administration from 1979 to 1997 never properly 137WH managed it or sorted out its problems, and they managed the whole affair incompetently. MAFF and the Treasury never sorted the matter out between them. Ministers did not make their intentions clear and give direction.
I realise that the intentions of MAFF Ministers do not normally count in determining tax treatment for out-of-court settlements, but the matter should have been sorted out by the Department and the then Government. However, the growers believed that it had been sorted out. They believed that the intention expressed to them by the then Minister meant that they were entitled to non-taxable compensation. Meanwhile, the growers of Newent, represented, as I said, by Mr. Duncan Reed, suffered hardship and anxiety. They struggled with the poor and inefficient running of the scheme and had to fight their case over the inept closure with poor resources. They are not young, and suffered terrible anxiety and personal hardship. That has been an extra burden. Many of those people are now in their 60s and 70s. They have had to use their modest damages to help purchase their homes—otherwise they would have been virtually homeless—and they have been frightened by the pressure on them from the Inland Revenue. That is no way to treat the ex-growers. They have little else by way of assets or income with which to fight the case and the whole bungled affair is a recurring nightmare for them. We must put an end to the nightmare for my constituents.
The previous Government created the mess and the present Government need to sort it out fairly, justly, humanely and sympathetically. I ask the Minister not to suggest that taking the case to the General Commissioners of the independent tribunal would be the best way forward. We went round that loop five years ago and it did not resolve the issue for the people concerned. We should be giving them what is rightfully theirs. The compensation for hardship should be tax-free. The spirit, intention, understanding and reality in which the compensation was given was that it was not for the restriction of trading opportunities but for the personal hardship that they suffered and for the capital loss. In that case the ex-tenants of the LSA in the Scarr area of Newent are not liable to tax on their compensation. We need to resolve the issue for them now.

§ Mr. James Paice (South-East Cambridgeshire)
This issue has been on my desk, Mr. Deputy Speaker, ever since I have represented my constituency.

§ Mr. Edward O'Hara (in the Chair)
Order. I am not the Deputy Speaker, and I should be addressed by name.

§ Mr. Paice
I apologise, Mr. O'Hara.
I have been aware of this issue since becoming the Member for South-East Cambridgeshire in 1987. I then had two of the former LSA estates in my constituency—Great Abington and Fen Drayton, which, since the boundary changes at the last election has become the responsibility of my hon. Friend the Member for South Cambridgeshire (Mr. Lansley). My right hon. Friend 138WH the Member for Suffolk, Coastal (Mr. Gummer) will recall that I was his parliamentary private secretary when the case was settled. The hon. Member for Forest of Dean (Mrs Organ) waxed lyrical about how the previous Government messed everything up. It is worth pointing out, if we are going to make partisan points, that it was the Labour Government in the 1970s who caused the problem by messing up the way the whole thing was run. However, as my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) said, the issue is not really partisan. It is a matter that goes across all parties.

§ Mr. Gummer
Before my hon. Friend moves on, will he dwell on that point? The LSA was appallingly run and the fault of that lies with all parties. The Labour party did not even bother to put it right. It was badly run and the way in which people were treated was almost slavery because they were tied in. They owed so much money that they could not get out. We understood that, which was why we tried to put matters right by winding up the scheme and paying compensation, not for loss of earnings or anything else, but for the way in which our fellow citizens had been treated.

§ Mr. Edward O'Hara (in the Chair)
Order. The right hon. Gentleman's intervention is becoming a speech.

§ Mr. Gummer
May I just ask whether my hon. Friend accepts that, at all points, we would believed that the money would be without tax. If we had not believed that, we would have operated matters differently. Such people should not suffer.

§ Mr. Paice
My right hon. Friend is right. That is my recollection of the discussions at which he allowed me to be present. He was also right to refer to the shambolic way in which the LSA was run prior to the decision by Lord Walker of Worcester to abolish it soon after the Conservatives took office in 1979 because of the condition of the estate. It is worth emphasising that the tenants had no say in how the estate was run. I checked that fact this morning with the leader of the group of tenants on Abington estate in my constituency. The entire scheme was operated by Ministry of Agriculture, Fisheries and Food employees. I shall not get into the usual arguments about civil servants running businesses, but that was what was supposed to be happening. The tenants had no input. As my right hon. and learned Friend the Member for North-East Bedfordshire and my right hon. Friend the Member for Suffolk, Coastal said, the tenants were completely tied into the system, but it was one over which they had no operational influence or control.
I join all the tributes paid to my right hon. and learned Friend the Member for North-East Bedfordshire for his leadership of the group. As he said, the original claim was for about four times the final settlement. It was for £23.5 million and the tenants settled for about£7 million. I am the first to accept that individuals must decide whether to take advice from tax advisers and that the Revenue cannot be held responsible for that tax advice, but the tax advice given to the tenants was that the sum would not be taxable.
139WH I want to refer now to the papers given to the tenants that set out the agenda for a meeting at Sandy in Bedfordshire in what was then in my right hon. and learned Friend's constituency.

