New Clause.— (Tax Reliefs For Employed persons.)
The expenditure of any person taxable under Schedule E, Income Tax Act 1952, in respect of the purchase of overalls, tools of trade and books up to a total value of £25 in any year wholly and exclusively incurred for the purposes of his trade, occupation or profession shall be allowed as a deduction from the salary or wages in computing the amount of assessment.—[Mr. Sheldon.]
Brought up, and read the First time.
Mr. Robert Sheldon (Ashton-under-Lyne)
I beg to move, That the Clause be read a Second time.
The purpose of the Clause is to permit as allowable expenses against Schedule E the cost of overalls, tools of trade and books. A great part of the discussions we have on all Finance Bills is concerned with minor injustices which we come across from time to time. These invariably cover only a few cases, and they generally relate to people and companies of considerable means. It is right that we should concern ourselves with these few cases as and when they come up, because it is part of our function to put injustices right. But what we rarely do is consider the injustices which occur on a very much larger scale.
Many people with small means have the greatest disadvantage of all in being taxed under Schedule E. The Inland Revenue Annual Report for 1963–64 showed that there were over 20 million such people, earning just over £16,000 million, being the income chargeable under pay-as-you-earn, and this produced a revenue of £1,477 million. These people [column 2264]form a very large proportion of this country's taxpayers. What is clearly demonstrable is the unfairness of the impact of our taxation system which bears so heavily on so large a proportion of the people.
These taxpayers suffer many disadvantages. They have the big disadvantage that they are unable, or do not know how, to get the best possible advice on how to arrange their tax affairs in the best way. Their income is at the lower end of the scale so that any tax which they have to pay is less easily borne. Added to this they also suffer from the restriction of the straitjacket of Schedule E.
In this connection, I quote from paragraph 118 of the Report of the Royal Commission on the Taxation of Profits and Incomes:
“ Few kinds of income are fairly represented by the gross receipt from the source concerned: most come into existence only as a balance between gross receipt and the expense involved in obtaining it.”
It is about the expense involved in obtaining the income that I speak now.
It is accepted throughout industry that companies and the self-employed are allowed to claim certain expenses against tax which the P.A.Y.E. taxpayer is unable to claim. This is stated under Schedule D by Section 137 of the Income Tax Act, 1952, which allows expenses “wholly and exclusively” incurred. The advantage of that provision applies to the self-employed and business corporations of one kind and another.
Those who pay tax under P.A.Y.E. are bound by the much more rigid rule 9 [column 2265]which provides that all such expenditure must be “wholly, exclusively and necessarily” incurred. This is far too tight a definition. The expenses of so many people in industry, in the professions and elsewhere, being the expenses of those who are employed, are growing in variety and becoming much more exacting. There are those who wrongly feel that the firm for which they work should meet all the requirements, whether in books, tools of trade or in other ways. In respect of tools of trade, it has been accepted for many years that there should be a certain exemption. It used to be, in the engineering industry, £10 a year, it became £15, and I believe that it is currently £18 a year—that is, expenses allowable in respect of certain tools of trade in the engineering industry.
I maintain that this increase has only just kept pace with the cost of living and has not taken account of the increasing diversity of the tools and equipment required or the wider range covering the developing techniques and technologies which so many people have to use more widely now. People in this category suffer much more severely under rule 9 than do the self-employed and business corporations with whom this Committee is more generally concerned.
The self-employed doctor who buys his Lancet should not, in my view, be regarded as in a category separate from the employed engineer who must purchase his copy of Machinery. The business man who weekly buys his Economist and has this allowable against his tax charge should not be in a category different from the employed scientist who cannot do the same with the periodical Nature. This distinction between two categories of people in our society is quite artificial and unfair. The restriction imposed by use of the word “necessarily” in judging whether expenditure is allowable or not is unduly tight.
Even worse is the consequence of the spread of specialisation nowadays. Many people have to purchase instruments and books and other items covered by this new Clause which they might have managed without in the past. In the past, it was sufficient to have a few books on general matters in one's own subject, but now the growth of specialisation is such that virtually anyone in a [column 2266]profession has to have a wide range of books covering abstruse aspects of his specialty. The same applies, though not in quite the same measure, to certain tools of trade.
If these things were needed before, they are even more needed today. Yet the use of the word “necessarily” in judging whether an expense shall be allowable or not excludes these books and equipment. For some reason or other, the Inland Revenue is not prepared to accept them as necessary for the purposes of the taxpayer's occupation.
I do not believe that there is a scientist or technologist who buys books which are not necessary to his profession or occupation. These books are bought, and no allowance is made for them. The books, equipment and instruments which are purchased are necessary for the taxpayer to earn his living. They are not like entertainment expenses. They are not indulgences. They are things vital to the taxpayer in the earning of his living. When such a person buys a microscope or an advanced book on jig and fixture design, these are necessary, they are bought and yet are not allowed.
Rule 9 is now coming to appear quite inequitable and should be changed. I should like to refer to six legal rulings on the application of Rule 9. I am not in the legal profession, but I am aware that comments of this kind are rarely made in that profession. Rule 9 has been variously described as:
A very narrow and strict rule”
“Notoriously narrow in their application”
“Notoriously rigid, narrow and restricted in operation”
“Stringent and exacting … . This case raises a question of hardship. I may go further and say, the position really is unreasonable.”
These are all legal judgments. When we consider views of such great severity on the workings of a rule which affects 20 million people, we can appreciate that we ought to go further into this matter to see what can be done.
As I said, the amount of revenue raised under P.A.Y.E. was £1,477 million in 1963–64. I estimate, at a guess—it is not much more—that the cost of the Amendment would be about £50 million. [column 2267]I hope that my hon. and learned Friend will give a rather more precise cost. In our present economic situation, I would be prepared to understand his difficulty in implementing some of the provisions of the new Clause——
Mr. Evelyn King (Dorset, South)
Did I understand the hon. Member to say that the cost of the tools or the cost to the Treasury of an Income Tax rebate would be £50 million? Surely the tools could not cost £50 million?
