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Clause 11—(Surtax: Reliefs For Earned Income)

Volume 641: debated on Sunday 7 May 1961

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3.44 p.m.

I beg to move, in page 8, line 5, after "of" to insert "assessing and".

I think that it would be convenient for the Committee to discuss with this Amendment that in page 8, line 5, to leave out "for" and to insert:

"in respect of income arising in"
and that in line 6, to leave out "of assessment".

As you say, Sir Gordon, this Amendment can be taken in conjunction with those that you have mentioned.

As this is the first of a series of Amendments to this Clause, perhaps I may be permitted to make some brief preliminary remarks about our general approach to the matter. We on these benches are against Clause 11 as a whole. We shall oppose it, amended or unamended, because in our view it has no rightful place in this Bill and in the Budget in the context of the present economic and social situation.

We are against it, against what went before it in the way of supplementary Budgets, and against what is in Clause 11 now but, without prejudice in any way to our opposition to the Clause as a whole, we have put down these three Amendments, which are designed to correct faults in the Chancellor's own proposals. Even if we accept the right hon. and learned Gentleman's own premises as the basis for the proposal in Clause 11—which, as I have just said, we do not—we consider that he is mistaken in three respects.

First—and this is dealt with in the Amendment I am now moving—he gives incentives retrospectively to all self-employed persons who are assessed under Schedule D on the profits or gains of the preceding year. This is precisely what the Chancellor said he wished to avoid when putting a forward date to the Surtax reliefs in this Clause, and I will be returning to the detail of this Amendment in a moment.

The second of our three Amendments to Clause 11 deals with the incidental advantage that is given to unearned income by the relief which the Chancellor proposes for earned income. By reason of the reduction in earned income for the purpose of the charge to Surtax, the Surtax rate on unearned income is consequently reduced. We have tabled the second Amendment to rectify that fault.

Thirdly, we think that the Chancellor should have restricted or excluded from any business expenses deductible from the Surtax assessment certain types of expenses in which the taxpayer shares some amenity or personal benefit. We contend that these are flaws in a Clause the general principles of which we disagree with as much as with the proposals themselves.

With that introductory explanation, I will now deal with the first of our Amendments. In his Budget statement on 17th April, the Chancellor had this to say about Surtax reliefs:
"The changes I propose will be applicable to incomes earned—I repeat earned—during this new financial year and thereafter. In other words, the changes will affect what is payable on and after 1st January, 1963."
I myself thought that the Chancellor made an aside at that point, although it is not recorded in the OFFICIAL REPORT. I thought that I heard him say that there was no point in giving incentives when the money had already been earned; but I may have been mistaken.

Be that as it may, what the Chancellor is doing under his present proposals is to give retrospective incentives to a certain class of Surtax payer. He intended that the reliefs he was giving should relate to income being currently earned now. He stressed two points. One was that the reliefs would be given to earned income—and we have another Amendment later to deal with the fact that, as I said a moment ago, unearned income will consequentially benefit from the reliefs given.

The Chancellor not only stressed that the relief was to earned income, but that it was to income being earned, as he said
"…during this new financial year and there-after."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 820.]
I quite understand the logic of his approach. He wanted to give this stimulus now, and there was no point, in pursuance of his general objective, in giving retrospectve benefit. So he wanted the benefit of these reliefs to be reflected immediately in these incentives to those who are earning incomes in this new financial year and thereafter.

I suppose that the Chancellor's intention was that the 400,000 key men and women in Britain, including the whole of the Treasury Bench, should, upon hearing of these tax reliefs, show renewed vigour, energy and enterprise. Slothfulness was to be banished, intolerance dissipated, resentment removed, work to rule was to be abandoned and all drags on the fullest use of brain, skill and enthusiasm were to be removed from Monday, 17th April, at 6 p.m., the day of the announcement of their fiscal emancipation.

One can almost hear the hum of their increased activities. It was certainly the Chancellor's intention that this should happen. But we find, incidentally, that by the method of assessment for Income Tax under Schedule D the Chancellor is conferring retrospective incentives on people who have already earned the money and cannot possibly now give him any reward for the initial period over which they will get their Surtax reliefs.

I refer, of course, to all of those in business on their own—professional men in private practice and other self-employed persons—who are assessed under Schedule D on the profits of the preceeding year. As we all know, SurTax assessment are based on the Income Tax assessments made for the same year. For 1961–62, Surtax will be levied under Income Tax assessments for this current Income Tax year 1961 to 1962.

The Surtax assessments are not, however, made up until the Income Tax assessments for the year have been settled, and that is why there is a period of eight months after the end of the Income Tax year before the Surtax assessments are completed and the notices and demand notes are sent out.

As the Chancellor pointed out in his Budget statement, the Surtax assessments for 1961–62 will be the first in which these reliefs are given and the reduced Surtax will be payable on 1st January, 1963. As we can see, whereas those in employment during 1961–62 will be taxed on the incomes they are earning now, in the case of tax assessments on profits and gains—for the individual trader and professional man in private practice, and others similarly self-employed—Income Tax for the current year, 1961–62, will be on the amount of profits or gains earned in the Income Tax year 1960 to 1961, because the basis of assessment in this year is the profits and gains of the preceding year.

In those circumstances, it follows that Clause 11 gives relief to these people on incomes which were already earned—earned, indeed, before the Chancellor rose to his feet on 17th April. And there is no point either from the standpoint of incentive or fiscal justice in relieving incomes which were earned before the Chancellor announced these proposed reliefs. We cannot, therefore, agree to retrospective incentives. We do not think that they make sense. Indeed, the Chancellor's only possible excuse for introducing Clause 11 into the Bill is that he believes that it will add to the economic and industrial strength of the country.

As my hon. Friends and I said on Second Reading, there can be no justification for Clause 11 on the ground of equity, when it was preceded by earlier measures imposing higher National Health contributions and additional Health Service charges. The Chancellor raised substantial additions of revenue by those two previous measures. No one would tolerate what the Chancellor is proposing in Clause 11 unless he believed that it had something to do with the strengthening of our economy at this time.

The Chancellor cannot say that the number of Schedule D Surtax payers is so inconsiderable that it was scarcely worth worrying about this particular anomaly. There are, in fact, as far as I can trace, about 50,000 individual Surtax payers—traders, professional men, and so on—who have Schedule D assessments of more than £2,000 a year. There are 50,000 others who are in partnerships where the Schedule D assessments are also more than £2,000 a year. Not in all cases of partnerships is each partner liable to Surtax, if the total profit of the partnership is only £2,000 or £2,500 a year. I quote these figures from Table 38 in Command Paper 1258, which is the Report of the Commissioners of Inland Revenue. Traders and professional men and other self-employed persons in the Surtax range are neither inconsiderable in number, nor in the total income on which they pay Surtax.

My hon. Friends and I hope that it will not be too hard on the self-employed Surtax payers to say to them that the reliefs from Surtax in their case should be deferred for a year, so that the incentives we wish to give them shall apply at a time when they can be reflected immediately in greater effort, greater efficiency and in other ways which will be revealed when they receive the incentive.

While the hon. Gentleman is considering this point, will he, in addition to the question of incentives, appreciate that it is a principle of Income Tax law that there should be equity between taxpayers? Would he give an undertaking whether, if at any time in the future Surtax is raised should the party opposite come into power, there will be a similar deferment of operation in respect of profits of Schedule D taxpayers?

It would, of course, depend on the circumstances in which Surtax was raised. This is not a fiscal operation. It is, as I see it, an economic operation. The Chancellor is using the instrument of taxation to achieve certain economic objectives. I cannot see any other purpose for the proposal he is making in the context of the present situation.

I agree with the right hon. and learned Gentleman the Member for Herefordshire, East (Sir D. Walker-Smith) that if we defer the concession on the ground that this concession is related to a special effort, to give it prematurely would not further that objective. We should, further, certainly have to consider, if Surtax were increased in the future, whether a deferment in their case would be justified, having regard to the deferment in Clause 11 which is now proposed.

If we leave it as the Chancellor proposes, ray hon. Friends and I consider that the Schedule D taxpayer will have undue advantage over the Schedule E taxpayer, because the Schedule E taxpayer will have to sing for his supper before he gets the reward. He is exerting himself now to justify the relief that he will get in the year 1961–62 on the income that he is earning now. But the self-employed business or professional man will get relief on income earned during the year 1960–61; that is to say, he will get relief before he has bestirred himself—

4.0 p.m.

How would the hon. Gentleman deal with this proposal that he is putting forward with regard to the opening years of professional assessments and also, indeed, with regard to the closing years? Clearly, it would be possible to get out of this difficulty in many cases by having a cessation of partnerships and starting new partnerships later.

The hon. Gentleman, for whom I have a great respect and who is an accountant, is trying to complicate my argument. He is trying to make things difficult for me. What I am trying to do is to convince the Chancellor of the Exchequer that if there is any sense at all in Clause 11 it does not make sense to apply these incentives retrospectively to a certain section of the taxpayers concerned. That is what I want to get over to the Chancellor, and I do not want to be deflected by any accountancy complications raised by the hon. Member for Brighouse and Spenborough (Mr. Shaw).

This is a perfectly simple point. As we shall see later, when we come to other aspects of Surtax, there has been an abundance of manipulations of liability to Surtax to achieve certain purposes or to place limits on reliefs which might not on logical grounds have any limit at all, but which have been imposed as a matter of judgment especially in the relations between one citizen and another and one group of taxpayers and another.

I think that in this case it can be argued that fiscal equity would require that all Surtax payers should get their reliefs at the same time on the same Income Tax assessment made in the same year—and that is perfectly logical—but I want to pin the Chancellor down to the motive behind Clause 11 and I do not want anyone to help him wriggle out of it. The truth is that unless the added incentives, which the Chancellor said were the mainspring of his approach to Clause 11, are in the forefront the whole time, they are merely an excuse, and I do not think that the Chancellor would try to deceive the Committee and the country by using incentives as a blind for reaching some accommodation with the Conservative Party on the whole question of the high levels of taxation and the better-off.

I know that it is absolutely in the tradition of the Conservative Party to relieve the rich of tax and to impose it on the poor. We know that. It has done it this year. Indeed, the echoes of our protest against it have hardly died in the corridors of the House. Only a few weeks ago we were opposing the imposition of additional Health Service charges and National Health contributions and some of us said that this was the preliminary to reductions in Surtax. I stated that publicly. I said to my constituents, "You watch. This is merely a curtain-raiser to the reliefs on Surtax". Everybody knew it was coming.

I gave examples of the introduction of Health Service charges and National Health contributions several years ago at a time when earned income relief was extended for Income Tax purposes to incomes between £4,000 and £10,000 a year. In fact, I believe I am right in saying that earned income relief was extended from £2,000 to £10,000 a year only a few weeks after the introduction of additional Health Service charges and National Health contributions.

I am asking the Chancellor to dispel this belief that this is how the Tories behave. He said that incentives lay at the root of the proposals that he was making in the Budget, and I want to keep him to that. If I keep him to that, then I think that we on these benches are justified in pointing out one of the weaknesses of the method by which he proposes to do it. With great respect to my hon. and learned Friends, I do not see that we can justify giving Surtax reliefs for a period when, for all we know to the contrary, lawyers were turning down briefs, solicitors were rejecting business, accountants were delaying producing their accounts to inspectors of taxes and when there were other evidences of laziness, resentment or indolence owing to the high levels of taxation, all of which are now to be remedied by these Surtax reliefs. We see no reason for giving reliefs during a period when these undesirable features may have been in evidence. Those reliefs should be related to conscious effort to justify them.

I have taken rather a long time in moving this Amendment because I was deflected from my main task, but I hope that there may be opportunities of dealing with any further arguments which hon. Members opposite may raise in the course of the debate.

Clearly, two views about this matter are held in this Chamber. There is the view expressed on the benches opposite, that Surtax relief is an encouragement to effort. There is the view held on this side of the Committee, that relief from Surtax is the plea put forward by those who find themselves in a soft spot and would like it to be softer. The view that I hold very strongly is that all the arguments advanced from the benches opposite for reductions in Surtax are "phoney" and are known to be "phoney", and that this Amendment demonstrates that to the full.

My hon. Friend the Member for Sowerby (Mr. Houghton), who introduced the Amendment so forcefully and fluently, referred to an aside by the Chancellor which did not appear in the OFFICIAL REPORT. In fact, there is in the OFFICIAL REPORT a statement which is as clear as a bell, when the Chancellor said, in the debate on 17th April:
"It would be illogical to reduce what is already payable on past effort on the ground of giving an incentive to future effort."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 820.]
Let us examine what the Chancellor has said, not in the high hopes which my hon. Friend has expressed of producing some logicality of treatment on the other side of the Committee, but merely to demonstrate, as I am convinced the Chancellor knows, that this so-called incentive is utter poppycock and that everybody who has considered it has found it to be utter poppycock, that no careful investigation has shown one iota of evidence that reduction in Surtax is an incentive of any kind and, indeed, that the evidence is overwhelming that it is the reverse for the commonsense reason that if a person needs something he works to get the money to buy it, and that if the tax is higher he has to work the more to have the net cash left over with which to buy what he wants. That is common sense, proved by every single investigation which has taken place.

I repeat that I am not on the same high level as my hon. Friend the Member for Sowerby. I have no hope of producing sincerity or logicality on the other side of the Committee. I limit myself to demonstrating the utter falsity of the arguments which have been deduced. The first argument is that "it would be illogical to reduce what is already payable on past effort on the ground of giving an incentive to future effort." Those who make efforts are people assessed under Case II of Schedule D, people who carry on professions, people like the hon. Member for Brighouse and Spenborough (Mr. Shaw) and myself and many other professional people in the House, people who work very hard in the House and outside, people on whose judgment a great deal of business decisions are made, people on whom, therefore, the prosperity of the country depends to a certain extent.

I said "to a certain extent". I do not exaggerate. I say that these are all people who ought to exert the greatest effort in the work of the country. We all share that view.

The Chancellor's theory is that, if we reduce their Surtax, that will be an incentive, but we must not reduce it retrospectively because that would be nonsense. It would indeed be nonsense. All these people are assessed on the basis not only, as my hon. Friend rightly pointed out, on the previous Income Tax year's income but, much worse than that, on the basis of the accounting year ending within the previous Income Tax year. I will give an example to explain what I mean.

My birthday is on 30th April. I hope that everyone will take due and proper note of that so that I shall receive the right sort of communications from the respective sides of the Committee. I am a professional man and, as a matter of coincidence, I end my accounts on 30th April. On 30th April, 1960, I ended my accounts, and the effort which I put in in the distant twelve months from 1st May, 1959—it is almost prehistoric—until 30th April, 1960, resulted in the income I earned which will be assessed for the tax and Surtax on which I will receive relief under these provisions which we are discussing now, that relief being supposed to be an inducement to make me work harder.

What greater piffle than that could anyone produce? It is work I did in May and June, 1959. I was not then even able to direct arguments against the Chancellor, because he was not in that office then. This demonstrates how ridiculous it is for the Chancellor to say that his proposal is based on an incentive for this very large class of taxpayers and Surtax payers.

The hon. Member for Brighouse and Spenborough tried to blind my hon. Friend with science. He was, of course, quite unsuccessful because my hon. Friend has a very scientific mind. He has probably spent as many years on these matters as the hon. Gentleman has spent months. The hon. Gentleman knows full well that there is this complication of the year of assessment which the Government obstinately refuse to alter. In spite of the recommendations of the Institute of Chartered Accountants, to which the hon. Gentleman and I both belong, in spite of the recommendations of the Royal Commission, in spite of the common sense of the matter, and in spite of the fact that, if it were altered, all sorts of unpleasant and unsatisfactory dodges for tax avoidance would be avoided, the Chancellor, in his judgment, has hitherto obstinately refused to alter that basis of computation and, as a result, we have, apart from anything else, many Clauses in this Finance Bill to cope with it in terms of taxation overseas. We have put down a new Clause to deal with it. No doubt the hon. Member for Brighouse and Spenborough, with his knowledge, logic, professional understanding, and loyalty to his profession, will support that Amendment in argument and in the Division Lobby when the time comes.

It is recognised that the present year of assessment basis lends a certain technical complication to this matter, but that does not alter the argument one iota. The Chancellor was not right in saying that this relief would be an encouragement or incentive to effort and he could not possibly have thought that it was. With all the advice available to him, the right hon. and learned Gentleman must have known that there is an enormous body of taxpayers for whom there is a settled case provided in respect of whom it just could not possibly be suggested that his proposal would be an incentive because the past effort had occurred so far back as almost to have been forgotten.

This is why we are determined to continue our opposition. We do so not only because, as my hon. Friend the Member for Sowerby has said, our Amendment shows the illogicality of the Chancellor's position, but because—I say this for my part, at any rate—it shows the insincerity of his position. It shows that he is determined to help the Surtax payer in this obnoxious way and is determined to do so at a time when all manner of burdens have been put on the backs of the poorer sections of the community. This is the occasion the Chancellor chooses to give to the richest section the remission of about half of their Surtax burden. It is utter nonsense. It is utterly unjust. It should be shown to be so by every hon and right hon. Member.

4.15 p.m.

I have very little to add to what my hon. Friends have said. The point is very clear. It is a simple point of principle. The right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith) asked my hon. Friend the Member for Sowerby (Mr. Houghton) what would happen in reverse if there were a question of putting up the Surtax rate at some future date. It is not very easy to draw an analogy with that sort of circumstance because we are not here discussing just any sort of remission of Income Tax. We are dealing here precisely with the argument which the Chancellor advanced for introducing the remission of Surtax at this time.

The Chancellor might have said, for instance, that there was a need to stimulate demand in the economy, that we ought to reduce taxation and allow a certain amount more money to go to consumers to circulate in order to increase demand. If he had said that, the argument that the remission of tax should be deferred for a year would not have applied. Then, I think the argument of the right hon. and learned Gentleman about the reverse process might have had some substance. But that is not this case.

The argument here is whether the provisions of the Clause meet the considerations which the Chancellor himself enunciated. The primary consideration, in the Chancellor's view, was the need to give incentives. He himself said, very succinctly, that
"It would be illogical to reduce what is already payable on past effort on the ground of giving an incentive to future effort."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 820.]
The simple point is that that is what he is doing. He is giving an incentive based on past effort. By the very premises on which he bases his case for the remission, that cannot be a reasonable proposal.

As my hon. Friend the Member for Gloucester (Mr. Diamond) said, we by no means accept the Clause as a whole. We are violently opposed to it in principle. But, even accepting the Clause in principle, it would still be possible for the Chancellor to accept the Amendment which does no more than bring the Clause more into line with his own declared intentions.

Another point arises in answer to the hon. Member for Brighouse and Spenborough (Mr. Shaw). My hon. Friend the Member for Gloucester spoke about the number of people whose basis of assessment under Schedule D raises difficulties. There is an even simpler answer than that. If the hon. Gentleman turns to the terms of the Amendment, he will see that it does not speak of the year of assessment at all. The Amendment to page 8, line 5, refers to "income arising in", not the year of assessment, but at a particular period. There is not any question of it being based on the year of assessment.

Under the Amendment to page 8, line 6, the words "of assessment are specifically excluded. Even the technical point of the hon. Member for Brighouse and Spenborough—that is all that it was—about commencing years, and so on, is not valid in relation to these Amendments. It is a pity to have to labour the point at considerable length, but it seems that we are not to have any other speeches from hon. Members opposite. Therefore, since the two interjections which have been made by hon. Members opposite are to represent the total contribution from that side of the Committee, they have to be answered in detail.

As I have said, the point is a simple one of principle. We are not by these Amendments frustrating in any way the intentions of the Chancellor of the Exchequer as set out in his Budget statement. Therefore, I think that we have every right to expect the Chancellor to accept the Amendments.

I wonder when the Opposition's attack on Surtax is to develop. We were told in newspapers over the weekend that a broadly-based attack was to be instigated by the right hon. Member for Huyton (Mr. H. Wilson) which would last some hours and that after that we would get down to detail and would go through the night. When is the major question of Surtax to be discussed? Is it to be discussed under these Amendments?

May I remind the noble Lord that under the rules of order we cannot discuss the general principle of a Clause until we reach the Question, "That the Clause stand part of the Bill"? What we are permitted to do on these Amendments is to debate what is in them. They relate to the special exemption of Schedule D and the unfairness of it compared with Schedule E, a subject on which the noble Lord has tabled Amendments in past years. We did not criticise him when he was dealing with those Amendments for not talking about much wider issues.

The right hon. Gentleman is wrong and is inhibiting himself. The way to launch an attack on Schedule E—I should not have to tell the right hon. Gentleman this—is to table a wrecking Amendment, and then he can discuss the whole operation of Surtax. I realise that on the Question, "That the Clause stand part of the Bill" we cannot enlarge on what should have been done in previous years, or what should be done next year. All that we can discuss is what is in the Clause.

The right hon. Gentleman's attack has failed so far. I am curious about the technical means by which it will now develop. The party opposite has started in a very mild way on this point of postponing the operation of remissions of Surtax on Schedule D taxpayers. Then we are to get down to something equally jejeune. I wonder when the great attack is to develop.

The right hon. Gentleman is quite right in saying that in previous years I have done something to try to approximate the weight of taxation under Schedules E and D and will try to do so again. I have a slight contribution to make, although it has not come to your notice, Sir Gordon, and that is to bring the operation of Surtax forward one year, which is precisely the opposite to what right hon. and hon. Members opposite wish to do. My reason was that I was surprised and made a little unhappy by the words of the Chancellor of the Exchequer in his Budget statement which have already been quoted. He said:
"Of course, so far as Surtax is concerned, the amount due next January will be upon income already earned in the past. It would be illogical to reduce what is already payable on past effort on the ground of giving an incentive to future effort."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, cc. 819–20.]
The argument that it is an incentive to earn well this year depends on what the Government do to the wretched taxpayer the year after next. This has a Communist ring about it, which surprises me when I recall that I used to sit at the feet of my right hon. and learned Friend when he was a Liberal, at Cambridge University.

Does the Chancellor really maintain that incentive is so much involved in this? Incentive depends on the status of a taxpayer and his circumstances in relation to the effort which he makes. If the effort does not produce a reward which will enhance the status, the effort is simply not made. Whether one is a profit-maker, salary-earner, or a man of independent means makes not the slightest difference. It is very surprising that my right hon. and learned Friend, having taken the plunge over Surtax, on which we all congratulate him, has not made it applicable to next year and has refined the matter by reference to incentive.

My right hon. and learned Friend's case is somewhat compromised by one or two speeches which have been made by hon. Members opposite. As the hon. Member for Sowerby (Mr. Houghton) said, the Chancellor has already conceded the principle of equity rather than of incentive in providing that Schedule D Surtax payers pay on an income already earned. We have not had his reply yet, but if he has conceded this for the Schedule D Surtax payer he has passed the point of no return on incentive. He is talking about justice. We want him to talk about justice and equity and not about this spurious method of incentive which does not operate in the Surtax racket—[Laughter.]—Surtax (range at all. I said "racket" and I repeat it advisedly, because I think that there are some rackets in the Surtax range.

My right hon. and learned Friend has conceded the principle of equity for the Schedule D Surtax payer. I should like him to be generous and even at this late stage to bring the whole operation forward by one year so that the principle of equity is equally conceded to Schedule E taxpayers.

Will the noble Lord clearly tell us his view? Does he consider that the changes in the rate of Surtax have an effect on incentive or not?

It is a question not of incentive, but of doing justice to the Surtax payer, who is still called upon to pay enormous sums of his saved income or earned income long after the sociological need for it has passed.

I have made this point in previous debates. Surtax was justifiable in the 1920s and 1930s as a means of redistributing income when we had serious unemployment and very great poverty. It is not defensible in modern times. I should like it done away with and consolidated in a graduated Income Tax with a maximum rate of 10s. on the upper range of income.

May we take it that the noble Lord considers that this change will have no effect on the incentive to work?

I will not, at this early stage, follow my noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) with any provocative remarks concerning the Opposition. The hon. Member for Sowerby (Mr. Houghton) explained that the purport of these Amendments was to prevent the new Surtax reliefs in respect of earnings from applying to any income which, although it might be reflected in the Surtax assessment for this year of assessment, 1961–62, actually arose before 6th April this year.

That being the purpose of the Amendments, I could not follow the reasoning of the hon. Member for Gloucester (Mr. Diamond), who said that he thought that incentives were all poppycock. As the sole purpose of the Amendments is, as I understand, to limit the Surtax reduction to income which arises in the future, I cannot see how he can have any alternative but to vote against the Amendments.

Reference has been made, I think by the hon. Member for Gloucester, to two interjections from this side of the Committee. I thought that my hon. Friends were "on the ball" in each case. I should like later to deal with the two points which they raised.

Reference has also been made to what my right hon. and learned Friend the Chancellor of the Exchequer said in his Budget speech. He did not say that the Surtax payable as the result of past earnings would be unaffected in every case. He used the words which have been quoted as an explanation of why he was not proposing any Surtax relief which would be a burden on the Exchequer during the current financial year.

4.30 p.m.

My right hon. and learned Friend went on to describe his actual proposals. The hon. Member for Sowerby fairly quoted the following words from my right hon. and learned Friend:
"The changes I propose will be applicable to incomes earned—I repeat earned—during this new financial year and thereafter."
My right hon. and learned Friend then went on, however, with some words which the hon. Member for Sowerby quoted rather sotto voce, but which, I would have thought, were of particular importance in connection with this debate. My right hon. and leaned Friend went on to say:
"In other words, the changes will affect what is payable on and after 1st January, 1963."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 820.]
So far as I know, until these Amendments appeared, and, indeed, certain suggestions were made by the Opposition, it had never occurred to me, nor, I would have thought, to anybody else with whom I have been in contact, that these proposals of my right hon. and learned Friend would not apply to Schedule D taxpayers in the same way as they apply to Schedule E taxpayers.

Since the two sentences that the hon. Gentleman has quoted are obviously inconsistent, will he tell us which of them his right hon. and learned Friend meant?

What my right hon. and learned Friend was saying in his Budget speech, and what he said subsequently, was that the purpose of his proposals was to provide incentives. Before I come on to the differences between the method of assessment under Schedule D and Schedule E, perhaps I might deal with the point raised by the hon. Member for Sowerby, which is relevant in the context of what has just been said by the hon. and learned Member for Kettering (Mr. Mitchison).

The hon. Member for Sowerby referred to the large number—he was quite right in saying that it was a large number—of Schedule D taxpayers. What is important is that but for the Budget changes the number of Schedule E taxpayers paying Surtax in January, 1963, would have been nearly double the number of those who had earned income from Schedule D. My right hon. and learned Friend said again and again that he thought that these proposals were desirable to give an immediate incentive to salaried Surtax payers—that is, to those assessed under Schedule E. Therefore, in dealing with these Amendments, what we have to consider is whether, bearing in mind that the bulk of this relief will go to the Schedule E taxpayers, it would be reasonable to apply different and novel rules to those who are assessed under Schedule D.

The hon. Member for Sowerby said that he did not think it would be too hard on those people. As a matter of equity—and in a matter like this one cannot ignore equity—I would have thought that to deny the same concession to the taxpayers with earned in come under Schedule D would be most unfair and inequitable.

How does the hon. Gentleman come to argue that this is the same concession? Even though we oppose the whole proposal, in the first Amendment we are trying to put Schedule D people on the same basis as those on Schedule E so that they do not get any tax concession until the income has been earned. Surely the Economic Secretary realises that the Chancellor is giving more to the Schedule D than to the Schedule E people, because the concession is retrospective, but not for the Schedule E people. How can he say, therefore, that we must treat Schedule D and Schedule E people the same when that is what we are trying to do by the Amendment?

I do not accept what the right hon. Gentleman has said. My hon. Friend the Member for Brighouse and Spenborough (Mr. Shaw) referred, in passing, to the commencement and cessation provisions. I shall refer to them presently, because I hope to show to the right hon. Gentlemen satisfaction that over the years there would be no advantage whatever to the Schedule E taxpayers. The right hon. Gentleman has misunderstood the position.

The effect of the Amendments in that salaries earned in 1961–62 and tax for that year under P.A.Y.E. would lead to a reduced Surtax bill on 1st January, 1963, but that business and professional profits earned in 1961–62 would lead to a reduced Surtax bill on 1st January, 1964. For those assessed under Schedule D, there would be no Surtax reduction on 1st January, 1963.

Such a result overlooks the fact that under the law as it has existed for many years the profits of 1960–61—that is, the year of assessment, which is past—are taken to represent the income of 1961–62 for the purposes of assessment. The hon. Member for Sowerby describes this as being incidental to the method of assessment, and he is right. This is a pure technicality. I suggest that it would be an abuse of that technicality to hold it against the business man and to say, in effect, "We are giving a new relief on earned incomes as from 1961–62, but because the law assumes, as a result of a technicality, that your earned income for that year is measured by your earnings for the year before, you will get nothing until January, 1964."

Surely the Economic Secretary must agree that if the whole change is being made on the ground of incentive, what is not a technicality is the year in which the earnings are actually received.

The right hon. Gentleman is ignoring the effect over a period of years of doing what he wants to do, which would operate to the disadvantage of the Schedule D taxpayer. I repeat again that my right hon. and learned Friend throughout has been perfectly consistent in saying that the object of his proposals was to provide incentive. But there has never been the slightest suggestion that in doing what he considers best in the interests of the country the Schedule D taxpayer should be treated differently from the Schedule E taxpayer, in a way which has never been done before.

