Clause 14. — (Super-tax on undistributed income of certain companies.)

Orders of the Day — Finance Bill. – in the House of Commons am ar 20 Mehefin 1922.

Danfonwch hysbysiad imi am ddadleuon fel hyn

  1. (1) Where it appears to the Special Commissioners that any company to which this Section applies has not, within a reasonable time after the end of any year or other period ending on any date subsequent to the fifth day of April nineteen hundred and twenty-one, for which accounts have been made up, distributed to its members in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of Super-tax, a reasonable proportion, regard being had to the normal requirements of the business, of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that for purposes of assessment to Super-tax, the said income of the company shall, for the year or other period specified in the notice be deemed to be the income of the members, and the amount thereof shall be apportioned among the members.
  2. (2) Any Super-tax chargeable under this Section in respect of the amount of the income of the company apportioned to any member of the company, shall be assessed upon that member in the name of the company, and, subject as hereinafter provided, shall be payable by the company, and all the provisions of the Income Tax Acts and any Regulations made thereunder relating to Super-tax assessments and the collection and recovery of Super-tax shall, with any necessary modification, apply to Super-tax assessments and to the collection and recovery of Super-tax charged under this Section.
  3. (3) A notice of charge to Super-tax under this Section shall in the first instance be served on the member of the company on whom the tax is assessed, and if that member does not within twenty-one days from the date of the notice elect to pay the tax a notice of charge shall be served on the company and the tax shall thereupon become payable by the company: Provided that nothing in this Sub-section shall prejudice the right to recover from the company the Super-tax charged in respect of any member who has elected as aforesaid but who fails to pay the tax by the first day of January in the year of assessment or within twenty-one days of the date on which he so elected, whichever is later.
  4. (4) Any undistributed profits which have been assessed and charged to Super-tax 1222 under this Section shall when subsequently distributed be deemed not to form part of the total income from all sources for the purposes of Super-tax of any individual entitled thereto. Where a member of a company has been assessed to and has paid Super-tax otherwise than under this Section in respect of any income which has also been assessed and upon which Super-tax has been paid under this Section, he shall, on proof to the satisfaction of the Special Commissioners of the double assessment, be entitled to repayment of so much of the Super-tax so paid by him as was attributable to the inclusion in his total income from all sources of the first-mentioned income.
  5. (5) This Section shall apply to any company—
    1. (a) which is registered under the Companies Acts, 1908 to 1917; and
    2. (b) in which the number of shareholders computed as hereinafter provided is not more than fifty; and
    3. (c) which has not issued any of its shares as a result of a public invitation to subscribe for shares.
    In computing the number of shareholders of a company for the purpose of the foregoing provision there shall be excluded any shareholder who is not a beneficial owner of shares or who is an employee of the company, or is the wife or the unmarried infant child of a beneficial owner of shares in the company.
  6. (6) In this Section the expression "member" shall include any person having a share or interest in the capital or profits or income of a company, and the expression "employee" shall not include any governing director, managing director or director.
  7. (7) The provisions contained in the First Schedule to this Act shall have effect as to the computation of the actual income from all sources of the company, the apportionment thereof amongst members of the company and otherwise for the purpose of carrying into effect, and in connection with, this Section.
  8. (8) The provisions of this Section shall apply for the purposes of assessment to Super-tax for the year 1922–23 and any succeeding year of assessment.

Photo of Mr John Whitley Mr John Whitley , Halifax

The Amendment standing in the name of the hon. Member for Watford (Mr. D. Herbert) is not in order, but he has put in a revised version which would be in order.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I beg to move, in Sub-section (1), to leave out all the words after "it" ["Where it appears"] to the end of the Clause, and to insert instead thereof the words is proved to the satisfaction of the Special Commissioners (but subject to appeal by either party to the courts, either on grounds of law or of fact, that a person liable to Super-tax controls, or can control, either by himself or by nominees, three-fourths of the voting powers of a company of a private character registered under the Companies Acts 1908 to 1917, and that such company, after making reasonable provision for depreciation or reserves or replacement of wasting assets, is refraining from distributing income so as to render immune from Super-tax income which could be reasonably and properly laid to such person, then such person shall none the less be liable to be assessed to and to pay Super-tax in respect of such amount as he would have received from such company if such company had not so refrained from distributing such income as could have been so reasonably paid as aforesaid. The alteration which has been made in the Amendment to put it technically in order is that the words "of a private character registered under the Companies Acts 1908 to 1917" have been substituted for the words "whether incorporated in the United Kingdom or incorporated abroad." I must frankly confess that the alteration which I have been obliged to make to bring the Amendment in order takes away practically the whole point of my suggested Amendment, but I make the alteration with a view to being able to discuss certain points arising upon this Clause which appear to me to be of very great importance, and to which I referred on the Second Reading of the Finance Bill. Clause 14, as drawn, deals with companies registered in this country alone, and the Money Resolution, upon which this Clause is founded, is also confined to companies registered in this country, and companies of a private character registered in this country. Therefore, I was obliged to alter my Amendment, but the whole object was to meet the point that people who are forming companies of this kind in order to avoid Super-tax would defeat the purpose of the Government by registering those companies abroad. You cannot effectively legislate against a foreign company, any more than you can effectively legislate against a person who is a citizen of and resident in a foreign country. If you want to hit these particular people, and prevent their escaping the tax, you must direct your legislation not against companies that are registered but against the men themselves.