It is the cost to the Treasury. My figures are not much more than figures quoted out of the air, but if one estimates that 20 million people are already in receipt of some allowance for the purchase of overalls and tools of the trade, and assumes that most will make use of some of the advantages of the new Clause, one arrives at a figure of about £50 million. It is difficult to assess. I have been unable to get precise figures. It is difficult to say how much they would be likely to claim if the Clause were accepted. I mentioned the figure because I think that when one tries to reduce the Revenue, one should give some sort of estimate of how much one wants to take.
Although I understand that the present economic situation is not favourable to reforms that reduce the Revenue, I would point out that this should be one of the first claims on any concessions in taxation made in the future. Far better than providing tax reductions is to ameliorate gross injustices of so severe a rule. I look forward to the Financial Secretary's reply.
Mr. Frederic Harris (Croydon, North-West)
I put my name to the new Clause because I have always felt the same as the hon. Member for Ashton-under-Lyne (Mr. Sheldon). I have listened with interest to his case, which he has put so well that there seems to be little to add. I await the Financial Secretary's reply with considerable interest.
The only point which I found astounding and the first time I have heard such a figure was the hon. Gentleman's suggestion of a cost to the Treasury of £50 million. He is possibly not taking into account the considerable expenditure of this kind which is already incurred [column 2268]by companies. For instance, a large number of companies provide overalls. That is not such a large expenditure for private individuals as it was 10 or 15 years ago.
The point which has always interested me is tools of the trade. It is with considerable pride, particularly if he is a mechanic, that a man looks upon his own tools——
I said that I took the figure out of the air, but I might give the basis for my calculations. They are terribly crude, but this was the only basis on which I could make such an assessment. I estimated 20 million people taking £15 allowance a year, which gives £300 million. I then took a tax rate, almost out of the air, of, say, 5s. This gave me a figure of just over £50 million It is not much of a figure and I do not put too much confidence in it, but that was the basis of my calculations.
I thank the hon. Member for that explanation, but he has possibly overstated the case. However, perhaps the Financial Secretary has a more accurate figure for the Committee.
A large number of people would not have to take advantage of all the provisions in the Clause, because some are already provided by companies. However, there are individual people, particularly mechanics, who have pride in their own tools, which we want to encourage. They do not want the tools provided on a general basis, but take their own with them. It is part of the trade and we want to encourage that keenness. We want them to have modern tools. Therefore, the figure of £25 in the Clause is not unreasonable and I support the idea.
It is very important for the Committee to realise that business houses provide the supplies which are mentioned in the Clause. This is where the anomaly and the unfairness arises. It has always seemed wrong that business houses—I have something of a vested interest to declare in this matter—should be able to supply these tools, books and, of course, overalls. They are allowed to write them off as general expenses allowable against profits from the tax point of view. Yet the individual cannot do that if he has the pride and the desire to do it himself. [column 2269]
That seems wrong. The hon. Member has done a service in putting forward this Clause. I hope that the Financial Secretary can indicate the way in which the Treasury might think in future. There is an anomaly and an unfairness here. If the companies provide everything, so that a workman need not have the pride in his own individual possession, this is set against their tax. But if an individual wants to provide his own tools and keep them all his working life, he is not given an allowance of this kind against his liability for tax. That is wrong.
I very much support the Clause.
Mr. Joel Barnett (Heywood and Royton)
I am glad to have the opportunity of highlighting an example of the harsh way in which the 20 million people on P.A.Y.E. are treated compared to those whose tax is assessed under Schedule D and, in certain circumstances, even under Schedule E, as regards directors. The Clause is not asking for very much for people on P.A.Y.E., but it does ask for a little, and will go some way towards compensating them for the harsh and unjust way in which they are dealt with relative to those taxed under Schedule D.
My hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) has already referred to the word “necessarily” . I have had some experience of the use of the word in dealings with the Revenue and it is at times treated in a way which I find a little difficult to understand. For, the way in which the word “necessarily” is strictly interpreted by inspectors of taxes is not always the same.
However, I accept that much of what I want to do can be dealt with without necessarily having a Clause of this type. There are perhaps other ways in which it could be dealt with, which I hope my hon. and learned Friend the Financial Secretary will accept. The present rule is interpreted very rigidly by most inspectors of taxes. What I am asking for is a little less rigidity. A businessman or a director is dealt with under Schedule D with a little more flexibility. There are examples of how the rule is operated rather more flexibly for directors under Schedule E, and particularly under [column 2270]Schedule D, where the word “necessarily” is not included.
I am not referring to claims submitted by some people which are tantamount to tax evasion, but to legitimate claims submitted by businessmen in respect of all sorts of expenses where the benefits arising from them are not easy to define. The inspector has to decide what is the reasonable percentage to be assessed as a benefit. What invariably happens in these cases—I certainly do not complain about this—is that the taxpayer is given a fair amount of latitude as to the percentage which can be negotiated. It depends on the person doing the negotiation and it will vary considerably between one person and another.
Take the case of the benefit from private motor cars. The Revenue has in recent years been more stringent in calculating the mileage between home and business and the use at weekends, and so on, but whether the percentage is a fifth, a third, or half, does depend on the sort of negotiations and the negotiator. Then there is the question of wives working in a business. We know that most wives work in businesses and are paid up to £650 a year for genuinely working full-time in the business. They have to do that to have the claim allowed, but there is a little flexibility in the acceptance of the amount of work that a wife does.
There is also the allowance for homes being used for office purposes. It is amazing at times to find how many rooms in a house can be used for business purposes. So there is a degree of flexibility in the negotiation of the proportion of home expenses allowed. There is also flexibility over the use of telephones. One need not be cynical, but it seems that very few businessmen have private telephone calls. Postage and stationery expenses are wholly or largely allowable because they are almost 100 per cent. concerned with business purposes, or so we are told. Travelling expenses are another item on which people under Schedule D and directors can get a little latitude, but this does not apply to workers on Pay-As-You-Earn.
