—(Surtax Rates for 1965–66.)
I beg to move Amendment No. 166, in page 19, line 38, to leave out “£2,000” and to insert “£3,000” .
The Amendment is designed to provide an opportunity for discussing the question of Surtax on unearned income. The last time the subject was seriously discussed at any length was in June, 1961. We then had a long discussion on a series of seven or eight Amendments, but they were very limited in nature and were more or less specifically designed to cover the older ages in the population, people between 60 and 65.
I feel compelled to say, because I must be absolutely honest in the matter, that I thought that the then Conservative Government were, to say the least, extremely mean in refusing to accept those very limited Amendments. It is not too much to say that I was, frankly, rather ashamed of them. I say that to be fair to the Committee, as I usually am in these matters. I was very much on the wrong side of the debate on that occasion.
I say at once that for all too long there has been too large a difference, whatever argument there may be about what the difference should be, between the tax treatment of earned income and [column 126]so-called unearned income. My right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) inevitably made that very regrettable difference—unwarranted to my mind—infinitely worse and more marked by the substantial changes in 1961, which were very welcome and helped our economy very much at the earned Surtax levels. At this juncture I would most strongly protest at the continued use of the term “unearned” . If I use that term at the moment it is only because it has become so used that I feel that I must do so for the sake of clarity. There has been erroneous thinking over the years which no Government, including, I am afraid, Conservative Governments, have done anything much to alter. Very strong appeals were made in the course of the debates in 1961 to which I referred. Speaker after speaker then pressed for a change from the term “unearned” to “saving in investment income” or some other term as a sounder, better and more accurate one.
It was not only in 1961 that we had such debates. I have taken part in such debates year after year. I remember this matter being pressed year after year by Mr. Geoffrey Stevens, when he was the hon. Member for Portsmouth, Langstone, in the course of his specially well-informed speeches, which some of us who took part in those debates miss in our discussions today.
These savings of one generation or another have in very many cases been built up over the years by persons denying themselves for the future of themselves or their families, and I suggest that it is monstrous that such people should be penalised by this very marked difference which is enshrined in our tax laws. On Second Reading I touched briefly on this subject and mentioned that the distinction does not arise in the United States tax laws. They see no distinction or need to make one. On that same occasion, I said that we would not have real progress in healthy investment so long as we penalised that sort of incentive. If people feel that they will not be penalised if they save, that is a first-class incentive to savings.
In the 1961 debates we put the case for circumstances whereby investments arising from savings could be encouraged to fructify to the benefit of all. Where [column 127]would big business be today had it not been for the past opportunities of private individuals, in partnership or alone, to save money and plough it back into their firms, which have been amalgamated and have grown into such great organisations?
I remind the Committee that Surtax—it was called Supertax in those days—began in 1910 at the level of £3,000. It was and intended to be an imposition upon the rich. No one could deny that it had this effect in that it dealt with incomes of above £3,000. But circumstances have changed and in that context £2,000 today does not mean riches. There is a very different aspect altogether. I do not know the relative values offhand as between now and 1910, but certainly such a figure today is less than one-fifth of the value it held in those days. This fact makes the Amendment relatively modest. Indeed, it is so modest that I feel almost ashamed, but I want to keep a sense of proportion, as I did on the last Amendment.
Another aspect is, inevitably, the Labour reaction. Hon. Members opposite are grotesquely bad economists. I do not know why, for they have many trained economists in their ranks. But the more economists they recruit the worse they are. This particularly applies when they import them from abroad. Yet the Labour Party remains more or less aware of the importance of savings and of personal investment. It cannot be overstressed that savings and investment are the cornerstone of the economy and of the real standard of living of the people.
It is the small businesses which have prospered through this system and which have grown and developed under healthy and sound conditions, improving the standard of living of those working in them as well as the owners. But hon. Members opposite are inevitably in a dilemma. Yet it is of their own choice. They believe that a high level of savings contributes not only to the dignity of man but is also an answer to inflation. Despite this, they also believe in high taxation. They consider high taxation to be a weapon for levelling down. That is all their taxation does. It does not give people an incentive to level themselves up. It can only do that when it [column 128]is reduced. High taxation is the creed of hon. Members opposite and that creed is written into every page of the Bill.
I wish that hon. Members opposite were logical in their belief about the consequences of their guilt but actions speak louder than words. We are returned to this Committee to do justice to people in all walks of life. Of course, we have to take first one section and then another. Some sections deserve our attention before it is given to others. That is what happened under the Conservatives time and time again, and this was right and proper. I humbly suggest and plead for a sense of justice for those who have retired and who have built up an income from their own labours for the future or who are able to have an income from others who saved for the future.
As I have pointed out, many of these incomes were buildt up by people who have now retired. Through the appalling inflation of modern times, their savings have lost very much purchasing power. As Mr. Stevens said, there is a clear case in equity and on social grounds for savings. If the case was so clear in 1961, it is infinitely clearer and more urgent today.
Then there is the question of the inheritance of wealth in itself. What is wrong in anyone trying to build up, through savings, an income for the future benefit of their families? It is a sound, social, wise and prudent way of life. There is nothing harmful in it. Estate Duty is there to take account of the social aspects of inherited money. But it should not be penalised as it is under the existing Surtax rules for this class of income.
My first plea is to get away from the erroneous expression “unearned income” . Many people whose position I have attempted to describe do not understand the expression. If we can only get away from that erroneous phrase we shall at least be starting along the road to a greater sense of justice for a large number of people who have, I regret to say, been by-passed by all Governments, year after year.
I have already expressed my own sense of responsibility for what can or cannot be done in each financial year. No doubt [column 129]this is not a year in which the Government could accept this Amendment. I am conscious that, even if they accepted my case as a good one, they could not carry it out this year when, practically speaking, no further alleviation of taxation is to take place. Thus, I cannot press the Amendment but I am grateful to the Chair for calling it so that some voice can be raised for those who have been left out far too much.
I move the Amendment in the hope that in the not too distant future the present Government will beat the future Conservative Government to it and bring some measure of justice to this aspect of taxation. It would be too much to expect that they should restore the lost value altogether but they should certainly carry out some amelioration of the injustice that these people have suffered.
Mr. Harold Lever
I hope that it is not too much of a disappointment to the hon. Member for Shipley (Mr. Hirst) if the response of at any rate one hon. Member on this side of the Committee is not in accordance with the caricature which is constantly being painted by hon. Members opposite of the views of the Labour Party as being a high-taxing party and so on. I wish that hon. Members opposite would not constantly caricature the views of the Labour Party in this way. Some of my newer colleagues might take their Socialist instruction from hon. Members opposite and come to believe that it was truly party orthodoxy which was being preached by hon. Members opposite and vote accordingly, and that would be very distressing for me. I know that it was said in the last debate that I was not in the main stream of thought of my party on this question. I am not sure that that view is well justified. Certainly in the matter of disliking unnecessary taxation I think that the hearty majority of members of my party are as passionately keen to keep tax down as anyone else.
I think that the hon. Gentleman underestimated my party in supposing that it was hostile to unearned income in the sense that he described it. I think that my hon. Friends recognise, as we must all recognise, that unearned income is very often simply earned income congealed, at any rate earned income which [column 130]has congealed with time, and we respect it in the proper hands in all circumstances according to the way it gets there. But the fact that we recognise that it was once earned income does not mean that we are not entitled reasonably to make a differentiation between earned and unearned income. It is a differentiation which has been made by Conservative Governments who, we are assured by hon. Members opposite, have a passion for low taxation and equity and all the good things in fiscal life. Surely the hon. Gentleman will appreciate that we can make a distinction for tax purposes between the two kinds of income without despising the one, even though we think that there are occasions when it must bear a higher burden than perhaps earned income has to bear when all circumstances are taken into account.
For this purpose I cannot help relying on something said by the right hon. Member for Enfield, West (Mr. Iain Macleod) on the last Amendment when I wanted to make a brief intervention. I am somewhat mollified, not having been able to make that intervention, by the great integrity—one might almost say the accustomed integrity—which led the right hon. Gentleman to the conclusion which I would have reached and which was that one could not vote in favour of the last Amendment.
In arguing that the high taxation of income had a seriously damaging effect on incentives—and this applies to Surtax as much as to Income Tax—the right hon. Gentleman said that leading American industrialists had told him—and I am sure that this is absolutely right—that when the Americans reduced taxation the incentive of doing so had an electrifying effect on the American economy. Of course it had an electrifying effect on the American economy, but that was not because of the incentive of paying less Income Tax, but because of the electrifying effect of the injection of so much new purchasing power into an under-employed economy. To attempt a similar electrifying effect in the present situation of the nation would be entirely unsatisfactory. The right hon. Gentleman would then have been in receipt of a confidence which would have told him of the electrocuting effect of a reduction of taxation.[column 131]
Mr. Douglas Dodds-Parker (Cheltenham)
Is the hon. Gentleman saying that the Government should slow down the economy by increasing taxation so that there should be no pressure on the economy at all?
When there is a lack of demand and serious unemployment, as there was in America at the time to which the right hon. Gentleman was referring, a serious under-employment of resources, manpower and machinery, that is one thing, but anybody who believes that that is the case in our economy at the moment should have voted in favour of the last Amendment and in favour of significant reductions in taxation all round in order to stimulate the economy. But there can be very few hon. Members on either side of the Committee who have that view of the economy when the facts are so clearly in the opposite direction.