§ Sir Nicholas Lyell
It still is.

§ Mr. Paice
I thank my right hon. and learned Friend for confirming that. The meeting was to take place on 29 June 1991, when Simon Goldblatt QC and others were to consult the tenants about the offer that my right hon. Friend the Member for Suffolk, Coastal had put to them when he was the Minister of Agriculture, Fisheries and Food. The document contained sections entitled, "What is the offer?" and "Has the method of distribution been decided?" It stated that the fund would be divided into a first slice from which a flat-rate payment will be made to each Plaintiff in the sum of £5,000, but the main pool for distribution was on a time-related basis whereby points were allocated up to the previous six years. Incidentally, there was nothing to be gained for tenants who may have been in the scheme for 20 years or more.
The key point is that it had nothing to do with compensation for loss of profits because the settlement bore no relevance to the type of business, the level of trading, or the costs, efficiency or profitability of the businesses. In other words, no attempt was made to assess what profits may have been forgone. The fund was distributed purely on a time-serving basis without direct relevance to the businesses that were being undertaken. That is an important point and emphasises the fact that the compensation was not distributed in accordance with the loss of profit.
My right hon. Friend the Member for Suffolk, Coastal, my right hon. and learned Friend the Member for North-East Bedfordshire and the hon. Member for Forest of Dean all referred to the fact that the people were tenants and were, in effect, facing homelessness once the estate was abolished, as a result of which many of them borrowed significant sums to buy their homes. They would otherwise probably have been on housing benefit and in local authority housing. They used the money that they received, albeit a relatively small sum, to pay off some of their debts. Most of them were in their 70s and are now living on a state pension. As the hon. Member for Forest of Dean said, some of the tenants are deceased, including some of my former constituents, yet their widows still carry the heavy burden of concern, which we know is doubly worse for old people than others.
The 50 per cent. limit set by the Inland Revenue for distress and anxiety is arbitrary. It is therefore clearly open to dispute, and the Revenue can increase it if it feels so inclined. I should have said that by law the tenants would have had a right to local authority housing. It is not that they might have done; they would have had a right to it on the abandonment of the scheme.
The businesses were small. Most of them were one-man bands, or perhaps had a husband and wife working together. They operated on a low-profit basis, partly because of the shambolic way in which matters were organised. In an ordinary year, they would not have paid much tax, if any. To tax the debts forgone or the loss of earnings so that that will create a significant tax 140WH burden is far more onerous than if it is trickled out in the normal course of events. More important, many of the businesses ceased trading when Lord Walker of Worcester abolished the scheme in the early 1980s. The settlement was 10 years later. They had no method to generate the tax and mitigate the effects, because many of their businesses had ceased.
None of the former tenants has the resources to take the matter to the commissioners, which the Minister should take into account. The Revenue has helped at meetings; I have attended at least one meeting at which its officials were present. It has been intransigent in its actions, insisting on the arbitrary 50 per cent. rule. As I understand it—I am subject to correction—it is rolling up interest on the tax debts as it has assessed them. Although it gave the period of grace to which the hon. Member for Forest of Dean referred, that ended nearly a year ago, so interest is now rolling on those tax assessments.
Not all tenants were in the same position, as only some had debts. Therefore, only some had debts forgone. In the House of Lords, the tenants won a case for breach of contract. I am advised that some of the money that they received resulted from that case, so that should not be taxable either. The Minister's predecessors in this Government and, I am afraid, the previous one have consistently said that the matter is one for the Revenue to resolve and in which Ministers cannot interfere. I do not believe that that is the case.
By way of example, I shall make an analogy with another issue. A few years ago, a large charity for the homeless in my constituency was faced with a wholly unexpected and large VAT bill. I know that that concerns Customs and Excise, not the Revenue, but there was local outcry and Customs was adamant that it had to interpret the law that way and charge the VAT. Some people and I took a delegation to see the Conservative Minister responsible, who, needless to say, gave us the line that it was not for Ministers to intervene. Lo and behold, in a matter of days, Customs and Excise turned round and decided that there might be a way forward, and we were all able to emerge from the matter with some credit. Frankly, I do not accept that there is no way in which Ministers can influence such matters.

