UC-NRLF THE NEW INCOME TAX IN RELATION TO THE WAR & BUSINESS. BY ROLAND BURROWS, M.A., LL.D., OF THE INNER TEMPLE, BAR RISTER-AT-LAVV. Examiner in Commercial Law to the London Chamber of Commerce. Author o''" Income Tax on Business Profitt." o >- LONDON : NEWBERRY AND PICKERING, ESSEX STREET, STRAND, W.C. Price 1j- net. I9V5- THE NEW INCOME TAX IN RELATION TO THE WAR & BUSINESS. BY ROLAND BURROWS, M.A., LL.D., OF THE INNER TEMPLE, BARRISTER-AT-LAW. Examiner in Commercial Law to the London Chamber oj Commerce. Author of" Income Tax on Business Profits" LONDON : NEWBERRY AND PICKERING, ESSEX STREET, STRAND, W.C. Price 7/- net. PRINTED BY JOHN H. BURROWS AND SONS, LTD. SOUTH F.ND-ON-S1A. CONTENTS. PAGE INTRODUCTION : RATES FOR 1914-15 5 I. EFFECT OF WAR UPON BUSINESS : RELIEF FOR LOSSES OR DIMINUTION OF INCOME 9 II. BRANCHES & AGENCIES IN THE UNITED KINGDOM OF ENEMY FIRMS 23 III. ALIEN ENEMIES IN THE UNITED KINGDOM 24. IV. PROFITS EARNED OR RECEIVED IN AN ENEMY COUNTRY 26 V. PROFITS OF TRADING WITH THE ENEMY 29 VI. DIVIDENDS, ANNUAL PAYMENTS,, ETC 30 VII. APPEAL OR CLAIM FOR .RE JEF ',.> '. ? 31 324280 THE NEW INCOME TAX IN RELATION TO THE WAR AND BUSINESS. Income Tax was created as a war tax, and many years passed before it became recognised as an ordinary method of raising revenue. The outbreak of the present war rendered a large increase in the current rates inevitable, and these were stated by the Chancellor of the Exchequer in his speech of the i;th November, 1914, and became law by virtue of the second Finance Act, 1914. The rates before the second or Autumn Budget of 1914 were as follows : INCOME TAX. (1) General Rate is. 3d. in the . (2) Earned Income: The rate varied: Total Income from all sources. Rate on Earned In- come in the Not exceeding 1,000 ... Exceeding 1,000 but not 1,500 Exceeding 1,500 but not 2,000 Exceeding 2,000 but not 2,500 9 d. I Old. 1/2 If the total taxable income exceeds 2,500 there is no abatement on such part as is " earned income." (3) Small Incomes : There are two rates* : (a) Total income not exceeding 300 ... is. in the . (b) Total income not exceeding 500 . . . is. 2d. in the . SUPER TAX. The scale is complicated and requires a number of separate calculations. Income. Rate of Super Tax. I. Not exceeding 3,000 ... 5d. in the on amount above 5,000. 2. 4> 000 ... Same as No. I and yd. in the on amount exceeding 3,000. 3- $,o ... Same as No. 2 and qd. in the on amount exceeding 4,000. f 6,000 ... Same as No. 3 and 1 id. in the on amount exceeding 5,000. 5- 7,000 ... Same as No. 4 and i/i in the on amount exceeding 6,000. 6. 8,000 ... Same as No. 5 and 1/3 in the on amount exceeding 7,000. 7- Exceeding 8,000 Same as No. 6 and 1/4 in the on amount exceeding 8,000. The first 2,500 is always exempt. Each step must be calculated out. Thus, on the rates first fixed for 1914, if the income were 6,500 the total super tax would have been : On first 2,500 On 500 at 5d. ... On 1,000 at 7d. On 1,000 at gd. On 1,000 at lid. On 500 at is. id. nil. 10 8 6 29 13 4 37 10 o 45 16 8 27 i 8 i53 i 8 * These rates would necessarily be subject to the rates of "earned income " so far as the "small income" is earned. There are, in addition, allowances for incomes not exceeding 700. Thus if one's income is under 400 nothing is paid on the first 160. NEW RATES. By s. 12 of the Finance Act, 1914 (Sess. 2) the income tax and super tax are doubled for the last four months of the financial year ending 5th April, 1915. Where there is a direct assessment the tax payable can be ascertained by adding one-third to the amount ascertained in accor- dance with the above tables. Where the person assessed is entitled to deduct tax when paying his creditor, e.g., in cases of rent, dividends, annuities, etc., the total deductions during the year will be calculated at is. 8d. in the on the .amount paid during the year. Relief exemption or abatement is to be calculated as if the tax were is. 8d. in the and proportionate reduction is given. When the tax is payable in respect of part only of a year the rate is is. 8d. The problems arising out of the War have not been fully worked out. Since the last war of the nations our international trade has become transformed, and subse- quent wars have not caused anything like the same diffi- culties. The present War has operated, as in all previous cases, to the benefit of a few and the detriment of many, and the question of income tax becomes acute whenever a great and sudden change occurs in the earning capacity of the nation. In the following pages the most pressing problems which confront the business world in relation to income tax are raised and an attempt made to answer them, and point out the best procedure to adopt. The subject matter is grouped under the following heads : I. EFFECT OF WAR UPON BUSINESS : RELIEF FOR LOSSES OR DIMINUTION OF INCOME. 