A parallel case arose in, I think, 1912, when an alteration was made in the Income Tax law with reference to dividends on foreign property not brought to this country. Prior to that year a number of people had invested moneys in different parts of the world. For example, they invested money in Canada and they had the income collected by a Canadian bank and placed to a special savings bank account and accumulated, so that it was never brought to this country, and under the law as it then stood it was not liable to Income Tax and the taxpayer did not pay it. The Government, in order to prevent the loss of tax resulting from that course of action, legislated to the effect that every Income Tax payer, who was, of course, bound to divulge all his income, wherever it might be situated, should be liable to pay Income Tax on these dividends even though they were never brought to this country. People might say at first sight: "If you are going to tax a man on money that he may never bring to this country, how are you going to collect the tax?" In practice the answer is very simple. The man is over here, he is getting money to live upon—to live in some state of at least moderate luxury —and every penny which he gets in this country you can recover from him if you have a just, proper and effective judgment against him; and so can you do it in the case of the man who registers a company abroad and accumulates income abroad in order to get out of Super-tax. I respectfully suggest that the course which the Government ought to have adopted, and which, I take it, it is now out of their power to adopt on account of the terms of their Ways and Means Resolution, was to legislate against the Super-tax payer and to say that any man liable to pay Super-tax who controls in an objectionable way a company, whether in this country or abroad, so as to render what should be his income immune from Super-tax, shall, nevertheless, be liable to pay it. That, I believe, would be effective.

That raises other questions (which were discussed to some extent on the Second Reading of the Bill) as to the danger of the Clause as it stands at present. I know, and I have no doubt that the Committee generally can believe, that the Government by this Clause had no intention of trying to act harshly towards those one-man companies, or private companies, which have been formed for the genuine purpose of carrying on some trade or business and in order to enjoy all the advantages which the Joint Stock Acts were passed for the purpose of conferring on a limited liability company. On the one hand, there are a number of cases where people are unfairly accumulating their profits and escaping Super-tax in a way which they ought not to do; but it is extremely difficult to differentiate those cases from the cases of small trading companies existing, perhaps, largely on borrowed capital, and bound, if their trade is to progress—indeed if their business is to be made reasonably safe—to put aside and accumulate almost the whole of their profit, except the small amount needed for the proprietors to live upon. I am going to be so bold as to make a suggestion to the Government with regard to those cases. It is my firm opinion that the Government, bound as they are by the Ways and Means Resolution, and quite unable to hit the man who chooses to register a trust company abroad will find it impossible to attain in any degree the object which they have sought in this Clause. In view of the great danger which there is of their interfering unduly with other trading companies, doing a considerable amount of damage to the trade of the country, and perhaps reducing the amount upon which Income Tax generally will be assessed, I seriously suggest to them that it is a matter for their consideration whether they ought not to withdraw this Clause altogether this year, with a view to bringing in another, as soon as they can do it, based upon a money Resolution sufficiently broad to hit the person they really want to hit, the man who is forming a trust company in order to get out of Super-tax, a man not engaged in trade or business at all, and who, directly this is passed, will laugh at it by going and registering his company abroad. If they will only bring in legislation drafted somewhat on the lines of my Amendment as it originally stood, they will be able to hit the man who is the particular man they want to catch.

I only want to say, in conclusion, that my Amendment as originally drawn was drafted very loosely, and was intended merely to indicate the lines upon which I thought legislation of this kind should go. I do not for a moment suggest that in its details it is a sufficiently finished Clause, but I do say that until you can hit the man who makes use of a foreign company your Clause is absolutely worthless, and, in the meantime, is extremely dangerous and likely to be unfairly oppressive on the trade of the country in a manner that was not intended. I earnestly ask the Government whether, under all the circumstances, they will not withdraw this particular Clause for this year, if it is impossible to introduce any Ways and Means Resolution on which to found legislation which will hit a foreign company.

Photo of Mr Arthur Samuel Mr Arthur Samuel , Farnham

I, too, think this Clause will have to be withdrawn, and for reasons other than those given by my hon. Friend the Member for Watford (Mr. D. Herbert). Let me show the Committee what the position is at the present moment. There are 78,000 registered companies in this country, of which 60,000 are private companies, and in the case of all those which have less than 50 members it will he in the power of the Special Commissioners to say what each shall put to reserve, or to depreciation or keep back for wasting assets, or what they shall do in other matters which are of an intimate and expert nature in the conduct of their business; and if what the Special Commissioners say is not done it will lie in the power of the Special Commissioners to penalise those companies by inflicting, as a penalty beyond the Corporation Profits Tax, the Super-tax. That goes behind the clear intention of the Government in telling us some year or two ago that Corporation Profits Tax would be put upon companies because they did not pay Super-tax. It is thus to be within the power of the Special Commissioners to penalise some of these companies. For what reason is this Clause to be operative? There is evidence that certain people have been able to take an advantage—not an illegal advantage, because they are within their legal rights, for, as my hon. and learned Friend the Member for Central Bristol (Mr. Inkskip) said, it is not illegal to do it—have been able to get through a gap in the fence and have become immune from a certain form of taxation.