Will the hon. Gentleman explain, in plain English, how an incentive is given to anybody who has already earned the money?

I am sorry that if the hon. and learned Gentleman has not followed what I have said, I cannot help him much further. I have already read out what was quoted fairly by the hon. Member for Sowerby, who read out the words of my right hon. and learned Friend, that

"the changes will affect what is payable on and after 1st January, 1963."
The hon. and learned Member, and, I am sure, all his colleagues on Che Opposition Front Bench, knew perfectly well that that was to apply to Schedule D earnings as well as to Schedule E earnings.

My hon. Friend the Member for Brig-house and Spenborough mentioned, in passing, the cessation provisions of those who are engaged in Schedule D occupations. He asked a question of the hon. Member for Sowerby, who was rather coy in his reply. Perhaps I can put a suggestion to the hon. Member for Sowerby. The assessment made on the trader or the professional man for this year of assessment, 1961–62, is intended to be a charge on the income he makes through carrying on business during that year, notwithstanding that there is the statutory rule under which the income is measured by reference to the profits of a previous accounting period. This principle applies to the years which follow.

Whatever the period for which such a man continues in business after 6th April this year up to his retirement, his business profits will be exposed to Income Tax assessments and, consequently, to Surtax assessments for precisely the number of years and months contained in that period. In this respect, his position cannot be distinguished from that of the Schedule E employee who is paying his tax currently in respect of a salary and paying his tax under P.A.Y.E., who will be similarly exposed to Income Tax and Surtax liability for the precise period from 6th April this year to the date of his retirement.

It seems to follow that common fairness would demand that Surtax reliefs in respect of earnings should operate from the same year of assessment whatever Schedule applies.

Does that mean that it should apply to professional men, who have retired, in respect of fees payment of which they have postponed until after they have retired, and with particular reference to former practising barristers?

I think that it was recognised that we were dealing with the overwhelming majority of those assessed under Schedule D on a preceding-year basis, and not the very few people assessed on a cash basis.

The Committee should be under no illusion at all about the consequence of the Amendments. The result would be that the overwhelming majority of tax payers under Schedule D would receive no relief in the Surtax payable until 1964.

The hon. Member says "Hear, hear", but I would remind him of what his right hon. Friend the Member for Huyton said on Second Reading when, in referring to Schedule D, he said that it was

"…a field which embraces a multitude of sins…".
I would ask the right hon. Gentleman and the hon. Member for Gloucester who these sinful people are whom the Opposition wish to penalise.

Do they include the provincial shopkeeper who has built up his business until he is earning £2,500 a year? Do they include the tenant farmer who, by enterprise, has brought himself into the Surtax paying group; the owner of a filling station who ignores the eight-hour day, the accountant, the solicitor, the doctor and the dentist? All these people, according to the right hon. Member for Huyton, come within the field of the sinful and must be penalised. Because of a technicality they are to be told that they will receive no reduction until 1964, not through any fault of their own but simply because it has been laid down by law for thirty-five years that they are to be assessed on a preceding-year basis.

The right hon. Member for Huyton let the cat out of the bag when he imported this question of morality into his speech on Second Reading concerning Schedule D taxpayers, and it was quite apparent that what he said was motivated by pure political prejudice. The hon. Member for Glasgow, Craigton (Mr. Millan) said that the matter with which the Amendments deal was a point of principle. I have made inquiries and I have found no cases—

Would the hon. Gentleman quote the sentence which I used about a multitude of sins? He has made a lot of play about it and, as I thought, childish references to it.

Perhaps it was a rather childish passage to make a childish comment upon, but this is what the right hon. Gentleman said:

"The argument that he used is true for Schedule E, for which it is the 1961–62 income that is relevant, but it is not true for the very large field of surtaxable income earned under Schedule D, a field which embraces a multitude of sins in terms of tax avoidance, business expenses and the rest."—[OFFICIAL REPORT, 4th May, 1961; Vol. 639, c. 1649.]
What the right hon. Gentleman is saying, of course, is that his observations concerning tax avoidance and business expenses apply to the field of Schedule D, which includes people like shopkeepers, doctors, dentists and farmers.

I was making it clear to the Committee that I can find no case, and I have asked the Inland Revenue to look back, where, under any Government, a change in basic rates of taxation has not been applied uniformly in respect of the year of assessment to taxpayers regardless of whether they were assessed under Schedule E or Schedule D. My right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith) was absolutely right to raise the question of what the Opposition would do if it were to increase the rates of taxation. The hon. Member for Sowerby, quite understandably, gave a somewhat guarded reply, but the identical principle that my right hon. Friend is applying has been applied in the past when the basic rate has been increased.

The last increase in Income Tax or Surtax was made in 1951 by the right hon. Gentleman the present Leader of the Opposition. That related to the year of assessment 1951–52 and hon. Members opposite should know how it was applied to Schedule E and Schedule D. Those assessed under Schedule E paid the increase in respect of their earnings after 5th April, that is to say, actual earnings, but Schedule D payers paid the increase in respect of money earned in the accounting period which ended prior to the Budget. If the Labour Government thought that they should bear the increase on that universally accepted basis of assessment, I cannot see why these people should not have the benefit of a reduction on the same basis.

4.45 p.m.

That change in taxation was not made on the ground of incentive. It was made to restrain expenditure by taxpayers. The whole basis of this argument is the Chancellor's statement that he is making this change wholly on a quite different ground of incentive.

I have been over all that ground before and I would only add, for the benefit of right hon. Gentlemen opposite, that my right hon. and learned Friend has again and again explained the object of the change, but it does not follow on the ground of equity that we should treat Schedule D taxpayers, who are in the minority of taxpayers, differently from those who pay under Schedule E.

I can see no reason in equity why the sort of people to whom I have been referring, the tradesmen, the farmers, the professional people, the doctors and the dentists, should be penalised merely because taxation is being reduced. They bore the burden when it was increased and they should now receive the benefit when it is decreased. To defer until 1964 the reduction in Schedule D liability for Surtax would be inequitable in the extreme and I would ask the Committee to reject the Amendment.

I am surprised not only at the very inadequate answer from the Economic Secretary to the Treasury, but also at the fact that he was put up to reply. I am surprised that the Chancellor, who is so much involved in the Surtax proposals, did not see fit to reply to the Amendment. I hope that before it passes from the Committee the right hon. and learned Gentleman will explain himself. Some of my hon. Friends have said that the Chancellor's sincerity is in question. I think that is rather too strong, but his logical consistency is in question as a result of the Government's attitude to the Amendment.

Before coming to the general argument, I should like to refer to one or two points made in passing by the Economic Secretary. The hon. Gentleman did not deal with the main points about incentive at all. When he was asked about it he said that he had been over the point, but he did not go over it. He passed it. He never attempted to answer the point made by my hon. Friend the Member for Sowerby (Mr. Houghton). The second point is the hon. Gentleman's psychological Freudian attitude in always going back to 1951 when he possibly can.

The only reason why I went back to 1951 was that I had to go back to that year to find the last increase in basic Income Tax or Surtax.

The year 1951 is to the hon. Gentleman like the Freudian psychologist's reference to the child's desire to go back to the womb. Almost every Speech he has made has been on that basis. I think that he gets this from the Prime Minister, who cannot make an economic speech without going back to 1951. The hon. Gentleman thought that 1951 was in some way relevant, but, as my right hon. Friend the Member for Battersea, North (Mr. Jay) pointed out to him, what happened then was a change in rates. The Clause which we seek to amend makes no reference to change. It is a relief on earned income, and what we are saying is that even within the Chancellor's argument, which we do not accept, it would be logical for Schedule E and Schedule D to be treated in the same way. All the hon. Gentleman can tell us is that in 1951 Schedule E and Schedule D were treated in terms of time, of years, in the same way as the Government are treating Schedule E and Schedule D today.

Quite apart from the question that that, as I have said, was a change of rate and this is a change of relief, there is another point. In 1951, the Royal Commission was sitting. The then Chancellor of the Exchequer, now the Leader of the Opposition, had appointed the Royal Commission to go into this and many other questions. One of the questions that it went into was the timing of the Schedule D and Schedule E taxation. One of its recommendations was that Schedule E should be put on a current year basis. I will not say that that was sub judice but it had been considered by Lord Radcliffe and his colleagues, and it is obvious that when my right hon. Friend made that change in 1951 he applied the rules in terms of time as they already stood, but he had thrown this question and other questions for consideration by the Royal Commission.

It is six years since the Royal Commission reported, and this recommendation has not been accepted. To judge from the logic of the hon. Gentleman's reply—if I may use such a word in connection with his speech—it would appear that the Government have no intention of accepting that recommendation by the Royal Commission for very many years to come.

There was the rather silly point about a multitude of sins. We shall have to be careful with the phrases we use if hon. Gentlemen are to base whole speeches on them. The hon. Gentleman spoke of my reference to a multitude of sins and referred to provincial shopkeepers—I do not know why he goes only for the provincial ones—farmers, petrol station proprietors, solicitors, and so on. He suggested that I thought all those people were sinful people and that I was trying to bring some moral connotation into play. I was not, and the hon. Gentleman knows it.

I hope that the hon. Gentleman knows—at all events, the Inland Revenue knows—that there is far more tax avoidance with Schedule D than with Schedule E. We all know it. I do not think the Chancellor would deny it. Many of us have had regard to the sins of tax avoidance and to the abuse of business expenses, on which the Chancellor produced a highly moral sermon in the middle of his Budget speech. We all welcomed the sermon, but we should have liked action as well. The subject of business expenses is always within the Schedule D and not the Schedule E field. It is appropriate for one to say when referring to these things that they are found much more in connection with Schedule D. Therefore, for the hon. Gentleman to argue that I was suggesting that the Scottish doctor, the provincial shopkeeper and the Welsh petrol station proprietor were sinful was a childish use of words.

We must now come to the main question, because the hon. Gentleman, I thought, entirely failed to deal with the arguments of my hon. Friends. First, we have the question of the motive behind the Clause. We have made it plain—I thought that my hon. Friend started the debate off very usefully by pointing this out—that we oppose Clause 11 as a whole and that we intend to vote against it. That does not, however, prevent us—I am sure that the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) takes this point—from moving a series of Amendments to deal with particular points.

The first Amendment is designed to show the complete illogicality of the Chancellor's position in that some things which are supposed to be incentives, which, by their very nature, can only be prospectives, are being handed out on the system of retrospective incentive. Our second Amendment is to deal with the unfairness of the expenses point, and to bring that into the Surtax computation. Another Amendment deals with the problem of unearned income so far as that is concerned.

To move these Amendments does not mean that we in any way concur with the Chancellor's proposals in the Clause, but we felt that these matters should be debated. When we have passed the stage of the Clause standing part of the Bill and have then been defeated, we cannot say that we should like to go back and try to move some Amendments. Once Clause 11 stands part of the Bill we can move Amendments only to Clause 12 and later Clauses. That is why we are moving these Amendments at this stage, but that is only a subsidiary to our main intention of voting against, and, we trust, defeating, Clause 11 later.

I am sorry once again to inflict on the Chancellor the words that he actually used, but he has related this to incentives. This is Clause 11, and the only justification that he has attempted to put forward for it is the question of incentives. This upsets the noble Lord the Member for Dorset, South. The noble Lord does not think that it should be related to incentives. He thinks that it is almost Communist in its approach. He thinks that the matter should be judged in terms of social justice. We all have our different ideas of social justice, and I think that the noble Lord's conception of it is, on the whole, unique—and it is probably all the better that it should be. However, no one on this side of the Committee has heard any argument at any stage during the Budget debate, the Finance Bill or at any other time to suggest that the Chancellor really pretends that there is any social justice in this Clause.

The Chancellor has not put the Clause forward on this basis. Many of us warned the Chancellor in speeches in the country before 2nd February that we were afraid that the Government were contemplating increasing the charges on the Health Service, increasing the poll tax contribution, to find a little financial manoeuvring power for the right hon. and learned Gentleman to use in Surtax concessions. The Chancellor will remember that there were a great many inspired statements in the Press about his intentions on Surtax. The President of the Board of Trade—we are glad to see him here this afternoon; he and I were in foreign parts at the weekend—created a precedent by the freeness with which he spoke before the Budget about the likelihood of Surtax concessions.

Whether that speech was just a careless indication of what the right hon. Gentleman knew that the Chancellor of the Exchequer intended—actually, he never does anything in a careless manner, or tries publicly to put pressure on the Chancellor—I do not know. It is difficult to speculate about his motives. However, certainly from, roughly speaking, Christmas onwards there was a good deal of inspiration of the Press from Government sources that something was going to be done about Surtax. That was one reason why we felt it necessary then to warn particularly against probable changes affecting the National Health Service.

We know that a great deal was said in the Press about what was intended. It might not have had a lot to do with the Chancellor of the Exchequer, because he was discreet in this matter. In fact, he said nothing at all. It had much more to do with the Chancellor of the Duchy of Lancaster, for it comes under his Department. But no one except the noble Lord has pretended that this has anything to do with social justice, and he thinks it is unjust at that.

But we feel that this is characterised by social injustice. The social injustice is in increasing taxation on the poorest people in the country while giving tax concessions to the richest people. It cannot be described as anything but social injustice. Every hon. Member in the Committee except the noble Lord sees that point.

Nevertheless, the Chancellor—to do him justice, if I may use that word again—has not really tried to make much of any question of fairness or equity in this matter. He is quite cynical about it. It is true that he got a little lyrical one night while winding up the Budget debate and started telling us about the terrible time that the £5,000 a year people have. But he has never addressed himself to the rather simple point, put to him by my right hon. and hon. Frends, that if it is so difficult to live on £5,000 a year how can one live on £500 a year, or the old-age pension? As I say, the right hon. and learned Gentleman has never addressed himself to that question, but, obviously, if his argument is right about the £5,000 a year people, we must be right about some of the others.

I see that the Chancellor is getting excited now. The very mention of that lyrical passage at five minutes to ten o'clock at the end of the Budget debate, the Chancellor's "finest hour", is enough to get him in a state of subdued cancellarian excitement. It is, however, fair to say that the right hon. and learned Gentleman has never made this point about justice. The President of the Board of Trade, in the Budget debate, described it as a belated act of social justice, but the Chancellor did not go as far as that.

The Chancellor has been quite straight about this. He said that this is a question of incentives. He said it clearly on television on Budget night. He said it clearly on the radio on Budget night, in an obviously prepared speech. He said it in the House, and I apologise for again reading these words, but the Economic Secretary has not understood their full import. The Chancellor said:
"I do not, however, feel able to provide for any relief of direct taxation to take effect in the year 1961–62."
That is what upset the noble Lord.
"That will be a disappointment to many. Of course, so far as Surtax is concerned, the amount due next January will be upon income already earned in the past. It would be illogical to reduce what is already payable on past effort on the ground of giving an incentive to future effort."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 819–20.]
5.0 p.m.

If those words have any meaning, the Chancellor should accept the Amendment. The Economic Secretary gets up and tries to explain this away. He says that that is why he was explaining that he could not do anything about Schedule E Tax for this year. But the hon. Gentleman used an extraordinary argument. He said that, of course, this is mainly to help the Schedule E taxpayer, and, since it is mainly to help him, we must not do anything beastly to the Schedule D taxpayer. His argument was that there are more Schedule E taxpayers than Schedule D taxpayers. He has never given us the figures. I wish that he would produce figures of the number of people affected, and the number of people who will pay tax under Schedule E and Schedule D when the Bill becomes law.

The hon. Gentleman said that because this was designed to help Schedule E tax payers we must be particularly generous to Schedule D taxpayers and give them a fine bonus concession on money they have earned where incentive cannot possibly operate.

This is retrospective incentive. I have never heard anyone say that an incentive can be retrospective in its effect. I want to hear either the Chancellor or the Economic Secretary defend this argument that an incentive can apply retrospectively.

Those are our main arguments. My hon. Friend the Member for Gloucester (Mr. Diamond) went a bit further than my hon. Friend the Member for Sowerby, but I am entirely at one with my hon. Friend the Member for Gloucester. I do not accept the Chancellor's incentive argument, nor do any of my hon. Friends. If he justifies the Clause on the incentive argument, the logic of that is that he must accept the Amendment. The Economic Secretary tried to deal with my hon. Friend the Member for Gloucester by putting forward the feeble argument that if he felt there was something in the incentive argument to make him support the Amendment, he should support the whole Clause.

Our argument is simple. The Chancellor bases this on incentive. We shall give reasons later for disagreeing with the points about incentive which the Chancellor has made on many occasions. When the Question "That the Clause stand part of the Bill" is put we shall produce an unanswerable case showing why hon. Members should vote against it. But if, by some mischance, the Clause should go through, to provide a logical meaning to what the Chancellor has said it is right that it should contain this Amendment.

Before you occupied the Chair, Sir Norman, I permitted myself the use of a word which was inelegant but nevertheless in order. I described the argument of the Government that Surtax relief was an incentive to harder work as poppycock. I was not ruled out of order, but the Economic Secretary challenged me and asked how I could say that it was poppycock and yet speak to the Amendment. I am speaking to the Amendment to demonstrate that it is poppycock, and the Economic Secretary's reply has proved that it is, because, if it were dealt with on the basis of logicality, he would be compelled to accept the Amendment, but he has rejected it.

I want to detain the Committee for a few minutes to go through the argument he put forward for rejecting the Amendment. The Economic Secretary had in front of him a copy of HANSARD containing the Chancellor's Budget speech. As usual when dealing with a difficult section of the Chancellor's speech, as usual when dealing with one sentence which was unfortunate from his point of view, he chose to allay our fears, as he thought, by referring to a later sentence.

It is a simple matter to find two sentences within the same paragraph of the Chancellor's Budget speech which mean precisely opposite things, but I invite the Economic Secretary to come back to the sentence to which I referred, and to which my right hon. Friend referred, but which he carefully avoided, namely, the one which allegedly demonstrates that this is an incentive, and that it would be illogical, therefore, to use it in respect of past income.

The Chancellor went on to refer to this change being applicable to
"incomes earned—I repeat earned—during this new financial year and thereafter."
That was also wrong, as we shall see in a later Amendment. There is a reference to incomes earned and to a certain extent incomes unearned, as we shall see in later Amendments. The Chancellor then said:
"In other words, the changes will affect what is payable on and after 1st January, 1963."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 820.]
It is a very appropriate phrase. It is a very different phrase, a complete non sequitur, because if the hon. Gentleman thinks about it, what his noble Friend the Member for Dorset, South said was right. This problem can be dealt with either on the basis of incentive, or on the basis of equity, and the noble Lord dealt with it on the basis of equity. The noble Lord is right. If we deal with it on the basis of equity—equity as he sees it and not as I see it—it is equitable to deal with all classes of taxpayers at the same time.

If one deals with it on the basis of equity, one does not base the incentive on relief arising in January 1963. That is not an incentive. An incentive is what one gets now. A bonus is what one gets at the end of the week. That is an incentive. Those of my hon. Friends who are well versed in trade union activities will bear me out on this. They would not consider an incentive which was addressed to the worker saying, "The harder you work this week the more you will get by way of a bonus in eighteen months". They would tell the person who offered that type of bonus where to place it.

That is not an incentive. As the noble Lord said, if one is dealing with incentive on the basis of equity, it must be something which one can obtain in the near future. An incentive would have to be something which one obtained in 1962, not in 1963. On the basis of equity which the Economic Secretary was adducing the incentive would have to apply in 1962.

The Economic Secretary said several times that on the basis of equity we have to deal with the Schedule D man in the same way as the Schedule E man. I am saying that they should be dealt with either on the basis of equity or we should stick to the Chancellor's words and assume that he meant what he said and deal with them on the basis of incentive.

If this were dealt with on the basis of equity, the relief would be granted next January, but the Chancellor cannot do that because he cannot afford it. One has only to look at the total out-turn for the year to see that this means about £83 million in a full year, and the basis of the Chancellor's Budget speech was that he had to have a certain net surplus at the end and he could not possibly afford £83 million out of the current year.

The Chancellor wanted to get the best of both worlds. He wanted to balance his Budget reasonably this year and get the credit for Surtax relief next year, and skilfully and shrewdly bring in an unusual Clause in the Finance Bill to prevent the House of Commons next year from deciding whether the 1963 Surtax relief should apply, and prevent us discussing it in a year's time. He wanted to get it all in in one fell swoop. On the basis of equity there is nothing whatsoever to support the Chancellor's argument. On the basis of equity this step should have been taken a year earlier, and should apply to both Schedule D and Schedule E.

But the Chancellor has referred to it on the basis of incentive, and it is no use the Economic Secretary avoiding the issue. We are discussing a tax Bill, and the Economic Secretary should not try to avoid the fact that the Chancellor said specifically that we cannot logically give tax relief without doing so as an incentive, in respect of income which has already been earned and effort already made. All this demonstrates that the incentice is utter poppycock.

The Economic Secretary has used the argument of equity, which is a different one entirely. There is nothing to substantiate it. The fact that the Government insist on sticking to the terms of the Bill as drawn in this respect, and to give Surtax relief to people who earned their incomes and put in their efforts months and months ago, demonstrates this absolutely. The effort put in as early as the end of April and the beginning of May, 1959, is the effort which the Chancellor, by this Surtax relief, purports to encourage. And I am expected to mince my words and not describe that as poppycock!

Is it not possible that the Chancellor originally intended to ensure that this Surtax relief was given as an incentive, and had no intentions of introducing it retrospectively? Is it possible that he has changed his mind for some reason?

The suggestion that the Chancellor has changed his mind involves the assumption that he made up his mind in the first place, and, also, that he had a mind to make up and had given some thought to the matter—and I do not accept that. I repeat: this cannot be argued on the ground of incentive or equity. Back-bench speeches from both sides have been directed to the argument, first, that it is invalid on equity grounds, as the hon. Member for Dorset, South (Viscount Hinchingbrooke) demonstrated; and, secondly, that it is invalid on incentive grounds, as all the rest of us have demonstrated.

That is why I referred to the question of sincerity. The Chancellor's sentiments are those of a man who has sincerity, and who sincerely believes that a person earning £5,000 a year, with the present rates of Surtax, finds it difficult to make ends meet. None of those who listened to his speech can doubt that that is what he feels, deep down. I argue that the £5,000-a-year man finds himself on a soft spot, and wants to make it softer. He wants to pay less Surtax, so that he can more easily afford the things which the Chancellor referred to. All this talk about incentive is utter poppycock.

5.15 p.m.

I am anxious to see the real fight started. To my mind all this talk about incentive and equity is a side issue. When the Government instituted the main provisions of the Bill they were not thinking in terms of equity and incentive; they wanted to give some free gifts to the supporters of the Tory Party, regardless of the question whether it was equitable or otherwise. I suggest that the Amendment is a useful educational effort to ventilate this matter and to indicate the inconsistency shown by the Government, but I believe that the large majority of the Labour Party wants to get down to the main battle. It is wise to try to make these provisions more consistent, but I hope that the Labour Party will not prolong the agony. Let us get down to battle.

I hope that the hon. Member will soon come to the terms of the Amendment.

If the hon. Member for Dorset, South (Viscount Hinchingbrooke) can enter into a discussion about getting down to the battleground, I cannot see why I should not be allowed to do so. I want to get down to the battleground, and so do all my hon. Friends, including those on the Front Bench. We all want to get down to the battleground. Let us not prolong the agony on small Amendments. Let us get them through and get down to a debate on the Question, "That the Clause stand part of the Bill." Then we will all be free to battle.

I hope the Committee will forgive me if I do not follow my hon. Friend the Member for Wallsend (Mr. McKay) on to his battlefield. Like him I want to debate the question "That the Clause stand part of the Bill", but I feel sure that I should be ruled out of order if I pursued the matter at too great a length now

I agree with the two statements so far made by my hon. Friend the Member for Gloucester (Mr. Diamond), but I have a feeling that when the Chancellor of the Exchequer originally said that it would be wrong to provide a retrospective incentive—whether or not my hon. Friend is correct in saying that it is also questionable whether the Chancellor has a mind—he was reflecting his true point of view on this issue. I wonder what has ensued which has caused him to change his mind and to cause us to have inflicted upon us this afternoon the type of argument advanced by the Economic Secretary. If ever there was an attempt completely to avoid the issues it was the speech made by the hon. Gentleman a few moments ago. It is not unusual for him to try to do this. I have listened to him trying to do so more often than not when he has been replying to debates.

If the Chancellor of the Exchequer originally intended that this tax relief was to be an incentive, he and the Economic Secretary cannot very well claim that there should be a retrospective incentive. I have for a long time been responsible for negotiating wages in industry. We always had the greatest difficulty in getting any retrospective increases. I can well imagine what those who represent industry would have said to me if I had said, "If you give us a retrospective payment as from a year ago that will constitute an incentive to the people I represent". I think that the best way out of this dilemma—of course, I do not challenge for one moment the sincerity of the Chancellor, although I sometimes challenge his ability—would be for the right hon. and learned Gentleman now to explain either why he made the original statement in error, that the Surtax relief was intended to be an incentive—if, in fact, he made the statement in error—or why there has been this subsequent shift from the position which he established at that time.

By coming to the Dispatch Box and explaining the matter the right hon. and learned Gentleman might satisfy some hon. Members a little more than the Economic Secretary to the Treasury has so far done. If the right hon. and learned Gentleman only explains away the statement which he made in his Budget speech, then I think he will be doing justice to the Committee and to himself. I, like most of my hon. Friends on this side of the Committee, will when the occasion arises later in the debate—perhaps in the early hours of tomorrow morning—have a lot to say about the whole issue of Surtax relief.

The reason why I am pursuing the matter at this stage is that I think that it is correct that if one proposes something on principle one can still put down Amendments of this kind to mitigate as far as possible the evils of it. I hope that the Chancellor will make a statement, because I think that he has a responsibility to the Committee to explain what he said in his Budget speech.

As the hon. Gentleman has very courteously asked me to make a statement, I will do so. However, I do not propose to get involved in the wider arguments about incentive and the suggestion that all incentives are poppycock. That was the argument put forward. I am going to deal with the Amendment.

I at once give the Opposition the point about Schedule D Surtax payers not paying until January 1964 on their earnings during the financial year 1961–62. I say quite frankly straight away that my points about incentive and future efforts apply to about two-thirds of the people in this category, in other words, to those assessed under Schedule E. I accept the logic of what is said that, including Schedule D, this is giving a retrospective benefit. Therefore, the question I had to decide was whether it was desirable or feasible to exclude the Schedule D payers from this Clause.

I came to the conclusion, for the reasons very clearly put by my hon. Friend the Economic Secretary, that relief should operate from the same year of assessment as earnings that were assessed under it. It is neither feasible nor desirable to have things operating in different years. I had to decide either to postpone the whole thing so that there was no relief until January 1964, or to proceed on the basis that the relief should come into effect in January 1963. The remarks about incentives and future efforts apply only to about two-thirds of the people concerned. I ask the Committee to reject the Amendment.

That, I am afraid, is a most unsatisfactory explanation. The right hon. and learned Gentleman made a Budget speech which, presumably, had been carefully prepared. He said not one word in that speech about the dilemma which he now tells us confronted him and which he resolved in the way he did. On the contrary, the right hon. and learned Gentleman defended the proposals that now appear in the Finance Bill on lines which were perfectly clear but which contained quite obvious inconsistencies.

I make no apology to the Committee for referring again to exactly what the right hon. and learned Gentleman said. I hope he will see that what he says now is quite inconsistent with what is proposed in the Finance Bill and quite consistent with what is proposed in the Amendment. In saying that, I take the view—I have always taken it—that the idea that reductions in Surtax are useful as incentives is nonsense. The Royal Commission on Taxation thought so and said so many years ago, and I have never heard any sound reason to the contrary.

What I am concerned with is the state of the right hon. and learned Gentleman's mind and, what is even more important, the state of the minds of hon. Members opposite who wish to support him on this matter. They ought to consider exactly what they are doing and why they are doing it. The right hon. and learned Gentleman said:
"Of course, so far as Surtax is concerned, the amount due next January will be upon income already earned in the past."
That statement is quite correct.
"It would be illogical to reduce what is already payable on past effort on the ground of giving an incentive to future effort."
That statement is perfectly correct, and it is absolute nonsense to defend as an incentive something which relates to past earnings. The right hon. and learned Gentleman went on:
"Nevertheless, I consider that there is force in the arguments against the present level of Surtax. In the modern world, the work of the manager"—
that is Schedule E—
"the scientist"—
who may be Schedule E or Schedule D—
"the technologist"—
exactly the same applies—
"is of increasing importance, not only to himself but to the community. In other countries there are much higher rewards for individual effort and skill."
All these words apply equally to Schedule D and Schedule E and I should have thought that the sound foundation for any incentive argument lay much more in the Schedule D than in the Schedule E cases. I can hardly conceive that a manager will be goaded into immediately higher efforts by an increase in his net income, but I can see a case, with which I disagree, for saying that those who are practising privately in some profession or other or who are earning their income under Schedule D methods might be induced to work harder on those lines. I repeat, so that there may be no misunderstanding, that I do not believe that to be the case. I accept on that the view of the Royal Commission.