Hon. Members opposite often confuse incentive and fair play. What matters is that a man's reaction to the taxation which is imposed upon him is not that he will not work because he has to pay 10s. or 12s. in the £. What can affect his desire to work is his sense of being unjustly used, unfairly treated, singled out for spitefulness, or unfairly chosen for a particular rate of tax. A sense of oppression has a serious disincentive effect.
In different circumstances, there might be a very reasonable case for having another look at the Surtax arrangements. It was very fairly recognised by the hon. Member for Shipley that no such possibilities exists at present, but I should like to go on record as saying that the Government ought to have generally in mind that, by the erosion of currency and the higher rates of tax imposed on the lower levels of Surtax incomes, the original allowances are devalued and the rate of tax automatically raised without any statutory increase.
We say that we are imposing the same rate of tax, but we are imposing not the same but a slightly higher rate, by reason of the erosion of the value of currency and the higher rate at which the lower un-Surtaxed slice of the income has been taxed. The Government should have that continually in mind. Everyone must recognise that the Government must look [column 132]at all the circumstances, but we should bear in mind that we are now operating Surtax on incomes which in pre-war buying power start at about £500 or £600 a year and I do not recall even the most enthusiastic Surtaxers of my younger days in the Labour Party urging that we should be keen to tax Surtax income at those levels.
It is easy for those of us who are marching towards fogeydom and who are the middle-aged Members of the House of Commons who think in terms of prewar buying power and pre-war standards of income, but we must not lose sight of the fact that incomes are different and that standards are different and that the level at which we now enforce Surtax and that level at which it begins to bite are probably out of date and should be reviewed as soon as the country's economic circumstances permit.
Sir J. Eden
I am sure that the Committee is grateful to my hon. Friend the Member for Shipley (Mr. Hirst) for moving the Amendment, particularly since it gave rise to the most interesting contribution of the hon. Member for Manchester, Cheetham (Mr. Harold Lever). I very much hope that the Financial Secretary will be able to show considerable sympathy for the points of view which have been expressed, even though they were advanced with extreme and almost unusual modesty and calmness. None the less, they raised issues of considerable importance.
A number of representations have been made to me about the differentiation in treatment between earned and unearned income for these purposes. If we could go some way towards indicating hope that shortly there would be a change of attitude and a change of approach, that would go a long way towards relieving some of the present distress.
Many people feel that they are being unfairly singled out for special treatment which they do not deserve. Surely we all desire to encourage people to earn more so that they may put it away in greater savings. That is the background to much of our discussion of personal taxation matters. How can we encourage savings on the one hand and yet ultimately penalise those who successfully invest their savings? Surely what we want most to achieve is greater savings [column 133]in order to lead to greater investment. Without investment we cannot possibly get the industrial expansion which we must have to try to rescue the economy.
Personally, I am a very keen supporter of any move to try to expand share ownership among people at all levels and in all income groups. I hope that we shall give every conceivable encouragement to the Wider Share Ownership and kindred movements. This is extremely important. I have spoken elsewhere advocating far greater dissemination of information by companies through their annual reports to shareholders and prospective shareholders of all kinds. This is part of the general subject which we are considering tonight of not discouraging those who save to invest, because that is an essential part of the capitalist system which all of us defend.
I, therefore, hope that, in replying to this debate, the Financial Secretary, on behalf of the Government, will give a lead to encouraging a change of attitude and the simple point put forward by my hon. Friend that we should stop talking about unearned income as though it was anti-social and to be avoided and despised. What the hon. and learned Gentleman can do in his speech by emphasising the importance which he attaches to this form of income through these savings and these investments would go a long way to easing the minds of people who are suffering under a sense of being most unfairly treated.
The whole Committee, I am sure, wants people to produce more, to earn more, to own more and to save more. Before we can achieve these desirable objectives, we must tax less.
The Financial Secretary to the Treasury (Mr. Niall MacDermot)
In moving the Amendment on which we have had this short and amicable debate, the hon. Member for Shipley (Mr. Hirst) adduced mainly general economic arguments, some of which were dealt with at length in the preceding debate. I do not want to follow the hon. Member in seeking to reply to what my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) called the caricature of the attitude of the Government and our party towards taxation, nor do I propose to try to respond by replying to what I [column 134]regard as the equal caricature which has been presented of the attitude of the party opposite to taxation. The fact is that any Government is wrestling and grappling with the problem of how to raise the funds which are required for the level of public expenditure that we all vote and to do so with the lowest possible levels of taxation. These depend on the growth rate and the amount of savings that we achieve.
The hon. Member for Shipley supported, by his hon. Friend the Member for Bournemouth, West (Sir J. Eden), urged that we should as soon as may be abolish the distinction which at present exists with Surtax as between investment income—I am quite content to call it that—and earned income. The hon. Member for Bournemouth, West in particular urged this as a necessary incentive towards saving. Speaking purely personally, I am not convinced by this argument.
I entirely agree about the need for us to be more successful in inducing people to save, but I should have thought that the levels at which there is that greatest need is not among the Surtax-payers so much as among the ordinary Income Tax-payers and the ordinary wage-earners, many of them earning substantial wages. It is at those levels, where in the aggregate so much of the country's income is earned, that we would like to see the level of saving much higher. For my part, therefore, I feel that there is a good and sound principle underlying the distinction which was introduced by the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) in the Surtax treatment of investment income compared with earned income.
If I may turn briefly to the Amendment and point out its implications, the proposal is to raise the starting point for Surtax from £2,000 to £3,000. I take it that the hon. Member for Shipley intends that the starting points for each slice would equally be raised by £1,000.
I instanced the tax in the United States of America, but the hon. and learned Gentleman has got me wrong or has misunderstood me. I was not being unreasonable in saying that the whole distinction should go like that, because that would be a major matter. I argued, and I was supported by the hon. [column 135]Member for Manchester, Cheetham (Mr. Harold Lever), that there is an injustice for the position having been left completely behind and that the difference between the two is too marked and unfair. I had it in mind that the Government might do something to close the gap a little. There is a distinct injustice that is has remained the same for the last 20 or 30 years.
The distinction has not been the same for 20 or 30 years. Surely, the present levels of the distinction between the two were fixed by the right hon. and learned Member for Wirral in one of his Budgets.
I remind the Committee that in recent years there have been two reforms which have improved the Surtax starting point over a wide field. Since 1957, the amount by which the total of the personal allowances due to an individual exceeds the single person's allowance has been deductible in computing his total income for Surtax. In addition, the special Surtax reliefs in respect of earned income have been allowable since 1961–that is, the earned income relief deduction and the special Surtax earnings allowance. The effect of all these is to raise the Surtax starting point for a single man for earned income to £5,001, and for married men and others entitled to more than the basic single person's allowance the starting points are somewhat higher.
If the hon. Member's proposal were accepted, the starting point for Surtax would be raised to £3,000 with those allowances left unchanged. The result would be that not only earned income, but investment income, would to a substantial extent be free of Surtax. A single person could have earnings up to £6,126, with a higher figure for a man with dependants, or earnings of £5,000 and an investment income of £1,000 and still not be liable to Surtax. The cost of these changes would be substantial. In the first year in which they would operate, which would be 1966–67, the cost would be £43 million and in a full year it would be £62 million.
The hon. and learned Gentleman knows only too well the difficulties and limitations of putting down Amendments on the Committee stage of the Finance Bill. I recognise that my [column 136]Amendment would go right across the board. The hon. and learned Gentleman could tell from the whole tone of my speech, however, that I was inviting the Government to say how they could help the investment income as I call it, in a strict compartment of its own, without affecting the earned income, which is fairly satisfactorily guarded. For drafting reasons, I could not do all this in my Amendment.
I appreciate the point made by the hon. Member and the way in which he moved his Amendment. I am not trying to take any false debating points, but it is only right that I should explain the implications of the Amendment.
I conclude by saying, as, I think, the hon. Member tacitly acknowledged when moving his Amendment, that this is clearly a year in which my right hon. Friend the Chancellor of the Exchequer has found it necessary to raise a substantial additional sum in taxation. Obviously, therefore, it is not a year in which it would be realistic to propose a raising of the starting point in Surtax rates.
The hon. Member has made his point. I have given my immediate personal reactions to the main point which he has argued. What the hon. Member has said will, of course, be borne carefully in mind if we reconsider this tax in a future year.
Mrs. Margaret Thatcher (Finchley)
I would like to say a word in support of the Amendment moved by my hon. Friend the Member for Shipley (Mr. Hirst) and to thank Niall MacDermotthe Financial Secretary for giving a fairly detailed reply. My support is in the spirit in which my hon. Friend moved his Amendment and the spirit in which the hon. Member for Manchester, Cheetham (Mr. Harold Lever) made his contribution.
Equity does not stop at an investment income of £2,000 per annum. Sooner or later we must pay attention to raising this limit. I understand that this year is not the year to do it, but we hope that one year, possibly before the next General Election, James Callaghanthe Chancellor will find that he has enough spare to do what my hon. Friend the Member for Shipley is asking.
I am grateful to the hon. and learned Gentleman for what he has [column 137]said, though he has not said all that I had hoped. I would him to have added a little indication of what the cost would have been in the clear spirit of my speech; that is, were the Government able to think up the necessary drafting to ensure that this alleviation would only be borne by the unearned or investment income people. I hope he will give some thought to that aspect.