I wish to say here and now, on behalf of the body with which I have the honour to be identified, the Association of British Chambers of Commerce, that we support the Chancellor of the Exchequer in the principle laid down in this Clause and we will help him all we can, but we cannot take this Clause as it stands, because it is not workable in its present form and the result will be that it will do more harm than good and great injustice. I am very glad to be able to say that we will support the Chancellor in the principle, because when an injustice has been done to us as traders in the past and we have gone to the Chancellor of the Exchequer to ask for a grievance to be remedied—I have been on many occasions on deputations to the Treasury during the last seven years—the Chancellor of the Exchequer of the day has always met us fairly, so far as lay in his power. We ask on various occasions for equity; we on our part must do equity. AB fair play has not been given to the revenue by reason of this gap, we are prepared to help the Chancellor of the Exchequer to stop a tax leakage arising from a defect in legislation, so that when we go to him again to ask for a grievance to be remedied we can say to him: "When there was a grievance against us on the part of the Treasury we helped you." The Clause itself contains indications of hasty draftsmanship, and elements which must defeat its usefulness quite apart from the point made by the hon. Member for Watford as to companies being registered abroad. The Clause talks about "members" of a company who will be called upon to pay Super-tax, but how can the Revenue call upon a "member" to pay Super-tax if that "member" is a limited liability company? Some of these small companies may have shareholders who themselves are limited liability companies, and you cannot as the law now stands, get the Super-tax from a limited company. You have to get the man who is the end of the funnel out of which the money comes: but while you have a limited liability company holding shares in a company of less than 50 people this Clause is utterly defeated. That is a point that will have to be dealt with.

The next point that may arise is that a proprietor may be of such small means that he does not pay Super-tax. How, then, is Super-tax to be got from him? Or, again, at what rate if he is liable for a rate lower than that claimable from the originating company liable under this Clause? Or it may be that no money has been distributed, and that no money is in the hands of the company, and if Super-tax is charged by the Special Commissioners, how is the Super-tax to be paid? If the company is called upon to pay money for a shareholder it will make it in the form of a payment to one of its proprietors, and that will be a payment out of capital and will offend the law. How is that difficulty met? There are three or four different points in the Clause which in themselves defeat its efficiency. In any case, to allow the Special Commissioners to say to trading people, because they happen to be a company of fewer than 50 persons, what they may put away for reserves, contingencies, fighting funds, and for wasting assets, is something which the trading community of this country cannot allow to pass without the most violent protest. You do not say to J. and P. Coats, to Brunner, Mond and Company, to an oil company, or to the P. and O. Company how many thousands of pounds they may put away for reserves against contingencies which none but those working the concerns can understand. Take the case of a ship-owning company with the small number of, say, 10 members. Suppose there is a prospect of a freight war five years hence, and that ship-owning company does not distribute its profit, but keeps it carefully in reserve for the purpose of fighting for its life when the time comes. Is it to be in the power of the Special Commissioners to say, "You have got to put what we think proper into your profits and call them divisible profits and pay Super-tax"? It is an intolerable state of affairs, and cannot possibly be permitted. Moreover, it means in effect that Special Commissioners, who cannot possibly know the intricacies or the future policy or apprehensions of a prudently-managed concern, are to dominate its rate of dividend and reserve and financial systems. Is that the intention of the Treasury? I am sure it cannot be; but that is what will eventually occur. Yet the very basis of our sound commercial system is the keeping back of profits for reserves over many years. This Clause contests and discourages that policy of prudence and strength. In times like these, when high taxation bears very heavily upon us, grievances have become more formidable than when taxation was low. We hold that the principle in this Clause is right, but we can- not support it in its detailed form. And for the reasons given, I have put down an Amendment that we should insert in Sub-section (1)—these words were arrived at after very careful consideration by some of the leading industrial men of this country who met together on several occasions for the purpose of assisting the Chancellor of the Exchequer in this specific matter by devising a formula to effect his aim without doing damage to those whom the Clause is not aimed at. I think the words of my Amendment express the principle and the spirit of what the Chancellor of the Exchequer wishes "for the purpose of avoiding or diminishing the liability of its shareholders to Super-tax." That is what the Chancellor aims at. But the trouble is—to avoid injury to innocent people.