What I am concerned with is what the right hon. and learned Gentleman thought. He went on to say in his Budget speech:
that is, purely on grounds of incentive—
"I want to do what I can to ensure that the present incidence of Surtax does not act as a disincentive to those who have positions of responsibility in our industries and elsewhere in our national life. Accordingly, I think it right to take action to modify, as far as earned incomes are concerned the present rules."
This was no general change in the rate of Surtax. That had been rejected earlier in the same speech.
"The changes I propose will be applicable to incomes earned—I repeat 'earned'—during this new financial year and thereafter."
That is a very good argument if one really believes in incentives of this character but clearly does not include incomes which had been earned before this financial year. However, in the very next sentence the right hon. and learned Gentleman said:
"In other words, the changes will affect what is payable on and after 1st January, 1963."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 819–20.]
5.30 p.m.

We must assume that the Chancellor of the Exchequer has some elementary idea of our tax system, and, making that assumption, those two statements are wholly inconsistent and we have not heard from anybody which of them the right hon. and learned Gentleman meant at the time. Is it the fact of the matter that his mind and motives were in such a state of confusion that he himself had no idea which alternative he was to adopt and that it required the actual drafting of the Finance Bill to confront him with the dilemma which he put before us today?

I take an entirely different view of what happened. I believe that the right hon. and learned Gentleman wanted to make a Surtax concession which he thought he could justify on grounds other than those of broad equity. I understand his difficulty. The prescription charges had just been increased and a poll tax had been levied on contributors to National Insurance, and in those circumstances it would have been very difficult, even for the most confirmed and embittered Tory, to defend on grounds

Division No. 191.]


[5.33 p.m.

Abse, LeoDavies, S. O. (Merthyr)Hale, Leslie (Oldham, W.)
Ainsley, Williamde Freitae, GeoffreyHall, Rt. Hn. Glenvil (Colne Valley)
Albu, AustenDelargy, HughHamilton, William (West Fife)
Allaun, Frank (Salford, E.)Diamond, JohnHannan, William
Allen, Scholefield (Crewe)Dodds, NormanHart, Mrs. Judith
Awbery, StanDugdale, Rt. Hon. JohnHealey, Denis
Benson, Sir GeorgeEde, Rt. Hon. C.Henderson, Rt. Hn. Arthur (Rwly Regis)
Blyton, WilliamEdwards, Rt. Hon. New (Caerphilly)Herbison, Miss Margaret
Bowden, Herbert W, (Leics, S. W.)Edward, Robert (Bilston)Hill, J. (Midlothian)
Bowles, FrankEdwards, Walter (Stepney)Hilton, A. V.
Boyden, JamesEvans, AlbertHolman, Percy
Braddock, Mrs. E. M.Fitch, AlanHolt, Arthur
Brockway, A. FennerFletcher, EricHoughton, Douglas
Broughton, Dr. A. D. D.Foot, Michael (Ebbw Vale)Howell, Denis (Small Heath)
Butler, Mrs. Joyce (Wood Green)Forman, J. C.Hughes, Cledwyn (Anglesey)
Castle, Mrs. BarbaraFraser, Thomas (Hamilton)Hughes, Emrys (S. Ayrshire)
Chapman, DonaldGeorge, Lady Megan Lloyd (Crmrthn)Hughes, Hector (Aberdeen, N.)
Corbet, Mrs. FredaGinsburg, DavidHunter, A. E.
Craddock, George (Bradford, S.)Gordon Walker, Rt. Hon. P. C.Hynd, John (Attercliffe)
Cronin, JohnGreenwood, AnthonyIrvine, A. J. (Edge Hill)
Crosland, AnthonyGrey, CharlesIrving, Sydney (Dartford)
Darling, GeorgeGriffiths, Rt. Hon. James (Llanelly)Jay, Rt. Hon. Douglas
Davies, G. Elfed (Rhondda, E.)Griffiths, W. (Exchange)Jenkins, Roy (Stechford)
Davies, Harold (Leek)Grimond, J.Jones, Rt. Hn. A. Creech (Wakefield)
Davies, Ifor (Gower)Gunter, RayJones, Dan (Burnley)

of equity a concession to Surtax payers at that moment.

Accordingly, what the right hon. and learned Gentleman did was to defend on grounds of incentive something which could not be put forward on those grounds, for if it was incentive that he meant and if it is incentive that he still means he has no conceivable ground for resisting the Amendments. The only argument against them was that they would tell differently in one case or the other, but that is not the question. The only proposal here is that we desire to encourage those who make these valuable contributions to our national life to do more and whether we should make certain tax changes for that purpose.

Are we in Bedlam in this place? Do we really suppose that we will give any encouragement to anybody by giving him tax relief in respect of that which he has already earned? One would have thought at times that we were in a lunatic asylum, or at a meeting of the Primrose League. Are we really trying to give this incentive? If we are, clearly the Amendments should be accepted.

The right hon. and learned Gentleman's defence indicated the choice he has finally made, but that is no defence of the proposals put forward in these terms and on these grounds in his Budget speech.

Question put, That those words be there inserted:—

The Committee divided: Ayes 175, Noes 235.

Jones, J. Idwal (Wrexham)Owen, WillSteele, Thomas
Jones, T. W. (Merioneth)Padley, W. E.Stewart, Michael (Fulham)
Kenyon, CliffordPaget, R. T.Stones, William
Key, Rt. Hon. C. W.Pannell, Charles (Leeds, W.)Strauss, Rt. Hn. G. R. (Vauxhall)
Lee, Frederick (Newton)Parker, JohnStross, Dr. Barnett (Stoke-on-Trent, C.)
Lee, Miss Jennie (Cannook)Pavitt, LaurenceSwingler, Stephen
Lever, L. M. (Ardwick)Pearson, A. (Pontypridd)Sylvester, George
Lewis, Arthur (West Ham, N.)Peart, FrederickTaylor, Bernard (Mansfield)
Loughlin, CharlesPentland, NormanTaylor, John (West Lothian)
McCann, JohnPlummer, Sir LeslieThomas, Iorwerth (Rhondda, W.)
MacColl, JamesPrice, J. T. (Westhoughton)Thompson, Dr. Alan (Dunfermline)
McInnes, JamesProbert, ArthurThomson, G. M. (Dundee, E.)
McKay, John (Wallsend)Randall, HarryThornton, Ernest
Mackie, John (Enfield, East)Rankin, JohnTimmons, John
MacMillan, Malcolm (Western Isles)Redhead, E. C.Ungoed-Thomas, Sir Lynn
MacPherson, Malcolm (Stirling)Reid, WilliamWade, Donald
Mallalieu, E. L. (Brigg)Rhodes, H.Wainwright, Edwin
Mallalieu, J. P. W. (Huddersfield, E.)Roberts, Albert (Normanton)Warbey, William
Manuel, A. C.Roberts, Goronwy (Caernarvon)Weitzman. David
Mapp, CharlesRobertson, John (Paisley)Wells, Percy (Faversham)
Marsh, RichardRobinson, Kenneth (St. Pancras, N.)Wells William (Walsall, N.)
Mason, RoyRoss, WilliamWhite, Mrs. Eirene
Mellish, R. J.Shinwell, Rt. Hon. E.Whitlock, William
Mendelson, J. J.Short, EdwardWilley, Frederick
Millan, BruceSilverman, Julius (Aston)Williams, D. J. (Neath)
Milne, Edward J.Silverman, Sydney (Nelson)Williams, W. R. (Openshaw)
Mitchison, G. R.Skeffington, ArthurWilson, Rt. Hon. Harold (Huyton)
Monslow, WalterSlater, Mrs. Harriet (Stoke, N.)Woodburn, Rt. Hon. A.
Morris, JohnSlater, Joseph (Sedgefield)Woof, Robert
Moyle, ArthurSmall, WilliamYates, Victor (Ladywood)
Neal, HaroldSmith, Ellis (Stoke, S.)
Noel-Baker, Francis (Swindon)Snow, JulianTELLERS FOR THE AYES:
Oliver, G. H.Sorensen, R. W.Mr. Rogers and Mr. Lawson
Oram, A. E.Soskice, Rt. Hon. Sir Frank
Oswald, ThomasSpriggs, Leslie


Agnew, Sir PeterCrosthwaite-Eyre, Col. O. E.Hollingworth, John
Aitken, W. T.Cunningham, KnoxHopkins, Alan
Allason, JamesDalkeith, Earl ofHornby, R. P.
Balniel, LordDance, JamesHughes-Young, Michael
Barber, Anthonyd'Avigdor-Goldsmid, Sir HenryHurt), Sir Anthony
Barlow, Sir Johnde Ferranti, BasilHutchison, Michael Clark
Barter, JohnDigby, Simon WingfieldIrvine, Bryant Godman (Rye)
Batsford, BrianDrayson, G. B.Jackson, John
Baxter, Sir Beverley (Southgate)du Cann, EdwardJames, David
Beamish, Col. Sir TuftonDuncan, Sir JamesJenkins, Robert (Dulwich)
Bell, RonaldElliott, R. W. (Nwcstle-upon-Tyne, N.)Johnson, Eric (Blackley)
Bennett, F. M. (Torquay)Emmet, Hon. Mrs. EvelynJohnson Smith, Geoffrey
Bennett, Dr. Reginald (Gos & Fhm)Fell, AnthonyJoseph, Sir Keith
Berkeley, HumphryFinlay, GraemeKerby, Capt. Henry
Bevins, Rt. Hon. ReginaldFoster, JohnKerr, Sir Hamilton
Biggs-Davison, JohnFreeth, DenzilKershaw, Anthony
Bingham, R. M.Galbraith, Hon. T. G. D.Kirk, Peter
Birch, Rt. Hon. NigelGammans, LadyLambton, viscount
Bishop, F. P.Gardner, EdwardLancaster, Col. C. G.
Black, Sir CyrilGlyn, Dr. Alan (Clapham)Langford-Holt, J.
Bossom, CliveGlyn, Sir Richard (Dorset, N.)Leavey, J. A.
Bourne-Arton, A.Goodhart, PhilipLeburn, Gilmour
Box, DonaldGoodhew, VictorLegge-Bourke, Sir Harry
Boyle, Sir EdwardGower, RaymondLewis, Kenneth (Rutland)
Brewts, JohnGrant, Rt. Hon. WilliamLindsay, Martin
Bromley-Davenport, Lt.-Col. Sir WalterGrant-Ferris, Wg. Cdr. R.Linstead, Sir Hugh
Brooke, Rt. Hon. HenryGreen, AlanLloyd, Rt. Hon. Selwyn (Wirral)
Brooman-White, R.Gresham Cooke, R.Longbottom, Charles
Browne, Percy (Torrington)Grimston, Sir RobertLongden, Gilbert
Bryan, PaulGrosvenor, Lt.-Col. R. G.Loveys, Walter H.
Buck, AntonyHamilton, Michael (Wellingborough)Low, Rt. Hon. Sir Toby
Bullard, DenysHarris, Frederic (Croydon, N. W.)Lucas, Sir Jocelyn
Bullus, wing Commander EricHarris, Reader (Heston)Lucas-Tooth, Sir Hugh
Butcher, Sir HerbertHarrison, Brian (Maldon)MacArthur, Ian
Campbell, Sir David (Belfast, S.)Harrison, Col. J. H. (Eye)McLaren, Martin
Carr, Compton (Barons Court)Harvie Anderson, MissMcLaughlin, Mrs. Patricia
Carr, Robert (Mitcham)Hastings, StephenMcLean, Neil (Inverness)
Cary, Sir RobertHay, JohnMacLeod, John (Ross & Cromarty)
Chataway, ChristopherHeald, Rt. Hon. Sir LionelMcMaster, Stanley R.
Chichester-Clark, R.Henderson, John (Cathcart)Macmillan, Maurice (Halifax)
Clark, William (Nottingham, S.)Hiley, JosephMaddan, Martin
Cleaver, LeonardHill, J. E. B. (S. Norfolk)Maitland, Sir John
Cooke, RobertHinchingbrooke, ViscountManningham-Buller, Rt. Hn. Sir R.
Cordeaux, Lt.-Col. J. K.Hirst, GeoffreyMarkham, Major Sir Frank
Corfield, F. V.Hobson, JohnMarples, Rt. Hon. Ernest
Costain, A. P.Hocking, Philip N.Marten, Neil
Critchley, JulianHolland, PhilipMathew, Robert (Honiton)

Matthews, Gordon (Meriden)Quennell, Miss J. M.Temple, John M.
Maudling, Rt. Hon. ReginaldRawlinson, PeterThatcher, Mrs. Margaret
Mawby, RayRedmayne, Rt. Hon. MartinThomas, Leslie (Canterbury)
Maxwell-Hyslop, R. J.Ridley, Hon. NicholasThomas, Peter (Conway)
Mills, StrattonRidsdale, JulianThomton-Kemsley, Sir Colin
More, Jasper (Ludlow)Robinson, Sir Roland (Blackpool, S.)Tiley, Arthur (Bradford, W.)
Morrison, JohnRodgers, John (Sevenoaks)Turner, Colin
Mott-Radclyffe, Sir CharlesRoots, WilliamTurton, Rt. Hon. R. H.
Nicholls, Sir HarmarRussell, RonaldTweedemuir, Lady
Nicholson, Sir GodfreyScott-Hopkins, JamesVaughan-Morgan, Sir John
Noble, MichaelSeymour, LeslieVickers, Miss Joan
Nugent, Sir RichardSharples, RichardVosper, Rt. Hon. Dennis
Oakshott, Sir HendrieShaw, M.Wakefield, Edward (Derbyshire, W.)
Orr, Capt. L. P. S.Simon, Rt. Hon. Sir JooelynWakefield, Sir Wavell (St. M'lebone)
Orr-Ewing, c. IanSkeet, T. H. H.Walker, Peter
Osborn, John (Hallam)Smith, Dudley (Br'ntf'rd & Chiswick)Walker-Smith, Rt. Hon. Sir Derek
Osborne, Cyril (Louth)Smithers, PeterWall, Patrick
Page, John (Harrow, West)Smyth, Brig. Sir John (Norwood)Ward, Dame Irene
Page, Craham (Crosby)Spearman, Sir AlexanderWells, John (Maidstone)
Partridge, E.Speir, RupertWhitelaw, William
Pearson, Frank (Clitheroe)Stanley, Hon. RichardWilliams, Dudley (Exeter)
Peel, JohnStevens, GeoffreyWilliams, Paul (Sunderland, S.)
Peyton, JohnSteward, Harold (Stockport, S.)Wills, Sir Gerald (Bridgwater)
Pickthorn, Sir KennethStodart, J. A.Wilson, Geoffrey (Truro)
Pike, Miss MervynStoddart-Scott, Col. Sir MalcolmWise, A. R.
Pilkington, Sir RichardStorey, Sir SamuelWolrige-Gordoo, Patrick
Pitman, I. J.Studholme, Sir HenryWoodhouse, C. M.
Pott, PercivallSumner, Donald (Orpington)Yates, William (The Wrekin)
Powell, Rt. Hon. J. EnochTalbot, John E.
Price, David (Eastleigh)Tapsell, PeterTELLERS FOR THE NOES:
Prior, J. M. L.Taylor, Edwin (Bolton, E.)Mr. Gibson-Watt and
Prior-Palmer, Brig. Sir OthoTaylor, W. J. (Bradford, N.)Mr. Gordon Campbell.
Pym, FrancisTeeling, William

I beg to move, in page 8, line 5, to leave out from "of" to the end of line 6 and to insert:

"calculating surtax to be charged under the next following subsection".

I think it would be convenient also to discuss the Amendments in page 8, line 19, at end insert:

(c) to the total income, reduced by the amount of any deductions under the two foregoing paragraphs, there shall be added the amount of any surplus expenses as hereinafter defined.
(2) For the purpose of charging surtax for the year 1961–62 or any subsequent year of assessment, the income of an individual shall be deemed to be his income as calculated under the foregoing subsections, if, and only if, the income so calculated and the charge on that income for surtax are less than the income and the charge for surtax would be, if this section had not been enacted.
and in page 9, line 7, at end add:
(4) In this section the phrase "surplus expenses" means—
  • (a) any expenses incurred by way of entertainment; and
  • (b) any other expenses of a personal character (being expenses in respect of travelling, subsistence or the like) allowed in relation to a source of income, and so allowed in excess of the amount of one quarter of the gross income (being the income before deduction of any such expenses) derived from that source.
  • When I moved the first of the three groups of Amendments upon which the Committee has just divided I explained that they were designed to correct faults in the Chancellor's proposals on the basis of his own premises without prejudice to our own opposition to the Clause as a whole. What we have just dealt with has been described in the course of the discussion as retrospective incentives. I now come to the question of expenses deducted from the Income Tax assessment and, therefore, automatically reflected in the Surtax assessment.

    5.45 p.m.

    The Amendment proposes to exclude from any deduction from the Surtax assessment any allowance made against the Income Tax assessment in respect of expenses incurred by way of entertainment. Secondly, we propose to restrict the deduction from the Surtax assessment in respect of certain other expenses to one-quarter of the gross amount of income derived from that source.

    The Amendment makes no difference to the business expenses which can be claimed or allowed against the relative Income Tax assessment. We can deal here only with what shall be deducted from the Surtax assessment. Hitherto, what has been allowable from the Income Tax assessment has been equally allowable from the Surtax assessment. The earned income as reduced by the set-off for expenses has been assessed to Surtax, the simple principle being that whatever the Income Tax assessment that is taken as the basis for Surtax.

    We now propose a breach in the traditional basis of assessing income to Surtax. We consider that we have justification for this having regard to the liberal reliefs which the Clause proposes to give to Surtax payers. I know that the Financial Secretary or the Chancellor, whoever replies, will stress the traditional identity between the amount assessed for Income Tax as being also the amount assessed for Surtax.

    Surtax is a superstructure on taxation of income and the same rules in determining what is chargeable have applied to both. We propose to break that traditional link in one respect. I agree that it is not very logical to have a different basis of assessment for Surtax from the basis of assessment of Income Tax on the same income, but there are numerous examples of differences of treatment for Surtax purposes based, not on logic, but on the judgment of the Chancellor of the Exchequer and of the House of Commons on what is right and proper in certain circumstances.

    For example, the exemption of the first £15 of interest on Post Office or trustee savings applies to Income Tax only. That exemption is not carried into the field of Surtax. Personal allowances which are set-off against the Income Tax assessment are not fully set-off against the Surtax assessment. As the Committee knows, personal reliefs may be set off about the Surtax assessment only to the extent that there is an excess over the single person's allowance of £140. In the past, earned income relief given for Income Tax purposes has not been extended to Surtax. The Clause proposes for the first time to give earned income relief to Surtax. So I do not think that our Amendment can be opposed on the ground that it is an objectionable change in the traditional treatment of Surtax. I think that it is a flexible tax which we can adjust to the circumstances of the time.

    We feel that the reliefs given in Clause 11 on earned income are so generous, one might even describe them as drastic, that now there is no case for allowing the Surtax payer to set off against his Surtax assessment certain expenses which, while allowable for Income Tax purposes, are objectionable as a deduction from Surtax. On this Clause or in this Bill we cannot deal with the rules applicable to deductible expenses either under Schedule E or Schedule D. We can deal only with those matters in relation to Surtax. That is why we have confined our proposals to Surtax. Had we been free to do so, I think we should certainly have wished to carry our proposals, and probably others too, into the sphere of Income Tax.

    It is difficult to discuss this proposed restriction on expenses deductible from Surtax assessment without making some reference to the wider question of expenses and taxation. I think I can say that there was some encouragement for this Amendment in the references which the Chancellor himself made in his Budget statement. He said:
    "I have been exercised in my mind about the tax treatment of expenses allowances and benefits in kind received by directors and other senior executives. The question of business entertainment is closely linked."
    The right hon. and learned Gentleman went on to say that many firms pursued a strict policy in these matters and nothing he had to say applied to them. He continued:
    "I think, however, that there is something behind this strong feeling which undoubtedly exists that some so-called business entertaining goes further than purely business motives. This is an unhealthy feature both on business and social grounds. I ask those concerned most seriously to consider whether some curtailment in the extent and scale of entertainment can be achieved without affecting business efficiency. It is a matter very difficult to deal with by legislation, but I shall review this matter again next year and I do not reject altogether the possibility of legislative action then."—[OFFICTAL REPORT, 17th April, 1961; Vol. 638, c. 815.]
    In Clause 20 of this Bill the Chancellor is taking the positive step of proposing to reduce the amount of money spent on motor cars which might qualify for relief for capital expenditure. But, in general, this year the Chancellor has given some sort of warning that he has the matter in mind. He has not uttered any threat about retrospective legislation, which I can quite understand, having regard to the fate of other threats of a similar kind in recent years. What the right hon. and learned Gentleman is really doing, I suppose, is binding over the offenders to be of less extravagant behaviour during the next 12 months. If there are physical signs that they have not heeded this warning he may be moved to do something. We want him to go some little way towards checking this abuse at the same time as he gives these liberal reliefs to Surtax payers.

    It has been suggested in some Press comments recently on this matter that now directors and business executives, and men in business on their own account, will get such liberal reliefs from Surtax that they will probably be able to afford to pay for their own lunch. I think that the message should go out from this Committee that that is what we expect them to do. In fact, we might go further and say that if they entertain a guest for business reasons they might keep an eye on the main chance and pay for his lunch too. But we do not think that the present liberal method of dealing with expense allowances should be carried into the Surtax field when the substantial reliefs are being given in this Bill.

    On the general question of expenses, my own view is that it is not a tightening up of administration which is required so much as a tightening of the law. I do not believe that this abuse can be effectively checked by closer scrutiny and more exacting administration. This problem is full of emotional reactions of all sorts and kinds, and it is very disagreeable work to do. It may not be as disagreeable for accountants as it is for Income Tax inspectors, but it is disagreeable work to do. Very often it leads to heated arguments and distasteful personal interviews with taxpayers. There is a limit to what the taxpayer will stand in the scrutiny and examination of his claim, the implied suspicion of his motives and even of his honesty. I believe that the only solution to this problem is a limit to allowances by law.

    If we had to go to inspectors of taxes and negotiate an allowance for a wife, or children, or for a housekeeper, what a time everybody would have. Those who have expensive wives; those who had economical wives—those who might even have two wives—would have to disclose to the inspector just what they spent on their womenfolk. We might be told about the children's taste in toys and what has to be done to keep them sweet. Keeping up with the Joneses is no longer only an adult occupation, it now includes the children as well, and we can all imagine the sort of chaotic conditions there would be in such discussions with the Income Tax authorities. So by law we have said that a married man's relief is so and so; a single person's relief is so and so; the allowances for children are such and such, and for a housekeeper similar. I think that the principle of carrying formal allowances for Income Tax and Surtax purposes into the range of expenses is very strong.

    A great deal of mischief arises from the willingness of employers and employees to introduce a system of gross allowances for expenses. Instead of the employee claiming expenses necessarily incurred on some system of subsistence and travelling expenses or allowances for entertainment on specific and possibly vouched expenditure, an overall payment is made to cover all these things. That suits the employer because he has not to deal with individual claims. It suits the employee because he has not to render a detailed claim to the employer. The real substance behind this arrangement is that it leaves the employee free to contrive to get the maximum advantage personally from his expenses allowance. That, I think, is one of the big sources of difficulty and abuse in connection with expenses allowances. The taxpayer in those circumstances can overload his claim with items which his employer would disallow but which the Income Tax people must accept. It is a means of getting the maximum net benefit from a gross payment of salary inclusive of expenses.

    6.0 p.m.

    I think this is monstrously unfair on the Inland Revenue, because claims which should have been rendered against employers are rendered against them. In connection with tax reliefs for expenses, the Inland Revenue has no real means of deciding what is a fair standard of expenses and what is not. In many cases the employer does not come into it at all. The employee is left to tell his own story uncorroborated by the employer in a number of cases. If we had that system in the public sector there would soon be a public outcry against it.

    We do not get this in the public sector because all allowances are scheduled and subject to rule. That applies to any hon. Member of this House travelling on House of Commons business, to every Minister travelling on official business, on every trip abroad of a Minister or permanent official. Local government officers and those in nationalised industries and in the public services are subject to a set of rules about their expenses claims and their maximum allowances are usually fixed. It is only in the private sector of industry and commerce that this problem arises.

    I believe there is a very good case indeed for applying, as far as possible the principle now operating in the public service to private industry and commerce as well. I think it would end a great deal of abuse. I doubt whether it would restrict the legitimate activities of those concerned. For my part, I should have absolutely nothing to do with any entertaining claim whatever as a deduction from taxable income or taxable profits. I would be as drastic and sweeping as that, because nothing short of that would clean up the abuses of people entertaining themselves, their friends and colleagues and business associates on claims which they make either against the firm or against their taxable income and profits to the Inland Revenue.

    In this Amendment we can make only a very small gesture towards that ultimate though drastic proposal. What we propose by this Amendment is that on Surtax—which is the only thing we can touch in this Amendment—we should exclude, as the Amendment suggested to page 9, line 7, says:
    "any expenses incurred by way of entertainment."
    That is item No. 1. The other thing we propose to do is not wholly to exclude claims for certain other expenses but to restrict them. I think it a very modest restriction which we seek to impose. What we say is that:
    "other expenses of a personal character (being expenses in respect of travelling, subsistence or the like) allowed in relation to a source of income, and so allowed in excess of the amount of one quarter of the gross income (being the income before deduction of any such expenses) derived from that source."
    That wording is in the associated Amendment, to page 9, line 7.

    Is this proposal objectionable from the point of view of the Chancellor? It would, of course, fortify the Revenue to a comparatively small extent. It would check some of the abuses as they are extended into the Surtax field. It would be a tightening up of the law in one of the fields of taxation and would not be excessive at that. The Chancellor would probably welcome its general purpose and its financial benefit from the point of view of the Exchequer but might feel that this is rather jumping the gun which he is holding in his pocket for possible use next year. If he is to tell us that all that is wrong with our Amendment is that it is premature, that this is the sort of thing he has in mind to do next year, of course we might think again. However, we know that in this connection Chancellors tend to be willing to strike but are afraid to wound.

    The difficulty the Chancellor has in doing more than throwing out the hint he did in his Budget Statement is that he is dealing with a large number of people who are very generous supporters of the Conservative Party. I am sorry to say that, but it is no good blinking the facts of life in the political world. We are constantly being accused of getting our money from the trade unions. We are not ashamed of it and never tried to hide it. We publish our accounts, but we are never able to get the truth out of hon. Members on the benches opposite about where they get their money from. We know that a lot of it comes from the sources which are now standing to benefit most from Clause 11 and all that it seeks to do. In that sense, our Amendment would be objectionable to them.

    I know that also there are certain problems of administration. I am perhaps as sensitive as any hon. Member to problems of administration in the Inland Revenue, because I have been dealing with or listening to them for nearly forty years. There are some purposes in taxation for which one must exert every effort to overcome administrative difficulties and which have an overriding social or economic purpose. This is one. There would be no particular difficulty in disallowing from all expenses claims against Schedule E amounts allowed for entertaining and also to apply the restriction which is referred to in the Amendment to page 9, line 7, as regards other kinds of personal expenses.

    I admit that it would be more difficult to make this provision in assessments under Schedule D where so much is hidden in the general expenses of the business. There is a whole reform to be done in the method of rendering accounts for assessment under Schedule D and an insistence by law on the revelation of items of charges against taxable profits which at present have to be dug out by diligent scrutiny by inspectors of taxes. That would not be insuperable as a matter of administration under this Amendment. I certainly concede that the Chancellor of the Exchequer has a difficult matter in hand on this. A less courageous and steadfast Chancellor might be frustrated and turned aside from it, but I have hopes that the Chancellor really meant that something should be done about it.

    My final point is this. I know that it can be said that all this is marginal. I heard Mr. Paul Chambers giving an address to the Income Tax Society the other day. He made a speech in public and referred to the fuss there is about expenses of directors and others and suggested that on the whole it was marginal from the point of view of the national revenue. I do not dispute that.

    What I do say, however, is that the manifestations of this expenditure are a grave offence to many people who are being compelled to lead economical and not very exciting lives because the Government have imposed upon them heavy contributions for insurance and the National Health Service. They are taxpayers as well, and feel that there is something wrong with the alleged equity of our system of taxation when some people can clearly be enjoying themselves quite extravagantly and others can afford an evening out only once in a blue moon.

    It is socially disturbing. It arouses resentment. It casts the deepest suspicion on the effectiveness of the Revenue machine, and a lot of people think that these signs of extravagance must be due to a lot of tax dodging and evasion and a failure of the Inland Revenue to do its job properly. Some part of it is undoubtedly due to avoidance and evasion of tax, and to taking the fullest advantage of the expenses rules that there are, although I am sure that a lot of it flows from the enormous capital gains that some people are making at present, and on which they are paying no tax at all. I think that this is adding to the extravagance which we see around at present.

    A good deal of this could be called commercial extravagance, in which firms treat their customers and salesmen think that they have to treat those with whom they wish to do business. I have said more than once that it is a great pity if our overseas buyers have to see British goods through the bottom of a wine glass, but that is apparently how they have to look at what we have to sell. Apparently, they are not in a fit state to examine the quality of British goods unless they have been dined and wined beforehand, or, if they look at the quality of the goods before being dined and wined, at least they have to be dined and wined so that they will give an order. These are conditions of doing trade which should not be encouraged, and our Amendment goes a little way to putting some check upon the level of expenses in these two directions at the present time.

    I do not think that I ought to strain the patience of the Committee, or your own, Sir William, by going any further on these Amendments, because I might be tempted to hang a good deal on a comparatively small peg. I cannot deal adequately with this Amendment without sketching in the general background, which leads us to want to do something however small, about this matter.