8 II. BRANCHES AND AGENCIKS IN THE UNITED KINGDOM OF ENEMY FIRMS. III. ALIEN ENEMIES IN THE UNITED KINGDOM. IV. PROFITS EARNED OR RECEIVED IN AN ENEMY COUNTRY. V. PROFITS OF TRADING WITH THE ENEMY. VI. DIVIDENDS, ANNUAL PAYMENTS, ETC. VII. APPEAL OR CLAIM FOR RELIEF. I. EFFECT OF WAR ON BUSINESS. The effect of war upon business is, of course, not uni- form. Some trades are benefited by it, and, consequently, more profits are earned and more income tax must be paid. As a rule, however, war increases expenses, cuts off sources of profit, and brings about actual losses. Increased expense is not allowed as a matter of course. In general, the Income Tax Acts do not give much assis- tance to the taxpayer in determining what expenses may be deducted from receipts.* A few are expressly allowed ; a number are expressly disallowed, though the form adopted in certain cases amounts to a permission to deduct. Thus the taxpayer may not deduct wear and tear above a certain rate. This amounts to a permission to deduct wear and tear provided it does not exceed that rate. Lord Davey, in the case of Strong v. Woodifield\ ex- pressed the general rule thus : " It is not enough that the disbursement is made in the course of, or arises out of, or is connected with the trade, or is made out of the profits of the trade. It must be made -for the purpose of earning the profits" The words printed in italics would appear to be too narrow, and it is submitted that the true test is that the expenditure must be such as is made for the purpose of earning the profits or of maintaining the business as an efficient profit-earning machine, subject to the express pro- visions of the Income Tax Acts. Thus capital expenditure or loss or items in the nature of such are not allowed to be deducted. If Lord Davey's words were taken literally it would l be difficult to justify the deduction of an auditor's fee which can never be intended for the purpose of earning a * See Burrows : Income Tax on Business Profits, chap. ii. f [1906] A.D. at p. 453. 10 profit, though it is essentially a payment that ought to be made by a prudent business man. So again insurance premiums are intended not to earn profits but to guard against a loss, and by the latest decision of the House of Lords in Usher s V7 lit shire Brewery v. Bruce* they may be deducted. In this last case the Court said little that is capable of general application, but it is abundantly clear that the whole of the items in dispute were allowed because they were of a kind which a business man would naturally incur as a part of his ordinary business expendi- ture. One consequence of this decision will undoubtedly be that certain of the decisions which prevent deductions will have to be re-considered in the taxpayers' favour. The point about insurance premiums is at present more important than usual, for War Risk Insurance has ab- sorbed a large proportion of business receipts, and it would seem clear that they may be deducted in order to ascertain the balance of profits upon which income tax is levied. Most business expenses bear a double aspect, for though designed to earn profits they are also necessary to avoid loss. Substantially, the problem is to be solved for tax purposes in the same way as for business. An expense incurred to keep a business going or save it from serious embarrassment is incurred with a view to profit earning. For example, a firm with branches in the Colonies may have a manager who is an alien enemy. If the authorities intern or deport him then the local business is threatened with collapse, and measures will at once have to be taken in order to keep the business going. It can be said that the expense is incurred in order to avoid a contemplated loss, but it is not the less true that the object is to keep the business going and thereby earn profits. Such a situation may arise at any time during 3 1 T.L.R. 104. II peace by reason of the death or dishonesty or resignation of a manager. It is submitted that any money spent to cope with difficulties which have occurred by reason of the war in order to keep a business on foot is an expense properly deducted from profits in order to ascertain the "balance of profits and gains." It must be borne in mind that it is not necessary that profit shall actually have been earned or that the profit was not earned in the same year that the expenditure was incurred. If the amount may be deducted, the question whether profit has been earned thereby or not is immaterial. (See, e.g., Vallambrosa Rubber Co. v. Farmer (1910) $ Tax Cas. 529). Cutting off Sources of Profit naturally results in a loss of income. In normal times this causes little hardship, as the taxable income is not one's actual income, but the average of the income of the three preceding years (Income Tax Act, 1842, s. 100, Schedule (D), Case I., Rule I.; Income Tax Act, 1853, s. 48), and consequently each year is taken into account in due course and the taxable income adjusted accordingly. The object of thus averaging taxable income is to prevent abrupt fluctuations in income tax. There is also a remedy available when actual hardship will be caused by taking this average instead of the actual result of the year's working. (See post). Actual loss may arise on a specific transaction or on trading