Clause 15.—(SUPPLEMENTARY.)

§ Mr. Frederick Mulley (Sheffield, Park)

I beg to move, in page 22, line 6, at the end, to insert: (3) Where gains accruing to trustees of a settlement are assessed and charged on them under Case VII, the tax chargeable shall be treated by the trustees as a proper expense to he set against the capital of the trust estate notwithstanding any contrary direction in the instrument creating the trust. This Amendment is in a sense consequential upon the decision to impose a short-terms gains tax and is not concerned with the merits of the tax. I desire to get clarification of the position of trustees under the new tax and, in particular. of trustees of the ordinary type of settlement which is usually to be found in family arrangements.

I do not suggest that there should be any exemption because money is put upon trust as distinct from all other categories. That point has been exhaustively discussed and, quite properly, it has been decided that it would be wrong to make an exemption for trusts of this character. Had such an exemption been made, it would be a fruitful loophole for evaders.

The point I wish to stress is the responsibility of the trustees and, in particular, whether the tax should be charged against the corpus or capital of the trust fund, or whether it should be borne by the life tenant out of income. The Bill makes it clear—it is set out concisely in the White Paper—that the tax will be due from the trustees and not from the beneficiaries of the trust. I assume from that, although doubt has been expressed in view of the Chief Secretary's remarks on Second Reading that the trustees would be personally liable, that the trustees are liable only in the sense that it is they who must pay the tax. Obviously, they must recoup themselves from the trust fund.

463 Since the tax arises as a result of short-term capital gains, it would be wholly wrong if it were set against the income of the fund. To give an example of the simplest kind of settlement of this kind, in which money is left to a widow for life and the remainder to children, it would obviously be wrong if the trustees engaged in substantial speculation and the widow's income was reduced to pay the tax, whereas, of course, the additional capital would accrue to the benefit of the remainder-men.

I am sure that, although this tax is so expressed to be an income tax, it would be wrong if the life tenant had to bear the burden of it. In some cases it could happen that the income for the year could be largely obliterated by the incidence of an exceptional tax of this kind. It might be said that trustees of this kind of settlement should not speculate, and I could not agree more. But, as has already been pointed out in the discussion of earlier Amendments, there will be cases where a disposal for the purposes of this tax is forced upon the trustees, possibly by the take-over of shares that have been recently acquired for cash, when there is no alternative but to have a technical disposal for purposes of this tax. There may well be cases where trustees who have no desire to speculate may find themselves technically subject to this tax.

I therefore suggest that unless this point is already taken care of, there should be provision, while we are dealing with the tax, to guide trustees as to whether or not this should be set against the income or the corpus of the trust fund. As I understand the position, unless there is specific provision in the instrument creating the trust, since this is an income tax—it is, after all, Case VII of Schedule D and comes under the Income Tax Acts—the trustees would have no alternative but to charge it against the income of the life tenant.

It could well be in future, when these instruments are drafted, that this point will be taken into consideration and there will be a special direction in trust deeds guiding the trustees on the possibility of this matter arising. Clearly, that cannot be expected to be 464 found in deeds which had been drafted when there was no tax of this kind. It may be that if I were to draft my Amendment today I would insert a date at the end of the words because I would not wish to fetter settlors or testators in the future.

It seems to me that we ought to get the position of trustees clear as to their responsibilities and powers as a result of this new class of tax which may from time to time concern their investments because, as the Committee knows, it is now not only a general conveyancing practice to give very wide powers of investment in trust deeds of this sort; in fact, in recent years there is provision in most cases for equity investment as a result of the Trustee Investment Act. This was not the case when the Trustee Act was passed, and I understand that before the war deeds giving trustees wide power of investment were rather exceptional. But today it is the practice, and I would think that we should not leave Case VII without giving this guidance to trustees.

§ Mr. Wade

I am glad the hon. Member for Sheffield, Park (Mr. Mulley) has moved this Amendment to give the Attorney-General an opportunity of clearing up the position. I think that there is some doubt in the minds of trustees—that is to say, those trustees who have read the Bill.

It seems to me that there are three questions which require an answer. First, are trustees personally liable? If they are, I presume they will be entitled to recoup themselves from the fund. Secondly, as this is a form of income tax, is it to be payable out of income or out of capital? That is a point which I believe the hon. Gentleman has already raised. Thirdly, if it is necessary to make some Amendment as is proposed, will the word "settlement" be adequate? Will "settlement" cover trusts created by a will—for example, the trust for sale with power to vary investments from time to time during the continuance of the trust for sale? If there is to be an Amendment, I hope that it will be wide enough to cover that point.

§ Mr. Mulley

I would not want to anticipate the views of the Attorney-General, but if the hon. Member for Huddersfield, West (Mr. Wade) looks at 465 the Settled Land Act and the Trustee Act he will find that he need have no anxiety on the point.

§ Mr. Wade

I have no doubt that the Attorney-General is well informed on these matters. I think that the points which I have raised should be cleared up, and I look forward with interest to what he has to say.

§ Mr. Mitchison

I should like to add a word on the second question raised by the hon. Member for Huddersfield, West (Mr. Wade), which I regard as the primary and perhaps the only question raised by this Amendment.

I see the difficulty here. It may be said that this is income, that these are short-term gains and that they are being treated for taxation purposes as income. None the less, they come out of dealings with the capital, and I should have thought that it was right as between the life tenant and the remainderman that they should be charged to capital account. When considering that question we are not considering any more than the nature of the tax itself. We are not really considering the administrative machinery under which it is taxed. It seems to me, looking at the matter as fairly as one can, that it is therefore right that these gains should be charged to capital and that the life tenant should not be made to pay them.

I also agree with what my hon. Friend the Member for Sheffield, Park (Mr. Mulley) said at the end of his speech, that the Amendment as it stands is not quite satisfactory because one does not really wish to limit future settlements. What one wishes to do is to prevent provisions which were put in without contemplation of this rather exceptional tax being applied in a manner which might not and, indeed, cannot be in accordance with the settlor's intentions because it is extremely unlikely that he foresaw what the Goverment were going to do.