    Time after time we have heard the hon. Member for Sowerby (Mr. Houghton) on this theme. For years past he has been going at it. He is the most attractive, the most popular and the most agreeable spoilsport it has ever been my privilege to meet. He is a very much nicer man than Mr. Scrooge.

    The effect of doing what the hon. Gentleman wants to do would be to turn this country into a meagre, impoverished, unexciting, boring, depressed, grey and distracted country, rather equivalent to Albania or that sort of country behind the Iron Curtain. If anyone wants to reorientate our society and put it effectively behind the Iron Curtain, from the sociological point of view, he would adopt this Amendment.

    I can never quite understand the desire of the Opposition for this, because they are supposed to be deserting the theory of pure Socialism and are accepting more and more the advantages of a competitive commercial society. They are taking pride in being members of the Western world, but if the Western world is to win over Communism it has to show some results from capitalism, and the sort of results which capitalism best shows are a high standard of living, a ladder of opportunity, a chance that a man who works hard in his early life will rise to enjoy some the benefits which the hon. Gentleman is so anxious to repress by legislation. Therefore, I can see that if this Amendment were passed we should collapse the ladder of opportunity down to the first rung, and a lot of earnest people who are wondering whether they should join the Conservative Party or the Socialist Party will desert any kind of invitation which the hon. Gentleman and his hon. Friends put out.

    6.15 p.m.

    I cannot understand their attitude. They are introspective, psychotic and altogether not to be comprehended on this theme, and I very much trust that, as we return to this theme year after year relentlessly in what has now become, from the public point of view, I should say, a very boring way, in the end we shall win our point of view and put it across. The mischief today is not that there are these enjoyments, these opportunities and these excitements, this glitter and glamour in public life which even Socialist newspapers exemplify on their front, middle and back pages with great enjoyment, but that all this is experienced by a comparatively narrow band of people.

    Time after time, we have suggested to successive Chancellors that the only way in which real justice can be done is to reduce Surtax on all persons to such a level that they can, out of their net retained income—all of them—enjoy some of these privileges and opportunities. Since the war, it is only the business world and a certain section of Schedule E taxpayers in the professional classes who have been allowed expenses and entertainment allowances and who have been able to opt out of the consequences of the drastic Surtax proposals which successive Governments in their un-wisdom have imposed.

    The real answer, if we want to maintain an elevated standard of life, an exciting life, with a real ladder of opportunity for everybody, is that the rates of Surtax, as I suggested in a previous Amendment, should be consolidated with Income Tax, making it something like 10s. in the £ on the top range of income, so that these opportunities will be available to everybody, not only to successful and prosperous commercial classes. I wish we could convince the Socialist Party that that is the real answer, so that it would turn right about face, forget its out-of-date political beliefs and recognise that the country as a whole wants to see these things, provided that they are not grossly exaggerated, and that we do not live in the somewhat exaggerated and fantastic state of some Oriental empires of the past.

    I quite agree that there are scandalous excrescences in all this, which must be avoided in any sober, Christian society like ours, but, at the same time, let the Opposition understand that the real mischief is this overall, crashing imposition of paying 17s. or 18s. in the £, from which only the business classes can escape. Until we correct that, we shall have a situation which they themselves continue to despise.

    Will the noble Lord answer one question for me? I am interested in his proposal to abolish Surtax, consolidate it with Income Tax and have a top rate on higher incomes of 10s. in the £. It is obvious that this would entail a severe loss of revenue. Does he make his proposal on the assumption that expenditure will continue at the present level? If so, how does he propose that the Chancellor of the Exchequer should raise the revenue which he would sacrifice if his proposal were adopted?

    The hon. Member knows very well that private Members are constitutionally barred from suggesting proposals for increasing taxation.

    I support very strongly everything my hon. Friend the Member for Sowerby (Mr. Houghton) said in favour of the Amendment. I do so for a variety of reasons, including all those he mentioned. However, before getting down to the detail of the Amendment I want to put it in perspective. I have spoken on this subject before and have been, perhaps, a little misunderstood by some of my hon. Friends. I will repeat it now in order to get it properly and thoroughly understood, I hope.

    I am almost in the position of regretting every minute we devote to the discussion of expenses and the prevention of tax avoidance on expenses, because I would far rather we devoted the time to the discussion of the real matter of preventing avoidance of proper tax liability on capital profits and things which are really material. Those are the material things. They are the methods whereby millions of pounds are saved. Expenses are the methods whereby pounds are saved. In terms of proportions I should be much happier if we could discuss the material things. However, we cannot. On the Amendment we are limited to expenses.

    On expenses, I share my hon. Friend's view that this is not a matter to be dealt with by more severe administrative rules, by greater scrutiny on the part of the Revenue, or more lengthy scrutiny or tougher instructions by the Treasury. It has reached the stage, in many cases, at which the relationship between the taxpayer and the Revenue, which must exist, has to be based on understanding. It is our job to ensure that effective taxes are spread evenly. We on this side must not forget that the taxpayers are the people who pay the taxes. If there were a strike of taxpayers, we should be in very serious difficulty. We must try to bring about a relationship between the Inland Revenue and the taxpayer which is based on understanding of one another's positions. The Inland Revenue official has to do his duty. The taxpayer has to pay his taxes, but he is a human being and his human frailty of not wishing to pay over what he has earned must be understood.

    I have said that to put the matter in perspective. I will now say why I strongly support the Amendment, which is not directed to administrative action but to an alteration in the law. I will deal, first, with the point made by the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke). How right he was when he said that the Western world should win the battle. He did not follow that up by mentioning that the way in which one of the leaders of the Western world—the newest leader, namely, the President of the United States—is proposing to win this battle is by tackling, first and foremost, the great unpopularity and the great evil which affects the whole economic attitude of the American businessman, namely, the concentration on the expenses racket. Mr. Kennedy has sent a message to Congress to deal with this matter. He did this within three weeks of being elected the new President of that great capitalistic, private enterprise society, the United States of America.

    Let me say how right the noble Lord was to draw attention to the need to remove this evil from our society if we are to win the battle. This is a vital matter, because there is an attitude of unrest on the part of many people who see this going on and cannot understand how it happens. They think that there is a lack of administrative effort, and so on. That is not so. This is an attitude which is being adopted more and more by the business community. Somehow or other it must be moderated. It has gone wild in the United States. It is going wild here. It becomes more and more exaggerated every year.

    We have only to listen to the complaints of the businessman himself to know that this is true. For example, a London manufacturer of ladies' clothing would say that if he had to entertain a buyer from the Provinces who visited London once a year to make his purchases, it was sufficient, ten years ago, to take him out to lunch, buy him a sherry and a glass of wine, and perhaps one cigar.

    I hope that my hon. Friend will allow me to finish my illustration. Then I will give way.

    Today, the manufacturer has to entertain the buyer to lunch and dinner. He has to take him out to a party at night. [An HON. MEMBER: "And his wife."] Very likely. I do not know these details—somebody's wife, anyway. When all this is over, and the manufacturer has incurred all this expense, the buyer goes back to his provincial city and presents his own boss with a chit for the expenses which have been paid by somebody who entertained him.

    I rise only because the hon. Member for Gloucester (Mr. Diamond) keeps looking at me. He knows that I am in that trade. All my trading life I have had a rule that I never allow a supplier even to buy me a drink.

    I am not relying on my imagination for this. I am quoting what a businessman told me in one instance. I have heard of other instances which show, as I am sure the whole Committee will accept, that the practice of entertaining and spending is increasing, not reducing. The general level is increasing. Indeed, the business community needs to be helped against itself, because they are in competition. The more one man goes in for this, the more another has to go in for it. We must set a standard.

    It is a difficult matter to deal with. I shall now consider what is the best method to adopt. The Royal Commission examined this problem and came to the conclusion that expenses should be allowed on the basis of their being reasonable, as opposed to the present definition. It suggested that the criterion should be whether the expenses are reasonably incurred. The Government did not accept that, because to accept the view that the Inland Revenue had to decide what was reasonable would run counter to the whole basis on which the relationship between the Inland Revenue and the taxpayer exists. The relationship can continue only on the basis that the taxpayer runs his own business, decides his own affairs, and is the judge of what is or is not reasonable, and that the Inland Revenue accepts that view and taxes him on the results of his activities, be they wise or foolish, reasonable or unreasonable.

    Therefore, the Government were not prepared to accept the recommendation of the Royal Commission. But the position has got worse and worse, and the Government are now driven to doing something. In this very Finance Bill, in the question of motor cars, which is closely related to this matter, they are saying for the first time that the Inland Revenue will take the decision as to what is reasonable. They are saying that a motor car of £2,000 is reasonable, but one of £5,000 or anything over £2,000 is not reasonable. For the first time the Government are being driven to make a breach into the previous continuing relationship between the Revenue and the taxpayer. They are right to be driven to do this, because there is no alternative. Expenditure of this kind is mounting and the business community needs helping against itself.

    6.30 p.m.

    The Amendment moves on precisely the same philosophical argument. It goes on the basis of what the Chancellor of the Exchequer has said. Indeed, he has said it on the Bill. I wish the noble Lord would read what his right hon. and learned Friend has said. This is what his own Chancellor said in his Budget speech about business expenses:
    "I think…there is something behind this strong feeling which undoubtedly exists that some so-called business entertaining goes further than purely business motives…I ask those concerned most seriously to consider whether some curtailment…"
    The Chancellor also said:
    "It is a matter very difficult to deal with by legislation"—
    Indeed it is, as I have illustrated—
    "…and I do not reject altogether the possibility of legislative action…"—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 815.]
    That is a very clear warning of what is in the Chancellor's mind. We are helping the Chancellor over expenses set against Surtax for the simple reason that we cannot do so in relation to Income Tax without being out of order. We are dealing with this purely on Surtax grounds for that reason alone, but what we say in this Amendment—which the Chancellor should view very sympathetically—is that the situation has got beyond the bounds where the discretion of the businessman can be relied on to decide what rate of entertaining, travelling and other expenses is reasonable. Now, the tax gatherers—the Inland Revenue—have to intervene, and say, "We think that a certain thing is reasonable."

    As to entertainment expenses, nothing is reasonable. This is not a great departure from the present law and practice because, as can be confirmed by those hon. Members who are in the same profession as I am, under the existing law entertainment expenses are not allowed at all in many cases—not at all. I will not go into details, but there are very many cases in which they are not allowed. We say that entertainment expenditure should be disallowed completely for Surtax purposes.

    We also say, echoing what the noble Lord has said, that inasmuch as all taxpayers with incomes of less than £5,000 a year have been relieved completely of Surtax—completely—and so get this large net income, they should themselves pay for their own lunches and entertainment. As this relief is being made, it is now reasonable that the very thing the noble Lord is suggesting should take place; these people should pay for their lunches from their own pockets—

    Would the hon. Gentleman explain what would happen, if this Amendment were incorporated into the Bill, in regard to such expenses as are occasioned by a limited company of which one of the directors is paying Surtax? Assuming that it is a one-man company and these expenses, in effect, were greater than the proportion specified in the Clause, what would be the effect on that man's Surtax?

    I shall come to that. The Amendment I have in mind is divided in paragraphs (a) and (b). I have dealt with (a), and will deal with the other. That is why we say that entertainment expenses should be disallowed completely for Surtax purposes.

    We come to expenses of a personal character. These are defined, and nobody would argue whether or not this definition is completely right. Nobody can say for certain what is the best way of defining that point. One does the best one can. The whole difference in the approach here is that one is allowing for the first time, as in the motor car Clause appearing later in the Bill, the Inland Revenue to say what is reasonable or not, because the taxpayer is no longer able so to control expenses of this kind as to keep them within reasonable bounds.

    I think that this approach is right. It is justified on motor cars, and now on entertaining and personal expenses. Some hon. Members may have a better formula for achieving this purpose, but our formula is a good one. It sets some relationship between expenses incurred and income earned. That is a normal business approach. One could justifiably incur expenditure up to a certain point, but beyond that it could only be incurred, not for business but for personal purposes.

    To reply fully to the hon. Member for Barry (Mr. Gower) would take me into certain technicalities, but he will understand that there are certain circumstances in which the director of the public company is charged under Schedule E with expenses incurred by him on behalf of the company, and he is then left to argue with the Inland Revenue as to whether those expenses were wholly and necessarily incurred, and so on. Therefore, for certain purposes, that gentleman's expenses would be limited in this way. Entertainment expenses—no reduction for Surtax purposes; no allowance—and, in other circumstances, expenditure reduced in accordance with the formula laid down.

    I say that this Amendment is wholly in line with the latest approach of the Government, as shown in the Clause dealing with motor cars. I say that this is wholly appropriate at this time, when Surtax is being considerably reduced in all cases, and extinguished in the case of all people with incomes under £5,000 a year so as to enable them to meet this expenditure from their own pockets. It is a proper approach, it is well timed, and it should be accepted by the Government.

    I should like to take up one point—and it is not an unreasonable playing with words. The hon. Member for Gloucester (Mr. Diamond) spoke a great deal about "reasonable" expenses, and said that in terms of motor cars, as dealt with in a later Clause, it was the Government who were deciding what was reasonable. But what the Government are really doing is to decide what is legal. At no stage have we in this House ever wished, because it leads only to capricious government, to have such points as what is reasonable to be decided anywhere but in the law laid down.

    The hon. Member should have used the word "necessary". Under the existing law, the taxpayer or the man incurring expenses has to justify those expenses as being necessary. It is open to the inspector—and, as we all know, it very frequently happens—to argue with very great cogency that such-and-such an expense is not necessary. This may appear to be a legal or quibbling point on words, but I think that that correction should be made in respect of what the hon. Gentleman has just said.

    I think that I can claim a reasonable degree of impartiality in this debate because I have not a wife—expensive or otherwise—but I am not sure that I would be an entirely conforming citizen either in the ideal State of the hon. Member for Sowerby (Mr. Houghton) or that of my hon. Friend the Member for Dorset, South (Viscount Hinchingbrooke). I start by saying in reply to the hon. Member for Gloucester (Mr. Diamond) that I think he was drawing too close an analogy between this Amendment and Clause 20. In Clause 20 we do not ask the Inland Revenue to decide what should be the maximum amount proper for a car; we are asking this Committee to decide that there should be some limit on the capital allowances, which is a rather different matter. That is a Clause where the Committee has to decide the maximum figure.

    Those who heard the hon. Member for Sowerby speak on the last day of the Budget debate, in which he made a remarkable statement, as I thought at the time, that a Labour Government
    "…would disallow all entertainment as a business expense charged against taxable profits"—[OFFICIAL REPORT, 20th April, 1960; Vol. 638, c. 1405.]
    will not, I think, have been surprised to see this group of Amendments on the Notice Paper. Their combined effect, as the hon. Member for Sowerby very clearly explained, would be to cut down the new Surtax reliefs on earned income by reference to a taxpayer's "surplus expenses". These expenses are defined in the Amendment as, first, any entertainment expenses; and, secondly, other personal expenses which have been allowed for Income Tax purposes in respect of travelling, subsistence and so on, provided that they exceed one-quarter of the gross earnings from the particular source of earned income.

    Yes, to that extent.

    Before coming to the wider issues raised by the Amendment there are two preliminary points which I must make. In the first place, this Amendment, as the hon. Member for Sowerby recognised in his speech, would introduce a new and, in my view, objectionable form of discrimination as between our treatment of Income Tax, on the one hand, and Surtax on the other; because the effect of this Amendment would be that a taxpayer would have to pay Surtax on expenses which had been proved to be legitimate and had been allowed for Income Tax purposes.

    When a director or a company official puts in his claim for expenses, either these expenses should be allowed or they should not be allowed. I can see nothing that can be said for a system which allows them for Income Tax purposes but which brings them in again when considering the man's Surtax liability.

    It seems to me that the comparison between expenses and personal allowances—although it appears a reasonable one at first sight—is really a fallacious one, because all expenses which are allowable under Schedule E are expenses of earning the income and they vary from case to case. But fairness demands that the actual expenses be allowed or disallowed, as the case may be, before getting down to the taxable income. Personal allowances—marriage allowances and child allowances and so on—reflect expenses not of earning but of spending income. We give these personal allowances because, naturally, it costs more to live if one has a family than if one has not.

    Fairness here demands that account should not be taken of actual expenditure because actual expenditure in the case of allowances would surely benefit the wealthier families as against the poorer ones. This analogy drawn by the hon. Member for Sowerby, as between expenses, on the one hand, and personal allowances on the other, was not really very sound because, in the case of Income Tax allowances, we do not take into account the actual expenditure of individuals, whereas it is of the essence of the case in considering matters of business expenses that we take into account actual expenditure.

    The hon. Gentleman has pointed to the illogicality of deducting expenses for Income Tax purposes and not allowing them for Surtax purposes which is proposed in the Amendment. Could he tell us how we can put forward an Amendment which would be accepted by the Table which would provide for a reduction of expenses for Income Tax purposes? If not, will the hon. Gentleman make the illogicality complete by introducing an Amendment himself?

    I hope that the hon. Gentleman will do me the courtesy of listening to what I have to say. Even if such an Amendment were put down, I could not advise the Committee to accept it. I thought it was reasonable to point out what seemed to me to be an objectionable feature of the Amendment as drafted, particularly as the hon. Member for Sowerby, in moving the Amendment, had drawn attention to this.

    There is a second preliminary point concerning the drafting of the third Amendment. The definition of personal expenses in paragraph (b) of the Amendment refers to
    "(b) any other expenses of a personal character (being expenses in respect of travelling, subsistence, or the like)…"
    It is not very clear from those words just what "the like" expenses refer to. I should judge that this kind of phrase would cause a good deal of trouble to administer, especially remembering that the treatment of business expenses is one of the hardest tasks facing any tax inspector today.

    6.45 p.m.

    I want now to say a further word, in reply to the hon. Member for Sowerby, concerning each of the two main categories of expenses covered respectively by paragraphs (a) and (b) of the third Amendment. First, I will say a word about entertainment expenses. There is, I agree, a rather widespread feeling in Britain today that there is a good deal of unnecessary extravagance in the matter of business entertainment. The Chancellor, in his Budget speech, referred to this as
    "an unhealthy feature both on business and social grounds,"
    and said:
    "It is a matter very difficult to deal with by legislation, but I shall review this matter again next year and I do not reject altogether the possibility of legislative action then."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 815.]
    The Chancellor certainly gave no encouragement in his Budget speech to that section of business opinion in this country which is inclined to talk as though this matter of expenses was something with which the Government and Parliament have no right to interfere. I certainly would not quarrel, and I know the Chancellor would not quarrel, with a great deal of what was said by the hon. Member for Sowerby about the social aspect of this matter, particularly when he said that it disturbs many people of all political parties, or of no political party, who have to live in rather straitened circumstances on fixed incomes.

    But that is different from saying that all entertainment expenses should be disallowed for tax purposes. Indeed, as I said in the Budget debate, it would be very difficult to imagine a proposal which is less helpful from the point of view of our export trade. I noticed that during the Budget debate, in response to an interjection by the hon. Member for Wycombe (Mr. John Hall) the hon. Member for Sowerby admitted that there was a case for differentiating between expenses connected with exports and those connected with home sales.

    Even as regards purely home entertainment not directly connected with the export trade, I do not believe that it would be wise or fair to go as far as the hon. Member for Sowerby proposes. I said in an earlier debate, and I repeat,
    "that the strength of our balance of payments reflects our competitive economic performance over the economy as a whole".—[OFFICIAL REPORT, 20th April, 1961; Vol. 638, c. 1422.]
    I do not believe that our competitive economic performance would be improved if all business entertainment expenses were to be disallowed for tax purposes.

    The fact that there is some unnecessary extravagance surely does not, as a matter of equity, justify a complete prohibition of any deduction for entertainment. Such a prohibition would penalise not only those who are extravagant but those many individuals and companies the cost of whose entertainment of business connections is strictly controlled.

    Concerning the second proposal, that expenses for travelling and subsistence should be disallowed in so far as they exceed one-quarter of the gross earnings from any particular source of earned income, I suppose the idea behind this second half of the Opposition proposal is that some of the expenses which are at present allowed ought not to be, and that those who travel on business ought to be content with a lower standard of expenditure than they actually incur.

    It is quite true that if a taxpayer makes a business trip the Revenue cannot, except in extreme cases, disallow part of that expenditure on the grounds, say, that he could have travelled more cheaply, or that he could have stayed in a less expensive hotel. In my view, any detailed inquisition of that kind would be wrong in principle and would prove impossible in practice. As the hon. Member for Sowerby said, there is a limit to the amount of questioning, verbally or through correspondence, which taxpayers will put up with.

    Even if it could be shown that there is unnecessary extravagance in this kind of expenditure, the disallowance of anything incurred above an arbitrary fraction of income, which is what hon. Gentlemen opposite are proposing, would prove unfair. Such a rule would have no effect on the man who makes only a few business journeys, but it would hit hard at the man who has to be away from home for a considerable part of the year, and the total of whose perfectly legitimate expenses—measured by any ordinary standard—may considerably exceed one-quarter of his gross salary.

    Such a rule would also work unfairly for the man whose duties do not generally include a great deal of business travel but who in one year has to spend a number of months overseas—perhaps in visiting subsidiary companies, or organising an export drive for his firm. If this proposal were accepted, that man might find, in that particular year when he felt himself contributing more directly to Britain's export trade than ever before, that his allowable expenses would be seriously cut down, however reasonable in scale they were. Such a state of affairs would obviously strike the average business man as singularly unjust, frustrating and unreasonable.

    Why would the business man feel so frustrated about this kind of allowance being determined in an arbitrary way, when he has got used to the position in which other allowances that he gets for his plant and machinery and so on are determined in an identically arbitrary way? He cannot argue about it. It is not his decision. It is the Inland Revenue's decision.

    In the first place, the basic rates of some capital allowances—for example, the initial allowance and the investment allowance—are decided not by the Inland Revenue but by the House. The point that I was making was simply that we know very well that cases of grievance where expenses are incurred arise when people have (been busy on work in the export field. A man whose duties do not generally include a great deal of travel abroad but who in one particular year has to spend a number of months overseas, perhaps to help organise an export drive for his firm, would probably feel himself contributing more directly to Britain's export trade than ever before that year, and he would have an understandable grievance if his allowable expenses were seriously cut down in those circumstances.

    I have tried to explain that my right hon. and learned Friend the Chancellor fully realises the importance of this subject of expenses, not only on business grounds but on social grounds as well. We fully realise on this side of the Committee that if we are to win the battle of ideas in the world at the moment it is extremely important that there should not be cynicism about the way in which the capitalist system works. I entirely agree. But I can only advise the Committee that these Amendments that we are now discussing are defective technically; they would introduce a new and, I believe, objectionable form of discrimination into our tax system; they would be harmful to our export trade; and, most important of all perhaps, because equity between individuals is the essence of our tax system, they would not work out fairly as between one businessman and another.

    For those reasons, I hope that the Committee will reject these Amendments.

    Since this is such a complicated question, and it is so difficult to get a really effective way of dealing with business expenses, naturally, quite a lot of what the Financial Secretary has said must be accepted by hon. Members on this side of the Committee. I would certainly accept right away a number of the things he said by way of technical objection to the Amendment, and I would not argue with him.

    However, as the hon. Gentleman appreciates, this Amendment would not be taken on its own. From the point of view of consistency as between Income Tax and Surtax, if there were to be an amendment of principle of the kind adumbrated in this Amendment for Surtax, there would have to be an appropriate amendment in respect of Income Tax. As my hon. Friend the Member for Gloucester (Mr. Diamond) has pointed out, it is impossible for us to keep in order and, at the same time, to propose, in this Clause, Amendments relating to expense allowances for Income Tax purposes. We are perfectly aware of this point. But it is a technical objection and it does not get to the heart of what we are trying to do here.

    The same applies to the question of drafting. The Financial Secretary said some disrespectful things about the wording of paragraph (b), but, again, I think that he will appreciate that it is extremely difficult to get definitions of expenses which are both comprehensive and precise enough to do exactly what one is trying to do; and, no doubt, if the will were there and the principle were accepted we could get a better form of words than we have in our proposed paragraph (b).

    I drew attention to this point largely because I think that those words illustrate the great difficulty of legislating on this subject. I quite understand the desire of the hon. Member for Sowerby (Mr. Houghton) to be comprehensive in his drafting. On the other hand, I think that the hon. Member, with his precise mind, would agree that enormous difficulties will arise if we use words such as "or the like" in a Statute dealing with business expenses. The presence of these words in the Opposition Amendment reveals clearly the enormous difficulties of legislating on this subject.

    I accept that. I am not blaming the Financial Secretary for taking advantage of the wording which we have used and saying that it might be impracticable. I do not say that the wording of this Amendment is absolutely the best wording that one could get, but the important point is the question of principle, and that is what we are really concerned with having discussed.

    With respect to the Financial Secretary, he said that the principle involved in this Amendment is different from the one which the Government were introducing with regard to motor cars. If I followed him correctly, he said that in the case of this Amendment we were asking the Inland Revenue to decide something and that in the case of the Clause relating to motor cars we were asking the House to decide something. But there is nothing in the present Amendment which says anything about discretion being granted to the Inland Revenue. In fact, we lay down certain rules in the most precise terms; and, indeed, the Financial Secretary found fault with the Amendment precisely for that reason. We had laid down a particular percentage of the gross income as a maximum expense to be allowed for Surtax purposes. It seems to me that the basic principle behind this Amendment, whether or not the wording is effective and whether or not this Amendment could work in principle, is exactly the same as the principle behind the subsequent Clause dealing with motor cars.

    I should like to say a word about the two different rules which are applied to expenses under Schedule D and Schedule E. I am willing to admit that this Amendment would not touch entertainment and other expenses which come under Schedule D, in the sense that they are charged directly to the companies or firms concerned and are not under present law attributable to individuals. I agree that one could not catch that sort of expenditure under this Amendment. This is, in fact, the kind of expenditure which many of us would like to see cut, because a great deal of expenditure on entertainment, and so on, is expenditure by the company concerned and never is placed to the account of any particular person.

    When we come to the Schedule E rule, under which directors of companies and other senior officials with incomes of more than £2,000 a year have to make certain returns to the Revenue and argue their expenses, one of the difficulties about that Schedule E situation is that a great many of the expenses which directors may have incurred will never have to be accounted for by them, because the expenses will never be paid by them and refunded to them by the company. They will be paid direct by the company. A director may give an expensive lunch. The bill will be rendered by the hotel to the company and will be paid by the company. It will never come within the expenses of the director, so far as Schedule E is concerned, and he will never have to argue with the Inland Revenue about it. I confess at once that I think it is almost impossible to deal with that, and I do not pretend that the Amendment deals effectively with that kind of expenditure, assuming that it is extravagant, as in many cases it is.

    7.0 p.m.

    However, the fact that we cannot deal effectively with that kind of Schedule E expenditure or the particularly difficult cases does not justify inaction about other kinds of expenditure with which we can effectively deal. In his Budget speech the Chancellor admitted that a great many people were concerned about the expenses question. Many people felt that rackets were going on. Many people in business feel the same, and I dare say that a great many businessmen who are themselves guilty of extravagant expenditure would be only too glad if the Government were to prohibit it because they find it sometimes an embarrassment and something which they do not greatly like to do. But the Government have done nothing. They have introduced no proposals at all. They have suggested that they might do something next year. We want something done this year. The fact that we cannot deal with everything effectively in a Clause on Surtax does not mean that we should not try to do something in this case.

    There is one thing which could be done under Schedule E quite easily. One of the most fruitful sources of extravagance and tax avoidance arises when companies pay individual employees not a refund of their expenses as they have incurred them and justified them to the company, but a lump sum payment by way of expenses regardless of what the individual may actually spend. It can be argued that the individual may spend rather more or rather less and the lump sum paid represents some sort of average of what he is likely to spend in the circumstances of his employment. That is the justification given for it, but we know very well that in many cases these lump sum payments are excessive and well beyond what an individual can be expected to spend in the normal course of his employment.

    What happens in many cases is that the individual is put in the position of having to argue with the Inland Revenue about whether the expense allowances he has been paid are justified or whether an additional assessment should be made. Of course, it is very difficult for the Inland Revenue to carry on sustained argument in cases of that kind. There must be very many cases where the Inland Revenue feels that an individual is being paid an excessive amount and that his claims are not justified, but, because of the difficulties of the situation, the need to get evidence, the difficulty of disproving statements which the individual has made, the difficulty of getting back to the company which has washed its hands of the whole affair, and so on, the Inland Revenue, in the last analysis, simply gives up.

    We could put a stop to that sort of thing by the simple prohibition of the practice of paying lump sum expenses. The payment of lump sum expenses really amounts to a device by which a company converts taxable salary into tax-free expenses. In other words, instead of giving a man £500 extra on his salary, it gives him an extra £500 on his lump sum expenses allowance, that is, £500 beyond what he can reasonably be expected to pay in his employment, and then it leaves him to persuade the Inland Revenue that that is all right and have the £500 tax free.

    There is an important principle here. The Government ought to do something about it. It would not be difficult to do something effective by prohibiting lump sum payments. There would be no injustice to the individual who spends large sums of money quite legitimately in the course of his employment or business because the company concerned, instead of paying the lump sum, would have to pay him refunds based on his actual expenses and, presumably, the employee concerned would see that he did not suffer under that alternative arrangement. It is not, of course, a foolproof method of abolishing the practice of paying excessive expenses, but it is something which the Government ought to take up. The Government have done nothing this year in this or in any other direction. We are, therefore, entitled to ask them to consider the proposals we advance and answer them in detail.