as a whole. Of course, if specific losses are bal- anced by gains no hardship arises and the usual way in which specific losses are investigated is when they are used to show a diminution in the result of trading. It is a question to be considered now that the war has caused such an abnormal diminution in the profits of so many businesses, whether it is better to let the result of the 12 year's trading have its effect in due course on the average upon which the tax is levied or an express claim be made to be assessed on the result actually obtained. There are now two ways of obtaining relief: (i) the permanent method ; (ii) the temporary method for dealing with war losses. (i) Until the second Finance Act of 1914, there was little to guide a business man. In practice there was only s 134 of the Income Tax Act, 1 842, which runs as follows : "In case any person charged to the said duties under Schedule (D), whether the computation thereon shall have been made on the profits of one year or on an average, as herein allowed, shall cease to exercise the profession, or to carry on the trade, employment, or vocation, in respect whereof such assessment was made, or shall die, or become bank- rupt or insolvent, before the end of the year for making such assessment, or shall from any other specific cause be deprived of or lose the profits or gains on which the computation of duty charged in such assessment was made, it shall be lawful for such person, or his executors or administrators, to make application to the commissioners for general pur- poses of the district within three calendar months after the end of such year ; and on due proof thereof to their satisfaction the said commissioners shall cause the assessment to be amended, as the case may require, and give such relief to the party charged, or his executors or administrators, as shall be just ; and in cases requiring the same the said commissioners shall direct, in manner before men- tioned, repayment to be made of such sum as shall have been before mentioned, repayment to be made of such sum as shall have been overpaid on the as- 13 sessment amended or vacated. Provided always, that where any person shall have succeeded to the trade or business of the party charged, no such abatement shall be made, unless it shall be proved to the satisfaction of the said commissioners that the profits and gains of such trade or business have fallen short from some specific cause, to be alleged to them and proved, since such change or suc- cession took place, or by reason thereof ; but such person so succeeding to the same shall be liable to the payment of the full duties thereon without any new assessment/' If this section were to be applied, there would at once have arisen the question whether the war constituted a " specific cause" within the meaning of the section. There were also two other Acts which might have been used if the circumstances warranted. The Customs and Inland Revenue Act, 1890, s. 23. "(i) Where any person shall sustain a loss in any trade, manufacture, adventure, or concern, or profession, employment, or vocation carried on by him either solely or in partnership, or in the occupation of lands for the purpose of husbandry only, it shall be lawful for him, upon giving notice in writing, to the surveyor of taxes for the district within six months after the year of assessment, to apply to the commissioners for the general purposes of the Acts relating to income tax for an adjust- ment to his liability by reference to the loss and to the aggregate amount of his income for that year estimated according to the several rules and directions of the said Acts. (2) The said commissioners shall, on proof to their satisfaction of the amount of the loss, and of the payment of income tax upon the aggregate amount of income, give a certificate authorising repayment of so much of the sum paid for income tax as would represent the tax upon income equal to the amount of loss, and such certificates may extend to give exemption or relief by way of abatement in accordance with the provisions of the said Acts. Upon the receipt of the certifi- cate the commissioners of inland revenue shall cause repayment to be made in conformity therewith. (4) Where repayment has been made to a person in any year under the provisions of this section, he shall not be entitled to claim, or be allowed, a deduction on the assessment for a subsequent year by reference to the amount of loss in respect whereof such repayment has been obtained.'' The Finance Act, 1907, s. 24. " (2) Where a person charged or chargeable with in- come tax in respect of any profession, trade, or vocation which has been set up or commenced within the period of three years upon the average of which the profits or gains are to be taken un- der the Income Tax Acts, or within the year of assessment, proves at the end of the year of assessment to the satisfaction of the commis- sioners by whom the assessment has been or can be made that the actual profits or gains arising from the profession, trade, or vocation in the year