If the Government can prove that any company, to use a colloquialism, is tax-dodging by means of a gap in the revenue fence the Treasury has a right to come down and frame a law to stop this gap and take tax on that which is till now permissibly put aside, after the legislative permission has been given in suitable form. These words are not put down as an Amendment at random. May I read an extract, which guided us, from paragraph 575, page 125, of the Report of the Royal Commission on Income Tax, 1920: The problem can be handled in two ways. It could be enacted that the undistributed profits of a company should be allocated among the shareholders, and regarded for Super-tax purposes as their income; alternatively, the undistributed profits of a company could he made liable to a special counterbalancing tax. Any universal application of either of these solutions would be open to considerable objections, and would apply to cases where there is no reason to suppose any avoidance of Super-tax is intended. We accordingly recommend that when assessing authorities are satisfied that the profits of a company or a portion of them are retained undistributed or are distributed as bonus shares for the purpose of avoiding or diminishing the liability of its shareholders to Super-tax, the income of those shareholders may be treated as if the profits or a portion of them had actually been distributed as an ordinary dividend. The words of that Report have been adopted by us in this Amendment. I will go further and say that we are not alone in using these words. I hold in my hand an Act, 9–10, Geo. V, to amend the Income War Tax Act, 1917, with the advice and consent of the Senate and House of Commons of Canada, and the same words are used which I want to urge upon the Chancellor of the Exchequer: The share of a taxpayer in the undivided or undistributed gains and profits of a corporation shall not be deemed to he taxable income of the taxpayer unless the Minister is of opinion that the accumulation of such undivided and undistributed gains and profits is made for the purpose of evading the tax, and is in excess of what is reasonably required for the purposes of the business. It appears, therefore, that if we ask the Chancellor of the Exchequer to withdraw this Clause, to reconsider it in the light of what the hon. Member for Watford has said and in the light of what I have ventured to lay before the Committee, I think then we shall get nearer to attain the object which the Chancellor of the Exchequer has in view. I hope he may think fit to make some statement to-night to meet our wishes, and if he does endeavour to frame a new Clause of a kind which will avoid the objections I have mentioned, he can depend upon getting the support of those who think with me in this matter.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

I do not think the Committee is under any misapprehension as to the object with which the Government has presented the proposal to the House of Commons. The conditions, I think, are now well known. It is possible under our laws for individuals to form private companies by which, within the provisions of the law relating to these private companies, they need publish no balance sheet to the world. They preserved practically all the secrecy they would have as private partnerships, and enable the persons chiefly interested to put to reserve much of the profit, indeed, all the profit, if thought fit, and entirely escape the payment of Super-tax upon profits which other individuals and private partnerships are required to pay. It is possible, under these conditions, to get full advantage of the reserves so set aside by borrowing from the company. It is also possible to bring the company to an end at any period chosen, and put all the reserves in their pockets without without having paid any Super-tax upon those funds. It is perfectly obvious, and I am sure every Member of the Committee agrees, that that is a device we must be put in a true position to avoid. The only difficulty I see is that of finding the proper means to meet that kind of measure. I think it would be a pity if the Committee were to ask me to defer legislation for a year upon such a matter as this, because it has become particularly prominent in recent times. It has become notorious that professional people are advising, as they are entitled to advise as the law is to-day, to adopt this device, and bankers are giving the same advice.

The matter, a short ago, did not assume any great proportions; to-day it is one of very formidable dimensions. Therefore, we should wish to deal with it at the earliest possible moment. That is why the present Clause is before the Committee now. I do not say for a moment that we have found the best way of dealing with it. We have had a sufficient expression of opinion both by the Amendments put upon the Paper and from certain hon. Members to enable us, without delaying for a year, to present to the Committee a solution of the problem. The hon. Member for Watford (Mr. D. Herbert) has suggested that our Clause is nugatory in respect that it does not deal with the possibility of individuals trading through companies abroad, and registered under the laws of foreign countries instead of those of Great Britain. I dare say that is possible and, indeed, may be likely in certain circumstances, but I do not think we should be deterred from legislation at the present time on the ground merely that we are not able to deal with people who adopt that device. It is a quite possible device, I admit, but there is a natural disinclination even on the part of people who wish to evade their tax to set up companies abroad. It is an overt act of a particular and obvious ostentatious character, and most people shrink from making so public a demonstration of what they are seeking to attain. I have no doubt the instance to which my hon. Friend referred was one where the person who set up the company abroad had acquaintance with the land in which the company was formed.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

There was one particular company I referred to, but that was ancient history, some 12 years ago. The companies I have in my mind were purely private trust companies, not carrying on trade, the details of which are private and which will be moved abroad without other people knowing anything about it.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

At any rate, there are a great many other companies of which we know to which that description might be given, and I think it is quite worth while even although we do not cover all the possible loopholes. We can get at some of them now by legislation and it is worth while. The proposals which have been made for amendment indicate the lines upon which the minds of certain Members have been running as to the methods which should be taken to get rid of this difficulty. The hon. Member who has just sat down has referred to some of these, and he has indicated what is perfectly known that there might be great apprehensions on the part of the trading community if they were to be subjected to investigations which were annoying and irritating and might result in some process of investigation and indeed of appeal. I entirely agree that is an apprehension that might justify itself, and he suggests, as an alternative, that we should use words which would show that all we desire to do is to get at these people who form their companies for evading their liability of assessment to Super-tax. Speaking with some experience of the Law Courts, I cannot imagine any phrase with more difficulty. One of the oldest maxims in the law is that you cannot try a man's mind. You cannot get inside a man's mind to say what his motive is. There is nothing which a man can so readily evade as a disclosure of what his motive was. You cannot really arrive in any clearness or conclusiveness at what a man's motive was. Is there anybody in this country who would put it into the hands of the Minister to say that a certain person was or was not seeking to evade his proper duty?

Photo of Mr Arthur Samuel Mr Arthur Samuel , Farnham

You have put this into the hands of special commissioners.

1.0 A.M.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

That is just the distinction between what my hon. Friend has suggested and what we propose. He proceeds by way of assessing men's motives. The method by which we propose to deal with this matter is to take cakes in which funds have been accumulated which, in the ordinary way, might readily have been distributed and say in such cases that an unreasonable propor- tion of the funds has been put to reserve fund. It is a definite fact and not an attempt to assess a man's motive, and I am ready to suggest that the method is far surer than that proposed by the hon. Member. Now, take another of the suggestions which have been put upon the Paper.