I would never have dreamed of puting down the Amendment had I been of the opinion that I could press for a reduction of £44 million. The great bulk of that is going to those who already benefit by the 1961 arrangements. I wanted to benefit those people who were left out of the 1961 arrangements. I hope that I have made that point, and perhaps he will give some thought to that aspect. If a study can be made and if I can be informed of the sorts of sums that have been worked out, I shall be grateful.
However, in view of what he has said I beg leave to withdraw the Amendment.
Amendment, by leave, withdrawn.
Clause ordered to stand part of the Bill.
—(Exclusion from relief of interest on Post Office investment deposits.)
Question proposed, That the Clause stand part of the Bill.
Mr. Harold Lever
I am in a rather ambiguous position, having promised to cover my hon. and learned Friend, as his Parliamentary Private Secretary. However I find that I am the only voice to speak on the Clause.
I hope that my hon. and learned friend will tell us why he thinks it necessary to exclude the investment deposits, as defined in Section 1 (2) of the Post Office Savings Bank Act, 1966. I have not looked at the point with the care which those of my absent hon. Friends who tabled the Amendment have. My recollection is that the Clause excludes the savings account deposits in a savings bank and not the ordinary accounts. If that is so, I should like to know why that distinction has to be made.
I shall now sit down and await eagerly a word or two from my hon. and learned Friends.[column 138]
Before Niall Macdermotthe Financial Secretary replies, perhaps I may be allowed to say a word about the Clause.
It is now ten years since the first £15 of interest on Post Office savings was exempted from Income Tax, and I believe that that exemption extends both to a husband's and a wife's account in the Post Office. Jointly, it is quite an advantageous exemption from tax. As I understand it, the exemption cannot extend to the new accounts which are due to start on 20th June because it would be difficult to do it in respect of that one kind of saving only and not extend it to savings which are similar in nature and to such things as the trustee savings bank.
The same point applies about the ordinary Post Office savings exemption under this Clause as applied under the last Clause. It is ten years since the rate was fixed. Sooner or later, it will have to be raised. There will have to be a thorough review of all the effects of taxation measures on the level of savings in general and on specific savings.
It would have been nice if the Post Office exemption could have extended to the new accounts. That would have been a start in the right direction and would have convinced us that James Callaghanthe Chancellor is really out for savings. At the moment, it looks as if he preaches more savings and less tax, but practises more tax and less savings.
I understand the reason for the Clause, but I hope that, sooner or later, the £15 limit will be raised and extended to other forms of savings.
May I say, first, that it was made clear during the debates on the Post Office Savings Bank Bill that the distinction which my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) complains of would be drawn and that the tax exemption would not apply to the new type of investment deposit.
The new type of investment deposit is, as it were, the equivalent of the special investment department of the trustee savings bank. The exemption of the first £15 of interest on deposits with the ordinary Post Office Savings Bank account is one which applies also to ordinary deposits in the trustee savings bank. But [column 139]it does not apply to the special investment department.
There is a reason for the £15 exemption. It is often quoted by people who seek exemption from some particular form of savings or another. But it is in a unique position. To start with, the ordinary account at the Post Office Savings Bank is a form of investment which provides, in effect, an elementary form of banking facilities without charge. The deposits can be withdrawn on demand at any time, and, in consequence, the rate of interest, naturally, is a very low one of 2½ per cent. As there is only that low rate of 2½ per cent., since 1956 there has been this relief from Income Tax, but not from Surtax, on the first £15 of interest on ordinary accounts in the Post Office Savings Bank and the trustee savings bank.
That is intended to encourage small savers to lend to those institutions, which lend the money deposited with them direct to the Government and pay only a low rate of interest. It would be quite illogical to extend that to these accounts which are offering a very much more attractive rate of interest. The rate of interest on investment accounts in the Post Office Savings Bank will be 5½ per cent.
If the proposal were accepted to make an equivalent exemption for these accounts, for a person who was paying Income Tax at the standard rate the effect would be to pay a gross rate of interest of 9⅓ per cent. on the first £250 of Post Office Savings Bank investment deposits. That is taking into account the minimum holding which he would be required to have in his ordinary account before he was entitled to have an investment deposit account. The 9⅓ per cent. would compare with and be considerably higher than the effective return of 7¾ per cent. on the latest issue of National Savings Certificates which, I am glad to say, is proving a very successful and attractive savings medium. I do not think that anyone would expect that we should try immediately to better that to the tune of a 9⅓ per cent. return on the special investment deposits. As I say, there is a more particular argument for the ordinary accounts.
The hon. Lady the Member for Finchley (Mrs. Thatcher) raised a [column 140]separate point, taking the occasion of the debate to invite the Government to look at the £15 figure as it applies to the ordinary accounts and see whether, with the passage of time—and, no doubt she would say, the decline in the value of money—that figure could not be raised. We have received representations to that effect. It is not something which my right hon. Friend is in a position to do at the moment, but we shall take those representations into account.
Mr. Harold Lever
I rise to record briefly my total dissatisfaction with the logic of the Treasury. I do not shrink in horror at the notion that someone who has £250 in a special account with the Post Office should have 5 per cent. tax free on his money, even after the computation made by my hon. and learned Friend that that would amount, at 5 per cent. net, to an approximate 9 per cent. gross.
I would point out to him that, to the more skilled and sophisticated investor, there is no difficulty in getting 5 per cent. free of Income Tax by way of income, very often on short-dated Government bonds. This raises a very important point, and I hope that my hon. and learned Friend will not brush this off, because it is of some importance.
The Government are wrong in thinking that the man who invests at 2½ per cent. gets a bad rate of interest and is entitled to some consideration. When the rate of 2½ per cent. was fixed it was a fair rate. Over the years it became a totally inadequate rate, which amounted to little more than taking advantage of ignorant people who did not know much about banking and bank accounts, and were only capable of using the Post Office Savings Account. It is much to the discredit of all Governments, Conservative and Labour, that they did not trouble to put this matter right, but were content to get large sums of money from the least sophisticated section, and very often that means the poorest section, of the community at a totally unwarrantable low rate of interest.
Now, when the Government, somewhat belatedly, are putting this right by offering, not a spectacular reward for the small saver, but a modest reward, still below the general rate of interest, at 5 per cent., still barely adequate, it seems that they [column 141]are showing a false meticulousness of logic to exclude them from this paltry concession on Income Tax, and I am not satisfied that the Government are wise in doing so.
I hope that none of my hon. Friends, nor hon. Gentlemen opposite will be misguided enough to read this as an attack on the Government. What I am attacking is the characteristic Revenue view that all these concessions have to be wrung from them by force majeure, and when they are wrung from them, and we finally get this pitifully small contribution to equity on the small saver's account with the Post Office, we get a ridiculous exercise in logical acrobatics to deprive the small taxpayer of this modest tax-free rebate.
I hope that my hon. and learned Friend will look at this again. Because there is no Amendment in my name, my hon. and learned Friend cannot quote what the total cost of the concession would be. I know that it would be trifling, but psychologically it would be reassuring to many of us if the Treasury were to overrule the pedantry which has led to this restriction.
I find myself in almost complete agreement with the hon. Member for Manchester, Cheetham (Mr. Harold Lever). I do not always agree with the hon. Gentleman, but on this occasion I feel that the Treasury is not fully aware, or does not seem to be aware, of the change which has taken place in the investment climate in recent years, and which I think will show itself increasingly in the future.
As the hon. Gentleman said, the Post Office has received investment not only from the less sophisticated of the investing public, but has received it because such investors in the past have had very little temptation or very little experience of looking elsewhere. If that day has not gone already, I think that it will soon depart, and unless the Treasury and the Post Office are more realistic in their assessment of what will be needed to sustain investment in the Post Office Savings Account, they will find that the traditional investing public will be a declining asset.
Question put and agreed to.
Clause ordered to stand part of the Bill. [column 142]
—(Personal Reliefs for non-residents.)
Question proposed, That the Clause stand part of the Bill.
I find this a complicated Clause, and I hope that Niall Macdermotthe Financial Secretary will read one of those expositions after which all becomes clear.
This Clause, entitled “Personal reliefs for non-residents” , is tied up with certain other Clauses in the Income Tax Act, and if the hon. and learned Gentleman would listen to me for a moment he might tutor me and tell me whether I have the meaning of the Clause right.
As I understand it, certain non-residents are entitled to personal reliefs on that part of their income which arises in the United Kingdom. The reliefs to which they are entitled are in the same proportion that the United Kingdom income bears to their total income, but there are certain difficulties in calculating the United Kingdom income and total income particularly where there is a double taxation agreement in force, and where that double taxation agreement provides for a low withholding tax on dividends.
If I have it right, the recipient of the dividends cannot have both allowances and a low rate of withholding tax on the same portion of income. That is to say, the United Kingdom income will be calculated without reference to the dividends which go out, and therefore his personal allowances will follow the proportion which the United Kingdom income bears to the total income but the dividends will be disregarded for calculating the personal reliefs.
I hope that that is more or less right. If it is, I think that we can perhaps let the Clause go through fairly quickly.
The hon. Lady is right, and so I am spared having to read a much lengthier and far less lucid exposition of the Clause.
As I understand it—and I am putting it in my own words, and not in the learned words with which I have been supplied—the effect of the Clause is to separate the income which is subject to the limited rate under the double taxation agreement from the rest of the income. For the rest of the income the [column 143]overall rate of tax on the United Kingdom income is to be what it would have been in the absence of relief provided by the double taxation agreement, and for the rest of it, that which is subject to the double taxation agreement—and this is the only point that I really want to make—the taxpayer will have an election either to have the rate of taxation on those dividends which is provided for by the double taxation agreement, or the overall rate, whichever is the smaller, so there is an election on that point.
