The point involved here is that if an employee's service is terminated and the employer makes a voluntary payment, that payment is not liable to tax in the hands of the employee or allowable as an expense against taxable income unless it exceeds £5,000. If, on the other hand, on the termination of employment, a contract takes effect and the employee has a right to a payment as a result of the termination of that employment, then it is taxed as if it were his salary or wage.

That is the position for payments not over £5,000. If they are received as of right, they are taxable. If they are ex gratia, they are tax free. If they are over £5,000, then by Section 37 of the Finance Act, 1960, whether or not they are made in pursuance of a legal obligation, they are chargeable to tax under Schedule E if—and here I bring in Section 38 of the 1960 Act—they are over £5,000. The words at the end of the new Clause No. 37 … shall be subject to the provisions of section 37 of the Finance Act 1960 are intended to do exactly the same thing as Section 38 did; that is to say, the Clause would apply only to sums up to £5,000.

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It must, I think, be entirely accepted that if we are to modernise industry there will be many occasions when redundancy will occur, when it will be necessary to cut down the number of employees and to terminate their employment. It is, therefore, essential that employers should recognise their financial obligations to those who have to be sacked in order to modernise the industry: that not only should they recognise their financial obligations to those employees whose contracts are terminated, but that they should be seen to recognise them; not that it should be merely done by an under-the-counter, "old boy" method of "We'll pay you something ex gratia."

We say to the employers that it is good commercial practice, that it is good labour relations, and it is acting in all humanity that they should recognise this obligation to their employees while, on the other hand, we say in law, and in tax law in particular, "If you do recognise your obligation by putting it in a contract and making it enforceable, the recipients will have to pay tax on the money you pay them." So it is left to the vague basis of "Well, you'll be paid, but I shall not put it in writing." In short, the employer will not bind himself by contracting to pay on termination of the contract because, if he does so, that money will be taxable in the hands of the sacked employee.

If the voluntary payment is free of tax, so should the contractual payment be. The employer should not be deterred, by tax on the contractual payment, from binding himself to make payment on redundancy. As industrial development accelerates—as, indeed, it surely will—this will become more and more urgent. But it has become of particular urgency this year, in that the Contracts of Employment Act is shortly to come into operation.

By that Act the employer is under an obligation to provide a written statement of the terms of employment, and he should insert in that written statement the particulars of the payments that will be made on termination of contract, and the redundancy he binds himself to pay. But if he does put that into the written statement—as, indeed, I think he is required to do by the Contracts of Employment Act—at once that payment becomes taxable in the hands of the recipient. By accepting this Clause, my right hon. Friend the Chancellor of the Exchequer could bring about a very great benefit to labour relations in the modernisation of industry.