I do not complain about the fact that the tax benefit comes down invariably on the side of this category of taxpayer; indeed, I object very strongly to any “third degree” of taxpayers under[column 2271]-Schedule D with the object of squeezing out an extra bit of tax. It is worth while allowing a little extra tax relief over and above what perhaps the taxpayer is reasonably entitled to in order not to get the sort of third degree which a few inspectors tend to operate. I say at once that most inspectors, in my experience, are very reasonable and fair-minded but at times they tend to waste the time of businessmen in wanting to see them to discuss a minute percentage of private benefit. All that I ask is that those on Pay-As-You-Earn, if they are not to be treated equally, should be treated a little more fairly.
I have tried to ascertain what exactly is the amount of allowances given at present to all employees in industry for tools of trade and overalls. The research staff in the Library has not been able to get any information about this. They have tried the T.U.C. to see what is negotiated and they have tried the Inland Revenue. It appears that there is a variety of different allowances for different trades. I understand that there is a confidential document known as “3B” which is not available to anyone outside the Inland Revenue. Certainly, the Library was not able to get a copy for me. Apparently that document sets out the whole variety of allowances which are given for different trades and categories.
The Committee should be told what the allowances are for the various industrial categories. My hon. Friend referred to the engineering industry where, he understands, the allowance amounts to £18. I understand that in the textile industry it varies with different types of work, for example, taking into account whether the overall used is a long one or a short one. I understand that at one time the allowance was as small as £5, but it will probably be more now. It would be useful to know what allowance is given as a sort of blanket allowance to all the various categories of employees.
There is then the problem of teachers and lecturers and the use of books. I know a grammar school teacher, head of the English department, who recently spent £12 on a dictionary which was not provided at the school and which she thought would be very valuable in her [column 2272]work. I consider that she could get an allowance for that, but there must be many teachers and other employees who do not claim for an item for which they could get an allowance.
On the other hand, I know of lecturers who are able to claim, and have claimed, up to two-thirds of this expense, as much as £90, for books, magazines and journals. I do not say that all lecturers are able to claim this. Many will be surprised that it is possible to obtain such allowances, but in certain circumstances it is possible to get the allowance and it has been obtained. One thing is quite clear. The present system is not only unfair between employees and businessmen under Schedule D; it is also unfair as between different categories of employees.
For workers in certain industries it is dependent on the ability of their trade union negotiators as to the amount which can be obtained from the Revenue in the particular industry concerned. With the greatest possible respect for trade union negotiators in their own field, in which I know they are very skilful, I think that when it is a case of negotiating tax relief with inspectors of taxes they are as babes in arms. I believe that there are greater allowances even under the present system which could be obtained by many millions of workers. One would like to think that more workers would submit claims for the allowance to which they may or may not be entitled.
We all know that under the old Schedule A claims could be made, but were not made and that many workers, whatever we do, simply will not submit claims. I am sure that even under the present rigid interpretation there must be many millions of workers who today are spending on overalls, books and journals, and could submit expense claims. If they pressed hard enough they could get some allowance, probably in many cases in excess of the blanket allowance given in their particular industry. I am particularly thinking of teachers and lecturers and even engineers who may be spending far more than the £18 allowance in respect of rather higher quality tools to enable them to do their job well.
I appreciate the difficulties of the Clause as it stands, because some individuals in a particular category will spend more than others. If we leave it entirely to the [column 2273]individual to claim, many would not get the relief. As I say, there will be many who would not submit a claim, but it must be left to the workers to be able to do so if they wish. On the other hand, if the Board of Inland Revenue gave instructions to its inspectors to view this rule with slightly less rigidity than is done at present, it should not be impossible for various categories of workers to have negotiations conducted on their behalf to give them a rather better allowance than they receive at present.
It is not necessary to have legislation to do this. Something can be done immediately by way of concessions, such as the Customs concession given for the first £5. Something can be done without waiting for legislation. Certainly, I feel that the whole question should be approached with the desire to compromise on the side of the taxpayer, at least to the same degree as is done in the sort of negotiations to which I have referred, about the percentage of private benefits for businessmen. I hope that my right hon. Friend will advise Her Majesty's inspectors of taxes to approach the matter in this way. There would then be no need for this Clause, although I am delighted that the debating of it has enabled us to shed some light on the rather rigid way in which the rule is at present interpreted.
Sir Stephen McAdden (Southend, East)
I congratulate the hon. Gentleman the Member for Ashton-under-Lyne (Mr. Sheldon) on the way in which he moved the Second Reading of the new Clause, which I will strongly support, and which, I should like to feel, the Financial Secretary would be able to support as well. The position is that there is this great disparity in the treatment of those on P.A.Y.E. and those taxed under Schedule D in that, as has been said, there is a greater elasticity in the treatment allowed in the case of Schedule D payers. It seems extraordinary that we should not make available to those who require books and the tools of their trade treatment at least as equally reasonable as we are prepared to accord to ourselves.
In my case, as a Member of Parliament, I do not find any difficulty in establishing a claim and being able to claim relief on books purchased in order that I may equip myself better to do my job. This is allowed, and it ought to be [column 2274]allowed to teachers or other people in the pursuit of their occupation. I want to declare an interest here in making a special plea for nurses, because my daughter is a nurse.
I was rather astonished to find when I did what little I could to help her in the preparation of her Income Tax claim—not unaided but with professional advice as well—that, because she was provided with a uniform by the hospital, she could not make any claim for that uniform. That was fair enough, but surely people do not imagine that nurses go around the wards dressed only in a uniform, and that they do not have other things, such as stockings and shoes? Apparently the Inland Revenue makes a concession to nurses, who are allowed to claim up to £6 a year for stockings. That does not go very far but it is a concession.
Does the hon. Gentleman get an allowance for his socks?
Sir S. McAdden
I do not think that that is quite a relevant interruption, but the socks that I wear, or do not wear, are not necessarily a part of my uniform. Nurses are expected to wear black stockings, and they would not be seen dead in black stockings outside their period of duty. They are compelled to wear shoes in which they would not be seen dead off duty, and there ought to be some concession for people who are compelled to wear the kind of things which they would not normally wear. They ought to have some kind of tax allowance. It is obviously impossible for the Treasury to consider every trade and single out the allowances which ought to be given to the nurses, or the builders or whatever trade.