of assessment fall short of the profits or gains as computed in accordance with those Acts, he shall be entitled to be charged on the actual amount of the profits or gains so arising instead of on the amount of the profits or gains so computed, and, if he has paid the full amount of the tax on the profits or gains so computed, be entitled to repayment of the amount overpaid. (3) Where a profession, trade, or vocation is discon- tinued in any year, any person charged or charge- able with income tax in respect of that profession, trade, or vocation, shall be entitled to be charged on the actual amount of the profits or gains arising from the profession, trade, or vocation in that year, and shall also, if he proves to the satisfaction of the commissioners, by whom the assessment has been or could have been made, that the total amount of the income tax paid during the three previous years in respect of that profession, trade, or vocation exceeds the total amount which would have been paid if he had been assessed in each of those years on the actual amount of the profits or gains arising in respect of the profession, trade, or vocation, be entitled to repayment of the excess." None of these Acts provide a really satisfactory relief for the difficulties which have been caused by the war, and in the course of the debate on the Finance Bill it was pointed out that until 1907 section 133 of the Inland Revenue Act, 1842, gave a general right to claim relief on the ground that one's income for the year had fallen short of expectations. In the course of the passing of the Bill through the House of Commons a new clause appeared based upon this section. The chief defects of s. 134 of the Act of 1842 were that " specific cause " was not defined and its interpretation was open to some measure of doubt (see Inland Revenue v. i6 Farie (1878), 16 Sc. L. R. 189; and Ryhope Coal Co. v. Foyer (1881), 7 Q.B.D. 485) ; and that, as s. 133 was per- fectly general in its terms and was passed at the same time, it would seem that a restricted operation should be given to s. 134 and for that purpose the repeal of s. 133 was immaterial ; and, most important of all, no ' appeal lay from the decision of the Commissioners. This point had been known for some years, but was not by any means free from doubt. It was convenient both for the Crown and for the taxpayer that such a right should exist. How- ever, in Furtado v. City of London Brewery Company [1914] i K.B. 719, it suited the convenience of the par- ticular taxpayer to raise the point, and it was then settled that the decision of the Commissioners was final. (ii). Section 13 in the second Finance Act of 1914 is intended to remove all three defects. It is worded as follows : " (i) Section one hundred and thirty-three of the Income Tax Act, 1842, and section six of the Revenue Act, 1865 (which provide for the reduction of assessments or the repayment of duty in certain cases where the profits of the year of assessment fall short of the sum on which the assessment has been made), shall, notwithstanding their repeal by section twenty-four of the Finance Act, 1907, have effect as respects any assessment to income tax for the current income tax year where it is proved to the satisfaction of the Commissioners, by whom the assessment has been made, that the diminution of profits and gains on account of which relief is claimed under those sections is due to circumstances attributable directly or indirectly to the present war, whether those circumstances are a specific cause of diminution of income within the meaning of section one hundred and I? thirty-four of the Income Tax Act, 1842, or not; and diminution of profits and gains on account of which relief can be given under this section shall not be deemed to be a specific cause authorising the grant of relief under the said section one hundred and thirty-four. The foregoing provision, in its application to the case of any person who, in connection with the present war, is or has been serving as a mem- ber of any military or naval forces of the Crown, or in any work abroad of the British Red Cross Society, or the Saint John Ambulance Associa- tion, or any other body with similar objects, shall be construed as if that provision referred only to section one hundred and thirty-three of the Income Tax Act, 1842, and contained no refer- ence to section six of the Revenue Act, 1865. (2) Where it is proved to the satisfaction of the Com- missioners for the special purposes of the Acts relating to income tax that the actual income from all sources of any individual charged to super tax for the current income tax year is or will be less than two-thirds of the income on which he is liable to be so charged, he shall be en- titled to postpone the payment of so much of the super tax payable by him as represents the dif- ference between the tax payable on the income on which he is liable to be assessed and the tax which would have been payable by him if he had been assessed on his actual income ; and any amount of which the payment is so postponed