Photo of Mr Arthur Samuel Mr Arthur Samuel , Farnham

What is the right hon. Gentleman's objection to the Canadian method?

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

The Canadian method puts it upon the Minister to say whether a particular man has done what he has done with a view to evading the tax. It would be much easier to decide upon the lines which the Government has suggested. Take the next suggestion which has been made as an alternative, that we should insert words to apply it only to a company not formed or carried on for bonâ fide trade purposes. That can be evaded in the easiest fashion possible. Take the case of a man carrying on business by a private limited company. He carries on the business that he previously carried on, but he would evade it entirely because he would say, "I am carrying on a bonâ fide trading business," and, of course, it would be so. The whole point is that he would not be carrying it on in the way in which he would be doing if a private individual with obligations to the State. He would entirely defeat the phraseology which it is sought to insert in the Bill.

We looked at the matter from various points of view, and I do not profess that it is the best phraseology, but I have the various suggestions before me, and I have taken advantage of the many proposals made in the Amendments on the Paper. In particular, there are suggestions with regard to purposes for which funds might be set aside. I confess quite frankly to the Committee that I am not in a position to put before it in any kind of form the suggestions before the Report stage. I am reluctant to delay to the Report stage any matters with which I can deal now, but we are dealing here with rather novel proposals and suggestions which must be very carefully scrutinised before we come to a final conclusion upon them, and I hope the Committee will forgive me if I do not at the present time put before hon. Members the final words which the Government would seek to use in order to give effect to their object. Perhaps they would take from me the assurance that the whole aim of the Government is to catch the man who is really seeking to evade the tax. We are very anxious to do nothing and to use no words in any Act of Parliament of which any business man can be apprehensive. For example, as indicating the course of my mind on this subject there is an Amendment on the Paper by the Member for North East Derbyshire (Mr. Holmes), which would allow companies, in the first place, to obtain a certificate from a reputable firm of chartered accountants, who would be permitted to give evidence that they were not doing anything which was contrary to the spirit of the legislation in this matter. That proposal I would be quite willing to accept if that would meet the views of the business men. [HON. MEMBERS: "No!"] If that would alleviate any anxiety I certainly would be prepared to go as far as that, but if that is not thought to be sufficient, I may say that my mind is perfectly open upon the matter.

Photo of Mr Arthur Samuel Mr Arthur Samuel , Farnham

Suppose we were willing to admit that amelioration, how would it meet the case of a small ship-owning company which reserves the whole of its profits in order to defend itself against a rate war by another country? No auditor would dare say that that was a normal reservation. Or take my own trade. Suppose I say that, as there is a new set of fashions coming out, I will scrap the whole of my patents. No auditor would allow me to wipe out all that in one year. Would you consider that a proper excuse for me not being called upon to pay Super-tax? If you wish to test a difficult point, take its logical conclusion. These are the difficult questions upon which the whole of our objection to the working of Clause 14 rests. In a normal case the auditor's certificate would do quite well, but it is in the abnormal cases that the difficulty would come in.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

I am prepared to give my own opinion on that now, and I should not hesitate at all to give latitude to a firm which is building up a reserve fund either to meet competition which it foresaw or in the case of a shipping company by which a larger fleet could be secured. These are quite ordinary legitimate business purposes known to be practised by many of the enterprising business people of this country. These things do not seem to me to be abnormal at all, but I am prepared to drop the word "normal" out of the Clause, because I quite see that if it gives a limiting effect I should not desire to do that. I am prepared to drop that out and to put in words which would make it perfectly legitimate for firms to do everything in their power in the way of putting past reserves for what may be called the maintenance, development, or extension of the business, or any words which would give extreme latitude for a legitimate purpose upon which success depends. But I am not in a position to put a final form of words before the Committee to-night. Perhaps my statement may be regarded as giving sufficient assurance with regard to most of the Amendments on the Paper. If the Committee would be so good as to allow me to have the Clause as it stands, I give the assurance that I shall put before the House on Report a form of words which by that time I shall have ready for the consideration of Members of the House.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I want to make this suggestion to see if the right hon. Gentleman can go a little further. There are considerable difficulties in discussing what is practically a new Clause for the first time on the Report stage. I am going to ask the right hon. Gentleman whether it would be possible for him to prepare for consideration some Clause which might come at the end on the last day on which the Bill is being considered in Committee.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

I shall be very willing indeed. I recognise the difficulty in which I am putting Members, and I am very anxious to make any arrangement which will facilitate their acquiring a proper knowledge of the proposals and being ready to discuss them.

Photo of Mr Godfrey Locker-Lampson Mr Godfrey Locker-Lampson , Wood Green

There are other points in the Clause than those that have been discussed.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

I have indicated how many of the Amendments on the Paper would be covered by the proposal which I have made.