But this kind of overall concession of up to £25 seems to be a very reasonable figure, and I hope that we may have some support in securing a concession from the Treasury on behalf of the many people who are engaged in occupations where they are paid on a P.A.Y.E. system, so that they may be able to enjoy the benefit of a concession of this kind which is long overdue. I hope that, if nothing else touches the heart of the Treasury, it will remember that those of us who are sometimes taken ill in this House or feel a little under the weather never hesitate [column 2275]to retire to Westminster Hospital in order that we may be looked after.
Let us show the nurses at Westminster Hospital a little tenderness in return and accord them rather more than £6 for the relief of their tax. But let us not just grant it to Westminster Hospital; let all nurses share it. I hope that the Treasury will have an easy and comforting heart on this occasion.
Sir Gerald Nabarro (Worcestershire-South)
I would not support this new Clause, because I never believe in nibbling at a problem and this Clause nibbles at a problem. For 15 or 20 years in this Committee, when the party opposite were seated on this side, this subject was a hardy annual. The right hon. Gentleman the Member for Sowerby (Mr. Douglas Houghton) was a frequent performer: not every year but alternate years, drawing attention to the anomalies existing between Schedule D for Donald and Schedule E for Edward and how a person could secure certain allowances under Schedule D for Donald as a self-employed person, which were not allowed under Schedule E for Edward , because he was an employed person, or occupying an office of employment. Those are the two definitions applicable to Schedule E for Edward and D for Donald.
I have a very real interest in this matter resulting from personal experience, and I want something much more fundamental than this new Clause. I want the allowances as between Schedule D and Schedule E made uniform. That can be done by an addition to a Finance Bill but it would not be done in the form of a new Clause of this kind, which only nibbles in an administrative fashion through the machinery of Inland Revenue, dealing with what is at present an abuse.
Let me relate a personal experience, because it exactly touches on all the points made by the hon. Gentleman opposite. I once said in this Committee that I was assessed personally and simultaneously to Schedule A, to Schedule B, Schedule D, Schedule E and to Surtax. In contemporary circumstances I am only interested in the narrower consideration that I am simultaneously assessed to Schedule E and Schedule D. I am assessed to Schedule D as a journalist and [column 2276]broadcaster and to Schedule E as a company director and employed person, and as a Member of Parliament.
When I challenged this at the Treasury a few weeks ago, and in the Last Parliament but one, the Treasury reply was that I was treated as an employed person as a Member of Parliament, or as an occupant of an office of employment, and therefore I could not enjoy certain allowances under my Schedule E assessment which I could avail myself of under the Schedule D assessment.
I quarrel with the presumption of the Treasury that I am an employed person as a Member of Parliament. That was established in 1911 when Members were first paid by this House. No Member of Parliament has ever taken a case to the General Commissioners challenging that he should be assessed under Schedule E. I shall be the person to do so in due course, because I believe that I should be assessed under Schedule D. Nobody employs me as a Member of Parliament. The electorate does not employ me; the Government do not employ me; the Treasury certainly does not employ me. I am a self-employed person. If I could establish that I were a self-employed person, I would be assessed for Income Tax under Schedule D.
Here is the extraordinary situation. For purposes of the Selective Employment Tax—I am not going out of order; this is only a passing reference—I am a self-employed person and do not pay the tax as a Member of Parliament. The Treasury answered my Parliamentary Question on that two or three weeks ago. But for Income Tax purposes I am judged as a Member of Parliament assessable under Schedule E as an employed person. This is a serious anomaly.
I return to the words in this new Clause which are extremely interesting, drafted by a man—the hon. Member I fancy—who obviously knows a great deal about this problem. He refers to the purchase of overalls, tools of trade and books. My hon. Friend the Member for Southend, East (Sir S. McAdden) referred to being able to make reference books a charge against tax, which is very unusual, under Schedule E.
Sir S. McAdden
I managed to get it done.[column 2277]
Sir G. Nabarro
It is very unusual under Schedule E.
Sir S. McAdden
It can be done.
Sir G. Nabarro
It can be done, straining the case.
I wish to address my following remarks to the Financial Secretary. They deal with the most unusual case on record, and as it happened to me I should like the Committee to benefit from my experience. Many Members of Parliament have complained over the years that if they have a Press cutting service they cannot charge the cost of it against tax under their assessment of income as Members of Parliament because they are assessed under Schedule E. Shortly expressed, as a Private Member of the House of Commons, I cannot charge the cost of a Press cutting service against Schedule E; it is not allowed.
In 1954–55 I had a long battle with the Treasury about why it was not chargeable and I threatened to take the matter to the Commissioners. The then Financial Secretary to the Treasury, my right hon. Friend the Member for Wolverhampton, South-West (Mr. Powell), saw me in the Lobby and said, “Gerald, my boy, you are assessed at present under both Schedule D and Schedule E. You are assessed under Schedule E as a company director and as a Member of Parliament. You are assessed under Schedule D in respect of your substantial income from television, broadcasting, and Press journalism. If you would be prepared to translate your claim in respect of Press cutting from Schedule E to Schedule D, we will allow it” . Therefore, I promptly transferred it and the Inland Revenue allowed it, not only in respect of that year, but for five previous years. [An Hon. Member: “Congratulations.” ] Do not congratulate me. I am up to all the tricks in taxation. I believe in paying as little tax as possible, not as much. I am very proud to say that, as long as it is legitimate, and it is always legitimate.
I give this only as an example of a ridiculous state of affairs. A man such as myself who is paying Income Tax under Schedule D and Schedule E is prompted by a Minister of the Crown to translate his claim from one to another in order to secure admissibility for a very important “tool of trade” , as I call it. [column 2278]
How many hon. Members opposite would love to have the advantages as Members of Parliament of a Press cutting service? The hon. Member for Salford, East (Mr. Frank Allaun) has pressed this claim for years; but he has pressed it at public expense. I always say, “Do not do that. You have an income under Schedule D.” The hon. Member televises occasionally, broadcasts occasionally and writes occasionally. He must have an income from these activities. Why does he not charge his Press cutting service against that income?