shall, subject to any provisions which may be made by Parliament, become payable on the first day of January, nineteen hundred and six- teen. i8 (3) Section fifty-nine of the Taxes Management Act, 1 880 (which relates to the statement of a case in point of law), shall apply to cases in which relief is claimed under this section." This section is a typical example of legislation by refer- ence. It is absolutely unintelligible without knowing exactly what are the terms of the repealed sections men- tioned in it, and furthermore it revives for a temporary and single purpose sections which were designed to serve per- manently for relief in cases which were perfectly general in their nature, and also some of the officials, etc., men- tioned have changed since they were passed. It is, therefore, necessary to set them out. THE INCOME TAX ACT, 1842, Section 133. " If within or at the end of the year current at the time of making any assessment under this Act, or at the end of any year when such assessment ought to have been made, any person charged to the duties contained in Schedule (D), whether he shall have computed his profits or gains arising as last aforesaid on the amount thereof in the preceding or current year, or on an average of years, shall find, and shall prove to the satisfac- tion of the Commissioners by whom the assess- ment was made, that his profits and gains during such year for which the computation was made fell short of the sum so computed in respect of the same source of profit on which the computa- tion was made, it shall be lawful for the said Commissioners to cause the assessment made for such current year to be amended in respect of such source of profit, as the case shall require, and in case the sum assessed shall have been paid, to certify under their hands to the Com- missioners for special purposes at the head office for stamps and taxes in England the amount of the sum overpaid upon such first assessment, and thereupon the said last-mentioned Commissioners shall issue an order for the repayment of such sum as shall have been so overpaid, and such order shall be directed to the receiver general of stamps and taxes, or to an officer for receipt or collector of the duties granted bv this Act, or to a distributor or sub-distributor of stamps, and shall authorise and require the repayment of the said sum so overpaid as aforesaid, in like manner as is hereinbefore provided with respect to the allowances to be granted under No. V. of Schedule (A) of this Act." THE REVENUE ACT, 1865, Section 6. " And whereas by section one hundred and thirty-three of the said Act of the fifth and sixth years of Her Majesty's reign* provision is made for giving relief, by reduction of the assessment, or repayment of duty, in certain cases where the profits of the year of assessment fall short of the sum on which the assessment has been made: Be it enacted, that so much reduction or repay- ment shall be made in any such case unless the profits of the said year of assessment are proved to be less than the profits for one year on the average of the last three years, including the said year of assessment ; nor shall any relief extend to any greater amount than the difference * That is the section just previously set out. 2O between the sum on which the assessment has been made and such average profits for one year as aforesaid." It will be noticed that relief is given where there is a diminution of income so that the profits of the year of assessment are less than the amount of the assessment. The section in its original form was perfectly general in its items, but now under s. 13 of the second Act of 1914 it has been limited so that it is necessary to shew to the satisfaction of the Commissioners that such diminution is attributable " directly or indirectly to the present war." The expression "directly or indirectly" is probably not so wide as at first sight appears. The whole business com- munity is affected by the war and it is possible to say that the dislocation of business is such as to have caused any diminution of a man's income. Probably it will be necessary to shew that but for the war such diminution would not have occurred. In other words, one cannot merely say, " My income is less. I don't know why, unless it is that the war has so dislocated business that one cannot make as much as before." It will be necessary to shew some definite causal connection so that one can shew that the cause of the diminution could not have operated but for the war. In other words, though the war need not be the Causa causans of the diminution, it must be the Causa sine qua non It will be noticed that s. 6 of the Revenue Act, 1865, which makes it a condition for obtaining relief that the profits for the year in question must be less than the aver- age profits for that year and the two preceding years, does not apply to persons serving in His Majesty's forces or serving abroad with the British Red Cross Society or the St. John Ambulance Society or any other body with similar 21 objects. This is a considerable concession, as the in- clusion of the result of the year in question (the loss in which causes the application) in the three years on which the average is taken considerably reduces the amount of relief. For example : if the income for the three preceding years averaged 1,000; made up of 1,200, 800, 1,000 and the income in the year of assessment is 500, the amount of relief will only be upon the tax or the differ- ence between 766 135. 