Photo of Mr Frederick Macquisten Mr Frederick Macquisten , Glasgow Springburn

I regard this Clause with the greatest possible apprehension. It is only a beginning. It is all very well for the Chancellor of the Exchequer to tell us that the law would never dream of trying a man's mind. That is exactly what the Clause is intended to do. He told us, on the one hand, that he wants to get at those people who are making Super-tax, and, on the other hand, he has not the courage to say that that is the purpose of the Clause. He must either do that or he is framing a Clause which is going to take in thousands of innocent people. He is going to fire grape shot into the crowd of innocent and guilty alike He will not get a Clause that will only hit those who are evading Super-tax. That is beyond the wit of man. The Clause is not clear. It begins by saying that "where it appears to the Special Commissioners" that a company is not distributing a reasonable proportion. The question of what is a reasonable proportion is left to the Special Commissioners. There is still the question of fact: What is a reasonable proportion? No one knows what a reasonable proportion is. In Scotland, under the Food Control, when certain people were being prosecuted for having more than a reasonable quantity of butter in their possession, the accused objected to the relevancy of the complaint on the ground that there was no definition under the Food Controller's Order of what was reasonable, and they did not know what they had to plead to, and a man must know when he was committing a crime. Therefore, unless there is a definition of what is reasonable no relevant offence can be charged. It is not clear here when it is the Special Commissioners who decide what is reasonable. In the first place, the question will be decided by a Government official, and if there he any human being in Great Britain less qualified to decide what is a reasonable thing, it is the average Government official. He is not a commercial man at all. How can he possibly tell the multifarious businesses in this country what is reasonable? The cases which have called attention to this particular thing are said to be cases of certain landed proprietors.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

My hon. Friend is quite wrong.

Photo of Mr Frederick Macquisten Mr Frederick Macquisten , Glasgow Springburn

There has been cases of that kind brought to knowledge. Why do they do it? Simply because the allowances made are so small that it is impossible for them to run their properties. If they had been allowed reasonable deductions these devices would not have occurred. If the Chancellor of the Exchequer attempts to frame a Clause, he must come into the open and put it in the Statute that his intention is to get at certain people who have the culpable intention of dodging Super-tax. He must have the courage to tell these people that they are doing something wrong. After all, is it to be a crime that a man saves money, that a man does not draw money out of a company, but uses it to develop his business? The Chancellor of the Exchequer said he would have every sympathy with a man putting past money for the developement of his business. What is that but a fresh investment? The man who is extending his business is investing money, and I am old-fashioned enough to believe that people who save money, and do not scatter it, are really benefactors to the rest of the community. I will call the attention of the Chancellor of the Exchequer to the system of the Dutch with their companies. They are, perhaps, the most thrifty and industrious race in Europe. Theme a company is never taxed upon its profits, but upon the dividend which it distributes. The whole purpose of modern taxation seems to be that if anybody has the audacity to make any money, or save any money, it is a serious offence against the body politic, and that he should be stripped of the money, and that large sums of it should be handed over to the Government to be expended on objects with which thrifty people do not usually agree. I believe that this Clause is a most pernicious Clause and that it is impossible for the Chancellor of the Exchequer to devise the kind of Clause he wants unless he comes out into the open. There are people who would easily find other devices for evading their obligations. It would be perfectly easy to register one company as holding shares in another, and it would be easy to have a trust company abroad, while all the time the Clause would be inflicting an intolerable interference on a vast mass of honest traders who are bearing their burdens and doing what is perfectly right. These are the people who will be hit and not the people the Chancellor of the Exchequer is endeavouring to bring down.

Photo of Sir Halford Mackinder Sir Halford Mackinder , Glasgow Camlachie

I want to appeal to the Chancellor of the Ex- chequer in this matter, and I am speaking on behalf of a number of the most important firms in Scotland, who have been giving close attention to this matter during the last 10 days. They, in common with those for whom the hon. Member for Farnham (Mr. A. M. Samuel) spoke just now, are absolutely in sympathy with the Chancellor of the Exchequer in the object he has in view, as declared by him in his Budget speech. They will do everything they possibly can to help, but they feel that you may do more harm in attempting to catch the culprits than if you let them go free. Let me put only one single case; it is a case that is very present to the City of Glasgow. Supposing it is thought by certain ship-owners that within the next few years there will be such discoveries in regard to the propulsion of ships as will lead to the reconstruction of the mercantile marine of this country. That would be a matter for which they must lay by large sums of money. If they are great concerns that have been operating for more than a generation past, they will probably have enormous hidden reserves upon which they may draw, and they have large credit in the market; but there are small companies owning just a few ships, companies which are private companies, and therefore companies which will be hit by this Clause. These small companies are precisely the type of companies which, if their directors have wisdom, will put by large sums of money if they believe in this invention coming, in order that they may hold their own and not be caught unawares, like the foolish virgins. The question which my friends in Glasgow have been addressing their minds to is how you are to distinguish a company that ought not to be hampered from the company which you ought to attack. Their feeling is very strong that, somehow or other, it must be done by segregating this kind of company; that you must not pass in review, or attempt to pass in review, or take power to pass in review, 60,000 companies; because that is what this Clause does.

