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Income Tax On Excess Profit Tax Refunds

Volume 415: debated on Wednesday 31 October 1945

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Seventh Resolution read a Second time.

Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

If I understand this Resolution aright an anomaly is likely to arise under it. Under this Resolution all sums which are to be refunded under E.P.T. are to be treated as income for all purposes of the Income Tax Acts. That means that these sums will, in the case of private individuals and partnerships, be assessable to Surtax. In the case of limited companies, these sums have been collected for a period of six or seven years, but if they are to be paid in one year, they will aggregate for Surtax purposes, and will bear a very much higher rate of tax than they would have done had Surtax been at 90 per cent. and the final 10 per cent. had been retained in the hands of the firm or individual. As these refunds are primarily for the purpose of re-equipment, it seems that there is a great deal of inequality in taking income for six years and then aggregating it for taxation purposes; also it is rather defeating the purposes of the fund in using it for Income Tax purposes instead of for the purposes of equipment.

I would like to support what the hon. Member for Chesterfield (Mr. Benson) has said and I hope that the Chancellor will extend these repayments for Surtax purposes over the same period of years as they would have been it paid at the time. There is a point I want to raise and I hope that the Chancellor will be able to make it clear. It may be that I ought to understand it, but I do not. Is the Income Tax which is to be charged on the sums repaid to be at 9s. in the £, or at10s. in the £ at which it was when the E.P.T. profit was earned? It would be helpful if the House could be informed what is intended on that point and I should be grateful if the Chancellor could give an answer.

6.30 p.m.

I want to reinforce the observations of the hon. Member for Chesterfield (Mr. Benson) and of my hon. Friend the Member for St. Marylebone (Sir W. Wakefield) that this may result in very considerable injustice to the taxpayer. He might be liable, taking Income Tax and Surtax together, to pay 15s. in the £ and it rather looks as though there will be a large sum of money which will remove him into an entirely different category of taxpayer. By the Chancellor's action, and not by any action of his own, he may have his tax put up from 15s. to 19s. 6d. I ask the Chancellor to reconsider this matter, and to allow the taxpayer, if he elects to do so, to spread the repayment over a six-year period, or the equivalent period over which he has paid the tax concerned. The Chancellor has not told us anything, so far, about the basis of charging tax on these sums at all, and I would like him to justify that basis. It seems to me that there is no real ground for what is really a capital levy being taxed as income in this way. The same principle is observed in the payment of post-war credits. They, as I understand it, are now to be subject to Income Tax although they represent money taken from the taxpayer compulsorily during the war. When repayment is made, the taxpayers receive only half of what is due to them. The same principle is implied here, and I would ask the Chancellor to justify it, if he can. It was said many times in the Debate the other day, that there are instances when the Chancellor gives with his right hand and takes away with his left. I do not believe the Chancellor has a right hand at all. He appears to me to have two left hands, but I would like him to justify this proposal if he can.

I would like to deal first with the point about the repayment of the Excess Profits Tax. The Act of 1941 specifically provides that payments of Excess Profits Tax are to be allowed as deductions, in arriving at the annual profits of the firm on which it is assessed to that, naturally, they must come in as trading receipts. The Chancellor of the day did, in point of fact, use these words:

"The amount of the 20 per cent. Excess Profits Tax repaid, will, of course, be fully treated as a trading receipt, and thus come under the charge for Income Tax, so that the tax available to industry on this concession will be the 20 per cent. less whatever Income Tax is due."
I think that meets that particular point.

Then there is the point made by an hon. Member on the question of Surtax. My right hon. Friend is very conscious of a possible injustice and also the effect it might have on trade by rendering a trader suddenly liable to a large Surtax payment. In order to avoid that the tax payer will have the following option. He will be entitled, if he wishes, to have the repayment spread over six years during which it was collected so that it may come into his yearly accounts for those six years as a trading receipt. That will, I submit, avoid any injustice on that score. Then the question was asked as to what—