Mr. Leo Abse (Pontypoll)
The hon. Gentleman is doing an injustice to my hon. Friend the Member for Salford, East (Mr. Frank Allaun), whom he has misunderstood before. I want to thank the hon. Gentleman for giving me this advice some years ago, since I benefited from it. But my hon. Friend the Member for Salford. East wants a Press cutting service for the information of all hon. Members. It has nothing to do with his personal Press cutting service.
Sir G. Nabarro
I am grateful to the hon. Gentleman for his intervention. I bow at once. What he says may be so. But what I am seeking to point out is that hon. Members who happen to have incomes under Schedule D find this service available to them whereas it is not available if they have no income under Schedule D. That is a thoroughly incongruous state of affairs, and I quote it only because it is within my personal experience of tax claims.
The hon. Member for Heywood and Royton (Mr. Barnett) in his admirable speech, referred to schools and the cost of books. I had an animated correspondence recently with the vicar of Pershore Abbey, in Worcestershire, which is a very famous church going back about 1,000 years. There is a Pershore festival every year which attracts a great number of foreign visitors and visitors from this country. The vicar was extremely aggrieved because in the conduct of his office as an Anglican minister of religion he had been having a long battle through his accountants with the Revenue about the cost of books. He sent me all the papers and asked whether I would take up the matter with the Treasury. I sent the papers back last week saying that I would not take it up and that it was a [column 2279]waste of time to do so, because until the law is altered and allowances are made uniform as between Schedule D and Schedule E, I could not help my friend the vicar. He is assessed as a vicar under Schedule E, and the Inland Revenue, sternly applying the rules to which the Member referred, would not admit books, journals, reference documents and the remainder as a charge for assessment of tax under Schedule E.
As I say, this is hardly annual. The right hon. Member for Sowerby and myself have argued it over the years. We have always arrived at the conclusion—and this is not a party political issue—that we would give a great welcome to any measure introduced by the Chancellor of the Exchequer of either party which would make uniform allowances under these two tax Schedules. This Clause would only nibble at the problem. I could not support it because I think that it would make the situation worse than it has been in recent years.
I should be disrespectful to my hon. Friends the Members for Ashton-under-Lyne (Mr. Sheldon) and Heywood and Royton (Mr. Barnett), who moved and supported the new Clause, if I were to adopt the language of the hon. Member for Worcestershire, South (Sir G. Nabarro); but I wish to adopt his argument.
The truth is—and we must face the truth—that the Clause raises one of the very big, contentious and difficult issues in our tax law, which is the difference in treatment under Schedules D and E. The Clause has been skilfully drawn. It limits the field to a very narrow compass. This is done intentionally, because if it were not so it would raise such a very big issue and such large sums of money, that there could be no hope of it being accepted, however well disposed one might be to it, this year.
The Inland Revenue prides itself on the fact that it tries to operate our tax system on the basis of principle. It is very important to maintain that basis of principle and not to make exceptions and alterations, however much we may be moved by sympathy for the arguments adduced on behalf of the Amendment, unless they are consistent with our general tax principles. If we were to [column 2280]accept the Clause, it would be a toe in the door leading between the Schedule E and the Schedule D tax treatment. One cannot make a start in this field without facing the general principles.
The difference in principle is well known. Under the Schedule E rule, the employee or office holder, in order to be entitled to deduction for any expenses, has to show that he was obliged to incur them wholly, exclusively and necessarily in the performance of his duties or employment. As was stated by my hon. Friend the Member for Ashton-under-Lyne, this distinction was criticised by the Royal Commission, which thought that the rule should be brought into closer conformity with the Schedule D rule.
The method the Royal Commission proposed—different from that put forward in the Clause—was that the Schedule E deduction should be allowed for all expenses reasonably incurred for the appropriate performance of the duties of the office or employment. It expressed itself to be particularly concerned with the professional employee whose duties are not so easily defined and recognised. For the great majority of employees, the present rule does not create hardship.
The Royal Commission's recommendation has never yet been accepted. It has been rejected on the ground that it would permit deductions for a very wide range of personal expenditure by employees, much of which is incurred primarily for personal reasons. I do not want to argue here the wider question. I only want to point out that the Clause raises the issue and I do not think that we could accept it without facing that wider issue.
My hon. and learned Friend has made the point that the Clause raises the wider issue. He previously said that we have not raised it. Indeed, we strictly limited the application of the Clause in order not to raise the wider issue because already an allowance is given for Schedule E. We would, therefore, not be breaching the general principle but only extending it slightly.
No. I hope to persuade my hon. Friend that it does breach the principle. By the wider issue I mean the principle. Although the extent of the breach is confined by the [column 2281]terms of the Clause, it does breach the principle where it refers to tools of the trade. The difference between the two rules stems from the inherent difference between the two types of income. Whether one likes it or dislikes it, whether it is right or wrong, that is the origin.
The Schedule D rule approaches the matter from a different standpoint. It is not, like the Schedule E rule, concerned with a deduction for expenses which the office holder or employee is obliged to incur out of his emoluments. The approach is that, instead of stating which expenses may be allowed, it states what may not be allowed. The effect is that no sum
“… shall be deducted in respect of—(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, etc.”
The purpose is one of commercial expediency based on the decision of the person who is incurring the expenditure. Where an employee is obliged to incur any of these expenses, including the expenses of tools, overalls and books, he is entitled under existing law to claim a tax deduction for his expenditure. That is not as an exception to the existing law, but its application.
We can deal, first, with tools and working clothes. Deductions for the upkeep of necessary tools and working clothes are given already one large scale to manual workers. It is a common practice for the Revenue to agree with the trade union concerned a flat rate deduction for tools and overalls, given without a detailed claim, to all workers employed in similar occupations under similar conditions. Many millions of workers receive flat-rate deductions of that kind on their working tools and overalls.