Question put and agreed to.
Clause ordered to stand part of the Bill.
—(India, Pakistan and Burma pensions.)
Question proposed, That the Clause stand part of the Bill.
Mr. Peter Hordern (Horsham)
There are three points that I should like to raise on the Clause. The object of the Clause appears to be to bring the 1965 pension increases into line with those paid in 1959 and 1962, both of which were liable to Income Tax. It has been put to me that it was only after representations had been made to the Treasury that two specific classes of pensioners were included in the 1962 pension increases. The two classes to which I refer are the widows of men dealt with by the Indian Civil Service family pension funds and the superior services pension funds. I appreciate that it may be difficult for the Financial Secretary to give me an answer to this point immediately, but we on this side would like to press for an assurance that those two classes will not be left out.
The second point is that the India, Pakistan and Burma Act of 1955 has never been properly implemented. It will be recalled that the object of the Act originally was to exempt from Income Tax all those from the United Kingdom, India, Burma and Pakistan who live abroad and outside those territories. In fact in only one of those countries—India—has a suitable agreement been reached with the United Kingdom, although negotiations have been going [column 144]on between the Treasury and the Governments of Pakistan and Burma for nearly 20 years.
It was on 1st April, 1948, that Sir Stafford Cripps gave an assurance that an arrangement was being made with Pakistan. I recall that my hon. Friend the Member for Cheltenham (Mr. Dodds-Parker) said that it would be in a matter of weeks that a similar arrangement would be made with Pakistan.
The second point, therefore, is whether the Financial Secretary can give some indication as to whether progress has been made with the Governments of Pakistan and Burma, because pensioners from the Indian Civil Service who live abroad and outside those territories are better treated than the pensioners of Pakistan and Burma.
The third point arises from a request of mine to the Financial Secretary for information about the effect of the recent Indian devaluation. He was kind enough to give me an assurance that it would have no effect at all on pensions granted by this Act. He went on to say, however—I trust that he will take the opportunity to reply to this point—that similar pensions awarded since 31st March, 1955, other than those contingent payments are paid by the Indian High Commission in London. Some are sterling pensions and some are rupee pensions. No reason was known why the sterling pensions should be affected by the devaluation, but the Financial Secretary said that he was not yet in a position to say whether the Indian Government would be prepared to make any special arrangement to protect the rupee pensioners.
On this side of the Committee, although we know that it is difficult to give a precise answer, we think that we ought to have a general assurance that, whatever happens to the rupee pensioner paid by the Indian High Commissioner in this country, those pensioners will receive precisely the same rates as are paid in sterling by that same Indian High Commission.
These are the three points which we should like to put to the Government and it may be that some of them are a little difficult to answer now. We should, however, be happy if the hon. and learned Gentleman could provide the answers on Report.[column 145]
The hon. Gentleman's questions are highly technical and without notice I cannot answer them. We have no further information to give with regard to the Indian pensions payable in rupees. I have nothing to add, in other words, to the letter which I sent him on these points. On the other two points, I will write to the hon. Member, and if he feels that there is anything in the reply to which it would be valuable to give greater publicity, we can no doubt find a way of raising the matter.
Question put and agreed to.
Clause ordered to stand part of the Bill.
—(Surtax on income under certain settlements: exceptions to s. 415(1) of Act of 1952. 1965 c. 25. 1952 c. 10.)
Question proposed, That the Clause stand part of the Bill.
Niall MacDermotThe Financial Secretary will remember that we had an extensive debate on partnership covenants last year and had a number of tries at getting the Clause right. We did not succeed and some of my hon. Friends warned J. Diamondthe Chief Secretary that his Clause then was drawn too narrowly and would prevent the payments under certain partnership covenants from having relief for Surtax purposes. This Clause has been brought in in substitution for the provisions which applied last year. As a drafting point, I would say that we are grateful that this Clause substitutes for last year's and does not merely amend the one last year by reference. It makes it a good deal easier to consider it and will no doubt make it easier for those who later have to consult the Act.
As this is our second try at this problem, it is important that we should get it right. I recognise that a majority of the Clause gives wider relief than was given last year. What we have to consider is whether that relief is sufficiently wide even now. A number of cases have been raised with me and I think that it will be easier to illustrate the point if I describe them to the right hon. Gentleman.
One solicitor has put to me the case of two separate covenants, the first concerning a partner who retired well over 12 years ago and my correspondent dealt [column 146]with the inadequate provision under that partnership agreement for a pension.
That agreement gave the retired partner only a right to certain partnership profits for two years after the end of the partnership. Two years passed and the majority of his income had gone. He had no further right by virtue of the partnership agreement. But I am sure that the Chief Secretary will agree that one cannot stand only upon legal obligations in these matters. People in this position are entitled to expect that the partners will honour their moral obligations, and naturally the partners drew up a covenant to benefit that other retired partner. Because the Clause last year was not retrospective, that covenant has continued to enjoy Surtax relief.
It is now due for renewal, and I suspect that, as the Clause stands, payment made under a covenant drawn up now would not be a payment
“under a liability incurred for full consideration.”
I suspect that that would fail because of the absence of consideration.
Mr. Harold Lever
There would be no consideration given by the partner, who retired ten years ago, to the present partnership for the covenant.
I am asking that where a covenant has been in existence and has been allowed and comes up for renewal, there should be provision in the Clause to provide that payments made under that covenant shall be allowed for Surtax purposes. In most cases where people retire in modern times adequate provision is made in the partnership agreement for some sort of income for the retired partner. This was not so many years ago, and people in this position will find themselves without an income or with a very much reduced income if this Clause goes through and such covenants are not allowed for Surtax purposes. Alternatively, the partners would still grant an income to the retired partner but it would cost them a great deal more, and possibly with their own obligations they could not give the same amount.
The second point concerns the widow of another retired partner, and this covenant, too, is coming up for renewal. There was never a legal obligation in [column 147]this case on the partners to provide for the widow. In fact, they did it out of a sense of moral obligation. She has been enjoying the benefit for a number of years. The covenant is due for renewal. I refer hon. Members to subsection (1) and to the phrase that covenants will be allowed only if
“payments made under a liability incurred for full consideration” .
A number of legal commentators have got at this Clause and have pointed out that the phrase
“liability incurred for full consideration”
is nowhere defined. For example, if a partnership covenants with a retired partner that that partnership will make payments to the widow of the retired partner, is that a liability? The widow of the retired partner could not enforce it against the partnership. What is “full consideration” ? Even if the covenant were made directly with the widow, it seems to me that there would be no consideration—not merely not full consideration but no consideration at all.
We are very much concerned that this type of provision should continue to be allowed for Surtax purposes. If this point has not so far been raised with the Chief Secretary, I hope that he will think about it and, if the Clause is defective, will undertake to bring forward Amendments on Report.
I understand that a number of dependants commute their right to the income in return for a capital sum by assigning their right under a covenant to a financial institution. As the Clause is drawn, if the dependant does this it may deprive the payer of Surtax relief even though he could not prevent the recipient from commuting his interest under the covenant. It would seem wrong that the payer should himself be deprived of a relief because of something over which he had no control.
I hope that the Chief Secretary will consider these matters because it is important that this year we should get the provision right. We should try to make it as wide as possible to help those who do not stand on legal obligations but who are honouring their moral obligations as well.
The Chief Secretary to the Treasury (Mr. John Diamond)
I have listened [column 148]carefully to what the hon. Lady the Member for Finchley (Mrs. Thatcher) said and there is no need for me to explain the Clause because she and, I am sure, the rest of the Committee, fully understand it in its complete and utter simplicity. It is, as the hon. Lady rightly said, a relieving Clause to a provision which was brought in last year and which was, perhaps, too narrowly defined. The Clause was introduced last year to meet representations made at that time.
The representations made on that occasion came from a number of professional bodies and were to the effect that annual payments made by individuals, paid under bona fide business arrangements not as a matter of pure bounty, should not count; in other words, should still attract relief for Surtax purposes. The essential condition was that they should arise from business arrangements and not as a matter of pure bounty.
The two examples given by the hon. Member for Finchley would clearly fall in the latter category. It would not be for me, as a non-lawyer, to go too closely into the law on this matter, particularly in view of the hon. Lady's great knowledge of these affairs. However, the distinction is, to a layman, clear. As she pointed out, they were examples of what she called “moral obligations” . We all know what a moral obligation is. It is something which one is not compelled to do but which one does out of one's good nature, sense of responsibility, good citizenship and the rest of it. However, it does not count as a transfer of income and is not allowable for Surtax purposes. It was not intended that it should be. Thus, the answer to the hon. Lady's first two questions is that she is right in assuming that they would not attract relief for Surtax purposes.
In answer to her third point it would be easy to say “No, I do not think that they should count either” . I can say that they would not. Although the hon. Lady was not asking that question, she did ask me to consider the matter and to see if we might extend the Clause to take that into account. I would not like to offer sympathetic consideration, although I am prepared to offer consideration. I do not want it to be understood from my words that the Government are under an obligation of any kind whatever [column 149]to introduce an Amendment on Report. Thus, I will look at it further, but I do not want it to be thought that I am undertaking on behalf of the Government to bring in an Amendment.