§ Mr. Menzies Campbell (North-East Fife)
Like the hon. Gentleman, I have puzzled over the intransigence of the Revenue. I suppose that it is based on the floodgates argument—namely, if a concession is made, it will somehow be relied on in future. However, the hon. Gentleman's remarks and those of the right hon. and learned Member for North-East Bedfordshire, the right hon. Member for Suffolk, Coastal and the hon. Member for Forest of Dean have made it clear that the circumstances are unique. Although precedent will never be eliminated in all circumstances, the notion that a favourable decision in this case will be relied on in future is so remote as to be discounted.

§ Mr. Paice
The right hon. and learned Gentleman is right. As Governments have generally ceased their involvement in running businesses during the past couple of decades, one cannot even imagine a similar case arising in future. Therefore, as the right hon. and learned Gentleman says, the precedent argument is an excuse rather than a realistic concern about the future.
141WH My right hon. Friend the Member for Suffolk, Coastal referred to a suggestion that I was going to make. Those of us in this Chamber who have been in government are conscious that Ministers always want a way out. Would not some kind of ex-gratia payment be possible? If the Revenue insists on tax assessments for various reasons—with which we do not agree—cannot the issue be reopened and an ex-gratia payment made that would nullify the tax burden? The income is peanuts in terms of public expenditure. It is of no consequence to the nation but of huge consequence to former tenants up and down the country, most of whom are elderly, have no businesses and are eking out their later years. Those people are very worried.
I have regular meetings with former tenants of the Abington estate, some of whom are still there, some of whom have moved away. Every time I have those meetings, their concern and anguish is clear. The matter must be settled. It is of no comfort to me that it has taken such a long time. It is now 18 years since the estate was abolished, and eight years since the settlement was agreed with the Ministry of Agriculture, Fisheries and Food.
I hope that the Minister will recognise that there is a wide body of concern in the House about the way in which this matter has been handled. We do not want to apportion blame or responsibility, but we want the threat that has hung over the heads of hundreds of people during the past eight years to be removed, so that they can look forward to a slightly more comfortable life in their later years. I hope that the Minister will understand the intensity of concern among tenants and those of us who represent them.

§ Mr. Adrian Sanders (Torbay)
I pay tribute to the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) not only for running a long-standing campaign on this issue but for keeping other hon. Members informed. That has been extremely helpful.
I speak on behalf of a constituent who is affected. First, in the light of the comments this morning, there is a great deal of unity across parties. We are considering not a party political issue but an issue of justice that unites Members from all parties. The apportionment of blame is not the way forward. Secondly, we are united in believing that tenants have been consistently let down, under the LSA and since its winding-up. Thirdly, an urgent resolution to the problem is needed, given the age of the people affected.
Two solutions are available. One is for the Inland Revenue to write off the debt and not pursue the tenants for the tax and the other is an ex-gratia payment to enable tenants to meet the tax liability. Justice will therefore have been seen to be done. I apologise to the right hon. and learned Member for North-East Bedfordshire that I cannot be here after 11 am because I have another engagement. I would have liked to hear the Minister's response. I hope that he will take on board the views expressed across the party divide, and that he will be able to give some hope to those tenants who have waited all too long for justice to be done.