For those reasons, I think that this is the right thing to do as between the two interests in the settlement.

§ The Attorney-General (Sir Reginald Manningham-Buller)

I am glad to be able to agree with the hon. Member for Sheffield, Park (Mr. Mulley) that the concluding words of the Amendment are 466 not really very happy because they would certainly fetter the discretion of those who create trusts in the future as to how provision should be made for this tax. I myself do not think there is the least doubt about the position of trustees in relation to this matter, or any reason for concern.

Under Clause 9 (3), the net amount on which tax is charged for a year of assessment is deemed for Income Tax purposes to be income of the persons chargeable, and in this case it would be the trustees. But this is, I repeat, for Income Tax purposes. It does not completely alter the character of the receipt. The capital gain will not become an income receipt which will go to the life tenant. The provisions of this Bill do not operate to affect that. So it is right to say that this provision does not operate to make the net gain income for any other purpose.

In the ordinary course it would seem that trustees would have to find the tax out of the capital of the trust, since the gain less tax would go to increase the capital. I think that there is no real doubt about that at all, and I would be reluctant to put into the Bill anything to fetter the discretion of trustees as to how provision is made in relation to payment of this tax. But, in view of the nature of the gain, being a capital gain for all other purposes except the purposes of tax liability, I would not think that there is any power, apart from the provisions of the trust deed, for them to make any deduction at all from the income to the life tenant.

I completely disagree with the statement which the hon. Member for Sheffield, Park made in moving his Amendment, saying that as the Clause now stands they would have no alternative but to charge the tax against the income of the beneficiaries. That is really not the case. I can understand how, on a first reading of the Bill, that impression might be gained, and I am grateful to the hon. Member for giving me the opportunity of making it as clear as I can that certainly the provisions of this part of the Bill do not operate to cast the duty on trustees of discharging this tax liability out of income payable to the beneficiaries.

In answer to the hon. Member for Huddersfield, West (Mr. Wade), trustees 467 are personally liable. I have dealt with the second question, and the third question does not, therefore, arise.

§ Mr. F. J. Bellenger (Bassetlaw)

Some confusion does arise, although the Attorney-General has attempted to allay it by his dictum, because the tax is charged under Case VII of Income Tax. Yet the Attorney-General said that trustees, although personally liable, will have to pay that tax not out of the income derived from the trust, but out of capital. Of course, if that is the case, that ends the matter so far as the Amendment is concerned, I should have thought. Indeed, the Attorney-General has said so clearly, that this comes out of the capital of the trust.

I intervene only because I happen to be a trustee myself, a trustee of two trusts, one a trade union trust of which the trustees will probably—I hope so—find that this matter will arise, because it happens that we recently invested some of our funds in a unit trust. Obviously, the purpose of that is to make sure that our capital does not depreciate too far, so that the beneficiaries can enjoy, as they hope to enjoy, the full benefits of the trust as it was originally set up.

Of course it does sometimes occur that the courts take different views from those expressed in statements made in this Chamber, even by the learned Attorney-General. We must hope that the views which the Attorney-General has stated in dealing with my hon. Friend's Amendment will meet the point

§ Mr. Graham Page (Crosby)

I am sure that none of us would worry if my right hon. and learned Friend the Attorney-General were translated to another bench on this subject, or were even a Special Commissioner; we would rely on the proper interpretation of this Clause as he has interpreted it to us in the Committee.

But everyone does not read the reports of the debates of the Committee; the trustee who is in charge of a trust fund. when he makes a gain on a disposal of some of the trust fund, will read this Bill when it is a Statute, and the whole of these Clauses, from Clause 9 to Clause 15, deal with income and treat this gain entirely as charge- 468 able to Schedule D Income Tax. I am sure that there will be confusion in the minds of the public on this, and I am not sure that that confusion will not go into the legal profession and thence to the bench.

I really cannot see what harm would be done in making it clear beyond peradventure in the Measure itself that any tax on a gain of this sort comes out of the gain itself and is therefore chargeable to capital. I would ask my right hon. and learned Friend to see whether he can provide a form of words which will in no way detract from anything else in the Clause but which will make it quite certain from what source this tax is to be paid.

§ Mr. Mulley

I am sure none of us wants to venture to disagree with the legal views of the Attorney-General, but there is, I would suggest, a great deal of force behind the cogent argument of his hon. Friend the Member for Crosby (Mr. Graham Page). It is the argument which induced me originally to put down the Amendment. It seems to me that in a complicated matter of this sort the trustees, who, after all, for the most part, are taking on an onerous duty quite voluntarily, should be given clarity when it is possible, instead of obscurity.

Like the hon. Member, I would certainly hesitate to suggest the view which a High Court judge might express if this came before him, but I can certainly think of many points which, as counsel, one might put in submissions on a matter of this sort, and it is certainly the case, as many hon. Members of the Committee have already said, that, in presenting this tax to the Committee and, indeed, to the country, the Chancellor of the Exchequer and other Government spokesmen have always said it was to be a tax on income, or short-term speculative profits by way of income. This tax was designed to start from that, it has been said, and that this view would be before the judge.

As the Attorney-General well knows, and it is to a large extent the point of the Amendment, it is not a question of just the general law: it is a question of a wide variety of clauses in a large number of different settlements and instruments. I have not brought precedents from the books with me, but I can 469 think of several forms containing some such words as, "All tax arising from the investment of the fund shall be borne by the income of the fund"—words of that sort.

I would think that he would be an extremely bold man who would say that if the construction of such a provision in a trust instrument came before the court looking at Clause 9 (3, c) of the Bill it would find beyond any doubt at all that the trustees were entitled to, or were not guilty of a breach of duty if they did not, charge it against capital instead of against income. I think that it may well happen, if we were not clear in this matter, that there will be endless litigation, which will involve expense to trust funds, and I suggest that we should not put this burden on people if a simple Amendment to this Bill could remove the doubt.