I am perfectly ready to accept the assurance, which I have no doubt will be given by the right hon. Gentleman, that it is not his intention to harry bonâ fide trading companies, but to deal only with certain cases which are well-known to the Treasury. That may be so, but you are putting a law on the Statute Book and the Board of Inland Revenue is a Pharaoh that may not know Joseph, a Pharaoh with perpetual succession. It has many moods, and the mood, when the right hon. Gentleman has gone and some other Government is in power, may lead to a quite different application of the law, and the law as you have it proposed in this Clause is to give power to the Special Commissioners to pass in review the whole of the private companies of this country. The hon. Member for North-East Derbyshire (Mr. Holmes) has an Amendment down which seems to find favour with the Chancellor of the Exchequer. I agree that that Amendment is far better than the Clause as it stands, but even as regards that Amendment I draw attention to the fact that it will almost inevitably lead to every private company—I do not say every public company—as a matter of form and as a matter of custom attaching to its audit a certificate to cover this Act, if the Bill becomes an Act. That proceeding will become a mere formality.

The Government take the power to appeal, and in all cases where there is any suspicion an appeal will take place. The Commissioners will not be satisfied with the audit of some of the auditors, especially in dealing with some of the smaller companies, and the result will be that starting from a condition of things in which you will accept the vast majority of the certificates which will be forthcoming you will very soon get more and more suspicion on the part of the bureaucracy and you will get a capricious system of appealing which will lead to a great deal of harrying and a great deal of discontent and will, I think, do a great deal of harm. It is this fear which has led the companies with whom I have been in communication in the last few days to feel that it is only by distinguishing the kind of company that you really want to get at that you will be able to do what you want without causing a great deal of trouble, a great deal of bureaucratic routine, and, possibly, a very great deal of harm.

I have put down an Amendment to another part of the Clause. That may not cover all that is necessary, there may be loop-holes in it, but at any rate it indicates the kind of thing we desire. The effect of that Amendment is to add a fourth condition. You would deal not only with private companies as defined under (a), (b), (c), but there would be a paragraph (d) in which it would be laid down that it applied to companies of not more than three shareholders, being individuals, owning or controlling three-fourths of the voting power of the company. I agree that it may be difficult to ascertain where control exists and where it does not exist. All that Amendment is put down for is to bring before the Chancellor of the Exchequer the very strong opinion which has been formed by great firms, well qualified to investigate this matter, and far removed from any suspicion of being within the category that the right hon. Gentleman wishes to reach. It registers their feeling that you must have a limiting condition which will reduce the total of 60,000 to a very small number of firms to be investigated.

There is one method by which, it seems to me, you might attack this problem, and that is the general method of the Amendment which is now under discussion. That Amendment does not, in the first instance, go for the company at all, it goes for the individual. That Amendment starts with the words Where it is proved to the satisfaction of the Special Commissioners that a person liable to Super-tax controls or can control either by himself or by nominees three-fourths of the voting power of the company—". In the first instance, you do not pass under review a company, but you pass under a review a person, and where you have reason to believe that a person is liable to Super-Tax, and you have reason to believe that that person controls a company, then you have got a case to investigate, and there is no need to pass in review great numbers of quite innocent and quite immaterial cases. I commend to the Chancellor of the Exchequer that, when he is drafting his new proposals which he has promised to put before us, he should remember that there will be considerable opposition to and considerable criticism of any method which is based upon the investigation of accounts, even if you accept the criticism of an auditor, and that the only system which will really give satisfaction, if ho can find it, is a system which either narrows down the companies to be investigated to some small category, or, alternatively, does what this Amendment in a rough and ready way attempts to do, namely, singles out individuals and then investigates the companies which may be controlled by those individuals.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

Perhaps the Committee will now allow me to make a suggestion, in order to save time. If all those who have put down Amendments would consent to withdraw the Amendments and allow us to come to the question of whether the Clause shall stand part of the Bill or not, we will then negative the Clause, and I will present a new Clause at the last part of the Committee stage.

Photo of Mr John Sturrock Mr John Sturrock , Montrose District of Burghs

May I ask the right hon. Gentleman whether he will be so good as to indicate to the Committee in a general way something of the nature of this new Clause?

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

I am afraid I have already taken up considerable time, and I hope that something of what I have already said has indicated that.

Photo of Mr Samuel Samuel Mr Samuel Samuel , Wandsworth Putney

This is a very serious matter to the commercial community, for it has been suggested by nearly all the speakers that the commercial community as a whole is a party to what you might, call a fraud on the revenue. [HON. MEMBERS: "No!"] Well, it assumes that all private companies have been attempting to escape Super-tax, whereas as a matter of fact a great many of those companies were established—and others will continue to be established in the future, if we wish the business of the country to go on—for purely financial reasons. It is a well-known fact that private companies of one, two, and three people are very often established at the instigation of their banks. When they go to the bank to borrow money the bank requires security, and mortgage is not a security that all bankers like, and sometimes the borrowers are asked to form a limited liability company and to issue debentures as security for loans which they are going to take up. A bank does not invest in debentures as industrial enterprises do. They require the directors of the company to give an undertaking for the redemption of their debentures, and it is very often the case it is essential that they should make a plan for the redemption of those debentures. If you are going to do away with the necessary facilities that they have had in the past for the redemption out of profits of these debentures, you are going to shut up half the private companies that exist in this country and to prevent any expansion of trade, do away with any revival of trade and the resumption of normal conditions in this country. I wish to warn the Chancellor of the Exchequer that the principles of this Clause are most dangerous to the commerce of the country.