4d. and 1,000, but if the taxpayer is serving with the forces, etc., the amount of relief will be determined by the difference between 1,000 (the average of the previous three years) and 500 (the actual income of the year). The relief is limited to the effects of the war, and, con- sequently, when it is exhausted the sections just cited will cease to operate. In the case of SUPER TAX, there is no relief in amount, but only a right to postpone payment. The power of appealing against the decision of the commissioners is therefore limited to the payment of in- come tax proper, and it will only exist so long as the relief is available. It must be borne in mind that the wording of s. 133 has been affected by changes in the Inland Revenue Department. " The head office for stamps and taxes " is now the chief office of Inland Revenue at Somerset House ; there is now no Receiver General of Stamps and Taxes " ; and the duties he performed are now entrusted to the Commissioners of Inland Revenue, who operate an account called "The General Account of the Commis- sioners of Inland Revenue." 22 It has been held that the words in s. 133, "within or at the end of the year," mean within the shortest time that a claim can be made, having regard to the circumstances of the actual case in question (Reg v. Special Commis- sioners (1888) 21 Q.D.B.3I3 ; Russell v. North of Scotland Bank (1891) 18 Rettie, 543). II. ENEMY FIRMS IN THE UNITED KINGDOM. An enemy firm or company may carry on business in this country: (1) Through a. branch. (2) Through an agent, who may be a company of which the shares are owned by the enemy firm or company. (3) Through personal visits and correspondence. The term " enemy " requires a little explanation. He is a person, firm or company, resident or trading in an enemy country, and it is immaterial whether he is a subject of the enemy or of a neutral state or of this country or any of its allies. The actual evils which arise from trading with the enemy are dealt with by the Trading with the Enemy Acts, 1914. It follows from the Statutes that a branch or agent in this country may, under certain conditions, lawfully continue to do business, and, therefore, is liable to assessment. The fact that the profits may belong to an enemy is quite immaterial. The Income Tax Acts do not contain any exception of enemies from taxation. (See also No. VI). It would seem clear that the agent in this country of an enemy firm can be called upon to make returns and pay tax on behalf of his principal, notwithstanding the war. III. ALIEN ENEMIES IN THE UNITED KINGDOM. An alien enemy may be either free or in some kind of restraint. He may be free in every sense of the word or be placed upon conditions, and if he is under that re- straint that may vary from strict imprisonment to a very mild form. Again, he may be in custody as a resident in this country with regard to whom the authorities have exercised their powers, or as a prisoner of war brought to this country against his will. In dealing with such cases, the question at once arises whether the person in question is resident here. (See Income Tax Act, 1842, ss. 39 and 41). In time of peace all aliens in this country are liable if they are resident here. It cannot be said that a prisoner of war is liable to income tax, for his presence in this country dees not de- pend upon him at all. It would be a tempting revival of the old system of ransom if prisoners of war were made to pay income tax. On the other hand, an alien enemy who was resident in this country at the time that war broke out or who came here during the war with the intention of residing here and was interned by the author- ities would seem to be resident here, and many, of course, would reside here in the sense of maintaining a home whether they left this country for the period of the war or remained (in re Young (1876), I Tax Cas. 57; Rogers v. Inland Revenue (1879), I Tax Cas, 225). In such cases, presence in this country is entirely voluntary. The cases just cited apply to the case of British sub- jects interned in an enemy country. They are not resident there, and, if their ordinary residence is in this country, they would appear still to be liable to income tax. 25 Dividends and annual payments payable to alien enemies are taxed at the source, i.e., the company or person making the payment is assessed and pays the tax and then deducts the tax paid when paying the dividend or annual sum to the person entitled. In such cases the Crown does not come into actual contact with the taxpayer. In cases where the Public Trustee acts as statutory custodian for alien enemies under the