    I do not pretend that everything in the Amendment is practicable. Probably, a certain amount of it is not. I do not pretend that it provides a completely just and fair way of meeting the problem. If one lays down an arbitrary proportion of income as a maximum, certain people will be adversely and unfairly effected. But, despite those qualifications, I have no hesitation whatever in wholeheartedly supporting the Amendment. It represents an honest attempt to deal with the expenses problem. Since the Government have done absolutely nothing this year except make a vague threat about next year, a threat which I myself think that they have little or no intention of carrying out, I ask the Committee to support the Amendment.

    This Amendment is a nonsense. As accountants, the hon. Member for Gloucester (Mr. Diamond) and the hon. Member for Glasgow, Craigton (Mr. Millan) know that it is a nonsense.

    Every chairman and managing director of every company would like to cut down the expenses of his co-directors and his representatives to the minimum so that, at the end of the financial year, he may show the best possible result. No one can deny that that is so.

    I think that we are in danger of being confused here. The hon. Member is talking about the expenses of a company. All we are talking about is expenses in connection with Surtax, which companies, with certain irrelevant exceptions, do not pay.

    It would be rather nice if the hon. and learned Member allowed me at least to begin my speech. Then he might understand what I am talking about.

    If the Amendment were passed in its present form, evasion would be so easy that in subsequent years the hon. Member for Gloucester would come forward with Amendments to do away with what he is proposing today. Under the present regulations, anyone whose salary exceeds £2,000 has to justify his expenses to the Inland Revenue. If a company director wished to incur substantial expenses, all he would need to do would be one of two things, either to open an account with the hotel or restaurant where the entertainment took place, or take with him somebody on the staff whose salary was less than £2,000 a year. In consequence, the Amendment would be nullified. Nobody could deny that that is so. Therefore, this Amendment is nonsense, because it could be evaded so easily.

    The question of expenses by company directors and executives is a bogy which has been built up over the years, and it is to an extent far greater than is justified on the facts. I said at the outset that every company chairman, every managing director and every sales director—I happen to be in that category-wishes to keep expenses down to the lowest possible level. We do not authorise expenses which are extravagent or greater than is necessitated by the circumstances.

    Let us consider one or two things which might happen. In my own case, within the last fortnight we have had, unexpectedly, six visitors from the United States who are closely connected with my own business. They were in England for a week. Very substantial sums of money were expended in that week to look after them and to ensure that their creature comforts were attended to. Under the existing law of this country those expenses are allowable for tax. Some hon. Members may think that the expenditure involved was extravagant. On the face of it, it was, but when directors or executives of my own company go to the United States, as they often do, three, four or five times a year—

    Order. I hope that the hon. Gentleman will confine himself to the expenses of individuals rather than of firms. I believe that it has already been ruled that our discussion must be limited in that way. Indeed, the Amendment limits it in that way.

    Thank you, Mr. Thomas. At the end of the day someone has to sign the bill. If the director of a company signs the bill, then, at the end of the month or at the end of the year, the Inland Revenue comes to him—

    Order. We must confine ourselves to a discussion on individual expenses. We are not discussing firm's expenses under this Amendment.

    Let me deal with my own case. If I went out this evening with a customer and signed the bill, at the end of the financial year the Inland Revenue would ask me to account for that matter notwithstanding the fact that the expenses which I had incurred were on behalf of my company. I am merely relating my own case to that of my company. Surely I am not at odds with the Chair on this matter.

    If the hon. Gentleman is seeking a Ruing, I would say that he has been here long enough to know that, when we are dealing with individual expenses, we are dealing with individual expenses. I know that I can rely on his good judgment.

    That means that I have an amber rather than a red light.

    All that I am saying is that, while we may as companies and individuals incur very substantial expenses in this country in looking after individuals from abroad, when we go to other countries they look after us in very much the same way. All of us would very much like to see companies' and individuals' expenses reduced to the minimum, but my honest opinion is that this Amendment is a nonsense and can be evaded without difficulty.

    7.15 p.m.

    On the whole, this has been a very well-tempered debate. Certain points have emerged from it upon which there is a good deal of agreement on both sides of the Committee.

    First, it seems to be generally accepted that this matter arouses a great deal of public concern which is not limited to any one party. My experience is that the concern about expense allowances and the opportunities of abuse which arise from the present system is fairly general.

    The second thing which has emerged is that this is a matter which it is very difficult to deal with by legislative action. I agree with some of what the hon. Member for Ilford, South (Mr. Cooper) has said. Like the Minister, some of my hon. Friends have pointed out the difficulty of dealing with this matter by legislative action. I appreciate the technical defect of the Amendment. The Minister said that one objection to the Amendment is that it would lead to inequality between one taxpayer and another. He said that it was the primary object of our fiscal legislation to avoid such inequality. I appreciate that, and would like to expand it a little.

    It is obvious that some people have to travel much more than others. Some individuals' travelling expenses may, quite legitimately, exceed their income. Other people may not have to travel at all. It depends on an individual's job. Therefore, I can appreciate the technical criticisms which can be made about an Amendment which attempts to limit travelling allowances and similar allowances to a proportion of income.

    A glaring case in which expenses exceed income is that of the British Ambassador to Washington who gets an expense allowance which is far larger than his salary. As far as I know, no one has criticised that. [Interruption.] I do not know whether the amount is reasonable or not, but one assumes that it is. Equally, in the business world there may be isolated examples of people who are continually travelling—

    Since my hon. Friend has raised the matter of ambassadorial expenses and expenses paid to the Foreign Service, this is a matter which was extensively examined by the Select Committee on Estimates in the years when I was a member of it. It heavily criticised the system. For some reason, the House has never agreed to debate the Select Committee's Report.

    I am grateful for that intervention, because it leads to the conclusion that I was about to draw, which is this. Every individual case must be looked at on the facts and on its merits. It is obvious that if we try to lay down a hard and fast rule there is bound to be some injustice somewhere.

    One of the reasons why the present system of expense allowances causes such deep public concern is that it creates inequality between one taxpayer and another. It is commonly said that taxpayers who pay tax under Schedule E have nothing like the same advantages, concessions and opportunities of deciding for themselves what a reasonable expense is as taxpayers who are charged under Schedule D. It is because of that basic inequality between the system of taxation under Schedule D and taxation under Schedule E that such great public concern is aroused.

    I differ, I think, from my hon. Friend the Member for Sowerby (Mr. Houghton) in this respect. This is a matter which could be dealt with far more efficiently—perhaps not completely satisfactorily, but far more satisfactorily—administratively rather than by legislation.

    I have not before me the text of the message which the President of the United States has recently sent to Congress, but the fact that this problem exists in the United States as well as in this country convinces me that it is something which must be dealt with, and dealt with fairly quickly, if we are to remove the great sense of injustice that prevails among the public because of the opportunities of abuse that the existing system permits.

    If everybody dealt with this matter completely conscientiously, there would be no trouble. I have no doubt that a great many people have real scruples in deciding how much they would legitimately spend by way of entertaining other people when engaged on business enterprises, but different people apply different standards. On the other hand, there are notorious examples of abuse and it is commonly thought that there are cases of gross abuse. I should have thought that the remedy was tighter administrative control.

    I was disappointed when the Minister said that there was a limit to the kind of inquisition to which the taxpayer would submit.

    I was not saying that. I was echoing what had been said just before by the hon. Member for Sowerby (Mr. Houghton) with his considerable knowledge and experience of these matters. I take full responsibility for my own remarks, but I was struck by the emphasis which the hon. Member for Sowerby gave to the same point.

    To be fair to my hon. Friend the Member for Sowerby (Mr. Houghton), what he said was that with the existing law there was often difficulty for the tax inspector, but that if the law were altered in the ways which he proposed the tax inspector's position would be strengthened.

    I am in the position of having to deal with two interventions concurrently, and I will do my best.

    My view is that without any alteration of the law much more could be done by inspectors of taxes. I was not sure whether the Minister accepted that view or dissented from it. I began by saying that I did not entirely agree with my hon. Friend the Member for Sowerby that this is a matter which could be dealt with only by legislative action. When the Minister echoed my hon. Friend's remarks, I thought he agreed that there was a limit to what the taxpayer could stand.

    Is that really so? Surely, the ordinary, honest taxpayer has no objection to proper inquisition by an inspector of taxes concerning his Income Tax return. He has no objection to saying that he had to incur a certain amount of travelling expenses because his duties took him here, there or everywhere, or because he was engaged as a salesman for a firm involved in the export trade, or any other trade, and had to entertain people.

    My view is that some of the existing abuses could be effectively cured if there were rather more investigation by inspectors of taxes with regard both to lump sum payments that are made to some employees and also with regard to some of the claims submitted by individuals for expenses.

    Has the hon. Member ever had to submit to interrogation by the Inland Revenue on the question of company expenses? I can tell him from experience that the interrogation which one receives at the hands of the Inland Revenue is very searching and one is a very lucky man in 1961 to get away with anything.

    I am glad to hear that and I am glad that the hon. Member has not been able to get away with it. His intervention was salutary. If it were generally known that it is difficult to get away with improper expense claims, that would be all to the good.

    The difficulty, and the reason why the Amendments are put down and the subject is being discussed, is that there is a general opinion among the public which the Chancellor of the Exchequer confirmed in his Budget statement when he said that there was a considerable amount of abuse. That is the basis of our argument. The public feel that there is a good deal of abuse. If the hon. Member for Ilford, South is right and there were a great deal of vigilant inquisition by inspectors of taxes, there would be no need for this argument. The hon. Member, however, is wrong. The Chancellor of the Exchequer is right, and public opinion is right, in thinking that a lot of people get away with improper claims for expenses and that there is a good deal of abuse. That could be corrected without legislative action if there were many more people like the hon. Member who were subjected to close, careful scrutiny and inquisition about their expense claims.

    Therefore, the Chancellor and the Financial Secretary, having given technical reasons for resisting the Amendment, would be serving a purpose to the community if they were to indicate that all possible steps will be taken by inspectors of taxes to see that abuses in this regard are checked.

    It is, perhaps, of singular importance that the hon. Member for Ilford, South (Mr. Cooper) should have made his statement about ability or inability to "get away with it". At the time the hon. Member made his interjection, I was looking at what the Chancellor himself said in the Budget debate. It might be for the benefit of the Committee if I quote from the Chancellor's remarks on this question of so-called business entertaining expenses.

    The Chancellor said:
    "I think, however, that there is something behind this strong feeling which undoubtedly exists that some so-called business entertaining goes further than purely business motives. This is an unhealthy feature both on business and social grounds."
    It is generally accepted throughout the whole community that there are gross abuses of the expense claims that are allowed. Whilst there may be technical reasons why the Government resist the Amendments, if one takes the Chancellor's statement at its face value it is incumbent upon the Government to face the position to which the right hon. and learned Gentleman referred.

    There is no great difficulty in doing that. The Chancellor gave the clue to this, because in his Budget speech, from which I have quoted, he went on to say:
    "It is a matter very difficult to deal with by legislation, but I shall review this matter again next year and I do not reject altogether the possibility of legisative action then."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 815.]
    Furthermore, while there may be technical difficulties in implementing the Amendments which we have submitted, it is apparently not outside the bounds of possibility, according to the Chancellor—not according to my right hon. and hon. Friends—that this matter might be dealt with by legislative action. Whilst I sympathise very much with the hon. Member for Ilford, South in not being able to "get away with it", as he termed it, if one examines the full implications of that statement one must conclude that it is of a despicable type. It amounts to saying that it is difficult to avoid one's responsibilities to society, and a person who holds that point of view is not fitted to be a member of society.

    The Amendment relates to a particular Surtax concession. It is, therefore, confined to individuals and it is impossible within its terms to meet the objection that what is allowable on Income Tax ought also to be allowable on Surtax and vice versa. Whatever the merits of that may be, all that the Opposition can do in debating a Finance Bill is to seek to limit the conditions under which a particular Surtax concession is made. If we had been able to deal with other matters, such as the expenses of companies or expenses in connection with Income Tax, we should have put down a much more sweeping Amendment, that is sweeping in the sense that it would have been a good deal more complicated, and necessarily so.

    7.30 p.m.

    What we are considering is merely personal expenses and we are not seeking, as the Financial Secretary put it, to prohibit anything. We are merely considering to what extent this expenditure should be allowed against a Surtax concession which is being given at a moment when it has produced a great deal of social outcry, and not only on this side of the Committee. It is not unreasonable to say that when a concession of that sort is made at a moment when Health charges are being increased and a poll tax put on contributors to the National Health Service, it is right to look critically at expenses if they are to be allowed in connection with this Surtax concession. The purpose of the Amendment therefore is to write back for this purpose certain categories of expenditure.

    It seems to me that the whole question of expenses has reached a stage when something must be done about it by way of legislation. I am applying that to what we are considering under the Amendment. Legislation is curiously sketchy on the subject. There is a strict rule under Schedule E and none at all under Schedule D, except that the expenses must have been incurred for the purposes of trade. What is to be deduced about expenses is the result of practice and Royal Commission Inquiries and so on. Matters have reached a stage which the Chancellor himself recognised in a passage in his Budget speech when he said that something really must be done, a passage which has been widely quoted since. There is public indignation, for good and sufficient reason, on a matter on which necessarily public information is rather limited.

    The trouble about Schedule D expenses is that no doubt they have to be incurred for the purposes of trade, but it rests with those who conduct the trade to decide what is necessary for that purpose. The consequence is that the inspector of taxes is in a difficult position if he seeks to question Schedule D expenses on the ground that they are not necessary. He does question them from time to time and cases come before the courts. But we all know too well that too much is allowed to persons.

    I agree broadly with my hon. Friend the Member for Sowerby (Mr. Houghton) that it is not really a question of administrative improvement, though there may be something in that, but that it has substantially reached the point where some changes of a legislative character ought to be made. Indeed, the Chancellor himself foreshadowed something of that sort unless there was marked repentance and improvement in the business world about it. This is the question that we have to consider.

    The Financial Secretary's speech was, like all his speeches, most reasonable in substance and most interesting for what is omitted. I was waiting to hear from him what the Government had in mind, on what lines they thought to proceed, and whether they thought that the general lines of the Amendment were right or wrong. We had nothing of the kind from the hon. Gentleman. We had the sort of point which he made when he said that a line would be unfair in some cases. But, of course, when any line is drawn it is always unfair in certain cases. When we come to consider the £2,000 line drawn for motor cars, which is a similar case to this, no doubt it will be said that it is unfair. Either we are not going to draw a line at all in these cases or we must draw a line which is bound to have something of the arbitrary in it.

    We take entertainment in the Amendment because that was a specific thing which the Chancellor himself mentioned as a matter which was causing public anxiety. This would be an unjustifiable Amendment if we sought to prohibit that. It might be less justifiable if we tried to deal with it from the point of view of the company employing the person. If the company pays it, well and good- It has nothing to do with the Amendment, but if the individual pays it he should not be allowed the benefit of that matter when it comes to this Surtax concession. That is the point we are discussing in connection with entertainment.

    I turn from that to personal expenses. It is very easy to raise technical objections to any Opposition Amendment. I have hardly known of one to which there was not some technical objection or other. There might or might not be difficulty in defining personal expenses which were like those for subsistence and travel. I myself doubt whether there would be that practical difficulty, but if we are ever going to deal with expenses at all it is clear by now that some legislative provision is needed.

    If the Government do not like what we propose, what is the alternative? Will they give up the whole business because, although there is public indignation about it, administrative improvements are insufficient and legislative improvements are impossible? I do not believe that any self-respecting Government would do anything of the sort. I should have wished to hear from the Financial Secretary some clear indication that the Government recognise, agreeing as they do with my hon. Friend the Member for Sowerby, that administrative improvements are not enough and that legislative changes would have to be made and some kind of line taken by this Committee as a legislative body on this question.

    That was substantially what nobody

    Division No. 192.]


    [7.41 p.m.

    Aitken, W. T.Campbell, Gordon (Moray & Nairn)Emery, Peter
    Allason, JamesCarr, Compton (Barons Court)Emmet, Hon. Mrs. Evelyn
    Balniel, LordCarr, Robert (Mitcham)Fell, Anthony
    Barlow, Sir JohnCary, Sir RobertFinlay, Graeme
    Barter, JohnChataway, ChristopherFreeth, Denzil
    Batsford, BrianChichester-Clark, R.Galbraith, Hon. T. G. D.
    Baxter, Sir Beverley (Southgate)Clark, Henry (Antrim, N.)Glover, Sir Douglas
    Beamish, Col. Sir TuftonClark, William (Nottingham, S.)Glyn, Dr. Alan (Clapham)
    Bennett, F. M. (Torquay)Cleaver, LeonardGlyn, Sir Richard (Dorset. N.)
    Bennett, Dr. Reginald (Gos & Fhm)Cole, NormanGoodhart, Philip
    Berkeley, HumphryCooke, RobertGoodhew, Victor
    Bevins, Rt. Hon. ReginaldCooper, A. E.Cower, Raymond
    Biggs-Davison, JohnCordeaux, Lt.-Col. J. K.Grant, Rt. Hon. William
    Bingham, R. M.Cordle, JohnGrant-Ferris, Wg. Cdr. R.
    Birch, Rt. Hon. NigelCorfield, F. V.Green, Alan
    Bishop, F. P.Costain, A. P.Gresham Cooke, R.
    Black, Sir CyrilCritchley, JulianGrimond, J.
    Bottom, CliveCrosthwaite-Eyre, Col. O. E.Grosvenor, Lt.-Col. R. G.
    Bourne-Arton, A.Crowder, F. P.Gurden, Harold
    Box, DonaldCunningham, KnoxHamilton, Michael (Wellingborough)
    Boyle, Sir EdwardCurrie, G. B. H.Harris, Frederic (Croydon, N. W.)
    Braine, BernardDalkeith, Earl ofHarris, Reader (Heston)
    Brewis, JohnDance, JamesHarrison, Brian (Maldon)
    Bromley-Davenport, Lt. Col. Sir WalterDavies, Rt. Hn. Clement (Montgomery)Harrison, Col. J. H. (Eye)
    Brooman-White, R.d'Avigdor-Goldsmid, Sir HenryHarvey, John (Walthamstow, E.)
    Brown, Alan (Tottenham)Deedes, W. F.Harvie Anderson, Miss
    Browne, Percy (Torrington)Digby, Simon WingfieldHastings, Stephen
    Bryan, PaulDoughty, CharlesHay, John
    Buck, AntonyDrayson, G. B.Heald, Rt. Hon. Sir Lionel
    Bullard, Denysdu Cann, EdwardHenderson, John (Cathcart)
    Bullus, Wing Commander EricDuncan, Sir JamesHiley, Joseph
    Butcher, Sir HerbertEccles, Rt. Hon. Sir DavidHill, Mrs. Eveline (Wythenshawe)
    Campbell, Sir David (Belfast, S.)Elliott, R. W. (Nwcstle-upon-Tyne, N.)Hill, J. E. B. (S. Norfolk)

    from the other side of the Committee, including the hon. Gentleman, mentioned. I was much touched by the speech of the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke). It reminded me of the poem of the Bishop of Norwich beginning "Farewell rewards and fairies". The noble Lord told us that if there were no expense accounts in this country we should be reduced to the condition of Albania, a country with which he is no doubt better acquainted that I am. It was a lovely, picturesque figure, but I really doubt whether contributions of that kind to a discussion of a serious social problem are more than the casual ornaments attaching to a rather difficult question.

    We feel that something has to be done in this matter, that as regards this Surtax concession excessive expenses will be allowed in aid of it unless an Amendment of this kind is carried, and since no one can suggest to us a better way of doing it, and since I think it is generally agreed that our Amendment on these lines is not an unreasonable one, we propose to press it to a Division.

    Question put, That the words proposed to be left out stand part of the Clause:—

    The Committee divided: Ayes 240, Noes 165.

    Hinchingbrooke, ViscountMatthews, Gordon (Meriden)Spearman, Sir Alexander
    Hirst, GeoffreyMaudling, Rt. Hon. ReginaldSpeir, Rupert
    Hobson, JohnMawby, RayStanley, Hon. Richard
    Hocking, Philip N.Maxwell-Hyslop, R. J.Stevens, Geoffrey
    Holland, PhilipMills, StrattonSteward, Harold (Stockport, S.)
    Hollingworth, JohnMore, Jasper (Ludlow)Stodart, J. A.
    Holt, ArthurMorrison, JohnStoddart-Scott, Col. Sir Malcolm
    Hopkins, AlanNicholson, Sir GodfreyStorey, Sir Samuel
    Hornby, R. P.Nugent, Sir RichardStudholme, Sir Henry
    Hughes-Young, MichaelOakshott, Sir HendrieSumner, Donald (Orpington)
    Hurd, Sir AnthonyOrr, Capt. L. P. S.Talbot, John E.
    Hutchison, Michael ClarkOrr-Ewing. C. IanTapsell, Peter
    Irvine, Bryant Godman (Rye)Osborn, John (Hallam)Taylor, Sir Charles (Eastbourne)
    Jackson, JohnOsborne, Cyril (Louth)Taylor, Edwin (Bolton, E.)
    James, DavidPage, Graham (Crosby)Taylor, W. J. (Bradford, N.)
    Jenkins, Robert (Dulwich)Partridge, E.Temple, John M.
    Johnson, Eric (Blackley)Pearson, Frank (Clitheroe)Thatcher, Mrs. Margaret
    Johnson Smith, GeoffreyPeel, JohnThomas, Leslie (Canterbury)
    Joseph, Sir KeithPeyton, JohnThomas, Peter (Conway)
    Kerby, Capt. HenryPickthorn. Sir KennethThornton-Kemsley, Sir Colin
    Kershaw, AnthonyPike, Miss MervynTiley, Arthur (Bradford, W.)
    Kirk, PeterPilkington, Sir RichardTurner, Colin
    Langford-Holt, J.Pitman, I. J.Turton, Rt. Hon. R. H.
    Leavey, J. A.Pitt. Miss EdithTweedsmuir, Lady
    Leburn, GilmourPott, Percivallvan Straubenzee, W. R.
    Legge-Bourke, Sir HarryPowell, Rt. Hon. J. EnchVickers, Miss Joan
    Lewis, Kenneth (Rutland)Price, David (Eastleigh)Vosper, Rt. Hon. Dennis
    Lindsay, MartinPrior, J. M. L.Wade, Donald
    Linstead, Sir HughPrior-Palmer, Brig. Sir OthoWakefield, Edward (Derbyshire, W.)
    Lloyd, Rt. Hon. Selwyn (Wirral)Pym, FrancisWakefield, Sir Wavell (St. M'lebone)
    Longden, GilbertQuennell, Miss J. M.Walker, Peter
    Loveys, Walter H.Rawlinson, PeterWalker-Smith, Rt. Hon. Sir Derek
    Low, Rt. Hon. Sir TobyRedmayne, Rt. Hon. MartinWall, Patrick
    Lucas-Tooth, Sir HughRees-Davies, W. R.Ward, Dame Irene
    MacArthur, IanRidsdale, JulianWebster, David
    McLaren, MartinRobinson, Sir Roland (Blackpool, S.)Wells, John (Maidstone)
    McLaughlin, Mrs. PatriciaRodgers, John (Sevenoaks)Whitelaw, William
    MacLeod, John (Ross Cromarty)Roots, WilliamWilliams, Dudley (Exeter)
    McMaster, Stanley R.Russell, RonaldWilliams, Paul (Sunderland, S.)
    Macmillan, Rt. Hn. Harold (Bromley)Scott-Hopkins, JamesWills, Sir Gerald (Bridgwater)
    Macmillan, Maurice (Halifax)Seymour, LeslieWilson, Geoffrey (Truro)
    Macpherson, Niall (Dumfries)Sharples, RichardWise, A. R.
    Maddan, MartinShaw, M.Wolrige-Gordon, Patrick
    Maginnis, John E.Simon, Rt. Hon. Sir JocelynWoodhouse, C. M.
    Maitland, Sir JohnSkeet, T. H. H.Yates, William (The Wrekin)
    Markham, Major Sir FrankSmith, Dudley (Br'ntf'rd & Chiswick)
    Marples, Rt. Hon. ErnestSmithers, PeterTELLERS FOR THE AYES:
    Mathew, Robert (Honiton)Smyth, Brig. Sir John (Norwood)Mr. Gibson-Watt and Mr. Noble.


    Abse, LeoEvans, AlbertIrving, Sydney (Dartford)
    Alnsley, WilliamFitch, AlanJay, Rt. Hon. Douglas
    Albu, AustenFletcher, EricJeger, George
    Allaun, Frank (Salford, E.)Foot, Michael (Ebbw vale)Jones, Dan (Burnley)
    Allen, Scholefleld (Crewe)Forman, J. C.Jones, Elwyn (West Ham, s.)
    Awbery, StanFraser, Thomas (Hamilton)Jones, J. Idwal (Wrexham)
    Baxter, William (Stirlingshire, W.)Gaitskell, Rt. Hon. HughJones, T. W. (Merioneth)
    Blyton, WilliamGalpern, Sir MyerKenyon, Clifford
    Bowden, Herbert W. (Leics, S. W.)George, Lady Megan Lloyd (Crmrthn)Key, Rt. Hon. C. W.
    Bowles, FrankGinsburg, DavidLawson, George
    Boyden, JamesGordon Walker, Rt. Hon. P. C.Lee, Frederick (Newton)
    Braddock, Mrs. E. M.Greenwood, AnthonyLee, Miss Jennie (Cannock)
    Brockway, A. FennerGrey, CharlesLever, L. M- (Ardwick)
    Broughton, Dr. A. D. D.Griffiths, W. (Exchange)Lewis, Arthur (West Ham, N.)
    Castle, Mrs. BarbaraGunter, RayLoughlin, Charles
    Chapman, DonaldHate, Leslie (Oldham, W.)Mabon, Dr. J. Dickson
    Cliffe, MichaelHall, Rt. Hn. Glenvll (Colne Valley)McCarm, John
    Corbet, Mrs. FredaHamilton, William (West Fife)McInnes, James
    Craddock, George (Bradford, S.)Hannan, WilliamMcKay, John (Wallsend)
    Cronin, JohnHart, Mrs. JudithMackie, John
    Darling, GeorgeHenderson, Rt. Hn. Arthur (Rwly Regis)MacPherson, Malcolm (Stirling)
    Davies, G. Elfed (Rhondda, E.)Herbison, Miss MargaretMallalieu, E. L. (Brigg)
    Davies, Harold (Leek)Hill, J. (Midlothian)Mallalieu, J. P. W. (Huddersfield, E.)
    Davles, S. O. (Merthyr)Hilton, A. V.Manuel, A. C.
    Deer, GeorgeHolman, PercyMapp, Charles
    Delargy, HughHoughton, DouglasMason, Roy
    Diamond, JohnHowell, Denis (B'ham, Small Heath)Mellish, R. J.
    Dodds, NormanHughes, Cledwyn (Anglesey)Mendelson, J. J.
    Dugdale, Rt. Hon. JohnHughes, Emrys (S. Ayrshire)Millan, Bruce
    Ede, Rt. Hon. C.Hughes, Hector (Aberdeen, N.)Milne, Edward J.
    Edwards, Rt. Hon. Ness (Caerphilly)Hunter, A. E.Mitchison, G. R.
    Edwards, Robert (Bllston)Hynd, John (Attercliffe)Monslow, Walter
    Edwards, Walter (Stepney)Irvine, A. J. (Edge Hill)Moody, A. S.

    Moyle, ArthurRhodes, H.Taylor, John (West Lothian)
    Noel-Baker, Francis (Swindon)Roberts, Albert (Normarrton)Thomas, Iorwerth (Rhondda, W.)
    Oliver, G. H.Roberts, Goronwy (Caernarvon)Thompson, Dr. Alan (Dunfermline)
    Oram, A. E.Robertson, John (Paisley)Thomson, G. M. (Dundee, E.)
    Oswald, ThomasRobinson, Kenneth (St. Pancrae, N.)Thornton, Ernest
    Owen, willRoss, WilliamTimmons, John
    Padley, W. E.Shinwell, Rt. Hon. E.Wainwright, Edwin
    Paget, R. T,Short, EdwardWarbey, William
    Pannell, Charles (Leeds, W.)Silverman, Julius (Aston)Wells, William (Walsall, N.)
    Parker, JohnSkeffington, ArthurWhite, Mrs. Elrene
    Pavitt, LaurenceSlater, Mrs. Harriet (Stoke, N.)Whitlock, William
    Pearson, Arthur (Pontypridd)Slater, Joseph (Sedgefleld)Wigg, George
    Peart, FrederickSmall, WilliamWilkins, W. A.
    Pentland, NormanSmith, Ellis (Stoke, S.)Willey, Frederick
    Plummer, Sir LeslieSorensen, R. W.Williams, D. J. (Neath)
    Price, J. T. (Westhoughton)Soskice, Rt. Hon. Sir FrankWilliams, W. R. (Openshaw)
    Probert, ArthurSpriggs, LeslieWilson, Rt. Hon. Harold (Huyton)
    Pursey, Cmdr. HarrySteele, ThomasWoodburn, Rt. Hon, A.
    Randall, HarryStewart, Michael (Fulham)Woof, Robert
    Rankin, JohnStones, WilliamYates, Victor (Ladywood)
    Redhead, E. C.Swingler, Stephen
    Reid, WilliamSylvester, GeorgeTELLERS FOR THE NOES
    Reynolds, G. W.Taylor, Bernard (Mansfield)Mr. Charles A. Howell and
    Mr. Ifor Davies.

