§ Mr. Diamond
I beg to move Amendment No. 204, in page 28, line 39, at end insert:`and(c) the main object, or one of the main objects, of the transactions or arrangements was the avoidance or reduction of liability to income tax '.
§ Mr. Deputy Speaker
It has been suggested by the Government, and I understand that it commends itself to the Opposition, that with this Amendment we also take Amendment No. 299, in page 28, line 39, at end insert:Provided that entering into a service agreement for a reasonable remuneration on an 915 arm's length basis and with a person who is not a ' connected person ' as defined by paragraph 21 of Schedule 8 to the Finance Act 1965 shall not constitute a transaction or arrangement for the purposes of this section.and Government Amendment No. 205.
§ Mr. Diamond
The purpose of the Amendment is to exclude from the scope of Clause 25 any transactions where avoidance or reduction of liability to income tax is not a main object. Clause 25 deals with the sale by an individual of income derived from his personal activities.
When we were considering this matter in Committee, the Clause led to a great deal of misunderstanding and I undertook to see whether words could be incorporated in the Clause to make the position clearer. The Amendments put down to this Clause will, I think, achieve that object. I hope that they will clarify the situation in a way which hon. Members in Committee understood that it would be clarified.
The difficulty which arose was that the words in the Clause were interpreted in a way which was not intended. In Committee, I made it clear that the words were not intended to apply to bona fide transactions, such as the customary sale of a partnership interest or to a customary capital sum received from the admission of a new partner to work in a partnership.
As a result of re-examining the drafting of the Clause, it was thought wise to introduce Amendment No. 204, which makes clear that avoidance or reduction of liability to income tax should be one of the main objects of the transaction if the Clause is to apply.
§ Mr. John Nott (St. Ives)
I think that it might save time if I interrupt the right hon. Gentleman. Is this the first time in our tax legislation that this type of Clause has been inserted, or is it common practice? Could the right hon. Gentleman enlarge on that?
§ Mr. Diamond
It is not the first time. It is fairly common practice. I think that that is the better description of it. It is a mehod which is well known to practitioners in this field. I think that it helps considerably in removing the anxiety which many people had about the way to interpret the rest of the Clause.
916 This is what we are trying to do. We are not attempting to add or to detract anything from the Clause, but to make it clear that it should be read in the way that I am advised it always should have been read. But there had been some dispute about it.
The Amendment, I hope, makes it inevitable that it will now be read in the way that I was instructed that it should be read. The Amendment, therefore, seeks to make certain that the Clause provides an ample general safeguard for bona fide transactions of all types.
I think that that answers, in the main, Amendment No. 299, but I shall listen carefully to any points which are made on it.
Amendment No. 205 ensures that a genuine going concern sale of a professional practice or a share in one or of a company or a stake in one is not caught by Clause 25.
It could be argued that Amendment No. 204 is sufficient by itself. However, the anxiety that was expressed on this Clause was such and the misunderstanding so widespread that I took it as my responsibility to see that further words were introduced to remove the misunderstanding and make it absolutely clear to the layman, as well as to the skilled reader of novels of this kind, that the wording could only have one meaning.
Amendment No. 205 has been put down as an additional exemption for these two reasons. First, to deal exclusively with the customary sales of professional practices or shares in them, because there were many representations both in Committee and outside that those transactions might have been caught by the Clause.
Secondly, to give a more specific indication in the Clause of the distinction between the sale of personal earnings and the sale of a going concern. The sale of a going concern represents a different thing, and many more things, than the sale of personal earnings.
I hope, therefore, that with those two additions to the Clause, these two aids to interpreting it, it will now be felt that the Clause does not cover more than I said in Committee that it was intended to cover.
§ Sir J. Foster
Before the right hon. Gentleman sits down, may I ask him to 917 explain how the proviso in Amendment No. 205 works? He says that it is clear to the layman. As he is more skilled than the layman, will he explain how it works?