Trading with the Enemy Amend- ment Act, 1914, it would seem clear that payment to the person entitled, and, consequently, the payer may deduct from the payment in question the tax which he has paid. Deductions on such payments may give rise to a claim for exemption or repayment and the difficult questions may arise in the future as to whether the period of war is to be excluded when an alien enemy is concerned. There is nothing in the Acts upon the matter, but in construing statutes the Courts always have regard to the principles of international law. IV. PROFITS DERIVED FROM AN ENEMY COUNTRY. Before the first Finance Act of 1914 there used to be a great struggle between revenue authorities and trading firms. If profits earned abroad came under Case I. of Schedule (D), then they were lumped into the general balance and it was immaterial whether they were received in this country or not. If they fell under Case IV. or Case V. of that Schedule then they were only liable to income tax here if they were received in this country. Now by the Finance Act, 1914, s. 5, income derived from foreign property is liable to income tax in any case unless the recipient is either domiciled in this country, or if a British subject is not ordinarily resident here. It is not clear how far this section covers income which is hit by Case V. and it is submitted that trading profits are not affected by it, so that the old law remains unaffected so far as they are concerned. The consequence of this alteration of the law is that very difficult problems arise on the liability to pay tax on such income. Thus, a person resident here may have large holdings in German, Austrian or Turkish stocks or shares (Govern- ment, local or private). Is he liable to pay tax upon the income due to him in respect of such holdings? The true criterion, it is submitted, is: Can it be truly said that he has received that income? Before 1914, the question would have been : Has such income been received in this country? 27 Clearly, it cannot be said that he has received such income if it is neither paid to him nor set apart for him to be paid on the conclusion of the war. If it is S3t apart for him it would also seem that he has not received it, any more than a landlord has received rent which his tenant has placed in a separate account for the purpose of paying it or given to a messenger to take to the land- lord. The problem does not depend upon the law. It is not : Is he entitled to the money ? but : Has he received it ? If the payment has been made to an agent abroad to hold for the person entitled, it is submitted that he still has not received the sum, for so far as he is concerned the agent who holds it was not authorised by him and the war prevents him from recognising such an agent. A more difficult problem would arise in the case of an es- tablishment or branch of an enemy's country, if s. 5 of the Finance Act, 1914, applies to trading profits. It is true that the firm here can no longer have dealing with it, as that would clearly be trading with the enemy. If the place is closed, then, of course, no profits will be- earned and no question of income tax will arise. But in some cases oper- ations may be continued without any communication with the firm here. Any profit earned thereby belongs to the British firm and prima facie should bear tax. It is a question whether the firm here can be said to have re- ceived such profits at all when it can neither go there to get them nor can they be sent here. It is a practical impossibility during the war to include such results in an income tax return, and the simplest and most convenient way of solving the difficulty is to reserve the inclusion of such profits until the end of the war, for not until then can it be found out whether any profits have been earned and what has been done with them. In other words, the 28 combination of law and fact prevents such income being received at all. As already stated, the true view seems to be that such income, not having been received in this country, is not liable to tax. V. PROFITS FROM TRADING WITH THE ENEMY. In certain cases licences to trade may be issued and then no doubt can arise that profits derived from such trade are lawfully made and are liable to tax. But in the event of it being discovered that a firm has traded with the enemy in a way forbidden by the law, then, it is suggested, the same result follows, for it is not possible to answer a claim by setting up one's own crime. The tax is levied on profits made in the course of one's business. Systematic betting has been held to be an occupation, the profits of which are liable to tax (Partridge v. Mallandaine (1886), 1 8 Q.B.D., 276), and there would seem to be no valid rea- son for exempting such an illegitimate profit from the burden imposed upon legitimate profits. There is very little authority, but income derived from trading in breach of various administrative Acts has never been exempted, e.g., trading in breach of the Metropolitan Police Acts, Nor is it possible to deduct the cost of obtaining