I would not be so immodest as to suggest that the form of words I have put forward would be the best way of meeting the point, but if the Attorney-General would concede that there is some need for amplification, and would give an undertaking that on Report he will include words for this purpose, I would not, of course, press my own form of words.

§ The Attorney-General

I have listened to all that has been said. I am sorry I cannot agree with the hon. Member that a competent solicitor studying this Bill would think it completely converted what is a capital receipt in the ordinary sense into an income receipt qua a trust fund. He has only to look at the Bill to see that what it does is to treat a capital receipt as income for Income Tax purposes and Income Tax purposes only. Therefore, while I have listened with the greatest possible attention, I really do not think there is any need for any legislation to remove an alleged doubt which any competent solicitor ought to be able to dispel.

§ Mr. Mitchison

With great respect to the Attorney-General, this is being obstinate to little purpose. Here are one, two, three people, and all have a little experience in these matters. None of us would wish to set ourselves up against him even on what is rather a Chancery matter. We all agree with him to start with on what the Clause means. I said the same thing. But we 470 all feel some doubt about what may happen. All we are asking him to do is to put his own opinion and our opinion into the Bill, instead of uttering it in this Committee and hoping that everybody will read it. There is no need for me to tell him that what he says here is not available in the court dealing with it. Of course it is not

5.0 p.m.

Though the Treaty of Rome may enable us to search into Parliamentary debates to discover the motives which induced the legislature to put this or that into a Bill, at present we cannot do it, and so long as we cannot do it, surely the only sensible thing to do is to accept that—I do not want to rate us too high—three fairly sensible hon. Members have doubt about what people may think and put something into the Bill to meet it.

If the Attorney-General will not do that, I am sorry to say that we shall have to divide the Committee. We know that the Amendment is inadequate at the end. We all agree with the Attorney-General about what the actual state of affairs is. What we should divide on would be his obstinate refusal to do a very small and sensible thing.

§ The Attorney-General

It really is not that. I will try to make the point as clear as I can. The Amendment, as has been admitted, is one which completely fetters the discretion of the creator of the trust.

§ Mr. Mitchison

We could alter that on Report.

§ The Attorney-General

While it is perfectly easy to express the view that these payments should and would come out of capital—I do not think there is any doubt about that—I am very reluctant to agree to put any statutory provision into the Bill which would prevent trustees and beneficiaries making such arrangements as they wished to do in relation to a trust.

It is not all that easy simply to take the declaratory provision which the hon. Members opposite is seeking to do without at the same time fettering the rights of beneficiaries and trusts to make such arrangements as they wish Personally, I do not share the view expressed that there is any real doubt about what the 471 position would be in the absence of any special agreement. I am certainly reluctant to put anything into a Statute which would interfere with the power of the trustees and beneficiaries to make any such special arrangements as might be suitable.

§ Mr. Bellenger

Would the Attorney-General explain the remark that he has just made about fettering the rights of trustees and beneficiaries to treat the charge as a charge against capital or income? Surely that depends on how the trust deed is drawn? If the charge, as it is at the present moment, is an Income Tax charge, the assumption would be, I should have thought, that without any contrary provision in the trust deed it would come out of income.

But if the Attorney-General is right in saying that it is mandatory on the trustees to make this a charge against capital, it seems to me to be almost a non sequitur for the right hon. and learned Gentleman to say that the trustees have some margin to decide whether it should go as a charge against capital or income. After all, the trustees are subject to fairly rigid laws.

1 agree with my hon. and learned Friend the Member for Kettering (Mr. Mitchison). If it is only a question of making this point clear—it is not a question of great substance to the Government—what harm would it do if the right hon. and learned Gentleman made the point as clear in the Act of Parliament as in the words which he has expressed to the Committee?

§ The Attorney-General

I should like to get this point home to the right hon. Member for Bassetlaw (Mr. Bellenger).

§ The Attorney-General

I beg to move, in page 22, line 19, to leave out "twenty-eight" and to insert "twenty-six".

This is a drafting Amendment. Clause 15 (4) refers to a unit trust scheme … as defined in subsection (1) of section twenty-eight of the Prevention of Fraud (Investments) Act, 1958… The definition in fact appears in subsection (1) of Section 26 of that Act, and this Amendment puts the matter right.

§ Mr. Wade

I beg to move, in page 22, line 36, to leave out "on behalf of" and to insert: as agent and nominee for". It might be helpful if I first of all referred the Committee to the concluding paragraph, headed "Information", of the White Paper on the Taxation of Short-term Gains, which reads as follows: Provisions are included to enable the Revenue to obtain information from agents, etc., about transactions entered into by them on behalf of named persons. Persons who act on behalf of others (such as banks, estate 476 agents, solicitors and stockbrokers) will be under an obligation to state, in reply to Revenue enquiries, whether they have acted on behalf of a named person in acquiring or disposing of a chargeable asset or assets, and to give details, including dates of transactions and prices. The wording of the Clause differs somewhat from the wording in the White Paper. Subsection (5) states: Where it appears to the Commissioners of Inland Revenue that a person is or may be chargeable to tax under Case VII in respect of his acquisition and disposal of assets, they may by notice in writing served on any person require him … Then the subsection deals with the period allowed and goes on: … to furnish information in his possession with respect to the acquisition or disposal, being information as to matters specified in the notice … That seems to me to give very wide powers. It is in the nature of a general inquiry. I do not wish to help those who intend to evade their duty to pay tax as laid down by this Bill or any other legislation, but a principle is involved. We must ask ourselves to what extent we should go in interfering with the confidential relationship between bankers, solicitors, accountants and their clients. We should look with 477 some care at any legislation which will destroy that confidential relationship, because in the end it will ultimately not be to the benefit of the Inland Revenue itself.

§ The Attorney-General

On a point of order. This is a very narrow Amendment, seeking that the words "on behalf of" in line 36 should be taken out of the Bill and the words "as agent and nominee for" inserted. There is nothing in relation to that Amendment dealing with paragraph (b), to which the hon. Gentleman has referred. I thought the whole question of the scope of the powers taken by the Revenue to secure information arose on a later Amendment. It would be much more convenient to discuss the extent of those powers then and keep this discussion to the very narrow point raised by the Amendment. namely, the changing of these words.