These deductions are given in this way in order to save the immense time and trouble that would be involved in dealing with individual assessments. I assure my hon. Friend that the claimant is not bound by the negotiated flat-rate deduction. If he can show that he has been obliged to incur expenditure beyond the flat-rate deduction and can satisfy the conditions of the rule, he is entitled to a higher allowance.
The cost of these flat-rate deductions varies from case to case. They are all [column 2282]negotiated with the individual unions and the order of total cost is about £25 million a year. If my hon. Friend wants particulars about any case I will be glad to supply them or, if he likes to put down a Question, the information will be provided. There is nothing secret about them.
What happens from the practical point of view is that his tax return form tells the employee to put a cross in a particular box if there is a flat-rate deduction applicable to his case. His union will have told him if there is one. The flat-rate deduction agreed with the union is then applied. The result of this procedure is that, where employees are supplying their own tools and overalls, they are entitled to deductions but the employer who provides the tools or overalls is entitled to a deduction in his own tax assessment.
A much more difficult problem in my view arises in relation to books. Again, the Revenue seeks fairly and impartially to apply the existing rule and it is this which results in what appears to my hon. Friend to be discrepancies in treatment. They are not discrepancies. They are an attempt to apply the rule fairly and properly to different circumstances. The test is that the claimant is required to purchase books for use in the performance of his duties. This must vary according to the type of teacher and the type of work he is doing.
In practice, a claim by a university lecturer or a sixth form teacher who is required to provide his own books for use in class or for the preparation of lectures would normally be accepted. But, in the case of a teacher of subjects up to O level, the usual result is that he cannot establish such a claim because he is normally provided by the education authority with the books necessary for the performance of his duty.
I do not mean that he does not buy other books which relate to the subject—many do. But these are generally books of the nature of background reading and, applying strictly the terms of the rule, the position is that they are regarded and must be regarded under existing law as being reading which they have to undertake to keep them fit for performing their duties rather than actually carrying [column 2283]out their duties. It is a logical distinction, although at times it may seem harsh in application.
Last summer, I received a deputation from the National Union of Teachers who raised this among a number of other tax issues which it wanted to put to us. I gave the N.U.T. the answer which I am now giving to the Committee. I said that I did not see how, in general, any different treatment could be given to the teaching profession which would not have to extend over the whole range of the many other people who would be in a similar position. I am sure that there are many civil servants who do background reading of books and journals which are relevant to their work, but which are relevant to their work, but which are not, as it were, required reading. The same must apply to technicians and many people in scientific occupations.
It may be argued that the words “wholly and exclusively” would be a sufficient protection in the Schedule D rule, but, unfortunately for this purpose, those words have been interpreted over and over again as permitting, where required, the apportionment of any expenditure which has a dual purpose. This, again, would present quite formidable problems of administration, for the whole range of employed persons would be able to enter into this sort of argument as to what was the proper apportionment.
I think that my hon. Friends would agree that, if we accepted their proposals, we could not avoid extending them over a whole lot of other expenditure, going beyond books to periodicals and to training and refresher courses, an issue raised in our debates last year, to further education, or any other expenditure which had a necessary link with the job. As I pointed out to the N.U.T., many of the things for which it was asking were similarly related.
To accept the proposal of my hon. Friends would raise this major issue of principle, which, no doubt, one day the Committee will have to face and about which it will have to decide. But, clearly, there can be no question of making an alteration of this kind in a year when my right hon. Friend is finding it necessary to impose additional taxation rather than give relief from taxation. The difficulties would still be quite formidable. [column 2284]Whatever one's wishes, in a matter like this one must look at the administrative implications.
Unless one could achieve something comparable to the agreements prevailing at the moment in relation to tools of the trade, it must mean opening up the possibility of individual negotiations for these relatively small sums and involving a high proportion of 20 million taxpayers, and the criticisms which we now receive about the increase in the size of the Civil Service would appear as nothing compared with what we would hear following such a change.
I was asked about the cost. It can be only a theoretical estimate. I am advised that the theoretical maximum cost would be £100 million; that is to say, if all taxpayers assessed under Schedule E were to be entitled to claim a deduction of £25 replacing any deductions already allowable in terms of the tools of trade the theoretical maximum would be £100 million. I do not think, however, that anyone would expect that to result. There would obviously be many employees who would not spend and would not claim the full £25. But the expert statisticians in the Revenue do not feel that they could make a useful estimate of how much it would be within that figure.
The real danger from the Revenue's point of view is not so much the cost which would be involved, but that it would be opening the floodgates to a very much wider relief if we were to accept this abolition of the distinction between the Schedule D and the Schedule E rules.
Mrs. Margaret Thatcher (Finchley)
I do not wish to detain the Committee very long, because most of the arguments have already been deployed. It is always tempting to those of us interested in taxation to have a very long intellectual argument about matters which we find extremely interesting from our professional work. However, I want to raise only one or two issues.
We all understand that so far we have not come to grips with the differences of computing expenses in Schedule D and Schedule E. This has been a problem for a very long time and most of us have quoted the words in paragraph 140 of [column 2285]the Final Report of the Royal Commission on the Taxation of Profits and Income, the words which the Financial Secretary quoted and which are:
“The wording that we propose would allow the deduction of ‘all expenses reasonably incurred for the appropriate performance of the duties of the office or employment’.”
That would have applied to both Schedule D and Schedule E and the rules for assessment would have been the same.
In considering what Amendments to put down to any Finance Bill, this is obviously one proposal which comes to mind, because there are still some recommendations of the Royal Commission which have not been implemented. However, I was a little surprised by Niall Macdermotthe Financial Secretary, because he appeared to say that the Revenue had rejected that solution. I think that he said that by implication. I am not sure whether that has ever been said before. If it has, then we must all think again, because if the Revenue has rejected that solution, we must recognise that there is still a problem on the broader issue to which we must try to find some alternative broad solution, because this problem will remain until we do and it should not rest until we have another Royal Commission.