§ Mr. Howard Flight (Arundel and South Downs)
I congratulate my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) on running the campaign for a small group in society who have had a particularly hard lot for a long time. I hope and believe that the Minister is a fair and decent person and that this debate will help towards a solution to the problem. It is a disgrace that the matter has dragged on for nine years, and that the tax situation has not been resolved, although the original intention seems to have been clear.
It is difficult to add to the excellent contributions made by my right hon. and learned Friend, the hon. Member for Forest of Dean (Mrs. Organ) and others. There is no legal requirement for the Revenue to treat the payments in the way that it is; it is not a matter of law from which it has no escape. The Revenue might take the view, within the narrow confines of its perspective, that payments of up to £25,000, for example, were made for general suffering and did not relate to loss of profit. The Revenue itself chose to use a commercial case as a case study, from which it took its 50:50 offer. As other hon. Members have said, the cases are not analogous, nor has there been any case before the courts that is precisely analogous. That is a good reason for the Revenue not to take the view that a common-sense approach to the matter would create a dangerous precedent.
It is unreasonable, and a sign of weak government, for Governments of both parties to have ducked the issue. The matter is a practical one: the individuals concerned are elderly and had to put up with virtual serfdom when they were members of that badly administered, crackpot land settlement scheme. By saying that the Revenue has to act in such a way because it is legally required to do so, Governments are passing the buck in the worst traditions of this country. Governments can advise and tell the Revenue what to do, as there is nothing in law to stop them, and the Revenue is free to take a sensible and enlightened view.
If the Revenue persists with the position that it has taken, the Treasury is likely to incur just as much expense as if it surrendered the tax. The cost of fighting the cases through the commissioners who made the unwise recommendations and of making housing benefit and other social security payments is likely to be just as great. The tax involved is only £1.5 million, which might be quickly consumed in such expenses.
It was fortunate that my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer) could attend and put on record the Government's position at the time of the settlement. He made it absolutely clear that the settlement was intended as an ex-gratia payment for the various nasties that the Government had inflicted on the people involved, in particular the suffering resulting from poor administration and the unwise method by which the MAFF scheme was managed. In all practical senses, he committed the Government at the time. For the Inland Revenue to turn around afterwards in contradiction of the position expounded by the Minister responsible at the time is a form of retrospective taxation, which I trust the Government continue to set their face against as a matter of principle.
143WH The position of my right hon. Friend the Member for Suffolk, Coastal and the Government was made clear publicly at the time. The matter was not handled behind closed doors. The 400 families involved were clearly led to believe that the payments would not be subject to tax. For the Government collectively to go back on that is morally improper, and to find clever legal ways of proposing to do it is unnecessary.
As others said, two perfectly easy solutions are available.

§ The Financial Secretary to the Treasury (Mr. Stephen Timms)
I should like the hon. Gentleman to clarify his comments, as he may have inadvertently misled the House. I am not aware that the Government ever said that the payments were not liable to tax, but the hon. Gentleman implies that they did. Will he correct that point?

§ Mr. Flight
I believe that that is so. The contribution of my right hon. Friend the Member for Suffolk, Coastal this morning made it clear that, when he was the Minister responsible he made it clear publicly that the Government intended the payments to be ex-gratia, and not subject to tax.

§ Mr. Timms
I do not believe that the hon. Gentleman is right or that a statement on record makes that point. The right hon. Member for Suffolk, Coastal made clear this morning his recollection of his understanding at the time, but I do not believe that the hon. Member for Arundel and South Downs (Mr. Flight) can point to a statement to that effect.

§ Mr. Flight
I thank the Financial Secretary for raising the issue. It might be appropriate for him to interview my right hon. Friend the Member for Suffolk, Coastal and put on record what my right hon. Friend believed that he said publicly. However, the Financial Secretary will find that the record shows that the right hon. Member for Suffolk, Coastal publicly communicated his understanding of the position.

§ Sir Nicholas Lyell
After the event, my right hon. Friend the Member for Suffolk, Coastal wrote a letter that clearly sets out the advice that he received from his civil servants and his clear understanding at the time, which, rightly, permeated MAFF. The tenants were advised from another angle, and they had a similar point of view. Of course there was some to-ing and fro-ing, and there has been some discussion about that. However, the general understanding in MAFF was perfectly clear.

§ Mr. Flight
I do not know the precise time involved, but I also have proper reason to believe that the view of my right hon. Friend the Member for Suffolk, Coastal, the Minister at the time, was not confidential but available and was therefore known, as I said earlier, by the 400 families involved.

§ Mrs. Organ
That is the crux of the issue. That may have been in the mind of the right hon. Member for Suffolk, Coastal, and the intention throughout MAFF, and the right hon. Member for Suffolk, Coastal may have subsequently written to the chairman of the Board 144WH of Inland Revenue, made a public statement or written a public letter. However, the problem is that when the settlement was made he did not give clear directions or lay down absolutely clearly that he intended it to be non-taxable. The problem is that no communication took place between the two Departments. That may have been the intention, but does the hon. Member for Arundel and South Downs agree that it was not clear?

§ Mr. Flight
Like me, the hon. Lady listened to what my right hon. Friend the Member for Suffolk, Coastal said this morning. In my view, he made it clear that there was no question at the time that the settlement would be taxable—on the advice of his civil servants and lawyers. It would therefore have been inappropriate to have even raised the issue of tax.