§ The Temporary Chairman

I think the hon. Gentleman should confine himself to this Amendment. He can seek to raise this point on the next Amendment.

§ Mr. Wade

I am aware of the next Amendment, Sir Samuel, and it has my general approval, but the object of the Amendment which I am moving is, first, to draw attention to the wording, and, secondly, to try and bring the wording of this Bill more into line with the wording of the White Paper, from which I have quoted. I think my reference to paragraph (b) was only incidental to the extent to which the Commissioners of Inland Revenue should inquire. I quite agree that this Amendment affects the earlier words, and if it is your wish that some of the wider aspects which arise from my Amendment should be discussed on the later Amendment, I am quite willing to abide by your Ruling.

§ The Temporary Chairman

I think it would be more convenient if we did that.

§ Mr. Wade

I will reserve presenting some of my views on the matter to the discussion of the later Amendment, which I feel sure will be called and on which there will be an opportunity for me to do so.

I hope I am in order, Sir Samuel, in pointing out that the wording in the White Paper is narrower than the word- 478 ing which appears in the Bill. It is my contention that the Bill goes considerably further. I would not entirely agree with the article with appeared in the Economist of 28th April on this point. I hope I shall be in order and be allowed to quote from that article on the point of the comparison between the wording in the White Paper and the wording in the Bill, to which my Amendment draws attention. The paragraph I wish to quote is as follows: This will be the costliest exercise to collect an exiguous revenue in the history of our tax administration. It is an effort that ought to have been put to better purpose, and Mr. Lloyd is wholly to blame for burdening Somerset House with it. His successors, we can be sure, will build on his bad foundation a bad capital gains tax.

§ Mr. Nigel Birch (Flint, West)

On a point of order. What 'has this to do with the Amendment?

§ The Temporary Chairman

I am waiting to hear how the hon. Gentleman will connect it with the Amendment.

§ Mr. Wade

I do not want to duplicate the debate, because I think I may have an opportunity on a later Amendment. I do not want to go too wide, but if I may I should like to be allowed to complete this quotation, which refers to this particular point. It continues: His successors, we can be sure, will build on his had foundation a bad capital gains tax. He is also to blame for allowing the Inland Revenue to attempt another dangerous (and tendentiously presented) foray into the remaining preserves of personal liberty. I recognise that, in using the words "agent or nominee", we may still give fairly wide powers to the Inland Revenue, but what I wish to know is why the wording which is contained in the White Paper—and even that may raise some rather dangerous problems—has been altered to this considerably wider wording now found in the Bill. Perhaps if I leave it at that, and give an opportunity for the learned Attorney-General to reply, I may reserve my general observations for the discussion on the later Amendment.

§ The Attorney-General

This is a very narrow Amendment. The wording of the Bill in paragraph (a) is— to state whether he has acted on behalf of the first-mentioned person in connection with any acquisition or disposal of assets by that person; 479 and the Amendment seeks to leave out the words "on behalf of" and to insert the words "as agent and nominee for." The hon. Gentleman, in referring to his own Amendment, by error said that the words were "agent or nominee", which, of course, alters the sense entirely.

The hon. Gentleman has said that there was a difference between the White Paper and what is in the Bill, and, of course, at the moment we are only considering the difference between the White Paper and this particular language in the Bill, because that is all that is raised by the Amendment. The passage which the hon. Gentleman read out from the White Paper made it quite clear that the White Paper was saying that the Revenue would be able to ask whether they had acted on behalf of a named person, and that we find the actual words "on behalf of" in the White Paper as they now are in the Bill.

The substance of the matter is that if the Clause is amended as the hon. Gentleman seeks to have it amended, the Revenue could only ask the person if he had acted as agent and nominee in connection with the acquisition or disposal of assets, and so the Revenue would be restricted to finding out whether someone had acted as nominee. That would severely limit the field of inquiry, because a stockbroker who merely acts in buying or selling shares for a client does not act as nominee, and, indeed, in the great majority of cases persons who act on behalf of others in regard to the acquisition or disposal of assets do not do so as nominees.

The later Amendment, to which the hon. Gentleman referred, makes reference to the powers of the Revenue, and I do not think that I ought to say anything about it on this Amendment. If this Amendment were accepted, the power of the Revenue to obtain information would be so restricted as to be practically useless, and whatever may be the argument which we may have later as to the extent of the powers, if the Revenue is to have any powers, I suggest that these powers must extend, if evasion of liability under Case VII is to be prevented, to being able to ask persons whether they acted on behalf of a named taxpayer and not be confined only to asking persons whether they acted as nominees on behalf of a named taxpayer.

480 For these reasons, I hope the Committee will agree to reject the Amendment, if the hon. Gentleman indeed presses it, but I think that perhaps from what he said in moving it he was under some misapprehension as to the scope of the Amendment he was moving.

§ Mr. Wade

I was not under any misapprehension. I wished to draw attention to the matter, and I am still of opinion that the words suggested in the Amendment are preferable to those in the Bill.

§ Mr. Ellis Smith (Stoke-on-Trent, South)

The hon. Gentleman wants a Division?

§ Mr. Wade

In view of your Ruling, Sir Samuel, I think we might still have an interesting discussion on the later Amendment, and solely in order that that may take place and in the hope that I shall catch your eye, I beg to ask leave to withdraw this Amendment.

§ Mr. Birch

I beg to move, in page 22, line 40, to leave out from "disposal" to the end of line 46.

