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New Clause—(Postwar Refunds Of Excess Profits Tax)

Volume 440: debated on Wednesday 16 July 1947

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In paragraph 2 of Part 11 the Seventh Schedule to the Finance (No.2) Act,1939,the following sub-paragraph shall be inserted after sub-paragraph(2):

"(3) Any sums repayable by virtue of section thirty-eight of the Finance (No. 2) Act, 1945, as excess profits tax postwar refunds under Subsection (I) of Section twenty-eight of the Finance Act, 1941, as amended by Section thirty-seven of the Finance Act, 1942, shall be deemed to have become an asset of the trade or business on the first day of January, nineteen hundred and forty-six, and for this purpose the sum repayable shall be taken to be the gross amount before deduction of income tax."

Brought up, and read the First time.

I beg to move, "That the Clause be read a Second time."

The new Clause in my name is of a somewhat technical character and of rather narrow ambit, but I hope that I shall be able to explain to the House its purpose, which is fairly simple, and to show that there is a matter of quite important principle involved. The House will remember that from 1st April, 1940, to 31st December, 1945, Excess Profits Tax stood at 100 per cent. That is to say, the whole of the profits of a trade or business above the standard revenue of the business was taken in tax. At the time that the tax was imposed, however, it was provided by the Finance Act in question that 20 per cent. of the total amount taken from a business during the 100 per cent, period should ultimately be repaid, subject to the condition that on repayment the amount repayable would be added to the capital of the business and not distributed by way of dividend or profit.

The pledge given in the Finance Act, 1940, was in fact implemented, and generously implemented, by the present Chancellor of the Exchequer in his first Budget—the Finance (No. 2) Act, 1945. That Act was passed on 20th December, 1945. Under it, a proportion of the profits of each business which has been paid away in E.P.T. during the too per cent. period became repayable to the business concerned, and it was provided by that Act that the sums were to be repaid as soon as may be after a final settlement of the total amount of tax in respect of which they were repayable. There was provision made for payment to be made on account in appropriate cases, but nothing was laid down as to the date of payment. I readily concede that it would have been impossible for the Government to have provided that payment should have been made on some particular date, but I think that it was of some considerable importance that the Finance (No. 2) Act, 1945, should have failed to provide that the sums repayable should be deemed to have been paid on a particular date I will explain the reason why.

These sums had to be added to the capital of the business concerned. That was part of the scheme. Every one has always entirely agreed with that in principle. By adding it to the capital of a business, that at once increases the amount which could be taken as the standard profits of the business. It would not be invariably the case because the standard profits could be assessed in different ways, but I think that it is probably true to say that in 1945 the majority of businesses were having their standard profits assessed on the basis of capita] employed, and when that capital was increased it at once increased the standard profits and, to that extent reduced the amount which could be charged in tax against the businesses for the following year. In this particular case the following year was the calendar year 1946, the tax being finally abolished at the end of 1946. It becomes apparent that it was of great concern to businesses, who were receiving very large sums by way of repayment, when they could bring those sums into account for assessing their standard profits, and so arrive at the amount of Excess Profits Tax which would be levied against them in the year 1946. What has happened in fact, I am told, is that businesses who have received repayment have been allowed to reckon those repayments as added to their capital as on the date where payment is actually made.

6.45 p.m.

I think that it will be generally agreed that very few businesses indeed will be employing a smaller capital than the amount they were allowed to reckon for the purposes of E.P.T. in 1946. But whether it is a small number of businesses or a large is immaterial. The point is that a number of businesses would have been able to get a considerable advantage if they could have brought into account the amount due to them under the repayment provided for in the Chancellor's Budget. If as I understand from the Financial Secretary's interruption, it is a fact that in a number of cases these sums were able to be brought into account as on the date of actual payment, it means that the amount of tax these businesses have been assessed on during 1946 has been entirely at the discretion of the Revenue.

That is as I understand it from conversations with those who had been subjected to this tax, and if that is not so, I would like to have some explanation from the Government. There are two reasons why this is entirely unfair. In the first place, when the boot was on the other leg, and it was a question of the Revenue wishing to take the amount paid by the company as E.P.T. into account, it was expressly and narrowly defined that the amount payable by the company should be deducted at the earliest possible date. Paragraph 2 of Part II of the First Schedule of the Finance Act, 1942, states that any E.P.T. in respect of businesses had to be deducted from the capital employed, and such E.P.T. had to be deemed to be deducted on the first date on which it was payable. That is to say on the first day of the next accounting year. In other words, when it suited the Revenue to do so, they regarded a company or business as making payment on the earliest possible date when it was physically impossible for any business to make a payment, because no assessment could be made in the half second that passed between the end of the preceding year and the first day of the next year. The present case is precisely the same in principle, only now it is the other way round.