advice or of defending proceedings connected with it. This liability to taxation seems to be well founded in principle, and even if the profit so gained is swallowed up by costs and fines there is no reason why the tax should not be exacted. No one, indeed, would feel any sympathy for a firm whose conduct had yielded such a result. VI. DIVIDENDS. The collection of income tax on dividends and other annual or periodical payments is carried out by the charge being imposed on the company or person liable to make the payment and the amount paid being deducted from the payment when made- In this way many persons pay income tax by deduction who would not easily be reached otherwise ; for example, a married woman has thus always borne the burden of the tax on dividends paid to her even when no direct assessment could be made upon her. (Pur die v. The King [1914] 3 K.B. 112). This also would apply to persons resident abroad. It would seem clear that payment may lawfully be made to alien enemies resi- dent in this country so that deduction can be made in the ordinary course of business. The only difficulty that can arise is as to alien enemy prisoners. In such a case the wisest plan is to withhold payment until assured that it will be lawful to pay direct to the prisoner and deduct when payment is actually made. A great deal of trouble will be avoided when the Cus- todian of Enemy Property has organised his department. Under s. 2 of the Trading with the Enemy Amendment Act, 1914, all payments to persons, companies or associa- tions resident or carrying on business in any enemy country are made payable to the Custodian and any person who has been charged with income tax and is entitled to deduct it from payments made will be entitled to pay the Custodian the sum due (less income tax) leaving that official to take whatever steps he thinks fit to claim exemp- tion and repayment in respect thereof. The prompt and honest payment of dividends, etc., to the Custodian will, therefore, relieve taxpayers from what has been from all points of view an embarrassing problem. VII. APPEAL OR CLAIM FOR RELIEF. The method of appealing against an assessment or of claiming relief is to write to the Surveyor of Taxes giving him notice. He is the respondent. A letter is also writ- ten to the Clerk to the local General Commissioners (or to the Special Commissioners, for persons liable to as- sessment under Schedule (D) can elect to be assessed by the Special Commissioners). The Commissioners then give the parties notice of the date fixed for the hearing. It is not necessary to follow any particular form of notice of appeal. A letter is all that is neces- sary. On an appeal strictly it is not necessary to give the grounds, but on a claim for relief natur- ally it is necessary to indicate what kind of relief is asked for. It is, however, very useful to indicate clearly and concisely one's main contentions so that one's case is before the Commissioners as early as pos- sible. Great care is necessary in setting out one's grounds, for, although no technical objections are taken, yet there is always a chance that the Commissioners would stop an argument being raised at the hearing if its nature is so different from the grounds alleged that it would be unfair to the other side, they being misled by the letter giving notice of appeal or claim. In general it is not usual to go to the Commissioners unless the Surveyor of Taxes has refused to give effect to the taxpayer's contentions. The hearing before the Commissioners is very informal, being somewhat analogous to an arbitration. This informal- ity may from its nature become dangerous, for the Commis- sioners are the only tribunal that hears evidence and finds the facts. Any appeal from them can only challenge their application of the law to, or the inference which they have drawn from, the facts they hold to have been established by the evidence. Unless, therefore, care is taken to have all the relevant facts properly before the Commissioners the taxpayer may find that the findings of fact against him prevent him from appealing to the High Court with any chance of success. From the Commissioners, appeal lies (if at all) to the High Court. The defeated party must express dissatis- faction at the time when the decision is given and then apply for a "case to be stated" within twenty- one days. This document is usually drafted on behalf of both sides and then if they cannot agree settled by the Commissioners. It states the facts proved and admitted, and the findings and decision of the Commissioners. The case is then lodged at the Crown Office at the Law Courts, and put in the "Revenue List" and heard by a single Judge. Appeal from his decision lies to the Court of Appeal, and thence to the House of Lords in the same way as other appeals. YC 23270 324280 UNIVERSITY OF CALIFORNIA LIBRARY UNIVERSITY OF CALIFORNIA LIBRARY -~~'1T r,* T BY THE SAME AUTHOR. THE LAW OF INCOME TAX ON BUSINESS PROFITS PRICE 5/- NET. LONDON : SWEET AND MAXWELL, LTD., 3 CHANCERY LANE. EFFINGHAM WILSON, 54 THREADNEEDLE STREET.