§ The Temporary Chairman

I think it will be for the convenience of the Committee if we discuss with this Amendment (No. 66) Amendments No. 86, in page 22, line 30, to leave out from beginning to end of line 46 and insert— (5) Where it appears to the Commissioners of Inland Revenue that a person is or may be chargeable to tax under Case VII in respect of his acquisition and disposal of assets, the High Court may on the application of the Commissioners of Inland Revenue order any person within such time, being not less than twenty-eight days as may be specified in the order,

1. (a) to state whether he has acted on the behalf of the first mentioned person in connection with any acquisition or disposal of assets by that person;
2. (b) if so, to furnish information in his possession with respect to the acquisition or disposal being information as to matters specified in the order which are relevant to the question whether the first mentioned person is chargeable as aforesaid by reference to the acquisition or disposal, or are relevant to the computation of the gain or loss to be treated for the purposes of Case VII as accruing to that person by reference thereto.

Subject to rules of court the authority and jurisdiction of the High Court may be exercised by a judge of the High Court sitting in chambers and either in vacation or in term time. 481 No. 68, in page 22, line 49, at the end, to insert— Nothing in this subsection shall be interpreted as giving the Commissioners of Inland Revenue wider powers to demand information from any person than are provided under section four hundred and fourteen of the Income Tax Act, 1952. No. 85, in page 31, line 29, at the end, to insert— Provided that nothing in this subsection shall impose on any bank the obligation to furnish any particulars of any ordinary banking transactions between the bank and a customer carried out in the ordinary course of banking business, nor upon any solicitor, accountant or any member of a recognised Stock Exchange to furnish to the Commissioners of Inland Revenue any information with respect to the affairs of a client being information gained by him in the course of carrying out his professional duties on behalf of such client. and No. 69, in page 31, line 29, at the end, to insert— Nothing in this subsection shall be interpreted as giving the Commissioners of Inland Revenue wider powers to demand information from any person than are provided under section four hundred and fourteen of the Income Tax Act, 1952.

§ Mr. Birch

This Clause is called supplementary, but it raises a question of considerable principle. As the hon. Member for Huddersfield, West (Mr. Wade) noticed, it raises the question of disclosure and the relations between banks and others and their customers. There has been a good deal of comment about this in the Press and some anxiety displayed, and the people whom I have found most anxious about it have been the clearing banks themselves. I understand that they have made representations through their usual channels, of which, no doubt, my right hon. and learned Friend the Chancellor of the Exchequer is aware.

What they are frightened of is what in banking terms is described as a breach of confidentiality between the bank and its customers. This confidentiality between banks and customers has been a hallowed tradition of our banking system and has, no doubt, been good for the country, good for the banks and equally good for our foreign banking business. Whether they are justified in it or not, the banks themselves think that these provisions will be damaging to their business both at home and 482 abroad, and if they think so themselves some weight should be given to that opinion.

It may be argued that there was a breach in the confidentiality between bank and customer in the provisions of the Income Tax Act, 1952, by which banks were obliged to furnish to the Revenue details of the deposit interest of their customers; but that case is not on all fours with this, because in the case of deposit interest the bank is a principal. It is not only the agent but the principal in that case, and if it makes that disclosure it is not making more of a disclosure than is contained in a dividend warrant. In fact, that disclosure is analogous to a dividend warrant, whereas in the case which we are now discussing the bank would be acting purely as an agent and not in any way as a principal.

The banks have no wish to protect people who are being fraudulent, and bank books can be and are inspected by the Revenue now—but only after a High Court Order. My Amendment seeks to bring in the provision that a High Court Order must also be obtained in connection with this new tax. If it is, the banks are perfectly willing that their books should be examined, because the High Court will not grant an order without sonic prima facie case that fraud or misbehaviour of some sort has occurred.

The important point to get hold of in this Clause is that it contains no mention of the word "fraud" or "concealment", or any similar term. It says: Where it appears to the Commissioners … that a person is or may be … liable to the tax.

After all we have heard about unit trusts, I cannot think that there is an adult in the British Isles who may not be liable to the tax. The vast majority of people may be liable. The Commissioners do not have to have a reason for thinking that someone is doing wrong. There does not have to be any allegation of fraud. This is purely a power to be able to fish without any real evidence to back up the Commissioners who need not have any reason to suppose that they will catch anything at the other end.

That is what has rather upset the banks in this matter, because once books 483 are open books are open. No doubt the Attorney-General will argue that the questions to be asked are fairly narrow, not very wide-ranging. But it is not easy to convince people that once the Inland Revenue can ask questions of one's bank of a quite wide-ranging nature it will not ask many more and get the answers. Once books are open they are open, and it is the view of the banks, strongly and sincerely held, that this procedure will damage their business very much and damage our banking position in the world.

I do not see any reason why the present system under the present law—quite apart from the Amendment—should not continue, so that in anything to do with the Income Tax Acts the Commissioners will have the power to apply to the courts, if they think that fraud is going on, to obtain power to examine the books. Those powers seemed amply sufficient and should be left in the hands of the Revenue, but should not be added to by the provisions of this so-called supplementary Clause.

§ Mr. Wade

I support the Amendments. My only reason for wishing to discuss this wider subject on the earlier Amendment was that I did not desire to be limited in any constructive proposal to advocating an application to the High Court. I do not think that that is the only procedure which may he followed. Secondly, I did not want to limit my remarks to banks, because I think that other professional men are concerned.

I have no desire to assist those who intend to evade or avoid paying taxes, but a principle is involved. We have to ask ourselves how far it is right to go in breaking this confidential relationship which affects not only banks but accountants and solicitors and probably stockbrokers.

§ Mr. Houghton

The hon. Member for Huddersfield, West (Mr. Wade) has spoken of breaking the confidential relationship. Surely the only question here involved is a communication of information to the Inland Revenue. There is no general breaking of the confidentiality. This is a disclosure of information to a particular authority for a particular purpose and on an extremely narrow basis. It is a mistake to convey the impression, as the right hon. Mem- 484 ber for Flint, West (Mr. Birch) did, that when books are open they are open as if everything were there for the world to see.

§ Mr. Wade

If the hon. Member for Sowerby (Mr. Houghton) will bear with me, he will see what I mean. He may not like the word "breaking" and may prefer "interfering", but there is some effect on this confidential relationship.