§ Mr. Menzies Campbell
If the hon. Gentleman can, will he put himself back into the minds of those to whom the settlement was offered? Does he think that they would have accepted it if they had been told that it was liable to tax?

§ Mr. Flight
The right hon. and learned Gentleman makes an excellent point. My right hon. Friend the Member for Suffolk, Coastal also said that if there had been any question of the settlement not being an ex-gratia payment, as his officials advised him, the Government would not have viewed it as an appropriate settlement.

§ Mr. Laurence Robertson (Tewkesbury)
I support my hon. Friend's stance. Constituents who have come to see me said that they were clearly told that no tax would be payable on the settlement. It was clear in their minds.

§ Mr. Flight
As my hon. Friend says, that was the legal advice given to the 400 families at the time. My right hon. Friend the Member for Suffolk, Coastal has put clearly on the record his position both in regard to the intent of the Government at the time and the advice received by officials. With great respect to the hon. Member for Forest of Dean, the issue was not unclear. What happened was that subsequently, when everyone believed that the settlement was an ex-gratia payment that would not be taxable, some bright individual in the Revenue looked up that old commercial case and thought, "Ah, hah! We'd better levy some tax here." The thing has been sitting around disgracefully for eight years since then, because no Government can morally justify taxing the sum, thereby delaying, until a year ago, the date until which interest would run. For some extraordinary reason, no Government have chosen to grasp the nettle and resolve the matter.

§ Mr. Paice
Before my hon. Friend leaves the issue of what Governments said, it is important to realise that the statement by my right hon. Friend that no tax would be involved was not made only this morning. It was made five years ago when, although he was no longer the Minister of Agriculture, Fisheries and Food, he was still a senior member of the Government. The Minister is chasing for a Government statement; a senior Minister clearly said in 1995 that the events leading up to the settlement in 1992 were made on the basis that no tax was payable.

§ Mr. Flight
I thank my hon. Friend for that helpful addition. I cannot help but comment that it was 145WH therefore a great pity that the Government in 1995 did not follow what the then Minister had said. I am sure that the present Financial Secretary will wish to rectify that.

§ Mr. Timms
I want to put one further point to the hon. Gentleman. I agree with my hon. Friend the Member for Forest of Dean that at no time during the process did MAFF ask the Inland Revenue what the tax position would be. At the heart of the matter is the fact that the position was never resolved, which is why the Inland Revenue has subsequently had to take the decision that it has.

§ Mr. Flight
I thank the Minister for that comment, but I do not believe that that is a fair stance. There are all manner of situations whereby tax may or may not arise. If organisations go to the Inland Revenue for clarification, it frequently will not give a view. Clear advice was given in the Ministry on behalf of Government and much learned legal advice was given to the 400 families at the time. Although I am not questioning the good faith of the Revenue in subsequently erasing the tax claim that it raised, to suggest in retrospect that the Revenue should have been approached to give a ruling at the time of the settlement would be to put matters the wrong way round. The belief of all involved was that the payment was ex gratia and non-taxable. As I and my right hon. and learned Friend the Member for North-East Bedfordshire noted earlier, it was not legally necessary for the Revenue to apply that particular commercial case to the situation, which is different.
It is ridiculous for a Government—whether this Government or the previous one—to take such a Scrooge-like attitude to some of the most downtrodden members of our society. The matter is easily resolved, either by the Government persuading the Inland Revenue to take the approach that my right hon. and learned Friend has suggested or by their squaring the circle by making an exgratia payment of about £1.5 million to cover the burden if they feel—incorrectly—that there is an important point of tax law. They would probably save money by taking that approach as an alternative to allowing the matter to proceed, thereby incurring the various legal, social security and other expenditure involved.
The Minister knows that telling the people to go to the commissioners is no answer—they cannot afford the legal costs involved and they would not be entitled to legal aid. That five-year-old ducking tactic does not wash now. I hope that the Minister will justify his reputation and our proceedings by getting the silly issue resolved, as the Government have the power to do.

