I move amendment No. 6:
Before section 12, but in Part I, to insert a new section as follows:—
"Rule 9 of the Rules applicable to Schedule E contained in the Income Tax Act, 1918 is hereby amended by the substitution of ‘reasonably to incur expenditure for the appropriate performance' for ‘to expend money, wholly, exclusively and necessarily in the performance'."
We had some considerable discussions about this matter on an earlier Finance Bill and the more I think of it, the more I feel that I am not absolutely happy about the position as it is at present. When we were discussing this question then, we understood, accepted and appreciated the difference that exists in the phraseology in respect of the expenses allowable for persons assessed under Schedule E as compared with persons assessed under Schedule D. That means, of course, that there is a different law for a person who is employed by another from the law for the person who employs himself in relation to a claim for expenses for purposes of income tax assessment. The case made by the Minister at the time was that the person under Schedule D would determine much more for himself having regard to the balance of profit from his business and that the cost was primarily on him and, in addition, that when bearing that cost himself, it was proper that he should be the judge in a loose way of what expenses were necessary for the business.
I do not want to suggest at all that in relation to the assessment of these allowances the Revenue approach is niggardly. My experience is that it is not. Having regard, but only having regard, to the phraseology of the statute under which they are acting, that statute is restrictive beyond question. Let me say at once that so far as the question of the cost of this amendment is concerned, it would depend to a very large extent on the phraseology used. For reasons which I shall give in a few minutes, I have deliberately chosen phraseology analogous to that which was recommended in the British Royal Commission on the Taxation of Profits and Income. The final report of that Commission was published in June, 1955, I think. The reference is CMD 9474.
Regardless of the rights or wrongs of whether the existing rule is fair or unfair, it is an undoubted fact that there is a very strong feeling abroad that it is a most rigorous and unfairly restrictive rule. I am sure the Minister has met that opinion in his experience as a Deputy, quite apart from his experience as Minister. I am sure he has met it in relation to problems about which his constituents come to see him who have the necessity to incur expenses from the point of view of carrying out their job in a reasonable way.
We all know that employees, if they are to do their job properly, must on occasion take into account that if they happen to meet a customer of their firm outside the door of a licensed premises, they will be regarded as extremely mean if they do not suggest that he should come in and have a drink, even though it may not be necessary in regard to their actual job that they should make that suggestion. But it is, as we all know, standard practice and it would be regarded as mean and not in the least calculated to promote good relations, if expenses to that mild degree were not met from time to time.
The existing wording of Rule 9 is so restrictive that it does not take into account the expenses employees have to incur in a variety of cases. So far as I am aware—I speak subject to correction and I should be grateful to the Minister if he will correct me if I am wrong—there is no statutory relaxation in any way of the Rule 9 provision as between this country and Great Britain. So far as I am aware the Rule 9 provision operates in exactly the same way here as it operates across the water. I am not going to offer an opinion as to whether the gentlemen who operate the Rule here are more or less humane than their counterparts on the other side of the sea. I have experience only of the ones here and I am not making the case at all that their interpretation is unfair. I am making the case that the statute governs their interpretation in an unfair manner.
When the Royal Commission to which I have referred were dealing with this matter on the other side, they made recommendations in a series of paragraphs, some of which are so apposite to the problem as I see it in Ireland that they are worth quoting. Paragraph 129 reads:
It seems to be the general impression that the Rule governing the deduction of expenses in respect of offices or employments, under Schedule E is too narrow. It will be convenient to refer to it by its old name as Rule 9. We had before us a great many representations complaining of the operation of the Rule in various respects, to which we gave our careful attention. In making these criticisms our witnesses were doing no more than apply to their own particular circumstances the substance of a series of comments which have been made by Courts of law during the last thirty years. There can have been no part of the income tax code which has been so regularly the subject of unfavourable notice.
May I stress that last sentence? For a Commission solemnly sitting in relation to the whole gamut of taxation on profits and income to say categorically that there can have been no part of the income tax code which has been so regularly the subject of unfavourable notice is a very striking commentary.