§ Mr. Diamond
Certainly. It will work in this way. Where a person is selling the goodwill of his practice, for example, and continuing to work in the practice, provided that he is receiving full consideration for the work that he carries on doing in the practice, it is clearly to be distinguished from the case where he sells his future earnings, continues to work, but does not receive full consideration for his future work by way of income.
The remuneration for his future work is satisfied by the capital sum which was paid at the time that the contract was entered into. Therefore, the device, which we all understand, of turning income into capital and substituting the lower rate of capital gains tax for the higher rate of income tax and surtax would apply. That is why the words to which the hon. and learned Gentleman referred are used. If there is less than full consideration, the transaction could be caught.
Let us forget the case of an actor and similar cases where there is an obvious and deliberate attempt to avoid the higher rate of surtax. Let us take the ordinary case of a professional man who wishes to turn his income into capital. He could enter into a partnership, sell the goodwill, and obviously take a much reduced salary for his future services. That could all be part of the transaction. That is a case where someone is deliberately trying to turn his future remuneration from the nature of income into something which is partly income, but mainly capital, the capital consideration taking place at the sale. Therefore, we must have these words to prevent that kind of transaction taking place.
§ Sir. J. Foster
Again, the Opposition can take great credit for the result of their strenuous fighting in Committee against the position taken by the Government that the Clause did not catch the people that everybody thought it would. There were letters from the Financial Secretary to the public saying, "We do not take the view that ' exploiting ' means ex- 918 ploiting ' when it applies to a solicitor, an accountant, and so on". In the end, however, the mass of objections which were represented through the members of the Opposition in the Committee convinced the Chief Secretary that there might be substance in them. The right hon. Gentleman then promised to look carefully at everything that had been said, and the Amendments are the result of those considerations.
Speaking for myself, it may seem churlish that I do not thank the Chief Secretary, because the Government should never have embarked on this course at all. All that they have done is that in cooking somebody's boiling oil, they have reduced the heat. It seems rather absurd that the impression gets out to the public that the Government have made a lot of concessions when all that they have done is to acknowledge a few mistakes and that they have gone too far.
One can imagine in a similar vein that if Hitler, instead of torturing his prisoners, had shot them, there might have been headlines in the British papers to thank Hitler for shooting his prisoners and not torturing them as well.
§ Sir J. Foster
The right: hon. Gentleman says that it would have been an improvement, but I do not interpret any of these things as a concession. It is a verbal argument, but it perhaps spoils the amenities between the two parties.
I should like to make two comments. The Chief Secretary is quite right in saying that his Amendment takes care of Amendment No. 299 and, therefore, I shall not seek to support it. I wish, however, to use Amendment No. 205 to make a protest against the complexity of tax legislation, of which no Government are altogether innocent.
The Chief Secretary said that Amendment No. 205 would introduce language from which even a layman reading this type of novel would see immediately that he had benefited. I ask the House to consider how this works. The proviso states:if the value of the profession…is derived to a material extent from…receipts derived…from the individual's activities "—919 so far it is not very difficult—and for which, when all capital amounts are disregarded, the individual will not have received full consideration".That is very esoteric, because "full consideration" means, the Chief Secretary has said, full consideration in income. There is no hint of that. One cannot know that "capital amounts…disregarded" is again a term of art. A "capital amount" is defined in the Clause as an amount on which tax is not paid.
We thus have the very involved algebraical equation that if a man gets A plus X, having had the A disregarded he is then taxed on A. This seems most absurd in legislation. The capital amounts are disregarded. They having been disregarded, naturally the consideration is that much short and, therefore, the capital amounts are then taxed, because the proviso to the Amendment then goes on to say that the subsectionshall not exempt the part of the capital amount so derived.The layman who reads that would be rather surprised to see that "consideration there means income consideration, because one must disregard capital. The capital having been disregarded, it is then taxed. It is a very odd result. I recognise that it works out all right for a lawyer; having looked up what "capital amount" means, it is not too difficult, although it is fairly difficult even then.