In this case, it is the re-payment of E.P.T. which it is to the advantage of the business to take into account. I should have thought that if the original provision was fair, and I have no complaint about it, it would be equally fair to say that we should regard the repayment to be made on the first day it became due, that is to say, on 1st January, 1946. Therefore, as a matter of fair treatment as between the Government and business concerns, I submit that this is the proper date to take.

Would the hon. Member also explain to the House, if that argument holds, how a business can be said notionally to be using capital which, on its own showing, it has not yet received by way of refund in respect of E.P.T.?

I do not think I need weary the House with that. I need only refer the right hon. Gentleman to the Section he put in the same Finance Act, permitting repayment of E P.T. to be set off against arrears of E.P.T.due to the business concerned. If it were true that the company or business had not been using, as capital, the amount due to be repaid to them, then I should fully concede that the amount should not be taken into account. I do not think that any propriety could come about as a result of the Clause I am moving, but if that is so, I have no doubt that the Government will provide for it by making some suitable amendment. I put my case no higher than this: that where a business was, in fact, using as capital an amount as large or larger than the repayment due to them, it is fair and proper that as soon as that repayment becomes due they should be allowed to take it into account in reckoning their tax for the year in question.

I wish now to refer to the last sentence in the Clause, which deals with Income Tax. This is really a separate point, and I added this sentence merely to be in order in raising this point. The point is this: the amount repayable to a business by way of postwar repayment of E.P.T. is expressed to be subject to tax for the year 1946–47, and if that is so, then, strictly speaking, the amount deducted from any repayment should not be brought into account. The tax would not be strictly payable until 1st January, 1947—that is to say, after E.P.T. has ceased to be payable at all. If that is the position, the Government should acknowledge, although they will in some cases recover the amount of tax sooner than 1st January, 1947, that the deduction ought not to be taken into account before that date. I realise that this is a repayment out of a taxed sum, and there is, therefore, a good case for saying that only the net amount should be repaid to the business concern. The Government cannot have it both ways. Either this is an amount which should be taken into account as new profits for the year 1946, when the gross amount should be reckonable for E.P.T. purposes during the year, or it is repayment in respect of income for an earlier year, in which event 1 submit that the Government will have to accede to the propriety of the Clause I am moving. I do not know what attitude the Government will take, but if they can see their way to accept something on the lines of the first part of the Clause, I should be perfectly willing to withdraw the last lines, so as not to bring Income Tax into account.

I beg to second the Motion.

It seems to me that the Government have got to answer a major question, which is at what stage, and how, does an E.P.T. claim for refund become available as standard capital? As I understand it, it is purely a matter of hazard. If, during the year 1946, a company's claim receives approval and the money is paid in for the use of that company, in accordance with the Government's limitations the date on which that money is received is the date from which it may be taken into account as standard capital. If so, it means that if a company is lucky, it gets the benefit of the refund, but if another company is held up because some questions are asked, or because some correspondence is lost between one Government Department and another, it gets practically no benefit at all. That arbitrary decision seems to be entirely wrong.

If this Clause is accepted, it will mean that there will be the same treatment for all companies entitled to a refund, irrespective of any hazards which may beset an application. It seems to me that if E.P.T. is claimed by the Government as payable in each year, irrespective of the accounting period, the same policy should be pursued in regard to refunds. As the right hon. Gentleman knows, if a company failed to make the standard rate of income in one year, it did not mean that it could set off its previous E.P.T. against that loss, whatever E.P.T. it owed. A company had to pay in the money, irrespective of the actual balance of indebtedness. As I have said, the same policy should be pursued in regard to refunds, which should all become due together and should all be assumed to be paid together. Let the whole of industry be treated in the same way.

The Financial Secretary asked, during the speech of my hon. Friend the Member for South Hendon (Sir H Lucas-Tooth), how it could be said that the money was being employed by a firm until it had been paid. I think he has gone slightly wrong, because the only point in a firm trying to get a refund is that it wants to use the money, and can satisfy the Government that it does wish to use it. Only the other day, I had a case of an engineering firm which wanted one of these refunds. Directly the application was put in, an order was placed for the machinery it required. I am sure that the Financial Secretary would not say that the firm was committed from the time or date the order was placed, and not the date when the money was paid. What I wish to say is that the payment shall rank from the time when the capital is employed rather than when payment is made.