The Chief Secretary is sparse in his sympathy tonight, so sparse that I was not sure to which section of my representations he was allocating it.
To the third and last point which the hon. Lady raised, namely whether Surtax relief should continue to be given if the pensioner commutes his pension as opposed to disallowing it for an action not by the covenantor but by the covenantee.
I am sorry that the right hon. Gentleman did not have sympathy for the other covenants as well, because it is important that we should try to include them in the Clause. The right hon. Gentleman said that representations had been made to the effect that covenants should be allowed where they were made for bona fide business reasons. That is different from a liability being incurred for “full consideration” . I should have thought that “bona fide business reasons” allowed far more covenants to get by than would appear from the phrase the right hon. Gentleman chose. One could probably successfully argue that where there were solicitors in partnership in a comparatively small town it would redound very badly against the business if it were known that the existing partners did not look after former partners and the widows of former partners. Certainly a company which did not look after its former employees would not expect to have the good will of the surrounding locality and it would of course be allowed, albeit under a different Schedule and a different computation.
If the Chief Secretary is very unsympathetic we shall obviously have to return to the matter on Report. I am especially concerned, and ask him again, about covenants coming up this year for [column 150]renewal. I can get a little sympathy on that narrow point? We have a special obligation there because people are now damnified by the Treasury whereas last year they were perfectly all right. I hope that the right hon. Gentleman will have second thoughts. I can assure him that my second thoughts on this subject will be exactly the same as my first. It would save him time on Report if he had second thoughts now.
Question put and agreed to.
Clause ordered to stand part of the Bill.
—(Dividend increases etc. in 1965–66: exclusion of surtax relief under s. 238 of Act of 1952.)
I beg to move Amendment No. 194, in page 22, line 37, at the end to insert:
(2) If on an application made by any individual for the purpose, before 6th April 1967 in respect of the year 1965–66, the applicant proves to the satisfaction of the General Commissioners——
(a) that as respects any assets, in consequence of the operation of the provisions of this Act which require that any income which is chargeable with income tax by way of deduction shall be deemed to be the income of the year in which it is receivable, the income from those assets as estimated for the purpose of income tax for that year represents more than the income which would be attributable to a period of one full year if the income were deemed to have accrued from day to day; and
(b) that in consequence, his income is above the limits within which he could otherwise have obtained relief under one or more of the following provisions:——
(i) section 21 1(2) or (3) of the Income Tax Act 1952 (which refers to earned income and old age reliefs) as amended,
(ii) section 13 of the Finance Act 1957 (which refers to relief for persons over 65 with small incomes) as amended,
the General Commissioners shall adjust his liability to income tax for that year and the following year so as to give such relief as may be just having regard to all the circumstances and in particular to the amount of any liability which would have arisen if(iii) section 15(2) of the Finance Act 1952 (which refers to relief for small incomes) as amended,
(i) the income from such assets were deemed to have accrued from day to day and to have been apportioned accordingly and
(ii) the income so deemed to have been apportioned had been treated as part of his total income for the purposes of income tax.
When I spoke on Second Reading I referred to the possibility that we would put down an Amendment in these terms. The Amendment is designed to relieve those who but for extra dividends would have had relief under Section 211 of the Income Tax Act, which gives relief on unearned investment income where a taxpayer or his wife is over 65, or under Section 15(2) of the Finance Act, 1952, which gives similar relief for small incomes of under £450, or Section 13 of the 1957 Act, which gives age exemption relief for those of 65 and over when the income is £390 for a single person or £625 for a married couple. It is quite clear that if these people received a rather larger number of dividends before the turn of the year than was normal, the relief to which they would otherwise be entitled would be nullified by the extra dividends.
J. DiamondThe Chief Secretary is aware that, apart from this year, apparently if a similar situation arose for a Surtax payer he would apply to have a kind of averaging made under Section 238 of the 1952 Act. Under that Section the effect would be that his income would be averaged over the two years. The Commissioners could give such relief to the Surtax payer as they deemed just. We are asking for a similar averaging over last year and this year to apply to those who otherwise would have got special relief either because they are old or their incomes are very small.
Perhaps this could be pleaded best in the terms of someone who otherwise would lose relief unless an Amendment of this kind is made. There was a letter in the Financial Times on 9th May, 1966. I hope that the fact it was written to the Financial Times will not damnify the writer in the eyes of the Chief Secretary. I am sure that he is a devoted reader of the Financial Times, albeit that that is not a newspaper to which those who are pleading poverty normally write.
Mr. Harold Lever
The editor of the Financial Times can hardly stand in need of the warning which the hon. Lady is giving to my right hon. Friend.[column 152]
I hope the fact that the letter was written to the Financial Times and not to the Daily Mirror will support the case I am making. The paragraph, after giving an example, was as follows:
“The retired person entitled to age relief on an income of £900 fares worse. Not only is his age relief nullified for 1965–66, but his income for 1966–67 will be reduced to about £540, and his repayment claim for 1966–67 will also be drastically reduced.
I hope Mr. Callaghan will see some very good reason to avoid penalising the old folk of receiving the unsolicited extra dividends of 1965–66.”
The Chief Secretary can probably see what the effect of the Amendment would be. Without the Amendment, a person who went just over the limits for age relief would be denied relief this year. With the Amendment, he may get relief this year and also get relief next year. I hope that the right hon. Gentleman will be prepared to be as generous as possible to those who, through no fault of their own, may be put in a rather bad position as a result of the limits imposed by these Clauses.
I am invited to consider the bad position—so the hon. Lady says—of certain individuals who have received a greater income than they had expected to receive because they have had a greater distribution of dividends from certain companies in which they are shareholders. I do not know that we can necessarily call this a bad position. I am perfectly prepared to look sympathetically at any position, but first we should get our adjectives right.
All that is happening here is that the hon. Lady proposes that a new arrangement should apply for one particular year, in relation to three income limits, which has never applied before and which she does not propose should ever apply again. She proposes that it should apply just for this one particular year, although it has never been the case that in arriving at these reliefs one has done other than take account of the total income.
The total income can vary for a whole host of reasons. One takes account of the total income. The total dividend income can vary for a whole host of reasons. It can vary in the next year and in the year after that. It has never been the practice under Tory Governments or under this Government to take [column 153]account of variations in income when dealing with the calculation of these reliefs.
Therefore, I am afraid that, for the good reasons I have already indicated, I cannot recommend to the Committee that we should depart from what has been the established practice. I do not know whether the hon. Lady wants me to deal with the Clause as a whole. Perhaps I can deal with it on the Question “That the Clause stand part of the Bill” . On the proposal she makes, there is no reason to treat the matter as involving any special hardship. All that is happening is that people with small incomes have incomes which are slightly less small than they expected them to be and they are in no worse position but in a rather better position than they had expected to be in. All that is proposed in the Clause is that the law as it has always applied over the years should continue to apply.
The Chief Secretary seems a little perturbed that the Amendment extends only to dividends declared this last year. If it will make the right hon. Gentleman any happier, I will extend the Amendment indefinitely. If that would lead him to grant my request, I should be only too happy to do so. I thought that the chances of getting the Amendment accepted would be greater if I confined it to the special circumstances of last year.
The right hon. Gentleman knows that this last year has been a special year. Indeed, he spent a long time last year laying down precise circumstances in which dividends should be allowed. I hope that he will not deny that this immediate past year has been a special year. It is true that some of these people may have a higher gross income, but because they were on the margins of relief and because relief is therefore withdrawn they might have a lower net income. So there is the ridiculous position that they have more dividends but if they are just above the marginal relief limit they might have a lower net income. Taking the two-year period, that may well be so. They could in fact over the two-year period have a lower net income taking one year with another. [column 154]
I therefore hope that the Chief Secretary will consider their position sympathetically. There are special circumstances this year. A number of his professional colleagues have pointed out that no relief is to be given to those who hitherto have been on the margins for age relief. I hope that the Chief Secretary will further consider the Amendment.
Mr. Harold Lever
I should like to intervene in the hope of persuading the hon. Lady the Member for Finchley (Mrs. Thatcher) that she is wrong.
The Clause says that certain reliefs normally available to Surtax payers for averaging income shall be taken away this year because their dividend income was inflated to the advantage of the companies in which they are shareholders by very substantial concessions which were given by the Chancellor. Whether or not the Chancellor is right, whether because they got these advantages they should not have the advantage of the Surtax averaging normally available, we shall consider in a moment. He may be wrong. There may be no case for withdrawing the privilege from the Surtax payer, but there is certainly no case for giving an advantage to the particular sections of taxpayer whom the hon. Lady has in mind.
The income that is given this year is partly to their advantage, but in every year they are denied the averaging provisions of the Surtax arrangements. In this particular year the reliefs which are granted, and granted only because their income is below a certain level, cannot apply simply because their income has gone above the level to which those reliefs apply. The fact that they did so by reason of the advantageous dividend encouraged by reliefs given by the Chancellor last year is surely no reason for giving them special treatment this year.
I hope the hon. Lady will abandon the Amendment and turn to the more substantial point, which is whether the Chancellor is justified in withdrawing a relief from the Surtax payer, which is an interesting point, but it cannot be a case for giving special relief dependent upon a person's income in respect of dividends which are very much to his advantage in this year. [column 155]Question put, That those words be there inserted:— [column 156]
The Committee divided: Ayes 125, Noes, 225.
