I move amendment No. 40:
Before Section 66, but in Part VII, to insert a new section as follows:
"This part of the Act shall at the election of the society only apply in respect of profits earned subsequent to the 5th day of April, 1963 and any assessment that may be raised for the year 1963-64 shall, if the society has so elected, be raised as if the society was a new business commencing on the 6th day of April, 1963."
The manner in which Part VII of this Bill deals with societies registered under the Industrial and Provident Societies Act of 1893 is a trifle complicated. As I understand it, the effect of the Part is that in future no society will get the exemption from income tax which has heretofore obtained, unless it comes within the exceptions set out in this Part of the Bill. I should like the Minister to confirm if I am correct in thinking that to that extent this Part of the Bill consolidates the law in relation to these societies. If I am correct in that assumption, then we go on to the provisions in the Bill that, for the first time in the year 1963-64, the current income tax year, these societies are now to be made liable to tax.
The Minister made it clear in the course of his earlier remarks that he was introducing these provisions for the purpose of stopping a loophole in his anti-avoidance measures. That can be perfectly well understood. I am concerned, however, to ensure that in such stopping of the loophole that existed, no damage will be done, in the first place, to genuine existing societies and, in the second place, to ensure that the ordinary arrangements operate by which any new business brought into charge for the first time is entitled to be assessed on the profits it brings into account during that first year.
We shall have an opportunity at a later stage of discussing the exemptions and the societies that should be brought into the tax net properly, and particularly whether the exemptions provided for actual societies in the section and the exemptions the Minister introduces in amendment No. 45 are such as to provide that the appropriate society is truly exempted. However, apart from that, there is the other question, that is, that where person starts a new business, that person, when he does that, is taxable for the first year when he starts in the actual capacity that first year. If he starts a new business on 6th April in any year, he is taxable for that year on the exact profits earned in it and then, for the following year, he goes to the ordinary taxation on the profits of the preceding year.
In a partnership, for example, where there are three partners and one leaves before the end of the financial year the remaining partners have the right to decide whether they will be taxed on the profits of the preceding year or on the actual profits of the first year in which the new partnership operates. I have, in this amendment, tried to apply by analogy the same proposals. I do so particularly because I am worried about the effect this Part of the Bill will have on those societies which have been carrying on building activities.
The Minister is aware that by reason of Section 6 of the Finance Act of 1935, people who develop land are assessable under that section to profits on the capitalised value of the ground rent they create. That section was introduced because certain builders found a way out by selling the houses they had erected at their exact cost and taking their whole profit on the ground rents which they subsequently sold. That has been the law since 1935 but if the effect of this Part of the Bill was that societies carrying on building last year were to be assessed, as a matter of mandatory provision and without choice of election, on the profits they earned last year, it would mean that they would be assessed not merely on any building profits as such but, in addition, on the capitalised value of any rents they might have created last year, even though they had disposed of them prior to 5th April last.
I think the effect of that will be that virtually all the societies that were carrying on building, and particularly the societies doing speculative building, will have to be liquidated at once. They made all their arrangements last year in the belief that the operations they were carrying out were, in fact, free of tax and that they would be entitled to adjust their future arrangements and operations on that basis.
Now they are being brought into the tax net. I am making no point as to whether they should or should not be brought in but I am interested to ensure that when they are being made liable for tax as from 6th April this year, the effect will not be to put them into liquidation. I fear that unless there is some arrangement by which, during the current year, they can be taxed on the profits they are earning this year, after they have got due and adequate notice in the Budget, because if they are taxed on the profits they are earning and on the arrangements they made before they got that notice, the result will be to force virtually all of them into liquidation.
The Minister is as aware as I am, and if he is not so aware, his advisers can readily tell him, that as well as the provident society that was in fact a family concern and was in fact solely a tax avoidance operation, there were many other societies which were operating in this way throughout the country, in not so small towns, and working on the basis of getting, sometimes through the local authority and sometimes otherwise, a site for six or eight or ten of them together. They were getting that site and they were joining together to carry out a development plan for themselves and when that development came, they were, as a result, able to provide for their own housing needs, get the additional housing grant that is payable to a building society under the housing Acts, and borrow the balance of what they wanted by way of loans from the local authority under the Small Dwellings Act.