Mr. HUGH EDWARDS:

May I ask my right hon. Friend whether we are to assume that this new Clause which he will draft will be based on the criticisms and the suggestions made here this evening?

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

I shall try to meet them.

Photo of Mr Henry Rae Mr Henry Rae , Shipley

The criticisms have been limited to very few speakers. There are other lines of thought which can he suggested by some who have not spoken. The hon. Member for Camlachie (Glasgow) (Sir H. Mackinder) says you have got individual concerns where the direction of these concerns is, practically speaking, vested in one person. He suggests that these companies should be dealt with in a different way. But there are many companies in this country with shareholders where the direction is as much in the hands of one man as a private concern, and ought not to have that different recognition in the way which has been suggested.

Photo of Mr Neil Maclean Mr Neil Maclean , Glasgow Govan

One would have thought that the Clause that has been put forward by the Chancellor of the Exchequer would have received considerable support from a large number of Members of this Committee who desire at this time to see the Government get the money required, and get it particularly from those places where the most money is to be obtained. The Chancellor of the Exchequer, evidently yielding to the speeches which have been made from different Members in the Committee who have Amendments down to this Clause, yielding is now willing that the Clause should be negatived and promises to introduce another Clause which, no doubt, will contain certain sentences calculated to meet some of the objections that have been urged against the Clause as it is at present. To me that seems rather peculiar on the part of the Chancellor of the Exchequer. We have been discussing the Bill now for practically one might say, counting the time that has been taken on this matter, three days of the House of Commons week, and many Amendments have been put to various parts of the Bill pointing out hardships considerably greater than any of the hardships that must bear upon those forming companies. Yet the Chancellor of the Exchequer has not yielded one inch and has resisted the appeals which have been made on behalf of the poorer people of the community. But now, in the House of Commons at half past one in the morning, he can agree to the pressure that has been placed upon him and his Department by the rich men of this House. [An HON. MEMBER: "By those who create employment!"] By those who take the surplus part of the wealth of those who work, who made their money out of the War. [An HON. MEMBER: "What were you doing during the War?"] I did more for the country during the War than the men who made fortunes out of it. I tried to stop it, and that was more than some of the profiteers did. The Chancellor of the Exchequer have listened to speeches from these benches of the protest that this Budget is a rich man's Budget. The very fact that the Chancellor of the Exchequer has yielded to pressure to-night indicates that we were correct in dubbing it the rich man's Budget. The evasion of Income Tax has been raised. It has been circulated over the country that a Peer of the Realm forming a private company for himself with a supposed capital of £100,000 increases it with bonus shares by £200,000. If the total income has been for that year the £100,000 he has added to his capital, he would have paid in Income Tax and Super-tax something like £30,000. Yet he has escaped that, and the Chancellor of the Exchequer is now prepared to withdraw this Clause. The position I take up in this matter is that the Clause should be kept before the House if the Chancellor of the Exchequer requires the money which he says he does to carry on the affairs of the country. He cannot allow even the small sums that he is going to get in duties to escape him. Let the Chancellor keep this Clause in operation and collect the money that he himself has admitted is being taken away from the Revenue of the country.

Photo of Mr Neil Maclean Mr Neil Maclean , Glasgow Govan

It is remarkable how many budding Chancellors of the Exchequer we have in the House advising the Chancellor. [An HON. MEMBER: "What is your job going to be?"] My job will probably be the kind that will make your hair stand on end.

Photo of Mr Harold Smith Mr Harold Smith , Warrington

If it stands like yours I would get it cut.

Photo of Mr Neil Maclean Mr Neil Maclean , Glasgow Govan

If you had it cut you might let your brains escape. I hope the (chancellor of the Exchequer will not give way, and keep this Clause for a vote, when we will be able to see all the Members of this House who are interested in keeping these companies that are being formed practically for the purpose of evading the taxation of this country. We will then see the Members who support these companies in their evasion as their names are recorded in the Division List to-morrow morning. We on this side will challenge the withdrawal and press it to a division.

Photo of Sir Francis Acland Sir Francis Acland , Camborne

I think the Chancellor of the Exchequer has made an offer which, in fairness to himself, ought to be accepted in a reasonable time. I do not think we can ask him to withdraw the Clause now for consideration and go on at the same time with this Debate. I do not gather that the Chancellor of the Exchequer has pledged himself to a particular Amendment but to consider points that have been raised for his notice.

Photo of Mr John Sturrock Mr John Sturrock , Montrose District of Burghs

I voted yesterday in I do not know how many Divisions, I think 12, in complete support of the Finance Bill, and I must confess I do rather regret that the Chancellor of the Exchequer has withdrawn from the position taken up on this Clause. A great many exaggerated conceptions of the nature of the companies have been conjured up which have no foundation in fact. I would like to ask my right hon. Friend to give us some sort of a pledge, before giving away point after point on the Finance Bill, that in the new Clause which is now to be proposed the sense of the present Clause will remain, subject to any alteration he may think fit to make it more reasonable.

Photo of Sir Robert Horne Sir Robert Horne , Glasgow Hillhead

The object of the proposal will undoubtedly be the very same.

Amendment, by leave, withdrawn

Motion made, and Question put, "That the Clause stand part of the Bill."

The Committee divided: Ayes, 42; Noes, 160.