I again enter a plea to have these matters drafted in much easier language. There is an argument for saying that it could be drafted in ordinary language. When Grace Kelly's father drafted his will, he said that he would not call his children issue of the first party but would call then kids, and he did throughout. It worked very well. He said that he would not leave his son anything because he had helped himself to all his shirts and ties. He made a very good will.
§ Sir J. Foster
I ask that there should be a great drive by one Government or another to draft these matters as far as possible in ordinary language. Wherever they have a definition in an Act, it should be printed in heavy black letters and 920 where the definition is in a particular Section of the Act, it should be printed in italics. One can never understand these things from an Act. The Dogs Act, for example, states that the expression "cattle" shall include poultry. An ordinary man reading that Act cannot guess that "cattle" means poultry. It is no good our saying that even a layman can understand what these novels mean.
We accept the Amendments as simply a late-minute repentance from a rather dogmatic assertion of what the law is.
§ Mr. Nott
These Amendments clearly improve the position as it was originally drafted in the Bill. Whatever the situation may be at the present time, however, it is quite wrong to add to the Statute Book additional legislation which makes a person taxable on a particular transaction if tax avoidance was the object of the transaction.
This is removing from Parliament the ultimate right to legislate on tax matters. It undoubtedly puts into the hands of the Inland Revenue powers to decide on people's individual transactions which it should not be given. It may well be that my own party, when in power, passed one or two pieces of tax legislation which gave undue discretion to the Inland Revenue. Nevertheless, that does not in any way condone a Government in putting further legislation of this sort on the Statute Book.
How can the Inland Revenue judge in every case whether a person arranged his tax affairs to avoid tax or to pay as little tax as possible within the law? This puts upon the Inland Revenue a task which I do not think Parliament should give it. As mentioned in one of the Sunday newspapers last week, it attributes to the Inland Revenue a degree of moral sensibility which the Department neither has nor should be asked to assume.
Clause 25 was probably the worst in the whole of the Bill. Whereas the Clause concerning overdraft interest was foolish and misguided, I think that Clause 25 was repugnant and still is. I do not want the Government's Amendments to go through without my saying that it is utterly wrong for the Government to introduce and pass through Parliament legislation which leaves it to the Inland Revenue to decide whether a person is liable to tax.
§ Mr. Kenneth Baker
It is regrettable that the Chancellor of the Exchequer has not been responsible for piloting the Clause through the House. When he introduced the Budget and announced that he would tackle the Beatles and the Constellation-type investment, he got a great cheer from his back benches, but he had no conception of the complexity that was needed in our tax laws to try to catch the Beatles and that sort of arrangement.
As we pointed out in Committee, and as the Chief Secretary has now recognised, the Clause was originally drafted so widely that it caught not only the Beatles, but virtually every small businessman who attempted to sell or float his company, as well as many professional partnerships.
It is no good the Chief Secretary shaking his head, because the Amendment which he has just moved recognises the validity of what I have said.
I, too, would like to comment upon the obnoxious way in which the remedy has been made. It is now up to each taxpayer who makes a transaction of this sort to show that lie is not doing it to avoid tax, and this, in the end, comes down to a straight conversation or argument between the taxpayer and the Inland Revenue. Who is to decide? It will be the officials of the Inland Revenue who will decide because the law on this point is not precise. So one has to give the Inland Revenue a degree of psychological insight and interpretation of motivation which no Government Department is capable of exercising and which no Government Department should have.
I suspect that the way in which the Chief Secretary has amended the Clause will make it completely nugatory. Virtually any movie or pop star who undertakes such a transaction will be able to argue very persuasively under the Amendment that he is not doing it for tax avoidance. This is a fine example of trying to amend a bad Clause in a bad way. It is like trying to keep the damp out of a house by shutting the door and turning the key in the lock. It cannot be done.
The Chief Secretary suggested in Committee that this was an important Clause because it might bring in about £4 or £5 million. He did not say how that would 922 be brought in, but I suggest now that the yield from the Clause will be very small indeed.
