§ Where the person so entitled grants a lease or licence to extract minerals on terms which are such that payments made in accordance with the grant fall to be taken into account in computing his income for the purposes of the Income Tax Acts, there shall be allowed as a deduction in so computing his income an amount equal year by year to the allowance which would have been made to the lessee or licensee under section 37 of the Finance Act, 1963, if the lessee or licensee had incurred capital expenditure on the acquisition of the minerals equal to their value at the time of the grant:
§ Provided that if a premium is required to be paid to the grantor by the lessee or licensee in respect of the lease or licence, the amount of which is not to be taken into account in computing the income of the grantor, then the amount of that premium shall be deducted from the value of the minerals in computing the allowance to be made to the grantor under this section.—[Mr. More.]
§ Brought up, and read the First time.
§ Mr. Jasper More (Ludlow)
I beg to move, That the Clause be read a Second time.
2055 We now move back from Capital Gains Tax to Income Tax. The new Clause is intended to clarify and, I hope, rectify an anomaly in Income Tax in that only too well trodden field of royalties. It has always been in the tradition of the Income Tax Acts that royalties have been regarded as income. As rates of taxation have increased, that has inevitably become an increasing source of grievance among those who receive royalties, because the royalty owner always has the feeling that what is being taxed is his own capital.
Two years ago, in the discussions on the 1963 Finance Bill, a good deal was said about allowances for mineral depletion. In the course of one of those debates, a precedent was set—which I hope will be continued by the Treasury Bench—that without accepting the Amendment in question, some useful advice was given from the Treasury Bench to those in receipt of royalties. I believe that that advice was much appreciated and that it has been of great use. I commend that precedent to the Chief Secretary as one which might well be followed in these debates.
The background to the new Clause is Section 37 of the Finance Act, 1963, which gives relief to those who are mineral operators, entrepreneurs or whatever the correct term is. The Section was confined to the operator and did not in any way cover the owner. It gave certain annual allowances at varying rates. These are set out in subsection (2) of the Section and are designed to give an Income Tax allowance to an operator who carries on his trade and who for the purpose of it has actually incurred capital expenditure on the acquisition of the minerals which he operates.
The object of the new Clause is to give a comparable concession to an owner who grants a licence to an operator under the terms of which—these are still the ordinary terms of such leases or licences—the owner gets a royalty for the minerals. The object of the Clause is to put the owner who enters into a lease or licence of that kind on the same footing for Income Tax as the operator who has launched on his own operation in the terms set out in Section 37 of the 1963 Act. The Chief Secretary may 2056 be able to convince me that in some way the owner is already covered to this extent. If so, I and those who have advised me have not been able to satisfy ourselves of it. Equally, he may be able to give advice that is as helpful as was that given two years ago by one of his predecessors on the Treasury Bench. I ask that the new Clause be accepted in this form so as to put the owner on a footing comparable with that of the operator.
The new Clause has a proviso, because there are different ways of carrying out these things. The proviso has regard to the case that can happen, in which the transaction is not wholly in terms of royalty but, perhaps, partly in terms of royalty and partly in terms of premium. It is not the object of the new Clause to harm, so to speak, the Revenue by getting an allowance twice over for the owner and the operator simultaneously. We are trying to get an allowance for either one or the other. It is really in order to remove what appears to be a present anomaly, in that the owner is not covered, that I ask the right hon. Gentleman to accept the new Clause.
Mr. J. E. B. Hill
As the asset in question is a wasting asset, it seems desirable that an allowance should be paid to whoever had the capital which is represented by the wasting asset. To some extent, this new Clause links up with the previous one. A farmer might well find that he had bought a new farm on which there was some gravel for which there was permission to extract. In buying the new farm, he would have to pay the full capital value of the gravel. He would not want to sell it off because, with the gravel gone, the land would have to be restored after extraction in order to be used for farming operations. In such circumstances, it would be undesirable if an allowance for the wasting of a capital asset were not given to the farmer.
§ Mr. Diamond
The hon. Member for Ludlow (Mr. More) expressed the hope that we would either accept the new Clause or be prepared to give some advice. At the Treasury, we always much prefer to give advice than anything else. I am sorry that I cannot accept the new Clause, for the simple reason, as I shall explain, that I do not think that the hon. Gentleman is wholly right in say-in that the person here concerned is on the 2057 same footing as the operator, which is the essence of his argument.
Since the 1963 legislation was passed we have regarded the operator as a trader, so to speak, who wins minerals in order to sell them. Anything that enters into that cost is just the same as anything which enters into the cost of any other goods that a trade acquires with a view to selling. The so-called capital costs to which the hon. Gentleman referred are, in effect, part of the costs of acquiring the goods which he is then in a position to sell—I am talking purely now of the operator. It is on that philosophy that an allowance is given for the capital cost spread so as to be appropriate.
I suggest that that is an entirely different situation from that situation of a lessor, because the lessor, by and large, and certainly not as part of his normal lease or licence, does not incur any capital costs at all. Does the hon. Member for Norfolk, South (Mr. J. E. B. Hill) wish to dissent from that suggestion?