If the confidential relationship is affected in this way, the Revenue may be the loser in the long run, for the simple reason that there will be a reluctance to transact business through normal channels and there may be a reluctance to consult professional persons. It may be for the benefit of the Revenue to consider this provision rather carefully.

The right hon. Member for Flint, West (Mr. Birch) referred to banks. The Revenue already has some powers in this respect. Banks have to disclose interest. That is already covered by earlier Finance Acts. But, in general, if information is required from banks, some form of authority must be obtained from the courts. Where proceedings have actually been started, it is customary to make use of a subpoena served on the person at the bank who is able to provide the necessary information and bring the books to court. But there are other ways. The customer may be called upon to give, a letter of authority to the bank. That is a procedure which, I imagine, most banks would prefer, and I think that it would be preferable for the Revenue to follow that procedure.

A great deal of confidential information is given to a bank manager by his customers, and it is a good thing for this relationship to continue. I certainly would not like to see a practice growing up which would frighten the honest customer from disclosing his affairs to his bank manager. It is not only the bank manager who is affected but the solicitor also. I have here a letter from a solicitor written to my hon. Friend the Member for Bolton, West (Mr. Holt), which reads: I have had occasion to look at the Finance Bill, and particularly Chapter 2 thereof, comprising Sections 9 to 15 inclusive. I find in Section 15, subsection (5), that for the purpose of that Chapter 2, the Commissioners of Inland Revenue may by notice serve 'on any person', require him to give information in 485 relation to acquisition and disposal of assets (which includes land) within that Chapter. This clearly is wide enough to include Solicitors. So far as. I know, with the possible exception of wartime legislation, and, possibly, the Official Secrets Act matters, communication between a Solicitor and his Client, certainly in relation to property transactions, is absolutely privileged and cannot be made the subject matter of disclosure to any person or authority without the consent of the Clients. This applies even in criminal matters, and is surely the basis upon which a Solicitor can discharge his duty to advise the Client, knowing that the Client without fear or favour can make the full disclosure to him. In a later letter the same solicitor suggested that if there are to be these powers the words "Special Commissioners" might be inserted in the place of the word "Commissioners". I think that that is a point worth looking into. However, I will not pursue it.

§ Mr. R. T. Paget (Northampton)

Is the hon. Gentleman aware that the point which he is putting was put rather more succinctly some years ago by Mr. Sidney Stanley when he said that in these days of revenue snoopers the only safe place for a man to put his money was with his bookmaker?

§ Mr. Wade

That may well be so, but it is not a practice that I look upon with any great favour.

The intention of this Amendment is to provide that this information may only be obtained if, in the first place, an order has been granted by the court. That is one way, and, generally, I approve that principle. The alternative method is to go to the person in question and ask for a letter of authority to the bank or solicitor, or to whoever it may be. I see no objection to that.

Before concluding, perhaps I might make a general observation, as we are now reaching somewhere near the end of this debate on the capital gains tax. I believe that those who wish to avoid payment of the tax will not have much difficulty in so doing. I do not go quite as far as the article in the Economist which I have already quoted, but it is certainly clear that there has not been very much praise for these proposals. I hope that I am in order because I am about to conclude—

§ The Temporary Chairman

The hon. Gentleman is getting wide of the Amendment.

§ Mr. Wade

I am about to conclude, Sir Samuel, and I think that this is of some importance. I do not believe that hon. Members want to help people to avoid paying tax, but there is an attempt in this Amendment to hold the right kind of balance. I am sure that the powers given to the Inland Revenue should not be too wide. I think that is a fair point. The introduction of this tax is dealt with in seven very complicated Clauses, and it would be an interesting exercise to calculate the ratio of words to potential revenue. I calculate that in these Clauses there are 5,700 words.

§ The Temporary Chairman

The hon. Member must come back to the Amendment.

§ Mr. Houghton

May I ask you, Sir Samuel, whether we are considering Amendment No. 66—

§ The Temporary Chairman

Yes.

§ Mr. Houghton

—and, associated with that, Amendments Nos. 86, 68, 85 and 69? Am I right about that? If we are discussing primarily Amendment No. 66, what it does is to propose to delete certain words after the word "disposal" in line 40, page 22 to the end of line 46, that is to say, to delete from paragraph (b) of subsection (5) words which extend the first two lines regarding the furnishing of information. Therefore, we are not in this Amendment considering whether a person shall be called upon to furnish information; we are merely considering what kind of information, defined here, he may be called upon to supply. Is that right?

§ The Attorney-General

It would be to the convenience of the Committee in this debate to discuss the points raised not only in this Amendment but in the other Amendments which you, Sir Samuel, said might be taken with it. That does not, of course, mean, I would respectfully submit, that one can go commenting as one likes upon the ratio between the number of words in the Bill and anything else.

§ The Temporary Chairman

That is why I asked the hon. Member to confine himself to the Amendment.

§ Sir Kenneth Pickthorn (Carlton)

I still am not clear in my mind, Sir Samuel, which are the Amendments. It is rather a long list and I could not get it down the first time.

§ The Temporary Chairman

We are discussing Amendment No. 66 together with which we are considering Amendments Nos. 86, 68, 85 and 69.

§ Mr. Wade

I hope that you will bear with me for a moment, Sir Samuel. I think it is a revelvant point and I will put it quite briefly.

The purpose of this Amendment is to limit in some degree the powers of the Inland Revenue tin obtaining information in respect of the Capital Gains Tax. As far as the number of words in all these Clauses are concerned—I mentioned that there were 5,700 words—I have never found so many words which achieved so little as far as the Inland Revenue is concerned. I ask the Committee to consider whether it is right when introducing this very complicated new measure to grant at the same time these new powers which, I believe, will interfere with the normal confidential relationship between a person and his banker—I have no special brief; I am just interested as a general principle—his accountant, and, maybe, his solicitor—I have some interest here because I happen to be a member of that profession. Is it wise to give these powers which, I think, fundamentally affect that principle of confidential relationship? That is the underlying purpose of this Amendment and I hope that it will receive the support of other hon. Members.