The problem on the broad issue is not that the law is unclear about Schedule E, but that it is very clear. Going through the cases and looking at the definition of “necessary” , one finds that to be deductible expenses must be those which each and every occupant of the particular office is necessarily obliged to incur for the performance of those duties. It means that it does not matter whether the teacher is good or bad, or needs or does not need a Latin dictionary. If every teacher had to have a Latin dictionary, that would be deductible. Merely because it is reasonable for a teacher to have an extra dictionary at home, or desirable that he should, does not render it deductible.
I am not sure whether my hon. and learned Friend was saying that. I understood him to say that it was being rather better interpreted from the teacher's point of view and that it would be allowable in the sort of case which the hon. Lady has mentioned.[column 2286]
Then we are differently interpreting the Financial Secretary. The words I quoted were quoted directly from a particular case and I would have thought that the test was not whether it was desirable that a teacher should have it, but whether every teacher who held that post should have that book. That is the test upon which Schedule E proceeds.
The problem arises, as I have said, because the law is clear. Occasionally, there are one or two difficulties about applying it to a particular case and deciding the facts of that case. If I had been the hon. Member for Worcestershire, South (Sir G. Nabarro) I would have felt bound to have a crack about the case of the vicar who had to have a certain number of books, because I would have thought that it was arguable that any person who held the office of vicar would have to have had a certain number of books for the performance of that office. Perhaps we can get together and advise my hon. Friend the Member for Worcestershire, South afterwards and have a go at this one. [Interruption.] I wonder whether it might not be better if nurses did not have to wear black stockings. It would obviate so much trouble.
We have heard a great deal about Schedule D for Donald and Schedule E for Edward. Perhaps it is not inappropriate to comment that D for Doreen and E for Edwin find that stockings get ruined in the Palace of Westminster because there seem to be so many splinters on chairs in the Dining Room. However, D for Doreen and E for Edwina, if we were dealing with both Schedules, would not want to claim a personal Press cuttings service under Schedule E for that amount. Perhaps this proves that the female of the species is not so vain as the male. This is one conclusion which could be drawn.
Our problem is this. The wider issue has yet to be solved. Niall MacDermotThe Financial Secretary appears to have rejected the only possible solution which has yet been put forward by a body of persons appointed to try to find a solution. The law on Schedule E seems to be fairly clear, but we do not like that particular law, because it leads to anomalies and hardships.
Therefore, we come to the narrower issue I am very concerned, as are the [column 2287]hon. Members who have supported the Motion, about those who must have, or who ought to have technical books. I could not go back to my former profession—that of research chemist—without having a large number of technical books. Nor, indeed, could I ever have kept up with it without having my own supply of technical books. However, I do not think that they would have been allowable. I am thinking, too, of nurses and people such as physiotherapists, who constantly have to deal with new equipment. It may not be strictly necessary for them to have books of their own, but they ought to have them.
We tried to go some way towards this in the Finance Act, 1958, which, the Financial Secretary will remember, allowed for the first time fees and subscriptions to professional learned societies. From that time such fees were deductible for tax under Schedule E. Could an extension of that be considered, possibly for next year, so as to allow certain technical and reference books to be deductible?
I am concerned about this. It is ironic that I had the British Tax Encyclopaedia. I could not get it as a Member of Parliament, but as a lawyer I could. I am sure that the Financial Secretary will agree that I ought to have the book in my present job as a Member of Parliament, if only to argue the better with the hon. and learned Gentleman, which would be a very good reason for having it. He has the book in the Treasury. Therefore, he has an advantage over me. Although we have the book in the Library, we have only one copy between all of us who want to borrow it from time to time.
I am especially concerned about those who must keep up with the latest developments, whether they be scientific, technical, legal, or even accountancy. Such people must keep up-to-date. On the narrower issue, we should consider, at any rate for next year, if not for this year, how to find some way, possibly a similar method to that used in the Finance Act, 1958.
I recognise the difficulties which the Financial Secretary has put before the Committee. It would be impossible to consider any extension of anything like the order he mentioned this year. For [column 2288]that reason, I would recommend my hon. Friends not to pursue the matter, but I imagine that before such an eventuality certain other action will be taken. However, I hope that we shall pursue both the broader issue—that is, the difference between Schedule D and Schedule E—and the smaller issue if, in the meantime, we cannot get a final decision on the broader one.
I am conscious of the administrative difficulties. Indeed, I referred to them myself. I ask my hon. and learned Friend to look again at the point I made about the strictness of interpretation, the rigidity with which these rules are often interpreted in different branches. Perhaps my hon. and learned Friend would consider the question of many employees, such as the teacher whom he mentioned, who are entitled to claim in respect of certain books, but who do not do so because they are unaware of their entitlement. It would be helpful if teachers and lecturers were made aware that they could claim. I beg to ask leave to withdraw the Motion.
The Temporary Chairman (Mr. Brewis)
The Motion will need to be withdrawn by the hon. Member for Ashton-under-Lyne (Mr. Sheldon), who moved it.
I beg to ask leave to withdraw the Motion.
Motion and Clause, by leave, withdrawn.
New Clause.—(Income tax: Relief in respect of wife.)
In section 210 of the Income Tax Act 1952 (personal reliefs) as amended by section 12(1) of the Finance Act 1963 and section 10(2) of the Finance Act 1965 in paragraph (a) of subsection (1) (married) for the reference to £340 there shall be substituted a reference to £440; and subsection (2) of the said section 210 is hereby repealed.—[Mr. John Lee] Brought up, and read the First time.
Mr. John Lee (Reading)
I beg to move, That the Clause be read a Second time.
I hope to set a record this evening by stating my argument in the shortest possible time, because the Clause deals with a singularly uncontroversial matter. I want merely to draw attention to an anomaly in the law which has existed for a long time. It is an [column 2289]anomaly that is well known to people who concern themselves with tax law. It is one which should have attracted a great deal of attention and interest on the part of lady Members of Parliament.
From the tax point of view, it is much more advantageous to live in sin, if one is a working person, and if one's male lover is working, than it is to be a married woman and to be employed. This is an extraordinary situation when it is remembered that our society regards marriage as socially desirable. It is a tax situation which most people have deplored for many years.