§ The Financial Secretary to the Treasury (Mr. Stephen Timms)
I pay tribute to the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) for his vigour in pursuing the matter and to all those who have so eloquently presented their constituents' cases in the debate. What we have heard has left me in no doubt about the anxiety experienced by constituents of several hon. Members.
146WH As we have heard, the Ministry of Agriculture, Fisheries and Food wound up the Land Settlement Association in 1983. There were 500 tenants at the time, 293 of whom joined in an action against the Ministry, which was on two counts—first, mismanagement and, secondly, distress and anxiety. The mismanagement issue regarded loss of profit and that is taxable. The distress and anxiety count concerns personal injury and so is not taxable. I make that important point because those two issues of profit and personal injury have been of concern from the beginning of the discussion of the case. The action led to out-of-court compensation from MAFF in 1991.
The nature of a compensation payment in an out-of-court settlement depends on the terms of the settlement read in the light of the pleadings. Establishing the precise details of the claims proved difficult in this case. The grounds for the 293 individual claims boiled down to just two grounds. The nature of the claims is now common ground. The loss of profits was quantified at £28.8 million. The personal injury claim was not quantified, but £6.5 million was offered and accepted in full settlement of all claims. In addition, debts of £677,000 owed to MAFF were forgiven.
To avoid for all parties the difficult task of analysing each of the 293 claims and apportioning the award for each individual between the taxable quantified elements and non-taxable unquantified elements, the Revenue offered a general compromise. In broad terms, it sought to tax 50 per cent. of the cash award and 40 per cent. of the debt forgone. It was for each individual to decide whether to accept that offer or pursue their claim in the normal way. About half the cases were settled on that basis. Negotiations continue on the remaining cases, principally because of a reluctance on the part of many individuals to accept that any tax is payable. When information was most recently collated a couple of years ago, 141 tenants had open appeals.

§ Sir Nicholas Lyell
The Minister is stating the Revenue's position that the apportionment depends on the settlement in light of the pleadings. Will he think carefully about the two cases of Wiseburgh v. Domville and Roberts v. W. S. Electronics, which I have mentioned repeatedly in correspondence? Both cases show that what is agreed must not be a sham but a genuine representation of what has happened. The cases do not mean that if someone makes an apportionment, it must be an arbitrary 50:50, and they certainly do not mean that we cannot take the general damages aspect first up to, say, £25,000.

§ Mr. Timms
It is true that the relevant tax case does not specify a 50:50 split of the cash award. The Revenue's offer was an attempt to produce a fair figure in the absence of specific information. Given that only limited information is available, the Revenue's general compromise to tax only half in recognition of distress in each case does not seem to be unreasonable. However, I understand the anxiety about that aspect of the offer.
The tax charge has been the subject of representations by taxpayers and several hon. Members over a number of years to the Revenue and Treasury Ministers to the effect that the situation of the Land Settlement Association is unique. The most recent approach to Ministers was an oral question last December in 147WH response to which my hon. Friend the Paymaster General explained that no change was made to tax legislation when the compensation was paid and that, therefore, the current tax law applied. My hon. Friend also pointed out that Ministers do not intervene in individual cases. If agreement cannot be reached between the Revenue and taxpayers about the meaning of tax law, the matter can be resolved by the appeal commissioners and the courts.
The most recent approach to the Revenue resulted in a meeting between the right hon. and learned Member for North-East Bedfordshire, the chairman of the Inland Revenue and officials on 4 April. It covered the Revenue's view of the relevant law. As well as the tax charge, the matter of interest chargeable on the unpaid tax was raised. The Revenue agreed to discuss that with the tenants to see whether a compromise on interest could be reached as part of a settlement of the open cases. It suggested that settlement of the open cases, including interest on unpaid tax, should be considered by the inspector who was dealing with them. The inspector wrote to the right hon. and learned Gentleman with an offer for the tenants to settle the outstanding appeals. It included charging interest only up to 5 April this year.

§ Sir Nicholas Lyell
The Minister is correct. The Revenue wanted to charge interest up to 5 April this year, notwithstanding the understanding that interest would be suspended while the difficult matters were discussed. I was shocked that it asked for interest to be paid up to 5 April when we had been going to and fro over such a grey area. Will the Minister reconsider that decision?

§ Mr. Timms
The point that I want to emphasise is that those are not matters for Ministers. I know that the right hon. and learned Gentleman finds that unhelpful, but that is the position. The chairman of the Inland Revenue wrote to him and said that the Revenue would see whether some compromise on interest could form part of the settlement of the open cases. He also suggested that the issue of the interest charged could be explored at a meeting between the inspector and the tenants to discuss the settlement of those cases.
The offer to explore all those issues with the inspectorate of taxes has not so far been taken up, although my advice would be that it certainly should be. Mr. Richard King is the inspector who is co-ordinating all the open cases, and he should be the next port of call for those who are dealing with the issue.