    I beg to move, in page 8, line 14, at the end to insert:

    "under sixty years of age on the first day of April in the year of assessment and, in all other cases, the total income of the individual".

    I think that it would be convenient for the Committee to discuss with this Amendment the following Amendments:

    In line 19, at the end to insert:
    (2) For the purposes of this section the income of any person who is retired and was of the age of sixty-five or over on the seventeenth day of April nineteen hundred and sixty-one, and of any person under that age who was then retired from service overseas under the Crown, or shall since that date have so retired shall be deemed to be earned income.
    In line 19, at the end to insert:
    (2) For the purposes of this section the entire income of any person of the age of sixty-five years or over on the first day of the year of assessment shall be deemed to be earned income.
    In line 23, to leave out "subsection" and to insert "subsections".

    In line 23, to leave out "it applies" and to insert "they apply".

    In page 9, line 7, at the end to add:
    (4) For the purposes of this section the unearned income of a person aged sixty-five years or over at the beginning of a year of assessment shall be deemed to be earned income.
    In line 7, at the end to add:
    (4) For the purpose of this section the unearned income of a person aged sixty or over at the beginning of a year of assessment shall be deemed to be earned income.

    This is one of a number of Amendments put down by my hon. Friends and I and dealing to some extent with the principle of the assessment of saved income as against earned income. We seek to introduce an Amendment this year which will pave the way—we hope the Chancellor will note—for consequential and further Amendments in subsequent years.

    On this side of the Committee we are all grateful to my right hon. and learned Friend for having taken the plunge with Surtax for the first time that that has been attempted since the war. We all know from the temper of the Opposition that the water under which my right hon. and learned Friend has plunged is a good deal more tepid than some political commentators in past years have thought would be the case. It is quite apparent that the water is agreeable to bathe in. I hope that next year my right hon. and learned Friend will proceed on the path which we are now indicating to him.

    I was surprised to see from the changes which have been made this year to what extent we have recovered the ground lost since the war. Indeed, the Surtax scales today compare very favourably—if one can use a word of that sort about Surtax—with the figures in 1937–38.

    I do not defend the figures for 1937–38, for reasons which I have given on previous Amendments.

    The hon. Member must not go into that argument in too much detail, because that would be going too far from the Amendment.

    I am well aware of that, Sir Gordon. I will observe what you have said.

    However, the ground we have covered is not all the ground. In the higher ranges of Surtax we are still some way from the position of the period between the wars, but in the range covered by the Budget this year, £2,000–£5,000, we have got back nearly completely to it, with the exception of about £200 or £300 in each bracket, which is the extent to which, if my right hon. and learned Friend will accept our proposals, we will cover the ground completely.

    On the whole, my right hon. and learned Friend has been hard on the saved income element of those whose incomes are between £2,000 and £5,000 a year. He has gone for the earned income element and, in doing so, he has widened the ground between the two elements. On this side of the Committee, we have always taken the view that saved income is earned income which should attract the same sort of general level of taxation and we have been disappointed to find that the discrimination against saved income has been carried a stage further than before.

    Tables 77 and 78 of the Report of the Commissioners of Inland Revenue show the extent of saved income which there is in the incomes of the groups earning between £2,000 and £5,000 a year. It shows that at a figure of £27—million the investment income of those with a total income of £5,000 is nearly half that of the earned income, while for those with an income of £2,000 the fraction is not even as low as one-third. One always tends to think that moderately salaried individuals have relatively little in the way of savings or investments, but that is not so, as the tables clearly show.

    When the noble Lord uses the rather unusual term "saved income", does he mean the same as the Inland Revenue does when it uses the term "investment income", which includes inherited income? When he speaks of saved income, does he mean that to include inherited income?

    Yes, I do. I use the term "saved income" because there are some forms of property-owning which are not strictly investments, whereas income earned and saved can be invested in any sort of property. I take the right hon. Gentleman's point, but it would be out of order to pursue it further.

    We think that those who have saved income are just as important to the community as those who are earning it. So as to point up the case conclusively, we have put down an Amendment suggesting that at a time when income is no longer earned but is saved, we should apply a correction. One hopes that in subsequent years my right hon. and learned Friend will bring the age group which we here define down to the point when taxation begins to apply to the individual.

    There is a fashion today to say that it is only enterprising young men of commerce or science who ought to be considered in taxation matters. Those who are mad keen about production and production alone for its own sake will take that view, but society as a whole consists of a whole range of individuals. Looking at it objectively, nobody can say that one sort of person is more important than another. Society consists of an enormous range, from the artist to the scientist, from the poet to the practical man of business, and from the yogi to the commissar, as has been pointed out in a distinguished work by Mr. Arthur Koestler. I defy anybody to say that the scientist, technologist, successful motor car salesman, or the practical man of affairs should be any more an object for State benefit than anybody else.

    8.0 p.m.

    Perhaps the right hon. Gentleman will make clear, in his subsequent speech, the cause of his intense amusement. He must have parents who are retired, and who are no longer earning. Is he telling the Committee that he does not take pride in them, and think that they are making a contribution, in their retired state, to the society in which they live?

    I will not follow the noble Lord in his personal arguments, but he appears to be saying that we should make no distinction between one member of the community and another for the purposes of taxation. If we accepted that principle all our debates would be pointless.

    I am not saying that. My hon. Friends, who have similar Amendments on the Notice Paper, can speak for themselves, but I think that what they want, as I do, is the total abolition of discrimination between earned and unearned income. We cannot extend State patronage to those who happen to be generating money at a particular moment and say that they are more worthy individuals than those who have generated it in the past—

    or, by reason of their aptitudes or knowledge, have contributed to the success of society without very great earning power. I am talking of artists, philosophers, priests, judges and people in the lower ranges of income who are quite worthy members of society and are not in the dynamic earning classes.

    I have set the age limit at 60 because women retire at that age and, since they are independent Income Tax payers in their own right, if we are to put in a retiring age it is best to put it in at the lower end. My hon. Friends have Amendments which would introduce the principle at the age of 65. It may be that an important money differential is involved here, and that the cost of agreeing to a limit of 60 years of age would be too great for the Chancellor to bear this year. But whatever it is—60 or 65—the principle is the same, and we are all anxious to see the differential closed.

    My right hon. and learned Friend the Chancellor has three years, at any rate, before the next General Election, in which to tackle the question of Surtax in relation to these age groups, if he accepts the principle of the matter. Many Press commentators are continually saying that this mid-year, between elections, is the only politically safe year in which to make any reductions of this kind, and that, having taken the plunge this year, my right hon. and learned Friend must resist any further changes next year.

    My hon. Friends and I do not take that view. We do not want the Chancellor's sense of justice to be tempered by political fears that right hon. and hon. Members opposite will sweep into power at the next election. I am sure that he appreciates that under the leadership of this Government the country is sufficiently radical at the moment not to want any further steepening of these prejudices towards the views of hon. Members opposite, and that if there is to be any change it will be to the Right rather than to the Left.

    Therefore, my right hon. and learned Friend has plenty of time and opportunity in the coming years to make the sort of taxation changes that we want.

    Can the noble Lord tell us what the effect of any of the Amendments to which he has been speaking would be?

    I lend my full support to the case which my noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) has put forward in his Amendment. My hon. Friends and I have put down other Amendments which differ in two details from that of my noble Friend, one of those differences being rather important. The small detail is the question of date; my noble Friend's Amendment refers to 1st April and mine to the beginning of the year of assessment. I will not go into that point too closely. My noble Friend has selected the age of 60, and I have selected the age of 65. I will not quarrel with my hon. Friend about that, and if my right hon. and learned Friend is prepared to accept an age limit of 60 I shall be very satisfied.

    The hon. and learned Member for Kettering (Mr. Mitchison) asked what was the purpose of these Amendments. I can only assume that he has not read the Notice Paper, which I would have thought made their purpose abundantly plain. If there is any other hon. Member who is not clear as to their meaning I shall be very happy during the next twenty minutes to indicate what they intend to do.

    I should think that the hon. and learned Gentleman is the only Member of the Committee who is not aware of the intention of these Amendments.

    My noble Friend put forward one argument which strongly appeals to me, and which I mentioned in my speech in the Budget debate. In recent years there has been too much differentiation between the tax treatment of earned incomes and so-called unearned incomes. The term "unearned", especially from a taxation point of view, is singularly unfortunate. For a number of years I have been trying to persuade successive Chancellors that the name should be changed. The difficulty has bean to find any other nomenclature which would meet the situation. Perhaps it should be called "savings income", or "investment income", or something of that kind. But a large proportion of incomes which are now classified as unearned incomes have been earned by the sweat of the brow. They represent dividends and interest, and they have been derived from the self-denial of men who have worked extremely hard for a great many years. [Laughter.] I sometimes wonder how serious discussion can take place in this Committee, when statements such as that which I have just made are greeted with laughter. The truth of my statement is abundantly clear to anyone who has studied the industrial history of this country. Perhaps hon. Members opposite have not done so.

    The right hon. Member for Battersea, North (Mr. Jay) made a justifiable interjection during my noble Friend's speech. He said that if, instead of referring to these incomes as unearned incomes, we called them savings incomes or investment incomes, we should be including incomes which did not derive from the sweat of the brows of the people concerned. That may be true in some cases, but in a large proportion of cases they have arisen in that way, and for that reason I support my noble Friend.

    I have two other strong reasons for doing so. For many years prior to 1956 it was possible for directors and employees to have provided for them by their employers pensions on the date when they retired. The annual premiums for these pension benefits were not assessed as part of the incomes of the directors or employees for Income Tax or Surtax purposes. Until 1956 that was not possible for a self-employed person. In that year my right hon. Friend the Prime Minister, who was then Chancellor of the Exchequer, was seized of the point, and in his Budget he remedied that situation in some degree. Retirement pension provisions were incorporated in the Finance Act of that year which, although to a lesser extent than was competent for employees, none the less made it possible for self-employed people to set aside out of their gross incomes rather than their net incomes money to provide pensions on their retirement. But, quite obviously, there were a large number of self-employed people in 1956, who had reached such an age—I suppose I ought to declare an interest; I was one of them—that the cost of the premiums to provide a reasonable pension on retirement was quite prohibitive at that date. Furthermore, they had during their working life up to 1956, saved out of their net income—not gross income—so that these people, who either retired between 1956 and now, or who are going to retire in the near future, will be denied the advantage which my right hon. and learned Friend is conferring on other people by the provisions in Clause 6 of this Bill. That seems to me manifestly unfair and in great contradistinction to the action of my right hon. Friend the Prime Minister in 1956, when he tried to put self-employed persons on the same basis as employed persons.

    The third reason why I support this group of Amendments is that there is a most respectable precedent for them. Section 221 of the Income Act, 1952, as amended by Section 14 of the Finance Act, 1958, provides that the unearned income of elderly persons up to a certain limit shall for Income Tax purposes be deemed to be earned income, and that earned income allowances for Income Tax purposes shall apply. So I say that for the reasons given by my noble Friend, for reasons of equity and justice, bearing in mind the 1956 provisions, and for reasons of precedent, this group of Amendments should commend itself warmly to the Committee. I hope that my right hon. and learned Friend will find himself able to accept them.

    I wish to support my noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) and my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens). I join with them in thinking that the general principle of equity is absolutely valid for the concession to Surtax which has been granted in this year's Budget. Equally I claim that there is great expediency on the earned income side in the sense that I know of nothing which stops mobility of hired staff more than high Surtax. If an employer has an employee in the higher Surtax bracket or even paying Surtax at all, he knows that nobody else will tempt away that employee by an offer of increased salary because so little would reach the employee's pocket. The effect of this will be to make for mobility and stop a great many of the expense rackets which hon. Members on both sides of the Committee are anxious to stop, because they rise out of high rates of Surtax. Here there is equally a general principle and expediency.

    This arises from the fact that every hon. Member is satisfied that a return on capital, that is to say interest and dividends, is acceptable and good. The idea that it is something which is wrong has now vanished in this country. Today we have heard a lot about the war of ideas. In a capitalist, free enterprise Western world the war of ideas can be carried on only if there are savings and borrowings. Since, above all, Governments are great borrowers, I cannot imagine any person more than the Chancellor of the Exchequer who should be more out to encourage saving and, therefore, to put himself in the position of being able to borrow.

    8.15 p.m.

    There are four sources from which such savings—I propose to use the word "savings"—can arise. First, there are savings out of income. Hon. Members opposite may say that there is a difference of degree. From a small income that would be all right, but in respect of a big income it is not so good. I do not think that we can agree. But even if we did, from a big income is paid a big whack of Income Tax, Profits Tax and Surtax before there is any saving at all. So the class of savings that we are discussing has already borne its share of taxation. There is the possibility of inheritance. Equally, if it is small inheritance, hon. Members opposite have no objection and argue that the income from it should not pay Surtax because it is only a small inheritance, and so on. But in the case of a big inheritance the State takes up to 80 per cent. Why should the State take another whack out of it because of the magnitude of the income? By raising the figure to £5,000 we are not talking of a great increase in degree.

    There is another source of saving, what a man has saved and built up by his enterprise. At some time Lord Nuffield must have saved to build up the great Morris Motor empire, and no doubt in the saving the value of his enterprise increased. I am sure hon. Members would say that they wished that sort of thing to be encouraged and would not dissent from money from such a source helping a man in his old age. Finally, there is the possibility of savings by gifts inter vivos. I ask hon. Members to be realistic about this and appreciate that it is not the age at which gifts inter vivos are received. Indeed, here there is an element of definite saving. If someone has had such a gift at an early age and has not spent it, they have obviously saved it. The whole purpose of this principle of equity to which I have referred is that for the elderly particularly, and indeed in general for people of any age, the application of the concession on Surtax, regardless of whether it is earned income or saved income, is a valid general principle.

    When we come to the question of expediency, as was pointed out by my hon. Friend the Member for Langstone, we already have the precedent of Income Tax. If it is valid in principle for Income Tax, surely it is equally valid for Surtax. We then have the question of provision for old age and retirement. In our Amendment in line 19 we make the point that persons should not only be old but retired. That is linked with the point made by my hon. Friend about the way in which some people in this country have pensions. But at a date when we have so recently introduced a graduated pension scheme, the related injustice between them and the young is particularly hard.

    I happen to be a member of a firm which was one of the pioneers of graduated pension schemes. We started our pension scheme in 1934 so that by this time the fund has accumulated quite nicely. But anybody in a firm which started later is dependent on his own savings, his own inheritance which he has not spent, his own enterprise, or whatever it may be, to provide for his old age. In that respect I think it important to realise the distinction that the professional man has not until very recently even had that opportunity. I have said that I have had the opportunity since 1934, but my hon. Friend the Member for Langstone has not had it at all because be is a self-employed man. Professional self-employed men have had to put money aside to provide a pension. Their pension would be regarded as earned income if it came from the savings income were our Amendment accepted, whereas my pension would do so in any case because it comes from the pension scheme. On retirement a man suffers a big drop in income. I should have thought that that was just the time when the Chancellor would be very glad to do something for him so that he could have something coming in by the transfer from earned to unearned income, making the drop less.

    In the Amendment in my name there is raised the question of expatriate Crown servants. Those people have received a lump sum on retirement on the assumption that their career has been broken and that they have not had the same degree of income as they would have had had they been resident in England before that time. It seems that to treat their income accruing from that source as being unearned is a travesty of the facts. We have seen what has happened in the case of those serving in the Sudan. We have debated this kind of thing over and over again, and we have the greatest sympathy for people in that category. I suggest that we ought to include them with the elderly in this concession.

    I do not know what the cost would be. I put a Question to the Minister, but he was unable to answer it. I can conceive that it could be negative, because it might be that it would put an end to gifts inter vivos. People would be inclined to keep their money and to enjoy the income from it, whereas under the present system of high taxation on unearned income at a late stage in life, there is no encouragement for that to happen.

    The fact that many of us on this side of the Committee have listened patiently during this debate should not be misunderstood as meaning that we have listened with sympathy to any of the arguments, or so-called arguments, from hon. Members opposite. I hope it will not be taken the wrong way by hon. Members opposite, with whom I am personally on the best possible terms, when I say (that I am astounded at the greed shown in the present attitude of back-bench Tories. It is right that that should be said, and said straight from the shoulder.

    Here we have a situation in which the richest section of the community is getting the greatest tax benefit in one fell swoop—taking the plunge, the noble Lord the Member for Dorset, South (Viscount Hinchinghrooke) said—and this is the occasion they use for not being satisfied with that but for attempting to say that those who do the work and enable those with unearned income to enjoy the benefits of that work without doing a hand's turn should be treated in exactly the same way. It is an astounding and immoral attitude, and it is also wholly impracticable, I shall show how impracticable it is.

    The fact of unearned income gives the person an extra claim on the total production of the community to which he makes at that point of time no contribution beyond his savings. We recognise that the savings are there.

    I shall give way in a moment, but I shall say something which will be less welcome to hon. Members opposite than what I have already said. Unless the worker continued to do his work—and I mean work in its broadest sense—the person with £1 million unearned income today would starve.

    It may be vice versa. There would be no one to produce the food or to carry it and no means for the continuing of activity which all people enjoy in one form or another. The whole thing would come to a standstill and the unearned income would be of no use at all. It would be merely a beautiful picture.

    In view of what the hon. Member has just said, is he taking any steps to bring about the removal of the earned income allowance for Income Tax purposes at present granted to the vast majority of pensions receivable by people in this country?

    I am coming to that. I shall come to the hon. Member's reference to the age allowance. He should not be impatient. We have sat quietly listening to speeches by hon. Members opposite hoping that some hon. Member would show some temperance in his view and some realisation of the fact that the people who do the work are the people on whom we all depend. We hoped that there would be some appreciation of the way in which unearned incomes arise.

    Having explained that we all depend on the activities of people actively engaged in production, I should have thought it followed that we and the Chancellor should want to encourage those people. The whole purpose of the Surtax concession is to encourage people to greater work and greater productivity. We know that our export drive depends entirely on increased productivity. We are urging people all the time to do more work. Yet every speech made in favour of this Amendment has been in favour of our sitting on our respective backsides enjoying the product of the work of other people.

    Let us be clear how unearned income arises. In the majority of cases, as the noble Lord knows only too well, it arises through what by a curious euphemism he called "saved income". He knows that it arises from being born in the right cradle. I congratulate him on the fact that he was. Good luck to him but it is useless to pretend that because he was born in the right cradle everyone should treat the efforts of the workers in the same way as we treat the efforts of the spenders. Normally, unearned income arises from substantial savings which have come as a result of being born in the right cradle and receiving the income of one's family.

    The other major source of unearned income is untaxed capital gains. Having capital in the first place, the capital grows and increases by not being taxed. It is those two sources which provide the savings on which unearned income arises. It is nonsense for hon. Members opposite to say that the income is earned. Admittedly the amount saved in appropriate cases—not where it is inherited or is the result of capital gains—in the tiny minority of cases of capital saved out of earnings earned over the years is itself earned, but income from capital is not.

    There are two stages. The capital has been earned and has been subject to tax, and the argument of hon. Members opposite is that Surtax and Income Tax have been so high that it was not possible to save. It is not possible to save; in the normal way, substantial sums out of earnings. Where the savings come from inheritance, as the noble Lord knows, or from capital profits, these are two major sources. As the hon. Member for Langstone claims, many professional men have not been able to save very much, because of the high rates of taxation. Do not let us pretend that that income is saved income and give it fancy titles to make the proposition more attractive to both sides of the Committee.

    8.30 p.m.

    The simple fact is that this group of Amendments is paraded under the impression that it is an attempt to deal with old people who, having retired and reached the age of 65, are no longer able to carry on with their earning capacity, and who should, up to a limited point, as we do for Income Tax purposes, have a maximum of £800 to be treated as being earned income on the general grounds of humanity; and, on the logical grounds that, having retired, they were unable to earn, and this is something to take the place of the earned income allowance that they would be given if they were young and capable of continuing to earn. This has nothing to do with this group of preposterous Amendments, which I hope the Government will reject completely.

    The hon. Member for Gloucester (Mr. Diamond) started his speech by saying that he was on personally good terms with so many of us on this side of the Committee that he hoped that we would not take amiss any of the strictures he made. Of course, we do not, because we appreciate the free play of keen debate between those taking part. As I entertain a high regard for the hon. Gentleman personally, I hope that he will not take it amiss if I animadvert on what he has just said to the Committee.

    I think that the speech of the hon. Gentleman supplied abundant proof, if further proof were needed, of the fact that although he is no doubt a very good chartered accountant, he is a very bad economist. He is subjected to these stresses and strains which always afflict what I believe are known as the intelligentsia section of the party opposite when they come into conflict between what their experience and economic knowledge teaches them to be true, on the one hand, and what is the party dogma, on the other. I can only say, of his speech, that if he believes what he said it is a condemnation of his intelligence, and that if he said it without believing it it is a condemnation of his sincerity and the duty which he owes to the Committee.

    Taken by and large, it was a remarkable speech, because it confused so many issues. In listening to the hon. Gentleman, one would imagine that Surtax today was purely an impost upon the rich. Of course, it started by being an impost upon the rich. When Supertax, as it was then known, was introduced, in 1910, it was a levy which began at £3,000, but only fell upon those with a total income, in the purchasing power of money in those days, of over £5,000. [Interruption.] If the hon. Member for Burnley (Mr. D. Jones) insists on making these sedentary interruptions, I cannot reply to them without following his bad example and getting out of order myself.

    The very fact that it was at that level at that time does not make it right.

    I now understand why the hon. Gentleman was so very reluctant to rise and make an intervention which would be recorded immortally in the OFFICIAL REPORT, to the wonderment of generations to come and to the great bewilderment of his constituents, if they ever do him the compliment of reading what he says.

    At over £5,000, it was an impost upon the rich. Of course it was, but today it is not a levy solely upon the rich. It is a levy on ordinary members of the community at £2,000, which equated with the purchasing power and the value of money in those days, bears a very different aspect indeed to the incidence and purposes of the tax when it was first put on. Therefore, it really is quite unbecoming and wholly inaccurate and inappropriate for the hon. Gentleman to try to get away with that "poppycock" which was the word he used earlier, in relation to giving benefits and concessions to the rich.

    I want to follow, not to criticise. I do not follow the right hon. and learned Gentleman's argument. Is he talking about Surtax being levied only on those earning not less than £5,000?

    The right hon. and learned Gentleman is talking about the previous position, which was £2,000. The present position is that Surtax is being levied on incomes of over £5,000. These Amendments seek that benefit over and above the concessions, which means that Surtax would not be payable on incomes less than £5,000.

    The value of the hon. Gentleman's interruption was in inverse ratio to its length, which was considerable.

    The point I was on—I am sure that it was clear to every other hon. Member—was that it is wrong to talk in terms of an impost upon the rich. The pre-1961 Budget level of £2,000 must be contrasted with the 1910 level, with the then purchasing power of money, of £5,000 nominal value but probably about £20,000 contemporary value. It will now rise, as the hon. Gentleman said, in respect of earned income.

    These Amendments, which are a relatively modest contribution, but an important one, for reasons I shall develop, are designed to extend that relief not over the whole range of so-called unearned income, but merely in respect of unearned income, so-called, over the age of 65. There are two reasons for this—reasons of equity and savings.

    My next criticism of the hon. Gentleman's speech—I say this intending no personal offence, as he knows—is that he showed that he was a bad economist because of his total unawareness of the great importance of savings and investments in building up economic development, and thereby the standard of life of the people. Of course the contribution of the workers is necessary—but "workers" includes many people on the Surtax level. It is also necessary to have a high level of savings and investment.

    Here hon. Members opposite are in a political difficulty, for this reason. We believe in a high level of savings not only because it gives dignity and stability to the individual citizen, which is an important thing in itself, but also because it is the best means of countering simultaneously the evils of inflation, on the one hand, and high taxation, on the other. Hon. Members opposite have a different philosophy. They really do not want to see private savings. They want to see what are euphemistically called compulsory savings by high taxation. They want to see that for a very obvious reason. They are logical.

    All I criticise is their lack of candour in confessing it. They want to see compulsory savings in lieu of voluntary savings because it is a much better mechanism for a controlled economy. It is a much better basis for the control of the economy through the fiscal measures of taxation rather than through the traditional monetary method and methods of the market. That is why hon. Members opposite do not like savings. It was, therefore, quite frank of the hon. Gentleman to dismiss savings in the very perfunctory way in which he did.

    It points to a great divide between the attitudes of the party opposite and us on these benches. We believe in a free society, on the basis of a high level of voluntary savings. They believe in a controlled economy, on the basis of a high Budget surplus year after year, contributed to by high taxation and so-called compulsory savings. Therefore, we say that the basis of an incentive to savings is most important both for the individual citizen and the community as a whole, and we say that it is a right and proper incentive to savings that there should be an extension to the over-65's of the earned income relief principle in respect of Surtax which now falls on such a wide and varied range of people.

    That is the case, as I see it, in regard to savings. There is no question here of the retrospective incentive such as was criticised by the hon. Member for Sowerby (Mr. Houghton) earlier Obis afternoon, because this is an incentive that will apply to every young and middle-aged worker in the country, who will see that it will benefit him to save and invest because, at the end of the day, he will be allowed to get a better return on it than he does under the taxation of today.

    I should like to add just a word on the other aspect—on which I shall be brief, but it is important; that of equity. As the hon. Member for Sowerby and other hon. Members who were present will remember, two strands ran through our discussions this afternoon—the strand of economic incentive and the strand of fiscal equity. Economic incentive is a relatively new consideration in our Income Tax affairs. It is a consideration which historically existed in the field of Customs and Excise but not in that of Income Tax. It has been drawn into that field for, perhaps, an unenviable reason—the rates of Income Tax have become so high.

    On the other hand, fiscal equity is a basic, integral, traditional and continuing strand in our Income Tax affairs. It is, therefore, right that even though we now admit the principle of economic incentive, it should not erode or displace the primary principle of fical equity between taxpayers.

    The case in equity in regard to the income of people over 65 arises in the sense that they will not be able to benefit from the concessions on earned income as the younger and middle-aged people will. There are further considerations that arise. Many of these people are enjoying now the incomes built up by the fruits of their labours but, owing to the inflation of modern times, at a much lower real or purchasing value. And there is a special point about those who have not been able to take advantage of the provisions of Section 22 of the 1956 Finance Act, referred to by my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens).

    There is, therefore, a clear case in equity, just as there is a clear case on the economic and social grounds of savings. I think that it is a good case, and I should like to reinforce my hon. Friend's plea that the term "unearned income" is scarcely apposite. [Laughter.] The hon. and learned Member for Kettering (Mr. Mitchison), who laughs, knows far more about unearned income than I do—

    As the right hon. and learned Gentleman is so kind as to select me for comment in this way, will he tell the Committee, since he has not yet done so, whether it is consonant with fiscal equity to increase the Health Service charges and, at the same time, to accept these Amendments?

    I am on record as saying that my enthusiasm for the Health Service charges was confined with, out difficulty within the bounds of decorum. But this is not within the Income Tax provisions and I am talking about equity within the ambit of the Income Tax law. On that, we say that there is a case, in equity, and I agree with my hon. Friends that the "unearned income" nomenclature is an unfortunate thing.

    The hon. Gentleman the Member for Gloucester referred to inherited wealth, but the high level of Estate Duty is intended to take care of that; and the majority of unearned income today would more properly be called retirement income, savings income or even deferred earned income. Therefore, we say that, on these grounds of savings and on equity, there is a strong case to do this and I commend the principle to the Chancellor. If he cannot accept this Amendment in the context of this year's Finance Bill he will appreciate that both in the social and economic context there is a strong case for this, and I hope that he will bear it in mind in future years.

    8.45 p.m.

    We have had an interesting speech from the right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith). I imagine, since he has now retired to the back benches, that that is the sort of speech we can expect from him often in the future. He has, however, spoken at a rather high level, a level which I would be tempted to try to follow, particularly concerning his remarks about the Opposition's attitude to personal savings, and so on, and also concerning his admonitions of my hon. Friend the Member for Gloucester (Mr. Diamond) as to his lack of ability as an economist.

    But I will resist that temptation and come to the actual, practical Amendment which, after all, in theory, we are meant to be discussing. It is significant that the right hon. and learned Gentleman—and I say this without meaning any offence to him—has spoken with considerably more intelligence than have any of his right hon. Friends on this series of Amendments, but the high level of discussion which he injected into the debate is completely inappropriate to this subject.

    Returning to the point of the Amendment, hon. Members are being asked to extend the principle of the concessions which have been given in Clause 11 to unearned incomes up to a level of £5,000 a year. Of course, the fact that there are unearned incomes postulates that somewhere there are capital sums from which those unearned incomes are derived. Even at the lowest level of Surtax, at £2,000, assuming that the unearned income is at about 5 per cent. on the capital sum, there must be a capital sum of £40,000 available to the taxpayer.

    Rising to the £5,000 a year level—and the purpose of this Amendment is to treat all unearned income up to £5,000 as earned income—at a rate of interest of 5 per cent. there must be a capital sum of £100,000. Thus we have a plea made by hon. Gentlemen opposite for taxpayers all to have capital sums available to them ranging from £40,000 to £100,000.

    Is the hon. Gentleman aware that the capital sum about which he is speaking may not be available to them? I urge him to consider the question of annuities or people working under a trust.