This Clause raise, a point in a narrow compass. If accepted, it would cost million gross, and bearing in mind that E.P.T. is a deduction for Income Tax purposes, it would cost f8 million. Therefore, it would be an extremely expensive proposal.

I would point out that I offered to withdraw the last sentence in regard to Income Tax, which, I think, would again roughly halve the total amount of the cost.

7.0 p.m.

We carefully worked out the figure according to the new Clause. What the cost would be if we treated the net amount could be calculated, I suppose, according to Income Tax at 9s. in the£ but it would be expensive even if we made a rough calculation of that sort, and scaled it down accordingly. The hon. Baronet proposed that the gross amount should be treated as capital, whether received or not, from 1st January, 1946, with the result that it would scale up, by the statutory percentage, the capital computed in arriving at standard profit. Is there any precedent for that in Income Tax and Excess Profits Tax legislation? The hon. Gentleman referred to Paragraph 2 of Part II of the Seventh Schedule, and said that for that purpose the amount is due at the beginning of the accounting period. There is no precedent for the Government charging interest on overdue Income Tax.

What the hon. Baronet and his hon. and gallant Friend are asking is that if the Government delay in paying at the earliest moment this refund of Excess Profits Tax, they should pay interest on that at the rate of 8 or 10 per cent., according to whether the business is being carried on by a partnership or a company. But the converse does not hold good. Supposing the taxpayer does not pay the Excess Profits Tax or Income Tax which is due, the Revenue does not charge interest on that overdue payment, save in the sense which was indicated by the hon. Member for South Hendon (Sir H. Lucas-Tooth). It does not charge any interest on Income Tax. So the proposal to pay interest on what is notionally an overdue payment of Excess Profits Tax refund by the Government is entirely novel. There is no precedent fot that in tax legislation.

Apart from that, it seems to me that both hon. Members opposite proceeded upon a misunderstanding of the object of Section 38 of the Finance (No. 2) Act, 1945. The provision for interim payments is purely permissive, and the Section says that the refund, in order to comply with the undertaking in earlier Excess Profits Tax legislation, has to be paid after the final assessment of tax. It also states that if it should turn out to be possible to make an earlier interim payment, then, as a matter of concession and indulgence to the taxpayer, that concession will he extended to him. He will get it earlier than he is entitled to have it. The hon. Baronet has pressed the Government to go still further, and to say that if they do not pay as from 1st January, 1946. interest should be charged at 8 or 10 per cent. as from that date to the actual date of receipt.

Under present law it ranks as capital provided it is employed as capital as from the date of receipt; but it does not say that in the case of tax which is overdue interest is to be charged. The Excess Profits Tax which is quasi overdue, does not have interest charged upon it. Be that as it may, the main answer 1 make is that Section 38 of the Finance (No. 2) Act, 1945, provides for a concession which will be extended to the taxpayer if it can be done. He will get his tax refund earlier than he was entitled to expect it, and will only get it if it is practical to give it to him at that earlier stage. For those reasons, I ask the House to say that no case has been made out to show why the Government should go further in the direction of a concession than they have already done.

When the Solicitor-General talks about 8 to 10 per cent. interest, that applies to only one financial year, and only if the Excess Profits Tax is at the rate of 60 per cent., and not ion per cent.

It is true that it applies to one financial year, but the interim payments began to be paid in Marcn. 1946, and most taxpayers have received their interim refunds between that date and December, 1946. It is true that the interest charge relates to that period only, but hon. Members opposite are asking for a concession which will cost £8 million net, which is an extensive concession. It would amount to an extension of a concession already accorded to the taxpayer, and no case has been made out for it at all.

I intervene with diffidence in this battle of the experts, but, with respect to the Solicitor-General, I do not think it is fair to say that the new Clause means that this amount would be added to the capital for E.P.T. The Clause does not say so; it says that it shall be an asset of the concern. That is not necessarily capital for E.P.T. purposes. I have known cases where an inspector has said that cash at the bank was not capital for taxation purposes, so I presume that it may be competent for an inspector, where a company is adequately financed, to argue that the amount theoretically owing was merely an outside investment. If the concern was not "flush" with money, and had incurred overdrafts on the strength of that, it would seem proper that the inspector should treat the matter in that light. The cost to the Revenue, as stated by the Solicitor-General, was not based by him on completely sound facts. There is a further point The fact that there will be an increased cost to the Revenue in one year does not dispose of the matter if what is to be aimed at is fairness as between taxpayers. It is not satisfactory that one taxpayer should get a benefit which another does not

Question put, and negatived.