Question proposed, That the Clause stand part of the Bill.
We now come to the question of Surtax. Many small points arise on this, and I want to refer to one before coming to the main principle that lies behind the Clause. It acknowledges that ordinary preference dividends are outside its scope, but it makes no reference to participating preference dividends. A tricky logical position therefore arises. Although preference dividends are outside the scope of the Clause, participating preference dividends upon which no more than the basic amount of dividend has been paid are caught.
This will obviously be seriously to the disadvantage of many people, among whom are those who have had participating preference shares for many years but have had no dividends from them or several years, when suddenly the company concerned found itself in a position to pay the arrears of dividends and paid the full arrears of the basic amount of [column 158]dividend last year. The whole amount is then caught by the Clause.
J. DiamondThe Chief Secretary recognises that ordinary preference dividends are outside the scope of the Clause, and I submit that participating preference dividends should be caught to the extent, and no more than to the extent, that the basic rate of dividend has been paid. Had the Amendment covering this point been selected I would have hoped that it would have been accepted, which would have made for a happy atmosphere for the rest of our debate on the Clause and, possibly, on the whole Bill.
I turn now to the main features of the Clause itself. As the right hon. Gentleman knows, it is tied up with Section 83 of the Finance Act, 1965, which was the anti-forestalling provision to prevent companies from avoiding Schedule F by declaring more than a standard amount of dividend. For that purpose, the standard and the excess were minutely defined, and on 15 occasions the Treasury itself sought to amend its provisions. [column 159]The ordinary taxpayer, therefore, assumed that, in the end, the Section was right and that the consequences of declaring dividends would be in accordance with the law which Parliament so carefully laid down.
The dividends to which the Clause applies were either within the limits laid down by Section 83 of the Finance Act so that there could be no possible justification for penalising the shareholder because Parliament said that those limits were all right, or, alternatively, if they were not within the limits, they became excess dividends and were deemed to be declared on the first day of the financial year this year and in consequence they have suffered, or will suffer, Schedule F tax. Thus, James Callaghanthe Chancellor has got his pound of flesh if they were excess dividends. The position is, therefore, this: either the dividends were all right according to the law laid down by Parliament last year, or they were excess dividends, in which case they have been subject to the extra slice of tax under Schedule F.
When Section 83 was going through Parliament, at no time that I can remember or can trace did the Chancellor, who is never short of warnings, threaten to suspend Section 238. Now we find that non-Surtax paying shareholders will benefit from these dividends. Examples are pension funds, trade union funds and the like. If someone draws a pension from a former employment, that is all right. If, on the other hand, he is self-employed, has to accumulate his own assets, and now has an annual income only twice as high as the average industrial earnings in manufacturing industry, he is made to suffer. It is only the Surtax payers who are being made to suffer through the increased dividends covered by this Clause. It seems that the Chancellor is using the fiscal system in this case against a certain class of taxpayer regardless of whether that taxpayer had any influence over the declaration of the dividend and regardless of whether that dividend was either the standard or the excess under Section 83.
One of the principal objectionable features of the Clause is that it is retrospective in action though not in form. This is the first occasion on this Finance Bill when we have to discuss retrospection although it will come up several [column 160]times because there are several retrospective Clauses in it.
As J. Diamondthe Chief Secretary knows, there are certain fundamental rules in our system of taxation. One is that there should be no taxation unless the liability is clearly imposed by Statute. This tenet was honoured for many years, but, as taxes became higher and the system more complicated, people within the scope of a tax managed to put themselves outside its strict legislative provisions. In the following year's Finance Bill, therefore, those people were brought within the scope by a new strictly defined provision, but always the new provision to close the loophole was strictly defined and usually it was not retrospective in effect. Usually, it did not need to be retrospective because, as we have Finance Bills every year, most of the cards are stacked high in the hands of the Treasury.
Sometimes, the new provision did not succeed in closing the loophole completely. Once again an Amendment had to be made in the succeeding year. But then a new feature came. An attempt was made at what I shall call legislation by warning—the warning that if the new provision did not close the loophole, retrospective provision would be made. But even in those cases—and I dislike legislation by warning intensely—a clear warning was always given, and that warning related to precise circumstances.
From my viewpoint, I should have preferred no retrospection even following a warning. It would have been far better if the House of Commons had arranged it so that if money was escaping through a certain tax loophole, we could have had either a small Finance Bill or some other way of getting at that escape straight away without having to wait for another Finance Bill. Then there would have been no need whatever for retrospection.
However, all these fundamental rules, such as the rule about strict liability or strict warning, have been part of our system of taxation, and upon them respect for fiscal law has been founded. It is because we have been so careful to adhere to these principles that, on the whole, our taxpayer has respect for the law, a respect which is not always present in countries on the Continent. People have paid their taxes with comparatively [column 161]few grumbles believing that they were levied absolutely honestly and also believing that their liabilities could be calculated at any given moment.
Now we have a completely new factor in retrospective legislation in this Clause. The best thing I can do is to quote from the British Tax Review of April, 1966 which says on page 74:
“The suspension is clearly retrospective legislation, and means visiting the sins, if they can be so described, of companies on their Surtax-paying members. Hitherto, retrospective legislation has been reserved for cases where some adequate warning has been given; it is new for it to be imposed on actions which Parliament clearly authorised one year previously.”
I use the words of someone still practising at law rather than my own, because I no longer practise, hoping that the Chief Secretary will take them very seriously, indeed.
There are no other words which the hon. Lady could use which are half as persuasive as her own.
I hope, then, that the Chief Secretary will be more forthcoming in his sympathy on this Clause than he was on certain past Amendments.
That was a very serious accusation, and it arises from very serious action taken by James Callaghanthe Chancellor. I repeat that last sentence:
“it is new for it to be imposed on actions which Parliament clearly authorised one year previously.”
If the Clause goes through, it will mean that no one can rely ever again on what we say this year, for it may well be disavowed retrospectively next year. This would introduce into our taxation system a completely new and bad element.
Mr. Harold Lever
Before the hon. Lady enlarges on that point, would she assist me to understand why she says that the Clause penalises only a certain class of dividends authorised by Parliament? Does it not have the same effect on all dividends, whatever their origin?
Yes. I am sorry. If I said that, I misled the hon. Gentleman. I believe that I said that it penalises only those in receipt of dividends who are Surtax payers.
The hon. Lady said that it penalised dividends which were [column 162]specifically authorised by the previous Finance Bill. I cannot read anything in the Clause which justifies that assertion.
It penalises dividends more than those authorised in the last Finance Bill. The reasons which James Callaghanthe Chancellor gave in his Budget speech, as I understood it, were directed particularly to dividends which had arisen through Section 83 of the last Finance Act. Last month, referring to this provision in relation to Corporation Tax, the Chancellor said:
“Many companies paid extra dividends last year for tax reasons, and I see no reason to give the recipients Surtax relief as well.” —[Official Report, 3rd May, 1966; Vol 727, c. 1434.]
The Chancellor had previously related this proposal as one which arose out of Corporation Tax. It was, therefore, reasonable to assume that it was the extra dividends declared under Section 83 of the Finance Act, 1965, which gave rise to putting this Clause into the Bill. However, in so far as that is correct, then my argument is clearly also correct—that dividends clearly authorised one year previously in a section on which companies were entitled to rely are now being taxed to an extra extent in the hands of Surtax payer through this Clause. Many companies would have taken the law as it was at the time—which hitherto has been a reasonable thing to do—and so, if they were declaring extra dividends, then some of their shareholders would be entitled to rely on Section 238 of the Income Tax Act, 1952.
One goes on to another particular point. This Clause will go far wider than the dividends declared under Section 83 of the Finance Act, 1965. It will catch dividends which were declared before the beginning of the year or agreed to before the beginning of last year but happened to be paid last year and had nothing to do with tax avoidance or were not declared for tax reasons at all. In so far as that goes, it seems to me that there is no case for these dividends being caught by the Clause. They should never be within it.
Furthermore, in so far as dividends are given a clearance for tax purposes under Section 83(11) of the Finance Act, 1965, they clearly were not declared for tax reasons and should not be caught by the Clause. The Clause is retrospective [column 163]and very widely drawn because it catches dividends which were never declared for tax reasons and may have been declared even before the beginning of the year. In this way, the Government are destroying an excellent tax system which enables the Chancellor of the Exchequer to collect, as my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) said earlier, some £10,000 million a year without a good deal of trouble to taxpayers—and destroying that system for the sake of £3 million and a good deal of personal prejudice.
The Clause should not be in the Bill. We should vote it out, first, because it is retrospective and, secondly, because it goes far wider than the dividends which were declared in order to reduce the tax liability of the particular company. I hope that J. Diamondthe Chief Secretary will give this serious consideration.
We give most careful consideration to what the Opposition, and the hon. Lady on their behalf, say. The hon. Lady asked detailed points about fixed preference dividends, then challenged the justification of the Clause as a whole on merit and, finally, was most anxious about retrospective effect.
First, I will deal with the dividends which are caught and which are not caught. As she rightly said, one is concerned here with ordinary dividends and dividends of that same category—that is to say, participating preference dividends. What are not caught are dividends which are not of that category—fixed preference dividends and, by the same logic, interest on debentures.