    Nevertheless, a sum, in one form or another, is available. [HON. MEMBERS: "NO."] In the case of annuities, exactly the same position arises, with a sum being used to purchase an annuity. The analogy which the hon. Member for Portsmouth, Langstone (Mr. Stevens) drew with pensions is completely inappropriate, because a pension is a form of deferred earned income and is a legitimate subject for earned income relief. But an annuity is a legitimate device for using a capital sum in order to get a particular sum in unearned income per year. Even a person of 65 who has an annuity of £2,000 a year has basically a capital sum of a very considerable amount.

    Quite apart from annuities there are many people involved in these categories with which we are dealing who will have no annuities and will be drawing up to £5,000 a year in unearned income, in the form of dividends and interest, and that fact postulates that there is a capital sum of anything up to £100,000 available to them. As my hon. Friend the Member for Gloucester said, all this tear shedding for people with unearned incomes ignores one of the most conspicuous sources of inequity in our present taxation system, and that is the lack of taxation of capital gains.

    If the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) were to say to the Committee, "We ought to have a tax on capital gains and then you could give this sort of relief to the elderly taxpayer with large sums of unearned income" I could at least respect his sincerity, but I do not at the moment respect his sincerity at all.

    I am particularly suspicious when the right hon. and learned Member for Hertfordshire, East tries to carry this argument on to a high level, talking about principles of saving and the effect on the economy, but does not explain the facts which I have explained to the Committee—facts which must be available and known to the right hon. and learned Gentleman. We are entitled to bring out these facts, and we are also entitled to criticise hon. Members opposite and ask why we have not been given the facts that I have just indicated.

    I hope that there is absolutely no chance of the Government accepting these particularly misconceived Amendments. As my hon. Friend said, it is most extraordinary that when we have a Budget like the present one giving away large sums of money to the wealthier members of the community, their reaction is not one of grateful thanks but "What more can we get out of the Government?" I hope that the Committee will not be misguided enough to give any support to these Amendments.

    The attitude of the Opposition to these proposals is unfortunate, to some extent, from their own point of view, and I hope it will be noted throughout the country that those people who might benefit from the proposals made on this side of the Committee are treated by the Opposition to adjectives such as "greedy" and one hon. Member said derisively that his heart bled for them. I hope that the people whose situation would be improved by the proposals contained in these Amendments will note the attitude of the Opposition and will treat Members of the Opposition accordingly when the opportunity comes.

    I am also a little surprised at the attitude of my right hon. and learned Friend the Chancellor of the Exchequer to these proposals. He recently made a speech which was reported in The Times on 29th May under the headline, "Absolutely Vital Need for Saving". It seems to me that his present attitude is a peculiar way to approach what apparently my right hon. and learned Friend thought—and, indeed, what I am sure he does think—would be very beneficial. The importance of saving has, after all, been a theme, and rightly so, of this Government for some considerable time, but the proposed incidence of this tax relief, with the distinctions between earned and unearned income, falls upon certain citizens in a very harsh way indeed.

    I expect that many hon. Members have received many letters on this question. I have one from which I should like to quote because it puts the case in an effective way. This is from a man over 65 years of age who writes:
    "It is to be hoped that simple justice will be done to those savers of the past who had to provide for their own pensions. Otherwise a deep sense of injustice will be felt by those similarly placed to myself."
    He adds—I hope the Opposition will note this—
    "In conclusion, I have heard it said that even the Socialists might not have been so unfair".
    Little did he know of the speeches to be made by them this evening. I hope that he will realise the truth.

    I hope the hon. and gallant Gentleman will forgive me for saying that what he quoted did not seem to relate to these Amendments or to the issue involved. Will he quote the letter in full?

    I will show the letter to the hon. Gentleman afterwards. I do not want to detain the Committee. I hope he will take it from me that the letter has in it no substance which would support his contention at all. The heart of the matter is in what I read.

    I realise that the Opposition have pursued this line because, after all, they had to have something to oppose and, presumably, they thought that this was a suitable subject. I will give one more quotation. Let the Opposition see whether they can square this with what they have been saying. It comes from their own newspaper, the Daily Herald, of 16th January last:
    "Surtax was meant to be a tax on the rich. Rut £2,000 now equals £700 pre-war. Even if (he starting level were raised to £5,000, the tax would still be discouraging people whom it was never meant to reach. People to whom £2,000 still seems a lot should not be jealous; for the present state of affairs is harming the interests of the whole country."
    The Opposition are prepared to deny many things, but surely they will not deny the mouthpiece of their own party in saying that. I suggest that hon. and right hon. Members opposite should withdraw all opposition to these proposals and join with us on this side in urging the Chancellor to accept our suggestions.

    Will the hon. and gallant Gentleman read the part of the article dealing with the capital gains tax which the Daily Herald suggested should be adopted? Also, having regard to what he said and read about hardship to individual correspondents of his, will he say how many letters he and other hon. Members have received about the far greater hardships—I am still talking in terms of savings and past savings—of those who invested in gilt-edged and have seen their gilt-edged savings sharply reduced in value as a result of the Government's high interest rate policy?

    I hope that this Government will deal with all hardships which are suffered today. I have not the article with me because it is not relevant to the point I was making. What I did read was the relevant part.

    The right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith) conducted himself as an intellectual comic. I do not think that he satisfied many members of the Committee that his strictures on my hon. and right hon. Friends were as good as they may have appeared on the surface to be. I do not want to follow him in his wise-cracking fashion.

    We recognise that, apart from the efforts of those who work, there are other factors which go towards the good state of the economy, but that is not the issue involved in these Amendments. Hon. Members opposite have talked about the difficulties faced by the people for whom they are concerned. We are talking about those who receive a substantial income from capital gains.

    9.0 p.m.

    One hon. Member opposite referred to the sweat of the brow of the landlords, of the speculators on the Stock Exchange and of the land speculators, the boys who are earning fabulous golden hand-outs of one kind or another. It is nonsense for hon. Members opposite to talk about working people being able to save and to invest money. If it had not been for the imposition of charges of one kind or another by the Government, some of which are hitting many old-age pensioners, there would not have been any chance for the Surtax payer to get earned income, let alone unearned income, relief of the kind which the party opposite want for those who seek to get it on unearned income as well.

    If the Government entertain for one moment the Amendments of hon. Members opposite, there ought to be the greatest possible agitation at least in the trade union movement. When the right hon. and learned Member spoke about the worker who can see the possibility of future investment of his savings, the thought flashed across by mind of the number of industrial workers who are excluded, because of their rate of wages, from the Government's graduated pension scheme. It is sheer hypocrisy for right hon. Members opposite, like the right hon. and learned Member who was so clever with hon. Members on this side of the Committee, to talk about workers being able to save money as though all workers were able to do so.

    We have an affluent society only because of the plurality of the wage packet in the household. That is something which the right hon. and learned Member has to learn. If an industrial worker is able to save, it is only because his wife is going out to work as well. These Amendments clearly indicate the greed of right hon. and hon. Members opposite.

    I have an Amendment down concerning this matter and also support another. I am grateful to my hon. Friends for the speeches which they have made, because they have covered many of the points which I otherwise would have made myself. Speeches like that of the hon. Member for Gloucestershire, West (Mr. Loughlin) make it only too clear why the Socialist Party is so completely unfit to govern. Hon. Members opposite cannot recognise the complete difference which there is in these subjects between the two sides of the Committee. No one has done more in this field than the Conservative Party. [Laughter.] Of course that is so.

    At the moment we are discussing the question of taxation relating to certain classes of people. Those who provide investment and saved income, which was one of the terms my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith) used—he certainly invented a few new ones—are a third partner in industry. We cannot possibly have progress in a free society unless we provide the conditions and circumstances whereby investment will be encouraged to grow and to fructify to everybody's benefit. Where would the big businesses, employing a vast number of people and doing a great export trade, be if it were not for that principle running through the smaller industries from which they have grown? That is fundamental.

    While I recognise, as I must do in realising the overall position, that my right hon. and learned Friend the Chancellor could not do all that I am sure he would have wished to do this year—and I am grateful for what he has done—I share the view of my noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) that there is the danger that in doing what he has done in the way he has done it, we have opened a gulf rather wide in this context and have made it no easier for ourselves to bring about that element in equity which my right hon. and learned Friend the Member for Hertfordshire, East mentioned which is fundamental to our sound appreciation of economics—and it is a sound appreciation. That is the only thing of which I am frightened.

    Therefore, while I readily lend my support to the Amendments as an opportunity to express in this Committee views in which I wholeheartedly believe, I do not expect them to be accepted by many hon. Members opposite for the very reasons given by my right hon. and learned Friend. There is no argument about it. This is a fundamental approach. It is different. It is one of the great fundamental issues that divide the Tory Party from the Socialist Party. We may quarrel about details, but this approach is fundamental.

    I do not expect my remarks to be accepted with great glee on the benches opposite, but I trust that my right hon. Friends on the Front Bench, who will understand what I am talking about if hon. Members opposite do not, will take note of what has been said this evening. It is vitally important that however much good we have done in one sector, we should not make it more difficult for us to complete what is a sound policy based on practices which have been proved in the past.

    I, too, have received a vast number of letters, dozens of them—

    I shall make my speech in the way I wish and I do not need the hon. Member's assistance.

    Several of the writers have expressed the feeling that there is injustice or hardship, that they are being treated differently from other people and they do not see why they should be. I do not think that they should be treated differently from other people.

    My hon. Friends have mentioned that the Estate Duty takes large cuts out of inheritances. What is wrong with a man working to try to provide something for the future for his children? His savings should not be penalised. Hon. and right hon. Members opposite, through their love of the taxation system to get a controlled economy, adore killing that sort of source of vital life blood in our economy. I beg my hon. and right hon. Friends to take a serious view of this matter and to note what we have had to say, because I know that they believe it in their hearts and that they would like to do it if the situation of the economy permitted. I hope that if it does not permit it this year, it will do so in the very near future.

    Let me make it quite clear, at the outset of my remarks, that my right hon. and learned Friend the Chancellor of the Exchequer fully realises the heavy impact of direct tax, both Surtax and the standard rate of Income Tax, on investment income. He also realises that this impact is felt in particular by many elderly and retired persons who have, in many cases, given a lifetime of service to the nation and, by the nature of things, cannot themselves gain from a great deal of the important social expenditure of today on matters such as education.

    Even so, there are a number of reasons why my right hon. and learned Friend does not feel able to accept any of these Amendments which have been so interestingly moved, supported and discussed. I will mention in particular three reasons. First, any blurring of the distinction between earned income and investment income would be contrary to the basis deliberately adopted by my right hon. and learned Friend when framing his Budget this year.

    Looking back over the past ten years, I do not think any one can say that the Government have neglected the personal tax problems of any section of the community. I gave a number of what seemed to me to be striking instances of how the Government have helped those with lower incomes when I wound up the debate on Second Reading. In the context of the Amendment, it is worth remembering that any elderly taxpayer dependent entirely on the proceeds of investment income and whose total income brings him within the ambit of Surtax must have gained substantially from the reduction of the standard rate of Income Tax by as much as 1s. 9d. since the present Government took office. My right hon. Friend made it quite clear both in his Budget speech and again when moving the Second Reading of the Finance Bill that he could not afford a major reduction of direct taxation this year. My right hon. and learned Friend was concerned to do what he could to give a dynamic boost to the economy, and he felt that one of the most effective ways of doing so would be to increase the incentives to people in managerial, scientific and other positions of responsibility by countering, so far as future earnings are concerned, the disincentive tendency of the Surtax structure.

    It was therefore of the essence of my right hon. and learned Friend's Surtax proposals and his whole Budget judgment—and here I quote from his speech—that:
    "…the relief will only flow from and be related to the amount earned."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 821.]
    I therefore must say frankly to my hon. Friends that as far as this year's Budget is concerned the Amendments which we have been discussing run counter to what was a fundamental aspect of my right hon. and learned Friend's Budget judgment.

    The second point concerns savings, and I listened with great attention to what a great many of my hon. and right hon. Friends had to say about it. I do not want to take up all the points made on savings this evening, many of them of great interest. There is one point, however, which I might take up from the speech of the hon. Member for Gloucester (Mr. Diamond), and one from my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith). The hon. Member for Gloucester interested me when he said that although he recognised that if a man was earning during his working life and saved money, that money was, so to "speak, most properly his, he felt rather differently about income gained from the capital value of his savings. Surely the hon. Member would not dispute for a moment, and I would not have thought that any hon. Member opposite would dispute, that the raising of the standard of living of workers depends largely on the rate of capital investment. I should think, therefore, that no sensible worker could possibly grudge the inclusion of interest on money saved, because it is entirely in the interest of the nation and of the great mass of the people that a man should be saving income in the course of his working life.

    Nobody has said that they grudged that. We said that we drew a distinction in terms between earned income and income accruing from investment and not being earned.

    Interesting as I found his speech, my chief criticism of the hon. Member would be that in many cases he drew much sharper distinctions than were really justified.

    If I may say so to my right hon. and learned Friend the Member for Hertfordshire, East, one point in his speech where I could not go all the way with him was when he talked about the Budget surplus. Surely a very low overall borrowing requirement is really in the interest of a mainly free enterprise economy, because it means that more private saving becomes available for investment in the private sector. There are two sides to the Budget surplus, and I am sure that my right hon. and learned Friend will bear in mind the important bearing of budgetary policy on monetary policy as well.

    I fully agree that the last thing we want to do is to discourage saving by the professional man or woman in the course of their working life. In this context it is worth remembering that my right hon. and learned Friend's proposals will affect total tax on mixed incomes comprising some earnings and some income from investments. This is a matter which we shall be debating on a subsequent Amendment and, therefore, I shall not pursue it now.

    It is important also surely to remember that my hon. Friends' Amendments are not in any way limited to the income from investments which represent the accumulation of savings from past earnings. Indeed, I think it would be a practical impossibility to devise any form of words for precisely that purpose. Therefore, the reliefs which my hon. Friends suggest would be given equally to investment income arising from inherited wealth, or indeed from the reinvestment of the proceeds of capital appreciation that had no connection at all with earnings. Again, the pure rentier would get relief equally with the man for whose benefit these Amendments have been chiefly devised.

    9.15 p.m.

    Of course, it is perfectly true—I recognise this—that the existing Income Tax age relief is undiscriminating in the same way. But that, after all, is a relatively small relief designed to help elderly people with investment incomes of a very moderate size. I put it to the Committee that circumstances are very different when one is considering an Amendment that could give a Surtax benefit running up to as much as £1,775 in amount.

    I would tell my hon. Friends that I make this point and draw attention to these figures because my right hon. and learned Friend felt that relief in this way on this scale of investment income would not be justified in the present year at a time when he frankly told the House that he was unable to afford any general reduction of direct taxation.

    My third point is the most important of all, I think, and I ask my hon. Friends to consider it very carefully. I should have thought that it would be regarded as a quite intolerable anomaly if we were to retain the present age relief up to a limit of £800, with tapering provisions, and if the law were also to recognise a new hardship category consisting of elderly people with incomes of £2,000 and upwards. Surely such a state of affairs would be regarded—and with some reason—as extremely unfair by all those elderly taxpayers with incomes below £2,000 which are nevertheless too large to qualify for Income Tax age relief.

    Having said that and put those three points before my hon. Friends, I want to say that of course my right hon. and learned Friend realises very clearly indeed the danger of having too large a discrimination between earned income and investment income. I share much of the dislike that many of my hon. Friends have expressed about the term "unearned income", but I must equally say that, frankly, I was rather surprised to hear my noble Friend, in his very interesting speech moving the Amendment, say—if I understood him aright—that we ought to work towards no discrimination between earned and unearned income at all. All I would say is that this may be orthodoxy on the back benches today, but it was not orthodoxy when we discussed this subject some years ago. I do not remember any one making that point.

    I must tell my noble Friend that I certainly do not remember that point being made in, for example, the Budget of 1952 when the present Home Secretary raised the earned income allowance to 2/9ths, and I do not remember it being made during the Budget debates of 1957 when the present Minister of Aviation extended the earned income allowance into the Surtax field. While I absolutely agree that we want to be careful about too great a discrimination, it was my impression that there was a good deal of support not only in this House, on the Government benches, but in the country for the idea of some extension of the earned income allowance into the Surtax range.

    I would not care to associate my hon. Friends with this statement, but I feel very strongly that one can differentiate entirely between the situation which obtained some years ago and the present situation. In the situation that obtained after a major war when the nation was completely impoverished, everything was done by State action to encourage the entrepreneur to industrial effort, but when we arrive at an affluent society all sorts of different considerations applied.

    I greatly respect my noble Friend's convictions, as I hope he realises, but in view of what he said this evening I thought I was bound to raise this point, which seemed to me one of very considerable importance.

    My hon. Friend is making a very unfair point in relation to the Minister of Aviation and all that. At that time there was a limitation on what could be done. My hon. Friend must know—it would not be proper for me to say it—what has been said outside this Chamber.

    I do not profess by any means to know all that is said outside this Chamber. I would hesitate to say, and I think that in this I shall carry a large part of the Committee with me, that all the economic problems which we recognised in 1957 can now be said to have been solved once and for all by 1961.

    I come to the Amendment of my hon. Friend the Member for Bath (Mr. Pitman). There are certain serious difficulties about this proposal. When one considers the difficulties which have arisen in devising and administering a retirement condition in connection with a man's title to draw retirement pension, one would think very hard before deciding to introduce that concept into our tax law. I agree that at first sight retirement from the service of the Crown seems straight-forward enough, but what about those who, in the past, left overseas Crown service to take up another occupation?

    There is another point to be mentioned. Except in the case of persons retiring from Crown service overseas, by my hon. Friend's proposal anyone under 65 could never qualify for the relief, even though his Surtax liability came to be in question for a year of assessment falling wholly after the date when he became 65 and retired.

    I quite understand that those in Crown service are more likely than most people in other occupations to find their employment suddenly terminated, for example, when a former Colonial Territory becomes self-governing. However, I say frankly to my hon. Friend that I doubt whether the grant of a special tax relief designed for quite another purpose is the best way to help those people. In case I should sound unsympathetic about those people, I assure my hon. Friends that I regard the cost of the Overseas Service Act, 1961, as money extremely well spent. I believe that that Act and the White Paper of October, 1960, which preceded it, pointed towards the correct way of dealing with this sort of problem.

    Surely if those people who have served overseas come back to live in this country we shall get a tax gain, because they will come back only when we have a reasonable form of taxation? That is not making a sacrifice but helping the economy of the country and our sterling balances.

    I was trying to deal with the interesting and specific suggestions made in the Amendment of my hon. Friend the Member for Bath and merely pointing out that I think that there are difficulties about trying to help these people by a grant of a special tax relief, although I agree that it is very important that we should keep their needs in mind.

    For the reasons I have explained, I must invite my hon. Friends not to press their Amendment but to recognise that it is an essential element in my right hon. and learned Friend's Budget judgment this year that the Surtax reliefs should only flow from and be related to the amount earned. Of course, he recognises the danger of too great a discrimination between earned and investment income in our system of taxation, but he made his Budget judgment perfectly plain this year and, for that reason, I cannot advise the Committee to accept the Amendments.

    Sorry as I am to have missed a minute or two of the beginning of the hon. Member's speech, I want to say that the Opposition agree with his conclusions, and I should like to add one or two further reasons. I listened to the speeches in support of the Amendments, and I hope that I may be forgiven for saying that I wondered how much those hon. Members meant those speeches wholeheartedly and to what extent they had their tongues in their cheeks. Some of the arguments seemed absolutely incomprehensible in the light of one or two things which have been happening lately.

    The first is that hon. Gentlemen opposite, unanimously so far as I know, decided to increase the health charges, knowing perfectly well that that increase would apply especially to the old people towards a particular class of whom these Amendments are directed. What hon. Members opposite have been asking the Committee to do, having just imposed additional charges on the old the sick and the poor, is to give Surtax relief to those people who with some £40,000 of capital are getting an income of £2,000 a year or more from it. I find it difficult to conceive a more inconstant suggestion, at this time of day. I noticed that the first few hon. Members who spoke to the Amendments omitted to say what they were about. They talked about almost everything else, but not that.

    I would remind them of one other thing. The party opposite is responsible for a pensions scheme the effect of which is to remove from the taxpayer a number of increases, which will be put on to the contributors. At the last election that party rejected the pensions scheme put forward by the Labour Party, which was intended to give considerable assistance to elderly people. Yet, for a special class of elderly people—those who have what is called "saved income" of over £2,000 a year—hon. Members opposite are asking the Chancellor to extend a concession which, on social grounds, I would already regard as quite indefensible, and which we shall oppose in due course.

    What astonished me about the debate was to hear hon. Members—people whom I had hitherto regarded as tolerably sensible—talking about fiscal equity, and nonsense of that sort, in connection with this set of Amendments which deal with saved income, devised in the ingenious mind of the noble Lord to cover capital gains which might have been made after a lifetime of speculation on the Stock Exchange and to cover, again, a nice fruitful inheritance of the kind that many people will have received in their early years and contrived to cling to for the rest of their lives. We are being asked to support the socially desirable function of not spending an inheritance, and we are being asked to do so after what the Government have done in respect of Health Service charges, the poll tax and contributions. To get up and talk that sort of nonsense is an insult to the country.

    Amendment negatived.

    I beg to move, in page 8, line 19, at the end to insert:

    (c) any deductions made under the foregoing paragraphs shall be disregarded for the purpose of determining the rates of surtax applicable to the unearned income (being any income other than earned income) of the individual in question and that unearned income shall be assessed for surtax as if the earned income (without any such deductions as aforesaid) were first assessed and thereafter the unearned income were assessed at rates appropriate to a supplementary assessment of the unearned income made immediately after the assessment of the earned income".
    As we have had several discussions on the purpose of the Chancellor's Budget, we had better start afresh. I take as my text an extract from the Chancellor's Budget statement. He said:
    "I want to do what I can to ensure that the present incidence of Surtax does not act as a disincentive to those who have positions of responsibility in our industries and elsewhere in our national life. Accordingly, I think it right to take action to modify, as far as earned incomes are concerned, the present rules. The changes I propose will be applicable to incomes earned—I repeat earned—during this new financial year and thereafter."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 820.]
    It is clear, therefore, that what the Chancellor had in mind, whether rightly or wrongly, were changes in the Surtax rates and in the burden falling on those who had earned incomes, and that he was most anxious to restrict help to those who earned their incomes, and was not intending to give relief to those who were not earning their incomes. I will repeat what he said:
    "The changes I propose will be applicable to incomes earned…during this new financial year and thereafter."
    That is what the Chancellor said, but when we refer to the tax tables it becomes immediately clear that what he said was not fully carried out by the provisions of the Finance Bill. In fact, instead of the Surtax provisions helping only those who earn their incomes they help those who have unearned incomes, by reducing Surtax liability.

    9.30 p.m.

    I do not know whether it is necessary for me to go into the figures again. They were put before hon. Members effectively by my right hon. Friend the Member for Battersea, North (Mr. Jay), during the debate on the Budget statement. My right horn. Friend said:
    "…a man getting £1,500 a year on earned income gels nothing from this Budget. But if he is receiving £1,500 of earned income plus £1,500 of unearned income, if single, he gets £42 a year."
    That makes it quite clear that a man who has, in addition to his earned income, unearned income of an equal amount, gets £42 reduction in Surtax relief because of his unearned income.
    "If he received £2,000 a year all earned he gets nothing at all."
    That is clear because there is no Surtax payable and there remains no Surtax payable. If a single man earns £2,000 a year he gets no relief.
    "But if he gets £2,000 a year earned income plus £2,000 a year unearned, he gets £80 a year to encourage him to more initiative and enterprise."—[OFFICIAL REPORT, 19th April, 1961; Vol. 638, c. 1285–6.]
    I can give more figures at length, if any hon. Member requires it, showing the effect at different ranges. But the short point is that the Chancellor said that he wished to help those people with earned income. The effect of this Amendment is to enable the Chancellor to achieve what he set out to achieve. It is as simple as that.

    We believed the Chancellor when he said that he did not want to help those with unearned incomes. We have put down this Amendment which would have the effect of making certain that those with unearned incomes did not benefit, while those with earned income continued to get the benefit. This Amendment seeks to give effect to the Chancellor's own wish that there shall not be Surtax relief on unearned income for people with a mixed income.

    The way in which this works is simplicity itself. It asks one to imagine a person's income being built up into a series of blocks. The first block will represent the earned income and on top of that would be put a second block representing his unearned income. That block would attract a certain level of Surtax which he must pay and for which he would receive no relief. So the person would pay Surtax on the second block which would then be taken away, leaving the lower block representing the earned income on which he would receive Surtax relief as provided for by the Finance Bill.

    I hope that I have made the provision clear. We are only helping the Chancellor to do what he wants to do and we are doing so in the simplest possible way. If accepted, this Amendment would have the effect of extinguishing the present Surtax relief under the Bill on unearned income, leaving the taxpayer with his full Surtax relief on earned income. I submit it very hopefully indeed to the Committee, as it is precisely what the Chancellor wants. It may be that the wording is not precise, and that the right hon. and learned Gentleman may have his own wording, in which case the Opposition, as ever, would be accommodating. At all events, it is an Amendment designed to do exactly what the Chancellor wants and I have no hesitation in believing that the right hon. and learned Gentleman will accept it.

    The hon. Member for Gloucetser (Mr. Diamond) said four or five times in the course of quite a short speech on this Amendment that it would do exactly what the Chancellor said he wanted to do in his Budget statement. If the hon. Member had read through three further paragraphs and ejaculations by my hon. Friend the Member for Kidderminster (Mr. Nabarro) he would have found that that is not so, but that the Bill as drafted carries out exactly the intention of my right hon. and learned Friend. My right hon. and learned Friend said:

    "These proposals will give no relief to incomes derived solely from investments. They will give maximum relief to incomes wholly earned. But because Surtax is a tax on total income they will affect the total burden of tax on mixed incomes comprising some earnings and some income from investments. But the relief will only flow from and be related to the amount earned. So, again, there will be an incentive to increase earnings."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 820–1.]
    The Bill, as drafted, carries out that intention exactly.

    I agree on one point put by the hon. Member. We are here on a relatively narrow and confined point and I do not think that on this Amendment we could have quite such a wide-ranging debate as we had on the previous Amendment. I think that I can put the issue to the Committee most clearly by giving a concrete example, not exactly the same but very nearly the same as the example I quoted in the debate on the Budget Resolutions.

    Take the case of a man with a mixed income of, say, £4,000 of earnings and £500 investment income. There is nothing between us, as the hon. Member for Gloucester fairly said, in that the man does not pay tax on the £4,000 of earnings. The sole question we have to consider is whether the £500 should be taxed as the Bill says, at 2s. in the £ or, as the hon. Member and his Friends say, the tax the £500 of investment income should be calculated at 4s. 6d. in the £.

    The view that investment income should be regarded as the top slice of a mixed income is no doubt theoretically a tenable one, but I say quite frankly that I think as a basis for the working of this Clause it would be quite unfair and would in the view of the Government operate as a strong disincentive to the acquisition of further income from savings. Indeed, I think one could carry the argument a stage further and put the point even more strongly by considering the position in the case I have just quoted if the taxpayer earned an additional £1,000 more.

    Under the Clause as drafted he would pay no further Surtax because the deduction for earned income relief and special earnings allowance would have increased by £1,000. Under the Amendment there would be no Surtax on the additional earnings as such, but the £500 of investment income, considered as the top slice of the total income, would be pushed up to a rate of 5s. 6d. in the £ solely because of the additional earnings. In the view of my right hon. and learned Friend this would be an extremely wrong feature in a scheme designed to encourage further earnings for effort and increased initiative. I think it would be quite indefensible to penalise and discourage saving by people during their working life in a way which would be certainly caused if we accepted the Amendment. I have no hesitation at all in advising the Committee to reject the Amendment.

    I do not wish to bring the debate to an end. My hon. Friends may wish to comment further on what the Financial Secretary has said, but when he sat down I almost automatically got up. It all depends on how far the Chancellor wants to go.

    My hon. Friend the Member for Gloucester (Mr. Diamond), as the Financial Secretary said, kept saying that this Amendment sought to do what the Chancellor intended to do. This Amendment does what we thought the Chancellor intended to do. Now, we find that he intends, apparently, to do something more, and this Amendment seeks to check him from going too far. The Financial Secretary only a few moments ago, speaking to the previous Amendment, said that the proposals in Clause 11 were a dynamic boost to the economy. I have the greatest respect for the Financial Secretary, his choice of language and the sincerity with which he always addresses the Committee, but if he really believes that this is a dynamic boost to the economy, he will believe anything. One is inclined to ask, "Who and what is the economy, if this is a boost to it?"

    Another thing that the hon. Gentleman said was that Surtax relief was directly related to the amount earned, so we see how misleading a phrase can become. Of course, in the initial stages of the application of the proposals in Clause 11 to Surtax, relief is directly related to the amount earned, but it is also indirectly related to the amount of unearned income. What I wish to stress is that when these reliefs in Clause 11 have been given, the total gross income remains the same. They do not reduce the income; they increase the reliefs for tax purposes to be given against that income, so that the gross income in the hands of the taxpayer is the same before the reliefs and after. At the initial stage, the income is the same.