§ Mr. Houghton

First, I think I ought to ask the Committee to make some allowance for me in this matter because for so many years I was a spokesman of the bureaucracy of the Inland Revenue Department. Therefore, I come to a question of this kind with a certain bias That being so, the Committee must make allowances for me.

I am a little puzzled as to what we are really discussing, because Amendment No. 66, to which I referred a moment ago, proposes to delete certain words from paragraph (b) of subsection (5). As amended, this part of the subsection would read: 488 (a) to state whether he has acted on behalf of the first-mentioned person in connection with any acquisition or disposal of assets by that person; (b) if so, with furnish information in his possession with respect to the acquisition or disposal. That would be the effect of this Amendment.

The point at issue on the Amendment is not the furnishing of information, because the Amendment proposes to leave in the Bill the requirement to furnish information in his possession with respect to the acquisition or disposal". The point at issue in the Amendment must, therefore, be contained in the words that it proposes to delete, which are: being information as to matters specified in the notice which are relevant to the question whether the first-mentioned person is chargeable as aforesaid by reference to the acquisition or disposal, or are relevant to the computation of the gain or loss to be treated for purposes of Case VII as accruing to that person by reference thereto; I do not see how the words which it is proposed to leave out make any real mischief of the words that it is proposed to leave in.

I think that if a requirement is put in the Bill as to the furnishing of information in a person's possession there should be some explanation of what sort of information it is for which the authorities can ask, and this, it seems to me, is in the lines which the Amendment proposes to delete.

The right hon. Member for Flint, West (Mr. Birch) sits there writhing in some kind of mental agony. It is most distracting from this side of the Committee to see the tortures through which the right hon. Gentleman goes when someone other than himself is speaking. I ask him to bear with a point of view which may differ from his, and especially do I ask him to bear with lesser intellects than his own.

There are other Amendments associated with this one, and one of the important ones to which the hon. Member for Huddersfield, West (Mr. Wade) referred is the Amendment to page 22, line 30, which would require the Inland Revenue to apply to the High Court for an order to issue a notice for the supply of information under this Clause. It is 489 surely going much too far to suggest that a High Court order should be sought before someone who may have acted as an agent for someone else can be asked for a few particulars of what he did.

An application to the High Court would, I think, be appropriate if the Commissioners of Inland Revenue were asking for full disclosure of books and records and the laying bare of all particulars of this or that transaction. To have the power compulsorily to inspect books and records is very different from having the power to ask a person who may have acted as agent or nominee on behalf of some other person to render information which will enable the Inland Revenue to deal with any liability arising.

§ Mr. Wade

I endeavoured to make it clear that I did not regard application to the High Court as the only procedure that might be followed. I hope that there will be many cases in which the Inland Revenue will be able to obtain a letter of authority from the person concerned to the bank or to whoever it may be. I think that this would be the best procedure. I would not even object to special powers being given to the Inland Revenue if it had not already got them. Applying to the High Court is only one method that might be used.

§ Mr. Houghton

I am obliged to the hon. Gentleman. I have no wish to misrepresent his view on this matter.

The hon. Gentleman also suggested that it might be preferable for the Special Commissioners to be given this power. As I understand it, it is the Commissioners of Inland Revenue referred to in this Clause—which means the Commissioner of Inland Revenue—who are the body entrusted by letters patent with the administration of this whole range of taxes. It is not the local Commissioners and I think it should be made clear that it would not rest either with the local inspector of taxes. The Commissioners of Inland Revenue are mentioned here, not the surveyor or the inspector of taxes, and when powers are invested in inspectors of taxes the Act usually says so, so this is a matter in which the ultimate power rests with the Commissioners of Inland Revenue and they, from their central point, will be 490 able to decide what orders shall be issued, and they will be able to maintain a reasonable approach to the exercise of their powers and keep the matter under control. All this seems to be perfectly reasonable.

I know how sensitive many people are to this mystique regarding the confidential relationship between banks, solicitors, accountants, and the world at large, and the Inland Revenue in particular. I hope that the Committee will not think me biassed when I say that on the whole it is the richer people in Britain whose affairs can be kept confidential—the poor must always disclose their innermost private secrets for the benefit of bureaucracy. I hope that hon. Members will keep this matter in perspective. I am not seeking to work on anyone's emotions, but I feel that this question of confidentiality attaches to the possession of property rather than to other things in life.

Anyone applying to the National Assistance Board must produce evidence of his means. He must disclose his investments and produce his Post Office Savings Bank book. If he objects to doing this he is told, "You must not be so squeamish about your pride. This is your right. After all, before you can be given a benefit from the social service we must know what your resources are, and you should not be reluctant to disclose them."

Again, what about the confidential relationship between a worker and his employer? Goodness me, the worker not only has his pay disclosed, but has his tax taken off before he gets it. What is this nonsense about the confidentiality of people's affairs? For years before we had a tax deduction scheme all payments to a worker by way of overtime, bonuses, fees, or anything of that kind were disclosed to the Inland Revenue. This was done long before banks were required to disclose bank interests to the Inland Revenue, and I feel that if any harm is being done to banking or to professional life as an institution we ought to consider it, but that if we are concerned only with what may he conceived to be the right of the individual it has to be put in a much broader context.

If it were possible for tax to be deducted from capital at the source and 491 to leave the recipient to claim his relief and allowances from the Inland Revenue I should be in favour of doing it that way. After all, it is done that way with dividends. Poor people who are not liable to tax receive annuities or dividends with tax taken off at the standard rate and they have to claim repayment from the Inland Revenue.

When there is no means of deducting tax at the source, in the case of an employee the Inland Revenue writes to the employer without so much as a by-your-leave and asks for information about the earnings of that employee. The Revenue writes and asks for particulars of when an employee left, where he went, what he went to do, and any other information it needs to trace the taxpayer to his new employer. All this is a legitimate part of the duty of the Inland Revenue, and is accepted in the trade union movement and elsewhere. Tax cannot be taken off in that case. The nature of the activities enable many transactions to be undertaken without their coming to the notice of the Inland Revenue.

6.0 p.m.