They go on to say in paragraph 130:
Rule 9 has been variously described as "jealously restricted", "strictly limited", and "a very narrow and strict rule". Its words are said to be "notoriously narrow in their application" and "notoriously rigid, narrow and resticted in their operation...stringent and exacting." Nor has judicious sympathy been withheld from those to whom the "very strict words laid down in Rule 9" have been applied.
One of the judges in question made these comments:
This case raises a question of hardship. I may go further and say the position really is unreasonable... A great number of these cases have produced, in my judgment, extremely hard results ... a ...rule ... which undoubtedly causes a considerable amount of hardship when applied to particular cases.
That the "position really is unreasonable" is a commentary that frankly requires considerable explanation from the official point of view.
There was another Committee in England in 1936 which considered the codification of certain income tax laws and their reference to this section was "the extreme rigour of the existing law". It is fair enough to say that even though these criticisms have been made all along the line, nothing was done about it at all. I am not aware as to why exactly that was so but the difficulty that has arisen in the strictness of its application is that perhaps, in a very large industrial country such as England, there are so many facets that it would be impossible to alter it in the easy way in which it could be altered in a small country such as ours and particularly one which does not have the same type of industrial employment.
There must clearly be some statutory principle, some statutory guide, by which to judge whether expenses are proper to be incurred or not. It would, of course, be quite unreasonable to provide that the employee himself be the sole judge of what expenses he should or should not incur and by incurring them, claim deductions for income tax purposes. At the same time, I think that the obligement in the existing rule which lays down that the guiding course to be steered is that the person concerned will be asked if he does not incur the expenses is far too rigorous.
An employee's duty can be performed in two ways—willingly or grudgingly. This rule is based entirely in its phraseology on the old conception that an employee does his work only grudgingly and that it is only the very bare minima he is bound to do under pain of dismissal he will do. I do not think that is a fair and just presentation at all of the approach of the vast majority of employees at present.
I am not going to weary the House by going over all the arguments put forward in that Commission's report but they consider, first of all, whether the alternative solution was to have exactly the same rule for Schedule D as for Schedule E. Having rejected that, they then, in paragraph 140, came to the conclusion that the best solution was to recommend the rewording of Rule 9 on less restricted lines than at present. The wording they suggested would allow the deduction of "all expenses reasonably incurred for the appropriate performance of the duties of the office or employment."
We have just merely turned that around here because so far as our phraseology is concerned, the verbs are at the beginning rather than at the end. We believe that our suggestion would give a more liberal form of allowance to employees to ensure that the employee who was genuinely making an effort in certain respects to assist his employer, quite apart from making an effort to improve himself, would be, in consequence, enabled to claim.
It is not, for example, laid down in the contract of employment of an assistant solicitor that he will keep himself abreast of the law in respect of the particular side which he is carrying on for his employer but everybody appreciates and understands that you cannot do a job like that, unless you do make an effort to keep abreast of the law in that respect, but it is not necessary to incur expenses in regard to it, although it certainly is desirable and certainly is designed to increase efficiency, but yet, as I understand the situation, expenditure incurred for that purpose, because it is not actual expenditure that must be incurred under pain of dismissal, is not allowable as the law stands at present.
One could go through the various facets of our employees and produce a great many examples but I do not think there is any necessity to do so. I think everybody who is aware of the problem knows all the cases that have been met and realises that in relation to those cases, there is undoubtedly something that is not quite fair in the rigidity of the existing statute.
Again, the Minister may say that on the phraseology here, the cost would be very large. I do not think so. If it were very large it is one that could be met by a relaxation of the existing rule in the direction we have in mind. If we could not get the full amount of it, it certainly is a case that needs to be considered away and apart from any question of the standard rate to which the Minister refers. It is a case I have never heard fully argued out from the point of view of adhering to the existing rule which is certainly not at all in accord with modern times and not in accord with the spirit of willingness and anxiety to further the interests of the employer which is, thank goodness, abroad in the type of person to whom such a rule refers. If it were not abroad we would have a poor outlook as a nation. I think the Minister should lend his quota to acceptance and understanding and appreciation of that spirit that is abroad at the moment.