    What the Chancellor is doing is reducing the amount of Surtax payable on the same income as before, and to achieve that purpose he reduces the amount of chargeable income—not the amount of the income, but the amount of income to be chargeable to tax—so that he is free to vary the reliefs that he is giving on the gross income. It is a perfectly tenable argument to use against the Chancellor's proposals that, while giving the reliefs to earned income, he is consequentially giving quite substantial relief to unearned income as well.

    I am not saying that we were in any real doubt about this at the earlier stages of the debates on the Bill, because it seemed to follow from some comments which the Chancellor made at the earlier stages, but we deplore it, nevertheless. The Financial Secretary, a few moments ago, after saying that Surtax reliefs will be directly related to the amount earned, went on to say that the reliefs will affect the burden on mixed income. Indeed, he was using this very fact as an argument against the Amendment of his hon. Friends for still further relief on unearned income, and was drawing their attention to the fact that they are to get quite noticeable reliefs in Surtax on unearned income as a consequence of the reliefs being given on earned income.

    The example which the Financial Secretary quoted a moment ago was a a man on £4,000 a year. I take the case of a married man earning £4,000 a year with dividends of £500. If one takes the unearned income as the top slice of income for calculation purposes, the amount of Surtax on the £500 of dividends will be reduced from £107 10s. to £40. That is a very substantial reduction in the Surtax on unearned income for a man who, from the Chancellor's point of view, is on the rather modest salary of £4,000 a year, and other Surtax payers would stand to gain a greater benefit than that.

    9.45 p.m.

    This is a question of how far the Chancellor of the Exchequer wishes to go. There is no reason why, in giving these reliefs to earned income, he should not regard unearned income as taking its present place in the total computation of Surtax and at the same rate as it would be taxed at present before the reliefs to earned income are given. That seems to us to be the logical thing to do. There are no difficulties of administration. There is no justification, from the point of view of the Chancellor of the Exchequer's original intentions when proposing the Clause, why unearned income should share the benefit with earned income. We wish to differentiate between the two.

    This is the third fault in the right hon. and learned Gentleman's own proposal which we think should be remedied, even looking at them from his point of view. We made it clear at the outset, and we have repeated, that we are against the Clause as a whole. We think that it is wrong to propose reliefs on this scale in the Bill when additional taxation is being levied by the Bill and when prior to it very substantial additional charges were imposed upon the great mass of the people. We are, therefore, trying to discuss the matter on the basis of the right hon. and learned Gentleman's own approach to the proposals in the Clause and to amend them as seems suitable from his own standpoint.

    We certainly wish to press the Amendment. Whatever the Chancellor may think about giving a dynamic boost to the economy, whatever he may think about the justification for giving substantial reliefs to earned incomes in the Surtax brackets at present, we see no justification for giving consequential reliefs in respect of unearned incomes of better-off people only a few weeks after he levied several hundreds of millions of pounds by increased National Insurance contributions and Health Service charges. On that basis we shall press the Amendment.

    I want to press the right hon. and learned Gentleman one point further on the explanations we have been given. The case made out by my hon. Friend the Member for Gloucester (Mr. Diamond) and supported from the Front Bench by my hon. Friend the Member for Sowerby (Mr. Houghton) has not been answered properly. The Financial Secretary, with his usual bright, breezy and urbane manner, carefully chose an example to illustrate his defence of mixed income. I am not complaining about his manner but the substance of his argument.

    As he spoke to us, I asked myself why he had chosen the example of a person with a mixed income of £4,500 a year. The first reflection produced the obvious answer, namely, that the ceiling for Surtax has been lifted to £5,000 a year from the original figure of £2,000. If the Financial Secretary had addressed his example and its effect on the tax to the reverse case, there would have been a much more spectacular result. He quoted the case of a taxpayer with an earned income from a profession or industry of £4,000 a year, to which must be added £500 a year received as unearned income from investment revenue.

    What would be the position in the reverse case of a man doing only nominal work and receiving an income of £500 from employment or profession but being in the fortunate position of enjoying an unearned income of £4,000 a year? There must be many cases where an individual, either by inheritance or other circumstances, is fortunate enough to have an income of £4,000 a year while, perhaps, carrying out quite nominal duties bringing in an earned income of £500.

    Where one has mixed income, the major part of which is unearned and the rest is earned, the person will get very much more than in the case quoted, unless the example is entirely wrong. Even in the case quoted by my hon. Friend the Member for Sowerby, a man with an unearned income of £500 a year stands to benefit by £60 from a transaction under this relief provision, so the man whose major income is from investments will be in an even better position. I should be very grateful to hear an explanation of what the position would be where the major portion of income is unearned, so long as it is under the ceiling of £5,000.

    The Financial Secretary said that this was a very narrow point, but perhaps that is the wrong word. It is a very simple point, but not a narrow one. An important matter of principle is involved. By this Amendment we are trying to restrict the relief given under the Clause exclusively to earned income. When one has mixed income it all depends what particular part of the income one takes as marginal income—the "top slice" of income, I think, is the term used by the Inland Revenue.

    What happens under the Chancellor's proposal is that the unearned income is taken as the top slice of the income, which means, whether or not one's relief flows, in the Chancellor's words, from the earned income that the actual relief is at the topmost marginal rate, which is a rate determined by the amount of unearned income as well as the amount of earned income. Because of the progressive rates of Surtax we are, in fact, treating the unearned income as the top slice of income, and by that means giving what we consider to be an unnecessary relief to people with unearned income, although the whole basic intention of the Clause is that the whole relief should go to those with earned income.

    There might just be a case for the Government to say that we should take both earned and unearned income as being progressive proportionately, so that one has an even spread of income from the bottom to the top, increasingly proportionately. Had the Government said that, it would have been possible to provide for it in the Clause, and there would have been a certain restriction on the relief for unearned income. But it seems to me to be completely indefensible that the Government should have chosen this method—which is not the only technical method—which has the effect of making the unearned income the top slice of income.

    What we are saying in this Amendment is that we should split the total income into the two categories of earned and unearned, and that they should be treated separately for the assessment of Surtax. We say that we should calculate the Surtax on the total, as it were, without the remissions under this Clause. One then gives not deductions from total income but remissions on tax calculated on total income, which has the effect, by the terms of the Amendment, of making absolutely sure that none of the relief flows to unearned income but is concentrated on earned income. As I have said, that meets far more consistently and logically what the Chancellor said were the basic purposes of the Surtax reliefs.

    The Financial Secretary gave an interesting example of someone with £4,000 a year earned income, and £500 investment income, receiving a £1,000 a year increase in salary. He said that the effect of that, if the Amendment were accepted, would be that that man would pay Surtax at a higher rate although, in fact, he had had an increase in earned income and not in unearned income.

    That is correct, but it is also true—and this is a reversal of the arguments used by the Chancellor and by the Financial Secretary about the reliefs flowing from earned income—that the increase in Surtax would have flowed from the unearned income and not from the earned. There would have been no increase in tax if he had had no unearned income. The fact that the increase in earned income meant that there was more Surtax payable does not derogate from the fact that it is still true that the increase in Surtax came from the unearned income. That is a reversal of the principle, as I have explained.

    My hon. Friends and I consider that the proposals we are making more consistently and logically follow what were the Government's intentions. Although it is a simple point, it is one of principle. We hope that the Financial Secretary will have something further to say about the matter and, if he has not, I hope that my hon. Friends will divide the Committee.

    It has been said by hon. Gentlemen opposite that this is a narrow point, while my hon. Friends have said that it is a simple one. I hope that there will be one or two other hon. Members who, having listened to the debate, will dissent from the view that it is, indeed, a simple point.

    Despite the powers of perspicacity and persuasion of my hon. Friend the Member for Gloucester (Mr. Diamond), some hon. Members may still not be able to grasp the whole of the argument. I was not enlightened on the subject by the reply of the Under-Secretary, particularly since he appeared to select an example which suited him. This is a matter of some considerable complexity in Income Tax law and operation and, therefore, it is pardonable if some hon. Members are not able exactly to understand the position. Nevertheless, it is the duty of hon. Members to try to understand what is going on, and the Financial Secretary has not done as much as he might have to enlighten us.

    Although the issue may be complicated, two facts stand out clearly. The first is that the Government, in this proposal which my hon. Friends are seeking to remedy, intend, by their Surtax proposals, to give relief to certain forms of unearned income. Whatever the Chancellor may say, and whatever the Financial Secretary may say on his behalf by quoting some of the Chancellor's speeches—and I am not saying that he distorted them in any way—that was not the impression hon. Members got at the time of the Chancellor's Budget speech, and the impression given generally to the country. At that time the Government were intent on other impositions, saying that they would have to raise money in various other ways.

    It was never understood that the Government were, by their Surtax proposals, going to give a certain amount of relief to people on unearned income. The Government are, therefore, doing something which they did not make fully clear at the time and, considering that, hon. Members should have today received some justification for that from the Financial Secretary.

    10.0 p.m.

    Another matter arises. Whenever on Finance Bills hon. Members make proposals which would involve increased burdens on the Chancellor and on the Treasury the Financial Secretary replies, "I have great sympathy with this point of view, but I have had to examine the extra burdens which would be placed on the Exchequer and I have to tell hon. Members that we cannot afford it because we have to scrutinise every million pounds. We have to know exactly what is being spent".

    I think the Financial Secretary referred to an hon. Friend of mine using the same phrase on many occasions. The Financial Secretary used on many occasions the phrase "the Budget judgment of the Chancellor of the Exchequer". We are always told by Financial Secretaries that the Budget judgment of the Chancellor of the Exchequer is being worked out very carefully. But whatever may be the exact meaning of my hon. Friend's proposal, it surely means that if this Amendment were accepted it would be of some benefit to the Treasury.

    Why did not the Financial Secretary tell us how much money is involved? Has he made any estimate of what would be the benefit to the Treasury if this Amendment were accepted? When proposals of this nature are made, which would be of assistance to the Chancellor in his conduct of his financial operations, at least the Treasury ought to make as careful inquiries as they would make on occasions when people are proposing extra burdens to be carried by the Treasury.

    Perhaps the Financial Secretary would like me to continue speaking for a minute of two to enable him to make inquiries if he has not got the figure. If he has the figure, I am surprised that he did not give it to us in his earlier speech. I would be extremely surprised if the figure were not available in the House so that we could be told how much money the Treasury is prepared to lose rather than accept the Amendment. Will the hon. Gentleman tell me how much it is? Is it £2 million or £3 million? If it is, it would certainly cover all the extra charges which were imposed in respect of teeth and spectacles. Let us know exactly the figure which the Financial Secretary threw away without even attempting to inform the Committee of the amount involved. Let us be told exactly how much money the Chancellor, by rejecting this Amendment, is going to give to those with unearned incomes, what is the benefit he is giving to them which could have been used for other purposes.

    I rise to answer the last three speakers. The hon. Member for Westhoughton (Mr. J. T. Price) asked me about the case of somebody with an earned income of £500 a year and an unearned income of £4,000 a year. As a matter of fact, here there would be very little difference. Under the Clause as drafted the Surtax payable is £375. Under the Amendment the Surtax payable would be £400. The total difference in tax liability in that case would be only £25.

    In answer to the hon. Member for Glasgow, Craigton (Mr. Millan), who said that he felt this was an important point, I quite agree, and I am sorry if anything that I said suggested that this was not so. Obviously, this was a major point on which my right hon. and learned Friend had to decide, when framing his proposals this year, whether he should treat mixed incomes as they have been treated in the Clause or whether they should be treated as they are treated in the Amendment.

    In answer to the hon. Member for Ebbw Vale (Mr. M. Foot), one reason why this is an important point is that a considerable amount of money is involved. The difference from the point of view of the Exchequer is, I think, £13 million for 1962–63, and £19 million for a full year. Therefore, my right hon. and learned Friend obviously had to take an important decision on this matter. I can only repeat what I said before. In my view, to treat mixed incomes in the way that hon. Members opposite propose in the Amendment would, although it would save money from the point of view of the Exchequer, be too great a deterrent and discouragement to saving

    One point in the speech of the hon. Member for Craigton I could not accept. It is true, of course, that, if a man earns £4,000 and his earnings rise to £5,000, the additional Surtax under the conditions proposed in the Amendment arises on the £500. On the other hand, the increased rate—a fairly high increased rate—of 5s. 6d. in the £ arises from the additional earnings. I cannot help feeling that to say, "If you have been earning £4,000 and your earnings rise to £5,000, you must then pay at 5s. 6d. in the £ on even a quite modest amount of investment income derived from saving" would not be equitable. That was the reason, after considering the matter very carefully, both because of the point of principle and because of the amount of money involved, why my right hon. and learned Friend took the decision he did.

    I quite agree that a great many Clauses in the Finance Bill are not easy to follow. I imagine that the hon. Member for Ebbw Vale will agree with the lady who said to G. K. Chesterton that if St. Thomas Aquinas' account of God in his simplicity was right then God in his complexity must be very difficult indeed. However, after reading again the paragraphs in my right hon. and learned Friend's Budget speech which occur at columns 820 and 821 of the OFFICIAL REPORT of 17th April, it does not seem to me that that is an obscure passage. However much we may disagree in this Committee about the proper way to treat mixed incomes, I do not think that there is any plausible case for saying that my right hon. and learned Friend has intentionally or unintentionally misled the Committee.

    The Financial Secretary has made one of the most remarkable and revealing statements of this whole series of debates. He has now admitted that the Chancellor decided deliberately to give away £19 million not just on Surtaxed incomes, but on unearned Surtaxed incomes. We have now discovered that a very large proportion of the sums raised from National Insurance contributions and Health Service charges is to be given away to people paying Surtax on unearned incomes.

    My hon. Friend the Member for Ebbw Vale (Mr. M. Foot) understated the case against the Government and against what they propose. He said, very rightly, that this was not a narrow issue. I quite agree, but I think it is a fairly simple issue. The issue is that, whereas the Chancellor justified the whole of his Surtax reliefs on the ground that they would give an incentive on earned incomes, one finds, on looking at the tax tables, that he is giving a very large proportion of them to unearned incomes, not what the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) called savings incomes but inherited incomes as well as investment incomes in the general sense.

    What is actually happening can be easily explained by reference to the Chancellor's tax tables. Let us suppose that a single man has an earned income of £1,500. He has nothing from the Surtax reliefs. If he has also an unearned income of £1,500, he receives £40 a year in tax relief. In plain English and in common sense, that is a tax relief for unearned income. If he has an earned income of £3,000 a year, he receives from this Budget according to the tables a tax relief of £112. If he has also £3,000 unearned income, he receives a tax relief of £275. Again, in terms of common sense, that is an extra £150 or so by virtue of his unearned income.

    Going to the £10,000-a-year taxpayer, to whom the Chancellor has been more kind than to any other, if his £10,000? income is all earned he receives £350 in relief. If he has £10,000 unearned income also, he receives £775 tax relief. That is an extra £400 by virtue of his unearned income. That is what the Chancellor is doing.

    I am astonished that the Financial Secretary should lend himself to such a disingenuous and hypocritical proceeding as this. He read out the words which the Chancellor used in the Budget debate. I ask any hon. Member whether he would have thought from these words that the Chancellor was doing what I have been describing. The Chancellor said—and the Financial Secretary produced this as his trump card—
    "But because Surtax is a tax on total income they will affect the total burden of tax on mixed incomes comprising some earnings and some income from investments. But the relief will only flow from and be related to the amount earned."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 821.]
    That did not imply to any of us what the Chancellor is, in fact, doing.

    Those words apply directly to the example which the right hon. Gentleman has given. If in the case which he quoted a man's earned income fell, his tax liability would go up sharply.

    I can well believe that the Financial Secretary, by some form of semantics or pedantry, may be able to reconcile these words with what the Chancellor is doing. I am certain that no one in this Committee or in the country understood that that is what is being done.

    It is an exposure of the whole cynical, hypocritical nature of this Budget that we should have recommended to us and to the country these huge Surtax reliefs which amount to a reduction of nearly half in the total yield in Surtax on the ground that they are designed to increase incentive and to be a reward for earned income. Then when we look at what the Chancellor is actually doing we find that a very large part of the relief is going to unearned incomes.

    Is the right hon. Gentleman bearing in mind that unearned income will be reduced under this Budget by an increase in Profits Tax?

    That may or may not be so, but it was not what the Chancellor said when he was recommending these concessions.

    The fact is that the Chancellor says—and the Financial Secretary does not deny it—"If you have a large unearned income, you get increased tax reliefs through the Surtax concessions in the Budget". This was not the impression conveyed to us. All that the Financial Secretary can do in an attempt to palliate or excuse this hypocritical proceeding is to read out an almost unintelligible form of words which convey no meaning of the kind suggested to us. This is one of the most cynical and hypocritical humbugging performances that we have had from any Government in recent years, and it exposes the selfish, shabby and anti-social nature of the Budget and the excuses that we have had made for it today.

    The disclosure of the Financial Secretary that in practice this will mean the loss to the Chancellor of the Exchequer of £19 million is one of the most cynical things that we have heard. We do not know what hon. Members opposite think about this. It might be to the benefit of the Committee if they made some contribution to the debate instead of sitting on their backsides and interrupting.

    The Chancellor clearly indicated in his Budget speech—and it has been repeated again and again—that Surtax reliefs should apply only to earned income. In col. 820 of the OFFICIAL REPORT for 17th April, he not only stated it clearly and categorically, but he even used the words which have been repeated today. If we wanted to use the £19 million which is involved for the benefit of society, we might consider giving it to the teachers for the work which they are doing. That is precisely the figure about which there is difficulty in the teaching profession.

    10.15 p.m.

    I am not content to see the use of the Budget in this way whereby we can throw away without any consideration £19 million to people who do not need Surtax relief, and who have not earned the money anyway, when there are so many reasonable things that we could do with the £19 million, and, in particular, because the Chancellor clearly indicated to the House and to the country that his intention was to ensure that the Surtax reliefs should apply solely to earned income and in that way be an incentive.

    The Chancellor should reconsider the matter. He should understand that because he conveyed clearly to the House and to the country that any relief from Surtax should be specific to earned incomes, he will be failing in the responsibility of his office if he does not carry out the promise which he gave both to the House and to the nation.

    Earlier this week, I received a letter from the Ministry of Pensions and National Insurance and, to make doubly sure, I received a similar letter from the Ministry of Health. Both of them referred to a matter which I regard as being related strictly to what we are now discussing.

    No one on this side of the Committee imagines that high taxation is desirable in itself. What we must always decide is what are the priorities in a civilised community. In those two letters, from different Departments, I was told that an old couple whose income was £8 a week, who were paying about 30s. a week for rent and who had reached an age when one or other or both of them were frequently ill and drawing prescriptions from their doctor, could not recover the 2s. per item for those prescriptions.

    The priorities are such that the letters went on to say that if either of the old people had a disease of such a nature as to require constant prescriptions, it would be in order for the doctor to prescribe larger amounts of medicine each time a prescription was required. There was no indication that we could so organise our taxation system as to relieve them from the anxiety of those prescription charges, nad yet tonight we are faced with the uncivilised, savage attitude and the lies of hon. Members opposite who, before the Budget, created public opinion that Surtax had to be reduced as an incentive to the export trade. That was the talking line of the Government.

    Now, it is clearly exposed that the export argument was simply a camouflage under which hon. Members opposite, in this disgraceful fashion, do not come to the rescue of the people who are doing a serious export job or to the rescue of anybody earning a living in any way for the benefit of the community. It is simply a bit more smash and grab of the kind by which hon. Members opposite still insist on charging 2s. per item for prescriptions, even from old couples who do not have enough

    Division No. 193.]


    [10.20 p.m.

    Ainsley, WilliamHenderson, Rt. Hn. Arthur (Rwly Regis)Parkin, B. T.
    Albu, AustenHerbison, Miss MargaretPavitt, Laurence
    Allaun, Frank (Salford, E.)Hill, J. (Midlothian)Pearson, Arthur (Pontypridd)
    Allen, Scholefield (Crewe)Hilton, A. V.Peart, Frederick
    Awbery, StanHolman, PercyPentland, Norman
    Bacon, Miss AliceHolt, ArthurPrice, J. T. (Westhoughton)
    Baxter, William (Stirlingshire, W.)Houghton, DouglasProbert, Arthur
    Blyton, WilliamHowell, Charles A. (Perry Barr)Pursey, Cmdr. Harry
    Bowden, Herbert W. (Leics, S. W.)Howell, Denis, (Small Heath)Randall, Harry
    Bowen, Roderic (Cardigan)Hughes, Cledwyn (Anglesey)Rankin, John
    Bowles, FrankHughes, Emrys (S. Ayrshire)Redhead, E. C.
    Boyden, JamesHughes, Hector (Aberdeen, N.)Reid, William
    Braddock, Mrs. E. M.Hunter, A. E.Reynolds, G. W.
    Brockway, A. FennerHynd, John (Attercliffe)Rhodes, H.
    Broughton, Dr. A. D. D.Irvine, A. J. (Edge Hill)Roberts, Albert (Normanton)
    Castle, Mrs. BarbaraJay, Rt. Hon. DouglasRoberts, Goronwy (Caernarvon)
    Chapman, DonaldJones, Rt. Hn. A. Creech (Wakefield)Robertson, John (Paisley)
    Cliffe, MichaelJones, Dan (Burnley)Ross, William
    Craddock, George (Bradford, S.)Jones, Elwyn (West Ham, S.)Silverman, Julius (Aston)
    Cronin, JohnJones, J. Idwal (Wrexham)Skeffington, Arthur
    Crosland, AnthonyJones, T. W. (Merioneth)Slater, Mrs. Harriet (Stoke, N.)
    Darling, GeorgeKenyon, CliffordSlater, Joseph (Sedgefield)
    Davies, C. Elfed (Rhondda, E.)Lawson, GeorgeSmall, William
    Davies, Ifor (Gower)Lee, Frederick (Newton)Smith, Ellis (Stoke, S.)
    Davies, S. O. (Merthyr)Lee, Miss Jennie (Cannock)Snow, Julian
    Deer, GeorgeLever, L. M. (Ardwick)Sorensen, R. W.
    Delargy, HughLewis, Arthur (West Ham, N.)Soskice, Rt. Hon. Sir Frank
    Diamond, JohnLoughlin, CharlesSpriggs, Leslie
    Dodds, NormanMabon, Dr. J. DicksonSteele, Thomas
    Dugdale, Rt. Hon. JohnMcCann, JohnStones, William
    Edwards, Rt. Hon. Ness (Caerphilly)MacColl, JamesSylvester, George
    Edwards, Robert (Bilston)McInnes, JamesTaylor, Bernard (Mansfield)
    Edwards, Walter (Stepney)McKay, John (Wallsend)Taylor, John (West Lothian)
    Evans, AlbertMackie, John (Enfield, East)Thomas, Iorwerth (Rhondda, W.)
    Fitch, AlanMcMillan, Malcolm (Western Isles)Thompson, Dr. Alan (Dunfermline)
    Fletcher, EricMallalieu, E. L. (Brigg)Thomson, G. M. (Dundee, E.)
    Foot, Dingle (Ipswich)Manuel. A. C.Thornton, Ernest
    Foot, Michael (Ebbw Vale)Mapp, CharlesTimmons, John
    Forman, J. C.Mason, RoyUngoed-Thomas, Sir Lynn
    Fraser, Thomas (Hamilton)Mellish, R. J.Wade, Donald
    Gaitskell, Rt. Hon. HughMillan, BruceWainwright, Edwin
    Galpern, Sir MyerMilne, Edward J.Warbey, William
    George, Lady Megan Lloyd (Crmrthn)Mitchison, G. R.Weitzman, David
    Ginsburg, DavidMonslow, WalterWhite, Mrs. Eirene
    Gordon Walker, Rt. Hon. P. C.Morris, JohnWilkins, W. A.
    Grey, CharlesNoel-Baker, Francis (Swindon)Willey, Frederick
    Griffiths, W. (Exchange)Oliver, G. H.Williams, W. R. (Openshaw)
    Grimond, J.Oram, A. E.Willis, E. G. (Edinburgh, E.)
    Hale, Leslie (Oldham, W.)Oswald, ThomasWilson, Rt. Hon. Harold (Huyton)
    Hall, Rt. Hn. Glenvil (Colne Valley)Owen, WillWoodburn, Rt. Hon. A.
    Hamilton, William (West Fife)Padley, W. E.Woof, Robert
    Hannan, WilliamPaget, R. T.Yates, Victor (Ladywood)
    Hart, Mrs. JudithPannell, Charles (Leeds, W.)
    Hayman, F. H.Parker, JohnTELLERS FOR THE AYES:
    Mr. Irving and Mr. Short.


    Agnew, Sir PeterBishop, F. P.Bullus, Wing Commander Eric
    Aitken, W. T.Black, Sir CyrilButcher, Sir Herbert
    Allan, Robert (Paddington, S.)Bossom, CliveCampbell, Sir David (Belfast, S.)
    Allason, JamesBourne-Arton, A.Carr, Compton (Barons Court)
    Atkins, HumphreyBox, DonaldCarr, Robert (Mitcham)
    Balniel, LordBoyle, Sir EdwardCary, Sir Robert
    Barlow, Sir JohnBraine, BernardChataway, Christopher
    Barter, JohnBrewis, JohnChichester-Clark, R.
    Beamish, Col. Sir TuftonBrooman-White, R.Clark, Henry (Antrim, N.)
    Bennett, F. M. (Torquay)Brown, Alan (Tottenham)Clark, William (Nottingham, S.)
    Berkeley, HumphryBrowne, Percy (Torrington)Cleaver, Leonard
    Biggs-Davison, JohnBryan, PaulCooke, Robert
    Bingham, R. M.Buck, AnthonyCooper, A. E.
    Birch, Rt. Hon. NigelBullard, DenysCordeaux, Lt.-Col. J. K.

    income to provide proper nourishment and far less to pay for bills.

    Question put, That those words be there inserted:—

    The Committee divided: Ayes 160, Noes 229.

    Cordle, JohnJackson, JohnRenton, David
    Corfield, F. V.James, DavidRidley, Hon. Nicholas
    Costain, A. P.Jenkins, Robert (Dulwich)Ridsdale, Julian
    Critchtey, JulianJohnson, Erie (Blackley)Robinson, Sir Roland (Blackpool, S.)
    Crosthwaite-Eyre, Col. O. E.Kerby, Capt. HenryRodgers, John (Sevenoaks)
    Cunningham, KnoxKershaw, AnthonyRoots, William
    Curran, CharlesKirk, PeterRussell, Ronald
    Currie, G. B. H.Lancaster, Col. C. G.Scott-Hopkins, James
    Dalkeith, Earl ofLangford-Holt, J.Seymour, Leslie
    d'Avigdor-Goldsmid, Sir HenryLeavey, J. A.Sharpie, Richard
    Deedes, W. F.Leburn, GilmourShaw, M.
    de Ferranti, BasilLegge-Bourke, Sir HarryShepherd, William
    Digby, Simon WingfieldLewis, Kenneth (Rutland)Simon, Rt. Hon. Sir Joceyln
    Doughty, CharlesLinstead, Sir HughSkeet, T. H. H.
    Drayson, G. B.Litchfield, Capt. JohnSmith, Dudley (Br'ntf'rd & Chiswick)
    du Cann, EdwardLloyd, Rt. Hon. Selwyn (Wirral)Smithers, Peter
    Duncan, Sir JamesLoveys, Walter H.Smyth, Brig. Sir John (Norwood)
    Elliot, Capt. Walter (Carshalton)Lucas-Tooth, Sir HughSpeir, Rupert
    Elliott, R. W. (Nwcstle-upon-Tyne, N.)MacArthur, IanStanley, Hon. Richard
    Emery, PeterMcLaren, MartinStevens, Geoffrey
    Emmet, Hon. Mrs. EvelynMcLoughlin, Mrs. PatriciaStewart, Michael (Fulham)
    Farr, JohnMacLeod, John (Ross & Cromarty)Stodart, J. A.
    Finlay, GraemeMcMaster, Stanley R.Stoddart-Scott, Col. Sir Malcolm
    Fraser, Ian (Plymouth, Sutton)Macmillan, Rt. Hn. Harold (Bromley)Storey, Sir Samuel
    Freeth, DenzilMacmillan, Maurice (Halifax)Studholme, Sir Henry
    Galbraith, Hon. T. G. D.Maddan, MartinSumner, Donald (Orpington)
    Gardner, EdwardMaginnis, John E.Talbot, John E.
    Gibson-Watt, DavidMaitland, Sir JohnTapsell, Peter
    Glover, Sir DouglasManningham-Buller, Rt. Hn. Sir R.Taylor, Sir Charles (Eastbourne)
    Glyn, Dr. Alan (Clapham)Markham, Major Sir FrankTaylor, Edwin (Bolton, E.)
    Glyn, Sir Richard (Dorset, N.)Mathew, Robert (Honiton)Taylor, w. J. (Bradford, N.)
    Goodhart, PhilipMatthews, Gordon (Meriden)Teeling, William
    Goodhew, VictorMaud ling, Rt. Hon. ReginaldTemple, John M.
    Cower, RaymondMawby, RayThatcher, Mrs. Margaret
    Grant, Rt. Hon. WilliamMaxwelf-Hyelop, R. J.Thomas, Leslie (Canterbury)
    Grant-Ferris, Wg. Cdr. R.Mills, StrattonThomas, Peter (Conway)
    Green, AlanMontgomery, FergusThornton-Kemsley, Sir Colin
    Gresham Cooke, R.More, Jasper (Ludlow)Tiley, Arthur (Bradford