This is a good example of how bad our tax legislation can be. A Clause is introduced to get a party cheer in the Budget speech; it is badly drafted, badly thought out, and it has to be substantially amended in such a way that it cannot be effective.
§ Mr. David Howell
May I associate myself briefly but strongly with the points which have been made about the Clause and the Amendment. As my hon. and learned Friend the Member for Northwich (Sir J. Foster) has said, the Clause and the Amendment are of byzantine complexity. As my hon. Friend the Member for Acton (Mr. Kenneth Baker) said, it is a perfect example, almost a case study, of how not to legislate. It provides as strong an example as earlier new Clauses which we discussed of the almost desperate need for the Government, in attempting to bring forward great new slices and principles of legislation that were omitted in the original draft of the Clause, to do so in a rather more mature and adult way than they have done.
I personally think—and this point has been made in other parts of the debate on Report—that innovations in tax legislation must he discussed through the medium of the Green Paper technique or, better still, through a Select Committee on tax reform, if we are to avoid the neurosis that understandably seizes the country when such Measures appear in the Finance Bill, with the threat that the Government will use their majority to ram them through, come what may.
It is only in the last weeks before Report that we have seen that the Government have been trying to cook up something to get out of the muddle that they are in.
I agree with my hon. Friend the Member for Acton that the net effect of the Amendment is that nobody will be caught. A huge new principle of taxation is brought forward, Amendments are brought in which erode the principle, which continues to be triumphantly asserted, but the Clause will have no effect.
The only bizarre effect to come out of it is that tax inspectors will have to go 923 through the curiously medieval process of enquiring into men's souls and looking into the motives with which they set out to do certain transactions. That is an inquisitorial procedure in which, if I were an inspector of taxes, I would wish to have no part, and it is wrong for us to ask the Inland Revenue to participate [...] this. I join my hon. Friends in deploring this method of legislation and the thoughts, motives and petty feelings which lay behind this attempt to get a cheap cheer.
§ Sir Eric Errington (Aldershot)
A difficult task has already been placed upon inspectors of taxes by existing legislation, but never before has an inspector of taxes had to decide a case where the onus is not upon the Government to prove that there should be taxation but upon the individual to prove that he is not avoiding taxation. This is a complete alteration of principle, and it has arisen only because it has been found necessary to alter the original Clause which was discussed in Committee.
It is a serious thing to ask taxpayers to prove that they are not avoiding taxation. The use of the word "avoidance" is often an unhappy one, but what really matters is that no taxpayer should be put into the position of having to prove that he is not avoiding tax.
§ Mr. Stanley R. McMaster (Belfast, East)
I was not a member of the Committee, but I should like to join my colleagues on this side of the House who have spoken on the Amendment. I fail to understand Amendment No. 204, and I hope that the Chief Secretary will elucidate it a little more clearly.
The Amendment states that:the main object, or one of the main objects, of the transactions or arrangements was the avoidance or reduction of liability to income tax.Surely every sensible man attempts to reduce his income tax. Is the Chief Secretary legislating to say that a man, in order to avoid falling under this provision, must show that he attempted to pay the maximum amount of tax? What kind of duty is that man showing towards his wife and family? Every man must reasonably be assumed to reduce his tax liability; there is nothing wrong in this. One is not of course entitled to evade 924 taxation; that is an entirely different proposition; but surely one is entitled so to arrange one's affairs that one pays the minimum amount of tax possible?
It therefore seems to be complete nonsense to add this provision to the Clause. I am completely unsatisfied on this, and I hope that the Chief Secretary will explain it a little more clearly.
§ Mr. Diamond
I have received a request to explain matters a little more clearly. May I call in aid the fact that when the hon. and learned Member for Northwich (Sir J. Foster) was responding more or less officially he did not take the point that has been taken by those who are not perhaps as fully familiar with the law as is the hon. and learned Gentleman?