The participating preference dividend, the hon. Lady goes on to argue, is a combination of a first slice of fixed dividend plus an additional slice of participating dividend. I cannot accept the hon. Lady's desired slicing, because the Statute itself, Section 238 of the Income Tax Act, 1952, refers to “the income” from those assets and not to part of the income from those assets. One has to take the whole of the income arising from a particular asset and there is therefore no question of attempting to divide the income from this asset in the notional sense of a fixed slice plus a participating slice.
The hon. Lady talked about Surtax payers being “made to suffer” . Let [column 164]us see the extent to that which they are being made to suffer. It is true that what the Clause proposes to do is to withdraw for one year the spreading relief of the dividends received in 1965–66. I repeat that what one is withdrawing is only the spreading relief in respect of the income from ordinary and participating preference dividends. One is dealing with 1965–66, because after that year companies are required to pay Schedule F Income Tax in respect of dividends being declared. So, for any dividend which might have been paid after the date but which in fact perfectly legally was paid before the date, the company is saved 8s. 3d. in the £.
A company is owned by its shareholders jointly and the shareholders jointly therefore enjoy the benefit in the form of 8s. 3d. in the £ for every £'s worth of dividend which was declared in the year 1965–66 as opposed to the following year. In those cases where as a result of the additional dividend the marginal rate of Surtax goes up by 6d. or 1s.—and it may go up by 6d. and it may go up by 1s. and it is almost inconceivable that it could go up by more than that and the probability is that in the majority of cases it will be 6d. and in a number of cases it will be 1s.—in respect of action taken by the shareholders' company to save the company and its shareholders 8s. 3d. in the £, it is hardly correctly describing that to say that the Surtax payers are being “made to suffer” , the hon. Lady's term.
The shareholders of this company are benefiting to the extent of 8s. 3d. in the £ and the Chancellor sees no good reason why in addition they should get Surtax relief which, by the process which has been previously described, would reduce the top marginal rate of the figure which it will now be to a figure 6d. or 1s. in the £ less. They will still be left with a benefit, split between themselves and their company, of either 7s. 3d. or 7s. 9d. in the £ benefit as against the Exchequer—perfectly properly and nobody is complaining; we are not dealing with the aspect of whether the dividends declared were in excess of the provisions of the Act. We are assuming that the dividends declared were within the provisions of the Act, but, nevertheless, we are saying—not out of pique or anything else, but as a matter of equitable tax treatment [column 165]and, incidentally, as a matter of avoiding excessive administrative difficulties from a whole host of tiny claims arising—that there is no need both to agree to the benefits of 8s. 3d. in the £ and also to agree to the spreading of the benefit of perhaps another 6d. or another 1s.
The Chancellor proposes to deal with the matter in this way for this one year, which is the only relevant year under consideration. I hope that the Committee will agree that this is reasonable and fair and not in any sense dictated by pique or any of the adjectives which have been used.
Mr. Stratton Mills (Belfast, North)
Surely the basic flaw in the argument is that the benefit, if such it be, is owed to the company and all its shareholders, while this discriminatory provision applies only to certain shareholders who are in this range of tax.
I repeat, the company gets the benefit of 8s. 3d. in the £ for every £1 worth of dividend declared. The company is getting that benefit and every shareholder who shares in the reserves of the company is sharing in that benefit in a corporate sense.
The only question is whether certain shareholders should, in addition, get the benefit of the spread. The Chancellor does not see why they should have it both ways. The extra dividend was declared by the company in the interests of the shareholders. They got their dividend, they have had the additional money, they have benefited. If they had all been asked to a shareholders' meeting and it was put to them whether they would rather have a larger dividend or a smaller dividend, one can conjecture that the answer would be that they would prefer the larger dividend. There is therefore, no question of anybody being prejudiced or damaged. The 6d. or the 1s., as the case may be, is something that the Chancellor does not think that they should get in addition.
Perhaps I may now deal with the argument about retrospection. I hope that it may be forgiven for reverting to the last Clause for the sake only of illustrating the argument of what is and what is not retrospective legislation. As the hon. Lady the Member for Finchley [column 166](Mrs. Thatcher) was good enough to point out, we have just repealed a Section in the Finance Act, 1965, and replaced it with another Section. Because we have repealed a Section of the 1965 Act in a relieving sense, we have—the Committee has just passed it—decided that the benefit should have retrospective effect to April, 1965. The benefit is a Surtax benefit in connection with covenanted payments. Within the last quarter of an hour, therefore, we have decided, as was appropriate, that there should be a Surtax benefit going back to 1965–66. Nobody commented on it. No person in the Committee, not even the hon. Lady, thought that this was being unjustly or excessively fair.
The right hon. Gentleman is putting an extremely facile and false argument. To say that because we confer a benefit retrospectively we are justified in conferring a retrospective liability is nonsense. I think the less of the right hon. Gentleman for putting that to me from his exalted position at the Dispatch Box.
Perhaps the hon. Lady will be good enough to listen to the argument which I was about to propose. [Interruption.] If the hon. Lady does not want to listen, she is not compelled to do so, but perhaps she will do me the justice of listening to the argument before criticising it. Once again, she has put into my mouth words that I was not proposing to use. Last time, it was words which I had not used. Now, perhaps, we can get down to what I was going on to say.
I was drawing the attention of the Committee to the fact that we had altered a Surtax provision back to 1965–66. The reason for this is that 1965–66 Surtax is payable on 1st January, 1967. The relevant consideration is when the tax is payable. I am not making any kind of argument of the sort of which the hon. Lady thought I was making.
We are looking forward—we are not looking back—to 1st January, 1967, when certain Surtax is payable. We have agreed to this within the last 20 minutes.
Mr. Harold Lever
By his words “looking forward” , my right hon. Friend is probably exaggerating in describing the feeling of those who are to pay.[column 167]
My hon. Friend will forgive me: I was looking forward from the point of view of a Treasury Minister. Perhaps I ought instead to say “having in mind a future date” when the payment would become due. That is exactly what is happening in this case under the Clause. We are affecting the 1965–66 Surtax which becomes payable on 1st January, 1967. The Budget is the normal opportunity for fixing the Surtax rate for the year, and that has always been the case. Until this year's Budget, no Surtax payer could have anticipated with any reliable degree of accuracy what his or her Surtax liability would be on 1st January, 1967. We are in exactly the same position. There is no argument of retrospection to answer.
Mr. Harold Lever
I venture to add a word to what my right hon. Friend has said. On the retrospection point, despite any learned comments to the contrary and despite the fact that I have ceased to practise at the Bar, I must say that I agree with my right hon. Friend. When the hon. Member for Finchley (Mrs. Thatcher) reflects on it, she will agree that the point which she thought he was making, which was, as she rightly believed, a bad point, he was not making at all; otherwise he would have stood corrected.
There are other points of some importance which are worth discussing, apart from retrospection. It is asking a little too much of the Treasury, in the heat of battle of the kinds of debates that we had last year, to have foreseen in miscroscopic detail all the possible consequences of Amendments favourable to the taxpayer. Though I suppose it would be a counsel of perfection that the Clause might have been incorporated in last year's Finance Bill, in my opinion it is dangerous folly to incite the taxpayer with the belief that he is the victim of retrospection. I venture to say, too, that we depend on a degree of co-operation from the taxpayer, and it is wrong that there should be put out from the Committee false notions of the reasons for our legislation.
The idea that this arose from the Chancellor's personal prejudice is completely misconceived. It was not the Opposition who forced upon him an Amendment which he was unable to [column 168]resist. It was his own sense of fair play and justice to shareholders that made him make the concession in the first instance which has caused these dividends to be free of Income Tax.
I want to say a word about the language which has been used when we have talked about penalising the people who have received the dividends. First of all, although the hon. Lady might think that I am being pedantic, she was wrong in the language which she used in saying that a particular dividend was penalised.
It is no use praying in aid what the Chancellor said. Whatever their origin or motivation, all dividends are treated alike by the Clause. Whether they were paid by the concession given in the last Finance Bill or in the ordinary course of events, all dividends get exactly the same treatment. Whatever else is said, the dividends are not penalised. They are all treated alike.
The hon. Lady is probably quite right that the motivation for the change in the law may be because of the concession made in the last Finance Bill, but that is different from saying that the dividends resulting from it are being penalised. They are not.
Is the Chancellor justified in being motivated by the concession contained in the last Finance Bill to withdraw the Surtax relief? After careful consideration, I am convinced that he is. To show my reason, I will point out the bad argument that was made from the Opposition benches either by the hon. Lady or by the right hon. Member for Enfield, West (Mr. Iain Macleod) at some stage of the Finance Bill.
The relief was contained in Section 238, which is being repealed. That is a Section which gives to the taxpayer the right to go before Special Commissioners and have such relief as they think just. It is a relief which depends upon the examination of the individual circumstances of the taxpayer. It is not a blanket relief.
Either the right hon. Member for Enfield, West or the hon. Lady used the argument that this was the reason for not withdrawing this relief, but, as I hope to persuade the Committee, I hope not unfairly, this is the reason why the relief has to be withdrawn, because it is a [column 169]relief which depends on the individual examination of each case.
In former days the number of cases which had to be individually examined was relatively few and could be reasonably coped with by the tax machine, but, as a result of the substantial concession made in last year's Finance Bill, the number of cases could probably be multiplied literally by 100 or 200 compared with the number of cases which occur in normal times.
Mr. Stratton Mills
This is a very interesting argument, but if the hon. Gentleman examines the Chancellor's speech he will find that this was not the argument used by the right hon. Gentleman who has invoked a form of penalty approach to get at the companies which forestalled the Budget.