Nothing I have said is intended to convey the suggestion that I am in favour of making the Inland Revenue the all-seeing eye with its finger in every poke so that we cannot do anything without the Inland Revenue being told about it. Nevertheless, there are reasonable safeguards against evasion which it is possible for this Committee to take, and I think this is one of them. I have no hesitation in sticking my neck out over this because I believe it is necessary for these powers to be in the Bill, to be reasonably used by the Commissioners of Inland Revenue—as I am sure they will be.

We do not want to lose the good will of the tax-paying public. That I regard as indispensable to the efficient administration of the tax system. There is a great deal in our Income Tax system which relies on voluntary disclosure. If this matter were pressed too far there could be a reaction on the part of taxpayers, who would say, "If that is how you conduct your business, you must find out yourselves what you want to know." That sort of thing would be very bad for the Inland Revenue. If the taxpayer were pressed in that way it would lead him to some kind of non- 492 payment strike. He would feel so resentful that when the Inland Revenue sent him a demand note he would not pay, and when he got the final demand note he would not pay. These things are done by taxpayers with obsessional grievances against the Revenue.

This provision is not likely to press matters too far. With wisdom and experience, both of which I am sure will be brought to bear on the administration, I do not think there is anything in the provision in the Bill to which the Committee, the taxpayers or anyone can take exception.

§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)

The hon. Member for Sowerby (Mr. Houghton) has made his move from the back benches to the Front Opposition Bench without impairing his vigour, but also without displaying that touch of mellowness which we appreciate in hon. Members of the Front Bench. In addressing the Committee in the last few days he has been a little less than gracious to my right hon. Friend the Member for Flint, West (Mr. Birch), who made his sole contribution to the debate a few minutes ago. No doubt the hon. Member for Sowerby felt that he was scoring an important point, but he was, in fact, being rather blind and rather deaf to the amount of time which he personally has spent in contributions to this Measure and the amount of speeches which we have sat through. I do not wish to say much about the Liberal contribution. It is nice to have one and we have not had many. All I say about it is that I do not believe it advanced matters very much further.

The hon. Member for Sowerby must take this also. At one stage in one of his speeches he taunted hon. Members on this side of the Committee for speaking from prepared briefs. There is not the same expertise common to hon. Members on this side as he personally enjoys. Matters would not be raised at all in this House if they were always left to be raised by experts. If he can criticise the wording of these Amendments, that is an example of the lack of expertise and also of the desire to probe, to obtain knowledge and clarification. I do not think that the hon. Member's strictures are in this case remotely justified.

493 The object of my speech is simply to ask my right hon. and learned Friend the Attorney-General to tell us why he considers the provisions of Section 414 of the Income Tax Act, 1952, no longer sufficient for the purposes of this Measure. If the Committee will bear with me for a few minutes, I shall go through these provisions and draw attention to them. Under Section 414 (3, a) the Commissioners may require information relating: to transactions with respect to which the individual person: is or was acting on behalf of others. Paragraph (b) refers to transactions which the Commissioners think they should be investigating, even though those transactions may not themselves be liable to tax. Thirdly, there is the provision as to whether the subject of the inquiry is taking part in: transactions of a description specified in the notice. I look forward to my right hon. and learned Friend enlightening me on whether that is sufficient. Under Section 414 little protection is given under subsection (4) to solicitors and under subsection (5) to banks. My right hon. Friend mentioned banks, but I think the provision in regard to solicitors is worth mentioning also because it is very relevant.

The subsection says that a solicitor shall not be considered to have taken part in a transaction simply by virtue of having given advice. He cannot be compelled to disclose that advice except with the consent of his client. Without the consent of his client he can be compelled only to state that he has been acting in the matter and to furnish the names and addresses of the clients, also the names and addresses of the transferor and transferee, the names and addresses of bodies corporate and, in the case of a settlement, the names and addresses of the settlor and the recipient.

Under subsection (5) a bank is under no obligation to furnish particulars of any ordinary banking transactions between a bank and a customer carried out in the ordinary course of banking business, unless the bank is acting on behalf of the customer in connection either with the formation or management of a body corporate or in connection 494 with the creation or execution of a trust in a settlement.

Since 1952 I have not heard that these powers have proved insufficient for the Revenue, or that that has been brought to the notice of the House in any way. I ask whoever is to reply to this debate whether the powers granted under the 1952 Act are no longer considered suffficient and, secondly, if they are to apply, not only to Case VII but to all matters arising under Income Tax law in future. I think the Committee is entitled to a reply on those questions.

§ Mr. Glenvil Hall (Colne Valley)

I hope that my hon. Friend the Member for Sowerby (Mr. Houghton) will not mind when I say that his enthusiasm for the service he once adorned is not entirely reciprocated by some of the rest of us. The Inland Revenue, like the rest of mankind, is composed of some who are very good, some who are good and some who are not so good. That naturally applies to us all.

The question arises whether the powers which these words we are now discussing give to the Inland Revenue are essential. Like the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), I shall await with interest what the Attorney-General has to say on that. If they are essential I would accept them, but I am glad that this matter has been raised because they are sweeping powers and unless they are absolutely necessary it would be a pity for this Committee to give any Government Department such powers as are envisaged.

Although I have tried, I still cannot envisage the circumstances in which the Inland Revenue would approach the individuals mentioned in the subsection. What information will the Commissioners go on? It seems that it must in all eases be a kind of fishing expedition.

§ Mr. Glenvil Hall

I am glad to see the right hon. and learned Attorney-General shake his head. If that is the case, what information will the Commissioners go on? So many thousands and thousands of transactions take place every year on the Stock Exchange that unless individual stockbrokers or stock jabbers are asked to make a periodical 495 return, I do not see how the Inland Revenue will be able to pick out the people to approach. For that reason alone I await with interest what the Attorney-General has to say.

I am sure that I am speaking for many hon. Members when I say that the provisions of the Clause are exceedingly sweeping. The Inland Revenue now possesses considerable powers under other enactments, and it would be a pity to add to them unless it was essential. I shall w