§ Mr. Flight
The Minister and the Government might choose to take the constitutional stance that he has described, but having heard what was the Government's intention at the time, is it not in the Minister's power to solve the problem by making an ex-gratia payment to cover the tax that must be paid?

§ Mr. Timms
I simply make the point that that is a matter of law. The responsibility of the Revenue is to interpret the law, and the law in that area is clear.

§ Sir Nicholas Lyell
The Minister says that the law is clear, but he knows that he cannot put his finger on any case that says that there must be a 50:50 split. What is 148WH more, the Minister has mentioned officials by name, which I have been extremely careful not to do. To push the tenants back to Mr. Richard King, who has been handling the matter for years, is simply to push them back to square one.

§ Mr. Timms
No, I suggest that that is the right place to take the discussion forward. A range of issues could be discussed with the inspector.

§ Mr. Paice
I am concerned about the proposition that we should go back to Mr. Richard King. My right hon. and learned Friend the Member for North-East Bedfordshire and I were present at a meeting with Mr. Richard King in one of the rooms off Westminster Hall three or four years ago, so we have been down that road. As a result of that, my right hon. and learned Friend had meetings with more senior Revenue officials, who suggested that the matter should be taken up with Ministers. Therefore, it is unreasonable for Ministers to say that we should now go back to square one and talk to Mr. Richard King.

§ Mr. Timms
It really is not for Ministers to take views on the tax arrangements of individual taxpayers. The hon. Member for Arundel and South Downs (Mr. Flight) raised the same issue. If it were for Ministers to do that, we would spend all our time in Westminster Hall debating the tax affairs of individuals. There is a procedure for pursuing such matters, which should be used to resolve this matter. The Inland Revenue must apply its interpretation of the law to the tenants of the Land Settlement Association, as it has been applied to other taxpayers who have received compensation for loss of profit. Indeed, many of the Land Settlement Association tenants have already settled their tax liability on the compensation received on that basis. The right hon. Member for Suffolk, Coastal (Mr. Gummer) made it clear that, when the payments were made in 1991, it was the intention of Ministers at the Ministry of Agriculture, Fisheries and Food that the payments should not be taxable. As my hon. Friend the Paymaster General made clear in a debate last December, no change was made to the law, so the current law must apply to this case.

§ Sir Nicholas Lyell
I had a succession of meetings with Mr. King and a very intelligent young lawyer called Mr. Deeps Jaggi, with whom I worked when I was a Minister. We agreed that, because the Revenue had never had to face such circumstances before, it would have to go to Ministers. The point was subsequently taken, however, that it should not go to Ministers, which is why I went to see the head of the Inland Revenue personally. These matters are not covered by settled tax law and I have received many letters suggesting that the issue should be pushed away to the special commissioners. The Revenue can clearly exercise discretion, rather than transfer the issue to the special commissioners and perhaps to the Court of Appeal, with which the tenants have no money to deal. None of that process is settled law, so does it not require proper intellectual consideration by Ministers with senior tax officials and the head of the Inland Revenue?

§ Mr. Timms
The right hon. and learned Gentleman said that this was a matter that needed to be settled by 149WH the Revenue and not by Ministers. I agree with that view. It is well established that compensation that is received for personal hardship is not liable to income tax, but that compensation for the loss of trading profit is taxable as trading income. The nature of compensation payments in out-of-court settlements depends on the terms of the settlement and on the pleadings.
I understand that the tenants received conflicting advice from professional advisers. Their counsel advised that no tax would be payable, but I understand that their accountants advised them correctly and said that tax would be payable—a point that has not so far been made. It was unfortunate that that mistaken advice was given, but that does not mean that the tax charge should be waived. Equally, problems with payment are not grounds for waiving a tax charge, as other taxpayers face difficulties in paying tax. As there are difficulties in analysing each of the many claims for compensation and apportioning the award for each individual between taxable and non-taxable elements, the Revenue has offered a general compromise to settling the tax charge. Some tenants have settled on that basis, but others have not done so.
Tenants and their Members of Parliament have made representations saying that the circumstances of the Land Settlement Association compensation are unique and that no tax should be payable. There has been disagreement about the Revenue's view that a relevant tax case means that all the elements of the claim—loss of profit and distress—must be taken into account when deciding on the nature of the out-court-settlement. It has also been suggested that the tenants should be able to choose the approach that is most advantageous to them. In this instance, that approach would be to claim that the payment was wholly for distress. I understand that the Revenue's view is that the judge in the tax case accepted that a head of claim could be dropped before settlement but not afterwards. That means that both heads of charge must be taken into account in the LSA case. Of course, tenants who want to pursue their argument through the appeal process are entitled to do so.