This is a well-tried form of words. It appeared first in Section 32 of the Finance Act, 1951, then in Section 412 of the Income Tax Act, 1952, and in Section 28 of the Finance Act, 1960. It is a form of words used to protect a taxpayer whose transactions might, if it were not for this form of words, look as though they were undertaken for tax avoidance.
We place upon the Inland Revenue the responsibility of collecting tax in accordance with the will of Parliament. We must give to the Inland Revenue reasonable authority and opportunity to carry out the wishes of Parliament. This device is used for that purpose.
If the hon. Member for Belfast, East (Mr. McMaster) will look at the Clause, he will see that it starts off by saying "This section has effect where …" and two matters then arise. We are now saying that there is also a third matter which arises, namely, where a transaction is not entered into with a view to avoiding tax. I hope that I have made the purpose clear.
I cannot get people to accept what I am saying; I can only repeat what I understand to be the situation on the best authority available to the Inland Revenue and the Government. The Clause now means what it has always meant. It has not altered its effect or its compass at all. Words have been added to make the meaning clear. There can be no doubt that this has been successful.
I was grateful for the speeches of the hon. Member for Acton (Mr. Kenneth 925 Baker) and the hon. Member for Guildford (Mr. David Howell). They are two completely independent, objective-minded Members of Parliament and have said that although the provision sought to catch everybody, the Clause now catches nobody. I wish to make clear to them that their original understanding was a complete misunderstanding, and I am glad that that is so.
§ Mr. Kenneth Baker
Before the right hon. Gentleman leaves that point, as he says that we have totally misunderstood the point of this misconceived Clause and Amendment, would be hazard an estimate as to the yield of taxation from the Clause as amended and how he reached that estimate?
§ Mr. Diamond
The compass of the Clause being unaltered, the estimate of saving is unaltered. It remains precisely the same as before. We expect to get the same revenue from the Clause as we expected to get before.
The hon. Member for St. Ives (Mr. Nott) is anxious about the use of these words. I have already indicated that they are based on considerable authority and precedent. Perhaps he did not fully consider the reason that the Government thought fit to use these words and why Parliament thought fit to accept them after some years' experience of the operation of the formula. Anybody who is dissatisfied is not subject to excessive authority on the part of the Inland Revenue. A person who disagrees with the Inland Revenue has the same right under this Clause as under any other Clause to appeal to the court.
§ Mr. Diamond
The position is the same. The purpose of this provision is not to protect the Inland Revenue but to protect the taxpayer. It is to make clear that where a transaction may be thought to be purely one of tax avoidance, there is a responsibility on the Revenue to be satisfied that the transaction is aimed at tax avoidance. With that explanation, I hope that the House will accept the Amendment.
§ Sir E. Errington
Could the Chief Secretary say what extra work this will involve for the inspectorate of taxes, who are already overladen with work?
§ Mr. Diamond
Every responsibility put upon the Inland Revenue to collect tax inevitably means an additional duty for them. The only test one can make in this case is whether it is a reasonably efficient way of collecting tax. We feel that it is an efficient way. If we do not bring in this provision, the situation could develop in which every professional man could turn his income into capital and escape tax. We have to take this action in respect of those who may avoid tax in that way. This action was promoted and suggested by right hon. Gentlemen opposite, by the Press, by a number of my hon. Friends, and I am sure that the House will feel it a sensible thing to do.
§ Amendment agreed to.
Further Amendment made: No. 205, in page 29, line 11, at end insert:
(4) This section shall not apply to a capital amount obtained from the disposal—
Provided that if the value of the profession, vocation or business as a going concern is derived to a material extent from prospective income or receipts derived directly or indirectly from the individual's activities in the occupation, and for which, when all capital amounts are disregarded, the individual will not have received full consideration, whether as a partner in a partnership or as an employee or otherwise, this subsection shall not exempt the part of the capital amount so derived.
In this subsection references to the company's business include references to the business of any other company in which it holds shares directly or indirectly.—[Mr. Taverne.]