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New Clause—(Law Costs Of Tax Appeals)

Volume 466: debated on Tuesday 28 June 1949

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Paragraph ( a) of Rule 3 of the Rules applicable to Cases I and II of Schedule D, Income Tax Act, 1918, shall be amended by the addition of the following words:

"Provided that the expenditure incurred in obtaining a decision of the General or Special Commissioners for Income Tax or of any appeal therefrom touching the computation of the profits or gains to be charged to income tax (including surtax), profits tax or any other tax on the profits to be levied hereafter, shall be regarded as money wholly and exclusively laid out or expended for the purposes of the trade profession employment or vocation unless the tribunal giving the decision certifies that the appeal is vexatious."—[Mr Selwyn Lloyd.]

Brought up, and read the First time.

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

There may be considerable doubt as to the beneficent effects of the various actions of the Government over the past four years, but two professions which may look forward to a full and stable future, with much activity for years to come, are the legal and accountancy professions. The mass of legislation which has been put on the Statute Book will mean that they will be in great demand, for it is impossible for any business concern to know, without professional advice, what is its own financial position; what its taxation position should be; to what extent it will have to make provision for future taxation, and to what extent its present resources will be called upon to meet old taxation.

If anybody wants proof of the truth of the submission which I put to the Committee, they have only to try to study the Sixth Schedule to this Bill. I defy any person in this Committee who is not fully qualified and highly experienced in taxation matters, to understand it. In fact, I would say that not more than three persons in the Committee understand it, and I do not include myself—probably, that is a liberal estimate. It is a highly complicated Schedule, and one for which it is absolutely necessary that the busines man should have professional advice before learning his taxation position. If he is to embark on litigation for the purpose, he should, I claim, be allowed to count the cost as deductible expenses. He may have to have a long and costly law suit, and he may have to go all the way to the House of Lords before the position is finally given in his favour, and, assuming that the decision is in his favour, it nevertheless involves him in substantial expenditure. He may even be put to a substantial expenditure in order to prove that he is right and that his view of the tax position of his company is right. It seems to me to be quite ridiculous to say that such moneys are not proper expenses of the business. The same position, I submit, applies whether they are proved to be right or wrong.

In the case of an insurance company, for example, which has to go to litigation to prove that one of its insured has been negligent, I submit that that must be accepted as a legitimate expense of the company's business. That is a direct analogy with the tax position and I see no reason why such expenses could not be legitimately allowed. I do not suggest that the actual wording of the Clause is perfect. It may well be capable of being improved in certain, respects, but I ask the right hon. and learned Gentleman to accept it in principle. If he says he will look at it and consider it between now and the Report stage, I will later ask leave to withdraw it.

I hope that the Committee will not desire to pass this Clause at this stage because this problem, probably more than any other problem that we have discussed this evening, is par excellence one for the committee which will investigate the basis on which profits should be computed. The question of the costs of successful appeals in tax matters has just been pronounced upon by the House of Lords which, by a majority of three against two, decided that these costs could not be said fairly to be costs of earning profits and that they were not costs which a trader incurred in his capacity as a trader. That was decided by the House of Lords after examining this extremely difficult matter, and as to which it is extraordinarily difficult to reconcile conflicting statements of view pronounced in the course of various judicial decisions on costs.

It is not as if we could adopt the Clause and alter the law, because we would then have to consider a whole number of other similar problems. The Clause deals only with the legal costs of a tax appeal. If we dealt with that, we would be drawn into dealing with costs of other legal proceedings. There is by no means any unanimity among judges with regard to the various categories of costs, and their decisions are not easy to reconcile. Not only would we have to deal with the posi- tion of costs under Schedule D of a trader who was assessed under Schedule D, but we would have to deal with costs under Schedule E where he was assessed under that Schedule.

I hope the Committee will agree that this is a vast and complex problem which cannot be considered in isolation from other similar problems relating to the costs of proceedings in the courts. I hope they will agree that the most expeditious and sensible way is not to ask the Government between now and the Report stage to take steps and regard the costs of tax appeals in isolation, but to leave it to the committee to investigate exhaustively with the hope that they may recommend a course of action.

Can the right hon. and learned Gentleman give a guarantee that in fact the committee will consider this point?

I think that some of this could be taken in isolation. At the moment it is an injustice, as it seems to the layman, that when a firm, business, company, or a person in trade has an Income Tax appeal which deals wholly with the question of what are profits or gains, the law costs incurred in winning the case against the Income Tax Commissioners should not be counted as deductible. It is possible to isolate that. Why not start on a section and improve that? Why not start on some part of this problem which to the layman is obviously unjust? Then one will find that the other anomalies and difficulties can be dealt with at leisure.

2.0 a.m.

In my submission the wording of this Clause deals only with a situation well on one side of the line. The view of the two dissenting noble Lords in the House of Lords should be adopted, and in this case the Solicitor-General's argument should be reversed. The Treasury are glad to come along and reverse a decision when the taxpayer has scored a success, and to put in a new Clause or Amendment to the Finance Bill. They ought to do it the other way, too, when it is quite obvious, not only to the man in the street, but also to the accountant at his desk, that it is quite anomalous that expenses of this kind should have to come out of profits. That does not make much sense, and I suggest to the Committee that they should pass this new Clause or get an assurance from the Government that they will look into it between now and the Report stage to see whether they can improve upon the small section dealt with. It will not help the Committee to leave untouched a section which can obviously be remedied without any great difficulty.