The local authority was in the situation under the Small Dwellings Act that it could only take a first charge and therefore that meant if there was to be any development charge provided for, it had to be provided by way of a ground rent. The ground rent was sometimes done by way of a lease, a terminating lease for a period. I know of one case where there was a terminating lease for 35 years. There was a rent payable for 35 years to pay off the development charge and at the end of that time, the lease remained there but it was a lease at 1d. a year. It was, if you like, a device for the purpose of enabling the local authority to provide, on a small dwellings loan, the balance of the money which the purchaser or member of the society wanted to put up for the erection of his house.
As I see it, unless some arrangement is made in this Part of the Act to ensure that the people who got together in a society and did that type of operation, are taxed on the profits of this year, not on the profits of last year, it will mean utter chaos and confusion and I fear it will mean for the tailend of the couple or so people developing in that scheme, whose leases may not have been created, serious financial loss. I want to stress to the Minister that the proposal I make involves no loss to the Revenue, unless it is a fortuitous loss. I am not suggesting in any way that the societies concerned should be freed of income tax for any year. The Minister has decreed, and I am not arguing about it, that as from 6th April last, any society other than an exempted society—and roughly, I would call an exempted society an agricultural society—shall be liable to tax. As I understand the provisions of this Part, if the Minister does not accept an amendment somewhat on the lines I have introduced, these societies will for this year be liable to income tax in 1963/64 on the profits they earn in 1962/63 and in 1964/65 will be liable for the profits they earn in 1963/64, and so on.
Under my proposal, exactly the same situation would arise as arises in respect of any new business—for 1963/64, they will be liable for tax in respect of profits earned during 1963/64 and in 1964/65, they will be similarly liable for the profits they will earn in 1963/64. In other words, the profits earned during this coming year will be the basis of assessment by the Revenue on that society for two years and the only loss, if one could call it that, would be the fortuitous loss that might arise if this year's profits were in fact less than last year's. Even if that were so, I would think that the Revenue should not gain that extra tax, first of all, because these people are a new business coming into the tax net and secondly, people are entitled to expect to be able to plan their affairs on the basis of the law in existence at any one time.
I could understand it better, although I might not agree with the proposal in the Bill as such, if it were something that had been liable to tax always and if a person with a good knowledge of the tax laws had found a way around. That is not the case. Industrial and provident societies have never been liable to tax so far as I am aware—certainly never in the past 20 years or so. They are being brought into the tax net now and there seems to be no reason why they should not be treated in exactly the same way as any other new business is treated when it is brought into the tax net.
Let me go back on an analogy again for the Minister, for although I may be sarcastic about other matters at times, this is a matter which is very technical and it is understandably difficult for him to follow it. If you have a firm carrying on any business, say, a solicitor's business, and there are four partners in that firm, they make up their accounts every year to 5th April, the last day of the income tax year, and on 4th April, 1963, one of those four partners dies. The other three will, of course, be liable, properly, for tax and then this new firm starts off the new income tax year. They have the right, and properly the right, to say whether they are going to be deemed to be a continuation of the old firm or whether they are going to be treated as a new firm and be taxed on their actual profits. It is exactly the same suggestion I am making in this amendment. May I just add that the amendment is far from perfectly drafted? It would take a very long draft to put it in its exact form but it is drafted in such a way as to make it clear to the Minister and his advisers what is its purpose.
Let me take another example. Supposing three persons : Messrs. A, B and C go out today to start a new business, a motor garage business, shall we say? They will be taxed for their first full year on the actual profits earned in that year and it will not be until after they have gone through a full year's trading that they will be taxed, as all of us are taxed, on the profits of the preceding year. These societies, for the purposes of income tax, are new businesses and should be treated as such for taxation purposes, and unless there is an amendment of the Bill of the nature of this amendment, they will not be so treated.