§ Sir Nicholas Lyell
To what case is the Minister referring? I have not been told that a case has established that one part of the claim has to be dropped. Surely he is speaking merely about the Revenue's interpretation.

§ Mr. Timms
I do not have the details of the case with me, but I can ensure that the right hon. and learned Gentleman receives them. I must emphasise that Treasury Ministers do not intervene personally in the Inland Revenue's application of tax law or in its handling of particular cases, although it has been suggested that we should do so. If hon. Members reflect on what such intervention would mean, they will be much less enthusiastic. Ministers do not influence the way in which local inspectors settle specific cases. The 150WH Inland Revenue is independent from Treasury Ministers in applying tax law. That independence in administering the tax system must be scrupulously observed.

§ Mr. Paice
rose—

§ Mr. Flight
rose—

§ Mr. Timms
I shall give way first to the hon. Member for South-East Cambridgeshire (Mr. Paice).

§ Mr. Paice
This is a fairly crucial point. I speak for myself, but I suspect also for others. I understand that Ministers should not interfere in the tax affairs of individual constituents, but we are not talking about individual cases. To describe these cases as individual is to pick on a weak point—almost, it seems, in order to divide and conquer.
I am not a lawyer, but I believe that it could be called a class judgment. The court has to look not at Mr. Smith's and Mr. Brown's tax affairs, but at the entirety of cases, especially as they arose as the result of government action. It should not be a matter of individual inspectors dealing with individual taxpayers, but of an overall ruling to resolve the affair for that class of former tenant.

§ Mr. Timms
It is a matter for the Revenue to resolve on the basis of the law as it stands. It is for the Revenue to decide how the matter should be concluded.

§ Mr. Flight
Is it not the case that if there is some doubt about the law—my right hon. and learned Friend the Member for North-East Bedfordshire has made it clear that that is the case in this instance—the Inland Revenue will often concur with the Government on the interpretation to be followed? Indeed, my right hon. and learned Friend said that when he spoke to the head of the Inland Revenue, he was advised that it was for the Government to make a decision.

§ Mr. Timms
No, the hon. Gentleman is not right. Such matters are determined by the Revenue on the basis of its understanding of the law. The Revenue does not ask Ministers for their views.

§ Mr. Menzies Campbell
I am grateful to the Financial Secretary; he has been generous in giving way. When are Members of the House of Commons entitled to seek redress on behalf of their constituents if not on occasions such as this? The hon. Gentleman should have no difficulty in persuading us that Ministers should not crawl over the tax affairs of individuals, but an issue of principle that goes beyond the affairs of individuals is surely the sort of issue upon which Ministers should take a view.

§ Mr. Timms
The Revenue has to work in line with established law and case law, as set out in statute or as determined by the courts. It is not for Ministers to seek to push the Inland Revenue in a particular direction. Individuals who have a problem with the tax system have recourse to the commissioners and the appeal system. That has always been the arrangement. That is how such matters should be resolved.
151WH The rules that the Revenue seeks to apply to the compensation received by the Land Settlement Association tenants are those that apply to other taxpayers who receive compensation. The tax system should be neutral. It should apply equally to all taxpayers. Disagreement about the meaning of tax law and its application to individual cases is a matter for the Revenue, not Ministers. The Revenue does not have policy discretion to ignore the application of tax law in certain circumstances.
As for concerns about the difficulties of paying a tax bill, tax collectors have some leeway to allow payment over a period if a taxpayer's personal circumstances justify it. I also understand the concerns about interest accruing on unpaid tax. As I said, the Revenue has agreed to consider that with the tenants to see whether some compromise can be reached as part of a settlement for the open cases. Again, I suggest that the tenants explore that with the Revenue.
I hope that agreement can be reached. I accept the strength of feeling expressed this morning, and I know that that reflects the concerns of the constituents of right hon. and hon. Members. However, if the Revenue's compromise offer or its view of the law continues to be disputed, the matter should go to the independent appeal commissioners and to the courts, to determine how the law should be applied.