It is unfair when the Chancellor is on his feet in a general debate on the Finance Bill to take one passing reference to this matter as comprehending all the arguments which could be used to justify the action that he has taken. Secondly, even if those words were what the Chancellor wanted to say in his defence, and even if that was the only reason why he brought it in, which I do not believe because the amount it would cost the Revenue to make the concession is a trifle, but even if I were persuaded that that was the reason, I would say that he has done the right thing, even if for the wrong reason.
Where relief depends on the individual examination of each case where it is to be granted by the Commissioners, I think that it would be unreasonable to perpetuate it in circumstances wholly different from those when the relief was given. It would cast a burden on the tax machine which would be intolerable at the present time.
I am rarely to be heard singing the praises of the Inland Revenue in the Committee.
My right hon. Friend says “never” . I would not have that belief widely held, especially if it were to reach the ears of my Income Tax inspector. The Revenue in this country in its operation of our tax laws is meticulously fair and stands favourable comparison with [column 170]any Revenue machine in the world. I often think—I know that this is heresy at the moment—that the talents, ability and integrity which the officials display, and the responsibility which they undertake, make them the most underpaid section of the community. I hope that this will not reach too many inspectors outside.
I think that at this point to throw on a machine which by common knowledge is heavily overloaded with work the impossible task of assessing the innumerable cases which would fall to be discussed in this year would be wrong. This is not to say that next year, or the year after, when we get back to a normal number of such cases, these could not be adequately dealt with by the Revenue machine. I know that it sounds well on a soapbox to say let justice be done even if it brings the Revenue machine to a standstill. No man is entitled to strict and meticulous accuracy in his examination of the tax obligation where it would involve a hopelessly disproportionate amount of administrative time. I know that this is not an attractive argument to use, but it is a realistic one, and I beg hon. Gentlemen opposite not to go about propagating the notion that the Clause is being introduced out of some kind of spite, lack of sympathy, or a desire to penalise. That just is not so.
The truth of the matter is that the Clause is forced on the Chancellor. He is obliged to bring it in, and he is right in saying that in seeing and assessing its effect on the people who have been the beneficiaries of the considerable relief outlined by my right hon. Friend, the fair and reasonable justice of the matter is, for this year at any rate, to withdraw a relief which would be so disproportionately expensive to continue.
The hon. Member for Manchester, Cheetham (Mr. Harold Lever) has put the case in a very frank way. He said that the reason for this is that the machine is likely to be so clogged that something must be done to prevent it breaking down, and that something must be at the expense of what is, after all, an acquired right.
I hope that the hon. and learned Gentleman is not seriously attributing that argument to me. What I suggested was that the very nature of [column 171]the relief was such that it could be given only in a year in which the number of applicants for that relief was relatively limited. This is a totaly different argument.
I am prepared to accept that description of the motive, which seems to me identical to the one which I was giving. At any rate, I concede the words which the hon. Member has used and on that basis I think that we ought to consider whether that is a proper justification.
The hon. Member was less than his usual convincing self when he supported his right hon. Friend in saying that this is not retrospective. In reality, of course, it is. In the sense that the events which could give rise to liability are past and cannot now be altered by a taxpayer wishing to rearrange his business, it is true, of course, that the actual tax does not become payable until a future date, but that is not in the least interesting. The only interesting question when one is assessing whether or not this is retrospective is whether, when all the effects giving rise to the liability have already taken place, are past and are unalterable, the law is subsequently changed, so that those who have control of the facts are no longer in a position to alter them, although they might otherwise have done so.
Of course, in substance, it is retrospective, though in form it is not——
Mr. Harold Lever
Is not the hon. and learned Gentleman aware that this is a common place of taxation? Where Income Tax rates are fixed for a fiscal year, they apply in that year, and even if the liability is computed by reference to unalterable past events such as the previous year's profits, that does not make the slightest difference. No one suggests that that is retrospective, because the year in question was the year governed by the Income Tax rate, even though irreversible facts are taken into account in computing that liability.
The rate is retrospective but the incidence of the liability is not made retrospective where a certain profit is chargeable to tax or where a certain escape clause is allowed [column 172]to apply. The hon. Member does not treat the Committee with his usual seriousness when he tries to pretend that this is not an alteration of acquired rights, retrospectively and subsequently. If it is not that, I do not know why he needs to go into all the justification which he did. If it is not retrospective, there is no need to do what he did—very well—which was to explain why, in this year, it is necessary to do what the Chancellor would otherwise be most loth to do.
I think that the hon. Member gives away the point. Otherwise, he protests too much. I think that he is right. I believe that the reason why this is done is not out of spite but simply because the right that the Surtax payer has to apply for this relief would clog a machine which is already on the point of collapse. It does not seem to me that this is a good reason why we should support a state of affairs so lamentable as that. I hope that my hon. Friend will advise us to divide.
Mr. John Biffen (Oswestry)
I was intrigued by the arguments of the hon. Member for Manchester, Cheetham (Mr. Harold Lever), and I am very reluctant to enter into this controversy under his penetrating and perceptive eye, but if his concern is for the administrative convenience—I agree that that is a not inconsiderable point—I hope that at some future stage in our proceedings we may hear his views on the virtue of continuing the Capital Gains Tax with its consequent complications in the administration of our tax system.
One thing which has emerged from the debate is the anxiety, particularly as exemplified by the hon. Member for Cheetham, to assure us that what we all thought the Chancellor meant when he referred in his Budget to the fact that Surtax payers should not be the beneficiaries of companies having taken certain action following last year's Finance Bill, was not what he meant at all. In other words, those few sentences of the Budget speech, which not only my hon. Friends but a great many commentators outside have seen as the author of this Clause, were misconceived.
The least we should have from the Government Front Bench is some explanation of what the Chancellor did mean when he made those remarks. Speaking very much as a layman, it [column 173]looked to me as though last year's Finance Bill contained certain prosions which led to permissible forestalling which resulted in certain dividend payments, and these gave rise to this Clause. It is wholly unfair that the beneficiaries of those company decisions should suffer, most of all as a great deal of the philosophy behind the Corporation Tax provision was that of dividing the company from its shareholders for tax treatment. It may be said that the figure is only £3 million, but it could equally be said that £3 million will fall very heavily indeed on a limited number of people. The hon. Member for Cheetham says that this could lead to a large number of claims. That may be so, but it is relative to what would ordinarily be the number of claims, and my final request is for some idea from the Government of the number of people who will be affected.
Mr. Stratton Mills
The Treasury Bench has not succeeded in convincing the Committee that the Clause should be accepted. The hon. Member for Manchester, Cheetham (Mr. Harold Lever) based his argument on the claim that the detailed burden which this would place on the Revenue would be so colossal that it would be impracticable to give this relief in the year 1965–66. As I pointed out—he partly answered my point in respect of the Chancellor—this was not the basis of the Government's argument. The Chief Secretary had an opportunity of giving this reason in his fairly detailed speech this evening, but he made no reference to this argument, for the reason, I suspect, given by my hon. Friend the Member for Oswestry (Mr. Biffen) that it could have been used against him on the Capital Gains Tax.
Mr. Harold Lever
I was not trying to withdraw what the Chancellor said. I was giving the commonsense meaning of what he said. He was saying, “I have to take away a small relief from the Surtax payer because I gave him a big relief by way of Income Tax” .
That argument will not square with any of the arguments put forward by any of the Ministers who have spoken on the Clause. I looked up the figures for a number of investment trusts to seen the amount of money, [column 174]which had been paid in addition, and it appeared that an extra 10 per cent. of dividend income had been received by these trusts as a result of payments in advance. In those cases the chairmen of the companies went on to stress that the dividend income in the year 1966–67 would be reduced by a comparable amount. The Government would have been much fairer if they had said that the words in the 1952 Income Tax Act “such relief as may be just” should be viewed in the light of the two years together—1965–66 and 1966–67. The arguments marshalled from the Government Front Bench this evening have been singularly unconvincing. The Chief Secretary completely failed to answer the arguments of my hon. Friend the Member for Finchley (Mrs. Thatcher) and I hope that we shall vote against the Clause.
J. DiamondThe Chief Secretary's argument proceeded on an entirely different basis from that adduced by his hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever). The Chief Secretary proceeded on the basis that dividends paid out before the beginning of this financial year had saved on them 8s. 3d. in respect of each £. That is not necessarily true. If that is the right hon. Gentleman's argument, he must exclude from the operation of the Clause those dividends which will have Schedule F payable on them, although I saw no such willingness on his part in his reply.
It is one thing to fix the rate of a tax in respect of a previous year. It is quite another—and the hon. Member for Manchester, Cheetham knows this—to change the rules by which the corpus which is liable to the tax are to be calculated, because the events which could be altered have already taken place; in other words, in certain companies dividends would perhaps not have been declared had they known at the time that this provision was to be withdrawn.
The hon. Member for Cheetham proceeded on the basis of trying to make an honest man of James Callaghanthe Chancellor in respect of the Clause. The hon. Gentleman attempted the impossible. He cited the difficulties of administration. Such difficulties have never prevented the present Government from imposing taxes on the subject. It is quite wrong, therefore, [column 175]that they should be cited for withdrawing a relief from the subject. I hope, therefore, that my hon. Friends will firmly vote against the Motion. [column 176]
Question put, That the Clause stand part of the Bill:—
The Committee divided: Ayes, 218, Noes 144.