Yes. Then the point was raised as to the rate at which it would be assessed for tax. As to that, I have to state that the tax will be deducted at source. The repayments will take some time to effect, and the bulk of them will be made during the 1946–47 accounting period. It would, it is thought, be unfair to treat them in that period as income on which tax is deducted at source, where the amount received, if it fell to be taxed in the succeeding year, that is to say, 1947–48, would benefit by a reduction of tax. Therefore, my right hon. Friend offers these two options to the taxpayer; either he can have the amount spread over the six years which preceded the option I referred to a moment ago, or he can, if it serves his interest better, when he receives the money, even though he receives it in the year 1946–47 with tax deducted at source, treat it as a trading receipt taxable for the ensuing year. There will be a cross-account so as to compensate him for any reduction of tax which would be available to him during the succeeding year. Of course, it would not apply to a trader who would not be liable to tax in respect of the year 1947–48. For example, a trader who was not trading, who had gone out of business, or something of that sort, would not have the option. The two options would be there and, therefore, there would be no injustice upon the taxpayer in that he would not be liable to Surtax unfairly nor deprived of any advantage he might have in respect of the provision.

When the hon. and learned Gentleman talks about the Chancellor giving the taxpayer an option does he mean they will be statutory options?

It is difficult to say. The taxpayer will be given the opportunity of saying which he would prefer. It will be made clear to him what is the option, and he will be asked which course he prefers. But he will receive the money, in the first place, after suffering a reduction of tax at source, so it will be a question of accounting after payment has been received by the Exchequer, and there would, presumably, be a repayment to the taxpayer, but it depends on the circumstances.

Might I ask one question? In Section 11 are the words "at whatever date." Is there no limit during the stage when we can go back to 1946–47?

If I understand the hon. Gentleman correctly, his question is: "Is there to be no limit to the time when the payment is to be assessed and made"?

The answer is that the assessment of 100 per cent. E.P.T. liability is a process which must necessarily take a considerable time. I think the only answer I can give is that it is being done as soon as possible. It is a difficult thing to do, and the assessment has to cover a period right up to date. In the event of its having to take some considerable time, where the affairs of any particular undertaking are such that the ascertaining of the figures required take months or years, particularly in the case of a concern which has not been run quite honestly, the assessment of the E.P.T. liability, and the ascertainment of the amount of refund to the taxpayer, may take a long time.

A limitation will be brought about in the natural course of events, that is to say, it cannot take more than a certain number of years to assess E.P.T. liability. Naturally, the revenue authorities want to get their hands on what is due to them at the earliest possible moment, so it is in the interest of those authorities to get the thing cleared up as soon as possible. The provision is merely to allow time to ascertain the exact circumstances. It may take some considerable time, but it will be done as soon as possible.

I am afraid, from the very nature of the problems with which the assessing authorities are concerned, it is utterly impossible. It is much easier in the case of a concern whose affairs are conducted honestly. It is a matter of the computation of figures. Even then, in certain cases, contingent liabilities and contingent values have to be assessed which sometimes are difficult to assess at their proper figures. In the case of firms whose transactions are not recorded in their books, or who may have resorted to some sort of subterfuge to avoid E.P.T. liabilities, it is bound to take some considerable time, as all cases do not involve an exact computation of figures from books properly kept.

This is not a cross-examination. We are not in a Committee stage; these are speeches which are being made now.

May I say there are some wider aspects of this problem than the one my hon. and learned Friend has made. This is not only a question of dealing with firms of dubious honesty. Is there no risk of a sheer physical difficulty in determining E.P.T. liability as long as you have so many points of principle to settle? There are also questions of fact. For example, this issue of deferred repairs. Many hon. Members will know about the shortage of materials which means that, at the moment, it is impossible for a firm to put repairs into effect. The consequence is that the Revenue authorities cannot assess the amount of E.P.T., and, if the shortage of materials continues, it may well be a matter of years before repairs are put into effect, and the exact liability can be determined. In those circumstances, I suggest that this is a very wise precaution.

May I make my point? While I quite agree that the Revenue, on their side, should have the opportunity to take up things like repairs, there is also the aspect that the taxpayer needs some provision against the unnecessary spinning-out of procedure, so that he does not get taxed for years and years. Are we really having to live all these years with this thing hanging over the heads of the taxpayer?

Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.

Eighth Resolution agreed to.