While appreciating the Solicitor-General's arguments that this is a very wide problem, I suggest that it is conceivable that the terms of reference of the committee to which he has referred do not cover the whole matter. In the meantime, as my hon. Friend has said, there exists a fairly narrow and glaringly obvious anomaly. It is that individuals who have to interpret this very complicated Bill and various complicated finance Measures have to have recourse to extremely expensive legislation at a very high level. It is right that we should immediately press for redress for such persons. I think that the Solicitor-General has tried to escape the issue by going into a barrage of remote future possibilities, when only today we have seen that the Minister of Health has dispensed with the services of one of the most important committees ever set up—that to investigate local government boundaries. The right hon. and learned Gentleman says: "Wait and be reasonable; these anomalies will be remedied when one of these multifarious committees makes an investigation and reports in a few years' time, when action will be taken." Surely action should be taken now?

I think that the ground on which the right hon. and learned Gentleman the Solicitor-General resisted this new Clause is not very convincing. Without any hesitation I accept his assurance that this matter will be within the terms of reference of the committee, but I take it that he will not deny that a great many matters that we have already considered in this Bill are also within the terms of reference. Nevertheless, on the Government's recommendation, this committee has seen fit to take a line about them. There is no reason to think, even if we adopted this Clause, or whatever better wording may be preferred by the Government, that such action would take the matter out of the terms of reference of the committee. They could make recommendations on the law as it would then stand. I agree with my hon. Friend the Member for Northwich (Mr. J. Foster) that the very fact that the House of Lords was so divided on this subject is a good reason why the Committee should take a definite line. That definite line, I suggest, should be that which has been suggested in all the speeches made and of which the force is not denied by the Solicitor-General, although he has given a very inadequate reason for not passing the new Clause now—namely, that the matter would be within the committee's terms of reference.

I think that the Solicitor-General was very sympathetic towards this new Clause, but I was a little disappointed with what he told the Committee. The case has been made by my hon. and learned Friend who moved the new Clause and strongly supported by several other hon. Members. I do not think that anything that was said by the Solicitor-General led the Committee to believe that he was not in sympathy with it. He told us that he did not think it went far enough. I understand that, but do not think it any reason for what he has put forward. Will the Solicitor-General undertake to put to the committee the problem which this Clause raises? If he will give that undertaking, perhaps my hon. and learned Friend will take a different view.

It is within the terms of reference, which are very general and clearly cover this matter. The committee clearly will be conscious of what has taken place in this Debate and I should have thought that was sufficient.

But will the Solicitor-General draw attention to it? It will obviously be a matter to which the committee will give careful attention if the Solicitor-General asks it to do so.

May I ask your guidance, Major Milner, to clear up this point? Is it within the province of the Opposition to draw the committee's attention to this matter?

I do not think that question is one for me, but I imagine it is competent for anyone to bring any matter to the attention of any committee. Whether the committee takes action or not is a matter for the committee itself.

I do not want to be finicky and obstinate about this, but I thought the procedure was that, when a committee is appointed and given terms of reference and when matters will be obviously perfectly clear to it, we should leave it to the committee's discretion as to how to discharge all the functions with which it is entrusted. I have no doubt the committee will read what has taken place and, this being one of the most discussed problems in the Income Tax law, I should be surprised if it did not give attention to it.

I saw the Solicitor-General nod his head when I asked him to invite the attention of the committee to this matter. Is he now withdrawing the nod, or not?

I hope hon. Members will allow us to come to a decision on this matter. With every respect to the Committee, it would appear to me that when a firm reply has been given by the Government hon. Members might consider how far it is desirable or necessary to proceed with the Debate in present circumstances. I venture to hope they will give that consideration.

I very much agree with what you say, Major Milner, but really that does not settle the point. It is the duty of Members of the House of Commons to get grievances remedied, and whatever the Solicitor-General has said tonight, he is no nearer to getting a real grievance remedied at the present time; and as long as I have anything to do with the House of Commons, I shall do all I can to get the grievances of my constituents put right, whatever anyone else may say. The first reason the Solicitor-General gave was one of the most completely futile that even he has made in this Committee. As regards this Clause, he said that he could not remove the grievance because if he removed this grievance it would lead to another grievance having to be removed. That really is not the position which should be taken up in the House.

On this new Clause, we are being given a chance to put a matter right. There is no doubt at all that the average layman believes that when he takes a complicated legal matter to a very high court and that involves enormous expense connected with his business, it ought to be a business expense. By a very bare and very narrow majority in the House of Lords, an opinion was given otherwise. All I can say is that this is obviously one of the cases where the House of Commons should decide and make laws of its own. There can be very little doubt that, in any of the instances which we have had put to us by our legal friends tonight, there has been no case on the other side. There has been nothing laid down by the Treasury, who are going to lose a lot of money.

2.15 a.m.

I would point out to the Committee that during the last year we have passed a Bill giving legal help to a vast number of poor people. I only use that as an illustration. It shows there is a general desire in the House to do justice in legislation of this kind. When we have a chance like this to put a matter right and see that the very heavy charges come out of the business affairs of a firm, I think we should have been treated with greater courtesy and help by the Government than we have been. It is easy for hon. Members opposite to take no notice of the vast burdens which the poor business people have to bear today. Our party would like to see this injustice remedied. Whenever the Treasury lose a case they put it right as quickly as they can, but whenever the taxpayer loses they never miss a chance under the present régime of weighting the balances against the taxpayer, sometimes in a dishonest way.

I do not think the right hon. and learned Gentleman has been as gracious over this matter as he might have been. I ask him to consider once again the matter which we are impressing upon him. As a result of this discussion, I have no doubt that the Committee will examine this proposal, and I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.