Mr. J. E. B. Hill
In the case I cited, the man quite obviously incurred a capital cost. The farmer bought a farm that had workable gravel on it. He had to pay for the value of the gravel. He does not want it, but it is there. He wishes to get rid of the gravel, but does not want to sell the land, because he wants to retain the land when restored after the gravel has been extracted.
§ 9.0 p.m.
§ Mr. Diamond
I am sorry that I have not made myself sufficiently clear. The capital costs which the operator incurs are the costs of providing buildings, plants and equipment on which allowances are granted. There is no comparable capital expenditure by the lessor or the landowner who leases or licences for these purposes. On that basis the two codes are not on all fours.
The hon. Gentleman asked whether we would offer any advice. Considering Capital Gains Tax, as opposed to Corporation Tax or Income Tax, and, to make it simple, taking the straightforward case of the landowner who after Budget day acquires a piece of land on which minerals of some kind are discovered, and assuming that he lets the mineral rights; the minerals are won and the value of the land is then diminished; if he then proceeds to sell the land, he will 2058 sell it at a loss and the loss will be equal to the diminution in value as a result of the royalties or part of the royalties.
The hon. Gentleman is suggesting that that part of the royalties should be allowed for and should not be subject to Income Tax as part of ordinary income and that it would reduce the value of the asset. However, the landowner would have made a loss which would be an allowable deduction from any realisable capital profit which he had made, or which he would make later on, not necessarily at identically the same rate. That is the way to look at it.
I can only repeat that there is no true comparison between the operator who incurs fresh capital costs which are divided over a period, so as to represent the true cost of acquiring goods which he then sells, and the landowner who receives royalties which are subject to Income Tax and Surtax in the same way and who incurs no capital costs and is therefore not entitled to any special allowance in that way. However, if as a result of the total operation the owner suffers a realisable capital loss, if he sells, that is available for set-off against future capital gains. In those circumstances, I imagine that I shall not be pressed to accept the new Clause.
§ Mr. Scott-Hopkins
Although the Chief Secretary has been his usual persuasive self, and I expect that he is as glad as the rest of the Committee and I am that this is the last new Clause which we are to discuss, I am sorry that he is not in as accommodating a mood as his hon. and learned Friend the Financial Secretary on the previous new Clause. Although he has been persuasive, his argument was not up to its usual standard of clarity and forcefulness.
I accept that the positions of the lessor and the operator are not exactly on all fours, but, as the right hon. Gentleman has accepted, the lessor has a diminishing or depreciating asset. Of course it is true that if the minerals had been worked out, he would have sustained a capital loss and been able to receive any allowance in operation at the time. But what the right hon. Gentleman is saying is that whenever mineral rights are worked out, the only way in which the lessor or owner can get any compensation is to sell immediately. But in many cases this will have 2059 been a diminishing asset for many years, as with the example of the working of china clay, tin or gravel. In many cases disposal will not take place and the diminished asset will remain the property of the original lessor or owner, in which case there is to be no allowance of any kind.
My hon. Friend the Member for Ludlow (Mr. More) made the point extremely cogently that we are trying to find some method whereby some small relief can be given to the lessor for the facet that over a period of many years he has been in possession of a dimishing asset. Although the Chief Secretary has obviously closed his mind to our suggestion in the new Clause, I hope that he will look at the matter again with his usual sympathy. Not long ago he said that there was nothing the Treasury Bench liked more than looking at something sympathetically and then doing nothing. I hope that he will do the former and not the latter.
I hope that he will give the assurance that he will look at this matter sympathetically yet again to see whether anything can be done, because there is a case for doing something for the lessor or owner of mineral rights, not necessarily on all fours with what is done for the operator, and I accept that, but something which would be only justice. I hope that the Chief Secretary will, in his accommodating way, come half way to meet us on this.
§ Mr. Diamond
I am glad to respond to the invitation of the hon. Member for Cornwall, North (Mr. Scott-Hopkins) to say a few more words. I am afraid I cannot hold out any hope of meeting the argument here, because what is being sought
§ here is fundamentally an allowance, a deduction, from the income in respect of a wasting asset for that part which wastes. This is a totally new principle and it is no part of our Income Tax at all. I am sorry that I cannot recommend its introduction in this one limited case.
§ It is, however, the case—although I do not say this is a full compensation—that as we now have a Capital Gains Tax a loss of this kind is ultimately represented by a capital loss, and that is a deduction from a realised capital gain. So, just as in the course of time a capital gain comes to be realised and becomes assessed for Capital Gains Tax, so in the course of time this diminution in capital value would be realised and would be a set-off. I hope that the hon. Gentleman the Member for Cornwall, North will feel that I have been as accommodating as I reasonably can be having regard to the structure of taxation in our system.
§ Question put and negatived.
§ The Chairman
We now come to new Clause No. 61 on which I promised a Division if it were to be moved formally.