I do not know what the cost of the new Clause would be. I dare say that my right hon. Friend the Chief Secretary will have something to say upon that aspect. When this matter was examined only a few years ago, it was found that the cost of the change would have been very small. My sole purpose tonight is to draw attention to the anomaly. Even if a concession cannot be granted now, I hope that a concession can be given within a short time so as to put right something which must be the cause of a great deal of offence to many people.
My hon. Friend the Member for Reading (Mr. John Lee) certainly moved the Clause with commendable brevity. I want to respond in a similar way and tell him some of the reasons, both in terms of cost and in terms of logic, why the Clause could not be accepted.
My hon. Friend says—we have heard this before—that it is cheaper to live in sin in certain circumstances than it is to live a respectable married life. Fortunately, my responsibility is limited to explaining the Income Tax position, and I would not dream of offering a comment of any kind on any moral issue.
As my hon. Friend no doubt realises, the general expenses of a married couple are not necessarily—let me put it at its minimum—twice those of a single person. This is recognised in the difference between the allowance for a single person of £220 and the allowance for a married person of £340, as opposed to the £440—double the single allowance—proposed by my hon. Friend.
I recognise that my hon. Friend is on solid ground in drawing attention to the fact that the additional amount—[column 2290]the difference between the married and the single allowance—is perhaps a little on the low side. It is now somewhat less in percentage than it earlier was. Therefore, there is, perhaps, something to be said for an improvement in the married man's allowance, but my hon. Friend is mistaken in believing that this would not be expensive. It would be extremely expensive, as I shall shortly explain, and would for that reason be quite out of the question this year, when I am afraid there is no money to spare, as has been pointed out, for tax reliefs.
My hon. Friend did not go at length into the second part of his proposal dealing with the wife's earned income allowance, but as this is of general interest, I will comment on it. A married woman, if she has an earned income of her own, will receive special earned income allowance, known as the wife's earned income allowance. This amounts to seven-ninths, which is the balance after the two-ninths to which a married couple would, in any event, be entitled. She gets an additional seven-ninths of earned income, with a maximum allowance of £220, which is set off for Income Tax purposes——
—but not for Surtax purposes, as the hon. Lady the Member for Finchley (Mrs. Thatcher) was, I am sure, about to remind me.
As my hon. Friend the Member for Reading also no doubt recollects, a special set of reduced rate reliefs is also available against a married woman's earnings. That applies on the first £100, having been given the earned income relief and the wife's earned income allowance. There is a tax at 4s. in the £ on that, while on the next £200 it is at 6s. in the £.
The new Clause would abolish the wife's earned income allowance but leave untouched her right to special reduced rate reliefs. This would give a married woman who is earning the same basic reliefs as those of a single person. The special reliefs for wife's earnings take into account the fact that extra expenditure is involved in keeping the home going when she goes out to work. My hon. Friend's proposal would reduce this [column 2291]advantage for a family with a working wife over the single woman or widow and it would also greatly reduce the disparity between a family where the wife works and the family where she stays at home.
The cost of my hon. Friend's proposal would be substantial. Since the new Clause is in two parts, I will give the cost in two parts. The proposed increase in the married man's allowance, from £340 to £440, would cost the Exchequer £320 million in 1966–67 and £400 million in a full year. The abolition of the wife's earned income allowance would yield £210 million in 1966–67 and £265 million in a full year. Thus, the net effect of the full Clause would be £110 million in 1966–67 and £135 million in a full year. That is a very substantial cost indeed and the effect of the Clause would be to give appreciable benefits to couples where the wife did not go out to work, the cost of which, in effect, would be offset by extra taxation on all couples where wives earn £220 a year or more, and in some cases where they earn less than that.
Having regard to the fact that, within reason, the tax system wants to take account of the economic situation of the country, and to encourage married women, particularly teachers and so on, to return to work in appropriate circumstances, I think it right that the allowances should be framed as they are. However, my hon. Friend has done a service in drawing this matter to our attention. I am always glad to remind the Committee and the public of the extent to which married women earning income are treated with appropriate generosity for tax purposes in terms of their allowances.
I am grateful to my hon. Friend for raising the matter, but I am sure that he appreciates, having regard to the cost involved and the arguments I have deployed, that I cannot recommend acceptance of the new Clause.
The hon. Member for Reading (Mr. John Lee) does not believe in doing things by halves. I can well understand that he wants to give more in benefits in respect of the allowances to wives who stay at home, but I was absolutely appalled to learn that he [column 2292]would be prepared to withdraw the wife's earned income relief to do it. I know exactly what would happen. Many of the women on whom the nation has spent a great deal of money, in giving them professional training, would no longer find it worthwhile to go out to work.
The hon. Member for Reading was not with us last year when we deployed this argument extensively at a time when married women were put in a slightly worse position by virtue of the previous Budget because if they had young children and had to employ women to look after them, and had to pay the employer's part of the National Insurance stamp, the relief for that part of the stamp was withdrawn. If one adds to that the effect of this year's Budget, under which some married women must pay an extra 12s. 6d. in Selective Employment Tax, for which they cannot get tax relief—then if one took another swipe at them by withdrawing the £120 personal earned income relief, the hon. Member for Reading would find that he would be very short indeed of teachers, nurses and many married women who go out to work but for whom the incentives are not over great at present.
Like J. Diamondthe Chief Secretary, I recognise that this is not a year in which to give extensive tax reliefs. But, equally, it is not a year in which to withdraw the reliefs which have already been given. In the Budget this year the Treasury, through its S.E.T. proposal, has already had a crack at married women who go out to work. Let us not do anything worse by withdrawing the earned income relief. When I looked at the new Clause I thought that it was a typical bit of Socialism, for it would give something with one hand and take more away with the other. For that reason, I could not support it.
Mr. John Lee
I am grateful for the courteous and comprehensive explanation given by my right hon. Friend the Chief Secretary and also for the comments, though they were slightly more controversial, of the hon. Member for Finchley (Mrs. Thatcher).
Although not entirely satisfied, I understand the difficulty and beg to ask leave to withdraw the Motion.
Motion and Clause, by leave, withdrawn.